1 Introduction

1.1 ten Principle of Economics

1~4 How People make decisions

1.People face tradeoffs

Efficiency v. Equity

Efficiency means society gets the most that it can from its scarce resources.
Equity means the benefits of those resources are distributed fairly among the members of society.

2.The cost of something is what you give up to get it.

opportunity cost: The opportunity cost of an item is what you give up to obtain that item.

3.Rational people think at the margin

Rational People: People who systematically and purposefully do the best they can to achieve their objectives.
Marginal changes are small, incremental adjustments to an existing plan of action.

People make decisions by comparing costs and benefits at the margin.

4.People respond to incentives.

5~7 How People Interact with each other

5.Trade can make everyone better off.

Trade allows people to specialize in what they do best.

6.Markets are usually a good way to organize economic activity.

A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

7.Governments can sometimes improve market outcomes

Invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy.

Government can intervene to promote efficiency and equity.

Efficiency
Market failure occurs when the market fails to allocate resources efficiently.
- Externality is the impact of one person or firm’s actions on the well-being of a bystander.
- Market power is the ability of a single person or firm to unduly influence market prices.
Equity
The invisible hand does not ensure that everyone has sufficient food, decent clothing, and adequate healthcare.

8~10 The forces and trends that affect how the economy as a whole works

8.The standard of living depends on a country’s production.

Almost all variations in living standards are explained by differences in countries’ productivities.

Productivity is the amount of goods and services produced from each hour of a worker’s time.

9.Prices rise when the government prints too much money.

Inflation is an increase in the overall level of prices in the economy.

10.Society faces a short-run tradeoff between inflation and unemployment.

The Phillips Curve illustrates the tradeoff between inflation and unemployment.

1.2 Thinking Like an Economist

Economics
- The jewel on the crown of social sciences (Gang Fan)
- A social science
- A science
Economists
- (Social) Scientists
  
  Theories → data → verify or refute theories
Methodology
- Value neutrality: developing and testing of theories about how the world works
- Observations → theories → more observations
A comment
- Since economics is a social science (on how people interact), it is difficult to keep value neutrality (for researchers)
- The usefulness of economic theories usually depends on specific models of social interactions (structures or relationships)
Testing an economic theory
- Social experiments: usually impractical
- Laboratory experiments: A substitute
- Verify econometrically or statistically the implication(s) of a theory via data analysis
Models with assumptions
- Assumptions
  - To simplify the complex world (with many details) for analytic traceability
  - But need to capture the nature of the world
  - Assumptions are made for questions
- Models
  - Built with assumptions (for omitting some unimportant details)
  - Describe how the “world” works (to capture the truly important aspects)
  - For purpose to understand the “world” in question

Two levels of concern
- Microeconomics
  - How do households and firms make decisions and how they interact in markets
- Macroeconomics
  - The behavior of the economy as a whole. For example, the main concern usually includes inflation, unemployment, and economic growth.
Two kinds of questions
- Positive Questions
  - To describe what the world is, how the world works, why the world works this way or that way
  - Descriptive
  - Confirm or refute by examining evidence
- Normative Questions
  - To prescribe how the world should be
  - Prescriptive
  - Supported by social values, cultures, histories, and etc.
Two concerns of a policy advisor
- Efficiency
  - The utilization of resources
- Equity
  - The distribution of resources (income) among people in a society
  - These two concerns are usually conflictive

An economist may be either a (social) scientist or a policy advisor.

1.3 Interdependence and the Gains from Trade

Basis of the Trade: Absolute Advantage & Comparative Advantage

Absolute Advantage —The comparison among producers of a good according to their productivity.

注意：单人的production possibilities frontier (PPF) 是直线，社会的PPF是凹向原点的曲线，因为随着产量的增加，社会边际成本增加，单位转化率增加。

Comparative Advantage: Compares producers of a good according to their opportunity cost. The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.

Although it is possible for one person to have an absolute advantage in both goods, it is impossible for one person to have comparative advantage in both goods.

Trade allows each person to specialize in the activities he or she does best, thus increasing each individual’s productivity.

2 Supply and Demand: How Markets Work

Demand and Supply in A Competitive Market
Market Equilibrium and Government Policies
Elasticity and Its Application

2.1 The Market Forces of Supply and Demand

Markets and Competition

Market: a group of buyers and sellers of a particular good or service.
Competitive market: a market with many buyers and sellers, each has a negligible effect on price.
In a perfectly competitive market(完全竞争市场):
- All goods exactly the same
- Buyers & sellers so numerous that no one can affect market price – each is a “price taker(价格接受者)”
- In the following we assume markets are perfectly competitive

Demand

The quantity demanded (Qd) of any good is the amount of the good that buyers are willing and able to purchase.
Law of demand(需求定理)
- the claim that the quantity demanded of a good falls when the price of the good rises, other things equal

Demand Curve Shifters

Variables that can shift the demand curve

Income 收入
- Normal good (正常物品)
  - Other things constant
  - Demand for a normal good is positively related to income
- Inferior good (低档物品)
  - Other things constant
  - Demand for an inferior good is negatively related to income
Prices of related goods 相关物品的价格
- Substitutes(替代品), two goods
  - An increase in the price of one leads to an increase in the demand for the other
  - Example: Coke and Pepsi
- Complements(互补品), two goods
  - An increase in the price of one leads to a decrease in the demand for the other
  - Example: gas cars and gas
Tastes/Preference 爱好/偏好
- Change in tastes: changes the demand
Expectations 预期
- Expect an increase in income: Increase in current demand
- Expect higher prices: Increase in current demand
Number of buyers 买者的数量

Supply

The quantity supplied ( $Q^s$ ) of any good is the amount of the good that sellers are willing and able to sell.
Law of supply (供给定理)
- the claim that the quantity supplied of a good rises when the price of the good rises, other things equal

Supply Curve Shifters

Input prices 投入品价格
- Higher input prices: decrease in supply
Technology 技术
- Advance in technology: increase in supply
Expectations about future 预期
- Expected higher prices: decrease in current supply
Number of sellers 卖者的数量

2.2 Market Equilibrium and Government Policies

Supply and Demand Together: Equilibrium

Supply and demand curves intersect
Various forces are in balance
A situation in which market price has reached the level where Qd = Qs

Law of Supply and Demand

 The price of any good adjusts
• To bring the quantity supplied and the quantity demanded for that good into balance
 In most markets
• Surpluses and shortages are temporary

Comparative Static Analysis 比较静态分析

Three Steps to Analyzing Changes in Eq’m:

Decide whether event shifts S curve, D curve, or both.
Decide in which direction curve shifts.
Use supply-demand diagram to see how the shift changes eq’m P and Q by comparing the initial and the new equilibrium

How Government Policies Affect Market Outcomes

EXAMPLE: Price controls

Usually enacted when policymakers believe that the market price of a good or service is unfair to buyers or sellers

Price ceiling(价格上限): A legal maximum on the price at which a good can be sold
Price floor (价格下限): A legal minimum on the price at which a good can be sold

2.3 Elasticity and Its Application

Elasticity

• Basic idea

Elasticity measures how much one variable responds to changes in another variable
• Definition in Economics
Elasticity is a numerical measure of the responsiveness of Qd or Qs to one of its determinants.

Different Elasticities

• Price elasticity of demand 需求价格弹性
• Price elasticity of supply 供给价格弹性
• Income elasticity of demand 需求收入弹性
• Cross-price elasticity of demand 需求交叉弹性

Price Elasticity of Demand

Price elasticity of demand ( $E_D$ ) measures how much $Q^d$ responds to a change in P.
Loosely speaking, it measures the price-sensitivity of buyers’ demand.
Use absolute value (drop the minus sign)

Calculating Percentage Changes

The Variety of Demand Curves

Determinants of Price Elasticity of Demand

Availability of close substitutes 相似替代品的可获得性
- Goods with close substitutes: more elastic demand
Necessities vs. luxuries 必需品与奢侈品
- Necessities: inelastic demand
- Luxuries: elastic demand
Definition of the market 市场的定义
- Narrowly defined markets: more elastic demand
- 冰淇淋 vs 草莓冰淇淋
Time horizon 时间范围
- Demand is more elastic over longer time horizons

Price Elasticity of Demand & Revenue

Total revenue, TR
- Amount paid by buyers and received by sellers of a good
- Price of the good times the quantity sold (P×Q)
For a price increase
- If demand is inelastic, TR increases
- If demand is elastic, TR decreases