A-Level Economics

Economics starts with one big idea: scarcity 稀缺性. We never have enough to give everyone everything they want.

• resources 资源 are the things we use to make goods and services. They are finite 有限的 — there is only a limited amount, so they are scarce 稀缺.
• goods 物品 (things you can touch, like food) and services 服务 (work done for you, like a haircut) are what we make from resources.
• human wants 欲望 are unlimited. People always want more.

Because wants are bigger than resources, this is called the economic problem 经济问题. Every society must answer three questions:

1. What to produce?
2. How to produce it?
3. For whom to produce it?

Choice and opportunity cost

Because resources are scarce, you must choose. Every choice means you give up something else.

opportunity cost 机会成本 — the next best alternative 替代选择 you give up when you make a decision.

Opportunity cost is faced by everyone:

• consumers 消费者 (people who buy and use goods): buy a phone, and you give up the holiday that money could have paid for.
• producers 生产者 and firms 企业 (the businesses that make goods): use a factory to make cars, and you give up the trucks it could have made.
• governments 政府: spend tax money on hospitals, and you give up the schools that money could have built.

Economics as a social science

Economics is a social science 社会科学. It studies how people behave when they make choices. Like other sciences, it builds models 模型 (simple pictures of the real world) and tests them with data.

The real world is complex, so economists change one thing at a time and keep everything else fixed. This is the idea of ceteris paribus 其他条件不变 — a Latin phrase meaning "all other things stay the same". For example: "if the price of coffee rises, people buy less coffee, ceteris paribus".

Positive and normative statements

• a positive statement 实证表述 is about fact. It can be tested as true or false. Example: "a higher price of petrol reduces the amount people buy."
• a normative statement 规范表述 is about opinion. It says what should happen, and it cannot be tested as true or false. Example: "the government should make petrol cheaper."

Normative statements rest on a value judgement 价值判断 — a personal view about what is good or fair. Two people can agree on the facts and still disagree about what should be done.

Microeconomics and macroeconomics

• microeconomics 微观经济学 studies single parts of the economy: one market, one firm, one consumer.
• macroeconomics 宏观经济学 studies the whole economy together: total output 产出, jobs, and rising prices.

The factors of production 生产要素 are the four kinds of resource used to make goods and services. Each one earns a reward 报酬.

Land includes some non-renewable resources 不可再生资源 (like oil and coal) that can run out. Enterprise is supplied by the entrepreneur 企业家, the person who has the business idea and risks their own money.

Specialisation and division of labour

specialisation 专业化 is when a worker, firm or country makes only the things it is best at, then trades for the rest.

Inside a workplace, specialisation leads to the division of labour 劳动分工: a big job is split into small tasks, and each worker 工人 does one task again and again.

Mobility of factors

mobility 流动性 means how easily a factor can move to a new use.

• occupational mobility 职业流动性 — how easily a factor moves from one job or use to another. A teacher who retrains as a nurse is occupationally mobile.
• geographical mobility 地理流动性 — how easily a factor moves from one place to another. Land cannot move at all, so it has no geographical mobility.

Labour is often not very mobile. Family ties, the cost of housing, and missing skills all make it hard for workers to move.

An economic system is the way a country decides how to allocate 配置 (share out) its scarce resources. There are three types.

• a market economy 市场经济 — firms and people own resources, and prices decide what is made. The government does little.
• a planned economy 计划经济 (also called a command economy 指令经济) — the government owns resources and decides what is made, how, and for whom.
• a mixed economy 混合经济 — a blend of the two. The private sector 私营部门 (firms and households) and the public sector 公共部门 (the government) both make decisions. Almost every real country is mixed.

The price mechanism

In a market economy, resources are guided by the price mechanism 价格机制. Prices do three jobs:

• signalling 信号传递 — a price tells buyers and sellers where resources are wanted. A rising price says "this is wanted — make more".
• incentive 激励 — a higher price rewards producers, so they want to supply more of that good.
• rationing 配给 — when a good is scarce, a higher price shares it out to those who are willing and able to pay.

Comparing the systems

In practice no country sits at a pure extreme. China's economy, for instance, is officially a socialist market economy, where markets set most prices while the government guides key sectors and owns major enterprises. Every real system mixes the two and sits somewhere on the spectrum below.

A production possibility curve 生产可能性曲线 (PPC) is a line showing the largest combinations of two goods an economy can make when all its resources are fully and well used.

Imagine an economy that makes only food and machines. The PPC is drawn with food on one axis and machines on the other.

• a point on the curve: all resources are used with full efficiency 效率.
• a point inside the curve: resources are wasted (for example, unemployment 失业 of workers). The economy could do better.
• a point outside the curve: impossible today, because there are not enough resources. This shows scarcity.

Moving along the curve shows opportunity cost: to make more food, you must move resources away from machines, so you make fewer machines. This is the trade-off 取舍 between the two goods.

The shape of the curve shows how opportunity cost behaves:

• a straight-line PPC means constant opportunity cost — each extra unit of food costs the same number of machines.
• a curve that bows outwards means increasing opportunity cost — each extra unit of food costs more and more machines, because resources are not equally good at making both goods.

Shifts and growth

When the PPC moves outward (to the right), the economy can make more of both goods. This is economic growth 经济增长. It happens when there are more resources, or better ones (new technology 技术, a bigger or more skilled workforce). War or disaster can move the PPC inward — this is economic decline 经济衰退.

A country must also choose between two kinds of good now:

• capital goods 资本品 — goods used to make other goods (machines, factories).
• consumer goods 消费品 — goods people use directly (food, clothes).

Making more capital goods today means fewer consumer goods today. But more capital goods help the economy grow faster, so the PPC shifts out by more in the future.

Worked example. Why is a production possibility curve usually drawn concave (bowed outwards) rather than as a straight line? A straight line would mean the opportunity cost of each extra unit stays constant. The curve bows out because factors of production are not perfectly substitutable - they are specialised. Starting from all-food production, the first factors moved into making cars are the ones least suited to farming, so very little food is given up for a lot of cars. Keep going and you must move factors that are increasingly good at farming and increasingly bad at making cars, so each extra car costs more and more food. That rising cost is increasing opportunity cost, and the bowed shape is simply its picture. A straight-line PPC is not wrong - it just assumes factors are perfectly substitutable, and naming that assumption is what earns the mark.

Free goods and economic goods

• a free good 免费物品 has no opportunity cost. Its supply is unlimited, so it has no price (for example, air or sunlight).
• an economic good 经济物品 (also called a private good 私人物品) is scarce. Making it has an opportunity cost, so it has a price.

A private good has two features. It has rivalry 竞争性 (if I eat the apple, you cannot) and excludability 排他性 (the seller can stop you using it unless you pay).

Public goods

A public good 公共物品 is the opposite of a private good. It has two features:

• non-rivalry 非竞争性 — one person using it does not reduce the amount left for others.
• non-excludability 非排他性 — you cannot stop people who do not pay from using it.

Because of non-excludability, public goods suffer from the free-rider problem 搭便车问题: people enjoy the good without paying for it. So private firms cannot make a profit and will not supply it. The government must provide public goods instead — for example, street lighting and national defence 国防.

Merit and demerit goods

• a merit good 优值品 is better for you (and for society) than you realise, so people buy too little of it. Examples: education and health care.
• a demerit good 劣值品 is worse for you than you realise, so people buy too much of it. Examples: cigarettes and alcohol.

People misjudge these goods because of information failure 信息失灵 — they do not have, or do not use, the full facts about the benefit or harm.

Deciding what counts as a merit or demerit good is partly a value judgement, so people may disagree about which goods belong on each list.

• Frame answers around scarcity and choice: every choice has an opportunity cost — the next best alternative given up.
• Read a PPC: a point inside means unused resources, on the curve is efficient, outside is unattainable; the slope shows opportunity cost.
• Distinguish positive (a testable fact) from normative ("should", a value judgement) statements.
• Classify goods: free versus economic, and public / merit / demerit goods (non-excludable, non-rival, and so on).

demand 需求 is the quantity of a good that buyers are willing and able to buy at each price 价格 in a period of time. It is not just a wish — buyers must also be able to pay.

The law of demand says: when the price rises, the quantity demanded 需求量 falls; when the price falls, the quantity demanded rises. Price and quantity move in opposite directions.

So the demand curve 需求曲线 slopes downward, from top-left to bottom-right.

What shifts the demand curve

A change in the good's own price is shown as a movement along the demand curve. A change in any other cause shifts the whole curve to a new position — this is a shift 移动 of demand. The main causes (the determinants 决定因素) are:

• income 收入 — for most goods, higher income raises demand.
• the price of a substitute 替代品 — a good you can use instead (tea for coffee). If the substitute's price rises, demand for this good rises.
• the price of a complement 互补品 — a good used together with this one (cars and petrol). If the complement's price rises, demand for this good falls.
• tastes and fashion, the size of the population, and advertising.

Individual and market demand

One consumer 消费者 has an individual demand. The market demand 市场需求 is found by adding up the quantity that all consumers want at each price (adding the curves sideways).

Marginal utility and demand

utility 效用 is the satisfaction you get from consuming a good. marginal utility 边际效用 is the extra utility from one more unit.

The law of diminishing marginal utility 边际效用递减 says each extra unit gives less extra satisfaction than the one before. Because later units are worth less to you, you will only buy them at a lower price. This is why the demand curve slopes downward.

supply 供给 is the quantity of a good that producers 生产者 are willing and able to sell at each price in a period of time.

The law of supply says: when the price rises, the quantity supplied 供给量 rises. Higher prices mean more profit 利润, so firms make more. So the supply curve 供给曲线 slopes upward.

What shifts the supply curve

A change in the good's own price is a movement along the supply curve. Other causes shift the whole curve:

• costs of production 生产成本 — if wages, raw materials or rent get dearer, supply falls.
• technology — better machines raise supply.
• a subsidy 补贴 (government payment to producers) raises supply; an indirect tax lowers it.
• the number of firms 企业 in the market, and weather (for farm goods).

Individual and market supply

The market supply 市场供给 is found by adding up the quantity all firms will sell at each price.

price elasticity of demand 需求价格弹性 (PED) measures how much the quantity demanded responds when the price changes.

PED is normally negative (because of the law of demand), but we usually look at the size and drop the minus sign.

Worked example. The price of a good rises by 10% and the quantity demanded falls by 25%. Find the PED and classify the demand.

Ignoring the minus sign, $2.5 > 1$, so demand is elastic — quantity responded much more than the price did.

What makes demand elastic or inelastic

• the number and closeness of substitutes (more substitutes → more elastic).
• whether the good is a necessity 必需品 (inelastic) or a luxury 奢侈品 (elastic).
• the share of income spent on the good (a large share → more elastic).
• time — demand is more elastic in the long run, when buyers can find other options.
• habit or addiction makes demand inelastic.

PED and total revenue

total revenue 总收益 is the money a firm earns: $\text{TR} = \text{price} \times \text{quantity}$. PED tells a firm what happens to revenue when it changes the price:

This is useful to firms (how to price for more revenue) and to governments 政府 (a tax on an inelastic good, like petrol, raises a lot of revenue without cutting sales much).

income elasticity of demand 需求收入弹性 (YED) measures how much demand responds when income changes.

• a normal good 正常品 has positive YED: demand rises as income rises. Necessities have YED between 0 and 1; luxuries have YED above 1.
• an inferior good 低档品 has negative YED: demand falls as income rises (people switch to better goods). An example is cheap instant noodles.

Worked example. A person's income rises by 20% and their demand for restaurant meals rises by 30%. Find the YED and classify the good.

YED is positive and greater than 1, so restaurant meals are a normal good — and a luxury.

This helps firms plan: as incomes grow, demand for luxuries grows fastest.

cross elasticity of demand 需求交叉弹性 (XED) measures how much demand for one good responds when the price of another good changes.

• for substitutes, XED is positive (the price of B rises, so people buy more A).
• for complements, XED is negative (the price of B rises, so people buy less A and less B).
• for goods that are not related, XED is about zero.

Worked example. When the price of tea rises by 10%, the quantity of coffee demanded rises by 4%. Find the XED and say how the two goods are related.

XED is positive, so tea and coffee are substitutes.

This helps a firm watch its rivals: if XED with a rival's good is high and positive, a price cut by the rival will hurt its sales.

price elasticity of supply 供给价格弹性 (PES) measures how much the quantity supplied responds when the price changes.

PES is positive. Supply is elastic if it responds a lot, inelastic if it responds little.

Worked example. The price of a good rises by 8% and the quantity supplied rises by 4%. Find the PES.

PES is less than 1, so supply is inelastic.

What makes supply more elastic:

• spare capacity 闲置产能 — unused machines and workers, so firms can quickly make more.
• stocks 库存 — goods stored in a warehouse that can be sold fast.
• how easily factors of production can move into the industry.
• time. Economists split time into three periods:
  • the momentary 瞬时 period — supply is fixed; PES is zero.
  • the short run 短期 — at least one factor is fixed, so supply can rise only a little.
  • the long run 长期 — all factors can change, so supply is most elastic.

Equilibrium

The market is in equilibrium 均衡 where the demand curve crosses the supply curve. Here demand equals supply. This gives the equilibrium price 均衡价格 and the equilibrium quantity 均衡数量. There is no pressure for the price to change.

Disequilibrium

When the price is not at equilibrium, the market is in disequilibrium 非均衡:

• if the price is too low, there is excess demand 超额需求 (a shortage 短缺). Buyers compete, so the price is pushed up.
• if the price is too high, there is excess supply 超额供给. Sellers cannot sell everything, so the price is pushed down.

In both cases the price moves back to equilibrium. This shows the price mechanism doing its jobs of signalling, rationing and giving an incentive.

How shifts change the equilibrium

Demand and supply in different markets

The same analysis works in many markets:

• in product markets 产品市场, demand and supply set the price of goods and services.
• in factor markets 要素市场, they set the price of factors — for example, the demand for and supply of labour set the wage 工资.
• in the foreign exchange market 外汇市场, the demand for and supply of a currency set the exchange rate 汇率 (the price of one currency in terms of another).

consumer surplus 消费者剩余 is the gain to buyers. It is the difference between the most a consumer was willing to pay and the price actually paid. On a diagram it is the area below the demand curve and above the price line.

producer surplus 生产者剩余 is the gain to sellers. It is the difference between the price a producer receives and the lowest price the producer would have accepted. On a diagram it is the area above the supply curve and below the price line.

How they change:

• if demand rises, the price and quantity rise, so producer surplus rises and consumer surplus usually rises too.
• if supply rises, the price falls and quantity rises, so consumer surplus rises.
• a higher price (with the curves fixed) raises producer surplus but lowers consumer surplus.

Together, consumer surplus plus producer surplus is the total welfare 福利 (gain to society) from the market. It is largest at the free-market equilibrium.

• Quote the elasticity formula and interpret the value: PED inelastic ($<1$), elastic ($>1$); link PED to total revenue.
• Distinguish a movement along (a price change) from a shift (a non-price factor) of demand or supply.
• Use the sign of XED (substitutes $+$, complements $-$) and YED (normal $+$, inferior $-$).
• On a diagram, label consumer and producer surplus and show how a price change alters each.

A free market often gives a good result, but not always. market failure 市场失灵 is when the market does not allocate 配置 (share out) resources efficiently — too much or too little of a good is made. Then the government may step in.

There are several reasons for market failure.

Externalities

An externality 外部性 is a cost or a benefit that falls on a third party 第三方 — someone who is not the buyer or the seller.

• a negative externality 负外部性 is an external cost 外部成本 paid by others, like the pollution from a factory. The social cost 社会成本 (the cost to all of society) is bigger than the private cost 私人成本 (the cost to the producer). When people ignore the external cost, the market makes too much of the good.
• a positive externality 正外部性 is an external benefit 外部收益 enjoyed by others, like the protection that vaccination gives to everyone. Here the market makes too little, because buyers ignore the benefit to others.

Public goods

A public good 公共物品 (like street lighting or national defence) has non-rivalry 非竞争性 and non-excludability 非排他性. Because non-payers cannot be shut out, there is a free-rider problem 搭便车问题, so private firms make no profit and supply none. The market fails completely.

Merit and demerit goods

A merit good 优值品 (like education) is under-consumed; a demerit good 劣值品 (like cigarettes) is over-consumed. People misjudge them because of information failure 信息失灵 — they do not know, or do not use, the true benefit or harm.

Monopoly power

monopoly 垄断 means one firm dominates a market. A firm with monopoly power 垄断势力 can cut output and raise the price above the competitive level. This wastes resources and harms consumers.

Inequality and asymmetric information

• the market rewards people who own resources, so it can produce great inequality 不平等 — some people are left with too little to live on.
• asymmetric information 信息不对称 is when one side of a deal knows more than the other (a used-car seller knows the faults; the buyer does not). This leads to poor decisions and unfair deals.

Indirect taxes

An indirect tax 间接税 is a tax on spending. It raises a firm's costs, shifts the supply curve to the left, and so raises the price and cuts the quantity. Governments tax demerit goods (like tobacco) and goods with negative externalities to make people use less.

The incidence of a tax 税收归宿 is who really pays it. This depends on elasticity:

• if demand is inelastic 缺乏弹性, consumers pay most of the tax (the price rises by nearly the full tax).
• if demand is elastic 富有弹性, producers pay most of the tax (they cannot pass it on).

Subsidies

A subsidy 补贴 is a government payment to producers. It lowers their costs, shifts the supply curve to the right, and so lowers the price and raises the quantity. Subsidies are used for merit goods and goods with positive externalities.

Maximum and minimum prices

• a maximum price 最高限价 is a legal top price, set below equilibrium (for example, rent control). Because the price is held down, quantity demanded is greater than quantity supplied, so there is a shortage 短缺.
• a minimum price 最低限价 is a legal bottom price, set above equilibrium (for example, a minimum wage, or a floor for farm prices). Because the price is held up, quantity supplied is greater than quantity demanded, so there is excess supply 超额供给.

Buffer stocks

A buffer stock 缓冲库存 is used to steady the price of farm goods. The government buys and stores the good when the price is low, and sells from the store when the price is high. This keeps the price inside a target band.

Regulation, provision and permits

• regulation 管制 means rules and laws — bans, age limits, safety standards, or pollution limits.
• state provision 政府提供 means the government 政府 supplies a good directly, often free at the point of use (public goods and merit goods like schools and hospitals).
• tradable permits 可交易许可证 set a total cap on pollution and give firms permits to pollute. Firms that pollute less can sell spare permits to firms that pollute more. This caps total pollution at the lowest cost.

Government failure

Intervention does not always help. government failure 政府失灵 is when the government's action makes the use of resources worse, not better. Common causes:

• poor information, so the government sets the wrong tax or subsidy.
• high cost of running the policy.
• unintended results — for example, a maximum price can create an illegal black market 黑市.
• decisions made for political reasons rather than for efficiency.

Worked example. A government puts a £2 per-packet tax on cigarettes, whose demand is very price-inelastic. Who really pays it, and what does that mean for the policy's two aims? The incidence falls mainly on whichever side is less able to respond - the more inelastic one. Because smokers keep buying almost the same quantity as the price rises, producers can pass most of the tax on, so consumers bear most of the incidence: the price might rise by about £1.80, with producers absorbing only about £0.20. That creates the tension the question is really testing. As a revenue raiser the tax succeeds: quantity barely falls, so revenue is large and steady. As a way of cutting consumption it largely fails - for exactly the same reason. And because poorer smokers spend a larger share of their income on it, the tax is regressive. Argue from elasticity to incidence, then judge each aim separately.

It helps to separate two ideas:

• income 收入 is a flow 流量 — money received over a period, such as wages, rent and interest.
• wealth 财富 is a stock 存量 — the value of assets owned at a point in time, such as houses, shares and savings.

Wealth produces income (savings earn interest), and income can be saved to build wealth, so the two are linked. Inequality has many causes: differences in skills and wages, the ownership of wealth, inheritance, and unemployment.

Policies to reduce inequality

• a progressive tax 累进税 takes a larger percentage 百分比 from higher incomes than from lower incomes. This narrows the gap after tax.
• benefits 福利金 (also called transfer payments 转移支付) are money paid by the government to the poor, the old, and the unemployed.
• state provision of free services, like education and health care, raises the real living standards of poorer people.

Together these policies bring about redistribution 再分配 — moving income and wealth from richer to poorer people. But there is a trade-off 取舍: very high taxes and large benefits may weaken the incentive 激励 to work and to invest.

• Define market failure as a misallocation of resources, then name the type (externality, public good, information gap).
• On an externality diagram, mark the divergence of private and social cost/benefit and shade the welfare loss.
• Evaluate each intervention (tax, subsidy, regulation, tradable permits) with one advantage and one drawback.
• Show that tax incidence depends on elasticity — the more inelastic side bears more of the tax.

To judge how an economy is doing, we measure its national income 国民收入 — the total value of everything it produces in a year.

• gross domestic product 国内生产总值 (GDP) is the value of all goods and services made inside a country in a year.
• gross national income 国民总收入 (GNI) is GDP plus the income a country's people and firms earn abroad, minus income foreigners earn inside it.

Two important differences:

• nominal 名义 values are measured at current prices. real 实际 values are adjusted to remove the effect of rising prices, so they show the true change in output. Always compare real values over time.
• total values cover the whole country. per capita 人均 values are divided by the population, so they show the average per person.

Uses and limitations

National income is used to measure the standard of living 生活水平 and to compare countries. But it has limits:

• it ignores the distribution 分配 of income — a high average can hide great inequality.
• it leaves out unpaid work (housework) and the informal economy 非正规经济 (hidden, untaxed activity).
• it says nothing about pollution, leisure time, or health.

So a higher GDP per capita usually means a better life, but not always.

The circular flow of income 收入循环流 shows money moving around the economy. Households 家庭 supply factors of production to firms 企业 and receive income (wages, rent, interest, profit). They spend that income on goods and services, and the money flows back to firms.

Money also leaves and enters this flow:

• leakages 漏出 take money out of the flow: saving 储蓄, taxation 税收, and spending on imports 进口.
• injections 注入 put money into the flow: investment 投资, government spending 政府支出, and exports 出口.

The flow is in equilibrium 均衡 when total injections equal total leakages. If injections are greater, the economy grows; if leakages are greater, it shrinks.

A closed economy 封闭经济 has no trade with other countries. An open economy 开放经济 trades, so it has exports and imports.

Aggregate demand

aggregate demand 总需求 (AD) is the total spending on a country's goods and services at each price level. It has four parts:

• C is consumption 消费 — spending by households.
• I is investment — spending by firms on capital.
• G is government spending.
• (X − M) is net exports 净出口 — exports minus imports.

The AD curve slopes downward: a lower price level means higher real spending, so a greater real output is demanded. AD shifts when any of its four parts changes (for example, a tax cut raises C).

Aggregate supply

aggregate supply 总供给 (AS) is the total output firms are willing to make at each price level.

• short-run aggregate supply 短期总供给 (SRAS) slopes upward. In the short run, higher prices make production more profitable, so firms supply more. SRAS shifts when costs change (wages, raw materials, taxes).
• long-run aggregate supply 长期总供给 (LRAS) shows the economy's full productive capacity 生产能力. It shifts only when the quantity or quality of factors changes.

Macroeconomic equilibrium

macroeconomic equilibrium 宏观经济均衡 is where AD crosses AS. It sets the price level 价格水平 and the real output 实际产出 of the economy. A shift in AD or AS changes both.

economic growth 经济增长 is a rise in a country's real output (real GDP) over time.

• actual growth 实际增长 is the rise in output that really happens (a movement to a point further out, or from inside the LRAS towards it).
• potential growth 潜在增长 is the rise in the economy's capacity (the LRAS shifting outward).

Growth is caused by more or better factors of production: a bigger or more skilled workforce, more investment in capital, new technology, and higher productivity 生产率 (output per worker).

The business cycle

Real output does not grow smoothly. The business cycle 经济周期 (also called the trade cycle) is the up-and-down pattern of output over the years. It has four phases: boom 繁荣 (fast growth), recession 衰退 (falling output), slump 萧条 (the low point), and recovery 复苏.

Costs and benefits of growth

unemployment 失业 means people who are able and willing to work, and are looking for a job, but cannot find one.

Measuring unemployment

• the claimant count 申领救济人数 counts only people claiming unemployment benefits. It is cheap but misses those who do not claim.
• the labour force survey 劳动力调查 asks a large sample whether they are working or seeking work. It follows an international standard, so it is better for comparing countries. The labour force 劳动力 is everyone working or looking for work.

Types and causes

• frictional unemployment 摩擦性失业 — short-term, while people move between jobs.
• structural unemployment 结构性失业 — when an industry declines and workers' skills no longer match the jobs available.
• cyclical unemployment 周期性失业 — caused by low AD in a recession. This is usually the largest type.
• seasonal unemployment 季节性失业 — when work is only available at certain times of the year (such as farming or tourism).

Consequences

Unemployment wastes output (the economy produces inside its PPC), lowers incomes, and costs the government (more benefits, less tax). It also harms families and can raise crime and ill health.

Inflation, deflation and disinflation

• inflation 通货膨胀 is a sustained rise in the general price level. Money then buys less, so its purchasing power 购买力 falls.
• deflation 通货紧缩 is a sustained fall in the general price level.
• disinflation 反通货膨胀 is when inflation is still positive but is slowing down (prices rise, but more slowly).

The price level is measured with the consumer price index 消费者价格指数 (CPI). A typical household's spending is used to build a "basket" of goods. Each good is given a weight 权重 for how much is spent on it, and the change in the basket's cost from year to year is the inflation rate:

Worked example. A country's CPI rises from $100$ to $104$ over one year, then to $107$ the year after. Find the inflation rate in each year.

Year 1: $\dfrac{104 - 100}{100} \times 100\% = 4\%$. Year 2: $\dfrac{107 - 104}{104} \times 100\% = 2.9\%$.

Notice that prices are still rising in year 2, just more slowly — this fall in the inflation rate (from $4\%$ to $2.9\%$) is disinflation, not deflation.

Worked example. A worker's wage rises from $\text{\pounds} 500$ to $\text{\pounds} 520$ a week (a $4\%$ rise) while the CPI rises by $4\%$. What happens to the real wage?

Money (nominal) pay is up $4\%$, but prices are also up $4\%$, so the real wage — what the pay can actually buy — is unchanged. A pay rise only raises living standards if it beats inflation.

Causes of inflation

• demand-pull inflation 需求拉动型通货膨胀 — AD rises faster than AS, so "too much money chases too few goods".
• cost-push inflation 成本推动型通货膨胀 — firms' costs rise (wages or raw materials), so they raise prices, shifting SRAS to the left.

Consequences

Inflation lowers purchasing power, especially for people on fixed incomes. It creates uncertainty, can make a country's exports dearer, and helps borrowers but harms savers. Deflation sounds good but can be harmful: people delay buying (waiting for lower prices), so AD falls, firms cut output, and unemployment rises.

• Distinguish real vs nominal (real removes inflation) and calculate an inflation rate from a price index.
• Explain AD $= C + I + G + (X - M)$ and what shifts each part; distinguish an AD shift from an AS shift.
• Distinguish the types of unemployment (frictional, structural, cyclical) and how each is tackled.
• Distinguish demand-pull vs cost-push inflation on an AD/AS diagram.

A government usually has five main aims:

• price stability 物价稳定 — low and steady inflation 通货膨胀 (often a target of about 2% a year).
• full employment 充分就业 — jobs for almost everyone who wants to work.
• economic growth 经济增长 — a rising real output over time.
• balance of payments 国际收支 stability — not importing far more than the country exports for years on end.
• redistribution of income 收入再分配 — narrowing the gap between rich and poor.

Conflicts between objectives

The aims can conflict 冲突 — reaching one can hurt another:

• growth versus inflation: fast growth raises aggregate demand 总需求, which can pull prices up.
• growth versus the balance of payments: as incomes rise, people buy more imports, worsening the trade balance.
• unemployment versus inflation: cutting unemployment by raising demand can cause more inflation.
• growth versus the environment: more output often means more pollution.

The government has three sets of tools. Fiscal and monetary policy are demand-side policies 需求侧政策 (they work on AD). Supply-side policy works on aggregate supply 总供给.

fiscal policy 财政政策 is the use of government spending and taxation to influence the economy.

The budget 预算 compares the two:

• a budget deficit 预算赤字 is when spending is greater than tax revenue. The government must borrow, adding to the national debt 国债.
• a budget surplus 预算盈余 is when tax revenue is greater than spending.

Types of tax

• a direct tax 直接税 is paid straight to the government on income or profit (income tax, corporation tax).
• an indirect tax 间接税 is a tax on spending (added to the price of goods).

Taxes are also grouped by how the rate changes with income:

Using fiscal policy

• expansionary 扩张性 fiscal policy raises government spending or cuts taxes. This raises AD, to fight a recession and unemployment.
• contractionary 紧缩性 fiscal policy cuts spending or raises taxes. This lowers AD, to fight inflation.

Effectiveness. Fiscal policy can act fast on AD, but it has problems: time lags (a budget is set once a year), large deficits and debt, and crowding out 挤出效应 — when heavy government borrowing pushes up interest rates and reduces private investment.

monetary policy 货币政策 is run by the central bank 中央银行. Its main tool is the interest rate 利率, but it can also change the money supply 货币供给 or influence the exchange rate 汇率.

The transmission mechanism

The transmission mechanism 传导机制 is how a change in the interest rate reaches the wider economy. If the central bank raises the interest rate:

• borrowing becomes dearer, so households and firms spend and invest less.
• saving is rewarded, so people spend less.
• the currency tends to rise, so exports fall.

All of these lower AD, which slows inflation. A cut in the interest rate does the opposite, raising AD.

Effectiveness. Monetary policy is flexible (the rate can change at any time), but it works with a time lag of a year or more. In a deep slump, even very low rates may not make worried firms and households borrow.

supply-side policy 供给侧政策 tries to raise the economy's productive capacity 生产能力 — to shift long-run aggregate supply to the right. It aims to make markets work better and raise productivity 生产率.

There are two kinds.

Market-based policies let markets work more freely:

• cutting income tax and benefits to strengthen the incentive 激励 to work.
• privatisation 私有化 — selling state firms to private owners, who run them for profit.
• deregulation 放松管制 — removing rules that block competition.

Interventionist policies use the government directly:

• spending on education and training 培训 to raise workers' skills.
• spending on infrastructure 基础设施 — roads, ports and broadband.
• support for research and new technology.

Effectiveness. Supply-side policy is powerful because it can raise growth and lower inflation at the same time, with no trade-off. But it is slow (education takes years to pay off), costly, and some measures, like cutting benefits, can widen inequality.

Worked example. An economy is in a deep recession with a large output gap, and interest rates are already near zero. Which policy should the government use, and why is the other one weak here? Monetary policy is weak: with the base rate already near zero there is almost no room to cut further, and even cheap credit will not make firms invest when they expect no demand. Fiscal policy is stronger: government spending raises aggregate demand directly, without waiting for anyone to choose to borrow, and the multiplier means each pound spent raises national income by more than a pound as it is re-spent. Weigh the costs against it - a bigger budget deficit and rising debt, plus time lags on large projects. Match the policy to the constraint named in the question: here it is the zero lower bound, and that is precisely what makes fiscal policy the answer.

• Match a policy to an objective: fiscal and monetary policy act on demand; supply-side policy raises long-run capacity.
• Explain how a change in interest rates works through AD, and fiscal policy through $G$ and $T$.
• Evaluate policy with time lags, side effects and conflicts between objectives.
• Supply-side measures (education, tax incentives) are long-run and slow to work.

international trade 国际贸易 lets countries buy and sell with each other. Trade lets each country specialise 专业化 in what it makes best, so the world makes more in total.

Absolute and comparative advantage

• a country has an absolute advantage 绝对优势 in a good if it can make more of it with the same resources than another country.
• a country has a comparative advantage 比较优势 in a good if it can make it at a lower opportunity cost 机会成本 than another country.

Comparative advantage is the key idea: a country should make the goods it gives up least to produce, and trade for the rest. Look at this example, where each country uses the same resources:

Country A is better at both (absolute advantage in both). But think about opportunity cost:

• in A, making 1 cloth means giving up 2 wine.
• in B, making 1 cloth means giving up 1 wine.

So B gives up less to make cloth — B has the comparative advantage in cloth. A has it in wine. If A makes only wine and B makes only cloth, and they trade, both can end up with more than before.

Terms of trade

The terms of trade 贸易条件 measure the price of a country's exports compared with the price of its imports. It is worked out as an index:

If export prices rise faster than import prices, the terms of trade "improve" — the country can buy more imports for the same exports.

Worked example. Over a year, a country's export price index rises from $100$ to $110$, while its import price index rises from $100$ to $105$. Find the new terms of trade.

The figure is above $100$, so the terms of trade have improved: each unit of exports now buys about $4.8\%$ more imports than before.

Limits of the theory

The gains are real, but the simple theory assumes no transport costs, no trade barriers, and that costs do not change with output. In the real world these do not fully hold, and specialising in one good is risky if its price falls.

protectionism 贸易保护主义 means a government protecting home producers from foreign competition. The main tools:

• a tariff 关税 — a tax on imports, which raises their price.
• a quota 配额 — a legal limit on the quantity of a good that may be imported.
• a subsidy 补贴 to home producers, so they can sell more cheaply than foreign rivals.
• an embargo 禁运 — a complete ban on trade with a country or in a good.
• administrative barriers 行政壁垒 — extra paperwork and tough standards that make importing hard.

For and against

Arguments for protection include protecting an infant industry 幼稚产业 (a young industry that needs time to grow), saving jobs, and stopping dumping 倾销 (foreign firms selling below cost to destroy local rivals).

Arguments against are strong: protection raises prices for consumers, protects weak firms so they stay inefficient, and can lead to retaliation 报复 — other countries hitting back with their own barriers.

Effects on stakeholders

A tariff affects each stakeholder 利益相关者 differently: home producers gain, the government gains tariff revenue, but consumers lose (higher prices, less choice) and foreign producers lose sales.

The balance of payments 国际收支 is a record of all money flows between one country and the rest of the world. Its most-studied part is the current account 经常账户, which has four parts:

• trade in goods 货物贸易 — exports and imports of physical goods.
• trade in services 服务贸易 — exports and imports of services (tourism, banking).
• primary income 初次收入 — income from work and investment abroad (wages, profit, interest).
• secondary income 二次收入 — transfers with nothing given back, like foreign aid.

A current account deficit 经常账户赤字 means a country buys more from abroad than it sells. A current account surplus 经常账户盈余 is the opposite. A long deficit can mean rising debt to other countries; a large surplus can mean the country saves a lot but consumes little.

An exchange rate 汇率 is the price of one currency in terms of another. There are three main systems.

• a floating exchange rate 浮动汇率 is set freely by the demand for and supply of the currency. If more people want a currency (to buy its exports), its value rises.
• a fixed exchange rate 固定汇率 is held at a set value by the central bank, which buys and sells the currency to keep it there.
• a managed exchange rate 管理浮动汇率 mostly floats, but the central bank steps in now and then to steady it.

Appreciation and depreciation

Under floating rates:

• appreciation 升值 is a rise in the currency's value. Exports become dearer for foreigners, and imports become cheaper.
• depreciation 贬值 is a fall in the currency's value. Exports become cheaper, and imports become dearer.

A depreciation can therefore raise export sales and cut imports, helping the current account — but it can also raise inflation, because imports cost more.

Worked example. Suppose the exchange rate is $\text{\pounds} 1 = \$1.40$.

A UK exporter's $\text{\pounds} 200$ machine costs an American buyer $\text{\pounds} 200 \times 1.40 = \$280$. If the pound then appreciates to $\text{\pounds} 1 = \$1.60$, the same machine costs $\text{\pounds} 200 \times 1.60 = \$320$ — dearer for the American, so fewer are sold. Going the other way, a $\$700$ invoice from a US supplier costs a UK firm $\$700 \div 1.40 = \text{\pounds} 500$.

A government can use three kinds of policy to cut a deficit:

• expenditure-reducing 支出减少 policies lower total demand (higher taxes or interest rates), so people buy fewer imports. But they also slow growth and raise unemployment.
• expenditure-switching 支出转换 policies move spending away from imports towards home goods (a tariff, or a lower exchange rate). But they can cause retaliation or inflation.
• supply-side policies raise the competitiveness 竞争力 of home firms (better skills and technology), so exports rise. These work best in the long run but are slow.

• Explain comparative advantage through opportunity cost (specialise where you give up least) and state its assumptions and limits.
• Evaluate protectionism (tariffs, quotas): it can protect jobs but raises prices and risks retaliation.
• Read the balance of payments (the current account covers trade, income and transfers).
• A depreciation makes exports cheaper and imports dearer, helping the current account only if demand is elastic enough (Marshall-Lerner).

utility 效用 is the satisfaction a consumer gets from a good.

• total utility 总效用 is the satisfaction from all the units consumed.
• marginal utility 边际效用 is the extra satisfaction from one more unit.

The law of diminishing marginal utility 边际效用递减 says each extra unit gives less extra satisfaction. Total utility still rises, but more and more slowly.

The equi-marginal principle

A consumer with a fixed budget gets the most total utility when the last dollar spent on each good gives the same extra utility. This is the equi-marginal principle 等边际原则:

Because marginal utility falls as you buy more, you only buy extra units when the price falls. This is why the demand curve 需求曲线 slopes downward.

Limitations

The approach is hard to use in practice: utility cannot really be measured in numbers, and people do not calculate like this. It also ignores habit and advertising.

An indifference curve 无差异曲线 shows all the combinations of two goods that give a consumer the same total utility. It slopes downward (more of one good means less of the other) and bows in towards the origin.

A budget line 预算线 shows all the combinations the consumer can just afford with their income, at the current prices.

consumer equilibrium 消费者均衡 is the best the consumer can do: the point where the budget line just touches the highest possible indifference curve.

Income and substitution effects

When the price of a good falls, the consumer buys more for two reasons:

• the substitution effect 替代效应 — the good is now cheaper than others, so the consumer switches towards it.
• the income effect 收入效应 — the consumer's money now buys more, so real income has risen.

These effects work differently for different goods:

• for a normal good 正常品, both effects raise the quantity bought.
• for an inferior good 低档品, the income effect works the other way (higher real income lowers demand), but it is usually weaker, so demand still rises when price falls.
• a Giffen good 吉芬品 is a rare, very inferior good where the income effect is so strong that demand actually falls when the price falls. Its demand curve slopes upward.

Economists judge how well resources are used.

• productive efficiency 生产效率 — making goods at the lowest possible cost (using the fewest resources).
• allocative efficiency 配置效率 — making the goods people most want, where price equals marginal cost.
• Pareto optimality 帕累托最优 — a point where no one can be made better off without making someone else worse off.
• dynamic efficiency 动态效率 — improving over time through new technology and better products.

market failure 市场失灵 happens when the free market does not reach an efficient result. The main causes are monopoly power, externalities 外部性, public goods 公共物品, information failure 信息失灵, and factor immobility 要素不流动性 (factors cannot move quickly to where they are needed).

Some costs and benefits fall on people outside the deal. We separate three levels:

• a private cost 私人成本 or private benefit 私人收益 falls on the buyer or seller.
• an external cost 外部成本 or external benefit 外部收益 falls on a third party.
• the social cost 社会成本 is private cost plus external cost; the social benefit 社会收益 is private benefit plus external benefit.

Marginal analysis

We study externalities with marginal analysis 边际分析, using these curves:

• marginal private cost 边际私人成本 (MPC) and marginal social cost 边际社会成本 (MSC).
• marginal private benefit 边际私人收益 (MPB) and marginal social benefit 边际社会收益 (MSB).

The best outcome for society is where MSC = MSB. But the market produces where MPC = MPB. The gap between these creates lost welfare.

• a negative externality 负外部性 (like pollution) means MSC is above MPC. The market makes too much.
• a positive externality 正外部性 (like education) means MSB is above MPB. The market makes too little.

The lost welfare from making too much or too little is the deadweight welfare loss 无谓损失 — the triangle on the diagram between the social and private curves.

Costs

In the short run 短期, at least one factor is fixed; in the long run 长期, all factors can change.

Worked example. Making $10$ units costs £500 in total; making $11$ units costs £540. Find the average cost at $10$ units and the marginal cost of the 11th unit.

Here $MC$ ($\text{\pounds} 40$) is below $AC$ ($\text{\pounds} 50$), so making the 11th unit pulls the average cost down — whenever marginal cost is below average cost, average cost falls.

In the short run, output is limited by the law of diminishing returns 边际报酬递减: as you add more of a variable factor (workers) to a fixed factor (machines), each extra worker eventually adds less output. This makes marginal cost rise.

In the long run, all factors vary, so we look at returns to scale 规模报酬. As a firm grows, it can gain economies of scale 规模经济 (lower average cost from buying in bulk, using big machines, and specialising). If it grows too big, it may suffer diseconomies of scale 规模不经济 (poor communication and control), and average cost rises.

Revenue

Worked example. A firm sells $10$ units at £50 each. To sell an 11th unit it must lower the price to £48 on every unit. Find the total revenue at each output and the marginal revenue of the 11th unit.

The marginal revenue ($\text{\pounds} 28$) is well below the £48 price, because the lower price applies to all $11$ units, not just the extra one.

Profit

Profit is total revenue minus total cost. Economists include the opportunity cost of the owner's resources in cost, so:

• normal profit 正常利润 is just enough profit to keep the firm in the industry. It counts as a cost.
• supernormal profit 超常利润 (also called abnormal profit) is profit above normal.
• subnormal profit 次正常利润 is profit below normal — the firm may leave in the long run.

A firm makes the most profit at the output where $MR = MC$.

Worked example. At its best output a firm makes $100$ units, sells each for £12 (its average revenue), and has an average cost of £9. Find the supernormal profit.

Because average revenue (£12) is above average cost (£9), the firm earns supernormal profit. If instead $AR = AC$, it would make only normal profit; if $AR < AC$, it would make a loss.

A market structure 市场结构 describes a market by the number of firms, the barriers to entry, and the type of product.

• in perfect competition, each firm is a tiny price taker 价格接受者 — it must accept the market price. Firms make only normal profit in the long run, and the market is both productively and allocatively efficient.
• in monopolistic competition, many firms sell slightly different products (product differentiation 产品差异化), so each has a little price-setting power, but free entry competes profit away.
• in an oligopoly, a few large firms dominate. They watch each other closely. They may compete hard on price, or they may agree to fix prices — this is collusion 合谋, and a group that does so is a cartel 卡特尔.
• a monopoly is a single seller protected by high barriers to entry 进入壁垒. It can earn supernormal profit for a long time but is usually inefficient.

Price and non-price competition

• price competition 价格竞争 means cutting prices to win customers.
• non-price competition 非价格竞争 means competing in other ways — advertising, quality, branding and service.

Price discrimination

price discrimination 价格歧视 is charging different consumers different prices for the same good (for example, cheaper train tickets for students). It needs price-setting power, groups with different elasticities, and a way to stop resale between groups. It raises the firm's profit.

Firms grow in two ways:

• internal growth 内部增长 (organic) — growing bigger by selling more.
• external growth 外部增长 — joining with another firm through a merger 合并 or takeover. Types:
  • horizontal integration 横向一体化 — joining a firm at the same stage of the same industry (two car makers).
  • vertical integration 纵向一体化 — joining a firm at a different stage (a car maker buys a tyre maker).
  • conglomerate integration 混合一体化 — joining a firm in a different industry, to spread risk.

Why some firms stay small

Many firms stay small because the market is small (local services), the owner wants to keep control, or there are few economies of scale. They survive by offering personal service or filling a niche 利基市场.

Firms also face barriers to entry and barriers to exit 退出壁垒 (such as costly machines that cannot be sold). High exit barriers can trap a firm in a loss-making market.

Not every firm simply chases the most profit.

• profit maximisation 利润最大化 — producing where MR = MC. The traditional aim.
• revenue maximisation 收益最大化 — producing where MR = 0, perhaps to grow market share.
• sales maximisation 销售最大化 — selling as much as possible while still making normal profit.
• satisficing 满意化 — aiming for "good enough" results that keep owners, workers and customers all reasonably happy.

Divorce of ownership from control

In large companies the owners (shareholders) are not the managers. This divorce of ownership from control 所有权与控制权分离 creates the principal-agent problem 委托代理问题: managers (the agents) may pursue their own aims — bigger salaries or an easier life — instead of the owners' aim of maximum profit.

• Calculate AC, MC, TR and MR, and remember a firm maximises profit where $MR = MC$.
• Distinguish the market structures (perfect competition, monopolistic competition, oligopoly, monopoly) by number of firms, barriers and price-setting power.
• Distinguish normal from supernormal profit and link long-run entry and exit to it.
• On a cost diagram, note that MC cuts AC at the minimum of AC.

A government has many tools to push a market towards a better use of resources.

• an indirect tax 间接税 on a good with a negative externality (like fuel) raises its price and cuts the quantity used.
• a subsidy 补贴 for a good with a positive externality (like solar panels) lowers its price and raises the quantity.
• a price control 价格管制 sets a legal maximum or minimum price.
• tradable permits 可交易许可证 cap total pollution and let firms buy and sell the right to pollute.
• regulation 管制 uses rules and laws, such as bans, safety standards and pollution limits.
• state provision 政府提供 means the government supplies a good directly, often free (schools, hospitals, defence).
• nationalisation 国有化 is taking an industry into government ownership; privatisation 私有化 is selling a state industry to private owners.

Competition policy

A firm with monopoly power 垄断势力 can raise prices and cut output. competition policy 竞争政策 is the set of laws used to protect competition — for example, blocking mergers that create too much power, banning price-fixing, and fining firms that abuse their position.

Government failure

Intervention can backfire. government failure 政府失灵 is when the government's action leads to a worse use of resources than before — through poor information, high costs, long time lags, or unintended effects (such as a black market caused by a price control).

It is important to separate two words that sound alike:

• equity 公平 means fairness — people getting what is fair, which may not be an equal share.
• equality 平等 means everyone getting the same.

A fair (equitable) outcome is not always an equal one. Most governments worry about too much inequality 不平等.

Remember the difference between the two things being shared:

• income 收入 is a flow received over time (wages, rent, interest).
• wealth 财富 is a stock of assets owned (houses, shares, savings).

Measuring inequality

• the Lorenz curve 洛伦兹曲线 is a graph. It plots the share of total income against the share of the population, from poorest to richest. A straight diagonal line would mean perfect equality. The further the curve bends below the line, the more unequal the country.
• the Gini coefficient 基尼系数 turns this into one number between 0 and 1. Zero means perfect equality; one means one person has everything. A higher number means more inequality.

Policies to redistribute

• a progressive tax 累进税 takes a larger share from higher incomes.
• benefits 福利金 (also called transfer payments 转移支付) give money to the poor, the old and the unemployed.
• free state services (education, health care) raise the real living standards of the poor.

These bring about redistribution 再分配 — moving income from richer to poorer people. Wealth is harder to redistribute than income, because the rich can hide assets or move them abroad, and wealth taxes are hard to collect.

Worked example. Country X has a Gini coefficient of 0.25 and country Y one of 0.48. What does that mean, and what does each Lorenz curve look like? The Gini runs from 0 (perfect equality) to 1 (one person has everything), so a higher number means more unequal: country Y at 0.48 is markedly more unequal than X at 0.25. On the graph, Y's Lorenz curve sags further below the 45° line of equality, while X's hugs it more closely. The Gini is exactly the area between the line of equality and the Lorenz curve, as a fraction of the whole triangle beneath that line - which is why a bigger sag gives a bigger number. One caution is worth stating: the Gini measures relative inequality only. It says nothing about absolute living standards, so a poor country and a rich one can share the same Gini.

A wage is just a price — the price of labour — so we use demand and supply to study the labour market 劳动力市场.

The demand for labour

The demand for labour 劳动力需求 is a derived demand 派生需求: firms want workers not for their own sake, but to make goods that sell. So labour demand depends on the marginal revenue product 边际收益产品 (MRP) — the extra revenue one more worker brings in. A worker is worth hiring while the MRP is at least as big as the wage.

The supply of labour

The supply of labour 劳动力供给 to a job rises when the wage 工资 rises, and also depends on training needed, working conditions, and how many people have the right skills.

In a competitive labour market, the wage settles where the demand for labour equals the supply of labour.

When the market is not competitive

• a monopsony 买方垄断 is a single, dominant buyer of labour (for example, the only large employer in a town). It can pay a wage below the competitive level and hire fewer workers.
• a trade union 工会 is an organised group of workers that bargains for higher pay. A union can push the wage above the competitive level, but this may reduce the number of jobs.
• a national minimum wage 全国最低工资 is a legal lowest wage. Set above the market wage, it raises low pay but may cause some unemployment. Interestingly, in a monopsony it can raise both the wage and employment.