Basic Economic Concepts

Economics 经济学 begins with one stubborn fact: people's wants are effectively unlimited, but the resources 资源 to satisfy them are limited. This gap is scarcity 稀缺性, and it is why economics exists – if everything were free and endless, there would be nothing to decide.

The resources (the factors of production 生产要素) are land (natural resources), labor 劳动 (human effort), capital 资本 (tools, machines, buildings), and entrepreneurship 企业家才能 (organizing the other three and taking risks). Because these are scarce, every economy must answer three questions: what to produce, how to produce it, and for whom to produce.

Scarcity forces choice, and every choice has an opportunity cost 机会成本 – the value of the next-best alternative you give up. This single idea runs through the whole course: the true cost of anything is what you sacrifice to get it, not just the money you pay.

An economic system 经济体制 is a society's way of answering the three questions.

Economic systems form a spectrum from a free market to full government planning

• In a market economy 市场经济, private buyers and sellers decide through prices; self-interest and competition coordinate them (the "invisible hand").
• In a command economy 计划经济, the government owns resources and plans production.
• Real economies are mixed 混合经济 – mostly markets, with government providing some goods and correcting problems.

The key advantage of markets is that prices carry information and incentives 激励 automatically, with no central planner needed.

The production possibilities curve (PPC) 生产可能性曲线 shows the maximum combinations of two goods an economy can produce with its resources and technology fully and efficiently used.

Points on, inside, and outside the production possibilities curve

• Points on the curve are efficient 有效率; points inside are inefficient (wasted or unemployed resources); points outside are currently unattainable 无法实现.
• The PPC's downward slope shows opportunity cost: making more of one good means making less of the other. The slope at a point is the opportunity cost of the good on the horizontal axis.
• A bowed-out (concave) PPC shows increasing opportunity cost – resources are not equally suited to both goods, so making more of one costs ever more of the other. A straight-line PPC means constant opportunity cost.
• Economic growth 经济增长 (more resources, better technology) shifts the whole curve outward.

Exam skill: be ready to read opportunity cost off a PPC, decide if a point is efficient/inefficient/unattainable, and explain what shifts the curve.

A production possibilities curve: efficient, inefficient, and unattainable points

Two producers can both gain from trade by specializing 专业化.

Comparative advantage comes from differently-sloped production possibilities curves

• A producer has an absolute advantage 绝对优势 in a good if it can make more of it with the same resources.
• A producer has a comparative advantage 比较优势 if it has the lower opportunity cost for that good. Comparative advantage – not absolute – determines who should specialize.
• Compute opportunity cost from output data: for each producer, one unit of good X costs (units of Y) $\div$ (units of X). The producer who gives up less Y should make X.
• Both sides gain if they trade at a rate between their two opportunity costs – the terms of trade 贸易条件. Specializing by comparative advantage lets total output exceed what either could make alone, so consumption can lie outside each producer's own PPC.

Worked example. Anna can make $20$ shirts or $10$ tables a day; Ben can make $12$ shirts or $12$ tables. For Anna one table costs $\tfrac{20}{10}=2$ shirts; for Ben it costs $\tfrac{12}{12}=1$ shirt. Ben gives up fewer shirts, so Ben specializes in tables and Anna in shirts. Any terms of trade between $1$ and $2$ shirts per table – say $1.5$ – leaves both better off than producing alone.

Exam skill: these calculations appear almost every year – practice finding comparative advantage from both output tables and input tables, and stating a valid terms-of-trade range.

Comparative advantage goes to the producer with the lower opportunity cost

Rational decision-makers weigh benefits against costs. An action is worthwhile only when its benefit is at least as large as its cost – including the opportunity cost. Money already spent and unrecoverable is a sunk cost 沉没成本 and should be ignored in decisions: only future costs and benefits matter.

Most real decisions are not "all or nothing" but "a little more or a little less." Marginal analysis 边际分析 compares the marginal benefit 边际收益 (the benefit of one more unit) with the marginal cost 边际成本 (the cost of one more unit).

Each extra unit consumed gives less extra satisfaction (diminishing marginal utility)

• Decision rule: keep doing the activity while marginal benefit $>$ marginal cost; stop where MB $=$ MC. That point maximizes net benefit (total benefit minus total cost).
• Consumers get utility 效用 (satisfaction) from goods, but each extra unit usually gives less added satisfaction – the law of diminishing marginal utility 边际效用递减法则.
• A consumer maximizes total utility by the utility-maximizing rule: spend so that the marginal utility per dollar is equal across all goods, $\dfrac{MU_x}{P_x}=\dfrac{MU_y}{P_y}$, using up the whole budget. If one good gives more utility per dollar, buy more of it until the ratios equalize.

Worked example. A consumer is choosing between good X ($MU_x=20$, $P_x=\$2$) and good Y ($MU_y=15$, $P_y=\$1$). The utility per dollar is $\tfrac{20}{2}=10$ for X but $\tfrac{15}{1}=15$ for Y. Y delivers more satisfaction per dollar, so the consumer should buy more Y and less X; as they do, $MU_y$ falls and $MU_x$ rises until $\tfrac{MU_x}{2}=\tfrac{MU_y}{1}$ and the budget is spent.

Exam skill: the "MB = MC" logic and the "equal MU-per-dollar" rule are tested repeatedly – be able to find the optimal quantity from a table and explain why it is optimal.

Rational choice: keep going while marginal benefit exceeds marginal cost, stopping where they are equal

• Opportunity cost is the next-best alternative given up; ignore sunk costs in any decision.
• Comparative advantage (lower opportunity cost) determines specialisation and the gains from trade.
• Apply marginal analysis: keep doing an activity while MB > MC, stopping where MB = MC.
• Maximise utility by equalising the marginal utility per dollar across goods.
• Read opportunity cost off the PPC slope; a bowed curve shows increasing cost.