Understand economics from scratch

Chapter 1 After understanding the ten principles of economics, you will graduate with a bachelor's degree - an introductory course by Harvard professor Mankiw (1)
N. Gregory Mankiw (N. Gregory Mankiw), born in 1958, became the youngest tenured professor in the history of Harvard University at the age of 29.He is currently a professor of economics at Harvard University, studied economics at Princeton University and the Massachusetts Institute of Technology; as a faculty member, he taught macroeconomics, microeconomics, statistics, and principles of economics.Professor Mankiw Director of the Monetary Economics Planning Division of the National Bureau of Economic Research, a non-profit think tank in Cambridge, Massachusetts; consultant to the Federal Reserve Bank of Boston and the Congressional Budget Office; Higher-level Examination Committee and NBER Business Cycle Committee; from 2003 to 2005, he served as the chairman of the President's Council of Economic Advisers under the Bush administration.

Mankiw was a prolific academic.His work has been published in academic journals such as the American Economic Review, Journal of Political Economy, and Quarterly Journal of Economics, as well as in more general newspapers such as The New York Times, Financial Times, The Wall Street Journal and Fortune.The publication of "Macroeconomics" in 1992 made him famous, and even Krugman, who is known for his sharpness, spoke highly of this book.The economics textbook "Principles of Economics" he edited for Harvard students is currently recognized as the best primary economics textbook.

In the Harvard classroom, Mankiw always used the ten principles of economics he summed up as the core part of his teaching.In his opinion, understanding these ten principles is already at the level of a bachelor's degree in economics.Everyone agrees that if beginners know these ten principles, they will have a general understanding of the starting point and basic framework of economics research.

Our supper is not from the favor of the butcher, the brewer, and the baker, but from their concern for their own interests.

--Adam Smith

Those who learn are those who observe things and discover their truths; those who are skilled are those who take the truths they have invented and apply them.

——Liang Qichao
Choices: The trade-off between eating your cake and eating it
Economists are busy in their rooms with their heads buried in their science.At this time, a woman who liked him boldly knocked on his door: "Let me be your wife, you will never find a woman who loves you more than me if you miss me." He also liked her very much, but still replied: "Let me think about it!" So he fell into long-term distress, unable to make a decision for a long time.Finally, he finally came to a conclusion: "I should agree to that woman's request."

So the economist came to the woman's home and said to the woman's father, "Where is your daughter? I have decided to marry her."The old father replied indifferently: "You came 10 years late, and she is now the mother of three children." The economist almost collapsed when he heard this. , In the end, it turned out to be a remorse.

Trade-offs are one of Mankiw's principles of economics.He believes that in order to get one thing, people must give up another thing.As the saying goes, "If you are willing to give up, you will gain something." It means that life is always a choice.You are choosing which outfit to wear when you wake up in the morning; you are choosing where to eat at noon; girls have many suitors, when considering who to marry, which man is more suitable for you , to choose; when a boy is looking for a job, he faces many companies and has to make a choice.Although the above choices are big or small, the accumulation of all the daily and monthly choices will affect the outcome of your life.

Some people earn a lot of money and live a high quality of life, have good health and good relationships; while others are busy and can only make ends meet.Whether you are good at choosing is the main reason for the difference.What is choice?Selection can be seen as a process of judging and discarding, finding the most ideal one among multiple possibilities, and the criterion is that the utility (opportunity benefit minus opportunity cost) is the largest.

A wise choice requires a clear and correct calculation of costs and benefits, an assessment of risks, and more importantly, an understanding of what you want.Everyone wants to have choices, and to make the right choices—if not the best ones, at least the better ones.So is there some way to help us?The following methods are worth learning from.

There are five steps in the formation of the selection, each of which is extremely simple:
(1) List all the actions that can be taken, including the actions not to be taken, and the decision-making is to choose one from various possible courses of action.

(2) Whenever possible, list the visible consequences of each action.

(3) Try to assess the probabilities that each outcome could occur, which is often overlooked and therefore needs to be discussed carefully.

(4) Try to express how much you desire or fear each outcome.

(5) Finally, consider all the listed factors together and make a reasonable decision.

If you haven't listed the options or possible outcomes, then you must first solve these two problems. After all, the essence of decision-making is to choose the best option from many options, and its purpose is to achieve the best outcome; if you You can't even tell the options, let alone make any decisions.

Opportunity cost: The starving donkey between two piles of straw

Opportunity cost is the second principle of Mankiw economics.

Faced with limited resources, in order to get what they want, people must choose to give up.From this point of view, making a choice is not an easy task. The root cause is that in the case of limited resources, what you gain must be lost.When you can't have both fish and bear's paw, if you choose to eat fish, then you can't eat bear's paw. Bear's paw is the opportunity cost of choosing to eat fish.Economists often say that there is no free lunch in the world, which means that any choice behavior has an opportunity cost.

There was a donkey, who was very hungry, looking for food everywhere, and finally saw two piles of grass in front of him.It quickly ran over, but it was in a dilemma, because the two piles of grass were equally fresh, and it didn't know which pile it should eat first.He hesitated, wandering between the two piles of grass, always thinking about which pile to eat first.Because he didn't know how to choose, the donkey eventually starved to death.

Opportunity cost, also known as choice cost, refers to the maximum benefit that may be obtained by not making the choice that is lost after making a choice.In other words, in order to get one thing, you must give up another thing.In order to make a correct judgment and evaluation of the economic benefits of the alternatives, an analysis must be carried out before making a decision, and the potential benefits of the abandoned plan must be taken into account as the opportunity cost of the selected plan.This is what we say "whatever you gain, you must lose".

For example, a farmer has a piece of land that he can use to grow wheat, vegetables, and pigs.Suppose the cost of growing wheat in this land is 100 yuan, and the cost of growing vegetables is 150 yuan. If you raise pigs, you will earn 200 yuan.If the farmer uses this land to grow vegetables, and correspondingly he cannot grow wheat or raise pigs, how much does it cost him to grow vegetables?Is it 150 yuan?No, 150 yuan is just an accounting cost. The real cost is 200 yuan, which is the value of the most valuable item among the other two items he discarded!
Opportunities in opportunity cost must be optional items for you.If the project is not your choice, it is not your opportunity.For example, farmers can only grow wheat, vegetables, and pigs, and real estate is not an opportunity for farmers; if you only want to eat bean paste cakes or chocolate pancakes, then fried dough sticks will never be your opportunity.

In addition, the opportunity cost must refer to the item with the highest benefit among the abandoned opportunities, not the sum of the benefits of the abandoned items.For example, a farmer can only choose one of growing wheat, growing vegetables, and raising pigs. The profit relationship among the three is raising pigs>growing vegetables>growing wheat. The opportunity cost of is only growing vegetables.

It can be seen that if a farmer uses the land to grow vegetables or wheat, his economic profit is negative. Only when he uses the land to raise pigs can he make a profit.

Economics assumes that under the guidance of rationality, people will optimize the allocation of limited resources to maximize benefits.It can be seen that the opportunity cost is due to the scarcity of resources.Since any kind of resource is limited, and limited resources can have multiple uses.Putting resources to one use forgoes other options at the same time.

Opportunity cost can be used to analyze many fields. Opportunity cost exists everywhere in life. It is the first choice of rational people to be good at using opportunity cost to analyze the pros and cons and make the choice that maximizes utility.

Marginal: A rational person considers a marginal quantity

"Margin" is a more academic term, a term used to describe a tiny increment.The third principle of Mankiw's economics proposes the concept that rational people consider marginal quantities.

Jamian prepared a big pot of soup and invited his friend Fuka to taste it.

Jamian said enthusiastically: "Please, old friend, thank you for coming! This dish is specially prepared for you."

Foca replied: "No, dear friend, I can't eat any more! I've eaten enough to stuff my throat."

"It's okay, it's only a small pot, and you can eat it. How delicious is this soup!"

"But I've already eaten three bowls!"

"Hey, why bother counting? Drink as much as you like. In good conscience, this soup is very fragrant and thick, and watch the oil slick congeal in the basin, it is almost like amber. Old friend, finish it for me It’s good to eat! Here, this is sea bass, this is belly slices, and this is sturgeon. Just eat half a bowl, eat it!” Jamie Yang called his wife, “Honey, you come to respect our guests, The guests will appreciate your favor."

Demyan entertained Foka warmly in this way, and kept persuading him to eat, not letting him rest or panting.Fuka's face was profusely sweating, and he reluctantly ate another pot, pretending to eat with relish, and ate up all the soup in the pot.

Jamian shouted: "I like friends like this. I hate those who are picky about what they eat. I'm so happy to see you eating so deliciously! Okay, let's have another pot!"

Poor Foca liked soup, but it was like suffering in this way.He got up at once, grabbed his hat, belt, and cane, and ran home with all his strength, and never came to Demyan's house again.

When Foca drank the first bowl of soup, he felt extremely delicious. From the perspective of economists, it was this bowl of soup that worked.The so-called utility refers to the degree of satisfaction that people get when they consume a certain item.For example, eat a piece of bread to get material satisfaction, or watch a movie to get spiritual satisfaction.Utility is entirely a subjective feeling of consumers, depending on personal preference, and there is no objective standard.

Although utility is subjective, the consumption of all people follows a common law, that is, as the consumption of the same item increases, the degree of satisfaction brought to consumers decreases.For example, when Foca drank Jamian's first bowl of soup, he must have felt delicious (high level of satisfaction), and the feeling of drinking the second bowl of soup was not as good as the first bowl of soup (decreased level of satisfaction).As you drink bowl after bowl, the level of satisfaction becomes less and less, and eventually becomes so painful (disutility) that you have to run away.Economists summarize this general phenomenon as the law of diminishing marginal utility.

In economics, marginal utility is a very important concept, and diminishing marginal utility is also one of the basic laws of economics.Economists use marginal utility to explain value, which has caused a revolutionary change in economics.Therefore, the emergence of marginal utility theory is called the "marginal revolution" in economics, and it has become one of the cornerstones of modern economic theory.

Many companies are now worried about the inability to sell their products.In fact, the fact that the product cannot be sold is not because consumers have no purchasing power, but because your product cannot meet the requirements of consumers, which has brought diminishing marginal utility to consumers and has become "Jamian's soup."

China is known as a big country of porcelain, but the market is almost full of blue and white porcelain with very similar patterns and shapes.You need at most one set of this same porcelain.The more the same porcelain, its marginal utility will decrease, and if there is no place to put it, the marginal utility will be negative.But isn't the porcelain market so limited?of course not.The same porcelain brings diminishing marginal utility, and different porcelain does not have diminishing marginal utility—remember, diminishing marginal utility refers to the increase in the quantity of the same thing, and different things satisfy different needs of consumers, so there is no marginal utility decrease.Porcelain can have different shapes and patterns, and each type of porcelain can meet different needs and bring different effects.For example, practical porcelain can be used in daily life; artistic porcelain can be used as appreciation and bring spiritual enjoyment to consumers; animated porcelain that is loved by children can meet the needs of parents to love their children, which is another kind of satisfaction.Of course, there will be no diminishing marginal utility for such three sets of porcelain, so there will be no demand.

How much a consumer wants a good depends on how much marginal utility he gets from consuming the good.Consumers are willing to pay a high price for a product that has a large marginal utility; on the contrary, consumers are willing to pay a low price for a product that has a small marginal utility.If the marginal utility is zero, or even negative, like the third and fourth bowls of soup from Jamie Young, consumers will never buy them.Economists often say that there are no products that cannot be sold, only products that consumers do not need.As long as it is not "Jamian's Soup", it will definitely sell.

Marginal analysis is one of the basic research methods of economics, not only in theory, but also plays a considerable role in practical work, it deserves our attention.

Incentives: People respond to incentives

The basic premise of economics is to admit that human nature is self-interested, so when people make choices, they will consider the cost and benefit of the marginal quantity.Once one of the costs and benefits changes, or both change, people's choices will change accordingly.In other words, changes in costs and benefits change people's incentives, and at the same time people will make choices about incentives—this is the fourth principle of Mankiw economics.

A hound chased a rabbit for a long time but failed to catch it.

The shepherd saw it and laughed at the hounds.The hound replied: "I only ran for a meal, but it ran for my life!" The words were heard by the hunter, and the hunter thought: "The hound is right, if I want to get more prey, You have to think of a way."

The hunter bought several hounds. Anyone who can catch rabbits in the hunt can get some bones, and those who can't catch rabbits will have no food.This method really worked, and the hounds chased the rabbit one after another, because everyone wanted to catch more prey.After a period of time like this, the problem reappeared.Big rabbits are hard to catch, but small rabbits are easy to catch, and the bones they get are almost the same. The hounds discovered this trick and went to catch small rabbits.The hunter said to the hunting dog: "Recently, the rabbits you catch are getting smaller and smaller, why?"

After thinking about it, the hunter decided not to link the number of bones to whether he caught a rabbit, but to count the total weight of the rabbit caught by the hunting dog every once in a while, and determine its treatment within a certain period of time according to the weight .In this way, the number and weight of rabbits caught by the hounds have increased.

Hunter is very happy.But after this, a new problem appeared again, the number of rabbits caught by the hounds decreased a lot, and the more experienced the hounds were, the more the number of rabbits caught dropped.So the hunter asked the hounds again.

The hounds said: "We have devoted our best time to you, but we will grow old. When we can't catch rabbits, will you still give us bones to eat?"

After some thought, the hunter analyzed and summarized the number and weight of rabbits caught by all hunting dogs, and stipulated that if the number of rabbits caught exceeds a certain number, even if no rabbits can be caught, a certain number of bones can be obtained for each meal. .The hounds were very happy, and everyone worked hard to complete the number stipulated by the hunter.After some time, finally some hounds did it.At this time, one of the hounds said: "We have worked so hard and only got a few bones, and the prey we caught far exceeded these bones, why can't we catch rabbits for ourselves?" So some hounds left Hunter, went to catch the rabbit by himself.The hunter realizes that the hunting dogs are losing, so the hunter has carried out reforms, so that each hunting dog can get n% of the total amount of rabbit meat it hunts except the basic bones, and as the service time increases, the contribution becomes larger, and this ratio also increases. It can be increased incrementally, and has the right to share m% of the hunter's total rabbit meat.In this way, the runaway hounds strongly demanded to return to the hound team.

From the above example, we can draw the conclusion that a good incentive system can effectively meet the needs of personal interests and stimulate the unlimited work motivation of team members.The hunter's effective management of the hunting dog lies in the hunter's effective use of the incentive effect.

In the case of a certain ability, the level of motivation will determine the size of their work performance.Comprehensive use of various incentive methods is a magic weapon to effectively improve the incentive level.Whether the incentive mechanism has an impact depends on whether the incentive method can meet the needs of the individual.The main incentives include the following:
One is material incentives.Stimulate people's enthusiasm and creativity by satisfying the needs of personal interests.Only reward those with outstanding achievements. If those who see them have a share, it will not only encourage the laziness of the laggards, but also hurt the hard work motivation of the outstanding ones, thus losing the meaning of motivation.

The second is spiritual motivation.Motivate individuals to work at a higher level by satisfying their needs for self-esteem, self-development, and self-actualization.Spiritual incentives mainly include target incentives, honor incentives, emotional incentives, trust incentives, and respect incentives.

(End of this chapter)