Understand economics from scratch

Chapter 7 Modern Society is a Market Society——Supply Demand and Business Cycle (1)
The development of a society and the growth of civilization must be based on finding a solution to the economic problem—the problem of the continued existence of human beings. This actually means two related but independent basic tasks: ① Composition A system to ensure that the products and services needed to survive are produced. ② Arrange the distribution of social production results to ensure that more production activities can be carried out.Behind the seemingly simple but complex tasks of economic production and distribution, there are three hidden challenges:
First, the challenge of human mobilization: that is, to design social institutions that can mobilize human energy for productive use.Nature cannot provide exactly the quantity of products we need, so production means how to apply tools and technology to natural resources, avoid waste, and use society's human resources as efficiently as possible.

Second, the challenge of manpower allocation: that is, the social system must not only ensure a sufficient amount of social manpower in the production field, but also ensure its effective allocation.Not only must enough manpower be mobilized for production, but the products and services they produce must meet the needs of society, otherwise there will be a surplus of some products and a shortage of others.The most serious thing is that when many people are facing hunger and cold, the society allocates resources to the production of non-subsistence materials, which directly threatens the basic condition for people's continued existence - food and clothing.If productive manpower cannot be directed to areas of greatest need, then the allocation mechanism fails, and serious allocation failures can lead to disastrous consequences.

Third, the challenge of product distribution: through appropriate distribution methods, it is necessary to ensure that people are willing to continue to invest in the production field.In order to ensure the continuation of the production process and the stability of material supplies, society must distribute products in such a way that it not only maintains production capacity, but also guarantees people's willingness to continue producing.If the rewards distributed are not sufficient to induce people to continue to engage in the production process, then the distribution mechanism fails.Failures in distribution mechanisms are often the main cause of production failures.

Responding to the challenges in the above three aspects has formed a solution for human society to solve economic problems.Economists go back in time from modern times to examine the basic mechanisms of these economic programs in human society.It is found that there are only three types of great human economic systems: the economy run by tradition, the economy run by command, and the economy run by market.Alone or in combination, they enable humanity to solve economic challenges.

Markets: the ubiquitous economic order

The market originated from the ancient people's name for a place where transactions were conducted at a fixed time or place. When the city grows and prospers, farmers, craftsmen, and technicians living in the adjacent areas of the city will start to trade with each other, and have a great impact on the city's economy. contribute.Obviously, the best way to trade is to have a centralized place in the city, like a market, where people can provide goods and buy and sell services, making it easier for people to find goods and contact business.When a city's market becomes larger and more open, the city's economic vitality will also grow relatively.

Now when it comes to the market, people are no strangers.At first glance, the market is full of crowds and chaos, but what is amazing is how the market produces a wide variety and huge quantities of goods and services?
Economists believe that the market mainly solves the three basic problems of "what to produce", "how to produce" and "for whom to produce".

(1) What to produce: In the market, consumers make purchase decisions almost every day—the currency is the vote in their hands, and goods and services with more votes are produced, and those with less votes are eliminated.These currencies end up in businesses as wages, rents, and bonuses.Firms, of course, are the ultimate decision makers in deciding what to produce, and they are driven by profit maximization to leave low-margin or loss-making industries to produce high-margin items—those that have the greatest demand.

(2) How to produce: fierce competition among producers forces them to adopt the most efficient production technology in order to minimize costs.For example, the replacement of horses by steam engines, trains by airplanes, and typewriters by computers are all the results of rapid technological advances.

(3) For whom to produce: the supply and demand in the market of factors of production determine for whom to produce.The levels of wages, rent, interest, and profits determine the direction of factor market production, and they are called factor prices.

It can be seen from this that the actual monarch of the market economy is neither the president of the country nor the CEO of a multinational enterprise, but the preferences of consumers and the available science and technology.Consumers "money vote" on goods and services according to their innate or acquired preferences, but this voting is also limited.Because consumers can fly to Hong Kong, but they can't find a flight to Mars.Social resources and science and technology limit this consumption tendency.But science and technology are not omnipotent. If the most advanced science and technology produces items that are beyond the purchasing power of consumers or consumers have no willingness to consume, then it cannot gain a firm foothold in the market.For example, the smokeless and tasteless cigarettes that once appeared on the market will automatically die out because they cannot satisfy people's taste requirements.

Supply and Demand: The Heart of Economics
During the Opium War in 1840, Britain forcibly opened the door of China with guns, and British businessmen were ecstatic to open the vast market of China.At that time, businessmen in Manchester, the center of the British cotton textile industry, estimated that there were 4 million people in China. If [-] million people wore nightcaps at night, and each person used two nightcaps per year, the entire Manchester cotton mill would not be able to work overtime day and night, let alone make clothes. !So they shipped a large amount of foreign cloth to China.

As a result, contrary to their dreams, China was still in a self-sufficient feudal economy, and conservative, closed and even xenophobic social customs were formed on this basis.The Opium War opened the door of China, but did not change the consumption habits of the Chinese people.At that time, the upper classes wore silk, and ordinary people wore homespun cloth woven by their own homes. Chinese people did not have the habit of wearing nightcaps at night, and foreign cloth could not be sold at all.

how to solve this problem?In the theory of economics, it can be simply said that how to solve the contradiction between supply and demand.Supply and demand are the most basic issues in economics. If you understand supply and demand, you can understand the whole of economics.Samuelson quoted a sentence in his "Economics": "You can make a parrot an economist, but the premise must be that it understands 'supply' and 'demand'".For a long time, economics has devoted itself to the equilibrium analysis of supply and demand, including the conditions of equilibrium and the stability of equilibrium.

As we all know, the so-called supply is to provide something.Economics textbooks explain it this way: supply refers to the amount of goods that manufacturers (producers) are willing and able to sell at each price level within a certain period of time.So, how to understand it?

Supply refers to the quantity of goods that firms (producers) are willing and able to sell at each price level in a certain period of time.Among them, "manufacturer" and "a specific period" refer to "who" and "when" are stipulated due to the necessity of research; "at each price level" refers to "specific circumstances"; "willing" and " "Can be sold" refers to the restriction; "quantity of goods" is the central word of this sentence.Coherently connecting these meanings is the definition of supply in economics.This definition is different from the supply that people understand daily. The focus is on "willing and able to sell". These are the two basic conditions for supply: having the desire to sell and having the ability to supply.

For example, during the "SARS" period, the price of masks rose to 2 yuan each. Manufacturer A "wanted" to produce 5 masks a day, which showed that A "had a desire to sell", but factory A's outdated equipment could only produce 3 masks a day at most. One, that is, Factory A does not have the remaining 2 production capacity, let alone sell it.Therefore, when the price of masks is 2 yuan each, the supply of manufacturer A can only be 3.Of the 5 masks "willing to sell" in mind, there is only a "supply capacity" of 3.

Looking at demand again, demand in economics refers to the quantity of goods that consumers are willing and able to buy at each price level within a certain period of time.Using the above analysis method, it is not difficult to find that it contains two meanings: first, the demand comes from consumers’ hobbies or preferences, which is a purely subjective need; afford it.If a person is rich and can afford high-end fashion, but he is not interested in fashion and does not plan to buy it, he does not constitute a demand for fashion; another person likes fashion and wants to buy it, but has no ability to pay , he also does not constitute the demand for fashion.Only those who have the subjective desire to buy fashion and objectively have the ability to pay constitute the demand for fashion.

With an understanding of supply and demand, all economic problems in life can be solved.This is because there are two principles that everyone often sees in life. The first is the supply theorem: under certain conditions, "the higher the price of the commodity, the greater the supply"; the second is the demand theorem: Under certain conditions, "the lower the price of the commodity, the greater the consumer's demand for the commodity."Then combining these two theorems, under certain conditions, adjusting the price can solve the problem that the supplier's supply is equal to the consumer's demand, and achieve a win-win effect.

Equilibrium prices: the role of the "invisible hand"
The equilibrium price is the price at which the supply price of a commodity equals the demand price.In a market, due to the interaction of supply and demand forces, the market price tends towards the equilibrium price.If the market price is higher than the equilibrium price, there will be excess supply in the market, and the excess supply will make the market price tend to fall; on the contrary, if the market price is lower than the equilibrium price, there will be excess demand in the market, and the excess demand will make the market price tend to rise until equilibrium price.Therefore, market competition stabilizes the market at the equilibrium price.

In people's minds, wheat is a "fine grain" and corn is a "coarse grain". The price of wheat has always been more expensive than corn.However, since 2006, the price of "coarse grain" corn has been rising.Even more than wheat.By 2007, the industrial purchase price of corn in Baoji, Shaanxi reached 1.66 yuan/kg, while the market price of wheat per kilogram was only about 1.44 yuan.People can't help but wonder: How can corn, which made people eat uncomfortable during economic hardships, be valuable again?And it's more expensive than wheat?
What does this phenomenon mean?This shows that supply and demand determine the price of an item.Why is corn, whose price has always been lower than that of wheat, suddenly becoming more valuable and more expensive than wheat? This price change shows that their supply and demand relationship has changed.We know that market laws are determined by the relationship between supply and demand, that is to say, when the supply exceeds demand, the market price will drop, and when the supply exceeds demand, the market price will rise.However, on the other hand, when the supply exceeds demand and the price falls, the demand will increase. At this time, the supply may exceed the demand, which will lead to an increase in the price of the item; and vice versa.The question is, will supply and demand continue in this cycle forever?Isn't there a balance among them?We know that according to the objective law of the development of things, this balance exists absolutely, which is what we call the equilibrium price.So, what is the equilibrium price?
To answer this question, let's look first at economic theory.In microeconomic analysis, the demand price refers to the price that consumers are willing to pay for a certain amount of goods, and the supply price refers to the price that producers are willing to accept to provide a certain commodity.The so-called equilibrium price refers to the price when the demand and supply of a certain commodity are in equilibrium.The formation of equilibrium price is the process of price determination, which is formed through the spontaneous adjustment of market supply and demand.The supply of the market is oscillating and adjusting around the equilibrium price, making the irregular automatic adjustment of the market appear regular.This is what Adam Smith called the "invisible hand" forcing the price equilibrium.

Western economics believes that in a market economy, the price mechanism plays a vital role in the allocation of resources.The market coordinates the decision-making of various economic entities in the entire economy through price adjustment, so as to maintain a balance between consumers' purchases and manufacturers' output.In a market economy, the resource allocation issues of "what to produce", "how to produce" and "for whom to produce" are all determined by the market price mechanism.The equilibrium price formed by the equilibrium of supply and demand in the market can guide the effective allocation of social resources and realize the Pareto optimal state.In this state, the product output combination that maximizes the producer's profit coincides with the product consumption combination that maximizes the consumer's utility, thus maximizing social welfare.So what role do prices play in the economy?

American economist M. Friedman summed up the role of price in the economy as follows: first, to transmit information; second, to provide an incentive to encourage people to adopt the most cost-effective production method and use available resources the most valuable ends; third, to determine who gets how much of the product—that is, the distribution of income.

These three roles are closely related.According to Friedman's explanation, the situation where prices work is the price mechanism.However, everyone knows that every plant and tree in nature is priced at zero before it is discovered.So why do we always pay different prices for different items?Because the price of goods is always determined in the competition of consumers, that is, ourselves, and it has nothing to do with whether the provider of goods, that is, the creator, charges or not.A stone, a stone without any processing, if we rush to buy it, then its price will be high.That is to say, the price of pies falling from the sky will also rise due to the competition of hungry people!
The Cobweb Theory: Wisdom from a Sweet Potato Farmer
A farmer planted a lot of sweet potatoes and had a good harvest. When the price of sweet potatoes rose, he sold them for a good price, built a house, and married a wife. He became a sweet potato woman.The sweet potato woman and the sweet potato farmer planted sweet potatoes together. Seeing that the sweet potatoes were easy to sell, the sweet potato woman asked her natal family to plant sweet potatoes too.Autumn is here, and it's time for a bumper harvest, but the sweet potato farmers and sweet potato mothers are not happy at all, because last year there were few people who planted sweet potatoes, so the price went up, but this year there were too many people who planted sweet potatoes, and they lost all.The poor and lowly couples are sad. The sweet potato farmer and the sweet potato woman divorced in the quarrel.A year later, the sweet potato woman came back again, because the sweet potato farmer made money again, and they never separated again and lived happily ever after.How did sweet potato farmers make money again?Because he consulted an economist, the economist told him that the market is controlled by something called the cobweb theory, and told him when to plant sweet potatoes and when not to plant sweet potatoes.

Agricultural products frequently fall into the vicious circle of high yield but no increase in income.Economists call this phenomenon the "harvest paradox." The "harvest paradox" refers to the contradictory phenomenon that farmers' income in a good harvest year is lower than that in an average year or even in a poor harvest year. The root cause of the "harvest paradox" lies in the low elasticity of demand for agricultural products and the long production cycle.In short, consumer demand is insensitive to changes in the prices of agricultural commodities.This phenomenon shows that the market economy is not perfect, and the spontaneity and hysteresis of its regulatory economy are its inherent defects.The "spider web theory" in economics reveals this point.

(End of this chapter)