Understand economics from scratch

Chapter 8 Modern Society is a Market Society——Supply Demand and Business Cycle (2)
When the price of sweet potatoes rises, there must be a shortage in the market. At this time, the supply will inevitably increase. Due to the asymmetric market information, the supply will often exceed the demand. When the supply increases, the demand will decrease, then the price of sweet potatoes will drop, and then the supply will decrease. It will decrease, the demand will increase, and the price of sweet potatoes will increase again.The sweet potato farmer just understands the law of using the "spider web theory". When the price falls, the supply must increase. Then next year, the supply will decrease, the demand will increase, and the price will rise. Therefore, he starts planting this year and has a good harvest next year. Sweet potato farmers and sweet potato women can earn a lot every time. Therefore, "spider web theory" has the reputation of "beautiful spider web that explains the trajectory of both supply and demand in the market".

"Spider web theory" is one of the contents of western economics. It uses elasticity theory to examine the impact of price fluctuations on the output of the next cycle, and the change of equilibrium price due to the impact on the output of the next cycle.Introduce the important factor of time, and analyze and examine the changes in demand and supply from the perspective of dynamic changes. If the changes are described in a plane Cartesian coordinate system, the resulting image is like a spider web. Ding Bogen in the Netherlands vividly expressed this theory Named "Spider Web Theory".

The "spider web theory" believes that when supply and demand determine prices, and prices guide production, there will be a cyclical fluctuation in the economy.For example, when the supply of a certain product is less than the demand in the first period, the price rises, the second period will inevitably increase production, and the price will fall; because the second period price falls, the production will decrease, and the price will rise; this will cause the third period to increase production, Prices fell again.Draw a graph of price and output fluctuations in each period. This graph is similar to a spider web, so it is called "spider web theory".

This cobweb-like fluctuation is most evident in agriculture.

Take Chinese cabbage as an example. Xinhua Net once reported such a case: Chinese cabbage fell into a vicious circle, where it got up and fell down——In November 2004, the cabbage harvest in Gu’an, Hebei was bumper, but the price suffered a "cold current" , the purchase price was as low as 11 cent per catty, and a lot of cabbage rotted in the field and no one took care of it. There was even a phenomenon of feeding cabbage to geese and sheep. After 1, many farmers withdrew from cabbage cultivation. As a result, the price of cabbage rose all the way in 1. The "hotness" of cabbage in 2004 led vegetable farmers to plant a large number of cabbage in 2005, so the price of cabbage fell again, and the price was less than 2005/2006 of that in 2005.No wonder some people commented: "The cabbage market is simply getting up and falling down!"

This spider web fluctuation tells us that farmers cannot face the market alone.Farmers do not have enough strength to make more accurate market forecasts like large enterprises, can control the market to some extent, or afford market risks. The realistic background that the "spider web theory" once established is some experiences of farmers in western countries.So, how did farmers in the West get out of this "net"?
American citrus farmers have also suffered from cyclical fluctuations resembling spider webs over the past few hundred years.Citrus production, like other grains, is cyclical.Whenever the citrus harvest fails, the farmer is happy, but when the citrus harvest is good, the farmer is troubled.Citrus farmers, unable to grasp the variability in production, are tormented by mountain-like price fluctuations.So they thought hard about a way out of the predicament, and finally someone came up with a brilliant idea and formed an intermediary organization between farmers and the market-Sunkist Association.

Sunkist associations are marketing organizations formed by farmers themselves.The farmers sell the citrus to the association, and the association goes to the market.When the association controls the supply, it has the right to speak in the market. When the supply exceeds demand, the association can control the supply and price to reduce the losses of farmers.At the same time, the association also provides farmers with a lot of useful information and practical assistance in various aspects such as technology.As a powerful organization, the association has also done many things that farmers alone cannot do, such as registering the "Sunkist" trademark of citrus, organizing the export of products, storing, keeping fresh, processing, regulating supply and a lot of publicity, etc. .These practices allow farmers to stabilize volumes in supply, which balances market forces against demand, thus securing prices for citrus.Seeing that they will not lose money, farmers are more motivated to grow citrus, and the good sales performance also guarantees farmers' income and their interests.

It can be seen that to get farmers out of the limitations of the "spider web theory", farmers cannot rely solely on their meager strength. It is a very good solution to establish an effective intermediary organization between farmers and the market.

Marginal utility: the first sandwich is different from the third
After US President Roosevelt was re-elected for three terms, a reporter once asked him how he felt. The president didn’t say a word, but just took out a piece of sandwich bread for the reporter to eat. .Then the president took out the second piece, and the reporter ate it reluctantly.Immediately after the president took out the third dollar, the reporter quickly declined it politely in order not to break his belly.At this time, President Roosevelt smiled slightly: "Now you know what it's like for me to be re-elected for three terms!"

This story reveals an important principle in economics: the law of diminishing marginal utility.

So let's first look at what utility is. Utility is the ability of items to satisfy people's desires, and it is the degree of satisfaction consumers feel when consuming commodities.Speaking of utility reminds us of the famous happiness equation.When Samuelson, a contemporary American economist, studied happiness as an economic issue, he proposed a happiness equation:

Happiness = Utility ÷ Desire
From this formula, happiness depends on two factors: utility and desire.When the desire is given, the greater the utility, the happier; when the utility is given, the smaller the desire, the happier.From an economic point of view, utility refers to the degree of satisfaction that people get from consuming a certain commodity (or labor).In general, the more goods consumed, the greater the utility obtained.

Let's take a look at the margin again. According to economics, the margin is the last one.Marginal utility is the degree of satisfaction that would be gained by increasing the consumption of the last unit of a good when consuming it.Total utility is the total degree of satisfaction that can be obtained from consuming a given amount of a good or service.

Assuming that a person eats steamed buns, he gets 1 units (satisfaction level) by eating the first steamed bun, 3 units (satisfaction level) by eating the second steamed bun, and 2 unit (satisfaction level) by eating the third steamed bun.Assuming that the steamed buns are free, how many steamed buns do you think he should eat?Will he keep eating it?Obviously not, if he is rational, he will definitely choose the marginal quantity, that is, when eating the xth steamed bun, he can no longer get any satisfaction, and the steamed bun is already tired and meaningless, at this time, he will stop eating Steamed buns.Suppose, when he eats the fourth steamed bun, he gets 2 units (satisfaction level), and if he continues to eat, it may be a negative satisfaction level. For example, when he eats the fifth steamed bun, he feels sick and wants to vomit. One or three is better.Therefore, even for free things, such as steamed buns, although the marginal cost is zero, but because the marginal revenue is diminishing, as the number of steamed buns eaten increases, the degree of satisfaction will continue to decline. When the marginal revenue equals the marginal cost, Rational people achieve equilibrium at this marginal amount.

Most Chinese people know the story of Zhu Yuanzhang's "Pearl Jade White Jade Soup".Zhu Yuanzhang, who was down and out when he was young, survived by being helped by a beggar's "hundreds of meals". He thought that meal was the best delicacy he had ever eaten in the world.After eating all the delicacies in the world, he still can't forget the so-called "pearl, emerald and white jade soup".Why did the same thing have different effects on Zhu Yuanzhang?In the end, Zhu Yuanzhang sighed: "When you are hungry, the bran is sweet, and when you are full, the meat is also salty." Zhu Yuanzhang at different stages has different expectations for material and spiritual life due to different environments and social status, and the feelings he gets are also completely different. .

Now that our lives are rich, we all have the experience of "eating delicacies from mountains and seas every day, but you can't taste the aroma of dumplings in the past", this is the law of diminishing marginal utility.Imagine what the result would be if it was not decreasing but increasing, and eating 1 bread would not be enough.So, fortunately, we live in a world of diminishing utility, and the diminishing utility will stop after purchasing and consumption reaches a certain amount.

The application of marginal utility theory is very extensive. For example, the law of demand in economics is based on this, that is, the more the user purchases or uses the goods, the lower the cost he is willing to pay for the unit of goods (because the goods purchased later are more important to Its utility is reduced).Knowing the concept of marginal utility, you can try to apply it in real life.

For example, if you are the management of a company and you want to increase the wages of your employees, the effect of adding 3000 yuan to a person with a monthly salary of 1000 yuan is generally greater than the effect of adding 6000 yuan to a person with a monthly salary of 1000 yuan. Therefore, it seems that it is more beneficial for the company to increase the monthly salary of low-income people; in addition, it seems that it is not enough to often rely on salary increases to maintain the enthusiasm of employees. After the first salary increase of 6000 yuan, the employees were very excited. Increased work enthusiasm; the second salary increase of 2000 yuan, I was very excited, and increased some work enthusiasm; the third salary increase of 1000 yuan, a little excited, may increase work enthusiasm; the fourth time...until the salary increase can no longer bring any effect.If you want to avoid this situation and want to achieve the same effect as the first salary increase of 1000 yuan every time, you may need 1000 yuan for the second salary increase and 1000 yuan for the third time...or use other incentives For example, they can be arranged to participate in career development training for the second time, and they can be promoted in their positions for the third time. Although the cost may be the same, better results are achieved due to different methods.

The law of diminishing marginal utility also gives operators some other inspirations. The marginal utility of a consumer's continuous consumption of a product is diminishing.If an enterprise produces only one product in a row, the marginal utility it brings to consumers will decrease, and the price consumers are willing to pay will be lower.How to change this situation?The theory of product diversification in the economic field can solve this problem.Because the products of the enterprise continue to create diversified products, even if they are similar products, as long as they are different, they will not cause diminishing marginal utility.For example, the same notebook computer can be made into different models according to the needs of consumers to buy computers. Some consumers buy computers to play games and pursue fashion, so we can focus on memory, graphics cards and appearance for such consumers; If most consumers want mobility, then it is necessary to save weight for such users; in this way, the same notebook computer becomes a different product, which will not cause diminishing marginal utility.If they are exactly the same, it will cause diminishing marginal utility, and consumers' desire to buy will drop faster.

To sum up, it can be seen that the principle of diminishing marginal utility reminds us that in order to develop better, enterprises must continue to innovate, produce different products to meet the needs of consumers, and reduce and hinder diminishing marginal utility.

Business Cycle: Changes in the "Economic Climate"
The cyclical fluctuation of the economy is called the business cycle, which refers to the process of the expansion and contraction of the overall economic activity.Every economic cycle can be divided into two phases, rising and falling.The business cycle generally refers to the phenomenon of alternating expansion and contraction of the overall level of economic activity measured by real gross national product.It is specifically manifested in the fact that economic expansion is constrained by resource supply or consumption, and economic contraction occurs, and economic contraction re-enters economic expansion due to abundant resource supply or consumer demand, and the cycle repeats itself.Under normal circumstances, a complete economic cycle can be divided into four stages: recovery-prosperity-recession-depression.Among them, the economic recovery and prosperity stages constitute the expansion period in the economic cycle, while the economic recession and depression stages constitute the contraction period in the economic cycle.During the rising phase of the business cycle, known as the boom phase, the highest point is called the peak.Then extremes will reverse, and the peak is also the turning point of the economy from prosperity to decline. After that, the economy will enter the decline stage, that is, recession.When the recession is severe, the economy enters a depression, and the lowest point of the recession is called the trough.Of course, the bottom is also a turning point when the economy turns from recession to prosperity, after which the economy enters an upward phase.The economy goes from one peak to another peak, or from one trough to another trough, which is a complete economic cycle.

Economic cycles are generally divided into long and short. Generally speaking, there are the following theories of economic cycles:
(1) Kuznets cycle is a long economic cycle. In 1930, the American economist Kunets proposed an economic cycle with a period of 15 to 25 years and an average length of about 20 years.Since this cycle is mainly divided by the periodic fluctuation phenomenon of the prosperity and decline of the construction industry, it is also called the construction cycle.

(2) The Jugra cycle is a middle cycle. In 1862, French doctor and economist Clement Juglar (C Juglar) first proposed it in his book "On the Commercial Crisis and Occurrence Cycle in France, Britain and the United States".It is proposed that there are 9-10 year cycle fluctuations in the market economy.This medium-length economic cycle is generally called the Jugra cycle by later generations, also known as the Jugra medium cycle.

(3) Kitchin cycle is a short cycle, also known as short wave theory. In 1923, Joseph Kitchin of the United States started from the phenomenon that when manufacturers produce too much, they will form inventories and reduce production. He called this short-term adjustment of 2 to 4 years in "Cycles and Tendencies in Economic Factors" The inventory cycle is also known as the Kitchin cycle.

(4) Kondratieff cycle is a long cycle or long wave. In 1926, the Russian economist Kondratiev proposed a 50-60-year economic cycle.According to the cycle theory, there have been three long cycles since the end of the 18th century: the first long cycle was from 1789 to 1849, with a rise of 25 years and a fall of 35 years, for a total of 60 years.The second long cycle is from 1849 to 1896, with a rise of 24 years and a decline of 23 years, a total of 47 years.The third long cycle is from 1896, the rising part is 24 years, and after 1920, it enters the falling period.

As any member of the market economy, one must understand and grasp the fluctuations of the economic cycle, and be able to formulate corresponding countermeasures to adapt to the fluctuations of the cycle, otherwise one will lose vitality in the fluctuations.Under the conditions of market economy, entrepreneurs are more and more concerned about the economic situation, that is, changes in the "economic climate".

As a government department, understanding the operating laws and characteristics of the economic cycle in a market economy will help the government enhance predictability and avoid lag when formulating expansionary or contractionary economic policies and making policy transitions.

The concept of economic cycle tends to give people an illusion that since it is a cycle, it should be as accurate and predictable as the periodic table of elements, but it is not.We should see that the business cycle is just a description of a phenomenon. In fact, no matter what kind of theory it is, it is just an explanation of economic fluctuations. It is an afterthought, not an immediate one.Because the factors that affect economic fluctuations are extremely complex, the so-called world affairs are like chess-the game is new, which is the truth.We can predict the exact time of the 24 solar terms throughout the year, but we cannot predict the sudden changes that may occur in each solar term throughout the year.The factors affecting economic fluctuations are like sudden changes in the sky, which are different every time, so economic fluctuations are irregular and almost impossible to predict accurately; otherwise, we will eliminate recession and achieve long-term stable economic growth .

In reality, it is widely believed that economic fluctuations are damaging, while ignoring its positive effects.In fact, in a market economy, economic fluctuations often promote corporate reforms, speed up technological transformation, and improve management efficiency. "When misfortune comes, blessings depend on it", Lao Tzu's words are correct.

(End of this chapter)