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在这份报告中，基本介绍宏观经济学和微观经济学的。第一节解释了稀缺性和选择的问题，机会成本的概念和微观与宏观经济学的区别。第二节将讨论如何个人需求和市场需求曲线的推导，在短期和长期的产出决策。第三节显示需求和供给理论，包括如何实现均衡价格和均衡数量，超额供给和需求对市场均衡的影响。第四节解释了完全竞争和寡头垄断的含义。五节介绍了凯恩斯经济学和货币经济学。
In this report, the basic introduction of macroeconomics and microeconomics will be shown in five sections. Section one will explain the problems of scarcity and choice, the concept of opportunity cost and the difference between micro and macro economics. Section two will discuss how individual demand and market demand curve is derived, output decision in the short-run and in the long-run. Section three shows demand and supply theory including how to achieve an equilibrium price and equilibrium quantity, the effects of excess supply and demand on market equilibrium. Section four explains the meanings of perfect competition and oligopoly. Section five introduces Keynesian economics and monetarist economics.
Section 1. Basic information of economics
Part 1. (A) A definition of economics
Economics is a kind of study telling people how to choose limited resources. In reality, resources in our life include land, time, wealth, talent people, building and the knowledge of how to combine these resources to make optimal goods and services. Many countries and regions are lack of resources. Therefore how to choose resources could be a very important thing for governments or individuals. (Begg, D., 2008)
How to make optimal choice in resources is a big question. Important choices include how much time devote to go shopping, leisure, how many to save and how to combine their resources to improve their welfare and well-being. If we suppose resources are indefinite, optimal choices still could not be made properly, let alone we are living in a world with limited resources. Well-being means people feel satisfaction from their gaining of goods and services they choose to consume, from the time they spend in leisure, from security and services provided by governments, from the job they work in. However, people choose to use their resources in ways that may not take effect in improving their happiness and well-beings.
The key point we need to know how it is so important to choose resources is that resources in fact is scare, whether we can choose resources and combine them to make optimal goods and services will determine our life.
Part 1. (B) Scare resources and opportunity cost
Available resources are very limited, how fast we can improve our life depends on what kind of resources we have. Politics is based on the economy of a country; humans become civilized because of the development in economy. The original reasons are due to the scarcity of resources.
Therefore we have to make choices in combining different kinds of resources to make goods and services in order to improve our life. We cannot take all choices at the same time. While we are taking one choice, to some extend it also means that we are losing opportunity in choosing others. Theoretically, the value of the next best choice to some who has picked between several mutually exclusive choices is the opportunity costs. The thing is that we cannot always make an optimal choice in our life; opportunity cost becomes one of the most important indicators assessing our behaviors and decisions.
While the opportunity costs are very high, it indicates that the choice we are choosing is not optimal; in the same way, if the opportunity costs are lower, it means that we are making right decisions in making goods and services. The opportunities costs are not restricted by financial or monetary costs (Buchanan, 1987).
For example, a person can have chance to get a job for 10,000 pounds per year and at the same time, he can also choose to go to the university. If he chooses the job, then he is not able to go to the university right away. Consequently, the opportunity cost for him to work is not going to the university.
Part 1. (c) The difference between micro and macro economics
Economics can be divided into two areas, Microeconomics and Macroeconomics. From my opinion, Microeconomics is concerned with small parts of the economy such as the individual on the firm and with issues such as supply and demand. For example, if you go to a supermarket, you buy a bottle of water from it, therefore, the supermarket is supplier and their supply just matches your demand. Macroeconomics is concerned with the economy as a whole and issues such as inflation, interest rates and unemployment. For instance, if there is a high inflation rate in somewhere, it will cause a higher price of goods and decreased real value of money.
Microeconomics studies the individual behaviors, industry organizations, such as Consumer's Behavior and Production Theory. And macroeconomics studies the general consumption, investment, government expenditure and net exports in an open economy, such as National Income Account and Inflation. Although they are different, they still mutually affect because of overlapping issues between the two fields. For example, inflation is macro effect which cause raw materials prices go up, in a result, the product's price will be higher.
Section 2. Demand curve
Part 2.(A) Individual demand curve and market demand curve.
In economics, individual demand curve is used to describe the relationship between price and quantity of a specific commodity that a consumer is willing to buy at a given price in a specific time period. Actually, there is inverse relationship between prices and quantity of the goods.
For example, both A and B got cars and they use it every day normally. However, due to the increased price from £0.5 to £1.00, A and B started to reduce the frequency of using cars. As the price is going up, they reduce the time of using cars. And when the price increases to a high level at £8.00, A gives up using a car and buys a bike instead; B lives far away from city, and he still need a car. Because of the high price of petrol, B prefer go out by train most of times. So, he only uses 5 Liter per week. We can describe how the individual demand curve is derived in the diagram.
Therefore, when the price goes up, the demand will decrease. On the contrary, the price increases will cause lower demand.
Market demand curve is the sum of individual demands. It is also a downward sloping line.
Part 2. (B) Firm's output decision in the short-run.
In order to make things simple and clear, we suppose the firm make output decision under perfect competition. It means that firms are producing homogeneous goods, there are no entry/exit barriers, there is perfect information and firms would like to maximize their profits. Under perfect competition, price is given in the market, and average revenue (AR) is equal to marginal revenue (MR) and demand. When the MC is equal to MR, then the firm will get maximum output.
Under perfect competition, firms choose output when price equals to marginal cost (p=mc). Therefore, MC curve will tell us how much firm will produce in both short and long run. In Figure 2, we can observe that the output of a firm is Q when MC=MR and AR under perfect competition.
In the short run, average total costs (ATC) is the same of average variable costs (AVC) and average fixed costs (AFC), and firms will produce when MC is more than AVC (average variable costs) because every unit they produce will be more than add more to avenue than costs and AFC is fixed in the short run and have to be paid. Therefore, in the short run, if the MC is equal to or above to ATC, then firms will produce and the MC above ATC is also called short-run firm's supply curve (see Fig 3).
However, compared with short run, under which firm will produce as long as MC is more than AVC, firms will shut down when MC is less than ATC in the long run because average variable costs are average total costs in the long run. Only when MC is more than or equal to ATC, then every unit firms produce will add more avenue than costs, otherwise, firms will shut down when MC is less than ATC. In the long run, as long as the MC is more than ATC, then the firm will produce. In Figure 4, the MC above ATC is the long supply curve under perfect competition.
In this section, we will discuss the supply and demand in equilibrium, in the first part, we will discuss the equilibrium price and quantity and the second and third part, and we will discuss the situation when there is excess demand and supply.
Part 3. (A) Equilibrium price and equilibrium quantity
Economics equilibrium tells us that supply will equal to demand (Arrow, 1959). The equilibrium price and equilibrium quantity will be achieved when supply equals to demand. Market equilibrium tells us demand of goods and services from consumers should be equal to the supply of goods and services from suppliers. In Figure 5, we can observe that demand curve is a downward slope curve indicating that there is negative relationship between price and quantity of goods and services; but supply curve is a upward sloping line indicating that when price is increasing, the supplier would like to provide more goods and services, in other words, there is positive relationship between price and quantity of goods and services in supply curve.#p#分页标题#e#
In equilibrium we found that when supply equal to demand, there is an interaction of supply curve and demand curve. In the Fig 5, the vertical axis is the price level and the horizontal axis is the quantity of goods. The interaction of supply and demand curve is the equilibrium point, the corresponding price and quantity in horizontal and vertical axis is the equilibrium price and equilibrium quantity. There is a simple example, if the factory produces 10 cars in the market, and the demand of cars is exactly 10 cars, then the equilibrium point is achieved.
When supply is less than demand, the price is lower than equilibrium level. However, demand of goods and services will cause the price to increase until it reaches the equilibrium point. When supply is more than demand, price is higher than equilibrium level, it indicates that fewer customers would like to pay for the goods and services at that time, therefore, the price will have to decrease until it reaches the equilibrium level. Therefore, market equilibrium tells us supply equals to demand when we got the equilibrium price and equilibrium quantity.
Part 3. (B) The effects of excess supply on market equilibrium
In this section, we can observe the excess supply in Figure 6. The static equilibrium tells us supply equals to demand, but when there is extra supply in the market, suppose the excess supply is shown in zone A, the price of excess supply is higher than the equilibrium point. For example, if the supply of apple is excess, the demand for apple is constant. But if we bring the price down, more people will buy apples. Therefore the price level will fall back to the initial equilibrium and there will be no excess stock.
Part 3. (C) The effects of excess demand on market equilibrium
When there is extra demand, it indicates that the demand is less than supply. In Figure 6, excess demand is shown in zone B. As the same example in part 2, increased price will cause the demand decrease which can back to the equilibrium point. When there is excess demand, it indicates that the prices will go up because resources are very limited, until the price reaches the equilibrium point. Therefore in the long run, no matter there is excess supply or demand, the equilibrium price and equilibrium quantity will reach the initial equilibrium point.
In this section, we discuss the equilibrium price and quantity in the long run when supply equals to demand. In the short run, there will be excess supply and demand, however, when price is more or less than equilibrium, it will go back to initial equilibrium in the long run.
Section 4 Perfect competition and oligopoly
In this section, we will discuss the economic definition of perfect competition and oligopoly in Part 4. (A) and Part 4. (B), respectively.
Part 4. (A) Perfect competition
In perfect competition, there are some characteristics as follows (Kreps, 1990). There are many firms in the market, no buyers or sellers believe that they have ability to influence the price level, and each firm can enter and exit market freely without any kinds of barriers. Consumers have perfect information in the market. The products they are producing are homogenous. All firms in the markets want to maximize their profits when marginal costs equal to marginal avenue.
8. A Firm 8.B Industry
In Fig 8, we can observe that price is given and is a horizontal line in the diagram. Marginal cost (MC) is an upward sloping line and cross with the lowest point of average cost (AC). It indicates that when average costs is higher than marginal costs, then the average costs will decrease, otherwise, when average costs is lower than marginal costs, then average costs will increase.
When MC=MR, then we can get the maximum profits when output reaches the equilibrium. When MC=MR, then the average cost is c, as long as marginal costs is higher than c, then we will make profits. The profits are located in the square zone in Fig. 8.
Based on this assumption, we can observe that when there are profits, more firms will enter the market due to free entry/exit policy. The short-run supply curve is SRSS. However in the long run, since more and more firms enter the market, price will decrease until there are no profits, then SRSS curve will shift outwards. Figure 9 the perfect competition for both firms and industry in the long run shows us the change of price and short run supply curve. When more and more firms enter the market, then the marginal avenue curve (horizontal line) will shift downwards, it indicates that the price is going down because more and more supply of these kinds of goods, and SRSS curve will shift outwards to SRSS1.
For example, company A and B they both produce bottle of water, it's easy to entry this market but the profit is very low and also company A and B are the price taker, the price will be set by the market.
9.A Firm 9.B Industry
Part 4. (B) Oligopoly
Compared with perfect competition, few firms can enter market and they are producing differentiated goods, and each of them has some ability to influence the price of the goods they produced (Nicholson, 2005). The most typical example is car industry, there are few car firms in the market due to the high technology they have. Each car firm has some ability to adjust their price. However, due to the high competitiveness, each firm is very concerned about the behaviors of others. Ford is very concerned about the price of Toyota. Therefore under oligopoly, each firm also considers how their own actions can affect the behaviors of the other competitors (Lee, 1998).
In essence oligopoly can be characterized as collusion and non-cooperation (Petri, 2004). Collusion is a kind of agreement between existing firms to avoid or limit competition with each other. Cartel is probably a typical situation of oligopoly, in which formal agreements between firms are legally permitted. The most famous example is OPEC (Organization of the petroleum exporting countries). All these member countries have an agreement that they will not cheat each other in prices of petroleum. However, it is also expected that Cartel will disappear in the future because it is very difficult for the member counties to keep its agreement as long as there are huge amount of profits when they are cheating.
For example, the Coke market can be treated as the oligopoly market, in this area, market is occupied by few large firms, they got their knowledge, equipment and their brand, there are higher barriers in this market. And they can set the price to keep their profit, because there are only few companies in that area, therefore the market must be the price taker.
Section 5 Two different branches of economics
In this section, we will analyze two branches of economics. One is Keynesian economics and the other one is Monetarist economics.
Part 5. (A) An explanation and evaluation of Keynesian economics.
Keynesian economics, also called Keynesianism or Keynesian theory, is a macroeconomics theory based on the ideas of 20th-century British economist John Maynard Keynes. It argues that private sector decisions will lead to inefficient macroeconomic outcomes and even advocates active policy such as monetary policy action by the central bank and fiscal policy by the government in order to stabilize output over the business cycle in the economy (Keyness, 2004 and 2007).
Keynesian economics works in a mixed economy over the last century. It has served as the economic model during the Great Depression, Work War II, the post-war economic expansion (1945-1973). It even works in the global financial crisis in 2007. For example, Gordon Brown, together with other country leaders has used the theory of Keynesian economics to intervene the world economy.
The key point of Keynesian economics points out that there is no strong automatic mechanism moves output and employment towards full employment levels. But in the neoclassical synthesis combines Keynesian macro concepts with a micro foundation, the conditions of general equilibrium also allow for price adjustments to arrive this target. Keynes emphasize on the international coordination of Keynesian policies, and economic forces could lead to war or promote peace.
Criticism: 批评：
Monetarist criticism 货币主义的批评
The representative of monetary economics is Milton Friedman. Rather than rejecting macro-measurements and macro-model of the economy, monetarists treat the entire economy as having a supply and demand equilibrium. In the early Keynesians, monetary policy is considered to be ineffective (Friedman and Meiselman, 1963).
In Keynesian model, in the Irving Fisher equation, inflation is only determined by money supply rather than being considered as a consequence of aggregate demand. The criticism of monetarist inspired a revision of Keynesian theory.
Lucas critique 卢卡斯批评
Lucas economics emphasize on consistency with microeconomic theory and rationality expectations. Lucas economist argued that Keynesian economics required foolish and short-sighted behavior from people, which absolutely contradicted the economic understanding of the behaviors at a micro level.#p#分页标题#e#
Austrian School Criticism 奥地利学派的批评
Austrian economists criticized Keynesian economic policies, which may encourage centralized planning and even leads to main investment of capital, which is the cause of business cycles. The representative of Austrian School Hayek even argued that Keynes' study of the aggregate relations in an economy is not wise because recessions are resulted from micro-economic factors (Kirzner, 1981).
Part 5. (B) An explanation and evaluation of Monetarist economics.
Monetarist economics states that variation in the money supply has major influences on national output in the short run and the price level in the long run. Monetary policy is always applied for targeting the growth rate of the money supply. Friedman and Schwartz (1963a and 1963b) argued that 'inflation is always and everywhere a monetary phenomenon'.
Monetarism today is mainly associated with the work of Milton Friedman, who was among the generation of economists to accept Keynesian economics and then criticize it on his own terms. Friedman and Anna Schwartz wrote an influential book, A Monetary History of the United States, 1867-1960, and argued that "inflation is always and everywhere a monetary phenomenon." Monetarist argued that money demand is a stable function gained considerable support during the late 1960s and 1970s. For example, Alan Greenspan, the former header of the U.S. Federal Reserve regarded monetarist as his policy orientation. The European Central Bank also officially also sets their money supply targets using their monetary policies.
Monetarist economics mainly reply on monetary policy. Contrast with Keynesians and economics of the Austrian School, who believe that there was significant asset inflation and unsustainable GDP growth in the 1920s, monetarists argued that there is no inflationary investment boon in the 1920s at all. Monetarist suggested to center on the contraction of the M1 at the beginning of the 1930s in order to avoid the Great Depression by providing sufficient liquidity because there was insufficient supply of money.
Anyway, the theory of monetarists can be supported by macroeconomic data, for example, the price stability in the 1920s and the slow rise of the money supply. Monetarists believe that the growth of money supply should be based on certain formulations related to economy growth in the 1970s and 1980s. However, monetarists are also criticized by other branches of economics.
Criticism 批评
There are also criticisms for monetarist economist as well. For example, Monetarism was criticized that Austrian economists did not recognize the citizen's subjective value of money but tried to create an objective value through supply and demand in the 1970s and 1980s. Neo-Keynesians argue that money demand is intrinsic to supply while conservative economist argue that it is difficult to predict money demand. According to Stiglitz (2001), when inflation is low, the relationship between inflation and monetary supply growth is even weak.
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