Basic economic principles (How people make decisions, how people interact and how the economy as a whole works)
(1)People have to face trade-offs.
When resources are scarce, making decisions requires trading one thing off for another. Nothing is free.
When we actually execute trade-offs, they reveal something very much about our value.
Efficiency refers to the size of economic pie and equity refers to how the pie is divided.
The way to give rich people's money to the poor is harmful.
The definition of free is that: if something is truly free,then when we produce or consume it,we don't use any resources whatsoever.
Example:
(1)Is there a free library?
No. We spend time and energy getting to the library and read the books, which are made by workers, and we sit in the library, built by workers who use bricks,stones,etc.
(2)Is health care free?
No. Other people pay for it and the doctors provide us the services.
(3)FDA
Drug lag: the medicine research is long and costly. What's seen is that the test can ensure the medicine is effective and won't cause side-effect.What's not seen is that many people who wait for it could have benefited, but they suffer or die because the test makes the medicine unavailable.
Drug loss: the marginal cost of a new kind of medicine is so big that it leaves fewer profit opportunity for the medicine company so they have no incentive to produce. As a result, people get fewer drugs and suffer.
Incentives of FDA: If they are not prudent, they will end their careers and reputation once the medicine released by them hurt patients; if they do all the things right, no people will say thanks to them but they can get a bigger budget from the government. So FDA would rather prolong the test of medicine.
What is a COST?
cost is anything that consumes resources.
Tax is not a cost because no resources are consumed in the process of getting tax.It's merely a transfer.
If you actually change people's behavior in the way that they consume resources or in the way that doesn't make those resources come into being, then it's costly.
(2)Opportunity cost. The net value of your second best opportunity.
When I buy something, I'm thinking about how much pleasure I can buy from that thing at the current price.
Example:
I win a ticket to see Bruce's show and it is no-resell.My second choice is to see Barry's show. I must pay 40 bucks for the ticket but I can buy 50 bucks of utility.What's the opportunity cost when I go to the Bruce show?
$10. I forgo the chance to see Barry's performance and thus I lose $50 of pleasure, but since I have to pay 40 dollars for the show, I can keep the money in my pocket due to my decision. The net loss is 10 bucks.And since I decide to see Bruce, the value of his show is at least $10, or I won't go for it.
When I buy something, I actually think that it is more worthy than its price.
If I throw the coin to decide which show to watch, I'm actually inclined to see Barry because I have at least to pay for the ticket while at the same time I don't feel excited to see Bruce even if the ticket is free.
Broken window fallacy: Destruction boosts GDP.
(1)No new jobs are created. What's seen is the working people who build the houses, what's not seen is that butcher, car salesmen don't have business.
(2)I have to spend money unwillingly in repairing rather than buying what I desire.
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