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Section 1 : A. Jaruwan ChontanawatAcknowledgement : A. Pom
Economic forces in daily
life
Introduction to social sciences
Economics (3rd Edition); John SlomanEconomics (16nd Edition); Paul Samuelson & William Nordhaus
Section II. Basic concepts
- Introduction
- The three problems economics organization
- Society’s technological possibilities
II. Supply, Demand and Market
III.Macroeconomic problems
I. Basic concept“Why study Economics?”
Make more money? Choosing your life’s occupation? Understanding the role of the
government and challenges of global market place?
Improving environment ? Inequality in the distribution of income ?
What is Economics? (1)
Studies how the prices of labor, capital and land are set to allocate resources.
Explore the behaviour of the financial market. Examine the distribution of income. Look at the impact of government spending, taxes
on growth. Studies the swing in unemployment and production
that make up the business cycle. Examine the patterns of trade among nations. Look at growth of LDCs and propose way to
encourage the efficiency use of resources.
What is Economics? (2) Economics is the study of how societies use
scarce resources to produce valuable commodities and distribute them among different people (Samuelson and Nordhaus,1998).
‘Scarcity & Efficiency’ : twin themes of economics.
Goods are limited, while wants are unlimited. So choices need to be made.
Choices : Three problems of Economic Organisation
What? What goods and services are going to be
produced and in what quantities?
How? How are things going to be produced, what technique will be
applied?
For whom? For whom are things going to be produced, Who will be the final
user?
Wages, rent, Dividends, etc.
The circle flow of goods and incomes
Expenditure
Goods and services
Land ,labour, capital goods
HouseholdFirms
Solutions: Market, Command, Mixed Economies
A market economy (A laissez-faire) Use ‘price mechanism’ (Invisible hand)
Command economy Use ‘central planning’
Mixed economy Use mixed element of market and
command
What do economists study? (1)
The production of goods and services. (Supply side)
How much the economy produces in total.
What particular combination of goods and services.
How much each firm produces. What techniques of production
they use. How many people they employ.
The consumption of goods and services. (Demand side)
How much the whole population spends.
What pattern of consumption is in the economy.
How much people buy of particular items.
What particular individuals buy. How people’s consumption is
affected by prices, advertising, fashion, and other factors.
What do economists study? (2)
Microeconomics VS Macroeconomics
Microeconomics is concerned with the behavior of individual entities eg. markets, firms, households. It is concerned with the demand and supply of particular goods, services and resources.
Macroeconomics is concerned with the overall performances of the economy. It is thus concerned with aggregate demand and aggregate supply.
Society’s Technological Possibilities
Input and Output
The production-possibility frontier
Opportunity cost
Factors of Production (Input)
Input = commodities and services that are use produce goods and services.
Labor (human resources)
Land and raw materials (natural
resources)
Capital (manufacturing resources)
Entrepreneurship
Output
Output are various useful goods or services that results from the production process.
Production possibility Frontier
Scared resource and technology A curve showing all the possible combination of
two goods within a specified time period with all resources fully an efficiently employed.
Butter Gun
0 151 142 123 9
4 55 0
Production possibility curve: ‘trade off ’
Guns (thou. Bt)
Butter (mil. Bt)
15
51
14
Example Assume that you
have 500 baht T-Shirt 200 baht CD 100 baht
2 Shirts 1 CD 1 Shirt 3 CDs 0 Shirt 5 CDs
Opportunity cost
Given scarcity, choosing one thing means give up something else.
Choice involves sacrifice. The more food you choose to buy, the less money you will have to spend on other goods.
The production or consumption of one thing involves the sacrifice of alternatives.
The opportunity cost of a decision is the value of the good and service forgone.
Assume that you only have capital to invest in 1 project
Invest in Project A Possibility to gain 1 million baht
Invest in Project B Possibility to gain 1.5 million baht
Example
II. Demand and Supply VS Market (1)
Demand involves consumption : consumers want to maximise ‘utility’
Supply involves production : producers want to maximise ‘profit’
Demand and Supply VS Market (2)
Demand = Wants (Unlimited)
Supply = Resources (Limited)
Demand Side Morning Activities
Breakfast Transportation costs Buy newspaper
Afternoon Lunch Go shopping Karaoke
Evening Dinner Buy Stuffs Movie Tickets
Demand :
The relationship between price and demand
Law of demand
Price of A = Demand of A
Demand
The demand curve
Demand Determinant
Price of goods Taste Income Price of related goods
(substituted, complimentary) Seasonal goods Price expectation
Indirect factors Personal income or
Normal goods Inferior goods
Taste Related goods
Substitution goods Complementary goods
Price expectation
Shifts in the Demand Curve
Demand
The demand curve
Personal income
Supply
Relationship between price and quantity Supply Price Supply Price Supply
Producer wants to maximise “Profit”
Supply
The supply curve
Supply Determinant
Its own price Technology Price of production factors Number of producer in the market Government policy Other determinants (war, disaster, etc.)
Shifts in the Supply Curve
Indirect factors Taste Technology Price of production factors Number of producer in the market Government policy Other determinants (war, disaster,
etc.)
Price Determination-Market Equilibrium
Market Equilibrium Demand = Supply
Price Equilibrium Price at Demand =
Supply
Price Mechanism
Pe
0 Q
S
P
E
D
Qe
P1
P2
QcQa QbQf
A B
FC
Excess Supply
Excess Demand
Terminology and Type of
“Market” in economics refer to “Activities” of transferring of products and services (including production factor).
Type of Market (1)
By Geographic Local Market Domestic Market Foreign Market and World
Market
By Product Category Final Product Market (output) Production Factor Market (input)
By Type of Transferring Central Market Retail and Wholesale Market
Other Types of Market (Financial Market) Money Market (less than 12 months) Capital Market (more than 12 months) Foreign Exchange Market Future Market
Type of Market (2)
Structure of Market
Perfectly Competitive Market Pure Monopoly Oligopoly Monopolistic Competition
Perfectly Competitive Market
Large number of consumers and producers
Free entry Homogeneous product Price taker
Pure Monopoly
One producer Patent, operated by government No substitution product Price are depended on producer,
sometime controlled by government
Oligopoly
Small number of producer, most of them have high market share
Product contain high and unique expertise
Price depended on the industry
Monopolistic Competition
In between monopoly and perfectly competitive level
Heterogeneous product, differentiate quality, feature, or services
Price depend upon the ability to create differentiation
Macroeconomic Problems
Inflation
Deflation
Balance of payments deficits
Unemployment
Inflation
‘Inflation’ = Rise in the level of prices throughout the economy
Inflation Level 1 : Mild inflation
Market price increase less than 5% per year (good for economy) More investment -> rate of employment increases
Level 2 : Moderate inflation Market price increase 5-20% per year (economy going down)More consumer expenditure-same income
Level 3 : Hyper inflation
Market price increase more than 20% per year (economic crisis)National currency lose its value; in period of war
Causes of Inflation
Cost Push Employee strikes for higher wage Producers reduce their production to increase market
price Costs of production factor raise (fuel price)
Demand Pull When Demand > Supply
Product shortage War Natural disaster Increasing of Global demand
Result to personal income (1)
Income from fixed salary - Lose advantage Expense increase-Fixed income or increase less
than inflation rate Government officer P ensioner Company officer
Income from profit - Gain advantage Can mark up the increasing costs in price of
goods Merchant Business owner
Advantage : Debtor Disadvantage : Creditor
Borrow today 100 baht, return 1 year later (inflation 5%)
100 baht value have been reduced to 95 baht overtime (1 year)
Disadvantage : Cash holder, bond holder, or bank account holder (when interest rate < inflation rate)
Advantage : Property owner, or other assets that have uncertain value
Result to personal income (2)
Results of Inflation
Employment Employee received higher income from overtime
working.
Expenses Full resources usage capability leaded to shortage
of production factors. Result in higher prices
If cannot control, it will create bubble economic situation.
Results of Inflation
Deflation
<
Situation when the prices of goods or services are reducing continuously caused by
What happens ? Low spending -> production cut ->price cut -
> income cut -> (job cut ) unemployment Business goes in debt -> Bank has more
uncollectable debt (non-performing loan) -> more strict to release new loan -> increase interest -> less investment - > recession
Aggregate supply
Aggregate demand
Causes of Deflation (1)
People don’t save their money in economic system Invest in property Producer stock their product
Government policy-Eg. High taxes Money is taken out of the market
Central bank policy Increase money reservation Inadequate release of bank note Restricted control on personal loan
Financial institutions retard releasing their loans Lack of money circulation in the economy
Balance of payments are continuously deficits Money have been moved out of the economic system
Causes of Deflation (2)
Balance of payments deficits
Trade Balance The monetary value of exports minus (-) imports over a
certain period of time .
Current Account The trade balance + other financial activities from other
countries; net factor income (such as interest and dividends), and net transfer payments (such as foreign aid ).
Recession Created from Economic shocks;
economic system lose its balance
Period of war Revolution Low level of money flow in economy
Unemployment Population in working age but out of
job/ non income earning
Cyclical: Demand for job exceed supply
Frictional: A period of changing job
Structural: Qualification for job is changed
due to the changing of industry circumstances
Types of Unemployment
Technological: Labor are replaced by new technology
or machinery Classical:
When business can’t afford high wages
Marxian: Lay out to keep company running
Seasonal: Ended season of some job ex.
agriculture or farming
Types of Unemployment
Results of Unemployment
Increase of ... Poverty Crime Politic instability Stress and health Economic problem
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