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