SSC 260 : Introduction to Social Sciences :

1. SSC 260 : Introduction to Social Sciences : Economic section Jaruwan Chontanawat Topic 1: Economic force in Daily life (I) 03/02/2009

2. Text books • Samuelson, P. & Nordhaus, W. Economics (16nd Edition) • Sloman, J. Economics (3rd Edition • Begg, D.(2006). Foundations of Economics. (3rd Edition), McGraw-Hill, London. (Begg)

3. Outlines I. Basic concepts - Introduction - The three problems economics organization - Society’s technological possibilities II. Market VS Demand, Supply

4. Introduction • Are humans rational ? • Needs • Scarcity • Make decision between choices, ‘trade off’ • Opportunity cost • Maximise net benefit

5. What is Economics? • 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 decision (choices) must be made, either by society or by individuals, on three central economic questions.

6. Choices : Three problems of Economic Organisation • What? • What goods and services are 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?

7. Solutions: Market, Command, Mixed Economies • A market economy (A laissez-faire) • Use ‘price mechanism’ (An invisible hand) • Command economy • Use ‘central planning’ • Mixed economy • Use mixed element of market and command

8. 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.

9. What do economists study? (2) • 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.

10. Micro economic Macro economic

11. Microeconomics VS Macroeconomics • Microeconomics is concerned with the behavior of individual entities eg. markets, firms, households. It is concerned with the demand and supplyof 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.

12. Statement about economic issues: Positive &Normative • Positive: explain how part of the economy operates. Offer objective analysis • Normative: go beyond objective analysis, offer prescriptive advices e.g policy, related to ‘value judgement’

13. Society’s Technological Possibilities • Input and Output • The production-possibility frontier • Opportunity cost

14. Factors of Production (Input) Input = commodities and services that are used to produce goods and services. • Labor (human resources) • Land and raw materials (natural resources) • Capital (manufacturing resources) • Entrepreneurs

15. Output Output are various useful goods or services that results from the production process.

16. Production possibility Frontier (PPF) • Given scared resources (input) and existing technological knowledge, What are things to be produced ? • PPF shows the maximum amounts of production that can be obtained by an economy, given its technological knowledge and quantity of inputs available. • PPF represents the menu of goods and services available to society. • Assume economy produces two goods, a curve showing all the possible combination of two goods within a specified time period with all resources fully an efficiently employed. • PPF shows the crucial economic notion of ‘trade-offs’.

17. Production possibility curve: Gun Butter ‘trade off ’ 0 15 1 14 2 12 3 9 4 5 5 0 Guns (thou. Bt) 15 14 0 1 Butter (mil. Bt) 5

18. Example 1 • 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

19. 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.

20. Example 2 • 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 What is the opportunity cost of investment in project A ?

21. II. Market VS Demand and Supply

22. Market and government in modern economy • 19th century become the age of ‘laissez-faire: leave us alone, believe in ‘an invisible hand’. • The end of century : new system called ‘welfare state’: market direct day-to-day economic life while gov regulates social conditions and provides pensions, health care, and other necessities for poor families. • Around 1980 turn to market economy e.g. ‘Regan revolution’ deregulate gov control over the economy. The era of big government control is over. • There are most dramatic turn such as Russia, socialist countries of Eastern Europe, China, Taiwan, Singapore and Chile.

23. What exactly is a market economy • Who solve the three fundamental questions- what, how and for whom in the market economy? • A market economy is an elaborate mechanism for coordinating people, activities, and businesses through a system of price and market. • In a market economy, no single individual or organisation is responsible for production, consumption, distribution, and pricing.

24. How do markets determine prices, wages and outputs? • A market is a mechanism through which buyers and sellers interact to set prices and exchange goods and services. • There are market for almost everything; goods and services, labour, input, finance, currency.

25. Prices coordinate the decisions of producers and consumers in a market. • Higher prices tend to reduce consumer purchases and encourage production. • Lower prices encourage consumption and discourage production. • A market equilibrium represents a balance among all the different buyers and sellers. • Those prices for which buyers desire to buy exactly the quantity that sellers desire to sell yield an equilibrium of supply and demand.

26. Demand and Supply (1) • Demand involves consumption : consumers want to maximise ‘utility’ • Supply involves production : producers want to maximise ‘profit’

27. Demand and Supply (2) • Demand = Wants (Unlimited) • Supply = Resources (Limited)

28. Demand Side • Morning Activities • Breakfast • Transportation costs • Buy newspaper • Afternoon • Lunch • Go shopping • Karaoke • Evening • Dinner • Buy Stuffs • Movie Tickets

29. Demand : • The relationship between price and demand • Law of demand Price ofA=Demand ofA

30. Demand • The demand curve Price 0 Demand

31. Demand Determinant • Price of goods • Taste • Income • Price of related goods (substituted, complimentary) • Seasonal goods • Price expectation

32. Shifts in the Demand Curve • Indirect factors • Personal income  or  • Normal goods • Inferior goods • Taste • Related goods • Substitution goods • Complementary goods • Price expectation

33. Demand • The demand curve Personal income  Price 0 Demand

34. Supply • Relationship between price and quantity Supply • Price  Supply  • Price  Supply  • Producer wants to maximise “Profit”

35. Supply • The supply curve Price 0 Supply

36. Supply Determinant • Its own price • Technology • Price of production factors • Number of producer in the market • Government policy • Other determinants (war, disaster, etc.)

37. 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.)

38. Price Determination-Market Equilibrium • Market Equilibrium • Demand = Supply • Price Equilibrium • Price atDemand = Supply • A market equilibrium represents a balance among all the different buyers and sellers. • Those prices for which buyers desire to buy exactly the quantity that sellers desire to sell yield an equilibrium of supply and demand.

39. P S A B P1 Excess Supply E Pe C F Excess Demand P2 D Q 0 Qe Qa Qb Qc Qf Price Mechanism

40. The circle flow of goods and incomes : how consumers and producers interact to determine prices and quantities for both inputs and outputs Goods and services Expenditure Household Firms Wages, rent, Dividends, etc. Land ,labour, capital goods

41. How market solve the three economics problems • What goods and services will be produced is determined by the demand and supply side. • How things are produced in determined by the competition among different producers. To maximise profit is to keep cost at a minimum by adopting the most efficient methods of production. • For whom things are produced; who is consuming and how much depend on supply and demand in the market of factors of production.

42. The invisible hand • First recognised by Adam Smith (1723-1790), father of economics. • Quoted from The Wealth of Nations, he saw the harmony between private profit and public interest. He argued that even though every individual “intends only his own security, only his own gain,…he is led by an invisible hand to promote an end which was no part of his intension. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.” • Smith introduce the idea of economic growth by pointing to the great strides in productivity brought about by specialization and the division of labor. In a famous example, he describe the specialised manufacturing of pin factory in which “one man draws out the wire, another straightens it, a third cuts it.” and so it goes. This allow 10 people to make 48000 pins in a day. • Smith discovered a remarkable property of competitive market economy. Under perfect competition and with no market failures, market will squeeze as many useful goods and services out of the available resources as is possible. • But where market failure (monopolies or pollution etc) become pervasive, the remarkable efficiency properties of the invisible hand may be destroyed.

43. Terminology and Type of Market • “Market” in economics refer to “Activities” of transferring of products and services (including production factor).

44. 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

45. Type of Market (2) • Other Types of Market (Financial Market) • Money Market (less than 12 months) • Capital Market (more than 12 months) • Foreign Exchange Market • Future Market

46. Structure of Market • Perfectly Competitive Market • Pure Monopoly • Oligopoly • Monopolistic Competition

47. Perfectly Competitive Market • Large number of consumers and producers • Free entry • Homogeneous product • Price taker

48. Pure Monopoly • One producer • Patent, operated by government • No substitution product • Price are depended on producer, sometime controlled by government

49. Oligopoly • Small number of producer, most of them have high market share • Product contain high and unique expertise • Price depended on the industry

50. Monopolistic Competition • In between monopoly and perfectly competitive level • Heterogeneous product, differentiate quality, feature, or services • Price depend upon the ability to create differentiation