Economics I, Semester 1/2023 PDF

ECONOMICS I THE FIRST LECTURE: COURSE SYLLABUS, INTRODUCTION INSTRUCTOR: KATIKAR TIPAYALAI, PH.D. FACULTY OF ECONOMICS SEMESTER 1/2023 1 08/08/66  WHAT IS ECONOMICS? Economics...

ECONOMICS I THE FIRST LECTURE: COURSE SYLLABUS, INTRODUCTION INSTRUCTOR: KATIKAR TIPAYALAI, PH.D. FACULTY OF ECONOMICS SEMESTER 1/2023 1 08/08/66  WHAT IS ECONOMICS? Economics is a field of social sciences that results from the fact that resources are scarce (ทรั พยากรมีอยู่อย่ างจํากัด) while our needs are unlimited (ความต้ องการไม่ จาํ กัด). Example, if you have 40 baht for lunch, you cannot buy everything with this money even though your hunger tells you to buy everything that looks yummy. Similar problems apply at a household level (ระดับครัวเรื อน), society level (ระดับสังคม) or even at national level (ระดับประเทศ). Given that we cannot do anything with the scarcity, the question is what should we do to get the most out of the scarce resources we have. This involves maximizing an individual/household/society’s utility on a resource constraint (การทําให้ เกิดอรรถประโยชน์สงู สุดในทรัพยากรทีDมีอยูอ่ ย่างจํากัด). Economics is the study of how society manages its scarce resources (สังคมจัดการกับทรั พยากรที:มีอยู่อย่ างจํากัดอย่ างไร) (Mankiw 2012). Those with economic knowledge would be able to understand how people decide on their choices (คนตัดสินใจเลือกอย่ างไร), how people interact in an economy (คนเรามีปฏิสัมพันธ์ กันอย่ างไร), and how the economy as a whole works (ระบบเศรษฐกิจโดยรวมทํางานอย่ างไร). 2 08/08/66  HOW PEOPLE MAKE DECISIONS Principle 1: People face trade-offs (ผู้คนต้ องเผชิญกับการได้ อย่ างเสียอย่ าง) Because resources are scarce, people need to make decisions and every decisions involve trade-off. In 24 hours, the more you go to a party, the less you study. The more you study, the less you can sleep. With limited monthly allowances, the more you spend on clothes, the less you can spend on food/other goods and services. With limited income, the more you save, the less you can spend on consumption. With limited monthly salary, the more your parents spend on you, the less they can spend on themselves. With limited tax revenue, the more a government spends on national defense (gun), the less it can spend on consumer goods (butter) to raise its standard of living. 3 08/08/66  HOW PEOPLE MAKE DECISIONS The most well-known trade-off in economics would be the trade-off between efficiency (ประสิทธิภาพ) and equality (ความเสมอภาค). Efficiency: Society gets the maximum benefits from its scarce resources. That is when individual utility or social welfare is maximized given resource constraints. We are interested in the size of economic pie. Equality: when the economic benefits are distributed equally among society’s members. We are interested in how the pie is divided into individual slices. Those who are very productive become very rich while those who are not become very poor. è Efficient, but not equitable. To achieve greater equality, we could redistribute income from wealthy to poor. But this reduces incentive to work and produce. è Equality, but not efficient 4 08/08/66  HOW PEOPLE MAKE DECISIONS Principle 2: The cost of something is what you give up to get it (ต้ นทุน ของสิ:งหนึ:งคือสิ:งที:เสียไปเพื:อให้ ได้ ส: ิงนันO มา). Due to trade-offs, people have to give up something in order to do the other. The value of what you give up in making a choice (อะไรที(เรายอมเสียไปเพื(อให้ ได้ สงิ( หนึง( มา) is called “opportunity cost”(ค่าเสียโอกาส). In making choices, you have to compare (opportunity cost) with benefits of each alternative (ในทุกการตัดสินใจ เราจําเป็ นต้ องเปรี ยบเทียบต้ นทุนและ ผลประโยชน์). What is the opportunity cost of going to college for a year? (ต้ นทุน ของการมาเรี ยนที:มหาวิทยาลัย) Tuition, books, and fees NOT: room and board PLUS foregone earnings What is the opportunity cost of going to the movies? (ต้ นทุนของการไปดู หนังกับเพื:อน) The price of the movie ticket PLUS the value of the time you spend in the theater 5 08/08/66  HOW PEOPLE MAKE DECISIONS Principle 2: The cost of something is what you give up to get it. The cost of attending college is not just the “accounting cost” (ต้ นทุน ทางบัญชี) you incur, but also the cost of forgone wage (ต้ นทุนของรายได้ ที6เสีย ไป). Why do many superstars choose to quit schooling? The cost of buying a new car is not just the amount of money you pay a car dealer, but also the cost of forgone interest. The cost of dining out is not just the meal’s price, but also the cost of forgone time. 6 08/08/66  HOW PEOPLE MAKE DECISIONS Principle 3 Rational people think at the margin (คนทีCมีเหตุผลจะคิดแบบส่ วน เพิCม) In order to efficiently achieve their goal, rational people would look at the incremental effect of their actions. Marginal benefits (ผลประโยชน์สว่ นเพิ6ม) : Additional benefits Marginal costs (ต้ นทุนส่วนเพิ6ม) : Additional costs Take an action if and only if MB > MC Example: If you are enjoying a very delicious meal but you begin to feel full, you need to compare the MB and MC of another bite. Example: If you are studying for the exam of this class but you begin to have a bad headache, you need to compare the MB and MC of another hour of reading. Examples: The near-zero marginal cost of an airline taking an extra passenger when the flight isn’t full. The diamond-water paradox: water is essential for life but virtually free; diamonds are inessential but expensive. 7 08/08/66 ACTIVE LEARNING 1: THINKING AT THE MARGIN A. As the manager at the local Save-a-lot, you are thinking of hiring one more cashier that would increase sales revenues by $400 per week. The new cashier would earn $300 per week. Should you hire the new cashier? Why? B. You pay $12/month for access to Netflix, regardless of how many movies or TV shows you watch in a month. Should you watch one more movie (or episode)? Why? 8 08/08/66  HOW PEOPLE MAKE DECISIONS Principle 4: People respond to incentives (ผู้คนตอบสนองต่ อสิCงจูงใจ) Incentive is something that induces a person to act (สิง6 ที6ชกั นําให้ บคุ คลเกิด การกระทํา). Examples: Death penalty acts as an incentive for a person not to commit serious crime. High-valued prize acts as an incentive for a person to buy a lottery. In Economics, market price acts as an important incentive to direct buyers/sellers’ behaviors. Example: An increase in the price of doughnuts, Consumers buy fewer doughnuts. Sellers produce more doughnuts. In decision making, both costs and benefits act as incentives that determine the final choice. 9 08/08/66  HOW PEOPLE MAKE DECISIONS The government increases the gasoline tax by 3 baht per litre. How do consumers respond? Drive smaller or more fuel-efficient cars Carpool Use public transportation Move closer to work How do businesses respond? 10 08/08/66  HOW PEOPLE INTERACT Principle 5: Trade can make everyone better off (การค้ าทําให้ ทกุ ฝ่ ายดีขนึ N ) Trade (การค้ า) Allows each person to specialize in the activities he or she does best Enjoy a greater variety of goods and services at lower cost Countries also benefit from trade and specialization: Get a better price abroad for goods they produce Buy other goods more cheaply from abroad than could be produced at home 11 08/08/66  HOW PEOPLE INTERACT Principle 6: Markets are usually a good way to organize economic activity (ตลาดเป็ น วิธีท/ ดี ใี นการจัดการกิจกรรมทางเศรษฐกิจ) Communist countries – central planning (การวางแผนจากส่ วนกลาง) Government officials (central planners) Allocate economy’s scarce resources What goods & services were produced (ผลิตอะไร) How much was produced (ผลิตมากเท่าใด) Who produced & consumed these goods & services (ใครเป็ นผู้ผลิต) Market economy (ระบบเศรษฐกิจแบบตลาด) - allocates resources Through decentralized decisions of many firms and households (การตัดสินใจของครัวเรื อนและ บริ ษัทต่าง ๆ) As they interact in markets for goods and services Guided by prices and self interest (ราคาและผลประโยชน์สว่ นตัวเป็ นตัวช่วยในการตัดสินใจ) Adam Smith’s “invisible hand” in The Wealth of Nations (1776) (มือที/มองไม่ เห็นของอดัม สมิธ) Households and firms interacting in markets Act as if they are guided by an “invisible hand” Leads them to desirable market outcomes The invisible hand works through the price system (ราคาสินค้ า) Corollary: Government intervention (การแทรกแซงของรัฐบาล) Prevents the invisible hand’s ability to coordinate the decisions of the households and firms that make up the economy 12 08/08/66  HOW PEOPLE INTERACT Principle 7: Governments can sometimes improve market outcomes (บางครั งG รั ฐบาลช่ วย ทําให้ ผลลัพธ์ ของตลาดดีขนึ G ) Why do we need government? To enforce rules and maintain institutions: Enforce property rights (รับรองกรรมสิทธิJใน ทรัพย์สนิ ) To promote efficiency (เพิLมประสิทธิภาพ): Avoid market failure (ป้องกันไม่ให้ เกิดความล้ มเหลวของตลาด) To promote equality (เพิLมความเสมอภาค): Avoid disparities in economic wellbeing Market failure (ความล้ มเหลวของตลาด) Situation when the market fails to allocate society’s resources efficiently(ตลาดไม่สามารถ จัดสรรทรัพยากรได้ อย่างมีประสิทธิภาพ) Causes for market failure: Externality (ผลกระทบภายนอก): Impact of one person’s actions on the well-being of a bystander (e.g. pollution (ภาวะมลพิษ)) Market power (อํานาจเหนือตลาด): Ability of a single economic actor (or small group of actors) to have a substantial influence on market prices (e.g. monopoly (การผูกขาด)) Disparities in economic wellbeing Market economy rewards people According to their ability to produce things that other people are willing to pay for Government intervention: through public policies May diminish inequality (ช่วยลดความไม่เสมอภาค) Process far from perfect (เป็ นกระบวนการที@ไม่ได้ สมบูรณ์แบบ) 13 08/08/66  HOW THE ECONOMY AS A WHOLE WORKS Principle 8: A country’s standard of living depends on its ability to produce goods and services (มาตรฐานการครองชีพของประเทศขึน6 อยู่กับความสามารถในการผลิตสินค้ าและบริการ) Large differences in living standards (มาตรฐานการครองชีพแตกต่ างกันอย่ างมาก) Among countries Over time Example: Example: In 2021, the average American had an income of about $69,288, while the average German earned $50,802, the average Thai earned $7,233, the average Vietnamese earned $3,694, and the average Nigerian earned $2,085 (World Bank, 2022). Explanation: differences in productivity (ความแตกต่ างของผลิตภาพ) Productivity (ผลิตภาพ) The amount of goods and services produced from each unit of labor (ปริ มาณสินค้ า และบริ การทีDผลิตได้ จากแรงงานแต่ละคน) Productivity depends on the equipment, skills, and technology available to workers Higher productivity = Higher standard of living Growth rate of nation’s productivity (อัตราการเติบโตของกําลังผลิต) Determines growth rate of its average income (กําหนดอัตราการเติบโตของรายได้ เฉลีย8 ) 14 08/08/66  HOW THE ECONOMY AS A WHOLE WORKS Principle 9: Prices rise when the government prints too much money (ราคาสินค้ าจะสูงขึนN เมืCอรั ฐบาลเพิCมปริมาณเงินเข้ าสู่ระบบมากเกินไป) Inflation (ภาวะเงินเฟ้ อ) An increase in the overall level of prices in the economy (ภาวะที6ระดับ ราคาของสินค้ าในระบบเศรษฐกิจเพิ6มสูงขึ Pนโดยทัว6 กัน) Causes for large / persistent inflation Growth in quantity of money (ปริ มาณของเงินสูงขึ Pน) Value of money falls (มูลค่าของเงินลดลง) The faster the government creates money, the greater the inflation rate 15 08/08/66  HOW THE ECONOMY AS A WHOLE WORKS Principle 10: Society faces a short-run trade-off between inflation and unemployment (สังคมเผชิญภาวะได้ อย่ างเสียอย่ างในระยะสันO ระหว่ างภาวะเงินเฟ้ อกับภาวะการ ว่ างงาน) Short-run effects of monetary injections (ผลกระทบระยะสันO ของการอัดฉีดเงินเข้ า ระบบ): Stimulates the overall level of spending (กระตุ้นการใช้ จา่ ยโดยรวม) Higher demand for goods and services (อุปสงค์ตอ่ สินค้ าและบริ การสูงขึ Oน) Firms – raise prices; hire more workers; produce more goods and services Lower unemployment (การว่างงานลดลง) Short-run trade-off between unemployment and inflation Key role – analysis of business cycle Business cycle (วัฏจักรธุรกิจ) Fluctuations in economic activity (ความผันผวนของกิจกรรมทางเศรษฐกิจ) Employment (การจ้ างงาน) Production (การผลิต) 16 08/08/66  FIELDS OF ECONOMICS Microeconomics (เศรษฐศาสตร์ จุลภาค) As the name suggests, Microeconomics studies the micro units in an economy whether at a household level or a firm level. The study of how households and firms make decisions and how they interact in markets (การศึกษาว่าหน่วยครัวเรื อนและหน่วยธุรกิจมีการตัดสินใจอย่างไร และ มีความเกี6ยวข้ องกันอย่างไร) Examples of topics include how a person makes a consumption decision, how a firm decides how many workers to hire, how the price and quantity of goods/services are determined in a particular market, etc. Macroeconomics (เศรษฐศาสตร์ มหภาค) Macroeconomics looks at an economy as a whole, it focuses especially on economic variables at the national level rather than at a single market. Examples of variables include aggregate consumption level, inflation, unemployment, economic growth (GDP growth), etc. 17 08/08/66  TYPES OF ECONOMIC ANALYSIS ปี เตอร์ : กฎหมายค่ าจ้ างขันG ตํ/าทําให้ เกิดภาวะการว่ างงาน นาเดีย: รั ฐบาลควรเพิ/มค่ าจ้ างขันG ตํ/า Positive Economics (เศรษฐศาสตร์ ตามที/เป็ นจริง) A study that tries to explain a particular economic phenomena objectively. What is the situation ? What are the results ? What are the causes ? Normative Economics (เศรษฐศาสตร์ ท/ คี วรจะเป็ น) A study that tries to incorporate individuals’ value judgments in the economic phenomena. It is very subjective and each person’s attitude toward the same situation could be very different. What should it be? Example: The proposal to open a casino in Thailand Positive Economics: What are the effects on people’ productivity ? What are the effects on tax revenue ? Normative Economics: Is it suitable for our country ? What regulations should we impose ? In this class, we will focus only on Positive Economic Analyses. Hopefully, with positive economic knowledge, you will be able to do normative analyses. 18 08/08/66 ACTIVE LEARNING 2: POSITIVE OR NORMATIVE? Which of these statements are “positive” and which are “normative”? How can you tell the difference? A. Prices rise when the government increases the quantity of money. (ราคาสินค้ าเพิ6มสูงขึ Pนเมื6อรัฐบาลเพิ6มปริ มาณเงินเข้ าสูร่ ะบบเศรษฐกิจ) B. The government should print less money. (รัฐบาลควรลดปริ มาณเงินใน ระบบเศรษฐกิจ) C. A tax cut is needed to stimulate the economy. (การลดอัตราภาษี เป็ นสิง6 ที6 ควรทําเพื6อกระตุ้นเศรษฐกิจ) D. An increase in the price of oil will cause a decrease in consumer demand for gold. (การเพิ6มขึ Pนของราคานํ Pามันทําให้ อปุ สงค์ของปริ มาณ ทองคําลดลง) 19 08/08/66  FACTORS OF PRODUCTION Factors of production (ปั จจัยการผลิต): important ingredients of any production process. Land (ทีCดนิ ): all the natural resources whose returns are called “rent”. Labor (แรงงาน): all the human resources that involve in a production process, their returns are called “wage” or “salary”. Capital (ทุน): all the capital goods such as mechanical tools, machinery, factory, etc. that facilitate production process in a society. Since money generates capital goods, we can say that money is one form of capital goods, its return is “interest”. Entrepreneur (ผู้ประกอบการ): all those who take main responsibilities in production process, they organize all the factors of production together. Their return are called “profit”. 20 08/08/66  GOODS AND SERVICES Economic goods Those that are produced using resources in a society. Since resources are used, these goods and services have price associated with them. These prices are determined within the market. Free goods Those exist in a society while no resources are used to produce them. There are no price associated with them, people can consume them without paying. Examples are natural resources. In economic analyses, we only focus on those with price attached (economic goods). 21 08/08/66  BASIC ECONOMIC PROBLEMS What? What goods and services a society should produce to meet people’s need? How? Which production means/process should a society employ to reach the objective of maximizing social welfare? What’s the best way to make use of existing resources? For whom? Who should obtain the products a society chooses to produce? 22 08/08/66  ECONOMIC SYSTEMS Capitalist Economic System or Market Economy (ระบบเศรษฐกิจแบบตลาด) Every units in the economy have the complete freedom in the production process. The market is led by the “invisible hands”, the market forces that determine the market prices/quantity of goods and services. Goods with high demand would have their price raised. Goods with low demand would have their price lowered. This system promotes social efficiency in the sense that only those who efficiently utilize their resources can survive in the market. Minimum government intervention (การแทรกแซงของรัฐบาลน้ อยที6สดุ )) Efficiency VS. Equity Those who earn more can consume more, but what about those born disadvantaged? 23 08/08/66  MARKET FAILURES (ความล้ มเหลวของตลาด) In a Capitalist Economic System, sometimes market fails to do its job and government intervention is required. Public Goods Any good that are “non-rival” (ไม่เป็ นปรปั กษ์ ) and “non-excludable” (ไม่กีด กัน), national defense and lighthouse are some examples. No-one would be willing to produce these goods as they cannot exclude those who consume the goods but don’t pay the price. Externalities (ผลกระทบภายนอก) The problem occurs when one party’s action affects the other party’s well-being (in a bad or good way) and that action is not priced in the market. Monopoly (การผูกขาด) The problem occurs when only single seller/buyer has market power over the market and can control market price. Asymmetric Information Product information is asymmetric between parties involved. 24 08/08/66  ECONOMIC SYSTEMS Centrally Planned Economy. The government owns all the resources and controls every economic activities. The government decides on how to distribute goods and services. Equity is the goal, although efficiency must be sacrificed. 25 08/08/66  ECONOMIC SYSTEMS Mixed Economic System Each system has its own flaws, so most countries employ a combination of each system’s characteristics. Examples: USA allows a lot of freedom in its market activities, while the problems of public goods/externalities/monopoly are controlled by federal/state agencies.è We say that they have a capitalist economy. Chinese government has a lot of control over economic activities but began to allow market competition.è We say that they have a centrally planned economy. 26 08/08/66  ECONOMIC MODELING An economist develops a model/theory that tries to explain a particular economic phenomena using many variables and simplified assumptions. They then use the real-world data to test their theories. The correctly specified theories are used to explain many economic phenomena and sometimes make policy suggestions to the authority. In order to present their models, economists use Diagram (แผนภาพ): Visual presentation of the relationship between economic variables or economic units. Equation (สมการ): Mathematical expression of the relationship between economic variables. 27 08/08/66  ECONOMIC AGENTS Consumer (ผู้บริโภค) Demand goods and service. Maximize utility (อรรถประโยชน์สงู สุด). Producer (ผู้ผลิต) Supply goods and services. Maximize profit (กําไรสูงสุด). Factor Owner (เจ้ าของปั จจัย) Supply factors used in a production process. Maximize return (ผลตอบแทนสูงสุด). 28 08/08/66  ECONOMIC UNITS Two types of decision makers 1. Household (หน่ วยครั วเรื อน) Consumes goods and services. Supplies factors of production. Consumers + factor owners 2. Firm (หน่ วยธุรกิจ) Produces goods and services. Demand factors of production. Producers + factor buyers. Two markets 1. The market for goods and services (ตลาดสินค้ าและบริ การ): Households as buyers / firms as sellers 2. The market for factors of production (ตลาดปั จจัยการผลิต): Households as sellers / firms as buyers Economic units can meet and trade their good/services through the market system. 29 08/08/66 THE CIRCULAR-FLOW DIAGRAM: Revenue Spending Markets for G&S Goods & G&S sold Services bought Firms Households Factors of Labor, land, production Markets for capital Factors of Wages, rent, Production Income profit 30 08/08/66  THE PPF Production possibilities frontier (PPF) (เส้ นความเป็ นไปได้ ในการผลิต) A graph that shows various combinations of outputs that the economy can possibly produce, given the available factors of production and the available production technology. (เส้ นกราฟที6แสดง จํานวนสินค้ าประเภทต่าง ๆ ที6ระบบเศรษฐกิจผลิตออกมาได้ จากปั จจัยการผลิตและเทคโนโลยีที6มีอยู)่ For a 2-dimensional diagram, we assume that the economy has to choose between producing 2 goods. It shows the basic concept of Economics; with scarce resource, the economy faces tradeoff between the production of one good against the other. The opportunity cost of one good is just the amount of other good the economy must give up producing. 31 08/08/66 EXAMPLE 1: THE PPF Assume the following: A country produces only two goods: airplanes and soybeans. It has a fixed amount of resources (labor). And it has a fixed amount and quality of technology. The available resources and technology can be used to produce: Only soybeans (5,000 tons) Only airplanes (100 airplanes) Or a combination of soybeans and airplanes 32 08/08/66 EXAMPLE 1: THE PPF AND OUTPUT COMBINATIONS These are just a few of the possible production combinations. To increase the production of airplanes from 0 to 20, how many tons of soybeans do we have to give up? 33 08/08/66  EXAMPLE 1: DRAWING THE PPF Airplanes 100 E Airplanes Tons of D Soybeans 80 A 0 5,000 C B 20 4,000 50 C 50 2,500 B 20 D 80 1,000 A E 100 0 1,000 2,500 4,000 5,000 Soybeans (tons) Efficient (ประสิทธิภาพ): the economy is getting all it can from the scarce resources available – points on the PPF (A, B, C, D, E) Inefficient levels of production (ระดับการผลิตที5ไม่มีประสิทธิภาพ) : points inside the PPF Not feasible: points outside the PPF 34 08/08/66 ACTIVE LEARNING 3: POINTS OFF THE PPF Use the graph from the previous example. Would it be possible for the economy to produce the following combinations of the two goods? Point F: 80 airplanes and 4,000 tons of soybeans Point G: 30 airplanes and 2,500 tons of soybeans 35 08/08/66 THE PPF: WHAT WE KNOW SO FAR Points on the PPF (like A – E): efficient Efficient: all resources are fully utilized Points under the PPF (like G): possible Not efficient: some resources are underutilized (e.g., workers unemployed, factories idle) Points above the PPF (like F) Not possible 36 08/08/66 MOVING ALONG THE PPF Moving along a PPF Involves shifting resources from the production of one good to the other Society faces a tradeoff. Getting more of one good requires sacrificing some of the other. The slope of the PPF The opportunity cost of producing one good in terms of the other. How many tons of soybeans the economy must sacrifice in order to produce 1 more airplane? How many airplanes the economy must give up in order to produce 1 more ton of soybeans? 37 08/08/66  EXAMPLE 2: THE PPF AND OPPORTUNITY COST Airplanes To produce the first 1,000 tons of soybeans: give up E 20 airplanes 100 D Opportunity cost of 1 80 airplane = ______ C 50 Opportunity cost of 1 ton B of soybeans = _______ 20 A 0 1,000 2,500 4,000 5,000 Soybeans (tons) 38 08/08/66  EXERCISE A small country produces two goods: PS5 consoles and game online downloads. Points on a production possibilities frontier (PPF) can be shown in a table below: A B C D E PS5 consoles 0 100 200 300 400 Game 70,000 60,000 45,000 25,000 0 Downloads The PPF should be drawn from the numbers above. Calculate the opportunity cost of increasing the number of PS5 consoles produced by 100 (คํานวณหาค่าเสียโอกาสของการเพิม5 จํานวนการผลิตเครือ5 งเล่น PS5 100 เครือ5 ง): ระหว่าง 0 ถึง 100 ระหว่าง 100 ถึง 200 ระหว่าง 200 ถึง 300 ระหว่าง 300 ถึง 400 39 08/08/66  GRAPHING: A BRIEF REVIEW Graphs of two variables: the coordinate system (ระบบพิกัดร่ วม) Display two variables on a single graph Scatterplot Ordered pairs of points x-coordinate (พิกดั x) Horizontal location (ระนาบแนวนอน) y-coordinate (พิกดั y) Vertical location (ระนาบแนวตัง)G 40 08/08/66  GRAPHING: A BRIEF REVIEW Curves in the coordinate system Data Price of Number of novels Novels Price of novels $11 (5, $10) Income 10 (9, $9) Demand curve 9 (13, $8) 8 Effect of a good’s price (17, $7) 7 On the quantity of the good 6 (21, $6) consumers want to buy (25, $5) 5 For a given income 4 Demand, D1 3 2 1 0 5 10 15 20 25 30 Quantity of novels purchased 41 08/08/66  GRAPHING: A BRIEF REVIEW Slope (ความชัน) Ratio of the vertical Price of distance covered to the Novels $11 horizontal distance covered 10 As we move along the 9 line (13, $8) 8 Δ (delta) = change in a 7 6-8=-2 variable (21, $6) The “rise” (change in y) 6 divided by the “run” (change 5 21-13=8 in x). 4 Demand, D1 Dy 3 Slope = 2 Dx 1 0 5 10 13 15 20 21 25 30 Quantity of Novels purchased 42 08/08/66 ECONOMIC GROWTH AND THE PPF Economic growth is the ability to increase its goods/services production. If there is an advance in production technology or an increase in available resources, the PPF shifts out and indicates the ability of the economy to produce more. The shift-out could be only on one axis or both depending on which production technology improves. Since the shift-out expands the set of feasible production combination, we say that it generates economic growth. 43 08/08/66  ECONOMIC GROWTH AND THE PPF Airplanes With additional resources or an 120 Economic growth improvement in shifts the PPF technology, the economy 100 outward. can produce: 80 more soybeans, more airplanes, 50 or any combination in between. 20 0 1,000 2,500 4,000 5,000 6,000 Soybeans (tons) 44 08/08/66 THE SHAPE OF THE PPF Shape of the PPF Straight line: constant opportunity cost (ค่าเสียโอกาสคงที6) Previous example: the opportunity cost of 1 airplane is 50 tons of soybeans Bowed outward: increasing opportunity cost (ค่าเสียโอกาสเพิ6มขึ Pน) As more units of a good are produced, we need to give up increasing amounts of the other good produced. 45 08/08/66  WHY THE PPF MIGHT BE BOWED OUTWARD – 1 As the economy shifts Beer resources from beer to mountain bikes: PPF becomes steeper and the opportunity cost of mountain bikes increases. Mountain Bikes 46 08/08/66  WHY THE PPF MIGHT BE BOWED OUTWARD – 2 At A, opportunity cost of At point A, most workers are Beer A mountain bikes is low. producing beer, even those who are better suited to building bikes. At B, most workers are B producing bikes. The few left in beer production are the best brewers. At B, opportunity cost of mountain bikes is high. Mountain Bikes 47 08/08/66 WHY THE PPF MIGHT BE BOWED OUTWARD The PPF is bowed outward when: Different workers have different skills There are different opportunity costs of producing one good in terms of the other There is some other resource, or mix of resources, with varying opportunity costs E.g., different types of land suited for different uses 48 08/08/66 PPF IMPLICATIONS With social welfare function, we can identify the combination of production that is the best for an economy. Different shape of PPFs in different economies will lead to specialization. Specialization (ความเชี6ยวชาญ) will lead to trade among economies, we will learn later on that trade improves economic well-being. 49 08/08/66  THE GAIN FROM TRADE Sweater from Bangladesh Coffee from “Every day you rely on many Brazil people from around the world, most of whom you’ve Jeans from North never met, to provide you Carolina, USA with the goods and services Paper bag you enjoy.” from China Leather shoes from Italy 50 08/08/66  THE GAIN FROM TRADE Assume an economy with 2 people and 2 goods. Mr. A and Miss B Both can produce either bikes or beer or both at the same time. Beer/day with no Bikes/day with no bikes beer Mr. A 48 24 Miss B 32 8 51 08/08/66  PPF PPF shows all the possible combination of production set available to each person. Mr. A chooses to consume at point A, while Miss B chooses point B. Beer Beer 32 48 B 16 24 A Bike Bike 12 24 4 8 Mr. A Miss B Without trade, each person’s PPF is also his or her CPF (Consumption Possibilities Frontier). 52 08/08/66  COMPARATIVE/ABSOLUTE ADVANTAGE Absolute Advantage (ความได้ เปรี ยบโดยสัมบูรณ์ ) : The ability to produce a good using fewer inputs than another producer. (ความสามารถในการผลิตสินค้ า โดยใช้ ปริมาณปั จจัยการผลิตน้ อยกว่ าผู้ผลิตรายอื:น) Comparative Advantage (ความได้ เปรี ยบโดยเปรี ยบเทียบ) : The ability to produce a good at a lower opportunity cost than another producer (ความสามารถในการผลิตสินค้ าที:มีค่าเสียโอกาสน้ อยกว่ าผู้ผลิตรายอื:น) From previous example, Opp. cost of 1 beer Opp. cost of 1 bike Mr. A 24/48 = ½ (0.5) bike 48/24 = 2 beer Miss B 8/32 = ¼ (0.25) bike 32/8 = 4 beer We say Mr. A has comparative advantage in producing bikes. Miss B has comparative advantage in producing beer. Mr. A has absolute advantage in both goods. 53 08/08/66  COMPARATIVE/ABSOLUTE ADVANTAGE Principle of comparative advantage Each good - produced by the individual that has the smaller opportunity cost of producing that good (สินค้ าแต่ละชนิดควรผลิตโดยผู้ผลิตที6มีคา่ เสียโอกาสในการผลิตสินค้ าชนิดนันตํ P 6ากว่า) One individual Can have absolute advantage in both goods Cannot have comparative advantage in both goods Opportunity cost of one good Inverse of the opportunity cost of the other (ค่าเสียโอกาสของสินค้ าชนิดหนึง6 มีคา่ เท่ากับความผกผันของค่าเสียโอกาสของสินค้ าอีกชนิด) Gains from specialization and trade Based on comparative advantage Total production in economy rises Increase in the size of the economic pie Everyone – better off 54 08/08/66  TRADE AND SPECIALIZATION Since Mr. A has a comparative advantage in producing bikes while Miss B has a comparative advantage in producing beer, trade theory suggests that each party should specialize in the production of what they have comparative advantage and trade. Suppose that Mr. A chooses to produce 18 units of bikes and 12 beer while Miss B produces 32 units of beer and no bikes and they agree to trade their production with the term of trade of 3 units of beer for 1 unit of bikes. Mr. A can give away 5 units of bikes and get 15 beer, while Miss B can give 15 beer to Mr. A and get 5 additional units of bikes. Both can consume more of each products (the combination which would have been infeasible without trade),they are both better off. 55 08/08/66  TRADE AND SPECIALIZATION Without Trade Bikes Beer Bikes Beer Production Production Consumption Consumption Mr. A 12 24 12 24 Miss B 4 16 4 16 With Trade and Specialization Mr. A 18 12 - - Trade -5 +15 13 27 Miss B 0 32 - - Trade +5 -15 5 17 Gains from trade for Mr. A = 13-12 = 1 bike, =27-24=3 beer, Miss B = 5-4 =1 bike, =17-16=1 beer. 56 08/08/66  GAIN FROM TRADE With trade, both people can consume outside their original PPFs. Think about Mr. A as the U.S. and Miss B as Germany, do you know now why we export beer and import bikes from the U.S. ? Beer Beer 32 48 B* A* 17 B 27 16 24 A Bikes Bikes 12 13 24 45 8 Mr. A Miss B 57 08/08/66 ACTIVE LEARNING 4: ARGENTINA AND BRAZIL Argentina, 10,000 hours of labor/month: producing 1 lb. coffee requires 2 hours; producing 1 bottle wine requires 4 hours Brazil, 10,000 hours of labor/month: producing 1 lb. coffee requires 1 hour producing 1 bottle wine requires 5 hours A. Which country has an absolute advantage in the production of coffee? B. Which country has a comparative advantage in the production of wine? 58 08/08/66  MORE EXERCISES 1. Should Cristiano Ronaldo Mow His Own Lawn? (คริสเตียโน โรนัลโดควร ตัดหญ้าเองไหม) Ronaldo, in 2 hours Mow his lawn, or Film a TV commercial, earn $20,000 Forest Gump, in 4 hours Mow Ronaldo’s lawn Work at McDonald’s, earn $40 1. Who has the absolute advantage (ความได้เปรียบโดยสัมบูรณ์) of mowing Ronaldo’s lawn? 2. Calculate the opportunity cost of Ronaldo in mowing his own lawn? 3. Calculate the opportunity cost of Forest Gump in mowing Ronaldo’s lawn? 4. Who has the comparative advantage (ความได้เปรียบโดยเปรียบเทียบ) of mowing Ronaldo’s lawn? 5. Should Ronaldo mow his own lawn? 59 08/08/66  MORE EXERCISES 2. Should the U.S. trade with other countries? U.S and Japan Imports (สินค้านําเข้า) Goods produced abroad and sold Each produces food and cars domestically One American worker, in one month Exports (สินค้าส่งออก) One car, or Goods produced domestically and sold Two tons of food abroad Principle of comparative advantage One Japanese worker, in one month Each good – produced by the country with One car the smaller opportunity cost of producing One ton of food that good Specialization and trade All countries have more food and more cars 1. Which country has an absolute advantage (ความได้เปรียบโดยสัมบูรณ์) in the production of food? 2. Calculate an opportunity cost of the U.S. in producing one car? 3. Calculate an opportunity cost of Japan in producing one car? 4. Who has a comparative advantage (ความได้เปรียบโดยเปรียบเทียบ) in the production of one car? 5. Who has a comparative advantage (ความได้เปรียบโดยเปรียบเทียบ) in the production of one ton of food? 6. Should the U.S. import cars from Japan? 7. Should Japan export food to the U.S.? 60 08/08/66