How Economy Works

Teerawat Tussanapirom D.D.S, M.P.A.

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He generally, indeed, neither intends to promote the public interest, nor how much he promoting it. By ... Directing that industry in such a manner as its produce may be of the of the the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by invisible hand to promote an which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more eectually than when he really intends to promote it.

Adam Smith

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Homo economicus
In economics, homo economicus, or economic human, is the concept in many economic theories of humans as rational and narrowly self-interested actors who have the ability to make judgments toward their subjectively dened ends. Using these rational assessments, homo economicus attempts to maximize utility as a consumer and economic prot as a producer.[1] This theory stands in contrast to the concept of homo reciprocans, which states that human beings are primarily motivated by the desire to be cooperative and to improve their environment.

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Micro Economic VS Macro Economic

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Internal market forces External shocks

Output Jobs Macro Economy Prices Growth International balances

Policy levers

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Mix economy Freedom Capitalism Equality Communism

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(Fiscal policy) (Monetary policy)

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Demand, Supply & Market Failure

Teerawat Tussanapirom
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MARKET PARTICIPANTS
Our absolute inability as individuals to produce all
the things we need or desire.

The limited amount of time, energy , and resources

we have for producing those things we could make for ourselves.

the basic goals of utility maximization, profit maximization, and welfare maximization explain most market activity.
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Demand

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Demand
demand is an expression of consumer buying

intentions, of a willingness to buy, not a statement of actual purchases, ceteris paribus.

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The amount we buy of a good depends on its price .

As the price of a good falls, people purchase more of it

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The determinants of market demand Tastes

(desire for this and other goods). (of the consumer). (their availability and price). (for income, prices, tastes).

Income

Other goods Expectations

Number of buyers.

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Supply

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market supply
The total

quantities of a good that sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus.

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law of supply:
The quantity of
a good supplied in a given time period increases as its price increases, ceteris paribus.

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The quantity of a good supplied in a given time period increases as its price increases, ceteris paribus.

Market supply is an expression of sellers intentions an offer to sell not a statement of actual sales.

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The determinants of market supply include

Taxes and subsidies Factor cost Expectations Other goods Number of sellers

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The Equilibrium & The invisible hand

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equilibrium price: The price at which the quantity of a good demanded in a given time period equals the quantity supplied.

Self-Adjusting Prices.

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Changes in Equilibrium

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Tastes (desire for this and other goods). Income (of the consumer).

Taxes and subsidies Factor cost

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Zero Price Ceiling.

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 Increase the quantity demanded Decrease the quantity supplied Create a market shortage
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Market failure

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The four specific sources of market failure

Public goods Market power Externalities Equity

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Public goods
The problem is that the market tends to underproduce public goods and overproduce private goods

government intervention

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externalities
Whenever externalities are present, market prices aren't a valid measure of a good s value to society.

Social demand = market demand +/- externalities

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Market power
Restricted Supply
monopoly control of resources restrictive production agreements efficiencies of large-scale production

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Equity
Taxes and Transfer Merit good

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Taxes and Transfer

The tax-and-transfer system is the principal mechanism for redistributing incomes. The idea here is to take some of the income away from those who have too much and give it to those whom the market has left with too little.

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Merit good
When the market does not distribute that minimum provision, the government is called on to fill in the gaps. In this case, the income transfers take the form of inkind transfers (e.g., food stamps, housing vouchers, Medicaid) rather than cash transfers (e.g., welfare checks, Social Security benefits)

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THANKS

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