Transcript Document

Advanced Microeconomics:
lecture 1
Charit Tingsabadh
M.Sc. Programme in
Environmental and Natural Resource Economics
June 2006
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Outline
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Introduction to subject
Why Microeconomics
Expectation
Simple concepts
Tools
Uses
Example
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Introduction to subject
• Microeconomics is about “individual”
behaviour
• How to decide on resource allocation?
• Individual as consumer-demand theory
• Individual as producer – production
• Theory of market – balancing demand and
supply
• What happens when there more than one
of us? Collective action…
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Why Microeconomics
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Basis of discipline
Philosophical foundation, logical system
Can explain the world, to some extent
Tools for analysing the behaviour of
business
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Expectations
• Understanding the theories– assumptions,
arguments, conclusion
• Explain..verbalising the understanding in
words, graphs, equations.. etc.
• Applying theories to cases..goods,
analysis of changes in the conditions of
market
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Simple concepts
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Prices and quantities
How they are related
Functions represent such relations
Also graphs, good way of simple
representation
• For complex relationships, equations are
needed, because they allow for more
variables (dimensions), but more difficult
to handle (need mathematics)
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Simple concepts
• Quantities of “Things”
• Why care about things?
• Object of living is “satisfaction” …through
use/consumption of “things” materialist
approach, may not always guarantee
“happiness” but seems to work for a lot of
people
• Another word is … UTILITY
• (not FUTILITY)
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Simple concepts
• Price is about…
• The value the individual places on an object..
Willingness to pay..
• But this implies a producer.. Where the good
comes from, who receives the pay..
• Can there be a price with only one person? Yes,
imagine a one man-economy, still can decide
how to spend effort..individual as both consumer
and producer– sufficient economy?
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Simple concepts
• So there is the demand
price and the
• Supply price
• With more than one person, meaning is
quite self-evident
• Show by graph, quite simple to do..
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Price
Quantity
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Tools
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Graphs, as shown
Mathematical equation
Demand: Qd = a – pQ
Supply: Qs = b + pQ
Idea of market as place where demand
and supply interact, but in practice, needs
no physical space – eBay is a market,
Amazon.com is a supplier in a market, so
market is a flexible concept.
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More simple concepts
• Want to talk about how quantities respond
to price changes
• This is “elasticity” defined as
• Percentage change in quantity
supplied(demanded) as the price changes
by 1 percent
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Tools
• Distinguish between
• Total-average-marginal
• Total: production Q = f(L) where Q is
output, L is input
• Total: expenditure Y = p1X1+p2X2, all
income (Y) is spent on buying two goods
X1 and X2 at prices p1 and p2
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Tools
• Average : based on ratio between total
quantity and total labour
• Average productivity is Q/L
• Average price of computers is ..100,000
baht can buy 3 computers, so average
price is 100,000/3.
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Tools
• Marginal
• Marginal productivity of L in producing Q,
• Is the change in production Q from using
“one” more unit of L, so it is NOT the
average, but the additional/incremental
output, mathematically like this:
• MPL = dQ/dL
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Tools
• Budget Constraints
• Is there a limit to what we can buy, use,
consume?
• Human want is limitless, but not so our
income, so there is the
• BUDGET CONSTRAINT
• Excess of spending over income means
debt..an accounting concept is necessary
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Concepts
• Welfare
• Means the result of consumption, so it is more
than the sum of things consumed, but in relation
to the willingness to pay for the thing..
• So, for the consumer, it is the difference
between the WTP and the price, the
consumer surplus
• And the producer, the price and the cost of
production, the producer surplus
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Finally, for today
• Equilibrium is
• When both consumer and producer are
satisfied– deal is done, all goods are sold,
market is cleared..
• Everyone is happy.. And can go home
• But not for all goods
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Types of good
High excludability
High rivalry Private good
Low
excludability
Open access
Low Rivalry Club good
Public good
Give examples of each type
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Finished for today
• Any questions?
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Lecture 11 Various Microtopics
Charit Tingsabadh
M.Sc. Programme in Environmental
and natural resource economics
Semester 1/2005
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Topics
• Capital and investment
• Empirical demand and cost functions
• Corruption
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Capital and Investment
• Capital as factor of production
• Source of capital – saving = income not
consumed in current period
• Choice between present and future
consumption
• Rate of time preference
• Opportunity cost of capital
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Investment
• Rental rate – r – from MR.MPk = r
• MR = marginal revenue, MPk = marginal
product of capital
• Rental r, interest i, maintenance m and
depreciation d
• r > i+m+d, for a capital renting firm
• Buying equipment, reverse the above.
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Appraisal of investment project
• Benefit (B), Cost (C), discount rate d, time
t
• Present value of investment
• PV = S t (Bt-Ct)/(1+d)t >= 0
• Other indicators: internal rate of return d*
to make PV=0 d*>i
• Benefit cost ratio (BCR) = PVB/PVC >1
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Empirical demand and supply
functions
• Demand: perhaps adequate demand
systems(Almon)
• Production/Cost function: Cobb-Douglas,
CES, Translog
• Recognise and interpret
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Demand function
• Perhaps adequate demand system
• AIDS: good I, price p, income y, s = share of
good I in total expenditure
• Almon demand function xi per capita
consumption, c constant
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Almon demand function
• Make certain assumptions on substitutions
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Then…
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Empirical estimates..
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For food and cars..
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Production/cost functions
• Production Q as function of factor inputscapital K and labour L,
• Cost of production C as function of wages
w and interest i. So
• Consider some fucntional forms
• Cobb-Douglas, CES, Translog
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Cobb-Douglas
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Estimation
Also useful for growth accounting exercise
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CES production function
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Translog: Specification
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Translog cost function
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Results
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Corruption
• How to consider
corruption
economics?
• Develop a model
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In praise of microeconomics
• As a tool for thinking about situations
• Understand motivations and behaviour of
agents
• Rational explanation of strange behaviour
• Enjoy!!
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