Advanced Microeconomics lecture 1 Charit Tingsabadh M Sc

Advanced Microeconomics: lecture 1 Charit Tingsabadh M. Sc. Programme in Environmental and Natural Resource Economics June 2006 1

Outline • • Introduction to subject Why Microeconomics Expectation Simple concepts Tools Uses Example 2

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 supply • What happens when there more than one of us? Collective action… 3

Why Microeconomics • • Basis of discipline Philosophical foundation, logical system Can explain the world, to some extent Tools for analysing the behaviour of business 4

Expectations • Understanding 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 5

Simple concepts • • 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) 6

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) 7

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? 8

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. . 9

Price Quantity 10

Tools • • • Graphs, as shown Mathematical equation Demand: Qd = a – p. Q Supply: Qs = b + p. Q Idea of market as place where demand supply interact, but in practice, needs no physical space – e. Bay is a market, Amazon. com is a supplier in a market, so market is a flexible concept. 11

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 12

Tools • Distinguish between • Total-average-marginal • Total: production Q = f(L) where Q is output, L is input • Total: expenditure Y = p 1 X 1+p 2 X 2, all income (Y) is spent on buying two goods X 1 and X 2 at prices p 1 and p 2 13

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. 14

Tools • 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 = d. Q/d. L 15

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 16

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 17

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 18

Types of good High excludability High rivalry Private good Low Rivalry Club good Low excludability Open access Public good Give examples of each type 19

Finished for today • Any questions? 20

Lecture 11 Various Microtopics Charit Tingsabadh M. Sc. Programme in Environmental and natural resource economics Semester 1/2005 21

Topics • Capital and investment • Empirical demand cost functions • Corruption 22

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 23

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. 24

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 25

Empirical demand supply functions • Demand: perhaps adequate demand systems(Almon ( • Production/Cost function: Cobb-Douglas, CES, Translog • Recognise and interpret 26

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 27

Almon demand function • Make certain assumptions on substitutions 28

Then… 29

Empirical estimates. . 30

31

For food and cars. . 32

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 33

Cobb-Douglas 34

Estimation Also useful for growth accounting exercise 35

CES production function 36

Translog: Specification 37

Translog cost function 38

Results 39

Corruption • How to consider corruption economics? • Develop a model 40

In praise of microeconomics • As a tool for thinking about situations • Understand motivations and behaviour of agents • Rational explanation of strange behaviour • Enjoy!! 41