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Advanced Microeconomics:lecture 1Charit Tingsabadh

M.Sc. Programme inEnvironmental and Natural Resource Economics

June 2006

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Outline

• 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

• 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

• 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

• 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 Low excludability

High rivalry Private good 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 Micro-topics

Charit TingsabadhM.Sc. Programme in Environmental

and natural resource economicsSemester 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 = 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 inputs-capital 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!!