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

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

3 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…

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

5 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

6 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)

7 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)

8 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?

9 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..

10 Price Quantity

11 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.

12 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

13 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

14 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.

15 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

16 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

17 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

18 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

19 Types of good High excludabilityLow excludability High rivalryPrivate goodOpen access Low RivalryClub goodPublic good Give examples of each type

20 Finished for today Any questions?

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

22 Topics Capital and investment Empirical demand and cost functions Corruption

23 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

24 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.

25 Appraisal of investment project Benefit (B), Cost (C), discount rate d, time t Present value of investment PV = S t (B t -C t )/(1+d) t >= 0 Other indicators: internal rate of return d* to make PV=0 d*>i Benefit cost ratio (BCR) = PVB/PVC >1

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

27 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

28 Almon demand function Make certain assumptions on substitutions

29 Then…

30 Empirical estimates..

31

32 For food and cars..

33 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

34 Cobb-Douglas

35 Estimation Also useful for growth accounting exercise

36 CES production function

37 Translog: Specification

38 Translog cost function

39 Results

40 Corruption How to consider corruption economics? Develop a model

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