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Advanced Microeconomics: lecture 1

Advanced Microeconomics: lecture 1. Charit Tingsabadh M.Sc. Programme in Environmental and Natural Resource Economics June 2006. Outline. Introduction to subject Why Microeconomics Expectation Simple concepts Tools Uses Example. Introduction to subject.

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Advanced Microeconomics: lecture 1

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  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 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 depreciationd • 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(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

  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. For food and cars..

  32. 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

  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!!

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