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Lecture 11 Various Micro-topics

Lecture 11 Various Micro-topics. Charit Tingsabadh M.Sc. Programme in Environmental and natural resource economics Semester 1/2005. Topics. Capital and investment Empirical demand and cost functions Corruption. Capital and Investment. Capital as factor of production

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Lecture 11 Various Micro-topics

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

  2. Topics • Capital and investment • Empirical demand and cost functions • Corruption

  3. 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

  4. 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.

  5. 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

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

  7. 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

  8. Almon demand function • Make certain assumptions on substitutions

  9. Then…

  10. Empirical estimates..

  11. For food and cars..

  12. 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

  13. Cobb-Douglas

  14. Estimation Also useful for growth accounting exercise

  15. CES production function

  16. Translog: Specification

  17. Translog cost function

  18. Results

  19. Corruption • How to consider corruption economics? • Develop a model

  20. 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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