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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!!