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Lecture 11 Various Micro-topics

This lecture covers various crucial microeconomic topics in environmental and natural resource economics, focusing on capital and investment, empirical demand and cost functions, and the impact of corruption. Key concepts include the factors of production, the trade-offs between present and future consumption, opportunity costs, and capital appraisal methods. The lecture also discusses demand systems, production functions like Cobb-Douglas and CES, and the significance of empirical estimates in understanding economic behaviors, leading to better decision-making in resource management.

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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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