Microeconomics Course 2009

8/9/2019 Microeconomics Course 2009

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Microeconomics 1

MICROECONOMICSMICROECONOMICSa course for engineersa course for engineers

Prof. Anca [email protected]

2010 - UPT International Studies

mailto:[email protected]

mailto:[email protected]



Microeconomics 2

Why microeconomics?

Can you buy ALL the clothing, vacations, sportequipment, health care, food, beauty products,yoga classes, seasons tickets to sport event,

donations to charity you want?

NO Microeconomics helps you decide how much to

spend and on what; Microeconomics will help you decide to be your

own BOSS ……have a nice life……



Microeconomics 3

Course/Seminar Brief Outline:

Firms typology. The External environment of the firm

Production factors: Land; labor; capital; neo-factors

Production costs. Break-even point

Factors’ productivity. Labor productivity

Pricing with Market Power. Price Discrimination and

Bundling. Price and pricing

Competitive Markets. Supply and demand. Competition

Consumer Theory. Producer Theory

Welfare. Expected Utility and Risk Aversion

Profit and profitability rates



Microeconomics 4

Learning Microeconomics Program andObjectives:

Learning procedures:

Studying theory and concepts -course Debate and solve problems – course and

seminar Prepare and present a rapport (through

individual study) - seminar



Microeconomics 5

Our Common Program – 10 weeks

3h of course each week – Friday, 08:00 – 11:00, Seminar:

II ETC (1h/week) Friday 11:00 – 12:00Amphitheatre A1, 14 Remus str. at the Faculty of Management in Production and Transportation

II Civil Engineering specialization (Asist. Dr. MihaelaVartolomei) (2/week) Thursday 16:00 – 18:00



Microeconomics 6

Grading: exam type ED(distributive examination)

Final Exam: 60%

Participation in class discussions and debates +

Homework presentation: 40%

BUT:

Distributive examination: ED1 – week 5 and ED2 week

10 ED(1+2) bis … will be somewhere from 11-14 week



Microeconomics 7

References:

Frank A. Cowell, MICROECONOMICS. Principles andAnalysis, London School of Economics, December 2004

Quantum Microeconomics with Calculus, Version 4.02,January 2009, Available with and without calculus

at:http://www.smallparty.org/yoram/quantum

MIT Open Courses



Microeconomics 8

References in Romanian Language:

Important authors from our university – books are in the UPTlibrary:

Prof. Mariana DOBRAN Lecturer Diana Barglazan

RO-ENGL and/or ENGL-RO economics DICTIONARY will be good tohelp you better understand concepts and terminology!

The .ppt course with some notes of yours will be good for theexam!



Microeconomics 9

I. What Economics Is?

Economics is the study of how human beings coordinate their wants and desires, given the decision-makingmechanisms, social customs, and political realities of thesociety.

A good definition of economics: Study of choice underconditions of scarcity

Scarcity: Situation in which the amount of somethingavailable is insufficient to satisfy the desire for it



Microeconomics 10

I.1. The Economic Problem

Scarcity exists because individuals want more than can be

produced.

Scarcity – the goods available are too few to satisfy

individuals’ desires.

The degree of scarcity is constantly changing.

The quantity of goods, services, and usable resources

depends on technology and human action.



Microeconomics 11

Does Bill Gates face the problem of Scarcity?



Microeconomics 12

Scarcity and Individual Choice:

There are an unlimited variety of scarcities, however they

are all based on two basic limitations:

Scarce spending power;

Scarce time. Scarcity vs. Poverty:

Bill Gates certainly does not face poverty, but

despite his wealth, he faces scarcity.

Poverty is kind of scarce in spending power.



Microeconomics 13

Scarcity and Economics:

The scarcity of resources - and the choices it forces us tomake - is the source of all of the problems studied ineconomics: Households allocate limited income among goods and

services; Business firms choices of what to produce and howmuch are limited by costs of production;

Government agencies work with limited budgets andmust carefully choose which goals to pursue.

Economists study these decisions to: Explain how our economic system works; Forecast the future of our economy; Suggest ways to make that future even better.



Microeconomics 14

Scarcity and Social Choice:

The problem for society is a scarcity of resources: Labor: time human beings spend producing goods and services; Capital: something produced that is long-lasting, and used to

make other things that we value, like human capital and

physical capital; Land/natural resources: physical space on which production

occurs, and the natural resources that come with it; Entrepreneurship: ability and willingness to combine the other

resources into a productive enterprise;

Technology: physical and scientific "recipes" of history .



Microeconomics 15

Examples of scarcity of resources:

Suppose you attend the UPT International to study Computer sciences

What are you consuming? Knowledge from university lectures,from books in the library, from Internet etc.

What is the labor? I learn (intellectual work/stress).

What is the Capital? Physical Capital: desk, chairs, computers, hard & soft … Human Capital: instructor’s specialized knowledge and lecturing

skills

A physician's knowledge and skills are referred to by economists as:

a. human capitalb. laborc. physical capitald. entrepreneurship



Microeconomics 16

Understanding Economics:

Any economic system must solve three coordinationproblems: What, and how much, to produce; How to produce it;

For whom to produce it. To understand the economy, you need to learn:

Economic reasoning; Economic terminology; Economic insights about issues and theories that lead

to those insights; About economic institutions; Information about economic policy options.



Microeconomics 17

People are rational:

Decision-Makers choose purposefully. We weigh the costs and benefits when we make a decision.

(Based on all the information we have) Economizing - Getting the maximum benefit at the minimum

cost

People respond to Economic Incentives: Human beings act from a variety of motives, including

religious belief, envy and compassion. FBI’s advice on bank robberies.



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Optimal decisions are made at margins!

Economic thinking is marginal thinking! What does the word marginal mean here???

"additional“; "adding (+) or subtracting (-) from what is already

there“.

Economic Reasoning: Economic reasoning is making decisions by comparing

marginal costs and marginal benefits. Marginal cost – the additional cost over and above costs

already incurred. Marginal benefit – the additional benefit above and beyond

what has already accrued.



Microeconomics 19

The economic decision rule:

If the marginal benefits of doing something exceed themarginal costs, do it.

If the marginal costs of doing something exceed the marginalbenefits, don’t do it.

Economic Reasoning – imagine the case:If you do decide to skip this class, you have weighed the benefits

and the costs and you have decided that the benefits of skipping the class exceed the benefits of attending the

class??????? What are the costs of attending class?

**Tuition is not a part of the day-to-day marginal cost What are the benefits of attending class?



Microeconomics 20

Economic insights:

Economic theories are generalizations that are insights

into how economies work.

Theories may be embodied in economic models or

economic principles. Economic model is a framework that places the generalized

insights of the theory in a more specific contextual setting.

Economic principle is a commonly held insight stated as a

law or general assumption.



Microeconomics 21

Invisible hand theory:

1776 book “AnInquiry into theNature and Causes of

the Wealth of Nations”

Adam Smith http://en.wikipedia.org/wiki/Adam_Smith



Microeconomics 22

The Invisible Hand Theory:

Price has a tendency to fall when the quantity

supplied is greater than the quantity demanded.

Price has a tendency to rise when the quantity

demanded is greater than the quantity supplied. According to the invisible hand theory, a market economy,

through the price mechanism, will allocate resources

efficiently.

Efficiency means achieving a goal as cheaply as possible.



Microeconomics 23

I.2. Microeconomics - Definition

Micro comes from Greek word mikros, meaning “small”.

MicroeconomicsMicroeconomics is the study of individual choice, and

how that choice is influenced by economic forces:

Choices they make;

Interaction in specific markets.

Focuses on individual parts of an economy, rather than

the whole.



Microeconomics 24

Official Definitions:

Microeconomics is the study of how individuals and firms

make themselves as well off as possible in a world of

scarcity and the consequences of those individual

decisions on the markets and the entire economy.

Microeconomics is the study of the allocation of scarce

resources.

Microeconomics is also often called PRICE THEORY .

This is to emphasize the important role that price

plays. Products and services prices …… think of health care

market or price of education.



Microeconomics 25

In other words:

Economics, as a science, belongs to social sciences,as it studies the human beings, in their activitiesdirected towards the best satisfaction of their unlimited needs with the limited resources available.

Human needs are unlimited, while the resources – the

elements people use for satisfying their needs – arelimited. This is why we say resources are scarce. Economics is the study of how societies choose to use

scarce productive resources that have alternative uses, toproduce commodities of various kinds, and to distributethem among different groups.

Economics must provide the answer for 3 importantquestions:

What kinds and quantities should be produced? How should resources be used? And for whom are the goods produced?



Microeconomics 26

Microeconomics is concerned with the behavior of

individual entities such as markets, companies, and

households.

Macroeconomics views the performance of the economy as

a whole. There is also international economics. In time, the economy evolved from natural economy,

based on auto-consumption, to an exchange economy,

based on exchange and on the social division of work.

Nowadays, there are 2 main forms of exchange economies:

the command economy and the market economy . They do

not exist in pure form – national economies are mixed

economies, where elements specific to one or another type of

exchange economy prevail.



Microeconomics 27

Economic indicators:

In economics a lot of economic indicators are used. For anyindicator X, the value of X at a certain moment indicates thelevel of the indicator X at that moment. In order to analyzethe dynamics of economic indicators, dynamics indicatorsare used, the most important being the absolute modificationof an indicator (ΔX), the relative modification (%) of theindicator (ΔX(%)) and the index of the indicator considered(IX).

Economic indicators can be divided into 2 categories:quantitative indicators and qualitative indicators.

For qualitative indicators it is usually calculated not only thelevel at a given moment (level corresponding to a certain

level of a quantitative indicator), but also the average level (the level corresponding to o physical unit), and in dynamics,the marginal level (the modification of the indicatorcorresponding to a change by 1 unit of the quantitativeindicator).



Microeconomics 28

Because we can’t have everything, we need to make

tradeoffs and microeconomics helps us make those tradeoffs.

A society faces 3 key tradeoffs:

1. Which goods and services to produce?

2. How to produce them? How much labor and inputs should a

firm use to produce a specific good and/or service

3. Who gets the good and services (allocation)?

Observations: Workers need to choose how to allocate their time between

labor and leisure. Firms need to choose how to allocate their investment

between human capital and machines. Households need to choose how to allocate their incomes

between savings and expenditure.



Microeconomics 29

Macroeconomics definitions

Macro comes from Greek word, makros, meaning

“large”;

MacroeconomicsMacroeconomics study of the economy as a whole;

Focuses on big picture and ignores fine details.



Microeconomics 30

What is the difference between micro- andmacroeconomics?

Microeconomics: behavior of individual economic

units like consumers, producers, landowners,

families, etc. How and why do they make the

decisions they make? Macroeconomics: analyzes how the entire national

economy performs. It analyzes unemployment,

inflation, price levels, interest rates (many things we

take as given in microeconomics).



Microeconomics 31

Economic Policies

Economic policies are actions (or inactions) taken by

government to influence economic actions.

Objective policy analysis keeps value judgments

separate from the analysis.

Subjective policy analysis reflects the analyst’s view

of how things should be.



Microeconomics 32

Policy Analysis:

To make clear the distinction between objective and subjectiveanalysis, economics is divided into three categories: Positive economics; Normative economics;

Art of economics. Positive economics – the study of what is, and how the economy

works. Normative economics – the study of what the goals of the

economy should be.

Art of economics – the application of the knowledge learned inpositive economics to achieve the goals determined in normativeeconomics.



Microeconomics 33

Positive Economics:

Study of how economy works; Statements about how the economy works are positive

statements, whether they are true or not; Accuracy of positive statements can be tested by looking at the

facts - and just the facts.

Normative Economics: Study of what should be

Used to make value judgments, identify problems, andprescribe solutions;

Statements that suggest what we should do abouteconomic facts, are normative statements (based onvalues);

Normative statements cannot be proved or disproved bythe facts alone.



Microeconomics 34

Positive economics vs. Normative economics

Positive economics:

A statement can be

tested, proven or provenfalse.

The scientific study of “what is” among economicmatters.

A positive economics canbe true or false.

Normative economics:

Judgments about “what

ought to be” ineconomic matters. Cannot be proved false,

because they are basedon opinion.

A normative economicscan be true or false.



Microeconomics 35

Examples of positive and normative:

Positive or Normative?

“Bill Clinton is a good

president.”

Normative because this

judgment can’t be

proven false and is

based on opinions.





Microeconomics 37

More examples on positive vs. normative:

Example: “We lose anestimated 10 to

1,000 species eachyear to extinction”.

Positive or Normative?

Taxes are too high - Normative.

All children should be provided with a quality education -

Normative.

Market allocate income according

to our marketable skills - Positive



Microeconomics 38

http://media.causes.com/516860?p_id=106119461 II. About Firms / Companies

II. 1. Companies/Firms represent the main form of existence for enterprises in a modern economy.Entrepreneurship can manifest itself in other forms, such asauthorized persons, family associations, state enterprise etc. InRomania, the main law referring to companies is the Lawno.31/1990.

In our country, there are five forms of companies, recognisedby the law: general partnership (societate în nume colectiv – SNC), limited partnership (societate în comandită simplă – SCS), commercial partnership limited by shares (societate în

comandită pe acţiuni – SCA), public limited company or joint stock company (societate pe

acţiuni – SA) and limited liability company (societate cu răspundere limitată –

SRL). The forms most frequently met are joint stock company and

limited liability company (SA and SRL).

http://media.causes.com/516860?p_id=106119461

http://media.causes.com/516860?p_id=106119461



Microeconomics 39

Companies can be classified into personal companies (SNC

and SCS) and capital companies (SCA and SA). SRL is a

mixture form of personal and capital companies.

The stock capital of a limited liability company is divided intosocial shares , which can hardly be exchanged (sell or bought)on the market. The stock capital of a joint stock company isdivided into shares – negotiable securities that can beexchanged freely on the market (on specialized financial market ,called stock exchange).

Bonds represent securities that are acknowledgements of adebt, and are issued either by the state (by public institutions –and they are called public bonds), either by private entities(companies).

All securities bring some form of income to their owner.Stocks bring variable incomes, in the concrete form of dividends,while bonds bring fixed incomes, in the concrete form of interests.

The income brought by bonds (interest) is determined



Microeconomics 40

g y ( )based on the nominal value of the bond and the interest ratementioned on the bond. The income brought by stocks (shares)(dividend) is determined based on the profit obtained by thecompany and the number of shares issued.

The price of securities is called rate (market price) and it is

established on the market, under the heavy influence of the

interest rate for newly issued bonds. The price of the

securities depend on the income brought by each type of

security (the higher the income brought, the higher price). When a company issues new shares, after its founding, most

probably the new shares will be sold a little under the market

price (so they can be sold rapidly). This issue makes the

market price for the shares of the company decrease a little,

reaching the weighted arithmetic average between the price

of old shares and new shares.



Microeconomics 41

Observations:

Each firm is an economic, social and technical entity “born”

to produce goods or services for market and for the customers

satisfactions. The main purpose of firms activity is profit

maximization.

Firm’s economic processes are linked with technology, know-howproperty and use.

Social aspects of firm include the relationship complex (inter-

personal or multi-personal relations developed between different

employees).

SMESME are important “actors” of the market economy ….because of their economic role (the most taxes collected for the national

budget and new job created – employment problem solving).



Microeconomics 42

II.2. SMEs phenomena

SMEs are linked with entrepreneurship competencies!

Advantages and PRO arguments: Being you own boss (managing better your own time);

Work place security; Creativity in practice; Work in a desire field, so, job is his/her passion; Self-learning person; Direct contact with customers/clients/users;

Support for the local economy; The firm profit allows him/her to build a nice life when retire

(for whole family). Better satisfy your hobby.



Microeconomics 43

Disadvantages:

High activity risk;

Working over program, under time stress (shortdeadlines);

The incomes are variable (sometime, can be zero!);

Permanent knowledge up-date in the field of economics,

management, marketing, law etc.



Microeconomics 44

II.3. The cybernetic model of the firm

In-put (resources) X Out-put (results) Y

Resources: materials, financial, human, information, time / costs

Results: products and/or services, information / outcomes, profit

FIRM

f(X) = Y

Regulation/adjustmentmechanism

∆Y

Feed-back

External

environment

Internalenvironment



Microeconomics 45

f(X) = Y the function that represent the firm activity(technology, know-how) and shows the modality of transform/process resources X into results Y;

∆ Y = the results Y errors measure/evaluate by the

regulation/adjustment mechanism:+/- and then adjust theresource X, in terms of quantity and quality;

The regulation/adjustment mechanism is used by the firmmanagement and describe the modality of firm evolution inits external environment.

From the economics point of view: X = C costs and Y = Vincomes, so: Y – X = V – C = P profit.



Microeconomics 46

The cybernetic model’s properties:

A good firm functions in the external environment can be assure in

two conditions:

1. The firm’s activity stability: Y = constant, the existing of a

continuous activity assure continuous results in accord with the

environment conditions, requirements and constraints.2. The results fidelity: ∆ Y → 0, the quality and the quantity of

results has to better satisfy customers needs. This will assure the

economic cycle development in profitable conditions.

The properties are linked with the firm behavior regarding the

external environment conditions.



Microeconomics 47

Firm behavior in the external environment:

Firm behavior = attitude = evolution

Behavior typology: Adaptive attitude – based on the external environment

evolution forecasts, the firm can adapt its processes,activities in the internal environment. This is a desire attitude

and require flexibility, mobility, agility from the firm; Adaptive-participative attitude – is characteristics for big

companies with a good market position or having monopoleon market. Firms use forecasts to anticipate the externalenvironment evolution but simultaneously, they try to

influence environment evolution to create opportunities fortheir own; Passive attitude – firms do not use either adaptive or

participative behavior and they can only take measures tosurvey on the market and avoid bankruptcy.



Microeconomics 48

III. External environmentcomponents

III.1 The Micro-environment

The micro-environment

consists of componentsthat are in direct

relation with the firm

activities/processes.



Microeconomics 49

III.2. The Macro-environment The macro-environment consists of components that are inindirect relation with the firm activities/processes.



Microeconomics 50

IV. Firm’s resources. ProductionFactors (in-put) Theory

IV.1. Firm’s resourcesThe main resources used by a firm are:

Raw Materials (RM) related with the real capital or thereal assets;

Financial resources, (RF) linked with the monetarycapital;

Human resources, (RU) related with the number andqualification of the employees;

Touristic resources (RT) or the local/regional/nationaltouristic potential is a precious resource for companiesthat operate in the field of tourism industry. This resourceconsist of natural and entropic resources;

Information resources (I) that determine theknowledge capital of each firm;

Time ………..



Microeconomics 51

IV.2. The Production Factors

The resources attracted by economic entities in the productionprocess are known as in-puts or production factors.

There are 3 traditional production factors:

1. the natural factor - land;

2. the human factor - labor and

3. the material factor - capital. There are also “neo-factors” – information, knowledge,

abilities, scientifically and technological progress etc.

1. In a wide approach, the natural factor refers to all primaryresources, obtained directly from nature and which can be

used in the production process. In a narrow meaning, itrefers to a certain space where productive activities takeplace. Although in the field of industry and services the roleof the natural factor is marginal; this factor is still anindispensable one.



Microeconomics 52

2. Labor is a typically human activity, being the conscientiouseffort done by a person, issued from his/her own will,directed towards achieving some results.

At a macroeconomic level, the human factor is the active population(population able to work), formed by occupied population andinactive population.

At the microeconomic level, the human factor is determine by thecompany’s employees (although entrepreneurs are also included ).

3. Capital represents the assembly of material and financialelements used by a company for its productive activities. It isan extremely complex and heterogeneous production factor.The most frequently used classification divides the capital of

a company in non-current capital and current capital . Thetotal capital used by a company, at a given moment, is thesum of the two components.

The every company’s capital is represented in the balance sheet , asassets and liabilities. Only the assets are studied by microeconomicsand considered here as economic capital of a firm (and productionfactor).



Microeconomics 53

The assets are divided into: non-current assets (intangibles assets, tangible non-

current assets and long-term investments) and current assets (inventory, receivables, short-term

investments and cash and cash equivalents).

There are many indicators calculated when the capital isanalyzed. Some of them are common indicators (dynamicsindicators), but there are also, specific indicators for thecirculating capital (velocity of capital - turnover indicators)and for the fixed capital ( physical state of fixed capital

indicators and efficiency indicators). Neo-factors are formed by immaterial elements, mainly

informational, and their role is constantly growing.



Microeconomics 54

Observations:

The production can be expressed as a function of the knownproduction factors. In the economic literature many types of production functions are analyzed, from very simple ones tovery complex ones. Usually, economists are choosing onespecific function trying to reach equilibrium between simplifyingas much as possible and perfectly reflecting the reality.

The production-possibility frontier (PPF) represents theassembly of efficient combinations possible while usingresources with alternative uses. With given resources andtechnology, the production choices between two goods can be

summarized in the PPF. The PPF then shows how the productionof one good is traded off against the production of anothergood.



Microeconomics 55

V. Economic Models

How do economists allocate resources?

They develop theoretical model.

“Everything should be made as simple as possible but not

simpler ” - Albert Einstein



Microeconomics 56

The models are abstractions of the real world:

Too complicated to take into consideration all factors;

Without simplifications we would not be able to make

predictions;

Like a roadmap, does not give each house, but the

bare essentials i.e. major streets, highways and

sometime main attractions.

It may appear that the model makes heroic abstractions

(assumptions) from the complexities of the real world.



Microeconomics 57

Example:Determinants of Poster Demand on Campus

You are advertising a big event for the freshman class (ro.

“Balul Bobocilor”) how many posters will you need?

Factors in your model:

Price to make poster, size of freshman class

Factors not in your model:

Content of poster, placement of poster, relative size

of poster

Are there any constraints to this model?

the amount of budget you have to spend on poster

advertising.





Microeconomics 59

Tools of Microeconomic Analysis:

1.1. Constrained Maximization / Marginal AnalysisConstrained Maximization / Marginal Analysis

2.2. Equilibrium AnalysisEquilibrium Analysis

3.3. Comparative StaticsComparative Statics



Microeconomics 60

V.1. Constrained Optimization:

Constrained optimization is an analytical tool used when adecision maker seeks to make the best (optimal)choice, taking into consideration possible restrictions onthe choice.

This tool has two parts:

1. Objective function: is the relationship the decisionmaker seeks to optimize (maximize or minimize).

2. Constraint: limits or restrictions that are imposed onthe decision maker.

SIMPLEX problems, CPM, PERT are methods to solveproblems with function to be optimize (profit - max,costs – min, production time – min, time to market –min etc.)



Microeconomics 61

Example:

You want to maximize your happiness during your winterholiday!

• Objective function:

Happiness =f (days of skiing per week, no. beers perweek).

• Constraints: s.t. (subject to)

Income, time for leisure



Microeconomics 62

Marginal Analysis:

Solution to a constrained optimization problem depends

on the marginal impact of the decision variables on the

value of the objective function.

But what is marginal?

The term marginal tells us how the value of the

objective function changes as a result of adding one unitof a decision variable.



Microeconomics 63

Example:

Happiness %

$ spent Frombeer

Fromskiing

0 0 0

25 80 4

50 90 10

75 92 15

100 94 20

Marginal Happiness %

From beer From skiing

- -

80 4

10 6

2 5

2 5



Microeconomics 64

Happiness Optimization:

$100 spend on beer = 94 % of

happiness

$75 spend on beer plus $25

spend on skiing = (92+4) 96 %

of happiness.

$50 on beer and $50 on skiing

= (90+10)100 % of happiness.

Yes a day of skiing with a nice

after ski program makes you

very happy!

Happiness %

$ spent Frombeer

Fromskiing

0 0 0

25 80 4

50 90 10

75 92 15

100 94 20



Microeconomics 65

You just did a constrained optimization problem regarding Optimize happiness (beer and skiing) subject to you

$100 weekly entertainment budget.

Max H(B, S) subject to (s.t.) Pb*B + Ps*S = 100%Max H(B, S) = (s.t.) Pb*B + Ps*S = 100%

Where: B= quantity of beer; Pb=price beer

S=days of skiing; Ps=price skiing.



Microeconomics 66

V.2. Equilibrium Analysis:

Price (P)(1) Doctorsvisit(2) Productprice

Quantity (Q)(1) Number of appointments/day(2) Number of products(production volume)

10

P*

Qd: DemandQs Supply

Equilibrium: Qd=Qs50

25

Q1 Q2

Excess Demand



Microeconomics 67

In a competitive market, equilibrium is achieved at a

price at which the market clears – that is, at a price at

which the quantity offered for sale just equals the

quantity demanded by consumers.

Since Qd = Qs at P *, there is no upward or downwardpressure on price. Hence, price could stay at P *

indefinitely.



Microeconomics 68

What is Excess Supply?

50

8

Qd DemandQs Supply

13

70

Excess Supply

Quantity (Q)(1) Number of appointments/day(2) Number of products(production volume)




Microeconomics 69

What is Excess Demand?

50

5

Qd DemandQs Supply

13

70

Excess Demand

30


Q Quantity(1) Number of appointments/day(2) Number of products(production volume)



Microeconomics 70

V.3. Comparative Statics:

Examine how a change in an exogenous variable willaffect the level of an endogenous variable.

First, look at the value of the endogenous variable atthe initial level of the exogenous variable;

Second, look at the value of the endogenous variableat the new level of the exogenous variable.



Microeconomics 71

Comparative Statics Example:

. 10

P* 50

Q*

Q Quantity(1) Number of appointments/day(2) Number of products(production volume)


Qd DemandQs Supply



Microeconomics 72

Comparative Statics Example:

Suppose we are in China and there is an outburst of the

Avian Flu. A few weeks later there are some new

regulations put on doctors and they are unhappy about

it. So, they do a rotating strike.

How will these factors affect our Supply and Demand

curve and the price?

Follow the next graphics regarding this scenario ……



Microeconomics 73

Price (P)Doctorsvisit

QNumber of appointments perday per doctor

. 10

P1

D1 S1

50

D2

P2 60

13Q1 Q2

Outbreak of Avian Flumoves demand to the right

(increase demand for medical

services), but supply curve

does not change (same

number of doctors).

So, Q increases and P, too.



Microeconomics 74

D1 S1

D2

The rotating strike will lead to:

P3 65

11

S2

A reduction in supply,decrease of S. This is a

shift to the left.

Q3

QNumber of appointments perday per doctor

Price (P)Doctorsvisit

VI. How MicroeconomicsCh t i th Fi ’



Microeconomics 75

Characterize the Firm’sProduction Function

VI.1. Depreciation of fixed capital

From an economic point of view, the depreciation is the monetary expression of the non-current capital depreciation.The depreciation is a part of the non-current capital value,

the part included in the production costs in a given year. It isone of the few costs which do not imply a payment.

Among the elements constituting the non-current capital,there are some elements which are not subject to thedepreciation process - those elements for which the value

does not continuously depreciate in time (land and long-terminvestments). Only for intangible assets and tangible non-current assets there is calculate the depreciation value rate– because the value of these assets is gradually lost in time andit must be included in costs.



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In Romania, the fixed depreciation is legiferated by theLaw 15/1994 on the depreciation of the existing capital astangible and intangible assets (Law no.15/1994 regarding the depreciation of the invested capital intangible and non-tangible assets).

The non-current assets depreciation value is establishedby applying depreciation quotas on the initial value of the non-current assets. Each element subject todepreciation has a certain duration of normal use (duratănormală de utilizare – DNU). The law establishes thatthe following three depreciation regimes can be legallyused in Romania: linear regime, accelerated regime and

digressive regime. Linear depreciation is calculated applying the averageyearly amortization quota (the linear depreciation quota)to the initial value of the non-current assets. The lineardepreciation represents the general rule for depreciation.



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Linear depreciation calculation:

It is very simple to calculate the norm of the linear depreciation (Na) based on the value of the normal useduration (DNU):

The annual depreciation (Am) is calculate base on theacquisition value or the initial value of the fixed capital:

In conclusion, the annual depreciation is:

%1001

×= DNU

Na

Vi Na Am ×=

DNU

Vi Am =

Digressive depreciation is based on digressive depreciationquotas, obtained by multiplying the linear depreciationquotas with a specific depreciation coefficient The digressive



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quotas with a specific depreciation coefficient. The digressivedepreciation quotas are applied to the remained value (thevalue not yet included on costs through depreciation). Everyyear, the result obtained through this digressive method iscompared to the result that would have been obtained if thelinear depreciation applied, for the remained value and theyears remaining. From the year when the linear depreciationis higher or at least equal to the digressive depreciation, forthe remained value and the remained period of time (fromthe duration of normal use) the linear depreciation applies.The digressive depreciation regime can be applied in two

forms, ignoring the moral depreciation (AD1) or consideringthe moral depreciation (AD2). The management of acompany can decide to use the linear depreciation or thedigressive one, without restrictions. Digressive depreciationallows considering as costs higher amounts (larger parts of the initial value) in the first years, but it has the inconvenientof more difficult and complex calculations.

Accelerated depreciation consists in using a higherdepreciation quota, up to 50%, in the first year. Afterwards,the remaining value is passed on costs through the lineardepreciation model, for the remaining number of years. Acompany can use accelerated depreciation only with theapproval of the Finance Ministry, in Romania.



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VI.2 Production Costs

In order to obtain goods and services, companies consumeinputs (production factors). The production costs expressthe value of the total production factors consumptiongenerated by the production activity. The production costsare covered from the incomes realized by companies from

selling the goods and services produced on the market. Theprofit represents the difference between the total incomes of a company and its total costs. If the difference is negative,when the costs are higher than the incomes, the companysuffers a loss.

The profit and loss account is the financial document

containing the expenses and the incomes of the company,broken down on categories of activities (operating activity,financial activity, and extraordinary activity).



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Cost type:

The expenses (costs) of a company can be classified inmany ways, using different classification criteria: thetype of activity that generated them, the productionfactor concerned, the way they depend on the physical production.

Considering the level of the costs, we can distinguish 3categories of global costs: fixed costs (FC), variablecosts (VC) and total costs (TC). If we keep all thingsthe same, except the production level, we shall noticethat the fixed costs remain constant, while the variablecosts and the total costs increase when the company is

producing more. Also incomes increase when thecompany is producing (and selling) more.

TTCC = F= FCC + V+ VCC

FC

VC

TC

Q

Costs





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Marginal cost:

The marginal cost (Cmg) represents the absolutemodification (increase) of total costs induced by amodification (an increase) with one unit in the physicalproduction.

where ΔTC = TC1 – TC0 and ΔQ = Q1 – Q0

If we keep all things the same, except the production level,we shall notice that the fixed average costs decrease whenthe company is producing more. The variable average costs

and the total average costs decrease up to a point, then theyincrease with the increase of the production level. So, do themarginal costs. The total average cost is at its minimum whenits level is equal to the marginal cost.

Q

TC C mg

∆

∆=



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Profit maximization strategies:

The main objective of every company is profitmaximization.

Profit is: P = CA – TC In detail:

CA = Q x p, and CT = Q x TAC, so:

P = Q (P = Q (pp – T– TACAC))

In order to reach this objective, a company can takeactions in 3 directions:

increasing the quantity of goods and services sold (Q max),

increasing the price of the goods and services,or/and (p max)

reducing the total average cost (TAC min).



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Breakeven point:

Because there are fixed costs, for very low production levels, acompany will not be able to obtain profit. The level of production for which the total (global) costs equal the totalincomes of the company is the breakeven point. At the levelof the breakeven point the profit is zero and the total averagecost is equal to the price. A company must know its breakeven

point because it can obtain profits only by producing andselling more than the breakeven point. The economic model of the breakeven point is:

TC = CA, P = 0 and TAC = p There is one more level of the production level that companies

are interested in, the so-called “dead point ” – the level of

production from which the total incomes are equal to thevariable (global) costs (and the price is equal to variableaverage costs) When the production level of a company dropsbelow the dead point, the company should be closed (orrestructured).



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Graphic representation:

FC

VC

TC

CA

Q*Qr

P

Profit

Loss

VI 3 Factors’ productivity Labor



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VI.3 Factors productivity. Labor

productivity Factors’ productivity measure the efficiency of the use of

production factors, comparing the results obtained with theefforts represented by the consumption of production factors.The productivity can be calculated either dividing the results(the production obtained and sold) to the factors used, eitherdividing the factors used to the production level.

There are many forms of productivity. The global productivity measures the use efficiency of the assembly of available production factors (Fi),

while the partial productivity measures the efficiency of

using one production single.

Q can be replace with CA.

∑=

i

F F

QW



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We can also distinguish: the total productivity, the average productivity

the marginal productivity.

The marginal productivity gives us information about theproductivity dynamics, and this analysis is usuallycompleted by the information given by the dynamicsindicators calculated for the average productivity.

i

Fi F

QW =

Q

F W i

Fi =

i

mgFi F

QW ∆

∆

=Q

F W i

mgFi∆

∆=



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The partial productivity can be calculated for eachproduction factor:

Land productivity represents the efficiency of land and it isextremely important in the case of agricultural activities.

Capital productivity expresses the return of capital, theefficiency of capital use. It is calculated as capitalproductivity (production divided to capital), but also as

capital coefficient (capital divided to production). Labor productivity (average value or marginal)

represents one of the most important indicators of economicperformance, reflecting the efficiency of the working force.

where L is the work force. L

QW L =

L

CAW L = L

QW mgL

∆

∆=

L

CAW mgL

∆

∆=



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Observations:

For every company, the best situation is the one maximizingthe factors’ productivity. In terms of dynamics, theproductivity should have a positive dynamics – shouldincrease over time (while the capital coefficient should beminimized, and it should decrease in time).

Every company should be preoccupied to increase its laborproductivity. The economic theory shows many way of increasing the labor productivity, among which, the mostefficient seem to be introducing scientific and technologicalprogress, improving the level of qualification of theemployees, and giving material/financial incentives to theemployees.

When labor productivity increases, wages tend to increaseand this is a perfectly normal evolution, as long as the wagesincrease in a slower pace than the labor productivity (it is away of giving some incentives to the employees, in order toencourage them to further improve the productivity). Whenwages increase faster than the labor productivity, thecompany does not benefit from the increase of productivity.

VII. How MicroeconomicsCharacterize the Firm’s



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Characterize the Firm sCommercial/Marketing Function

VII.1 Market. Demand and supply

The market can be defined as the place where demandand supply meet. The price of the goods sold and boughton the market is formed on the market, issued from the

confrontation of demand and supply.

The demand (C) represents the quantity of a certainproduct that the economic entities from a certain marketare willing to buy, at a certain moment and at a certainprice.

The main factors influencing the demand evolutionThe main factors influencing the demand evolutionare the price (P) and the consumers’ incomes (V).are the price (P) and the consumers’ incomes (V).



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The evolution of demand based on price (the law of demand): when the price a product is increasing, thequantity demanded from that product decreases; when theprice a product is decreasing, the quantity demanded fromthat product increases. The analysis of the evolution of demand based on price is using the price elasticity of

demand (Ecp).

The evolution of demand based on incomes: when theconsumers’ incomes are increasing, their demand isincreasing; when the consumers’ incomes are decreasing,their demand is decreasing. Similarly to the price elasticity

of demand, we can calculate an income elasticity of demand (Ecv).



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The supply (O) represents the quantity from a certainproduct that the economic entities from a certain marketare willing to sell, at a certain moment and at a certainprice.

The main factors influencing the supply evolutionThe main factors influencing the supply evolutionare the price (P) and the production costs.are the price (P) and the production costs.

The evolution of supply based on price (the law of the supply): when the price a product is increasing, thequantity supplied from that product increases; when theprice a product is decreasing, the quantity supplied fromthat product decreases. The analysis of the evolution of

supply based on price is facilitated by the use of the price elasticity of supply (Eop).



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The market reaches its equilibrium when the demand isequal to the supply. Left alone, the market will reach itsequilibrium, without interventions (the market equilibriumis reached automatically). The equilibrium price (Pe) isthe price for which the demand and the supply expressed

on the market are equal. It is also the price for which thelevel of transactions is maximum (all economic entitieswilling to make a transaction will find partners and theexchanged quantity of products is maximum – the marketequilibrium is optimum).

At any given price, the exchanged (traded) quantity of products (Qtz) is the minimum between demand andsupply.



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VII.2 Competition

Competition appears naturally among economic entitiesof the same type. More frequently, it appears amongproducers (sellers) but it can also appear amongconsumers (buyers).

Theoretically, we can talk about a perfect market – amarket having the following main features: atomicity, homogeneity, transparence, fluidity and inputs mobility .On a perfect market, we have perfect (pure)competition.

In reality, the market is not perfect. On the realmarkets, the competition is not perfect. Accordingto the number of economic agents existing on the

market, several types of imperfect competition canbe distinguished: monopolistic competition, monopoly,monopsony, oligopoly, oligopsony.



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The strategies adopted by a company depend on the typeof market to which the company belongs. On a marketwith monopolistic competition, the price is anexogenous variable for the company; if the function of variable costs depending on the production is linear, theprofit maximization is realized through the

maximization of the production sold on the market. Incase of monopoly, the price depends on the quantity of products obtained by the company and offered on themarket (the price is an endogenous variable).Therefore, the company should establish its optimumproduction level – the production level that maximizesthe profit for the company. There are also othersituations when profit maximization is not realizedthrough production maximization, but the maximalprofit can be obtained for a certain level of production –e.g. when the function of the variable costs dependingon production is not linear.



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VII.3 Utility

Utility represents the satisfaction obtained by a consumerfrom using (possessing and consuming) certain products andservices. The main objective of each consumer is maximizingthe utility obtained from using his/her available income.

Utility can be expressed in an ordinal system or in a cardinalsystem. For any good we can analyze the individual utility(marginal utility), and the total utility.

When the quantity of the product consumed increases, thetotal utility increases. The individual utility(the marginal utility – the utility of the last unit consumed) decreases withthe increase of the quantity consumed from a given good(The theory of decreasing marginal utility); when the

quantity reaches a certain level, the phenomenon of saturation manifest itself, and the marginal utility reacheszero (the consumer does not want to consume anysupplementary unit).



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A consumer will define his/her demand of goods andservices in a manner allowing the maximization of thetotal utility. In order to have a maximum total utility, weanalyze and calculate the maximum of the total utilityfunction, considering also the budgetary restriction. For agiven number of goods, the total utility is maximized

when the marginal utility of the last monetary unit spentfor each of the considered goods is identical. The consumer surplus appears because on the market

the price of a product is constant, identical for all theunits acquired from a given product, while for the firstunits consumed, a buyer would have been willing to pay

more. At a given moment, considering the limited income thatevery consumer has, in order to buy a supplementaryunit form one product, the consumer will have to give upa certain quantity from a different product (theopportunity cost).



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VII.4 The price In a modern, market economy, the price is established on the

market, based on demand and supply . In order to obtain aprofit, a company must be able to sell at a price superior toits unitary total cost.

For companies working in trade, a very common practice is tocalculate the selling price of merchandises as the acquisition

price, plus a trade mark up. For companies having aproduction activity (producers offering goods and services onthe market), most frequently the price is established based onthe total unitary cost – by adding a certain profit spread tothe total unitary cost. The profit spread represents the profitobtained for each one of the units of product sold. Usually the

trade mark up is higher than the profit spread – because atrade mark is covering not only the profit of the trader, butalso a part of its costs (indirect costs – wages, rents,amortization, taxes etc.).



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The prices found on the market are heavily affected by taxation – there are many indirect taxes applied at theprices of goods and services traded on the market;among them, the most important are: value added tax(VAT), excise duties and custom duties.

There is a clear distinction between the productionprice (the price established and asked by the seller,which does not include any indirect taxes) and theconsumption price (the total price paid by the buyer,with all indirect taxes included).



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VII.5 The profit

Not only the level of the profit is analyzed, but also theprofitability rates (or profit rates), which express theprofit as a percentage of another economic indicator(usually total cost, value of the sales or capital used).

The most frequently used profitability rates are the rate of

profit based on total cost, the rate of profit based onthe sales, the rate of profit based on capital. For thefixed capital, the profitability of fixed capital, iscalculated, expressed as units of profit for 1.000 units of fixed capital.

The profit is subject to taxes. Usually, the profit tax is

calculated by applying a quota (of 16%, in Romania,nowadays) on the gross profit obtained by the company.



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The profit remaining available to the company is the net

profit, the amount of money left after paying the profit

tax to the state.

All profitability rates can be calculated for both the grossprofit and the net profit. Most frequently, gross profit is

compared to costs and sales, while net profit is

compared with the capital invested.

VII. How MicroeconomicsCharacterize the Firm’s Human



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Characterize the Firm s HumanResources Function The wage represents the main form of income for

individuals (natural persons). The wage is theremuneration received by a person for the work done..

The nominal wage (Sn) is the wage expressed inmoney, at a given moment - the wage in current prices.

The real wage (Sr) represents the wage in constantprices (showing which would have been the nominalwage if the prices remained unchanged) – actually it isthe purchasing power of the nominal wage. It can alsobe defined as the quantity of goods that can be boughtwith the nominal wage. The real wage is calculated by

dividing the nominal wage to a price index (IPC).

IPC

S S n

r =

The inflation rate is the relative modification (increase) of consumption prices. Basically, a consumption basket usedthe average price of goods and services contained in the



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the average price of goods and services contained in thebasket is calculated and for that price, the index is theconsumption price index (IPC) and the relative modificationis the inflation rate.

, π = IPC – 100%

The basic wage is the basis from which the wage iscalculated (usually, it is the negociated wage, theonementioned in the working contract). The gross wagerepresents the total wage paid by the employer: basic

wage, plus additional allowances, plus bonuses, plus thewage for extra hours etc.).

From the gross wage several contributions are calculated,plus the wage tax. In Romania, currently, form the grosswage, the following amounts are deducted: contribution to

social insurances (CAS); contribution for health insurances(CASS); contribution for the unemployment fund (somaj);wage tax (16% from the taxable wage = gross wage, minuscontributions, minus personal deduction).

%100

0

1 ×= P P IPC



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The net wage represents the amount of money that the

employee receives - the part from the gross wage

remaining after the deduction of contribution and taxes.

The difference between the gross wage (wage before

taxes) and net wage (wage after taxes) represents

different contributions and taxes paid by the employer to

the state, in the name of the employee



Documents

Microeconomics Course 2009