8/9/2019 Microeconomics Course 2009 http://slidepdf.com/reader/full/microeconomics-course-2009 1/105 Microeconomics 1 MICROECONOMICS MICROECONOMICS a course for engineers a course for engineers Prof. Anca DRAGHICI [email protected]2010 - UPT International Studies
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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
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.
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 .
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?
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).
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.
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
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
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
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
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.
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;
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.
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).
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.
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.
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.)
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.
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.
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
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.
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).
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.
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.
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).
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
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.
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.
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.
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).
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).
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).
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.
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.
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.
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).
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).
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.).
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).
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.
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
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).