OUTPUT AND COSTS ......................................................................................................................................... 2 OUTPUT ........................................................................................................................................................ 2 SHORT RUN .................................................................................................................................................. 4 LONG RUN .................................................................................................................................................... 6 PERFECT COMPETITION ................................................................................................................................

8 BASICS........................................................................................................................................................... 8 THE FIRMS SHORT RUN SUPPLY CURVE ............................................................................................. 10 THE FIRMS LONG RUN SUPPLY CURVE ................................................................................................ 11 MONOPOLY ....................................................................................................................................................... 13 SINGLE PRICE MONOPOLY ..................................................................................................................... 14 PRICE DISCRIMINATION .......................................................................................................................... 15 MONOPOLY REGULATIONS ..................................................................................................................... 16 MONOPOLISTIC COMPETITON .................................................................................................................. 17 BASICS......................................................................................................................................................... 17 EXCESS CAPACITY AND MARKUP .......................................................................................................... 18 OLIGOPOLY ...................................................................................................................................................... 19 BASICS......................................................................................................................................................... 19 MARKETS FOR FACTORS OF PRODUCTION ........................................................................................... 20 LABOR ......................................................................................................................................................... 20 MONOPSONY ............................................................................................................................................. 22

MICROECONOMICS BY IRFAN IBROVIC

OUTPUT AND COSTS

Today, size does not guarantee survival in business. Not only small firms close down every year. But, what does a firm have to do to be a survivor? All firms have to decide how much will they produce,and how to produce it. The firm makes many decisions to achieve its main objective: profit maximization. Some decisions are critical to the survival of the company and are irreversible (nepovratne), and some are less critical, but still influence profit. All those decisions can be placed in two time frames : 1. THE SHORT RUN 2. THE LONG RUN The short run is a time frame in which the resources used in production are fixed. For most companies, the capital is fixed in the short run. Other resources used in the firm (such as labour, material and energy) can be changed in the short run. The long run is a time frame in which the resources used in production can vary, including the plant size- (iznos kapitala/novca ili velicina postrojenja). Long run decisions are not easily reversed ( short run are) Sunk cost is a cost incurred by the firm and cannot be changed. If a firms plant had no resale value, the amount paid for it is a sunk cost. Sunk costs are irrelevant to a firms decisions.

OUTPUT
To increase output in the short run, a firm must increase the amount of labour employed.. Three (3) concepts describe the relationship between outpund and the quantity of labour employed : 1. TOTAL PRODUCT 2. MARGINAL PRODUCT 3. AVERAGE PRODUCT Total product is the total output produced in a given period. Marginal product of labour is the change in total product, htat results from a one-unit increase in the quantity of labour employed, with all other inputs remaining the same. The average product of labor is equal to total product divided by the quantity of labor employed. Product curves are graphs that are showing the change of 3 product concepts, as the quantity of labor employed changes

Total product curve shows how total product changes with the quantity of labor employed. It seperates attainable(dostizan) output levels from unattainable output levels in the short run

Example: when labor increases from 2 to 3, total product increases from 10 to 13. So, the marginal product of the THIRD worker is 3 units of output.

Almoust all production processed are like the one shown above, and they have: INCREASING MARGINAL RETURNS INITIALLY ( u pocetku, povecavanje granicnog prinosa) when a marginal product of worker exceeds marginal product of the previous worker, the total marginal product of labor increases. DIMINISHING MARGINAL RETURNS EVENTUALLY ( u konacnici, opadajuci granicni prinos) When the marginal product of a worker is less than the marginal product of the previous worker, the total marginal product of labor decreases. Increasing marginal returns arise from increased specialisation and division of labour. Diminishing marginal returns arises from the fact that employing additional units of labor means that each worker has less access to capital and less space to work The law of diminishing returns tells that if a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the input will eventually decrease (diminish).

When marginal product exceedes average product average product increases When marginal product is below average product average product decreases When marginal product equals average product average product is at its minimum.

SHORT RUN
To produce more output in the short run, the company must employ more labor, but that means increasing costs. The companys cost change as total product changes, and we describe the change by using 3 types of cost curve: 1. TOTAL COST 2. MARGINAL COST 3. AVERAGE COST Total cost ( TC) is the cost of all resources being used. Total fixed (TFC) is the cost of the firms fixed inputs. Fixed costs do not change with output Total variable cost (TVC) is the cost of the firms variable inputs. Variable costs do change with output

TC = TFC + TVC

Total fixed costs are the same at each output level Total variable costs increases as output increases. Total cost also increases as output increases.

Total variable cost curve is quite similar to the total product curve. The only difference is that total product curve is steeper at low output levels and than less steep at high output levels. In contrast, the TVC curve is less steep at low output levels and steeper at high output levels. Marginal cost (MC) is the increase in the total cost that results from a one-unit increase in total product. Where it is increasing marginal return the marginal cost falls as output increases. Where it is diminishing marginal return the marginal cost rises as output increases. Average fixed cost (AFC) is total ficed cost per unit of output Average variable cost (AVC) is total variable cost per unit of output.

ATC = AFC + AVC

AFC curve shows that average fixed cost falls as output increases. AVC is U-shaped. As output increases, AVC first falls to minimum and than increases. MC curve is very special. Where AVC is falling, MC is below AVC At minimum AVC, MC =AVC Where AVC is rising, MC is above AVC

COST AND PRODUCT CURVES RELATIONS

The shapes of a firms cost curves are determined by the technology the company uses: MC is at its minimum on the same output level at which marginal product is at its maximum When marginal product is rising, marginal cost is falling and vice versa. AVC is at its minimum at the same output level at which average product is at its maximum When average product is rising, AVC is falling and vice versa. The position of a firms cost curves depend on two factor: 1. TECHOLOGY 2. PRICES OF FACTORS OF PRODUCTION Technology changes both the productivity and cost curves. An increase in productivity shifts the average and marginal product curve upward and the average and marginal cost curves downward. If technology brings more capital and less labor into use, fixed costs increase and variable costs decrease. In this case ATC increases at low output levels and decreases at high output levels. An increase in the price of factor of production, increases costs and shifts the cost curves. An increase in a fixed cost shifts the TC and ATC curves upward, but doesnt influence the MC curve. An increase in variable cost shifts all 3 ( TC, ATC and MC) curves upward.

LONG RUN
In the long run, all inputs and costs are variable. Production function shows the relationship between the maximum output attainable and the quantities of both capital and labor. Marginal product of capital is the increase in output resulting from a one-unit increase in the amount of capital employed, holding constant the amount of labour employed. For each plant size, diminishing marginal product of labour creates a set of short run, U shaped costs curves for MC, AVC and ATC. The larger the plant size, the greater is the output at which ATC is at minimum.

The long run ATC curve is made up from the lowes ATC for each output level. We use it to decide which plant has the lowest cost for producing output level. Long run average cost curve is the relationship between the lowest attainable ATC and output when both the capital and labor are varied. Once the company had chosen plant size, it incurs the costs that correspond to the ATC curve for that plant.

ECONOMIES OF SCALE firms technology that lead to falling LRATC as output increase DISECONOMIES OF SCALE firms technology that lead to rising LRATC as output decrease A firm experiences economies of scale up to some output level. Beyond that output level, it moves into constant returns to scale or diseconomies of scale. MINIMUM EFFICIENT SCALE is the smallest quantity of output, at which the LRATC reaches its lowest level 7

PERFECT COMPETITION
BASICS
Perfect competition in an industry in which : many firms sell identical product to many buyers there are no restrictions to entry into the industry established firms have no advantages over new ones sellers and buyers are well informed about prices Perfect competiton arises then: companys minimum efficient scale is small relative to market demand so there is room for many firms in the industri each company produces same product with no unique characteristics, so consumers dont care from which company they buy from In perfect competition, each company is a price taker. - A price taker is a firm that cannot influence the price of a good or service. No single firm can influence the price It must take the equilibrium market price. - Each firms output is a perfect substitute for the output of the other firms, so the demand for each firms output is perfectly elastic. Marginal revenue is the change in the total revenue that results from a one-unit increase in the quantity sold. In perfect competition, the firm can sell any quantity it chooses at the market price, so marginal revenue equals price and the demand curve for the firms product is horizontal for/at the market price. A perfectly competitive firm faces 2 constraints: 1. A market constraint summarised by the market price and the firms revenue curves 2. A technology constraint summarised by firms product curves and cost curves The goal of the firm is to make maximum ecc. profit, facing these constraints. So, the firm must make 4 decisions : 2 in the short, and 2 in the long run. Short run decisions: 1. Whether to produce or to shut down temporarily 2. If the decision is to produce, what quantity to produce Long run decisions: 1. Whether to increase or decrease its plant size 2. Whether to stay in the industry or leave it

One way to find the profit maximising output is to look at the firms total revenue and total cost curves.

Total revenue Total cost = Economic profit

At low output levels, the firms incurs an economic loss it cant cover its fixed costs. At intermediate output levels, the firm makes an economic profit. At high level outputs, the firm again incurs an economic loss steeply rising costs. Other way of determining the profit maximising output is the usage of marginal analysis. Because marginal revenue is constant and marginal cost eventually increases as output increases, profit is maximised by producing the output at which marginal revenue equals marginal cost. MR > MC = Ecc profit rising as output rises. MR < MC = Ecc profit falls as output rises MR = MC = Ecc profit falls if output goes in any direction, so ecc. profit is maximised

Maximum profit is not always a positive economic profit. To determine wheter a firm is making an ecc. profit or incurring an economic loss, we compare firms ATC at the profit maximising output with the market price

a price equals ATC and the firm makes 0 economic profit ( brake even) b price exceedes ATC and the firm makes a positive economic profit c price is less than ATC and the firm incurs an economic loss

THE FIRMS SHORT RUN SUPPLY CURVE

A perfectly competitive firms short run supply curve shows how the firms profit maximising output varies as the market price varies, other things remaining the same. There is a price below which the firms produces nothing and shuts down temporarily. If price is less than minimum AVC, the firm shuts down temporarily and incurs an ecc. loss equal to TFC. Every output at a price below minimum AVC means additional loss. The shutdown point is the output and price at which the firm just coveres its TVC. At the shutdown point, the firm is indifferent between producing and shutting down temporarily.

MC above the T point is actually a firms short run supply curve. 10

Short-run industry supply curve shows the quantity supplied by the industry at each price when the plant size of each firm and the number of firms remains constant.

At the shutdown price, the industry supply curve is perfectly elastic because some firms will produce the shutdown quantity,and others will not produce at all.

THE FIRMS LONG RUN SUPPLY CURVE

In the short run, a firm can make economic profit, break even or incur an economic loss, but in the LONG RUN, the firm may: enter or exit an industry change its plant size Now firms will enter an industry in which existing firms make an economic profit. Firms exit an industry in which they incur an economic loss. When new firms enter an industry, industry supply curve increases, and shifts rightward. The price falls and quantity increases, so economic profit of each firm decreases. When old firm exits an industry, industry supply curve decreases and shifts leftward. The price rises and quantity decereases, so economic loss of each firm remaining in the industry decreases. A firm changes its plant size whenever doing so if profitable. If ATC exceedes the minimum LRATC, the firm changes its plant size to lower average costs and increase economic profit

EXTERNAL ECONOMIES- are factors beyond the control of an individual firm that lower the firms costs as the industry output increases EXTERNAL DISECONOMIES- are factors beyond the control of an individual firm that raise the firms costs as industry output increases

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In the absence of external economies or external diseconomies, an increase in demand does not change the price in the long run. Long run industry supply curve LSa is horizontal

When external diseconomies are present, an increase in demand brings a higher price in the long run. LSa is upward sloping. When external economies are present, an increase in demand brings a lower price in long run. LSa is downward sloping. New technologies enables firms to produce at lower costs. Firms that adopt new technology make an economic profit, and the ones who doesnt exit industry Resources are being used efficiently when no one can be made better, without making someone else worse off. This situation arises when marginal social benefit equals marginal social cost

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MONOPOLY
Market power- is the ability to influence the market, and in particular, the market price, by influencing the total quantity offered for sale. Monopoly is an industry that produces a good or service for which no close substitute exists and in which there is one supplier that is protected from competition by a barrier preventing the entry of new firms. So, monopoly has 2 key features : NO CLOSE SUBSTITUTES BARRIERES TO ENTRY Barrieres to entry are legal or natural constraints that protect a firm from potential competitors. Legal barieres create a legal monopoly- a market in which competition and entry are restricted by: public franshize government license patent and copyright Natural barieres create a natural monopoloy - a market in which one firm can supply the entire market at a lower price, than two or more firms can One firm can produce 4 units 5 cents per unit Two firms can produce 4 units -10 cents per unit Four firms can produce 4 units 15 cents per unit In a natural monopoly, economies of scale are so powerful that they are still being achieved even when the entire market demand is met. The LRATC curve is still sloping downward when it meets the demand curve.

For a monopoly firm to determine what quantity to sell, the firm must choose the appropriate price. There are 2 types of monopoly price-setting strategies: A single-price monopoly is a firm that must sell each unit of its output for the same price to all its costumers Price discrimination is a practice of selling different units of good or service for different prices. Many firms are price discriminators, but not all of them are monopoly firms. A monopoly is a price setter, NOT a price taker like a firm in perfect competition

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SINGLE PRICE MONOPOLY

For a single-price monopoly, marginal revenue is less than price, at each output level. MR < P At one price, the monopoly firm can sell lets say 2 units (for 16$). When reduce a price, the firm can sell 3 units (for 14 $). The firm looses a part of revenue for selling at higher price, but gains higher revenue for selling at lower. So, total revenue increases.

If demand is elastic, a fall in price brings an increase in total revenue. If demand is inelastic, a fall in price brings an decrease in total revenue. If demand is unit elastic, a fall in price does not change total revenue.

Total revenue is maximised when marginal revenue is = 0 A single price monopoly never produces an output at which demand is inelastic. If it would produce so, the firm could not increase total revenue by decreasing total costs and increase economic profit. 14

The monopoly faces the same types of technology coinstraints as the competitive firm, but the monopoly faces a different market coinstraints. The monopoly first selects the profit-maximizing quantity ( MR = MC), and then sets the price at the level at which it can sell the profit maximising quantity. The monopoly might make an economic profit, even in the long run, because the barieres to entry protect the firm from market entry by competitor firms.

Ecc. profit is the profit per unit multiplied by the quantity produced.

Eqilibrium in perfect competiton occurs where the demand is equal to supply. Equilibrium for monopoly occurs where MR = MC. Compared with perfect competition, monopoly produces a smaller output and charges a higher price. Competitive equilibrium is efficient where MSB = MSC (social benefit and cost) In monopoly, because price exceedes marginal social cost, marginal social benefit exceedes marginal social cost and a deadweight loss arises Economic rent any surplus (consumer or producer). Rent seekers pursue their goals in 2 main ways: BUY A MONOPOLY transfer rent to creator of monopoly CREATE A MONOPOLY uses resources in political activity

PRICE DISCRIMINATION
Price discrimination is the practice of selling different units of a good or service for different prices. To be able to price discriminate, a monopoly must: 1. Identify and separate different buyer types 2. Sell a product that cannot be resold Price differences that arise from cost differences are not price discrimination. Price discrimination converts consumer surplus into economic profit. 15

Perfect price discrimination occurs if a firm is able to sell each unit of output for the highest price anyone is willing to pay. In this situation, MR = D With perfect price discrimination : the profit maximising output increases to the quantity of which price equals marginal cost economic profit is above one made by single-price monopoly deadweight loss is eliminated The more perfectly a monopoly can price discriminate, the closer its output is to the competitive output ( P = MC) and the more efficient is the outcome. A single price monopoly creates inefficiency and a price-discriminating monopoly captures consumer surplus and converts it into produces surplus and economic profit When demand and cost condition create natural monopoly, government agencies regulate the monopoly.

MONOPOLY REGULATIONS
The monopoly maximises the ecc. profit by producing the quantity at which marginal revenue equals marginal cost and charging the highest price at which that quantity will be bought. The marginal cost pricing regulation that sets the price equal to marginal cost. This way of regulating monopoly is efficient, but if ATC exceedes price, the firm incurs economic loss Average cost pricing rule another alternative is to permit the firm to produce the quantity at which price equals ATC and to set the price equal to average cost

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MONOPOLISTIC COMPETITON
BASICS
Monopolistic competiton is a market with the following characteristics : large number of firms each firm produces a differentiated product firms compete on product quality, price and marketing firms are free to enter and exit the industry Exactly the presence of a large number of competitors in the market implies: each firm has only a small market share and therefore has limited market power to influence the price of product each firm is sensitive to the market price, but firms dont pay too much attention to the actions of the other, and no firms actions directly affect the other firm collusion or conspirising to fix prices is impossible Product differentiation- each firm makes a product that is slightly different from the products of competing firms. Product differentiation enables firms to compete in 3 areas : quality, price and marketing. There are no barriers to entry in monopolistic competition, so firms cannot earn an economic profit in the long run. On this graph is a short-run equilibrium for a firm in monopolistic competition. It operates much like a single-price monopoly. The firm produces the quantity at which marginal revenue equals marginal cost. It makes an economic profit when P > ATC

In the long run, economic profit attractes other companys. Entry to industry continues as long as firms in industry make an economic profit (as long as P>ATC) In the long run, a firm in monopolistic competition maximises its profit by producing the quantity at which MR = MC. As new firms enter an industry, each existing firm loses some of its market share. The demand for those products ( from that firm) shifts leftward. The decrease in demand decreases the quantity of which MR = MC and lowers the maximum price. Price and quantity continues to fall until P = ATC and firm earns 0 economic profit.

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EXCESS CAPACITY AND MARKUP

Two key differences between monopolistic competition and perfect competition are : 1. excess capacity ( visak kapaciteta) 2. markup A firm has excess capacity if it produces less than the quantity at which ATC is at minimum. A firms markup is the amount by wich price exceedes marginal cost. Firms in monopolistic competition operate with positive markup. Firms in perfect competition have no excess capacity and no markup. To keep making an economic profit, a firm in monopolistic competition must contiously develop product. Innovation is costly, but it increases total revenue. Firms pursue development until the marginal revenue from innovation equals the marginal cost of innovation. MSB of innovation is the increase in price that people are willing to pay for the innovation. MSC of innovation is the amount that the firm must pay to make the innovation. For this market structure, selling costs (like advertising expenditures) are fixed costs. Average fixed costs decrease as production increases. Advertising cost might lower the average total cost. The advertising expenditure shifts the average total cost curve upward. Also, advertising makes demand more elastic, increases the quantity and lowers the price and markup.

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OLIGOPOLY
BASICS
You can recognize oligopoly by: natural or legal barriers that prevent entry of new firms a small number of firms compete Dupoly a market with 2 firms ( when 2 firms can satisfy the demand) A legal oligopoly arise where the demand and costs leave room for a larger number of firms Because an oligopoly market has a small number of firms, the firms are interdependent and face a temptation to cooperate. Interdependence with a small number of firms, each firms profit dependes on every firms actions Cartel is an illegal group of firms acting together to limit output, raise price and increase profit. Firms in oligopoly face the temptation to form a cartel, but aside from being illegal, cartels often break down. An HHI that exceedes 1000 is usually an oligopoly. An HHI below 1000 is usually monopolistic competition. Kink demand curve model each firm believes that if it raises its price, competitors will not follow, but if it lowers the price, all of its competitors will follow. Dominant firm oligopoly in a dominant firm oligopoly there is one large firm that has a significant cost advantage, over many other, smaller competing firms. The large firm operates as a monopoly, setting its price and output to maximize the profit. In that case, the small firms act as perfect competitors, taking as given the market price, set by the dominant firm. The large firm maximizes profit by setting MR = MC. In the long run, such industry might become a monopoly, as the large firms buys up the small firms and cuts costs. Collusive agreement an agreement between firms to restrict output, raise the price and increase profit. These agreemenents are illegal, but still conducted as secret. The strategies that firms in a cartel can pursue are: to comply ( da radi u skladu sa ) to cheat The cartels MC curve is the horizontal sum of the MC curves of the 2 firms and marginal revenue curve is like that of a monopoly Contestable market - a market in which firms can enter and leave so easily, that firms in the market face competition from potential entrants (potencijalnih sudionika).

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MARKETS FOR FACTORS OF PRODUCTION

LABOR
Goods and services are produced using factors of productions labor, capital, land and entrepreneurship (preduzetnistvo) Factor incomes are: wages earned by labor interest earned by capital rent earned by land normal profit earned by entrepreneurship Firms demand factors of production and households supply them. The demand for factors of production is a derived demand , because it is derived from the demand for the goods and services produced by the factors. The income earned by the owner or a factor of production equals the equilibrium factor price multiplied by the equilibrium factor quantity. An increase in the demand for a factor of production raises its equilibrium price, increases equilibrium quantity and increases its income. An increase in the supply lowers its equilibrium price, increases its equilibrium quantity, and has an ambiogus (gotovo nikakav) effect on its income (dependes of elasticity od demand). A firms demand for labor is the flip side of its supply of output. Marginal revenue product of labour (MRP) is the change in total revenue that results from employing one more unit of labor MRP OF LABOUR = MP OF LABOUR X MR For a firm in perfect competition, MRP diminishes as the quantity of labor employed increases because the MP of labor diminishes. For a firm in monopoly (monopolistic competition or oligopoly), MRP also diminishes, but for a second reason : - marginal revenue is below price and to sell more, the firm must lower its price (and its MR) If marginal revenue product (MRP) exceedes the wage rate, the firm increases profits by hirinig more labor. Only when MRP is equal to the wage rate the firm is employing the profit-maximizing quantity of labor.

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The firm has 2 conditions for maximizing profit : 1. Hire the quantity of labour at which the MRP of LABOR is equal to wage rate (w) 2. Produce the quantity of output of which marginal revenue (MR) equals marginal cost ( MC) The demand for labor changes and the demand for labor curve shifts if: 1. the price of the firms output changes 2. the prices of other factors of production change 3. technology changes The elasticity of demand for labor measures the responsivness of the quantity of labor demanded to a change in the wage rate. This elasticity dependes on the : labor intensity of the production process elasticity of demand for the product substitutability of capital for labor Reservation wage the lowest wage rate for which he or she is willing to supply labor. The opportunity cost of leisure increases with the wage rate. Substitution effect describes how a person responds by increasing the quantity of labor supplied as the wage rate rises. Income effect leisure is a normal good and the income effect describes how a person responds to a higher wage rate by increasing the quantity of leisure and decreasing the quantity of labor supplied. At low wage rates, the substitution effect dominates, so a rise in wage rate increases the quantity of labor supplied. At high wage rates the income effect dominates, so a rise in wage rate decreases the quantity of labour supplied.

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The factors that change the supply of labor have increased over time and they are: increase in population technological change and capital accumulation in home production Techological change create more jobs than they destroy and on the average, the new jobs pay more than the old ones did. Labor union is an organised group of workers that aims to increase wages and influence other job conditions. There are 2 types of unions : A CRAFT UNION a group of workers who have similar range of skills, but work for many industries and regions AN INDUSTRIAL UNION a group of workers who have a variety of skills and job types, but work for the same firm and industry. Unions negotiate with employers in a process called collective bargaining. Binding arbitration is a process in which a third party determines wage rates and other employment conditions The union tries to increase the demand for union labor, as well as make the demand for labor less elastic. Some of the methods to do that are : increase the MRP of members encourage import restrictions support minimum wage laws support immigration restrictions increase the demand for the good produced

MONOPSONY
Monopsony is a market with just one buyer. Because a monopsony has control over the labor market, it has the market power to set the market. The supply curve tells us the lowest wage rate of which a given quantity of labor is willing to work. Because the monopsony controls the wage rate, the marginal cost of labor exceedes the wage rate. The marginal cost of labor curve MCL is upward sloping. The monopsony maximizes profit by hiring the quantity of labor at which the marginal cost of labor equals the marginal revenue product. It pays the lowest wage rate for which that quantity of labor will work. Compared with competitive labor markets, the monopsony employs fever workers and pays a lower wage rate.

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Bilateral monopsony when both, the firm and employes have market power Efficiency wage a wage rate that firm pays above the competitive equilibrium wage rate, with the aim of attracting the most productive workers. Capital markets the cannels through which firms obtain financial resources to buy physical factors of production that economist call capital Real interest rate the return on capital and is the price determined in the capital market The factors that determine investment and borrowing plans are : marginal revenue product of capital interest rate Marginal revenue product of capital is the change in total revenue that results from employing one more unit of capital. It diminishes as the quantity of capital increases Interest rate the opportunity cost of the funds borrowed to finance investment. It is also the opportunity cost a firm using its own funds, because it could lend those funds to another firm and earn interest rate on the loan. The higher the interest rate, the smaller is the quantity of planned investment and borrowing in the capital market. Firms demand curve for capital

INCOME, SAVINGS AND RESOURCES

The quantity of capital supplied results from peoples savings decisions. The main factors that determine savings are: income expected future income interest rate Saving is the act of converting current income into future consumption. As income increases, savings increases.

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If current income is high and expected future income is low, people will have a high level of savings. If current income is low,and expected future income is high, people will have a low level of savings. The higher the interest rate, greater are the savings A rise in interest rate also brings an increase in the quantity of capital supplied and a movement along the saving supply curve Population growth and technological advances increase the demand for capital Population growth and income growth increase the supply of capital. Renewable natural resources are resources that can be used repeatedly, such as land, rivers, lakes, rain and sun Non renewable natural resources are natural resources that can be used only once and that cannot be replaced once they have been used, such as oil or natural gas

Supply of natural resources is special. The quantity of land (and other renewable natural resources) at any given time is fixed, which means the supply of land is perfectly inelastic

Hotteling Principle the price of non-renewable natural resources is expected to rise at a rate equal to the interest rate, other things remaining the same. Economic rent the income recived by the owner of a factor of production

MICROECONOMICS BY IRFAN IBROVIC

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