Using Microsoft Excel, the market leading spreadsheet package, this book combines theory with modelling aspects and spreadsheet analysis. Microeconomics Using Excel provides students with the tools with which to better understand microeconomic analysis.It focuses on solving microeconomic problems by integrating economic theory, policy analysis and
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Yes, you can access Microeconomics using Excel by Gerald Schwarz,Kurt Jechlitschka,Dieter Kirschke in PDF and/or ePUB format, as well as other popular books in Business & Business General. We have over one million books available in our catalogue for you to explore.
In Chapter 1 we discuss the basic concepts of supply, demand and price policies, and we formulate an appropriate Excel model. In order to do this, supply and demand functions are defined and the process of price formation on a market without and with government intervention is illustrated. We then discuss how various price policies affect political objectives such as producer revenue, consumer expenditure, foreign exchange or government budget.
Theory
The starting point for the analysis of price policies on a market is the formulation of supply and demand functions. Let us consider the following linear supply function:
(1.1)
where qs(.) ā supply function qsā quantity supplied psā supply price.
Parameter a describes the hypothetical quantity of supply for a supply price of zero, and the value will be negative since supply will only begin above a certain minimum supply price. Parameter b describes the slope of the supply function and indicates the change in units supplied as a consequence of an increase of the supply price by one unit, exactly: by one infinitesimally small unit. It is common to graphically show supply and demand functions as inverse functions with the price on the y-axis and the quantity on the x-axis. Solving (1.1) with respect to ps yields the following inverse supply function:
(1.1)'
where
(.) ā inverse supply function.
The function is visualised in Figure 1.1.
Similar to the supply side, the following linear demand function can be formulated:
(1.2)
where qd (.) ā demand function qd ā quantity demanded pd ā demand price.
Parameter c marks a saturated situation. Parameter d is the slope of the demand function indicating the change in units demanded as a consequence of an increase of the demand price by one unit, exactly: by one infinitesimally small unit.
Solving (1.2) with respect to pd yields the following inverse demand function illustrated in Figure 1.1:
(1.2)'
where
(.) ā inverse demand function.
Let us now consider a closed economy without government intervention. For such a policy framework there will be an equilibrium price on the market equalising supply and demand. This is the autarky price pa in Figure 1.1. Under free trade, instead, the world market price pw will be the relevant price for domestic supply and demand. We assume that the world market price is given for the domestic market; this is the āsmall country assumptionā according to which the world market price will not change due to domestic supply and demand changes. According to Figure 1.1, domestic supply and demand will be qs ( pw ) and qd ( pw ) under free trade and imports will be qim = qd ( pw ) ā qs ( pw ). Autarky and free trade as discussed here mark the absence of government interventions in a market, but the scenarios may also be interpreted as describing only the specific policy framework: autarky and free trade.
Figure 1.1 Linear supply and demand functions.
Let us now consider that a country sets the domestic price independently of the world market price according to domestic policy objectives. Such a price policy can be implemented by price and quantity interventions; in market economies the typical intervention is a āsubsidisationā or a ātaxationā of economic activities yielding domestic supply and/or demand prices different from the world market price. In Figure 1.2 a protectionist price policy is visualised that may be implemented by a tariff in an import situation or an export subsidy in an export situation. Formally, policy objectives on this market such as increasing producer revenue or government budget now depend on the world market price and/or the domestic price.
Figure 1.2 presents the case of a protectionist price policy in an import situation. As compared to free trade, the quantity of supply increases to qs ( p) and the quantity of demand decreases to qd ( p). Further relevant policy objectives may be defined for this protectionist price policy. The producer revenue will be:
(1.3)
Figure 1.2 Consequences of a protectionist price policy in an import situation.
For consumer expenditure we get:
(1.4)
In the import situation considered here import expenditures occur. In general, covering both an import and an export situation, we define a foreign exchange function as follows:
(1.5)
Thus, foreign exchange is a function of the two exogenous prices and it has a negative value in the import situation considered. Similarly, we define a government budget function:
(1.6)
The value of this function is positive for the case considered. It would be negative for a protectionist price policy in an export situation to be established by an export subsidy. Foreign exchange (expenditure) and government budget (revenue) are visualised in Figure 1.2.
The values of the defined functions can now be calculated depending on the values of the exogenous prices and the parameters of the supply and demand functions. In order to assess the impact of the prices on these functions, it is helpful to draw the corresponding graphs of these functions. Foreign exchange will thus be a linear rising function of the domestic price p as the derivative of this function is a constant. It intersects the price axis at the autarky price pa. The foreign exchange function is visualised in Figure 1.3.
(1.5)'
Figure 1.3 also shows the government budget function with respect to the domestic price. For the linear supply and demand functions considered, we get a strictly concave quadratic budget function, intersecting the price axis at free trade p = pw and autarky at p = pa. At a domestic price level below the world market price, import subsidies are paid and, hence, budget expenditures occur that decrease with a rising domestic price. For a domestic price level between free trade pw and autarky pa, tariffs create budget revenues, with a maximum exactly between pw and pa. Finally, with higher domestic prices above the autarky price pa, increasing budget expenditures occur due to export subsidies.
Figure 1.3 Foreign exchange and government budget as a function of the domestic price.
Based on (1.5) and (1.6), analogous foreign exchange and government budget function...
