Course Description
Provides an understanding of the microeconomic forces that influence firm decision making. Includes competitive markets and market failure, benefit-cost analysis, demand estimation and forecasting, decision making under risk and uncertainty, production and cost estimation, and market structure analysis.
Course Objectives
The objective of this course is to help business students become more adept at designing and developing business strategy at the firm level. Students should gain a rigorous understanding of competitive markets as well as alternative market structures such as monopoly, oligopoly, and monopolistic competition. Engaged students should also acquire a basic competence in the theoretical derivation and empirical estimation of demand, cost, and production functions, answering the fundamental managerial questions of what, how, and for whom to produce.
Week 1
Lecture: Introduction
Outcomes
- Describe the rational-actor paradigm, and use the paradigm to predict behavior
- List and explain the two main reasons why mistakes are made by decision makers
- Define the terms wealth, value and willingness to pay
- Explain how voluntary transactions create wealth
- Describe how tax, subsidy and price control policies can destroy wealth
- Define and illustrate the concepts of fixed costs, variable costs and opportunity costs
- Define and give examples of the fixed-cost and hidden-cost fallacies
Week 2
Lecture: Making Extent Decisions: Background Materials
Outcomes
- Explain the difference between average and marginal costs, and describe how marginal analysis is used to make extent decisions
- Calculate MC and make profitable decisions using the marginal analysis rule
- Describe some problems when moving from theory to practice, and how best to deal with these problems
- Identify the relevant benefits and costs of entry and shutdown decisions
- Calculate break-even quantity and break-even price, and use these concepts to make profitable entry and shutdown decisions
- Distinguish fixed costs from sunk costs
- Identify two investments that are relationship specific
- Define the terms sunk cost and post-investment hold-up
- Describe two strategies that reduce transaction costs and encourage relationship specific investments
Week 3
Lecture: Stay-Even Analysis
Outcomes
- Explain how marginal analysis is used to find the profit maximizing price
- Calculate and interpret the price elasticity demand
- Use price elasticity information to calculate marginal revenue, and to make profitable simple pricing decisions
- Calculate a table of stay-even quantities and construct a stay-even curve
- Make profitable pricing decisions by comparing the stay-even curve with the demand curve
- Describe the relationship between marginal productivity and marginal costs
- Explain why cost curves are U-shaped
- Identify three types of long-run scale economies
- Define the term economies of scope, and provide examples of how consolidation can produce economies of scope
- Describe strategies that a single product company can use to benefit from the economies of scope of others
Week 4
Lecture: Demand and Supply: Value and Surplus
Outcomes
- Understand and explain the concepts of value and surplus for both consumers and producers
- Explain why demand curves slope downward and supply curves slope upward
- Predict the impact on equilibrium price and quantity of a change in demand or supply
- Define a market in terms of product, time and geographic dimension
- Outline the analytical steps in correctly using the demand/supply model
- Explain the concept of mean reversion, and explain why firm profits revert to an average rate of return in competitive industries
- Explain why, despite inherent competitive advantages, monopoly profits eventually erode as well
- List and distinguish between industry-based and resource-based determinants of long-run profitability
- Describe the various strategies that can be used to gain or maintain a sustainable competitive advantage
Week 5
Lecture: Pricing Commonly Owned Products
Outcomes
- Describe pricing strategies for jointly owned substitutes and jointly owned complements
- Explain how capacity decisions are made, and how pricing decisions are made after capacity is built
- Explain the effect advertising expenditures have on demand elasticity for both price-related promotions and product-related promotion, and how to price in each situation
- List the conditions needed for direct price discrimination
- Explain how to price to groups with different elasticity
- Describe implementation strategies for direct price discrimination
- Provide examples of indirect price discrimination and list its primary disadvantages
- Develop pricing strategies that avoid cannibalizing sales from a high margin product
Week 6
Lecture: The Theory Behind Game Theory
Outcomes
- Define Nash equilibrium
- Find the Nash equilibrium in a sequential move game
- Explain how credible threats can change the outcomes in game theory
- Find the Nash equilibrium of the Prisoner’s Dilemma
- Explain the tension between conflict and cooperation
- List strategies to avoid or get out of games that are like the Prisoner’s Dilemma
- Explain how a player can gain an advantage by shifting a simultaneous move game to a sequential game; and how the first-move advantage can be negated by a credible threat
- Describe the non-strategic view of bargaining and based on this view, list strategies that can increase bargaining power
Week 7
Lecture: Moral Hazard
Outcomes
- Calculate expected benefits and costs
- List the three benefits of modeling uncertainty
- Use a decision tree to model uncertainty
- List and describe the main attributes of each auction type and the inherent tradeoffs of each
- Explain the consequences of adverse selection, and provide examples of adverse selection and how to solve it
- Describe the moral hazard problem
- Distinguish adverse selection from moral hazard
- Explain behavior using both adverse selection and moral hazard explanations
- Calculate break-even values to induce hard work and negate shirking
Week 8
Lecture: Aligning Employee Incentives with Firm Goals
Outcomes
- Explain the principle-agent problem and how it relates to incentive conflicts
- Describe strategies to resolve problems that arise due to the principle-agent relationship
- Diagnose and fix incentive conflicts using a three-question/three-answer paradigm
- Provide examples of how transfer pricing can reduce company profits
- List and describe the methods by which vertical integration can increase profits
The course description, objectives and learning outcomes are subject to change without notice based on enhancements made to the course. May 2011
