Sometimes, you take a course and wonder what the point of it all was. So, here are my takeaways from four months of Microeconomic Analysis, through 1-2 sentence summaries of each lesson.
Along with helping me remember what I actually learned, I’m hoping that this can help any students who are considering taking a similar course or want to know what it might cover. For context, this is a second-year university course focused on applying microeconomics to managerial decisions.
Module 1: Supply and Demand
Demand Theory: Price elasticity of demand is the change in quantity in response to a marginal change in price, and it varies along the demand curve. Price elasticity of demand means that there is an optimal price that maximizes firm revenue.
Consumer Behavior: Consumers have different combinations of goods that they would be indifferent to receiving (indifference curves) and other combinations of goods that they’re actually able to afford. Consumers want to purchase the combination of goods that give them the most value for the amount they’re able to afford (the intersection of the indifference curve and budget line).
Production Theory: Producers are a lot like consumers, in that they have combinations of inputs that they would be indifferent to using (producing the same amount of output) and a budget constraint of combinations of inputs they would actually be able to use.
Cost Analysis: Opportunity cost is the foregone value of the next best alternative - this is important in decision making. Sunk costs are what have already been spent and can’t be recovered - we ignore these in in decision making because they are in the past.
Module 2: Market Conditions
Perfect Competition: To maximize revenue, always produce where marginal cost is equal to marginal revenue! For a competitive industry, firms make no profit in the long run - otherwise, new firms will enter to make profit or unprofitable firms will leave
Monopoly and Monopolistic Competition: Monopolies are able to charge higher prices and product lower output while generating economic profits because they are the sole supplier. Monopolistic competition acts like a monopoly in the short run but like perfect competition in the long run.
Price Discrimination: Price discrimination is all about charging as close as possible to the maximum a consumer would be willing to pay for a product. Coupons, peak load pricing (think about hydro/utilities), and two-part tariffs of an entry fee + use fees are actually all methods of price discrimination!
Oligopoly: Being the first to act reaps rewards. Firms in an oligopoly that know each other very well can calculate the ideal quantity to produce or price to charge depending on the actions of their rival.
Module 3: Managerial Challenges
Risk Analysis: People value the opportunity of money differently depending on whether they are risk averse, loving, or neutral. We can actually model this mathematically through a utility function!
Principal-Agent Problems: It’s difficult to compensate managers because managers want to maximize their pay and minimize their effort, while shareholders want to incentivize them to maximize firm profit.
Adverse Selection: A used-car market of indistinguishable gems (great cars) and lemons (terrible cars) will eventually just become a market of lemons.
Whew, we made it to the end of the course! Congrats on making it through four-months worth of learnings if you read all the way! 🎉
This was a new type of content for me - let me know if you found it interesting or useful!
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