Course Syllabus
© Anna P. Della Valle
Key Economic Concepts
Opportunity cost, incentives, marginal analysis and why they matter.
- The "economic" cost of getting an undergraduate degree
How Markets Work
Supply and demand, elasticity
The model of supply and demand is the basic economic model used to describe how market economies function. Defining and constructing demand and supply curves and functions, shifts vs. movements along the curves, deriving market clearing outcomes, elasticity of demand and supply, impact on revenues from changes in price in elastic versus inelastic markets.
- Which markets are best described by the model of supply and demand
- Estimating elasticity of demand in the markets for oil and cigarettes
- Effect of OPEC cartel strategy on profitability in the world oil market
When we don’t “like” the market outcome
The effect of price floors, price ceilings, subsidies, positive and negative externalities on the market outcome.
- Prices that are “too low”: agricultural subsidies and the WTO debate.
- Prices that are “too high”: immunizations, electricity, rent control.
- When supply or demand excludes costs or benefits to society: reducing pollution, building parks.
Market efficiency and welfare
Theoretically, the free interaction between buyers and sellers in the demand and supply model maximizes economic welfare and efficiency. This is one of the fundamental tenants of market economics. Defining and measuring economic welfare, consumer and producer surplus, relationship between market efficiency and welfare maximization.
The Economics of Taxation
Taxation changes the market outcome by creating a wedge between the price buyers pay and the price sellers receive with implications that are often counterintuitive. Effect of taxation of goods and services on market equilibrium, impact of taxes levied on buyers vs. sellers, tax incidence, effect of taxation on economic welfare.
- Estimating the impact of cigarette taxes on demand and government revenues
- Does a luxury tax really have the intended consequences?
Producer Theory
Theory of the firm
The study of what firms are, different forms of firm ownership, structure and organization, identifying and modeling firms’ objectives and strategic behavior.
- Addressing the problem of separation of ownership from control in corporations
- When CEOs have goals other than profit maximization: visionaries or megalomaniacs?
- Benefits and challenges of incorporation
- Ownership structures in the Italian luxury market
Production theory
Identifying the various components of a firm’s costs and the relationships between them, production functions and costs of production, economies of scale and scope.
Market Models
There are five main market models that describe how industries are structured in market economies:
Market Model 1: Perfect Competition
Many buyers and sellers relative to the size of the market with no one having any influence over price. The perfectly competitive model, firm behavior under perfect competition, short-run and long-run supply curves and market outcomes.
Market Model 2: Monopoly
A single seller that supplies the entire market and thus has control over price and output. The monopoly model, firm behavior under monopoly, welfare loss under monopoly.
- Incumbent advantage: monopolist’s entry-deterring strategies
Market Model 3: Monopolistic Competition
Many sellers (as in perfect competition), some of whom are able through branding or product differentiation to control a portion of the market (as in monopoly.) Product differentiation, marketing, advertising and branding; estimating the costs vs. impact of product differentiation and marketing on demand; Lancaster’s characteristic model.
- Why do consumers pay premiums of 50-80% more for brand name products (even when they have identical ingredients?)
- US firms with top advertising budgets
- Brand “Italy”
Market Model 4: Cooperative Oligopoly
Few sellers who join together so as to influence market price and output.
- Examples of successful cooperative oligopolies
- Why cartels tend to be unstable
- US and EU cartel antitrust suits: vitamins, beer, flat screens.
Market Model 5: Non-Cooperative Oligopoly
Few sellers who actively compete with one another and understand that they are affected by the actions of the other sellers. Early models to study noncooperative oligopoly behavior: early Cournot and Stackelberg models; introduction to game theory, Nash equilibrium, dominant strategies, repeated games.
- Using game theory to model non cooperative oligopoly strategies
- Mafia solution to the prisoner’s dilemma
- The risky business of making movies: from phenomenal success to huge losses
Firm Strategic Behavior
Pricing strategies: price discrimination, predatory pricing, two-part tariffs.
Investment strategies: research and development, vertical and horizontal mergers and acquisitions, tie-in sales, investments to raise rivals’ costs.
Government Intervention into Markets
Rationales for Government Intervention
Economic rationales for government intervention into markets? Market failure, externalities, public goods, common resources, natural monopoly, equity concerns, industries affected by the “public interest.”
Forms of Government Intervention
These include: complete or partial government ownership, private ownership with government regulation of entry, standards, investments and/or prices, price ceilings, price floors, tariffs, subsidies, antitrust (overview and scope of antitrust legislation in the US, landmark antitrust cases), patents and copyrights. When private solutons work despite exernalitites (Coase Theorem).
- When sellers have more information than buyers: the used car market
- Interventions to reduce CO2 emissions
- Antirust: Microsoft, Intel, Google suits
