Firms and Markets Syllabus and Introductory Notes Firms and Markets (B01.1303) Professor John Asker Office: KMC 7-79 Telephone: (212) 998-0062 Email: [email protected] Course Description The goal of this course is to give you some insight into how markets work. The first part of the course starts with the study of decision making by consumers and firms and concludes with a fundamental result in economics: a set of conditions under which markets function efficiently. In the second part of the course, we focus on situations when, for one reason or another, markets don’t work efficiently. We will emphasize the importance of strategic behavior, as modeled by game theory. Microeconomics (as the topic of this course is frequently referred to) is an important component of an MBA program. First, microeconomics focuses on specific dimensions of optimal firm decision making, such as pricing and entry and exit. Second, the economics formal perspective on business plays an important role in other areas of MBA study, such as finance or marketing. Finally, by studying public policy towards market failures, microeconomics highlights important factors conditioning firm strategy. Some of the key concepts we will introduce include economic incentives, marginal analysis, opportunity cost (which costs matter), market efficiency (what does it mean for a market to work), strategic behavior (how to predict and respond to your rivals’ decisions), and asymmetric information (what happens when others know something you do not). Our experience with students in prior years is that much of this is intuitive. But much is not, and our hope is that the combination of theoretical structure and practical examples will be useful in the years to come. It will not make you a success on its own, but it might give you an edge a few times when it matters. A complete list of topics can be found in the detailed course outline. Prerequisites You are expected to be comfortable with basic algebra and calculus, including systems of equations, logarithms and NPV calculations, derivatives. Course Materials • Lecture notes. They review the theory relevant to most classes. In 3-6 pages, they outline and explain the conceptual issues for the day, define terms, give examples, and (where it makes sense) work through numerical problems.Introduction 2 • Textbook. There is no required textbook for this course. However, if you want to have a reference text, I very strongly recommend Michael Baye’s Managerial Economics and Business Strategy (McGraw-Hill, 6th edition), which is available in the bookstore. There is also a study guide to accompany the text. About 30% of students indicate that they find this book helpful. It really doesn’t matter whether you get the 4th, 5th or 6th edition of this book so if you do get it get the cheapest. I also want to draw your attention to Managerial Economics by Samuelson and Marks (Wiley, 4th edition). This is a good auxiliary text for the course – it is a little more advanced in some parts, but is a little more comprehensive and is sensible on how to take concepts to data. • Slides. The slides are a forecast of where the class will head, but if the discussion moves in another interesting direction we will generally let it run its own course. Also, I will amend the slides from time-to-time to keep the course up-to-date with current research and events. I will use blackboard to post the most up-to-date slides. I will also endeavour to post copies of all the board-work I do in class. With the exception of the text, all of this material will be handed out the first day of class and posted on the course management system (http://classes.nyu.edu). Deliverables and Grades The various “deliverables” in the course are designed to develop different skills: • Class participation. It’s important to integrate what you learn and be able to express it effectively. Your grade will be based on such measures as the quality (not the quantity) of your contributions, attendance, punctuality, and so on. • Individual problem sets. Problem sets emphasize quantitative applications of the principles and tools developed in class. They are due at the start of class. They will not be graded, but will be marked with a check (and possibly a plus or minus). Most of the problems are quantitative; some require a qualitative answer (the latter typically refer to mini-cases that my colleagues and I have written over the years). The problems marked “challenge problems” are harder than most and need not be perfect to get a check. Your overall performance on problem sets will serve as an informal tie-breaker if you’re on the border between two grades. You should also note that the problem sets are the best preparation for the mid-term exams. • Mid-term exam. Generally three or four problems, similar to the practice mid-term exams that I will distribute in due course. In past summer intensives students have opted to make this redemptive, in the sense of counting only if it increases your final grade. I’ll assume that your class will choose this too, but we will discuss it in class on the first day. • Group projects. Generally more complex and realistic quantitative assignments that use and extend the principles and tools developed in class. • Final-term exam. Generally three or four problems, similar to the practice finals that I will distribute in due course. A slight weighting toward the latter part of the course Your grade for the course will be based on your contributions to all of these deliverables, weighted as follows: Class participation 15% Individual problem sets (3) “check+/–”Introduction 3Group projects (2) 25% Mid-term exam 25% (redemptive) Final exam 35% or 60% The mid-term is redemptive, in the sense that it only counts if it increases your grade. This means that if you do better in the final than the mid-term, then the mid-term will not count. The reason for doing this is that this course will move fast and I am sensitive to cater to students who need a little time to get their head around what economics is about. Ultimately I care about what you know at the end of the course: this grading scheme is consistent with that concern. Final grades will follow the School’s guideline for core courses: no more than 35% of the class will receive A or A–. This guideline was