Okay, reality check.
Why should I spend what is going to amount to
over 100 hours of my precious life studying this subject,
or in the parlance, what's in it for me?
That's a pretty good question and let's tackle
it first from the business side of the ledger.
Here, microeconomics can help answer questions
like: How can my firm minimize its costs and increase its profits?
What prices should I charge for my products?
Should I invest in new plant and equipment?
And how should I respond to an aggressive strategic move by one of my competitors?
At a personal level,
microeconomics is equally practical.
It can help answer questions like: How can I
maximize my grade point average given my time constraints?
Will I really be better off financially if I quit
my job now and go back for an MBA degree?
What kind of career should I be preparing myself for?
And what about that new refrigerator or automobile I want to buy,
should I get the new energy efficient one with
a higher price tag and maybe help save the planet or settle for a cheaper model?
And guess what, microeconomics can also help solve
fun riddles like this: Why does popcorn costs so much at the movies?
In our lesson on consumer behavior,
I will show you that has something to do with what's
called the price elasticity of product demand.
And yes, they are trying to rip you off.
And how about this: Why does the grocery cereal aisle have
so many different and expensive ways
to sell you what is essentially cheap grain and sugar?
In our lesson on monopoly and monopolistic competition,
I'll show you that has something to do with a key concept in
both marketing and management strategy known as brand proliferation.
And check this out. How come they try
to sell you beer that will make you fat by portraying it as
a ticket to meeting the lean man or woman of your dreams?
This, you will learn,
has something to do with a key concept known as product differentiation,
and yes, perhaps more than a bit of cynical exploitation.
And here's one to get your conscience thinking.
Is the quality of music really getting
worse because people download so much free stuff on the internet,
that musicians can't make a buck any more?
Answer? A strong maybe here,
it's all about reduced incentives.
Most broadly, microeconomics can also help you
come to understand why the government is so involved in our economic and business lives.
And on that note, here are some more puzzlers for you.
Why does the government regulate prices in
some industries like electricity but not in other industries like trucking?
I will show you this is because only some industries
suffer from a market failure called natural monopoly.
Why does Big Brother government make people wear seat belts and motorcycle helmets?
These obvious restrictions on citizen rights may be explained
fairly easily by a concept known as negative externalities.
And here may be the biggest one of them all.
Why does the government provide some goods like our national defense and lighthouses,
and let the free market provide other goods like hot dogs and computers?
That will be explained in one of our last lessons in
the course to the so-called public goods problem.
Yes indeed, microeconomics can help answer all of these questions because it arms
us with a very powerful set of conceptual and problem solving tools.
And here is your second important warning.
As you study this challenging subject,
you're going to encounter many ideas and words that may be quite foreign to you.
In fact, I just threw a bunch of them at you with my hints.
Phrases like brand and product differentiation and natural monopoly and public goods.
The essential truth here is this,
like most subjects you will study,
microeconomics has its own vocabulary,
and part of the process of learning this subject will be to master
this new vocabulary and other phrases like opportunity cost,
the time value of money,
price elasticities, marginal cost, and oligopoly.
Let me show you now how powerful and helpful this vocabulary can
be by telling you several stories about some fictional people in very real situations.
Let's start with a typical choice that I just
referred to and one you will face throughout your life.
Whether to buy the cheap product or the more energy efficient.
The idea here is to get beyond the idea that you might buy
some energy efficient refrigerator or light bulb or for that matter,
electric car, simply because you want to save the planet.
Instead, you make that seemingly more expensive choice because
it is actually much cheaper to do so over the life of the investment.
Did the professor just say the more expensive product was actually cheaper?
I believe he did. Well, that certainly is a paradox.
Here, it may indeed seem paradoxical that expensive can be cheaper.
Let's resolve that paradox with the help of
a fictional student of mine from Mexico named Maria Lupe.
And by using a microeconomic concept called the time value of money.
Here's the deal.
Maria wants to buy a new refrigerator and her choice
is between a basic model for $1,000 and
a more energy efficient model that will save $100 a
year in electricity costs, but cost $1,300.
Of course on the face of it it's easy to see that it will take
three years for the energy savings to
equal the extra $300 for the more energy efficient refrigerator.
But Maria knows the problem is a bit more
complicated than that because money itself has a time value.
That's because if she doesn't spend the extra $300 on the refrigerator,
she can either put it in the bank and earn interest on
the money or spend it on something else.
So yes, it's a complicated calculus but having studied microeconomics,
Maria knows how to compute
the so-called net present value of the energy savings on an electricity bill,
to take into account the time value of money.
Now that she does that, Maria realizes that
the seemingly more expensive refrigerator is actually
much cheaper over the 10 year lifetime of the investment
with the added benefit of helping the environment.
In fact, Maria helped her fiance Pradesh come to
a similar conclusion on a completely different topic.
Pradesh was thinking about entering a full time MBA program but
the cost of the program is very expensive, a full $100,000.
So how would you value that kind of investment?
Take a few minutes now to think about these: what are
the costs you must account for and what are the benefits?
Please pause the presentation now to do this and when you're ready just start up again.
Okay,
let's use the concept
of net present value and start with the benefits.
Based on the salary data Maria analyzed,
she is confident Pradesh would earn at least
$50,000 more per year with an MBA in his field of finance.
What about the costs?
Most obviously, there is the investment cost,
the $100,000 Pradesh must pay in tuition and fees for the program.
But there is also an important so-called opportunity cost that we have to account for.
That's the $45,000 in salary
Pradesh would have to forgo by quitting work and going back to school.
A total of $90,000 for the two years of his MBA studies.
Of course, all these different payments and cash flows must be discounted for time.
We will learn a whole lot about that later.
I think you get the picture.
And after crunching all the numbers using this net present value approach,
Maria did indeed conclude that Pradesh's investment in
an MBA would be well worth it over the course of his career.
That's what Pradesh is doing right now,
getting his MBA and he sits right next to
Phong Nguyen in his Microeconomics for Managers class.
Before losing his job
and company in Vietnam and coming to America to go to business school,
Phong was the chief executive officer of
a high flying computer software firm he had
started himself with the help of his family and friends.
However, when his company started to lose money,
Phong's solution was to raise prices in the hopes of boosting revenues and profits.
Unfortunately, Phong came from
a computer engineering background and hadn't studied microeconomics,
so Phong didn't understand that the demand for his company's product in
a highly competitive market was what economists call very price elastic.
In such a case, raising prices actually reduces both total revenue and profits.
The result was that Phong's pricing strategy bankrupted the company.
Jean Twilley was a lot smarter when confronted with a similar situation in
her job as chief economist for the transit authority in Paradise California.
Facing a revenue shortfall,
Jean ordered an analysis of the elasticity of demand for bus services.
When she found that bus demand was highly price elastic,
she recommended to her supervisor that the transit authority actually lower bus fares.
This pricing strategy did indeed increase ridership and boost total revenues.
It also earned Jean a nice promotion.
Of course, I could go on and on with these kinds of examples,
and I will in this course.
But I think you already get the point.
When you learn microeconomics,
you will learn a skill that will help you
enormously in both your personal and professional lives.