EMBA 7010
Economic Analysis for
Business Leaders
Microeconomics
David B. Mustard
Fall 2011
Microeconomics
Human Behavior
What is Economics?
How is Economics Different?
How Do Managers Use Economics?
Technological Change and Business
Human Behavior
• What is Economics?
• Economics is the “Allocation of Scarce Resources to
Competing Interests.”
• Who allocates?
• What are competing interests?
• There are many misunderstandings.
• Economics differs from other disciplines in that it is
not the substance, but the method of analysis.
Economics
“Economics is a method of analysis, not an
assumption about particular motivations.”
Gary S. Becker, “Nobel Prize Lecture: The
Economic Way of Looking at Life.”
Journal of Political Economy
June 1993
Human Behavior
• Goal: Understand behavior
People, families, firms, organizations, ….
• How is self-interestedness different from selfishness?
• Economists believe that “individuals maximize their
utility as they conceive it, whether they be selfish,
altruistic, loyal, spiteful, or masochistic.” (Becker)
• Therefore, economics is unlike most other disciplines
that assume people are motivated in certain ways.
What people want
"Undoubtedly, I would have gone into finance if the
financial meltdown hadn't occurred," he says. "Now
I won't make as much money, but I can go home at
night and feel good about what I do. That's worth
more than any amount of money.“
Ted Fernandez, MIT student
“As Riches Fade, So Does Finance’s Allure”
WSJ, Sep 18, 2009
Strengths of Economics
• Theory
• Empirical
• Understand unintended consequences
a. Poorly designed compensation schemes
b. Subprime mortgage crisis
How Do Business Leaders Use
Economics?
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Compensation
Handling of risk
Choosing the best mix of inputs
Determining whether and how to invest
Pricing of products
Who are your competitors and how may they
respond to you?
Microeconomics
The Big Picture
Innovation
The IBM 350
1956
Technological change and
GNP Growth
Source: Delong, The Economic History of the Twentieth Century
Technological Progress and Wealth
The source of this wealth – the engine of
prosperity – is technological progress. And the
engine of technological progress is ideas – not
just the ideas from engineering laboratories,
but also ideas like new methods of crop
rotation, or just-in-time inventory management.
You can fly from New York to Tokyo partly
because someone figured out how to build an
airplane and partly because someone figured
out how to insure it.
Innovation Reduces Marginal Cost
Most of us who covered media did not fully
understand the implications of the new
technology that could publish and distribute
information at zero marginal cost.
Complementary Skill Sets
The ability to take data—to be able to understand
it, to process it, to extract value from it, to
visualize it, to communicate it—that’s going to be
a hugely important skill in the next decades, not
only at the professional level but even at the
educational level for elementary school kids, for
high school kids, for college kids. Because now we
really do have essentially free and ubiquitous
data. So the complementary scarce factor is the
ability to understand that data and extract value
from it.
Technological Change is Often
Misunderstood
The ability to take data—to be able to understand
it, to process it, to extract value from it, to
visualize it, to communicate it—that’s going to be
a hugely important skill in the next decades, not
only at the professional level but even at the
educational level for elementary school kids, for
high school kids, for college kids. Because now we
really do have essentially free and ubiquitous
data. So the complementary scarce factor is the
ability to understand that data and extract value
from it.
Innovations Can Threaten Firms
and Create Opportunities
- Henry L. Ellsworth, United States Commissioner of
Patents (mid 19th century), commented on the
proposed construction of a new building for the U.S.
Patent Office. He said that a new building should not
be too large or expensive because, “the advancement
of the arts from year to year taxes our credulity and
seems to presage the arrival of that period when
further improvements must end.”
- Charles H. Duell, U.S. Commissioner of Office of
Patents, in 1899 pronounced, "Everything that can be
invented has been invented.“
- Many other misestimates.
Microeconomics
A gentle warning
Part of my problem was that I kept getting caught up in grand
concepts when I needed to master details. In Micro, I found
myself fascinated not by the mathematics involved but by the
way Micro shed light on the essentially tragic nature of the
human condition. I mean this. All of microeconomics turned
upon a central fact of life: Whether as consumers or producers,
human beings always want more than they can get. For me, this
places Micro right back there in the Garden of Eden with
concupiscence, pride, jealousy, and all the other effects of
original sin. Yet while perhaps useful in a seminary, this turn of
mind was of no help in preparing for the midterm.
Peter Robinson, Snapshots from Hell: The Making of an MBA