Thursday, October 20, 2005

Teaching The Theory of the Firm

Today was the day I dread every fall term. Am I the only micro teacher in the world who hates teaching our perfectly competitive model and monopolist model? Our job is to explain and predict human behavior. Do these models teach us anything about "real world" firms? These static models are boring and mechanical.

When I read the business section of the newspaper, I see little link between its coverage and these models. I appreciate that the perfectly competitive equilibrium's properties are useful for knowing how low prices could go but I have trouble staying awake for these chapters.

Fortunately, after presenting monopoly I can then discuss price discrimination and finally discuss firm strategy. These topics allow for some much needed realism relative to the two polar cases.

It amazes me how many generations of economics students have slept their way through the static monopoly and perfect competition models. Years ago I read Milgrom's and Roberts' textbook and I just thought that their approach was a much better way for teaching the economics of firms.

Perhaps the next generation of textbooks will have the guts to banish this boring material. I felt for my students today as they suffered through the important insight that the perfectly competitive firm produces where P=MC.


Anonymous said...

It's a common problem, I suppose. I am reminded of something Eugene Fama said: "Perfect capital markets are like a perfect vacuum - they don't exist on earth. The idea, however, is to look at situations in that perfect environment and then relax the constraints to see what happens." I believe as long as students see the static theory for what it is, they should be able to appreciate its usefulness in describing that "perfect" state and then move on to the dynamic aspect of empirical data. After all, you have to start somewhere.

John Whitehead said...

I stopped teaching these models as they appear in the textbooks last year. I talk through the entry/exit dynamics of competition and then say entry doesn't occur with monopoly so prices don't fall. Enough said? Then I go to imperfect competition and game theory.

Oh. And everyone in the room hates them, maybe one of these students will be an econ major, so I don't cover cost curves.

I know this is bad behavior but I can't help myself.

Anonymous said...

Although boring, they serve as a pretty good benchmark for the welfare losses from market failures later! This is how I justify spending two lectures on them. Max

Anonymous said...

So glad to find that I'm not the only one. Costs and cost curves, definitely the most boring to teach and listen to... students were actually falling asleep. Next time, I might just spend a day on them and go on to cost minimization, since it will be somewhat important in grad school.

boy labyog said...

What is the esscene of being a teacher if you don't like to teach? how ironic.

Laby[men overcoat]