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.