This course aims to teach students how to apply principles from microeconomic theory to structure and address real-world problems. Students will get a solid understanding of the microeconomic models of consumer and firm decision-making behavior, why markets sometimes fail, and the use of interventions to achieve the best possible outcomes for society. However, rather than just teaching students the theoretical principles of microeconomics, we will also show how it is practiced by firms, ministries, and organizations and thereby demonstrate the direct relevance for the student’s professional life.
To achieve this goal, the course is organized around several distinct topics. For any given topic, we will cover the most important microeconomic theories to structure ideas into hypotheses and predictions about what we expect to happen under different conditions. Next, we want to think about ways to test the theory and discuss different empirical approaches that enable us to draw conclusions about causal relationships. Importantly, conclusions are drawn by bringing both elements together; We use real-world data to test theory and use theory to interpret real-world data. By highlighting the interconnection between theory and empirical evidence, students will appreciate the usefulness of economic theory, the importance of careful analytical thinking when conclusions are drawn, and that conclusions based on intuitions and preconceptions can be very misleading or sometimes right out wrong.
For example, consider the potential effects of a merger between two competitors. If the merging firms are close competitors, the merger will induce upward price pressure. On the other hand, if the merged firm is more efficient and marginal cost decreases, this will cause downward price pressure. Competition Authorities will not allow a merger if they expect it to lead to a price increase. How should they decide whether to allow a specific merger or not?
Examples of topics that are covered in the course (non-exhaustive list):
- Public policies to reduce poverty and inequality; In-kind versus cash transfers, Universal Basic Income, minimum wages, disability income.
- The microeconomics of price formation in the energy market; Technology, cost structure, and the supply curve.
- Optimal taxation, tax salience, and tax incidence.
- Behavioral economics; rationality and irrationality; Inattention and salience.
- Strategic behavior by firms in entry situations and the role of commitment.
- The use of pricing pressure indicators to provide proxies for the welfare effects of mergers.
- Good and bad sources of market concentration.