102 · Microeconomics for Business

Relationships, Pricing, Markets, and Information

Course Overview

EC102 is intermediate microeconomics for business. It teaches the core tools of microeconomics, from strategy and pricing through competitive markets to risk and information, with an emphasis on why real firms, markets, and contracts look the way they do. No calculus is required.

We follow this textbook: David M. Kreps, Microeconomics for Managers, 2nd edition (Princeton University Press, 2019). Each class page names the chapter to read. The textbook isn’t required, but it will certainly help you if you’re confused about any topic. It’s also written for MBA students, so we’ll skip some of the more complicated sections.

This workbook is your home base. Each class page has three parts: key ideas, problems of the day, and multiple choice check-your-understanding questions the unit tests are built from. Class notes are published here after each class, and lab pages at the end of each week. The Syllabus has the full schedule, grading, and policies.

Why this course

By the end of this course you will be able to look at a price, a contract, a market, or a rivalry and explain why it is the way it is. Microeconomics is not a set of facts about the economy; it is a way of thinking that lets you take a messy situation apart, see what matters, and put it back together with an answer.

Here are some things you cannot explain now and will be able to explain in ten weeks. In 1991 it was cheaper to fly first class from San Francisco to Tokyo to London and back than to fly business class from San Francisco to Tokyo and back. General Motors once settled a lawsuit by issuing 4.7 million coupons worth $500 to $1,000 each and called it a $2 billion settlement; the judge called it a $200 million settlement and threw it out, and the judge was right. Japan’s restrictions on rice imports probably raised the profits of Thai rice farmers. Xerox, holding the patents on plain-paper copying, chose to lease its machines to law firms rather than sell them. Two firms in an industry can charge high prices for decades without ever meeting to fix them, and a third firm entering can make that stop. Each of these is a puzzle now. Each will be obvious later.

How we will work

I teach by asking questions rather than by presenting slides, because an idea you have worked out for yourself is understood far more deeply than one you have merely been told. In class I pose a problem, everyone works on it, and we build the idea together from what you found. In lab your group works a harder problem at a whiteboard while the instructor circulates without giving answers. For that to work you have to be in the room: come to class and come to lab. Students who skip them do not succeed in this course.

Kreps likens learning economics to learning tennis: you hit fifty backhands in a row before you play a match. Lectures teach the strokes with stripped-down models. Labs are where you play. You will run cartels that collapse, price goods in spreadsheets, trade in a market that finds its equilibrium in front of you, and sell used cars to people who suspect they are lemons.

Course goals

By the end of the course you will be able to do the four things below. Each has a basic, intermediate, and advanced level, and every class and lab is designed to move you to a particular level of one or more of them. Hover over a class or lab in the map to see what you will do there.

Course goalsEach goal has three levels; the map below shows which level each class and lab targets

1.Model purposeful behavior

Write down what an actor wants, what constrains them, and what they will therefore do, in a model simple enough to solve.

BasicName the actors, what each one chooses, and what each gets from every outcome

IntermediateWrite the situation as a game table, a tree, or a revenue and cost table, and read off the best choice

AdvancedBuild a model from a bare description, deciding what to leave out, and use it to design a price schedule, a contract, or a reputation

2.Find the equilibrium

Locate the point where everyone is doing the best they can given what everyone else is doing.

BasicFind best responses and Nash equilibria in a one shot game, or the price where supply meets demand

IntermediateSolve for equilibria that unfold over time: backward induction, repeated play, and entry and exit

AdvancedFind equilibria in which people sort themselves or respond to incentives: price menus, markets with hidden information, and incentive contracts

3.Evaluate the outcome

Ask whether an outcome is efficient, who gains and who loses, and what a change in the rules would do.

BasicSay whether an outcome leaves gains from trade on the table, and who comes out ahead

IntermediateMeasure consumer surplus, producer surplus, and deadweight loss

AdvancedCompare rules or policies (a tax, a ceiling, a quota, a toll) by who gains, who loses, and how much surplus is lost

4.Reason from cases to principles and back

Walk into an unfamiliar industry and ask the right first questions.

BasicRecognize which principle a real case illustrates

IntermediateUse a principle to explain a real puzzle, or to find the flaw in a plausible business argument

AdvancedTake an unfamiliar industry, choose the tools that apply, and combine them into an explanation

BBasicIIntermediateAAdvancedLab rows are shown in grey.

1 Model purposeful behavior  ·  2 Find the equilibrium  ·  3 Evaluate the outcome  ·  4 Reason from cases to principles and back

Class or lab	1	2	3	4
Class 1: The Economics of Relationships You rank industries from tobacco to airlines by two decades of profits and ask why the ordering never moves, then decide what you would need to know before opening a third coffee shop between two profitable ones. Porter's forces become a checklist for why cases turn out as they do (Goal 4, basic), and you start naming who the players are and what each one wants (Goal 1, basic).	B			B
Lab 1: Playing Games Four games described out loud: guess two thirds of the average, cooperate or fink, take it or leave it, and a bet on five or three that everyone in the room must win together. For each you say what a points-only player does and what the room will actually do (Goal 1, basic), and you find your first equilibria by reasoning about what everyone else will do (Goal 2, basic).	B	B
Class 2: Game Theory I: Simultaneous Moves Sam and Jan pick a place to spend Tuesday evening without consulting each other, Alice and Bob test how many steps of reasoning you can count on, Carla and Dev face the prisoner's dilemma, and four coordination games ask which equilibrium is obvious to whom. You find dominant strategies and Nash equilibria with best responses (Goal 2, basic) and notice when everyone doing their best leaves everyone worse off (Goal 3, basic).		B	B
Class 3: Game Theory II: Sequential Moves and Commitment Jan texts Sam "I'm at X and I'm not moving," two firms decide whether to enter a market before Nature reveals their costs, and two bakeries choose how much bread to bake. You draw games as trees, with Nature as a player (Goal 1, intermediate), and solve them by backward induction (Goal 2, intermediate).	I	I
Lab 2: Cartels in the Lab You play cooperate or fink five times with a known end, then with a die deciding when it stops, then as one of four sellers choosing high or low prices. You reason back from the last round and price out "cooperate until betrayed" (Goal 2, intermediate), and your group builds a list of when rivals can keep prices high with no contract (Goal 4, basic).		I		B
Class 4: Reciprocity and Collusion You run Allis-Chalmers on day 25 of the lunar month, when an illegal bid rotation says to bid high on a contract you badly need; you compute how much future is enough to hold a cartel together; and you explain to a legislator why real estate commissions have sat at six percent for decades. You find the cooperative equilibria of repeated games (Goal 2, intermediate) and use the conditions for tacit collusion to explain a real industry (Goal 4, intermediate).		I		I
Class 5: Credibility and Reputation An incumbent growls at an entrant, then buys an expensive technology that ties her own hands; a string of challengers asks whether anyone has ever seen her fight; and an accounting firm hires you to design a reputation that survives honest mistakes. You test threats for credibility and find the equilibrium a reputation sustains (Goal 2, intermediate), then build a model of reputation from a bare description (Goal 1, advanced).	A	I
Lab 3: Contracts, Courts, and Reputation Yaki Industries can license an unpatentable technology to Zenith, which promises not to use it to invade Yaki's market. You add a courtroom to the game tree, with court costs and damages (Goal 1, intermediate), and solve it backward to find when the promise is worth believing (Goal 2, intermediate).	I	I
Class 6: The Pricing Problem: MR = MC Chicolini Steel refuses to export because the world price is below its average cost, a bakery sets its price one block of loaves at a time, and three smart businesspeople make three arguments that are wrong for the same reason. You set up the firm's pricing problem in a revenue and cost table (Goal 1, intermediate) and learn to find the flaw in arguments built on averages and allocated costs (Goal 4, intermediate).	I			I
Class 7: Markup Pricing and Elasticity You compute elasticity at three points on one demand line, read elasticities off the margins of a supermarket, a fashion retailer, and a patented drug, and price an amusement park for tourists and locals. You turn MR = MC into a markup rule (Goal 1, intermediate) and use it to explain the prices real firms charge (Goal 4, intermediate).	I			I
Lab 4: Pricing in a Spreadsheet Brightside Coffee sells a subscription box at the same price everywhere and has sales data from twelve test cities. Starting from nothing but the numbers on the board, your group estimates demand, builds the profit model in a spreadsheet, and chooses a price (Goal 1, advanced).	A
Class 8: Price Discrimination I You find the best two price scheme for the Malvino bakery, decide how much to charge seniors, work out who should get coupons, and untangle two airline fare puzzles. You model a firm selling to separate groups (Goal 1, intermediate) and use the model to explain pricing that looks irrational from the outside (Goal 4, intermediate).	I			I
Class 9: Price Discrimination II Three consumers face an entry fee plus a price per unit, you count squares on a grid of Disneyland visitors to price a two day pass, and a publisher decides whether to make its softcover worse on purpose. You design two part tariffs, bundles, and versions (Goal 1, intermediate) and find the menus under which each type of buyer chooses the option meant for them (Goal 2, advanced).	I	A
Lab 5: Designing a Price Schedule Summit Climbing tries a monthly fee plus a price per visit for its Regulars and Casuals, and Ledger builds a Pro and Basic menu for firms and freelancers. In spreadsheets, your group builds each pricing model from scratch (Goal 1, advanced) and searches for the schedule under which customers sort themselves the way the firm wants (Goal 2, advanced).	A	A
Class 10: Channels of Distribution and Double Marginalization A car manufacturer sells through a retailer who adds a markup of his own, then offers him a deal with a fee up front; later she sells through dealers in three cities, and a law changes what she may do. You solve for the equilibrium when two firms each set a markup in turn (Goal 2, intermediate) and measure what the second markup costs both firms and their customers (Goal 3, intermediate).		I	I
Class 11: Supply, Demand, and the Consumer You find where supply equals demand with and without a tax, rebuild a consumer's choice of bread and cheese from a table of incremental values, and value GM's 4.7 million truck coupons the way the judge did. You locate a competitive equilibrium (Goal 2, basic), see who bears a tax (Goal 3, basic), and use the model to settle a real dispute over a claimed two billion dollars (Goal 4, intermediate).		B	B	I
Lab 6: A Market in the Room Everyone gets a card with a private value or cost and trades by calling out bids and asks, first in one market, then on two separate beaches, then with phones that let sellers move. You watch the price find the equilibrium that supply and demand predict (Goal 2, basic) and count how much of the gains from trade the room captured (Goal 3, basic).		B	B
Class 12: Technology and Cost A bread kiosk turns its production table into a cost curve, two widget makers find the cheapest way to make a hundred, and the owner of Riverside Creamery, stuck with a freezer no one else wants and eight months left on the lease, decides whether to keep scooping. You build cost functions from technology and input prices (Goal 1, intermediate) and recognize which costs are sunk, fixed, or avoidable in a real decision (Goal 4, basic).	I			B
Class 13: Competitive Firms in Competitive Markets One firm, then fifty identical ones; an industry with an unlimited queue of entrants, followed through the short, intermediate, and long run; and four firms whose superior technology earns them rents. You find competitive equilibria with entry and exit (Goal 2, intermediate) and see who keeps the profits that entry cannot compete away (Goal 3, basic).		I	B
Lab 7: Cost Curves and the Long Run Bright Creek brewery faces a wage, an ingredient cost, and a fixed cost it avoids in any week it does not brew, and identical breweries can enter. In a spreadsheet you build its cost curves and supply (Goal 1, intermediate), then find the long run number of breweries and tell the three run story of a cost shock (Goal 2, intermediate).	I	I
Class 14: The Invisible Hand You measure consumer and producer surplus as two triangles and find the third that appears when output is wrong, trace where the money goes among twenty five competitive firms, and advise the Commissar for Shoes, who has set the price at a fifth of what would clear the market. Surplus and deadweight loss become the way you measure an outcome (Goal 3, intermediate).			I
Class 15: Taxes, Subsidies, Administered Prices, and Quotas A tax on sellers computed two ways, a price ceiling on short term rentals, and Freedonia's sorghum growers under a ban on imports and then under free trade. You find the new equilibrium under each intervention (Goal 2, intermediate) and compare the policies by who gains, who loses, and how much surplus disappears (Goal 3, advanced).		I	A
Lab 8: Policy in the Market The Lab 6 market returns with a tax on sellers, a price ceiling, and a quota whose permits can be sold. You watch each intervention move the room's equilibrium (Goal 2, intermediate) and keep the books on buyer surplus, seller surplus, government revenue, and loss for every round, so the policies can be compared side by side (Goal 3, advanced).		I	A
Class 16: Externalities and Public Goods Four hundred thousand commuters choose between a bridge and a tunnel, fishermen crowd Lake Bella, and three divisions of one firm share a server room. You find the equilibrium that each self interested choice produces (Goal 2, intermediate), compare it with what a planner would choose, and ask what rule would close the gap (Goal 3, advanced).		I	A
Class 17: Risk and Expected Utility Twins with identical tastes but different bank balances face the same gamble, Marisol decides whether to insure her house, and Priya's uncle weighs drilling for oil alone against selling shares to a syndicate. You model choices under risk with expected utility (Goal 1, intermediate) and measure the gains from insurance and from sharing risk (Goal 3, intermediate).	I		I
Class 18: Hidden Information: Adverse Selection, Signaling, and Screening Akerlof's used car lot, Beantown Casualty selling insurance against not landing a summer job, and a degree that teaches nothing an employer can use but pays anyway. You find equilibria in markets where one side knows more, through unraveling, signaling, and screening (Goal 2, advanced), and measure the gains from trade that hidden information destroys (Goal 3, intermediate).		A	I
Lab 9: Lemons and Warranties Twelve used cars, twelve buyers, and owners who know which cars are lemons. You watch the market unravel as the price falls to the worth of the cars actually offered, find the smallest warranty that lets a good car's owner prove it (Goal 2, advanced), and count the gains from trade lost and recovered (Goal 3, intermediate).		A	I
Class 19: Hidden Action: Moral Hazard and Incentives Beantown Casualty returns, now worried that insured students stop trying; a venture fund decides how much of Nadia's startup to leave her; and Safelite switches its windshield technicians to a piece rate. You design contracts from a description of effort and risk (Goal 1, advanced), find the terms under which people choose to work hard (Goal 2, advanced), and explain what happened at Safelite (Goal 4, intermediate).	A	A		I
Class 20: Synthesis: The Puzzles, Solved The Class 1 puzzles come back: tobacco's profits and the airlines' losses, the third coffee shop, and Toyota's small circle of powerful suppliers, which Porter's checklist says should have failed. For each one you choose the tools from the whole course that apply and combine them into an explanation (Goal 4, advanced).				A