Introduction

Usually this course would be a first year introduction to economic theory of the consumer, firm and market.  It would be intended to screen and enlist students for further studies at the undergraduate and graduate level.  This class, however, is a graduate Master of Business Administration or MBA course.  As such the course will provide not only an introduction to economic theory but also to its practice. 

In effect, the standard model of market economics will serve as the sub-structure of the course.  Beginning in the 1870s with the so-called 'Marginalist Revolution', Jeremy Bentham's (1748—1832) felicitous calculus or the calculus of human happiness was married to Newton's calculus of motion.  As will be seen through the constrained maximization of a consumer's happiness we derive the demand curve; through constrained maximization of output by firms we derive the supply curve; and, combining the two we find market equilibrium where the willingness to buy equals the willingness to sell and the market clears.   This model provides mathematically and geometrically precise determination of the profit maximizing price and output for firms under perfectly competition, monopoly and monopolistic competition.  It breaks down with oligopoly, the dominant form of market competition today.

This course will be an Introduction to Industrial Organization or IO.  IO is usually taught in 3rd year undergraduate and 5th year graduate level.  IO will serve as the super-structure of the course.  IO is Classification L in the Journal of Economic Literature (JEL) System identifying economic articles, books and research studies (Exhibit 1).  One can, among other things, use JEL classifications to narrow literature searches, e.g., L71 - Mining, Extraction, and Refining: Hydrocarbon Fuels / L24 - Contracting Out; Joint Ventures; Technology Licensing.  Many more ‘narrow’ studies are published, around the world every year.   In effect, the object of study in the standard model is the individual consumer and producer.  In IO the object is an industry as a whole.

The IO Framework

In this course we will use a simplified IO framework (Exhibit 2) to integrate basic economic theory of the ‘atomized’ consumer, firm and market with textbook IO issues complimented by two case studies conducted on the Arts Industry and the Biotech Industry.  The big difference between Microeconomics and Industrial Organization is its focus on an industry as a whole rather than the individual consumer and producer.

Industrial Organization or IO was the brain-child of Joe Bain.  His seminal work - Industrial Organization - was first published in 1959.  During the Second World War Bain taught at Berkley and after the war some of his students rose to become senior executives in Detroit.  They invited Bain to visit and see how the real world of industry worked.  Bain thus became one of the first academic economists since Charles Babbage (inventor of the computer) in the 1830s to come down from the ivory tower and see how the real work of industry is conducted.  The result was IO which arguably middles between microeconomics (theory of the consumer, firm and market) and macroeconomics (theory of the national economy).  In this sense it constitutes ‘meso-economics’.  

The IO framework takes the industry as the basic unit of analysis rather than consumer, firm, market or Nation-State.  While intuitive it is but a taxonomy or classification system with limited predictive power.  The IO schema (Exhibit 2) consists of four parts.  First, Basic Conditions of Demand and Supply underlay every industry.  Second, an industry has a Structure or organizational character.  Primary elements include barriers to entry, number and size distribution of firms and product differentiation.  Third, firms in a given industry follow typical patterns of Conduct in adapting and adjusting to an ever changing and evolving marketplace.  Key variables include advertising, capacity utilization, legal tactics, product and process innovation, quality and pricing.  Fourth, an industry achieves varying levels of Performance with respect to allocative efficiency & profitability, competitiveness/fitness/sustainability, conservation, innovativeness and various socio-economic-political objectives.

Four elemental economic terms will be used.  First, buyers and sellers exchange of goods and services in markets - geographic and/or commodity-based.  Second, an enterprise is any entity engaging in productive activity - with or without the hope of making a profit.  This thus includes profit, nonprofit and public enterprise as well as self-employed individuals.  All enterprises have scarce resources and are accountable to shareholders and/or the public and the courts.  An enterprise is defined in terms of total assets and operations controlled by a single management empowered by a common ownership.  Third, an industry is a group of sellers of close-substitutes to a common group of buyers, e.g. the automobile industry.  Fourth, a sector is a group of related industries, e.g. the automobile, airline and railway industries form part of the transportation sector.  Often, as herein, 'sector' and 'industry' are used interchangeably, for example - the transportation industry or sector.

An Aside on Deductive Logic

Economics is a Deductive Science satisfying criteria laid down by the 17th century French philosopher and co-founder of the Scientific Revolution, Rene Descartes.  It is from Descartes that we get mind/body dualism expressed, today in computing sciences, as ‘the ghost in the machine’.  He also gave us analytic geometry, i.e., location in Space defined by co-ordinate axes.  For Descartes Science begins with the fewest assumptions from which one deduces outcomes subject to mathematical and geometric proof.

Of Descartes’ Spaces, the German philosopher Martin Heidegger argues the essence of the contemporary world is objectivity resulting from the triumph of ‘representation’ in the Arts since the Renaissance in the 15th and in the Sciences since Descartes in the 17th century.  In effect, our ability to model or imitate Nature, especially using mathematics or in Renaissance visual art, the geometry of perspective, brings certainty of knowledge.  Through representation or models everything in and of the world is brought before us as Object.  The result is “The Age of the World Picture” (Heidegger 1938). 

Deductive science is guided by ‘Occam’s Razor’: fewest assumptions for maximum explanation.  Occam was a 13th/14th century English monk.  It is also known as 'the principle of parsimony'.  His ‘Razor’ is used throughout the Natural and Artificial Sciences.  The world is a complex place. One reduces its complexity by focusing on primary factors holding all others constant or simply ignoring them.  There are benefits and costs to such an approach to modelling.

Take the case of Demand in the standard model of market economics.  We will assume consumers are rational and strive to maximize their happiness.  Happiness is measured in units of pleasure/pain call utiles.  This involves the ‘quantification of the qualitative’ using ordinal, not cardinal, measurement.  To gain happiness people consume a mix of goods and services constrained by their income and commodity prices.  We assume this is the only source of happiness.  To maximize happiness subject to the budget or income constraint in Demand is paralleled in Supply.  Here the firm wants to maximize its output subject to a cost constraint and the prices of inputs or factors of production.  All of this occurs in changing Descartian Spaces in which geometric and mathematical proof can determine the maximization of profit for the firm under perfect and monopolistic competition as well as monopoly but not with respect to oligopoly.

In effect this course takes the full theoretical package I call the Standard Model of Market Economics, the last ideology standing, and re-frames it within the IO framework.  It is hoped that this perspective or paradigm will provide MBA students with a broader and richer appreciation of Economics and in their subsequent careers be better able to ask informed questions of economists and assess the merits of their answers with respect to what assumptions have been made, what factors are considered constant in the analysis and, of course, what happens if any of these factors change.

Dr. Harry Hillman Chartrand, PhD

Assistant Professor, Economics,

University of New Brunswick, Saint John

Publisher

Compiler Press: Intellectual & Cultural Property in the Global Village