PGPX 2021-22

Term: I Core Area: ECONOMICS

Course Title: Firms and Markets (FAM) Sections: A and B

Prof Viswanath Pingali Course

Name of the Instructor: 0.75
viswanath@iima.ac.in Credit:

Course objective:
This microeconomics course aims to introduce basic economic concepts and tools of analysis
used in explaining consumers’ and producers’ behaviour. It aims to provide a broad perspective
on the business by considering a firm as both a producer and a consumer. In this context, the role
of government as a regulator or a facilitator would also be discussed. Several basic concepts like
demand, supply, trade-off, opportunity cost, cost of production, types of competition or market
structure, market failure, externality, information asymmetry, etc. will be discussed in detail.
Specific tools of analysis used widely for understanding, explaining, forecasting or predicting the
economic agents’ behaviour will be illustrated with practical applications. The basic purpose of
the course is to gain insights and develop intuition on the business aspects by achieving clarity in
concepts and methods rather than proficiency in mathematical derivations of results. The course
would encourage the economics way of looking at things around.

Pre-requisites:
As far as possible, the course would use simple two dimensional diagrams and avoid
mathematics beyond high school level. The most important pre-requisite is an open mind and
willingness to learn.

Textbook:
Pindyck, R., Rubinfeld, D. (2017), Microeconomics, 8th Edition, New Delhi: Pearson Education
Harford, T. (2006). The Undercover Economist, Hachette UK, Abacus.
Mankiw, N. G. (2007). Principles of microeconomics, 7th Edition Mason
There would be a few additional readings circulated as and when required.
 Schedule with Readings

Session 1: Introduction
 Idea of demand and supply
 Market equilibrium
 Shifts in demand and supply
Readings: PR (pp. 45 – 56) + Paragraphs 70 to 77 of a court case on Gold Price Fixing
Additional readings: Mankiw (pp. 65-84)
Session 2: Antecedents to demand curve
 How does demand curve get estimated?
 The concept of elasticity of demand
 Inferior goods
 Externalities to demand curve: Bandwagon effect and Snob effect

Readings: PR (pp. 159-166, 57-69, 130-140 + Estimating demand for natural gas
Additional readings: Mankiw (pp. 89-107, 195-211)
Session 3: Elasticity continued + Firm behaviour
 Factors influencing elasticity of demand
 Average and marginal product
 Average cost, average variable cost and marginal cost
Readings: PR (pp.57-60, 220-223, 250-251)
Additional readings: Mankiw (pp. 89-107, 260 – 271)
Session 4: Firm Behaviour
 Short run vs long run costs
 Sunk cost, opportunity cost
 Returns to scale, economies of scale and scope
 Pricing below average variable cost

Readings: PR (pp. 244-279, 237)

Additional readings: Mankiw (pp. 271-274,286)
Session 5: Competitive market structure
 Firm equilibrium
 Producers’ and consumers’ surplus
Readings: PR (pp. 287-308, 156-158)
Additional readings: Mankiw (pp. 135-144, 279- 295)
Session 6: Welfare measures
 Idea of price ceiling and price floors
 Fixing of quotas
 A primer on international trade and globalization
 Is government intervention good or bad?

Readings: PR (pp. 327-359)

Additional readings: Mankiw (pp.112-128, 171-188)
Session 7: Pricing under Monopoly
 Concept of marginal revenue
 Marginal revenue vs marginal cost
 Welfare loss with monopoly
Readings: PR (pp. 365-390)
Additional readings: Mankiw (pp. 299-313)
Sessions 8 and 9: Price discrimination in monopoly markets
 First, second and third degree price discrimination
 Two part tariffs
 Peak-load pricing

Readings: PR (pp. pp.409-425(selected))

Additional readings: Mankiw (pp. 314-322)
Session 10: Basics of digital markets
 Arguments of tying and bundling; why is bundling useful?
 Modern issues with bundling
 Regulatory issues in digital markets
Readings: PR (pp.427- 439) + Two sided markets paper by Vishy Pingali
Additional readings: To be circulated
Session 11: Oligopoly markets
 Price competition in oligopoly
 Prisoners’ dilemma
 Collusion in oligopoly

Readings: Pricing Competition: Sony PlayStation vs. Microsoft Xbox (case)

Question to analyse: What price should PlayStation and Xbox chare? Please calculate profits of
PlayStation and Xbox under various prices that can be charged based on Exhibits 1, 2 and 3
Additional Reading: Mankiw (pp. 347-366) + PR (pp. 452-479)
Session 12: Oligopoly – Predatory pricing
 Idea of charging less than average variable cost
 When is it successful and when is it not?
 Legal ramifications of predatory pricing

Readings: Lesser Antilles Lines: The Case of San Huberto (A) (case)
Question: Develop a one-page executive summary of the report Mr Vaughan will be submitting
to the headquarters
Additional readings: PR (pp.397- 400)
Session 13: Idea of externalities
 Positive externalities
 Negative externalities
 How do you correct them? The Coase theorem
 Can we connect it to the carbon permits market?
Readings: PR (pp. 657- 690)
Additional readings: Mankiw (pp. 195-211)
Session 14: Adverse selection – the problem of lemons
 The idea of adverse selection
 What are lemons?
 Interdisciplinary perspective to management?

Readings: PR(pp. 627- 650)

Additional Reading: Mankiw (pp. 462-466)
Session 15: Review
 Sink for any spill overs

Evaluation Pattern:
Quizzes – 20%; Midterm Exam – 30%; Endterm Exam – 40%; Class participation – 10%