I start with the "monopoly model" of a firm with downward sloping demand, choosing price such that MC=MR, and treating "price taking" as a special case. Then I do "competitive markets," teaching both perfect competition and monopolitic competition, with free entry driving profits to zero as the driving feature of both. Then later I talk about barriers to entry and deadweight loss. (This isn't 101 though, it's a second class more like intermediate micro.)
My main issue with that is that the "supply curve" isn't even really defined except for price taking firms, which is not a good model for most markets. (Of course there is still a "supply side" that matters very much.)
We can say the same thing about the demand curve. People think it requires price taking. Where we disagree is that I think it’s a great model for most markets. It’s not perfect but it gets you a long way.
Agree with your comments. The biases remain. In the approach of the discipline and it is maintained from years to years, from one generation to another...
A old history..
Then, it is difficult correct the biased view in Economics and this involve even the choices respect to the public policies, which is the typical conflict zone, from different person.
Our science. Although lost during the decades the adjective politics, remain a influenced from the political vision.
Just so you know, I started econ this year (in Spain) and the teacher actually used that last framing you mentioned (price-setters vs. price-takers) to explain the difference between competitive and monopoly markets. I guess I was lucky.
This took me back decades to my first economics classes. I'm saddened but not really surprised that they are still teaching these outdated models. Even in 1981, I knew that perfect competition, static models, and SCP were worse than unhelpful. But that's because before my first economics class I had been reading Armen Alchian, Israel Kurzner, and others. Thanks for an excellent post on the topic.
When you write your first best-selling book for the general public, I suggest it be about the conceptual and empirical fallacies behind the antitrust lawyers' arguments for delegating massive discretionary powers to attorney-dominated government bureaucracies to define and enforce "fair competition."
I'm reminded of the Mark Blaug quote which went something like: "the purpose of studying perfect competition is to generate an endless series of exam questions."
That is a relevant issue. Everything needs to be transferable to an exam for 600 person classes (as I've taught before). Simple comparisons of monopoly vs. competition make easy multiple choice questions.
I've wondered before whether the necessary "sorting/screening" function of modern education gets in the way of imparting knowledge and understanding.
I've run into this with language learning too. Some people believe the "comprehensible input" method is the best way to learn a language (producing output is de-emphasized in the beginning). This may or may not be the best way but the problem is you *can't* implement it in a school, because you can't grade it, and the grade is the point, not the learning.
Would everything be solved if we reframed our structural assumption as behavioral ones? Rather than say, "there are many buyers and sellers," we should say, "firms/consumers behave as price takers." And replace, "there is a monopolist" with "firms affect prices."
I like that but I don't love that as the full solution. For one, it takes the behavior as an assumption and it seems like part of the role is to explain behavior, not assume it. But that's less important than explaining prices, so I'm open to the suggestion as a simple fix.
Actually, I am a new assistant professor in Brazil, having finished my PhD one year ago.
I am about to teach a module on IO for undergrads (which have gone through three modules on microeconomics covering basicly everything on traditional textbooks, from consumer choice to market failures, going thorugh firm, partical equilibrium, general equilibrium, etc)
Mos of my colleagues are seniors which are used to older IO textbooks (Tirole, Carlton & Perloff, Scherer & Ross, etc) but I wanted to undertake a fresh approach on IO, any reccomendations?
Thank you. Well written. Is Joan Robinson really fully part of the SCP school? The introduction to her “Economics of Imperfect Competition” and chapter 27, are very strongly at odds to the classic binary analysis of monopoly and perfect competition. “We only have to take the word monopoly in its literal sense, a single seller, and the analysis of monopoly immediately swallows up the analysis of competition.”
Which paper would you recommend, as an Demsetz' approach introduction. Like a standard Econ 101 text but using the Demsetz model? Only simple equations and nice diagrams.
I start with the "monopoly model" of a firm with downward sloping demand, choosing price such that MC=MR, and treating "price taking" as a special case. Then I do "competitive markets," teaching both perfect competition and monopolitic competition, with free entry driving profits to zero as the driving feature of both. Then later I talk about barriers to entry and deadweight loss. (This isn't 101 though, it's a second class more like intermediate micro.)
My only hesitation with that approach is that supply and demand isn’t first.
My main issue with that is that the "supply curve" isn't even really defined except for price taking firms, which is not a good model for most markets. (Of course there is still a "supply side" that matters very much.)
We can say the same thing about the demand curve. People think it requires price taking. Where we disagree is that I think it’s a great model for most markets. It’s not perfect but it gets you a long way.
Agree with your comments. The biases remain. In the approach of the discipline and it is maintained from years to years, from one generation to another...
A old history..
Then, it is difficult correct the biased view in Economics and this involve even the choices respect to the public policies, which is the typical conflict zone, from different person.
Our science. Although lost during the decades the adjective politics, remain a influenced from the political vision.
Great post!
Just so you know, I started econ this year (in Spain) and the teacher actually used that last framing you mentioned (price-setters vs. price-takers) to explain the difference between competitive and monopoly markets. I guess I was lucky.
Thanks :) That’s great to hear! I know it happens and it’s in some textbooks but not in the big ones in the US at least.
Where are you studying? I did a masters at UPF and UAB in Barcelona
I didn’t know that! I’m actually at UPF. I’m pretty satisfied with it.
Did you like it?
I loved it! Hard to be Barcelona in your early 20s
This took me back decades to my first economics classes. I'm saddened but not really surprised that they are still teaching these outdated models. Even in 1981, I knew that perfect competition, static models, and SCP were worse than unhelpful. But that's because before my first economics class I had been reading Armen Alchian, Israel Kurzner, and others. Thanks for an excellent post on the topic.
You had the advantage. I had the advantage. Not many people are so lucky :)
When you write your first best-selling book for the general public, I suggest it be about the conceptual and empirical fallacies behind the antitrust lawyers' arguments for delegating massive discretionary powers to attorney-dominated government bureaucracies to define and enforce "fair competition."
I appreciate the support. Not sure it will be a best-seller but I like the idea :)
I'm reminded of the Mark Blaug quote which went something like: "the purpose of studying perfect competition is to generate an endless series of exam questions."
That is a relevant issue. Everything needs to be transferable to an exam for 600 person classes (as I've taught before). Simple comparisons of monopoly vs. competition make easy multiple choice questions.
I've wondered before whether the necessary "sorting/screening" function of modern education gets in the way of imparting knowledge and understanding.
I've run into this with language learning too. Some people believe the "comprehensible input" method is the best way to learn a language (producing output is de-emphasized in the beginning). This may or may not be the best way but the problem is you *can't* implement it in a school, because you can't grade it, and the grade is the point, not the learning.
Would everything be solved if we reframed our structural assumption as behavioral ones? Rather than say, "there are many buyers and sellers," we should say, "firms/consumers behave as price takers." And replace, "there is a monopolist" with "firms affect prices."
I like that but I don't love that as the full solution. For one, it takes the behavior as an assumption and it seems like part of the role is to explain behavior, not assume it. But that's less important than explaining prices, so I'm open to the suggestion as a simple fix.
That is an excelent text, congrats on that.
Actually, I am a new assistant professor in Brazil, having finished my PhD one year ago.
I am about to teach a module on IO for undergrads (which have gone through three modules on microeconomics covering basicly everything on traditional textbooks, from consumer choice to market failures, going thorugh firm, partical equilibrium, general equilibrium, etc)
Mos of my colleagues are seniors which are used to older IO textbooks (Tirole, Carlton & Perloff, Scherer & Ross, etc) but I wanted to undertake a fresh approach on IO, any reccomendations?
Once again, great text!
Marcos Lyra
Thank you. Well written. Is Joan Robinson really fully part of the SCP school? The introduction to her “Economics of Imperfect Competition” and chapter 27, are very strongly at odds to the classic binary analysis of monopoly and perfect competition. “We only have to take the word monopoly in its literal sense, a single seller, and the analysis of monopoly immediately swallows up the analysis of competition.”
I don’t think she really is, which is why I phrased as I did.
But SCP doesn’t require you to use the competition/monopoly distinction. As I try to explain, that’s only one manifestation of SCP
Which paper would you recommend, as an Demsetz' approach introduction. Like a standard Econ 101 text but using the Demsetz model? Only simple equations and nice diagrams.
It's a great question. Unfortunately, I can't think of any.
That's why its not taught in econ 101 then :D