CHAPTER 1Microeconomics, A Way of Thinking about Business In economics in particular, education seems to be largely a matter of unlearning and “disteaching” rather than constructive action. A once famous American humorist observed that “it’s not ignorance that does so much damage; it’s knowin’ so darn much that ain’t so.” . . .It seems that the hardest things to learn and to teach are things that everyone already knows. Frank H. Knight rank Knight was a wise professor. Through long years of teaching he realized that students, even those in advanced business programs, beginning a study of economics, no matter the level, face a difficult task. They must learn many things in a rigorous manner that, on reflection and with experience, amount to common sense. To do that, however, they must set aside – or “unlearn” -- many pre-conceived notions of the economy and of the course itself. The problem of “unlearning” can be especially acute for MBA students who are returning to a university after years of experience in industry. People in business rightfully focus their attention on the immediate demands of their jobs and evaluate their firms’ successes and failures with reference to production schedules and accounting statements, a perspective that stands in stark contrast to the perspective developed in an economics class. As all good teachers must do, we intend to challenge you in this course to rethink your views on the economy and the way firms operate. We will ask you to develop new methods of analysis, maintaining all the while that there is, indeed, an “economic way of thinking” that deserves mastering. We will also ask you to reconsider, in light of the new methods of thinking, old policy issues, both inside and outside the firm, about which you may have fixed views. These tasks will not always be easy for you, but we are convinced that the rewards from the study ahead are substantial. The greatest reward may be that this course of study will help you to better understand the way the business world works and how businesses might be made more efficient and profitable. Much of what this course is about is, oddly enough, crystallized in a story of what happened in a prisoner-of-war camp. The Emergence of a Market Economic systems spring from people’s drive to improve their welfare. R.A. Radford, an American soldier who was captured and imprisoned during the Second World War, left a vivid account of the primitive market for goods and services that grew up in his prisoner-of-war camp.1A market is the process by which buyers and sellers determine what they 1R.A. Radford, “The Economic Organization of a POW Camp,” Economica (November 1945), pp. 180-201. F
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