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Teaching notes for chapter 2

This chapter is addressed to readers who have not previously studied microeconomics (or have done it so long ago that they need a refresher). When teaching economics majors, who will normally have taken at least one economics class before taking IO, this chapter may be skipped without much loss.

Short as it is, this chapter encapsulates some of the most important concepts in microeconomics. The concepts of consumer surplus, producer surplus, and allocative efficiency play a central role in any discussion regarding public policy. For this reason, in courses that emphasize the public policy side of IO, it is well worth it to spend some extra time making sure students understand these concepts. It is also important to emphasize that allocative efficiency is only part of the story. Historically, economists have placed a little too much weight on static allocative efficiency, leaving productive efficiency and dynamic efficiency to a secondary level

In courses that emphasize the strategy aspect of IO (e.g., MBA courses), special emphasis should be put on the concept of economic cost and its applications for decision making. Rational decisions should take into account opportunity costs, even if these do not correspond to actual expenditures; and should exclude sunk costs, even if these correspond to actual expenditures. Although, in most of the book, this does not appear explicitly, the concept of economic cost is implicit in just about every economic decision.

In courses that include both the managerial and the strategy aspects of microeconomics (e.g., the MBA micro course at LBS and Berkeley), it might be worth to include additional materials to discuss the concept of economic costs: these ideas are much too important to be limited to a short chapter as this.

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