Thursday, January 21, 2010

Microeconomics - I kind of like it

The basic Microeconomics class, MECN-430, in the core curriculum at Kellogg is not the sexiest of classes; that much is apparent by the general lack of enthusiasm in class (to some extent on both sides of the lectern), but I kind of like it.  The concepts that we discuss are intuitive and easily applicable to scenarios that closely approximate the real world, versus say, using a geometric distribution to determine how many attempts it will take before your old 1972 AMC Gremlin finally turns on;  DECS-433....I'm looking at you buddy.

Although the things we discuss make sense, it is still nice to gain an understanding of the quants that keep the gears turning as you'd expect.  Here is a graph from the last HW assignment we had to turn in.

What you are looking at are the Min Average Total Cost (variable costs per unit + fixed costs per unit at that production level) and Min Full-redeployment Average Total Cost (Min ATC + annualized capital charge per unit at that production level) curves for an imaginary firm.

The key takeaway is that when looking at long term supply curves for an industry, a firm will only continue to operate if the market price of the good is expected to remain above the firm's Min ATC.  Furthermore, if the market price for a good exceeds the min FR-ATC, then firms with this cost structure will begin to enter the market, effectively capping the max price for the goods in the market.

If that last paragraph doesn't get your heart pumping, then I don't know what will!

BTW,  if you are looking for general "How Do I Get In" advice, then I suggest you drop by Jeremy's newly redesigned blog!  He has started posting his very thoughtful responses to emails that he gets from applicants.


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