Yale Curriculum: Economic Thinking

Professors Keith Chen and Sharon Oster teach Basics of Economics, part of the Orientation to Management segment that begins the first-year Yale Management integrated curriculum. As the class wrapped up earlier this month, Chen talked about how he and Oster introduce MBA students to economics in six weeks.

Keith Chen
Assistant Professor of Economics

Basics of Economics is an introduction to economic tools, but in some sense, it’s also an introduction to economic thinking.

We go from classic economic theory — Marshall and Adam Smith — all the way to the beginnings of behavioral economics. The first topic is basic supply and demand — the theory of competitive markets and, broadly speaking, how those markets allocate resources across an economy. We introduce people to the most basic of economic ideas, which is that people respond to incentives. We talk about how consumers respond to prices and how firms respond to prices. But then we start to move beyond that to talk about more complicated ways in which consumers respond to incentives. We do a little bit on the economic theories of advertising, the economics inside the family. We talk a little bit about the economics inside the firm.

We introduce the core rational theory of consumer behavior: consumers are perfectly informed; they look out at the world and they decide what bundle of goods they should buy that, given their budget, maximizes their happiness. I’m a behavioral economist, so I study a lot of what we think of as deviations from perfectly rational consumer and firm behavior. But we start by focusing on rational economic theory, and on some level just how beautiful a theory it is. You have to get religion before you can lose it.

One of the most fun classes is when we talk about three different ways that a world with only rational consumers can accommodate the facts we see on the ground in terms of advertising. You don’t need to believe that people are sheep who are just mindlessly swayed by pictures of girls and beer to understand what’s going on. The students really get into it.

Typically about a quarter of the class is lecture, where we go through a basic numeric example or a basic principle. Then the last three-quarters of the class is Socratic — we learn a principle and then we stretch it. We talk through myriad examples. We talk through interesting things that happened in the Wall Street Journal that week. This year we talked about the labor negotiations between GM and the UAW, and how the principles of competitive markets are breaking down. GM has a large amount of market power and the UAW is forming a large amount market power, so how do these two entities interact with each other?

Because this is an introduction to economics for MBAs, Sharon talks about industrial organizations. She talks about the economics of competition between firms. She talks about how firms compete for customers, how firms compete on both price and quality. She talks about how firms have market power and what kind of strategies they pursue. Price discrimination, for example: why do airlines charge different prices if you stay over for the weekend? Why do firms sometimes damage their goods before they sell them — that is, why would a computer company make two versions of a processor, where one of them is literally the other one with certain abilities turned off?

The content of what we teach them is nothing that they wouldn’t get majoring in economics in college. But in approach and in the examples we think about, it has a definite managerial flair to it. We focus on economic problems as the manager would see them, the manager who’s negotiating the internal structure of a firm and designing and responding to incentive systems within the firm and between firms in the market.

Economics is in some ways the most analytic and challenging class that the students face in the core, and they work pretty hard. There’s a tremendous range of experiences and interests — there are people who want to do high-powered finance, and people who are getting joint degrees with the forestry school and want to do environmental management. The range of students and what they bring to the class is really, really breathtaking. And they work well together. For example, the students coming into economics are encouraged to form study groups. You could imagine a cliquish system forming relatively quickly, but in fact, almost no study group has more than one ex-economics major in it, and almost all of them have an ex-humanities major.

There is a real common sense of purpose. They are excited about learning a new way of thinking.