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While it is a widespread practice for business majors to take the microeconomics course in the early years of their college education, for most students it is followed by courses in other disciplines such as accounting, finance, and marketing. In turn, in these disciplines, the formulation of theory, models and examples involve use of nomenclature specific to that discipline such as accounting and financial performances. Sometimes the word "economic" measure does appear in these discipline specific courses. Many of these concepts and models with resulting measures though perceived to be developed in different business disciplines, they originate from or developed utilizing the micro economic theory. In this study, we plan to link together the microeconomic theory and its applications in development of concepts and models in other disciplines so that student and practitioners will be able tie in a seamless manner, and if necessary, modify these concepts to apply and solve business issues in a firm.
Keywords: microeconomics, average cost and revenue, marginal cost and revenue, fixed and variable cost, opportunity cost, indifference curve, utility function, risk and return, capital budgeting
INTRODUCTION
The economic theory identifies the firm's goal as maximizing its economic profit, which is reflected in its share price. To that end, microeconomics studies decisions related to the utilization and distribution of resources. It attempts to explain why these resources carry different values and how businesses and individuals may benefit from efficient allocation for production, exchange, and consumption of goods. Microeconomists develop several types of models using logic and human behavior, then evaluate these models using actual data. It deals with (1) consumer behavior and incentives via the theory of utility and producer behavior involving a combination of inputs to maximize profit or minimize cost, and (2) the theory of price which involve the combining the utility and production theory in a competitive market. Of course, the examples in the microeconomic textbooks are limited to economic variables so that students can understand the basic concepts.
A business manager needs to assess the economic policies and activities in (1) the entire economy and (2) its industry, but more importantly needs to understand how to apply micro economic principles and theory to use the right economic principle to increase his/her company's shareholder value. In...