Theory of the firm, specialized resources and market structure, applied to a firm competing with imported goods

This is appropriate for principles of economics, at the end of a section on the theory of the firm and market structure. This could also be used in an intermediate class on international trade. There should be no class size limitation, as long as teams of five can be constructed. This will probably take twenty to forty minutes, although considerable discussion could make it longer if students are highly motivated and consider all aspects of the problem (see teaching notes).

Overview

An accompanying document poses a question to members of each team. The teams are to make a mock managerial decision for a hypothetical firm in response to competition from imported goods. Students will deliberate and make a recommendation using the concepts of average and marginal costs of production, comparative advantage, market structure, and other relevant concepts. They will report to the broader class and listen to other teams respond to the same question.

Expected Student Learning Outcomes

Students will assess how production cost and market structure aid their choice about how a firm would address competitive pressure from imported goods. The possibility for economic profit and loss will play a role in their decisions. The instructor may also use this to address questions of comparative advantage and international trade if desired, since the firm has specialized resources. This step, however, may take one beyond the usual principles level treatment of international trade where more sophisticated models of international trade are in covered.

Information Given to Students

An accompanying document will be handed to each team.

Theory of the firm competing with imported goods (Microsoft Word 2007 (.docx) 15kB Aug6 18)

1. This problem should be given aftermore basic questions on firm costs and types of profit have been completed, since this problem will require a sophisticated analysis that combines a number of concepts covered and used earlier.

2. Implicit is that students must assume an appropriate market structure and defend that assumption. For that reason, make sure they read the "note" in the downloadable file carefully before proceeding.

3. The market structure question requires the instructor consider what preliminary remarks to make. Perfect competition (with the caveat that backpacks are not all identical) or monopolistic competition may work. Others may argue for oligopoly, which is a harder case to make (but see below under point 5). Most important is how they defend their decision.

4. Students should be reminded that they should use concepts developed earlier in the course concerning specialization, comparative advantage, and gains from trade. For instance, with choice b, the firm could liquidate and go into banking, but would this really take advantage of the specialized resources of this firm?

5. Hiring of engineers brings set-up costs to mind, but this implies a market with relatively few firms. Encourage students to address this issue, particularly if they started assuming a competitive market structure.

6. Choice c also suggests learning-by-doing for the alert student, if this has been covered or even mentioned earlier in the course.

7. The instructor will want to make sure students know what a tariff is and how it works to raise prices.

8. The instructor should emphasize that the entire team will be needed in order to address the problem, and the team will need to go through the all alternatives, listening to each team member weigh in with her or his perspective. The problem is hypothetical, but in real life (some day!) you wouldn't want a hasty decision to end up throwing numerous employees including yourself out of work.

9. As stated the problem handed to students does not assume a competitive market structure. If one does want to restrict the problem to a given market structure, the choices given on that sheet can be modified as needed.

A different hypothetical setting with similar characteristics can be posed on a graded individual problem set or test question.