1. Introduction: The scope of managerial economics

2. Course aims
The aim of the course is to apply the basic concepts and principles of microeconomics within the broader framework of organisational management
In particular, the course aims to:
outline economic determinants of managerial decisions under different market conditions, methods of economic analysis, decision support aids and tools and selected economic theories that help managers understand economic processes and structures; and
develop skills needed to analyse links between the firm’s business activities, its external environment and the broader socio-economic phenomena
While the course focuses on managerial decision making in the commercial (private) sector, the application of microeconomic principles in the public sector will also be considered

3. Student learning outcomes
At the end of this course you should be able to:
understand and identify factors impacting managerial decision making;
outline the scope of managerial decision making and the available decision aids;
explain managerial decision under different market conditions;
evaluate the impact of external and internal factors on managerial decision making;
apply managerial decision making tools; and
understand the demand for and supply of the focal firm’s products

4. Detailed course schedule
Day no
Topic
Textbook ch.
1 (24 Nov; 3 hrs)
1. Introduction. Decision making process and its elements. The scope of economic decision making. Application of marginal analysis
Chs. 1-2
2 (25 Nov; 3 hrs)
2. Demand analysis and demand elasticities
Ch. 3
3 (26 Nov; 3 hrs)
3. Buyer product valuation and choices. Consumer surplus. Buyer pricing decisions
Ch. 4
4 (27 Nov; 2 hrs)
4. Production/transformation process. Production technologies and input-output structure
Ch. 5
5 (28 Nov; 2 hrs)
5. Cost structure and cost drivers of producer pricing strategies. Production scale and scope.
Chs. 5 and 7
6 (1 Dec; 3 hrs)
6. Structure-conduct-performance. Market structures: competition and contestability. Pricing strategies of buyers and sellers
Ch. 8
7 (2 Dec; 3 hrs)
7. Market structures: monopoly/monopsony, monopolistic competition and oligopoly. Pricing strategies and strategic behaviour
Chs. 9-10
8 (3 Dec; 3 hrs)
8. Input sourcing and investment. Pricing and market power
Chs. 6 and 11
9 (4 Dec; 2 hrs)
9. Decision making under conditions of uncertainty. Informational asymmetries and risk management
Ch. 12
10 (5 Dec; 2 hrs)
10. Market research and market analysis. Auction and rings. Strategic behaviour
Ch. 13
11 (8 Dec; 2 hrs )
11. Public sector perspective
Ch. 14
12 (9 Dec; 2 hrs)
12. Revision
13. Examination
13 (11 Dec; 2 hrs)
Examination

5. Readings
Main reading: M. R. Baye, Managerial economics and business strategy, 7th edition, Irwin/McGraw-Hill, 2010 Focus on managerial challenges rather than economic issues as such. Please note that Microeconomics is specified as a prerequisite of this course

6. Topic 1: The scope of managerial economics Topic Contents
1.1 Economics and economists 1.2 Why economics is useful to managers 1.3 Managers and the market 1.4 Principles of decision making 1.5 Marginal analysis
1.6 Decision making processes and their elements
1.7 Principles of economic interaction
1.8 Circular flow of
economic activity
1.9 Firms and governments
1.10 Further reading

7. 1.1 Economics and economists
Economics is the study of how people manage and/or should manage their scarce resources
An economy is a group of people interacting with each other as producers, consumers and traders. It used to have spatial boundaries but it may also be virtual
To understand how it works, economists study/analyse how:
individuals, firms, communities and governments make decisions about scarce resources
economic decision-makers interact with each other
private and social products and outcomes of this interaction

8. 1.1 Economics and economists
Microeconomics is the study of individual (e.g., persons, households, firms) economic behaviour under conditions of scarcity and uncertainty
Macroeconomic is the study of aggregate economic variables such as national income, consumption or investment
Specialised or functional areas of economics application such as growth, development, health or education
Managerial economics is the science (and art) of directing scarce resources to manage more effectively (using economic principles to manage better)

9. 1.2 Why economics is useful to managers
It helps to understand:
gains from specialisation and trade
economic trade-offs and valuation
opportunity cost (opportunities foregone) of production and consumption
the nature of substitution and complementarity in economic activities
the application of ”thinking at the margin”
the nature of economic incentives and disincentives
the mechanics of net benefit and profit maximisation
market power and how people interact in markets

10. 1.3 Managers and the market
Products/outputs of production activities are validated in output markets
value chains run from downstream (end product) to upstream
cost (supply) chains run from upstream to downstream
Markets for outputs – goods and services (selling/marketing)
Markets for inputs – labour, capital, knowledge, land (sourcing/procurement/hiring/renting)
The discipline of the market - money votes
Market power –the power to set the terms of market exchange

11. 1.3 Managers and the market
Value
Costs

12. 1.3 Managers and the market

13. 1.3 Managers and the market
Markets comprise clusters of buyers and sellers who try to engage each other to exchange goods and services
Market as an area of opportunity (what, where, why?)
Market as a source of information
Market as a source of seller/buyer power
Market as a source of uncertainty and as risk mitigation mechanism
Market as an economic umpire (winners and losers)

14. 1.4 Principles of decision making
Resources are finite, thus scarce, and should be used economically
Decision-makers face trade-offs and must make choices
Every choice implies opportunity cost
To economise, decision-makers must think at the margin (see below)
Decision-makers usually respond to incentives
Decision-makers should consider the value of time (or time value of money)

15. 1.5 Marginal analysis
To economise, we compare the cost of an incremental (marginal) unit of activity, its marginal cost, with the benefit produced by this increment of activity, marginal benefit
If Marginal Benefit > Marginal Cost, it pays to engage in an activity providing that its Average (or Total) Benefit equals or exceeds its Average (or Total) Cost
Thus, to maximise the Net Benefit (Benefit less Cost) of an economic activity we should engage in it as long as its MB>MC providing that its AB>AC
Max NB when MB=MC and AB>AC or TB>TC

16. 1.5 Marginal analysis Costs and Benefits Total cost, TC MB Max NB lossMC
profit/net gain Total benefit, TB
loss
Optimal scale Volume of output or scale of activity

17. 1.6 Decision making processes and their elements
Production perspective
Scoping (definition/measurement/analysis)
Design
Development
Production
Launch
In-production optimisation/refinement/improvement
Control/evaluation
Decommission
Sourcing perspective
Requirements specification
Acquisition/tendering

18. 1.6 Decision making processes and their elements
Sustainment in-service/use
Disposal
Evaluation
The process of organisational decision making
Organisational planning
Organising
Leading
Monitoring and control
Change management incl. corrective action
In managerial economics we normally use economic models which provide concise description of activities of interest and allow us to analyse options

19. 1.6 Decision making processes and their elements
Example production mgt for six sigma quality

20. 1.7 Principles of economic interaction
Trade can make everyone better off
Markets are usually good for organising economic activity and moving resources to areas of best use
Governments may sometimes improve on the market performance but they could also make things worse
But, institutions of the state are needed to underpin market operations (e.g., produce “money” to trade or create a legal framework to contract business)

21. 1.7 Principles of economic interaction
Distinction between
stocks (quantities of specified items measured at a point in time); and
flows (changes in quantities measured over a period of time)
They can be mixed but should not be confused
Ceteris paribus – “holding other things equal” to examine a change associated with or attributed to the factor being studied independently of changes associated with/attributed to other factors or influences

22. 1.7 Principles of economic interaction
Markets facilitate physical exchange of goods and services and the exchange of property rights
Property rights are the rights established in law to receive the benefits of ownership of a good, service or an asset
For some goods and services ‘marketable’ property rights cannot be economically produced and/or enforced, e.g., positive or negative externalities (re: Topic 11)
Market participants often seek market power to set terms of exchange to favour their interests (re: market structures)

23. 1.8 Circular Flow of Economic Activity
Macroeconomic model: Circular flow of economic activity
Output Markets
Firms/ buyers/ sellers/ employers
People/households/ consumers/investors/savers/employees
Input Markets
Principle of market exchange: Buying is also selling, e.g., to exchange goods for money is to exchange money for goods

24. 1.9 Firms and governments The nature of the firm Business objectives
profit
rents
satisfaction
The principal-agent framework
owners/shareholders
managers/employees
Limits of government economic intervention
rationale for intervention: market failure
principal-agent problem
rationale for non-intervention: government failure
excessive government

25. 1.10 Further reading
M. R. Baye, Managerial economics and business strategy, 7th edition, Irwin/McGraw-Hill, 2010: chs. 1-3