CALDWELL COLLEGE

Department of Business Administration

SYLLABUS

BU 694 Managerial Economics

Instructor: Anatoly Kandel

Required text:

E. Mansfield, W.B. Allen, N.A. Doherty, and K. Weigelt, Managerial Economics.

Theory, Applications, and Cases, 5^th Edition

W.W. Norton & Company, Inc, 2002

The course will fulfill a requirement for an elective in the MBA Program

Managerial economics draws on economic analysis for such concepts as cost, demand, profit, competition, pricing, entry strategy, and market protection strategy. It bridges the gap between the analytical problems and the day-to-day decisions that managers face. The aim of the course is to complement managers’ intuition and personal style of analysis by decision techniques that make easier a thorough, systematic examination of the problem at hand and its feasible alternative solutions. The course will provide students with the knowledge that is absolutely necessary for being an effective competitive manager.

Topic 1 (1^st & 2^nd weeks). WHAT IS MANAGERIAL ECONOMICS? Microeconomics’ and Decision Sciences’ Perspectives. Managerial Economics applies and extends Microeconomics and the Decision Sciences to solve management problems. Steps required for an effective decision-making process include a specification of objectives, a creation of imaginative alternatives, an understanding of the consequences and tradeoffs, and a clarification of uncertainties. Taking into account linked decisions: what managers decide today could influence their choices tomorrow, and their goals for tomorrow should influence their choices today. The nature of opportunity costs and economic profits. Case studies that illustrate the aforementioned problems.

Topic 1 (3^rd week). WHAT IS MANAGERIAL ECONOMICS? Taking a Global View. Managers are conducting business in increasingly global environments. They need to understand the relevant aspects of international economics: the principle of comparative advantage, the determinants of exchange rates, the nature and effects of tariffs, quotas, and strategic trade policy. Examples and case studies that illustrate the aforementioned aspects of international economics.

Topic 2 (4^th & 5^th weeks). DEMAND AND FORECASTING. Industry’s and firm’s demand functions. Price, income, and advertising elasticities of demand. Consumer and producer surpluses. Estimating demand functions: the identification problem, consumer interviews, and regression analysis. Elementary forecasting techniques. Examples and case studies that illustrate the forecasting of demands.

Topic 3 (6^th & 7^th weeks). PRODUCTION AND COSTS. Production functions and their applications. Measurements of technological progress. Inventions and innovations. The learning curve and its applications. Short-run and long-run cost functions. Economies of scale and scope. Profit contribution analysis. Examples and case studies that illustrate measurements and analyses of production and costs.

Topic 4 (8^th, 9^th, 10^th, & 11^th weeks). MARKET STRUCTURE, STRATEGIC BEHAVIOR, AND PRICING. Types of competitive market structures: perfect competition, monopolistic competition, monopoly, and oligopoly. Strategic interactions and business games. Credible threats and commitments. Strategies to deter entry. Strategies to preempt business opportunities. Difficulties in formulating effective contracts. Cost-plus pricing. Pricing of joint products. Price discrimination. Transfer pricing. Examples and case studies that illustrate efficient market strategies and pricing methods.

Topic 5 (12^th, 13^th, & 14^th weeks) RISK, UNCERTAINTY, INCENTIVES. Expected values of outcomes of business decisions. Moral hazard and Principal-agent problems inside firms and between shareholders and creditors. Motivating managers when efforts of employees are (i) observable and (ii) not observable. Resolving incentive conflicts through incentive compatible compensation mechanisms. Examples and case studies that illustrate how different business firms try to solve the problem of incentive compatibility.