Managerial Economics (Eco 685)

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Course Description

Managerial Economics is the application of economic theory to decisions made by firms. Our focus is on three topics. We start with production and cost theory, where we think about the most basic decisions of firms: how much to produce and what inputs to use. We then move to pricing, studying how consumers and other firms respond to price changes and thus how to decide what price to charge. Lastly, we move to game theory, which is a framework for decisions made between a small group of managers or firms (sometimes called business strategy). Game theory is extremely powerful and gives precise mathematical rules and strategies for such things as salary negotiations or price competition between two firms.

Economics is the study of the allocation of scarce resources. Because all decisions are essentially about the allocation of scarce resources, economics is in fact the study of decision making and problem solving in general. Thus many of the techniques we will study can (and are) applied to other business disciplines. In fact, most business disciplines such as finance were originally sub-fields of economics. For example, CAP-M and Black-Scholes from finance, executive compensation in organizational behavior, and price elasticities used in marketing are all derived from economic theory. Mangerial Economics also studies some topics not covered (at least not in detail) by other disciplines. These include what inputs to use, how much to produce, and what price to charge. Because in general these very fundamental decisions are made by higher level executives, economics becomes critically important for CEOs and other senior executives. This is one reason why economics is the most common major among Fortune 500 CEOs.

General Information

Professor: Associate Professor Dr. David L. Kelly (Dave).

Course Meetings: Tuesday and Friday from 8:00 am to 10:00 am in Room GB 530.

Office: Room 517H, Jenkins School of Business.

Office hours: Thursday at 2-4 pm (Dave is almost always around during business hours, but try to come during office hours if you can).

Contacts: Dave can be contacted via phone (8x3725) or email (dkelly@miami.edu).

Web Site: Dave has established a website (http://moya.bus.miami.edu/~dkelly/teach/eco685/eco685.html) for this course. At this site, you can download or view course material (notes, homeworks, etc.), as well as a continuously updated syllabus.

Final Exam: Friday March 4 from 8 am to 10 am.

Prerequisites

This course requires Eco 680, Principles of Economics.

Textbooks

The required textbook is:

Mansfield, Edwin, et. al. Managerial Economics (5th Edition). W. W. Norton & Co., New York, 2002.

Grades

3 Homeworks 25% (due dates: January 28, February 11, February 25)
First Quiz (February 4) 25%
Second Quiz (February 18) 25%
Final Quiz (March 4) 25%

You can now access your grades on line using EASY HERE!

Additional Notes

Attendence is very important for this class. All exam material comes from class notes, and not all class notes are available in the book. Dr. Dave will provide detailed notes, but it is difficult and time consuming to try to understand the notes without being in class.
There is a homework, quiz, or review sheet due every week. Each homework is worth 5%, about half of a letter grade (eg. an A- would be a B+ or B if one homework was not turned in) These are due at the beginning of each class, in class. Never turn in a homework in my mailbox, etc. The homeworks demonstrate how the concepts used in class are applied in the "real world." Because the real world is complicated, the homeworks can be long. Do not wait until the last minute to start the homeworks.
The three quizzes are February 4, February 18, and March 4. Now is the time to mark your calandars. Only in the most dire emergencies can a student not take a quiz at the scheduled time. Even in dire emergencies, Dr. Dave does not allow a make-up, but instead counts the next quiz double. Students must let me know in advance or else a zero is automatically recorded.

Course Outline

Introduction (chapter 1, January 18).

What is Economics and what is managerial economics?
Thinking like an Economist.
Managerial decisions studied in this course.
Principles of managerial economics.
An overview of theory of the firm.

Value of the firm.
Economic and Accounting Profits.
Objective of the firm: profit maximization.
Profit maximization, ethics, and welfare.

Production and Cost Theory: How much to produce and what inputs to use.

Production Theory (Chapter 7, January 21 - 25).

The production function and it's properties.
Optimal input use.
Marginal rate of technical substitution.
Measuring production functions.
HOMEWORK 1 DUE JANUARY 28.

Cost Analysis (Chapter 9, January 28 - February 4).

Fixed, average, and marginal costs: short run.
Sunk costs.
Average costs: long run.
FIRST QUIZ, FEBRUARY 4

Pricing (Chapters 4, 5, 13).

Demand curves (February 8).

Price elasticity.
Income elasticity.
Estimating Demand.
HOMEWORK 2, DUE FEBRUARY 11.
Setting the price to maximize profits.

Pricing Techniques (February 8 - February 11).

Perfect Competition.
Cost plus pricing.
Discrimination.
Other pricing strategies: an evaluation.

Business strategy and game theory.

Game Theory (chapter 12, February 15 - 25).

Static games and basic definitions.
Dominant Strategies.
Nash Equilibria.
Mixed Strategies.
Applications (chapter 12).

Price wars and price collusion.
How to split a market.
Blue light specials.
Auctions (chapter 15).

SECOND QUIZ, FEBRUARY 18.
Dynamic Games.
Nash Equilibria and Sub-Game Perfection.
Repeated games.

Applications.

Repeated price wars.
Committment and market entry.
HOMEWORK 3 DUE FEBRUARY 25.

LEARNING OBJECTIVES.

Note: all handouts may be downloaded as Adobe Acrobat pdf files. If your computer cannot read acrobat files, download the reader for free HERE .

Up to Dave Kelly's homepage

Interesting web sites for Eco 685 students.

National Association for Business Economists.
The Economist.
The Economist.com argues that economics is valuable for MBAs since economics has more compelling and realistic theories business administration than other disciplines.
Cool Economics