Managerial Economics (Eco 685)

Managerial Economics (Eco 685)

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 competing 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, price competition between two firms, and more.

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. Indeed, many firms such as Google and Microsoft are now have in-house economics departments (as well as economists who work at investment banks and consulting firms) to deal with these issues. 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: Professor David L. Kelly (Dave).

Course Meetings: Section 52: Tuesday and Thursday from 10:15 am to 12:15 pm in Room SB 302. Section 55: Tuesday and Thursday from 1:15 pm to 3:15 pm in Room SB 302.

Office: Room 521B, Jenkins School of Business.

Office hours: Wednesdays from 10-12 and 3-5 (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 (

Web Site: Dave has established a website ( for this course. At this site, you can download or view course material (notes, homeworks, etc.), grades, and a continuously updated syllabus.

Final Exam: NOW OCTOBER 17 room SB 302. Section 52 is from 10:15 am to 12:15 pm. Section 55 is from 1:15 pm to 3:15 pm.


This is a first semester course with no pre-requisites. Nonetheless, I will assume a working knowledge of basic economic concepts such as supply and demand, and basic math. See me for some extra references if you feel your skills are lacking in either area.


The required textbook is:

Allen, W. Bruce, Keith Weigelt, Neil A. Doherty, and Edwin Mansfield, Managerial Economics (8th Edition). W. W. Norton & Co., New York, 2012.

The 7th edition is also OK.

Allen, W. Bruce, Keith Weigelt, Neil A. Doherty, and Edwin Mansfield, Managerial Economics (7th Edition). W. W. Norton & Co., New York, 2009.


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

Additional Notes

Course Outline

  1. Introduction (chapter 1, August 22).
    1. What is Economics and what is managerial economics?
    2. Thinking like an economist.
    3. Managerial decisions studied in this course.
    4. Principles of managerial economics.
    5. An overview of theory of the firm.
      1. Value of the firm.
      2. Economic and accounting Profits.
      3. Objective of the firm: profit maximization.
      4. Profit maximization, ethics, and welfare.
  2. Production and Cost Theory: How much to produce and what inputs to use.
    1. Production Theory (Chapter 4:7th edition, chapter 5:8th edition, August 22 - August 29).
      1. The production function and it's properties.
      2. Optimal input use.
      3. Marginal rate of technical substitution.
      4. HOMEWORK 1 DUE AUGUST 31.
      5. Mergers and returns to scale.
      6. Measuring production functions.
    2. Cost Analysis (Chapter 5:7th edition, chapter 6:8th edition, August 31 - September 7).
      1. Fixed, average, and marginal costs: short run.
      2. Sunk costs.
      4. Average costs: long run.
  3. Pricing.
    1. Demand curves (Chapter 2, NOW SEPTEMBER 28 ).
      1. Price elasticity.
      2. Income elasticity.
      3. Estimating Demand.
    2. Setting the price to maximize profits (Chapter 6, NOW SEPTEMBER 28 ).
    3. Pricing Techniques (Chapters 7-9:7th edition, chapter 8-10:8th edition, NOW SEPTEMBER 28 - OCTOBER 6 ).
      1. Perfect Competition.
      2. Cost plus pricing.
      3. Monopoly pricing.
      5. Price discrimination.
      6. Upcharging.
  4. Business strategy and game theory.
    1. Static games and basic definitions (chapter 11:7th edition, chapter 12:8th edition, NOW OCTOBER 6 - OCTOBER 10 ).
      1. Dominant Strategies.
      2. Nash Equilibria.
      3. Mixed Strategies.
      4. Applications.
        1. Price wars and price collusion.
        2. Price matching guarantees
        3. How to split a market.
        4. Blue light specials.
    2. Dynamic Games (Chapter 11:7th edition, chapter 12:8th edition, NOW OCTOBER 10 - 12).
      1. Nash Equilibria and Sub-Game Perfection.
      2. Credible and non-credible threats.
      3. Applications.
        1. Market entry.
        2. Deterring market entry.


Homeworks, quizzes, review sheets, and solutions.

Study Materials.

Class notes.

Case Studies and Examples.

Up to Dave Kelly's homepage

Interesting web sites for Eco 685 students.

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