Managerial Economics (Eco 685)
Managerial Economics (Eco 685)
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,
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.
Professor: Professor David L. Kelly (Dave).
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 (firstname.lastname@example.org).
Dave has established a website (http://moya.bus.miami.edu/~dkelly/teach/eco685/index.html)
for this course. At this site, you can download or view course material (notes, homeworks, etc.), grades, and a
continuously updated syllabus.
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.
- 3 Homeworks 25% (due dates: August 31, NOW OCTOBER 3, OCTOBER 12 )
- First Quiz (NOW SEPTEMBER 26 ) 25%
- Second Quiz (NOW OCTOBER 6 ) 25%
- Final Quiz (NOW OCTOBER 17 ) 25%
You can now access your grades on line using Blackboard HERE!
- Attendence is required and 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 many in-class examples of the types of
problems on quizzes are not provided. Smart students will attend every class and take detailed notes on the in-class
examples, and will therefore find that the homeworks and quizzes are straightforward.
- There is a homework, quiz, or review sheet due every week. Each homework is worth 8.3%, about a letter grade.
Homeworks are due at the beginning of each class, in class. Showing up 20 minutes late because you didn't finish the
homework on time is not acceptable. Putting a homework in my mailbox, under my door, etc. is also not acceptable.
Emailing homework is only acceptable if done in advance. Only in the most dire emergencies can a student be excused from
turning in a homework on time. Even in dire emergencies Dave does not allow the homework to be turned in late, but will
instead weight the final more. Students must let Dave know of their dire emergency before the homework
is due or else a zero is automatically recorded. Finally, the homeworks sometimes 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.
- Only in
the most dire emergencies can a student not take a quiz at the scheduled time. Even in dire emergencies, Dave does not
allow a make-up, but instead counts the final double. STUDENTS MUST LET DAVE KNOW OF THEIR DIRE EMERGENCY BEFORE CLASS ON
THE DAY OF THE QUIZ OR ELSE A ZERO IS AUTOMATICALLY RECORDED. LEAVING ME A MESSAGE OR EMAIL AND NOT SHOWING UP PUTS YOU
AT GRAVE RISK OF YOUR DIRE EMERGENCY NOT BEING APPROVED, IN WHICH CASE A ZERO IS AUTOMATICALLY RECORDED.
- Computers and Ipads are not allowed in class. 99% of what you need to write down in your notes is either math or
graphs. Most definitions, etc. are in the notes Dave provides.
- Smart phones, texting, portable games, X-boxes, Wiis, etc. are not allowed, as seeing students text breaks Dave's
mental flow. WARNING: Dave can see you text even when done in the back of class or under the table.
- With six week courses, it is important to keep up. Missing one class is equivalent to missing a week's worth of
- What they say about Dave on Rate My Professor:
- "Can be an a-- if you procrastinate."
- "God help you if you don't go to class."
- Introduction (chapter 1, August 22).
- 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 4:7th edition, chapter 5:8th edition, August 22 - August 29).
- The production function and it's properties.
- Optimal input use.
- Marginal rate of technical substitution.
- HOMEWORK 1 DUE AUGUST 31.
- Mergers and returns to scale.
- Measuring production functions.
- Cost Analysis (Chapter 5:7th edition, chapter 6:8th edition, August 31 - September 7).
- Fixed, average, and marginal costs: short run.
- Sunk costs.
FIRST QUIZ NOW SEPTEMBER 26
- Average costs: long run.
- Demand curves (Chapter 2, NOW SEPTEMBER 28 ).
- Price elasticity.
- Income elasticity.
- Estimating Demand.
- HOMEWORK 2 NOW DUE OCTOBER 3
- Setting the price to maximize profits (Chapter 6, NOW
SEPTEMBER 28 ).
- Pricing Techniques (Chapters 7-9:7th edition, chapter 8-10:8th edition, NOW SEPTEMBER 28 - OCTOBER 6 ).
- Perfect Competition.
- Cost plus pricing.
- Monopoly pricing.
- SECOND QUIZ NOW OCTOBER 6
- Price discrimination.
- Business strategy and game theory.
- Static games and basic definitions (chapter 11:7th edition, chapter 12:8th
edition, NOW OCTOBER 6 - OCTOBER 10 ).
- Dominant Strategies.
- Nash Equilibria.
- Mixed Strategies.
- Price wars and price collusion.
- Price matching guarantees
- How to split a market.
- Blue light specials.
- HOMEWORK 3 NOW DUE OCTOBER 12
- Dynamic Games (Chapter 11:7th edition, chapter 12:8th edition, NOW OCTOBER 10 - 12).
- Nash Equilibria and Sub-Game Perfection.
- Credible and non-credible threats.
- Market entry.
- Deterring market entry.
Homeworks, quizzes, review sheets, and solutions.
Case Studies and Examples.
Up to Dave Kelly's homepage
Interesting web sites for Eco 685 students.
National Association for Business Economists.
The Economist.com argues that economics
is valuable for MBAs since economics has more compelling and realistic theories business administration than other