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Managerial Economics

 

Rationale

Managerial Economics (also called business economics), is a branch of economics that applies microeconomic analysis to specific business decisions. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression and correlation, Lagrangian calculus, linear programming, decision theory, and game theory. It is similar to operations research in this regard, and indeed uses operations research techniques.If there is a unifying theme that runs through most of managerial economics it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity.Almost any business decision can be analysed with managerial economics techniques, but it is most commonly applied to:

 

 

Demand estimation - statistical techniques such as regression analysis are used to determine the level of demand for a product, service, or brand.

Risk analysis - various uncertainty models, decision rules, and risk quantification techniques are used to assess the riskiness of a decision.

Production analysis - microeconomic techniques are used to analyse production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm's cost function.

Pricing analysis - microeconomic techniques are used to analyse various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.

Capital budgeting - Investment theory is used to examine a firm's capital purchasing decisions.

At universities, the subject is taught primarily to advanced undergrads. It is approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses.

See also

• Microeconomics
• Important publications in managerial economics

 

 

Learning Outcomes

The student who successfully completes this course will: 

1. be able to demonstrate a comprehensive knowledge of the vocabulary associated with the principles of microeconomics. 
2. be able to demonstrate a basic understanding of the theories associated with the principles of microeconomics. 
3. be able to better comprehend events that happen in the world which surrounds them. 
4. be able to critically evaluate government policy with respect to economics. 
5. have a solid foundation which will enable them to be successful in any future economics course they may take. 

 

 

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What Is Economics? Key Principles of Economics.

Tutorials

• What is Economics?
• Key Principles of Economics
• The Definition and Scope of Managerial Economics

 

Readings

• What are the Essential Principles of Economics?

 

Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία (oikonomia, "management of a household, administration") from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)".^[1] Current economic models emerged from the broader field of political economy in the late 19th century. A primary stimulus for the development of modern economics was the desire to use an empirical approach more akin to the physical sciences.^[2]

Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business, finance and government, but also in crime,^[3] education,^[4] the family, health, law, politics, religion,^[5] social institutions, war,^[6] and science.^[7] At the turn of the 21st century, the expanding domain of economics in the social sciences has been described as economic imperialism.^[8]

Common distinctions are drawn between various dimensions of economics. The primary textbook distinction is between microeconomics, which examines the behavior of basic elements in the economy, including individual markets and agents (such as consumers and firms, buyers and sellers), and macroeconomics, which addresses issues affecting an entire economy, including unemployment, inflation, economic growth, and monetary and fiscal policy. Other distinctions include: between positive economics (describing "what is") and normative economics (advocating "what ought to be"); between economic theory and applied economics; between mainstream economics (more "orthodox" dealing with the "rationality-individualism-equilibrium nexus") and heterodox economics (more "radical" dealing with the "institutions-history-social structure nexus");and between rational and behavioral economics.

 

Larger Map

 

• Microeconomics
  • Markets
  • Production, cost, and efficiency
  • Specialization
  • Supply and demand
  • Firms
  • Uncertainty and game theory
  • Market failure
  • Public sector
• Macroeconomics
  • Growth
  • Business cycle
  • Inflation and monetary policy
  • Fiscal policy and regulation
• International economics
• Practice
  • Theory
  • Empirical investigation
  • Profession
• Related subjects
• History
  • Classical political economy
  • Marxism
  • Neoclassical economics
  • Keynesian economics
  • Chicago School of economics
  • Other schools and approaches
• Criticism
  • Criticism of assumptions

 

See also

• References
• Further reading

 

External links

 

 

The Firm

Tutorials

• Business Objectives and Basic Models of the Firm
• The Boundaries of the Firm
• Ownership and Control of the Firm
• The Multinational Enterprise

 

Readings

Larger Map

Activity

• Business Growth - Motives, Objectives and Conflicts: Philip Green and Marks and Spencer

 

 

 

• Ten days that shook the High Street - Observer article (http://observer.guardian.co.uk/business/story/0,6903,1232145,00.html)
• Turning principles into profits - Guardian article (http://www.guardian.co.uk/business/story/0,3604,1259507,00.html)
• Analysts are divided - Guardian article (http://www.guardian.co.uk/business/story/0,3604,1259833,00.html)
• D-Day on Baker Street - Observer article (http://observer.guardian.co.uk/business/story/0,6903,1258290,00.html)
• Green drops bid for M&S after small investors back Rose's revival campaign - Guardian article
• Profile: M&S boss Stuart Rose - from the BBC (http://news.bbc.co.uk/1/hi/business/3766215.stm)
• M&S suitor is retail king - BBC article (http://news.bbc.co.uk/1/hi/business/3755195.stm)

 

The Market Environment

Tutorials

• Consumer Behaviour
• Demand and Elasticity
• Estimating and Forecasting Demand
• Production and the Determination of Costs
• Elementary Models of Competitive Structure
• The Five Forces Approach of Competitive Structure
• Risk and Uncertainty
  

 

Readings

• Markets and Government in the Global Economy
• Market Efficiency and Government Intervention
• Elasticity: A Measure of Responsiveness
• Supply, Demand, and Market Equilibrium
• Consumer Choice

 

Production, costs, and pricing Production theory basics production efficiency   Factors of production total, average, and marginal product curves marginal productivity isoquants the marginal rate of technical substitution   Economic rent classical factor rents Paretian factor rents   roduction possibility frontier what products are possible given your resources the trade-off between producing one product rather than another the marginal rate of transformation   Production function inputs diminishing returns to inputs the stages of production shifts in a production function   Cost theory the different types of costs   Opportunity cost Accounting cost or historical costs Transaction cost Sunk cost Marginal cost the isocost line   Cost-of-production theory of value Long-run cost and production functions long-run average cost curves long-run production function and efficiency returns to scale and isoclines minimum efficient scale plant capacity   Economies of density Economies of scale the efficiency consequences of increasing or decreasing the level of production   Economies of scope the efficiency consequences of increasing or decreasing the number of different types of products   Optimum factor allocation output elasticity of factor costs marginal revenue product marginal resource cost   Pricing various aspects of the pricing decision   Transfer pricing selling within a multi-divisional company   Joint product pricing price setting when two products are linked   Price discrimination different prices to different buyers types of price discrimination yield management   Price skimming price discrimination over time   Two part tariffs charging a price comprised of two parts, usually an initial fee and an ongoing fee   Price points the effects of a non-linear demand curve on pricing   Cost-plus pricing a Markup is applied to a cost term in order to calculate price   Cost-plus pricing with elasticity considerations cost plus pricing is often used along with break even analysis   Rate of return pricing calculate price based on the required rate of return on investment, or rate of return on sales   Profit maximization determining the optimum price and quantity the totals approach the marginal approach   See also Microeconomics Important publications in production theory

 

 

Activity

• British Airways: Asset-led or Market-led?

 

 

 

Business Decisions

Tutorials

• Game Theory and Oligopoly
• Pricing in Theory
• Pricing in Practice
• Non-Price Competition and the Marketing Mix
• Investment Decisions and the Cost of Capital
• Economics and the Analysis of Business Strategy
• Managerial Economics: The Information Sector and the Internet
  

 

Readings

Game theory Representation of games Normal form Extensive form Types of games Symmetric and asymmetric Zero sum and non-zero sum Simultaneous and sequential Perfect information and imperfect information Infinitely long games Uses of game theory Economics and business Descriptive Normative Biology Computer science and logic Political science Philosophy History of game theory Notes References

 

 

Larger Map

 

 

 

 

Public Policy

Tutorials

• The Economics of Regulated Industries
• Competition Policy

 

Readings

• Mastering Strategy: Regulated Industries
• Competition policy
  • Antitrust laws in the United States
  • European Union competition policy and The Treaty of Rome
  • Regulators

 

See also

• Resale price maintenance
• Competition law
• Consumer protection
• External links
  • World Bank article detailing competition policy

 

 

Recommended Text

 

Managerial Economics: An Analysis of Business Issues, Third Edition, Howard Davies & Pun-Lee Lam Check the availability and buy your books from our Bookshop.

 

Microeconomics and Behavior, 5/e Robert H. Frank, Cornell University   Check the availability and buy your books from our Bookshop.

 

• ACE Quiz
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Resources

 

 

 

 

• Study Guide: Key concepts
• Study Guide: Definitions
• Quiz 1
  • Quiz 1 Solutions

• Economics on the Web
• The Illustrious Yet Elusive World of Microeconomics
• Lecture Slides
• Microeconomics
• Microeconomics
• Microeconomics Student Resource Center
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• Principles of Microeconomics Web Resources
  
• Resources for Microeconomics
• Web Links

 

 

 

 

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