Managerial Economics

Capacity: 4 credit units

Semester: 1

Course description

The discipline «Managerial Economics» falls to the basic part of the MEP curriculum. This
discipline is sometimes referred to as business economics and is a branch of economics that applies
microeconomic analysis to decision methods of businesses or other management units. As such, it
bridges economic theory and economics in practice. It draws heavily from quantitative techniques
such as regression analysis and correlation, calculus. 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, for example through the use of operations
research, mathematical programming, and other computational methods.

The purposes of the course «Managerial economics» are:

- to acquaint the audience with the main particularities of economic thinking when treating
practical managerial problems,
- to provide the audience with the main theoretical concepts, models and analytical methods
proper to economic disciplines and especially to microeconomics and focusing them on
practical managerial problems,
- to illustrate the central decision problems managers face and to provide the economic
analysis they need to guide these decisions.
- to train the students to treat real business problems applying effective analytical methods
having sound theoretical background.

Learning outcomes of the course

As a result of the acquisition of the discipline the students should:
Know:
 the main approaches to microeconomic modeling the behavior of economic agents:
households, firms, regulatory bodies;
 the main characteristics of the business objects modeled and analyzed with respect of their
interrelations and available data including accounting report;
 the basic economic-mathematical constructions applied to model the business objects
behavior;
 the main approaches to practical analysis of the business problems involving both all the
solution alternatives proper and the methods to choose the best of them;
 the names of the famous scholars in the field of microeconomic analysis, the titles of the
established textbooks and journals and recognized internet-resources on the topic.

Be able to:
 set a problem of business-situation analysis proceeding both from the purposes and needs
of business and the information available,
 explain the analytical instruments in the view of theoretical economics,
 use the main approaches and methods to solve the practical problems of business situations
analysis and forecast,
 describe a microeconomic problem of a business object given by its content using the
means of mathematics,
  give an expert opinion on a certain regulation measure in a view of its efficiency, stability
and some other proper criteria and to suggest a better one, if necessary;
 proceeding from the mathematical models forecast the future behavior of economic agents
and the development of economic,
 present the results of the analytical work as a report, lecture, survey, analytical and paper.

Possess:
 methodology of economic research,
 methods and techniques of analysis of business situations and economic processes using
the modern mathematical models,
 methods of individual work, self-organization and organization of task fulfilling.

Course content

1. Introduction: A Note on the Methodology.

Role of business in the Society: managerial economics. Economic optimization. Maximizing the
value of the firm. Methods of expressing economic relations. Total, marginal and average
relations, Marginal analysis. Multivariate optimization. Constrained optimization. The
incremental concept in economic analysis.
2. The Nature of Markets: the choice of the agents
Demand Analysis. The basics for demand. The market demand function. Industry demand versus
firm demand. The demand curve. Measuring responsiveness: elasticity. Price elasticity of demand.
Price elasticity and revenue. Cross-price elasticity of demand. Income elasticity of demand. Time
impact on elasticity. Derived demand products.
Demand Estimations. The identification problem. Consumer interviews. Market studies and
experimentations. Regression analysis. Regression statistics.
Forecasting. Forecasting methodologies. Qualitative analysis. Expert opinion Survey techniques.
Surveys for forecasting varies classes of expenditures. Time series analysis and projection.
Seasonal and cyclical variations. Barometric methods. Econometric methods. Single equation
models. Multiple equation systems. Input –output analysis. Input-output tables. Uses of input-
output analysis. Forecasting with input-output tables. Forecast reliability.
3. Production and Cost.
Production. Production function. Total, marginal and average product. The law of diminishing
returns to factor. Main concepts: production set, isoquants and marginal rate of technical
substitution. The role of revenue and cost in production. Returns to scale. Empirical production
functions.
Cost analysis. Relevant cost concept. Opportunity costs. Explicit and implicit costs. Incremental
and sunk costs in decision analysis. Short run and long run costs. Short run cost curves. Long run
cost curves. Minimum efficient scale. Plant size and flexibility. Learning cost. Economics of scope.
Cost-volume-profit analysis.
Cost estimation. Short run cost estimation. Long run cost statistical estimation.
Application of linear programming techniques.
4. Market Structure. Classification of market structures. Factors determining the level of
competition: effects of production characteristics on market structure and competition, effect of
entry conditions on competition, effect of buyers on competition. Pure competition. Market price
determination. The firm’s Price/Output decisions. The firm’s supply curve.
Pure monopoly and market power. Barriers to entry Perfect competition versus pure monopoly.
Cartels. Natural monopolies. Monopolistic competition.
Oligopoly. Five forces framework. Industry concentration. Concentration and prices. Quantity
competition. Competition among symmetric firms. Price competition. Price rigidity and kinked
demand
Price wars and Prisoner’s dilemma. Other dimensions of competition. Strategic commitments.
Advertizing
Game theory and competitive strategies. Sizing up competitive situations. Analyzing pay of tables.
. Equilibrium strategies. Competitive strategy. Market entry. Bargaining. Sequential competition.
Repeated competition. Mixed strategies
5. Pricing Practices. Cost-plus pricing. Role of cost and demand in cost-plus pricing. Cost-plus
pricing and profit maximization. Incremental analysis in pricing. The time factor in incremental
analysis. Price discrimination. Requirements for profitable price discrimination. Types of price
discrimination.. Profit maximization under price discrimination. Multiple product pricing.
Demand interrelationship. Production interrelationship. Joint products produced in fixed
proportions. Joint products produced in variable proportions. Transfer pricing. Transfer pricing of
a product having a competitive market. Transfer pricing with an imperfect external market for the
intermediate product.
6. The Role of Government in the Market Economy. The rational for regulation. Economic
consideration: marker failures and externalities. Political consideration. Regulatory response to
incentive failures. Operating right grants. Patent grants. Subsidies. Tax policies. Operating
controls. The “Who pays?” issue. Regulatory response to structural failures. The dilemma of
natural monopoly. Utility price regulation. Problems in utility price regulation: pricing problems,
output level problems, inefficiency, investment level, regulatory lag and political problems, cost
of regulation. Excess of windfall profit taxes. Small company tax preferences. Antitrust policy.
Overview of Antitrust Law. Enforcement. Economic analysis in Antitrust actions. Regulatory
environment: a second look. Cost of regulation. The size-efficiency problem. The capture problem.
The deregulation movement. Rationalizing the regulatory process.
Benefit-cost analysis and public goods. Public goods. Public goods and efficiency. The basis of
benefit –cost analysis. Applying the net benefit rule. Currency values. Efficiency versus equity.
Evaluating a public project. Public investment in a bridge. Valuing benefits and costs. Market
values. Nonmarket benefits and costs.
7. Decision making under uncertainty. Risk in economic analysis. Probability distributions.
Expected value and standard deviation. Utility theory and risk aversion. Certainty equivalent
adjustment. Risk-adjusted discount rates. Adjusting the valuation model for risk. Further
techniques for decision making under uncertainty. Decision trees. Simulation. The standard normal
curve. Game theory. Maximin decision rule. Minimax regret decision rule. An alternative use of
the loss concept.
8. Decision making: the role of information. The value of information. The oil wildcatter
revisited. Imperfect information. Revising probabilities: Bayes’ theorem. Other applications.
Predicting credit risks. Business behavior and decisions pitfalls.
Optimal search. Optimal stopping. Optimal sequential decisions. The value of additional
alternatives. Simultaneous search.
Asymmetric information. Adverse selection. Signaling. Principals, agents and moral hazards.
Organization design. The nature of the firm. The boundaries of the firm. Assigning decision-
making responsibilities. Monitoring and rewarding performance. Separation of ownership and
control in the modern company.

Method of assessment

After the finishing each section of the discipline an evaluation of the degree of the material
the students have acquired is conducted. The estimates are calculated as based on the sum of the
points received for the control works, individual work as well as for the realization of the project
task and presentation of its results.
The final estimate for semester work in total is calculated as based of the sum of the points and the
points got for the examination paper.
In the next table the maximum sums of points which could be received for each type of the control
are presented.

Current control
Control work 1 15
Control work 2 15
Home task 5
Report 10
Project task 10
Bonus for active work 5
Totally by current work 60
Final control
Examination paper 40
In total by the course 100

Basic literature
Mark Hirschey, James L. Pappas, Managerial economics /. - 12th ed., Fort Worth : Dryden Press,
2008, 827 pages
James L. Pappas, Mark Hirschey, Managerial economics /. - Fort Worth : Dryden Press, - Dryden
Press series in economics, 1993, 800 pages