Kathmandu University School of Management (KUSOM)

Course Description for Business Economics

Course Title Business Economics/2012

Credit Hours/Total 4/ 60 hours
Contact Hours
Prescribed Text Managerial Economics: Theory, applications and cases by Allen, Weigelt, Doherty,
Mansfield, Viva-Norton Student edition
Course The guiding philosophy of this course is to train you to become an economic naturalist, to help
Introduction you see things through an economic lens. You may not be aware but almost every decision you
made/will make from going to school, coming to KUSOM, to getting married and having children
etc is predominantly an economic decision. You will be making many more decisions in the future
- as a manager, as a voter in an election, as a social activist, as a family member – and this course
will offer you insights in making informed decisions.

Due to its business orientation, the course aims at cultivating your understanding of the economic
environment that prevails in a business world. Microeconomic tools and methods are useful to
managers for various reasons: to understand markets and competitors, to help manage available
resources efficiently, to develop strategic competency, to understand market imperfections and
government’s policies etc. Variety of topics that will be discussed relate to demand and supply
analysis, cost and production behaviour, market structures and pricing strategies, strategic
behavior of economic agents, risk & uncertainty and incentives, and government regulations &
public policy.

Course learning Upon successful completion, this course will enable you to:
objectives
1. apply economic principles in formulating rational business decisions.
2. interpret market models on the basis of demand and supply, estimate elasticities and evaluate
their implications for businesses.
3. examine production and cost functions and relation between them, estimate break even
output, leverage ratio.
4. classify different market structures, analyze their output and pricing behaviours.
5. understand the different pricing practices: cost plus pricing, discrimination, block pricing,
transfer pricing, peak load pricing etc.
6. analyze the impact of various strategic behavior of firms; measure attitudes toward risk
7. describe the role of government intervention including its effects on costs, benefits of
operating a business.

Learning Units Readings

Economist’s guide Nature and scope of business economics, Chp 1, Appendix
(1st/2nd weeks) opportunity costs, costs and benefits, rent
seeking behavior, nature of profits,
optimization techniques

Demand and Consumer’s optimal demand; market Chps 2,3

Supply demand, supply and equilibrium;
(3rd week) elasticities; estimating demand functions,
use of elasticities. forecasting demand
Production and Nature of production function; isoquants
Cost and optimal combination of inputs;
Cases: Forecasting demand; estimating
demand for a film; oil prices and demand and
supply
Chps 4,5
Cases: plastics case, understanding cost for

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(4th /5th weeks) innovation and global competitiveness; management decisions, a low cost retail,
estimating production functions. production system of a company

Nature of cost, short and long run cost

curves; learning curves; economies of
scale; breakeven analysis; profit
contribution analysis; empirical estimation
of cost functions.

Market structure Various market structure; price and output Chps: 6,7
and simple pricing determination under perfect competition,
strategies long-run adjustment; monopoly and
( 6/7 weeks) monopolistic competition; cost plus
pricing; multiple product firm’s behavior;
pricing of joint products; monopsony

Sophisticated Price discrimination; peak-load pricing, Chps: 8,9

pricing strategies two-part tariffs, bundling strategy; transfer
(8 weeks) pricing and its use
Strategies faced by Oligopoly market behavior and models,
managers collusive behavior, duopoly, price
( 9/10 weeks) leadership, Sticky price, strategy with
game theory approach; dominant strategies,
Nash equilibrium, strategic form game,
extensive form game with backward
induction, repeated and coordination
games
Auctions Auction mechanisms, bidding strategies,
(11 week) risk aversion, winner’s curse
Case: transfer pricing,
Chps: 10, 11
Cases: Microsoft’s strategies, consolidating
steel industry, game theory as business
strategy, newspaper price war
Chp 12
Reading; auctions and bidding: a primer by
Milgrom (JEP)

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Risk, uncertainty Risk analysis and probability, measures of Chps: 13,14,15
and incentives risk, expected value of perfect information,
(12/13 weeks) utility approach of measuring attitudes
toward risk, prospect theory and certainty
equivalent; principal-agent issues, effect of
risk, information and compensation;
resolving incentive conflict; market for
lemons and adverse selection, resolving
adverse selection through self-selection

Government Competitive market vs monopoly; Chp: 16

actions and regulation of monopoly; effects of Should energy be subsidized,
managerial regulation on monopoly, antitrust laws,
behavior effects of taxes, price-ceilings and floors;
(14th/15th weeks) public goods and market failure; dealing
with positive and negative externalities

Pedagogy/Learnin Pre-reading of assigned chapters is important, and must be ready for presentation when asked.
g Methods Your class will be divided into several groups, each consisting of three members. Each group is
required to present various assigned group work/projects in the class.

Lectures follow or are followed by group presentations/ discussions on related exercises (to be
assigned). Lectures must be interactive and participatory, to have effective learning
environment. Textbook, case studies, newspaper readings, journal articles and other references
will constitute the basic reading materials for the course. A number of business applications
will be introduced wherever possible.
Course Evaluation Your performance on the course will depend on the following instruments; note mark allocation
on the side.

(i) Five quizzes: 20% (Every second week there will be a quiz!)
(ii) Case/class presentation: 15%
(iii) Individual presentation: 5%
(iv) Mid-term exam: 20%
(v) Group Project: 15%
(vi) Final exam: 25%

Quiz plans (Each quiz will have a time limit of 15 minutes):

Case presentation plan: A case study will be assigned to each group. The group is expected to
conduct a thorough analysis of the case and present it to the class on a specified date.

Individual presentation: Each individual will select a microeconomic issue from newspaper or
magazine and will deliver a five-minute presentation.

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 Group project plan: It will include presenting assigned case studies and anyother assigned
group project.

Class-room Someone with an ambition to earn a good post-graduate degree in business is expected to strive
Etiquettes for high ethical work-standard. I expect a business student to be focused, disciplined, respectful,
hard-working and goal-oriented.
Also, please observe the following guidelines.
- No mobile phone calls or text messaging in class
- No laptop to be turned on unless asked to work on it
- Late arrival (over 5 minutes) will be reported as class absence
- There will be no make-up for quiz, midterm, final exam, or group presentation
- A deduction of 50% will be made for each late submission
- Plagiarism or cheating will result in zero grade for that test or assignment

Other References (1) Economics for Managers by Mark Hirschey. Thomson.

(2) Managerial Economics by Craig Petersen, W. Lewis and Sudhir Jain. Pearson.
(3) Managerial Economics by D. Salvatore and R. Srivastava. Oxford University Press.
(4) Economics for Business by John Sloman and Mark Sutcliffe. Pearson.

Other readings Newspapers:

You should skim through economic sections of Nepali and Indian newspapers where you will
find plenty of issues dealing with contemporary economic problems including how respective
governments tackle them.

Magazines:
Following magazines, although not exclusively, would be good source for understanding
international economic agenda.
(1) The Economist
(2) Businessweek
(3) Business Today