GM 1

Sept./Oct. 2015

Managerial Economics
Assoc. Prof. Sven Feldmann
Melbourne Business School
Office 24
9349 8171

What is Managerial Economics?

The job of a manager is to identify problems and opportunities, evaluate alternative courses
of action, make choices, and convince others to embrace and implement these choices.
Some entrepreneurs or top managers are driven by a firm vision and intuition about which
choices are correct for their company. Even for these leaders, making the right decisions that
guide the company along the intended path requires anticipating and evaluating the
consequences of various strategic alternatives, which requires analysis.
Managerial economics provides you with a robust framework and a set of tools, collectively
known as economic thinking, that help you identify and evaluate strategic business options
and make better choices. To this end you learn fundamental economic tools and analytical
skills that help you in managerial and strategic decision-making.
Economic decision-making focuses on the strategic aspect of decisions: actions by
individuals and firms effect others, either through the market or through other forms of
interaction with one another. The effect of a decision is therefore often mitigated by the
response of other actors, a fact that needs to be anticipated when evaluating the options.
Game theory is the formal framework that incorporates these interactions into the decision
making process. Many subjectsin particular finance, business strategy, and marketing
build on tools and intuitions developed in this course.
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Four step model of learning and

developing leadership in economics*
4. Economic Leadership
3. Critical Thinking
2. Problem Solving
1. Understanding
Ability to talk about
economic concepts and
explain them to others.

Ability to apply economic

concepts to problems
specifically designed to
be analysed with a given
concept.

Ability to apply economic

analysis to real-world
problems.
Ability to deal with
complexity, ambiguity,
incomplete data, and lack
of textbook structure.

Ability to use economic thinking in designing

and implementing solutions to management
problems, processes and decision-making.
Ability to engage and influence others in their
understanding, formulation, and solution of
complex problems, through your actions and
communication based on economic thinking.

* adapted

from Accelerated Learning Lab, R.E. Wood

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Learning method
The goal of this course is to achieve the level of Critical Thinking in managerial economics. This
means that you will need to be able to understand the economic concepts, learn to apply them in
structured problems, and develop the ability to apply them in more complex, less structured
problems exhibiting a degree of complexity and ambiguity.
Learning economics is like learning a new sport, instrument, or language: you cant learn it by
just watching it being performed! You need to participate and put in effort to practice it. Inevitably
you will experience some set-backs. It is normal that you will find economics difficult and
unfamiliar at first, but you will get better at it. Keep an open mind when encountering difficulties,
and view challenges and mistakes as learning opportunities, not as failures.
To achieve the learning goal the course offers you the following learning structure:

Theory
Lectures, reading

Practice
Practice problems,
quizzes

Advanced Practice
Complex problems

Exam
Combo of simple and
complex problems

To learn managerial economics you will need to put in the time and
put up with some failures, just like you would when learning a new sport
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Expectations
As a lecturer it is my role to help you learn managerial economics, and as a student it is your role
to make the best of it. This suggests the following ground rules:
It is my responsibility to
come prepared to every class and begin and end class on time
offer you opportunities to learn and practice new skills
provide you with a stimulating learning environment
respect you and your experience and background
treat all students equitably, grade you fairly, and provide honest feedback on your learning
realise that it is not always your fault if you dont understand the material.

It is your responsibility to
come prepared to every class and be ready to begin class on time
be focused and engaged in the class proceedings at all times and contribute your share
keep distractions to a minimum. In particular this means no email, smart phone use or laptop
internet browsing at any time during class
be respectful to your classmates and me. Listen actively and engage
act with academic and personal integrity: uphold the Student Honour Code, do not seek an unfair
advantage, and contribute your fair share to joint efforts such as group assignments and study group
complete all assigned work and make an effort to learn and practice the material presented
accept fair and honest feedback. Realise that it is not always my fault if you dont understand the
material.

Class materials
The following text books are strongly suggested for the course:
Besanko, D. and R. Brautigam (2011), Microeconomics, 4th or 5th Edition, Wiley. (B&B)
An excellent text book covering our material for weeks 37 and more. Available at the book store
in bound copy and loose-leaf (cheaper) and as e-book from the publisher. There are several copies
in the library too. I recommend you buy it.

Van Zandt, T. (2002), Firms, Prices, and Markets, INSEAD. (VZ)

Downloadable for free at <http://faculty.insead.edu/vanzandt/teaching/FPM-Aug2012.pdf>

An excellent and chatty book that shows how economics and game theory apply to business
strategy and the real world of business, is
Brandenburger, A. and B. Nalebuff (1997/2007), Co-opetition, Doubleday.
Start reading it now! (You wont be tested on it though.)
Class slides will be available on LMS the day before class. You are not expected to read the
slides before classin fact, I prefer it if you dont.
Summaries of the material will be provided in due time before the exam to assist your review.
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Requirements
Preparation: There are sections and chapters assigned for reading. However, most of
your time spent on managerial economics outside of the classroom will be devoted to
solving practice and advanced practice problems, and reviewing prepared solutions. You
need to be willing to dedicate the time necessary to complete these problems.
Maths skills: Economics is a quantitative subject and as such requires some basic maths
skills. Fluency in the topics covered in Refreshing Maths during accelerator week is
eminently helpful. If you are not fluent in any of the following, you should review them
on your own, with a tutor, or have a word with me.
Excel: You need to be comfortable doing calculations with Excel and be able to graph a
function (using Charts). You should learn how to format graphs and tables beyond the
Excel defaults.
Calculator: During quizzes and exam you will not be able to use Excel and need a
calculator. In addition to the basic four functions, the calculator should have exponent
(xy) and a memory function. You need to know how to use the memory function. A
financial calculator is OK; a smart phone calculator is not allowed during the final exam
(by University of Melbourne rules).
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Assessment
Your grade will be based the following components:
Adding value to class

10%

Your added value is determined by the quality, not quantity, of your participation during class. A good
question enhances the learning process for everyone. Value-adding participation during a discussion
entails engaging with comments others have made and building on them, not ignoring them. In addition,
I may on occasion cold call students. Added value is graded by classifying students into four groups:
below, at, above, and well above expectations. The majority of students will be at expectations.

Problem sets

15%

A weekly problem set is due via LMS. You may solve the problems individually or in your syndicate/
study group. If solved in groups, you are responsible for your own solution and submit your own answer.

Quizzes

15%

Beginning with week 2 there will be a brief review quiz of the previous weeks material at the beginning
of class. The quiz starts promptly at 8:30. Review and recall is critical for long-term learning.

Final exam

60%

There will be an individual 3 hour final exam. You will receive sample practice questions and summaries
to prepare for the exam. The exam is closed book and you can bring a 4-page, hand written, cheat sheet
to the exam.
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One more thing

It is against the rules of this class to:

1. access quizzes, problem sets or exams from previous
terms
2. pass any solutions to quizzes, problem sets or exams
(in whole or in part) to future students.

Typical day structure

Time

Activities

8:30 8:50

Quiz (except for week 1)

8:50 9:50

Session A

9:50 10:00

Break

10:00 10:55

Session B

10:55 11:10

Break

11:10 12:00

Session C

12:00 - 14:00

Lunch and Recreation

14:00 15:30

Syndicates work on problem sets

15:30 15:45

Break

15:45 16:30

Session D / Review
Independent work
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Topics
Week

Theme

Creating and appropriating value

Bargaining with market power

and multilateral negotiation

Selling to large markets:

Pricing with market power

Introduction to Game Theory

Topics/Activities

Preparation

We examine how transactions create value

and how a firm can appropriate some of this
value. We focus on bilateral relationships
which occur frequently in B2B dealings.

Read: Course outline

Read: Note on Consumer Choice and on
Bilateral Bargaining (both on LMS)

We examine how competition among

multiple participants limits the range of
feasible bargaining outcomes

We examine how pricing decisions affect

profitability. We learn as a benchmark the
uniform pricing model, and analyse more
advanced forms of customised pricing

Read B&B Ch. 11.111.3

Read B&B Ch. 12.112.4

Game theory is the analysis of strategic

bahavior. By examining the fundamental
structure of interactions we learn to think
strategically, analyse a strategic situation
and make correct choices. This week we
focus on the building blocks

Read B&B Chapter 14

Read Coopetition, in: A. Brandenburger,

B. Nalebuff, Coopetition, Chapter 2
Read: Note on Multilateral Bargaining
(LMS)

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Topics
Week

Theme

Competing in contested markets

Collusion, commitment, and

repeated games

Dealing with incomplete

information

Topics/Activities

Preparation

Most firms have to decide whether to enter a

market, introduce new products, choose
their capacity, and design and price their
products while competitors face similar
choices. We examine long-run and short-run
optimal behaviors and the associated
competitive outcomes.

Read B&B Ch. 13.113.2 (up to p.543),

13.4

Strategic commitment and trust play an

important part both in the relationship with
customers and suppliers and in competitive
strategy. An important tool for understanding
trust and credibility lies in the theory of
repeated games. Application include
industry collusion.

Read B&B Ch. 13.2 (pp. 54446), 14.2

Many of the basic economic models make

unreasonably optimistic assumptions about
the information available to players. We
examine how incomplete and asymmetric
information affects bargaining, pricing, and
contractual relationships

Reading t.b.a.

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