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INTRODUCTION TO

MANAGERIAL ECONOMICS
Dr. Gong Jie
National University of Singapore

Why Do We Study Economics?


People have to Choose.
Resources are scarce.
There is No Such Thing as Free Lunch!

Economics: the science of Rational Choice


Rationality: the basic assumption
Rational Choice: Economic agents use all the information
available to make decisions that most efficiently satisfy their
needs and achieve stated objectives.
How do people make rational choice? This is the subject of
Economics!

Paul A. Samuelsons definition of Economics


Economics is the study of how men and society
choose, with or without the use of money, to employ
scarce productive resources, which could have
alternative uses, to produce various commodities over
time and distribute them for consumption, now and in
the future, among various people and groups in
society.

Managerial Economics
Economics
Micro: individual decision maker (consumers, households,
workers, firms, etc.)
Marco: aggregate level

Managerial Economics
The study of making decisions in allocating scarce resources to
achieve a managerial objective
The application of microeconomics on effective management
Managerial Economics helps managers make rational choice.
Manager in narrow sense and in broad sense

After completing BSP1005, you will be able to:


Thoroughly understand the function of market mechanisms
and the interaction among economic agents
Understand how the interplay between cost and demand
fundamentals shape the prices that prevail in a market
Master key concepts and principles of the basic market
structures
Develop a set of tools to make qualitative and quantitative
analysis of real-world economic issues

Course Road Map


Demand and Supply

Determination of
Prices

Consumer Theory
Producer Theory
Competitive Markets

Managerial Economics

Market Structure &


Profit-Maximizing
Pricing Decisions

Market Power & Monopoly


Pricing with Market Power

Game Theory&
Oligopoly Markets

Simultaneous-Move Game
Sequential-Move Game

Class Preparation
Class participation: NO WEBCAST
Course readings
Microeconomics,

by Bensako and Braeutigam


Managerial Economics, by Png: optional

Assignments
Problems

Sets
Presentation

Tutorial
Practice

questions and selective homework problems


15-min group presentation

Tutorials
Tutorials start from week 3
No tutorial in recess week

Practice problems will be assigned after each lecture


Solutions to practice problems discussed in tutorials
Written solutions will be posted on IVLE.

Presentation
Each group presents once.
The groups and topics will be announced at first tutorial
class.

Grading
Homework Problem Sets
15 percent

Presentation
25 percent

Final exam
60 percent

Two sets of individual homework


Due at the beginning of the
designated tutorial

Group project
15-min presentation in tutorial
Schedule to be announced in
IVLE & first tutorial

Monday, 24 Nov
Closed-book, covering all lecture
materials throughout the course

Important Dates and Times


Tuesdays, 2:00-3:30pm
Office hours

Week 3 (25-29 Aug)


First tutorial

Recess Week (20-28 Sep)


no class

Deepavali (22 Oct)


no class on 21&22 Oct. Tutorials meet as usual.

Monday, 24 Nov
Final Exam

Mathematics Required

A Few More Things


Enrollment Matters
Enrolling in module and tutorial sessions should be
addressed directly to BBA office.

Classroom Etiquette

Be on time to class
Switch off your cell phone
No side conversations
Laptops allowed ONLY for learning activities

Agenda
Essence of Economic Modeling
Opportunity cost
Economic models
Exogenous and endogenous variables
MARGINAL thinking!

How Do People Make Rational Choice?


People respond to Incentives.
Incentives: carrots (benefits) and sticks (costs)

People make decisions by weighing benefits against costs.


How do we measure benefits:
How much one is willing to sacrifice
What is cost:
Economists are concerned about opportunity cost.
You should always have in mind your next best options.

Benefits of Studying Economics?


Tools that will better equip you to make choices
How to quantify?
How much are you willing to sacrifice in order to learn
economics?

An econ major may make you richer!


Econ majors earn almost 20% more than degree-earners in
other social sciences.
Among law school or MBA graduates, those who studies
econ as undergrads earn 35% more.

What is Opportunity Cost?


The value of the next-best alternative that is foregone
by the decision-maker
Cost of purchasing a new car=price of the car+ return that
you would have earned from keeping the money
Labor cost of your own business=wage paid to others +
what you could earn on the outside
Cost of using your own building for office space=0?

Rental revenue!

What is your cost if you join NUS full-time MBA


Program?
Explicit Cost
Tuition
Textbooks
Meal?

Is that all?

What is the cost if you run you own


restaurant?
Suppose that you own a house on Orchard Road, and
you decide to run a restaurant, your total cost would
include:
Explicit Cost:

Implicit Cost

Economic Modeling
Models are simplifications, like maps.
Resemble reality
Abstract from the rich details
Help understand the fundamental forces

Decision making has two components


First, there is a goal.
Basic managerial objective: to maximize net benefits

Net Benefits = Total Benefits - Total Costs


Profits = Revenue - Costs

Objective function: functional relationship between the


value of the goal, and the values of variables.

Second, there is a set of options taken to achieve the


goal:
How much of the variable should be used to maximize net
benefits?

Endogenous vs Exogenous Variables


Exogenous variables: Variables that have values that
are taken as given in the model.
Endogenous variables: Variables whose value is
determined within the model being studied.
Analyze the business of a lemonade stand:
Exogenous

Endogenous

Find the optimal choice:


Marginal (Incremental) Analysis
Marginal Benefits (MB): Change in total benefits
arising from a unit change in the endogenous
variable, Q.
Marginal Costs (MC): Change in total costs arising
from a unit change in the endogenous variable, Q.

Example
Q

Benefits

MB

Costs

MC

Net Benefits

30

30

24

48

18

14

34

60

12

24

10

36

64

40

16

24

Marginal Principle
MB > MC means the last unit of the endogenous
variable increased benefits more than it increased
costs.
MB < MC means the last unit of the endogenous
variable increased costs more than it increased
benefits.
To maximize net benefits, the managerial
control(endogenous) variable should be increased
up to the point where MB = MC.

Marginal Benefit (MB) for


Continuous Variable
Marginal Benefit from an infinitely small change in
the endogenous variable, Q:

B
MB =
Q
Slope (calculus derivative) of the total benefit curve

Marginal Cost (MC) for


Continuous Variable
Marginal cost from an infinitely small change in the
endogenous variable, Q:

C
MC =
Q

Slope (calculus derivative) of the total cost curve

The Geometry of Optimization


Total Benefits
& Total Costs

Costs
Slope =MB

Benefits

B
Slope = MC

Q*

Economics of Effective Management


Identify objective and constraints

Objective: Specify what the economic agent cares about


Constraints: Whatever limits are placed on the resources
available to the agent

Economic modeling

Agents behavior can be modeled as optimizing the


objective function, subject to his various constraints.

Takeaway

Make sure that you include all costs(opportunity


cost) and benefits when making decisions.
Optimal economic decisions are made at the
margin (marginal analysis).