ECO 501.1; ECO 501.

2
MANAGERIAL ECONOMICS

Summer Semester, 2021

BRAC University
 THIS WEEK
• Part I: Last week's covered topics • BLANK SLIDE
• Part II: BRACU and my student
honour code
• Part III: What is managerial
economics and definition of
economics
• Part IV: Concepts to understand
choice
• Part V: Others
 LAST WEEK
• We introduced ourselves. • We mentioned the texts we shall
• We briefed ourselves of the use. The texts have been sent to
course assessments you by email.
• We briefed ourselves that this • We briefly mentioned the initial
semester ‘may be’ totally online. core concepts we will start with
in Week 2.
• We introduced the Facebook
group- and advised all to add
• We introduced my YouTube
channel and advised all to add
 Cheating, Plagiarism, Copying:
BRACU’s Student Honour Code
• BRACU Student Honour Code • 2. I will immediately notify the
1. I will not cheat, use unfair course teacher of any such
means, join intentionally or activity or online or offline
unintentionally any online or groups that I become aware of.
offline group in which exam • 3. I acknowledge that I may be
answers are posted or discussed, suspended or expelled from Brac
or engage in any behavior that University if I am found to have
would commonly be deemed to engaged in any academically
be academically unethical. unethical behavior.
• BRACU is strict on cheating,
plagiarism, copying
 Cheating, Plagiarism, Copying:
My Honour Code
• My Student Honour Code
1. If the semester will be online
as was 21-1, then assessments
will also be online.
• 2. I will give take-home
assignments. I will give like say:
End of Week 2, Submission
Before Class of Week 3.
• 3. Each assignment will be
simple and should finish in two-
sides of type at the best
• 4. Each assignment will be
checked for plagiarism via
Turnitin. If plagiarism is high,
then marks may be deducted or
capped at a certain letter grade.
• 5. Through the semester, I shall
take online oral assessments.
These will be done randomly.
Each participant will face at least
one online oral assessment.
Details shall be mentioned in
class.
 What is Managerial Economics?
• What is managerial economics?
Managerial economics is an
applied branch of economics
that uses tools and techniques
from economic theory to enable
business managers to make
better decisions and understand
the environment in which they
operate.
• Why tools from economics?
Economics is the first among the
social-sciences to study how
decisions are made. Many
economic tools are based on
common-sense and easily
applicable to building theories
and models.
 What is Managerial Economics?
• Economics Background
If you have a background in
economics from O, A levels; or
SSC, HSC; or from your
undergrad, you will be familiar
with concepts in this course.
However, you may find the same
concepts in a different line when
you re-visit.
• No Economics Background
If you never studied economics
in your life, no problem. Most
concepts of economics we will
cover in this course will be based
on common sense and real-
world daily experiences.
 Economics: Definition
• Economics studies how
individuals, firms, government
and other organizations make
choices and how these choices
determine a society’s use of
resources (Stiglitz-Walsh: PP4)
• Identify keywords & link them
• 1. Individuals, firms, govts and
others: individual or a group
• 2. Choices: how are choices or
decisions made?
3. Society’s use of resources:
What is consequence of a choice
for an individual or a group?
• Linking Keywords: What
determines a choice? What are
the consequences of a choice?
Economics will seen as a science
of decision-making.
 Concepts to Understand Choice
• 1. TRADE-OFFS: Because of
scarcity, if we decide to do more
of X now, we sacrifice doing Y
• 2. INCENTIVES: How does the
environment in which firms and
households operate influence
what they will do, or won’t do?
• 3. EXCHANGE: When A and B
enter into an agreement, it will
be mutually beneficial for both.
• 4. INFORMATION: What role
does information play in making
decisions?
• 5. DISTRIBUTION: How is wealth
affected by choices made?
• Distribution shall not be
discussed in this course
 Concept 1/5: Trade-Off
• Foundation of choice is scarcity.
• We make choices based on: 1.
limited resources, 2. technology,
and 3. time.
• Both X&Y are available to us
before a choice. We cannot
choose X&Y at the same time.
What happens?
• If we choose X over Y, we make a
trade-off, a sacrifice.
• Trade-off is also known as
opportunity cost.
• We compare X&Y when both are
available. If we see X>Y, we
choose X over Y. The trade-off:
we sacrifice Y for X. Alternatively,
the cost of the opportunity to
choose X is the cost of sacrificing
Y.
• Think about examples.
 Concept 1/5: Trade-Off
• Opportunity Cost:
• Before you decided to do a
Masters at BRACU, you had say
three options: A,B,C. All these
three were available to choose,
but not all at the same time.
• You rank as: B>A>C, where B is
BRACU. Why Ranking?
• The opportunity cost of choosing
BRACU is sacrificing the next
best alternative univ A.
• Sunk Cost:
• Once you’ve chosen B, A&C
don’t exist anymore. You’re in a
new environment. Thus the cost
of choosing B over A (and also C)
is now a Sunk Cost after choice.
• Because of scarcity, we cannot
choose A,B,C at same time. Thus
we are forced to make a choice.
• Think about an example.
 Concept 2/5: Incentives
• Incentives: How choices are
influenced by changing
environments.
• If the price of fuel increases,
how will this influence the
choice of first-time car buyers?
• Decision-makers calculate the
cost & benefit of decisions from
changing environment. This is
known as cost-benefit analysis.
• Higher fuel cost raises cost of
maintaining your car, but the
cost of using a jeep will be more
than a 1000cc car.
• If you’re first-time car buyer you
are more flexible in buying a car
than one who already has a car.
• What about disincentive?
• Think about examples.
 Concept 2/5: Incentives
• Incentives: When an external
environment encourages you to
do something.
• Disincentive: When an external
environment discourages you to
do something.
• Encourages: to increase ↑
Discourages: to decrease ↓
• P↑: How is dd or ss affected?
P↓: How is dd or ss affected?
• Ques asked in this course:
1. When will incentive work?
2. When will disincentive work?
3. When will neither work?
• Incentives (or disincentives) may
be natural and within a system
(eg: prices in a market). They
may be external (eg: conditions
in a contract)
• Think about examples.
 Concept 3/5: Exchange
• Exchange: the process by which
good X moves from A to B.
• Exchange takes place in a market.
• Market: An arrangement where
buyers and sellers meet; large-scale
co-operation is possible.
• When assumption may not hold:
1. Market exchanges can go wrong
2. Some exchanges like kidneys
cannot be exchanged in any market
• Voluntary Exchange. Seller wants
to sell X; buyer wants to buy X.
Neither influenced by anything
• When exchanges are voluntary,
buyers & sellers mutually benefit.
Buyer finds utility. Seller receives
profit from sales.
• When exchanges are not voluntary,
then outcome will be one-sided.
One will be happy, not the other.
 Concept 3/5: Exchange
• Robin Hood would ‘steal’ from • When exchanges are voluntary,
the rich and give to the poor. markets solve three problems
Although his intentions were with no external intervention.
noble, this transaction was not • 1. WHAT will be produced
voluntary. The poor were happy 2. HOW it will be produced
at the cost of the rich. Both were 3. WHO gets what with no
not happy (mutually beneficial) external influence.
at the same time.
• When exchange is voluntary, all
parties benefit together. The
social welfare is maximized.
 Concept 4/5: Information
• What information sets do • Asymmetric information. One
transacting parties have? side knows more than the other.
• Does one side have more or less • With asymmetric information,
information than the other? resource allocation shall not be
• Used Car Market: The owner of efficient. Buyers (or sellers) will
a car knows more about a used constantly benefit more than the
car than the buyer. other party. This means the
good cannot be sold, or the
• Insurance Market: Insurance good will be sold at sub-optimal
buyer knows more about himself levels.
than the insurance company
 Concept 4/5: Information
• In the presence of asymmetric • This phenomenon is known as
information– it is very difficult the Lemons Market after George
for buyers (or sellers) to identify Akerlof who introduced. He won
credibly which is the good type a Nobel in Economics in 2001
and which is the bad type with two others for this
product. When this is not contribution.
possible, good quality goods are
driven out of the market.
• The course will explore this
phenomenon and its solutions
 Concept 5/5: Distribution
• In a market economy, firms are
constantly hiring and firing
workers- changing technology-
responding to consumer
demand and govt rules.
• This creates a change in the
distribution of wealth- who gets
what from the pie.
• As long as it is not socially
adverse, govts don’t intervene.
• If the distribution becomes
socially undesirable, then govts
have a moral responsibility to
intervene.
• Recent example is govt
intervention around the world
due to the Covid19 pandemic.
• Eco 501 will not discuss this
aspect.
 Three Major Markets
• The market: Households & Firms
• PRODUCT MARKET: Firms are
sellers; Households buyers. This
is the market we will analyze.
• LABOUR MARKET: Firms buy the
labour of Households (who sell)
• CAPITAL MARKET: Firms buy
savings of Households (who sell)
• STIGLITZ: Fig 1.1: 15
 Microeconomics & Macroeconomics
• Microeconomics: The branch of
economics that discusses how
individual firms and households
interact in a market-setting; and
how their sum-total decisions
influence the distribution of
wealth in a market.
• This branch is more relevant to
ECO 501: Managerial Economics.
• Macroeconomics: The branch of
economics that discusses the
‘economy’. Unemployment-
inflation- monetary policy etc
are discussed under
macroeconomics.
• This branch is less relevant to
ECO 501: Managerial Economics.
 Science of Economics
• To explain theories, economics
uses hypotheses & models.
• Hypothesis: A statement about a
population, EG: if the price
increases, ceteris paribus, people
tend to buy less.
• Model: How will the above
hypothesis be represented?
Table? Graph? Equations?
Econometric analysis? Etc?
• In Online: The course will focus
on graphical presentation of
theories more than other
methods. It is challenging to
explain mathematical concepts
online. However, that does not
mean the course will
compromise with quality. Every
effort will be made to try to
make you think.
 Why Economists Disagree
• POSITIVE ECONOMICS:
Theoretical economics is known
as positive economics. It asks
questions like: WHY did demand
fall? WHY did school enrolment
increase? Etc.
• This is the analysis of economics
as a pure science. This analysis
does not make any value
judgement.
• NORMATIVE ECONOMICS:
Economics is also a social
science. As a social science
economics also asks questions of
ethics and morality like: There
SHOULD be more schools and
hospitals? The answer to these
questions are not pure science
• ECO 501: Managerial Economics
will focus on positive economics
more. Normative issues will be
addressed in ethics courses.
 This Week’s References
• Participants are advised to go
through the following Text.
These have been shared to all
previously.
• Stiglitz. Chap 1. PP 1-22
• Advices:
1. Please see the pre-recorded
video lectures before a
discussion class on SAT, TUE.
• 2. Please attend the discussion
class. Hints on the course may
be given out.
• 3. Please participate as you can.
•  Good Luck 