1 BSP1703 Managerial Economics Semester II, AY2023-2024

Lecture Notes 1:
Introduction and Course Overview

Prof. Geunyong Park

 Lecturer
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➢ Lecturer: Geunyong Park (Assistant Professor)

➢ Department of Strategy and Policy, NUS Business School
➢ Office: Biz 1, 06-39
➢ Email: park.geunyong@nus.edu.sg
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INTRODUCTION OF ECONOMICS
 Why Economics is Important?
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➢ People make choices under constraints.

• The Rolling Stones once said: "You can’t always get what you want.”
• Resources are limited (e.g., the limited incomes, the limited budgets
and technical know-how, the limited hours in a week, etc.)

➢ Economics teaches us about Rational Choices.

• How to make use of all the information available to make decisions
that can achieve your goals or satisfy your needs in the most efficient
way (e.g., buying a car, picking a career, deciding years of schooling,
etc.)
• Crucial to understand social, economics, and management phenomena.
 Corporate Decision Making:
The Toyota Prius
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➢ In 1997, Toyota introduced Prius in Japan, and started selling it worldwide in

2001. The Prius was a big success, and within a few years other
manufacturers began introducing hybrid versions of some of their cars.

➢ The design and efficient production of the Prius involved not only some
impressive engineering, but a lot of economics as well.

➢ Toyota needs to consider

➢ how public would react to the design and performance of the new product.
➢ how strong demand would be, and how fast it would grow.
➢ how high production costs would be.
➢ how much and how fast costs would decline as managers and workers
gained experience with the production process.
➢ how to design a pricing strategy and consider how competitors would
react to it.
➢ the risks and possible outcomes of its decisions.
 Paul A. Samuelson’s definition of
Economics
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➢ “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.”

Paul Anthony Samuelson (May 15,

1915 – December 13, 2009) was an
American economist and the first American
to win the Nobel Memorial Prize in
Economic Sciences.
 Scope of Economics
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➢ Microeconomics: individual decision maker

➢ e.g. the behavior and interaction of individual firms and consumers

➢ Macroeconomics: aggregate level

➢ e.g. the growth rate of national output, interest rates, unemployment, etc.

➢ Example: If OPEC increases crude-oil price

➢ Microecon: oil industries, gas stations, drivers
➢ Macroecon: business cycle, inflation, unemployment

➢ Managerial economics is based on Microeconomics.

 Two Dimensions in Economics
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➢ Positive Economics
➢ descriptive, value-free
➢ e.g., If interest rate goes up, would consumption increase?
➢ e.g., If the US government imposes a quota on the import of
foreign cars. What would happen to the price, production, and
sales of cars?
➢ Normative Economics
➢ prescriptive, value-involved
➢ e.g., For economic growth, should a government lower interest rate or
not?
➢ e.g., Consider a new tax on gasoline. How much money should be
invested to make cars more fuel-efficient?
➢ We are doing both positive and normative economics.
Question
 Which of the following is a normative statement?
A) Taxes should be higher.
B) Lower taxes would lead to lower revenues.
C) A 2% increase in foreign investment is associated with a 0.5% rise in
economic growth.
D) Lower taxes would result in a 12% increase in consumption.
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MOVTIVATING EXAMPLES AND

COURSE OVERVIEW
 Motivating Example 1: Pricing
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➢ What’s the economic reason behind? Ever wondered?

 Motivating Example 2: Price Control
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➢ If people think their wage rate is low, should the government

implement minimum wage?

➢ Cross-country comparisons
• US: $7.25/hour
• Japan: $6.56/hour
• France: $11.03/hour
• Singapore: No minimum wage

➢ How would minimum wage affect average wage and

unemployment rate? Would it increase the social welfare?
 Motivating Example 3: Competition
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➢ Is competition always preferred over market power?

➢ Example: M1 was introduced to Telecom industry in 1999. SingTel
was forced to cut its rates twice in one day, by a total of 18%,
when M1 responded to its first rate cut. In the next few days,
SingTel also reduced some monthly subscriptions by 35 to 40%.
(Business Times)
➢ What’s the effect of Grab-Uber merger?
➢ In industries like gas and electricity, there is only one firm serving
the market for many countries. Is it efficient?

➢ How competition affects the net gain of consumers and business.

Why most countries have antitrust laws? Under which scenario it is
even preferred to have a sole seller?
 Motivating Example 4: Behavioral Economics
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➢ You are heading for a music concert.

➢ (Case A) You paid $100 to buy a non-refundable ticket. At the entrance,

you found you lost the ticket. Would you buy the ticket again?

➢ (Case B) You are about to buy a ticket at the box office. You opened your
wallet to find your $100 is gone. Would you still buy the ticket?

➢ Behavioral Economics is getting more and more popular.

 Class Preparation
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➢ Course readings
➢ Microeconomics (Global Edition), 9th, Robert

➢ S. Pindyck & Daniel L. Rubinfeld, 2015

➢ Supplementary book: Microeconomics, 3rd, Acemoglu, D., Laibson, D.,
and List, J. A., 2021
➢ Assignments (3 times)
➢ Tutorials
➢ Homework problems

➢ General Q&A
 Lecture Schedules
(Details are subject to change)
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Week Lecture Textbook Chapters Tutorial

Week 1 Course Overview and Intro Ch 1 No Tutorials

Week 2 Demand And Supply Elasticity Ch 2 No Tutorials

Week 3 Consumer Theory Ch 3 & 4 Math Review

Week 4 Uncertainty & Behavioral Econ Ch 5

Week 5 Utility and Profit Maximazation Ch 7 & 8 Assignment 1

Week 6 Competitive Markets Ch 9

Recess Week
 Lecture Schedules
(Details are subject to change)
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Week Lecture Textbook Chapters Tutorial

Week 7 Market Power and Monopoly Ch 10

Week 8 Sophisticated Pricing Ch 11

Monopolistic Competition and

Week 9 Ch 12 Assignment 2
Oligopoly

Week 10 Game Theory: Static Games Ch 13

Week 11 Game Theory: Dynamic Games Ch 13

Week 12 Asymmetric Information Ch 17 Assignment 3

Course Summary and Final

Week 13
Review
 Grading
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1. Assignments: 30%
• Late submission is not accepted
2. Tutorial Participation: 10%
3. Final Exam: 60%
• On 2nd May
• No make-up final examination is to be given.
 Questions, Doubts, and Consultations
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➢ Office Hours
➢ By appointments (In-person or Zoom)
➢ Extended consultation hours will be set up prior to the final exam.

➢ Email Consultations
➢ Our teaching team will do our best to reply swiftly, unless
➢ requiring long answers
➢ unprofessional
 Mathematics Required
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➢ Simple calculus: first derivative

➢ Will be reviewed in one of tutorials
d(5Q + 3)
=?
d(Q)

➢ Simple algebra:
Q 2 - 4Q + 4 = 0,

So Q=?
 A Few More Things
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➢ Enrollment Matters
• Enrolling in module and tutorial session (i.e., swapping tutorial
session or lecture group ) should be addressed directly to BBA
office.
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SOME PRELIMINARY CONCEPTS

 Trade-offs
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➢ Consumers
➢ Trade-offs in the purchase of more of some goods for less of others
➢ Trade-off between current consumption and future consumption

➢ Workers
➢ Trade-offs in their choice of employment
➢ Trade-off between labor and leisure

➢ Firms
➢ Trade-offs in what to produce
➢ Trade-offs in the resources to use in production
 Markets and Prices
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➢ In a centrally planned economy, prices are set by the government.

➢ In a market economy, prices are determined by the interactions of

consumers, workers, and firms. These interactions occur in markets—
collections of buyers and sellers that together determine the price of
a good.

➢ We are interested in the underlying motivations of all parties that

enter into this economic exchange, their decision makings and
economic implications. Naturally, price-determining mechanism is
important in microeconomics.
 Market vs. Industry
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➢ Market vs Industry
➢ A market is the collection of buyers and sellers that, through their
actual or potential interactions, determine the price of a product
or set of products.

➢ A firm must understand who its actual and potential competitors

and must also know the product boundaries and geographical
boundaries of its market in order to set price, determine
advertising budgets and make capital investment decisions.

➢ An industry is a collection of firms that sell the same or related

products.
 Competitive vs. Non-competitive Markets
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➢ A market is (perfectly) competitive if there are many buyers and

sellers so that no single buyer or seller has a market power.
Otherwise, non-competitive or imperfectly competitive.

➢ Markets have various structures:

➢ Perfect competition
➢ Monopoly
➢ Monopolistic competition
➢ Oligopoly
 Opportunity Cost
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➢ The value of the next-best alternative that is foregone by the

decision-maker.
➢ Cost of purchasing a property?
➢ Assume the next-best is to keep the money (=price of the property)
in saving accounts and earn some investment returns.
➢ Opportunity cost = price of the property + returns that you would
have earned from saving the money

➢ Cost of using your own building for office space = 0?

 Example (opportunity cost)
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➢ What is your opportunity cost for attending college?

➢ Explicit Cost
➢ Tuition
➢ Textbooks
➢ Boarding expenses

➢ Any other cost?

 Opportunity Cost vs. Accounting Cost
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➢ Accounting cost
➢ Cost appeared in accounting books, i.e., explicit cost
➢ Include items that an economist would not include and may not include
items that economists usually include.

➢ Opportunity cost = explicit cost + implicit cost

 Two Components in Decision Making
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➢ Objective
➢ To maximize net benefits or profit

➢ Net Benefits = Total Benefits – Total Costs

➢ Profit = Revenue – Costs

➢ Available options
➢ To identify which option is able to maximize net benefits
 Optimal choice: Marginal Analysis
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➢ Marginal Benefits (MB): Change in total benefits arising from a unit

change in Q.

➢ Marginal Costs (MC): Change in total costs arising from a unit

change in Q.
 Example
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Net
Q Benefits MB Costs MC
Benefits

0 0 0 0 0 0

1 30 30 6 6 24

2 48 18 14 8 34

3 60 12 24 10 36

4 64 4 40 16 24
 Marginal Principle
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➢ MB>MC means the last unit of quantity, Q increased benefits more than it
increased costs.

➢ MB<MC means the last unit of quantity, Q increased cost more than it
increased benefits.

➢ To maximize net benefits, the quantity Q should be increased up to the

point where MB = MC.
 MB and MC for Continuous Variable
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➢ Marginal benefits from an infinitely small change in the variable, Q:

DB dB
MB = =
DQ dQ
➢ Marginal costs from an infinitely small change in the variable, Q:

DC dC
MC = =
DQ dQ
Question
➢ According to marginal analysis, optimal decision-making involves:
A) Taking actions whenever marginal benefits are positive.
B) Taking actions only if the marginal cost is zero.
C) Taking actions whenever the marginal benefit exceeds the marginal cost.
D) All of the above.
 Takeaway
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➢ Make sure that you include all costs(opportunity cost) and benefits when
making decisions.

➢ Optimal economic decisions are made at the margin (marginal analysis).