Managerial Economics - Comprehensive Notes

Introduction

  • This course book is the core content; additional materials are on the learning platform.
  • Content is divided into units and sections, each focusing on a key concept.
  • Self-check questions are included at the end of each section to test understanding.
  • Knowledge tests on the platform must be completed with at least 80% correct to pass each unit.
  • Course completion requires passing all knowledge tests and completing the evaluation.

Basic Reading

  • Acemoglu, D., Laibson, D., & List, J. A. (2018). Microeconomics (Global, 2nd ed.). Pearson.
  • Case, K. E., Osten, S. M., & Fair, R. C. (2019). Principles of economics (Global, 13th ed.). Harlow.
  • Keat, P. G., & Young, P. K. Y. (2013). Managerial economics (Global, 7th ed.). Pearson Education Limited.
  • Leyton-Brown, K., & Shoham, Y. (2008). Essentials of game theory: A concise multidisciplinary introduction. Morgan & Claypool.
  • Mankiw, N. G. (2017). Principles of economics (8th ed.). Cengage Learning.
  • Pindyck, R. S., & Rubinfeld, D. L. (2017). Microeconomics (9th ed.). Pearson.
  • Parkin, M. (2019). Economics (13th ed.). Harlow.

Further Reading

  • Unit 1: Parker, S. C. (2009). The economics of entrepreneurship. Cambridge University; Pearl, J. (2009). Causality: Models, reasoning, and inference. Cambridge University.
  • Unit 2: Mulvaney, D. R. (Ed.). (2010). Green politics: An a-to-z guide. SAGE; Kennedy, G. (2009). Adam Smith and the invisible hand: From metaphor to myth. Econ Journal Watch, 6(2), 239—263.
  • Unit 3: Button, K. (2010). Transport economics (3rd ed.). Edward Elgar.
  • Unit 4: Dauvergne, P. (2008). The shadows of consumption: Consequences for the global environment. MIT.
  • Unit 5: Morrell, P. S., & Klein, T. (2018). Moving boxes by air: The economics of international air cargo (2nd ed.). Taylor & Francis Group.
  • Unit 6: Samuelson, L. (2016). Game theory in economics and beyond. Journal of Economic Perspectives, 30(4), 107—130.
  • Unit 7: Stiglitz, J. E. (2002). Information and the change in paradigm in economics. The American Economic Review, 92(3), 460—501; DellaVigna, S. (2009). Psychology and economics: Evidence from the field. Journal of Economic Literature, 47(2), 315—372.

Learning Objectives

  • The course provides an overview of economics fundamentals, focusing on scarcity and economics as the science of markets.
  • It examines the interplay between supply and demand, consumer behavior and entrepreneurial decision-making, and strategic interaction with competitors.
  • The course aims to convey the importance of economic understanding for business and applying it to solve current management challenges.

Unit 1 Fundamentals

  • Study Goals: To learn
    • What economic theory entails.
    • The central concepts of economics.
    • The two major branches of economics.
    • How economists think and the methods they use.
    • Why economists often come to different conclusions.

1.1 Definition of Terms and Subjects of Economics

  • Scarcity of Resources: Economics addresses decisions in professional and private lives, weighing alternatives and resolving conflicting goals. People often give up something valuable to get something they want.
  • Opportunity Costs: What must be given up to gain something else.
    • Example: Missing a business opportunity to attend an opera.
    • Students lose potential wages by studying full-time.
  • Factors of Production: Resources for producing goods divided into:
    • Land: Natural resources.
    • Labor: Physical and mental performance.
    • Capital: Facilities and equipment.
  • Three Basic Questions: Arising from resource scarcity:
    • Which goods and services should be produced?
    • How much of these goods and services should be produced?
    • Who should receive the produced goods and services?
      Economics is the study of coping with scarcity and making decisions to mitigate its effects.
  • Economics as Study of Markets: Markets involve interaction between buyers and sellers.
    • Examples: labor market, banking market, retail and wholesale markets.
    • Price and quantity are determined by the interaction between buyers and sellers.
      In a centrally administered economy, prices and wages are regulated by the government, unlike a market economy.
      In a market economy, the state protects the integrity of markets by enforcing property rights.
      State intervention is endorsed if it increases market efficiency or promotes fairness.
  • Subareas of Economics: divided into:
    • Microeconomics
    • Macroeconomics
      Microeconomics: Concerned with individual unit decisions and their interactions in markets, involving consumers, employees, investors, landowners, or commercial enterprises
      Macroeconomics: Focuses on the economy as a whole, such as GDP, interest rates, unemployment, and inflation; however, these boundaries are increasingly blurred.
      Savings paradox: If everyone saves more, overall wealth may decrease.

1.2 How Do Economists Think?

  • Economists as Scientists: Focus on explaining phenomena and predicting developments based on scientific theories.

    • Inductive Method: Start with observation, derive relationships, and develop a theory.
    • Deductive Method: Start with a theory, derive a hypothesis, and test it with observations.
      Falsification: Refutation of a theory or hypothesis through a counter-example.
      Omitted Variable: Unaccounted factor explaining results instead of the variable under consideration.
      Economic researchers face the problems of reverse causality and omitted variables.
      Economists use natural experiments where natural circumstances determine investigations, or laboratory experiments in computer labs to test theories.
      Models are used to illustrate theories, simplifying the real world but carry the risk of deviating too much from reality.

  • Economists as Political Consultants: Provide recommendations to improve economic outcomes, often dealing with positive and normative questions.

    • Positive analyses describe how the world is, and can be verified.
    • Normative analyses prescribe how the world should be, involving opinions and value judgments.
      Positive and normative analyses are related; positive insights influence normative views.

  • Economists as Managers: They are increasingly taking on positions of responsibility within private companies. Specific skills taught in economics prove to be particularly useful: the analysis of empirical relationships in data sets and the knowledge of how markets and incentive systems work (as well as their precise design).

  • Why Economists Contradict Each Other: Disagreement on positive theories and differing normative views.