MSF 603: Managerial Economics and Decisions of the Firm
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Course Description and Objectives
While warmed-hearted passion is always applauded, economics focuses more on how to make better decisions with cool-headed logics. In this course, we will familiarize ourselves to the mindset of approaching business decisions under the framework of goals, constraints, and optimization. We will emphasize rigor by the discipline of mathematics as well as intuition in class economic models. Our ultimate objective is to be able to apply economic theory and a rational mindset to make better decisions in strategic environments.
Learning objectives include:
- Understanding of how goals, constraints, incentives, and market rivalry affect economic decisions;
- The ability to apply preliminary present value analysis to make investment decisions and determine the value of assets and firms;
- The ability to use supply and demand analysis as a qualitative forecasting tool to determine equilibrium market outcomes;
- Understanding the factors that underlie both the demand and supply functions in order to be able to analyze consumer and producer behavior;
- The ability to calculate and interpret elasticities and their applications to business decisions;
- To acquire a framework for understanding the nature of the firm as an integrated whole, as opposed to a loosely connected set of functional departments;
- The ability to choose appropriate measures of the firm’s optimal use of resources;
- The ability to aid strategic thinking with tools from game theory;
- Understand market structures and how they affect business decisions under perfect competition, monopolistic competition, oligopoly and monopoly;
- Capability of using simple mathemematical tools to help with decision making (with respect to derivatives, please see the "Derivative rules" link in Week 1. Within that document we'll only ever work with four type of functions in our course: Constant, Line, Square, and Logarithms; don't ever bother with Exponential, Trigonometry, or Inverse Trigonometry; For derivative rules we'll only need Multiplication by constant, Power Rule when n=2 (square function), Sum Rule, Difference Rule, Product Rule, and Chain Rule);
I will request your feedback periodically to reassess the list of topics above and adjust it if necessary. Any feedback on how you think the course is evolving (including constructive criticism and suggestions) and potential additional topics to discuss in class will always be welcomed.
Class Materials
Michael Baye and Jeff Prince, Managerial Economics and Business Strategy, 9th ed., McGraw-Hill Irwin, 2016
I may include additional materials for class discussions. The slides will be posted before each class, but may change afterwards depending on the actual content that was covered and discussed during class.
Exams and Grading
The final grade will be based on homework, final exams, and class participation. The grade allocation is:
| Homeworks | 60% |
| Final Exam | 40% |
| Class Participation | 5% (bonus) |
Economics is not about memory but understanding. The final exam will require you to demonstrate your understanding of the key theories and concepts and your ability to apply them to problems. The final exam will be comprehensive. There will be no make-up exams. I also assign homework problems for each lecture and will post solutions. Working on these problems are key to obtaining good understanding and thus good grades in the exam. You are required to hand in all your homework except for one "cheat week".
Please submit your homework to the submission link. Name all your homework submissions in the following format: Lastname_Firstname_#.docx or Lastname_Firstname_#.pdf, where # stands for the homework number. For example, the first work from me would be Li_Jiasun_1.pdf. Each homework is due before the next lecture.
Tentative Schedule (subject to change as we progress) (Sample)
| Week | Materials | Topics |
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slides homework: Chapter 1: 1, 3, 6, 10, 13, 14, 16, 23; Chapter 6: 24, 27 HW solution Derivative Explained Derivative rules |
Course introduction. Opportunity cost, marginal analysis, and incentives. -Baye, Chapter 1 Organization of the firm: principal agent problem -Baye, Chapter 6 |
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slides homework: Chapter 2: 1, 6, 8, 14, 16, 20, 23; Chapter 3: 2, 6, 11 HW solution |
Supply, demand, and markets. -Baye, Chapter 2 Quantitative demand analysis. -Baye, Chapter 3 |
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slides homework: Chapter 4: 1, 2, 7, 9, 12, 17; Chapter 5: 1a, 2, 5, 6, 7, 10, 11, 12, 16, 17, 18, 20, 22 HW solution |
Consumer Behavior. -Baye, Chapter 4 The production process -Baye, Chapter 5 |
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slides homework: Chapter 7: 1, 7, 8; Chapter 8: 1, 3, 6, 7, 10, 11, 13, 14, 16, 20 HW solution |
Four-firm concentration ratio, Herfindahl Hirschman index, and four types of market structures: perfect competition, monopoly, monopolistic competition, and oligopoly (no lecture on this topic, read the relevant pages yourself before class) -Baye, Chapter 7: P206-207 and P221-222 Competitive and Monopolistic Markets. -Baye, Chapter 8 (the following topics are not required: multiplant decisions, optimal advertising decisions) |
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slides homework: Chapter 9: 1, 2, 3, 5, 6, 8, 9, 10, 17, 23 HW solution |
Oligopoly -Baye, Chapter 9 |
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slides homework: Chapter 11: 2, 3, 4, 5, 7, 10, 12, 13, 14, 15, 18, 20 HW solution |
Alternative Pricing Strategies with Market Power -Baye, Chapter 11 |
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slides homework: Chapter 12: 1, 4, 13, 15, 21, 23; Chapter 10: 2, 4, 7, 8, 14, 20 HW solution |
Uncertainty and asymmetric information. -Baye, Chapter 12 Introductory Game Theory. -Baye, Chapter 10 |
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| Final exam |
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