Managerial Economics

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Managerial Economics:

Managerial Economics refers to the application of economic theory and the tools of decision science to examine how an organisation can achieve its aims or objectives most efficiently.This definition can be best summarised in a diagram. Click on the link below to view the diagram: File:Diagram

Management decision problem arise in any organisations when they seek to achieve some objectives subject to some constraints. For e.g. A Telecommunication Company may seek to provide its service to as many customers as possible at the lowest possible cost. A hotel may seek to rent its room to the maximum tourists with limitations on its physical resources and budget. A university may aim to provide education to as many students as possible subject to the physical and financial constraints it faces.


Topics within Managerial Economics

Managerial Economics deals with:

  • The Theory of the Firm
  • Theories of Profit
  • Optimisation Techniques:
    • Substitution Method
    • Lagrangian Multiplier Method
    • Linear Programming
  • Demand Forecasting:
    • Qualitative forecasts
    • Time Series Analysis
    • Smoothing Techniques
    • Barometric Methods
    • Econometric Methods
  • Production Theory and Estimation
  • Cost Theory and Estimation
  • Market Structure:
    • Perfect Competition
    • Monopoly
    • Monopolistic Competition
    • Oligopoly
  • Pricing Practices:
    • Pricing of Multiple products
    • Price Discrimination
    • Transfer Pricing
    • Other Pricing Practices
  • Risk Analysis
  • Asymmetric information


Prerequisites

The prerequisites for this course include Microeconomic Theory, Macroeconomic Theory, Mathematics for Economics and Principal of Econometrics.


Syllabus

Most students taking Managerial Economics are likely to have some knowledge of some of the topics presented and tools of analysis utilized in Managerial Economics. Thus Managerial Economics concentrate more on its integrating and synthesizing role in analyzing the decision making process.

Click on the link below to view the syllabus for Managerial Economics Course:

File:Syllabus


Assignments


Summary

Managerial economics (also called business economics), is a branch of economics that applies microeconomic analysis to specific business decisions. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression and correlation, Lagrangian calculus, linear If there is a unifying theme that runs through most of managerial economics it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity.

Almost any business decision can be analysed with managerial economics techniques, but it is most commonly applied to:

  • Risk analysis - various uncertainty models, decision rules, and risk quantification techniques are used to assess the riskiness of a decision.
  • Production analysis - microeconomic techniques are used to analyse production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm's cost function.
  • Pricing analysis - microeconomic techniques are used to analyse various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.
  • Capital budgeting - Investment theory is used to examine a firm's capital purchasing decisions.


References

  • Ivan Png (2002) Managerial Economics, Malden, MA: Blackwell.
  • Edward Lazear (2008). "Personnel economics," The New Palgrave Dictionary of Economics. 2nd Edition.
  • Keith Weigelt (2006). Managerial Economics
  • Elmer G. Wiens The Public Firm with Managerial Incentives
  • NA, (2007). "Managerial economics," Encyclopædia Britannica online Concise Encyclopedia entry.


Supplementary Readings:


The Nature and Scope of Managerial Economics:

  • Beasley, Howard W.: “Can Managerial Economics Aid the Chief Executive Officer?” Managerial and Decision Economics, vol.2, September 1981
  • William J. Baumol (1961) "What Can Economic Theory Contribute to Managerial Economics?" American Economic Review, vol. 51, no. 2, May 1961, pp 142-46.
  • Salvatore, Dominick: Theory and Problems of Managerial Economics (New York: McGraw-Hill,1989)
  • Furubotn, Eirik G. “The New Institutional Economics and the Theory of the Firm.” Journal of Economic Behavior & Organization 45 (June 2001): 133–153.
  • Grinols, Earl L., and David B. Mustard. “Business Profitability Versus Social Profitability: Evaluating Industries with Externalities—The Case of Casinos.” Managerial & Decision Economics 22 (January–May 2001): 143–162.
  • Rajan, Raghuram G., and Luigi Zingales. “The Firm as a Dedicated Hierarchy: A Theory of the Origins and Growth of Firms.” Quarterly Journal of Economics 116 (August 2001): 805–851.
  • Ellig, Jerry. “Internal Markets and the Theory of the Firm.” Managerial & Decision Economics 22 (June/August 2001): 227–237.
  • Simon, Herbert A.: “Theories of Decision-Making in Economics,” American Economic Review, vol. 49, June 1959
  • Wong, Robert E.: “Profit Maximization and Alternative Theories: A Dynamic Reconciliation,” American Economic Review, vol. 65, September 1975


Optimisation Techniques:

  • Salvatore, Dominick: Theory and Problems of Managerial Economics (New York: McGraw-Hill,1989)
  • Baumol, William J: Economic Theory and Operations Analysis, 4th Edition
  • Chiang Alpha: Fundamentals Methods of Mathematical Economics, 3rd Edition (New York: McGraw-Hill,1984)


Demand Forecasting:

  • Beech, Alfred J. “Market-Based Demand Forecasting Promotes Informed Strategic Financial Planning.” Healthcare Financial Management 55 (November 2001): 46–56.
  • Bertrand, Marianne, and Sendhil Mullainathan. “Do People Mean What They Say? Implications for Subjective Survey Data.” American Economic Review 91 (May 2001): 67–72.
  • Dukart, James R. “Forecasting Demand.” Utility Business 4 (November 2001): 33–35.
  • Langabeer, Jim, and Tim Stoughton. “Demand Planning and Forecasting in the High Technology Industry.” Journal of Business Forecasting Methods & Systems 20 (Spring 2001): 7–10.
  • Toktay, L. Beril, and Lawrence M. Wein. “Analysis of a Forecasting-Production-Inventory System with Stationary Demand.” Management Science 47 (September 2001): 1268–1281.
  • Granger, C.W: Forecasting in Economics and Business (New York: Academic Press,1989)


Production Theory and Estimation:

  • Mefford, Robert N.: “Introducing Management into the Production Function.” Review of Economics and Statistics, January-February 1986, pp.75-81
  • Kumpe, Ted and Pit T. Bolwijn: “Manufacturing: The new case for vertical integration,” Harvard Business Review, March-April 1988, pp. 223-228
  • Gold B.: “Changing Perspectives on size, scale, and returns: An interpretative survey,” Journal of Economic Literature, March 1981 pp. 5-33.


Cost Theory and Estimation:

  • Achee, Rebecca, Thornton and Peter Thompson. “Learning from Experience and Learning from Others: An Exploration of Learning and Spillovers in Wartime Shipbuilding.” American Economic Review 91 (December 2001): 1350–1368.
  • Teece, David J: “Economies of Scope and the Scope of Enterprise” Journal of Economic behaviour and organization, September 1980, pp.223-247
  • Argote, Linda and Denis Epple: “Learning Curves in Manufacturing” Science, February 23, 1990, pp. 920-924
  • Daughety, A.P. and Forest D.N: “An econometric analysis of changes in cost and production structure of the trucking industry”, Review of Economics and statistics, February 1988, pp. 67-75


Market Structure:

  • Schere, F.M and David Ross: Industrial Market Structure and Economic Performance (Boston: Houghton Mifflin, 1990)

Salvatore, D: Microeconomics (New York: HarperCollins, 1991) Chaps. 8 and 9.

  • Chamberlin, E.H: The theory of monopolistic competition (Cambridge Mass: Harvard University Press, 1962)
  • Stiglitz, J. and G.F. Mathewson, eds: New Developments in the analysis of Market Structure (Cambridge Mass: MIT Press, 1986)


Pricing Practices:

  • Considine, Timothy J. “Markup Pricing in Petroleum Refining: A Multiproduct Framework.” International Journal of Industrial Organization 19 (December 2001): 1499–1526.
  • Nayle, Thomas: “Economic foundation of Pricing” Journal of Business, January 1984 pp. 23-39
  • Rao, V.R: “Pricing research in marketing: The state of the Art,” Journal of Business, January 1984 pp. 53-60


Risk Analysis:

  • Schaifer, R: Probability and Statistics for Business Decisions (New York: McGraw-Hill, 1959)
  • Blume, M.E: “On the assessment of Risk”, Journal of Finance, vol. 26, March 1971.


Asymmetric information:

  • Akerlof G.A. ‘The market for “lemons” quality uncertainty and the market mechanism’, Quarterly Journal of Economics (1970)
  • Spence, M: Market signalling (Cambridge: Harvard University Press, 1974)