Economics for Managers
Course Description
This is an upper division course in managerial economics in a way designed to be accessible
to management majors at CSUN. Traditional managerial economics courses are too
mathematical and quantitative intensive. That is, this course is called “Economics for
Managers” rather than “Managerial Economics”.
The course connects decision and game theories to practical issues faced by firm managers.
Both internal and external issues of a firm will be covered. Internal issues include
organizational structure design and incentive contracting. External issues include corporate
strategy and market for corporate control. Some simple math and graphs/diagrams will be
used to explain the existence, organization and behavior of a firm. These economic tools will
be incorporated with management approaches to assess problems inside firms.
Prerequisites: ECON 160, ECON 161 or its equivalent. Textbook
Managerial Economics and Organizational Architecture by James Brinkley, Clifford Smith,
and Jerold Zimmerman, 6th edition, McGraw-Hill Irwin, 2015. ISBN10: 0073523143 |
ISBN13: 9780073523149
Student Learning Outcome
1. Develop greater knowledge of the types of problems faced by firm managers.
2. Develop a greater knowledge of how to apply the economic theory and methods
to business and administrative decision making.
3. Prescribes rules for improving managerial decisions. Also tell managers how
things should be done to achieve organizational objectives efficiently.
4. Also helps managers recognize how external forces affect organizations.
1
Course Policies
How to Prepare for Lecture
1. Make sure you have read the assigned material prior to lecture.
2. Make sure to review the covered lecture material after class, this will ensure a higher
success rate.
3. Complete your homework assignments by the due date.
4. All lecture slides will be posted on Canvas.
Grading
Exams: There will be two written examinations in this course, one given as midterm
examination and the second given as a final. The materials covered and the format of each
test will be announced prior to its scheduled date. The final exam will cover the entire
syllabus, although it will be weighted more heavily toward material covered after the
midterm. No make-up exams will be given without verified legitimate reasons. However,
there will be NO make up for missing the final exam.
Homework: A series of homework assignments will be given throughout the semester to
help students assess their understanding of the material as well as offer a guide to the key
elements of the course. Late homework will not be accepted.
Project: A short paper is due by the end of the class on Tuesday 12/11/2018. The paper is to
be turned in as a hard copy no later than the mentioned date. The length of the paper can be
up to three (Times New Roman font, size 12, number your pages, and double spaced) pages.
Graphs, tables, and references are beyond these three pages.
Youshouldfindanewspaperarticlethatdealswithatopiccoveredinthisclass. Inorder to get an A or
B on the paper, you must use economic analysis to explain the issue in the article. Papers that
do not include any economic analysis will receive a grade of C, at best. Poorly written papers
without economic analysis will receive a grade of F.
Note that there will be no extra credit assignments available in this class, with no
exceptions.
Requirements
Percentage
Attendance & Participation 5%
Homework Assignments
10%
Term Paper
10%
Midterm Exam
30%
Final Exam
45%
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The overall course grade will be based on the following scale:
93% - 100% A 90% - 92% A- 87% - 89% B+ 83% - 86% B 80% - 82% BAttendance Policy
77% - 79% C+ 70% - 76% C 66% - 69% C- 60% - 65% D Below 60% F
You are expected to arrive and be seated at least three minutes before class begins. Students
are expected to review prerequisite material as needed and to do the assignments and read the
textbook prior to the session for which they are scheduled.
Student Conduct In-Class Policy: Proper classroom behavior, appropriate university- level
work, is assumed. When student’s classroom behavior becomes disruptive, then his (her)
final grade letter will be reduced by one letter; for example, from a B+ to a B, or C- to a D.
Examples of disruptive behavior include, but are not limited to: frequently showing up late to
class, leaving early without prior approval, walking out in the middle of a lecture without
prior approval, or chatting in the middle of a lecture, and using cell- phone (calling/texting).
You may use your computer to take notes. If your computer becomes a distraction, I reserve
the right to prohibit its use in the class.
Academic Dishonesty: academic integrity and quality education is the responsibility of each
student within CSUN. Cheating, fabrication, facilitating the academic dishonesty, and
plagiarism are prohibited. Cheating or plagiarism in connection with an academic program at
CSUN may result in an automatic failing grade and possible expulsion from the Program. For
more information please go to: http://www.csun.edu/catalog/policies/academic-dishonesty/
Drop Policy
According to University policy, non-attendance does not constitute withdrawal; to withdraw
from this class you must file a drop form with the University. If you fail to attend this class,
and you do not formally drop the class, a "WU" (unauthorized withdrawal), the equivalent of
a failing grade, will be recorded.
In this class, the university drop policy will be strictly enforced. During the first three weeks
of instruction, students may withdraw online. Once the third week has passed, drops are
normally not permitted. Exceptions are granted or denied by the Office of Undergraduate
Studies if there is a "serious and compelling reason" and "there is no viable alternative" (a
viable alternative includes taking a failing grade and repeating the course). Changes in work
schedule, etc., will not be considered a sufficient reason. "Complete Medical Withdrawals"
(all classes are dropped due to medical problems— yours or those of someone you care for)
are processed by the Health Center.
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Student with Disabilities
If you are in need of an accommodation for a disability in order to participate in this class,
please let me know and contact the Disability Resources and Educational Services at
Bayramian Hall 110. Phone: (818) 677-2684.
Tentative Course Outline
The course outline is provided as a general guide to how the course will be organized and
how to prepare for class. As we continue in the semester it may be adjusted to accommodate
any changes. A new outline will be posted should any major change be envisioned.
Week Date
Topics & Chapters (6th Edition)
(5th edition)
Syllabus
Ch1: Introduction (p.1-10)
(p.1-10)
1
Aug 2830
2
Sep 4-6
3
Sep 11- 13
(p.60-78 and
81-97)
4
Sep 18- 20 Ch4: Demand (p.120-141)
(p.106-127)
5
Sep 25- 27 Ch5: Production and Cost (p.156-184)
(p.142-171)
6
Oct 2-4
7
Oct 9-11
8
Oct 16- 18 Oct 11 (First Midterm)
Ch2: Economists’ View of Behavior (p.14-20 and 32-38)
Ch3: Exchange and Markets (p.66-80 and 90-119)
Ch6: Market Structure (p.193-217)
(p.14-20 and
32-38)
(p.178-200)
Ch8: Economics of Strategy: Creating and Capturing Value (p.257(p.240-275)
290)
Midterm Review
Ch9: Economics of Strategy: Game Theory (p. 296-318)
9
Oct 23- 25
10
Oct 30
Nov 1
(p.281-309)
Chapter 11 Organizational Architecture (p355- 373)
11
Nov 6-8
12
Nov 1315
13
Nov 2022
14
Nov 2729
15
Dec 4-6
16
Dec 11
Chapter 12 Decision Rights: The Level of Empowerment (p376 –
403)
(p.420-448)
Ch14: Attracting and Retaining Qualified Employees (p.438- 463)
Ch14 (continued)
(p.452-576)
Nov 22 Thanksgiving Recess Campus Closed
Ch15: Incentive Compensation (p.469-492)
(p.520-546)
Ch17: Divisional Performance Evaluation (p.537-564)
Final Exam Review
17
4
Dec 18
Dec 18 (Final Exam Time: 8:00AM - 10:00AM, Location:
Bookstein Hall 1204)
(p.600-628)
Ch6: Market Structure
Lecture 11
Hassan Almahmood
California State University- Northridge
Thursday, Oct 3, 2018
1
Barriers to Entry
Incumbent reactions
Incumbent advantages
•
•
•
•
•
•
•
•
Specific assets
Economies of scale
Excess capacity
Reputation effects
Precommitment contracts
Licenses and patents
Learning-curve effects
Pioneering brand
advantages
2
Monopoly
• A monopoly is a firm that is the sole seller of a
product without close substitutes.
• Monopoly arises when there are
1. No close substitutes
2. Strong barriers to entry
• Ownership. A single firm owns a key resource.
• Legal. E.g., granting of a public franchise, government
license, patent, or copyright
• Natural
3
Example for Natural Monopoly
Natural monopoly: a single firm can produce the entire market
Q at lower cost than could several firms. One electric power
distributor can meet the market demand for electricity at a
lower cost than two or more firms could
Example: 1000 homes
need electricity
ATC is lower if
one firm services
all 1000 homes
than if two firms
each service
500 homes.
Cost
Electricity
ATC slopes
downward due
to huge FC and
small MC
$80
$50
ATC
500
1000
Q
4
Price and Marginal Revenue
• Price and Marginal Revenue
– Because in a monopoly there is only one firm,
the firm’s demand curve is the market
demand curve.
• Total revenue
– The price multiplied by the quantity sold.
• Marginal revenue
– The change in total revenue resulting from a
one-unit increase in the quantity sold.
5
Monopoly
• Monopoly Price-Setting Strategies
– A monopoly faces a tradeoff between price and
the quantity sold.
– To sell a larger quantity, the monopolist must set a
lower price.
6
Example: A monopoly’s revenue
Common Grounds
is the only seller of
cappuccinos in town.
Q
P
0
$4.50
The table shows the
market demand for
cappuccinos.
1
4.00
2
3.50
Fill in the missing
spaces of the table.
3
3.00
4
2.50
What is the relation
between P and AR?
Between P and MR?
5
2.00
6
1.50
TR
AR
MR
n.a.
7
Answers
Here, P = AR,
same as for a
competitive firm.
Here, MR < P,
whereas MR = P
for a competitive firm.
Q
P
TR
AR
0
$4.50
$0
n.a.
1
4.00
4
$4.00
2
3.50
7
3.50
3
3.00
9
3.00
4
2.50
10
2.50
5
2.00
10
2.00
6
1.50
9
1.50
MR
$4
3
2
1
0
–1
8
Common Grounds’ D and MR Curves
Q
P
0
$4.50
1
4.00
2
3.50
3
3.00
4
2.50
5
2.00
6
1.50
MR
$4
3
2
1
0
–1
P, MR
$5
4
3
2
1
0
-1
-2
-3
Demand curve (P)
MR
0
1
2
3
4
5
6
7
Q
9
Understanding the Monopolist’s MR
• Increasing Q has two effects on revenue:
• Output effect: higher output raises revenue
• Price effect: lower price reduces revenue
• To sell a larger Q, the monopolist must reduce
the price on all the units it sells.
• Hence, MR < P
• MR could even be negative if the price effect
exceeds the output effect (e.g., when Common
Grounds increases Q from 5 to 6).
10
Marginal Revenue and Elasticity
Recall the total revenue test, which determines
whether demand is elastic or inelastic.
1. If a price fall increases total revenue, demand is
elastic.
2. If a price fall decreases total revenue, demand is
inelastic.
Use the total revenue test to see the relationship
between marginal revenue and elasticity.
11
Conclusion
The relationship between marginal revenue and
elasticity implies that …
A monopoly never profitably produces an output in
the inelastic range of its demand curve.
12
Monopoly’s Profit-Maximization
Price and cost per unit of output
$
Profits
P*=
105
Lost gains
from trade
MC = AC
D
Q*=95
Q
MR
Quantity
13
Monopoly’s Profit-Maximization
• Output and Price Decision
Like a competitive firm, a monopolist
maximizes profit by producing the quantity
where MR = MC.
• Once the monopolist identifies this quantity,
it sets the highest price consumers are willing to
pay for that quantity.
• Since it faces market demand, it finds this price
from the D curve.
• Unexploited gains from trade (deadweight loss)
14
Introduction:
Between Monopoly and Competition
Two extremes
• Perfect competition: many firms, identical products
• Monopoly: one firm, product with no close
substitutes.
In between these extremes: imperfect competition
• Monopolistic competition: many firms sell similar
but not identical products.
• Oligopoly: only a few sellers offer similar or identical
products.
15
Monopolistic Competition
Assumptions/Characteristics:
Monopolistic competition is a market structure in which
1. Multiple/ large number of firms compete.
2. Each firm produces a differentiated product.
3. Firms compete on price, product quality, and marketing.
4. With free entry and exit, firms compete away economic
profits
Examples:
toothpaste, shampoo, restaurants, banks, apartments, books,
clothing, fast food, night clubs, restaurant etc
16
Monopolistic Competition
• Like monopoly, firms face downward sloping
demand curves
• Profit maximization occurs where MC=MR
17
A Monopolistically Competitive Firm
Earning Profits in the Short Run
The firm faces a
downward-sloping
D curve.
Price
PMC.
PMC
To maximize profit, firm
produces Q where MR
= SRMC.
STATC
At each Q, SRMR <
The firm uses the
D curve to set PMC.
profit SRMC
SRATC
D
MR
QMC
Quantity
18
A Monopolistically Competitive Firm
With Losses in the Short Run
For this firm,
P < SRATC
at the output where
MR = SRMC.
Price
The best this firm can
do is to minimize its
losses.
SRATC
SRMC
losses
SRATC
P
D
MR
Q
Quantity
19
Monopolistic Competition and
Monopoly
• Short run: Under monopolistic competition,
firm behavior is very similar to monopoly.
• If profits in the short run:
New firms enter market, taking some demand
away from existing firms, prices and profits fall.
• If losses in the short run:
Some firms exit the market, remaining firms enjoy
higher demand and prices.
• Long run: In monopolistic competition,
entry and exit drive economic profit to zero.
20
A Monopolistic Competitor in the Long Run
• When P>SRAC, Entry decreases the demand for the product of each firm.
• When P< SRAC, Exit increases the demand for the product of each firm.
• In the long run, economic profit is competed away and firms make zero
economic profit.
Price
LRACi
Entry and exit occurs
until P = LRAC and
profit = zero.
LRMCi
P* i = LRACi
Di
Q*i
Qi
MRi
Quantity (firm i)
21
Comparing Perfect & Monopolistic Competition
Perfect
competition
Monopolistic
competition
number of sellers
many
many
free entry/exit
yes
yes
long-run econ. profits
zero
zero
the products firms sell
identical
differentiated
firm has market power?
none, price-taker
yes
D curve facing firm
horizontal
downwardsloping
22
Comparing Monopoly & Monopolistic Competition
Monopoly
Monopolistic
competition
number of sellers
one
many
free entry/exit
no
Yes
long-run econ. profits
Positive P>ATC
Zero P=LAC
firm has market power?
Yes P>MC
Yes P>MC
D curve facing firm
downwarddownward-sloping
sloping with
(market demand)
flatter slope
close substitutes
none
many
23
Discussion
Manifold Manufacturing, a large producer of
motorcycle parts, is accused of monopolizing
the market for a particular motorcycle part. Why
would its legal defense team be so interested in
a statistical estimate that the price elasticity of
demand for its motorcycle part was 0.62?
24
Discussion
6–5. The Johnson Oil Company has just hired
the best manager in the industry. Should the
owners of the company anticipate economic
profits? Explain.
25
Discussion
It is sometimes said that a manager of a
monopoly can charge any price and customers
will still have to buy the product. Do you agree
or disagree? Why?
26
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