ECON 601 Dr. William J.

Lawrence
Managerial Economics Hirschey 11th ed. Lecture notes

Chapter 1. The Nature and Scope of Managerial Economics

The art of management is about choice.

G. R. Thoman, CFO, IBM

How is Managerial Economics useful?

ME and its role in Decision making
Applications orientation
Microeconomic base
Systematic approach to decision making

Theory of the firm

Expected Value Maximization
Determining the value of a firm
Constraints of optimization

Profit Analysis
Alternative definitions of profit
Business vs. Economic profits
Frictional theory
Monopoly theory
Innovation theory
Compensatory theory

Assumptions and model building

Philosophical vs. Technical thinking

Business and Society

Why firms exist and their role in society
Beyond the pure business model
Social Responsibility

Baumol constrained maximization model

Assignments:
Read: Buffett essay pg. 2
Managerial Application 1.1 1.2, 1.3, 1.4
Know Table 1.1 on corporate profitability
Know Figures 1.1, 1.2, and 1.3
Read Coca-Cola case study
Prepare: Questions, Q 1.1, Q1.3, Q1.6, Q1.8, and Q1.10

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ECON 601 (MBA 0147) Dr. William J. Lawrence
Managerial Economics Lecture notes

Chapter 2
Economic Optimization

Failing is good, as long as it doesn't become a habit:

Michael Eisner, CEO, Walt Disney
Economic Optimization and:
Maximizing the value of the firm

Technology has changed the way economists work.

Mathematical interpretation of marginal theory: the key to profit maximization.

Total, Average, and marginal functions

Graphical interpretation of Marginal Analysis

Slope, Tangent, and inflection point

Managerial decision making: an application of

Differential Calculus
Derivatives and Partials

Determining maximum and minimum points.

Marginal v. Incremental Economics

Assignments: Read Managerial applications:

2.1, 2.2, 2.3, 2.4
Questions: 2.3, 2.4, 2.5, 2.10
Problems: 2.7, 2.9
NOTE
Students are advised to attempt to do at least one of the
Self-Test problems and solutions in this chapter. If you experience difficulty with
this you should consult the appendices in this chapter. They offer an excellent
mathematical review that will prove useful for all your courses at NYIT.

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ECON 601 Lecture Notes
Managerial Economics Prof. W. J. Lawrence

Chapter 3, Demand and Supply

I took one draught of life-

I’ll tell you what I paid-
Precisely an existence-
The market price, they said.
Emily Dickenson

Demand Defined
Factors influencing the demand function
Direct vs. Derived demand for a good or service.

The Demand curve and the demand function

Industry demand
Firm demand
A change in the quantity demanded, and a change in demand

Supply defined:
Factors influencing the supply of a good or service

The supply curve and the supply function

Industry supply
Firm supply
A change in the quantity supplied, and a change in supply.

Market equilibrium
Shortages and Surplus

Static analysis, comparative static, and dynamics

Cobweb theorem

Read Managerial application, 3.1, 3.2, 3.3, 3.4

Study Tables: 3.1, 3.2, 3.3,
Assignments: Questions: Q3.2, Q3.4, Q3.8,
Do problem 3.10

ECON 601, Prof. Wm. J. Lawrence

Managerial Economics Lecture notes
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 Chapter 4, Consumer Demand

Economy is a distributive virtue, and consists not in saving but selection.

Parsimony requires no providence, no sagacity, no powers of combination, no
comparison, no judgement.
And having looked to Government for bread on the very first scarcity they
will turn and bite the hand that fed them.
Edmund Burke
Thoughts and Details on Scarcity

Utility Theory Revisited

Marginal Utility Theory

Diminishing Marginal Utility: it's the law!

Creation of the indifference curve

That which we want to do
Assumptions behind the theory
Substitutes and Complements

The Budget Constraint;

That which we can do
Effects of changes in prices
Effects of changes in income
Substitution and income effects-a theory revisited.

Creating the individual demand curve

Price consumption curve
Income consumption curve
Engle Curves

Understanding Demand curves and consumer surplus

Read all Managerial Applications 4.1, 4.2, 4.3, 4.4

Homework assignments: Questions: Q 4.1, 4.2, 4.4, 4.6, 4.10
Problem sets: 4.3, and 4.9,
Read the case study on page 126-Tracking Consumer Demand

ECON 601, Prof. Wm. J. Lawrence

Managerial Economics Lecture notes

Chapter 5 Demand analysis

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 To him (her) whose elastic and vigorous thought keeps pace the sun, the
day is a perpetual morning
Henry David Thoreau
1817-1862
Walden

Measuring Market Demand

The Market Demand Curve under alternative market segmentation
Evaluating market demand

Determination Elasticity; Sensitivity Analysis

Elasticity concept
Point elasticity
Arc Elasticity
Direction of determination alters the value of coefficient.
Impact on total revenue
Elasticity related to but not equal to the slope of a function.
Using price elasticity
Determination of Marginal revenue

Graphical presentation of elasticity

Elasticity and Optimal pricing

Relationship to marginal analysis

Cross elasticity of demand

Normal, cyclical, and non-cyclical goods

Legislative examples of elasticity determination

Read all Managerial Applications 5.1, 5.2, 5.3, 5.4

Homework assignments: Questions: 53, 5.4, 5.6, ,5.7 and 5.8
Problem sets: 5.3, and 5.9,

ECON 601 Prof. Wm. J. Lawrence

Lecture notes Managerial Economics

Chapter 6 Demand Estimation

Statistics show that in 1940 each car on the road had an average of 2.2
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persons, in 1950 it was 1.4 at that rate every car on the road in 1985 must have
been empty.
Statistics can be used to support just about everything including
statisticians.
Anonymous
Demand Curve Estimation: concept actually useful for all estimation questions

Identification, Demand and supply revisited

Alternative methods:
Direct interview
Market experimentation
Consumer clinic
Statistical estimation

Regression analysis: Empirical analysis of available data.

Ordinary Least Squares Model
Model structure and value.
Time Series, Cross Section
Model specification; OLS method
Model verification and accuracy
SEE, R2, t, F,
Statistical testing
Model interpretation, Multivariate models,
Evaluating and interpretation of statistical results
Nonlinear relationships
Omitted important variables
Inclusion of mutually correlated variables
Power functions
Residual Analysis

Read all managerial applications, 6.1, 6.2, 6.3, 6.4

Homework assignments: questions; Q 6.1, 6.2,. 6.4, 6.6, and 6.8
Problems; 6.8 and 6.9 on page 188 and 189 of your text.
Read Case Study for Chapter 6, Mrs. Smyth's Frozen Fruit Pie market.

ECON 601 Prof. Wm. J. Lawrence

Lecture notes Managerial Economics

Chapter 7, Forecasting

I have but one lamp by which my feet are guided, and that is the lamp of
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experience. I know no way of judging of the future but by the past.
Patrick Henry
Speech in Virginia Convention 1775

Forecasting Applications:
Macroeconomic and Microeconomic Applications

Various techniques available from which to choose:

Limitations dictated by time, budget, data availability, importance of the questions
being asked of the forecast

Qualitative forecasting:
Personal insight
Panel consensus
Delphi
Survey

Trend Analysis:
Secular, Seasonal, cyclical, random or irregular
Linear Time trend
Growth trend analysis:

Economic indicators and the business cycle

What is the business cycle?
Leading, lagging, and coincidental indicators.
Economic expansions and recessions
Sources of economic information
Barometric forecasting
Diffusion index

Exponential Smoothing
1-2-3 parametric smoothing or data averaging

Econometric Forecasting:
Single equation models
Multiple equation models

Chapter 7
Forecasting Continued:

Judging reliability of a forecast:

Testing predictability, correlation analysis,
Mean Square Error
Choosing the best technique
The importance of judgment

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Read: Managerial App. 7.1, 7.2, 7.3,7.4
Study: Table 7.1, 7.2, 7.3, 7.4, 7.5, and especially table 7.6
Figure: 7.1, 7.2, 7.3, 7.4
Homework assignments: questions: 7.2, 7.3 7.6, 7.7, 7.8, 7.10
problems P7.1 and P7.3

ECON 601 Prof. Wm. J. Lawrence

Lecture notes Managerial Economics

Chapter8
Production Analysis and Compensation Policy

The pulse of modern life is economic and the fundamental principle of economic
production is individual independence.
Ch:En TuHsiu
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 1879-1942
The New Youth

Shift to production side

Basic production function Q = f (K, L,)

Assumptions of production model.

Development of Isoquant curves

The marginal rate of technical substitution

Diminishing returns to factor inputs.

The total product function,

Development of marginal and average product.

Comparison of the three stages of production and management decision-making.

Development of the isocost curves-the economics of production

Production level decision making-MRTS and the ratio of factor prices.

Optimal factor input analysis

Returns to scale, and measuring productivity

Read Managerial Applications: 8.1, 8.2, 8.3,

Study: Figure 8.1, 8.2, 8.3 8.4, 8.6
Homework assignments: Questions: 8.1, 8.2, 8.4, 8.9
Problem Number P8.3

ECON 601 Prof. Wm. J. Lawrence

Managerial Economics Lecture notes

Chapter 9, Cost Analysis and Estimation

To accuse others for one’s own misfortune is a sign of want of education; to

accuse oneself shows that one’s education has begun; to accuse neither oneself
nor others shows that one’s education is complete.

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 Epictetus
C c.50-120 A.D.)

Difficulty in measuring costs;

Accountants and Economists agree to disagree
Historical vs. Current Costs.
Replacement, Opportunity, Explicit, and Implicit costs

Decision making and costs analysis

Sunk and incremental costs
Fixed and variable costs

Short run and long run cost analysis

The long run average cost curve and economies of scale.
Development of the Long run cost curve
The Marginal efficiency of scale
Multi-plant economies and diseconomies of scale
The learning curve
Minimum Efficiency of Scale
Economies of scope

Breakeven analysis
Learning Curve
Economies of Scope

Read Managerial applications 9.1 through 9.4

Homework assignments: Questions Q9.1, 9.4, 9.7 and 9.10

Problem P9.1, and 9.4

ECON 601 Prof. Wm. Lawrence

Managerial Economics Lecture notes

Chapter 10: Competitive Markets

Chapter 11: Performance and Strategy in competitive markets
Chapter 12: Monopoly and Monopsony

Fortune is like the market, where many

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 times, if you can stay a little, the
price will fall
Francis Bacon 1561-1626
Essay, Of Delays

Market structure and output

A comparative competitive analysis

The Competitive Environment

Entry and Exit
Product Differentiation
Production methods

Review of market equilibrium:

Characteristics of the perfect competitive case

The Pure Competitive model

Profit maximization under competition
MR= MC revisited
MC and the short run supply curve
AVC and the shut down point
Determination of Q, P, equilibrium, profitability, economic profits

Homework assignments: Questions 3, 5 and 6 Chapter 10 pg. 339

Chapter 11: overview

This chapter is not assigned but the following are points of interest to the student.
Strategic thinking under competition

Deadweight loss-how competition compromises the social welfare function

Market failure: Structures in disequilibrium

The Role of Government: Efficiency, Distribution, Equity

Tax and subsidies
Price Controls
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Chapter 12: Monopoly and Monopsony: Know the structure and characteristics of
Monopoly
Historical development of a Monopoly
Social costs and Benefits
Economies of scale
Regulation
Profit Maximization
Anti Trust legislation and policy

Homework assignments: questions 2, 3, and 5, Chapter 12, pg. 412

ECON 601 Prof. Wm. J. Lawrence

Managerial Economics Lecture notes

Chapter 13:
MONOPOLISTIC COMPETITION AND OLIGOPOLY

To found a great empire for the sole purpose of raising up a people of

customers may at first sight appear a project fit only for a nation of shopkeepers. It
is however, a project altogether unfit for a nation of shopkeepers; but extremely fit
for a nation whose Government is influenced by shopkeepers.
Adam Smith
1723-1790
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 Wealth of Nations

Monopolistic competitor:
Characteristics of a monopolistic firm
Establishing equilibrium
Shut down
Long Term Equilibrium

Oligopoly
What makes an industry oligopolistic?
Kinked demand curve and administered pricing

Cartel Pricing models

Stackelberg Oligopoly
Price leadership
Barometric Bertrand, Sweezy pricing,
cases of guarded collusion

Market concentration
Anti Trust revisited
Hirfindahl-Hirschmann Index

Homework assignments: questions 1, 2, 3, and 5

ECO 601 Prof. Wm. J. Lawrence

Lecture notes managerial economics

Chapter 15:
Pricing Policies
Get place and wealth, if possible with grace;

If not, by any means get wealth and place.

Alexander Pope
1688-1744

Markup pricing

Markup on cost
Markup on price
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Price Discrimination: chipping away at the consumer surplus

First Degree
Second Degree
Third Degree

Multiple Unit pricing

Multiple product pricing

Transfer Pricing

Afterword:

You cannot fly like an eagle with the wings of a wren

William Henry Hudson

1841-1922

Enjoy, and may all your great decisions be economic, informed and fulfilling.

William J. Lawrence

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