1 BSP1703 Managerial Economics Semester II, AY2024-2025
Lecture Notes 1:
Introduction and Course Overview
Prof. Geunyong Park
Lecturer
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➢ Lecturer: Geunyong Park (Assistant Professor)
➢ Department of Strategy and Policy, NUS Business School
➢ Office: Biz 1, 06-39
➢ Email: [Link]@[Link]
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INTRODUCTION OF ECONOMICS
Why Economics is Important?
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➢ People make choices under constraints.
• The Rolling Stones once said: "You can’t always get what you want.”
• Resources are limited (e.g., the limited incomes, the limited budgets
and technical know-how, the limited hours in a week, etc.)
➢ Economics teaches us about Rational Choices.
• How to make use of all the information available to make decisions
that can achieve your goals or satisfy your needs in the most efficient
way (e.g., buying a car, picking a career, deciding years of schooling,
etc.)
• Crucial to understand social, economics, and management phenomena.
Corporate Decision Making:
The Toyota Prius
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➢ In 1997, Toyota introduced Prius in Japan, and started selling it worldwide in
2001. The Prius was a big success, and within a few years other
manufacturers began introducing hybrid versions of some of their cars.
➢ The design and efficient production of the Prius involved not only some
impressive engineering, but a lot of economics as well.
➢ Toyota needs to consider
➢ how public would react to the design and performance of the new product.
➢ how strong demand would be, and how fast it would grow.
➢ how high production costs would be.
➢ how much and how fast costs would decline as managers and workers
gained experience with the production process.
➢ how to design a pricing strategy and consider how competitors would
react to it.
➢ the risks and possible outcomes of its decisions.
Paul A. Samuelson’s definition of
Economics
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➢ “Economics is the study of how men and society choose, with or without
the use of money, to employ scarce productive resources, which could have
alternative uses, to produce various commodities over time and distribute
them for consumption, now and in the future, among various people and
groups in society.” – Paul A. Samuelson (Nobel Prize Laureate)
➢ The economic logics can be used in a wide range of situations.
➢ Marriage decision, penalty shoot-out, recommendation algorithm, etc.
Scope of Economics
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➢ Microeconomics: individual decision maker
➢ e.g. the behavior and interaction of individual firms and consumers
➢ Macroeconomics: aggregate level
➢ e.g. the growth rate of national output, interest rates, unemployment, etc.
[Link]
➢ Example: If OPEC increases crude-oil price
➢ Microecon: oil industries, gas stations, drivers
➢ Macroecon: business cycle, inflation, unemployment
➢ Managerial economics is based on Microeconomics.
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MOVTIVATING EXAMPLES AND
COURSE OVERVIEW
Motivating Example 1: Pricing
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➢ What’s the economic reason behind? Ever wondered?
Motivating Example 2: Price Control
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➢ If people think their wage rate is low, should the government
implement minimum wage?
➢ Cross-country comparisons
• US: $7.25/hour
• Japan: $6.56/hour
• France: $11.03/hour
• Singapore: No minimum wage
➢ How would minimum wage affect average wage and
unemployment rate? Would it increase the social welfare?
Motivating Example 3: Competition
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➢ Is competition always preferred over market power?
➢ Example: M1 was introduced to Telecom industry in 1999. SingTel
was forced to cut its rates twice in one day, by a total of 18%,
when M1 responded to its first rate cut. In the next few days,
SingTel also reduced some monthly subscriptions by 35 to 40%.
(Business Times)
➢ What’s the effect of Grab-Uber merger?
➢ In industries like gas and electricity, there is only one firm serving
the market for many countries. Is it efficient?
➢ How competition affects the net gain of consumers and business.
Why most countries have antitrust laws? Under which scenario it is
even preferred to have a sole seller?
Motivating Example 4: Behavioral Economics
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➢ You are heading for a music concert.
➢ (Case A) You paid $100 to buy a non-refundable ticket. At the entrance,
you found you lost the ticket. Would you buy the ticket again?
➢ (Case B) You are about to buy a ticket at the box office. You opened your
wallet to find your $100 is gone. Would you still buy the ticket?
➢ Behavioral Economics is getting more and more popular.
Class Preparation
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➢ Course readings
➢ Microeconomics (Global Edition), 9th, Robert S. Pindyck & Daniel L.
Rubinfeld, 2015
➢ Supplementary book: Microeconomics, 3rd, Acemoglu, D., Laibson, D.,
and List, J. A., 2021
➢ Assignments (3 times)
➢ Tutorials
➢ Homework problems
➢ General Q&A
Lecture Schedules
(Details are subject to change)
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Week Lecture Textbook Chapters Tutorial
Week 1 Course Overview and Introduction Ch 1, 7.1 No Tutorials
Week 2 Demand and Supply Elasticity Ch 2, 8.1 No Tutorials
Week 3 Consumer Theory Ch 3, 4
Week 4 Uncertainty & Behavioral Econ Ch 5
Ch 6, 7.1-7.4, 8.2-
Week 5 Firm Theory Assignment 1 due
8.8
Economic Efficiency and
Week 6 Ch 9
Government Intervention
Recess Week
Lecture Schedules
(Details are subject to change)
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Week Lecture Textbook Chapters Tutorial
Market Power and Uniform Pricing
Week 7 Ch 10
Monopoly
Week 8 Pricing with Market Power Ch 11 Assignment 2 due
Week 9 Game Theory 1 Ch 13
Week 10 Game Theory 2 Ch 13
Week 11 Holiday Clash (tentative)
Monopolistic Competition and
Week 12 Ch 12 Assignment 3 due
Oligopoly
Course Summary and Final
Week 13
Review
Grading
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➢ Three assignments: 45%
➢ 15% for each
➢ Late submission is not accepted
➢ Tutorial Participation: 10%
➢ Homework problems
➢ General Q&A
➢ Final Exam: 45%
➢ Schedule to be announced
➢ No make-up final examination is to be given.
Questions, Doubts, and Consultations
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➢ Office Hours
➢ By appointments (In-person or Zoom)
➢ Extended consultation hours will be set up prior to the final exam.
➢ Email Consultations
➢ Our teaching team will do our best to reply swiftly, unless
➢ requiring long answers
➢ unprofessional
Mathematics Required!
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➢ Simple calculus: first differentiation
➢ Will be reviewed in one of tutorials
d(5Q + 3)
=?
d(Q)
➢ Simple algebra:
Q 2 - 4Q + 4 = 0,
So Q=?
A Few More Things
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➢ Enrollment Matters
• Enrolling in module and tutorial session (i.e., swapping tutorial
session or lecture group ) should be addressed directly to BBA
office.
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SOME PRELIMINARY CONCEPTS
Trade-offs
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➢ Consumers
➢ Trade-offs in the purchase of more of some goods for less of others
➢ Trade-off between current consumption and future consumption
➢ Workers
➢ Trade-offs in their choice of employment
➢ Trade-off between labor and leisure
➢ Firms
➢ Trade-offs in what to produce
➢ Trade-offs in the resources to use in production
Markets and Prices
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➢ In a centrally planned economy, prices are set by the government.
➢ In a market economy, prices are determined by the interactions of
consumers, workers, and firms. These interactions occur in markets—
collections of buyers and sellers that together determine the price of
a good.
➢ We are interested in the underlying motivations of all parties that
enter into this economic exchange, their decision makings and
economic implications. Naturally, price-determining mechanism is
important in microeconomics.
Market vs. Industry
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➢ Market vs Industry
➢ A market is the collection of buyers and sellers that, through their
actual or potential interactions, determine the price of a product
or set of products.
➢ A firm must understand who its actual and potential competitors
and must also know the product boundaries and geographical
boundaries of its market in order to set price, determine
advertising budgets and make capital investment decisions.
➢ An industry is a collection of firms that sell the same or related
products.
Competitive vs. Non-competitive Markets
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➢ A market is (perfectly) competitive if there are many buyers and
sellers so that no single buyer or seller has a market power.
Otherwise, non-competitive or imperfectly competitive.
➢ Markets have various structures:
➢ Perfect competition: stock market, commodity market, etc.
➢ Monopoly: single producer
➢ Monopolistic competition
➢ Oligopoly
Which Cost Matters?
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➢ Economic cost
Total expenses incurred in production or consumption, including both
explicit and implicit costs.
➢ Could be different from accounting cost which reflects actual
expenses.
➢ Examples
- costs for capital, labor, and raw materials
- savings interest when investing
Opportunity Cost
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➢ The value of the next-best alternative that is foregone by the
decision-maker.
➢ Cost of purchasing a house?
➢ Assume the next-best is to keep the money (=price of the property)
in saving accounts and earn some investment returns.
➢ Opportunity cost = price of the property + returns that you would
have earned from saving the money
➢ Cost of using your own building for office space = 0?
Example: Opportunity Cost of College
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➢ What is your opportunity cost for attending college?
➢ Explicit Cost
➢ Tuition
➢ Textbooks
➢ Boarding expenses
➢ What is the opportunity cost?
Two Components in Decision Making
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➢ How to formally define a decision-making problem?
➢ Objective
➢ To maximize net benefits (of consumers) or profit (of firms)
➢ Net Benefits = Total Benefits – Total Costs
➢ Profit = Revenue – Total Costs
➢ Available options
➢ To identify which option is able to maximize net benefits or profit
➢ Constraints (income, production capacity, etc.) define available options.
Optimal choice: Marginal Analysis
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➢ Marginal Benefits (MB)/Marginal Revenue (MR): Change in total
benefits/revenue arising from a unit change in Q.
➢ Marginal Costs (MC): Change in total costs arising from a unit
change in Q.
Example
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Q Revenue MR Costs MC Profit
0 0 0 0 0 0
1 30 30 6 6 24
2 48 18 14 8 34
3 60 12 24 10 36
4 64 4 40 16 24
Marginal Principle
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➢ MB (or MR) > MC means one additional unit of quantity increases benefits
more than it increases costs.
➢ MB (or MR) < MC means one additional unit of quantity increases cost
more than it increases benefits.
➢ To maximize net benefits, the quantity should be increased up to the point
where MB (or MR) = MC.
MB and MC for Continuous Variable
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➢ Marginal benefits from an infinitely small change in the variable, Q:
DB dB
MB = =
DQ dQ
➢ Marginal costs from an infinitely small change in the variable, Q:
DC dC
MC = =
DQ dQ