executive MBA subject 16

Managerial Economics

Year 2, term C. 6.0 ECTS, about 150 hours, 7 parts. Part 1 is free.

task, condition, standard

What you will be able to do

Task, condition and standard

Task

Recommend a price and output plan for a product, including a competitor response.

Condition

Given demand data, cost data and information on two competitors.

Standard

Marginal analysis and elasticity are correct and the competitor response is reasoned.

Who it is for: Managers who set prices, plan output and compete in markets.

how this subject works

Free entry, voice and your learning style

Part 1 is free to try. Read it, listen to it and answer it before you decide. Join the programme, or this subject on its own, to open the other parts.

Listen. Every part has a Listen button that reads it aloud.
Speak or type. Answer each part by talking (press Speak) or by typing. Your answers stay on this device only.
Learn your way. Every part has a See, Hear, Do and Read-and-write route. Not sure which suits you? Take the eight-question learning-style check.

7 parts

The parts, with worked examples

Part 1 Why managerial economics matters 21 hUnderstand: explain

Economics helps managers decide how much to make, what to charge and how rivals will react, using clear logic about costs and benefits.

Scarcity means every choice has an opportunity cost
Think at the margin
Incentives drive behaviour

Worked example: Worked-example figures, in your currency. A manager spends a day on a deal worth 5,000 instead of one worth 8,000. The opportunity cost of the choice is 8,000.

Activity: Name three decisions in your work and their opportunity costs.

Standard: Three decisions with realistic opportunity costs.

Learn your way

See. Sketch "why managerial economics matters" as a picture: boxes, arrows and the key number.
Hear. Press Listen, or explain the worked example aloud to someone.
Do. Do the activity with your own work or a practice case.
Read and write. Write the idea in three lines in your own words below.

Your answer. Name three decisions in your work and their opportunity costs.

Part 2 Marginal analysis 21 hApply: calculate

Keep doing something while the extra benefit is greater than the extra cost.

Marginal revenue = change in revenue from one more unit
Marginal cost = change in cost from one more unit
Best output where they are equal

Worked example: Worked-example figures, in your currency. The 100th unit adds 30 revenue and 22 cost: make it. The 140th adds 24 revenue and 26 cost: stop before it.

Activity: Find the best output from a table of revenue and cost.

Standard: Output chosen where marginal revenue is about equal to marginal cost.

Learn your way

See. Sketch "marginal analysis" as a picture: boxes, arrows and the key number.
Hear. Press Listen, or explain the worked example aloud to someone.
Do. Do the activity with your own work or a practice case.
Read and write. Write the idea in three lines in your own words below.

Your answer. Find the best output from a table of revenue and cost.

Part 3 Market demand and supply 21 hUnderstand: predict

Prices rise when demand grows faster than supply. Shifts in income, tastes or input costs move the curves.

Demand falls as price rises
Supply rises as price rises
Shocks shift curves and change price

Worked example: Worked-example figures, in your currency. A drought cuts a crop supply by 20%. With demand unchanged, price rises until buyers cut purchases by 20%.

Activity: Predict the price effect of two events in your industry.

Standard: Direction of the change correct and the reason explained.

Learn your way

See. Sketch "market demand and supply" as a picture: boxes, arrows and the key number.
Hear. Press Listen, or explain the worked example aloud to someone.
Do. Do the activity with your own work or a practice case.
Read and write. Write the idea in three lines in your own words below.

Your answer. Predict the price effect of two events in your industry.

Part 4 Firm demand analysis 21 hApply: measure elasticity

Price elasticity shows how much sales change when price changes. It tells you whether a price rise will increase revenue.

Elasticity = % change in quantity / % change in price
Above 1 (ignoring sign): elastic, below 1: inelastic
Raise price when demand is inelastic

Worked example: Worked-example figures, in your currency. Price up 10%, sales down 5%: elasticity 0.5, inelastic. Revenue rises by about 4.5% (1.10 x 0.95 = 1.045).

Activity: Calculate elasticity from two price points and advise on price.

Standard: Elasticity correct and the price advice follows.

Learn your way

See. Sketch "firm demand analysis" as a picture: boxes, arrows and the key number.
Hear. Press Listen, or explain the worked example aloud to someone.
Do. Do the activity with your own work or a practice case.
Read and write. Write the idea in three lines in your own words below.

Your answer. Calculate elasticity from two price points and advise on price.

Part 5 Cost and industry analysis 21 hAnalyse: compare

Costs fall with scale up to a point. Industry structure, from many small firms to a few large ones, shapes prices and profits.

Economies of scale lower unit cost
Barriers to entry protect profits
Count the firms and their shares

Worked example: Worked-example figures, in your currency. Fixed cost 100,000, variable 20. At 5,000 units unit cost = 40; at 20,000 units it is 25.

Activity: Calculate unit cost at three volumes and describe your industry's structure.

Standard: Unit costs correct and structure described with shares.

Learn your way

See. Sketch "cost and industry analysis" as a picture: boxes, arrows and the key number.
Hear. Press Listen, or explain the worked example aloud to someone.
Do. Do the activity with your own work or a practice case.
Read and write. Write the idea in three lines in your own words below.

Your answer. Calculate unit cost at three volumes and describe your industry's structure.

Part 6 Decisions in oligopoly markets 21 hEvaluate: predict rivals

When a few firms dominate, each one's choice affects the others. Price wars can hurt everyone.

Watch rivals' likely reactions
Compete on value, not only price
Signals and commitments matter

Worked example: Worked-example figures, in your currency. Two firms each earn 10m at high prices. If one cuts price it earns 14m and the other 4m. If both cut, each earns 6m. Both cutting leaves each worse off than both holding.

Activity: Draw a two-firm payoff table for a pricing choice.

Standard: Table correct and the likely outcome explained.

Learn your way

See. Sketch "decisions in oligopoly markets" as a picture: boxes, arrows and the key number.
Hear. Press Listen, or explain the worked example aloud to someone.
Do. Do the activity with your own work or a practice case.
Read and write. Write the idea in three lines in your own words below.

Your answer. Draw a two-firm payoff table for a pricing choice.

Part 7 Sequential decisions and game theory 21 hCreate: plan moves

When moves happen in turn, think ahead to the rival's response and work backwards.

Draw the game as a tree
Work backwards from the end
A credible threat changes rivals' choices

Worked example: Worked-example figures, in your currency. If you enter, the incumbent can fight (both lose 2) or share (you gain 3, it gains 5). Fighting hurts it too, so sharing is likely: enter.

Activity: Solve a two-step entry game by working backwards.

Standard: Tree drawn and the solution reasoned.

Learn your way

See. Sketch "sequential decisions and game theory" as a picture: boxes, arrows and the key number.
Hear. Press Listen, or explain the worked example aloud to someone.
Do. Do the activity with your own work or a practice case.
Read and write. Write the idea in three lines in your own words below.

Your answer. Solve a two-step entry game by working backwards.

ten checks

Check yourself

Say or write your answer first, then read the model answer.

Q1. What is opportunity cost?
Model answer: The value of the best option you gave up. (Covered in part 1: Why managerial economics matters.)
Q2. Unit adds 30 revenue, 22 cost. Make it?
Model answer: Yes. (Covered in part 2: Marginal analysis.)
Q3. Where is the best output?
Model answer: Where marginal revenue equals marginal cost. (Covered in part 2: Marginal analysis.)
Q4. A drought cuts supply. What happens to price?
Model answer: It rises. (Covered in part 3: Market demand and supply.)
Q5. Price up 10%, sales down 5%. Elasticity?
Model answer: 0.5, inelastic. (Covered in part 4: Firm demand analysis.)
Q6. Should you raise price when demand is inelastic?
Model answer: Yes, revenue will rise. (Covered in part 4: Firm demand analysis.)
Q7. Fixed 100,000, variable 20, volume 5,000. Unit cost?
Model answer: 40. (Covered in part 5: Cost and industry analysis.)
Q8. Why can price wars hurt everyone?
Model answer: All firms earn less than if they held prices. (Covered in part 6: Decisions in oligopoly markets.)
Q9. How do you solve a sequential game?
Model answer: Work backwards from the end. (Covered in part 7: Sequential decisions and game theory.)
Q10. What makes a threat credible?
Model answer: Carrying it out must be in the threatener's interest. (Covered in part 7: Sequential decisions and game theory.)

slides L1 to L7

The seven-level ladder, slide by slide

Slide 1: L1 Economic thinking. Opportunity cost. Speaker note: Say: put "economic thinking" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.
Slide 2: L2 Margins. Extra benefit versus extra cost. Speaker note: Say: put "margins" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.
Slide 3: L3 Markets. Demand and supply. Speaker note: Say: put "markets" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.
Slide 4: L4 Elasticity. Price and revenue. Speaker note: Say: put "elasticity" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.
Slide 5: L5 Costs and industries. Scale and structure. Speaker note: Say: put "costs and industries" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.
Slide 6: L6 Rivals. Oligopoly payoffs. Speaker note: Say: put "rivals" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.
Slide 7: L7 Strategy. Games and credible moves. Speaker note: Say: put "strategy" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.

how it is judged

Marking rubric

Marking rubric (Not yet, Meets, Exceeds)
Criterion	Not yet	Meets	Exceeds
Accuracy	Several figures or facts are wrong.	Main figures are correct and the working is shown.	Figures are correct and checked a second way.
Use of managerial economics tools	Tools are named but not used.	The right tools are used for each step.	Tools are adapted to the case and their limits are stated.
Recommendation	No clear answer.	A clear answer backed by the analysis.	A clear answer that also says what would change it.
Communication	Hard to follow.	Answer first, clear and short.	Clear, short and persuasive under questions.

jobs this leads to

Where this takes you

Pricing manager. Sets and tests prices.
Economist or market analyst. Studies demand and competition.
Commercial director. Plans pricing and response to rivals.

language

Choose your language

This subject is in English first. Choose any language and the page is translated for you by machine, with the English kept as the official text.

Keep going

All subjects Previous: Global Operations Management Next: Global Strategy

Draft for review. Not live. Credit values are aligned with the European credit system for orientation only and are not an accreditation.