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									ECON 601                                                  Dr. William J. Lawrence
Managerial Economics         Hirschey 12th 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

      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 at the end of this chapter
Prepare and submit: Questions, Q 1.1, Q1.3, Q1.6, Q1.8, and Q1.10

ECON 601                                                Dr. William J. Lawrence
Managerial Economics        Hirschey 12th ed.           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
       Price and Total Revenue determination

Managerial decision making: an application of

Differential Calculus
       Derivatives and Partials

Determining maximum and minimum points.

Marginal v. Incremental Economics
      Marginal Revenue and Marginal cost
      Profit Maximization determined

Assignments: Read Managerial applications:                            2.1, 2.2, 2.3, 2.4
Study Table:                                                          2.1, 2.2, and 2.3
      Figures:                                                        2.2, and 2.4
Questions and problems to be handed in:                               2.3, 2.4, 2.5, 2.10
                                                     Problems:        2.2, 2.7
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.

ECON 601                                              Lecture Notes
Managerial Economics       Hirschey 12ed.             Prof. W. J. Lawrence

                           Chapter 3, Demand and Supply

                 Order is not pressure which is imposed on society
                          from without, but an equilibrium
                             which is set up from within
                                Jose Ortega Y Gasset
                             Mirabeau and Politics, 1927

Demand Defined
     Factors influencing the demand function
            The determinants of Demand
     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 to be handed in: Questions: 3.1, 3.2, 3.4, 3.6, 3,8, and 3,9
                                Do problems: 3.4, 3.6, and 3.7

ECON 601, Prof. Wm. J. Lawrence
Managerial Economics   Hirschey 12th ed.                           Lecture notes

                              Chapter 4, Demand Analysis

        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
        Marginal rate of substitution
Understanding Demand curves and consumer surplus
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
ECON 601, Prof. Wm. J. Lawrence
Managerial Economics   Hirschey 12th ed.                  Lecture notes

                            Chapter 4, Demand Analysis

Cross elasticity of demand
Normal, cyclical, and non-cyclical goods
Legislative examples of elasticity determination

Read all Managerial Applications 4.1, 4.2, 4.3, 4.4, 4.5, 4.10
Homework assignments: Questions: Q 4.1, 4.2, 4.4, 4.6, 4.10
                          Problem sets: 4.2, 4.4, 4.6 and 4.8,
Read the case study on page 159, Optimal level of advertising

ECON 601                                          Prof. Wm. J. Lawrence
Lecture notes                                     Managerial Economics

                     Chapter 5 Demand Estimation

       Statistics show that in 1940 each car on the road had an average of 2.2
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
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, 5.1, 5.3, 5.4,
Homework assignments: questions; Q 5.1, 5.3, 5.4, 5.6, and 5.8
                          Problems; 5.2 and 5.9
Read Case Study for Chapter 6, Mrs. Smyth's Frozen Fruit Pie market.

ECON 601                                             Prof. Wm. J. Lawrence
Lecture notes                                   Managerial Economics

                           Chapter 6, Forecasting

      I have but one lamp by which my feet are guided, and that is the lamp of
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

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

Read:     Managerial App. 6.1, 6.2, 6.3, 6.4
Study:    Table 6.1, 6.2, 6.3, 6.4, 6.5, and especially table 6.6
          Figure: 6.1, 6.2, 6.3, 6.4, 6.5
Homework assignments: questions: 6.1, 6.2, 6.3, 6.6, 6.7, 6.8,
                          problems P6.1, P6..3 and P6.4

ECON 601                                         Prof. Wm. J. Lawrence
Lecture notes                                    Managerial Economics 12th edition

                                     Chapter 7
                    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
                                     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: 7.1, 7.2, 7.3. and 7.4
Homework assignments:         Questions: 7.1, 7.2, 7.4, 7.8 and 7.9
          Case Study: Worker productivity, class discussion

ECON 601                                                        Prof. Wm. J. Lawrence
Managerial Economics        Hirschey 12 edition                 Lecture notes

              Chapter 8, 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.
                                     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: 8.1, 8.2, 8.3, and 8.4,
Homework assignments:          Questions Q8.1, 8.4, 8.7 and 8.10
     Case Study: Estimating Hospitalization costs

ECON 601                                                         Prof. Wm. Lawrence
Managerial Economics               Hirschey 12th ed.                         Lecture notes
                             Chapter 10: Competitive Markets
                         Chapter 12: Monopoly and Monopsony
              Fortune is like the market, where many
              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
              Normal Profit, Economic Profit, Economic Losses
      MR= MC revisited
      MC and the short run supply curve
      AVC and the shut down point
Determination of Q, P, equilibrium, profitability, economic profits

Chapter 12: Monopoly and Monopsony: Know the structure and characteristics of
     Historical development of a Monopoly
            Social costs and Benefits
            Economies of scale
            Profit Maximization
            Anti Trust legislation and policy
Homework assignments: Questions 3, 5 and 6 Chapter 10 pg. 399-400
                       Questions 1, 2, and 6 Chapter 12, pg 486
Managerial Applications:
     Benefits for Free Trade, pg. 381
     Is the Stock Market Perfectly Competitive, pg. 384
     Dot.Com pg 302
     The Enron Debacle, pg 398
Study Table 12.2, pg 484, and Mgrial app. 12.1, NCAA Cartel

ECON 601                                                   Prof. Wm. J. Lawrence
Managerial Economics       Hirschey 12th ed.               Lecture notes

                               Chapter 13:

       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
                                        Wealth of Nations

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

      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 See table 13.3 and 13.4 on concentration ratios.
     NAICS System, see tables 13.1, and 13.2
Homework assignments: questions 1, 2, 3, and 5
Managerial Applications: Dell's price war with Dell, pg. 504
                          Intel: Runnig fast to stay in place, pg 507
                          Contestable Airline Passenger Service mkts. Pg. 526

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

Markup pricing

       Markup on cost
       Markup on price

Price Discrimination: chipping away at the consumer surplus

       First Degree
       Second Degree
       Third Degree

Multiple Unit pricing
       Multiple product pricing

Transfer Pricing


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

                                               William Henry Hudson

                                     End Note:
Enjoy every day of your life, and may all your decisions-large and small, be
economic, informed, Profitable, and fulfilling.

                                               William J. Lawrence

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