Week 1: Introduction, Motivation and Course Overview
Managerial economics is based on microeconomics.
Market is a collection of buyers and sellers that interact resulting in the possibility of exchange
Markets have various market structures:
1. Perfect competition
2. Monopoly
3. Monopolistic competition
4. Oligopoly
Market power- a consumer or a firm with market power can influence market outcomes with their
own advantage.
Week 2: Supply and Demand
Supply curve: R/S between the quantity of the good that producers are willing to sell and the price of
the good
Upward sloping: the higher the price, the more firms are able and willing to produce and sell.
Non price factors: shift in supply curve
Price factors: movement along supply curve
Demand curve: R/S between the quantity of a good that consumers are willing to buy and the price
of the good
Downward sloping: holding other things equal, consumers will want to purchase more of a good as
its price goes down
Equilibrium: price that equates the quantity supplied and quantity demanded
Market mechanism: tendency in a free market for price to change until the market clears
Surplus: situation in which the quantity supplied exceeds the quantity demanded
Shortage: situation in which the quantity demanded exceeds the quantity supplied
Price elasticity of demand: change in quantity demanded of a good resulting from a marginal
increase in price
= (P/Q)(1/slope)
Linear demand curve: demand curve that is a straight line Q = a – bP
Inverse demand function: P = f(Q)
, Infinitely elastic demand: consumers will buy as much of a good as they can get at a single price, but
for any higher price the quantity demanded drops to zero, while any lower price the quantity
demanded increases without limit. Eg. 200 chicken rice store in 1 food court
Completely inelastic demand: consumers will buy a fixed quantity of a good regardless of the price.
Eg. Miracle pill
Income elasticity of demand: change in quantity demanded resulting from a marginal increase in
income
Cross-price elasticity of demand: change in quantity demanded of one good resulting from a
marginal increase in the price of another
Elastic: increase in price leads to a decrease in total revenue
Inelastic: increase in price leads to an increase in total revenue
Unitary: total revenue is maximised at the point where demand is unitary elastic
Factors that affect own price elasticity:
1. Relative market positions between buyers and sellers (bargaining)
2. Available substitutes- the more the substitutes, the more elastic the demand.
3. The breath of the definition of the good: the broader the good is defined, the less elastic the
demand. Eg. Phone > smartphone > Samsung
4. Expenditure share: goods that comprise a small share of consumer’s budget tend to be more
inelastic than goods for which consumers spend a large portion of their incomes
5. Response time: short run and long run
Week 3: Consumer Preference and the Theory of Demand
Theory of consumer behaviour: description of how customers allocate incomes among different
goods and services to maximise their well-being
Consumer behaviour is best understood in 3 steps:
1. Consumer preferences
2. Budget constraints
3. Consumer choices
Some basic assumptions about preferences:
(1) Completeness: preferences are assumed to be complete. Consumers can compare and rank all
possible baskets. Eg. A over B, B over A, A = B note: these preferences ignore costs
Managerial economics is based on microeconomics.
Market is a collection of buyers and sellers that interact resulting in the possibility of exchange
Markets have various market structures:
1. Perfect competition
2. Monopoly
3. Monopolistic competition
4. Oligopoly
Market power- a consumer or a firm with market power can influence market outcomes with their
own advantage.
Week 2: Supply and Demand
Supply curve: R/S between the quantity of the good that producers are willing to sell and the price of
the good
Upward sloping: the higher the price, the more firms are able and willing to produce and sell.
Non price factors: shift in supply curve
Price factors: movement along supply curve
Demand curve: R/S between the quantity of a good that consumers are willing to buy and the price
of the good
Downward sloping: holding other things equal, consumers will want to purchase more of a good as
its price goes down
Equilibrium: price that equates the quantity supplied and quantity demanded
Market mechanism: tendency in a free market for price to change until the market clears
Surplus: situation in which the quantity supplied exceeds the quantity demanded
Shortage: situation in which the quantity demanded exceeds the quantity supplied
Price elasticity of demand: change in quantity demanded of a good resulting from a marginal
increase in price
= (P/Q)(1/slope)
Linear demand curve: demand curve that is a straight line Q = a – bP
Inverse demand function: P = f(Q)
, Infinitely elastic demand: consumers will buy as much of a good as they can get at a single price, but
for any higher price the quantity demanded drops to zero, while any lower price the quantity
demanded increases without limit. Eg. 200 chicken rice store in 1 food court
Completely inelastic demand: consumers will buy a fixed quantity of a good regardless of the price.
Eg. Miracle pill
Income elasticity of demand: change in quantity demanded resulting from a marginal increase in
income
Cross-price elasticity of demand: change in quantity demanded of one good resulting from a
marginal increase in the price of another
Elastic: increase in price leads to a decrease in total revenue
Inelastic: increase in price leads to an increase in total revenue
Unitary: total revenue is maximised at the point where demand is unitary elastic
Factors that affect own price elasticity:
1. Relative market positions between buyers and sellers (bargaining)
2. Available substitutes- the more the substitutes, the more elastic the demand.
3. The breath of the definition of the good: the broader the good is defined, the less elastic the
demand. Eg. Phone > smartphone > Samsung
4. Expenditure share: goods that comprise a small share of consumer’s budget tend to be more
inelastic than goods for which consumers spend a large portion of their incomes
5. Response time: short run and long run
Week 3: Consumer Preference and the Theory of Demand
Theory of consumer behaviour: description of how customers allocate incomes among different
goods and services to maximise their well-being
Consumer behaviour is best understood in 3 steps:
1. Consumer preferences
2. Budget constraints
3. Consumer choices
Some basic assumptions about preferences:
(1) Completeness: preferences are assumed to be complete. Consumers can compare and rank all
possible baskets. Eg. A over B, B over A, A = B note: these preferences ignore costs
