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Module Title: Managerial Economics

Module Director: Professor John Goddard

Available Routes:

Core Module - All Routes

Module Overview:

This module considers the managerial theories of the firm, including production and costs, market structures, strategic pricing and competition policy. These important and challenging concepts, and their relevance to modern management, are set in context for the student to reflect upon their own
organisation’s economic behaviour and strategies. The module emphasises the importance of an
economic understanding of how modern firms behave, from managerial behaviour to production
methods, and a detailed analysis of cost controls. The objective of the module is to expose the student to a challenging perspective on evaluating firms and management in areas as diverse as pricing policy and behaviour in inter-dependent markets. The module examines the key concepts of managerial
economics and applies these to real world scenarios.

Aims & Objectives:

On completing this module students will:

  • Be able to understand and apply the key theories governing managerial economics;
  • Have an understanding of the impact of fixed and variable costs, slack, elasticity and the Penrose effect on organisations;
  • Be able to apply the knowledge gained in the study of the production process and its various elements to the organisation;
  • Understand the linkage between costs and profits and the importance of fixed costs;
  • Understand the economic nature of strategic rivalry and exploit it to consolidate a firm’s market share;
  • Be able to review their firm’s competitive strategy in respect of competition legislation and policy;
  • Have a detailed understanding of the role of managerial economics within the banking and financial services industry.

Key Text:

Industrial Organization: Competition, Strategy, Policy—3rd Edition J Lipczynski, J Wilson, J Goddard

Means of Assessment:

This module is assessed by means of an individual assignment (40%) and examination (60%)

Unit One covers:

Module 1 reviews the core elements of production and cost theory and demand theory that form the
building-blocks of the neoclassical theory of the firm. Section 1.2 introduces the theory of the firm and the Structure-Conduct-Performance paradigm. The technical analysis of production and costs begins in Section 1.3 with a review of production and cost theory. A key distinction is drawn between the short run (when some inputs are variable and others are fixed) and the long run (when all inputs are variable). The short-run relationship between inputs, output and production costs is governed by the Law of Diminishing Returns, and the long-run relationship is governed by economies of scale or diseconomies of scale. Section 1.4 reviews the essentials of demand theory, including price elasticity of demand, a standard measure of the responsiveness of quantity demanded to a change in price. Finally, Section 1.5 develops a general rule for the firm to achieve profit maximization. The profit-maximizing firm should produce the output level at which its marginal revenue equals its marginal cost.

Unit Two covers:

Module 2 begins by reviewing the body of microeconomic theory known as the neoclassical theory of the firm. The neoclassical theory of the firm describes how firms should set their output levels and prices in order to maximize their profits, under various sets of assumptions concerning market structure. The most important characteristics of market structure are the number of firms, the extent of barriers to entry, and the degree of product differentiation. The two most extreme cases considered by the neoclassical theory of the firm are perfect competition (the most competitive model) and monopoly (the least competitive). Sections 2.2 and 2.3 examine these two models, and Section 2.4 examines an intermediate case known as monopolistic competition.

Unit Three covers:

Module 3 uses a managerial economics framework to examine selected topics in firm strategy and competition policy. The pricing models developed in the previous modules are based on an assumption that firms set uniform prices that are identical for all consumers, and are identical no matter what quantity each consumer buys. Section 3.2 examines an pricing policy known as price discrimination, under which a firm either sells at different prices to different consumers, or makes the price per unit each consumer pays dependent on the number of units purchased. For such a policy to be possible, the firm must enjoy some degree of market power, and the market must be divisible into sub-markets between which secondary trade or resale is not possible.

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