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Managerial Economics

Luke Froeb
Organization: Vanderbilt University
Department: Owen Graduate School of Management
Education level


This course is designed to provide MBA students with a basic understanding of how microeconomics can be used both to help manage and to compete more effectively in a business environment. Thus, microeconomics will be used to evaluate both the internal structure and incentives within a firm as well as the competitive forces external to the firm.

Notes for Managerial Economics by Luke Froeb (1999). These are my lecture notes, designed to supplement your own in-class lecture notes. This is the most important material for the class and is pitched at MBA's. Along with the marked (*) discussion and review questions in PNG, the questions in these notes will appear in slightly-altered form on the final exam.

Managerial Economics by Ivan Png. Blackwell (1998) This is the main text for the class. We will read all but Chapter 14, the last chapter. Do not worry if you do not understand the technical or graphical analyses in the text. You will be tested on the intuition behind the principles as exemplified in the marked discussion questions at the end of each chapter. Test your intuition by trying the problems. Some of these discussion questions will be assigned as homework. In addition to the homework, the marked discussion questions may appear in altered form on the final exam. There are answers to the review questions in the back of the book.

Pushing the Numbers in Marketing by David Rados. Quorem (1992) This is a marketing text, but Professor Rados uses microeconomic decision-making tools in his approach to marketing. I will reference the material in Rados' book that complements the material in economics and expect you to read it for our class. "The Economics of Orgnizations" Brickley, Smith, and Zimmerman. Journal of Financial Economics, Vol. 8:2 (Summer, 1995) pp. 19-31. The real value of this article, denoted BSZ in the syllabus, is that it derives operational advice (how do I solve this problem now) from the principal/agent models in PNG Chapters 12 and 13

excerpted from: Teaching MBA Students to Compete in Simulated Oligopoly Environments by Philip Crooke, Luke Froeb, Steven Tschantz Vanderbilt University

We teach MBAs how to compete by putting students into simulated competitive environments and asking them to make strategic choices. We teach the principles of competition through practice without requiring students to learn the mathematical machinery behind the models that create the simulated environment. All of the games are motivated by actual antitrust cases. This degree of realism makes it easy to sell the games to MBA students, who are ever-wary of learning abstract models with little relevance to the business world.

As the price of computing power has fallen, researchers have adopted computationally intensive research tools that have allowed them to solve new problems with increasingly complex and realistic models. In almost every branch of science, including the social sciences, new high-level languages have radically changed the way research is done.

Unfortunately, the potential of these tools to change teaching has gone unfulfilled. In response to this, as well as looking for new instructional models, faculty from the Department of Mathematics and the Owen Graduate School of Management developed new technology in 1995 called MathServ. MathServ uses existing web browsers, such as Netscape Communicator or Internet Explorer, as an interface to the Mathematica computational engine (the Mathematica kernel) running on a remote server. By putting a user-friendly web interface on Mathematica, instructors can utilize the computational power of the program for pedagogical applications at very low cost.

The web pages used in the system are typically focused on narrow tasks that permit a greater degree of control over the learning process. The instructor designs tools, exercises, or games that illustrate one particular idea or concept with an easy-to-use web interface. The student learns the concept by playing the games or using the tools to answer questions.

While it seems clear to us that the technology is working, we have not developed any formal tests of its pedagogical effectiveness. Although our usage logs indicate hits from all over the world, including educational as well as commercial and government domains, the games are probably not well-developed enough to be used as stand-alone teaching tools. We find they are most effective if used in class to illustrate how firms compete or in a laboratory setting where students can ask questions of a lab assistant or professor. Before they are assigned as homework, it is important to show students how the game is played and describe the setting that motivated the game. This background puts the principles learned in a decision-making context, something that is crucial for teaching MBA students

We will focus on a few key concepts that form the foundation of economic theory and have important business applications. At the heart of any microeconomic analysis is an assumption that individuals are rational, and act optimally in their own self-interest. In your Human Resources or Organizational Behavior class, this is called the "rational actor paradigm." This paradigm helps explain much of what we observe in capitalist societies. It is also a good starting point for analyzing most business decisions.

*Business and Economics