BSP1703 Managerial Economics Semester I, AY2021-2022

Lecture Notes 1:
Introduction and Course Overview

Justin Leung
National University of Singapore
Lecturer
Lecturer: Professor Justin Leung
Department of Strategy and Policy, NUS
Office: BIZ1, 6-50
Email: [email protected]

About me
PhD in Economics, University of Chicago Booth School of Business
MBA, University of Chicago Booth School of Business
Research Fields: Applied Microeconomics
• Labor Economics, Public Economics, Industrial Organization
Outline
Introduction to Economics
Motivating Stories and Course Overview
Preliminary Concepts
INTRODUCTION TO ECONOMICS
What comes to mind when you hear the word
“economics”?
Why is economics important?
People have to make choices every day.
• Scarcity: Limited resources vs. unlimited wants
• Limited income
• Limited knowledge
• Limited attention
• Limited time etc.

Economics is a toolkit for thinking and making

choices.
• How to make use of all available information to make
decisions that can achieve your goals or satisfy your needs in
the most efficient way.
• For example: choosing your spouse, your job, your house,
your car, your religion and beliefs etc.
http://rightasaclock.tumblr.com/post/44965224721/
Corporate Decision Making: Grab
In 2012, Anthony Tan launched the Grab app in Malaysia together
with Tan Hooi Ling. Grab’s popularity was evident from day one,
although it wasn’t all smooth sailing.
The development and efficient operation of Grab involved not only
excellent software engineering, but a lot of economics as well.
Grab needs to consider
How strong (or weak) demand from drivers and riders would be, and how fast it
would grow.
How to design a pricing strategy and consider how competitors would react to it.
How many employees to hire, how much to pay them, and when.
How to raise capital funding and how to keep track of their cash balance.
How the public (riders, drivers, and the government) would react to the introduction of
this new product.
The risks and possible outcomes of its decisions.
 Definition of Economics
Economists are far from unanimous about the definition of their
subject

Backhouse, Roger E, and Steven G Medema. “Retrospectives: On the Definition of Economics.” Journal of Economic Perspectives 23, no. 1 (January 2009): 221–33.
 Lionel Robbin (1932)’s definition of
Economics
“Economics is the science which studies human
behavior as a relationship between ends and scarce
means which have alternative uses.”

Lionel Charles Robbins, Baron Robbins, CH, CB, FBA (22 November 1898 – 15 May 1984) was a British economist,
and prominent member of the economics department at the London School of Economics. He is famous for the quote,
"Humans want what they can't have."

https://en.wikipedia.org/wiki/Lionel_Robbins
 Gary Becker (1971)’s definition of
Economics
“Economics is the study of the allocation of scarce
means to satisfy competing ends.”

Gary Stanley Becker (1930 - 2014) was an American economist. He was a professor of economics and sociology at
the University of Chicago. Economist Justin Wolfers called him, "the most important social scientist in the past 50
years."[1] Becker was awarded the Nobel Memorial Prize in Economic Sciences in 1992. A 2011 survey of economics
professors named Becker their favorite living economist over the age of 60.

https://en.wikipedia.org/wiki/Gary_Becker
 Paul A. Samuelson (1976)’s definition
of Economics
“Economics is the study of how men and society
choose, with or without the use of money, to employ
scarce productive resources, which could have
alternative uses, to produce various commodities over
time and distribute them for consumption, now and in
the future, among various people and groups in society.”

Paul Anthony Samuelson (May 15, 1915 – December 13, 2009) was an American economist and the first American
to win the Nobel Memorial Prize in Economic Sciences.

https://en.wikipedia.org/wiki/Paul_Samuelson
Levitt and Dubner: Freakonomics
“Melding pop culture with economics”
4 million copies sold worldwide in first 4 years
2005: Freakonomics: A Rogue Economist Explores the Hidden
Side of Everything
What Do Schoolteachers and Sumo Wrestlers Have in Common?
Why Do Drug Dealers Still Live with Their Moms?
Where Have All the Criminals Gone?
2009: SuperFreakonomics: Global Cooling, Patriotic Prostitutes,
and Why Suicide Bombers Should Buy Life Insurance
How Is a Street Prostitute Like a Department-Store Santa?
Why Should Suicide Bombers Buy Life Insurance?
Monkeys are People Too.
2010: Freakonomics: The Movie
Freakonomics Podcast
2015: Think Like a Freak
Freakonomics and Superfreakonomics

Incentives are the cornerstone of modern life

Understanding and deciphering them is key to understanding a
problem and how it might be solved
Knowing what to measure, and how to measure it, can
make a complicated world less so
The conventional wisdom is often wrong
Correlation does not equal causality
E.g. Marriage and happiness are positively correlated
Does marriage make people happier?
Are happier people more likely to be married?
Is there a latent gene that makes people both happier and more
likely to be married?
Levitt and Dubner (2015): Think Like a
Freak
“Economic approach doesn’t mean focusing on “the
economy” – far from it”
“It relies on data, rather than hunch or ideology, to
understand how the world works, to learn how
incentives succeed (or fail), how resources get
allocated, and what sort of obstacles prevent people
from getting those resources, whether they are
concrete (like food and transportation) or more
aspirational (like education and love).
Levitt and Dubner (2015): Think Like a
Freak
Why do so few people think like a Freak?
It’s easy to let your biases – political, intellectual, or otherwise
– color your view of the world
It’s also tempting to run with a herd
Most people are too busy to rethink the way they think – or to
even spend much time thinking at all
Potential downsides
Way out of step with prevailing minds
Grow accustomed to people calling you a crank, or sputtering
with indignation, or perhaps even getting up and walking out of
the room
 How the public and economists think
differently

Freakonomics authors vs. David Cameron

• National Health Service: Free, unlimited, lifetime healthcare
• Inefficient consumption vs. Inalienable rights

NUS’ New Grade Policy: S/U option at the end of semester

• Would it help overall GPA to improve?
• Would it help NUS graduates beat others in job market?

http://www.nus.edu.sg/registrar/education-at-nus/undergraduate-education/continuation-and-graduation-requirements.html
Scope of Economics
Microeconomics: individual decision maker
e.g. the behavior and interaction of individual firms and consumers
Macroeconomics: aggregate level
e.g. the growth rate of national output, interest rates, unemployment, etc.
Econometrics: application of statistical methods to economic data
e.g. distinguishing between causality and correlation
Example: If OPEC increases crude-oil price
• Microecon: gas stations, drivers, non-OPEC countries
• Macroecon: business cycle, inflation, unemployment
• Metrics: quantitative models to provide empirical evidence and estimate
quantitative impact
Managerial economics is based on microeconomics.
Boundaries between fields becoming less distinct
Managerial Economics
The application of microeconomics to effective management

The study of how society uses its scarce resources (i.e.,

‘science of choices’)

We will analyze the microeconomic behavior of consumers,

firms and governments under various market structures.

Managerial economics helps managers make choices

Manager of
Your own life
Your family
Your work organization (business, government, non-profit etc.)
Two Dimensions in Economics
Positive Economics
• Descriptive, value-free
e.g., If interest rate goes up, would consumption increase?
If the US government imposes a quota on the import of foreign cars.
What would happen to the price, production, and sales of cars?
Normative Economics
• Prescriptive, value-involved, moral philosophical debates
e.g., For economic growth, should a government lower interest
rates or not?
Consider a new tax on gasoline. How much money should be
invested to make cars more fuel-efficient?

We are doing both positive and normative economics.

https://inomics.com/insight/top-memes-all-economists-will-love-1305239
https://knowyourmeme.com/photos/253463-what-people-think-i-do-what-i-really-do
https://www.pinterest.com/pin/309833649337896136/
MOVTIVATING STORIES AND
COURSE OVERVIEW
Motivating Story 1: Coupons
Coupons are everywhere: newspaper, supermarket
entrance, online (promo codes) etc.
• But some people have never bothered to use them.
• Why not running an ad on sale? Isn’t it a lot simpler and more
effective?

What coupon value

should a firm recommend
for a product in order to
maximize revenue?
Motivating Story 2: Pricing Strategy
What’s the economic reason behind? Ever wondered?
Motivating Story 3: Price Control
If people think their wage rate is low, should the
government implement minimum wage?
Cross-country comparisons
• US: $7.25/hour
• Japan: $6.56/hour
• France: $11.03/hour
• Singapore: No minimum wage

How would minimum wage affect wage and

employment? Would it increase the social welfare?
Lecture Schedules
(Details are subject to change)

Week Lecture Textbook Tutorial

Chapters Activities

Week 1 Course Overview and

Introduction Ch1 No Tutorials

Week 2 Demand and Supply

Elasticity Ch2 No Tutorials

Week 3 Group
Consumer Theory Ch3&4 Formation

Uncertainty and
Week 4 Behavioural Math
Economics Ch5 Review
Cost, Profit
Week 5 Maximization and Problem Set
Competitive Supply Ch7&8 I
Week 6 Analysis of Case 1
Competitive Markets Ch9 Presentation
Recess Week
Week 7 Market Power and Uniform
Pricing Monopoly Ch10 Problem Set II

Week 8 Sophisticated Pricing with Case 2

Market Power Ch11 Presentation

Week 9 Monopolistic Competition

and Oligopoly Ch12 Problem Set III

Week 10 Game Theory: Static Case 3

Games Ch13 Presentation

Week 11 Game Theory: Dynamic

Games Ch13 Problem Set IV

Week 12 Case 4
Asymmetric Information Ch17 Presentation

Week 13
Course Summary Final Review

Reading Week
Class Preparation
Class participation
Course readings
• Microeconomics (Global Edition), 8th ed,
Robert S. Pindyck & Daniel L. Rubinfeld, 2015
• E-text, used/old/newer versions are okay.
• Supplementary book: Managerial Economics, 5th ed, Ivan Png, Taylor &
Francis, 2015
Assignments
• Problem Sets
• Presentation
Tutorial
• Group formation and math review
• Homework problems and group presentation
• General Q&A
Grading
1. Homework Problem Sets: 20%
2. Presentation: 10%
3. Class/Tutorial Participation: 10%
4. Final Exam: 60%
• Assessment 2 is team-work
• Assessment 1: All students have to complete the questions individually online
on ExamSoft. Writing out calculations steps clearly is encouraged for your own
learning but is not required. Discussion with classmates is allowed but
plagiarism is against the University rules.
• Assessment 2: All team members receive the same evaluation, regardless of
the individual variation in their contribution.
• Details on team formation will be briefed during the first tutorial
in Week 3.
• Final exam is an open-book exam
• 50 MCQ’s in 90 minutes using ExamSoft
• I will provide 32 practice questions
• 1 past exam question per lecture, 8 final review questions, 12 practice final exam
questions
• By the University policy, no make-up final examination is to be given.
Questions, Doubts, and Consultations
Please ask questions when you feel lost or doubtful.
Best time to ask questions: during or after class

Office Hours
• By appointments
• Extended consultation hours will be set up prior to the final exam.
• In the meantime, feel free to approach to me and your tutors for any
query.

Email Consultations
• Our teaching team will do our best to reply swiftly, unless questions
• require long answers
• are unprofessional
Some Emails to Previous Lecturers
• “Sorry, I came 20 minutes late yesterday because .... Can you
please email me about what I missed?”
• Lectures will be recorded

• “I didn’t do well in the exam because …... “ (and he asked for a

make-up exam.)
• Unfortunately, no make-up exam will be available by university
policy
Mathematics Required
Simple calculus: first derivative
• Will be reviewed in one of tutorials

Simple algebra:

𝑄𝑄 2 − 4𝑄𝑄 + 4 = 0, 𝑄𝑄 =?
 More Things
Enrollment Matters
• Enrolling in module and tutorial sessions should be addressed
directly to the BBA office.

Classroom Etiquette
• Be on time to class
• Laptops and cell phones allowed ONLY for learning activities

http://www.nus.edu.sg/ModReg/contact_undergraduate.html
How to get a good grade
Be an active thinker and participant in lectures and
tutorials.
Focus on understanding the concepts from each lecture
note.
Problem sets are the best exercise aids.
• Many of the questions in problem sets would require
calculations. (Economics is a rigorous science.)
• Make sure that you can solve all problems independently.
Take cases seriously.
Final exam focuses more on applying concepts, problem
sets more on calculations.
SOME PRELIMINARY CONCEPTS
Economics
As a toolkit for thinking and making choices
As a language
As a way of life
Opportunity Cost
The value of the next-best alternative that is foregone by
the decision-maker
• Cost of purchasing a property?
• Assume the next-best is to keep the money (=price of the
property) in other investments and earn some returns.
• Opportunity cost = price of the property + returns that you would
have earned from keeping the money
• Cost of using your own house for office space = 0?
Example (opportunity cost)
What is one’s opportunity cost for attending college?
• Explicit Cost
• Tuition
• Textbooks
• Meal

• Any other cost?

• The money that would be earned by working at a job full time
 What is a market?
A market is a place where parties can gather to
facilitate the exchange of goods and services.
Explicit vs. implicit prices
Medium of exchange in the form of money
Shadow prices
Opportunity cost of time
Goods and services
Organs and “repugnant transactions”
Marriage
Private vs. public provision
Education

https://www.investopedia.com/terms/m/market.asp
Markets and Prices
In a centrally planned economy, prices are set by the
government.

In a market economy, prices are determined by the

interactions of consumers, workers, and firms. These
interactions occur in markets—collections of buyers and
sellers that together determine the price of a good.

We are interested in the underlying motivations of all parties

that enter into this economic exchange, their decision
making and economic implications. Naturally, price-
determining mechanisms are important in microeconomics.
 Life choices
Your most important decisions in life require choices
and involve markets

Marriage
Household Economics and Matching Theory
Positive Assortative Matching (Like Attracts Like): Mate Preferences
vs. Search Frictions?

Hitsch, Gunter J., Ali Hortaçsu, and Dan Ariely. “Matching and Sorting in Online Dating.” American Economic Review 100, no. 1 (March 2010): 130–63.
 Life choices
Your most important decisions in life require choices
and involve markets

Education and Jobs

Labor economics, economics of education
Will AI (artificial intelligence) take away all our jobs?

Inequality
Labor economics
Why has wage inequality risen?

Acemoglu, Daron, and Pascual Restrepo. “Automation and New Tasks: How Technology Displaces and Reinstates Labor.” Journal of Economic Perspectives 33, no. 2 (May 2019): 3–30.
Juhn, Chinhui, Kevin M. Murphy, and Brooks Pierce. “Wage Inequality and the Rise in Returns to Skill.” Journal of Political Economy 101, no. 3 (June 1, 1993): 410–42.
https://edsource.org/2014/higher-college-attainment-will-raise-wages-but-not-narrow-income-gap/63535
 Life choices
Your most important decisions in life require choices
and involve markets

Religion and beliefs

Economics of religion
Causal effect of religiosity on depression
Randomized evaluation of a religious education program

Fruehwirth, Jane Cooley, Sriya Iyer, and Anwen Zhang. “Religion and Depression in Adolescence.” Journal of Political Economy 127, no. 3 (October 30, 2018): 1178–1209.
Bryan, Gharad T., James J. Choi, and Dean Karlan. “Randomizing Religion: The Impact of Protestant Evangelism on Economic Outcomes.” Working Paper. National Bureau of Economic Research,
February 2018.
 Life choices
The most important decisions in a firm require choices
and involve markets

Firms and markets

Industrial Organization, Game Theory
Pricing Strategies in Platform Markets
Video-game Industry: Vertical integration

Weyl, E. Glen. “A Price Theory of Multi-Sided Platforms.” The American Economic Review 100, no. 4 (September 1, 2010): 1642–72.
Lee, Robin S. “Vertical Integration and Exclusivity in Platform and Two-Sided Markets.” American Economic Review 103, no. 7 (2013): 2960–3000.
Life choices
Society’s most important decisions require choices and
involve markets

Housing
Housing economics
Health
Health economics
Government
Public economics, political economy, media economics
Climate change
Environmental economics
 Economic Modeling
Problems or reality are simplified to models, like maps.

Abstract important characteristics from the rich details.

The world is too complicated

Caveat: A model relies on the realism of its assumptions and

the quality of its data.

Given certain assumptions, how should we solve a problem

optimally? What are the implications and predictions of the
model and do they line up with the data? Are these
assumptions realistic in the setting of interest?

A model helps us understand fundamental forces.

https://en.wikipedia.org/wiki/Economic_model
Two components in decision making
Objective
• To maximize net benefits or profit
• Net Benefits = Total Benefits – Total Costs
• Profit = Revenue – Costs

Available options
• To identify which option is able to maximize net benefits
 Optimal choice: Marginal Analysis
Marginal Benefits (MB): Change in total benefits arising
from a unit change in Q.

Marginal Costs (MC): Change in total costs arising from a

unit change in Q.

“Marginal Revolution” led to marginal analysis becoming

an integral part of mainstream economic theory
Blog: http://marginalrevolution.com

Paradox of value
Why are diamonds more expensive than water?
https://en.wikipedia.org/wiki/Marginalism
MC and MB for Discrete Variable
Example:
Jerry owns a candy store. The store's revenues depend on
the number of hours the store is open each day as shown
in the Table below. The cost of staying open each hour is
$10. If Jerry follows the marginal principle, how many
hours each day should he keep his store open?
MC and MB for Discrete Variable
Marginal Principle
MB>MC means the last unit of quantity, Q increased
benefits more than it increased costs.

MB<MC means the last unit of quantity, Q increased cost

more than it increased benefits.

To maximize net benefits, the quantity Q should be

increased up to the point where MB = MC.
MB and MC for Continuous Variable
Marginal benefits from an infinitely small change in the
variable, Q:
Δ𝑀𝑀 𝑑𝑑𝑀𝑀
𝑀𝑀𝑀𝑀 = =
Δ𝑄𝑄 𝑑𝑑𝑄𝑄
Marginal costs from an infinitely small change in the
variable, Q:
Δ𝑀𝑀 𝑑𝑑𝑀𝑀
𝑀𝑀𝑀𝑀 = =
Δ𝑄𝑄 𝑑𝑑𝑄𝑄
Economics as a language
Specific terms and definitions for effective
communication
Businesses and other organizations
Quantitative vs. qualitative thinking
Importance of data and mathematics
Why calculus is needed
Mathematics as a universal language
Causality vs. correlation
Machine learning
Currently focuses on prediction via correlation
Econometrics
Focuses more on causality
Economics as a way of life
Applying the toolkit to all areas of life
Think like a Freak
Economic imperialism
The application of economics to many academic fields
Social sciences: Economics, psychology, sociology, political science, history
etc.
Law, public policy, and business etc.
Business: Accounting, finance, marketing, strategy, management
Optimization mindset
Optimization frictions
Learning costs
Incentives
Family: Parents
Labor: Contracts
Industrial Organization: Competition
Revealed preference
"It is not what you say, it is what you do that reveals what you want."
What comes to mind now when you hear the
word “economics”?
Recap
Introduction to Economics
Economics is a toolkit for thinking and making choices
Becker (1971): Economics is the study of the allocation of scarce means to
satisfy competing ends
Scope of Economics: Microeconomics, Macroeconomics, Econometrics
Positive and Normative Economics
Motivating Stories and Course Overview
Preliminary Concepts
Economics as a language and a way of life
Opportunity cost: The value of the next-best alternative, “scarce means”
Markets: A “place” where two parties can gather to facilitate the exchange of
goods and services
Your most important decisions in life require choices and involve markets
Marriage, Education and Jobs, Religion and Beliefs, Firms and Markets
Economic modeling requires abstraction from a complicated world
Cost-Benefit Analysis, Marginal Revolution
Past Exam Question
Which of the following statements is (are) normative?

A. Governments should tax the rich, who have lower marginal

utility of income to help the poor, who have higher marginal
utility of income.
B. Governments should subsidize education.
C. Governments should break up large firms.
D. All of the above
Past Exam Question and Answer
Which of the following statements is (are) normative?

A. Governments should tax the rich, who have lower marginal

utility of income to help the poor, who have higher marginal
utility of income.
B. Governments should subsidize education.
C. Governments should break up large firms.
D. All of the above

Answer: D
Explanation: These are all statements about what governments
should do rather than positive descriptive statements.
This is it for the day.