Download Review Outline for Final Examination

E303. Spring 2006. Davis
Review Outline for Final Examination
I. Chapter 1. The Fundamentals of Managerial Economics
A. Definition of Topic.
1. Economics
2. Managerial Decisions
B. Components of Effective Decision Making
1. Identify Goals and Constraints:
2. Recognize the Nature and Importance of Profits: Economic profits differ from
Accounting profits. . Good decision-making involves the maximization of economic
profits.
3. Understanding Incentives. .Compensation and the structure of organizations
affects importantly organizations.
a. Organizational Incentives
b. Incentives for Motivating Individuals
4. Understand Markets. Market forces represent a series of rivalries. In any
problem, you must appreciate your position relative to other agents.
5. Recognize the Time Value of Money
6. Appreciate Marginal Analysis. Marginal decisions are an easy way to optimize
totals. Calculus is just a formal expression of marginal analysis.
a. Discrete Decisions.
b. Continuous Decisions and the calculus
c. Incremental Analysis
1. Pay attention to incremental costs and incremental benefits.
2. Ignore sunk costs. .
II. Chapter Market Forces: Demand and Supply
A. Introduction and Overview.
1. Overview
2. The structure of the supply and demand model.
B. The Demand Side.
1. Motivation: Diminishing marginal utility:
2. Definition of Demand Curve
3. Determinants of Demand.
4. Changes in demand vs. changes in qty demanded.
5. The Notion of Consumer Surplus
6. An Analytical Example
C. The Supply Side.
1. Driving Force. The Law of Diminishing Returns
2. Definition of Supply Curve
3. Determinants of supply:
4. Changes in supply vs. changes in quantity supplied.
5. Producer Surplus.
6. An Analytical Example.
D. Equilibrium. Putting Supply and Demand Together
1. Definition.
2. Binding the market.
Price floors
Price Ceilings
E. Comparative Statics.
1. Supply or Demand Shifts
2. Supply and Demand Shifts
III. Quantitative Demand Analysis
A. Price Elasticity of Demand
1. Motivation
2. Calculations
a. Arc price elasticity of demand
b. Point price elasticity of demand
c. Percentage Changes
3. A Graphical Interpretation of Price Elasticity.
4. Some Observations about Price Elasticity of Demand
a. Most Demand curves have elastic and inelastic segments
b. Exceptions
c. Elasticity and the Slope of Demand Curves
5. Price Elasticity, MR and TR.
6. Determinants of price elasticity of demand
B. Other Demand Elasticities
1. Cross Price Elasticities
2. Income Elasticities
3.Other Elasticites.
C. Elasticities and demand functions
1. Linear Demand functions.
2. Logrithmic Demand.
D. Estimating Demand: Regression Analysis.
1. Interpreting the significance of individual parameter estimates
2. Forecasting
IV. Chapter 5. The Production Process and Costs
A. Introduction
B. The Production Function
1. Short Run Production.
a. Diminishing Marginal Productivity and Marginal Product
b. Relationships between Productivity Measures.
c. Optimal Use of a single input.
2. Long Run Production (Optimal use of multiple inputs)
3. Returns to scale: Given a production function of the form
F(K,L) = KL
The function exhibits increasing returns to scale if >.5
constant returns to scale if =.5
decreasing returns to scale if <.5
C. Costs.
1. The relationship of production functions to cost functions.
2. Short run costs.
a. Cost curves
b. Sunk vs. Variable Costs
c. Algebraic forms of cost curves
3. Long-Run Costs
a. Long Run Average Costs
b. Economics of Scale
4. Multiple Output Cost functions
a. Economies of Scope
b. Cost complementarities
V. Chapter 6. The Organization of the Firm.
A. Overview and Motivation.
B. Optimal Methods of Obtaining Inputs
1. Options
a. Spot
b. Contract
c. Internal Production
2. Factors affecting choice of the optimal method
a. Costly Bargaining
b. Underinvestment
c. The Hold-up Problem.
C. Managerial Compensation and the Principal-Agent Problem.
1. The Principal-Agent Problem.
2. Structuring Contracts for Managers (review).
3. The Manager/Worker Problem.
a. Profit Sharing.
b. Revenue Sharing.
c. Piece Rates.
d. Time clocks and time checks
VI. Chapter 8. Managing in Competitive, Monopolistic and Monopolistically
Competitive Markets.
A. Introductory Comments on Chapter 7.
B. Competition.
1. Assumptions
2. Optimal short run decisions
a. Graphically
b. Analytically (set P = MR = MC)
3. Long run decisions.
C. Monopoly
1. Assumptions, Sources of monopoly power.
2. Characterization:
a. Graphically
b. Analytically
Q* is where MR = MC
P* is the demand curve at Q*
Profits are TR - TC
3. Observations: Social Costs of Monopoly
.
D. Monopolistic Competition
1. Assumptions
2. Characterization:
3. Optimizing decisions.
4. Observations.
VII. Chapter 11. Pricing Strategies.
A. Basic Pricing Strategies for Firms with Market Power
1. Optimal Pricing for a monopolist or monopolistic competitor
a. Basic Case
b. Imperfect Demand Information
P
=
MC/[1+1/].
B. Strategies that yield higher profits
1. Price Discrimination
a. Perfect (1st degree) price discrimination
i. Calculating gains
ii. Necessary conditions
b. Price List (2nd degree) price discrimination
c. Group Division (3rd degree) price discrimination.
2. Two part pricing.
3. Commodity Bundling
4. Peak Load Pricing