Managerial Economics

Teacher: Maggie Winslow

Presentation

• Week 5
• Partners: Katie Branagh, Ellen Wong
• Specifications

Residency 1

Overview

• Recommended book: economics dictionary
• She is often available in the morning for office hours

TAs – Katherine: Game theory

Posts

• Posts due Wednesday at midnight
• First post due any time during the semester
• Should read each other’s post and build on them

Assignments

• All assignments due Monday at midnight
• Recommended to work in groups, but try all problems first then meet to discuss. Don’t copy each others words
• Late problems are deducted 10% per day

Presentation

• Form groups of 2 (5 minutes) or 3 (7.5 minutes)
• 5 minutes – STRICT
• Don’t need to dress up, but take seriously

Problems Set

• Contact TA for problems, Maggie for general
• Late deducted 10% per day

Problems with neoclassic market system

• People with more money have more influence
• Short term thinking
• Based on individual not societal values, example cheap clothing vs organic cotton. (I still don’t understand where “society” values exist outside individual values)
• Doesn’t include externalities
• Doesn’t include public goods (air quality)

Pareto Efficiency

• State of an economy where no-one can be made better off without making someone worse off

Marginal Analysis

• The costs or benefits associated with the change in one unit – consuming one more unit, or producing one more unit
• Supply and demand graphs are marginal curves

Production Possibility Frontier (PPF)

• Shows all the combinations of goods and services that can be produced if all resources are used efficiently
• PPF is bowed outward because there are increasing marginal opportunity costs with trying to make more of something because, to make more, you must give up ever increasing quantities of something else.
  • For instance, some land might be better for corn and some for apples and you can maximize production by using
• “Declining returns of scale” or “Increasing marginal opportunity costs”

• Competitive Advantage: You do something better than anyone else?
• Comparative Advantage: You do something a little better than someone else?

Budget Constraints and Indifference Curves

• Indifference Curve: defines the combinations of goods x and y that give the consumer the same level of satisfaction.
• Indifference curve subject to:
  • Completeness: consumers know their preferences
  • More is better
  • Transitivity if a>b and b>c then a>c
  • Diminishing marginal rates of substitution
• Can’t have crossed or non-monotonic indifference curve
• Can have square indifference lines
• “Utility” (or happiness) is maximized where the indifference curve touches the budget line (where the slopes are equal)
• Principle of Rational Choice: spend your money on those goods that give you the most marginal utility per dollar

MWTP – Marginal willingness to pay MC – Marginal cost