The Nanyang MBA - Nanyang Technological University

The Nanyang MBA
B6013 – Economic Analysis
(TRIMESTER 3, 2008/2009)
Course Instructors
Professor David Reisman [Microeconomics], Course Coordinator
(Office: S3-01B-43, Tel: 6790-5659, E-mail: aardavid@ntu.edu.sg)
Professor David Reisman is (full) Professor of Economics at NTU. He is a
graduate of the London School of Economics. Professor Reisman has written a
number of books and articles on institutional economics, health economics,
development economics and economic thought. His other teaching interests are
investment analysis, the economics of management and public sector economics
in the ASEAN countries.
Dr. Lee Boon Keng [Macroeconomics]
Dr. Lee is a Senior Investment Strategist at DBS Bank. He is principally
concerned with trends in interest rates and trading opportunities in currencies
and equities. Prior to joining DBS Bank, he was an Assistant Professor at NTU.
He received his Ph.D. from New York University.
Course Description
This course has two components. The first half shows how microeconomics
can contribute to managerial decision-making within the organisation. It deals
with demand and cost analysis, markets and market failure, pricing decisions in
both competitive and concentrated markets, and the strategic interaction
between firms. The theories are applied to real world business problems through
a series of case studies.
The second half of the course focuses on macroeconomics. It helps participants
better to understand the broader economic environment in which companies and
industries operate. Specifically, the course examines the determinants of
national income, employment, economic growth, savings and investment,
inflation, exchange rates, monetary policy, and fiscal policy. The course also
looks at international trade, finance and capital flows.
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Section I: Microeconomics – Weeks 1 through 6:
Professor David Reisman
Prescribed Text
N. Gregory Mankiw, Principles of Economics, 4th Edition, 2007, Thomson
South-Western
Week Topics Readings
1 Introduction
Markets and efficiency
2 Externalities and public goods
The cost of production
3 Market structure: competition and
monopoly
4 Market structure: monopolistic
competition and oligopoly
Labour markets
Chapters 1,2, 4, 5
Chapter 6, 7
Chapters 10,11
Chapter 13
Chapters 14, 15
Chapters 16, 17
Chapter 18
5 Case Discussions
6 Case Discussions
Section II: Macroeconomics – Weeks 7 through 12
Dr. Lee Boon Keng
Prescribed Text:
R. Dornbusch and S. Fischer, Macroeconomics, 9 th edn., 2007, McGraw Hill
Week Topics Readings
7 Growth and Inflation Chapters 1,2,6,7
8 Economic Indicators Notes will be
distributed
9 Monetary Policy Chapters 16
10 Monetary Policy Chapter 16
11 Fiscal Policy Chapter 17
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12 The Open Economy Chapter 20
Assessment
Microeconomics and Macroeconomics each carries a weighting of 50%. Within
each part of the course the marks are distributed as follows:
Class participation/case study 25
Closed book final examination 25
(2½ hours)
Group Presentations for Microeconomics
The first four weeks of the module will consist of lectures given by the tutors.
The fifth and sixth weeks will be devoted to students’ presentations. The cases
to be discussed are included in the course file. During the first meeting students
will form groups and select their seminar topics. Each presentation, which is to
be done in PowerPoint during the last two weeks (weeks 5 and 6), will take
about one hour, including time for discussion and questions. Participants should
hand in to the tutor the final draft of their group’s PowerPoint presentation on
the day of their seminar. Students will receive feedback and be told their mark
by e-mail. None of the cases studied in the course will be the subject of a
question in the final examination.
Seminar Questions for Microeconomics
Every participant is expected to read each of the cases before coming to the
seminar. He or she should be prepared to contribute to the discussion. What
follows are some suggested topics that would make the presentation especially
interesting. Participants should feel free to draw attention to any aspect of the
case that is relevant, even if it is not indicated in the questions below. The
presentation should draw upon the main concepts of Microeconomic Theory,
covered in the lectures and notes.
Week 5/Group 1
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Trading the Right to Pollute: Developing a Market for Pollution
Allowances
This case is about a solution to externalities. It is, however, a market solution
rather than a command solution. The regulators act through the price
mechanism.
1. What is the problem being addressed? What are the economic issues?
What is the optimum amount of pollution? In what circumstances might
the complete elimination of pollution be economically sub-optimal?
2. For what reasons might an unmanaged market fail to limit noxious
emissions? What policy-tools are at the disposal of government to equate
the private and the social cost? Distinguish in your answer between the
theories of Coase and Pigou. Explain how regulations and prohibitions
might provide an alternative to controls that operate through markets. In
what way does Singapore’s COE policy fit into this framework?
3. What are the viewpoints of different stakeholders? (What would the
different preferences be of a member of Greenpeace, the head of the EPA,
the head of a public utility, the head of the CBT?). Use public choice
theory to explain how pressure groups have an impact upon public policy.
In what way can the public interest be ensured?
4. Are the economic problems of public utilities different from those of
perfect competitors? What are the uncertainties facing natural monopoly?
What criteria could be applied by a regulatory commission? In what
circumstances, if at all, would the problem be solved in the long run by
entrepreneurship and new entry?
Week 5/ Group 2
Duopoly and Uncertainty: The Beauregard Textile Company
This case deals primarily with issues of pricing, cost and strategy. Participants
should discuss market share, cost functions (fixed and variable) and alternative
price-volume scenarios. The expected value of contribution to profit should be
indicated.
The principal questions are:
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1. Should Beauregard announce a price of $3.00 or $4.00?
2. How would the numbers be different if Calhoun & Pritchard were to raise
their price to $4.00?
3. Show that the total pie becomes larger if both companies raise their price
to $4.00. Why then might they not do so?
Week 5/Group 3
Antitrust and Competitive Strategy in the 1990s: Microsoft Corp's Pricing
Policies
Provide an overview of government policy to ensure competition in the United
States. Refer to the Sherman Act, the Clayton Act and the Federal Trade
Commission Act.
Provide examples of different types of restrictive practices that are not in the
public interest.
What technical considerations (hardware, software etc.) influence the market for
Microsoft products?
First the group should explain the economic arguments against Microsoft. The
group should then defend Microsoft’s market position and oppose prosecution
on the grounds of performance. In both opposing and defending, the group
should take into account the relevant statutes and theories of economic
efficiency. Exclusionary licenses, minimum commitments and long contracts
should be cited as possible reasons for thinking that an offence had been
committed. Schumpeter’s arguments for economies of scale and research and
development should be cited in arguing that perhaps large organisations
promote economic welfare.
Apply these concepts to Singapore. What steps have recently been taken to
safeguard adequate competition in Singapore? What lessons does economic
theory teach about the appropriate level of competition in a small open
economy?
Week 6/Group 4
Inputs and derived demand: What Unions Do
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1. Explain the unique characteristics of the market for labour. What
monopolistic and monopsonistic elements are present in the wage
bargain?
2. What kinds of allocative and dynamic inefficiency can you detect in the
behaviour of unions? Are there any economic benefits that result from
union activity?
3 Use economic theory to determine the ‘fair’ rate of pay. What role would
you assign to marginal productivity? Average productivity?
Redistribution in line with consensus?
4. Apply the economic theory of unions to the labour market in Singapore.
Show how organisations such as the NWC and the IAC take into account
economic concepts such as supply and demand and the productivity of
labour.
Week 6/Group 5
New entry: Rogers Communications Inc.
1. What is meant by ‘convergence’ of television, telephone and computing.
How does it affect the future of cable television? How does it affect
Rogers?
2. Consider this convergence from the perspective of the consumer. How
will convergence deliver benefits to consumers? How rapidly are
consumers likely to embrace these benefits? What impediments exist to
their adoption?
3. What is your assessment of Rogers’ new product development process
with respect to high speed web access?
4. What is the likely size of the market for high speed Web access in the
Newmarket suburb of Toronto over the next three years? On what factors
does your estimate depend?
5. How should Rogers design its launch offering the WAVE?
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Week 6/Group 6
Modeling and games: Judo Economics
This case is about small-scale entry into a market.
1. Suppose that:
a. Each buyer has a willingness-to-pay of $200 for one unit of either
the incumbent’s or entrant’s product.
b. Both incumbent and entrant have a $100 unit cost of serving
buyers.
Formulate a strategy for the entrant. How much money can the entrant
make?
2. Now suppose that:
a. Each buyer has a willingness-to-pay of $200 for one unit of the
incumbent’s product and $160 for one unit of the entrant’s product.
b. The incumbent has a $100 unit cost and entrant has a $120 unit
cost of serving buyers.
Formulate a new strategy for the entrant. How much money can the
entrant make?
3. Finally suppose that:
a. Each buyer has a willingness-to-pay of $200 for one unit of either
the incumbent’s or entrant’s product.
b. The incumbent has a $120 unit cost and entrant has an $80 unit
cost of serving buyers.
Formulate a new strategy for the entrant. How much money can the
entrant make?
4. How much value does the entrant add in each of the games described in
1, 2 and 3 above? How does the amount of value that the entrant adds in
each game compare with the amount of money it can make in the game?
The incumbent basically has two strategies. It can accommodate entry or fight
entry. Participants need to evaluate both these and the entrant’s post entry
decision problem. Give real world examples of cases where a small firm might
have employed ‘Judo’ strategies to enter a market.
Each game can be represented diagrammatically with $s on the vertical axis and
the number of units on the horizontal axis. Value can be shown as a rectangle
(the total pie). It then is easy to show who captures how much of the value.
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As this case is rather brief, detailed notes are provided to accompany it. The
notes will assist the student but they are not a full answer to the question.
Coursework for Macroeconomics
Participants will receive a coursework mark-based on class participation and
individual projects. Topics and further information about assessment will be
distributed at the first meeting of the Macroeconomics module.
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