Economics 308

1. Economics 308 Managerial Economics Introduction and Chapter 1 Professor Kenny Ng

2. Administrative Details This course is currently full. There will be an in-class lottery to establish a waiting list. Students on the waiting list will be notified by email and given permission numbers to add the class as seats open. The permission numbers will be good for 48 hours. If the student doesn't use the permission number to add the class within the allotted time, the open seat will be passed on to the next student on the list. Students not present in class on for the in-class lottery will be placed on the bottom of the waiting list. Seats will continue to be given out until the 4th week of class. The waiting list will be posted online so that students can monitor their position on the list. After the first three weeks of the semester, the CSUN late drop policy will be strictly followed.

3. University Drop/Add Policy Source: CSUN 2002-2004 Catalog, page 515.Source: CSUN 2002-2004 Catalog, page 515.

4. Course Website buslab5.csun.edu/kng

5. Textbook Managerial Economics and Organizational Architecture, Fourth Edition by Brickley, Smith, and Zimmerman.

6. Online Homework Online Homework is done through the Aplia.com website. Requires a subscription-$28 Instructions for signing up on class website. Course key is BPHF-EW2Q-YR7J . Assignments occur about once a week. The assignments are generally due Tuesday morning at 11AM. The first assignment is due Tuesday of the 2nd week of class.

7. Online Homework Policy The online homework is required. It is the student�s responsibility to complete the homework before the due date/time. It is the student�s responsibility to use the Aplia.com site correctly. This includes but is not limited to making sure answers are entered, submitted, and recorded by the Aplia.com site. Technical problems are the students responsibility. This includes but is not limited to the student�s internet connection and the functioning/configuration of their personal computer.

8. Grading Grade is based on Aplia.com online problem sets, 2 during the semester exams, plus a comprehensive final. Aplia.com assignments 20% Exams 20% each. Comprehensive Final 40%. There will be a series of unscheduled in-class quizzes whose scores will be added to the next exam. If for any reason, the student does not take the next exam, any points earned on the quizzes will not count. Students who miss the quiz for whatever reason forego the opportunity to have the points added to the next exam. There will be no plus/minus grading. Old exams and assignments are available on the class website.

9. Missed Exam Policy Students are responsible for appearing and taking the exam at the scheduled place and time. Any student not taking the exam will receive a zero score. An excused missed exam must be approved in advance. Sending an unacknowledged email or leaving an unreturned voice mail does not excuse a student from taking the exam.

10. The Curve Grades in the class will be mean based. Letter grade is determined by how well each student performs relative to the average performance of all students in the class. Roughly speaking, 40% of the class will receive an A or B, 40% a C, and 20% (including those who do not complete the class) a D or F.

11. Course Description Course will apply standard economic theory to problems faces by managers in a typical business. Two Parts: Application of economic theory to standard business problems. What price should a firm charge for its� product? What combination of inputs and technology should a firm use to produce a good? What determines the price of a good and how does a market respond to changes in demand. Part 2 in textbook Economic View of Organizations Powerful Framework that can be used to address many different types of management problems, e.g. Organizational Architecture. Assignment of Decision Rights. The Reward System. Performance Evaluation System. How economic theory can be applied by firms to make employees behave in ways which increase firm�s profits and value. Part 3 in textbook.

12. Controlling and Predicting Human Behavior Using Economic Theory Consider the Quote: The average employee is motivated to do a good job that enhances his/her sense of self-worth. The best way to increase employee output is to show that you trust your employees and empower them. Do you always trust auto mechanics, sales people, stockbrokers, real estate agents, and politicians? Even though you hire them, these people may be working in their own self-interest ---not yours. Perverse Incentives The same principle applies to employees. Firm�s hire and pay their employees but if they are also self interested does it always make sense to empower or trust them? Discuss whether quote is an accurate description of the world. How can the owners of a business make employees behave in ways that maximize the firm�s profits. Discuss whether quote is an accurate description of the world. How can the owners of a business make employees behave in ways that maximize the firm�s profits.

13. An Illustrative Game Write your name on the sheet. Vote zero or 1 on the card. Will pay according to the schedule on the next page. Will �play� for points added to your score on the next exam�1 point added for each $5,000 won in the game above the amount average amount won by all participants.

14. Course Description Course will develop and apply standard economic theory to problems faces by managers in a typical business. Two Parts: Application of economic theory to standard business problems. What price should a firm charge for its� product? What combination of inputs and technology should a firm use to produce a good? What determines the price of a good and how does a market respond to changes in demand. Part 2 in textbook Economic View of Organizations How economic theory can be applied by firms to make employees behave in ways which increase firm�s profits and value. Part 3 in textbook.

15. Controlling and Predicting Human Behavior Using Economic Theory Consider the Quote: The average employee is motivated to do a good job that enhances his/her sense of self-worth. The best way to increase employee output is to show that you trust your employees and empower them. Do you always trust auto mechanics, sales people, stockbrokers, real estate agents, and politicians? Even though you hire them, these people may be working in their own self-interest ---not yours. Perverse Incentives The same principle applies to employees. Firm�s hire and pay their employees but if they are also self interested does it always make sense to empower or trust them? Discuss whether quote is an accurate description of the world. How can the owners of a business make employees behave in ways that maximize the firm�s profits. Discuss whether quote is an accurate description of the world. How can the owners of a business make employees behave in ways that maximize the firm�s profits.

16. An Illustrative Game Write your name on the sheet. Vote zero or 1 on the card. Will pay according to the schedule on the next page. Will �play� for points added to your score on the next exam�1 point added for each $5,000 won in the game above the amount average amount won by all participants.

17. Payoff Matrix Play game 3 times. Explain after the first game whether the outcome is �optimal�, play game 2 more times. Play game 3 times. Explain after the first game whether the outcome is �optimal�, play game 2 more times.

18. Lessons From Game. People behave in their own self interest. How could you solve this collective action problem? All winnings could be placed in a fund that is split equally among individuals. Decision rights could be changed. How does this game relate to real organizations? How can firms get employees including executives to behave in the best interests of the firm, i.e. maximize the firms profits. Main Idea of Course: Productive architectures link knowledge and decision-making authority and provide the correct incentives for decision makers to take productive actions. How managers can apply economic theory to control and predict human behavior to maximize a firm�s profits and value.

20. Example of Clever Organizational Architecture. Team Production in the automobile industry. Quality control. How do you make employees act in the best interests of the owners of the firm? Productive architectures link knowledge and decision-making authority and provide the correct incentives for decision makers to take productive actions Recreational Reading: The Reckoning by David Halberstam. Ford and NissanFord and Nissan

22. Harvard MBA, Ford Executive. Harvard MBA, Ford Executive.

23. F-111 AardvarkF-111 Aardvark

24. Economics Darwinism. Economics Darwinism is the economic counterpart of the biological theory of natural selection. Only those organizations that are relatively most efficient can survive in a competitive marketplace.

25. Example of Natural Selection Economics Darwinism is the economic counterpart of the biological theory of natural selection. Only those organizations that are relatively most efficient can survive in a competitive marketplace. As we will see, even if managers choose efficient policies by luck, there will be a tendency toward efficient organization in an industry (in a relative sense). Assumptions: There is an optimal way to compensate top managers within the industry. New entrants select the optimal compensation scheme with probability=.5 Firms fail after the first year if they adopt the wrong scheme. New firms enter each year to replace the firms that have failed. There are 100 firms at any point in time in the industry.

26. Implications The firms which adopt the most efficient organizational structures will survive and earn the most profits. Managers can increase the likelihood their firms will survive by understanding organizational theory better. The understanding and application of economic theory allows managers to discover or create efficient organizational structures.