MBA Managerial Microeconomics Course Guide Template

Managerial Microeconomics Course Guide: [Programme, term or section]

A course guide for the managerial microeconomics core of an MBA: demand and supply, elasticity, costs and economies of scale and scope, market structures, pricing, game theory, information economics, incentives and the boundaries of the firm. It is for students in the core year, admitted students who want to see the course before it starts, and working managers who want the economics behind pricing, make-or-buy and incentive decisions. It gives a 13-session roadmap, a key-concepts table that links every concept card, an original mini-case with exhibits and a teaching note, a grading rubric, an exam plan and a self-test with an answer key. Source basis: Marshall (1890), Cournot (1838), Lerner (1934), Coase (1937), Nash (1950), Akerlof (1970), Spence (1973), Williamson (1975), Jensen and Meckling (1976), Panzar and Willig (1981), written up in original words with fictional examples. Replace every [bracketed] value and every row marked Example. Course designs differ between schools: check your own syllabus for the session order, weights and rules.

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Contents

• 1. What the course is for
• 2. Prerequisites
• 3. Session roadmap
• 4. Key concepts
• 5. How the ideas connect
• 6. Mini-case: the Trailhead stove decision
• 7. Typical assignments and how they are graded
• 8. Exam preparation plan
• 9. Common struggles
• 10. Self-test
• My notes and next steps
• Teaching note: the Trailhead stove decision
• Sources and further reading
• Answer key
• Revision history

1. What the course is for

Managerial microeconomics is the core course that explains how prices, costs and competition interact, and how people and firms respond to incentives. In the MBA it is less about curves for their own sake and more about a small number of recurring decisions: what price to charge, whether to cut price or hold it, how far to expand, when to enter or stay out of a market, how to respond to a rival, how to write a contract or a bonus scheme that people will not game, and whether to make an input in-house or buy it. Strategy, marketing, operations, finance and negotiation all borrow these tools, so the course pays off far beyond its own exam.

The table maps the course to the competency list used across this library's MBA templates, which follows the kind of learning goals accreditation bodies ask business schools to define. As of October 2026 the AACSB accreditation standards in force are the Global Standards for Business Education, ratified by AACSB members on 20 April 2026 and grouped under Strategic Management, Learner Success and Pathways to Impact; each school sets its own learning goals within them, so check your programme's learning goals and the AACSB standards page before you rely on this mapping.

Learning outcomes. By the end of the course you should be able to: (1) estimate and interpret own-price, cross-price and income elasticities from data; (2) find the profit-maximising price and quantity and check it with the markup rule; (3) separate fixed, sunk, marginal and average costs and spot economies of scale and scope; (4) predict prices and margins under perfect competition, monopoly, monopolistic competition and oligopoly; (5) model a competitive interaction as a game and find its equilibrium; (6) recognise adverse selection, signalling, screening and moral hazard in a business situation and propose a remedy; (7) design an incentive scheme and judge a make-or-buy decision with transaction-cost reasoning.

2. Prerequisites

You need comfortable algebra (solving a linear equation, rearranging a formula), the idea of a derivative as a slope, natural logarithms, and basic spreadsheet skills. You do not need calculus beyond a first derivative, and you do not need an economics degree.

3. Session roadmap

Example plan for a 13-session core course. Many programmes teach the same topics in a different order or split them across two courses; adjust the rows, not the logic.

4. Key concepts

4.1 Costs, scale and scope

A fixed cost does not change with output in the period considered; a sunk cost cannot be recovered whatever you decide, so it must not influence the decision; a marginal cost is the cost of one more unit. With a fixed cost $F$ and constant variable cost $v$, average cost $AC(q) = F/q + v$ falls as output rises: that is an economy of scale. Real cost curves usually flatten out; the output at which average cost stops falling materially is the minimum efficient scale (MES). Compare MES with the size of the market: if MES is a large share of demand, expect few firms, high concentration and strong incumbents.

Economies of scope (Panzar and Willig 1981) exist when one firm produces two products more cheaply than two specialised firms would, because they share an input such as a brand, a store network, a design team or a distribution centre. A simple measure is

$SC = \frac{C(q_1, 0) + C(0, q_2) - C(q_1, q_2)}{C(q_1, q_2)}$

Example: Northfield's design team could run the tent range alone for USD 2.4m a year and the backpack range alone for USD 1.6m, or both together for USD 3.4m. $SC = (2.4 + 1.6 - 3.4)/3.4 = 0.176$: joint production saves about 17.6% of the joint cost (=(2.4+1.6-3.4)/3.4). Scope economies are the economic argument for related diversification; they are also why a focused rival can still win if the shared input is weak.

4.2 Information economics

Adverse selection. Akerlof (1970) showed that when sellers know the quality of what they sell and buyers do not, buyers pay only for average quality. Owners of good items then withdraw, average quality falls, and the market can shrink to the worst items. Business examples: used equipment, insurance, hiring, lending, acquisitions of private companies. Remedies change who bears the information gap: warranties, inspection and certification, reputation and ratings, disclosure rules, and pricing that varies with observable risk.

Signalling. Spence (1973) showed that an informed party can reveal its type through a costly action only if the action is cheaper for the good type than for the bad type. A long warranty is a credible signal of reliability because it costs a reliable producer little. Screening is the mirror image: the uninformed party offers a menu (deductible levels, contract lengths, product versions) that makes types sort themselves (Rothschild and Stiglitz 1976). The pricing card shows the same logic in versioning.

4.3 Principal-agent problems and incentives

A principal (owner, board, manager) hires an agent (manager, employee, supplier) whose effort or information the principal cannot fully observe. Jensen and Meckling (1976) define agency costs as the sum of the principal's monitoring costs, the agent's bonding costs and the residual loss from decisions that still differ from the principal's interest. Incentive pay reduces the gap but loads risk on the agent, and pay tied to a measure the agent can manipulate invites gaming: you get what you measure, not what you want. Holmström (1979) showed that a contract should use every signal that carries information about effort. In practice: tie rewards to the measure closest to value created (contribution rather than revenue, risk-adjusted rather than raw returns), combine measures, and keep some judgement in the assessment. Motivation beyond pay is covered in mba/mba-motivation-card.

4.4 Transaction costs and the boundaries of the firm

Coase (1937) asked why firms exist at all if markets allocate resources well; his answer was that using the market has costs (finding partners, negotiating, writing and enforcing contracts), and firms organise inside a hierarchy what would be costlier to organise through the market. Williamson (1975) identified when market contracting becomes costly: bounded rationality, opportunism, and above all asset specificity, an investment worth much less outside one relationship. Klein, Crawford and Alchian (1978) showed how specific investments create hold-up: once the asset is sunk, the other side can renegotiate to capture its value. Make-or-buy therefore compares production cost (where an outside supplier often wins on scale) with governance cost (where in-house wins when assets are specific, uncertainty is high and the transaction is frequent). Intermediate forms (long-term contracts, joint ownership of the specific asset, dual sourcing) are often the best answer.

5. How the ideas connect

Most case questions in this course reduce to one of five mechanisms. The diagram shows the order in which to test them: first ask whether the decision is about price, quantity or capacity, then whether rivals react, then whether information is unequal, then whether the question is really about the boundary of the firm. Many real cases, like the mini-case below, contain several mechanisms at once; the skill is to analyse each and then show how they interact.

6. Mini-case: the Trailhead stove decision

Situation

Northfield Outdoor Co. (fictional) sells outdoor gear through 30 stores and its own website. In spring, the category manager for cooking equipment, Amara Okonkwo, launched the Trailhead, Northfield's first private-label camping stove. A branded stove from an established outdoor brand sits next to it on the shelf at USD 85, and most customers compare the two. The Trailhead is made by a contract manufacturer at a quoted cost of USD 24 a unit, delivered.

The first decision was price. Instead of guessing, Amara ran a four-week test: the 30 stores were split into four comparable clusters, each with a different shelf price, and online prices were held at the middle level to avoid cross-shopping. Exhibit 1 shows the results. The finance team's draft plan uses USD 59, "because it moves the most units after USD 49 and still gives a healthy margin". The store operations director, Tomasz Lindqvist, argues for USD 49 because "volume is what builds a private label".

The second decision is sourcing. The contract manufacturer has asked Northfield to pay for a set of moulds that only fit the Trailhead, at USD 180,000, as a condition of holding the USD 24 price for three years. Separately, Northfield's engineering lead, Ji-woo Han, has costed an in-house assembly line in the existing returns facility: USD 420,000 a year of fixed cost (lease share, equipment, supervision) plus USD 16.50 of variable cost per unit (Exhibit 2). Ji-woo notes that the in-house option would make the moulds Northfield's own.

The third issue came up during the test. Store managers earn a quarterly bonus of 2% of store revenue. In two clusters, managers ran an unplanned 20% markdown on the Trailhead in the last week, and their unit sales rose. One manager wrote: "Markdown worked, revenue up, customers happy." Exhibit 3 shows a representative store.

The fourth issue is a new idea from the e-commerce team: a used-gear marketplace on the Northfield website where customers sell used tents to other customers, with Northfield taking a commission. A two-month pilot was disappointing: listings were mostly worn tents, and good tents almost never appeared. The pilot survey (Exhibit 4) asked sellers what they would accept and buyers what they would pay. The team proposes a "Northfield Certified" inspection at USD 12 per tent, paid by the seller, with a one-year guarantee on certified tents.

Amara has to present a recommendation to the executive team in two weeks. The CEO, Rafael Duarte, has asked for "one coherent answer, not four separate ones: price, sourcing, store incentives, and whether the marketplace has a future."

Exhibit 1: Trailhead price test (four store clusters, average weekly units per store)

Excel: revenue =B2*C2, contribution =(B2-24)*C2. Annual volume for the chain at a given price is weekly units per store times 30 stores times 52 weeks (for example =48*30*52 = 74,880 at USD 59).

Exhibit 2: Sourcing options

Exhibit 3: Representative store, last week of the test

Exhibit 4: Used-tent marketplace pilot survey (averages, USD)

Buyers cannot tell good from worn tents from the listing photos.

Discussion questions

1. Estimate the own-price elasticity of demand for the Trailhead from Exhibit 1, using both midpoint (arc) elasticities and a log-log fit. Which price maximises contribution at a cost of USD 24? Is the finance team's argument right?
2. At what annual volume does the in-house line beat the contract manufacturer? How does the sourcing decision change the best price, and how does the price change the sourcing decision?
3. What risk does the USD 180,000 mould request create? Use transaction-cost reasoning and suggest a contract design that reduces it.
4. Diagnose the markdown episode in Exhibit 3. Propose a bonus scheme that aligns store managers with Northfield.
5. Why did good tents not appear in the marketplace pilot? Will the certification proposal fix it, and what else could?
6. Write the one-paragraph "coherent answer" the CEO asked for.

7. Typical assignments and how they are graded

Most managerial economics courses combine four kinds of assessed work: class participation in case discussions (see mba/mba-class-participation-log), problem sets (calculation-heavy, often in teams), a case write-up or short analytical memo, and a final exam that mixes calculations with short applied essays. Some courses add a pricing or market simulation in which teams set prices and capacity against each other over several rounds.

Example rubric for a case write-up or exam essay question (adapt to your instructor's criteria):

8. Exam preparation plan

Spacing and retrieval practice are the study methods with the strongest evidence (Dunlosky et al. 2013); see mba/mba-exam-prep for the full routine.

9. Common struggles

1. Using average instead of marginal. Decisions turn on marginal revenue and marginal cost; average cost decides only whether to stay in business at all.
2. Letting sunk or fixed costs change the price. A fixed cost does not change the profit-maximising price for a given cost structure; it changes whether the product should exist. The mould cost in the mini-case is a good test.
3. Confusing a movement along the demand curve with a shift. A price change moves along the curve; income, rival prices and tastes shift it.
4. Treating elastic demand as a reason to cut price. Revenue can rise while contribution falls. Always compute contribution.
5. Reading the sign of the cross-price elasticity backwards. Positive means substitutes, negative means complements.
6. Ignoring the strategic response. In an oligopoly, a price cut that looks profitable with the rival's price held fixed may start a price war.
7. Mixing up adverse selection and moral hazard. Adverse selection is hidden information before the deal; moral hazard is hidden action after it.
8. Designing incentives on the easiest measure. Revenue, volume and short-term targets are easy to measure and easy to game.
9. Seeing make-or-buy as a pure cost comparison. Specific assets, uncertainty and frequency can make the cheaper option the riskier one.
10. Over-trusting a short test. Four weeks and four clusters give a useful estimate, not a law. State the uncertainty.

10. Self-test

1. A firm's demand has elasticity -0.6 at its current price. Can that price maximise profit? Explain.
2. Average cost is USD 30 and marginal cost is USD 18 at the current output. Is the firm in the range of economies or diseconomies of scale? Why?
3. Two products cost USD 5m and USD 3m to produce separately and USD 7m together. Compute the degree of economies of scope.
4. In the used-tent market of Exhibit 4, what share of good tents would make buyers willing to pay at least the good sellers' minimum price if all tents were pooled?
5. Give one example each of a signal and a screen in the MBA labour market.
6. Why can a bonus of 2% of revenue lead a store manager to destroy value? State the condition.
7. Name the three components of agency costs in Jensen and Meckling (1976).
8. Which three transaction characteristics did Williamson emphasise as raising the cost of market contracting?
9. Explain hold-up in two sentences, using the mould in the mini-case.
10. A rival cuts its price by 10% and your sales fall by 6%. What is the cross-price elasticity, and what does its sign tell you?

My notes and next steps

Teaching note: the Trailhead stove decision

Q1. Elasticity and price. Midpoint elasticities between neighbouring prices are -1.543 (49 to 59), -1.488 (59 to 69) and -1.501 (69 to 79). Excel for the first: =((48-64)/AVERAGE(64,48))/((59-49)/AVERAGE(49,59)). The log-log fit gives a slope of -1.516 (=SLOPE(LN(C2:C5),LN(B2:B5)), R squared 0.9999 by =RSQ(LN(C2:C5),LN(B2:B5))), so demand is close to constant elasticity at about -1.5. Contribution per store per week is highest at USD 69 (USD 1,710) in the test, and the constant-elasticity markup rule gives $P^* = c\,\varepsilon/(1+\varepsilon) = 24 \times 1.516/0.516 = 70.51$ (=24*-1.516/(1-1.516)), with Lerner index $(70.51 - 24)/70.51 = 0.660 = 1/1.516$. Finance's argument confuses volume with value: USD 59 gives more units but USD 30 a week less contribution per store than USD 69, which is about USD 46,800 a year across 30 stores (=30*30*52). Operations' USD 49 sells the most units and earns the least of the four. Note how flat contribution is between USD 69 and USD 79: the price decision matters less than the analysis suggests once you are near the optimum, which is useful when brand or rival reactions argue for a rounder price.

Q2. Make or buy, and the link to price. Break-even volume is $F/(c_{buy} - v) = 420{,}000/(24 - 16.5) = 56{,}000$ units a year (=420000/(24-16.5)). At USD 69 the chain sells about 59,280 units a year (=38*30*52), just above break-even: making saves about USD 24,600 a year (USD 1,422,720 buying vs USD 1,398,120 making). At USD 59 the volume is 74,880 and making saves USD 141,600. But the marginal cost when making is USD 16.50, and with elasticity -1.516 the optimal price falls to $16.5 \times 1.516/0.516 = 48.48$. Annual contribution across the four test prices:

Excel: buy =(B2-24)*C2, make =(B2-16.5)*C2-420000. The best combination on the test grid is make and price at USD 49 (USD 2.82m), not either option chosen alone. The decisions are interdependent: lower marginal cost justifies a lower price, and the higher volume at the lower price justifies the fixed cost. The caveats: the estimate rests on a four-week test; volume at USD 49 (99,840) is within the line's 110,000 capacity but leaves little room; and the branded rival at USD 85 may respond to a USD 49 private label (see mba/mba-game-theory-card).

Q3. Hold-up. The moulds fit only the Trailhead: a specific asset in Williamson's sense. If Northfield pays USD 180,000 and the moulds sit in the supplier's process, the supplier can raise the price after year three (or earlier, citing input costs) knowing that switching would require new moulds. Remedies: Northfield owns the moulds and has the contractual right to move them; a longer price agreement with an indexation formula; a second qualified supplier; or the in-house option, which removes the hold-up but adds fixed cost and operating risk.

Q4. Incentives. The markdown raised revenue 4.0% (5,900 to 6,136) but cut contribution 13.8% (3,500 to 3,016); holding contribution at the lower price would have needed about 151 units, 50.9% more (=3500/(47.2-24)). The bonus rose from USD 118.00 to USD 122.72, so the manager was rewarded for destroying USD 484 of contribution in one week. The condition is general: a revenue bonus rewards any price cut that raises revenue, which happens whenever demand is elastic, even when the cut lowers profit. A bonus of 3.5% of contribution would have fallen from USD 122.50 to USD 105.56. Better design: bonus on store contribution, with price changes reserved to the category team, and a customer-satisfaction or inventory-health measure so managers do not stop all promotions (Holmström 1979: use the signals that carry information about the decisions you want).

Q5. Lemons. With 50% good tents, an uninformed buyer values an average listing at $0.5 \times 140 + 0.5 \times 60 = 100$, below the good sellers' minimum of 110, so good sellers do not list and the market fills with worn tents: the Akerlof (1970) mechanism. Pooling would work only if at least 62.5% of tents were good (=(110-60)/(140-60)). Certification at USD 12 lets good tents trade: buyers pay up to 140, sellers need 122, leaving USD 18 of surplus per trade to share, and the one-year guarantee is a credible signal because it costs little on a good tent and a lot on a worn one (Spence 1973). Northfield's commission must fit inside that USD 18, or the certified segment will not clear. Worn tents can still be sold uncertified at a low price, which is fine because buyers then know what they get.

Q6. Coherent answer. Example: "Bring the Trailhead in-house and price it at about USD 49 to 55 after a short confirmatory test, because lower marginal cost and elastic demand together raise annual contribution by about USD 0.16m compared with buying at USD 69; own the moulds in any outsourcing fallback. Move store bonuses from revenue to contribution and centralise markdowns. Relaunch the marketplace only with certification and a guarantee, with a commission below USD 18 per certified tent." (USD 2,824,800 minus USD 2,667,600 = USD 157,200.)

Sources and further reading

• Marshall, A. (1890). Principles of Economics. Macmillan.
• Cournot, A. A. (1838). Recherches sur les principes mathématiques de la théorie des richesses. Hachette.
• Pigou, A. C. (1920). The Economics of Welfare. Macmillan.
• Lerner, A. P. (1934). The concept of monopoly and the measurement of monopoly power. Review of Economic Studies, 1(3), 157–175.
• Coase, R. H. (1937). The nature of the firm. Economica, 4(16), 386–405.
• Nash, J. F. (1950). Equilibrium points in n-person games. Proceedings of the National Academy of Sciences, 36(1), 48–49.
• Akerlof, G. A. (1970). The market for "lemons": quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84(3), 488–500.
• Spence, M. (1973). Job market signaling. Quarterly Journal of Economics, 87(3), 355–374.
• Williamson, O. E. (1975). Markets and Hierarchies: Analysis and Antitrust Implications. Free Press.
• Jensen, M. C., and Meckling, W. H. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
• Rothschild, M., and Stiglitz, J. (1976). Equilibrium in competitive insurance markets: an essay on the economics of imperfect information. Quarterly Journal of Economics, 90(4), 629–649.
• Klein, B., Crawford, R. G., and Alchian, A. A. (1978). Vertical integration, appropriable rents, and the competitive contracting process. Journal of Law and Economics, 21(2), 297–326.
• Holmström, B. (1979). Moral hazard and observability. Bell Journal of Economics, 10(1), 74–91.
• Panzar, J. C., and Willig, R. D. (1981). Economies of scope. American Economic Review, 71(2), 268–272.
• Dunlosky, J., Rawson, K. A., Marsh, E. J., Nathan, M. J., and Willingham, D. T. (2013). Improving students' learning with effective learning techniques. Psychological Science in the Public Interest, 14(1), 4–58.
• AACSB, Global Standards for Business Education (2026), https://www.aacsb.edu/educators/accreditation/business-accreditation/aacsb-business-accreditation-standards (checked 2026-10-28).
• Textbooks (further reading, by name only): Besanko, Dranove, Shanley and Schaefer, Economics of Strategy; Pindyck and Rubinfeld, Microeconomics; Baye and Prince, Managerial Economics and Business Strategy; Milgrom and Roberts, Economics, Organization and Management; Dixit, Skeath and McAdams, Games of Strategy.
• Open resource: OpenStax, Principles of Economics (3rd edition), CC BY-NC-SA 4.0, openstax.org.

Answer key

1. No. With $|\varepsilon| < 1$, MR is negative: raising the price would raise revenue and lower cost, so profit rises. A profit-maximising firm always prices in the elastic part of demand (Lerner: $L = 1/0.6 > 1$ is impossible).
2. Economies of scale. When marginal cost is below average cost, each extra unit pulls the average down, so average cost is still falling.
3. $SC = (5 + 3 - 7)/7 = 0.143$ (=(5+3-7)/7): about 14.3% saving from joint production.
4. Buyers pay $s \times 140 + (1 - s) \times 60 \geq 110$, so $s \geq 50/80 = 0.625$: at least 62.5% good tents.
5. Signal: a demanding degree or credential that is cheaper to earn for able candidates (Spence's example). Screen: an employer offering a lower base salary with a large performance bonus, which only confident high performers accept; or a demanding case interview.
6. When demand is elastic, a price cut raises revenue, so the manager's bonus rises, but if the price falls by more than the volume gain covers on contribution, profit falls. The condition is: revenue up while contribution down, which happens for elastic demand whenever the new price margin times the new volume is below the old contribution.
7. Monitoring expenditures by the principal, bonding expenditures by the agent, and the residual loss.
8. Asset specificity, uncertainty and frequency of the transaction (with bounded rationality and opportunism as the behavioural assumptions behind them).
9. Once Northfield has paid for moulds that only make the Trailhead and that sit in the supplier's process, the supplier can demand a higher price, because Northfield's alternative (new moulds and a new supplier) is costly. The quasi-rent from the specific asset can be appropriated after the investment is sunk.
10. $\varepsilon_{xy} = -6\% / -10\% = +0.6$. Positive: the rival's product is a substitute; a rival price cut draws some of your customers away.

Revision history

Standard and licence note

Based on the standard managerial microeconomics curriculum found in the primary works listed above (Marshall 1890, Cournot 1838, Lerner 1934, Coase 1937, Nash 1950, Akerlof 1970, Spence 1973, Williamson 1975, Jensen and Meckling 1976, Panzar and Willig 1981) and on the AACSB standards page checked in October 2026. The text, the mini-case, the exhibits and the questions are original; no published case or textbook text is copied or paraphrased, and Northfield Outdoor Co. and the people named are fictional. The template is independent and not affiliated with or endorsed by any business school or accreditation body. Check the current official versions of every dated fact before you rely on it. Template licence: MIT.