Economics of the Firm

Economics of the Firm, photo: Gerd Altmann

Course ID: 
Year of Study: 
For Erasmus Students: 

Learning Outcomes

This course aims at the enhancement of the students’ confidence about the usefulness of their studies, by showing that the theoretical knowledge obtained from the courses of Microeconomic Theory, Statistics and Econometrics, etc. can help to solve practical problems faced by business executives.


  1. An ability to demonstrate a broad and integrated knowledge and understanding of the scope, main areas and boundaries of intermediate micro-economic analysis of the firm. Demonstrating a critical understanding of a selection of the principal theories, principles, concepts and terminology at the core of this subject.
  2. Using skills, techniques and practices that are specialized or advanced and practicing routine methods of research.
  3. Undertaking critical analysis, evaluation and/or synthesis of ideas, concepts, information and issues.
  4. Making formal and informal presentations on mainstream topics in the subject. Interpreting, using and evaluating numerical data.
  5. Taking some responsibility for the team work and for a range of resources. Exercising autonomy and initiative in some activities at a professional level.

Course Contents

  1. Introduction to Managerial Economics: Relationships of M.E. to other disciplines. The basic process of decision making. The theory of the firm. Reasons for the existence of profit. Managerial interests and the Principal - Agent Problem.
  2. Demand Theory: The market demand curve, industry and firm demand functions. The price elasticity of demand, point and arc elasticities. Price elasticity and total money expenditure. Price elasticity and pricing policy. The income elasticity of demand. Cross elasticities of demand. The advertising elasticity of demand. The constant - elasticity demand function. Case studies – Problem solving.
  3. Estimating Demand Functions: The identification problem. Consumer interviews, Market experiments, regression analysis. Interpreting the computer printout. Multicolinearity, Serial correlation and analysis of the residuals. Case studies – Problem solving.
  4. Production Theory: The production function with one and more inputs. The law of diminishing marginal returns and the optimal level of utilization of an input. Isoquants, the marginal rate of technical substitution. The optimal combination of inputs. Returns to scale and the output elasticity. Measurement and analysis of production functions. Case studies – Problem solving.
  5. The Analysis of Costs: Opportunity costs. Short-run and long-run cost functions. Average and marginal costs. Economies of scope. Break-Even Analysis and profit contribution analysis. Case studies – Problem solving.
  6. Pricing Practices: Cost-Plus pricing. The multiple – product firm: Demand interrelationships. Pricing of joint products: fixed proportions. Output of joint products: variable proportions.  First-degree, second-degree and third-degree price discrimination. Using coupons and rebates for price discrimination. Tying and Transfer pricing. Case studies – Problem solving.
  7. Risk Analysis: Definition of risk and probability. Probability distributions and expected values. Comparisons of expected profit. Constructing decision trees. The expected value of perfect information. Measuring attitudes towards risk: The utility approach. Constructing and using a utility function. Attitudes toward risk: three types. Measures of risk: the standard deviation and coefficient of variation. Adjusting the valuation model for risk. The use of risk adjusted discount rates. Simulation techniques and the application of the maximin rule. Case studies – Problem solving.
  8. Capital Budgeting: The capital budgeting process, Cash flow estimation, Capital Budgeting Decision Rules: net present-value (NPV), profitability index (PI), internal rate of return (IRR), payback period. The cost of capital,  crossover discount rate, the component cost of debt, the component cost of equity, the risk-free rate of return (RF), the risk premium (RP), the beta coefficient, the weighted average cost of capital, the optimal capital structure, the optimal capital budget, the investment opportunity schedule (IOS), the marginal cost of capital, the post-audit process. Case studies – Problem solving.

Teaching Activities

Lectures (3 hours per week)

Teaching Organization


Semester workload


39 hours

Study and analysis of the literature

72 hours

Project writing and problem sets solving 

39 hours

Total number of hours for the Course

(25 hours of work-load per ECTS credit)

150 hours (total student work-load)


a) Submission of assignments (30%) and b) performance on the final written examination at the end of the semester (70%). The evaluation criteria are clearly defined and posted in the relevant web page of the course:

Use of ICT

Use of Information and Communication Technologies (ICTs) (e.g. powerpoint) in teaching and communicating with students.

Course Info

Reading List

Reading Recommendations: 
Perloff , J. M. "Managerial Economics and Strategy (2nd Edition), The Pearson Series in Economics.
Salvatore, D. ‘‘Managerial Economics in a global Economy’’, Gutenberg, 2012
Hirshcey, ‘‘Economics for Managers’’, Εκδόσεις Thomson, 2006