Transcription
ThirdEd» lOliEconomicsforManagerGlobal EditionPaul G. FarnhamGeorgia State UniversityPEARSONBoston Columbus Indianapolis New York San Francisco Upper Saddle RiverAmsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal TorontoDelhi Mexico City Säo Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
Preface 17About the Author 29PARTIChapter 1MICROECONOMIC ANALYSISMANAGERS AND ECONOMICS3232CASE FOR ANALYSIS: Micro- and Macroeconomic Influences on the GlobalAutomobile Industry 33Two Perspectives: Microeconomics and Macroeconomics 35Microeconomic Influences on Managers 36Markets 36Managerial RuleofThumb:Microeconomic Influences on Managers39Macroeconomic Influences on Managers 39Factors Affecting Macro Spending Behavior 41Managerial RuleofThumb:Macroeconomic Influences on Managers43End of Chapter ResourcesSummaryChapter 243 Key Terms44 ExercisesDEMAND, SUPPLY, AND EQUILIBRIUM PRICESCASE FOR ANALYSIS:44 Application Questions46Demand and Supply in the Copper IndustryDemand 48Nonprice Factors Influencing Demand 49Demand Function 53Demand Curves 54Change in Quantity Demanded and Change in Demand 55Individual Versus Market Demand Curves 56Linear Demand Functions and Curves 56Mathematical Example of a Demand Function 57Managerial RuleofThumb:DemandConsiderations58Supply 58Nonprice Factors Influencing Supply 58Supply Function 60Supply Curves 61Change in Quantity Supplied and Change in Supply 61Mathematical Example of a Supply Function 62Summary of Demand and Supply Factors 63Managerial RuleofThumb: Supply Considerations 644744
8ContentsDemand, Supply, and Equilibrium 64Definition of Equilibrium Price and Equilibrium Quantity 64Lower-Than-Equilibrium Prices 64Higher-Than-Equilibrium Prices 66Mathematical Example of Equilibrium 67Changes in Equilibrium Prices and Quantities 67Mathematical Example of an Equilibrium Change 70End of Chapter ResourcesSummary 72 Key TermsChapter 3DEMAND ELASTICITIESCASE FOR ANALYSIS:72 Exercises72 Application Questio.176Demand Elastidty and Procter & Gamble's Pricing Strategie:Demand Elasticity 78Price Elasticity of Demand 79The Influence of Price Elasticity on Managerial Decision Making 80Price Elasticity Values 81Elasticity and Total Revenue 81Managertal RuleofThumb: Estimating Price Elasticity 83Determinants of Price Elasticity of Demand 83Number of Substitute Goods 84Percent of Consumer's Income Spent on the Product 84Time Period 85Numerical Example of Elasticity, Prices, and Revenues 85Calculating Price Elasticities 85Numerical Example 87The Demand Function 87Other Functions Related to Demand 87Calculation of Are and Point Price Elasticities 88Price Elasticity Versus Slope of the Demand Curve 89Demand Elasticity, Marginal Revenue, and Total Revenue 90Vertical and Horizontal Demand Curves 92Vertical Demand Curves 92Horizontal Demand Curves 93Income and Cross-Price Elasticities of Demand 94Income Elasticity of Demand 94Managerial RuleofThumb: Calculating Income Elasticity95Cross-Price Elasticity of Demand 95Elasticity Estimates: Economics Literature 97Elasticity and Chicken and Agricultural/Food Products 98Elasticity and Beer 99Water Demand 100Elasticity and the Tobacco Industry 100Elasticity and Health Care 101Tuition Elasticity in Higher Education 101Managerial Rule of Thumb: Price Elasticity Decision MakingElasticity Issues: Marketing Literature 102Marketing Study I: Tellis (1988) 103Marketing Study II: Sethuraman and Tellis (1991) 104Marketing Study HI: Hoch et al. (1995) 105Marketing Study Update 105102n
ContentsManagerial Rule of Thumb: Elasticities in Marketing and Decision Making106End of Chapter ResourcesSummary 106 . Appendix 3Ä Economic Model of Consumer Choice 107 Key Terms 113 Exercises 113 Application Questions 114Chapter 4TECHNIQUES FOR UNDERSTANDING CONSUMER DEMAND AND BEHAVIOR 116CASE FOR ANALYSIS: The Use of New Technology to Understandand Impact Consumer Behavior 117Understanding Consumer Demand and Behavior: Marketing Approaches 118Expert Opinion 118Consumer Surveys 119Test Marketing and Price Experiments 120Analysis of Census and Other Historical Data 121Unconventional Methods 121Evaluating the Methods 122Managerial Rule of Thumb: Marketing Methods for Analyzing Consumer Behavior 123Consumer Demand and Behavior Economic Approaches 123Relationship Between One Dependent and One Independent Variable: Simple RegressionAnalysis 124Relationship Between One Dependent and Multiple Independent Variables:Multiple Regression Analysis 129Other Functional Forms 131Demand Estimation Issues 132Managerial Rule of Thumb:Using Multiple Regression AnalysisCase Study of Statistical Estimation of Automobile DemandManagerial Rule of Thumb:133133Using Empirical Consumer Demand Studies 137Relationships Between Consumer Market Data and Econometric Demand Studies 137Case Study I: Camation Coffee-mate 137Case Study II: Camation Evaporated Milk 138Case Study III: The Demand for Cheese in the United States 139Managerial Rule of Thumb: Using Consumer Market Data141End of Chapter ResourcesSummary 141 Key Terms 141 Application Questions 143Chapter 5 ExercisesPRODUCTION AND COST ANALYSIS IN THE SHORT RUNCASE FOR ANALYSIS:142144Production and Cost Analysis in the Fast-Food Industry 145Defining the Production Function 146The Production Function 146Fixed Inputs Versus Variable Inputs 146Short-Run Versus Long-Run Production Functions 147Managerial Rule of Thumb: Short-Run Production and Long Run FlanningProductivity and the Fast-Food Industry 147Model of a Short-Run Production Function 148Total Product 148Average Product and Marginal Product 148Relationships Among Total, Average, and Marginal Product 149Economic Explanation of the Short-Run Production Function 1511479I
10ContentsReal-World Firm and Industry Productivity Issues 152Other Examples of Diminishing Returns 152Productivity and the Agriculture Industry 153Productivity and the Automobile Industry 154Productivity Changes Across Industries 155Model of Short-Run Cost Functions 156Measuring Opportunity Cost: Explicit Versus Implicit Costs 156Accounting Profit Measures Versus Economic Profit Measures 157Managerial Rule of Thumb: The Importance of Opportunity Costs 158Definition of Short-Run Cost Functions 159Fixed Costs Versus Variable Costs 159Relationships Among Total, Average, and Marginal Costs 160Relationship Between Short-Run Production and Cost 162Other Short-Run Production and Cost Functions 163Managerial Rule of Thumb: Understanding Your Costs 164Empirical Evidence on the Shapes of Short-Run Cost Functions 164Econometric Estimation of Cost Functions 164Survey Results on Cost Functions 165Constant Versus Rising Marginal Cost Curves 166Implications for Managers 167End of Chapter ResourcesSummaryChapter 6168 Key Terms 168 Exercises 169 PRODUCTION AND COST ANALYSIS IN THE LONG RUNCASE FOR ANALYSIS: The iPhone in ChinaApplication Questic172173Model of a Long-Run Production Function 174Input Substitution 174Model of a Long-Run Cost Function 182Derivation of the Long-Run Average Cost Curve 182Economies and Diseconomies of Scale 183Factors Creating Economies and Diseconomies of Scale 184Other Factors Influencing the Long-Run Average Cost Curve 185The Minimum Efßcient Scale of Operation 186Long-Run Average Cost and Managerial Decision Making 189End of Chapter ResourcesSummary 189 . Appendix 6A Isoquant Analysis Exercises 197 Application Questions 198Chapter 7MARKET STRUCTURE: PERFECT COMPETITION190 Key Terms 197200CASE FOR ANALYSIS: Competition and Cooperative Behavior in thePotato Industry 201The Model of Perfect Competition 202Characteristics of the Model of Perfect Competition 202Model of the Industry or Market and the Firm 203The Short Run in Perfect Competition 209Long-Run Adjustment in Perfect Competition: Entry and Exit 209Adjustment in the Potato Industry 210Long-Run Ac ustment in Perfect Competition: The Optimal Scale of Production21170
ContentsManagerial RuleofThumb:Competition Means LittleControl Over Price11212Other Illustrations of Competitive Markets 212Competition and the Agricultural Industry 213Competition and the Broiler Chicken Industry 214Competition and the Red-Meat Industry 215Competition and the Milk Industry 217Competition and the Trucking Industry 218Managerial Rule of Thumb: Adopting Strategie: to Gain Market Powerin Competitive Industries 219End of Chapter ResourcesSummary 220 Appendix 7A Industry Supply 220 Exercises 222 Application Questions 223Chapter 8 Key TermsMARKET STRUCTURE: MONOPOLY AND MONOPOLISTIC COMPETITIONCASE FOR ANALYSIS:222226Changing Market Power for Eastman Kodak Co. 227Firnis with Market Power 228The Monopoly Model 228Comparing Monopoly and Perfect Competition 230Sources of Market Power: Barriers to Entry 231Managerial RuleofThumb:Using Lock-In asaCompetitiveStrategy241Changes in Market Power 241Measures of Market Power 243Antitrust Issues 246Managerial RuleofThumb:Understanding Antitrust Laws251Monopolistic Competition 251Characteristics of Monopolistic Competition 252Short-Run and Long-Run Models of Monopolistic Competition 252Examples of Monopolisücally Competitive Behavior 253Managerial Rule of Thumb: Maintaining Market Power in MonopolisticCompetition 256End of Chapter ResourcesSummaryChapter 9256 Key Terms 256 MARKET STRUCTURE: OLIGOPOLYExercises257 Application Questions260CASE FOR ANALYSIS: Oligopoly Behavior in the Airline IndustryCase Studies of Oligopoly Behavior 262The Airline Industry 262The Soft Drink Industry 264The Doughnut Industry 265The Parcel and Express Delivery IndustryOligopoly Models 267Noncooperative Oligopoly Models 268The Kinked Demand Curve Model 268Game Theory Models 269Strategie Entry Deterrence 272Predatoiy Pricing 273266261257I
12ContentsCooperative Oligopoly Models 275Cartels 275Tacit Collusion 281Managerial RuleofThumb: Coordinated Actions 283End of Chapter ResourcesSummary 283 Key TermsChapter 10283 ExercisesPRICING STRATEGIES FOR THE FIRM283 Application Q uc285288CASE FOR ANALYSIS: Airline Pricing Strategies: Will They Start Charging for theUse of the Lavatories? 289The Role of Markup Pricing 290Marginal Revenue and the Price Elasticity of Demand 291The Profit-Maximizing Rule 292Profit Maximization and Markup Pricing 292Business Pricing Strategies and Profit Maximization 294Markup Pricing Examples 295Managerial RuleofThumb: Markup Pricing296Price Discrimination 297Definition of Price Discrimination 297Theoretical Models of Price Discrimination 298Price Discrimination and Managerial Decision Making 305Marketing and Price Discrimination 312Macroeconomics and Pricing Policies 313End of Chapter ResourcesSummaryPART 2Chapter 11315 Key TermsMACROECONOMIC ANALYSIS315 Exercises316 Application Que s' -320MEASURING MACROECONOMIC ACTIVITY320CASE FOR ANALYSIS: Measuring Changes in Macroeconomic Activity:Implications for Managers 321Measuring Gross Domestic Product (GDP) 322The Circular Flow in a Mixed, Open Economy 322Managerial RuleofThumb: Spending Patterns 324National Income Accounting Systems 324Characteristics of GDP 325Real Versus Nominal GDP 326Alternative Measures of GDP 329Other Important Macroeconomic Variables 337Price Level Measures 337Measures of Employment and Unemployment 341Managerial Rule of Thumb: Price Level and Unemployment 343Major Macroeconomic Policy Issues 343What Factors Influence the Spending Behavior of the Different Sectors of theEconomy? 344How Do Behavior Changes in These Sectors Influence the Level of Output andIncome in the Economy? 344Can Policy Makers Maintain Stahle Prices, Füll Employment, and Adequate EconomicGrowth over Time? 34417
Contents13How Do Fiscal, Monetary, and Balance of Payments Policies Influencethe Economy? 346What Impact Do These Macro Changes Have on Different Firnisand Industries? 346Managerial Rule of Thumb: Competitive Strategie; and the Macro Environment346End of Chapter ResourcesSummaryChapter 12347 Key Terms 347 Exercises 348 Application Questions349SPENDING BYINDIVIDUALS, FIRMS, AND GOVERNMENTS ON REAL GOODSAND SERVICES 350CASE FOR ANALYSIS: Mixed Signals on the U.S. Economy in Summer 2012351Framework for Macroeconomic Analysis 352Focus on the Short Run 352Analysis in Real Versus Nominal Terms 353Treatment of the Foreign Sector 353Outline for Macroeconomic Analysis 353The Components of Aggregate Expenditure 354Personal Consumption Expenditure 354Gross Private Domestic Investment Expenditure 362Government Expenditure 371Net Export Expenditure 372Aggregate Expenditure and Equilibrium Income and Output 375Aggregate Expenditure 375Equilibrium Level of Income and Output 377Effect of the Interest Rate on Aggregate Expenditures 382End of Chapter ResourcesSummary 383 Appendix 12A Numerical Example of Equilibrium and theMultiplier 383 Appendix 12B Algebraic Derivation of the Aggregate ExpenditureFunction 385 Key Terms 388 « Exercises 388 Application Questions 389Chapter 13THE ROLE OF MONEY IN THE MACRO ECONOMY 390CASE FOR ANALYSIS: The Chairman's Quandary391Money and the U.S. Financial System 392Definition of Money 392Measures of the Money Supply 392Depository Institutions and the Fractional Reserve Banking System 393The Central Bank (Federal Reserve) 396Tools of Monetary Policy 398Managerial RuleofThumb:Federal Reserve Policy 407Equilibrium in the Money Market 407The Supply of Money 407The Demand for Money 409Equilibrium in the Money Market 411Change in the Supply of Money 411Change in the Demand for Money 412Overall Money Market Changes 413End of Chapter ResourcesSummary 413 Appendix 13A Monetary Tools and the Market for BankReserves 413 Key Terms 414 Exercises 415 Application Questions415I
14ContentsChapter 14THE AGGREGATE MODEL OF THE MACRO ECONOMY416CASE FOR ANALYSIS: WhatRole for Inflation? 417The Model of Aggregate Demand and Supply 418The Aggregate Demand Curve 418Fiscal and Monetary Policy Implementation 422The Aggregate Supply Curve 427Using the Aggregate Model to Explain Changes in the Economy from 2007 to 2008and from 2011 to 2012 434Impact of Macro Changes on Managerial Decisions 438Measuring Changes in Aggregate Demand and Supply 440Managerial Rule of Thumb: Judging Trends in Economic Indicators 442End of Chapter ResourcesSummary 442 * Appendix 14A Specific and General Equations forthe Aggregate Macro Model 442 Key Terms 444 Exercises 444 Application Questions 445Chapter 15INTERNATIONAL AND BALANCE OF PAYMENTSISSUES IN THE MACRO ECONOMYCASE FOR ANALYSIS:Uncertainty in the World Economy in 2012 447Exchange Rates 448Managerial Rule of Thumb: Currency Exchange Rates 451Equilibrium in the Open Economy 452U.S. International Transactions in 2011 (Balance of Payments) 453The Current Account 453The Financial Account 454Revenue or T-Account 455Deriving the Foreign Exchange Market 457The Demand for and Supply of Dollars in the Foreign Exchange Market 457Equilibrium in the Foreign Exchange Market 459Managerial Rule of Thumb: The Foreign Exchange Market460Exchange Rate Systems 460Flexible Exchange Rate System 462Fixed Exchange Rate System 463The Effect on the Money Supply 465Sterilization 465Policy Examples of International Economic Issues 466The U.S. Economy, 1995-2000 466The U.S. Economy, 2007-2008 and 2010-2012 468Effects of the Euro in the Macroeconomic Environment 470Euro Macro Environment Effects on Managerial Decisions 473Southeast Asia: An Attempt to Maintain Fixed Exchange Rates 474Macro and Managerial Impact of the Chinese Yuan Since 2003 476Policy Effectiveness with Different Exchange Rate Regimes 478End of Chapter ResourcesSummary 479 Appendix 15A Specific and General Equations forthe Balance of Payments 479 . Key Terms 480 Exercises 480 Application Questions 481446
ContentsPART 3Chapter 16INTEGRATION OF THE FRAMEWORKS482COMBINING MICRO AND MACRO ANALYSIS FOR MANAGERIAL DECISION MAKINGCASE FOR ANALYSIS:Streng Headwinds for McDonald's 483Mieroeconomic and Macroeconomic Influences on McDonald's and theFast-Food Industry 484Shifting Product Demand 484Oligopolistic Behavior 485Strategies to Offset Shifting Demand 487Cost-Cutting Strategies 488Innovations for Different Tastes 488Drawing on Previous Experience 4892012 and Beyond: A Focus on China and Other Emerging Markets 490Economic and Political Issues 492Responses of Other Fast-Food Competitors 494Calorie Counts on Menüs 495Macroeconomic Influences on the Fast-Food Industry in 2011 and 2012 497End of Chapter ResourcesSummary: Macro and Micro Influences on the Fast-Food Industry 497 Appendix T6A Statistical Estimation of Demand Curves 498. Exercises 500 Application Questions 500SOLUTIONS TO EVEN NUMBERED PROBLEMSGLOSSARYINDEX53552115501482
Chapter 1 MANAGERS AND ECONOMICS 32 CASE FOR ANALYSIS: Micro- and Macroeconomic Influences on the Global Automobile Industry 33 Two Perspectives: Microeconomics and Macroeconomics 35 Microeconomic Influences on Managers 36 Markets 36 Managerial RuleofThumb: Microeconomic Influences on Managers 39 Macroeconomic Influences on Managers 39
