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Second Edition.

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Economics for Managers

Georgia State University

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Preface

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Chapter 1

MANAGERS AND ECONOMICS

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In Mexico, Wal-Mart Is Defying Its Critics

by John Lyons 3

CASE FOR ANALYSIS: Micro- and Macroeconomic Influences on Wal-Mart in Mexico 4

Two Perspectives: Microeconomics and Macroeconomics Microeconomic Influences on Managers 6 Markets 7

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Managerial Rule of Thumb: Microeconomic Influences on Managers Macroeconomic Influences on Managers 10

Factors Affecting Macro Spending Behavior Managerial Rule of Thumb: End of Chapter Resources

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Macroeconomic Influences on Managers

Summary 113 ° Key Terms 14 ° Exercises Application Questions 15 ° On the Web 15 Chapter 2

DEMAND, SUPPLY, AND EQUILIBRIUM PRICES Copper Surplus Is Foreseen in'07 CASE FOR ANALYSIS:

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by Allen Sykora 17

Demand and Supply in the Copper Industry

Demand 19 Nonprice Factors Influencing Demand 19 Demand Function 23 Demand Curves 23 Change in Quantity Demanded and Change in Demand Individual Versus Market Demand Curves 25 Linear Demand Functions and Curves 26 Mathematical Example of a Demand Function 26 Managerial Rule of Thumb: Supply 28

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Demand Considerations

Nonprice Factors Influencing Supply 28 Supply Function 30 Supply Curves 30 Change in Quantity Supplied and Change in Supply Mathematical Example of a Supply Function 32; Summary of Demand and Supply Factors 33

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Managerial Rule of Thumb: Supply Considerations 33 Demand, Supply, and Equilibrium 34 Definition of Equilibrium Price and Equilibrium Quantity 34 Lower-Than-Equilibrium Prices 34 ' Higher-Than-Equilibrium Prices 35 Mathematical Example of Equilibrium 36 Changes in Equilibrium Prices and Quantities 37 Mathematical Example of an Equilibrium Change 40 End of Chapter Resources

Summary 41 • Key Terms 42 • Exercises Application Questions 43 • On the Web 45 Chapter 3

DEMAND ELASTICITIES

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Americans Start to Curb Their Thirst for Gasoline

by Ana Campoy 47

CASE FOR ANALYSIS: Demand Elasticity and the American Gasoline Consumer 48

Demand Elasticity 48 Price Elasticity of Demand 49 The Influence of Price Elasticity on Managerial Decision Making 50 Price Elasticity Values 50 Elasticity and Total Revenue 51 Managerial Rule of Thumb: Estimating Price Elasticity 53 Determinants of Price Elasticity of Demand 53 Number of Substitute Goods 54 Percent of Consumer's Income Spent on the Product 54 Time Period 55 j Numerical Example of Elasticity, Prices, and Revenues 55 Calculating Price Elasticities 55 Numerical Example 57 The Demand Function 57 Other Functions Related to Demand 57 Calculation of Arc and Point Price Elasticities 58 Price Elasticity Versus Slope of the Demand Curve 59 Demand Elasticity, Marginal Revenue, and Total Revenue 60 Vertical and Horizontal Demand Curves 61 Vertical Demand Curves 62 Horizontal Demand Curves 63 Income and Cross-Price Elasticities of Demand 63 Income Elasticity of Demand 63 Managerial Rule of Thumb: Calculating Income Elasticity 65 Cross-Price Elasticity of Demand 65 Elasticity Estimates: Economics Literature 66 Elasticity and Chicken and Agricultural Products 66 Elasticity and Beer 68 Elasticity and the Airline Industry 69 Elasticity and the Tobacco Industry 69 Elasticity and Health Care 69 Elasticity and Hotel Room Attributes 70

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Managerial Rule of Thumb:

Price Elasticity Decision Making

Elasticity Issues: Marketing Literature 71 Marketing Study I: Tellis (1988) 71 Marketing Study II: Sethuraman and Tellis (1991) Marketing Study III: Hoch et al. (1995) 74

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Managerial Rule of Thumb: Elasticities in Marketing and Decision Making Appendix 3A Economic Model of Consumer Choice 75 End of Chapter Resources Summary 75 • Key Terms 81 • Exercises 82 ° Application Questions 82 ° On the Web 83 Chapter 4

TECHNIQUES FOR UNDERSTANDING CONSUMER DEMAND AND BEHAVIOR

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Behind GM's Slide: Bosses Misjudged New Urban Tastes by Lee Hawkins Jr. 85 CASE FOR ANALYSIS: Consumer Behavior and GM Vehicles 86

Understanding Consumer Demand and Behavior: Marketing Approaches Expert Opinion 87 Consumer Surveys 87 Test Marketing and Price Experiments 88 Analysis of Census and Other Historical Data 89 Unconventional Methods 89 Evaluating the Methods 90 Managerial Rule of Thumb: Consumer Behavior 91

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Marketing Methods for Analyzing

Consumer Demand and Behavior: Economic Approaches 91 Relationship Between One Dependent and One Independent Variable: Simple Regression Analysis 92 Relationship Between One Dependent and Multiple Independent Variables: Multiple Regression Analysis 97 Other Functional Forms 100 Demand Estimation Issues 100 Managerial Rule of Thumb: Using Multiple Regression Analysis

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Case Study of Statistical Estimation of Automobile Demand 101 Managerial Rule of Thumb: Using Empirical Consumer Demand Studies 105 Relationships Between Consumer Market Data and Econometric Demand Studies 105 Case Study I: Carnation Coffee-mate 105 Case Study II: Carnation Evaporated Milk 107 Case Study III: The Demand for Hotel Rooms 108 Managerial Rule of Thumb: Using Consumer Market Data 108 End of Chapter Resources Summary 108 • Key Terms 109 • Exercises 109 • Application Questions 111 • On the Web 111 Chapter 5

PRODUCTION AND COST ANALYSIS IN THE SHORT RUN

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The Long-Distance Journey of a Fast-Food Order by Matt Richtel 113 CASE FOR ANALYSIS: Production and Cost Analysis in the Fast-Food Industry

Defining the Production Function 114 The Production Function 114 Fixed Inputs Versus Variable Inputs 115 Short-Run Versus Long-Run Production Functions

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Managerial Rule of Thumb:

Short-Run Production and Long-Run Planning

Productivity and the Fast-Food Industry 116 Model of a Short-Run Production Function 116 Total Product 117 Average Product and Marginal Product 117 Relationships Among Total, Average, and Marginal Product 117 Economic Explanation of the Short-Run Production Function 120 Real-World Firm and Industry Productivity Issues 120 Other Examples of Diminishing Returns 121 Productivity and the Agriculture Industry 122 Productivity and the Automobile Industry 122 Productivity Changes Across Industries 123 Model of Short-Run Cost Functions 124 Measuring Opportunity Cost: Explicit Versus Implicit Costs 124 Accounting Profit Measures Versus Economic Profit Measures 125 Managerial Rule of Thumb: The Importance of Opportunity Costs Definition of Short-Run Cost Functions 126 Fixed Costs Versus Variable Costs 127 Relationships Among Total, Average, and Marginal Costs 127 Relationship Between Short-Run Production and Cost 130 Other Short-Run Production and Cost Functions 131 Managerial Rule of Thumb: Understanding Your Costs 132 Empirical Evidence on the Shapes of Short-Run Cost Functions 132 Econometric Estimation of Cost Functions 132 Survey Results on Cost Functions 133 Constant Versus Rising Marginal Cost Curves 134 Implications for Managers 135 End of Chapter Resources Summary 136 • Key Terms Application Questions 138 ° Chapter 6

136 ° Exercises On the Web 139

PRODUCTION AND COST ANALYSIS IN THE LONG RUN A Tale of Two Auto Plants

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by Lee Hawkins Jr. and Norihiko Shirouzu

CASE FOR ANALYSIS: Production and Cost Analysis in the Automobile Industry 142

Model of a Long-Run Production Function 142 Input Substitution 143 Model of a Long-Run Cost Function 149 Derivation of the Long-Run Average Cost Curve 149 Economies and Diseconomies of Scale 150 Factors Creating Economies and Diseconomies of Scale 151 Other Factors Influencing the Long-Run Average Cost Curve 153 The Minimum Efficient Scale of Operation 153 Long-Run Average Cost and Managerial Decision Making 156 Appendix 6A Isoquant Analysis

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End of Chapter Resources Summary 157 ° Key Terms 163 • Exercises Application Questions 165 ° On the Web 165

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Chapter 7

MARKET STRUCTURE: PERFECT COMPETITION This Spud's Not for You

by Timothy W. Martin

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CASE FOR ANALYSIS: Competition and Co-operative Behavior in the Potato Industry

The Model of Perfect Competition 169 Characteristics of the Model of Perfect Competition 169 Model of the Industry or Market and the Firm 170 The Short Run in Perfect Competition 175 Long-Run Adjustment in Perfect Competition: Entry and Exit 176 Adjustment in the Potato Industry 177 Long-Run Adjustment in Perfect Competition: The Optimal Scale of Production 178 Managerial Rule of Thumb: Competition Means Little Control over Price 179 Other Illustrations of Competitive Markets 179 Competition and the Agricultural Industry 179 Competition and the Broiler Chicken Industry 180 Competition and the Red-Meat Industry 182 Competition and the Milk Industry 183 Competition and the Trucking Industry 183 Managerial Rule of Thumb: Adopting Strategies to Gain Market Power in Competitive Industries 185 Appendix 7A Industry Supply

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End of Chapter Resources Summary 185 • Key Terms Application Questions 188 • Chapter 8

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MARKET STRUCTURE: MONOPOLY AND MONOPOLISTIC COMPETITION Dell's Revival Strategy Runs into Trouble

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by Justin Scheck 191

CASE FOR ANALYSIS: Changing Market Power in the PC Industry

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Firms with Market Power 192 The Monopoly Model 192 Comparing Monopoly and Perfect Competition 194 Sources of Market Power: Barriers to Entry 196 Managerial Rule of Thumb: Using Lock-In as a Competitive Strategy Changes in Market Power 204 Measures of Market Power 206 Antitrust Issues 209 Managerial Rule of Thumb: Understanding Antitrust Laws Monopolistic Competition 215

Characteristics of Monopolistic Competition 215 Short-Run and Long-Run Models of Monopolistic Competition

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Examples of Monopolistically Competitive Behavior 217 Managerial Rule of Thumb: Maintaining Market Power in Monopolistic Competition 219 End of Chapter Resources Summary 219 • Key Terms 219 • Exercises 220 • Application Questions 220 • On the Web 223 Chapter 9

MARKET STRUCTURE: OLIGOPOLY

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The Anatomy of an Airline Fare Increase

by Trebor Banstetter 225

CASE FOR ANALYSIS: Oligopoly Behavior in the Airline Industry

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Case Studies of Oligopoly Behavior 226 The Airline Industry 226 The Soft Drink Industry 228 The Doughnut Industry 229 The Parcel and Express Delivery Industry Oligopoly Models 231 Noncooperative Oligopoly Models 231 The Kinked Demand Curve Model 231 . Game Theory Models 233 Strategic Entry Deterrence 236 Predatory Pricing 237 Cooperative Oligopoly Models 239 Cartels 239 Tacit Collusion 244

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Managerial Rule of Thumb: Coordinated Actions 246 End of Chapter Resources Summary 246 • Key Terms 246 • Exercises 247 Application Questions 248 • On the Web 251 Chapter 10

PRICING STRATEGIES FOR THE FIRM

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Seeking Perfect Prices, CEO Tears Up the Rules CASE FOR ANALYSIS:

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by Timothy Aeppel 253

Manufacturing Pricing Strategies

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The Role of Markup Pricing 255 Marginal Revenue and the Price Elasticity of Demand 256 The Profit-Maximizing Rule 257 Profit Maximization and Markup Pricing 257 Business Pricing Strategies and Profit Maximization 259 Markup Pricing Examples 260 Managerial Rule of Thumb: Markup Pricing 261 Price Discrimination 261 Definition of Price Discrimination 261 Theoretical Models of Price Discrimination 263 Price Discrimination and Managerial Decision Making 269 Marketing and Price Discrimination 275 Macroeconomics and Pricing Policies 276 End of Chapter Resources Summary 278 • Key Terms 278 • Exercises Application Questions 279 •> On the Web 281 PART 2 Chapter 11

gviACRQECQNQMDC ANALYSIS

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MEASURING MACROECONOMIC ACTIVITY

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Factory Slowdown Sets Off Alarm; Contraction Shows Limits of Recent Export Strength, Heightens Recession Fears

CASE FOR ANALYSIS:

by Timothy Aeppel and Sudeep Reddy

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Impact of Macro Environment Changes on Manufacturing Firms

Measuring Gross Domestic Product (GDP)

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The Circular Flow in a Mixed, Open Economy 284 Managerial Rule of Thumb: Spending Patterns 286

National Income Accounting Systems Characteristics of GDP 287

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Real Versus Nominal GDP 288 Alternative Measures of GDP 291 Other Important Macroeconomic Variables 298 Price Level Measures 298 Measures of Employment and Unemployment 303 Managerial Rule of Thumb:

Price Level and Unemployment

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Major Macroeconomic Policy Issues 305 What Factors Influence the Spending Behavior of the Different Sectors of the Economy? 305 How Do Behavior Changes in These Sectors Influence the Level of Output and Income in the Economy? 306 Can Policy Makers Maintain Stable Prices, Full Employment, and Adequate Economic Growth over Time? 306 How Do Fiscal, Monetary, and Balance of Payments Policies Influence the Economy? 307 What Impact Do These Macro Changes Have on Different Firms and Industries? 308 : Managerial Rule of Thumb:

Competitive Strategies and the Macro Environment

End of Chapter Resources Summary 308 • Key Terms Application Questions 310 • Chapter 12

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SPENDING BY INDIVIDUALS, FIRMS, AND GOVERNMENTS ON REAL GOODS AND SERVICES 312 Jobs Data Suggest U.S. Is in Recession; Largest Payroll Fall in Five Years Spurs New Stimulus Talk

by Sudeep Reddy

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CASE FOR ANALYSIS: Expenditure on Real Goods and Services and Employment Effects 314

Framework for Macroeconomic Analysis 314 Focus on the Short Run 314 Analysis in Real Versus Nominal Terms 315 Treatment of the Foreign Sector 315 Outline for Macroeconomic Analysis 316 The Components of Aggregate Expenditure 316 Personal Consumption Expenditure 316 Gross Private Domestic Investment Expenditure 323 Government Expenditure 331 Net Export Expenditure 332 Aggregate Expenditure and Equilibrium Income and Output Aggregate Expenditure 335

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Equilibrium Level of Income and Output 337 Effect of the Interest Rate on Aggregate Expenditures 341 Appendix 12A Numerical Example of Equilibrium and the Multiplier 343 Appendix 12B Algebraic Derivation of the Aggregate Expenditure Function End of Chapter Resources Summary 342 • Key Terms 348 ° Exercises 348 • Application Questions 349 - On the Web 349 Chapter 13

THE ROLE OF MONEY IN THE MACRO ECONOMY Credit Worries Ease as Fed Cuts, Hints at More Relief CASE FOR ANALYSIS:

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Federal Reserve Monetary Policy

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Money and the U.S. Financial System 352 Definition of Money 352 Measures of the Money Supply 353 Depository Institutions and the Fractional Reserve Banking System The Central Bank (Federal Reserve) 357 " Tools of Monetary Policy 358 Managerial Rule of Thumb: Federal Reserve Policy Equilibrium in the Money Market 366

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The Supply of Money 366 The Demand for Money 368 Equilibrium in the Money Market 369 Change in the Supply of Money 369 Change in the Demand for Money 370 Overall Money Market Changes 371 Appendix 13A Monetary Tools and the Market for Bank Reserves

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End of Chapter Resources Summary 371 ° Key Terms Application Questions 374 • Chapter 14

373 • Exercises On the Web 375

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THE AGGREGATE MODEL OF THE MACRO ECONOMY

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Fears of Stagflation Return as Price Increases Gain Pace

by Greg Ip

CASE FOR ANALYSIS:

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Multiple Factors Influence Economic Activity

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The Model of Aggregate Demand and Supply 378 The Aggregate Demand Curve 379 Fiscal and Monetary Policy Implementation 382 The Aggregate Supply Curve 388 Using the Aggregate Model to Explain Changes in the Economy from 2001 to 2002 and from 2007 to 2008 395 Impact of Macro Changes on Managerial Decisions 398 Measuring Changes in Aggregate Demand and Supply 400 Managerial Rule of Thumb:

Judging Trends in Economic Indicators

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Appendix 14A Specific and General Equations for the Aggregate Macro Model

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End of Chapter Resources Summary 403 • Key Terms Application Questions 406 • Chapter 15

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INTERNATIONAL AND BALANCE OF PAYMENTS ISSUES IN THE MACRO ECONOMY

Rescuing Dollar Raises Potential Policy Tug of War CASE FOR ANALYSIS: Value of the U.S. Dollar

Exchange Rates

by Craig Karmin 409 410

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Managerial Rule of Thumb:

Currency Exchange Rates

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Equilibrium in the Open Economy 414 U.S. International Transactions in 2007 (Balance of Payments) 415 The Current Account 415 The Financial Account 416 Revenue or T-Account 417 Deriving the Foreign Exchange Market 418 The Demand for and Supply of Dollars in the Foreign Exchange Market Equilibrium in the Foreign Exchange Market 421

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Managerial Rule of Thumb: The Foreign Exchange Market

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Exchange Rate Systems 422 Flexible Exchange Rate System 424 Fixed Exchange Rate System 425 - The Effect on the Money Supply 427 Sterilization 427 Policy Examples of International Economic Issues 428 The U.S. Economy, 1995-2000 428 The U.S. Economy, 2007-2008 429 Effects of the Euro in the Macroeconomic Environment 431 Euro Macro Environment Effects on Managerial Decisions 433 Southeast Asia: An Attempt to Maintain Fixed Exchange Rates 434 Macro and Managerial Impact of the Chinese Yuan Since 2003 436 Policy Effectiveness with Different Exchange Rate Regimes 437 Appendix 15A Specific and General Equations for the Balance of Payments End of Chapter Resources Summary 438 • Key Terms 439 • Exercises 439 • Application Questions 440 • On the Web 441 PART 3 Chapter 16

INTEGRATION OF THE FRAMEWORKS

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COMBINING MICRO AND MACRO ANALYSIS FOR MANAGERIAL DECISION MAKING Drive-Through Tips for China

by Gordon Fairclough and Geoffrey A. Fowler 443

CASE FOR ANALYSIS: McDonald's Use of Drive Throughs in China

Microeconomic Influences on McDonald's in China 444 Consumers and Markets 444 Economic and Political Issues 447 Macroeconomic Influences on Managers in China 449 Wal-Mart in Mexico Revisited 451 Microeconomic Influences on Wal-Mart in Mexico 451 Nature of the Market 451 Production and Cost Issues 453 Competitive Strategies 454 Macroeconomic Influences on Wal-Mart in Mexico 455 The 1994 Currency Crisis 455 Recent Macroeconomic Events 457 Appendix 16A Competitive Strategy in the Fast-Food Industry End of Chapter Resources Summary 458 • Exercises 467 • Application Questions 467 • On the Web 467 SOLUTIONS TO EVEN-NUMBERED PROBLEMS GLOSSARY INDEX

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