Preface i
ChAPtEr 1 Introduction 1
Introduction: Economics and Managerial Decision Making 2
A Brief Review of Important Economic Terms and Concepts 5
The Case of Global Foods, Inc.: Situations and Solutions 9
Summary of the Situations and Solutions 11
Global Application: The BRIC Countries 14
Summary 15
Important Concepts 16
Questions 16
ChAPtEr 2 the Firm and Its Goals 18
Introduction 19


Do Companies Really Try to Maximize Profits? 26
Maximizing the Wealth of Stockholders 29
Economic Profits 32
Global Application 34
Summary 35
Important Concepts 35
Questions 36
ChAPtEr 3 Supply and Demand 38
Introduction 39
Market Demand 39
Market Supply 42
Market Equilibrium 44
Comparative Statics Analysis 46
Supply, Demand, and Price: The Managerial Challenge 53
Global Application: The BRIC Countries and the Supply and Demand for Oil 53
Summary 56
Important Concepts 56
Questions 57
Problems 58
Appendix 3A The Mathematics of Supply and Demand 65
ChAPtEr 4 Demand Elasticity 68
The Economic Concept of Elasticity 69
The Price Elasticity of Demand 69
i

Contents
The Cross-Price Elasticity of Demand 86 Income Elasticity 87
Other Elasticity Measures 90 Elasticity of Supply 90
Global Application: Price Elasticities in Asia 91
Summary 93
Important Concepts 94
Questions 94
Problems 96
Appendix 4A Applications of Supply and Demand 100
ChAPtEr 5 Demand Estimation and Forecasting 114
Demand Estimation 115
Introduction 115
Introduction to Regression Analysis 117
Problems in the Use of Regression Analysis 125
Examples of Regression Analysis Across the Disciplines 129
Global Application: Food in Spain, Cigarettes in Chinese Taiwan 130
Forecasting 132
Introduction 132
Subjects of Forecasts 132
Prerequisites of a Good Forecast 133
Forecasting Techniques 133
Global Application: Forecasting Exchange Rates 156

Summary 159
Important Concepts 159
Questions 161
Problems 162
Appendix 5A The Demand for White Zinfandel in Los Angeles 167
ChAPtEr 6 the theory and Estimation of Production 175
The Production Function 176
A Short-Run Analysis of Total, Average, and Marginal Product 178
The Long-Run Production Function 188
The Estimation of Production Functions 191
The Importance of Production Functions in Managerial Decision Making 200
Going “Beyond the Curves”: Current Production Issues and Challenges for Today’s Managers 202
Call Centers: Applying the Production Function to a Service 204
Global Application: Shifting Trends in Global Outsourcing 205

Summary 206
Important Concepts 207
Questions 208
Problems 209
Appendix 6A Productivity in Services 215
Appendix 6B The Multiple-Input Case 226



Contents

ChAPtEr 7 the theory and Estimation of Cost 237
The Importance of Cost in Managerial Decisions 238
The Definition and Use of Cost in Economic Analysis 240
The Relationship Between Production and Cost 242
The Short-Run Cost Function 244
The Long-Run Cost Function 249
The Learning Curve 258
Economies of Scope 261
Economies of Scale: The Short Run Versus the Long Run 262
Supply Chain Management 262
Examples of Ways Companies Have Cut Costs to Remain Competitive 265
Cautionary Note to Managers About the Use of Cost-Cutting as a Strategy 268
Global Applications: Li & Fung Will Do It All for You 269

Summary 271
Important Concepts 271
Questions 272
Problems 274
Appendix 7A A Mathematical Restatement of the Short-Run Cost Function 280
Appendix 7B The Estimation of Cost 284
ChAPtEr 8 Pricing and Output Decisions: Perfect Competition and Monopoly 295
Introduction 296
Competition and Market Types in Economic Analysis 298
Pricing and Output Decisions in Perfect Competition 301
Pricing and Output Decisions in Monopoly Markets 314
The Implications of Perfect Competition and Monopoly for Managerial Decision Making 318
Global Application: The $736,000 Bluefin Tuna 320

Summary 323
Important Concepts 323
Questions 324
Problems 326
Appendix 8A The Use of Calculus in Pricing and Output Decisions 328
Appendix 8B Break-Even Analysis (Volume-Cost-Profit) 330
ChAPtEr 9 Pricing and Output Decisions: Monopolistic Competition and Oligopoly 346
Introduction 346
Monopolistic Competition 348
Oligopoly 350
Pricing in an Oligopolistic Market: Rivalry and Mutual Interdependence 352


Contents

Competing in Imperfectly Competitive Markets 354
Strategy: The Fundamental Challenge for Firms in Imperfect Competition 357
Global Application: The World’s Market for Beer 363

Summary 365
Important Concepts 365
Questions 366
Problems 367
Appendix 9A A Mathematical Restatement of Monopolistic Competition 372
ChAPtEr 10 Special Pricing Practices 375
Introduction 376

Cartel Arrangements 376
Price Leadership 381
Revenue Maximization 383
Price Discrimination 384
Nonmarginal Pricing 395
Multiproduct Pricing 400
Transfer Pricing 405
Other Pricing Practices 407
Global Application: The Decline of European Cartels 408

Summary 411
Important Concepts 412
Questions 412
Problems 413
ChAPtEr 11 Game theory and Asymmetric Information 417
Introduction 418
Game Theory: Modeling the Strategy of Conflict 419
Asymmetric Information 428

Summary 438
Important Concepts 440
Questions 441
Problems 442
ChAPtEr 12 Capital Budgeting and risk 446
Introduction 447
The Capital Budgeting Decision 448
Time Value of Money 449
Methods of Capital Project Evaluation 449
Cash Flows 455
Cost of Capital 457
The Capital Budgeting Model 460
Capital Rationing 462
Risk Versus Uncertainty 462
Sources of Business Risk 463



Contents

The Measures of Risk 463
Capital Budgeting Under Conditions of Risk 468 Two Other Methods for Incorporating Risk 469 Sensitivity and Scenario Analysis 471
Simulation 472
Decision Trees 473
Real Options in Capital Budgeting 475
Global Application 478

Summary 483
Important Concepts 483
Questions 484
Problems 485
Appendix 12A The Value of a Corporation 492
ChAPtEr 13 Government and Industry: Challenges and Opportunities for today’s Manager 494
Introduction 495
The Rationale for Government Involvement in a Market Economy 495
Stabilization of the Aggregate Economy: Monetary and Fiscal Policy 502
Subprime Loan Financial Crisis of 2007 to 2009 503
Government Deregulation, Mergers, and Acquisitions 507
Government Protection of Intellectual Property (IP) 512
Global Application: The Failed Attempt to Merge by General Electric and Honeywell 514
Summary 515
Important Concepts 515

Questions 516
Appendix A Statistical and Financial Tables 517