Economics for Managers 3/E
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econom
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economics for Managers
third edition
Paul G. Farnham
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Economics
for Managers
Third
Edition
Paul G. Farnham
Georgia State University
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Dedication
To my friend and colleague, Dr. Jon Mansfield, who
continues to excel at teaching economics for managers.
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Part 1 MicroeconoMic analySiS 32
1 Managers and economics 32
2 Demand, Supply, and equili
ium Prices 46
3 Demand elasticities 76
4 techniques for Understanding consumer Demand and Behavior 116
5 Production and cost analysis in the Short run 144
6 Production and cost analysis in the long run 172
7 Market Structure: Perfect competition 200
8 Market Structure: Monopoly and Monopolistic competition 226
9 Market Structure: oligopoly 260
10 Pricing Strategies for the Firm 288
Part 2 MacroeconoMic analySiS 320
11 Measuring Macroeconomic activity 320
12 Spending by individuals, Firms, and Governments on real Goods and Services 350
13 the role of Money in the Macro economy 390
14 the aggregate Model of the Macro economy 416
15 international and Balance of Payments issues in the Macro economy 446
Part 3 inteGration oF the FraMeworkS 482
16 combining Micro and Macro analysis for Managerial Decision Making 482
SolUtionS to even-nUMBereD ProBleMS 501
GloSSary 521
inDex 535
Brief Contents
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Preface 17
About the Author 29
Part 1 MicroeconoMic analySiS 32
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 rule of thumb: Microeconomic influences on Managers 39
Macroeconomic Influences on Managers 39
Factors Affecting Macro Spending Behavior 41
Managerial rule of thumb: Macroeconomic influences on Managers 43
End of Chapter Resources
Summary 43 • key terms 44 • exercises 44 • application Questions 44
chapter 2 DeManD, SUPPly, anD eQUiliBriUM PriceS 46
caSe For analySiS: Demand and Supply in the copper industry 47
Demand 48
Nonprice Factors Influencing Demand 49
Demand Function 53
Demand Curves 54
Change in Quantity Demanded and Change in Demand 55
Individual Versus Market Demand Curves 56
Linear Demand Functions and Curves 56
Mathematical Example of a Demand Function 57
Managerial rule of thumb: Demand considerations 58
Supply 58
Nonprice Factors Influencing Supply 58
Supply Function 60
Supply Curves 61
Change in Quantity Supplied and Change in Supply 61
Mathematical Example of a Supply Function 62
Summary of Demand and Supply Factors 63
Managerial rule of thumb: Supply considerations 64
Contents
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8 contents
Demand, Supply, and Equili
ium 64
Definition of Equili
ium Price and Equili
ium Quantity 64
Lower-Than-Equili
ium Prices 64
Higher-Than-Equili
ium Prices 66
Mathematical Example of Equili
ium 67
Changes in Equili
ium Prices and Quantities 67
Mathematical Example of an Equili
ium Change 70
End of Chapter Resources
Summary 72 • key terms 72 • exercises 72 • application Questions 74
chapter 3 DeManD elaSticitieS 76
caSe For analySiS: Demand elasticity and Procter & Gamble’s Pricing Strategies 77
Demand Elasticity 78
Price Elasticity of Demand 79
The Influence of Price Elasticity on Managerial Decision Making 80
Price Elasticity Values 81
Elasticity and Total Revenue 81
Managerial rule of thumb: estimating Price elasticity 83
Determinants of Price Elasticity of Demand 83
Number of Substitute Goods 84
Percent of Consumer’s Income Spent on the Product 84
Time Period 85
Numerical Example of Elasticity, Prices, and Revenues 85
Calculating Price Elasticities 85
Numerical Example 87
The Demand Function 87
Other Functions Related to Demand 87
Calculation of Arc and Point Price Elasticities 88
Price Elasticity Versus Slope of the Demand Curve 89
Demand Elasticity, Marginal Revenue, and Total Revenue 90
Vertical and Horizontal Demand Curves 92
Vertical Demand Curves 92
Horizontal Demand Curves 93
Income and Cross-Price Elasticities of Demand 94
Income Elasticity of Demand 94
Managerial rule of thumb: calculating income elasticity 95
Cross-Price Elasticity of Demand 95
Elasticity Estimates: Economics Literature 97
Elasticity and Chicken and Agricultural/Food Products 98
Elasticity and Beer 99
Water Demand 100
Elasticity and the Tobacco Industry 100
Elasticity and Health Care 101
Tuition Elasticity in Higher Education 101
Managerial rule of thumb: Price elasticity Decision Making 102
Elasticity Issues: Marketing Literature 102
Marketing Study I: Tellis XXXXXXXXXX
Marketing Study II: Sethuraman and Tellis XXXXXXXXXX
Marketing Study III: Hoch et al XXXXXXXXXX
Marketing Study Update 105
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contents 9
Managerial rule of thumb: elasticities in Marketing and Decision Making 106
End of Chapter Resources
Summary 106 • appendix 3a economic Model of consumer choice 107
• key terms 113 • exercises 113 • application Questions 114
chapter 4 techniQUeS For UnDerStanDinG conSUMer DeManD anD Behavior 116
caSe For analySiS: the Use of new technology to Understand
and impact consumer Behavior 117
Understanding Consumer Demand and Behavior: Marketing Approaches 118
Expert Opinion 118
Consumer Surveys 119
Test Marketing and Price Experiments 120
Analysis of Census and Other Historical Data 121
Unconventional Methods 121
Evaluating the Methods 122
Managerial rule of thumb: Marketing Methods for analyzing consumer Behavior 123
Consumer Demand and Behavior: Economic Approaches 123
Relationship Between One Dependent and One Independent Variable: Simple Regression
Analysis 124
Relationship Between One Dependent and Multiple Independent Variables:
Multiple Regression Analysis 129
Other Functional Forms 131
Demand Estimation Issues 132
Managerial rule of thumb: Using Multiple regression analysis 133
Case Study of Statistical Estimation of Automobile Demand 133
Managerial rule of thumb: Using empirical consumer Demand Studies 137
Relationships Between Consumer Market Data and Econometric Demand Studies 137
Case Study I: Carnation Coffee-mate 137
Case Study II: Carnation Evaporated Milk 138
Case Study III: The Demand for Cheese in the United States 139
Managerial rule of thumb: Using consumer Market Data 141
End of Chapter Resources
Summary 141 • key terms 141 • exercises 142
• application Questions 143
chapter 5 ProDUction anD coSt analySiS in the Short rUn 144
caSe For analySiS: Production and cost analysis in the Fast-Food industry 145
Defining the Production Function 146
The Production Function 146
Fixed Inputs Versus Variable Inputs 146
Short-Run Versus Long-Run Production Functions 147
Managerial rule of thumb: Short-run Production and long-run Planning 147
Productivity and the Fast-Food Industry 147
Model of a Short-Run Production Function 148
Total Product 148
Average Product and Marginal Product 148
Relationships Among Total, Average, and Marginal Product 149
Economic Explanation of the Short-Run Production Function 151
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10 contents
Real-World Firm and Industry Productivity Issues 152
Other Examples of Diminishing Returns 152
Productivity and the Agriculture Industry 153
Productivity and the Automobile Industry 154
Productivity Changes Across Industries 155
Model of Short-Run Cost Functions 156
Measuring Opportunity Cost: Explicit Versus Implicit Costs 156
Accounting Profit Measures Versus Economic Profit Measures 157
Managerial rule of thumb: the importance of opportunity costs 158
Definition of Short-Run Cost Functions 159
Fixed Costs Versus Variable Costs 159
Relationships Among Total, Average, and Marginal Costs