Managerial Economics [Hardcover]

One day after class, a student in one of our courses commented on the managerial economics text then being used: "This book is very dry. What it needs is a plot!" To a large extent, the idea for this text stemmed from this remark. This is a text that we believe will excite readers about managerial economics as well as inform them about this vital part of management education. Each chapter begins with a "Situation," in which managers in a fictional company, Global Foods, Inc., must make certain key decisions about their products in the beverage industry. After the relevant economic concepts or tools of analysis are presented, each chapter ends with a "Solution," a suggested way in which these concepts or tools can be used to help managers make the best decision.

The heart of managerial economics is the microeconomic theory of the firm. Much of this theory was formalized in a textbook written over 100 years ago by Professor Alfred Marshall of Cambridge University. Indeed, if readers were to refer to his Principles of Economics (1890), they would find many of the diagrams and equations presented in this text as well as in all other texts in managerial economics. To be sure, the world has changed greatly since Marshall's ideas were developed. Market structures other than the "perfectly competitive model" are now much more important. Technology moves at such a rapid pace that the rate of obsolescence of products is now often measured in months rather than years. Competition among firms is frequently conducted on a global scale rather than a local or national one. Multinational firms invest, manufacture, and sell around the world. In so doing, they sometimes buy out their global competitors or form alliances or joint ventures with them. In recent years, the Internet and e-commerce have become critical elements of most businesses.

Yet through all of these changes, basic microeconomic principles such as supply and demand, elasticity, short-run and long-run shifts in resource allocation, diminishing returns, economies of scale, and pricing according to marginal revenue and marginal cost continue to be important tools of analysis for managerial decision makers. In fact, the overall objective of this text is to demonstrate to our readers that the application of microeconomic theory has stood the test of time and continues to be relevant to many facets of modern business decision making.

One of the key reasons for managers to learn in studying economic analysis is the importance of understanding shifts in market demand and supply. In the first edition (1992), we cited Sun Microsystems as a good example of a company that was able to succeed in a market known for its rapidly changing supply and demand. At the time, we pointed out Sun's leadership in production and marketing of workstations as evidence of this. In, our second edition (1996), we observed how Campbell Soup and Grand Met, two leading global food manufacturers, were trying to take advantage of the growing demand for salsa and Mexican foods by buying food companies that produced these products. In the third edition, we noted that two dominant industry leaders, Levi's and Kellogg's, were being seriously challenged in their respective markets because of their inability to keep up with changing tastes, preferences, and life-styles (i.e., demand shifts) as well as pricing and product pressures from competitors (i.e., supply shifts.).

For this edition, we can point out an entire industry that has been roiled by the changing forces of supply and demand: the recording industry. Based on units shipped, music sales in the United States declined almost 10 percent in 2001. This decrease is apparently more of a structural trend than a result of that year's recession. In 2000, sales declined about 7 percent. The specific culprit in the falling demand for CDs seems to be the growing force of substitutes for music CDs such as video games, pay-per-view and DVD players, and the high-speed Internet. The last mentioned factor is the ultimate threat, enabling consumers to download selected music free of charge. To make matters worse, there are serious "supply-side" problems relating to the musical artists who are the "inputs" in the production process. A number of well-known stars (and their lawyers) are beginning to express publicly their distrust of the record companies' accounting for revenues and their commissions from sales as well as certain terms and conditions of recording contracts. In particular, some of the stars are demanding seven-year contracts rather than contracts based on a predetermined number of record albums. All of this clearly represents the "changing economics of the recording industry."

Our text presents numerous examples of firms such as those cited above that are facing changing market conditions. We point out a few here simply to give readers some introductory examples of just how relevant and fresh economic analysis can be. We are well aware of the reputation that economics courses have among some business students of being "too theoretical and not practical enough for the real world." In our opinion, nothing could be further from the truth. We know that the instructors in managerial economics will agree with us on this matter. We hope that this text will serve as a solid supplement to their classroom efforts to demonstrate to their students the importance and utility of economic theory for business decision making.

This text is designed for upper-level undergraduate courses and first-year MBA courses in managerial economics and applied economics. Very often, we have found that MBA students enter the managerial economics course with varying degrees of preparation for the subject. The first two chapters are a general introduction to economics and economic reasoning, and chapter 3 reviews the basic elements of supply and demand theory. The appendix to chapter 2 reviews the mathematics that can be used to help explain the material in selected chapters. We have purposely limited the use of calculus in this text. Thus, this appendix is intended primarily for those instructors and students who desire the economy of expression gained by using calculus and who want a general review of this mathematical technique. In addition, we have included brief mathematical appendices at the end of as well as within selected chapters.

In addition to discussing the applications of economic theory to the firm, our text (as is the custom with all texts in managerial economics) includes chapters on various tools of analysis that are helpful to business decision makers but that are not part of the core of traditional microeconomic theory. They are demand, production and cost estimation using regression analysis, forecasting, linear programming, capital budgeting, and risk analysis. Another subject, the role of government, can often be found in microeconomics texts under the heading of "market externalities." We are able to treat all of these subjects only in an introductory fashion. However, we hope that we have provided enough discussion and explanation on these topics to give readers a solid understanding of how they can be used in managerial decision making.

In this fourth edition, we have sought to improve on the previous editions by incorporating what we continue to learn from using the book in our classes. In addition, we received a number of useful comments from the faculty selected by Prentice Hall to review this edition's draft. One way in which we have tried to keep the material fresh and current is to incorporate many recent business examples from the popular press. At the same time, we have kept some of the examples that have appeared in our previous three editions. In our view, the passing of time has not diminished their powerful teaching points.

Our examples and applications are presented as integral parts of the general narrative. We have deliberately chosen not to use "boxed or shaded" sections of stories scattered all throughout the book. Our reviewers have told us that practice tends to be distracting for the reader. At the end of almost each chapter, we do have a specific "International Application" that demonstrates one or more of the chapter's key teaching points in a global context. We introduced this feature in the third edition and reviewers and students have told us that they found it to be quite helpful. As we initiated in the first edition, we also have our ongoing case of "Global Foods," the hypothetical food and beverage company that faces problems and challenges relating to the topics presented in each chapter. We recognize that with the ease of accessing library data bases and information on the Internet, any new example that we cite, no matter how recent, can be easily supplanted by more current information. Our hope is that our discussion in the text will motivate readers to update these examples or to find their own appropriate examples of the theoretical concepts presented in the text.

The following major changes and additions have been made in this fourth edition.

• An entirely new chapter on the "new economy" has been added (see chapter 12). Despite the recent collapse of the dot-corns, the Internet and all of its applications have definitely changed the nature of the way firms do business. Moreover, well-known dot-corns such as Amazon and Yahoo! are still in business (at least at the time this preface is being written), and companies such as e-Bay are in fact quite profitable. In this chapter, we provide a basic introduction to business activities involving the Internet such as B2C and B2B. More important, we link these activities to the fundamentals of managerial economics.
• Chapter 10 (Pricing and Output Decisions: Monopolistic Competition and Oligopoly) has been greatly expanded and rewritten. Given the increasing consolidation in many industries over the past decade, business behavior and managerial decision making in oligopoly markets have become more relevant and important than ever before. We also provide much more on game theory.
• Well over half of the "International Applications" are new and different from those provided in the previous edition. The global business scene is interesting and rapidly changing. We want our readers to be as excited about doing business outside the United States as they might be about doing business in the home market. In fact, as future managers, they may have no choice in the matter. Therefore, the international dimension of business is the one area that we want to be as current as possible in the use of our examples.
• An appendix on Asymmetric Information has been added (see Appendix B at end of the text). This topic has become increasingly important in recent years. In 2001, the developers of this theory received the Nobel Prize in Economics for their path-breaking work on the subject. This has no doubt added further interest in the field.
• According to several reviewers, one of the most useful and unique aspects of our text is the final chapter in which we try to incorporate as many of the concepts introduced throughout the text into the analysis of one real case: the situation facing selected firms in the semiconductor industry. In this fourth edition, we use the most current analysis by Standard & Poor's of the semiconductor industry available to us at the time the edition was being written. We also update the activities of the actual company that we used in the third edition, Standard Microsystems Corporation, and talk about several other companies in the industry as well.
• In the first and second editions, the major strategic move made by our hypothetical "Global Foods Corporation" was its entry into the soft drink market. In the third edition, the company decided to expand into bottled water. We decided to keep the strategic focus and almost all of the "Situations" and "Solutions" essentially unchanged in this fourth edition. However, in chapter 7 (The Theory and Estimation of Production) we decided to use a new situation and solution as a way of bringing attention to an important management tool called "supply chain management."
• We have also updated many of the examples and some of the sections that we presented in the previous editions. For example, the section on linear programming has been expanded considerably. In chapter 15 (Government and Industry: Challenges and Opportunities for Today's Managers), we have added information about the deregulation of electric utilities and more material on mergers and acquisitions.
• Special note to instructors: Several reviewers recommended that we try to link the situations and solutions more closely to the material in each chapter. We believe that this is one of the more intangible and subjective elements of teaching that would be best done in the classroom environment. Therefore, we have provided in the Instructor's Manual some guidelines on how instructors can make better use of these situations and solutions for classroom discussions in order to underscore the key teaching points of each chapter.It includes the following features:
  • Online study guide: Prepared by Professor David Eaton of Murray State University, these Online quizzes offer students another opportunity to sharpen their problem-solving skills and to assess their understanding of the text material. It has been completely revised for this edition. It includes an all-new set of short-answer, analytical questions that require students to further analyze the concepts covered in each chapter. The Online Study Guide grades each question submitted by the student, provides immediate and detailed feedback for correct and incorrect answers, and allows students to e-mail results to up to four e-mail addresses.
  • Excel® Spreadsheets: More than two dozen spreadsheet templates accompany the text and are intended to help students solve many of the questions raised in text discussions. An index of the applications is printed on the inside of the front cover of this book. This student aid can be downloaded from the Companion Website.
  • PowerPoint Presentation: This lecture presentation tool, prepared by Professors Benjamin F. Blair and Jon Rezek of Mississippi State University, can be downloaded by instructors. It offers outlines and summaries of important text material, tables and graphs, and additional examples. The package will allow instructors to make full-color, professional-looking presentations while providing the ability to create custom handouts for students.
  • Instructor's Manual and Test Bank: This manual provides answers to all of the questions and problems found in the text, as well as a group of multiple-choice and short-answer questions. Instructors can download the manual.