Authors: Richard B. McKenzie, Dwight Lee
ISBN-13: 9780521191470, ISBN-10: 0521191475
Format: Hardcover
Publisher: Cambridge University Press
Date Published: July 2010
Edition: 2nd Edition
Richard B. McKenzie is the Gerken Professor of Enterprise and Society in the Paul Merage School of Business, University of California, Irvine.
Dwight R. Lee is the Ramsey Professor of Economics and Free Enterprise in the Terry College of Business, University of Georgia.
The first textbook in microeconomics written exclusively for MBA students.
Preface
How to use this book
List of online perspectives
List of Further readings online
List of online video modules
Book I The market economy, overview and application
1 Microeconomics: a way of thinking about business 3
Part A Theory and public policy applications 7
The emergence of a market 7
The economic problem 10
The scope of economics 13
Developing and using economic theories 14
Microeconomics and macroeconomics 14
Private property rights, game theory, and the Prisoner's Dilemma 16
Private property rights and the games economists play 17
Communal property rights and the "tragedy of the commons" 25
Voluntary organizations and firms as solutions for "tragedies of the commons" 30
Part B Organizational economics and management 31
Managing through incentives 31
Why incentives are important 35
Practical lessons for MBAs: see management as a problem in solving Prisoners Dilemmas 38
Further reading online 39
The bottom line 39
Review questions 40
2 Principles of rational behavior in society and business 41
Part A Theory and public policy applications. 42
Rationality: a basis for exploring human behavior 42
The acting individual 42
Rational behavior 43
Rational decisions in a constrained environment 44
The effects of time and risk on costs and benefits 49
What rational behavior does not mean 53
Part B Organizational economics and management 55
The logic of group behavior in business and elsewhere 55
Common-interest logic of group behavior 55
The economic logic of group behavior 57
Overcoming Prisoner's Dilemmas through tough bosses 67
The role of the residual claimant in abating Prisoner's Dilemmas in large groups 73
Practical lessons for MBAs: profits from optimal shirking 76
Further readings online 77
The bottom line 77
Review questions 78
3 Competitive product markets and firm decisions 80
Part A Theory and public policy applications 81
The competitive market process 81
Supply and demand: a market model 84
Market equilibrium 92
The efficiency of the competitive market model 97
Nonprice competition 99
Competitive labor markets 105
Part B Organizational economics and management 108
Making worker wages profitable in competitive markets 108
Henry Ford's "overpayment" 109
Overpayments to prevent misuse of firm resources 112
The under- and overpayment of workers 113
The overpayment/underpayment connection 114
Mandatory retirement 114
Practical lesson for MBAs: recognize that management credibility can be a source of profits in business 124
Further reading online 124
The bottom line 124
Review questions 126
4 Applications of the economic way of thinking: domestic government and management policies 127
Part A Theory and public policy applications 128
Who pays the tax? 128
Price controls 131
Fringe benefits, incentives, and profits 136
Minimum wages 143
The draft versus the all-volunteer military service 151
Part B Organizational economics and management 153
How honesty can pay in business 154
Game theory: games of trust 155
Moral hazards and adverse selection 157
Practical lesson for MBAs: seek mutually beneficial deals with workers 160
Further readings online 160
The bottom line 161
Review questions 162
5 Applications of the economic way of thinking: international and environmental economics 163
Part A Theory and public policy applications 165
Global economics: international trade 165
Global economics: international finance 174
Green economics: external costs and benefits 183
Part B Organizational economics and management 198
The consequences of "quicksilver capital" for business and government 198
Capital mobility and business competitiveness 200
Capital mobility and government competitiveness 201
Practical lesson for MBAs: protectionist strategies 204
Further readings online 204
The bottom line 205
Review questions 205
Book II Demand and production theory
6 Consumer choice and demand in traditional and network markets 211
Part A Theory and public policy applications 212
Predicting consumer demand 212
Rational consumption: the concept of marginal utility 212
From individual demand to market demand 218
Elasticity: consumers' responsiveness to price changes 219
Applications of the concept of elasticity 225
Determinants of the price elasticity of demand 226
Changes in demand 228
Normal and inferior goods 230
Substitutes and complementary goods 231
Objections to demand theory 232
Part B Organizational economics and management 233
Pricing strategies based on lagged demands, network effects, and rational addiction 233
Scarcity, abundance, and economic value 238
Software networks 239
Practical lessons for MBAs: treat the law of demand for what it is, a relatively absolute absolute 241
Further readings online 242
The bottom line 242
Review questions 243
7 Production costs and the theory of the firm 245
Part A Theory and public policy applications 247
Various cost conceptions 247
The special significance of marginal cost 252
The cost-benefit trade-off 256
Price and marginal cost: producing to maximize profits 258
From individual supply to market supply 260
Part B Organizational economics and management 261
Production costs and firms' size and organizational structure 261
Firms and market efficiency 262
Reasons for firms 264
Changes in organizational costs 272
Overcoming the large-numbers Prisoner's Dilemma problems 273
Make-or-buy decisions 276
Practical lessons for MBAs: recognize potential decision-making biases and think more rationally 282
Further readings online 283
The bottom line 283
Review questions 284
8 Production costs in the short run and long run 287
Part A Theory and public policy applications 289
Fixed, variable, and total costs in the short run 289
Marginal and average costs in the short run 289
Marginal and average costs in the long run 293
Long-run average and marginal cost curves 295
Industry differences in average cost 297
Shifts in the average and marginal cost curves 298
The very long run 299
Part B Organizational economics and management 301
Firms' debt/equity structures and executive incentives 301
Debt and equity as alternative investment vehicles 302
Past failed incentives in the SaL industry 305
Firm maturity and indebtedness 310
The bottom-line consequences of firms' financial structures 311
The emergence of the housing bubble and burst of the early 2000's 311
Practical lessons for MBAs: cost structures, indebtedness, and risk taking 323
Further reading online 324
The bottom line 324
Review questions 325
Book III Competitive and monopoly market structures
9 Firm production under idealized competitive conditions 329
Part A Theory and public policy applications 330
Pricing and production strategies under four market structures 330
The perfect competitor's production decision 335
Maximizing short-run profits 338
Minimizing short-run losses 340
Producing over the long run 342
Marginal benefit versus marginal cost 345
The efficiency of perfect competition: a critique 347
Price takers and price searchers 350
Part B Organizational economics and management 352
Competing cost-effectively through efficient teams 352
Team production 353
Team size 356
Paying teams 357
Experimental evidence on the effectiveness of team pay 359
Practical lessons for MBAs: considering marginal cost, Ignoring sunk costs, and paying attention to incentive pay 362
Further reading online 364
The bottom line 364
Review questions 365
10 Monopoly power and firm pricing decisions 367
Part A Theory and public policy applications 368
The origins of monopoly 368
The limits of monopoly power 370
Equating marginal cost with marginal revenue 374
The comparative inefficiency of monopoly 377
Monopoly profits 379
Price discrimination 381
Applications of monopoly theory 386
The total cost of monopoly 389
Durable goods monopoly 391
Monopoly in government and inside firms 393
Part B Organizational economics and management 395
Profits from creative pricing 395
Price discrimination in practice 396
Pricing cartels 401
Practical lesson for MBAs: monopoly power and barriers to entry from the firm's perspective 407
Further readings online 408
The bottom line 408
Review questions 409
Appendix 411
11 Firm strategy under imperfectly competitive market conditions 415
Part A Theory and public policy applications 417
Monopolistic competition 417
Monopolistic competition in the short run 418
Monopolistic competition in the long run 419
Oligopoly 420
Cartels: incentives to collude and to cheat 424
The case of the natural monopoly 430
The economics and politics of business regulation 431
Part B Organizational economics and management 438
"Hostile" takeover as a check on managerial monopolies 438
Reasons for takeovers 439
The market for corporate control 440
The efficiency of takeovers 443
Practical lessons for MBAs: collusion delusions and takeover threats 450
Further readings online 451
The bottom line 451
Review questions 452
12 Competitive and monopsonistic labor markets 454
Part A Theory and public policy applications 456
The demand for and supply of labor 456
Why wage rates differ 462
Monopsonistic labor markets 467
Monopsony and the minimum wage 473
Part B Organizational economics and management 474
Paying for performance 474
The "right" pay 475
Piece-rate pay and worker risk 479
Lincoln Electric's pay system 482
When managers can change the rate of piece-rate pay 483
Two-part pay systems 483
Why incentive pay equals higher pay 484
Honest dealing with workers 487
Practical lessons for MBAs: avoid becoming a monopsony 488
Further reading online 489
The bottom line 489
Review questions 490
References 492
Index 513