Microeconomics for MBAs: The Economic Way of Thinking for Managers » (1st 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