Microeconomics for MBAs: The Economic Way of Thinking for Managers

by Richard B. McKenzie , Dwight R. Lee

• ISBN13: 9780521859813
• ISBN10: 0521859816
• Format: Hardcover
• Copyright: 2006-02-13
• Publisher: Cambridge University Press

Summary

This is the first textbook in microeconomics written exclusively for MBA students. McKenzie/Lee minimizes attention to mathematics and maximizes attention to intuitive economic thinking. The text is structured clearly and accessibly: Part I of each chapter outlines the basic theory and Part II applies this basic theory to management issues. 'Perspective' sections in each chapter provide a new line of argument or different take on a business or policy issue, and carefully chosen topics and review questions are designed to spark lively and instructive debates. Throughout the book, McKenzie and Lee aim to infuse students with the economic way of thinking in the context of a host of problems that MBA students, as future managers of real-world firms, will find relevant to their career goals.

Table of Contents

Preface	xvii
List of abbreviations and acnonyms	xxv
Microeconomics: a way of thinking about business	1	(47)
Part I Theory and public policy applications	4	(28)
The emergence of a market	4	(2)
The economic problem	6	(3)
The scope of economics	9	(1)
Developing and using economic theories	10	(2)
Microeconomics and macroeconomics	12	(3)
Private property rights and the Prisoner's Dilemma game	15	(8)
Communal property rights	23	(5)
Perspective: The Tragedy of the Anticommons	28	(4)
Part II Organizational economics and management	32	(16)
How incentives count in business	32	(1)
Tying pay to performance	32	(4)
The role of incentives in firm successes and failures	36	(1)
Why incentives are important	37	(4)
The bottom line	41	(1)
Review questions	42	(1)
Appendix: ``I, Pencil''	42	(6)
Competitive product markets and firm decisions	48	(51)
Part I Theory and public policy applications	49	(29)
The competitive market process	49	(2)
Supply and demand: a market model	51	(1)
The elements of demand	52	(5)
The elements of supply	57	(3)
Market equilibrium	60	(3)
Price ceilings and price floors	63	(2)
The efficiency of the competitive market model	65	(2)
Nonprice competition	67	(3)
Competition in the short run and the long run	70	(2)
Shortcomings of competitive markets	72	(2)
Perspective: Why Queues?	74	(4)
Part II Organizational economics and management	78	(21)
Overpaying and underpaying workers	78	(1)
Henry Ford's ``overpayment''	78	(5)
Overpayments to prevent misuse of firm resources	83	(1)
When workers should not accept overpayments	84	(1)
The overpayment/underpayment connection	85	(1)
Mandatory retirement	86	(3)
The role of employers' ``credible commitments''	89	(2)
Breaking commitments	91	(4)
The abolition of mandatory retirement	95	(1)
The bottom line	96	(1)
Review questions	97	(2)
Principles of rational behavior in society and business	99	(35)
Part I Theory and public policy applications	99	(20)
Rationality: a basis for exploring human behavior	99	(1)
The acting individual	100	(1)
Rational behavior	100	(1)
Rational decisions in a constrained environment	101	(5)
The effects of time and risk on costs and benefits	106	(2)
What rational behavior does not mean	108	(1)
Disincentives in poverty relief	109	(2)
Perspective: Maslow's Hierarchy of Needs and Demand	111	(8)
Part II Organizational economics and management	119	(15)
The last-period problem	119	(1)
Problems with the end of contracts	120	(1)
Solutions to the last-period problem	121	(7)
The keiretsu as a solution to the last-period problem	128	(2)
The role of markets in solving last-period problems	130	(1)
Problems as a source of profits	131	(1)
The bottom line	132	(1)
Review questions	133	(1)
The logic of group behavior in business and elsewhere	134	(38)
Part II Theory and public policy applications	135	(17)
Common-interest theory of group behavior	135	(2)
The economic theory of group behavior	137	(11)
Perspective: Management snooping	148	(4)
Part II Organizational economics and management	152	(20)
The value of tough bosses	152	(1)
Take this job and...	152	(2)
Games workers play	154	(3)
Actual tough bosses	157	(4)
The role of the residual claimant	161	(4)
Risk taking, risk aversion, and firm ownership	165	(4)
Optimal shirking	169	(1)
The bottom line	169	(1)
Review questions	170	(2)
Government controls: how management incentives are affected	172	(47)
Part I Theory and public policy applications	172	(33)
Who pays the tax?	172	(3)
Price and rent controls	175	(4)
Minimum wages	179	(10)
Pollution controls: external costs and benefits	189	(14)
Perspective: The Problem of Spam: for Spammers as Well as Spammees	203	(2)
Part II Organizational economics and management	205	(14)
How honesty pays in business	205	(1)
The role of honesty in business	206	(2)
Games of trust	208	(3)
The role of ``hostages'' in business	211	(3)
Moral hazards and adverse selection	214	(1)
The bottom line	215	(1)
Review questions	216	(1)
Appendix: key econometric findings	217	(2)
Reasons for firms and incentives	219	(43)
Part I Theory and public policy applications	220	(31)
Firms and market efficiency	220	(3)
Reasons for firms	223	(8)
Changes in organizational costs	231	(2)
Overcoming the large-numbers, Prisoner's Dilemma problems	233	(3)
Make-or-buy decisions	236	(8)
The franchise decision	244	(4)
Perspective: Evolutionary Foundations of Cooperation	248	(3)
Part II Organizational economics and management	251	(11)
Fringe benefits, incentives, and profits	251	(2)
Workers as profit centers	253	(1)
Optimum fringe benefits	254	(1)
Fringe benefits provided by large and small firms	255	(2)
The bottom line	257	(1)
Review questions	258	(1)
Appendix	259	(3)
Consumer choice and demand in traditional and network markets	262	(52)
Part I Theory and public policy applications	263	(29)
Predicting consumer demand	263	(1)
Rational consumption: the concept of marginal utility	263	(5)
From individual demand to market demand	268	(2)
Elasticity: consumer's responsiveness to price changes	270	(6)
Applications of the concept of elasticity	276	(1)
Determinants of the price elasticity of demand	277	(2)
Changes in demand	279	(1)
Normal and inferior goods	280	(2)
Substitutes and complementary goods	282	(1)
Lagged demands and network effects	283	(2)
Rational addiction	285	(3)
Network effects	288	(1)
Objections to demand theory	289	(1)
Scarcity, abundance, and economic value	289	(1)
Perspective: Software Networks	290	(2)
Part II Organizational economics and management	292	(22)
Covering relocation costs of new hires	292	(1)
Covering the added housing costs of new hires	293	(3)
The logic of not fully compensating new hires for their added housing costs	296	(1)
A few qualifications	297	(1)
The bottom line	298	(1)
Review questions	299	(1)
Appendix A: indifference curves and budget lines	300	(8)
Appendix B: common concerns relating to the law of demand	308	(6)
Production costs and business decisions	314	(33)
Part I Theory and public policy applications	315	(18)
Various cost conceptions	315	(4)
The special significance of marginal cost	319	(4)
The cost-benefit trade-off	323	(3)
The production function	326	(2)
Price and marginal cost: producing to maximize profits	328	(3)
From individual supply to market supply	331	(1)
Perspective: A Reason for Corporations: Cost Savings	332	(1)
Part II Organizational economics and management	333	(14)
Cutting health insurance costs	333	(1)
The national ``healthcare crisis'' and market forces	334	(3)
Business solutions for the healthcare crisis	337	(4)
Problems with MSAs	341	(2)
Business experience with MSAs	343	(1)
The bottom line	344	(1)
Review questions	345	(2)
Production costs in the short run and long run	347	(34)
Part I Theory and public policy applications	348	(16)
Fixed, variable, and total costs in the short run	348	(2)
Marginal and average costs in the short run	350	(3)
Marginal and average costs in the long run	353	(2)
Long-run average and marginal cost curves	355	(1)
Industry differences in average cost	356	(3)
Shifts in the average and marginal cost curves	359	(1)
The very long run	359	(2)
Perspective: The Myth of the First-Mover Advantage	361	(3)
Part II Organizational economics and management	364	(17)
Firms' debt/equity structures and executive incentives	364	(1)
Debt and equity as alternative investment vehicles	365	(3)
Past failed incentives in the S&L industry	368	(6)
Firm maturity and indebtedness	374	(1)
The bottom-line consequences of firms' financial structures	374	(1)
The bottom line	375	(1)
Review questions	376	(1)
Appendix: Choosing the most efficient resource combination: isoquant and isocost curves	377	(4)
Firm production under idealized competitive conditions	381	(42)
Part I Theory and public policy applications	382	(27)
The four market structures	382	(3)
The perfect competitor's production decision	385	(3)
Maximizing short-run profits	388	(2)
Minimizing short-run losses	390	(2)
Producing over the long run	392	(4)
Marginal benefit vs. marginal cost	396	(2)
The efficiency of perfect competition: a critique	398	(4)
Price takers and price searchers	402	(1)
Perspective: The Innovator's Dilemma	403	(6)
Part II Organizational economics and management	409	(14)
The value of teams	409	(1)
Team production	409	(4)
Team size	413	(1)
Paying teams	414	(2)
Experimental evidence on the effectiveness of team pay	416	(2)
The bottom line	418	(2)
Review questions	420	(1)
Appendix: contestable markets	421	(2)
Monopoly power and firm pricing decisions	423	(53)
Part I Theory and public policy applications	424	(34)
The origins of monopoly	424	(2)
The limits of monopoly power	426	(3)
Equating marginal cost with marginal revenue	429	(4)
Short-run profits and losses	433	(2)
Production over the long run	435	(2)
The comparative inefficiency of monopoly	437	(2)
Price discrimination	439	(6)
Applications of monopoly theory	445	(3)
The total cost of monopoly	448	(2)
Durable goods monopoly	450	(1)
The Microsoft monopoly	451	(3)
Perspective: The QWERTY Keyboard: A Case of Lock In?	454	(4)
Part II Organizational Economics and Management	458	(18)
Profits from creative pricing	458	(1)
Price discrimination in practice	459	(6)
Cartel cheating	465	(2)
Advantages of frequent-flyer programs	467	(2)
The bottom line	469	(1)
Review questions	470	(2)
Appendix: marginal revenue curve: a graphical derivation	472	(4)
Firm strategy under imperfectly competitive market conditions	476	(50)
Part I Theory and public policy applications	477	(26)
Monopolistic competition	477	(1)
Monopolistic competition in the short run	478	(1)
Monopolistic competition in the long run	479	(1)
Oligopoly	480	(4)
The oligopolist in the long run	484	(1)
Cartels: incentives to collude and to cheat	484	(3)
Cartels and the Nash equilibrium	487	(2)
Government regulation of cartels	489	(1)
The case of the natural monopoly	490	(5)
The public interest theory of monopoly regulation	495	(2)
Perspective: The Value of ``Mistreating'' Customers	497	(6)
Part II Organizational economics and management	503	(23)
``Hostile'' takeovers as a check on managerial monopolies	503	(1)
Reasons for takeovers	504	(1)
The market for corporate control	505	(3)
The efficiency of takeovers	508	(7)
Takeover defenses	515	(4)
The bottom line	519	(1)
Review questions	520	(1)
Appendix: antitrust laws in the United States	521	(5)
Competitive and monopsonistic labor markets	526	(41)
Part I Theory and public policy applications	527	(19)
The demand for and supply of labor	527	(6)
Why wage rates differ	533	(5)
Monopsonistic labor markets	538	(7)
Perspective: Monopsony and the Minimum Wage	545	(1)
Part II Organizational economics and management	546	(21)
Paying for performance	546	(1)
The ``right'' pay	547	(4)
Piece-rate pay and worker risk	551	(3)
Lincoln Electric's pay system	554	(1)
When managers can change the rate of piece-rate pay	555	(1)
Two-part pay systems	556	(1)
Why incentive pay equals higher pay	557	(2)
Honest dealing	559	(2)
Incentives in the Irvine Company rental contracts	561	(3)
The bottom line	564	(1)
Review questions	565	(2)
Problems in collective decision making	567	(36)
Part I Theory and public policy applications	568	(24)
The central tendency of a two-party system	568	(3)
The economics of the voting rule	571	(1)
The inefficiencies of democracy	572	(7)
The economics and politics of business regulation	579	(4)
The efficiency of competition among governments	583	(1)
The economics of government bureaucracy	584	(3)
Making bureaucracy more competitive	587	(2)
Perspective: The Mathematics of Voting and Political Ignorance	589	(3)
Part II Organizational economics and management applications	592	(11)
Why professors have tenure and business people don't	592	(1)
The nature of tenure	593	(1)
The costs and benefits of tenure to universities, professors, and students	593	(2)
Worker-managed universities and academic politics	595	(3)
Why business people don't have tenure	598	(1)
Tenure as a tournament	599	(1)
The bottom line	600	(1)
Review questions	601	(2)
International trade and finance	603	(48)
Part I Theory and public policy applications	605	(37)
International trade in goods	605	(22)
International finance	627	(11)
Perspective: Bastiat's Satirical Case for Free Trade: ``A Petition''	638	(4)
Part II Organizational economics and management	642	(9)
The consequences of ``quicksilver capital'' for business and government	642	(2)
Capital mobility and business competitiveness	644	(1)
Capital mobility and government competitiveness	644	(3)
The downside of capital mobility	647	(2)
The bottom line	649	(1)
Review questions	649	(2)
References	651	(17)
Index	668