Management Economics: An Accelerated Approach

An Accelerated Approach

William G. Forgang, Karl W. Einolf

• Publisher: Routledge
• Year: 2015
• Print ISBN: 9780765617781
• eBook ISBN: 9781317465645
• Topic: Business
• Subtopic: Business generale
• Index: Business

Thoroughly classroom tested, this text is designed specifically for one-semester accelerated and online courses at the upper undergraduate and MBA levels. It is based on the theme that business and personal decisions are made within both micro- and macro-economic environments. By understanding the environments and their effects on outcomes of decisions, better choices can be made. The text also differs from others in the area because it is less theoretical, it provides a broader perspective for management problem solving, and it bridges economics with other business disciplines. Each chapter includes a management decision-oriented case study that applies tools of economic analysis. An online instructors manual is available to professors who adopt the text.

1

The Macro- and Microeconomic Environments

This introductory chapter defines the economic problem, discusses its societal, managerial, and personal implications, and presents the macro- and microeconomies as environments within which we live, work, and make decisions. The macro- and microeconomic environments are complex and dynamic, external to firms and individuals, and beyond the control of decision makers. However, these economic environments affect the outcome of business and personal choices. Understanding how the economic environments influence the outcomes of decisions makes better choices possible.

Learning Objectives

The successful reader:

• Understands the economic problem, recognizes opportunity costs, and applies cost-benefit and marginal analysis to allocate scarce resources among competing uses

• Is aware of the nature of a free market economic system

• Realizes how the macroeconomic (aggregate output, employment, and income) and microeconomic (competitive conditions) environments affect the outcome of business and personal decisions

• Grasps how to align decisions with macro- and microeconomic realities

The Economic Problem

Scarcity and Decision Making

Economics is frequently defined as the science of scarcity.¹ Scarcity is the result of two conditions: (1) our infinite desire to consume goods and services and (2) finite productive resources that constrain our ability to produce. The first condition involves more than desires for consumer products. Contributing to unlimited wants are aspirations for quality education, health care, environmental protection, financially secure retirements, a contemporary infrastructure that provides clean water, abundant energy supplies, safe transportation systems, and support for basic research, exploration, and the arts. The second condition recognizes that the endowments of land, labor, capital, and entrepreneurial resources are limited and prevent fulfillment of our unlimited material wants.

With scarcity pervasive, choosing among competing and desirable alternative uses of scarce resources is a fact of life. At the societal level, finite productive resources are allocated among defense, roads and sewers, food, consumer products, health care, and education. In turn, the scarce goods are distributed among members of the community. Within a firm, scarce resources necessitate choosing among equipment, maintenance, personnel, compensation, research and development, and marketing. Further, in a firm’s marketing department finite personnel are allocated among inside sales, outside sales, and the production of new marketing materials. In a household, scarce time is allocated among family, work, school, and civic obligations. Similarly, scarce financial resources are allocated among different goods and services and savings. Given scarcity, finite resources are allocated among attractive alternative uses with the end goal of maximizing well-being.

Scarcity and Macro- and Microeconomics

Given scarcity, society’s material well-being is maximized by achieving two conditions over a fixed period of time: (1) producing as much as possible and (2) producing the most desired mix of goods. The first part of the response to scarcity analyzes an economy’s total production, and macroeconomics examines aggregate output and the utilization of resources. Macroeconomic policy refers to deliberate governmental actions to achieve full employment with stable prices. Fiscal policy refers to governmental decisions to alter spending on goods and services or to change tax rates in order to affect output, employment, households’ disposable income, and businesses’ profits. Macro-economic policy also includes the Federal Reserve System’s monetary policy—deliberate changes in interest rates with the intention of affecting output, employment, and income.

The second part of the response to scarcity recognizes that material well-being is enhanced by fulfilling wants in priority order. In microeconomics, the study units are individual firms, industries, and households, and microeconomics examines what determines the mix of goods produced. Microeconomic topics include how firms and households make decisions and interact, the competitiveness of markets, supply and demand, wage determination, costs of production, pricing, production, and the consuming behavior of households. Microeconomic policy refers to governmental actions designed to affect the output of individual industries, including taxes on selected goods (alcohol), subsidies for others (some agricultural products), regulations (legal drugs, worker safety, environmental protection, and food products), the outright ban of products (some drugs), tariffs that limit imports, antitrust actions, and government provision of selected goods and services such as defense, police and fire protection, and public education.

Production Possibilities and the Constrained Maximum

The economic problem of scarcity is displayed numerically in Table 1.1. The table refers to a hypothetical economy that produces books and food. If this economy dedicates all of its resources to the production of food, a maximum of 80 units is produced (point A) over a fixed time period and no books are produced. If all of the resources produce books, the maximum production over the period is 60 units (point E). Points B, C, and D represent different maximum combinations of books and food this economy is able to produce over a fixed time span, given its resource endowment and technology.

The data in Table 1.1 are transformed into a graph, and Figure 1.1 is the economy’s production possibilities curve.

The production possibilities curve shows the maximum combinations of the two goods this economy is able to produce over a fixed time period. The following points are noted:

• Production inside the production possibilities curve (point L) occurs when labor, equipment, or natural resources are not fully utilized or utilized inefficiently. Society’s material well-being is not maximized. At point L more of both goods can be produced.

• Production outside the boundary of the curve (point M) is not feasible given the economy’s endowment of resources, labor skills, and technology. There are not enough workers, equipment, or resources to produce at this rate.

• Production at points along the production possibilities curve correspo...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Tables and Figures
• Acknowledgments
• A Note to Students and Instructors
• Chapter 1. The Macro- and Microeconomic Environments
• Chapter 2. Aggregate Output, Prices, and Economic Indicators
• Chapter 3. Money and the Financial Markets
• Chapter 4. Supply and Demand and Market Processes
• Chapter 5. The Costs of Production
• Chapter 6. Market Structures, Firm Behavior, and Pricing
• Chapter 7. The Economics of Business Strategy
• Appendix: Present Value Tables
• Index