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BUSINESS ECONOMICS
N. Gregory Mankiw, Mark P. Taylor
and Andrew Ashwin
Australia(cid:129)Brazil(cid:129)Japan(cid:129)Korea(cid:129)Mexico(cid:129)Singapore(cid:129)Spain(cid:129)UnitedKingdom(cid:129)UnitedStates
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BusinessEconomics,1stEdition ©2013,CengageLearningEMEA
N.GregoryMankiw,MarkP.Taylor,
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1 2 3 4 5 6 7 8 9 10 – 15 14 13
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BRIEF CONTENTS
About the Authors viii 10 The Firm’s Production Decisions 237
Preface ix 11 Corporate Strategy and Pricing Policy 255
Walk Through Tour xiv 12 Market Structures 272
Acknowledgements xvii 13 Other Types of Imperfect Competition 301
Supplements xviii
PART5 Microeconomics – Factor
PART 1 The Economic and Business
Markets
331
Environment – Setting the Scene
1
14 Labour Markets 333
1 What Is Business Economics? 3 15 Financial Markets 361
2 Economics and Business Decision Making 23
3 The Business Environment 35 PART6 Introduction to Macroeconomics
385
PART 2 Microeconomics – The Market 16 The Macroeconomic Environment 387
17 Aggregate Demand and Aggregate Supply 423
System
53 18 Macroeconomics – Employment and
4 Supply and Demand: How Markets Work 55 Unemployment 449
5 Elasticity and Its Applications 87 19 Macroeconomics – Inflation and Price
Stability 466
PART 3 Microeconomics – The Limitations of 20 Macroeconomics – Fiscal, Monetary and
Supply-Side Policy 490
Markets
119
6 Market Failure 121 PART7 Global Business and Economics 517
7 The Consumer and Consumer Behaviour 150
21 The Global Economy 519
PART 4 Microeconomics – The Economics of
Firms In Markets Glossary 543
177
Index 549
8 Business Goals and Behaviour 179
9 Firm Behaviour and the Organization of Industry 208
iii
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CONTENTS
About the Authors viii Shareholder value and stakeholders 46
Preface ix Conclusion 47
Walk Through Tour xiv Summary 50
Acknowledgements xvii Key concepts 50
Supplements xviii Questions for review 50
Problems and applications 51
PART 1 PART 2
–
THE ECONOMIC AND BUSINESS MICROECONOMICS THE MARKET
ENVIRONMENT – SETTING THE SYSTEM
53
SCENE
1
4 Supply and Demand: How Markets
Work
1 What Is Business Economics? 55
3
The market forces of supply and demand 56
The ten principles of economics 4
How people and businesses make decisions 4 Markets and competition 56
Supply 58
How people interact 11
Demand 63
How the economy as a whole works 15
Conclusion 20 Demand and supply together 70
How prices allocate resources 82
Summary 21
Summary 84
Key concepts 21
Questions for review 21 Key concepts 84
Questions for review 84
Problems and applications 21
Problems and applications 85
2 Economics and Business Decision
5 Elasticity and Its Applications
87
Making
23
Elasticity and its application 88
Economics as the science of decision making 24
Price elasticity of supply 88
Business decision making 27
The price elasticity of demand 96
Conclusion 32
Other demand elasticities 104
Summary 34
Applications of supply and demand elasticity 110
Key concepts 34
Summary 116
Questions for review 34
Key concepts 117
Problems and applications 34
Questions for review 117
Problems and applications 117
3 The Business Environment
35
What is business – the transformation process 36
The PESTLE framework 40
iv
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Contents v
8 Business Goals and Behaviour
179
The goals of firms 180
Financial objectives 186
PART 3
Break-even analysis 190
Non-financial objectives 200
Summary 206
Key concepts 206
Questions for review 206
Problems and applications 207
–
MICROECONOMICS THE
9 Firm Behaviour and the Organization
LIMITATIONS OF MARKETS
119
of Industry
208
6 Market Failure
121 The costs of production 209
What are costs? 209
Introduction 122
Production and costs 212
Externalities 125
The various measures of cost 216
Producer surplus 127
Costs in the short run and in the long run 222
Government business and externalities 134
Isoquants and isocosts 226
Conclusion 146
Conclusion 232
Summary 147
Summary 234
Key concepts 148
Key concepts 234
Questions for review 148
Questions for review 234
Problems and applications 148
Problems and applications 235
7 The Consumer and Consumer 10 The Firm’s Production Decisions
237
Behaviour
150
Introduction 238
Introduction 151 The supply curve in a competitive market 246
Behavioural economics 162 Conclusion: Behind the supply curve 251
Advertising and branding 165 Summary 253
Brand names 168 Key concepts 253
Asymmetric information 170 Questions for review 253
Conclusion 173 Problems and applications 254
Summary 175
Key concepts 175 11 Corporate Strategy and Pricing
Questions for review 175
Policy
Problems and applications 176 255
Introduction 256
Business strategy 256
Pricing strategies 263
Summary 270
Key concepts 270
PART 4 Questions for review 270
Problems and applications 271
12 Market Structures
272
Introduction 273
– Imperfect competition 273
MICROECONOMICS THE
Monopoly 275
ECONOMICS OF FIRMS IN How monopolies make production and pricing
decisions 278
MARKETS
177 The welfare cost of monopoly 285
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vi Contents
Price discrimination 288 15 Financial Markets 361
Public policy towards monopolies 292
Conclusion: The prevalence of monopoly 296 Introduction 362
Summary 298 Financial institutions in the economy 362
Key concepts 298 Measuring the time value of money 367
Questions for review 298 Managing risk 368
Problems and applications 299 Asset valuation 372
Savings and investments in the national income
13 Other Types of Imperfect accounts 373
Conclusion 379
Competition
301 Summary 381
Key concepts 382
Introduction 302
Questions for review 382
Competition with differentiated products 303
Problems and applications 382
Oligopoly 308
Markets with only a few dominant sellers 308
Game theory and the economics of competition 314
Public policies toward oligopolies 322
Conclusion 325
Summary 327
PART 6
Key concepts 327
Questions for review 327
Problems and applications 328
INTRODUCTION TO
MACROECONOMICS
385
PART 5
16 The Macroeconomic Environment
387
Introduction 388
The economy’s income and expenditure 389
The measurement of gross domestic product 390
–
MICROECONOMICS FACTOR The components of GDP 392
MARKETS Real versus nominal GDP 394
331 Measuring the cost of living 396
The consumer prices index 397
14 Labour Markets Production and growth 401
333
Economic growth and public policy 402
The markets for the factors of production 334 Unemployment 405
The demand for labour 334 Specialization and trade 409
The supply of labour 340 Open-economy macroeconomics: Basic concepts 410
Equilibrium in the labour market 341 The prices for international transactions: Real and
The other factors of production: Land and capital 347 nominal exchange rates 414
Earnings and discrimination 349 A first theory of exchange rate determination: Purchasing
The economics of discrimination 352 power parity 416
Conclusion 356 Conclusion 419
Summary 358 Summary 420
Key concepts 358 Key concepts 421
Questions for review 358 Questions for review 421
Problems and applications 359 Problems and applications 421
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Contents vii
17 Aggregate Demand and Aggregate 20 Macroeconomics – Fiscal, Monetary
Supply and Supply-Side Policy
423 490
Introduction 424 Monetary policy, fiscal policy and supply-side policy 491
Three key facts about economic fluctuations 424 Monetary policy 491
Explaining short-run economic fluctuations 425 Fiscal policy 496
The aggregate demand curve 428 Supply-side policies 502
The aggregate supply curve 433 How monetary policy influences aggregate demand 506
Two causes of economic fluctuations 440 How fiscal policy influences aggregate demand 511
Conclusion 445 Conclusion 513
Summary 446 Summary 514
Key concepts 447 Key concepts 515
Questions for review 447 Questions for review 515
Problems and applications 447 Problems and applications 515
18 Macroeconomics – Employment
and Unemployment
449
Introduction 450
Identifying unemployment 450 PART 7
Job search 453
Minimum wage laws 457
Unions and collective bargaining 458
The theory of efficiency wages 460
Conclusion 463
Summary 464
GLOBAL BUSINESS AND
Key concepts 464
Questions for review 464 ECONOMICS
517
Problems and applications 465
19 Macroeconomics – Inflation and 21 The Global Economy 519
Price Stability Business in emerging markets 520
466
The Single European Market and the euro 524
Money growth and inflation 467 Common currency areas and European monetary
The classical theory of inflation 467 union 526
The costs of inflation 470 Fiscal policy and common currency areas 530
Inflation and unemployment 474 Outsourcing 535
The Phillips curve 474 Global business, culture and ethics 536
The role of expectations 477 Conclusion 538
The role of supply shocks 482 Summary 540
The cost of reducing inflation 483 Key concepts 541
Conclusion 486 Questions for review 541
Summary 488 Problems and applications 541
Key concepts 488
Questions for review 488
Problems and applications 489 Glossary 543
Index 549
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ABOUT THE AUTHORS
N. GREGORY MANKIW is ProfessorofEconomics at Harvard University.As a student,
he studied economics at Princeton University and the Massachusetts Institute of Technol-
ogy.Asateacherhehastaughtmacroeconomics,microeconomics,statisticsandprinciples
of economics. Professor Mankiw is a prolific writer and a regular participant in academic
and policy debates. In addition to his teaching, research and writing, Professor Mankiw
has been a research associate of the National Bureau of Economic Research, an advisor to
the Federal Reserve Bank of Boston and the Congressional Budget Office. From 2003 to
2005, he served as chairman of the US President’s Council of Economic Advisors. Profes-
sor Mankiw lives in Wellesley, Massachusetts, with his wife Deborah, their three children
and their border terrier Tobin.
MARK P. TAYLOR is Dean of Warwick Business School at the University of
Warwick and Professor of International Finance. He obtained his first degree in philoso-
phy,politics andeconomics fromOxford University and his master’s degree ineconomics
from London University, from where he also holds a doctorate in economics and interna-
tional finance. Professor Taylor has taught economics and finance at various universities
(including Oxford, Warwick and New York) and at various levels (including principles
courses,advancedundergraduateandadvanced postgraduatecourses).Hehasalsoworked
asasenioreconomistattheInternationalMonetaryFundandattheBankofEnglandand,
before becoming Dean of Warwick Business School, was a managing director at Black-
Rock, the world’s largest financial asset manager, where he worked on international asset
allocation based on macroeconomic analysis. His research has been extensively published
inscholarlyjournalsandheistodayoneofthemosthighlycitedeconomistsintheworld.
Professor Taylor lives with his family in a 15th century farmhouse near Stratford upon
Avon, Warwickshire, where he collects clocks and keeps bees.
ANDREW ASHWIN has over 20 years experience as a teacher of economics. He has an
MBA and is currently researching for a Ph.D. investigating assessment and the notion of
threshold concepts in economics. Andrew is an experienced author writing a number of
texts for students at different levels, journal publications related to his Ph.D. research and
has a recently published a text on the business environment for undergraduates with
Dr Phil Kelly. Andrew was Chair of Examiners for a major awarding body in England
and Wales for business and economics and is Editor of the Economics, Business and
Enterprise Association (EBEA) journal. Andrew also acts as a consultant to the qualifica-
tions regulator in England and Wales and is pursuing Chartered Assessor status with the
Chartered Institute of Educational Assessors. Andrew lives in Rutland with his wife Sue
and their twin sons Alex and Johnny.
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PREFACE
How much of business is economics and how much of economics is business? This is a
difficult question to answer but perhaps what is at the heart of both is decision-making.
This book is about decision making. Alfred Marshall, the great 19th-century British
economist, in his textbook, Principles of Economics published in 1890 wrote: ‘Economics
is a study of mankind in the ordinary business of life.’ For many people the ordinary
business of life is interwoven with relationships with business. Every single day, billions
ofpeoplearoundtheworldmakedecisions.Whenwemakedecisionswearebeingecon-
omist. A great proportion of these decisions are made by people in the context of their
work which in turn is part of business. So Business and Economics are very closely
linked. So wrote.
A study of economics in a business context will help you understand the world in
which you live. There are many questions about businesses and the economy that
might spark your curiosity. Why do airlines charge less for a return ticket if the traveller
stays over a Saturday night? Why are movie businesses prepared to pay some actors
extremely large sums to star in films whilst others struggle to even get a bit part? Why
are living standards so meagre in many African countries? Why do some countries have
high rates of inflation while others have stable prices? Why do businesses produce many
products that are so similar – surely they succeed only in cannibalising their market?
Why is it so important to have a better understanding of how consumers behave? Why
have some European countries adopted a common currency? These are just a few of the
questions that a course in Business Economics will help you answer.
ThesecondreasontostudyBusinessEconomicsisthatitwillmakeyouamoreastute
participant in the economy and in business. As you go about your life, you make many
economic decisions. While you are a student, you decide how many years to stay in full-
time education. When you have completed your degree you will have to decide on a
career path and (which may be difficult despite being highly qualified) find a job. Once
you take a job, you decide how much of your income to spend, how much to save and
how to invest your savings. In your daily work you will have to make many decisions
and respond to an ever-changing environment. One day you may find yourself running
your own small business or a large firm, and you will decide what prices to charge for
your products and what products to offer for sale. The insights developed in the coming
chapters will give you a new perspective on how best to make these decisions.
A study of Business Economics will give you a better understanding of the potential
and limits of economic policy and how such policy can influence business behaviour. In
your business career you may find yourself asking various questions about economics.
What are the burdens associated with alternative forms of taxation? What are the effects
of free trade with other countries? To what extent do businesses have a responsibility to
protect the environment? How does the government budget deficit affect the economy
and thus your business?
A study of Business Economics will go some way towards helping you make more
sense of the world, your place in it and how business is affected and behaves as a
consequence.
FOR WHOM IS THIS BOOK WRITTEN?
The book has been written with the non-specialist economist in mind but who has to
embark on a course of study in economics as part of a degree in Business. Your degree
might be Business Economics, it might be Business Management or it might be Sports
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