Business economics PDF
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Business economics N. GreGory MaNkiw, Mark P. Taylor, aNdrew ashwiN Third ediTioN Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. Important Notice: Media content referenced within the product description or the product text may not be available in the eBook version. Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Business Economics, Third Edition © 2019, Cengage Learning EMEA N. Gregory Mankiw, Mark P. Taylor, WCN: 02-300 Andrew Ashwin ALL RIGHTS RESERVED. 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ISBN: 978-1-4737-6277-0 Cengage Learning, EMEA Cheriton House, North Way Andover, Hampshire, SP10 5BE United Kingdom Cengage Learning is a leading provider of customized learning solutions with employees residing in nearly 40 different countries and sales in more than 125 countries around the world. Find your local representative at: www.cengage.co.uk. Cengage Learning products are represented in Canada by Nelson Education, Ltd. For your course and learning solutions, visit www.cengage.co.uk. Purchase any of our products at your local college store or at our preferred online store www.cengagebrain.com. Printed in China by RR Donnelley Print Number: 01 Print Year: 2018 Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. BRIEF CONTENTS About the authors vii 12 Market structures: Perfect competition 215 Preface viii 13 Market structures: Monopoly 233 Acknowledgements x 14 Market structures: Imperfect or monopolistic competition 257 15 Market structures: Oligopoly 271 PART 1 The economic and business 16 Corporate strategy and pricing policy 289 environment 1 1 What is business economics? 1 2 Economics and business decision making 16 PART 5 Microeconomics: Factor markets 315 3 The business environment 26 17 Labour markets 315 18 Financial markets 342 PART 2 Microeconomics: The market system 41 PART 6 Introduction to macroeconomics 369 4 Supply and demand: How markets work 41 19 The macroeconomic environment 369 5 Elasticity and its applications 74 20 Aggregate demand and aggregate supply as a 6 Taxes and subsidies 105 model to describe the economy 393 21 Government economic policy and the effect on business: Fiscal, monetary and supply side PART 3 Microeconomics: The limitations policy 417 of markets 119 7 Market failure 119 8 The consumer and consumer behaviour 140 PART 7 Global business and economics 447 22 The global economy 447 23 Issues in global business and economics 502 PART 4 Microeconomics: The economics of firms in markets 161 Glossary 524 9 Costs and revenues in production 161 Index 531 10 Business goals and behaviour 180 Formulas 541 11 Firm behaviour and the organization of industry 199 iii Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CONtENtS About the authors vii Demand 49 Preface viii Shifts versus movements along the demand Acknowledgements x curve 51 Demand and supply together 55 How prices allocate resources 69 Part 1 5 Elasticity and its applications 74 tHE ECONOMIC aND BUSINESS Elasticity and its application 74 ENVIrONMENt 1 Price elasticity of supply 75 The price elasticity of demand 81 1 What is business economics? 1 Other demand elasticities 88 Applications of supply and demand What is business economics? 1 elasticity 98 Some key ideas in economics 4 6 taxes and subsidies 105 2 Economics and business decision making 16 Introduction 105 Taxation and business 105 Economics: The science (or art) of decision Conclusion 113 making 16 Business decision making 19 Conclusion 23 Part 3 3 the business environment 26 MICrOECONOMICS: tHE The transformation process 26 LIMItatIONS OF MarKEtS 119 The PESTLE framework 30 Shareholder value and stakeholders 35 Conclusion 36 7 Market failure 119 Introduction 119 Externalities 122 Using the demand curve to measure consumer Part 2 surplus 123 MICrOECONOMICS: tHE MarKEt Producer surplus 124 Government, business and externalities 131 SYStEM 41 Conclusion 135 4 Supply and demand: How markets 8 the consumer and consumer work 41 behaviour 140 The market forces of supply and demand 41 Introduction 140 Markets and competition 43 Behavioural economics 151 Supply 44 Asymmetric information 153 Shifts versus movements along the Conclusion 156 supply curve 46 iv Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CONTENTS v PART 4 Monopolistic competition and the welfare of society 266 MICROECONOMICS: THE ECONOMICS OF FIRMS 15 Market structures: Oligopoly 271 IN MARKETS 161 Oligopoly 271 Interdependence, game theory and the 9 Costs and revenues in production 161 economics of competition 276 Public policies toward oligopolies 281 The costs of production 161 Conclusion 284 What are costs? 162 Production and costs 164 The various measures of cost 168 16 Corporate strategy and pricing policy 289 Conclusion 175 Introduction 289 Business strategy 289 10 Business goals and behaviour 180 Pricing strategies 297 Business forecasting 301 The goals of firms 180 Sales forecasting 305 Financial objectives 184 Qualitative data 310 Break-even analysis 184 Non-financial objectives 193 11 Firm behaviour and the organization PART 5 of industry 199 MICROECONOMICS: FACTOR Isoquants and isocosts 199 MARKETS 315 Costs in the short run and in the long run 204 Economies and diseconomies of scale 207 17 Labour markets 315 12 Market structures: Perfect The markets for the factors of production 315 competition 215 The demand for labour 316 The supply of labour 321 Competition and competitive markets 215 The gig economy 325 The supply curve in a competitive market 222 The other factors of production: Land Conclusion: Behind the supply curve 227 and capital 328 Imperfections in the labour market 331 13 Market structures: Monopoly 233 The economics of discrimination 335 Introduction 233 Conclusion 337 The sources of monopoly power 235 How monopolies make production and pricing 18 Financial markets 342 decisions 237 Sources of business finance 342 The welfare cost of monopoly 242 Financial institutions in the economy 346 Price discrimination 244 Measuring the time value of money 349 Public policy towards monopolies 248 Managing risk 351 Conclusion: The prevalence of monopoly 251 Asset valuation 354 Savings and investments in the national income 14 Market structures: Imperfect or accounts 355 monopolistic competition 257 An overview of Islamic finance 360 The nature of monopolistic competition 257 Fintech 361 Advertising and branding 261 Conclusion 364 Brand names 264 Contestable markets 265 Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. vi CONTENTS PART 6 PART 7 INTRODUCTION TO GLOBAL BUSINESS AND MACROECONOMICS 369 ECONOMICS 447 19 The macroeconomic environment 369 22 The global economy 447 Introduction 369 International trade 448 Key economic indicators 370 The principle of comparative advantage 452 The components of GDP 373 The determinants of trade 455 Real versus nominal GDP 375 The winners and losers from trade 456 Inflation: Measuring the cost of living 377 Restrictions on trade 460 Unemployment 381 Criticisms of comparative advantage theory 467 The balance of payments 383 Other theories of international trade 468 Conclusion 388 The prices for international transactions: Real and nominal exchange rates 470 A model of exchange rate determination: 20 Aggregate demand and aggregate supply Purchasing power parity 472 as a model to describe the economy 393 The single European market and the euro 475 Introduction 393 Common currency areas and European Three key facts about economic fluctuations 394 monetary union 477 Explaining short run economic fluctuations 395 Fiscal policy and common currency areas 481 The aggregate demand curve 397 Brexit 484 The aggregate supply curve 401 Global business, culture and ethics 488 Two causes of economic fluctuations 409 The costs and benefits of globalization 490 Business in emerging markets 492 21 Government economic policy and the Outsourcing 496 effect on business: Fiscal, monetary Foreign direct investment 497 and supply side policy 417 Government economic policies 417 23 Issues in global business and Monetary policy 418 economics 502 The banking system 420 The financial crisis 502 The central bank’s tools of monetary control 423 Austerity policies: Too far too quickly? 511 Fiscal policy 426 The productivity puzzle 515 Supply side policies 433 Sustainability 518 How monetary policy influences aggregate demand 437 How fiscal policy influences aggregate Glossary 524 demand 440 Index 531 Conclusion 442 Formulas 541 Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. ABOUT THE AUTHORS N. GREGORY MANKIW is Robert M. Beren Professor of Economics at Harvard University. As a student, he studied economics at Princeton University and the Massachusetts Institute of Technology. As a teacher he has taught macroeconomics, microeconomics, statistics and principles of economics. Professor Mankiw is a prolific writer and a regular participant in academic and policy debates. His work has been published in schol- arly journals such as the American Economic Review, Journal of Political Economy and Quarterly Journal of Economics. 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 Banks of Boston and New York, and the Congressional Budget Office. From 2003 to 2005 he served as chairman of the US President’s Council of Economic Advisors. MARK P. TAYLOR is Dean of the Olin Business School, Washington University and was previously Dean of Warwick Business School at the University of Warwick, UK and Professor of International Finance. He obtained his first degree in philosophy, politics and economics from Oxford University and his master’s degree in eco- nomics from London University, from where he also holds a doctorate in economics and international finance. Professor Taylor has taught economics and finance at various universities (including Oxford, Warwick and New York) and at various levels (including principles courses, advanced undergraduate and advanced postgraduate courses). He has also worked as a senior economist at the International Monetary Fund and at the Bank of England and, 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 macroe- conomic analysis. His research has been extensively published in scholarly journals and he is today one of the most highly cited economists in the world. He was also a member of the Academic Advisory Group of the Bank of England Fair and Effective Markets Review. ANDREW ASHWIN has over 20 years’ experience as a teacher of economics. He has an MBA from the University of Hull and a PhD from the University of Leicester. Andrew is an experienced author writing a number of texts on Economics and Business for students at different levels and publications related to his PhD research. Andrew was Chair of Examiners for a major awarding body in England and Wales for Business and Economics and is a former Editor of the Economics, Business and Enterprise Association (EBEA) journal. Andrew is also a subject expert for economics to the qualifications regulator in England and Wales and is a Chartered Educational Assessor and a Fellow of the Chartered Institute of Educational Assessors. vii Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 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 nineteenth-century British economist, in his textbook, Principles of Economics pub- lished 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 of people around the world make decisions. When we make decisions, we are being economists. 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. 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, while others struggle to even get a bit part? Why are living stand- ards 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 cannibalizing 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. The second reason to study Business Economics is that it will make you a more astute participant in the eco- nomy 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 find a job (which may be difficult despite being highly qualified). 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 for the non-specialist economist who has to embark on a course of study in eco- nomics as part of a degree in Business. Your degree might be Business Economics, it might be Business Management or it might be Sports Coaching and Management. An increasing number of degree courses will include some coverage of economic principles, and this book is designed for just such courses. We have tried to put ourselves in the position of someone seeing economics for the first time and not necessarily looking for- ward to the prospect. Our goal has been to emphasize the material that students should and do find interesting about the study of the economy and business. One result is that this book is briefer than many books used to introduce students to economics. Throughout this book we have tried to return to applications and policy questions as often as possible. All the chapters include a case study which illustrates how the principles of economics are applied. In addition, ‘In the News’ boxes offer highlights from news events showing how economic ideas shed light on current issues facing viii Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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