cover next page > cover next page > title: author: publisher: isbn10 | asin: print isbn13: ebook isbn13: language: subject publication date: lcc: ddc: subject: www.ebook3000.com < previous page page_iii next page > Page iii Economics for Business and Management K Alec Chrystal and Richard G Lipsey < previous page page_iii next page > cover next page > cover next page > title: author: publisher: isbn10 | asin: print isbn13: ebook isbn13: language: subject publication date: lcc: ddc: subject: www.ebook3000.com < previous page page_iv next page > Page iv Oxford University Press, Great Clarendon Street, Oxford OX2 6DP Oxford New York Athens Auckland Bangkok Bogotá Buenos Aires Calcutta Cape Town Chennai Dar es Salaam Delhi Florence Hong Kong Istanbul Karachi Kuala Lumpur Madrid Melbourne Mexico City Mumbai Nairobi Paris São Paulo Singapore Taipei Tokyo Toronto Warsaw and associated companies in Berlin Ibadan Oxford is a registered trade mark of Oxford University Press Published in the United States by Oxford University Press Inc., New York © K Alec Chrystal and Richard G Lipsey 1997 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press Within the UK, exceptions are allowed in respect of any fair dealing for the purpose of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act, 1988, or in the case of reprographic reproduction in accordance with the terms of the licences issued by the Copyright Licensing Agency Enquiries concerning reproduction outside these terms and in other countries should be sent to the Rights Department, Oxford University Press, at the address above This book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, re-sold, hired out or otherwise circulated without the publisher's prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser British Library Cataloguing in Publication Data Data available Library of Congress Cataloging in Publication Data Data available ISBN 0-19-877539-3 ISBN 0-19-877538-5 (pbk) 10 Printed in Great Britain on acid-free paper by Butler & Tanner Ltd., Frome and London < previous page page_iv next page > < previous page page_v next page > Page v To Alison < previous page page_v www.ebook3000.com next page > < previous page page_vii next page > Page vii CONTENTS Preface xi Part I Firms and Markets 1 Introduction to Economics and Business Economics and the Analysis of Business Issues 17 The Problem of Resource Allocation 29 Performance of the UK Economy Section Markets and Prices 43 Demand, Supply, and Price 45 46 Demand 60 Supply 65 The Determination of Market Price 72 Demand and Supply in Action Elasticity of Demand and Supply 84 86 Demand Elasticity 101 Elasticity of Supply 104 Measurement of Demand and Supply Section Optimization of the Firm 117 The Firm, Production, and Profit 119 120 The Firm in Practice 127 The Firm in Economic Theory 130 Production, Costs, and Profit Costs and Output 142 143 The Relationship between Output and Inputs 146 The Short Run 158 The Long Run 173 The Very Long Run: Endogenous Technical Change < previous page page_vii www.ebook3000.com next page > < previous page page_viii next page > Page viii Profit Maximization 180 181 Market Structure and Firm Behaviour 184 Profit Maximization 189 The Firm in Perfectly Competitive Markets 193 Short-Run Optimization for the Firm 198 Long-Run Optimization for the Firm 204 The Very Long Run Section Firms and Competition 211 Firms in Imperfect Markets I: Monopoly and Monopolistic Competition 213 214 A Pure Monopolist 227 Market Segmentation: A Multi-Price Monopolist 234 Monopolistic Competition Firms in Imperfect Markets II: Oligopoly and Business Strategy 242 243 Key Features of Imperfectly Competitive Markets 247 Oligopoly: Imperfect Competition among the Few 267 Oligopoly in Action: Two Case Studies Government and the Market 278 279 Economic Efficiency 288 The Case for Government Involvement in Markets 296 Public Policy towards Monopoly and Competition Section Economics of Business 311 10 The Economics of Employment 313 314 The Demand for a Homogeneous Input 324 Contracts and Performance Monitoring 335 Internal Labour Markets 11 The Economics of Investment 345 346 Capital and the Firm 352 Investment Appraisal 12 The Economics of Business Organizations 377 378 Firms as Organizations 388 Business Integration 399 The Market for Corporate Control 404 Firms and Markets < previous page page_viii www.ebook3000.com next page > < previous page page_ix next page > Page ix Part II The Economy as a Whole 407 Section National Product and National Income 409 13 Macroeconomic Issues and Measurement 411 412 What Is Macroeconomics? 413 Why Macroeconomics? 419 Value Added as Output 421 GDP, GNP, and National Income 435 Interpreting National Income and Output Measures 14 A Basic Model of the Determination of GDP 446 447 Potential GDP and the GDP Gap 450 Key Assumptions 454 What Determines Aggregate Expenditure? 468 Equilibrium GDP 473 Changes in GDP 15 GDP in an Open Economy with Government 484 485 Government Spending and Taxes 488 Net Exports 492 Equilibrium GDP 499 returns: on capital 134 constant 163 decreasing 163, 164 from takeovers 4003 future 348 increasing 162, 16572 internal rate of return (IRR) 354, 3646 law of diminishing 143, 14851, 155 long-run 1623 and risk 134, 3567 revenue: government 4868, 5678 incremental 1845, 1889, 1903, 21518 in perfectly competitive firms 1903 under monopoly 21518 see also marginal revenue revenue curves 185 reward structures 13 Ricardo, D 2001 rising-cost industries 298, 299 risk: aversion to 584 CEOs as risk takers 340 diversification 3856, 398 exchange rate 645 and return on investment 134, 3567, 3601 risk premium 134, 3567 road transport: bus services 3068 and public goods 292 road pricing 789 < previous page page_717 next page > < previous page page_718 next page > Page 718 Robbins, Lord L 616n robotics 166 RPC, see Restrictive Practices Court RPI, see Retail Price Index S Sangster, A 3678 Sargent, T 616 satisfaction maximization 47 satisficing 130, 379 saving 456, 4612, 4701, 472, 4979 propensity to save 4612, 498 savinginvestment model of national income 4701, 472, 4979 and thrift paradox 5647, 5667 and wealth 51112 saving function 4612 scale: decreasing returns to 163, 164 increasing returns to 162, 16572 minimum efficient 261, 262, 2878, 298n see also economies of scale scarcity 201, 27 schools of macroeconomic thought 61318 Austrian 61617 early Keynesian 61314 modern Keynesian 61516 monetarist 61416, 6701, 682 New Classical 61618, 665, 6736 New Keynesian 61718, 672 see also Keynesian economics Schumpeter, J 2267, 2667, 671n Schwartz, A 671, 672 secondary sector employment 3356 www.ebook3000.com Securities and Investment Board (SIB) 225 segmentation 22734, 2323 self-employment 429 semiconductor industry 7781 senior and chief executives 339, 340 seniority 3412 services 6, 20 employment in 346 for final consumption 36, 420 set-up costs 223, 2612 sex composition, labour force 320 shareholders: returns from takeovers 4003 separation of ownership and control 130, 326 shares 1235 effect of takeovers on 4002 shifts and movements: aggregate demand curve 514, 518, 51920, 52732, 5647 aggregate expenditure curve 4746, 51013, 514, 5335 aggregate supply curve 5245, 550, 552, 5578, 5602 demand curves 549 supply curve 635 shocks: demand, see aggregate demand shock exogenous 6645 monetary 591, 5923, 6037 random 6645 supply, see aggregate supply shock short run 1445, 14658 macroeconomic 452 output optimization 1934 profitability 1978 short-run aggregate supply (SRAS) curve 5216 changes in money supply 6037 cyclical fluctuations and 5602 demand shocks and 5279, 5315, 5504, 552 Keynesian 528, 61314 and multiplier 52932 and output gap 5449 and price level 5216 shape of 5213, 5325 shifts and movements in 5245, 550, 552, 5578, 5602 supply shocks and 527, 5356 short-run average total cost (SRATC) curve 2034 short-run costs 1518 and perfect competition 1934, 1956 relationship with long-run cost 1723 under monopoly 215 short-run demand curves 979 short-run equilibrium 188 under monopolistic competition 2356 under monopoly 21821 under perfect competition 1938, 2034 short-run marginal cost (SRMC) 152, 1535, 203 short-run output 14651 short-run profit maximization 188, 1923 short-run supply curves: absent under monopoly 2201 of firm 1946 of industry 1956, 197 see also short-run aggregate supply curve (SRAS) shut-down price 1856 SIB, see Securities and Investment Board signalling, labour market 327, 3301 signals: losses as 202 profits as 139, 198202, 222, 226, 235, 25965 quantity sold as 245 wage rates as 327, 3301 www.ebook3000.com single European currency 596, 652 single proprietorships, see sole traders size of firms: oligopolistic 24850 and organizational structure 3923 and shape of cost curves 1634 and use of specialized technology 166 skills, management 3989 slack, organizational 379 Sloan, Jr., A P 381 slumps 41415, 5478 Smith, Adam 169, 248 social costs 28990 social obligations 2956 sole traders 1201, 122 South West Water PLC 305 specialization of labour 225, 166, 170 speculation 639 speculative demand for money 5845 Spietoff, A 671n SRAS, see short-run aggregate supply curve SRATC, see short-run average total cost curve SRMC, see short-run marginal cost stabilization policy 5001, 553, 56271, 6706, 67881, 682 or automatic stabilizers 5678 and business cycles 1617, 450, 56271, 6706, 67881 and economic growth 5701 and exchange rates 418, 5967, 6428, 6514, 672 see also fiscal policy; government intervention; monetary policy stagflation 535, 536 stakeholders 130, 37980 standards: industry 16871 of living, see living standards sterling: demand for pounds 62831, 6367 as reserve currency 630 supply of pounds 628, 6312 sticky wages 553 Stockman, A 6767 stocks 347, 424 capital 425 and just-in-time production 170, 266, 424 stockbuilding 424, 464 stocks and shares, see shares stopgo government policy 67980 strategic behaviour 2478, 249, 25065 competitive 2514, 2589 co-operative 2501, 2558 and equilibrium concepts 2523, 2567 strategies 2567 structural change 639 subsidiary firms 3848, 3913 subsidies: cross 301 in National Income Accounts 431 substitutes and substitution: demand 55, 745 in elasticity of demand 956, 101 principle of 1601 substitution effect 3201, 3223, 32930 < previous page page_718 www.ebook3000.com next page > < previous page page_719 next page > Document Page 719 sunk costs 135, 2634, 346, 3614 of entry 2634 future 3614 and investment appraisal 346, 3614 past 135, 361 sun spot theory of business cycles 6801 supernormal profits 1378 superstars, economics of 3289 suppliers: co-ordination of 393 long-term relationships 1745, 3923 supply 605 in action 7281, 73 elasticity of 1014 excess 68 'laws' of supply and demand 6971, 70 see also aggregate supply (AS); demand and supply supply curves 623 absent under monopoly 2201 coal 1089 and demand curves 679 effect of new entrants 199 identification problem 1069 and input prices 64, 524 of labour 3201, 3223 long-run 196 shifts and movements in 635 short-run 1946, 197, 2201 slope of 1023 and technical change 65 see also aggregate supply curve; long-run aggregate supply curve (LRAS); short-run aggregate supply curve (SRAS) supply function 61 supply of effort 31924, 3223 supply of money 579, 5903, 6701, 6736 and aggregate demand 5924, 595, 6701 and business cycles 6701, 6736 changes in 5924, 5967, 6037 and interest rates 5902, 5934 and investment 5924 and money multiplier of pounds 628, 6312 see also monetary policy supply schedule 612, 63, 66 supply-side policies 672 surplus: balance of payments 6257 budget 4878 consumer 22830, 284 T tacit collusion 255 takeovers 1415, 399404 effects of 4004 hostile 400, 404 returns to shareholders 4003 winner's curse 4023 see also integration; mergers taste, consumer 57 taxation: direct taxes 431 disincentive effects 323 and fiscal policy 5034, 562, 564 government revenue from 486, 487, 5678 income tax 323, 4934, 498 indirect taxes 431 and National Income Accounts 431, 486, 4878 www.ebook3000.com value added tax (VAT) 431 Tax Exempt Special Savings Accounts (TESSAs) 5667 tax rates 4878, 5034, 518 and multiplier 504, 568 tax wedge 431, 568 TC, see total cost technical change: endogenous 1737, 1745 and job structure 346 and organizational structure 3923 and supply curves 65 in very long run 1737, 189, 2046, 300 see also innovation; knowledge technical efficiency 158, 283 technological interdependence 3901 technology, and returns to scale 16671 telecommunications industry 300 television industry 225, 3068 tender offers 400 term of debt 126 TFC, see total fixed cost theory of games 2514, 2567, 2736 third-party effects 289 thrift, paradox of 5647, 5667 time: as dimension of investment decisions 3468 individual rate of preference 373 'just-in-time' methods 170, 266, 393, 424 lifetime employment 337 lifetime income 342 present and future of physical capital 3467 time-scale in macroeconomics 4523 time value of money 356 see also present value The Times elasticity of demand 10913, 2689 Tirole, J 394n TNCs, see transnational corporations Tobin, J 584, 616 Tomkins PLC 14, 3967, 398 total cost (TC) 152, 1534 total fixed cost (TFC) 152, 1534 total product (TP) 1468 total revenue (TR) 1845, 1913 under monopoly 21618 total variable cost (TVC) 152, 1534 tournaments 33841 Toyota 393, 623 TP, see total product trade: balance of 626 deficit and surplus 6257 volume of 626 see also international trade trade account 6212 trade cycles, see business cycles trade marks 225 transaction costs 1289 transactions demand for money 5823, 609 transfer payments 426, 5701 transmission mechanism, see monetary transmission mechanism transnational corporations (TNCs) 37, 123, 1245 transport: air 2323, 2467 bus services 3068 cross-Channel journeys 726, 2678, 2723, 2745 road pricing 789 troughs in business cycles 41415 TVC, see total variable cost U www.ebook3000.com U-form structure of business organization 3813 UK Atomic Energy Authority 205 uncertainty: in input market 3934 and investment 348, 365 uncovered interest parity 651 underground activity 4401 undistributed profits 125 unemployment 412, 417, 4489, 6601 cyclical 30, 6601, 681 deadweight loss from 4489 and inflation 6601, 676, 67980 New Keynesian theories of 61718 and output gap 549 and paradox of thrift 5656 and supply shocks 6601 supply-side policies 672 see also employment; labour; working population unemployment benefits 486 unitary form (U-form) of business organization 3813 unit costs 152, 5212, 533 unit elasticity of demand 88, 89 unit labour costs 5459, 550, 5514 upstream integration 389 user cost, see opportunity cost utility maximization 47 utilization, capacity 151, 155, 157, 533 normal rate of 448, 544 V value: future 352 present, see present value value added 41921, 420 value added tax (VAT) 431 value additivity principle 398 < previous page page_719 www.ebook3000.com next page > < previous page page_720 Page 720 variable costs 137, 1525, 157 labour as 144, 14658 variable factors 144 velocity of circulation of money 586 vertical differentiation 244 vertical integration 14, 3905 and technological interdependence 3901 very long run 145, 1737, 2047 competition 2589, 2667 monopoly 300 profit maximization 189, 193 reaction to oil supply shocks 176 and technical change 1737, 189, 2046, 300 visible account 6212 volume of trade 626 von Mises, L 616n W wage rates 31522 cyclical 664 income and substitution effects 3201, 3223, 32930 market clearing 3212 and output gap 5459 signalling effect 327, 3301 wages: contracts 3245, 546n efficiency 32731, 338, 553 flexible or inflexible 5513 incentive pay 3223, 330, 3314, 340 and inflation 546n nominal 5223 and output gap 5459 and productivity 5469, 550, 5513 real 5223 rental or purchase price 347 reservation 3278 sticky 553 of superstars 3289 in UK (1940-95) 323 see also labour; pay wait-and-see investment policies 3601, 363, 3645 Wallace, N 616 war, and cyclical fluctuations 562, 681 wealth: and consumption function 463 and demand for money 576, 5845 effect of price level changes 51012 and saving 51112 weighted average cost of capital (WACC) 357 Wicksell, K 671n Williamson, O 128, 383n Willig, R D 263 winner's curse 4023 Winter, S G., see Nelson, R R and Winter, S G work-in-progress 424 working population 320 UK (1900-95) 2930 women in 320 workleisure choice 3201, 3223 World Trade Organization (WTO) 37 X X-inefficiency 283 Y yields 3656 Z Zantac 11, 171, 223 Zeneca PLC 14 www.ebook3000.com zero output 185, 187 zero-profit equilibrium 199, 202 < previous page page_720 ... Firms and Markets 1 Introduction to Economics and Business Economics and the Analysis of Business Issues 17 The Problem of Resource Allocation 29 Performance of the UK Economy Section Markets and. .. Markets and Prices 43 Demand, Supply, and Price 45 46 Demand 60 Supply 65 The Determination of Market Price 72 Demand and Supply in Action Elasticity of Demand and Supply 84 86 Demand Elasticity 101... the Business Cycle 18 Money and Monetary Policy 575 579 Supply of Money and the Demand for Money 588 Monetary Forces and GDP 602 Aggregate Demand, the Price Level, and GDP < previous page page_ix