Preface

ECONOMICS FOR MANAGERS
A Problem-Solving Approach
Copyright © 2002

by
Tran Huu Dung
Department of Economics
Wright State University
Dayton, OH 45435
USA

Why do I write this book?

My greatest dissatisfaction with Managerial Economics texts currently available is that none presents the theory very well, to the level we might expect from economics textbooks these days. Most of those books claim that they have plenty of business applications -- and indeed they seem that way at first -- but closer looks reveal that these applications are usuallly inappropriate (only vaguely connected to the topics at hand), verbose (too many spurious details). So, instead of helping students, they disrupt the flow of the texts, making them harder to follow than they ought to be.

I. SHORTCOMINGS OF EXISTING TEXTS

In choosing the textbook to require for the economics course in an MBA program, the teachers have three main options; (1) a standard price theory text, (2) a managerial economics text, or (3) an organization- and/or a strategy-oriented text.

The appeal of a regular price theory (micro) text (for example, Hirschleifer) is that there is an abundance of such texts that are reasonably well written and rigorous. The drawback is that most are heavy on theory, light on business applications, and stuffed with topics MBA students do not need. As a result, this option is preferred only by the economic traditionalist teaching in the MBA program

On the other hand, the appeal of the managerial economics texts (e.g., Pappas and Hirschey) is that they seem to be more practical, have more applications, and require only basic calculus. Yet, most are not well written, and still heavily influenced by the traditional price theory texts (with many unnecessary topics). Many are plagued by an alarming number of substantive errors. Business applications are often inappropriate and bloated with irrelevant details.

The third option, which has become increasingly popular, is to adopt a textbook that concentrates on one (or both) of the two topics now in vogue: organization structures (Milgrom and Roberts, Brickley et al, Acs and Gerlowski) and business strategies (Besanko, McMillan, Oster). Unfortunately, most of these books skim over the fundamentals found in a standard price theory or managerial economics texts.

Briefly, then, in this author’s opinion, no single textbook currently in the market is sufficiently well written, covering the full range of modern topics truly useful for the managers in a manner that is thorough, but accessible to non-economics majors.

II. WHY THIS BOOK IS BETTER THAN OTHERS

A new textbook must justify its publication not only by being good, but also by being superior to existing texts. Further, its superiority should be plainly noticeable to the casually browsing, potential adaptors.

A. The approach is managerial-oriented.

Topics are selected in response to managerial needs, framed in the context of managerial problems, not out of some reflexive loyalty to micro textbook tradition. Whenever possible, easy to follow, practical decision-making algorithms are drawn from the analysis. Important complicating factors (e.g., measurement costs, non-identical consumers) should be recognized (even if there is no resolution at present). Positive lessons are highlighted, common mistakes and misconceptions are also exposed and explained.

While the book is applied in nature, every effort is made to show the analytical underpinning of the derived managerial lessons. This addresses the common criticism that texts in this field are either overly theoretical, or applied in nature but resting on weak theoretical foundation.

B. The coverage is thorough

We want a textbook to be more than a collection of brief descriptions of economic practices

- Topic lengths and selection must be commensurate with managerial needs, especially for small or medium-sized firms. However, as this is a graduate-level text, some rigor is maintained (most proofs are furnished, if only in footnotes). Compared with a standard microeconomic text, this book is more thorough on practical topics (e.g., pricing), less so on theoretical issues (e.g., conditions of market equilibrium). Compared with existing managerial economics texts, this book reflects a more cutting-edge thinking on a wider range of topics (e.g., the internal structure of the firm)

- It places greater emphasis than other texts on modern theories – such as industrial organization theories, game theory, transaction-cost theories, information theory, and contract theory – that are useful in managerial decision. I believe that with careful and patient exposition, they can be made accessible to all students using simple algebra and graph.

To the extent possible, each topic should be explained to the point where the user can apply it in a business decision, not merely understand what it is.

C. The organization is logical.

The length allocated to each topic mirrors the topic’s relative importance. The organization reflects the real-world division of managerial tasks, not the convenience of economic theory. The writing is concise. Given the unusually detailed coverage of new topics (pricing, rivalry, vertical integration, personnel economics) the book is very concise (but not simplistic) in its choice of details. The required mathematics is limited to algebra and basic calculus.

In addition to including new subjects, this book has many novel organizational features (see Contents for more details)

D. An abundance of examples and exercises

Surely, an MBA textbook must include business applications. However, each application must be brisk, without irrelevant details, and succinctly illustrative of what it is supposed to illustrate. Extra readings will be regularly added to the author’s web page.

Numerical examples and solved problems, prepared with care, are in abundance. Some are challenging for the understanding they require of the theory, not because of the math involved.

E. An integrated web site

Applications will be on the book's website with frequent updates.

III. SUMMARY OF CONTENTS

Chapter 1. Introduction.

We begin with a brief discussion of the interplay between economic theory and business, viewed from an historical perspective. Students should know why economics looks at business the way it does, and the strengths and limitations of this approach. Fortunately, in recent years, the relevance of economics for managerial decisions has been greatly improved thanks to three advances: Transaction costs analysis, focus on organization structures, and strategies. Three overarching themes of the course are introduced: Efficiency, organization, and rivalry.

Chapter 2. Demand, Supply, and Market

This is a relatively conventional chapter on the basics of output demand and input supply. It is thorough, yet avoiding theoretical details inessential to managerial decision-making . Three features distinguish our presentation:

(1) Right from the outset, we point out the differences between

• price-taking and price-setting behavior,
• the firm and the industry;
• uniform and non-uniform pricing;

(2) output demand and input supply (as seen by the price-taking firm) are presented in one single chapter.

Chapter 3. Production and Costs.

This Chapter provides a standard presentation of production and costs. (In most other texts, these topics are covered in two or more separate chapters). The cut-and-dried nature of the subject, however, is deceptive. The chapter motivates learning by making clear, right at the outset, why certain concepts are useful in managerial decision making.

Chapter 4. Profit Maximization

This entire chapter is devoted to issues regarding profit maximization (static, dynamic, output, input ...). This is a radical departure from other texts where these rules are introduced bit by bit, and repeated for each market structure. This approach enables us to go into detail (knowing that there is no need to derive the same in future chapters) on the rules regarding entry, exit, and output choice that usually receive less attention in other textbooks. We place much emphasis on the difference between sunk costs and fixed costs, and the asymmetry between entry and exit decision.

It presents business and output decisions as two faces of profit maximization, not as unrelated choices. This treatment provides students with a more coherent view of how the various pieces fit together. In particular, we derive the rules for finding the profit-maximizing output level that are valid for any profit-maximizing firm. We take this approach for two reasons. One, by first deriving these rules in their general form, students are able to see the power of economic theory of the firm: it provides a coherent set of basic principles that can be applied in a wide variety of market settings. Two, the unified approach also has the advantage of presenting the students with less to remember–he or she has to learn these concepts only once.

Chapter 5. Markets without Rivalry.

While the topics covered in this chapter (perfect competition and monopoly, both in input and output markets) are run-of-the-mill, they are presented here emphatically from a managerial perspective. For instance, regarding perfect competition, we stress the behavioral lesson it offers a price-taking firm rather than the equilibrium condition of the market. Some topics related to monopoly are also discussed in more detail than usual: the nature of entry barriers, antimerger guidelines and policies toward natural monopoly, renting vs. selling.

Chapter 6. Strategies toward Customers

This is the signature chapter of this book. No other single text offers nearly as wide-ranging and detailed account of price discrimination, two-part tariffs, peak load pricing, bundling, tying, and many others.

Chapter 7. Strategies toward Rivals.

This is the material that in most textbooks appears in the chapter on oligopoly. Relying mainly on game theory we discuss the strategy that a firm should have toward its rival, current as well as potential. The main insights of game theory are developed in a way that is entirely intuitive. The emphasis is on the manager’s options, not on the abstract characterization of industry equilibrium. Practical decision-making algorithms are given with real-world applications. Classical models of oligopoly are included as an appendix to this chapter.

Chapter 8. Vertical Relationships.

This is a “hot” topic but an accessible treatment is hard to find. Most authors appear to be slugging it out with the topics rather than enjoying writing about them. By posing the question in terms of choices in a manufacturer’s input procurement and output distribution, the problem can be discussed in a way that the students would find extremely practical.

This Chapter explores three modes of transactions: spot markets, long term contracts, and vertical integration. A very detailed discussion of transfer pricing is in the Appendix.

Chapter 9. Uncertainty and Information.

In my opinion, the way most managerial economics textbooks approach uncertainty and information is all wrong. Surely, one must know about moral hazard and adverse selection, risk sharing and contingent contracts, and what not, but the manager’s main interest should be on how to best defend, and to exploit whenever possible, the information disadvantages or advantages of the firm. In addition, the students must keep in mind that some business exists precisely because there is uncertainty and risk in the world and lots of people would pay to shed them. There are three main sections: (1) Decisions under uncertainty, (2) Consequences of asymmetric information, and (3) Strategies when information is asymmetric

Chapter 10. Personnel Economies.

Curiously, in spite of the great insights that modern economic theory has shed in the relationship between employer and employee, and of the obvious connection between this and issues of human resources management that are the backbones of most MBA programs, few managerial economics texts have take personnel economics. One of the most important features of our text is our devotion an entire chapter to this topic.

Chapter 11. Firm and the Global Economy

This chapter is a response to the trend in the business education to “internationalize the MBA curriculum. It is not intended to replace courses in International Business or International Economics that students are likely to be taking, but as mediator between managerial economics and international economics.

Chapter 12. The Firm and Macroeconomics .

Very few MBA programs require macroeconomics beyond principles

Last updated: September 14, 2002