Richard B. McKenzie Graduate School of Management
Dwight R. Lee
Terry School of Business
University of Georgia, Athens
Fall 1999
Copyright © 1999 by Richard B. McKenzie
Chapter 1 Microeconomics, A Way of Thinking about Business
The Emergence of a Market
PERSPECTIVES: Adam Smith (1723-1790)
The Economic Problem
The Scope of Economics
Developing and Using Economic Theories
Positive and Normative Economics
Microeconomics and Macroeconomics
The Meaning and Importance of Property Rights
MANAGER’S CORNER: How Incentives
Count in Economics and Business
Concluding Comments
Review Questions
READING: "I, Pencil"
Chapter 2 Competitive Product Markets And Firm Decisions
The Competitive Market Process
Supply and Demand: A Market Model
The Elements of Demand
The Elements of Supply
Market Equilibrium
Price Ceilings and Price Floors
The Efficiency of the Competitive Market Model
Nonprice Competition
Competition in the Short Run and the Long Run in the
"Short Run" and "Long Run"?
Shortcomings of Competitive Markets
MANAGER’S CORNER: Paying Above-Market Wages
Concluding Comments
Review Questions
READING: The Effect of Airline Deregulation on Travel Safety
Chapter 3 Principles of Rational Behavior at Work in Society and Business
Rationality: A Basis for Exploring Human Behavior
The Acting Individual
Rational Behavior
Rational Decisions in a Constrained Environment
The Effects of Time and Risk on Costs and Benefits
What Rational Behavior Does Not Mean
Disincentives in Poverty Relief
MANAGER’S CORNER I: The Last-Period Problem
Concluding Comments
Review Questions
Chapter 4 Government Controls: How Management Incentives Are Affected
Who Pays the Tax?
Price Controls
The Case for Price Controls
The Cast Against Price Controls
Shortages and the Effective Price of a Product
Black Markets and the Need for Rationing
Consumer Protection
MANAGER’S CORNER: The Importance of Manager
Incentives in the Minimum-Wage Debate
Concluding Comments
Review Questions
READING: Water Rights and Water Markets
Chapter 5 The Logic of Group Behavior In Business and Elsewhere
Common Interest Theory of Group Behavior
The Economic Theory of Group Behavior
MANAGER’S CORNER I: The Value of Tough Bosses
MANAGER’S CORNER II: The Value of Teams
Concluding Comments
Review Questions
Chapter 6 Reasons for Firm Incentives
How Firms Make Markets More Efficient
Reasons Firms Exist
Changes in Organizational Costs
Prisoners’ Dilemma Problems, Again
Overcoming the Large-Numbers, Prisoners’ Dilemma Problems
The Moral Sense
What Firms Should Do
MANAGER’S CORNER I: Fringes, Incentives, and Profits
MANAGER’S CORNER II: Why Some Firms
Pay for Their Employees’ MBAs
Concluding Comments
Review Questions
Chapter 7 Market Failures: External Costs and Benefits
External Costs and External Benefits
The Pros and Cons of Government Action
Methods of Reducing Externalities
Choosing the Most Efficient Remedy for Externalities
MANAGER’S CORNER: How Honesty Pays in Business
Concluding Comments
Review Questions
Chapter 8 Consumer Choice and Demand in Traditional and Network Markets
Predicting Consumer Demand
Rational Consumption: The Concept of Marginal Utility
From Individual Demand to Market Demand
Elasticity: Consumer Responsiveness to Price Changes
Elasticity, Not the Slope
Applications of the Concept of Elasticity
Determinants of the Price Elasticity of Demand
Derivation of Demand from Indifference Curves and the Budget Line
Application: Cash Versus In-Kind Transfers
Application: Capturing the Consumer Surplus
Application: Charity Versus Corner Solutions
Application: Charity Versus Paternalism
The Demand for Public Goods
Irrationality and the Law of Demand
Lagged Demands and Network Externalities
MANAGER’S CORNER: Covering Relocation Costs of New Hires
Concluding Comments
Review Questions
Chapter 9 Product Costs and Business Decisions
Explicit and Implicit Costs
The Cost of an Education
PERSPECTIVE: Do Sunk Costs Matter?
The Cost of Bargains
Marginal Cost
The Law of Diminishing Returns
The Cost-Benefit Tradeoff
The Production Function in Pictures
Price and Marginal Cost: Producing to Maximize Profits
From Individual Supply to Market Supply
MANAGER’S CORNER: Cutting Health Insurance Costs
Concluding Comments
Review Questions
READING: Sunk Costs in the Railroad Industry
Chapter 10 Cost in the Short Run and Long Run
Fixed, Variable, and Total Costs in the Short Run
Marginal and Average Costs in the Short Run
Marginal and Average Costs in the Long Run
Average and Marginal Costs
Individual Differences in Average Cost
MANAGER’S CORNER: How Debt and Equity Affect Executive Incentives
Concluding Comments
Review Questions
APPENDIX: Choosing the Most Efficient Resource
Combination-Insoquant and Isocost Curves
PERSPECTIVES: Dealing with the Very Long Run
Chapter 11 Firm Production under Idealized Competitive Conditions
The Four Market Structures
PERSPECTIVES: Price Takers and Price Searchers
The Perfect Competitor’s Production Decisions
Producing Over the Long Run
The Efficiency of Perfect Competition: A Critique
Marginal Benefit Versus Marginal Cost
Contestable Markets
MANAGER’S CORNER: When Workers Would
Want Their Bosses to Cut Their Pay
Concluding Comments
Review Questions
Chapter 12 Monopoly Power and Firm Pricing Decisions
The Origins of Monopoly
The Limits of Monopoly Power
Equating Marginal Cost with Marginal Revenue
Short-Run Profits and Losses
Production Over the Long Run
The Comparative Inefficiency of Monopoly
Price Discrimination
Applications of Monopoly Theory
The Total Cost of Monopoly
Why a Durable Goods Monopoly Must Charge the Competitive Price
Monopoly in Network Goods
MANAGER’S CORNER I: Getting Prices Right with the Right Incentives
MANAGER’S CORNER II: The Desktop Monopoly
Concluding Comments
Review Questions
APPENDIX: Marginal Revenue Curve, A Graphical Derivation
Chapter 13 Imperfect Competition and Firm Strategy
Monopolistic Competition
Monopolistic Competition in the Short Run
Monopolistic Competition in the Long Run
Oligopoly
Price Stability and the "Kinked" Demand Curve
The Oligopolist in the Long Run
Cartels: Monopoly Through Collusion
PERSPECTIVES: Price Fixing, A Real-World Case
Antitrust Legislation
The Purposes and Consequences of Antirust Laws
PERSPECTIVES: The Consequences of Treble Damages in Antitrust Cases
MANAGER’S CORNER: "Hostile" Takeovers as a
Check on Managerial Monopolies
Concluding Comments
Review Questions
Chapter 14 Business Regulation
Major Federal Regulatory Agencies
The Public Interest Theory of Regulation
The Special Case of the Natural Monopoly
A Graphic Analysis of Natural Monopoly
Regulation of Destructive Competition
The Evidence on Regulation
The Economic or Private Theory of Regulation
Regulation as a Public Good for Industry
Regulation as Taxation
The Deregulation Movement
PERSPECTIVE: The Break-Up of AT&T
MANAGER’S CORNER: The Value of "Mistreating" Customers
Concluding Comments
Review Questions
Chapter 15 Competitive and Monopsonistic Labor Markets
The Demand for and Supply of Labor
Why Wage Rates Differ
Stricter Housing Standards for Migrants
Monopsonistic Labor Markets
MANAGER’S CORNER I: Paying for Performance
MANAGER’S CORNER II: Executive "Overpayment"
Concluding Comments
Review Questions
Chapter 16 Public Choice: Politics in Government and the Workplace
The Central Tendency of a Two-Party System
The Economics of the Voting Rule
The Inefficiency of Democracy
The Efficiency of Competition among Governments
The Economics of Government Bureaucracy
Making Bureaucracy More Competitive
MANAGER’S CORNER: Why Professors Have
Tenure and Business People Don’t
Concluding Comments
Review Questions
READING: The Mathematics of Voting and Political Ignorance
Chapter 17 International Trade and Finance
International Trade
Collective Gains from Trade
The Distributional Effects of Trade
Gains to Exporters
Losses to Firms Competing with Imports
The Effects of Trade Restrictions Such as Tariffs and Quotas
The Case for Free Trade
The Case for Restricted Trade
The Need for National Security
Other Arguments
International Finance
The Process of International Monetary Exchange
International Exchange Rates
The Exchange of National Currencies
Determination of the Exchange Rate
Market Adjustment to Changes in Money Market Conditions
Control of the Exchange Rate: The Fixed or Pegged Rate System
Concluding Comments
Review Questions
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.
Frederic Bastiat
(1801-1850)