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4324 results in Microeconomics

Page 60 of 217

  • Book IV - Competitive and monopoly market structures

  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp 403-404

  • Summary

    In Chapters 10, 11, and 12 of this book, we use the demand theory and cost structures developed in Chapters 7 through 9 to examine the organizational and production decisions under four market structures:

  • • perfect competition

  • • pure monopoly

  • • monopolistic competition

  • • oligopoly.

    • In Chapter 13, we revisit the market for a critical resource input, labor. We review and extend our analysis of how wage rates are determined in competitive labor markets, first briefly considered in Chapter 3. We then explain how a sole employer in a given market, called a “monopsony,” will determine the wage rate it will pay its workers.

  • 2 - Principles of rational behavior in society and business

  • from Book I - The market economy, overview and application
  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp 51-96

  • Summary

    We are not ready to suspect any person of being defective in selfishness.

    Adam Smith

    The combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach.

    Gary S. Becker

    Our purpose in this chapter is to lay out in clear (if not stark) terms exactly how economists think about people's decision making and behavior. We fully recognize that the economic way of thinking is not the only way people think about business and life more generally (through methods used in the hard sciences, psychology, the arts, etc.). Most people operate on several different intellectual plains, probably often more or less simultaneously. At other times they shift from intellectual plain to intellectual plain and remain there for a time with concentrated focus on given disciplinary methods of thinking. Here, we ask you to shift to the microeconomic intellectual plain and to remain there for at least the remainder of the course. However, be forewarned, with enough work on the economics plain, we expect many students will come to recognize the benefits of remaining there, or shifting back to the economics plain more often than you might now expect. We have frequently told our students that “economics is as much a ‘discipline’ as it is a disease. Once you catch it, it can be terminal, pervading with ease much of your thinking.” At the same time, we understand many students will want to resist the economic way of thinking every step of the way – until they have come to see the full method of thinking and have experienced its varied applicability to so many dimensions of behavior.

    We focus on the core founding assumptions in microeconomics, for two reasons:

  • • First, this is a course in economics – not psychology or literature. We need to use your time and textbook space at our disposal economically, which means we need to stay focused on one disciplinary approach.

  • • Second, we might wish we could fully integrate thinking methods and findings of other disciplines, but that is a tough order, primarily because economists have encountered difficulty doing that without undermining analytical progress through loss of precision, if not confusion, on students’ parts.

  • 1 - Microeconomics: a way of thinking about business

  • from Book I - The market economy, overview and application
  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp 3-50

  • Summary

    In economics in particular, education seems to be largely a matter of unlearning and “disteaching” rather than constructive action. A once famous American humorist observed that “it's not ignorance that does so much damage; it's knowin’ so darn much that ain't so” … It seems that the hardest things to learn and to teach are things that everyone already knows.

    Frank H. Knight

    The late Frank Knight was a wise professor at the University of Chicago who realized that students beginning a study of economics, no matter the level – even those who are in advanced business programs – face a difficult task. They must learn many things in a rigorous manner that, on reflection and with experience, amount to common sense. To do that, however, they must set aside – or “unlearn” – many preconceived notions of the economy and of the course itself. The problem of “unlearning” can be especially acute for MBA and other advanced business students who are returning to a university after years of experience in industry. People in business rightfully focus their attention on the immediate demands of their jobs and evaluate their firms’ successes and failures with reference to production schedules and accounting statements, a perspective that stands in stark contrast to the perspective developed in an economics class.

    You are now one of the many students to whom Knight directed his comments. As all good teachers must do, we intend to challenge you in this course to rethink your views on the economy and the way firms operate, as well as using abstract, deductive thinking. We shall ask you to develop new methods of analysis, maintaining all the while that there is, indeed, a distinctive “economic way of thinking” that deserves to be mastered.

    We will not tell you how you must think when you move into managerial roles. However, we will ask you to think differently while reading the materials for this course in the expectation that practicing the economic way of thinking will, to one degree or another, become more or less “natural.” We understand that you might never be as precisely rational as we assume people are in the economic models developed and refined throughout the chapters.

  • 7 - Consumer choice and demand in traditional and network markets

  • from Book III - Demand and production theory
  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp 269-309

  • Summary

    It is not the province of economics to determine the value of life in “hedonic units” or any other units, but to work out, on the basis of the general principles of conduct and the fundamental facts of social situations, the laws which determine prices of commodities and the direction of the social economic process. It is therefore not quantities, not even intensities, of satisfaction with which we are concerned … or any other absolute magnitude whatever, but the purely relative judgment of comparative significance of alternatives open to choice.

    Frank H. Knight

    People adjust to changes in some economic conditions with a reasonable degree of predictability. When department stores announce lower prices, customers will pour through the doors. The lower the prices go, the larger the crowd will be. When the price of gasoline goes up, drivers will make fewer and shorter trips. If the price stays up, drivers will buy smaller, more economical cars. Even defense departments around the world will reduce their planned purchases of tanks and bombers when their prices rise.

    Behavior that is not measured in dollars and cents is also predictable in some respects. Students who stray from the sidewalks to dirt paths on sunny days stick to concrete on rainy days. Professors who raise their course requirements and grading standards often find their classes shrinking in size. Small children shy away from doing things for which they have recently been punished. When lines for movie tickets become long, some people go elsewhere for entertainment.

    On an intuitive level, you very likely find these examples of behavior reasonable. Going one step beyond intuition, the economist would say that such responses are governed by the law of demand, a concept we first introduced in Chapter 3 and now take up in greater detail, with greater precision, and with more varied applications. In this chapter, we show how our understanding of a firm's strategy can be enhanced by simply classifying various goods into such categories as “normal” and “inferior” goods, “substitute” and “complementary” goods, and “network” and “lagged-demand” goods, with the nature of the goods affecting their demands. We will also introduce formally the concepts of “elastic” and “inelastic” demands, all of which suggests that the development of profit-maximizing pricing strategies requires that MBAs know more about goods than merely that their demands slope downward.

  • 10 - Firm production under idealized competitive conditions

  • from Book IV - Competitive and monopoly market structures
  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp 405-449

  • Summary

    Economists understand by the term market, not any particular market place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with one another that the prices of the same goods tend to equality, easily and quickly.

    Augustin Cournot

    Chapters 7– 9 largely dealt separately with the two sides of markets – consumers and producers. We devised graphic means of representing consumer preferences (the demand curve) and producer costs (the average and marginal cost curves). This chapter brings demand and cost analysis together in a way that allows us to examine how individual firms react to consumer demand in competitive markets. Our focus is on a highly competitive market structure. We investigate an intriguing question: at the maximum, how much can competitive markets contribute to consumer welfare?

    We do not attempt to give a full description of a real-world competitive market setting. Markets are too diverse for such a description to be very useful. Rather, our aim is to devise a theoretical framework that can enable us to think about how competitive markets work in general, as a constructive behavioral force. Although our model cannot tell much that is specific about real-world markets, it provides a basis for predicting the general direction of changes in market prices and output.

    Through the analysis in Part A of this chapter, we should gain a deeper understanding of the meaning and competitive foundations of the market forces of supply and demand and of market efficiency. We can see how the absence of restrictions on entry can impose intensive pressures on existing producers to contain their costs or be replaced.

    In Part B, we explain how getting the sizes of teams and their pay incentives right can be crucial to firms’ survivability when they face intense competitive pressures. At the end of this chapter we explain how “perfect competition” is not nearly as perfect, and maybe even “efficient,” as conventional microeconomic theory suggests. In Chapter 11, contrary to much conventional wisdom, we explain how “monopoly market power” can be “less bad” than conventional theory suggests, or that monopoly pricing power can, within limits, be a creative force in product development, meaning it can be a “creative force” largely underappreciated in antitrust law.

  • How to use this book in traditional, online, and hybrid courses

  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp xxxvi-xxxviii

  • Summary

    Five-week courses

    Assign the first four chapters (covering basic supply and demand analysis and application), plus either Chapter 5 (international economics) or Chapter 6 (environmental economics), one chapter a week.

    Assign one of the online readings for each of the chapters.

    Assign the online video lectures, suggested at the end of each of the assigned chapters.

    Set aside some time at the start of each class for discussion of problems students have with the topics covered in the chapters and the online video lectures.

    Seven-week courses

    Use the assignments for the five-week courses above, except assign both Chapters 5 and 6.

    Assign Chapter 7 (demand theory), Chapter 8 (theory of the firm), and Chapter 11 (monopoly and price discrimination), along with one online reading for each chapter.

    For demanding courses, assign Chapters 14 and 15 (behavioral economics).

    Assign the online video lectures.

    Set aside some time at the start of each class for discussion of problems students have with the topics covered in the chapters and the online video lectures.

    Ten-week courses

    Assign Chapters 1–12, along with at least one of the online readings for each chapter (to stay within the ten-week time limit, assign Chapters 5 and 6 for the fifth week and Chapters 11 and 12 for the tenth week).

    Assign the suggested video lectures at the end of the chapters.

    Set aside some time at the start of each class for discussion of problems students have with the topics covered in the chapters and the online video lectures.

    Fifteen-week courses

    Assign all fifteen chapters, one chapter a week, plus at least one online reading for each chapter, and all suggested video lectures at the end of the chapters.

    Set aside some time at the start of each class for discussion of problems students have with the topics covered in the chapters and the online video lectures.

    Online courses

    Assign all fifteen chapters, one chapter a week except for the following schedule:

  • First week, Chapters 1 and 2

  • Second week, Chapters 3 and 4

  • Third week, Chapter 5

  • Fourth week, Chapter 6

  • Fifth week, Chapter 7

  • Sixth week, Chapter 8

  • Seventh week, Chapters 9 and 10

  • Eighth week, Chapters 11 and 12

  • Ninth week, Chapter 13

  • Tenth week, Chapters 14 and 15

  • 3 - Competitive product markets and firm decisions

  • from Book I - The market economy, overview and application
  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp 97-148

  • Summary

    Competition, if not prevented, tends to bring about a state of affairs in which: first, everything will be produced which somebody knows how to produce and which he can sell profitably at a price at which buyers will prefer it to the available alternatives; second, everything that is produced is produced by persons who can do so at least as cheaply as anybody else who in fact is not producing it; and third, that everything will be sold at prices lower than, or at least as low as, those at which it could be sold by anybody who in fact does not do so.

    Friedrich A. Hayek

    In the heart of New York City, Fred Lieberman's small grocery is dwarfed by the tall buildings that surround it. Yet it is remarkable for what it accomplishes. Lieberman's carries thousands of items, most of which are not produced locally, and some of which come from other parts of this country or the world, thousands of miles away. A man of modest means, with little knowledge of production processes, Fred Lieberman has nevertheless been able to stock his store with many if not most of the foods and toiletries his customers need and want. Occasionally Lieberman's runs out of certain items, but most of the time the stock is ample. Its supply is so dependable that customers tend to take it for granted, forgetting that Lieberman's is one small strand in an extremely complex economic network.

    How does Fred Lieberman get the goods he sells, and how does he know which ones to sell and at what price? The simplest answer is that the goods he offers and the prices at which they sell are determined through the market process – the interaction of many buyers and sellers trading what they have (their labor or other resources) for what they want. Lieberman stocks his store by appealing to the private interests of suppliers – by paying them competitive prices. His customers pay him extra for the convenience of purchasing goods in their neighborhood grocery – appealing to his private interests in the process.

  • 11 - Monopoly power and firm pricing decisions

  • from Book IV - Competitive and monopoly market structures
  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp 450-501

  • Summary

    If monopoly persists, monopoly will always sit at the helm of government … its bigness is an unwholesome inflation created by privileges and exemptions which it ought not to enjoy. If there are men in this country big enough to own the government of the United States, they are going to own it.

    Woodrow Wilson

    That competition is a virtue, at least as far as enterprises are concerned, has been a basic article of faith in the American Tradition, and a vigorous antitrust policy has long been regarded as both beneficial and necessary, not only to extend competitive forces into new regions but also to preserve them where they may be flourishing at the moment.

    G. Warren Nutter and Henry Alder Einhorn

    At the bottom of almost all arguments against the free market is a deep-seated concern about the distorting (some would say corrupting) influence of monopolies. People who are suspicious of the free market fear that too many producers are unchecked by the forces of competition, but instead hold considerable monopoly power or control over market outcomes. Conventional antitrust wisdom has it that unless the government intervenes, these firms are likely to exploit their power for their own selfish benefit. This theme has been fundamental to the writings of the late and widely read economist John Kenneth Galbraith:

    The initiative in deciding what is produced comes not from the sovereign consumer who, through the market, issues instructions that bend the productive mechanism to his or her ultimate will. Rather it comes from the great producing organization that reaches forward to control the markets that it is presumed to serve and, beyond, to bend the customers to its needs.

    (Galbraith 1967, 6)

    This chapter is really a continuation of our earlier discussion of “market failures,” for monopoly is often seen as one of the gravest of all forms of failure in markets. In many people's views, monopoly has no (or close to no) redeeming virtue. Accordingly, we examine the dynamics of monopoly power and attempt to place the consequences of those dynamics in proper perspective.

  • 8 - Production costs and the theory of the firm

  • from Book III - Demand and production theory
  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp 310-359

  • Summary

    The economist's stock in trade – his tools – lies in his ability to and proclivity to think about all questions in terms of alternatives. The truth judgment of the moralist, which says that something is either wholly right or wholly wrong, is foreign to him. The win–lose, yes–no discussion of politics is not within his purview. He does not recognize the either–or, the all-or-nothing situation as his own. His is not the world of the mutually exclusive. Instead, his is the world of adjustment, of coordinated conflict, of mutual gain.

    James M. Buchanan

    Amazing things happen when people take responsibility for everything themselves. The results are quite different, and at times people are unrecognizable. Work changes and attitudes to it, too.

    Mikhail Gorbachev, former Premier of the Soviet Union

    Cost is pervasive in human action. Managers (as well as everyone else) are constantly forced to make choices, to do one thing and not another. Cost – or more precisely, opportunity cost – is the most highly valued opportunity not chosen. Although money is the most frequently used measure of cost, it is not cost itself.

    Although we may not recognize it as such, cost also pervades our everyday thought and conversation. When we say “that course is difficult” or “the sermon seemed endless” or “changes to the product design at this stage can't be made,” we are probably more often than not indicating something about the cost involved. If the preacher's extended commentary delayed the church picnic, the sermon was costly. Although complaints about excessive costs sometimes indicate an absolute limitation, more often they merely mean that the benefits of the activity are too small to justify the cost. Many people who “can't afford” a vacation actually have the money but do not wish to spend it on travel, and most students who find writing research papers “impossible” are simply not willing to put forth the necessary effort.

    This chapter explores the meaning of cost in business, specifically, and in human behavior, generally. We begin by showing how the hidden costs of a choice often can explain seemingly irrational behavior. We then develop further the concept of marginal cost which, together with the related concepts of demand and supply, defines the limits of rational behavior, from personal activities such as painting and fishing to business decisions such as how much to produce.

  • 5 - Applications of the economic way of thinking: international economics

  • from Book II - Applications of basic economic theory
  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp 201-231

  • Summary

    Money moves over, around and through them [national borders] with the speed of light. The flows of capital are now in the range of 30 to 50 times greater than world trade. The world's capital market that moves along this electronic highway goes where it is wanted and it stays where it is well-treated … As long as our free-market system permits and delivers an acceptable rate of return on investment in an environment of political stability that is competitive with other areas of investment, the capital will keep coming.

    Walter Wriston (long-time CEO of Citicorp)

    In this chapter we extend our applications of the economic way of thinking to international trade and finance and environmental economics, relying again extensively on supply and demand graphs. We cover international economics early in the book for a straightforward reason: international trade and finance have become progressively more important issues for business. Moreover, national economies have become integrated and interdependent to a degree not imagined just a few decades back. Much business has become global in scope because of technological gains in transportation and telecommunications. The extent of the integration of national economies has been dramatized in recent years through the rapid spread of the financial crisis, attributable to the bursting of the housing price bubble and the collapse of the market for mortgage-backed securities, that became evident in the US banking system in late 2007, only to cause a growing list of major banks around the world to hover on the brink of bankruptcy in 2008 and 2009. One national economy after another, mainly in Europe, like dominos fell into a financial crisis and substantial recession. In effect, the United States metaphorically sneezed, and the rest of the world caught pneumonia.

    Many CEOs and lower-ranking managers learned then that they could no longer see their role as one of allocating resources within the walls of their firms, or even within their local, geographically bound markets. They had to think across national boundaries with the intent of minimizing costs and maximizing sales and profits globally. Managers at all levels also had to consider the costs of various government policies, treating them in much the same way as labor-cost considerations that affect where goods are produced and sold.

  • 13 - Competitive and monopsonistic labor markets

  • from Book IV - Competitive and monopoly market structures
  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp 549-596

  • Summary

    Labour, like all other things which are purchased and sold, and which may be increased or diminished in quantity, has its … market price.

    David Ricardo

    Professional football players earn more than ministers or nurses. Social workers with college degrees generally earn less than truck drivers, who may not have completed high school. Even the best full professor of history probably earns less than a mediocre assistant professor of accounting on most campuses.

    Why do different occupations offer different salaries? Obviously not because of their relative worth to us as individuals. Just as there is a market for final goods and services – calculators, automobiles, and dry cleaning – there is a market for labor as a resource in the production process. In competitive labor markets, supply and demand are major forces determining the wage rate workers receive in different sublabor markets. And accounting and history professors are in decidedly distinct sublabor markets, because neither can do the other's jobs (or else some (hardly all) history professors might seek an accounting professorship to double or even triple their salaries).

    By concentrating on the economic determinants of employment – those that relate most directly to production and promotion of a product – we do not mean to suggest that other factors are unimportant. Many noneconomic forces – such as social status, appearance, sex, race, and personal acquaintances – influence who is employed at what wage. Our purpose is simply to show how economic forces affect the wages paid and the number of employees hired. Such a model can show not only how labor markets work but also how attempts to legislate wages, such as minimum-wage laws, affect the labor market.

    As noted in Chapter 3, the general principles that govern product markets govern labor markets, and the general principles that govern labor markets also apply to the markets for other resources, principally land and capital. The use of land and capital has a price, called rent or interest, which is determined by supply and demand. Furthermore, land, capital, and labor are all subject to the law of diminishing marginal returns. Beyond a certain point and given a fixed quantity of at least one resource, more land, labor, or capital will produce less and less additional output.

  • Preface

  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp xxiii-xxxii

  • Summary

    Almost all (if not all) textbooks used in business students’ first course in microeconomics are designed with undergraduate economics majors or first-year PhD students in mind. Accordingly, business students, especially MBA students, are often treated to a course in conventional intermediate microeconomic theory, full of arcane mathematical explanations. The applications in such standard textbooks deal mainly with the impact of social or government policies on markets, with little discussion of how real-world managers can use microeconomics to make better decisions within their firms in response to market forces or how market forces can be expected to affect firms’ institutional and financial structures. Standard microeconomics textbooks often pay scant direct attention to how the economic way of thinking (which differs dramatically from how professors in other business courses think about business issues) can offer managers guidance on how they can improve their thinking and decision making to enhance their firms’ profits (or to achieve other organizational goals).

    This is because much microeconomic theory simply assumes firms into existence, with little or no discussion of why they are needed in the first place. Managers and their staff are assumed to do exactly what they are employed to do by their firms’ owners – maximize owners’ profits – with no discussion of how firms’ organizational and financial structures affect incentives and how incentives affect firms’ production and profit outcomes. They also presume that managers always and everywhere think through business problems and make management decisions with great (even perfect) care and precision, a starting position that leaves no room for teaching students how they can improve their thinking and decision making.

    That is to say, little is often written in standard textbooks used in courses for serious business students about exactly how real-world firms pursue the goal of profit maximization (or any other goal) and how they can improve their pursuit of that goal. And that void in microeconomics textbooks is a real problem for serious business students, for an obvious reason: serious business students have typically come to business schools to learn how to improve their management skills, which involves learning about how they can improve their ability to extract more profits from the scarce resources available to their firms (or to the firms where they expect to move after graduation).

  • Book III - Demand and production theory

  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp 267-268

  • Summary

    In Chapters 1–6 we provided a broad overview of the forces of supply and demand, with emphasis on the application of those analytical devices to a variety of management and public policies. In Book III, we develop with greater care and depth the theoretical underpinnings of demand (Chapter 7) and supply (Chapters 8 and 9). We will use these theories in Book IV to explore firms’ production and organizational strategies under different competitive and monopolistic market conditions.

  • 14 - Challenges of behavioral economists

  • from Book V - Behavioral economics: a challenge to conventional microeconomics
  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp 599-631

  • Summary

    Economists create this problem [ignoring or sidestepping relevant factors to behavior in their models] with their insistence on studying mythical creatures often known as Homo economicus. I prefer to call them “Econs”– highly intelligent beings that are capable of making the most complex of calculations but are totally lacking in emotions. Think of Mr. Spock in “Star Trek.” In a world of Econs, many things would in fact be irrelevant.

    Richard H. Thaler (2015b, New York Times)

    Behavioral economics emerged as a subdiscipline in economics over the last half of the twentieth century because of the work of scholars whose main contributions were outside the strict boundaries of economics, most prominently Herbert Simon and Daniel Kahneman. Simon won the 1978 Nobel Prize in economics for his work on “bounded rationality” applied to firm organization collected in his three-volume set published in 1982, and Kahneman received the 2002 Nobel Prize in economics for his work on “prospect theory” developed largely in collaboration with the late Amos Tversky (Kahneman and Tversky 1979, 2000a, among a host of citations). Behavioral economics now covers a massive scholarly literature and, more recently, a growing list of widely read books on the subject, several of which have made the best sellers list of the New York Times. In this chapter, we can cover only a portion of the vast behavioral economics literature, but enough to establish the credibility of the formidable challenge that behavioral economics and behavioral psychology present to conventional, neoclassical economics. In the main, reservations regarding and criticisms of the behavioral approach and the findings are covered in Chapter 15.

    The overall dimensions of the behavioral challenge

    Duke University behavioral economist Dan Ariely has written a book, Predictably Irrational (2010), that made The New York Times best seller list. Ariely's catalogue of studies describing human irrationalities was published on the heels of a string of other widely selling books on behavioral economics that are accessible to general audiences, including University of Chicago Richard Thaler's The Winner's Curse (1992) and Yale University economist Robert Shiller's Irrational Exuberance (2005, but first published in 2000). Thaler returned to the trade market with his book Nudge (2010), coauthored with his former Chicago colleague who is now a Harvard University law professor, Cass Sunstein, which describes how insights from behavioral economics can be used to shape decisions and improve behavioral outcomes.

  • 4 - Applications of the economic way of thinking: domestic government and management policies

  • from Book I - The market economy, overview and application
  • Richard B. McKenzie, University of California, Irvine, Dwight R. Lee, Southern Methodist University, Texas
  • Book:
    Microeconomics for MBAs
    Published online:
    28 May 2018
    Print publication:
    18 July 2016, pp 149-198

  • Summary

    Without bandying jargon or exhibiting formulae, without being superficial or condescending, the scientist should be able to communicate to the public the nature and variety of consequences that can reasonably be expected to flow from a given action or sequence of actions. In the case of the economist, he can often reveal in an informal way, if not the detailed chain of reasoning by which he reaches his conclusions, at least the broad contours of the argument.

    E. J. Mishan

    Chapters 1–3 showed how the models of competitive markets are fundamental to the economic way of thinking. With such models we can illuminate the economic effects of market changes, such as an increase in the price of oil. This chapter examines how domestic government policies and management practices can affect the operations of markets, product prices, and output levels, as well as worker wages and employment levels. In Part A, we apply the supply and demand curve analysis developed in Chapter 3 to five types of government control: excise taxes, gasoline price controls, rent controls, minimum-wage laws, and mandated fringe benefits. As you will see, government controls imposed in competitive markets can inspire (if not force) management reactions that negate some of the expected effects of the controls. Along the way, we consider how management policies toward work demands, fringe benefits, and honest dealing affect wage rates and firms’ efficient operations in competitive markets. Our goal is to demonstrate how the application of just a few economic principles, and twists and turns of argument, can generate interesting and useful insights and testable predictions that policy makers and managers should consider before finalizing various policies.

    The approach economists take to analyzing human satisfaction stands in contrast to the approach taken in psychology and other social sciences. Business students will, at some point in their programs, confront “Maslow's Hierarchy of Needs,” which psychologists (and business school professors in organizational behavior and marketing, for example) use to explain the way people go about satisfying their various wants. In Perspective 4 for this chapter, we lay out Maslow's Hierarchy of Needs with two goals in mind. First, we want to use Maslow's hierarchy to clarify the distinguishing characteristics in the economic approach to human-want satisfaction.

Page 60 of 217