IAN WORTHINGTON CHRIS BRITTON ANDY REES BRITTON REES WORTHINGTON Economics for Business is a concise, business-focused book which illustrates how the ideas and perspectives of economics can help us make sense of the world in which we live. This book takes a business- first approach and then applies the economic theory to the business world. Business models are used to explain the relevance of the theory to business life and the real problems faced by firms and managers. The new edition of this highly accessible book has been thoroughly updated and continues to take a reader-centred approach, communicating complex ideas in a straightforward and easy to understand manner.
ECONOMICS FOR BUSINESS Blending Theory and Practice KEY FEATURES 2nd • Focuses on the application of microeconomics to business, with macro analysis applied when relevant to provide a fuller understanding of the business world. Edition 2nd Edition • Excellent balance between discussion of economic theory and practical illustrations. ECONOMICS FOR BUSINESS • Takes a global approach and includes chapters on international markets and environmental issues. • Case studies at the end of each chapter and mini cases within the chapter highlight key issues raised.
• Extensive pedagogy includes: chapter objectives, questions and assignments at the end of each chapter, definitions in the margin. NEW TO THIS EDITION • More extensive coverage of macroeconomic issues. • Increased coverage of modern economic topics such as game theory, transaction cost analysis and principal-agent theory. • Additional mini cases have been added to all chapters.
• Many chapters benefit from new (or revised) case studies. • New online resource package to help teaching and learning, available at www.uk/worthington, will include additional questions, solutions and hot links to economic websites. Economics for Business is suitable for undergraduate students studying business economics as part of a business degree. The book will also be appropriate for DMS students and MBA modules in economics.
Ian Worthington is Principal Lecturer in the Department of Strategy and Management, Leicester Business School, De Montfort University, where he specialises in the business environment and in environmental issues. Chris Britton is Principal Lecturer in the Department of Strategy and Management, Leicester Business School, De Montfort University. Her teaching and research interests lie in the field of industrial economics and labour markets. Andy Rees is Head of the Department of Strategy and Management and Head of Undergraduate Studies at Leicester Business School, De Montfort University, where he specialises in business economics.com An imprint of ECONOMICS FOR BUSINESS We work with leading authors to develop the strongest educational materials in economics, bringing cutting-edge thinking and best learning practice to a global market.
Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.uk Visit the Economics for Business, second edition Companion Website at www.uk/worthington to find valuable student learning material including: ● Multiple choice questions to help test your learning ● Links to relevant sites on the web ECONOMICS FOR BUSINESS Blending Theory and Practice Second Edition Ian Worthington Chris Britton Andy Rees Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies around the world Visit us on the World Wide Web at: www.uk First published 2001 Second edition published 2005 © Ian Worthington, Chris Britton, Andy Rees 2001, 2005 The rights of Ian Worthington, Chris Britton, and Andy Rees to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. 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, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP.
All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN 0273685600 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Worthington, Ian, 1946- Economics for business : blending theory and practice/Ian Worthington, Chris Britton, Andy Rees. Includes bibliographical references and index.5’024’658--dc22 2004057754 10 9 8 7 6 5 4 3 2 1 09 08 07 06 05 Typeset in Minion 10.
Printed and bound by Ashford Colour Press Ltd, Gosport The publisher’s policy is to use paper manufactured from sustainable forests. For Margaret, Nick, Lindsey and all the children and in memory of David, John, Jim and Eva 1 CHAPTER 1 · THE ACCOUNTING WORLD vii Contents Guided tour of the book xii 2.3 Organisational structure 33 Preface to the first edition xiv 2.4 Theoretical approaches to the organisation 38 Preface to the second edition xv Mini case: Outsourcing the human resources Acknowledgements xvi function 42 2.5 Networking and the virtual organisation 45 Section 1 2.6 Conclusion 46 THE FIRM IN ITS ENVIRONMENT 1 Case study: Executive recruitment consultancy as an example of the principal–agent problem 47 1 Studying business economics 3 Notes and references 48 Ian Worthington Review and discussion questions 49 1.1 Introduction: why study economics? 3 Assignments 49 1.2 What is business economics? 4 Further reading 50 1.3 The firm in its environment: an overview 5 1.4 Macro and microeconomic influences on the firm 8 Section 2 Mini case: VW issues profit warning 9 DEMAND AND SUPPLY 51 Mini case: A case of competition 10 1.5 Basic economic concepts 10 Mini case: Scarcity and the ivory tower 11 3 Consumer and market demand 53 1.6 Key themes 14 Andy Rees 1.7 The structure of the book 15 1.8 Choosing a route through the text 16 3.2 The demand curve 53 Case study: Problems at Rover 17 Mini case: Online piracy threatens the film Notes and references 19 industry 54 Review and discussion questions 19 3.3 The market demand curve 59 Assignments 19 3.4 Consumer surplus 60 Further reading 19 3.5 Other determinants of demand 61 Appendix 1.1 Illustrating opportunity cost 20 Mini case: Careless talk costs customers! 64 Appendix 1.2 Scarcity, choice and resource 3.7 Criticisms of demand theory 81 Mini case: The price of texting 82 2 Organisation for production: 3.8 Conclusion 85 practical and theoretical perspectives 22 Case study: What your supermarket says about Chris Britton you 86 2.1 Introduction 22 Notes and references 89 2.2 Legal structures 23 Review and discussion questions 90 Mini case: The Co-op 28 Assignments 90 Mini case: Organisational legal structures 32 Further reading 91 viii CONTENTS 4 Consumer behaviour: theory and 6 Firms’ objectives and behaviour 181 applications 92 Andy Rees Andy Rees 6.2 The problems with profit maximisation 181 4.2 Consumer preferences 93 Mini case: Share options for company 4.3 Indifference curve analysis 96 directors and workers 187 Mini case: How the producer might capture Mini case: Non-executives: are you consumer surplus 109 independent? 190 Mini case: ‘Gridlock fears as car costs fall’ 112 6.3 Alternative theories of the firm 192 Mini case: Advertising and indifference curve Mini case: Cosy world of the perk ethic? 198 analysis 115 6.4 Goods and their attributes 116 Case study: Investor power 203 4.5 Combining brands 120 Notes and references 207 4.6 Conclusion 128 Review and discussion questions 208 Case study: Overtime payments 128 Assignments 208 Notes and references 130 Further reading 208 Review and discussion questions 130 Assignments 131 Section 3 Further reading 131 MARKETS AND PRICES 209 5 Supply, costs and profits 132 Andy Rees 7 Market structures 211 Chris Britton 5.2 The supply curve 133 7.3 The elasticity of supply 135 7.2 The Structure–Conduct–Performance 5.4 The production function 136 approach 211 5.5 Short-run production 139 7.3 Porter’s five-forces model 214 5.6 Short-run cost 142 Mini case: Book retailing on the internet 215 5.7 Long-run cost 149 7.4 Market structure in theory 216 5.8 The explanation for scale economies 152 Mini case: OPEC 224 Mini case: Cost saving by ‘txt’ writing 155 7.5 Market structure in practice 225 5.9 Learning effects 156 Mini case: The long-run average cost curve 227 5.10 Scale diseconomies and ‘minimum 7.6 Conclusion 233 efficient size’ 157 Case study: Game theory and oligopoly 234 Mini case: Cost saving via relocation? 158 Notes and references 235 5.11 Profit maximisation 162 Review and discussion questions 235 Mini case: ‘Factories cash in on strong Assignments 236 sterling’ 164 Further reading 236 5.1 The prisoners’ dilemma 236 Case study: Returning a loss-making firm to profit 168 8 Conduct and performance 238 Notes and references 174 Chris Britton Review and discussion questions 175 Assignments 176 8.1 Introduction 238 Further reading 176 8.2 Conduct factors 239 Appendix 5.1 Market pricing by supply and Mini case: The market for trainers 245 demand 176 Mini case: Marketing to young children 248 Mini case: House prices 180 Mini case: Newspaper pricing 249 CONTENTS ix 8.4 Conclusion 261 Section 4 Case study: Advertising 261 GOVERNMENT, FIRMS AND MARKETS 341 Notes and references 263 Review and discussion questions 264 11 Government and business 343 Assignments 264 Ian Worthington Further reading 264 11.2 An overview 343 9 Pricing in theory and practice 265 11.3 Levels of analysis 346 Andy Rees 11.1 Introduction 265 Mini case: Privatisation in China 352 9.2 Setting an equilibrium price 266 11.5 Competition policy 353 Mini case: Supermarket pricing jargon and Mini case: UK car prices 353 practices 276 Mini case: The law and competition 357 9.3 Pricing in different competitive markets 277 11.4 Alternative pricing strategies 280 11.7 UK small firms policy 367 Mini case: Is KitKat in ‘decline’? 290 11.8 The ‘negotiated environment’ 373 Mini case: School holiday rip off? 297 11.5 Conclusion 301 Case study: Mega-mergers: a prescription for Case study: Selling by auction 302 success? 375 Notes and references 305 Notes and references 376 Review and discussion questions 305 Review and discussion questions 377 Assignments 305 Assignments 377 Further reading 377 Further reading 306 12 The macroeconomic environment 10 International markets 307 of the firm 379 Chris Britton Ian Worthington 10.2 International trade – why it takes place 307 12.2 The market-based economy 380 10.3 Restrictions to international trade 309 12.3 Modelling the macroeconomy 382 Mini case: The EU constitution 312 Mini case: Global economic crisis 386 10.4 The balance of payments 313 12.4 Government and the macroeconomy: 10.5 The history of the balance of payments objectives 387 in the UK 317 12.5 Government and the macroeconomy: Mini case: The current account of the policies 394 balance of payments 319 Mini case: Balancing the budget? 397 10.6 Government and the macroeconomy: Mini case: Membership of the euro 329 a comment 399 10.7 Exchange rates and business 330 12.7 The role of financial institutions 400 10.8 Multinationals and foreign direct 12.8 International economic institutions and investment 331 organisations 402 Mini case: FDI indices 334 Mini case: OECD predicts G7 recovery 404 10.9 Conclusion 405 Case study: European Union enlargement 337 Case study: Perceptions of fiscal prudence 406 Notes and references 338 Notes and references 407 Review and discussion questions 338 Review and discussion questions 407 Assignments 339 Assignments 408 Further reading 339 Further reading 408 x CONTENTS 13 Human resource issues 409 Assignments 470 Chris Britton Further reading 470 13.2 Labour market trends 410 Section 5 Mini case: Flexibility in the labour market 414 ANALYSIS FOR BUSINESS DECISION 13.3 Traditional labour market economics 416 MAKING 471 13.4 Human capital approach 422 13.5 Segmented labour market theory 424 Mini case: Call centres 428 15 Linking business economics 13.6 Other theoretical approaches to labour and business decision making 473 markets 429 Ian Worthington 13.7 Labour market policies 430 15.
