Business Economics and Managerial Decision Making
June 2004, ©2004
Business Economics and Managerial Decision Making is an essential introduction to business economics. A core textbook for students with a grounding in introductory microeconomics, it examines the nature and structure of the firm, and explores the economic principles underlying major business decisions. This accessible text avoids overly mathematical analysis, using diagrams, graphs and tables to explain economic theory.
Trefor Jones draws upon current research and real-world examples from around the globe to illustrate the practical implications of economic theory for the business of the firm. In addition, a major chapter-length case study of a single enterprise (Stagecoach plc) provides an integrative real-world analysis of the core concepts and major theories developed throughout the book.
Extending the approach traditionally taken by business economics texts, Trefor Jones introduces material on the boundaries of the firm, including its growth and development, diversification and mergers.
I. Corporate Governance and Business Objectives.
1. Ownership control and corporate governance.
Patterns of shareholding.
Classifying firms as owner or management-controlled.
Case Study 1.1 Manchester United – owner or managerially controlled?
Systems of corporate control.
Constraints on managerial discretion.
Improving corporate governance in the UK.
Case Study 1.2 Ownership and governance structures in UK retailing.
Case Study 1.3 Corporate governance in English football.
2. Business objectives and theories of the firm.
Sales revenue maximization.
Williamson’s Managerial Utility Model.
Comparison of behavioural and traditional theories.
Corporate social responsibility.
Owners, managers and performance.
Case Study 2.1 Objectives in company annual reports.
3. Risk and uncertainty.
Risk versus uncertainty.
Sources of uncertainty.
Incorporating time and uncertainty into decision making.
Attitudes to risk and uncertainty.
Case Study 3.1 UK Lottery and risk-loving behaviour.
Indifference curve analysis of risk and return.
Decision making and attitudes to risk.
Limiting the impact of uncertainty.
Case Study 3.2 Uncertainty and business decisions: buses and pharmaceuticals.
II Knowing the Market.
4. Consumer behaviour.
Indifference curve analysis.
Characteristics approach to consumer behaviour.
Case Study 4.1 The characteristics approach and the provision of airline services.
Case Study 4.2 Estimating and using hedonic prices: cars and wine.
Behavioural approach to consumer behaviour.
5. Demand analysis.
The demand function.
The demand curve.
Demand and revenue.
Elasticity and revenue.
Own price elasticity.
Own price elasticity and marginal revenue.
Case Study 5.1 Own price elasticity and rail travel pricing.
Factors affecting the own price elasticity of demand.
Advertising elasticity of demand.
Cross elasticity of demand.
Case Study 5.2 Estimating elasticities for petrol.
Demand elasticities and business.
6. Estimation of demand functions.
Estimating demand functions.
Interviews and survey methods.
Pitfalls using regression analysis.
The economic verification of regression models.
Statistical verification of regression models.
Econometric verification of the regression estimates.
Case Study 6.1 The demand for beer, wine and spirits.
III. Understanding Production and Costs.
7. Production and efficiency.
Optimal choice of factors.
Technical progress and the shape of isoquants.
Laws of production.
Total, average and marginal product curves.
Empirical production functions.
Case Study 7.1 Production function for a retail chain.
Relative measures of e⁄ciency.
Case Study 7.2 Measuring relative efficiency.
Case Study 7.3 Explaining productivity differences in the biscuit industry.
Country differences in productivity.
Short-run cost curves.
Long-run cost curves.
Costs and the multi-product firm.
Economics versus accounting cost concepts.
Empirical cost analysis.
Case Study 8.1 Estimating cost functions for hospitals.
Cost concepts and strategic advantage.
Case Study 8.2 Economies of scope in car production.
Case Study 8.3 Economies of scale in building societies and insurance companies.
Management of costs.
Appendix: statistical cost functions.
IV. Pricing, Promotional and Investment Policies.
9. Pricing and market structure: theoretical considerations.
Kinked demand curve model.
Collusion and cheating.
Non-zero sum game.
Case Study 9.1 The vitamin cartel and the EU.
Case Study 9.2 Price leadership in the salt industry.
Case Study 9.3 UK digital television.
10. Pricing in practice.
The nature of price.
Dominant-firm pricing and consumer surplus.
Case Study 10.1 Licence auction: third-generation mobile phones.
Peak load pricing.
Case Study 10.2 BT’s pricing structure.
Pricing in imperfect markets.
Studies of pricing.
Analytics of average cost pricing.
Other considerations in setting price.
Roles of advertising.
Advertising and changing consumer preferences.
Advertising: price and demand.
Advertising and costs.
Sales and advertising.
Optimal level of advertising.
Which products do firms advertise?
Advertising and market structure.
Advertising as investment.
Case Study 11.1 Tobacco advertising.
12. Investment appraisal.
Basic steps in investment appraisal.
Estimating cash flows.
Time and the value of money.
Discounting and present value.
Ranking of projects and the capital-spending plan.
Non-discounting methods of investment appraisal.
Capital rationing and the capital-spending plan.
Incorporating risk and uncertainty.
Coping with uncertainty.
The cost of capital.
The risk premium and the discount rate for capital investment.
Capital budgeting in large British businesses.
Case Study 12.1 Assessing the Concorde programme.
V. Strategic Decisions: The Growth and Development of the Firm.
13. The entrepreneur and the development of the firm.
A behavioural explanation of entrepreneurship.
Entrepreneurship and the development of the firm.
The birth of the firm.
Characteristics of new-firm founders.
The formation of new firms in the UK.
Case Study 13.1 Sir Richard Branson and the Virgin Group.
14. The boundaries of the firm.
Transaction cost approach.
Information, imperfect markets and transaction costs.
Knowledge-based theory of the firm.
The firm as a team.
The firm as a nexus of contracts.
Case Study 14.1 The changing distribution of Coca-Cola and Pepsi: a transaction cost explanation.
15. The growth of the firm.
Motives for growth.
A simple growth model.
Baumol’s dynamic sales growth model.
Marris’s model of managerial enterprise.
Diversification and the growth of the firm.
Endogenous growth theory of the firm.
Limits to growth.
Limits to growth: empirical evidence.
Resources and competences.
Case Study 15.1 Stagecoach: core competences.
The development of the firm.
16. Changing the boundaries of the firm: vertical integration.
Concept of vertical integration.
Case Study 16.1 Production linkages in the oil industry.
Motivation to vertically integrate.
Uncertainty and security of supply.
Alternative explanations of vertical integration.
Case Study 16.2 Kuwait National Oil Company.
Case Study 16.3 Fisher Bodies and General Motors.
Vertical integration and profitability.
17. Changing the boundaries of the firm: diversification.
Directions of diversification.
Related and unrelated diversification.
The firm’s portfolio of activities.
Economic arguments for diversification.
Benefits and costs of diversification.
The performance of diversified firms.
Case Study 17.1 Virgin Group – diversification and branding.
Case Study 17.2 US oil industry: related and unrelated diversification.
Case Study 17.3 Hanson Trust: its rise and dismemberment.
18. Changing the boundaries of the firm: divestment and exit.
Exit decisions in competitive markets.
Exit decisions in oligopolistic markets.
Factors encouraging exit.
Factors keeping the firm in the market: exit barriers.
Case Study 18.1 ITV Digital terrestrial service.
19. Changing the boundaries of the firm: mergers.
Mergers, acquisitions and takeovers.
Types of mergers.
Numbers of mergers in the UK.
Motives for merging.
Case Study 19.1 Ford’s acquisition of Kwik-Fit – a corporate error?
The merger process.
Indicators of the success or failure of mergers.
Case Study 19.2 Granada–Forte takeover battle in 1995–1996.
20. Organizational issues and structures.
Effort, outcomes and rewards.
Case Study 20.1 Sliding-scale payments in coal mining.
Case Study 20.2 Managerial incentive schemes.
Case Study 20.3 Organizational form – empirical studies.
Limits to growth and size of the firm.
21. The growth and development of the firm: Stagecoach Group Plc.
The bus industry.
Government policy changes in the bus industry^ creating opportunities.
Stagecoach: growth and development.
Stagecoach in 2003.
VI. Decision Making in the Regulated and Public Sectors.
22. Decision making in regulated businesses.
What is regulation?
Regulatory tools for promoting the public interest.
Case Study 22.1 Regulating BT.
Anti-competitive behaviour, or what firms cannot do.
Methodology of competition policy.
Competition policy in the EU.
Case Study 22.2 Air tours and First Choice – a rejected merger.
UK competition policy.
Case Study 22.3 Interbrew and the UK’s competition regulators.
23. Public sector production.
Why public sector production?
Characteristics of goods: excludability and rivalry.
Provision of goods by the public and private sector.
Arguments for public production.
Property rights approach.
Incentives and monitoring.
Public enterprise versus private enterprise performance compared.
Case Study 23.1 The postal service.
24. Quasi-markets and non-market public sector.
Decision making in the absence of prices.
Supply: economic analysis of bureaucracy.
Demand: merit and public goods.
Collective decision making.
Exit, voice, loyalty.
Consumer difficulties and public supply.
Theory of quasi, or internal, markets.
Case Study 24.1 Health reform: the quasi-market approach.
25. Cost-benefit analysis.
Public and private investment.
Theoretical foundations of cost-benefit analysis.
Which benefits and costs?
Measuring benefits and costs.
The value of time.
The value of life.
Case Study 25.1 Train protection systems and the saving of lives.
The choice of discount rate.
Case Study 25.2 Measuring the social benefits of a railway: the Cambrian Coast Line.
Consistency of approach.
Provides a combination of internal-firm material, strategic issues, and material on regulated industries.
Covers decision making of the firm in relation to the market.
Covers decision making in both private and public sector organisations.
Examines the role of managers in organisations.
Examines the responsibilities of managers to owners and/or stakeholders.
Includes topical case studies e.g. Manchester United PLC and Stagecoach Buses.
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