ECONOMICS FOR BUSINESS
The new edition of this highly accessible book has been thoroughlyupdated and continues to take a reader-centred approach, communicatingcomplex ideas in a straightforward and easy to understand manner.KEY FEATURES Focuses on the application of microeconomics to business, with macro analysis applied when relevant toprovide a fuller understanding of the business world.WORTHINGTONBRITTON REESEconomics for Business is a concise, business-focused book whichillustrates how the ideas and perspectives of economics can help usmake sense of the world in which we live. This book takes a businessfirst approach and then applies the economic theory to the businessworld. Business models are used to explain the relevance of the theoryto business life and the real problems faced by firms and managers.2ndEdition Excellent balance between discussion of economic theory and practical illustrations. 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 andprincipal-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 atwww.pearsoned.co.uk/worthington, will include additional questions, solutions and hot links toeconomic websites.Economics for Business is suitable for undergraduate students studying business economics aspart of a business degree. The book will also be appropriate for DMS students and MBA modules ineconomics.Ian Worthington is Principal Lecturer in the Department of Strategy and Management, Leicester BusinessSchool, 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 labourmarkets.Andy Rees is Head of the Department of Strategy and Management and Head ofUndergraduate Studies at Leicester Business School, De Montfort University, where hespecialises in business economics.An imprint ofwww.pearson-books.comECONOMICS FOR BUSINESS Takes a global approach and includes chapters on international markets and environmental issues.IAN WORTHINGTONCHRIS BRITTONANDY REESECONOMICS FOR BUSINESSBlending Theory and Practice2nd Edition
ECONOMICS FORBUSINESS
We work with leading authors to develop thestrongest educational materials in economics, bringingcutting-edge thinking and best learningpractice to a global market.Under a range of well-known imprints, including Financial Times Prentice Hall,we craft high quality print and electronic publicationswhich help readers to understandand apply their content, whether studying or at work.To find out more about the complete range of ourpublishing, please visit us on the World Wide Web at:www.pearsoned.co.ukVisit the Economics for Business, second edition CompanionWebsite at www.pearsoned.co.uk/worthington to find valuablestudent learning material including: Multiple choice questions to help test your learningLinks to relevant sites on the web
ECONOMICS FORBUSINESSBlending Theory and PracticeSecond EditionIan WorthingtonChris BrittonAndy Rees
Pearson Education LimitedEdinburgh GateHarlowEssex CM20 2JEEnglandand Associated Companies around the worldVisit us on the World Wide Web at:www.pearsoned.co.ukFirst published 2001Second edition published 2005 Ian Worthington, Chris Britton, Andy Rees 2001, 2005The rights of Ian Worthington, Chris Britton, and Andy Rees to be identified as authors of this workhave 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 retrievalsystem, or transmitted in any form or by any means, electronic, mechanical,photocopying, recording or otherwise, without either the prior written permission of thepublisher or a licence permitting restricted copying in the United Kingdom issued by theCopyright 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 thistext does not vest in the author or publisher any trademark ownership rights in such trademarks, nordoes the use of such trademarks imply any affiliation with or endorsement of this book by such owners.ISBN 0273685600British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the British LibraryLibrary of Congress Cataloging-in-Publication DataWorthington, Ian, 1946Economics for business : blending theory and practice/Ian Worthington, Chris Britton,Andy Rees.--2nd ed.p. cm.Includes bibliographical references and index.ISBN 0-273-68560-0 (alk. paper)1. Managerial economics. I. Britton, Chris. II. Rees, Andy. III. Title.HD30.22.W67 2004338.5’024’658--dc22200405775410 9 8 7 6 5 4 3 2 109 08 07 06 05Typeset in Minion 10.5/12.5pt by 30.Printed and bound by Ashford Colour Press Ltd, GosportThe publisher’s policy is to use paper manufactured from sustainable forests.
For Margaret, Nick, Lindseyand all the children and inmemory of David, John, Jim and Eva
1
CHAPTER 1 · THE ACCOUNTING WORLDContentsGuided tour of the bookPreface to the first editionPreface to the second editionAcknowledgementsSection 1THE FIRM IN ITS ENVIRONMENT1 Studying business economicsxiixivxvxvi13Ian Worthington1.11.21.31.4Introduction: why study economics?What is business economics?The firm in its environment: an overviewMacro and microeconomic influences onthe firmMini case: VW issues profit warningMini case: A case of competition1.5 Basic economic conceptsMini case: Scarcity and the ivory tower1.6 Key themes1.7 The structure of the book1.8 Choosing a route through the text1.9 ConclusionCase study: Problems at RoverNotes and referencesReview and discussion questionsAssignmentsFurther readingAppendix 1.1 Illustrating opportunity costAppendix 1.2 Scarcity, choice and resourceallocation2 Organisation for production:practical and theoretical is Britton2.1 Introduction2.2 Legal structuresMini case: The Co-opMini case: Organisational legal structures222328322.3 Organisational structure332.4 Theoretical approaches to the organisation 38Mini case: Outsourcing the human resourcesfunction422.5 Networking and the virtual organisation452.6 Conclusion46Case study: Executive recruitment consultancyas an example of the principal–agentproblem47Notes and references48Review and discussion questions49Assignments49Further reading50Section 2DEMAND AND SUPPLY3 Consumer and market demand5153Andy Rees3.1 Introduction3.2 The demand curveMini case: Online piracy threatens the filmindustry3.3 The market demand curve3.4 Consumer surplus3.5 Other determinants of demandMini case: Careless talk costs customers!3.6 Elasticity3.7 Criticisms of demand theoryMini case: The price of texting3.8 ConclusionCase study: What your supermarket says aboutyouNotes and referencesReview and discussion questionsAssignmentsFurther reading53535459606164658182858689909091vii
viiiCONTENTS4 Consumer behaviour: theory andapplications6 Firms’ objectives and behaviour92Andy Rees4.1 Introduction924.2 Consumer preferences934.3 Indifference curve analysis96Mini case: How the producer might captureconsumer surplus109Mini case: ‘Gridlock fears as car costs fall’ 112Mini case: Advertising and indifference curveanalysis1154.4 Goods and their attributes1164.5 Combining brands1204.6 Conclusion128Case study: Overtime payments128Notes and references130Review and discussion questions130Assignments131Further reading1315 Supply, costs and profits132Andy Rees5.15.25.35.45.55.65.75.8IntroductionThe supply curveThe elasticity of supplyThe production functionShort-run productionShort-run costLong-run costThe explanation for scale economiesMini case: Cost saving by ‘txt’ writing5.9 Learning effects5.10 Scale diseconomies and ‘minimumefficient size’Mini case: Cost saving via relocation?5.11 Profit maximisationMini case: ‘Factories cash in on strongsterling’5.12 ConclusionCase study: Returning a loss-making firm toprofitNotes and referencesReview and discussion questionsAssignmentsFurther readingAppendix 5.1 Market pricing by supply anddemandMini case: House 8168174175176176176180181Andy Rees6.1 Introduction6.2 The problems with profit maximisationMini case: Share options for companydirectors and workersMini case: Non-executives: are youindependent?6.3 Alternative theories of the firmMini case: Cosy world of the perk ethic?6.4 ConclusionCase study: Investor powerNotes and referencesReview and discussion questionsAssignmentsFurther readingSection 3MARKETS AND PRICES7 Market 11Chris Britton7.1 Introduction7.2 The Structure–Conduct–Performanceapproach7.3 Porter’s five-forces modelMini case: Book retailing on the internet7.4 Market structure in theoryMini case: OPEC7.5 Market structure in practiceMini case: The long-run average cost curve7.6 ConclusionCase study: Game theory and oligopolyNotes and referencesReview and discussion questionsAssignmentsFurther readingAppendix 7.1 The prisoners’ 368 Conduct and performance238Chris Britton8.1 Introduction8.2 Conduct factorsMini case: The market for trainersMini case: Marketing to young childrenMini case: Newspaper pricing238239245248249
CONTENTS8.3 Performance8.4 ConclusionCase study: AdvertisingNotes and referencesReview and discussion questionsAssignmentsFurther reading2532612612632642642649 Pricing in theory and practice265Andy Rees9.1 Introduction2659.2 Setting an equilibrium price266Mini case: Supermarket pricing jargon andpractices2769.3 Pricing in different competitive markets2779.4 Alternative pricing strategies280Mini case: Is KitKat in ‘decline’?290Mini case: School holiday rip off?2979.5 Conclusion301Case study: Selling by auction302Notes and references305Review and discussion questions305Assignments305Further reading30610 International markets307Chris Britton10.1 Introduction10.2 International trade – why it takes place10.3 Restrictions to international tradeMini case: The EU constitution10.4 The balance of payments10.5 The history of the balance of paymentsin the UKMini case: The current account of thebalance of payments10.6 Exchange ratesMini case: Membership of the euro10.7 Exchange rates and business10.8 Multinationals and foreign directinvestmentMini case: FDI indices10.9 ConclusionCase study: European Union enlargementNotes and referencesReview and discussion questionsAssignmentsFurther readingSection 4GOVERNMENT, FIRMS AND MARKETS11 Government and business341343Ian Worthington11.111.211.311.4IntroductionAn overviewLevels of analysisPrivatisation policyMini case: Privatisation in China11.5 Competition policyMini case: UK car pricesMini case: The law and competition11.6 Spatial policies11.7 UK small firms policy11.8 The ‘negotiated environment’11.9 ConclusionCase study: Mega-mergers: a prescription forsuccess?Notes and referencesReview and discussion questionsAssignmentsFurther 7737737712 The macroeconomic environmentof the firm379Ian 33733833833933912.1 Introduction12.2 The market-based economy12.3 Modelling the macroeconomyMini case: Global economic crisis12.4 Government and the macroeconomy:objectives12.5 Government and the macroeconomy:policiesMini case: Balancing the budget?12.6 Government and the macroeconomy:a comment12.7 The role of financial institutions12.8 International economic institutions andorganisationsMini case: OECD predicts G7 recovery12.9 ConclusionCase study: Perceptions of fiscal prudenceNotes and referencesReview and discussion questionsAssignmentsFurther 07408408ix
xCONTENTS13 Human resource issues409Chris Britton13.1 Introduction13.2 Labour market trendsMini case: Flexibility in the labour market13.3 Traditional labour market economics13.4 Human capital approach13.5 Segmented labour market theoryMini case: Call centres13.6 Other theoretical approaches to labourmarkets13.7 Labour market policiesMini case: The minimum wage13.8 ConclusionCase study: Women in the labour marketNotes and referencesReview and discussion questionsAssignmentsFurther reading14 Business, government and thenatural 443444444445Ian Worthington14.114.2Introduction445Linking the firm and the naturalenvironment44614.3 The problem of ‘free goods’ and‘externalities’44714.4 Governmental approaches toenvironmental problems: an overview 449Mini case: Towards a green Budget?454Mini case: A permit to pollute45514.5 Assessing environmental impact:techniques and approaches45614.6 Linking economy and environment: thenotion of sustainable development46014.7 ‘Drivers’ for change46114.8 Potential benefits of a ‘greener’ approach 462Mini case: A case of Fair Trade?46414.9 Corporate responsibility and businessobjectives46514.10 Conclusion: squaring the circle?466Case study: Tackling an environmental‘problem’467Notes and references469Review and discussion questions470AssignmentsFurther readingSection 5ANALYSIS FOR BUSINESS DECISIONMAKING15 Linking business economicsand business decision making470470471473Ian Worthington15.1 Introduction47315.2 Concepts of strategy and strategydevelopment47415.3 The three elements of strategicmanagement476Mini case: Tesco looks East47815.4 Economics and business decisions479Mini case: Shell and scenario planning480Mini case: The search for greater pricecompetitiveness48415.5 Information for business decision making 48815.6 Conclusion496Case study: Multinational inward investment inEastern Europe: a PEST analysis497Notes and references498Review and discussion questions498Assignments499Further reading49916 Estimating and forecastingtechniques500Chris Britton16.1 Introduction16.2 Statistical techniques of empirical researchMini case: The consumption function16.3 Survey and market experiments16.4 Forecasting16.5 ConclusionCase study: The estimation of elasticities ofdemandNotes and referencesReview and discussion questionsAssignmentsFurther reading500501505511513516516518519519519
CONTENTSAppendix 16.1 Plotting graphsAppendix 16.2 The linear functionAppendix 16.3 Non-linear functionsAppendix 16.4 Simple linear regressionAppendix 16.5 Multiple regression520521522523524Appendix 16.6 Non-linear functionsAppendix 16.7 Testing regression lines524525Index526Supporting resourcesVisit www.pearsoned.co.uk/worthington to find valuable online resourcesCompanion Website for students Multiple choice questions to help test your learning Links to relevant sites on the webFor instructors Complete, downloadable Instructor’s Manual PowerPoint slides that can be downloaded and used as OHTsAlso: The Companion Website provides the following features: Search tool to help locate specific items of content E-mail results and profile tools to send results of quizzes to instructors Online help and support to assist with website usage and troubleshootingFor more information please contact your local Pearson Education sales representativeor visit www.pearsoned.co.uk/worthingtonxi
Guided tour of the bookCHAPTERInternational markets10ObjectivesChris BrittonLearning Objectives and Introductionexplain what students will learn onreading the chapter1 To understand why international trade takes place.2 To look at the effects of the European Union on trade.3 To survey the balance of payments position in the UK.4 To understand the working of the foreign exchange markets and itsimplications for business.5 To consider the operation of multinationals and their link with foreign directinvestment.10.1 IntroductionInternational markets are important to most firms; even if they do not produce for theexport market, they may well be dependent upon raw materials which are imported andthey will almost definitely be affected by movements in exchange rates. The UK, like allother advanced industrial countries, is highly dependent upon international marketsand that dependence has grown over the years. What makes international trade differentfrom trade within a country is that the former needs a system for international payments. It is essential for businesses to have an understanding of international markets,exchange rates and the balance of payments. In this chapter we start with a standard theoretical view of international trade and why trade takes place, before concentrating onpractical issues such as exchange rates, their effects on business and the operation ofmultinationals. This chapter concludes with a discussion of the process of globalisation.4SECTION 1 · THE FIRM IN ITS ENVIRONMENTThe claim is not that studying economics will invariably provide us with the ‘right’answers to business problems, but that it gives us an insight into the nature of the problems themselves and their possible causes and thus helps decision makers – at home, infirms and in government – to search for solutions which are appropriate to the circumstances with which they are confronted. The economic way of thinking is not asubstitute for common sense, intuition or judgement, or for other conceptual and analytical approaches to decision making and problem solving, it is just one part of theintellectual armoury we have at our disposal when called upon to explain or react to asituation; it should be used as and when necessary.10.2 International trade – why it takes place!Key concept: International tradeTrade between countries takes place because resources are unevenly distributedthrough the world and the mobility of the factors of production is limited; consequently, some countries are better at producing certain goods than others. SomeC H A P T E R 1 4 · B U S I N E S S , G O V E R N M E N T A N D T H E N AT U R A L E N V I R O N M E N T453mental quality standard. Thus, while polluters with significant abatement costs are likelyto pay the charge, firms with low costs of abatement will tend to install anti-pollutionequipment. Either way market considerations help to shape the firm’s decision.!Key concept: Landfill taxesEnvironmental taxes can be classified into three main types according to theirmain policy objectives:1 Cost-covering charges – which are designed to cover the costs of providingenvironmental services and abatement measures and which may be earmarkedfor specific uses (known as ‘hypothecated’ taxes). An example is user chargesfor water treatment.MarginDefinitionshighlight andexplain keyterms throughoutthe text1.2 What is business economics?businesseconomics thestudy of the firmand of theenvironment inwhich it operatesand makes itsdecisionsproduction theconversion byfirms of inputs intooutputs, usuallywith a view tomaking profitsconsumptionusing up goodsand services tosatisfy humanwants; normallyachieved throughthe act ofpurchasingThere is some dispute in academic circles as to what should be included in a course onbusiness economics and to what extent, as an area of study, it differs from, say, managerial economics or industrial economics; we have no inclination to enter into this debate.To us, business economics is essentially about the firm or enterprise and in particularabout the factors which help to influence its decisions concerning the acquisition of productive resources and the transformation of these resources into goods and services tosatisfy human needs and wants: it is abou
Economics for Businessis 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
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ECONOMICS 40 Chapter 1: The Principles and Practica of Economics 40 1.1 The Scope of Economics 41 Economic Agents and Economic Resources 41 Definition of Economics 42 Positive Economics and Normative Economics 43 Microeconomics and Macroeconomics 44 1.2 Three Principles of Economics
