CHAPTER 1
Economics and Management
CHAPTER SUMMARY AND TEACHING OBJECTIVES
This is an introductory chapter; the primary focal point is to introduce the role of economics in
management.
2. Illustrate the various strategies management gurus suggest companies follow and explain why it
is important for executives to assess the economic costs and benefits carefully before going down
any one path.
IMPORTANT TERMS
market share percentage of total industry sales made by one company
TOPICS AND TEACHING SUGGESTIONS
1. What Makes a Firm Successful?
The objective in this section is to introduce students to the idea that “nothing is free” or “there is
2. The Role of Economics
The role of economics is to provide a way to THINK. Economic thinking or decision-making is
recognizing that something cannot be acquired without giving up something else. Economists
refer to such decision making as comparing costs and benefits and evaluating tradeoffs.
3. Our Study of Managerial Economics: How Do We Proceed?
Marginal analysis is the format used by economists to analyze problems. Marginal means ‘next’
ANSWERS TO EXERCISES
1. When would being first be a valuable strategy?
2. Would a focus on gaining market share make sense?
3. Look up the latest Business Week best seller’s business books list. How many introduce a “quick–
fix?”
4. You are to decide whether to implement “teams” in this course. Describe the costs and benefits of
having teams of students work together on papers, exams, and homework. Would you implement
teams? Why or why not?
Benefits to teams:
Interdependent learning—some must teach others, thereby increasing the learning.
5. Is there a relationship between market share and profit? What could account for this relationship?
6. In the following table, total cost is listed. Calculate marginal cost.
Quantity Total Cost Marginal Cost
0 0
7. In the following table, total revenue is listed. Calculate marginal revenue
Quantity Total Revenue Marginal Revenue
5 200
10 350 150
8. If economics assumes people are self-interested, then according to economics, why would
executives, experienced in business and exposed to business practices over many years, be so
quick to grab hold of a management fad?
9. What does the phrase “there is no free lunch” mean?
10. China is the world’s most populous nation with 1.25 billion people. Firms look at that population
as a huge customer base and are rushing to establish themselves in China. Is this appropriate for
all firms? Why or why not?
11. What is meant by the statement “quality is not free”?
12. How would you describe globalization? Thomas Friedman wrote a book called The World is Flat
that was published in April 2005. From the title, what would you suggest is his main thesis?
13. Suppose the marginal cost of solving the global warming problem and the marginal benefit of
doing so are listed below. How many degrees of temperature to be reduced are the best for society
to implement? Explain why.
14. An entrepreneur quits a job where she was earning $60,000 per year and starts her own business.
In this business she is earning $20,000. What is the cost of the business? Suppose the entrepreneur
is so happy being on her own that she thinks it gives her the same joy that a $100,000 job would.
What is the cost of the business?