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Managerial Economics


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Contents Chapter 1 Managerial Economics and Strategy The role of economics in business management What is economics? What is managerial economics? Strategic behavior Quantitative methods The role of a manager The role of profit The objective of the firm What's a company worth? Types of profit Constraints on the operations of the firm Conflicts of interest Other players Thinking at the margin Deriving marginal from total values Chapter exercises Chapter 2 Demand and Supply Demand Income and substitution effects Demand determinants Estimating the market demand equation Consumer surplus Supply Supply determinants Producer surplus Market Equilibrium Net Social Welfare Changes in Demand and Supply: Price and Output Determination Demand shifts Demand and supply shifts Rationing Function of Prices Price ceilings Price floors Allocating Function of Prices Chapter exercises Chapter 3 Elasticity Price Elasticity of Demand Calculating the price elasticity of demand Definitions Determinants of the price elasticity of demand Total and marginal revenue Formal relationship between the price elasticity of demand and total revenue Income Elasticity of Demand Cross-Price Elasticity of Demand Advertising Elasticity of Demand Chapter exercises Chapter 4 Production and Cost The Production Function Production relationships Productivity Measures Average and marginal products of a variable input Law of Diminishing Returns Isoquants Cost in the Short Run Total cost Average and marginal costs Functional form of the total cost equation Isocost Line Learning Curve Effect Cost in the Long Run Economies and diseconomies of scale Sources of economies of scale Sources of diseconomies of scale Multiproduct Cost Functions Economies of scope Cost complementarities Chapter Exercises Chapter 5 Profit Maximization Profit Maximization Optimal input combinations Maximizing profit in practice Optimal input substitution How to Procure Inputs Spot exchange Contracts Vertical integration Specialized Investments Types of specialized investment Bargaining costs Underinvestment Opportunism Procuring Inputs Involving Specialized Investments Promoting Maximum Effort: The Principal-Agent Problem Owner-manager principal-agent problem Manager-worker principal-agent problem Chapter Exercises Chapter 6 Corporate Structure and Culture The Supply Chain Transaction costs Vertical Integration Horizontal Integration Economies of scale Economies of scope Diversification Economies of scale and scope Lower transactions costs Smoother cash flows Internal financing Diversifying shareholder investment Undervalued firms Strategic Alliances Firm Architecture Evolution of the modern corporation Organizational Structure Types of Organizational Structure Unitary (functional) form (u-form) Multidivisional form (m-form) U-form/M-form hybrid Matrix structure Contractual network Strategy or Structure: Chicken or Egg? Corporate Culture Unwritten rules Creating a corporate culture Chapter Exercises Chapter 7 Industry Organization Market Structure Number, size, and distribution of rival firms Number, size, and distribution of buyers Product differentiation Entry and exit conditions The Five Forces Threat of entry Threat of substitutes Competitive rivalry Bargaining power of buyers Bargaining power of suppliers Industry Types Perfect competition Imperfect competition Monopoly Industrial Concentration Concentration ratios Herfindahl-Hirschman index Market Power and Pricing Lerner index Rothschild index Profitability Variations in profits across firms and industries Other Criteria for Classifying Industries Production technology Nature of market demand Degree of industrial integration Research and development Chapter Exercises Chapter 8 Perfect Competition and Monopoly Perfect Competition Short-run perfectly competitive equilibrium Economic losses and shutdown Long-run perfectly competitive equilibrium Monopoly Sources of monopoly power Barriers to entry Welfare implications of monopoly Landmark U.S. Antitrust Legislation Sherman Act (1890) Clayton Act (1914) Federal Trade Commission Act (1914) Willis-Graham Act (1921) Robinson-Patman Act (1936) Wheeler-Lea Act (1938) Celler-Kefauver Act (1950) Hart-Scott-Rodino Act (1980) Contestable Markets Chapter Exercises Chapter 9 Imperfect Competition Oligopoly Oligopoly Models Cournot model Stackelberg model Bertrand model Bertrand paradox Collusion Comparing oligopoly models Monopolistic Competition Short-run profit-maximizing price and output Long-run profit-maximizing price and output Advertising and product differentiation Product Differentiation and Strategic Behavior Chapter Exercises Chapter 10 Thinking Strategically What is Game Theory? Lexicon of game theory Rational versus actual behavior Static Games Nash equilibrium Secure strategy Mixed Strategies Cooperation Finitely-repeated static games Tit-for-tat Infinitely-repeated static games Evaluating payoffs in infinitely-repeated games Dynamic Games Subgame perfection Backward induction First-mover advantage Chapter Exercises Chapter 11 Pricing Strategies Standard Pricing Rule Extracting consumer surplus First-degree price discrimination Second-degree price discrimination Third-degree price discrimination Special Pricing Practices Capacity peak-load pricing Multiproduct pricing Non-Marginal Pricing Cost-plus pricing Price fixing Price matching Most-favored customer Price leadership Penetration pricing Transfer Pricing No external market Perfectly competitive external market Entry Deterrence Limit pricing Chapter Exercises Chapter 12 Bargaining The Bargaining Problem Nash Bargaining Rubenstein Bargaining Last-mover advantage Symmetric impatience Asymmetric impatience Chapter Exercises Chapter 13 Economics of Information Risk and Uncertainty Mean Variance Standard deviation Static Games with Uncertain Payoffs Attitudes toward Risk Risk aversion Understanding risk-averse behavior Managing Risk Diversification Options contracts Uncertainty and Search Costs Dynamic Games with Uncertain Payoffs Bayesian updating Asymmetric Information Adverse selection Moral hazard Separating and pooling strategies Screening Chapter Exercises Chapter 14 Contracts Contracting Environment Contracting Phase Implementation Phase Self-enforcement External enforcement Breach Remedies Expectation damages Reliance damages Restitution damages Chapter Exercises Chapter 15 Auctions Auctions and the Internet Types of Auctions Information Structures Incomplete-Information Auctions with Independent Private Values Sealed-bid, first-price auction Sealed-bid, second-price auction English auction Dutch auction Expected revenues from incomplete-information auctions with independent private values Incomplete-Information Auctions with Correlated Value Estimates Common-value auctions and the winner's curse Incomplete-Information Auctions and Risk Aversion Chapter Exercises Chapter 16 Networks Evolutionary Game Theory Reproductive success Evolutionary equilibrium Networks Positive feedback effects Network game Implications Restraint of Trade in Network Industries Bottlenecks Technical standards B2B exchanges Chapter Exercises AppendixRegression Analysis Estimation Diagnostics Confidence intervals t-statistic p-value Coefficient of determination Adjusted coefficient of determination Respecifying the regression equation Glossary References

About the Author

Thomas J. Webster is professor of economics in the Department of Finance and Economics of Pace University's Lubin School of Business.


The bridge between microeconomic theory and business behavior is well paved. Thomas Webster's book is well-written, and the signposts from one topic to another are clearly visible. Students will appreciate the clear prose and interesting examples. Highly recommended. -- Joan Nix, Queens College
Traditional microeconomics textbooks have lost their appeal because of the increasing interaction among the different approaches to the individual behavior of Economic Agents. Webster's textbook summarizes the right tools at the right place, in a really integrated shape, for a new global view of the whole issue. -- Augusto Schianchi, Universita Degli Studi di Parma

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