Managerial Economics: Third Edition

Author: (USA) H. Craig Petersen / W. Chris Lewis
Translator: Wu Deqing
Publisher:
Publish Date: 2001-12-01
Features: This textbook is co-authored by renowned American economist and professor of economics at Utah State University, H. Craig Petersen, and W. Chris Lewis. It is a highly influential and uniquely structured textbook in the field of management studies, widely welcomed by faculty and students of universities and business schools in the United States and many other countries. It is characterized by its timeliness, reflection of the latest research findings, in-depth yet accessible explanations, ease of understanding, and convenience for both teaching and self-study. It is equipped with numerous examples and exercises to help readers master and reinforce their knowledge. Building on a systematic and accurate exposition of the fundamental principles of microeconomics, the book focuses on the application of economic principles in management decision-making. Management decision-making issues are woven throughout the entire text. The discussion of all economic theories starts from the needs of management decision-making and serves as a tool for it. The structure of the book is also centered around management decision-making, with its main contents including: demand analysis and estimation; production and cost theory and linear programming; market structure analysis; the role of game theory in corporate strategic behavior decision-making; pricing decisions for products and input factors; long-term planning decisions for enterprises; corporate decision-making and government regulation, etc.
Excerpt: Maximization and Satisficing as Business Objectives Is the assumption of profit maximization realistic for businesses? This is a matter of debate. Some economists argue that in real life, managers may not always act in line with the profit maximization goal. At times, other objectives are at least as important as profit maximization. These include: maximizing total revenue, maximizing manager tenure and departmental budgets, maximizing manager salaries, achieving a satisfactory profit level, maximizing the utility function of the manager, and maximizing market share while ensuring a satisfactory profit level. In fact, there are already specialized works arguing for "satisficing" rather than "maximizing" as a management goal. Critics of the profit maximization assumption argue that it is unrealistic. This is because the information managers have about the potential outcomes of their strategies is incomplete and uncertain, yet they must make decisions in this environment of incomplete and uncertain information. Therefore, in practice, they cannot truly pursue profit maximization. Economist Fritz Machlup compared managing a business to driving a car to address this criticism. On a two-lane highway, when deciding whether to overtake, a driver must consider various conditions, including: the speed of their own car, the speed of the car being overtaken, the speed of oncoming traffic, road conditions, whether there are turns or intersections ahead, and lighting conditions, among others. Clearly, if a driver were to conduct a comprehensive analysis of all these conditions before overtaking, they might need a computer and spend several workdays. However, most drivers rely on their intuition, assessing these conditions and making decisions within seconds. Machlup argued that managers, in pursuing profit maximization, also rely on their intuition to respond to various conditions. These conditions, like those during overtaking, involve incomplete and uncertain information. Therefore, even if new information could potentially increase profits, managers can only strive to maximize profits based on the limited information available to them at the moment. As a result, although some managers may have other goals, most criticisms of the profit maximization assumption are inappropriate. The main interest of economics is not in how managers actually make decisions, but in understanding the environment in which they make decisions, particularly in providing a framework for them to respond to changes in the environment. In this sense, Machlup argued that there is no need to worry about how managers actually behave in practice or what their actual goals are. The real question is: if we assume that businesses pursue profit maximization, can the economic principles derived from the objective function still explain actual business behavior? The answer is: yes! If the assumed goal does not perfectly match reality, that is not a problem. For example, suppose there are two businesses, A and B. Except that manager A works 16 hours a day, 7 days a week, while manager B works only 4 days a week and plays golf for a while after lunch, the two businesses are identical. Because manager A is diligent, business A's profits may be higher than those of business B, but that is not the point. The fundamental issue is whether the two managers would react similarly when economic conditions change. If their product prices rise, would both increase production to pursue profit maximization? Manager A might act first because he spends more time on the job, but the reactions of the two businesses should be the same. Most economists agree with this view: principles of management economics can indeed help people make accurate management decisions, and profit maximization is a useful assumption in this regard. In fact, there is no general theory yet proven that can predict corporate decisions as accurately as the profit maximization model. Therefore, in this book, we assume that the goal of businesses is profit maximization, or, to put it another way, the maximization of corporate value.