Contents

List of figures ix

List of tables xi

Preface xiii

Part I The Macroeconomic Environment 1

Further reading for Part I 2

Chapter 1 Globalisation 3
1.1 Introduction 3
1.2 A Brief History 4
1.3 What Is Globalisation? 7
1.4 Measuring Globalisation 15
1.5 National and Business Implications of Globalisation 19
End of Chapter Summary 21
References 21
Answers to Self-Assessment Questions 21

Chapter 2 The economic environment 23

2.1 Introduction 23
2.2 The Economic Framework 24
2.3 A Simple Model of the Economy 26
2.4 Using the Model 34
2.5 The Economic Environment and Business 41
End of Chapter Summary 46
Answers to Self-Assessment Questions 46

Chapter 3 Measuring economic performance 49

3.1 Introduction 49
3.2 Measurement of Economic Variables 50
3.3 Macroeconomic Performance Indicators 56
3.4 Business and Macroeconomic Performance 63
End of Chapter Summary 65
Appendix 1 Analysis of the UK’s Economic Performance in the Short Run 66

v
contents

Appendix 2 Analysis of the UK’s Economic Performance in the Long Run 67

References 67
Answers to Self-Assessment Questions 68

Part II The Theory of the Firm and Competitive Strategy 69

Chapter 4 Business objectives 71

4.1 Introduction 71
Case Study ConsFirm 72
4.2 Profit Maximisation 73
Case Study ConsFirm 77
4.3 Sales Revenue Maximisation 78
Case Study ConsFirm 81
4.4 Sales Volume or Output Maximisation 82
4.5 Managerial Utility Maximisation 84
Case Study ConsFirm 88
4.6 Wealth or Value Maximisation 89
4.7 Growth Maximisation Models 90
Case Study ConsFirm 98
4.8 Behavioural Models of Business Objectives 99
End of Chapter Summary 102
References 102
Answers to Self-Assessment Questions 103

Chapter 5 Demand estimation and forecasting 106

5.1 Introduction 106
5.2 Demand Theory 108
Case Study Marks & Spencer 116
5.3 Demand Estimation and Forecasting 117
5.4 The Marketing Approach to Demand Measurement 118
5.5 Regression Analysis 126
Case Study Motorola in Scotland 132
5.6 Demand Forecasting Techniques 133
End of Chapter Summary 137
Answers to Self-Assessment Questions 138

Chapter 6 Production and cost estimation 140

6.1 Introduction 140
6.2 Supply Theory 141
Case Study easyJet 146
6.3 Introduction to Production Theory 146

vi
 contents

Case Study easyJet 157

Case Study A Sample Regression Equation 159
6.4 Cost Estimation 160
Case Study easyJet 168
End of Chapter Summary 168
Answers to Self-Assessment Questions 169

Chapter 7 Pricing in theory and practice 171

7.1 Introduction 171
7.2 Pricing and Market Structures 172
Case Study The Price of Rail Travel 178
7.3 New Product Pricing 179
Case Study Penetration Pricing versus Price Skimming 182
7.4 Pricing in Established Markets 182
Case Study ASDA 188
7.5 Specialist Forms of Pricing 189
7.6 Changing Prices over Time 191
End of Chapter Summary 193
Answers to Self-Assessment Questions 193

Chapter 8 Non-price competition 195

8.1 Introduction 195
8.2 Promotion and Advertising 196
Case Study Advertising by Universities 203
8.3 Product Policy 208
Case Study University Product Policy 214
8.4 Product Distribution and Production Site Location 215
Case Study ‘Place’ Decisions for Universities 221
End of Chapter Summary 221
Answers to Self-Assessment Questions 221

Chapter 9 Managerial decisions and the firm’s competitive strategy 224

9.1 Introduction 224
Case Study Strategic Choices in the Pharmaceutical Industry 225
9.2 The Firm’s Competitive Strategy 226
9.3 Implementation of the Firm’s Competitive Strategy 231
9.4 The Applicability of Competitive Strategies and Managerial Decision-making
Tools to Different Industries 235
End of Chapter Summary 236
Reference 236
Answers to Self-Assessment Questions 237

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contents

Part III Investment Decisions 239

Further reading for Part III 240

Chapter 10 Investment appraisal 241

10.1 Introduction 241
10.2 The Economic Nature of Investment 242
10.3 Traditional Techniques 246
10.4 Discounted Cash Flow Techniques 253
10.5 Capital Constraint Problems 269
End of Chapter Summary 274
Answers to Self-Assessment Questions 274

Chapter 11 Investment appraisal under risk and uncertainty 277

11.1 Introduction 277
11.2 Risk versus Uncertainty 278
11.3 Risk Assessment Methods 279
11.4 Probability Analysis in Investment Appraisal 284
11.5 A Case Study in Risk and Sensitivity Analysis 287
Case Study Alarms R Us 287
11.6 Investment Decisions under Uncertainty 299
11.7 Investment Analysis: Implications for Economic Efficiency 301
End of Chapter Summary 302
Answers to Self-Assessment Questions 303

Chapter 12 Public sector decisions 306

12.1 Introduction 306
12.2 Market Failure 307
12.3 Making a Difference? 309
12.4 Objectives in Public Sector Decision Making 312
12.5 The Meaning of Value for Money in the Public Sector 314
12.6 Public Sector Investment 325
Case Study The ‘NEWSITE’ Project 325
End of Chapter Summary 330
Reference 331
Answers to Self-Assessment Questions 331

Appendix Discount tables and the normal distribution table 333

How to Use the Tables 333

Index 340

viii
Part I
The Macroeconomic
Environment

In Part I we begin with a discussion of the process and concept of

globalisation. In other words, the text starts at the macro level and
gradually moves down to key microeconomic decisions which
business managers in the private and public sectors need to
consider. The first chapter introduces you to a brief history of
globalisation, what it means and how it can be measured. The
second chapter in Part I moves down in scale from the global
economy to a national economy and develops a simple model of
how an individual economy can be analysed in terms of its impli-
cations for managerial decision making. The level of mathematics
required is basic and students who prefer to avoid this can easily
do so and still fully grasp the main implications of the model. In
Chapter 3 we move on to the measurement of economic perfor-
mance at the macroeconomic level and this is directly linked to
consideration of performance at the level of business. Part I of the
text is thus designed to give you a clear overview of the links
between global economic processes, national economy perfor-
mance and the fortunes of the private and public sector.

1
Further Reading for Part I
Chapters 1, 2 and 3

Baldwin, R. (1994) ‘Towards an Integrated Europe’, Centre for Economic

Policy Research Paper, London.
Crafts, N. and Toniolo, G. (eds) (1996) Economic Growth in Europe since
1945, Cambridge University Press.
European Commission (1996) First Report on Economic and Social
Cohesion, ECU 14, Luxembourg.
Ferguson, P., Ferguson, G. and Rothschild, R. (1993) Business Economics,
Macmillan – now Palgrave Macmillan, Basingstoke.
Henley, A. and Tsakalotos, E. (1993) Corporatism and Economic
Performance, Edward Elgar, Aldershot.
HM Treasury Economic Trends (monthly).
Mankiw, G. (1990) ‘A Quick Refresher Course in Macroeconomics’, Journal
of Economic Literature 28(4): 1645–60.
Porter, M.E. (1990) The Competitive Advantage of Nations, Macmillan –
now Palgrave Macmillan, Basingstoke.
Temple, P. (1997) ‘The Performance of UK Manufacturing’, London Business
School Discussion Paper No. DP 14–97.

2
 1 Globalisation

■ 1.1 Introduction
If asked the question ‘what does globalisation mean to you?’, most people would be able to
give some kind of answer, even if based only on what they have read in newspapers or seen on
television news items. However, there would be a very wide array of answers – the term itself
has yet to be consistently defined and there will continue to be strong disagreement over what
it actually means. This chapter will introduce you to the ‘globalisation debate’ by focusing on
what the term is most likely to mean in practice and how the process itself might be identified
and measured. The discussion then moves on to an assessment of what globalisation may imply
for policy-makers, business and management decisions.

Objectives By the end of the chapter you will:

■ Understand and be able to explain the concept of global-

isation as an economic, political, social and psycho-
logical phenomenon.

■ Be able to argue convincingly that globalisation, as a

process, has many historical antecedents and is not
entirely unique to the past few decades.

■ Understand and be able to explain that globalisation is

amenable to measurement but that ‘indicators’ of glob-
alisation are necessarily only partial.

■ Be able to connect the process of globalisation to the

constraints faced by policy-makers and managers in
producing decisions that are nationally and locally
consistent with the interests of individual economies
and individual organisations.

3
managerial economics for decision making

■ 1.2 A Brief History

The EU economies have become increasingly open ones since the end of the
Second World War. The EU has always contained many trading economies, but
prior to the 1960s the trade was dominated by export activity while imports
represented a much smaller fraction of total GDP. In the late 1990s, although
export levels were lower relative to that ‘golden age’ they still represented
nearly a quarter of EU GDP and imports represented nearly 30 per cent of GDP.
Taken together, over half of the EU’s economic activity was based on trade as
the economy began the twenty-first century. This development was, however,
not confined to EU economies.
All industrialised economies in the world and many of the newly
industrialising ones share in a very large trade volume compared with 40 years
ago. The development of containerisation, ‘super’ ships, faster communi-
cations and easier currency transfers has enabled trade volumes globally to
increase by over 900 per cent in four decades. Alongside this massive growth
in global trade volumes has been an ‘explosion’ in foreign direct investment
(FDI), mainly between the industrialised countries, although in the last
decade this has increasingly involved developing and newly industrialising
countries. Taken together, the growth in trade volumes and in FDI has
produced not only a global economy, in a very real sense, but also the ‘global’
firm. In fact the growth in trade volumes and the emergence of the global
firm are closely related: many economies in the world still operate restrictions
on imports of one type or another, the EU included, and this has made it
necessary for large firms to locate production in foreign markets. In addition
the implementation of the General Agreement on Tariffs and Trade (GATT) in
1947 which sought to ease trade restrictions also enables trade volumes
between countries to be ‘negotiated’ so that if firms wish to sell more output
than ‘negotiated’ they must locate production facilities closer to or actually in
the receiving economy. So, why has globalisation happened, why has the
global firm emerged and what are the implications for EU business? There are
many reasons:

■ GATT/WTO
■ Aggregate demand
■ Market access
■ Currency convertibility
■ Strategic ‘thinking’
■ Vertical integration
■ Geopolitical interests

4
 globalisation

The GATT simply made it much easier for trading economies to develop
closer ties without the restrictions which dogged trade prior to 1945. In other
words, a great deal of potential trading had simply been ‘smothered’ for a whole
variety of political, social and economic reasons specific to different economies.
The advent of the GATT enabled the potential to be released and further devel-
oped. However, this could only take place in the context of growing aggregate
global demand for industrial and especially consumer products. Much of the
increase in aggregate demand experienced by the developed economies after
1945 was inspired by reconstruction, a need to satisfy ‘pent-up’ demand after
years of rationing, and a realisation that higher trade volumes would more
closely integrate these economies politically as well as economically.
However, the rapid development in FDI was mainly market driven, and not
cost driven, although in recent years cost has assumed a greater importance than
before. Under GATT it was simply not possible to export all of a firm’s non-
domestic consumption output; in many cases therefore it became necessary to
locate production facilities abroad. This improved market access, in terms of both
production and exports, lies at the root of the philosophy of the WTO – increased
market access is the very bedrock of the multilateral trading system today.
It could be argued that this has become even more essential for trade
growth in the future given the advent of economic blocs such as the EU and
NAFTA (North American Free Trade Area) which strictly controlled the level of
imports negotiated in each round of the GATT agreement. Thus, the sale of
computers produced in the EU by a US firm to Germany now represents output
for domestic consumption, whereas prior to GATT they were more than likely
to have to be imported from the US. However, it could be argued that the devel-
opment of these economic blocs runs counter to the philosophy of the WTO
since they tend to offer protection to their own firms, often negating WTO
rules. For many developing countries this is particularly the case in agricultural
products. This process of ‘regionalisation’ is continuing with the expansion of
the EU to possibly 25 countries by 2005, further development of the ASEAN
bloc (South-East Asian economies), SADCC in Africa and regional groupings in
South America. Indeed, the process of ‘globalisation’ is developing in parallel
with increasing regionalisation across the world.
The introduction of the Treaty of Rome in 1957 went a very long way to
achieving full convertibility of EU currencies and the US dollar, principally at
the insistence of US investors. Hence US FDI anywhere in the EU area would
not be exposed to currency risks. This in tandem with growing consumer
demand led to the development of a more strategic approach to business plan-
ning in which the restrictions implied by the ‘need’ for local sourcing,
controlled use of technology and other aspects of operating outwith the home
economy came to be viewed as much less of a problem than in the past.
Management methods were developed to cope with greater diversification of
products and greater vertical integration of business so that the ‘strategic’ firm
could guarantee not only sources of input supply but also markets to sell its

5
managerial economics for decision making

50

45

40

cent
Per cent
35
Per

30

25

20
1970
1970 1975
1975 1980
1980 1985
1985 1990
1990 1995
1995 2000
2000
Year
Year
Series1
Series 1 55per.
per. Mov. Avg.
Avg. (Series
(Series1)

Figure 1.1 Global trade as percentage of global GDP

Source: Constructed from World Bank Tables

output to. The development of production, logistics and financial planning

techniques accelerated more in the past three decades than at any other time in
business history. All of the above developments enabled the emergence of the
global firm; however, the environment in which these developments took place
was also amenable, that is, the emergence of new and stronger geopolitical inter-
ests on the part of the Western economies ensured that the political environ-
ment for such developments was welcoming. However, although GATT has
enabled long-term growth in global trade volumes these have fluctuated consid-
erably over the decades. Growth was well above its 5-year moving average
throughout the 1970s and early 1980s but fell below its trend for much of the
1980s. It accelerated again in the 1990s, especially from 1994/95, coinciding
with the advent of the World Trade Organization (WTO) in 1995. Whether this
was merely coincidental or simply a reflection of other global trends is a difficult
question to answer. Figure 1.1 traces this growth since the 1970s.
This continues to be the case at the beginning of the twenty-first century.
Indeed it is difficult to imagine the major economies of the world and the
newly industrialising economies once again retreating into fortress Germany,
America, France, UK or Japan.

■ ■ ■ Self-Assessment Question ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

Q1 What might ‘globalisation’ mean for the competitive stance taken by a small
EU firm?

■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■

6
 globalisation

Before we consider what all this might mean for business, business decisions,
EU governments and EU citizens we need to take a step back and consider
exactly what we mean by globalisation because it is not at all clear and it does
not necessarily apply across all sectors of an economy. We need a definition, we
also need to ‘measure’ it and we need to be able to assess what this definition
of globalisation and its component indicators can tell us about the probable
economic environment EU firms and citizens will face in the future.

■ 1.3 What Is Globalisation?

At its simplest level, globalisation could be defined as a process which increases
the share of trade in global GDP, as per Figure 1.1. Or we could define it as a
process which leads to an increasing share of FDI as a proportion of global
investment. There are many other economic and financial ratios we could use
to define the term or the process of globalisation. However, none of these
would be sufficient on their own as they are very uni-dimensional. This is
because globalisation, whatever it really is, is most certainly multi-dimensional.
It is not simply about trade or investment – it involves an acceleration in the
process of change which has been ongoing for hundreds, perhaps even thous-
ands, of years. These changes involve all facets of social, political and economic
relations which appear to have culminated in connecting billions of people
(whether they know it or not) around the world. If you drink tea you are
connected with the farmer in China or Sri Lanka; if you drink coffee you are
connected with the farmer in Colombia or Kenya; if you wear a designer T-shirt
you have a connection with a factory worker in Singapore, Mauritius or the UK.
The list of products and an associated list of country connections goes on and
on. So, globalisation also involves people: their place of work, their work condi-
tions, their wages, who they work for and how they live their lives are all
affected by globalisation.
It could be argued that, in the above sense, these connections are not really
that different from the ones created by earlier societies. We know for example
that the Romans were trading goods and labour 2000 years ago across Europe,
Africa, the Middle East and Asia Minor. The Minoan civilisation based on Crete
traded across three continents over 3500 years ago. The Vikings are thought to
have been involved in trade across the Atlantic and as far east as the Ural moun-
tains. There is also evidence of trade across the vast expanse of the Indian Ocean
between East Africa, Indonesia, Polynesia and even Western Australia occurring
thousands of years ago. These were all developed societies (in their terms) and
they all engaged in trade over large distances in the context of what was effec-
tively the known world to them. So, if globalisation is to be defined in terms of
trade alone then there really is nothing new about it – it has just become larger
in scale in terms of the known world today. Of course it is not just about
trade – it is more about the nature of trade today, how it is conducted and the

7
managerial economics for decision making

speed with which it is conducted. This is the essential difference today – speed
of movement and the speed of the flow of information.
Another key difference is in the content of trade – much of it today does not
involve physical goods at all. It involves the trading of information, finance,
legal and many other services which, even in the nineteenth century, were
rarely the subject of international trade. Indeed trade in services has grown so
large in recent decades that the GATT now has a parallel in GATS (General
Agreement on Trade in Services) which covers almost all types of service,
including education itself. The EU has already signed up to GATS inclusive of
trade in knowledge and knowledge acquisition – in just a few years it will be
possible for universities in over 100 countries to offer their courses in any other
country by attendance at class. Thus the very nature of what is traded today,
how it is traded and the speed of trade essentially define globalisation as some-
thing different from what has gone before. And, in addition to this, we now
have a trading ‘architecture’ – a system of rules most countries are expected to
follow under the multilateral trading agreements monitored by the WTO.
In some ways it could be argued that globalisation has also become an attitude
of mind as well as a system of economic relations – these days people are not
surprised by where a product or service comes from – indeed they are more likely
to be surprised if it is made in their own country. But there is another aspect of
today’s globalisation process which is distinct from similar processes in history –
that is the progressive reduction in the ability of the nation state to command its
own economic affairs. It is now more difficult than ever for a single country to
determine its own economic policy since multinational companies and internat-
ional financial service companies can move production facilities and money very
rapidly across borders to take advantage of differences in tax regimes, labour costs
and exchange and interest rates. Hence the trend discussed above towards regional
blocs designed to act as larger and therefore stronger economic bargaining units.
The world of finance is possibly the most glaring example of globalisation today
in terms of scale, speed of movement and cross-border versatility. But even this
‘financial globalisation’ still has many aspects which do not fit well with the purist
view of a wholly globalised world economy. For many, financial globalisation is
the forerunner of a wholly integrated world economy. But there are many ques-
tion marks as to just how globalised even finance has become (Lewis, 1995).
The clearest way to illustrate this is to describe what financial globalisation
is not. It is not simply the expansion of net or gross international capital
flows; it is not the expansion of individual economies’ external financial
transactions per se and nor is it the increasing entry of large financial insti-
tutions into non-home-based markets. These are all aspects of the internation-
alisation of capital and, as we already know, are subject to significant cyclical
fluctuations. Were these the key elements of financial globalisation it would
be irrefutably logical to talk of periods of ‘deglobalisation’ such as in the
1930s and 1950s. In addition there remains a strong tendency for investors
and their portfolios to retain a very strong ‘home bias’ and for wealth in all

8
 globalisation

its forms to be predominantly held within investors’ home countries. This

home or domestic bias is likely to decline with time, but it is an indication
that the completely ‘globalised’ financial world is still some way off. It seems
clear therefore that cyclical fluctuations in cross-border capital transactions
can neither conceptually nor empirically form the basis of what is effectively
a relatively new and even ‘populist’ concept. Instead we need a clear and
unambiguous theoretical rationale which is capable of providing deeper
insights into a process which we believe is under way but as yet do not fully
understand. As Shirakawa et al. argue:

globalisation refers to [a situation] where each country’s economy, including its

financial markets, becomes increasingly integrated resulting in development towards
a single world market.

In other words, financial market globalisation will not and cannot proceed in
the absence of the globalisation of all production relations, including labour
itself. Using the definition given above it is possible to delineate stages of the
globalisation ‘process’ and to categorise what these stages mean in terms of
both the ‘real’ economy and the financial markets. Consider Figure 1.2. This is
a ‘model’ which posits a world of only two economies, A and B, in which there
are two broadly defined sectors – the goods and services market (GSM) and the
financial services market (FSM). In Stage 1 there is no trade between A and B
but there is synergy between the GSM and FSM within each economy. In Stage
2 GSM trade between A and B is completely dominant but supported by the
FSM within each economy only. The degree of integration between the GSM
and the FSM domestically is expanding over time during this stage but does not
yet involve cross-border integration in any significant sense.
As GSM trade increases it becomes increasingly necessary for the FSMs in
each economy to support it bilaterally since the GSM demand for capital is
outstripping the supply of loanable funds domestically (Stage 3). Credit
creation and financial economies of scale and scope enable this. With
increasing integration there is a greater (parallel) need for coordinated policy
action between the authorities in A and B to ‘manage’ their respective domestic
economies. This point (Stage 3) is effectively where the ‘global’ economy is at
the present time – although a high degree of integration has already taken place
it is still characterised by a strong ‘home’ bias in the financial markets.
The shift to the next level (Stage 4), an integrated global economic system in
which all sectors are reciprocally and fully integrated within and between each
economy, represents a fundamental structural change in the nature of internat-
ional production relations. So much so as to effectively produce the globalised
economy in the Shirakawa et al. sense. In terms of Figure 1.2 the completely
globalised economy develops on the path between Stages 3 and 4. The key
policy issues along this path are those which relate to increased liberalisation of
trade and of financial markets, both of which represent a continued threat to a

9
managerial economics for decision making

Integration Globalisation

FSM
A
STAGE 4 GSM GSM
A B
FSM
B
STAGE 3
International GSM and FSM
A
FSM trade increasing fast GSM GSM
A B
FSM
B

FSM STAGE 2
A GSM trade dominates
GSM GSM
A B
FSM
B

STAGE 1
FSM
A No trade
GSM GSM
A B
FSM
B

Time

Figure 1.2 The globalisation process

nation’s or a group of nations’ control over economic policy. For many firms it
potentially represents a threat to their own domestic markets – they increasingly
face competition from similar firms often located in different continents. For the
public provision of services there is also increased competition from private
sector service providers since they are, and increasingly in the future will be able
to compete to deliver public services. This is especially true of services which are
expensive to provide such as health, education and transport. If increased glob-
alisation of trade and of firms is the likely future for many economies, what are
the implications for firms in the EU? We can analyse these in terms of possible
advantages and disadvantages.

10
 globalisation

Advantages

A main advantage claimed for EU firms of the emergence of the global firm is
the demonstration effect. The importation to the EU by foreign firms of new
technologies, new management methods, new products and a more dynamic
approach to business has enabled EU firms to become more competitive, more
attuned to consumers, more cost conscious, more quality conscious and gener-
ally more effective in the domestic and global economies.
Many of these advantages have been the result of FDI using local sourcing of
inputs supplied by domestic EU firms. In addition, the employment of EU
managers by many of these global firms has been an ‘education’ for EU manage-
ment in general and this has had spillover effects into EU-managed firms.

Disadvantages

A main disadvantage of the growth in global trade and in FDI to many EU firms
has simply been that it came in a period when many EU businesses were not
capable of competing effectively, the result being that many EU sectors are now
dominated by foreign firms. The claim that local sourcing has enabled many EU
firms to develop further is not as strong as first appears since many FDI firms
source globally – thus driving down the price a local firm can expect to get for
its sales to a global firm. In addition, the introduction of management methods
such as just in time, ‘outsourcing’ and ‘strategic’ (local) suppliers has meant EU
firms need to make investments which ‘tie’ them into a single customer, thus
raising their risk exposure.
Whether the advantages or disadvantages discussed above are perceived or
real probably depends on the experience of individual EU firms in competing
with or working with the FDI firm. Nevertheless it is quite clear that there are
serious threats to domestic EU firms from further globalisation and further
development of the global firm. The point is that these need to be recognised
and countered using the most modern management methods available and
continuing to meet the requirements of customers which are becoming more
demanding every year. Although the EU has a significant number of global
firms of its own, most employment in the EU is still in the context of small and
medium-sized enterprises. These are particularly at risk in the globally compet-
itive market place. The quality of the workforce, the product and above all the
management in such enterprises will be the key to long-term survival and
development – and not necessarily the minimisation of costs, a strategy which
has not been particularly successful for EU firms in the past. However, as a
regional economic bloc the EU has already taken a major step towards posi-
tioning itself so that its firms and its workers can compete in a globalising
economy. This step was the introduction of monetary union. Although only a
few countries within the EU have yet to join, there is clearly an advantage to

11
managerial economics for decision making

EU firms in terms of internal reductions in costs in trading within the EU and

in the development of a currency to compete with the dollar and the yen. Why
should European monetary union (EMU) be a likely benefit to EU firms in terms
of globalisation?

1.3.1 EMU and Globalisation

Given that over half of the EU’s economic activity involves trade whether as
final goods and services or as intermediate inputs, it is quite clear that 15
exchange rates within the EU are a crucial factor in determining not only the
volume of intra-European trade but also its value to businesses and to the
economy. We already know that globalisation of trade and the emergence of
very large multinational corporations have significant implications for EU
business but these take on even more significance in the context of EMU. The
very first point to make even though it seems obvious is that non-exporting
and non-importing firms in the EU will be as much affected by EMU as those
involved in intra-EU trade and extra-EU trade. If a family never takes an over-
seas holiday they will still be as much affected as those who do! In other words,
if EMU is eventually implemented as planned in all EU member states its effects
on all EU economies will be ubiquitous.

What is EMU?

It is simply the distillation of 15 currencies into one, the euro. This process has
already taken place in the USA (after the Civil War), Germany (after reunifica-
tion) and in the former Soviet Union, although in the latter the process has
since been reversed. Thus, integrating several different currencies into one is
not a new idea nor will it be a ‘first’ event. Some would argue that the circum-
stances are not that different either: in the cases of the three examples above
the overriding motivation for a single currency was political integration and
the creation of ‘nationhood’ – and hence in the global economy of today this
is exactly what Europeans are striving for although few politicians would
openly say so. Whether the motivation for EMU is mainly political or not we
are concerned here with its economic implications for EU business in a global-
ising economy.
The criteria for entry to EMU are, on the surface, fairly reasonable, pract-
icable and straightforward. They are as follows:

1. Low inflation
2. Low nominal interest rate
3. Stable nominal exchange rate

12
 globalisation

4. Fiscal deficit ≤ 3 per cent of GDP

5. Debt/GDP ratio ≤ 60 per cent

The first three criteria are monetary while the last two are fiscal. That is, a
country is required to balance as closely as possible its government ‘books’
between taxation and expenditure, and the restriction on the debt to GDP ratio
is a key instrument in enabling that. The first three criteria are very much
monetary in that they are linked to money supply control by the government
which in turn is linked to interest rate levels. The requirement for a stable
exchange rate (in the 2 years up to membership) is in turn a function of money
supply management and interest rates. Thus, all five criteria are interdependent
and all five must therefore be achieved if an EU economy is to enter the single
currency. Although there have been accusations that the criteria have been
relaxed to enable some countries to enter, the point is nevertheless that these
five criteria do make sense in terms of seeking a stable, strong and sustainable
single currency in the face of increasingly fiercer global competition.
We used the phrase earlier that ‘on the surface’ these are reasonable criteria
for the development of a single currency. This is because they are actually crit-
ical to the economic fortunes of all EU economies. In fact it is the criteria for
entry which themselves provide the debate over whether an economy should
or should not enter EMU.

What are the Implications for EU Business?

Firms which require imported inputs and/or are involved in exporting inter-
mediate or final goods and services currently incur transactions costs associated
with currency conversion. In addition, they also face a currency risk in that
contracts are often agreed on the basis of either the current rate of exchange or
a future rate of exchange, say 3 months ahead. Both of these carry the risk that
adverse exchange rate movements will result in a lower than expected price
receivable or a higher than expected price payable. Avoidance of these risks can
be accommodated using various insurance schemes (which are a cost) and in
some cases by using the export credit guarantee schemes operated by many EU
governments – in which case the taxpayer carries the risk. The point is clear:
trading arrangements on the basis of bilateral exchange rates (between two
economies) can be costly and risky. In theory therefore it ought to be in the
interests of EU firms to be dealing in a single European currency.
The transactions costs of trade can be significant. An extreme example of
this is the movement of people within the EU as tourists! Suppose someone
from the UK wished to visit all of the other 14 member states before the intro-
duction of the euro and let us suppose he/she took two wallets – one with
£1000 for converting and to live on and one with £1000 simply to convert into

13
managerial economics for decision making

the currency of each member state when they arrived there. Using the nominal
exchange rates which applied in 1999 within the EU, the second £1000 would
be reduced to £723 on return to the UK. That is, having bought absolutely
nothing but merely changing from one currency to the next and back to ster-
ling (15 changes) the transaction cost is £277! Although imported and exported
goods will never go through 15 currency conversions, nevertheless many EU
firms trade with several EU economies and therefore used to incur significant
transactions costs. These would still apply to firms and people based in the euro
area had the euro not been implemented.
Membership of the single currency reduces these types of cost to zero, a
very significant advantage to firms based in the euro area.

■ ■ ■ Self-Assessment Question ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

Q2 Is there a potential conflict of interest between the needs of business in EMU

and the needs of the individual national economies?

■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■

It could also be argued that past interest and exchange rate management by
many EU governments merely protected inefficient firms rather than enabled
them to become more competitive. Hence, the creation of EMU helps to enable
EU firms to compete more effectively not only with their continental counter-
parts but also with the rest of the world.
Of course the development of the single currency carries transitory risks but
in the long term, as a result of full economic convergence, such risks will be
reduced to zero or close to it. However, the benefits of a stronger single
currency (relative to the rest of the world) and a stronger pan-European
economy in the long term far outweigh transitory risks and changeover costs.
Indeed with the advent of the Asian ‘tiger’ economies, the continued economic
power of Japan and the USA and the rapid development of China, Brazil and
India, the potential costs of not developing a single currency and hence a single
economic bloc could be enormous. How many of the EU’s smaller and medium-
sized firms would be able to compete with the latter countries in the future if
they continue to operate in a ‘domestic’ system of 15 currencies? EMU is just
one lever to help them do so. This is a complex issue and only some of the
(main) arguments are represented here. The political, social and cultural advan-
tages/disadvantages of EMU have not been touched upon. However, it is likely
to be the case that these will eventually have more sway in which member
states join the euro in the future than the more technical economic arguments.
If we consider the five criteria for membership of EMU it is quite clear that
these are also highly relevant to becoming and remaining more competitive as
the world moves towards Stage 4 as described in Figure 1.2. Firms in the EU will

14
 globalisation

simply not be able to compete, especially with ‘low cost’ suppliers in other parts
of the world, in the absence of low inflation, low nominal interest rates and a
stable nominal exchange rate for the single currency. In addition the ‘rules’ on
the fiscal deficit and the debt/GDP ratio for each member state will help to
reduce the burden of taxation on business and workers below what it might
otherwise have been. This leaves more money in business and in people’s
pockets so that they can make their own decisions on investment and
consumption. It has often been argued by economists that the most vibrant
and fast growing economies in the world are characterised by generally lower
business and personal taxes than traditionally applies in EU economies. This
has certainly been true of the USA, the ‘tiger’ economies of South-East Asia,
India and Brazil. It is also true of China which entered the WTO in 2001 and
seems poised to expand at growth rates larger than those achieved by Japan in
the 1960s and 70s.
The process of globalisation thus has major implications for business,
government and citizens in the EU. Decisions on product pricing, investment,
personal consumption, public service provision and many other ‘micro-
economic’ aspects of the day-to-day management of firms, households and
government services are themselves influenced by globalisation, even in the
smallest way, and in addition, influence how the EU economy itself will
progress as globalisation itself progresses.
Now that we have a much clearer idea of what globalisation is (and what it
is not), how it relates to business and people and government and what it may
mean for all types of economic and managerial decisions, we are in a better
position to attempt to measure it. If we can identify a set of ‘indicators’ of glob-
alisation then business and government will be in a better position to judge
which investment options, pricing and marketing options and economic policy
options are more likely to succeed than others.

■ 1.4 Measuring Globalisation

As discussed above, the concept of globalisation is multi-dimensional and this
makes its measurement difficult – no one ‘indicator’ could possibly be sufficient
to describe it, explain it or predict its future path. What we can do, however, is
conceptualise what it might mean in terms of Figure 1.2. Whether some coun-
tries or no countries are already at Stage 4 cannot be determined precisely
because we do not, at present, have a good enough set of indicators of where
we are in the globalisation process. This is partly because, as discussed above,
there is widespread disagreement on what globalisation actually is. As already
mentioned, it could be thought of as a ‘state of mind’ in which people around
the world are either well aware or just notionally aware of the connections
between them and the rest of the world. Goods and services are items which
can be ‘globalised’ in the sense of production, sales, sourcing, supply chains,

15
managerial economics for decision making

information and strategy. However, it is not so straightforward to measure the

globalisation of social ‘norms’, ideas, consumer behaviour and other non-
tangible aspects of a process which some argue is leading to ‘sameness’ across
the world. At the moment, however, we can measure some of the tangible
aspects of the globalisation ‘process’.
We do know, from our previous discussion, that financial globalisation is
certainly not complete and that this is likely to be the key element in the
continued globalisation of goods and services towards Stage 4 in Figure 1.2 and
also in the Shirikawa et al. sense. It thus follows that despite claims to the
contrary, the globalisation of goods and services themselves cannot be
complete. However, we can identify a few ‘obvious’ measurements of global-
isation and test these against what has gone before. Three of these are:

■ Global exports and imports (volume)

■ FDI as a proportion of global GDP
■ FDI as a proportion of global direct investment

These three ‘indicators’ are useful because they give us a picture of the trends
involved and also show us whether these trends really are new, are significant
and are qualitatively different from trends in the past. Let us consider the
growth in global trade in terms of exports and imports as described in Figure 1.3.
The graph spans a period of 20 years at the end of the last century. It shows
that the expansion of exports and imports was very rapid in the second half of
the 1980s and even faster in the 1990s. A world recession in the early 1990s
significantly arrested both trends. We can find the same trends for these indic-
ators from the 1950s right through the 1960s and 70s – however they were not
as pronounced. The speed of expansion in the latter part of the twentieth

1350
1350

1150
1150

950
950
$bn
$bn

750
750

550
550

350
350
1980
1980 1985
1985 1990
1990 1995
1995 2000
2000
Year
Year

EXPORTS
Exports IMPORTS
Imports

Figure 1.3 Global exports and global imports

16
 globalisation

century coupled with the scale of trade in terms of volume was quite different
from previous periods. Indeed it was this scale and speed of expansion which
led to the current notion of globalisation in the populist sense. We can reason-
ably conclude from this that if the very rapid growth of this period was to
continue for the foreseeable future then the world (or large parts of it) will
rapidly enter Stage 4 in Figure 1.2. What about our other ‘indicators’ of global-
isation? It has been argued that the real basis of globalisation is not trade per
se but the development of ‘stateless’ corporations which can invest or disinvest
‘at will’ across the globe in order to maximise the benefits to them of differen-
tials in tax regimes, exchange and interest rates and in regulatory frameworks
between different countries.
Again we can clearly detect a sea change in the rate of growth of FDI rela-
tive to global GDP first in the mid-1980s and again, but even faster, in the
1990s (Figure 1.4). The troughs in the cyclical pattern of this correspond almost
exactly with major economic recessions in the 1970s, 80s and early 1990s when
FDI went below its 5-year moving average. This may be another indication of
the ‘home bias’ which we discussed in relation to financial globalisation – when
recession occurs there is a strong tendency for investors (corporations and
individuals) to reduce planned investments abroad first. This also suggests that
the perceived risk of such investment is higher than with domestic investment.
Economic uncertainty therefore plays a significant role in arresting, at least
temporarily, the process of globalisation in goods, services and finance. It
would appear that even large corporations prefer to continue to compete more
strongly in their domestic markets than elsewhere when such uncertainty
arises. In addition it should be noted that, despite the clear trend of greater

3.5

2.5
Per cent

1.5

0.5

0
1970 1975 1980 1985 1990 1995 2000

Year

Series1 Power (Series1) 5 per. Mov. Avg. (Series1)

Figure 1.4 FDI as a proportion of global GDP

17
managerial economics for decision making

12

10

8
Per cent

0
1970 1975 1980 1985 1990 1995 2000

Year

Series1 5 per. Mov. Avg. (Series1)

Figure 1.5 FDI as a proportion of global direct investment

investment abroad in the 1990s, the global proportion relative to GDP was still
very low by the end of the century at less than 3 per cent. It could be argued
that such a low proportion is hardly indicative of a rapidly globalising world
economy and in fact is just another, albeit more rapid, phase of foreign invest-
ment growth. In other words, some of the ‘wilder’ claims of a globalising world
economy simply do not match the evidence of a very obvious indicator of the
process. Another way to look at the foreign investment issue is to consider how
it has developed relative to global investment itself rather than global GDP.
This is depicted in Figure 1.5.
The same pattern we described in Figure 1.4 is also evident here. As a
proportion of global direct investment, foreign investment was significantly
above its 5-year moving average only in the latter half of the 1980s and for
most of the 1990s. Prior to this period it hardly deviated from its trend. In
addition, even by the end of the century only about 10 cents in every invested
dollar were actually invested outside domestic economies and the 5-year
average was less than 8 cents in every dollar. What can we conclude from this?
We know that the most ‘movable’ commodity, finance and financial services,
tends to be seen as the most globalised yet it is still dominated by a very strong
‘home bias’; we also know that global trade in terms of exports and imports
has certainly accelerated in the past 20 years and would suggest rapid global-
isation; but we also know that a fundamental aspect of globalisation as a
concept, FDI, has increased rapidly but is still a very small proportion of both
global GDP and global investment. In addition to this, such investment

18
 globalisation

expansion is quite easily arrested and sometimes actually reduced by recession

and economic uncertainty (Obstfeld and Taylor, 1997).
The evidence is therefore very mixed using these indicators. Indeed it can
quite easily be argued that very few economies, if any, are anywhere near Stage
4 as described in Figure 1.2 earlier. This leaves us with an alternative explan-
ation – that ‘globalisation’, as discussed above, is more to do with faster
communications, easier access to information on a global scale and a ‘state of
mind’ than with actual recent history of economic development per se. This
does not mean that it is not happening – it does mean that we are still a very
long way from Stage 4 in the conceptual model of globalisation. The evidence
does suggest that the world has become more of an economic ‘unit’ than it
used to be but still much less of an economic unit than the nation state
continues to be! If globalisation is happening then it is developing much more
slowly than many commentators and pressure groups suggest. But even at a
slower pace of development it still contains many significant implications for
national governments and for businesses, wherever they are located. We will
consider this in the next section.

■ 1.5 National and Business Implications of Globalisation

Even if developing more slowly than currently assumed, the process of global-
isation will have major and profound effects on how individual economies are
managed and how individual businesses, large and small, manage their
resources and plan their future. At the national level (including regional blocs
such as the EU) a number of key macroeconomic management tools are likely
to become less effective in addressing the needs of individual economies. These
include:

■ Regulation of business
■ Environmental policy
■ Taxation policy
■ Trade policy
■ Exchange rate management
■ Financial regulation
■ Central bank functions

Business regulation is commonly associated with competition policy and

the achievement of a set of standards in relation to the quality, safety and
selling of goods and services. These regulations tend to be domestically defined
but can be in contravention (or appear to be) of international or regional bloc

19
managerial economics for decision making

rules and agreements such as in the case of the WTO and the EU. There is thus
a trend towards the standardisation of such regulation across borders which
reduces the ability of domestic governments to determine their own standards
and rules. It may be the case that domestic firms’ costs will need to rise to meet
‘standardised’ regulations thus making them less competitive. In other words,
changes or enhancements to existing business regulation will inevitably give a
competitive edge to firms able to absorb these extra costs. This will have impli-
cations for those firms which are slow to react or fail to anticipate future regu-
latory change. Increasingly the domestic government cannot be relied upon to
produce predictable and locally relevant regulation since it is likely to be super-
seded by an international agreement.
The same analysis can be forwarded in terms of environmental policy
where regional or even global agreements will increasingly impose additional
costs on business at the local level – even where this may not be locally
appropriate in many cases. On taxation the difficulties for domestic govern-
ment could be even greater. Differentials in corporation tax between coun-
tries, even within regional blocs, will increasingly influence the direction of
FDI or the decision by a domestic based firm to move its facilities across
borders. This has many implications for employment, tax revenue and
domestic GDP growth. Although most economies are members of the WTO
and regional blocs they still have some room for determining domestic trade
policy and the level of protection they give to domestic industry, for example
through subsidies. But domestically produced trade ‘rules’, including protec-
tion, increasingly come into conflict with agreements already in existence or
are often seen to be by other countries. Increased globalisation is likely to
make it even more difficult for domestic trade policy to be ‘out of line’ with
international or regional agreements. The increasing globalisation of financial
services makes the management and targeting of an appropriate exchange
rate increasingly more difficult. This affects the ability of a domestic govern-
ment to achieve a ‘competitive’ exchange rate for its currency and to achieve
an interest rate which is consistent with the competitive stance of the
businesses operating within its borders. In addition, the possibility of a finan-
cial crisis in one country being transmitted to another (financial contagion)
has increased significantly, making financial management tools of economic
policy even less effective than before. Finally the role and functions of central
banks, including the European Central Bank, have now become more
complex and more difficult to manage. All of the above add up to an
inevitable conclusion – the ability of the nation state or regional economic
bloc to determine its own economic future has definitely been reduced and is
likely to be reduced further in the future. In the next chapter we consider
how the nation state can be understood as an economic system by applying
some basic economic analysis.

20
 globalisation

❏ ❏ ❏ End of Chapter SUMMARY ❏ ❏ ❏ ❏ ❏ ❏ ❏ ❏ ❏ ❏ ❏

In this chapter there are a number of key concepts and relationships with which you should now
be familiar. In particular:

■ The historical antecedents of globalisation

■ The different definitions of globalisation
■ The type of indicators of globalisation and their drawbacks
■ The key drivers of globalisation
■ The relationship between the global economy and the local economy
■ The constraints faced by decision makers imposed by globalisation

In addition you should be able to explain clearly that globalisation is not just an economic
phenomenon – it is as much driven by political and social developments and by individual
perceptions of the ‘world order’. The notion that globalisation could be considered as a ‘state
of mind’ is a very powerful one and helps to explain the increasing polarisation of opinion as to
the benefits and dis-benefits of the process itself.

References
Lewis, K. (1995) ‘Puzzles in International Financial Markets’ in Grossman, G.
and Rogoff, K. (eds) Handbook of International Finance Vol. III,
pp. 1913–71.
Obstfeld, M. and Taylor, A. (1997) ‘The Great Depression as a Watershed:
International Capital Mobility over the Long Run’, NBER Working Paper
No. 5960.
Shirakawa, M., Okina, K. and Shiratsuka, S. ‘Financial Market Globalisation:
Present and Future’, Bank of Japan Discussion Paper, No. 97-E-11, Tokyo.

■■■ ANSWERS to Self-Assessment Questions ■ ■ ■ ■ ■ ■

Q1 It could mean many things! First, the small firm may need to consider the
investment it needs to make in order to meet the quality levels and delivery
constraints imposed by the global firm. Second, it could mean that the small
firm’s real competitior(s) are not located within the domestic economy at all –
they are as likely to be located in economies both within and outwith Europe.
This is very much the case for small high technology (niche) firms in the EU –
many of their competitors are in Australia, the USA and the Far East. But

21
managerial economics for decision making

because of minimal transport costs (relative to production costs) these competi-

tors might as well be next door!

Q2 There is a potential conflict here. Not all EU firms are significantly engaged in
exporting or importing. Therefore the benefits of zero transaction costs to them
will be zero. This also applies to employees of such firms. However, the removal
of the ‘option’ to manage interest rates and taxation may well be a hindrance
to many sectors in the different member states of the EU, and not just the trad-
able goods sector.

22
 Index
A bias, 9, 120–1
absolute numbers, 50
accounting profit, 245
Adam Smith, 24
advertising, 92, 102, 106, 109,
113–14, 127–8, 175
budget, 195
elasticity of demand, 113, 115,
128
strategy, 109, 113, 118
Africa, 5, 7
agents, 76
agglomeration economies, 155
aggregate demand, 4, 20, 22, 24,
25, 32, 34, 37, 44
alternative goods, 109
arc elasticity of demand, 114
ASEAN, 5
assets, 89, 154
assumptions, 25
average,
physical product, 149
revenue, 83, 103, 175
revenue curve, 84
total cost curve, 164
B indicators, 56–62
back forecasting, 135
backward vertical integration, 91
balance of payments, 66
banking sector, 45
bankruptcy, 93
bargaining power, 101
barometric forecasting, 118, 133,
136
barriers to entry, 167, 171–2,
175, 180, 234, 307
basket of goods and services, 54
behaviour, 16, 24, 46
behavioural model, 71, 99–102
benefit–cost ratio, 271, 276
best fit, 128, 133
340
borrowing, 32, 46, 79, 212, 225,
277
brand identity, 83, 206, 209,
211, 233–4
business and macroeconomic
performance, 37
business cycle, 57, 66, 72, 241,
289
business forecasting, 50
business objectives, 71–3,
99–100, 102, 224
business regulation, 19
C
capital, 8–9, 146–8, 152, 157,
159, 161
capital constraint, 242, 269–74
capital rationing, see capital
constraint
captive market, 143
cartel, 177 see also oligopoly
Cobb–Douglas production
function, 147, 151, 158
collective rationality, 306
comparative performance
competition, 9–13
environment, 235–6
policy, 19
strategy, 69, 208, 213, 224,
226–8
tendering, 189–91, 193
complementary good, 108
composite indices, 137
constant price equation, 53, 66
consumer behaviour, 16, 124
consumption, 26–7, 30–1, 34 see
also aggregate demand
function, 31
consumption–investment trade-
off, 243

corporation tax, 20, 86
cost leadership strategy, 226–7
cost of production, 29
cost plus pricing, see markup
cost structure, 106, 164–5
cross-elasticity of demand, 113
currency convertibility, 4
Cyert/March model, 71, 99–101
D euro, 12–15
debt/GDP ratio, 13
decomposition analysis, 118,
134–5
de-globalisation, 8
Delphi technique, 122
demand constraint, 91–2,
demand curve, 111–12
demand estimation, 106–7
demand for labour, 27
demand forecasting, 106–7, 133
demand function, 108–10
demand growth, 94–6
demand measurement, 118
demand predictions, 119, 121
demand theory, 108–10
demographic spread, 110
demonstration effect, 11
diffusion indices, see barometric
forecasting
diminishing marginal returns,
148
discount factor, 254
discount rate, 254
discounted cash flow, 242,
253–6
diseconomies of scale, 153
displacement, 309–11
disposable income, 26, see also
consumption
dominant firm, 77
Dorfmann–Steiner condition,
197–8
E GDP, see gross domestic product
economic blocs, see ASEAN,
European Union, North
American Free Trade Area
economic environment, 7, 23–6
economic indicators, 56–9
economic policy, 8, 46,
economic profit, 245
index
economies of scale, 83, 91, 152,
157, 232
elasticities of demand, 112–15
elasticity of supply, 159
employment, 45, 56
EMU, see European monetary
union
engineering technique, 165–6
EU, see European Union
European Central Bank, 19–20
European monetary union,
12–14, 65
European Union, 13, 167
exchange rate, 19–20, 300
expected NPV, see net present
value
exports, 5, 16, 25, 28, 50, 57
F
factors of production, 146–7,
152, 156, 160
FDI, see foreign direct
investment
financial constraint, 91–2, 94, 97
financial globalisation, 8, 16
financial regulation, 19
financial services, 9–10, 18, 20
fiscal deficit, 13, 15
fixed costs, 74, 160, 183
focus strategy, 226–7, 230
foreign direct investment, 4, 5,
7, 11, 16, 18
forward vertical integration, 91
FSM, see financial services
functional relationships, 23–30
future value, 243, 253–4
G
GATS, see General Agreement on
Trade in Services
GATT, see General Agreement on
Trade and Tariffs
General Agreement on Trade
and Tariffs, 4–5, 8
General Agreement on Trade in
Services, 8
generic strategies, 227
globalisation, 3–4, 7–14, 15–20
globalisation of production, 49,
65
341
index
goals of the firm, 143
goods and services, 9–10, 13,
15–16, 19, 24
goods and services market, 26
government, 7, 13, 19–20, 24–5,
29
gross domestic product, 4, 6–7,
13, 15–18, 20, 57–9
gross national income, 34
growth maximisation, 71, 90–3
see also Marris growth
maximisation model
GSM, see goods and services
H market rate of interest, see IRR,
horizontal integration, 91
hurdle rate, 264
I marketing, see advertising
imperfect information, 99–100
import penetration, 67
imports, 4–5, 16, 33
index numbers, 50, 54
indifference curves, 87
inferior good, 109, 114
inflation, 12, 51, 66–7, 161, 183,
253, 263
input suppliers, 115
interest rates, 8, 13, 17, 63, 79
internal rate of return, 263–5
investment appraisal, 224, 241,
253
investment decisions, 63
IRR, see internal rate of return
irregular component, 97
iso-sales analysis, 206
K Trade Area
kinked demand curve, 176
L 56–7
labour, 9, 57, 74, 101, 146–8
law of supply, 141, 146
limit pricing, 173, 175, 177
linear demand function, 127
long-run cost estimation, 164–7
luxury items, 200
M normal good, 114
macroeconomic, 1, 19, 23, 41,
56, 63
342
managerial constraint, 91, 93, 95
managerial economics, 23, 236
managerial utility, 71, 84–8,
94–6
marginal cost, 73–6, 162, 173,
177–8, 179, 183, 197, 322
marginal cost curve see marginal
cost
marginal physical product,
149–50
marginal product, 159
marginal revenue, 73–6, 79–80
marginal revenue curve, 172–8
market failure, 306–11
discounted cash flow
market research, 123–5, 210, 231
market structure, 172–8
marketing configuration,
215–16, 218–19
markup, 183–4
Marris growth maximisation
model, 90, 94–6
mature markets, 204, 212
maximin method, 300–1
MC, see marginal cost
microeconomic theory, 171
minimax regret method, 301
monetary union, see EMU
monopoly, 172–5, 180, 191
MR, see marginal revenue
multi-product firm, 76
multi-stage production, 110
N
NAFTA, see North American Free
national expenditure, 30
national income, 30, 34, 50,
neoclassical economic theory,
307
net present value, see discounted
cash flow
nominal data, 50–1
non-perfect competition, 76–7
normal distribution curve, 284–6
North American Free Trade Area,
5

O RPI, see retail price index
oligopoly, 172, 175–7, 191
operating cost function, 161
opportunity cost, 241–2, 244
ordinary least squares, 128
ordinary least squares technique,
162
P shareholders, 76, 79–81
payback method, 246
penetration price, 180–1
perfect competition, 172
performance indicators, 56–8
planning cost function, see long-
run cost estimation
price competition, 176, 184
price elasticity of demand, 113,
198
price leadership, see oligopoly
price positioning, 184–5
price skimming, 179–80
pricing to infer quality, 185
probability analysis, 284–6
product life cycle, 232
product mix, 76
production function, 147, 158–9
production theory, 146, 151
profit maximisation, 73–7
profit maximising rate of sales
growth model, 90–3
profit related pay, 76
promotional pricing, 187
protection, 14
public policy, 167
public provision of services, 8
public sector, 55, 167
public sector investment, 167
R V
rate of return, see return on
capital, discounted cash flow,
IRR
recession, 16–18
regional policy, 220
regression analysis, 126–31
regression equation, 127–8
regression statistics, see
regression analysis
retail price index, 52–6
return on capital, 63, 246–9
risk adjusted discount rate,
279–80
index
S
sales force opinion, 120–1
sales maximisation, see
penetration price
satisficing model, 99–100
share price, 89, 92–3
short-run cost function, see
operating cost function
simulated store technique,
123–4
single currency, see euro
standard error, 129–30
substitute good, 108, 109
supernormal profits, 85
supply curve, 144–5
supply theory, 141–143
survivor technique, 166–7
T
t-test, 129–30
target market, 205, see also
demand function
target return pricing, 189
taxation, 19–20, 31, 34
theory of demand, 108
total physical product, see
production function
total revenue, 73–5
total revenue curve, 79–80
trade restrictions, 220
transfer pricing, 189–90
U
unemployment, 57–8, 125, 220
value for money, 186–7, 306–7,
311
value maximisation, 89–90
variable cost, 73–4
variable cost curve, 161–2, see
also short-run cost function
W
wealth maximisation model, 68
World Trade Organization
(WTO), 6, 15
343