JOHN SLOMAN EJ O Economics and The BUsinEss EnvironmEnt c SECOND EDITION H o N n S L Economics and the Business Environment is unique in o Get interactive with sloman! O introducing the essential principles of microeconomics and mM macroeconomics and applying them to the world of business. A Consideration is also given to wider, topical business issues, This textbook is accompanied by a Companion i such as business strategy, corporate social responsibility, ethics Website with Grade Tracker – rich in resources to cN and the state of the global environment in which we live today. enable you to assess your own learning. s Classic Sloman features: The website includes: a • Key ideas explained in context and cross-referenced • An online workbook and study guide, with n throughout the book. interactive exercises, diagrams that you can • Technical terms defined in the margin of the page where manipulate, videos and links to articles and d they first appear. other materials. • ‘Pause for thought’ questions, integrated throughout the • Self-test questions organised by chapter T book, encourage reflective learning. with automatic feedback and grading. h • A vast range of cases and applied material demonstrate • Economic news articles, updated monthly. e how economics can be used to understand real business • Hotlinks to over 200 useful websites, listed situations, including case studies on the London Olympics, at the end of the book and referred to at B investing in China and companies such as Samsung, Dyson, the end of each part. U Body Shop and The Gap. • Extra case studies with question for self • Direct and straight-forward writing style with short study, listed at the end of each part. s JOHN SLOMAN paragraphs to aid rapid comprehension. i Visit www.pearsoned.co.uk/sloman and get n Economics and What’s new: interactive with Sloman. To gain access, simply E • Realigned into four parts with global business redeem your unique access code inside this book. environment coverage integrated further into the text. s The BUsinEss EnvironmEnt • New and extended coverage of STEEPLE analysis, s the application of game theory to business situations, transactions cost analysis, the economics of E entrepreneurship, business ethics and corporate n social responsibility and the competitive advantage v SECOND EDITION of nations. • The list of business issues covered at the start of each i r chapter is now accompanied by a chapter map showing the topics covered and their respective pages. o • 21 new boxes included in this edition provide n further case study material. m As its new title illustrates, Economics and the Business E Environment, now in its second edition, is ideal for both introductory courses in economics taught from a business n perspective and business environment modules with an t economic underpinning. John sloman is Director of The Economics Network – the economics subject centre of the Higher Education Academy based at the University of Bristol. He is the author of several best-selling textbooks in economics also published by Pearson Education and used by students across the world. For a list of SECOND these titles please see the last page of the text. EDITION Access code InsIde unlock valuable online learning resources Once opened this pack www.pearson-books.com an imprint of cannot be returned for a refund 9780273710370_02_COVER.indd 1 3/10/07 09:39:16 ECOA_A01.qxd 9/21/07 2:04 PM Page i ECONOMICS AND THE BUSINESS ENVIRONMENT Visit the Economics and the Business Environment, Second Edition, Companion Website with Grade Tracker at www.pearsoned.co.uk/sloman to find valuable student learning material including: n Online workbook and study guide with interactive exercises, diagrams and videos n Multiple choice questions with Grade Tracker function to test your learning and monitor your progress n Business issues for each chapter n Up-to-date case studies with questions for self study n Topical economic issues relating directly to material in the book n Economics news articles with features on topical stories, with analysis and links to the book n Hotlinks to over 200 relevant sites on the web n Answers to all in-chapter ‘Pause for Thought’ questions n An online glossary to explain key terms Companion Website with Grade Tracker looks and performs just like a regular Companion Website. However, the student will need the access code shrink-wrapped with every copy of the book to register and gain access to the website. As the student completes the assessment ques- tions, the scores are automatically entered into the student’s personal gradebook, which is acces- sible through the ‘Grade Tracker’ link. Lecturers must also register for access to the Companion Website with Grade Tracker to be able to create a class for students to join. Lecturers who choose to participate in providing a class gain access to a class gradebook in which they can track student grades and download their results for integration into other systems. ECOA_A01.qxd 9/21/07 2:04 PM Page ii We work with leading authors to develop the strongest educational materials in economics bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high-quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk. ECOA_A01.qxd 9/21/07 2:04 PM Page iii ECONOMICS AND JOHN SLOMAN THE BUSINESS ENVIRONMENT SECOND EDITION ECOA_A01.qxd 10/4/07 2:01 PM Page iv Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published 2005 Second edition 2008 © Pearson Education Limited 2005, 2008 The right of John Sloman to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6-10 Kirby Street, London EC1N 8TS. All trademarks used therein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN 978-0-273-71037-0 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 9 8 7 6 5 4 3 2 1 11 10 09 08 07 Typeset in 9/12 Stone Serif by 35 Printed and bound by Rotolito Lombarda, Italy The publisher’s policy is to use paper manufactured from sustainable forests. ECOA_A01.qxd 9/21/07 2:04 PM Page v Brief Contents Guided tour xii Preface xvi Custom publishing xxi Acknowledgements xxiii Part A Introduction 1 Chapter 1 Business and the economic environment 3 Part B Markets, demand and supply 31 Chapter 2 The working of competitive markets 33 Chapter 3 Demand and the consumer 65 Chapter 4 Supply decisions in a perfectly competitive market 91 Part C The microeconomic environment of business 123 Chapter 5 Pricing and output decisions in imperfectly competitive markets 125 Chapter 6 Business growth and strategy 161 Chapter 7 Multinational corporations and business strategy in a global economy 193 Chapter 8 Labour and employment 217 Chapter 9 Government, the firm and the market 243 Part D The macroeconomic environment of business 275 Chapter 10 The economy and business activity 277 Chapter 11 National macroeconomic policy 313 Chapter 12 The global trading environment 339 Chapter 13 The global financial environment 363 Web appendix W:1 Key ideas K:1 Glossary G:1 Index I:1 ECOA_A01.qxd 9/21/07 2:04 PM Page vi ECOA_A01.qxd 9/21/07 2:04 PM Page vii Contents Guided tour xii Preface xvi Custom publishing xxi Acknowledgements xxiii Part A Introduction 1 Chapter 1 Business and the economic environment 3 1.1 The business organisation 6 1.2 The external business environment 11 1.3 The economist’s approach to business 22 Box 1.1 Minding The Gap 4 Box 1.2 The biotechnology industry 15 Box 1.3 The changing nature of business 22 Questions 27 Part end – additional case studies and relevant websites 28 Part B Markets, demand and supply 31 Chapter 2 The working of competitive markets 33 2.1 Business in a perfectly competitive market 33 2.2 Demand 35 2.3 Supply 40 2.4 Price and output determination 43 2.5 Elasticity of demand and supply 50 Box 2.1 Stock market prices 46 Box 2.2 UK house prices 48 Box 2.3 Shall we put up our price? 56 Box 2.4 Speculation 58 Questions 62 Chapter 3 Demand and the consumer 65 3.1 Demand and the firm 65 3.2 Understanding consumer behaviour 66 3.3 Estimating and predicting demand 73 ECOA_A01.qxd 9/21/07 2:04 PM Page viii viii CONTENTS 3.4 Stimulating demand 79 Box 3.1 Rogue traders 70 Box 3.2 Problems for unwary insurance companies 72 Box 3.3 Taking account of emotion 76 Box 3.4 Brands and own-brands 82 Box 3.5 Advertising and the long run 86 Questions 89 Chapter 4 Supply decisions in a perfectly competitive market 91 4.1 Production and costs: short run 91 4.2 Production and costs: long run 99 4.3 Revenue 110 4.4 Profit maximisation 112 Box 4.1 Diminishing returns and business 93 Box 4.2 Making use of your fixed inputs 97 Box 4.3 Industrial clusters and competitiveness 104 Box 4.4 Minimum efficient scale 108 Box 4.5 The logic of logistics 116 Box 4.6 E-commerce 118 Questions 120 Part end – additional case studies and relevant websites 121 Part C The microeconomic environment of business 123 Chapter 5 Pricing and output decisions in imperfectly competitive markets 125 5.1 Alternative market structures 125 5.2 Monopoly 128 5.3 Oligopoly 135 5.4 Game theory 141 5.5 Alternative aims of the firm 147 5.6 Setting price 151 Box 5.1 Concentration ratios 127 Box 5.2 Windows cleaning 132 Box 5.3 Supermarket wars 139 Box 5.4 The prisoners’ dilemma 144 Box 5.5 Stakeholder power? 150 Box 5.6 Easy pricing 154 Questions 159 Chapter 6 Business growth and strategy 161 6.1 Strategic analysis 161 6.2 Strategic choice 167 ECOA_A01.qxd 9/21/07 2:04 PM Page ix CONTENTS ix 6.3 Growth strategy 172 6.4 Financing growth and investment 182 6.5 Starting small 185 Box 6.1 Business strategy the Samsung way 168 Box 6.2 Horizontal growth and vertical ‘deintegration’ 178 Box 6.3 The Dyson Dual Cyclone vacuum cleaner 188 Questions 190 Chapter 7 Multinational corporations and business strategy in a global economy 193 7.1 Multinational corporations 193 7.2 Business strategy in a global economy 197 7.3 Problems facing multinationals 207 7.4 Multinationals and the host state 209 Box 7.1 The transnationality index 200 Box 7.2 Merger activity 204 Box 7.3 Grocers go global 206 Box 7.4 Investing in China 210 Questions 214 Chapter 8 Labour and employment 217 8.1 The UK labour market 217 8.2 Market-determined wage rates and employment 218 8.3 Power in the labour market 225 8.4 Minimum wages 229 8.5 The flexible firm and the market for labour 232 8.6 The labour market and incentives 235 Box 8.1 ‘Telecommuters’ 221 Box 8.2 The Internet and labour mobility 234 Box 8.3 The market for talent 238 Questions 240 Chapter 9 Government, the firm and the market 243 9.1 Market failures 243 9.2 Business ethics and corporate social responsibility 248 9.3 Government intervention in the market 252 9.4 Environmental policy 253 9.5 Competition policy and business behaviour 261 9.6 The regulation of business 266 Box 9.1 The Body Shop 250 Box 9.2 A Stern warning 254 Box 9.3 The problem of urban traffic congestion 258 Box 9.4 A lift to profits? 264 Box 9.5 What price for peace of mind? 265 Questions 269 Part end – additional case studies and relevant websites 271