Managerial Economics, 7th edition

Published by Pearson (January 3, 2013) © 2014

  • Paul G. Keat Thunderbird
  • Philip K. Young Thunderbird
  • Steve Erfle Dickinson College


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For upper-level undergraduate and first-year MBA courses in managerial and applied economics.

This text will excite readers by providing a more linear progression, while proving the consistency and relevance of microeconomic theory.

The Seventh Edition welcomes a new co-author, Stephen Erfle of Dickinson College, who has contributed many revisions and improvements to the quantitative sections of the text, as well as provided a major addition: the use of Excel in the presentation of many of the numerical and graphical illustrations presented throughout the text.
To strengthen students' ability to use Excel—a critical skill in today's job market—new Excel Applications (Excel Apps) allow readers to turn the static figures and tables in the text into dynamic illustrations.

Situational Analysis
Stemmed from a student commenting, “This book is very dry. What it needs is a plot!” the authors have created a text based on challenges managers face in the fictional company, Global Foods Inc.  Each chapter includes a:

  • Situation
  • Presentation of economics tools and analysis
  • Solution

Integrated Running Case Every chapter begins and ends with a situation facing managers at Global Foods, Inc., a company competing in the beverage industry.  By encapsulating the concepts with this integrated case, students will always know how the concepts apply to them.  By following one company, in one industry, students are able to see how economic decision-making can be applied across the vast array of functional units within the same organization. 
Reading Ease
In order to avoid distractions, the authors have deliberately chosen not to use boxed or shaded section of stories scattered throughout the chapter.    
Global Applications At the end of each chapter, the authors have included a “Global Application,” so readers understand the global implications of the concepts and tools of managerial economic analysis.  In this edition, more examples, both in the Global Application sections and in the main body of the chapter, are drawn from world growth markets such as China, India, Brazil, and Russia.
  Appendices and Companion Website

The website contains Internet exercises, activities, and resources related specifically to Managerial Economics: Economic Tools for Today’s Decision Makers. A number of other resources are available on the Companion Website such as the Mathematical Appendix, Time Value of Money Appendix, and Excel exercise modules. The modules provide students with templates of the economic models in the text. In this edition, we have introduced a new feature for our Companion Website: Excel Apps A listing of Excel Apps is provided on the inside back cover. The Excel Apps provide students with instructions to build their own models. In so doing, they gain a deeper understanding of the underlying assumptions of the models themselves.

  • Business Simulation: New to the seventh edition is an online, computer-based business simulation. In this simulation, a student becomes the product manager of ‘alpha’, a consumer product similar to bottled water or soft drinks. The student has the choice of being a low-price competitor (e.g., a private label bottled water) or a premium-price competitor (e.g., Evian or San Pellegrino). The student competes against two computer-generated companies. One is a low-price competitor; the other is a premium-priced competitor. Students make decisions on price, marketing, process development (to lower costs), and production capacity. By making these decisions and getting the results, students learn in a dynamic and engaging way about the concepts of price and marketing elasticities and the interdependency of pricing in oligopolistic markets.
  • Online Study Guide: The Online Study Guide offers students another opportunity to sharpen their problem-solving skills and to assess their understanding of the text material. The Online Study Guide grades each question submitted by the student, provides immediate feedback for correct and incorrect answers, and allows students to e-mail results to up to four e-mail addresses.
  • Excel Applications (Excel Apps):  Excel Apps allow readers to turn the static figures and tables in the text into dynamic illustrations.  In so doing, they will also strengthen students’ ability to use Excel—a critical skill in today’s job market. These apps, noted with an icon, are available to readers on the website; an index delineating what is in each Excel app is provided on the inside rear cover of the text. 
This edition’s changes are based on the authors’ classroom teaching, consulting engagements and corporate education seminars, as well as a number of useful suggestions from reviewers of the sixth edition. 
New co-author, Stephen Erfle of Dickinson College, has contributed many revisions and improvements to the quantitative sections of the text, as well as provided a major addition:  the use of Excel in the presentation of many of the numerical and graphical illustrations presented throughout the text.  
Excel Applications (Excel Apps) have been added for a number of the numerical and graphical illustrations used throughout the text.  Excel Apps allow readers to turn the static figures and tables in the text into dynamic illustrations.  In so doing, they will also strengthen students’ ability to use Excel–a critical skill in today’s job market.  These apps, noted with an icon, are available to readers on the website; an index delineating what is in each Excel app is provided on the inside rear cover of the text. 
A series of Regression Excel Apps provide readers with a more detailed discussion of many of the topics in regression analysis touched on in Chapter 5. See the Excel apps listing on the back cover for further information about regression topic coverage in various chapters.
A rewritten chapter on game theory and asymmetric information (Chapter 11).  This was in response to user feedback asking for stronger intuition of this challenging topic.  There is increased coverage of game theory and bargaining as well as a more in depth discussion of adverse selection and moral hazard.
A new chapter on managerial economics in action (Chapter 15).  Throughout the text, the authors try to show how the economic concepts and tools of analysis can be applied to the beverage industry by introducing in each chapter a “Situation” and a “Solution” for our hypothetical company “Global Foods.”   In the concluding chapter, they authors discuss how the basic concepts of supply and demand can be applied to the real global soft drink industry.  This chapter was written especially for this edition by a seasoned industry consultant, Farshad Sarmad.  Using current industry data and his own experiences, Farshad shows how the factors affecting supply and demand can be readily applied to various segments of the soft drink industry in countries around the world.
Chapter 5, Demand Estimation and Forecasting, has an added section on significant developments in information and communications technology (e.g., cloud computing, social media, and Internet commerce) that have enabled businesses to store massive amounts of data that are being generated in digital format.  Dr. Mukal Patki, a business analytics specialist at PayPal, talks about how “big data” has enabled companies to conduct in-depth studies of consumer behavior using a technique called “test and learn.” (Appendix 5B)
Chapter 14, Government and Industry, has an added a discussion of patent laws and the concept of protecting intellectual property (IP) such as trademarks and copyrights. This section was written by Riyon Harding, an expert in the commercialization of IP at IBM, a company that is recognized throughout the world for the number of new patents it receives from the government every year.
Navin Punjabi, a professor of business in Mumbai, discusses some of the challenges of doing business in India (Chapter 13). 
Lisa Vortsman, a product manager for the food “dressings” category in an actual “Global Foods” company (Lisa requested that her company not be identified), talks about the challenges of increasing the demand for this category in countries like Russia and Brazil. 
F. John Mathis, Professor of Global Economics and Finance, has written a highly informative summary of the causes and consequences of the 2008 Financial Crisis (Chapter 14). 
Steve Martson, a recently retired executive who has led supply chain systems implementation in such companies as Dell and IBM, talks about some of his experiences working in this very important field (Appendix 7C).
As we have done in all of our previous editions, we have updated our examples wherever appropriate.  We have kept some of the examples that we first introduced in our previous editions if we believe they serve as good teaching illustrations, regardless of when they occurred.

Table of Contents

  • 1. Introduction
  • 2. The firm and Its Goals
  • 3A. Supply and Demand
    • Appendix 3. The Mathematics of Supply and Demand
  • 4. Demand Elasticity
    • Appendix 4. Applications of Supply and Demand
  • 5. Demand Estimation and Forecasting
  • 6. The Theory and Estimation of Production
    • Appendix 6A. The Production of Services
    • Appendix 6B. The Multiple-Input Case
    • Appendix 6C. Expressing the Production Function with the Use of Calculus
  • 7. The Theory and Estimation of Cost
    • Appendix 7A. A Mathematical Restatement of the Short-Run Cost Function
    • Appendix 7B. The Estimation of Cost
  • 8. Pricing and Output Decisions: Perfect Competition and Monopoly
    • Appendix 8A. The Use of Calculus in Pricing and Output Decisions
    • Appendix 8B. Break-Even Analysis (Volume-Cost-Profit)
  • 9. Pricing and Output Decision: Monopolistic Competition and Oligopoly
  • 10. Special Pricing Practices
  • 11. Game Theory and Asymmetric Information
  • 12. Capital Budgeting and Risk
    • Appendix 12A. The Value of A Corporation
  • 13. The Multinational Corporation and Globalization
  • 14. Government and Industry: Challenges and Opportunities for Today's Manager
  • 15. Managerial Economics in Action
    • Part 1. Beverage Industry Survey
    • Part 2. The Business Planning Process
    • Appendix 15A. Beverage Industry Executives

Appendix A. Statistical and Financial Tables

Online appendices

Review of mathematical concepts used in managerial economics

Linear programming

Calculations for the time value of money

Solutions to odd-numbered problems


Paul G. Keat has been a member of the Global Business Faculty at Thunderbird School of Global Management for the past twenty-five years. At present he is an Associate Professor Emeritus. Prior to his coming to Thunderbird, he was associated for many years with the International Business Machines Corporation in professional and managerial capacities.

His education includes a B.B.A. in accounting from the Baruch School of the City University of New York, an M.A. from Washington University, and an M.A. and Ph.D. in economics from the University of Chicago.

Dr. Keat began his IBM career in the department of economic research and then moved into the long-range planning area. Later, as a member of the finance function, he spent several years at IBM’s European headquarters in Paris, as manager in the financial planning area and then as the financial manager for the company’s European software business. After his return to the United States, Dr. Keat served as manager in the pricing area of one of the company’s manufacturing groups. Before leaving IBM in 1987, he was associated with the company’s International Finance, Planning and Administration School (IFPA), where he taught managerial economics, lectured on finance in a number of company-related courses, and managed academic courses. He also taught at IBM’s IFPA School at La Hulpe, Belgium.

Dr. Keat has taught at several U.S. universities, including Washington University, the City University of New York (CUNY), and Iona College. He was an adjunct professor of finance at the Lubin Graduate School of Business at Pace University, and he also taught in Pace University’s Executive MBA program.

Philip K. Y. Young ( is the founder and president of Nth Degree Systems, Inc., a consulting firm that provides customized education and training programs to major corporations around the world. He recently co-founded Learning Burst Academy (, a company that produces courses in business education in an innovative, digital format. He is also a member of the global faculty network of Duke Corporate Education. He has thirty years of teaching experience as a professor of economics in MBA programs and over twenty-five years of experience developing and teaching customized education and training programs.

Most of Dr. Young’s teaching career was spent in the Lubin School of Business at Pace University in New York, followed by several years as clinical professor of management at Thunderbird School of Global Management. His list of clients includes a number of multinational corporations in industries such as information technology, telecommunications, fast-moving packaged consumer goods, consulting services, advertising and public relations, pharmaceuticals, semiconductor manufacturing and design, diversified manufacturing, and financial services. He teaches for these companies in the United States, Latin America, western and central Europe, Asia, and the Middle East.

Dr. Young received a B.A. from the University of Hawaii, a master’s degree in international relations from Columbia University, and a Ph.D. in economics from New York University.

Stephen E. Erfle began his career as a managerial economist during a 1994—1995 sabbatical at Seagram Classics Wine Company (SCWC). During those fourteen months, he maintained offices at Sterling Vineyards and at Mumm Cuvée Napa, where, respectively, the finance and marketing departments of SCWC resided. Trained as a microeconomic theorist, he began to use his economist’s toolkit to analyze concrete business questions, such as, Should Mumm raise the price of Brut Prestige a dollar a bottle? When does it make sense to have another tasting room associate on the floor in Sterling’s tasting room?

On returning to Dickinson College, Dr. Erfle decided to refocus his teaching in a more applied direction. He helped found the International Business and Management department and major during the late 1990s. One of the core courses in that major is his course, Managerial Economics, which uses Excel as a teaching platform. This course is modeled after what he did during his SCWC sabbatical. In the past fifteen years, he has taught more than a thousand undergraduates how to build economic models in order to do comparative statics analysis and how to do regression modeling in Excel.

Dr. Erfle received a B.S. in mathematics and B.A. in economics from the University of California, Davis, and a master’s and Ph.D. in economics from Harvard University. He has also taught in the Economics Department at Dickinson College and in the School of Social Sciences at the University of California, Irvine. He is also involved in wine education; he has taught wine-tasting classes and conducted wine tastings since his graduate school days as the resident economics and wine tutor for Harvard’s Leverett House.

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