While the debate continues, recent studies show that airline deregulation has in fact led to significantly more air travel but that the number of airline accidents and deaths has not bee
Trang 1Chapter 2 Competitive Product Markets 40
the price at the pump remains constant at the price ceiling, does that mean that the “real price” of gasoline has remained constant?
9 If the government imposes a price floor on whole milk and buys the resulting surplus, can it later sell what it has bought and recoup its expenditure? What else can the government do with the milk surplus? Why would you, as a milk producer, want the price floor? Show the industry benefits in a graph
10 Henry Ford more than doubled his workers’ wages Did worker real income double by Ford’s pay policy? Reflecting on the general principles behind Ford’s pay action, when should any firm – your firm – stop raising the pay of workers (not in terms of actual dollar amount but in terms of some economic/management principle that you can devise)?
11 Workers and their employers often talk about how workers “earn” their wages but about how firms “give” their workers health insurance (or any other fringe benefit) Should the different methods of pay be discussed in different terms?
12 In state universities, why does the state subsidize full-time MBA programs but not
executive MBA programs? Should the two programs be treated differently? Does the state subsidy explain the price differential for students in the two programs?
READING: The Effect of Airline Deregulation on Travel Safety
William F Shughart II, University of Mississippi
Before 1978 airlines in the United States were strictly controlled by government agencies The safety of airlines was, and remains today, regulated by the Federal Aviation Administration (FAA) In addition, the Civil Aeronautics Board (CAB) controlled airline fares and routes The effect of CAB regulations was to restrict the ability of airlines to compete by price and entry into markets Without CAB approval, for example, Delta Airlines could not lower its air fares or enter new markets to expand its business
In 1978 Congress passed legislation to eliminate gradually most of the economic controls the CAB had over the domestic airline industry However, airlines were not totally free to set prices and change routes until 1983
Many commentators fear that airline deregulation may have resulted in a reduction in the safety of air travel in the United States.1 From the perspective of economic theory, there are several reasons for
believing that air safety may have been compromised First, airline deregulation has led to reductions in the prices of many popular flights, especially long-distance flights (say, between New York and Los Angeles), and travel by air may have increased Deregulation may have increased the opportunity for air accidents Second, with the expansion of air travel, airlines may have had to draw on less experienced, qualified, and careful pilots and mechanics
Third, with greater competition in the airline industry, several airlines may have become unprofitable and mangers may have reduced expenditures on needed plane repairs in order to increase airline profits Fourth, before airfares were deregulated, airlines may have competed in many nonprice ways—for example, meals and in-flight service, movies, interiors of planes, and safety records When they could compete by price after deregulation, airlines may have sacrificed safety competition for price competition All of these factors may have led to increased air accidents and deaths
Trang 2Chapter 2 Competitive Product Markets 41
Economists have statistically investigated the effect of airline deregulation on airline safety While the debate continues, recent studies show that airline deregulation has in fact led to significantly more air travel but that the number of airline accidents and deaths has not been affected.2 Airline deaths have been on a downward trend for decades, and airline deregulation does not appear (to date) to have slowed the pace of decrease.3 Economists have reasoned that the greater freedom given airlines by deregulation may have been held in check by the considerable costs that airlines incur when they do have accidents Airlines, in other words, may have continued to maintain their safety records because of the fear and cost of liability suits that are brought against them when they do have crashes In addition, Congress never deregulated safety
Various government policies often have hidden, secondary market effects that economists and
policymakers must consider Airline deregulation is a good case in point Airline deregulation could have reduced total travel deaths in the country by its indirect impact on highway travel and accidents
By deregulating airlines fares, Congress increased air travel At the same time, Congress increased the
relative cost of travel by car on the nation’s highways This is because, as noted, after deregulation, air
travel became more convenient and often cheaper Therefore, car travel became relatively expensive relative
to air travel
Airline deregulation has had two distinct effects on automobile travel It has had a price (or substitution) effect Less automobile travel would be expected with relatively lower airfares Airline
deregulation has also had an income effect because greater efficiency in air travel may have led to more
national production and income The greater national income may have led to more travel by air and cars Because the price and income effects of airline deregulation on automobile travel are not expected to be in the same direction, theory alone does not give a clear answer to the question, “How has airline deregulation affected automobile travel?” Statistical analysis is required, and the only study currently available on the issue found that airline deregulation has, indeed, reduced travel by automobiles (by an annual average of nearly 4 percent between 1979 and 1985).4 However, because miles traveled on highways and automotive accidents and deaths are likely to be directly related, the small estimated decrease in automobile travel may have reduced automotive accidents and deaths by a sizable number In fact, one of the authors estimates that airline deregulation has probably reduced automobile accidents by an annual average of several hundred thousand and deaths by an annual average of several hundred.5
The indirect effects of policy changes, which are revealed through economic analysis, cannot be ignored
by policymakers Policymakers need to be mindful of the fact that efforts to resurrect the type of airline regulation abandoned in the late 1970s may, or may not, improve airline safety records Re-regulation, however, may cause people to shift from air travel to highway travel Unfortunately, highway travel remains far more dangerous than air travel, and unless precautions are taken, overall travel deaths can be increased
by airline re-regulation This does not mean that re -regulation should not be undertaken but only that care must be taken in designing any new economic controls on airlines
1
See Hobart Rowen, “Bring Back Regulation,” Washington Post (National Weekly Edition), August 31,
1987, p 5
2
See Nancy L Rose, Financial Influences on Airline Safety, no 1890-87 (Cambridge, Mass.: Sloan School
of Management, Massachusetts Institute of Technology, 1987; and Richard B McKenzie and William F
Shughart II, “The Impact of Airline Regulation on Air Safety,” Regulation (January 1988), pp 42-47
3
Establishing the effect of airline deregulation on air travel and air accidents and deaths is more difficult than
it appears This is because many factors affect air travel and deaths, including the amount of income people
in the economy have to spend The very valuable statistical methods used by economists to separate the impact of airline deregulation from people’s income are called econometrics
4
Richard B McKenzie and John T Warner, The Impact of Airline Deregulation on Highway Safety (St
Louis: Center for the Study of American Business, Washington University, December 1987)
Trang 3Chapter 2 Competitive Product Markets 42
5
Ibid., p 4
Trang 4CHAPTER 3
Principles of Rational Behavior at
Work in Society and Business
We are not ready to suspect any person of being defective in selfishness
ith this chapter we begin a detailed examination of key issues in
microeconomics, namely the study of how prices are determined in individual markets Prices are important – or, rather, should be important – to managers because of their unavoidable impact on the decisions of managers within individual
firms We have already seen how the forces of supply and demand determine prices
(Chapter 2) Now we will explore the determinants of the supply and demand for goods,
services, and resources
Microeconomics rests on certain assumptions about individual behavior One is that people are capable of envisioning various ways of improving their position in life This chapter reviews and extends the discussion begun in Chapter 1 of how people – business people included go about choosing among those alternatives According to microeconomic theory, consumers and producers make choices rationally, so as to
maximize their own welfare and their firms’ profits This seemingly innocuous basic
premise about human behavior will allow us to deduce an amazing variety of
implications for business and every other area of human endeavor
Rationality: A Basis for Exploring Human Behavior
People’s wants are ever expanding We can never satisfy all our wants because we will always conceive of new ones The best we can do is to maximize our satisfaction, or
utility, in the face of scarcity Utility is the satisfaction a person receives from the
consumption of a good or service or from participation in an activity Happiness, joy, contentment, or pleasure might all be substituted for satisfaction in the definition of
utility Economists attempt to capture in one word—utility—the many contributions
made to our well being when we wear, drink, eat, or play something
The ultimate assumption behind this theory is that people act with a purpose In the words of von Mises, they act because they are “dissatisfied with the state of affairs as
it prevails.”1
1
Ludwig von Mises, The Ultimate Foundations of Economic Science: An Essay on Method (Princeton,
N.J.: D Van Nostrad, 1962), pp 2—3
W
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The Acting Individual
If people act in order to satisfy their consciously perceived wants, their behavior must be
self directed rather than externally controlled However, there is no way to prove this
assertion Economists simply presume that individuals, as opposed to groups, perform
actions It is the individual who has wants and desires, and looks for the means to fulfill
them It is the individual who attempts to render his or her state “less unsatisfactory.”
Group action, when it occurs, results from the actions of the individuals in the
group Social values, for instance, draw their meaning from the values held collectively
by individuals Economists would even say that group action cannot be distinguished
from individual action Although economists do not deny the existence of group
psychology, they leave the study of social groups to others Thus to understand group
behavior, the economist looks to the individual
Of course individuals in a group affect one another’s behavior In fact, the size
and structure of a group can have a dramatic effect on individual behavior When
economists speak of a competitive market, they are actually talking about the influence
that other competitors have on the individual consumer or firm
Rational Behavior
When individuals act to satisfy their wants, they behave rationally Rational behavior is
consistent behavior that maximizes an individual’s satisfaction The notion of rational
behavior rests on three assumptions:
• First the individual has a preference and can identify, within limits, what he or she wants
• Second, the individual is capable of ordering his or her wants consistently,
from most preferred to least preferred
• Third, the individual will choose consistently from these ordered preferences
to maximize his or her satisfaction
Even though the individual cannot fully satisfy all her wants, she will always choose
more of what she wants rather than less Furthermore, she will always choose less rather than more of what she does not want In short, the rational individual always stands
ready to further her own interests
Some readers will find these assertions obvious and acceptable To others, they
may seem narrow and uninspiring Later in the chapter we will examine some possible
objections to the concept of rational behavior, but first we must examine its logical
consequences
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3
Rational Decisions in a Constrained Environment
Several important conclusions flow from the economist’s presumption of rational
behavior First, the individual makes choices from an array of alternatives Second, in
making each choice, a person must forgo one or more things for something else All
rational behavior involves a cost, which is the value of the most preferred alternative
forgone Third, in striving to maximize his or her welfare, the individual will take those
actions whose benefits exceed their costs
Choice
We assume that the individual can evaluate the available alternatives and select the one
that maximizes his utility Nothing in the economic definition of rational behavior
suggests that the individual is completely free to do as he wishes Whenever we talk
about individual choices, we are actually talking about constrained choices—choices that are limited by outside forces For example, you as a student find yourself in a certain
social and physical environment and have certain physical and mental abilities These
environmental and personal factors influence the options open to you You may have
neither the money, the time, nor the stomach to become a surgeon, or your career goal
may not allow you the luxury of taking many of the electives listed in your college
catalog
Although your range of choices may not be wide, choices do exist At this
moment you could be doing any number of things instead of reading this book You
could be studying some other subject, or going out on a date, or playing with your son or daughter You could have chosen to go shopping, to engage in intramural spots, or to jog around the block You may not be capable of playing varsity sports, but you have other
choices Although your options are limited, or constrained—you are not completely free
to do as you please—you can still choose what you want to do In fact, you must choose
Suppose that you have an exam tomorrow in economics and that there are exactly two things you can do within the next 12 hours You can study economics, or you can
play your favorite video game These two options are represented in Figure 3.1 Suppose you spend the entire 12 hours studying economics In our example, the most you can
study is four chapters, or E1 At the other extreme, you could do nothing but play
games—but again, there is a limit: eight games or G1
Neither extreme is likely to be acceptable Assuming that you aim both to pass
your exam and to have fun, what combination of games and study should you choose?
The available options are represented by the straight line E1G1, the production
possibilities curve for study and play and the area underneath it If you want to maximize
your production, you will choose some point on E1G1, such as a: two chapters of
economics and four games You might yearn for five games and the same amount of
study, but that point is above the curve and beyond your capabilities If you settle for
less—say one chapter and three games, or point x—you will be doing less than you are
capable of doing and will not be maximizing your utility The combination you actually
choose will depend on your preference
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Changes in your environment or your physical capabilities can affect your
opportunities and consequently the choices you make For example, if you improve your study skills, your production rate for chapters studied will rise You might then be able to study eight units of economics in 12 hours in which case your production possibilities
curve would expand outward Even if your ability to play Amazons from Outer space
remained the same, your greater proficiency in studying would enable you to increase the
number of games played Your new set of production possibilities would be E2G1 in
Figure 3.2
Again, you can choose any point along this curve or in the area below it You
may decide against further games and opt instead for four chapters of economics (point
c) You could move to point b, in which case you would still be learning more
economics—three chapters instead of two—but would also be playing more games The important point is that you are able to choose from a range of opportunities The option
you take is not predetermined
FIGURE 3.1 Constrained Choice
With a given amount of time and other resources,
you can produce any combination of study and
games along the curve E1G1 The particular
combination you choose will depend on your
personal preferences for those two goods You
will not choose point x, because it represents less
than you are capable of achieving—and as a
rational person, you will strive to maximize your
utility Because of constraints on your time and
resources, you cannot achieve a point above
E1G1
FIGURE 3.2 Change in Constraints
If your study skills improve and your ability at the game remains constant, your production possibilities curve will shift from E1G1 to E2G.1 Both the number of chapters you can study and the number of games you can play will increase
On your old curve, E1G1 , you could study two
chapters and play four games (point a) On your new curve E2G1, you can study three chapters
and play five games (point b)
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Cost
The fact that choices exist implies that some alternative must be forgone when another is
taken If A and B represent two mutually exclusive opportunities, to choose A is
simultaneously to not choose B In the presence of choice—a situation in which no more
than one alternative can be taken at a time—a cost must be incurred Cost (or more
precisely, opportunity cost) is the value of the most highly preferred alternative not taken Put another way, it is the value the individual places on the most favored alternative not
taken at the time the choice is made For example, suppose that you have decided to
spend half an hour watching old television programs The two programs you most want
to watch are M.A.S.H and Gilligan’s Island If you choose Gilligan’s Island, the cost is the pleasure you sacrifice by not watching M.A.S.H
Notice that cost is not defined in terms of money Money is a useful measure
because it reduces all costs to one common denominator Money is only the means of
measuring cost, however; it is not cost itself The shoes you are wearing may have cost
you $50 (a money cost), but the real cost (the opportunity cost) is the value of what you
could have purchased instead Money cost is a monetary measure of the benefits forgone
when a choice is made The real cost is the actual benefits given up from the most
preferred alternative not taken when a choice is made When economists use the term
cost, they mean real, or opportunity, cost You could have bought dozens of soft drinks
or deposited the $50 in a savings account for future use Either option would be a
legitimate alternative to purchasing shoes The point is that the cost of the shoes to you is the value of the most attractive option not taken, whether it is the soft drinks or the future use of the money
As long as you have alternative uses for your time and other resources, there is no such thing as a free lunch Nothing can be free if other opportunities are available One
goal of economics courses is to help you recognize this very simple principle and to train
you to search for hidden costs There is a cost to writing a poem, to watching a sunset, to extending a common courtesy, if only to open a door for someone Although money is
not always involved in choices, the opportunity to do to other things is A cost is
incurred in every choice
Maximizing Satisfaction: Cost-benefit Analysis
An individual who behaves rationally will choose an option only when its benefits are
greater than or equal to its costs Furthermore, individuals will try to maximize their
satisfaction by choosing the most favorable option available That is, they will produce
or consume those goods and services whose benefits exceed the benefits of the most
favored opportunity not taken
This restatement of the maximizing principle, as it is called, explains individual
choice in terms of cost In Figure 3.1, the choices along curve E1G1 represent various
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cost-benefit tradeoffs If you choose point a, we must assume that you prefer a to any
other combination because it yields the most favorable ratio of benefits to costs
A change in cost will produce a change in behavior Suppose you and a friend set
a date to play checkers, but at the last moment he received a lucrative job offer for the
day of the match Most likely the contest will be rescheduled The job offer will change
your friend’s opportunities in such a way that what otherwise would have been a rational
act (playing checkers) becomes one that is no longer rational The cost of playing
checkers will rise significantly, enough to exceed the benefits of most checkers games
Economists see cost-benefit analysis as the basis of much (but certainly not all) of
our behavior Cost-benefit analysis is the careful calculation of all costs and benefits
associated with a given course of action Why do you attend classes, for example? The
obvious answer is that at the time you decide to attend class, you expect the benefits to
attending the exceed the costs The principle applies even to classes you dislike A
particular course may have no intrinsic value, but you may fear that by cutting class, you
will miss information that would be useful on the examination Thus the benefits of
attending are a higher grade than you would otherwise expect Besides, other options
open to you on Tuesday morning at 10:00 AM may have so little appeal that the cost of
going to class is very slight
Take another example Americans are known for the amount of waste they pile
up Our gross national garbage is estimated to be more valuable than the gross national
output of many other nations We throw away many things that people in other parts of
the world would be glad to have However morally reprehensible, waste may be seen as the result of economically rational behavior Wastefulness may be beneficial in a limited
personal sense The food wrappings people throw away are “wasted,” but they do add
convenience and freshness to the food In the individual’s narrow cost-benefit analysis,
the benefits of the wrapping can exceed the costs
Is life priceless? Although we like to think so, many of us are not willing to bear
the cost that must be paid to preserve it Several million animals—dogs, opossums,
squirrels, and birds—are killed on the highways each year Most of us make some effort
to avoid animal highway deaths If saving lives were all important, we could drive less
but that would bring a significant cost Even when human beings are involved, we
sometimes refuse to bear the cost of preserving life People avoid helping victims of
violent crime, and doctors routinely pass by highway accidents although they might save
lives by stopping to help Indeed, revolutions succeed through people’s willingness to
sacrifice lives—both others’ and their one to achieve political or economic goals
The behavior of business people is not materially different from that of drivers or
consumers People in business are constantly concerned with cost-benefit calculations,
only the comparisons are often (but not always) made in dollar terms: For example,
whether the cost of improving the quality of a product is matched by the benefits of the
improvement Will consumers value the added benefits enough to pay for hem? In
assessing the safety of their products, business people must consider whether consumers
are willing to pay the cost of any improvements
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The Effects of Time and Risk on
Costs and Benefits
When an individual acts, costs are not necessarily incurred immediately, and benefits are
not necessarily received immediately The decision to have a child is a good example
At turn of the century prices, a college educated couple’s first child can easily cost
more than $500,000, from birth through college.2 Fortunately this high cost is incurred
over a relatively long period of time (or people would rarely become parents!)
Benefits received in the future must also be compared with present benefits If
you had a choice between receiving $10,000 now and $10,000 one year from now, you
would take $10,000 today You could put the money in a bank, if nothing else, where it
would earn interest, or you could avoid the effects of future inflation by spending the
money now In other words, future benefits must be greater than present benefits to be
more attractive than present benefits
To compare future costs and benefits on an equal footing with costs and benefits
realized today, we must adjust them to their present value Present value is the value of
future costs and benefits in terms of current dollars The usual procedure for calculating
present value a process called discounting involves an adjustment for the interest that could be earned (or would have to be paid) if the money were received (or due) today
rather than in the future.3
If there is any uncertainty about whether future benefits or costs will actually be
received or paid, further adjustments must be made Without such adjustments, perfectly rational act may appear to be quite irrational For example, not all business ventures can
be expected to succeed Some will be less profitable than expected or may collapse
altogether The average fast-food franchise may earn a yearly profit of $1 million, but,
but only nine out of ten franchises may survive their first year (because the average
profits is distorted by the considerable earnings of one franchise) Thus the estimated
profits for such a franchise must be discounted, or multiplied by 0.90 If 10 percent of
such ventures can be expected to fail, on average each will earn $900,000 ($1 million x
.90)
The entrepreneur who starts a single business venture runs the risk that it may be
the one out of ten that fails In that case profit will be zero To avoid putting all their
eggs in one basket, many entrepreneurs prefer to avoid putting all their “eggs” in the
2 For rough estimates of the cost of rearing children by expenditure, see U.S Department of Commerce, Statistical Abstract of the United States: 1998 (Washington, D.C.: U.S Government Printing Office, 1998), table 732 To obtain the total cost of childcare, you must then estimate the value of parental time
3
The mathematical formula for computing the present value of future costs or benefits received one year
from now is PV = [1/(1 + r)] f, where PV stands for present value, r for the rater of interest, and f for future
costs or benefits The interest rate used in this formula is the rate at which we discount future costs and benefits