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Relevance to Business Management of Microeconomics and Microeconomic

Policy (Summary of Chapter 3 in Microeconomic Policy: A New Perspective
2nd Edn)

Chapter · July 2008

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2 authors:

Clement Allan Tisdell Keith Hartley

The University of Queensland The University of York
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 Relevance to Business Management of Microeconomics and
Microeconomic Policy

Chapter 3 in Clem Tisdell and Keith Hartley (2008), Microeconomic Policy: A

New Perspective, Edward Elgar, Cheltenham UK and Northampton, MA, USA

3.1 Introduction

Knowledge of microeconomics and of microeconomic policy develops the capabilities of

business managers, and can help them improve the performance of their businesses. It
provides a basis for understanding the economic implications of production decisions within
a business, and is a means for assessing the economic implications for the firm of changing
environments external to the firm, such as alterations in the demand for commodities and
variations in government microeconomic policy.
Figure 3.1 provides a simple schematic representation of how knowledge of microeconomics
and microeconomic policy can assist managerial decision-making in business.
However, it needs to be recognized that there are different approaches to microeconomic
modelling. They differ in the factors that they take into account in modelling the economic
operations of businesses and the economy. They often vary in their degree of abstraction
from reality and in the range of influences that they deem to be important in explaining,
analysing or predicting economic phenomena. They provide different ways for looking at the
actual complex world. Each provides a partial picture of the world and depending on the issue
to be considered, judgement is required to select the most relevant model or models and
adjust these as needed to best fit the problem under consideration.
Microeconomics is able to provide insights into how different types of institutional
arrangements can affect the economic performance of businesses. For example, how is the
economic performance of a firm with a unitary pyramid-type of management structure likely
to differ from that with a multidivisional decentralized management structure? If the
ownership and management of business are separated, as is the rule for most public
companies, how might this affect their economic performance? In the early development of
neoclassical economics, these were not features given significant attention because during the
early period of its development, firms tended to be small and public companies were only
starting to evolve. However, they have been given more attention in recent developments of
microeconomics.
Early development of neoclassical economics did not entirely ignore institutional structures.
For example, in relation to markets, neoclassical economics gives particular attention to how
different types of industry structures can affect the operations and economic performance of

1
markets. It emphasizes the importance of institutional factors such as the number of firms in
an industry and the ease of entry by new firms (and exit of existing firms) as major influences
on the degree of market competition in an industry or market and in turn, the impact of
market structure on prices, supplies and the type of competitive strategies adopted in
industry. These institutional or structural characteristics are important considerations also for
governments and industry stakeholders in predicting the effects of changes in government
microeconomic policies.
With this background in mind, this chapter considers how different approaches to
microeconomics relate to business management, then considers how one might choose
between different economic perspectives before considering the applicability of micro-
economic policy to business management and subsequently concluding.

Table of Contents of Chapter 3

3. Relevance to Business Management of Microeconomics and Microeconomic
Policy 44
3.1. Introduction 44
3.2. The Relevance to Business Management of Different Approaches to
Microeconomics 45
Microeconomic knowledge not fixed 45
Neoclassical economics and different perspectives on
microeconomics 47
New and traditional institutional economics 48
Behavioural economics 50
Evolutionary economics 52
The Austrian School of Economics 52
3.3. Business Management and the Choice of Microeconomic Perspectives 54
3.4. The Relevance to Business Management of Knowledge about
Microeconomic Policy 55
3.5. Concluding Comments 56
Reading and References 56
Questions for Review and Discussion 57

List of Figures and Tables in Chapter 3

Figure 3.1 A schematic representation of how a knowledge of microeconomics 44

can assist business decision-making
Figure 3.2 Microeconomic models evolve and their relevance varies with 46
institutional and other changes that occur with the passage of time. In
case (a), models 4 and 5 are added to existing models (1, 2 and 3) to

2
 explain economic phenomena. In case (b), economic phenomena in set
A become irrelevant with the passage of time but a new set C becomes
important and adds to the relevant set B.
Figure 3.3 A representation of some different perspectives on microeconomics. 48
All the perspectives have different types of applications to business
management. Note that not all perspectives are represented, for
example, that attributed to the Austrian School of Economics is not.

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