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MANAGING PROJECTS

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Projects represent nonroutine business activities that often have long-term strategic ramifications for a firm. In this chapter, we examined how projects differ from routine business activities and discussed the major phases of projects. We noted how environmental changes have resulted in increased attention being paid to projects and project management over the past decade. In the second half of the chapter, we introduced some basic tools that businesses can use when planning for and controlling projects. Both Gantt charts and network diagrams give managers a visual picture of how a project is going. Network diagrams have the added advantage of showing the precedence between activities, as well as the critical path(s). We wrapped up the chapter by showing how these concepts are embedded in inexpensive yet powerful software packages such as Microsoft Project. If you want to learn more about project management, we encourage you to take a look at the Web site for the Proj...
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Aggregate Demand and Aggregate Supply

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All societies experience short-run economic fluctuations around long-run trends. These fluctuations are irregular and largely unpredictable. When recessions do occur, real GDP and other measures of income, spending and production fall, and unemployment rises. Economists analyze short-run economic fluctuations using the model of aggregate demand and aggregate supply. According to this model, the output of goods and services and the overall level of prices adjust to balance aggregate demand and aggregate supply. The aggregate demand curve slopes downward for three reasons. First, a lower price level raises the real value of households’ money holdings, which stimulates consumer spending. Secondly, a lower price level reduces the quantity of money households’ demand; as households try to convert money into interest-bearing assets, interest rates fall, which stimulates investment spending. Thirdly, as a lower price level reduces interest rates, the local currency...
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The Macroeconomic Environment

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Economic prosperity, as measured by GDP per person, varies substantially around the world. Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total income in the economy. Gross domestic product (GDP) measures an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. More precisely, GDP is the market value of all final goods and services produced within a country in a given period of time. The standard of living in an economy depends on the economy’s ability to produce goods and services. Government policies can try to influence the economy’s growth rate by encouraging saving and investment, encouraging investment from abroad, fostering education, maintaining property rights and political stability, allowing free trade, promoting the research and development of new technologies, and controlling population growth. Nominal ...
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Financial Markets

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The financial system of an advanced economy is made up of many types of financial institutions, such as the bond market, the stock market, banks and investment funds. All of these institutions act to direct the resources of households who want to save some of their income into the hands of households and firms who want to borrow. Because savings can earn interest, a sum of money today is more valuable than the same sum of money in the future. A person can compare sums from different times using the concept of present value. The present value of any future sum is the amount that would be needed today, given prevailing interest rates, to produce that future sum. Because of diminishing marginal utility, most people are risk averse. Risk-averse people can reduce risk using insurance. The value of an asset equals the present value of the income streams the owner of the aset will receive and the final sale price if appropriate. The interest rate is determined by ...
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Labour Markets

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The economy’s income is distributed in the markets for the factors of production. The three most important factors of production are labour, land and capital. The demand for factors, such as labour, is a derived demand that comes from firms that use the factors to produce goods and services. Competitive, profit-maximizing firms hire each factor up to the point at which the value of the marginal product of the factor equals its price. The supply of labour arises from individuals’ trade-off between work and leisure. An upward sloping labour supply curve means that people respond to an increase in the wage by enjoying less leisure and working more hours. The price paid to each factor adjusts to balance the supply and demand for that factor. Because factor demand reflects the value of the marginal product of that factor, in equilibrium each factor is compensated according to its marginal contribution to the production of goods and services. Because factors of p...
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Other Types of Imperfect Competition

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A monopolistically competitive market is characterized by three attributes: many firms, differentiated products and free entry. The equilibrium in a monopolistically competitive market differs from that in a perfectly competitive market in two related ways. First, each firm in a monopolistically competitive market has excess capacity. That is, it operates on the downward sloping portion of the average total cost curve. Secondly, each firm charges a price above marginal cost. Monopolistic competition does not have all the desirable properties of perfect competition. There is the standard deadweight loss of monopoly caused by the mark-up of price over marginal cost. In addition, the number of firms (and thus the variety of products) can be too large or too small. In practice, the ability of policy makers to correct these inefficiencies is limited. Oligopolists maximize their total profits by forming a cartel and acting like a monopolist. Yet, if oligopolists make...
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Market Structures

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Imperfect competition is where the assumptions of perfect competition are dropped and firms have some degree of market power. Having market power means firms behaviour may be different to that which operates under competitive conditions. At the extreme of imperfect competition is monopoly. A monopoly is a firm that is the sole seller in its market. A monopoly arises when a single firm owns a key resource, when the government gives a firm the exclusive right to produce a good, or when a single firm can supply the entire market at a smaller cost than many firms could. Because a monopoly is the sole producer in its market, it faces a downward sloping demand curve for its product. When a monopoly increases production by 1 unit, it causes the price of its good to fall, which reduces the amount of revenue earned on all units produced. As a result, a monopoly’s marginal revenue is always below the price of its good. Like a competitive firm, a monopoly firm maximizes...
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