Principles of Microeconomics: Global Financial Crisis Edition (with Global Economic Crisis GEC Resource Center Printed Access Card)

595 Pages·2009·9.64 MB·English

by  John B. Taylor

Principles
of
Microeconomics
About the Authors
John B.Taylor is one of the field’s Akila Weerapana is an
most inspiring teachers. As the Associate Professor of
Raymond Professor of Economics Economics at Wellesley
at Stanford University, his distinc- College. He was born and
tive instructional methods have raised in Sri Lanka and came
made him a legend among intro- to the United States to do his
ductory economics students and undergraduate work at
have won him both the Hoagland Oberlin College, where he
and Rhodes prizes for teaching earned a B.A. with highest
excellence. honors in Economics and
Professor Taylor is also widely Computer Science in 1994.
recognized for his research on the He received his Ph.D. in
foundations of modern monetary theory and policy. One Economics from Stanford in 1999, writing his disserta-
of his well-known research contributions is a rule—now tion on monetary economics under the mentorship of
widely called the Taylor Rule—used at central banks John Taylor.
around the world. Since then, Professor Weerapana has taught in the
Taylor has had an active career in public service, Economics Department at Wellesley College. His teaching
recently completing a four-year stint as the head of the interests span all levels of the department’s curriculum,
International Affairs division at the United States including introductory and intermediate macroeconom-
Treasury, where he had responsibility for currency policy, ics, international finance, monetary economics, and
international debt, and oversight of the International mathematical economics. He was awarded Wellesley’s
Monetary Fund and the World Bank and worked closely Pinanski Prize for Excellence in Teaching in 2002. He also
with leaders and policymakers from countries through- enjoys working with thesis students, advising projects
out the world. He has also served as economic adviser to ranging from a study of the economic benefits of eradica-
the governor of California, to the U.S. Congressional tion of river blindness in Ghana to an analysis of the deter-
Budget Office, and to the President of the United States minants of enterprise performance in Russia.
and has served on several boards and as a consultant to In addition to teaching, Professor Weerapana has
private industry. research interests in macroeconomics, specifically in the
Professor Taylor began his career at Princeton, where areas of monetary economics, international finance, and
he graduated with highest honors in economics. He then political economy.
received his Ph.D. from Stanford and taught at Columbia,
Yale, and Princeton before returning to Stanford.
Principles
of
Microeconomics
Global Financial Crisis Edition
JOHN B. TAYLOR
AKILA WEERAPANA
Cengage Learning
Principles of Microeconomics © 2010 South-Western, Cengage Learning
Global Financial Crisis Edition
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Brief Contents
Principles of Economics Principles of Principles of
Microeconomics Macroeconomics
Chapter
Number Chapter Title Chapter Number Chapter Number
PART 1 Introduction to Economics PART 1 PART 1
1 The Central Idea 1 1
2 Observing and Explaining the Economy 2 2
2A APPENDIX toChapter2: Reading, Understanding, and Creating Graphs 2A 2A
3 The Supply and Demand Model 3 3
4 Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, 4 4
and Elasticity
PART 2 Principles of Microeconomics PART 2
5 The Demand Curve and the Behavior of Consumers 5
5A APPENDIX to Chapter 5: Consumer Theory with Indifference Curves 5A
6 The Supply Curve and the Behavior of Firms 6
7 The Interaction of People in Markets 7
PART 3 The Economics of the Firm PART 3
8 Costs and the Changes at Firms over Time 8
8A APPENDIX to Chapter 8: Producer Theory with Isoquants 8A
9 The Rise and Fall of Industries 9
10 Monopoly 10
11 Product Differentiation, Monopolistic Competition, and Oligopoly 11
12 Antitrust Policy and Regulation 12
PART 4 Markets, Income Distribution, and Public Goods PART 4
13 Labor Markets 13
14 Taxes,Transfers, and Income Distribution 14
15 Public Goods, Externalities, and Government Behavior 15
16 Capital and Financial Markets 16 16: Financial Markets
16A APPENDIX to Chapter 16: Present Discounted Value 16A 16A
v
vi Brief Contents
Economics Principles of Principles of
Microeconomics Macroeconomics
Chapter
Number Chapter Title Chapter Number Chapter Number
PART 5 Principles of Macroeconomics PART 2
17 Macroeconomics: The Big Picture 5
17A APPENDIX to Chapter 17: The Miracle of Compound Growth 5A
18 Measuring the Production, Income, and Spending of Nations 6
19 The Spending Allocation Model 7
20 Unemployment and Employment 8
21 Productivity and Economic Growth 9
21A APPENDIX to Chapter 21: Deriving the Growth Accounting Formula 9A
22 Money and Inflation 10
PART 6 Economic Fluctuations and Macroeconomic Policy PART 3
23 The Nature and Causes of Economic Fluctuations 11
23A APPENDIX to Chapter 23: Deriving the Formula for the Keynesian 11A
Multiplier and the Forward Looking Consumption Model
24 The Economic Fluctuations Model 12
25 Using the Economic Fluctuations Model 13
26 Fiscal Policy 14
27 Monetary Policy and the Financial Crisis 15
PART 7 Trade and Global Markets PART 5 PART 4
28 Economic Growth and Globalization 17
29 The Gains from International Trade 17 18
30 International Trade Policy 18 19
Contents
Preface xvii
PART 1 Introduction to Economics 1
CHAPTER 1 The Central Idea 2
Scarcity and Choice for Individuals 4 Market Economies and the Price System 13
Consumer Decisions 4 Key Elements of a Market Economy 15
Opportunity Cost 4 ■ Gains from Trade: A Better Freely Determined Prices 15 ■ Property Rights and
Allocation 5 Incentives 15 ■ Freedom to Trade at Home and Abroad 15
Producer Decisions 5 ■ A Role for Government 15 ■ The Role of Private
Gains from Trade: Greater Production 6 ■ Specialization, Organizations 16
Division of Labor, and Comparative Advantage 6 The Price System 16
International Trade 8 Signals 16 ■ Incentives 17 ■ Distribution 17
Financial Crises and Recessions 17
Scarcity and Choice for the Economy
as a Whole 8 Conclusion 20
Production Possibilities 8 Key Points 21 ■ Key Terms 21 ■ Questions for
Increasing Opportunity Costs 9 Review 21 ■ Problems 22
The Production Possibilities Curve 11 ECONOMICS IN ACTION: GAINS FROM TRADE ON THE
Inefficient, Efficient, or Impossible? 11 ■ Shifts in the INTERNET 7
Production Possibilities Curve 11 ■ Scarcity, Choice, and ECONOMICS IN ACTION: THE BOOM IN COMMUNITY COLLEGE
Economic Progress 13 ENROLLMENTS AND THE ECONOMIC DOWNTURN 9
ECONOMICS IN THE NEWS: FINANCIAL CRISIS GENERATES
HEATED DEBATE ABOUT THE ROLE OF GOVERNMENT
IN THE ECONOMY 18
CHAPTER 2 Observing and Explaining the Economy 24
What Do Economists Do? 25 The Use of Existing Models 35
The Development of New Models 35
Understanding Fluctuations in the Price
of Gasoline 26 Recommending Appropriate Policies 36
Description 27 Positive versus Normative Economics 36
■ Data Limitations 28 Economics as a Science versus a Partisan Policy Tool 36
Explaining an Economic Event 29 Economics Is Not the Only Factor in Policy Issues 40
Correlation versus Causation 30 ■ The Lack of Controlled Disagreement Between Economists 40
Experiments in Economics 30
Conclusion: A Reader’s Guide 40
Predicting the Impact of Future Changes 32
Economic Models 32 ■ Microeconomic versus Key Points 41 ■ Key Terms 42 ■ Questions for
Macroeconomic Models 32 ■ An Example: A Model with Review42 ■ Problems 42
Two Variables 33
ECONOMICS IN ACTION: AN ECONOMIC EXPERIMENT TO
The Ceteris ParibusAssumption 35 STUDY DISCRIMINATION 31
vii
viii Contents
ECONOMICS IN ACTION: THE PRESIDENT’S COUNCIL Scatter Plots 47
OF ECONOMIC ADVISERS IN ACTION 37 Pie Charts 47
ECONOMICS IN THE NEWS: YOUNG ECONOMISTS AT WORK 38 Visualizing Models with Graphs 48
APPENDIX TO CHAPTER 2 Slopes of Curves 48
Reading, Understanding, and Creating Graphs 44 Graphs of Models with More Than Two Variables 49
Visualizing Observations with Graphs 44 Key Terms and Definitions 50 ■ Questions for
Time-Series Graphs 44 Review50 ■ Problems 50
Time-Series Graphs Showing Two or More Variables 46
CHAPTER 3 The Supply and Demand Model 52
Demand 53 Market Equilibrium: Combining Supply
The Demand Curve 54 and Demand 65
Shifts in Demand 54 Determination of the Market Price 66
Consumers’ Preferences 56 ■ Consumers’ Information 56 Finding the Market Price 67 ■ Two Predictions 70
■ Consumers’ Incomes 57 ■ Number of Consumers in the Finding the Equilibrium with a Supply and Demand
Market 57 ■ Consumers’ Expectations of Future Prices 57 Diagram 70
■ Prices of Closely Related Goods 57 Market Outcomes When Supply or Demand Changes 71
Movements Along versus Shifts of the Demand Curve 58 Effects of a Change in Demand 71 ■ Effects of a Change in
Supply 60 Supply 71 ■ When Both Curves Shift 74
The Supply Curve 60 Conclusion 77
Shifts in Supply 61 Key Points 77 ■ Key Terms 78 ■ Questions for
Technology 62 ■ Weather Conditions 63 ■ The Price Review78 ■ Problems 78
ofInputs Used in Production 63 ■ The Number of Firms
ECONOMICS IN THE NEWS: WHY ROSES COST MORE ON
inthe Market 63 ■ Expectations of Future Prices 63 VALENTINE’S DAY 68
■ Government Taxes, Subsidies, and Regulations 63
Movements Along versus Shifts of the ECONOMICS IN ACTION: USING THE SUPPLY AND DEMAND
Supply Curve 64 MODEL TO ANALYZE REAL-WORLD ISSUES 75
CHAPTER 4 Subtleties of the Supply and Demand Model:
Price Floors, Price Ceilings, and Elasticity 80
Interference with Market Prices 81 Talking about Elasticities 96
Price Ceilings and Price Floors 81 Elastic versus Inelastic Demand 96 ■ Perfectly Elastic versus
Perfectly Inelastic Demand 96
Side Effects of Price Ceilings 82 ■ Dealing with Persistent
Shortages 82 ■ Making Things Worse 84 Revenue and the Price Elasticity of Demand 97
Side Effects of Price Floors 84 What Determines the Size of the Price Elasticity
Dealing with Persistent Surpluses 84 ■ Making Things of Demand? 100
Worse 84 The Degree of Substitutability 100 ■ Big-Ticket versus
Little-Ticket Items 100 ■ Temporary versus Permanent Price
Elasticity of Demand 86
Changes 100 ■ Differences in Preferences 100 ■ Long-
Defining the Price Elasticity of Demand 86 Run versus Short-Run Elasticity 101
The Size of the Elasticity: High versus Low 87 Income Elasticity and Cross-Price Elasticity
The Impact of a Change in Supply on the Price of Oil 88 of Demand 101
Working with Demand Elasticities 93 Elasticity of Supply 105
The Advantage of a Unit-Free Measure 93 Working with Supply Elasticities 106
Elasticity versus Slope 94 Perfectly Elastic and Perfectly Inelastic Supply 107 ■ Why
the Size of the Price Elasticity of Supply Is Important 107
Calculating the Elasticity with a Midpoint Formula 94
Contents ix
Conclusion 110 ECONOMICS IN THE NEWS: INCREASING SCHOOL ENROLLMENT
Key Points 110 ■ Key Terms 111 ■ Questions for IN AFRICA 90
Review 111 ■ Problems 111 ECONOMICS IN ACTION: PREDICTING THE SIZE OF A PRICE
INCREASE 92
ECONOMICS IN ACTION: HOW POLICYMAKERS USE PRICE
ELASTICITY OF DEMAND TO DISCOURAGE UNDERAGE ECONOMICS IN ACTION: WILL AN INCREASE IN THE MINIMUM
DRINKING 87 WAGE BENEFIT POOR WORKERS? 103
PART 2 Principles of Microeconomics 115
CHAPTER 5 The Demand Curve and the Behavior of Consumers 116
Utility and Consumer Preferences 117 ECONOMICS IN ACTION: PEERING DEEPER INTO HOW
INDIVIDUALS MAKE DECISIONS 124
A Consumer’s Utility Depends on the
Consumption of Goods 118
ECONOMICS IN THE NEWS: CREATING CONSUMER SURPLUS
Important Properties of Utility 119 FOR THE POOR 134
The Budget Constraint and Utility ECONOMICS IN ACTION: BUILDING ROADS AND BRIDGES
Maximization 121 WITH CONSUMER SURPLUS 136
The Budget Constraint 121 APPENDIX TO CHAPTER 5
Maximizing Utility Subject to the Budget Constraint 122 Consumer Theory with Indifference Curves 141
Deriving the Individual’s Demand Curve 123
The Budget Line 141
Effect of a Change in Income: A Shift in the Demand
Curve 124 ■ Income and Substitution Effects of a Price The Indifference Curve 142
Change 126 Getting to the Highest Indifference Curve Given the
Budget Line 143
Willingness to Pay and the Demand Curve 127
The Utility-Maximizing Rule 143
Measuring Willingness to Pay and Marginal Benefit 127
Effect of a Price Change on the Quantity
Graphical Derivation of the Individual Demand Curve 128
Demanded 144
The Price Equals Marginal Benefit Rule 130
Effect of an Income Change on Demand 144
The Market Demand Curve 131
Graphical Illustration of the Income Effect and the
Different Types of Individuals 132 Substitution Effect 144
Consumer Surplus 133 Key Points 145 ■ Key Terms and Definitions 145
■ Questions for Review 146 ■ Problems 146
Conclusion 137
Key Points 138 ■ Key Terms 138 ■ Questions for
Review 139 ■ Problems 139
CHAPTER 6 The Supply Curve and the Behavior of Firms 148
Definition of a Firm 150 Production and Costs 153
Your Own Firm: A Pumpkin Patch 150 The Time Period 154 ■ The Production Function 154
Your Firm as a Price-Taker in a Competitive ■ Costs 155 ■ Graphical Representation of Total Costs and
Marginal Cost 157
Market 150
Other Types of Markets 152 Profit Maximization and the Individual Firm’s
Supply Curve 158
The Firm’s Profits 152
An Initial Approach to Derive the Supply Curve 159
Total Revenue 153
A Profit Table 159 ■ A Profit Graph 160