Microeconomics PDF
Preview Microeconomics
Microeconomic s R O G E R A. A R N O L D C A L I F O R N I A S T A T E U N I V E R S I T Y S A N M A R C O S 9 E (cid:2)(cid:23)(cid:21)(cid:22)(cid:20)(cid:9)(cid:15)(cid:14)(cid:9)(cid:1)(cid:26)(cid:1)(cid:3)(cid:20)(cid:9)(cid:25)(cid:14)(cid:15)(cid:1)(cid:26)(cid:1)(cid:4)(cid:9)(cid:19)(cid:9)(cid:17)(cid:1)(cid:26)(cid:1)Kor(cid:12)(cid:9)(cid:1)(cid:26)(cid:1)(cid:6)(cid:12)(cid:24)(cid:14)(cid:10)(cid:18)(cid:1)(cid:26)(cid:1)(cid:7)(cid:14)(cid:17)(cid:13)(cid:9)(cid:19)(cid:18)(cid:20)(cid:12)(cid:1)(cid:26)(cid:1)(cid:7)(cid:19)(cid:9)(cid:14)(cid:17)(cid:1)(cid:26)(cid:1)(cid:8)(cid:17)(cid:14)(cid:22)(cid:12)(cid:11)(cid:1)Ki(cid:17)(cid:13)(cid:11)(cid:18)(cid:16)(cid:1)(cid:26)(cid:1)(cid:8)(cid:17)(cid:14)(cid:22)(cid:12)(cid:11)(cid:1)(cid:7)(cid:22)(cid:9)(cid:22)(cid:12)(cid:21) Microeconomics, 9E © 2010, 2008 South-Western, a part of Cengage Learning Roger A. Arnold ALL RIGHTS RESERVED. 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For your course and learning solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.ichapters.com Printed in the United States of America 1 2 3 4 5 6 7 12 11 10 09 08 To Sheila, Daniel, and David Brief Contents Preface xvii Part 5 Market Failure and Public Choice Chapter 16 Market Failure: Externalities, Public Goods, and An Introduction to Economics Asymmetric Information 380 Chapter 17 Public Choice: Economic Theory Applied to Part 1 Economics: The Science of Scarcity Politics 406 Chapter 1 What Economics Is About 1 Appendix A Working with Diagrams 19 The Global Economy Appendix B Should You Major in Economics? 27 Part 6 International Economics and Globalization Chapter 2 Economic Activities: Producing and Trading 33 Chapter 18 International Trade 427 Chapter 3 Supply and Demand: Theory 53 Chapter 19 International Finance 446 Chapter 4 Supply and Demand: Applications 91 Chapter 20 Globalization and International Impacts on the Economy 475 Microeconomics Part 2 Microeconomic Fundamentals Practical Economics Chapter 5 Elasticity 113 Part 7 Financial Matters Chapter 6 Consumer Choice: Maximizing Utility and Behavioral Chapter 21 Stocks, Bonds, Futures, and Options 503 Economics 140 Appendix C Budget Constraint and Indifference Curve Analysis 158 Chapter 7 Production and Costs 166 Web Chapter Part 3 Product Markets and Policies Part 8 Web Chapter Chapter 8 Perfect Competition 196 Chapter 22 Agriculture: Problems, Policies, and Unintended Effects 524 Chapter 9 Monopoly 223 Chapter 10 Monopolistic Competition, Oligopoly, and Game Self-Test Appendix 524 Theory 246 Glossary 538 Chapter 11 Government and Product Markets: Antitrust and Regulation 272 Index 544 Part 4 Factor Markets and Related Issues Chapter 12 Factor Markets: With Emphasis on the Labor Market 295 Chapter 13 Wages, Unions, and Labor 320 Chapter 14 The Distribution of Income and Poverty 339 Chapter 15 Interest, Rent, and Profit 361 iv Contents Preface xvii An Introduction to Economics Part Economics: The Science of Scarcity CHAPTER WHAT ECONOMICS IS ABOUT 1 A Definition of Economics 1 ECONOMICS 24/7 Goods and Bads 1 Resources 2 Scarcity and a Definition of Economics 2 LOST Key Concepts in Economics 5 3 Opportunity Cost 5 Opportunity Cost and Behavior 6 Benefits and Costs 7 Decisions Made at the Margin 8 Efficiency 8 Unintended Effects 10 Why Didn’t Jessica Alba Exchange 11 Go to College? 7 Economic Categories 13 Positive and Normative Economics 13 Microeconomics and Macroeconomics 14 Economics in a Cosmetic Surgeon’s Office? A Reader Asks 16 12 Chapter Summary 16 OFFICE HOURS Key Terms and Concepts 17 “I Don’t Believe That Questions and Problems 17 Every Time a Person Does Something, He Compares the Marginal Benefits and Costs” 15 APPENDIX A: WORKING WITH DIAGRAMS 19 Two-Variable Diagrams 19 Slope of a Line 20 Slope of a Line Is Constant 22 Slope of a Curve 22 The 45-Degree Line 22 Pie Charts 23 Bar Graphs 23 Line Graphs 24 Appendix Summary 26 Questions and Problems 26 APPENDIX B: SHOULD YOU MAJOR IN ECONOMICS? 27 Five Myths About Economics and an Economics Major 28 Myth 1: Economics Is All Mathematics and Statistics 28 Myth 2: Economics Is Only About Inflation, Interest Rates, Unemployment, and Other Such Things 28 Myth 3: People Become v vi CONTENTS Economists Only if They Want to “Make Money” 29 Myth 4: Economics Wasn’t Very Interesting in High School, So It’s Not Going to Be Very Interesting in College 30 Myth 5: Economics Is a Lot Like Business, But Business Is More Marketable 30 What Awaits You as an Economics Major? 30 What Do Economists Do? 31 Places to Find More Information 32 Concluding Remarks 32 CHAPTER ECONOMIC ACTIVITIES: PRODUCING AND TRADING 33 The Production Possibilities Frontier 33 ECONOMICS 24/7 The Straight-Line PPF: Constant Opportunity Costs 33 The Bowed-Outward (Concave- Downward) PPF: Increasing Opportunity Costs 34 Law of Increasing Opportunity Costs 36 The PPF and Your Grades Economic Concepts Within a PPF Framework 37 40 Exchange or Trade 39 Trading Prisoners Periods Relevant to Trade 39 Trade and the Terms of Trade 41 Costs of Trades 42 41 Trades and Third-Party Effects 44 Jerry Seinfeld, the Production, Trade, and Specialization 44 Doorman, and Adam Smith Producing and Trading 44 Profit and a Lower Cost of Living 47 A Benevolent and All- 47 Knowing Dictator Versus the Invisible Hand 48 OFFICE HOURS A Reader Asks 50 Chapter Summary 50 “What Purpose Does the PPF Serve?” Key Terms and Concepts 51 49 Questions and Problems 51 Working with Numbers and Graphs 52 CHAPTER SUPPLY AND DEMAND: THEORY 53 A Note About Theories 53 ECONOMICS 24/7 What Is Demand? 54 The Law of Demand 54 What Does Ceteris Paribus Mean? 55 Four Ways to Represent Ticket Prices at the Law of Demand 56 Two Prices: Absolute and Relative 56 Why Does Quantity Disney World Demanded Go Down as Price Goes Up? 57 Individual Demand Curve and Market Demand 58 Curve 58 A Change in Quantity Demanded Versus a Change in Demand 59 What Factors iPods and the Law of Cause the Demand Curve to Shift? 62 Movement Factors and Shift Factors 65 Demand 62 Supply 66 The Law of Supply 66 Why Most Supply Curves Are Upward Sloping 67 Changes Advertising and the Demand Curve in Supply Mean Shifts in Supply Curves 68 What Factors Cause the Supply Curve to 63 Shift? 69 A Change in Supply Versus a Change in Quantity Supplied 70 The Dowry and Marriage The Market: Putting Supply and Demand Together 71 Market Disequilibrium Supply and Demand at Work at an Auction 71 The Language of Supply and Demand: A 75 Few Important Terms 72 Moving to Equilibrium: What Happens to Price when There Is Overbooking and the a Surplus or a Shortage? 72 Speed of Moving to Equilibrium 74 Moving to Equilibrium: Airlines Maximum and Minimum Prices 75 Equilibrium in Terms of Consumers’ and Producers’ 80 Surplus 76 What Can Change Equilibrium Price and Quantity? 78 OFFICE HOURS Demand and Supply as Equations 81 “I Thought Prices Equaled Price Controls 82 Costs Plus 10 Percent” Price Ceiling: Definition and Effects 82 Price Floor: Definition and Effects 85 86 A Reader Asks 87 Chapter Summary 87 Key Terms and Concepts 88 CONTENTS vii Questions and Problems 88 Working with Numbers and Graphs 90 CHAPTER SUPPLY AND DEMAND: APPLICATIONS 91 Application 1: Why Is Medical Care So Expensive? 91 OFFICE HOURS Application 2: Where Will House Prices Change the Most? 94 “Doesn’t High Demand Application 3: Why Do Colleges Use GPAs, ACTs, and SATs for Purposes of Mean High Quantity Admission? 95 Demanded?” Application 4: Supply and Demand on a Freeway 96 109 Application 5: Price Ceilings in the Kidney Market 97 Application 6: The Minimum Wage Law 99 Application 7: Price Floors and Winners and Losers 101 Application 8: Are Renters Better Off? 102 Application 9: Do You Pay for Good Weather? 104 Application 10: College Superathletes 105 Application 11: 10 A.M. Classes in College 107 Application 12: W hat will Happen to the Price of Marijuana if the Purchase and Sale of Marijuana Are Legalized? 108 A Reader Asks 110 Chapter Summary 110 Key Terms and Concepts 111 Questions and Problems 111 Working with Numbers and Graphs 112 Microeconomics Part Microeconomic Fundamentals CHAPTER ELASTICITY 113 How to Approach the Study of Microeconomics 113 ECONOMICS 24/7 Consumers 114 Firms 114 Factor Owners 114 The Choices Made in Market Settings 114 Recap 115 Drug Busts and Crime Elasticity: Part 1 115 121 Price Elasticity of Demand 115 Elasticity Is Not Slope 116 From Perfectly Elastic Why Is Jack Bauer Eating to Perfectly Inelastic Demand 117 Price Elasticity of Demand and Total Revenue a CalorieMate Block in (Total Expenditure) 119 Japan? 126 Elasticity: Part 2 123 Will High Taxes on Price Elasticity of Demand Along a Straight-Line Demand Curve 123 Determinants of Price Cigarettes Reduce Smoking? Elasticity of Demand 124 128 Other Elasticity Concepts 126 Greenhouse Gases and Gas- Cross Elasticity of Demand 127 Income Elasticity of Demand 127 Price Elasticity of Efficient Cars Supply 130 Price Elasticity of Supply and Time 131 129 The Relationship Between Taxes and Elasticity 132 OFFICE HOURS Who Pays the Tax? 132 Elasticity and the Tax 133 Degree of Elasticity and Tax Revenue 134 “What Is the Relationship Between Different Price Elasticities of Demand and Total Revenue?” 136 viii CONTENTS A Reader Asks 137 Chapter Summary 137 Key Terms and Concepts 138 Questions and Problems 138 Working with Numbers and Graphs 139 CHAPTER CONSUMER CHOICE: MAXIMIZING UTILITY AND BEHAVIORAL ECONOMICS 140 Utility Theory 140 ECONOMICS 24/7 Utility: Total and Marginal 140 Law of Diminishing Marginal Utility 141 The Solution to the Diamond-Water Paradox 144 Who Would Spend $16,000 for a Peanut Consumer Equilibrium and Demand 145 Butter and Jelly Sandwich? Equating Marginal Utilities per Dollar 145 Maximizing Utility and the Law of 143 Demand 146 Should the Government Provide the Necessities of Life for Free? 148 How You Pay for Good Behavioral Economics 149 Weather Are People Willing to Reduce Others’ Incomes? 149 Is $1 Always $1? 150 Coffee 147 Mugs and the Endowment Effect 151 Does the Endowment Effect Hold Only for New Which Is Better: A Tax Traders? 153 Rebate or a Tax Bonus? A Reader Asks 155 150 Chapter Summary 156 To Accept or Reject the Money Key Terms and Concepts 156 153 Questions and Problems 156 OFFICE HOURS Working with Numbers and Graphs 157 “Is There an Indirect Way of Proving the Law of Diminishing Marginal Utility?” 154 APPENDIX C: BUDGET CONSTRAINT AND INDIFFERENCE CURVE ANALYSIS 158 The Budget Constraint 158 Slope of the Budget Constraint 158 What Will Change the Budget Constraint? 158 Indifference Curves 159 Constructing an Indifference Curve 159 Characteristics of Indifference Curves 160 The Indifference Map and the Budget Constraint Come Together 163 From Indifference Curves to a Demand Curve 163 Appendix Summary 164 Questions and Problems 165 CONTENTS ix CHAPTER PRODUCTION AND COSTS 166 Why Firms Exist 166 ECONOMICS 24/7 The Market and the Firm: Invisible Hand Versus Visible Hand 166 The Alchian and Demsetz Answer 167 Shirking in a Team 167 Ronald Coase on Why Firms Exist 168 Markets: High School Students, Outside and Inside the Firm 169 Staying Out Late, and More The Firm’s Objective: Maximizing Profit 169 177 Accounting Profit Versus Economic Profit 170 Zero Economic Profit Is Not as Bad as It Sounds 171 What Matters to Global Competitiveness? Production 172 182 Production in the Short Run 172 Marginal Physical Product and Marginal “I Have to Become an Cost 174 Average Productivity 177 Accountant” Costs of Production: Total, Average, Marginal 179 186 The AVC and ATC Curves in Relation to the MC Curve 180 Tying Short-Run Production to OFFICE HOURS Costs 183 One More Cost Concept: Sunk Cost 184 “What Is the Difference Production and Costs in the Long Run 188 Between the Law of Long-Run Average Total Cost Curve 188 Economies of Scale, Diseconomies of Scale, and Diminishing Marginal Constant Returns to Scale 189 Why Economies of Scale? 190 Why Diseconomies of Returns and Diseconomies Scale? 190 Minimum Efficient Scale and Number of Firms in an Industry 190 of Scale?” Shifts in Cost Curves 190 192 Taxes 191 Input Prices 191 Technology 191 A Reader Asks 193 Chapter Summary 193 Key Terms and Concepts 194 Questions and Problems 194 Working with Numbers and Graphs 195 Part Product Markets and Policies CHAPTER PERFECT COMPETITION 196 The Theory of Perfect Competition 196 ECONOMICS 24/7 A Perfectly Competitive Firm Is a Price Taker 197 The Demand Curve for a Perfectly Competitive Firm Is Horizontal 197 The Marginal Revenue Curve of a Perfectly Competitive Do Churches Compete? Firm Is the Same as Its Demand Curve 200 Theory and Real-World Markets 201 199 Perfect Competition in the Short Run 201 Frank Sinatra, Sugar Ray Robinson, and the What Level of Output Does the Profit-Maximizing Firm Produce? 202 The Perfectly Jamestown Settlement Competitive Firm and Resource Allocative Efficiency 203 To Produce or Not to 208 Produce: That Is the Question 203 The Perfectly Competitive Firm’s Short-Run Supply Curve 206 From Firm to Market (Industry) Supply Curve 207 Why Is the Market Supply Lost Salaries Curve Upward Sloping? 208 218 Perfect Competition in the Long Run 209 OFFICE HOURS The Conditions of Long-Run Competitive Equilibrium 209 The Perfectly Competitive Firm “Do You Have to Know the and Productive Efficiency 211 Industry Adjustment to an Increase in Demand 211 Industry MR (cid:2) MC Condition to Adjustment to a Decrease in Demand 215 Differences in Costs, Differences in Profits: Now Be Successful in Business?” You See It, Now You Don’t 215 Profit and Discrimination 216 219 Topics for Analysis Within the Theory of Perfect Competition 217 Do Higher Costs Mean Higher Prices? 217 Will the Perfectly Competitive Firm Advertise? 217 Supplier-Set Price Versus Market-Determined Price: Collusion or Competition? 218 A Reader Asks 220
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