Microeconomics.

400 Pages·2016·6.092 MB·English

by  Jeff Borland

Contents
Prefacetothethirdedition ix
Acknowledgements ix
Abouttheauthor x
Introduction x
Notestothelecturer xii
SECTION1
SCARCITY,DECISIONMAKING,INCENTIVESANDTRADE:
ANINTRODUCTIONTOKEYCONCEPTSINECONOMICS 1
Casestudy1.1
Whatdidthatreallycostyou? 4
Coreconcept:opportunitycost
Theoryrefresher:Whatisopportunitycost? 4
Casestudy1.2
Opportunitycostandproductivityinagriculture 9
Coreconcept:opportunitycost
Theoryrefresher:Whatisproductivity? 9
Casestudy1.3
Thebenefitsandcostsofauniversitydegree 14
Coreconcept:optimaldecisionmaking
Theoryrefresher:Makinganoptimaldecision 14
Casestudy1.4
Howincentivesmaketheworldgoround 20
Coreconcept:incentives
Theoryrefresher:Whatareincentives? 20
Casestudy1.5
Doincentivesreallymatter:caneconomicpolicychangethetiming
ofbirthsanddeaths? 25
Coreconcept:incentives
Casestudy1.6
Howcreatingextraopportunitiesfortradecanimprovewellbeing:kidney
exchangeandICT 30
Coreconcept:tradeandwellbeing
Theoryrefresher:Tradeandwellbeing 30
Casestudy1.7
Arewealwaysrational? 38
Coreconcept:optimaldecisionmaking
Theoryrefresher:Whatisrationality? 38
iii
SECTION2
DEMAND,SUPPLYANDEQUILIBRIUMINCOMPETITIVEMARKETS 45
Casestudy2.1
Whatdeterminesdemand? 49
Coreconcept:demand
Theoryrefresher:Demandandsupply 51
Casestudy2.2
Doesequilibriumexist?Evidencefromexperiments 54
Coreconcept:equilibrium
Theoryrefresher:Equilibrium 54
Casestudy2.3
Somethingfishy?No,it’sjustamatterofsupplyanddemand 60
Coreconcept:comparativestatics
Theoryrefresher:Comparativestatics 60
Casestudy2.4
Explainingchangesinthepriceofoil:notsoslipperywhenyouuse
supplyanddemand 65
Coreconcept:comparativestatics
Theoryrefresher:Spillovereffectsbetweenmarkets 69
Casestudy2.5
Thegreateconomicspectacle:theupsanddownsoftheUS$/A$
exchangerate 74
Coreconcept:comparativestatics
Theoryrefresher:Wherecanweapplythedemand/supplymodel? 76
Casestudy2.6
Reducingchildlabour:whichpolicyworksbest? 81
Coreconcept:comparativestatics
Theoryrefresher:Whatiselasticity? 82
Casestudy2.7
Howmuchshouldweprotectournaturalenvironment? 88
Coreconcept:welfare
Theoryrefresher:Surplusandthenetgainfromtrade 88
Casestudy2.8
Areticketscalpersworsethanusedcarsalesmen? 94
Coreconcept:tradeandwellbeing
Theoryrefresher:Whatisefficiency? 96
Casestudy2.9
Carefulhowyoupunish:whyrestrictingCEOs’paymayhurtus
morethanthem 99
Coreconcept:directregulation
Theoryrefresher:Howdoesapriceceilingaffectmarketoutcomes? 101
iv
Casestudy2.10
Hasthealcopoptaxbeenapartypooper? 106
Coreconcept:indirecttax
Theoryrefresher:Howdoesanindirecttaxaffectmarketoutcomes? 106
Casestudy2.11
Usingpredictionmarketsinbusinessandpublicpolicy 114
Coreconcept:marketreview
SECTION3
INTERNATIONALTRADE 119
Casestudy3.1
Whydowetrade? 122
Coreconcept:thebasisofinternationaltrade
Theoryrefresher:Absoluteadvantage,comparativeadvantageandthe
returnstospecialisation 122
Casestudy3.2
Infinitelyinventive:amillionwaysofprotectingyourcountry’sproducers
(andharmingeveryoneelse) 130
Coreconcept:internationaltrade
Theoryrefresher:Thewelfarecostofprotectionagainstimports 134
Casestudy3.3
What’soursisours:puttingastoptoexports 138
Coreconcept:internationaltrade
Theoryrefresher:Thewelfarecostofrestrictingexports 139
Casestudy3.4
Haveglobalisationandtheexpansionofinternationaltrade
improvedwellbeing? 145
Coreconcept:internationaltrade
Theoryrefresher:Howdoesglobalisationoccur? 146
Theoryrefresher:Theeffectsofglobalisationonwellbeing 147
SECTION4
MARKETFAILUREANDGOVERNMENTPOLICY 155
Casestudy4.1
Externalitiesareeverywhere 158
Coreconcept:externalities
Theoryrefresher:Whatisanexternality? 158
Casestudy4.2
Howcanweunjamtrafficjams? 170
Coreconcept:externalities
Theoryrefresher:DealingwithexternalitiesusingPigoviantaxes
andsubsidies 171
v
Casestudy4.3
Whywouldwewanttotradepollution? 177
Coreconcept:externalities
Theoryrefresher:Whatisdirectregulation? 178
Casestudy4.4
Gettingvaccinatedagainstinfluenza:thereisa‘win–win’ineconomics 185
Coreconcept:externalities
Casestudy4.5
TheBushTenderschemeandconservationactivity 191
Coreconcept:publicgood
Theoryrefresher:Whatisapublicgood? 191
Casestudy4.6
Whyiscopyingbad? 196
Coreconcept:publicgood
Theoryrefresher:Whatarepropertyrights? 198
SECTION5
THEORYOFTHEFIRMANDMANAGERIALECONOMICS 203
Casestudy5.1
Arecostsimportant? 209
Coreconcept:costs
Theoryrefresher:Whatarecosts? 210
Casestudy5.2
Howmuchdoesauniversityeducationcost? 214
Coreconcept:costs
Theoryrefresher:Measuringcosts 215
Casestudy5.3
Cuttingcostsbyfindingnewwaystoproduce 222
Coreconcept:costs
Theoryrefresher:Productivityandtheproductionfunction 222
Casestudy5.4
Shouldyoumakeorshouldyoubuy? 229
Coreconcept:costs
Theoryrefresher:The‘makeorbuy’decision 229
Casestudy5.5
Thepathtomarketpower:whencanyourbusinesschargehighprices
withoutlosingallofitscustomers? 237
Coreconcept:marketpowerandtypesofmarkets
Theoryrefresher:Whatismarketpower? 237
Casestudy5.6
TheResourceSuperProfitsTax:howitcouldhavebeensuper 245
Coreconcept:profitmaximisationandMR/MCrule
vi
Theoryrefresher:Profitmaximisationforafirminaperfectly
competitivemarket 246
Casestudy5.7
TheupsanddownsofsupplyinAustralia’sironoreindustry 255
Coreconcept:competitivemarkets
Theoryrefresher:Long-runmarketsupply 256
Casestudy5.8
Themysteryofsausagerollprices 263
Coreconcept:competitivemarkets
Theoryrefresher:Theprofit-maximisingpriceforafirmwithmarketpower 263
Casestudy5.9
Innovationandimitation:dynamicsinacompetitivemarket 271
Coreconcept:pricediscrimination
Theoryrefresher:Competitionandcompetitivemarketdynamics 273
Casestudy5.10
Selllowandsellhigh:makinghigherprofitsusingpricediscrimination 277
Coreconcept:pricediscrimination
Theoryrefresher:Whatispricediscrimination? 278
Casestudy5.11
Smartregulationofamonopoly:howAustraliapayslessfor
pharmaceuticaldrugs 285
Coreconcept:regulation
Theoryrefresher:Thewelfarecostsofmonopoly 285
SECTION6
GAMETHEORY 293
Casestudy6.1
Whentellingthetruthisthebestpolicy:usinggametheorytobidoneBay 296
Coreconcept:simultaneousgames
Theoryrefresher:Gametheory,simultaneousgamesanddominantstrategy
equilibrium 296
Casestudy6.2
Cangametheorymakeyouagameshowchampion? 304
Coreconcept:simultaneousgames
Theoryrefresher:Theprisoners’dilemmagame 306
Casestudy6.3
Whentwosidesgotowar:hownobodywins 313
Coreconcept:simultaneousgames
Theoryrefresher:SimultaneousgamesandtheNashequilibrium 314
Casestudy6.4
Thecorruptiongame 323
Coreconcept:sequentialgames
vii
Theoryrefresher:SequentialgamesandsubgameperfectNashequilibrium 324
Casestudy6.5
It’snothowyoumovebutwhenyoumovethatmatters 332
Coreconcept:sequentialgames
SECTION7
LABOURMARKETS 341
Casestudy7.1
Beautyorcomputerskills:whichwillmostincreaseyourpay? 343
Coreconcept:determinantsofearnings
Theoryrefresher:Whatdeterminesaworker’slabourmarketearnings? 346
Casestudy7.2
Superstarsandthegrowingincomesoftheveryrich 350
Coreconcept:incomedistribution
Theoryrefresher:Measuringthedistributionofincome 353
SECTION8
ECONOMICSOFINFORMATION 357
Casestudy8.1
Tobesure,insure 360
Coreconcept:decisionmakingduringuncertainty
Theoryrefresher:Riskpreferences 361
Casestudy8.2
Doespayforperformancework? 367
Coreconcept:informationasymmetry
Theoryrefresher:Adverseselectionandmoralhazard 368
Index 377
viii
Preface to the third edition
ThisthirdeditionofMicroeconomics:casestudiesandapplicationsisasubstantial
reworkingofthesecondedition.First,itcontainsseveralnewcasestudieswhicheither
coverimportanttopicsthatwerenotaddressedinthefirsteditionofthisbook,suchas
long-runmarketsupply(5.7),orwhichnicelyillustrateaneconomicconcept,suchas
usingthedemand/supplymodeltoexplainchangesintheworldoilprice(2.4).Second,
allthecasestudieshavebeenreviewedandmanyhavebeenupdatedwithnew
examples.Third,Ihavetakentheopportunitytointroducemanynewapplication-
orientedquestionsintothe‘Somequestionstothinkabout’sections.
Acknowledgements
First edition
Thematerialinthebookhascomeoutofmysevenyears(sofar)ofteaching
introductorymicroeconomicsattheUniversityofMelbourne.Gettingtoteachsuch
brightandmotivatedstudents,andtoworkwithtutorswhoarededicatedandclever,
providedtheinspirationforwritingthecasestudies,andthenforkeepingonwriting
them.Ican’timagineamorerewardingorenjoyableenvironmentforteachingthanthat
intheEconomicsandCommerceFacultyattheUniversityofMelbourne.
ThroughoutmytimeteachingintroductorymicroeconomicsI’mespeciallygrateful
forbeingabletoworkwithNahidKhan.Hersupportandadvice,andall-round
professionalismintheroleoftutorialcoordinator,havebeenahugepartofthepleasure
ofteachinginthesubject.I’malsogratefultoNahidforpreparingtheoriginaldraftsofall
thediagramsforthebook.
I’vebeenfortunatetohavehadexcellentreviewerswhogavefeedbackonearlier
versionsofthebook.VivienneGrovesreadthefirstdraftsofeverycasestudy.Herideas
fornewcasestudiesandforextraexamples,herdetailededitorialcommentsandher
adviceonorganisingthebookwentfarbeyondthefeedbackIexpectedtoget,and
haveenabledmetoimprovethebookinmanyways.DavidJohnston,StephanieMalon
andHelenMitchellalsoreadthewholebookatvariousstagesofitspreparation.Eachof
themwenttogreateffort,makingcommentsthathavenotonlysavedmefrommaking
severalerrors,butthatsignificantlyimprovedhowthecasesarewritten.Atanearly
stage,LengLeereadseveralcasestudiesandgavemecommentsonwritingstylethat
weremostuseful.I’mgratefulaswelltocolleagueswhohelpedmeoutwithspecific
examplesandreferences:StephenKing,AndrewLeigh,IanMcDonaldandNikos
Nikofarikis.AndrewLeighalsokindlysupplieddataforFigure1.5.1inCasestudy1.5,
whileRussellHillberrysuppliedthedataforFigure3.0.1.
ix
CengageLearninghasbeengreattoworkwithonthisproject.Particularthanksgo
toLizMaleforherenthusiasmfortheprojectandforbeingsohelpfulinguidingthe
booktopublication,toCarolineHartleyfortakingupmyoriginalsuggestiontoturnthe
casematerialintoabook,andtoLeannePollandTanyaSimmonsfortheirexcellent
workineditingthebook.
Thinkingbacktomyowndaysasastudent,I’malwaysgratefultomyparents,who
providedtheopportunityformetostudyandfosteredtheloveoflearningthatIhope
comesoutinthebook.
Myfamily,Trish,TomandLouisa,areconstantlyencouraging,andtheirsupporthas
madeitpossibleformetocompleteaprojectthathasbeensotime-consuming.An
economistprobablyshouldn’tsaythis,buttheyarepriceless.Thanksguys!
Third edition
Iamgratefulforthecommentsandsuggestionsmadebytutorsandstudentsin
IntroductoryMicroeconomicsattheUniversityofMelbourneinthetimesincethefirst
editionwaspublished.Theirfeedbackhasbeenmostvaluableinpreparingthisnew
edition.
ThankstoMichelleAaronsatCengageLearningwhohasbeenagreatsupporterof
thebook,andtoStephanieHeriot,NatalieOrrandGregAlfordfortheirexcellentworkin
editingthisedition.
About the author
JeffBorlandisTrubyWilliamsProfessorintheDepartmentofEconomicsatthe
UniversityofMelbourne.Hehasbeenteachingmicroeconomicsfor25years.Heisa
pastwinneroftheUniversityofMelbourne’sEdBrownTeachingAward,andhas
receivedaCarrickCitationforOutstandingContributiontoStudentLearning.
Introduction
Economicsisnothingifitdoesn’tprovideuswithpracticalknowledge.Thegreatvalue
ofeconomicsisitsrelevancetotheworldaroundus,itscapacitytoilluminatehowthe
economyandsocietyworkandtoassistusinmakingbetterdecisions.Shouldyoubuya
carorkeeptravellingbypublictransport?Whatarethebestwaystoprotectthe
environment?Whatpricingstrategyshouldyourbusinessuse?Howshouldyoubidat
anauction?Allofthesequestionsandmanymorecanbeansweredusingeconomics.
Soifyouaregoingtolearneconomics,youshouldlearnitinawaythatwillmakeit
mostvaluabletoyou,awaythatletsyouapplyittoanswerquestionsjustlikethese.
Howcanyoudothis?Well,economistswhowanttounderstandtheeconomyand
societydeveloptheorieswhichtheyapplytoanalysethesituationinwhichthey’re
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