Microeconomics Demystified : A Self-Teaching Guide

328 Pages·2005·1.073 MB·English

by  DR. CRAIG A. DEPKEN, II

MICROECONOMICS
DEMYSTIFIED
DR. CRAIG A. DEPKEN, II
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DOI: 10.1036/0071459111
This book is dedicated to Linda and Campbell; both
have helped demystify my life.
ABOUT THE AUTHOR
Dr. Craig A. Depken, II, is an associate professor of economics at the University
of Texas at Arlington. Dr. Depken graduated with an undergraduate degree in
economics from the University of Georgia in 1991, and with a PhD in economics
from the University of Georgia in June 1996. He received a tenure-track appointment
at the University of Texas at Arlington in the fall of 1996. Dr. Depken was promoted
to Associate Professor with Tenure in the spring of 2002.
Dr. Depken has published extensively in peer-reviewed journals, such as The
Review of Industrial Organization, The Journal of Business, The Journal of
Economic Behavior and Organization, The Journal of Sports Economics, Economics
of Education Review, and Economics Letters, focusing primarily on the economics
of sports and various topics in applied microeconomics. He has also received awards
for his teaching, including the inaugural Innovation in Teaching award in the College
of Business at the University of Texas in Arlington for his integration of the then
young Internet and traditional classroom teaching. He was nominated in 2004 for
the National Faculty of the Year award of the National Society of College
Scholars.
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CONTENTS
Acknowledgments ix
Introduction xi
CHAPTER 1 The Language of Economics 1
Summary 7
Quiz 7
CHAPTER 2 Math Review 11
Summary 16
Quiz 16
CHAPTER 3 Production and Growth 19
Production 19
Production in a Robinson Crusoe Economy 20
Economic Growth 23
Gains from Trade 24
Summary 33
Quiz 33
CHAPTER 4 Demand and Supply 37
Demand 38
Supply 43
Price as a Regulator in the Market 47
Changes in Demand 50
Changes in Supply 51
v
Microeconomics Demystifi ed
vi
Changes in Supply and Demand 52
Government Interventions in the Market 55
Price Floors and Ceilings 56
Quantity Controls 58
Taxation in the Supply and Demand Model 59
Summary 66
Quiz 67
CHAPTER 5 Elasticity 73
Price Elasticity of Demand 74
Income Elasticity of Demand 78
Cross Elasticity of Demand 79
Elasticity of Supply 79
Applications of Elasticity 80
Price Elasticity of Supply and Demand
and the Burden of a Sales Tax 87
Summary 89
Quiz 90
CHAPTER 6 Consumer and Producer Surplus 93
Consumer Surplus 93
Producer Surplus 97
Changes in Consumer and Producer
Surplus and Changes in Supply and Demand 100
The Impact of a Sales Tax on Consumer
and Producer Surplus 102
Summary 105
Quiz 105
CHAPTER 7 Utility 111
The Utility Function and Indifference Curves 112
The Household’s Income Constraint 114
The Household’s Consumption Equilibrium 118
The Law of Demand and Utility Theory 120
Income and Substitution Effects 122
CONTENTS
vii
Substitution Effect 123
The Income Effect 125
Combining Substitution
and Income Effects 126
Summary 129
Quiz 129
CHAPTER 8 Theory of the Firm 133
Why the Firm? 134
The Firm’s Production Function and Isoquants 135
Effi ciency and the Firm 138
The Firm’s Cost Constraint 140
A Firm’s Cost Functions: Total Cost,
Average Cost, and Marginal Cost 143
Summary 147
Quiz 148
CHAPTER 9 Perfect Competition 153
Summary 164
Quiz 164
CHAPTER 10 Theory of Monopoly 169
Static Monopoly 169
Effi ciency Aspects of Static Monopoly 178
Price Discrimination 181
First Degree Price Discrimination 181
Third Degree Price Discrimination 182
Second Degree Price Discrimination 185
Cartel Theory 188
Contestable Market Theory 190
Summary 191
Quiz 192
CHAPTER 11 Monopolistic Competition and Oligopoly 197
Monopolistic Competition 198
Oligopoly 200
Microeconomics Demystifi ed
viii
The Kinked Demand Model 201
Oligopoly with a Dominant Firm 202
Strategic Interaction 204
Cournot Duopoly Game 205
Bertrand’s Duopoly Game 207
Summary 208
Quiz 209
CHAPTER 12 Factor Markets 213
Labor 215
Labor Demand 215
Labor Supply 217
Labor Market Equilibrium 218
Additional Topics in Labor Markets 220
Capital Markets 230
Demand for Capital 230
Supply of Capital 231
Capital Market Equilibrium 231
Land 238
Summary 240
Quiz 242
CHAPTER 13 Market Failure and Government
Intervention in Markets 245
Public Goods 246
Externalities 251
Summary 262
Quiz 263
APPENDIX A Quiz Answers 267
APPENDIX B Final Exam 279
Final Exam Answers 309
Index 313
ACKNOWLEDGMENTS
I primarily want to thank my parents, Geraldine and Craig Depken for their
countless sacrifi ces in helping me throughout the years. Their examples of
personal dedication to learning and investigation are testimony to the effect that
parents have on their children.
I also owe a debt to the faculty of the economics department at the University of
Georgia, especially Arthur Snow, Fred Bateman, and David Kamerschen. Without
these individuals I would not have been able to complete my graduate degree program
or obtained the extensive experience of teaching at the undergraduate level that
ultimately provided the basis for the approach taken in this book.
For their anonymous efforts, I acknowledge the undergraduate students that took my
principles of economics courses at the University of Georgia and the University of
Texas at Arlington. At the University of Georgia, especially, several students made
signifi cant contributions to my approach in teaching the principles of microeconomics,
many of which appear in this book.
I thank the faculty of the Department of Economics at the University of Texas at
Arlington for providing one of the best environments in the country for research and
collegiality. Our countless discussions about economics––always interesting and
provocative––have provided some of the examples included in this text. I specifi cally
want to thank Daniel Himarios for his personal support during my appointment as
assistant professor and my promotion to associate professor. Richard Buttimer, Bill
Crowder, Courtney LaFountain, Robert Sonora, Mike Ward, and Dennis Wilson are
also acknowledged for their indirect contributions to this text.
Finally, I thank Trisha Bezmen for her helpful comments on an earlier version of this
manuscript; her eye to fi ne details is greatly appreciated.
ix
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INTRODUCTION
This book provides a self-study approach to understanding the theory of microeco-
nomics, avoiding unnecessary mathematics. The approach in this book assumes that
you have not studied economics before.
What exactly is economics? You are probably familiar with economic terms from
watching the nightly news or reading the daily newspaper. Economics is often discussed
in terms of unemployment, the stock market, gross national product, the trade defi cit,
or consumer confi dence. However, none of these topics really defi nes economics.
Instead, these are elements of the broader set of questions that economics addresses.
Economics is a relatively young fi eld of formal investigation. While individuals
have made choices from the fi rst days of consciousness, the focused investigation
into the elements of human choice that would today be considered “mainstream”
economics can be dated to Adam Smith’s 1776 treatise An Inquiry into the Causes
of the Wealth of Nations. As the title suggest, Smith was concerned with what
infl uenced the general well being of nation states and the citizenry therein. After
Smith’s work was disseminated (in the non-Internet age!) several notable economists
extended his analysis to include topics that are today considered standard elements
of a principles course in economics, including Ricardo, Mill, Jevons, Edgeworth,
Marshall, and Keynes.
Many of these names are unfamiliar to those who have not studies economics,
but that does not indicate that their contributions are inconsequential. Like any fi eld
of study, economics has its “mighty pillars” upon which later generations base their
study, philosophy, and approach to problem solving. The names of those who
contributed the “principles of economics” are perhaps less important than the
concepts themselves.
Over the past hundred years, the fi eld of economics has expanded from the study of
what makes a country “wealthy” to an area that investigates all sorts of human behavior.
Indeed, some might point out that economics is less the study of numbers, such as
unemployment, interest rates, and prices, as it is a study of human behavior—borrowing
xi
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