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828 Pages·2012·29.95 MB·English
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Theory and Applications of Microeconomics v. 1.0 This is the bookTheory and Applications of Microeconomics(v. 1.0). This book is licensed under aCreative Commonsby-nc-sa 3.0(http://creativecommons.org/licenses/by-nc-sa/ 3.0/)license. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms. This book was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz (http://lardbucket.org)in an effort to preserve the availability of this book. Normally, the author and publisher would be credited here. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Additionally, per the publisher's request, their name has been removed in some passages. More information is available on this project'sattribution page(http://2012books.lardbucket.org/attribution.html?utm_source=header). For more information on the source of this book, or why it is available for free, please see the project's home page (http://2012books.lardbucket.org/). You can browse or download additional books there. ii Table of Contents About the Authors................................................................................................................. 1 Acknowledgments................................................................................................................. 2 Dedications............................................................................................................................. 3 Preface..................................................................................................................................... 4 Chapter 1: What Is Economics?.......................................................................................... 8 Microeconomics in a Fast-Food Restaurant................................................................................................9 Macroeconomics in a Fast-Food Restaurant.............................................................................................13 What Is Economics, Really?.........................................................................................................................16 End-of-Chapter Material.............................................................................................................................18 Chapter 2: Microeconomics in Action............................................................................. 20 Four Examples of Microeconomics............................................................................................................21 The Microeconomic Approach...................................................................................................................27 End-of-Chapter Material.............................................................................................................................34 Chapter 3: Everyday Decisions......................................................................................... 36 Individual Decision Making: How You Spend Your Income....................................................................38 Individual Demand.......................................................................................................................................58 Individual Decision Making: How You Spend Your Time........................................................................78 End-of-Chapter Material.............................................................................................................................89 Chapter 4: Life Decisions................................................................................................... 94 Consumption and Saving.............................................................................................................................96 Using Discounted Present Values.............................................................................................................121 Avoiding Risk..............................................................................................................................................133 Embracing Risk...........................................................................................................................................145 End-of-Chapter Material...........................................................................................................................151 Chapter 5: eBay and craigslist........................................................................................ 156 craigslist and the Gains from Trade.........................................................................................................161 eBay.............................................................................................................................................................171 Supply and Demand...................................................................................................................................180 Production Possibilities.............................................................................................................................193 End-of-Chapter Material...........................................................................................................................211 iii Chapter 6: Where Do Prices Come From? .................................................................... 215 The Goal of a Firm......................................................................................................................................217 The Revenues of a Firm.............................................................................................................................223 The Costs of a Firm.....................................................................................................................................244 Markup Pricing: Combining Marginal Revenue and Marginal Cost.....................................................250 The Supply Curve of a Competitive Firm.................................................................................................259 End-of-Chapter Material...........................................................................................................................265 Chapter 7: Why Do Prices Change?................................................................................ 269 Market Supply and Market Demand........................................................................................................274 Using the Supply-and-Demand Framework............................................................................................285 Another Perspective on Changing Prices................................................................................................297 Three Important Markets.........................................................................................................................307 Beyond Perfect Competition.....................................................................................................................317 End-of-Chapter Material...........................................................................................................................324 Appendix: Algebraic Presentation of Supply and Demand....................................................................327 Chapter 8: Growing Jobs.................................................................................................. 330 How Do Firms Decide How Many Hours of Labor to Hire?....................................................................335 Entry and Exit.............................................................................................................................................357 Search..........................................................................................................................................................368 Government Policies..................................................................................................................................376 End-of-Chapter Material...........................................................................................................................380 Chapter 9: Making and Losing Money on Wall Street............................................... 384 A Walk Down Wall Street..........................................................................................................................388 The Value of an Asset................................................................................................................................398 Asset Markets and Asset Prices................................................................................................................407 Efficient Markets........................................................................................................................................416 End-of-Chapter Material...........................................................................................................................428 Appendix: A General Formulation of Discounted Present Value..........................................................432 Chapter 10: Raising the Wage Floor.............................................................................. 434 Nominal Wages and Real Wages...............................................................................................................439 The Effects of a Minimum Wage...............................................................................................................448 Minimum Wage Changes...........................................................................................................................456 The Minimum Wage and the Distribution of Income.............................................................................462 Empirical Evidence on Minimum Wages.................................................................................................470 End-of-Chapter Material...........................................................................................................................480 iv Chapter 11: Barriers to Trade and the Underground Economy ............................. 485 How the Government Controls What You Buy and Sell.........................................................................489 Limits on Trade across Borders................................................................................................................512 Government and the Labor Market..........................................................................................................520 End-of-Chapter Material...........................................................................................................................526 Chapter 12: Superstars .................................................................................................... 530 Facts about Inequality...............................................................................................................................534 The Sources of Inequality..........................................................................................................................548 Distributive Justice....................................................................................................................................559 Government Policy....................................................................................................................................570 End-of-Chapter Material...........................................................................................................................575 Chapter 13: Cleaning Up the Air and Using Up the Oil............................................. 579 The Economics of Clean Air......................................................................................................................585 Externalities................................................................................................................................................597 Renewable, Nonrenewable, and Accumulable Resources......................................................................612 End-of-Chapter Material...........................................................................................................................624 Appendix: An Example of the Hotelling Rule in Operation...................................................................627 Chapter 14: Busting Up Monopolies.............................................................................. 629 Market Power and Monopoly...................................................................................................................632 Patents and Copyright...............................................................................................................................645 Markets with a Small Number of Sellers.................................................................................................655 End-of-Chapter Material...........................................................................................................................672 Chapter 15: A Healthy Economy..................................................................................... 677 Supply and Demand in Health-Care Markets..........................................................................................682 Health Insurance........................................................................................................................................697 Government Policy....................................................................................................................................708 End-of-Chapter Material...........................................................................................................................715 Chapter 16: Cars................................................................................................................ 720 The Demand for Automobiles...................................................................................................................723 Supply of Cars.............................................................................................................................................738 Market Outcomes in the Automobile Industry.......................................................................................746 Policy Issues................................................................................................................................................752 End-of-Chapter Material...........................................................................................................................758 v Chapter 17: Microeconomics Toolkit............................................................................ 761 Individual Demand.....................................................................................................................................762 Elasticity......................................................................................................................................................766 The Labor Market.......................................................................................................................................768 Choices over Time......................................................................................................................................770 Discounted Present Value.........................................................................................................................772 The Credit Market......................................................................................................................................775 Expected Value...........................................................................................................................................777 Correcting for Inflation.............................................................................................................................779 Supply and Demand...................................................................................................................................782 Buyer Surplus and Seller Surplus.............................................................................................................786 Efficiency and Deadweight Loss...............................................................................................................789 Production Possibilities Frontier.............................................................................................................792 Comparative Advantage............................................................................................................................794 Costs of Production....................................................................................................................................796 Pricing with Market Power.......................................................................................................................799 Comparative Statics...................................................................................................................................802 Production Function..................................................................................................................................805 Nash Equilibrium.......................................................................................................................................808 Externalities and Public Goods.................................................................................................................811 Foreign Exchange Market.........................................................................................................................813 Percentage Changes and Growth Rates...................................................................................................816 Mean and Variance....................................................................................................................................817 Correlation and Causality..........................................................................................................................820 vi About the Authors Russell Cooper Dr. Russell Cooper is a professor of economics at the European University Institute in Florence, Italy. He has held positions at the University of Texas, Boston University, the University of Iowa, and Yale University as well as numerous visiting positions in Asia, Europe, North America, and South America. He has taught principles of economics at many of these universities as well as numerous courses to PhD students. Cooper’s research has focused on macroeconomics, labor economics, monetary policy, and industrial organization. He received his PhD from the University of Pennsylvania in 1982. He was elected Fellow of the Econometric Society in 1997. A. Andrew John Andrew John is an associate professor of economics at Melbourne Business School, Melbourne, Australia. He received his undergraduate degree in economics from the University of Dublin, Trinity College, in 1981 and his PhD in economics from Yale University in 1988. He has held academic appointments at Michigan State University, the University of Virginia, and INSEAD. He has also held visiting appointments at the University of Michigan, the Helsinki School of Economics and Business Administration, and the University of Texas at Austin. He joined Melbourne Business School in January 2009. Andrew has consulting experience in the areas of marketing, economics, and strategy. He has worked with clients in Australia, Europe, and throughout the Asia- Pacific region. He has extensive experience in the pharmaceutical industry and has also worked with firms in the consumer goods and consulting sectors. Andrew has taught economics to undergraduates, PhD students, MBA students, and executives. His research interests include state-dependent pricing models, environmental economics, coordination games, and consumer boycotts. His published research has appeared in top economics and business journals, including American Economic Review,Quarterly Journal of Economics,Journal of Monetary Economics,Economic Journal,Journal of Public Economics,Management Science,Sloan Management Review, andJournal of Marketing. His work is widely cited in economics journals. 1 Acknowledgments The authors would like to thank the following colleagues who have reviewed the text and provided comprehensive feedback and suggestions for improving the material: • Ecrument Aksoy, Los Angeles Valley College • Becca Arnold, San Diego Community College • Bevin Ashenmiller, Occidental College • Diana Bajrami, College of Alameda • Michael Haupert, University of Wisconsin, LaCrosse • Fritz Laux, Northeastern State University • James Ranney, Pima Community College • Brian Rosario, American River College • Lynda M. Rush, California State Polytechnic University, Pomona We thank Jahiz Barlas, Mariesa Herrmann, Mhairi Hopkins, Heidy Maritza, Marjan Middelhoff-Cobben, and Kai Zhang, who provided outstanding research assistance during the preparation of this textbook. Eleanor Cooper, Jason DeBacker, Huacong Liu, and Shreemoy Mishra provided numerous comments and suggestions that improved our presentation and content. Lori Cerreto and Vanessa Gennarelli atUnnamed Publisherhave done a skillful job of shepherding this book through to completion; we are very grateful indeed for all their efforts. We extend particular thanks to Joyce M. R. Cooper for her contributions in the early stages of this project. Joyce Cooper played an integral role in the development of the ideas for this book and helped to draft early versions of the chapters on minimum wage and income taxes. 2 Dedications Russell Cooper To my family and friends. A. Andrew John To Jill Klein and Parichat Phetluk. 3 Preface We have written a fundamentally different text for principles of economics, based on two premises: 1. Students are motivated to study economics if they see that it relates to their own lives. 2. Students learn best from an inductive approach, in which they are first confronted with a question and then led through the process of how to answer that question. The intended audience of the textbook is first-year undergraduates taking courses on the principles of macroeconomics and microeconomics. Many may never take another economics course. We aim to increase their economic literacy both by developing their aptitude for economic thinking and by presenting key insights about economics that every educated individual should know. Applications ahead of Theory We present all the theory that is standard in books on the principles of economics. But by beginning with applications, we also show studentswhythis theory is needed. We take the kind of material that other authors put in “applications boxes” and place it at the heart of our book. Each chapter is built around a particular business or policy application, such as (for microeconomics) minimum wages, stock exchanges, and auctions, and (for macroeconomics), social security, globalization, and the wealth and poverty of nations. Why take this approach? Traditional courses focus too much on abstract theory relative to the interests and capabilities of the average undergraduate. Students are rarely engaged, and the formal theory is never integrated into the way students think about economic issues. We provide students with a vehicle to understand the structure of economics,andwe train them how to use this structure. 4

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