Microeconomics

576 Pages·2008·11.64 MB·English

by  Roger A. (Roger A. Arnold) Arnold

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
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Roger A. Arnold
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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