Principles of microeconomics : an integrative approach

338 Pages·2017·3.22 MB·English

by  Kolmar

Springer Texts in Business and Economics
Martin Kolmar
Principles of
Microeconomics
An Integrative Approach
Springer Texts in Business and Economics
Moreinformationaboutthisseriesat
http://www.springer.com/series/10099
Martin Kolmar
Principles of
Microeconomics
An Integrative Approach
MartinKolmar
InstituteforBusinessEthics
UniversityofSt.Gallen
St.Gallen,Switzerland
ISSN2192-4333 ISSN2192-4341(electronic)
SpringerTextsinBusinessandEconomics
ISBN978-3-319-57588-9 ISBN978-3-319-57589-6(eBook)
DOI10.1007/978-3-319-57589-6
LibraryofCongressControlNumber:2017951848
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Tomy daughter,
Carlotta
Acknowledgements
One may wonder why I think that it makes sense to add yet another introductory
textbooktotheoverfilledshelfofwell-establishedbooksonmicroeconomics.There
arethreereasonsthatmotivatedmetodoso.
First,alotoftextbooksineconomicswanttomakeonebelievethatthetheories
presentedaremoreorlesscontext-freeandobjective.Thisisawronganddangerous
belief. First of all, alltheoriesareembeddedin an intellectualmilieu fromwhich
theyborrowandonwhichtheybuild. Nomanisanisland,andnoscientifictheory
iseither. Thetendencytoshunanycontextualisationsofthetheoriescomesatthe
riskofblindnesstowardstheimplicitassumptions,valuejudgementsandepistemes
on which the theory depends. This makes economics prone to being misused for
ideologicalpurposes. Economicliteracydoesnotonlymeanthatoneisabletoun-
derstandtherulesandpatternsofmoderneconomies,butalsothatoneunderstands
how economic theories relate to other social sciences and the culture from which
theyemerge. Thistextbookisanattempttocontextualizemoderneconomicsinthe
hopethatstudentswillgetabetteroverviewofitsstrengthsandweaknesses. Itputs
alsoaspecificemphasisoncasestudiesthatrangewidelyfromthefunctioningof
coffeemarkets, the logicof overfishing, to pricediscrimination in the digital age.
Thisapproachmakesthis bookalso potentially interestingforstudents whostudy
economicsasaminorandwhowanttounderstandhoweconomictheoriesrelateto
othersocialsciencesandhowtheycanbeusedtobetterunderstandmarketsaswell
asphenomenalikeclimatechange,amongmanyothers.
Tomakeiteasiertoidentifythemostimportantcontextualizationsinthisbook,I
workwithaseriesoficonsthatonewillfindinthemarginsofthisbook.Lindicates
a legal, B a business, and ˆ a philosophical(broadly speaking) context. Further-
more,onewillfindthemostimportantdefinitionsandtechnicaltermshighlighted
✍
witha -signinthemarginsofthebook.
Second,textbooksthatgiveanintroductiontoeconomicshavebecomeamillion-
dollar business over the last decades, with thousands of universities and colleges
teaching the same basic principles worldwide. The globalization of this market
hasledtoacommodificationoftextbooksintheattempttosellasmanycopiesas
possible. Asaresult,thelion’sshareofthemarketisservedbytextbooksthatare
vii
viii Acknowledgements
veryelementaryandonlyscratchthesurfaceofmosttheories. Thisstrategymakes
themcommerciallysuccessful,becauseoftheappealtothemassmarketbut,atthe
same time, denies the students a deeper and more sophisticated understanding of
thestrengthsandweaknessesofthetheories. Onecouldarguethatsuchanin-depth
understanding of theories is not necessary in an introductory class in economics,
becausetherewillbeplentyofintermediateandadvancedcoursesthatwillfillthese
gapslateron. Therealityis,however,thatasignificantfractionofstudentsgetsall
of its knowledge from the introductory course. It is never too early to educate
independentandcriticalminds.
Third,mosttextbooksthatIamawareofarenottailoredtotheneedsofabusi-
ness school where students study economics, business administration and maybe
law. Economicsisaboutthefunctioningofinstitutionsandmostinstitutionshave
a legal backbone. Bringing this fact to the foreground creates synergies between
law and economics. By the same token, economic theory allows one to identify
the key parameters that a firm must know in order to be successful in the mar-
ketsinwhichtheycompete. Examiningthecommongroundbetweenmanagement
andeconomicsallowsonetobetterunderstandtheimplicationsofdifferentmarket
contextsandindustriesformanagersanditshowsonehowcloselyeconomicsand
business administration can and should be linked. Economics, law and business
administrationarereallythreeperspectivesonthesamephenomenon: thelogicof
socialinteraction.
ThisbooktookshapeovermanyyearsduringwhichIhavebeenteaching“Prin-
ciples of Economics” and “Microeconomics” to undergraduatestudents. I would
like to thank all of my former students for their patience and for their countless
discussionsthatallcontributed,intheirownways,tothisbook. Specialthanksare
due to my present and former PhD students and research assistants Philipp Den-
ter,MagnusHoffmann,HendrikRommeswinkelandDanaSisak,allofwhomhad
a major influence on the content and the didactics of this book. This is also true
for Thomas Beschorner, Friedrich Breyer, Claudia Fichtner, Jürg Furrer, Michael
Heumann,NormannLorenz,IngoPies,AlfonsoSousa-PozaandAndreasWagener,
whogavememedetailedfeedbackonearlier versionsofthebookandhelpedme
with valuable suggestions. I would also like to thank Maya G. Davies, Corinne
Knöpfel,LeopoldLerach,JanRissandJanSerwart,whosupportedmeinfinishing
thisbookandwho didagreatjobin makingit morestudentfriendlyand accessi-
ble. It is definitely nottheir fault if youfind yourselfstruggling with some of the
material.
St. Gallen,May2017 MartinKolmar
Contents
PartI Introduction
1 FirstPrinciples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.1 WhatIsEconomicsAbout? . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 SomeMethodologicalRemarks. . . . . . . . . . . . . . . . . . . . . . 10
1.2.1 TrueandReasonableTheories . . . . . . . . . . . . . . . . . . 12
1.2.2 TheoriesandModels . . . . . . . . . . . . . . . . . . . . . . . . 13
1.2.3 TheVirtueofThriftiness . . . . . . . . . . . . . . . . . . . . . 14
1.2.4 DoAssumptionsMatter? . . . . . . . . . . . . . . . . . . . . . 15
1.2.5 AnExample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.2.6 CriticalRationalism . . . . . . . . . . . . . . . . . . . . . . . . 17
1.2.7 PositiveandNormativeTheories . . . . . . . . . . . . . . . . 18
1.2.8 SchoolsofEconomicThought . . . . . . . . . . . . . . . . . . 20
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2 GainsfromTrade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.2 AnExample. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.3 HowGeneralistheTheoryofComparativeAdvantage? . . . . . . 32
2.4 ComparativeAdvantageandtheOrganizationofEconomicActivity 38
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
PartII APrimerinMarketsandInstitutions
3 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.1 GeneralRemarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.2 TaxonomyofMarkets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
ix
x Contents
4 SupplyandDemandUnderPerfectCompetition . . . . . . . . . . . . . 55
4.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
4.2 DeterminantsofSupplyandDemand . . . . . . . . . . . . . . . . . . 56
4.3 Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
4.4 EquilibriumAnalysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
5 NormativeEconomics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
5.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
5.2 NormativePropertiesofCompetitiveMarkets . . . . . . . . . . . . . 87
5.3 IsOne’sWillingnesstoPayOne’sWillingnesstoPay? . . . . . . . 94
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
6 ExternalitiesandtheLimitsofMarkets. . . . . . . . . . . . . . . . . . . 99
6.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
6.2 TransactionCosts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
6.2.1 AnExample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
6.2.2 AnalysisofExternalitiesonMarkets . . . . . . . . . . . . . . 107
6.2.3 TheBiggerPicture . . . . . . . . . . . . . . . . . . . . . . . . . 114
6.3 FourBoundaryCases . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
PartIII FoundationsofDemandandSupply
7 DecisionsandConsumerBehavior . . . . . . . . . . . . . . . . . . . . . . 145
7.1 BasicConcepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
7.1.1 ChoiceSetsandPreferences . . . . . . . . . . . . . . . . . . . 146
7.1.2 IndifferenceCurves. . . . . . . . . . . . . . . . . . . . . . . . . 150
7.1.3 UtilityFunctions . . . . . . . . . . . . . . . . . . . . . . . . . . 154
7.2 DemandonCompetitiveMarkets. . . . . . . . . . . . . . . . . . . . . 158
7.2.1 GraphicalSolution . . . . . . . . . . . . . . . . . . . . . . . . . 160
7.2.2 AnalyticalSolution . . . . . . . . . . . . . . . . . . . . . . . . . 163
7.2.3 ThreeExamples . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
7.2.4 ComparativeStaticsandtheStructureofMarketDemand . 176
7.2.5 ChangesinIncome . . . . . . . . . . . . . . . . . . . . . . . . . 177
7.2.6 ChangesinPrice . . . . . . . . . . . . . . . . . . . . . . . . . . 178
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
8 Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
8.1 WhatAreCosts,andwhyAreTheyImportant?. . . . . . . . . . . . 183
8.2 ASystematicTreatmentofCosts . . . . . . . . . . . . . . . . . . . . . 188
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197