Principles of Microeconomics for AP® Courses 2e

575 Pages·2011·22.56 MB·English

by  Openstax College

Principles of
Microeconomics for
®
AP Courses 2e

SENIOR CONTRIBUTING AUTHORS
STEVEN A. GREENLAW, UNIVERSITY OF MARY WASHINGTON
DAVID SHAPIRO, PENNSYLVANIA STATE UNIVERSITY

Based on the 2nd edition of Principles of
Economics, Economics and the Economy, 2e
by Timothy Taylor, published in 2011.
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Table of Contents
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Chapter1: Welcome to Economics! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.1 What Is Economics, and Why Is It Important? . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.2 Microeconomics and Macroeconomics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.3 How Economists Use Theories and Models to Understand Economic Issues . . . . . . . . . . 15
1.4 How To Organize Economies: An Overview of Economic Systems . . . . . . . . . . . . . . . 18
Chapter2: Choice in a World of Scarcity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.1 How Individuals Make Choices Based on Their Budget Constraint . . . . . . . . . . . . . . . 28
2.2 The Production Possibilities Frontier and Social Choices . . . . . . . . . . . . . . . . . . . . 33
2.3 Confronting Objections to the Economic Approach . . . . . . . . . . . . . . . . . . . . . . . 38
Chapter3: Demand and Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.1 Demand, Supply, and Equilibrium in Markets for Goods and Services . . . . . . . . . . . . . 46
3.2 Shifts in Demand and Supply for Goods and Services . . . . . . . . . . . . . . . . . . . . . 52
3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process . . . . . . . . . . . . . . 61
3.4 Price Ceilings and Price Floors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.5 Demand, Supply, and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Chapter4: Labor and Financial Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
4.1 Demand and Supply at Work in Labor Markets . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.2 Demand and Supply in Financial Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
4.3 The Market System as an Efficient Mechanism for Information . . . . . . . . . . . . . . . . . 98
Chapter5: Elasticity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.1 Price Elasticity of Demand and Price Elasticity of Supply . . . . . . . . . . . . . . . . . . . 108
5.2 Polar Cases of Elasticity and Constant Elasticity . . . . . . . . . . . . . . . . . . . . . . . 113
5.3 Elasticity and Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
5.4 Elasticity in Areas Other Than Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Chapter6: Consumer Choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
6.1 Consumption Choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
6.2 How Changes in Income and Prices Affect Consumption Choices . . . . . . . . . . . . . . 141
6.3 Labor-Leisure Choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
6.4 Intertemporal Choices in Financial Capital Markets . . . . . . . . . . . . . . . . . . . . . . 151
Chapter7: Production, Costs and Industry Structure . . . . . . . . . . . . . . . . . . . . . . . . 163
7.1 Explicit and Implicit Costs, and Accounting and Economic Profit . . . . . . . . . . . . . . . 165
7.2 Production in the Short Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
7.3 Costs in the Short Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
7.4 Production in the Long Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
7.5 Costs in the Long Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
Chapter8: Perfect Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
8.1 Perfect Competition and Why It Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
8.2 How Perfectly Competitive Firms Make Output Decisions . . . . . . . . . . . . . . . . . . . 197
8.3 Entry and Exit Decisions in the Long Run . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
8.4 Efficiency in Perfectly Competitive Markets . . . . . . . . . . . . . . . . . . . . . . . . . . 214
Chapter9: Monopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
9.1 How Monopolies Form: Barriers to Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
9.2 How a Profit-Maximizing Monopoly Chooses Output and Price . . . . . . . . . . . . . . . . 228
Chapter10: Monopolistic Competition and Oligopoly . . . . . . . . . . . . . . . . . . . . . . . . 243
10.1 Monopolistic Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
10.2 Oligopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252
Chapter11: Monopoly and Antitrust Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263
11.1 Corporate Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264
11.2 Regulating Anticompetitive Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
11.3 Regulating Natural Monopolies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272
11.4 The Great Deregulation Experiment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
Chapter12: Environmental Protection and Negative Externalities . . . . . . . . . . . . . . . . . 283
12.1 The Economics of Pollution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284
12.2 Command-and-Control Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288
12.3 Market-Oriented Environmental Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
12.4 The Benefits and Costs of U.S. Environmental Laws . . . . . . . . . . . . . . . . . . . . . 293
12.5 International Environmental Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296
12.6 The Tradeoff between Economic Output and Environmental Protection . . . . . . . . . . . 297
Chapter13: Positive Externalities and Public Goods . . . . . . . . . . . . . . . . . . . . . . . . 309
13.1 Why the Private Sector Underinvests in Innovation . . . . . . . . . . . . . . . . . . . . . 311
13.2 How Governments Can Encourage Innovation . . . . . . . . . . . . . . . . . . . . . . . . 314
13.3 Public Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317
Chapter14: Poverty and Economic Inequality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327
14.1 Drawing the Poverty Line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328
14.2 The Poverty Trap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331
14.3 The Safety Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334
14.4 Income Inequality: Measurement and Causes . . . . . . . . . . . . . . . . . . . . . . . . 338
14.5 Government Policies to Reduce Income Inequality . . . . . . . . . . . . . . . . . . . . . . 344
Chapter15: Labor Markets and Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
15.1 Market Power on the Supply Side of Labor Markets: Unions . . . . . . . . . . . . . . . . . 356
15.2 Employment Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363
15.3 Immigration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369
Chapter16: Information, Risk, and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377
16.1 The Problem of Imperfect Information and Asymmetric Information . . . . . . . . . . . . . 378
16.2 Insurance and Imperfect Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384
Chapter17: Financial Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397
17.1 How Businesses Raise Financial Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 399
17.2 How Households Supply Financial Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 402
17.3 How to Accumulate Personal Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 414
Chapter18: Public Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425
18.1 Voter Participation and Costs of Elections . . . . . . . . . . . . . . . . . . . . . . . . . . 426
18.2 Special Interest Politics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428
18.3 Flaws in the Democratic System of Government . . . . . . . . . . . . . . . . . . . . . . . 431
Chapter19: International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439
19.1 What Happens When a Country Has an Absolute Advantage in All Goods . . . . . . . . . 440
19.2 Intra-industry Trade between Similar Economies . . . . . . . . . . . . . . . . . . . . . . . 445
19.3 The Benefits of Reducing Barriers to International Trade . . . . . . . . . . . . . . . . . . 448
19.4 What Happens When a Country Has an Absolute Advantage in All Goods . . . . . . . . . 450
Chapter20: Globalization and Protectionism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461
20.1 Protectionism: An Indirect Subsidy from Consumers to Producers . . . . . . . . . . . . . . 462
20.2 International Trade and Its Effects on Jobs, Wages, and Working Conditions . . . . . . . . 469
20.3 Arguments in Support of Restricting Imports . . . . . . . . . . . . . . . . . . . . . . . . . 472
20.4 How Governments Enact Trade Policy: Globally, Regionally, and Nationally . . . . . . . . 477
20.5 The Tradeoffs of Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481
A|The Use of Mathematics in Principles of Economics . . . . . . . . . . . . . . . . . . . . . . . 489
B|Indifference Curves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505
C|Present Discounted Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 563
This OpenStax book is available for free at http://cnx.org/content/col23750/1.2
Preface 1
PREFACE
Welcome to Principles of Microeconomics for AP® Courses 2e (2nd Edition), an OpenStax resource. This textbook
was written to increase student access to high-quality learning materials, maintaining highest standards of academic
rigor at little to no cost.
About OpenStax
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About OpenStax resources
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Format
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®
About Principles of Microeconomics for AP Courses 2e
Principles of Microeconomics for AP® Courses 2e (2nd edition) covers the scope and sequence of most introductory
microeconomics courses. The text includes many current examples, which are handled in a politically equitable way.
The outcome is a balanced approach to the theory and application of economics concepts. The second edition has
been thoroughly revised to increase clarity, update data and current event impacts, and incorporate the feedback from
many reviewers and adopters.
Coverage and scope
For the second edition, we received expansive and actionable feedback from hundreds of adopters who had used the
book for several academic terms. These knowledgeable instructors informed the pedagogical courses, learning
objective development and fulfillment, and the chapter arrangements. Faculty who taught from the material provided
critical and detailed commentary.
2 Preface
The result is a book that covers the breadth of economics topics and also provides the necessary depth to ensure the
course is manageable for instructors and students alike. We strove to balance theory and application, as well as the
amount of calculation and mathematical examples.
The book is organized into five main parts:
What is Economics? The first two chapters introduce students to the study of economics with a focus on
making choices in a world of scarce resources.
Supply and Demand, Chapters 3 and 4, introduces and explains the first analytical model in
economics–supply, demand, and equilibrium–before showing applications in the markets for labor and
finance.
TheFundamentalsofMicroeconomicTheory,Chapters5through10,beginsthemicroeconomicsportion
of the text, presenting the theories of consumer behavior, production and costs, and the different models of
market structure, including some simple game theory.
Microeconomic Policy Issues, Chapters 11 through 18, covers the range of topics in applied micro, framed
aroundtheconceptsofpublicgoodsandpositiveandnegativeexternalities.Studentsexplorecompetitionand
antitrustpolicies,environmentalproblems,poverty,incomeinequality,andotherlabormarketissues.Thetext
also covers information, risk and financial markets, and public economy.
International Economics, Chapters 19 and 20, introduces the international dimensions of economics,
including international trade and protectionism.
Alternate sequencing
PrinciplesofMicroeconomicsforAP®Courses2ewasconceivedandwrittentofitaparticulartopicalsequence,butit
canbeusedflexiblytoaccommodateothercoursestructures.Onesuchpotentialstructure,whichfitsreasonablywell
withthetextbookcontent,isprovided.Pleaseconsider,however,thatthechapterswerenotwrittentobecompletely
independent, and that the proposed alternate sequence should be carefully considered for student preparation and
textual consistency.
Chapter 1 Welcome to Economics!
Chapter 2 Choice in a World of Scarcity
Chapter 3 Demand and Supply
Chapter 4 Labor and Financial Markets
Chapter 5 Elasticity
Chapter 6 Consumer Choices
Chapter 19 International Trade
Chapter 7 Cost and Industry Structure
Chapter 12 Environmental Protection and Negative Externalities
Chapter 13 Positive Externalities and Public Goods
Chapter 8 Perfect Competition
Chapter 9 Monopoly
Chapter 10 Monopolistic Competition and Oligopoly
Chapter 11 Monopoly and Antitrust Policy
Chapter 14 Labor Markets and Income
Chapter 15 Poverty and Economic Inequality
Chapter 16 Information, Risk, and Insurance
Chapter 17 Financial Markets
Chapter 18 Public Economy
Chapter 20 Globalization and Protectionism
Appendix A The Use of Mathematics in Principles of Economics
Appendix B Indifference Curves
Appendix C Present Discounted Value
Changes to the second edition
OpenStaxonlyundertakesrevisionswhensignificantmodificationstoatextarenecessary.InthecaseofPrinciples
This OpenStax book is available for free at http://cnx.org/content/col23750/1.2