The Economics Anti-Textbook: A Critical Thinker's Guide to Microeconomics

316 Pages·2010·2.16 MB·English

by  Rod Hill

About the authors
Rod Hill grew up in Ontario, was educated at the University
of Toronto, the University of Stockholm and the University
of Western Ontario, where he obtained a PhD in economics.
He has taught at the University of Windsor, the University
of Regina and the University of New Brunswick, where he
has been a professor of economics since 2003. His research
interests have included inter national trade policy, taxation
and the underground econ omy, and (as a result of growing
dissatisfaction) the content of the introductory textbooks. He
is a research associate with the Canadian Centre for Policy
Alternatives and a member of Econom ists for Peace and
Security and the Progressive Economics Forum.
Tony Myatt received his PhD from McMaster University with
distinction in theory. He has taught at McMaster University,
the University of Western Ontario, the University of Toronto
and the University of New Brunswick, where he has been
professor of economics since 1992. His research interests
have included the supply-side effects of interest rates, labour
market discrimination, unemployment rate disparities, and
the methods and content of economic education. He has
developed several different introductory courses as vehicles
for teaching principles of economics, including ‘Economics
of every day life’, ‘Economics in the real world’ and ‘Eco-
nomics through film’. Professor Myatt was the recipient of
UNB’s Arts Faculty Award for Excellence in Teaching in
2008.

The economics anti-textbook
A critical thinker’s guide to
microeconomics
Rod Hill and Tony Myatt
Fernwood Publishing
halifax | winnipeg
Zed Books
london | new york
The Economics Anti-textbook: A critical thinker’s guide to microeconomics
was first published in 2010
Published in Canada by Fernwood Publishing Ltd, 32 Oceanvista Lane,
Black Point, Nova Scotia b0j 1b0
<www.fernwoodpublishing.ca>
Published in the rest of the world by Zed Books Ltd, 7 Cynthia Street, London
n1 9jf, uk and Room 400, 175 Fifth Avenue, New York, ny 10010, usa
<www.zedbooks.co.uk>
Copyright © Rod Hill and Tony Myatt 2010
The rights of Rod Hill and Tony Myatt to be identified as the authors of this
work have been asserted by them in accordance with the Copyright, Designs
and Patents Act, 1988
Designed and set by Ewan Smith, London <[email protected]>
Index <[email protected]>
Cover designed by David Bradshaw
Printed and bound in Great Britain by the MPG Books Group
Distributed in the usa exclusively by Palgrave Macmillan, a division of
St Martin’s Press, llc, 175 Fifth Avenue, New York, ny 10010, usa
All rights reserved. No part of this publication may be reproduced, stored
in a retrieval system or transmitted in any form or by any means, electronic,
mechanical, photocopying or otherwise, without the prior permission of Zed
Books Ltd.
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data available
Library and Archives Canada Cataloguing in Publication:
Hill, Roderick
The economics anti-textbook : a guide to critical thinking / Rod Hill
and Tony Myatt.
isbn 978-1-55266-360-8
1. Economics. 2. Critical thinking. I. Myatt, Anthony II. Title.
hb171.h637 2010 330
c2010-900699-2
isbn 978 1 84277 938 5 hb (Zed Books)
isbn 978 1 84277 939 2 pb (Zed Books)
isbn 978 1 84813 548 2 eb (Zed Books)
isbn 978 1 55266 360 8 (Fernwood Publishing)
Contents
Tables and figures | vi
Acknowledgements | ix
Introduction: our goals, audience and principal themes . . . . .1
1 What is economics? Where you start influences where you go . .9
2 Introducing economic models. . . . . . . . . . . . . . . . . 27
3 How markets work (in an imaginary world) . . . . . . . . . . 46
4 People as consumers . . . . . . . . . . . . . . . . . . . . . 74
5 The firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
6 Market structure and efficiency – or why perfect competition
isn’t so perfect after all . . . . . . . . . . . . . . . . . . . 118
7 Externalities and the ubiquity of market failure . . . . . . . 150
8 The marginal productivity theory of income distribution –
or you’re worth what you can get. . . . . . . . . . . . . . . 169
9 Government, taxation and the (re)distribution of income:
is a just society just too expensive?. . . . . . . . . . . . . . 196
10 Trade and globalization without the rose-tinted glasses . . . 219
11 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . 243
Postscript: a case study on the global financial meltdown . . 256
Notes | 264 Bibliography | 274
Glossary | 291 Index | 297
Tables and figures
Tables
2.1 Labour’s productivity in England and Canada . . . . . . . . . . . . . . 28
2.2 Changes in world output. . . . . . . . . . . . . . . . . . . . . . . . . 30
2.3 Percent in agreement with the proposition: ‘minimum wages increase
unemployment among young and unskilled workers’ . . . . . . . . . . 33
3.1 Types of market structure . . . . . . . . . . . . . . . . . . . . . . . . 54
3.2 Tax incidence applications used in ten major North American
textbooks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
4.1 Mary’s benefit from eating pizzas . . . . . . . . . . . . . . . . . . . . 75
5.1 Inputs and output in the short run. . . . . . . . . . . . . . . . . . . . 94
5.2 Costs in the short run . . . . . . . . . . . . . . . . . . . . . . . . . . 95
5.3 Downward-sloping demand and marginal revenue. . . . . . . . . . . 100
6.1 A pay-off matrix illustrating the prisoner’s dilemma . . . . . . . . . . 129
6.2 Repeated plays when Esso plays ‘tit-for-tat’. . . . . . . . . . . . . . . 130
7.1 Classification of types of goods . . . . . . . . . . . . . . . . . . . . 153
7.2 Percentage changes in age-standardized cancer incidence rates . . . . 163
8.1 Marginal cost of labour for a monopsonist. . . . . . . . . . . . . . . 175
9.1 Taxation as a percentage of GDP, OECD countries, 2005 . . . . . . . . 197
9.2 Measures of income inequality . . . . . . . . . . . . . . . . . . . . 199
9.3 Distribution of household net worth. . . . . . . . . . . . . . . . . . 200
9.4 Percentage of children in households with less than half of median
household income, circa 2000 . . . . . . . . . . . . . . . . . . . . . 202
10.1 International trade, 2007 . . . . . . . . . . . . . . . . . . . . . . . 220
10.2 Estimates of the stock of foreign direct investment, by sector, 2006 . . 239
11.1 Conventional economics and the blank cells of Akerlof and Shiller. . . 244
11.2 Conventional textbook economics and the blank cells of Robert
Prasch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Figures
1.1 Marginal thinking . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.1 Wheat and cloth production in England and Canada . . . . . . . . . . 29
2.2 Expanded consumption possibilities . . . . . . . . . . . . . . . . . . 30
2.3 Different perceptions of reality . . . . . . . . . . . . . . . . . . . . . 41
3.1 Inelastic and elastic demand . . . . . . . . . . . . . . . . . . . . . . 47
3.2 Movement towards equilibrium . . . . . . . . . . . . . . . . . . . . . 48
3.3 Comparative static analysis . . . . . . . . . . . . . . . . . . . . . . . 49
3.4 The effect of rent control . . . . . . . . . . . . . . . . . . . . . . . . 50
3.5 The effect of a minimum wage. . . . . . . . . . . . . . . . . . . . . . 51
vi
3.6 The incidence of taxation. . . . . . . . . . . . . . . . . . . . . . . . . 52
3.7 Multiple equilibria in the labour market . . . . . . . . . . . . . . . . . 66
3.8 Self-fulfilling prophecies . . . . . . . . . . . . . . . . . . . . . . . . . 68
4.1 Marginal benefit and price . . . . . . . . . . . . . . . . . . . . . . . . 76
4.2 Market demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
4.3 Happiness in the United States, 1994–96, by income decile . . . . . . . . 88
4.4 Happiness and per capita income across countries, 1999–2004 . . . . . . 89
4.5 Happiness in the United States, 1946–2008 . . . . . . . . . . . . . . . . 90
5.1 The law of diminishing marginal returns . . . . . . . . . . . . . . . . . 95
5.2 Marginal and average costs . . . . . . . . . . . . . . . . . . . . . . . . 96
5.3 Marginal product and marginal cost . . . . . . . . . . . . . . . . . . . 96
5.4 Marginal benefit and market price . . . . . . . . . . . . . . . . . . . . 97
5.5 Long-run average cost relationships . . . . . . . . . . . . . . . . . . . 99
5.6 The long-run equilibrium for the competitive firm . . . . . . . . . . . 100
5.7 Relationship between demand and marginal revenue. . . . . . . . . . 101
5.8 Short-run marginal costs . . . . . . . . . . . . . . . . . . . . . . . . 103
5.9 Long-run average cost with increasing and then constant returns to
scale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
5.10 Why the competitive firm should raise its price above the market price . 108
6.1 Derivation of the competitive firm’s supply curve . . . . . . . . . . . . 119
6.2 The short-run response to an increase in demand. . . . . . . . . . . . 120
6.3 The long-run response to an increase in demand . . . . . . . . . . . . 121
6.4 The optimal quantity . . . . . . . . . . . . . . . . . . . . . . . . . . 122
6.5 Non-competitive firms don’t have a supply curve . . . . . . . . . . . . 123
6.6 Monopoly versus perfect competition. . . . . . . . . . . . . . . . . . 124
6.7 Price ceilings and monopoly . . . . . . . . . . . . . . . . . . . . . . 126
6.8 Natural monopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
6.9 Monopolistic competition . . . . . . . . . . . . . . . . . . . . . . . 128
6.10 Estimating the deadweight loss. . . . . . . . . . . . . . . . . . . . . 139
6.11 Aggregate stock price bubbles . . . . . . . . . . . . . . . . . . . . . 147
7.1 Markets are inefficient in the presence of externalities . . . . . . . . . 151
7.2 Cancer incidence per 100,000 males, age-standardized rates . . . . . . 164
7.3 Cancer incidence per 100,000 females, age-standardized rates . . . . . 165
8.1 Competitive determination of the wage of welders . . . . . . . . . . . 171
8.2 Two types of unions in otherwise competitive markets . . . . . . . . . 173
8.3 Monopsony in the labour market . . . . . . . . . . . . . . . . . . . . 176
8.4 Monopsony with minimum wage . . . . . . . . . . . . . . . . . . . . 176
8.5 The adding-up problem . . . . . . . . . . . . . . . . . . . . . . . . 178
8.6 Reswitching produces the possibility of multiple equilibria . . . . . . . 182
8.7 Derivation of a competitive firm’s upward-sloping supply of labour
schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
8.8 Executive pay relative to average wages in the USA. . . . . . . . . . . . 191
8.9 Dow Jones Industrial Average and CEO pay relative to average pay,
1970–2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
vii
9.1 The Lorenz curve . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
9.2 The equity–efficiency trade-off. . . . . . . . . . . . . . . . . . . . . 203
9.3 Income distribution and equality . . . . . . . . . . . . . . . . . . . 206
9.4 The equity–growth trade-off . . . . . . . . . . . . . . . . . . . . . . 212
9.5 Relative risk of CHD death excluding other risk factors. . . . . . . . . 214
9.6 The social gradient of health. . . . . . . . . . . . . . . . . . . . . . 215
10.1 The effects of a tariff. . . . . . . . . . . . . . . . . . . . . . . . . . 221
10.2 Average costs of producing nails in two countries . . . . . . . . . . . 230
viii
Acknowledgements
We would like to thank Walid Hejazi, Michael Krashinsky and Jack
Parkinson of the University of Toronto, participants in a seminar at the
University of New Brunswick, and a variety of anonymous referees who
provided helpful comments on the initial outline of the book. Many
colleagues also helped in selecting a title: Abdella Abdou (Brandon
University), Hafiz Akhand (University of Regina), Marilyn Gerriets (St
Francis Xavier University), John Janmaat (University of British Columbia,
Okanagan), Harvey King (University of Regina), Rob Moir (University of
New Brunswick), Saeed Moshiri (University of Saskatchewan), Michael
Rushton (University of Indiana, Bloomington), Jim Sentance (University
of Prince Edward Island), Calin Valsin (Bishop’s University) and Fattaneh
Zehtab-Jadid (Brandon University).
Special thanks to: Michael Bradfield of Dalhousie University, who com-
mented on initial drafts of some chapters; our two editors at Zed Books,
Ellen Hallsworth and Ken Barlow, for their guidance and their patience
with our missed deadlines; and to two anonymous referees who read the
first draft.
None of the above should in any way be held responsible for the views
expressed here.
Finally, thanks to our respective wives – Virginia and Muriel – for
putting up with us through the writing of this book.
We dedicate this book to our respective children, Rose and Thomas
Myatt, and Joan-Maki Motapanyane, and grandchildren, Maia and
Terence Motapanyane, and to all inquisitive economics students who
want to think for themselves and not just believe what they’re told.
ix