Table Of Content22347_ch03_ptg01_hr.indd 87 18/01/12 11:46 AM
U S I N G T H E T H E O R Y
Chapter 2 47 Chapter 10 311
Using the Theory: Are We Using the Theory: Why Americans
Saving Lives Efficiently? Pay for the World’s Pharmaceuticals
© IMAGES.COM/CORBIS
Chapter 3 79 Chapter 11 343
Using the Theory: The Price of Oil Using the Theory: Advertising in
Monopolistic Competition and
Oligopoly
Chapter 4 110
Using the Theory: The Housing
Boom and Bust: 1997–2011 Chapter 12 383
Using the Theory: The College
Wage Premium
Chapter 5 138
Using the Theory:
Applications of Elasticity Chapter 13 421
Using the Theory: The Present
Value of a College Degree
Chapter 6 171
Using the Theory:
Improving Education Chapter 14 451
Using the Theory: A Tax on Land
Chapter 7 209
Using the Theory: Chapter 15 484
The Urge to Merge Using the Theory: Moral Hazard
and the Financial Crisis of 2008
Chapter 8 238
Using the Theory: Getting it Chapter 16 515
Wrong and Getting it Right: Using the Theory:
Two Classic Examples The U.S. Sugar Quota
Chapter 9 275
Using the Theory: Real Estate
Agents and the Zero-Profit Result
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
22569_ifc_mic_se_ptg01_hires.indd 1 1/12/12 5:32 PM
MicroeconoMics
Principles & Applications, 6e
© Images.com/corbIs
Robert E. Hall
Department of Economics, Stanford University
Marc lieberman
Department of Economics, New York University
Australia Brazil Japan Korea Mexico Singapore Spain United Kingdom United States
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
22347_fm_micro_ptg01_hr.indd 1 18/01/12 4:10 PM
This is an electronic version of the print textbook. Due to electronic rights restrictions,
some third party content may be suppressed. Editorial review has deemed that any suppressed
content does not materially affect the overall learning experience. The publisher reserves the right
to remove content from this title at any time if subsequent rights restrictions require it. For
valuable information on pricing, previous editions, changes to current editions, and alternate
formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for
materials in your areas of interest.
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
22347_ch03_ptg01_hr.indd 87 18/01/12 11:46 AM
Microeconomics: Principles & © 2013, 2010 South-Western, Cengage Learning
Applications, 6th Edition
ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may
Robert E. Hall and Marc Lieberman
be reproduced, transmitted, stored, or used in any form or by any means graphic,
Vice President of Editorial, Business: electronic, or mechanical, including but not limited to photocopying, recording,
Jack W. Calhoun scanning, digitizing, taping, web distribution, information networks, or informa-
tion storage and retrieval systems, except as permitted under Section 107 or 108
Publisher: Joe Sabatino
of the 1976 United States Copyright Act, without the prior written permission of
Executive Editor: Michael Worls the publisher.
Senior Developmental Editor: Susanna C.
Smart For product information and technology assistance, contact us at
Senior Marketing Manager: John Carey Cengage Learning Customer & Sales Support, 1-800-354-9706
For permission to use material from this text or product,
Senior Marketing Communications
submit all requests online at www.cengage.com/permissions
Manager: Sarah Greber
Further permissions questions can be emailed to
Senior Content Project Manager: Tim Bailey [email protected]
Media Editor: Sharon Morgan
Manufacturing Planner: Kevin Kluck ExamView® is a registered trademark of eInstruction Corp. Windows is a
Production Service: MPS Limited, registered trademark of the Microsoft Corporation used herein under license.
a Macmillan Company Library of Congress Control Number: 2011941987
Senior Art Director: Michelle Kunkler
ISBN-13: 978-1-111-82256-9
Cover and Internal Designer: jen2design
ISBN-10: 1-111-82256-5
Cover Image: © Images.com/Corbis
Rights Acquisitions Specialist, Text: Deanna
South-Western
Ettinger
5191 Natorp Boulevard
Rights Acquisitions Specialist, Text: Sam
Mason, OH 45040
Marshall
USA
Cengage Learning products are represented in Canada by
Nelson Education, Ltd.
For your course and learning solutions, visit www.cengage.com
Purchase any of our products at your local college store or at our
preferred online store www.cengagebrain.com
Printed in the United States of America
1 2 3 4 5 6 7 16 15 14 13 12
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
22347_fm_micro_ptg01_hr.indd 2 18/01/12 4:10 PM
briEf coNtENtS
© Images.com/corbIs
Part i: Preliminaries Part V: labor, Capital, and Financial
markets
1. What Is Economics? 1
2. Scarcity, Choice, and Economic Systems 24 12. Labor Markets 353
13. Capital and Financial Markets 394
Part ii: markets and Prices
Part Vi: efficiency, Government, and
3. Supply and Demand 52
international Trade
4. Working with Supply and Demand 89
5. Elasticity 121 14. Economic Efficiency and the Competitive Ideal 428
15. Government’s Role in Economic Efficiency 456
Part iii: microeconomic Decision 16. Comparative Advantage and the Gains from
makers International Trade 492
6. Consumer Choice 146
7. Production and Cost 185 Glossary G-1
8. How Firms Make Decisions: Profit Index I-1
Maximization 221
Part iV: Product markets
9. Perfect Competition 244
10. Monopoly 282
11. Monopolistic Competition and Oligopoly 320
s
bI
r
o
c
m/
o
c
s.
e
g
a
m
© I
iii
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
22347_fm_micro_ptg01_hr.indd 3 18/01/12 4:10 PM
coNtENtS
© Images.com/corbIs
Part i: Preliminaries
Chapter 1: What is economics? 1 Chapter 2: Scarcity, Choice, and economic
Systems 24
Scarcity and Individual Choice 2
The Concept of Opportunity Cost, 2 Society’s Production Choices 24
Scarcity and Social Choice 6 The Production Possibilities Frontier, 25 Increasing
The Four Resources, 6 Opportunity Cost and Society’s Opportunity Cost, 26
Trade-offs, 7 The Search for a Free Lunch 28
The World of Economics 8 Productive Inefficiency, 28 Recessions, 30 Economic
Microeconomics and Macroeconomics, 8 Positive and Growth, 31
Normative Economics, 9 Economic Systems 35
Why Study Economics? 10 Specialization and Exchange, 35 Comparative
Advantage, 36 International Comparative Advantage, 39
The Methods of Economics 11
Resource Allocation, 41
The Art of Building Economic Models, 12 Assumptions
and Conclusions, 13 Math, Jargon, and Other Understanding the Market 43
Concerns, 13 The Importance of Prices, 43 Markets, Ownership,
and the Invisible Hand, 44 The U.S. Market System in
How to Study Economics 14
Perspective, 45
Summary 14
Using the Theory: Are We Saving Lives Efficiently? 47
Problem Set 14
Summary 50
Appendix: Graphs and Other Useful Tools 16
Problem Set 51
Part ii: markets and Prices
Chapter 3: Supply and Demand 52 The Three-Step Process 78
Markets 52 Using the Theory: The Price of Oil 79
Characterizing a Market, 53 Summary 84
Demand 56 Problem Set 85
The Law of Demand, 56 The Demand Schedule and
Appendix: Solving for Equilibrium Algebraically 88
the Demand Curve, 57 Shifts versus Movements Along
the Demand Curve, 58 Factors That Shift the Demand
Chapter 4: Working with Supply
Curve, 60 Demand: A Summary, 63
and Demand 89
Supply 63
Government Intervention in Markets 89
The Law of Supply, 64 The Supply Schedule and the
Fighting the Market: Price Ceilings, 89 Fighting the
Supply Curve, 64 Shifts versus Movements Along the
Market: Price Floors, 92 Manipulating the Market:
Supply Curve, 66 Factors That Shift the Supply
Taxes, 94 Manipulating the Market: Subsidies, 98
Curve, 67 Supply—A Summary, 70
Supply and Demand in Housing Markets 100
s Putting Supply and Demand Together 71
orbI Finding the Equilibrium Price and Quantity 71 What’s Different about Housing Markets, 101 The
c Supply Curve for Housing, 102 The Demand Curve for
om/ What Happens When Things Change? 74 Housing, 103 Housing Market Equilibrium, 105 What
s.c Example: Income Rises, Causing an Increase in Demand, 74 Happens When Things Change, 106
e
g Example: Bad Weather , Supply Decreases, 75 Example:
a Using the Theory: The Housing Boom and Bust:
m Higher Income and Bad Weather Together, 76
© I 1997–2011 110
iv
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
22347_fm_micro_ptg01_hr.indd 4 18/01/12 4:10 PM
contents v
Summary 116 Price Elasticity of Supply 135
Problem Set 116 Determinants of Supply Elasticity, 135 Calculating a
Supply Elasticity, 135
Appendix: Understanding Leverage 119
Other Elasticities 136
Chapter 5: elasticity 121
Income Elasticity of Demand, 136 Cross-Price Elasticity
Price Elasticity of Demand 121 of Demand, 137
Calculating Price Elasticity of Demand, 122
Using the Theory: Applications of Elasticity 138
Categorizing Demand, 125 Elasticity and Straight-Line
Summary 143
Demand Curves, 126 Elasticity and Total Revenue, 127
Determinants of Elasticity, 129 An Example: Elasticity Problem Set 144
and Mass Transit, 134
Part iii: microeconomic Decision makers
Chapter 6: Consumer Choice 146 Relationship between Average and Marginal
Costs, 198
The Budget Constraint 146
Changes in the Budget Line, 148 Production and Cost in the Long Run 200
The Relationship between Long-Run and Short-Run
Preferences 150
Costs, 202 Explaining the Shape of the LRATC Curve, 205
Rationality, 150 More Is Better, 151
Cost: A Summary 208
Consumer Decisions: The Marginal Utility Approach 152
Utility and Marginal Utility, 152 Combining the Budget Using the Theory: The Urge to Merge 209
Constraint and Preferences, 154 What Happens When Summary 211
Things Change?, 158 The Consumer’s Demand Curve, 161
Problem Set 212
Income and Substitution Effects 161
Appendix: Isoquant Analysis: Finding the Least-Cost
The Substitution Effect, 163 The Income Effect, 163
Input Mix 215
Combining Substitution and Income Effects, 164
Consumers in Markets 165 Chapter 8: How Firms make Decisions:
Consumer Theory in Perspective 167 Profit maximization 221
Extensions of the Model, 167 Behavioral Economics, 168 The Goal of Profit Maximization 221
Using the Theory: Improving Education 171 Understanding Profit 222
Summary 174 Two Definitions of Profit, 222 Why Are There Profits?, 224
Problem Set 175 The Firm’s Constraints 224
The Demand Curve Facing the Firm, 225 The Cost
Appendix: The Indifference Curve Approach 178
Constraint, 227
Chapter 7: Production and Cost 185 The Profit-Maximizing Output Level 228
The Total Revenue and Total Cost Approach, 228 The
Production 185
Marginal Revenue and Marginal Cost Approach, 228
Technology and Production, 186 Short-Run versus
Profit Maximization Using Graphs, 231 What about
Long-Run Decisions, 186
Average Costs?, 234 The Marginal Approach to Profit, 234
Production in the Short Run 187
Dealing with Losses 235
Marginal Returns to Labor, 189
The Short Run and the Shutdown Rule, 235 The Long
Thinking about Costs 190
Run and the Exit Decision, 237
The Irrelevance of Sunk Costs, 190 Explicit versus
Using the Theory: Getting it Wrong and Getting it Right:
Implicit Costs, 191 The Least-Cost Rule, 192
Two Classic Examples 238
Cost in the Short Run 193
Summary 240
Measuring Short-Run Costs, 193 Explaining the
Shape of the Marginal Cost Curve, 197 The Problem Set 241
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
22347_fm_micro_ptg01_hr.indd 5 18/01/12 4:10 PM
vi contents
Part iV: Product markets
Chapter 9: Perfect Competition 244 Comparing Monopoly to Perfect Competition, 295
Government and Monopoly Profit, 298
What Is Perfect Competition? 244
The Four Requirements of Perfect Competition, 245 Is What Happens When Things Change? 299
Perfect Competition Realistic?, 247 A Change in Demand, 299 A Cost-Saving Technological
Advance, 300
The Perfectly Competitive Firm 247
The Competitive Firm’s Demand Curve, 247 Cost and Price Discrimination 302
Revenue Data for a Competitive Firm, 249 Finding the Requirements for Price Discrimination, 303 Effects
Profit-Maximizing Output Level, 251 Measuring Total of Price Discrimination, 304 Perfect Price
Profit, 252 The Firm’s Short-Run Supply Curve, 254 Discrimination, 306 How Firms Choose Multiple
Prices, 308 Price Discrimination in Everyday Life, 310
Competitive Markets in the Short Run 256
The Market Supply Curve, 256 Short-Run Equilibrium, 257 Using the Theory: Why Americans Pay for the World’s
Pharmaceuticals 311
Competitive Markets in the Long Run 259
Profit and Loss and the Long Run, 259 Long-Run Summary 316
Equilibrium, 260 The Notion of Zero Profit in Perfect Problem Set 316
Competition, 263 Perfect Competition and Plant Size, 263
A Summary of the Competitive Firm in the Long Run, 264 Chapter 11: monopolistic Competition
What Happens When Things Change? 265 and Oligopoly 320
A Change in Demand, 265 Market Signals and the The Concept of Imperfect Competition 320
Economy, 271 A Change in Technology, 273
Monopolistic Competition 321
Using the Theory: Real Estate Agents and the Zero-Profit Monopolistic Competition in the Short Run, 323
Result 275 Monopolistic Competition in the Long Run, 324
Summary 278 Excess Capacity Under Monopolistic Competition, 325
Nonprice Competition, 327
Problem Set 278
Oligopoly 327
Chapter 10: monopoly 282 Measuring Market Concentration, 328 How Oligopolies
Arise, 330 Oligopoly versus Other Market Structures,
What Is a Monopoly? 282
331 The Game Theory Approach, 333 Simple Oligopoly
How Monopolies Arise 283
Games, 335 Cooperative Behavior in Oligopoly, 339
Economies of Scale, 283 Legal Barriers, 284 Network
The Four Market Structures: A Postscript 342
Externalities, 286
Using the Theory: Advertising in Monopolistic
Monopoly Behavior 288
Competition and Oligopoly 343
Single Price versus Price Discrimination, 288 Monopoly
Price or Output Decision, 288 Monopoly and Market Summary 348
Power, 292 Profit and Loss, 292
Problem Set 348
Equilibrium in Monopoly Markets 294
Appendix: Cartel Pricing 351
Short-Run Equilibrium, 294 Long-Run Equilibrium, 294
Part V: labor, Capital, and Financial markets
Chapter 12: labor markets 353 Labor Market Equilibrium 362
What Happens When Things Change, 363
Labor Markets in Perspective 354
Defining a Labor Market, 355 The Wage Rate, 355 Why Do Wages Differ? 364
Competitive Labor Markets, 355 An Imaginary World, 366 Compensating
Differentials, 367 Differences in Ability, 369 Barriers
Labor Demand 356
to Entry, 372 Discrimination, 374
The Labor Demand Curve, 356 Shifts in the Labor
Demand Curve, 358 The Minimum Wage Controversy 378
Who Pays for a Higher Minimum Wage?, 379 Who
Labor Supply 359
Benefits from a Higher Minimum Wage?, 379 Labor
Variable Hours versus Fixed Hours, 360 The Labor
Market Effects of the Minimum Wage, 379 The EITC
Supply Curve, 360 Shifts in the Labor Supply Curve, 361
Alternative, 381 Opposing Views, 382
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
22347_fm_micro_ptg01_hr.indd 6 18/01/12 4:10 PM
contents vii
Using the Theory: The College Wage Premium 383 Bonds 407
How Much Is a Bond Worth?, 408 Why Do Bond Yields
Summary 386
Differ?, 409
Problem Set 387
The Stock Market 410
Appendix: The Profit-Maximizing Employment Level 389
Why Do People Hold Stock?, 410 Valuing a Share
Chapter 13: Capital and Financial markets 394 of Stock, 411 Explaining Stock Prices, 412 What
Happens When Things Change?, 413
Physical Capital and the Firm’s Investment Decision 395
A First, Simple Approach: Renting Capital, 395 The Value The Efficient Markets View 415
of Future Dollars, 397 Purchasing Capital, 401 What The Meaning of an Efficient Stock Market, 416
Happens When Things Change: The Investment Curve, 403 Common Objections to Efficient Markets Theory, 417
Efficient Markets Theory and the Average Investor, 420
Markets for Financial Assets 405
Primary and Secondary Asset Markets, 406 Financial Using the Theory: The Present Value of a College Degree 421
Assets and Present Value, 407 Summary 424
Problem Set 425
Part Vi: efficiency, Government, and international Trade
Chapter 14: economic efficiency Asymmetric Information 478
and the Competitive ideal 428 Adverse Selection, 478 Moral Hazard, 479 The Principal–
Agent Problem, 479 Market and Government Solutions,
The Meaning of Economic Efficiency 428
479 An Example: The Market for Health Insurance, 480
Pareto Improvements, 429 Side Payments and Pareto
Improvements, 430 Productive Efficiency versus Efficiency and Government in Perspective 482
Economic Efficiency, 431 Opposition to Government Intervention, 482 Efficiency
versus Equity, 483
Competitive Markets and Economic Efficiency 431
Using the Theory: Moral Hazard and the Financial
Reinterpreting the Demand Curve, 432 Reinterpreting
Crisis of 2008 484
the Supply Curve, 433 The Efficient Quantity of a
Good, 434 The Efficient Allocation of a Good, 436 Summary 489
Evaluating the Efficiency of Perfect Competition, 436 Problem Set 489
Measuring Market Gains 437
Chapter 16: Comparative advantage and the
Consumer Surplus, 437 Producer Surplus, 439 Total
Gains from international Trade 492
Benefits and Efficiency, 441 Perfect Competition: The
Total Benefits View, 442 The Logic of Free Trade 493
International Comparative Advantage 493
Inefficiency and Deadweight Loss 442
Determining a Nation’s Comparative Advantage, 494
A Price Ceiling, 442 A Price Floor, 444 Market
How Specialization Increases World Production, 495
Power, 445 Taxes and Deadweight Losses, 447
How Each Nation Gains from International
Using the Theory: A Tax on Land 451
Trade, 497 The Terms of Trade, 500 Some Provisos
Summary 454 about Specialization, 500
Problem Set 454 The Sources of Comparative Advantage 502
Resource Abundance and Comparative Advantage, 502
Chapter 15: Government’s role
Beyond Resources, 503
in economic efficiency 456
Why Some People Object to Free Trade 504
The Legal and Regulatory Infrastructure 456 The Anti-Trade Bias, 506 Pro-Trade Forces, 506
The Legal System, 457 Regulation, 457 The
How Free Trade Is Restricted 508
Importance of Infrastructure, 458 Market Failures, 459
Tariffs, 508 Quotas, 509 Quotas versus Tariffs, 510
Monopoly 460 Protectionism 510
Limiting Market Power, 460 Coping with Market Protectionist Myths, 510 Sophisticated Arguments for
Power, 461 Regulation of Natural Monopoly, 463 Protection, 513 Protectionism in the United States, 514
Externalities 464 Using the Theory: The U.S. Sugar Quota 515
The Private Solution, 464 Government and Negative
Summary 517
Externalities, 466 Positive Externalities, 471
Problem Set 518
Public Goods 473
Glossary G-1
Private Goods, 474 Pure Public Goods, 474 Mixed
Goods, 475 index i-1
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
22347_fm_micro_ptg01_hr.indd 7 18/01/12 4:10 PM
