Introduction and Key Principles Introduction: What Is Economics? p. 2 What Is Economics? p. 4 Positive Versus Normative Analysis p.

Transcription

1 Preface p. xiv Introduction and Key Principles Introduction: What Is Economics? p. 2 What Is Economics? p. 4 Positive Versus Normative Analysis p. 5 The Three Key Economic Questions: What, How, and Who? p. 6 Economic Models p. 6 Economic Analysis and Modern Problems p. 7 Economic View of Traffic Congestion p. 7 Economic View of Poverty in Africa p. 7 Economic View of Japan's Economic Problems p. 8 The Economic Way of Thinking p. 9 Use Assumptions to Simplify p. 9 Isolate Variables-Ceteris Paribus p. 9 Think at the Margin p. 10 Rational People Respond to Incentives p. 10 Pedaling for Television Time p. 11 Preview of Coming Attractions: Macroeconomics p. 11 To Understand Why Economies Grow p. 11 London Solves its Congestion Problem p. 12 To Understand Economic Fluctuations p. 13 To Make Informed Business Decisions p. 13 Preview of Coming Attractions: Microeconomics p. 13 To Understand Markets and Predict Changes p. 13 To Make Personal and Managerial Decisions p. 14 To Evaluate Public Policies p. 14 Summary p. 15 Key Terms p. 15 Exercise p. 15 Using Graphs and Percentages p. 17 Using Graphs p. 17 Computing Percentage Changes and Using Equations p. 24 The Key Principles of Economics p. 28 The Principle of Opportunity Cost p. 30 The Cost of College p. 30 The Opportunity Costs of Time and Invested Funds p. 31 Opportunity Cost and the Production Possibilities Curve p. 31 The Marginal Principle p. 33 The Opportunity Cost of Military Spending p. 34 How Many Movie Sequels? p. 35 Renting College Facilities p. 36

2 Automobile Emissions Standards p. 36 Continental Airlines Uses the Marginal Principle p. 37 The Principle of Voluntary Exchange p. 37 Exchange and Markets p. 37 Online Games and Market Exchange p. 38 The Principle of Diminishing Returns p. 38 Tiger Woods and Weeds p. 39 Diminishing Returns from Sharing a Production Facility p. 39 Fertilizer and Crop Yields p. 40 The Real-Nominal Principle p. 40 The Declining Real Minimum Wage p. 41 Repaying Student Loans p. 42 Summary p. 43 Key Terms p. 43 Exercises p. 43 Economic Experiment p. 47 Exchange and Markets p. 48 Comparative Advantage and Exchange p. 50 Specialization and the Gains from Trade p. 50 Comparative Advantage Versus Absolute Advantage p. 52 The Division of Labor and Exchange p. 52 Comparative Advantage and International Trade p. 53 Moving Jobs to Different States and Different Countries p. 54 Movie Exports p. 54 Candy Cane Makers Move to Mexico for Cheap Sugar p. 55 Markets p. 56 Virtues of Markets p. 56 Markets in a Prisoner of War Camp p. 57 Market Failure and the Role of Government p. 58 Government Enforces the Rules of Exchange p. 59 Government Can Reduce Economic Uncertainty p. 60 Summary p. 61 Key terms p. 61 Exercises p. 61 Demand, Supply, and Market Equilibrium p. 66 The Demand Curve p. 68 The Individual Demand Curve and the Law of Demand p. 68 From Individual Demand to Market Demand p. 69 The Supply Curve p. 70 The Individual Supply Curve and the Law of Supply p. 71 Why Is the Individual Supply Curve Positively Sloped? p. 72

3 From Individual Supply to Market Supply p. 73 Why Is the Market Supply Curve Positively Sloped? p. 74 Market Equilibrium: Bringing Demand and Supply Together p. 74 Excess Demand Causes the Price to Rise p. 75 Excess Supply Causes the Price to Drop p. 76 Market Effects of Changes in Demand p. 76 Change in Quantity Demanded Versus Change in Demand p. 76 Increases in Demand Shift the Demand Curve p. 77 Decreases in Demand Shift the Demand Curve p. 78 A Decrease in Demand Decreases the Equilibrium Price p. 80 Market Effects of Changes in Supply p. 80 Change in Quantity Supplied Versus Change in Supply p. 80 Increases in Supply Shift the Supply Curve p. 81 An Increase in Supply Decreases the Equilibrium Price p. 82 Decreases in Supply Shift the Supply Curve p. 83 A Decrease in Supply Increases the Equilibrium Price p. 83 Simultaneous Changes in Demand and Supply p. 84 Predicting and Explaining Market Changes p. 85 Applications of Demand and Supply p. 86 Hurricane Katrina and Baton Rouge Housing Prices p. 86 Ted Koppel Tries to Explain Lower Drug Prices p. 87 Electricity from the Wind p. 88 The Bouncing Price of Vanilla Beans p. 89 Platinum, Jewelry, Catalytic Converters p. 90 Summary p. 91 Key Terms p. 91 Exercises p. 91 Economic Experiment p. 96 A Closer Look at Demand and Supply Elasticity: A Measure of Responsiveness p. 98 The Price Elasticity of Demand p. 100 Computing Percentage Changes and Elasticities p. 100 Price Elasticity and the Demand Curve p. 102 Elasticity and the Availability of Substitutes p. 102 Other Determinants of the Price Elasticity of Demand p. 105 Using Price Elasticity to Predict Changes in Quantity p. 105 Beer Taxes and Highway Deaths p. 106 Subsidized Medical Care in Cote d'ivoire and Peru p. 107 Price Elasticity and Total Revenue p. 107 How to Cut Teen Smoking by 60 Percent p. 108 Elastic Versus Inelastic Demand p. 109

4 Market Elasticity Versus Elasticity for a Firm p. 110 Transit Fares and Deficits p. 110 A Bumper Crop Is Bad News for Farmers p. 111 Drug Prices and Property Crime p. 112 Elasticity and Total Revenue for a Linear Demand Curve p. 112 Price Elasticity Along a Linear Demand Curve p. 112 Elasticity and Total Revenue for a Linear Demand Curve p. 114 Other Elasticities of Demand p. 114 Income Elasticity of Demand p. 115 Cross-Price Elasticity of Demand p. 115 The Price Elasticity of Supply p. 116 What Determines the Price Elasticity of Supply? p. 117 The Role of Time: Short-Run Versus Long-Run Supply Elasticity p. 117 Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply p. 118 Predicting Changes in Quantity Supplied p. 119 Using Elasticities to Predict Changes in Equilibrium Price p. 119 The Price Effects of a Change in Demand p. 119 The Price Effects of a Change in Supply p. 121 Metropolitan Growth and Housing Prices p. 121 An Import Ban and Shoe Prices p. 123 Summary p. 123 Key Terms p. 124 Exercises p. 124 Market Efficiency and Government Intervention p. 128 Consumer Surplus and Producer Surplus p. 130 The Demand Curve and Consumer Surplus p. 131 The Supply Curve and Producer Surplus p. 131 Market Equilibrium and Efficiency p. 132 Total Surplus Is Lower with a Price Below the Equilibrium Price p. 133 Total Surplus Is Lower with a Price Above the Equilibrium Price p. 134 Efficiency and the Invisible Hand p. 134 Government Intervention in Efficient Markets p. 135 Controlling Prices-Maximum and Minimum Prices p. 135 Setting Maximum Prices p. 135 Rent Control p. 136 Milk Mountains p. 138 Setting Minimum Prices p. 138 Controlling Quantities-Licensing and Import Restrictions p. 138 Taxi Medallions p. 139 Licensing and Market Efficiency p. 139 Winners and Losers from Licensing p. 140

5 Import Restrictions p. 140 U.S. and European Consumers Pay for Import Restrictions p. 142 Who Really Pays Taxes? p. 142 Tax Shifting: Forward and Backward p. 142 Supply and Demand for Human Organs p. 143 Tax Shifting and the Price Elasticity of Demand p. 144 Cigarette Taxes and Tobacco Land p. 145 Tax Burden and Deadweight Loss p. 145 Boat Workers and the Tax on Luxury Boats p. 145 Taxes and December Babies p. 147 Summary p. 147 Key Terms p. 148 Exercises p. 148 Economic Experiment p. 151 Consumer Choice Using Utility Theory p. 152 Total and Marginal utility p. 154 Consumer Choice p. 155 Consumer Constraints: The Budget Line p. 155 Making Choices Using the Equimarginal Rule p. 156 New Zealand's Tax on Light Spirits p. 157 Online Music Stores and Piracy p. 158 The Individual Demand Curve p. 159 The Income and Substitution Effects of a Price Change p. 159 Points on the Demand Curve p. 160 The Substitution Effect of a Gas Tax Decreases Gas Consumption p. 161 Application of Consumer Choice p. 162 Inflation Doesn't Change Consumption or Utility p. 162 Television Versus Radio Advertising p. 163 Summary p. 164 Key Terms p. 164 Exercises p. 164 Consumer Choice with Indifference Curves p. 168 Consumer Constraints and Preferences p. 168 Maximizing Utility p. 171 What's Your MRS? p. 172 Online Music and Piracy p. 173 Inflation Doesn't Change Consumption or Utility p. 174 Drawing the Individual Demand Curve p. 175 The Substitution Effect of a Gas Tax Decreases Gas Consumption p. 178 Summary p. 179 Exercises p. 180

6 Key Terms p. 180 Market Structures and Pricing Production Technology and Cost p. 184 Economic Cost and Economic Profit p. 186 A Firm with a Fixed Production Facility: Short-Run Costs p. 187 Production and Marginal Product p. 187 Short-Run Total Cost p. 188 Short-Run Average Costs p. 190 Short-Run Marginal Cost p. 191 The Relationship Between Marginal Cost and Average Cost p. 192 Production and Cost in the Long Run p. 193 Expansion and Replication p. 193 Reducing Output with Indivisible Inputs p. 195 Scaling Down and Labor Specialization p. 195 Economies of Scale p. 196 Diseconomies of Scale p. 196 Actual Long-Run Average-Cost Curves p. 196 Short-Run Versus Long-Run Average Cost p. 197 Applications of Production Cost p. 198 The Production Cost of an ipod Nano p. 198 Indivisible inputs and the Cost of Fake Killer Whales p. 199 Scale Economies in Wind Power p. 200 Information Goods and First-Copy Cost p. 200 The Average Cost of Producing Airplanes p. 201 Summary p. 202 Key Terms p. 203 Exercises p. 203 Perfect Competition p. 206 Preview of the Four Market Structures p. 208 The Firm's Short-Run Output Decision p. 210 The Total Approach: Computing Total Revenue and Total Cost p. 210 The Marginal Approach p. 211 Economic Profit and the Break-Even Price p. 213 The Firm's Shut-Down Decision p. 213 Total Revenue, Variable Cost, and the Shut-Down Decision p. 213 The Shut-Down Price p. 215 Fixed Costs and Sunk Costs p. 215 The Break-Even Price for a Corn Farmer p. 216 Short-Run Supply Curves p. 216 The Firm's Short-Run Supply Curve p. 216 The Short-Run Market Supply Curve p. 217

7 Market Equilibrium p. 218 Wireless Women in Pakistan p. 219 The Long-Run Supply Curve for an Increasing-Cost Industry p. 219 Production Cost and Industry Size p. 220 Drawing the Long-Run Market Supply Curve p. 220 Wolfram Miners Obey the Law of Supply p. 221 The Worldwide Supply of Sugar p. 222 Short-Run and Long-Run Effects of Changes in Demand p. 222 The Short-Run Response to an Increase in Demand p. 222 The Long-Run Response to an Increase in Demand p. 223 Zoning, Land Prices, and the Supply Curve for Apartments p. 224 Long-Run Supply for a Constant-Cost Industry p. 225 Long-Run Supply Curve for a Constant-Cost Industry p. 225 Hurricane Andrew and the Price of Ice p. 225 Summary p. 227 Key Terms p. 227 Exercises p. 227 Monopoly and Price Discrimination p. 232 The Monopolist's Output Decision p. 234 Total Revenue and Marginal Revenue p. 235 A Formula for Marginal Revenue p. 236 Using the Marginal Principle p. 236 The Social Cost of Monopoly p. 239 Deadweight Loss from Monopoly p. 239 Rent Seeking: Using Resources to Get Monopoly Power p. 241 Monopoly and Public Policy p. 241 Ending the Monopoly on Internet Registration p. 242 Patents and Monopoly Power p. 242 Incentives for Innovation p. 242 Trade-Offs from Patents p. 243 Price Discrimination p. 243 Bribing the Makers of Generic Drugs p. 244 Senior Discounts in Restaurants p. 245 Price Discrimination and the Elasticity of Demand p. 246 Paying for a Cold Soft Drink on a Hot Day p. 246 The Pricing of Movie Admission and Popcorn p. 247 Hardback Books Are Relatively Expensive p. 248 Summary p. 249 Key Terms p. 250 Exercises p. 250 Economic Experiment p. 252

8 Market Entry and Monopolistic Competition p. 254 The Effects of Market Entry p. 256 Entry Squeezes Profits from Three Sides p. 257 Woofer, Tweeter, and the Stereo Business p. 258 Deregulation and Entry in Trucking p. 258 Name Brands Versus Store Brands p. 259 Monopolistic Competition p. 259 When Entry Stops: Long-Run Equilibrium p. 260 Differentiation by Location p. 261 Trade-Offs with Entry and Monopolistic Competition p. 261 Average Cost and Variety p. 261 Opening a Dunkin' Donuts Shop p. 262 Monopolistic Competition Versus Perfect Competition p. 263 Advertising for Product Differentiation p. 264 Celebrity Endorsements and Signaling p. 264 Advertising and Movie Buzz p. 265 Summary p. 266 Key Terms p. 266 Exercises p. 266 Economic Experiment p. 269 Oligopoly and Strategic Behavior p. 270 What Is an Oligopoly? p. 272 Cartel Pricing and the Duopolists' Dilemma p. 273 Price-Fixing and the Game Tree p. 275 Equilibrium of the Price-Fixing Game p. 276 Nash Equilibrium p. 277 Overcoming the Duopolists' Dilemma p. 277 Low-Price Guarantees p. 277 Vitamin Inc. Gets Busted p. 273 Repeated Pricing Games with Retaliation for Underpricing p. 279 Low-Price Guarantees and Empty Promises p. 280 Price-Fixing and the Law p. 281 Alternative Models of Oligopoly Pricing p. 282 Price Leadership p. 282 The Kinked Demand Curve Mode p. 282 Simultaneous Decision Making and the Payoff Matrix p. 283 Simultaneous Price-Fixing Game p. 283 The Prisoners' Dilemma p. 284 The Insecure Monopolist and Entry Deterrence p. 285 The Passive Approach p. 285 Entry Deterrence and Limit Pricing p. 286

9 Legal and Illegal Entry Deterrence p. 288 Examples: Microsoft Windows and Campus Bookstores p. 288 Entry Deterrence and Contestable Markets p. 289 When Is the Passive Approach Better? p. 289 The Advertisers' Dilemma p. 289 Reynolds International Takes the Money and Leaves the Market p. 290 Summary p. 292 Key Terms p. 292 Exercises p. 292 Economic Experiment p. 297 Controlling Market Power: Antitrust and Regulation p. 298 Natural Monopoly p. 300 Picking an Output Level p. 300 Will a Second Firm Enter? p. 301 Price Controls for a Natural Monopoly p. 302 XM and Sirius Satellite Radio p. 303 A Decrease in Demand Increases The Price of Cable TV p. 304 Antitrust Policy p. 304 Breaking Up Monopolies p. 304 Blocking Mergers p. 305 Merger Remedy for Wonder Bread p. 306 Heinz and Beech-Nut Battle for Second Place p. 307 Regulating Business Practices: Price-Fixing, Tying, and Cooperative Agreements p. 308 Xidex Recovers Its Acquisition Cost in Two Years p. 309 The Microsoft Cases p. 309 A Brief History of U.S. Antitrust Policy p. 309 Deregulation: Airlines, Telecommunications, and Electricity p. 310 Deregulation of Airlines p. 310 Deregulation of Telecommunication Services p. 311 Deregulation of Electricity p. 311 Electricity Deregulation in California p. 312 Electricity Deregulation in Other U.S. States p. 313 Summary p. 313 Key Terms p. 313 Exercises p. 313 Externalities and Information Imperfect Information: Adverse Selection and Moral Hazard p. 316 The Lemons Problem p. 318 Uninformed Buyers and Knowledgeable Sellers p. 318 Equilibrium with All Low-Quality Goods p. 319 A Thin Market: Equilibrium with Some High-Quality Goods p. 320

10 Responding to the Lemons Problem p. 322 Buyers Invest in Information p. 322 Consumer Satisfaction Scores from ValueStar and ebay p. 322 Guarantees and Lemons Laws p. 322 Evidence of the Lemons Effect p. 323 The Resale Value of a Week-Old Car p. 323 Used Pickup Trucks p. 324 Regulation of the California Kiwifruit Market p. 324 Baseball Pitchers Are Like Used Cars p. 325 Uninformed Sellers and Knowledgeable Buyers: Insurance p. 326 Health Insurance p. 326 Equilibrium with All High-Cost Consumers p. 326 Responding to Adverse Selection in Insurance: Group Insurance p. 328 The Uninsured p. 328 Genetic Testing Benefits Low-Risk People p. 329 Other Types of Insurance p. 330 Insurance and Moral Hazard p. 330 Deposit Insurance for Savings & Loans p. 331 People with Insurance Take More Risks p. 331 Summary p. 332 Key Terms p. 332 Exercises p. 332 Economic Experiments p. 336 Public Goods and Public Choice p. 338 External Benefits and Public Goods p. 340 Public Goods and the Free-Rider Problem p. 341 Free Riders and the Three-Clock Tower p. 343 Overcoming the Free-Rider Problem p. 343 Paying Landowners to Host Wolves p. 344 Asteroid Diversion as a Public Good p. 344 Private Goods with External Benefits p. 345 External Benefits from Education p. 345 External Benefits and the Marginal Principle p. 345 Other Private Goods That Generate External Benefits p. 346 External Benefits from LoJack p. 347 Public Choice p. 347 Voting and the Median-Voter Rule p. 347 Alternative Models of Government: Self-Interest and Special Interests p. 349 Politicians Are Like Ice-Cream Sellers p. 350 Which Theory Is Correct? p. 351 Summary p. 351

11 Key Terms p. 351 Exercises p. 351 Economic Experiment p. 353 External Costs and Environmental Policy p. 354 The Optimal Level of Pollution p. 356 Using the Marginal Principle p. 356 The Optimal of Level Sulfur Dioxide Emissions p. 357 Taxing Pollution p. 358 A Firm's Response to a Pollution Tax p. 358 The Market Effects of a Pollution Tax p. 358 Traditional Regulation p. 360 Uniform Abatement with Permits p. 360 The Effects of a Carbon Tax p. 361 Command and Control p. 362 Market Effects of Pollution Regulations p. 362 Marketable Pollution Permits p. 362 Dear Abby and Environmental Policy p. 363 Voluntary Exchange and Marketable Permits p. 364 Supply, Demand, and the Price of Marketable Permits p. 364 External Costs from Automobiles p. 365 External Costs from Pollution p. 365 Marketable Permits for Sulfur Dioxide p. 366 Chicago Climate Exchange p. 367 External Costs from Congestion p. 368 External Costs from Collisions p. 369 Young Drivers and Collisions p. 369 Summary p. 370 Key Terms p. 370 Exercises p. 370 Economic experiment p. 373 The Labor Market and Income Distribution The Labor Market, Income, and Poverty p. 374 The Demand for Labor p. 376 Labor Demand by an Individual Firm in the Short Run p. 376 Market Demand for Labor in the Short Run p. 379 Labor Demand in the Long Run p. 379 Short-Run Versus Long-Run Demand p. 379 The Supply of Labor p. 380 The Individual Labor-Supply Decision: How Many Hours? p. 380 Different Responses to a Higher Wage p. 381 The Market Supply Curve for Labor p. 381

12 Labor Market Equilibrium p. 382 Changes in Demand and Supply p. 382 The Market Effects of the Minimum Wage p. 383 Codes of Conduct and Living Wages p. 384 Trade-Offs from Immigration p. 385 Explaining Differences in Wages and Income p. 385 Why Do Wages Differ Across Occupations? p. 386 The Gender Pay Gap p. 386 Wage Premiums for Dangerous Jobs p. 387 Racial Discrimination p. 388 Why Do College Graduates Earn Higher Wages? p. 388 Lakisha Washington Versus Emily Walsh p. 389 The Distribution of Income p. 390 Income Distribution Facts p. 390 Recent Changes in the Distribution of Income p. 391 Changes in the Top End of Income Distribution: p. 392 Poverty and Public Policy p. 393 Poverty Rates for Different Groups p. 393 Redistribution Programs for the Poor p. 394 Welfare Reform and TANF p. 394 Welfare and Work Incentives p. 395 Summary p. 396 Key Terms p. 396 Exercises p. 396 Unions, Monopsony, and Imperfect Information p. 400 Labor Unions p. 402 A Brief History of Labor Unions in the United States p. 402 Labor Unions and Wages p. 403 Truckers Trade Off Wages and Jobs p. 404 Market Structure and the Wage-Jobs Trade-Off p. 405 The Effects of Unions on Worker Productivity and Turnover p. 405 Competition Reduces Trucker Wages p. 406 Monopsony Power p. 406 Marginal Labor Cost Exceeds the Wage p. 407 Picking a Quantity of Labor and a Wage p. 407 Monopsony Versus Perfect Competition p. 408 Monopsony and a Minimum Wage p. 409 Monopsony and the Real World p. 410 Pubs and the Labor-Supply Curve p. 411 Imperfect Information and Efficiency Wages p. 411 The Mixed Market for Labor p. 411

13 Efficiency Wages at Ford Motor Company p. 413 Summary p. 413 Key Terms p. 414 Exercises p. 414 The International Economy International Trade and Public Policy p. 416 Benefits from Specialization and Trade p. 418 Production Possibilities Curve p. 418 Comparative Advantage and the Terms of Trade p. 419 The Consumption Possibilities Curve p. 420 How Free Trade Affects Employment p. 421 Protectionist Policies p. 422 Import Bans p. 422 Quotas and Voluntary Export Restraints p. 422 Responses to Protectionist Policies p. 424 The Impact of Tariff31s on the Poor p. 424 What Are the Rationales for Protectionist Policies? p. 425 To Shield Workers from Foreign Competition p. 425 To Nurture Infant Industries p. 425 Measuring the Costs of Protecting Jobs p. 426 To Help Domestic Firms Establish Monopolies in World Markets p. 426 Protection for Candle Makers p. 427 A Brief History of International Tariff and Trade Agreements p. 428 Ongoing Trade Negotiations p. 429 Recent Policy Debates and Trade Agreements p. 429 Are Foreign Producers Dumping Their Products? p. 429 Do Trade Laws Inhibit Environmental Protection? p. 430 Do Outsourcing and Trade Cause Inequality? p. 431 Why Do People Protest Against Free Trade? p. 432 Summary p. 433 Key Terms p. 433 Exercises p. 433 Glossary p. 436 Photo Credits p. 441 Index p. 442 Table of Contents provided by Blackwell's Book Services and R.R. Bowker. Used with permission.