PRINCIPLES OF MICRO- ECONOMICS. Fourth Edition

Transcription

1 PRINCIPLES OF MICRO- ECONOMICS Fourth Edition

2 Preface vii PART I Introduction Chapter I Thinking Like an Economist 3 Economics: Studying Choice in a World of Scarcity 4 Applying the Cost-Benefit Principle 6 Economic Surplus 6 Opportunity Cost 7 The Role of Economic Models 7 Three Important Decision Pitfalls 8 Pitfall 1: Measuring Costs and Benefits as Proportions Rather Than Absolute Dollar Amounts 9 Pitfall 2: Ignoring Implicit Costs 9 Pitfall 3: Failure to Think at the Margin 11 Normative Economics versus Positive Economics 15 Economics: Micro and Macro 15 The Approach of This Text 16 Economic Naturalism 17 EXAMPLE I.I THE ECONOMIC NATURALIST: Why do many hardware manufacturers include more than $1,000 worth of "free" software with a computer selling for only slightly more than that? 17 EXAMPLE 1.2 THE ECONOMIC NATURALIST: Why don't auto manufacturers make cars without heaters? 18 EXAMPLE 1.3 THE ECONOMIC NATURALIST: Why do the keypad buttons on drive-up automatic teller machines have Braille dots? 18 Summary 19 Core Principles 20 Key Terms 20 Review Questions 20 Problems 20 Answers to In-Chapter Exercises 22 Appendix: Working with Equations, Graphs, and Tables 23 Chapter 2 Comparative Advantage 35 Exchange and Opportunity Cost 36 The Principle of Comparative Advantage 37 EXAMPLE 2.1 THE ECONOMIC NATURALIST: Where have all the 400 hitters gone? 39 Sources of Comparative Advantage 40 EXAMPLE 2.2 THE ECONOMIC NATURALIST: Televisions and videocassette recorders were developed and first produced in the United States, but today the United

3 xxiii States accounts for only a minuscule share of the total world production of these products. Why did the United States fail to retain its lead in these markets? 41 Comparative Advantage and Production Possibilities 41 The Production Possibilities Curve 41 How Individual Productivity Affects the Slope and Position of the PPC 44 The Gains from Specialization and Exchange 46 A Production Possibilities Curve for a Many-Person Economy 47 Factors That Shift the Economy's Production Possibilities Curve 49 Why Have Some Countries Been Slow to Specialize? 51 Can We Have Too Much Specialization? 52 Comparative Advantage and International Trade 53 EXAMPLE 2.3 THE ECONOMIC NATURALIST: If trade between nations is so beneficial, why are free-trade agreements so controversial? 53 Outsourcing 53 EXAMPLE 2.4 THE ECONOMIC NATURALIST: Is PBS economics reporter Paul Solman's job a likely candidate for outsourcing? 54 Summary 56 Core Principles 56 Key Terms 56 Review Questions 57 Problems 57 Answers to In-Chapter Exercises 58 Chapter 3 Supply and Demand 61 What, How, and for Whom? Central Planning versus the Market 63 Buyers and Sellers in Markets 64 The Demand Curve 65 The Supply Curve 66 Market Equilibrium 68 Rent Controls Reconsidered 71 Pizza Price Controls? 73 Predicting and Explaining Changes in Prices and Quantities 74 Shifts in Demand 75 EXAMPLE 3.1 THE ECONOMIC NATURALIST: When the federal government implements a large pay increase for its employees, why do rents for apartments located near Washington Metro stations go up relative to rents for apartments located far away from Metro stations? 77 Shifts in the Supply Curve 78 EXAMPLE 3.2 THE ECONOMIC NATURALIST: Why do major term papers go through so many more revisions today than in the 1970s? 80 Four Simple Rules 81 EXAMPLE 3.3 THE ECONOMIC NATURALIST: Why do the prices of some goods, like airline tickets to Europe, go up during the months of heaviest consumption, while others, like sweet corn, go down? 84 Efficiency and Equilibrium 84 Cash on the Table 85 Smart for One, Dumb for All 86 Summary 87 Core Principles 88 Key Terms 89 Review Questions 89 Problems 89

4 xxiv CONTENTS Answers to In-Chapter Exercises 90 Appendix: The Algebra of Supply and Demand 93 PART 2 Competition and the Invisible Hand Chapter 4 Elasticity 97 Price Elasticity of Demand 98 Price Elasticity Defined 98 Determinants of Price Elasticity of Demand 100 Some Representative Elasticity Estimates 101 Using Price Elasticity of Demand 102 EXAMPLE 4.1 THE ECONOMIC NATURALIST: Will a higher tax on cigarettes curb teenage smoking? 102 EXAMPLE 4.2 THE ECONOMIC NATURALIST: Why was the luxury tax on yachts such a disaster? 102 A Graphical Interpretation of Price Elasticity 103 Price Elasticity Changes along a Straight-Line Demand Curve 105 Two Special Cases 106 Elasticity and Total Expenditure 107 Income Elasticity and Cross-Price Elasticity of Demand 111 The Price Elasticity of Supply 112 Determinants of Supply Elasticity 114 EXAMPLE 4.3 THE ECONOMIC NATURALIST: Why are gasoline prices so much more volatile than car prices? 116 Unique and Essential Inputs: The Ultimate Supply Bottleneck 117 Summary 118 Key Terms 119 Review Questions 119 Problems 119 Answers to In-Chapter Exercises 121 Appendix: The Midpoint Formula 123 Chapter 5 Demand 125 The Law of Demand 126 The Origins of Demand 126 Needs versus Wants 127 EXAMPLE 5.1 THE ECONOMIC NATURALIST: Why does California experience chronic water shortages? 128 Translating Wants into Demand 128 Measuring Wants: The Concept of Utility 128 Allocating a Fixed Income between Two Goods 132 The Rational Spending Rule 135 Income and Substitution Effects Revisited 135 Applying the Rational Spending Rule 138 Substitution at Work 138 EXAMPLE 5.2 THE ECONOMIC NATURALIST: Why do the wealthy in Manhattan live in smaller houses than the wealthy in Seattle? 138 EXAMPLE 5.3 THE ECONOMIC NATURALIST: Why did people turn to four-cylinder cars in the 1970s, only to shift back to six- and eight-cylinder cars in the 1990s? 138 EXAMPLE 5.4 THE ECONOMIC NATURALIST: Why are automobile engines smaller in England than in the United States? 140 The Importance of Income Differences 140

5 EXAMPLE 5.5 THE ECONOMIC NATURALIST: Why are waiting lines longer in poorer neighborhoods? 140 Individual and Market Demand Curves 140 Horizontal Addition 141 Demand and Consumer Surplus 142 Calculating Consumer Surplus 142 Summary 145 Key Terms 145 Review Questions 145 Problems 146 Answers to In-Chapter Exercises 147 Chapter 6 Perfectly Competitive Supply 150 Thinking about Supply: The Importance of Opportunity Cost 150 Individual and Market Supply Curves 152 Profit-Maximizing Firms in Perfectly Competitive Markets 153 Profit Maximization 153 The Demand Curve Facing a Perfectly Competitive Firm 154 Production in the Short Run 155 Some Important Cost Concepts 156 Choosing Output to Maximize Profit 157 A Note on the Firm's Shutdown Condition 159 Average Variable Cost and Average Total Cost 159 A Graphical Approach to Profit Maximization 159 Price = Marginal Cost: The Maximum-Profit Condition 161 The "Law" of Supply 163 Determinants of Supply Revisited 164 Technology 164 Input Prices 164 The Number of Suppliers 165 Expectations 165 Changes in Prices of Other Products 165 Applying the Theory of Supply 165 EXAMPLE 6.1 THE ECONOMIC NATURALIST: When recycling is left to private market forces, why are many more aluminum beverage containers recycled than glass ones? 165 Supply and Producer Surplus 168 Calculating Producer Surplus 168 Summary 169 Key Terms 170 Review Questions 170 Problems 170 Answers to In-Chapter Exercises 173 Chapter 7 Efficiency and Exchange 175 Market Equilibrium and Efficiency 176 Efficiency Is Not the Only Goal 179 Why Efficiency Should Be the First Goal 179 The Cost of Preventing Price Adjustments 179 Price Ceilings 180 Price Subsidies 183 First-Come, First-Served Policies 185

6 EXAMPLE 7.1 THE ECONOMIC NATURALIST: Why does no one complain any longer about being bumped from an overbooked flight? 185 Marginal Cost Pricing of Public Services 188 Taxes and Efficiency 190 Who Pays a Tax Imposed on Sellers of a Good? 190 EXAMPLE 7.2 THE ECONOMIC NATURALIST: How will a tax on cars affect their prices in the long run? 191 How a Tax Collected from a Seller Affects Economic Surplus 192 Taxes, Elasticity, and Efficiency 194 Taxes, External Costs, and Efficiency 195 Summary 196 Key Terms 197 Review Questions 197 Problems 197 Answers to In-Chapter Exercises 199 Chapter 8 The Invisible Hand in Action 203 The Central Role of Economic Profit 204 Three Types of Profit 204 The Invisible Hand Theory 207 Two Functions of Price 207 Responses to Profits and Losses 208 The Importance of Free Entry and Exit 214 Economic Rent versus Economic Profit 215 The Invisible Hand in Action 216 The Invisible Hand at the Supermarket and on the Freeway 216 EXAMPLE 8.1 THE ECONOMIC NATURALIST: Why do supermarket checkout lines all tend to be roughly the same length? 216 The Invisible Hand and Cost-Saving Innovations 217 The Invisible Hand in Regulated Markets 217 EXAMPLE 8.2 THE ECONOMIC NATURALIST: Why do New York City taxicab medallions sell for more than $300,000? 218 EXAMPLE 8.3 THE ECONOMIC NATURALIST: Why did major commercial airlines install piano bars on the upper decks of Boeing 747s in the 1970s? 219 The Invisible Hand in Antipoverty Programs 220 The Invisible Hand in the Stock Market 220 EXAMPLE 8.4 THE ECONOMIC NATURALIST: Why isn't a stock portfolio consisting of Canada's "50 best-managed companies" a particularly good investment? 223 The Distinction between an Equilibrium and a Social Optimum 224 Smart for One, Dumb for All 225 EXAMPLE 8.5 THE ECONOMIC NATURALIST: Are there "too many" smart people working as corporate earnings forecasters? 225 Summary 226 Key Terms 227 Review Questions 227 Problems 227 Answers to In-Chapter Exercises 229 PART 3 Market Imperfections Chapter 9 Monopoly, Oligopoly, and Monopolistic Competition 233 Imperfect Competition 234

7 xxvii Different Forms of Imperfect Competition 234 The Essential Difference between Perfectly and Imperfectly Competitive Firms 236 Five Sources of Market Power 237 Exclusive Control over Important Inputs 237 Patents and Copyrights 237 Government Licenses or Franchises 237 Economies of Scale and Natural Monopolies 238 Network Economies 238 Economies of Scale and the Importance of Start-Up Costs 239 EXAMPLE 9.1 THE ECONOMIC NATURALIST: Why does Intel sell the overwhelming majority of all microprocessors used in personal computers? 241 Profit Maximization for the Monopolist 242 Marginal Revenue for the Monopolist 242 The Monopolist's Profit-Maximizing Decision Rule 245 Being a Monopolist Doesn't Guarantee an Economic Profit 246 Why the Invisible Hand Breaks Down under Monopoly 247 Using Discounts to Expand the Market 249 Price Discrimination Defined 249 EXAMPLE 9.2 THE ECONOMIC NATURALIST: Why do many movie theaters offer discount tickets to students? 250 How Price Discrimination Affects Output 250 The Hurdle Method of Price Discrimination 252 Is Price Discrimination a Bad Thing? 255 Examples of Price Discrimination 255 EXAMPLE 9.3 THE ECONOMIC NATURALIST: Why might an appliance retailer instruct its clerks to hammer dents into the sides of its stoves and refrigerators? 256 Public Policy toward Natural Monopoly 257 State Ownership and Management 257 State Regulation of Private Monopolies 258 Exclusive Contracting for Natural Monopoly 258 Vigorous Enforcement of Antitrust Laws 259 Summary 260 Key Terms 261 Review Questions 261 Problems 261 Answers to In-Chapter Exercises 264 Appendix: The Algebra of Monopoly Profit Maximization 267 Chapter 10 Games and Strategic Behavior 269 Using Game Theory to Analyze Strategic Decisions 270 The Three Elements of a Game 270 Nash Equilibrium 272 The Prisoner's Dilemma 274 The Original Prisoner's Dilemma 274 The Economics of Cartels 275 EXAMPLE 10.1 THE ECONOMIC NATURALIST: Why are cartel agreements notoriously unstable? 275 Tit-for-Tat and the Repeated Prisoner's Dilemma 277 EXAMPLE 10.2 THE ECONOMIC NATURALIST: How did Congress unwittingly solve the television advertising dilemma confronting cigarette producers? 278

8 xxviii CONTENTS EXAMPLE 10.3 THE ECONOMIC NATURALIST: Why do people shout at parties? 280 Games in Which Timing Matters 280 Credible Threats and Promises 282 Monopolistic Competition When Location Matters 283 EXAMPLE 10.4 THE ECONOMIC NATURALIST: Why do we often see convenience stores located on adjacent street corners? 284 Commitment Problems 285 The Strategic Role of Preferences 287 Are People Fundamentally Selfish? 288 Preferences as Solutions to Commitment Problems 288 Summary 289 Key Terms 290 Review Questions 290 Problems 290 Answers to In-Chapter Exercises 294 Chapter 11 Externalities and Property Rights 297 External Costs and Benefits 298 How Externalities Affect Resource Allocation 298 How Do Externalities Affect Supply and Demand? 299 The Coase Theorem 301 Legal Remedies for Externalities 305 EXAMPLE I I.I THE ECONOMIC NATURALIST: What is the purpose of free speech laws? 306 EXAMPLE I 1.2THE ECONOMIC NATURALIST: Why does government subsidize private property owners to plant trees on their hillsides? 306 The Optimal Amount of Negative Externalities Is Not Zero 307 Compensatory Taxes and Subsidies 307 Property Rights and the Tragedy of the Commons 309 The Problem of Unpriced Resources 309 The Effect of Private Ownership 311 When Private Ownership Is Impractical 312 EXAMPLE 11.3 THE ECONOMIC NATURALIST: Why do blackberries in public parks get picked too soon? 313 EXAMPLE 11.4 THE ECONOMIC NATURALIST: Why are shared milkshakes consumed too quickly? 313 Positional Externalities 314 Payoffs That Depend on Relative Performance 314 EXAMPLE 11.5 THE ECONOMIC NATURALIST: Why do football players take anabolic steroids? 315 Positional Arms Races and Positional Arms Control Agreements 316 Social Norms as Positional Arms Control Agreements 317 Summary 318 Key Terms 320 Review Questions 320 Problems 320 Answers to In-Chapter Exercises 323 Chapter 12 The Economics of information 325 How the Middleman Adds Value 326 The Optimal Amount of Information 328

9 xxix The Cost-Benefit Test 328 The Free-Rider Problem 329 EXAMPLE 12.1 THE ECONOMIC NATURALIST: Why is finding a knowledgeable salesclerk often difficult? 329 EXAMPLE 12.2 THE ECONOMIC NATURALIST: Why did Rivergate Books, the last bookstore in Lambertville, New Jersey, go out of business? 329 Two Guidelines for Rational Search 330 The Gamble Inherent in Search 331 The Commitment Problem When Search Is Costly 332 Asymmetric Information 333 The Lemons Model 334 The Credibility Problem in Trading 336 The Costly-to-Fake Principle 336 EXAMPLE 12.3 THE ECONOMIC NATURALIST: Why do firms insert the phrase "As advertised on TV" when they advertise their products in magazines and newspapers? 337 EXAMPLE 12.4 THE ECONOMIC NATURALIST: Why do many companies care so much about elite educational credentials? 337 Conspicuous Consumption as a Signal of Ability 337 EXAMPLE 12.5 THE ECONOMIC NATURALIST: Why do many clients seem to prefer lawyers who wear expensive suits? 338 Statistical Discrimination 338 EXAMPLE 12.6 THE ECONOMIC NATURALIST: Why do males under 25 years of age pay more than other drivers for auto insurance? 339 Adverse Selection 340 Moral Hazard 340 Disappearing Political Discourse 341 EXAMPLE 12.7 THE ECONOMIC NATURALIST: Why do opponents of the death penalty often remain silent? 341 EXAMPLE 12.8 THE ECONOMIC NATURALIST: Why do proponents of legalized drugs remain silent? 342 Summary 342 Key Terms 344 Review Questions 344 Problems 344 Answers to In-Chapter Exercises 346 PART 4 Economics of Public Policy Chapter 13 Labor Markets, Poverty, and Income Distribution 349 The Economic Value of Work 350 The Equilibrium Wage and Employment Levels 352 The Demand Curve for Labor 352 The Supply Curve of Labor 353 Market Shifts 354 Explaining Differences in Earnings 355 Human Capital Theory 355 Labor Unions 355 EXAMPLE 13.1 THE ECONOMIC NATURALIST: If unionized firms have to pay more, how do they manage to survive in the face of competition from their nonunionized counterparts? 357 Compensating Wage Differentials 357

10 EXAMPLE 13.2 THE ECONOMIC NATURALIST: Why do some ad-copy writers earn more than others? 357 Discrimination in the Labor Market 358 Winner-Take-All Markets 360 EXAMPLE 13.3 THE ECONOMIC NATURALIST: Why does Renee Fleming earn millions more than sopranos of only slightly lesser ability? 360 Recent Trends in Inequality 361 Is Income Inequality a Moral Problem? 362 Methods of Income Redistribution 364 Welfare Payments and In-Kind Transfers 364 Means-Tested Benefit Programs 364 The Negative Income Tax 365 Minimum Wages 366 The Earned-Income Tax Credit 367 Public Employment for the Poor 368 A Combination of Methods 369 Summary 370 Key Terms 371 Review Questions 371 Problems 371 Answers to In-Chapter Exercises 373 Chapter 14 The Environment, Health, and Safety 375 The Economics of Health Care Delivery 376 Applying the Cost-Benefit Criterion 376 Designing a Solution 378 The HMO Revolution 379 EXAMPLE 14.1 THE ECONOMIC NATURALIST: Why is a patient with a sore knee more likely to receive an MRI exam if he has conventional health insurance than if he belongs to a health maintenance organization? 379 Paying for Health Insurance 380 EXAMPLE 14.2 THE ECONOMIC NATURALIST: In the richest country on Earth, why do so many people lack basic health insurance? 381 Using Price Incentives in Environmental Regulation 382 Taxing Pollution 382 Auctioning Pollution Permits 384 Workplace Safety Regulation 385 EXAMPLE 14.3 THE ECONOMIC NATURALIST: Why does the government require safety seats for infants who travel in cars but not for infants who travel in airplanes? 389 Public Health and Security 390 EXAMPLE 14.4 THE ECONOMIC NATURALIST: Why do many states have laws requiring students to be vaccinated against childhood illnesses? 390 EXAMPLE 14.5 THE ECONOMIC NATURALIST: Why do more Secret Service agents guard the president than the vice president, and why do no Secret Service agents guard college professors? 391 Summary 392 Key Terms 393 Review Questions 393 Problems 393 Answers to In-Chapter Exercises 395

11 Chapter 15 Public Goods and Tax Policy 397 Government Provision of Public Goods 398 Public Goods versus Private Goods 398 Paying for Public Goods 400 EXAMPLE 15.1 THE ECONOMIC NATURALIST: Why don't most married couples contribute equally to joint purchases? 402 The Optimal Quantity of a Public Good 403 The Demand Curve for a Public Good 405 Private Provision of Public Goods 405 EXAMPLE 15.2 THE ECONOMIC NATURALIST: Why do television networks favor Jerry Springer over Masterpiece Theater? 406 Additional Functions of Government 408 Externalities and Property Rights 408 Local, State, or Federal? 409 Sources of Inefficiency in the Political Process 410 Pork Barrel Legislation 410 EXAMPLE 15.3 THE ECONOMIC NATURALIST: Why does check-splitting make the total restaurant bill higher? 410 EXAMPLE 15.4 THE ECONOMIC NATURALIST: Why do legislators often support one another's pork barrel spending programs? 411 Rent-Seeking 411 Starve the Government? 413 What Should We Tax? 414 Summary 416 Key Terms 417 Review Questions 417 Problems 417 Answers to In-Chapter Exercises 420 Glossary G-l Index 1-1