Economic Principles Seven Ideas for Thinking ... About Almost Anything

by Allen, Doug

• ISBN13: 9781256170471
• ISBN10: 125617047X
• Edition: 4th
• Format: Spiral Bound
• Copyright: 2011-06-24
• Publisher: Pearson Learning Solutions

Summary

Most Principles of Microeconomicstextbooks are long, boring, and expensive. They start by introducing thirty terms (most of which are never returned to), spend the next four chapters shifting two lines around, and then proceed to discuss a number of details better left for an intermediate course. They seem to go out of their way to avoid teaching actual principles!   Economic Principles: Seven Ideas for Thinking... About Almost Anythingis about the fundamental ideas that every economic argument is based on: maximization, substitution, opportunity cost, and the like. It is designed to be engaging, focused, and effective.   Appropriate for a Principles of Microeconomics course, the book's main emphasis is on explaining economic behavior, rather than crunching numbers. It is full of interesting real-life examples, applications, and humorous stories - there is no mention of a ;widget ;!   The overriding emphasis of Economic Principlesis on explanation and critical thinking. Repetitive curve shifting, pointless arithmetic exercises, and moot theoretical policy discussions are not to be found. Rather, the book is filled with questions taken from popular culture, history, and world events.   Economic Principlesengages students without overburdening their wallets or their backpacks.

Author Biography

Douglas Allen is the Burnaby Mountain Professor of economics at Simon Fraser University in Burnaby, B.C., where he earned his undergraduate degree. He has a PhD in economics from the University of Washington, and is the author of four books and numerous articles.

Table of Contents

CHAPTER 1: Introduction . . . . . . . . . . . . . . . . . . . . . . 1

What isEconomics? . . . . . . . . . . . . . . . . . . . . . . 3

TheEconomicWay ofThinking . . . . . . . . . . . . . . . . . 4

EconomicPrinciples . . . . . . . . . . . . . . . . . . . . . . 12

The SevenIdeas . . . . . . . . . . . . . . . . . . . . . . . . 13

TheRoadmap . . . . . . . . . . . . . . . . . . . . . . . . . 14

 

PART I : EXCHANGE AND PRODUCTION . . . . . . . . . . . . . . 19

 

CHAPTER 2:Maximization . . . . . . . . . . . . . . . . . . . . . . 20

Scarcity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . 23

WhyBelieveinMaximization? . . . . . . . . . . . . . . . . . . 30

ThePanglossianDilemma . . . . . . . . . . . . . . . . . . . . 32

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

 

CHAPTER 3 : Substitution . . . . . . . . . . . . . . . . . . . . . . 40

Trade-offs areEverywhere . . . . . . . . . . . . . . . . . . . . 42

The Fallacy of Priority in Consumption . . . . . . . . . . . . . . 43

Marginal Value . . . . . . . . . . . . . . . . . . . . . . . . . 44

Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Appendix: Mapping Preferences . . . . . . . . . . . . . . . . . 55

 

CHAPTER 4:The Law of Demand . . . . . . . . . . . . . . . . . . . 58

Diminishing Marginal Value . . . . . . . . . . . . . . . . . . . 58

(Real) Income and (Relative)Prices . . . . . . . . . . . . . . . . 59

TheLawofDemand . . . . . . . . . . . . . . . . . . . . . . 63

TheLawofDemand isEverywhere . . . . . . . . . . . . . . . . 65

Direct, but Objectionable Examples of the Law of Demand . . . . . . 69

IndirectEvidencefor theLawofDemand . . . . . . . . . . . . . 71

TotalValue vsMarginalValue . . . . . . . . . . . . . . . . . . 74

TotalExpenditure andConsumer’sSurplus . . . . . . . . . . . . . 77

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Appendix: Deriving aDemandCurve . . . . . . . . . . . . . . . 94

 

CHAPTER 5:TechyIssues ofDemand . . . . . . . . . . . . . . . . . 102

Changes inDemand . . . . . . . . . . . . . . . . . . . . . . . 102

Changes inQuantityDemanded . . . . . . . . . . . . . . . . . 105

Elasticity . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

ElasticityMiscellany . . . . . . . . . . . . . . . . . . . . . . 111

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Appendix: ArithmeticIssues . . . . . . . . . . . . . . . . . . . 131

 

CHAPTER 6:ExchangeWithoutProduction . . . . . . . . . . . . . . 135

TradewithJustTwoPeople . . . . . . . . . . . . . . . . . . . 135

DeterminingPricewithTwoPeople . . . . . . . . . . . . . . . . 137

Market Demand and Supply Curves . . . . . . . . . . . . . . . . 140

UnitDemandCurves (ASpecialCase) . . . . . . . . . . . . . . . 142

Market Supply . . . . . . . . . . . . . . . . . . . . . . . . . 143

Exchange with Market Demand and Supply . . . . . . . . . . . . 146

Applications . . . . . . . . . . . . . . . . . . . . . . . . . . 148

Prelude ofThingsToCome . . . . . . . . . . . . . . . . . . . 150

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 152

 

CHAPTER 7:CostAndComparativeAdvantage . . . . . . . . . . . . . 163

What isCost? . . . . . . . . . . . . . . . . . . . . . . . . . 163

AddingUpCosts . . . . . . . . . . . . . . . . . . . . . . . . 164

Costs andBads . . . . . . . . . . . . . . . . . . . . . . . . 165

Sunk, Avoidable, Fixed, and Variable Costs. . . . . . . . . . . . . 166

ComparativeAdvantage . . . . . . . . . . . . . . . . . . . . . 167

TheGains fromSpecialization . . . . . . . . . . . . . . . . . . 170

ComparativeAdvantage andMarginalCostCurves . . . . . . . . . 171

Marginal Costs and the Supply Curve. . . . . . . . . . . . . . . . 173

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

 

CHAPTER 8:ProductionwithDiminishingMarginalProducts . . . . . . . 192

TheProductionFunction . . . . . . . . . . . . . . . . . . . . 192

MarginalProducts and theDemandfor Labor . . . . . . . . . . . 197

MarginalCostsAgain . . . . . . . . . . . . . . . . . . . . . . 202

AverageCostCurves . . . . . . . . . . . . . . . . . . . . . . 204

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

Appendix: DerivingCostCurves . . . . . . . . . . . . . . . . . 219

 

CHAPTER 9 : The Competitive Firm and Market Supply Curves . . . . . . 224

TheProfitMaximizingLevel ofOutput . . . . . . . . . . . . . . 226

Profits of theFirm . . . . . . . . . . . . . . . . . . . . . . . 231

The Market Supply Curve . . . . . . . . . . . . . . . . . . . . 236

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 238

 

CHAPTER 10:Applicationsof theNeoclassicalModel . . . . . . . . . . . 251

Market Equilibrium . . . . . . . . . . . . . . . . . . . . . . . 251

Shifts in Supply and Demand . . . . . . . . . . . . . . . . . . . 252

TradeOneMoreTime . . . . . . . . . . . . . . . . . . . . . . 258

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260

Quotas inAgriculture . . . . . . . . . . . . . . . . . . . . . . 265

WarmHouses inColdClimates . . . . . . . . . . . . . . . . . . 267

CriminalBehavior . . . . . . . . . . . . . . . . . . . . . . . 269

TheMarriageMarket . . . . . . . . . . . . . . . . . . . . . . 272

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 274

PART II : EXTENSIONS OF THE NEOCLASSICAL MODEL . . . . . . 291

 

CHAPTER 11:ChoiceOverTime and the InterestRate . . . . . . . . . . 292

The InterestRate . . . . . . . . . . . . . . . . . . . . . . . . 292

TheValue ofDurableGoods . . . . . . . . . . . . . . . . . . . 293

PresentValues . . . . . . . . . . . . . . . . . . . . . . . . . 295

The Equilibrium Interest Rate . . . . . . . . . . . . . . . . . . 306

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 307

 

CHAPTER 12: LaborMarkets . . . . . . . . . . . . . . . . . . . . . 321

TheDemandfor Labor . . . . . . . . . . . . . . . . . . . . . 321

The Supply of Labor . . . . . . . . . . . . . . . . . . . . . . 323

TheMarket for Labor Services . . . . . . . . . . . . . . . . . . 324

IncomeDifferences . . . . . . . . . . . . . . . . . . . . . . . 325

Prostitution . . . . . . . . . . . . . . . . . . . . . . . . . . 330

Unions andMinimumWages . . . . . . . . . . . . . . . . . . . 331

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 333

CHAPTER 13: PriceSearching . . . . . . . . . . . . . . . . . . . . . 342

Facing aDownward SlopingDemandCurve . . . . . . . . . . . . 342

MarginalRevenueCurve . . . . . . . . . . . . . . . . . . . . . 344

The Price Searching Equilibrium . . . . . . . . . . . . . . . . . 346

PriceDiscriminationandOtherPricingPractices . . . . . . . . . . 348

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 362

 

CHAPTER 14 : Game Theory, Collusion, and Competition Policy . . . . . . 379

SimpleGameTheory: InteractionsWithOthers . . . . . . . . . . . 379

DominatedandDominant Strategies . . . . . . . . . . . . . . . 381

TheEvolutionofCooperation . . . . . . . . . . . . . . . . . . 384

Theology andGameTheory . . . . . . . . . . . . . . . . . . . 386

The IncentivetoColludeForFirms . . . . . . . . . . . . . . . . 389

TheProblemofCollusion . . . . . . . . . . . . . . . . . . . . 390

Conditions forCollusion . . . . . . . . . . . . . . . . . . . . . 391

CompetitionPolicy . . . . . . . . . . . . . . . . . . . . . . . 394

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 397

PART III : THE ORGANIZATION OF MARKETS AND INSTITUTIONS . 409

 

CHAPTER 15 : Economic Property Rights and Transaction Costs . . . . . . 410

TheCoaseTheorem . . . . . . . . . . . . . . . . . . . . . . . 411

No-FaultDivorce and theCoaseTheorem . . . . . . . . . . . . . 413

What areTransactionCosts? . . . . . . . . . . . . . . . . . . . 415

Backto theCoase Theorem . . . . . . . . . . . . . . . . . . . 419

WhatCausesTransactionCosts . . . . . . . . . . . . . . . . . 421

Private Property, Common Property, and Open Access . . . . . . . . 423

TheOptimalValue of anAsset . . . . . . . . . . . . . . . . . . 428

SomeFinalThoughts onEfficiency . . . . . . . . . . . . . . . . 434

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 436

 

CHAPTER 16:TheEconomics ofOrganization: Firms . . . . . . . . . . 448

TheFalseDichotomyof FirmsandMarkets . . . . . . . . . . . . 448

TheNature of theFirm . . . . . . . . . . . . . . . . . . . . . 450

TheNature of theFarm . . . . . . . . . . . . . . . . . . . . . 451

The Success of the British Navy . . . . . . . . . . . . . . . . . 455

ThePurchase SystemintheBritishArmy . . . . . . . . . . . . . 458

Franchisingand theBigMac . . . . . . . . . . . . . . . . . . . 46

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 463

 

CHAPTER 17 : The Economics of Organization: Contracts and Markets . . . 470

ContractChoice inFarmLand Leases . . . . . . . . . . . . . . . 470

MarketEnforcedQualityControl . . . . . . . . . . . . . . . . . 474

Signals ofQualityType . . . . . . . . . . . . . . . . . . . . . 477

Screeningand theDuel ofHonor . . . . . . . . . . . . . . . . . 479

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 481