Microeconomics: Principles, Applications, and Tools

by O'Sullivan, Arthur; Sheffrin, Steven M.; Perez, Steve

• ISBN13: 9780131536067
• ISBN10: 0131536060
• Edition: 4th
• Format: Hardcover
• Copyright: 2007-01-01
• Publisher: Prentice Hall

Summary

The book provides a clear, concise, and accessible presentation of key points.Its hallmark feature includes a focus on the 5 Key Principles of Economics1) Opportunity Cost, 2) The Marginal Principle (comparing marginal benefits and marginal costs), 3) Diminishing Returns, 4) The Spillover Principle (for externalities in production and consumption), 5) The Reality Principle (distinguishing real from nominal magnitudes).For financial professionals and analysts.

Table of Contents

PART 1 Introduction and Key Principles	1	(92)
Introduction: What Is Economics?	2	(24)
What Is Economics?	3	(3)
Positive Versus Normative Analysis	4	(1)
Decisions in a Modern Economy: The Invisible Hand?	5	(1)
A Closer Look: When Do Economists Agree?	6	(1)
Economic Analysis and Modern Problems	6	(2)
Example 1: Traffic Congestion	6	(1)
Example 2: Poverty in Africa	7	(1)
Example 3: Japan's Economic Problems	8	(1)
The Economic Way of Thinking	8	(4)
Rational People Respond to Incentives	10	(1)
Application: Thinking About Congestion	11	(1)
Preview of Coming Attractions: Microeconomics	12	(2)
A Closer Look: Even Kids Respond to Incentives	12	(1)
To Understand Markets and Predict Changes	13	(1)
To Make Personal and Managerial Decisions	13	(1)
To Evaluate Public Policies	13	(1)
Preview of Coming Attractions: Macroeconomics	14	(3)
To Understand Why Economies Grow	14	(1)
To Understand Economic Fluctuations	14	(1)
To Make Informed Business Decisions	15	(1)
A Closer Look: ``Dismal'' Depends On Your Point of View	15	(2)
Appendix: Using Graphs and Formulas	17	(1)
Using Graphs to Show Relationships	17	(9)
The Key Principles of Economics	26	(18)
The Principle of Opportunity Cost	27	(5)
Opportunity Cost and the Production Possibilities Curve	28	(1)
Using the Principle: Military Spending, Collectibles	29	(1)
Using the Principle: The Cost of College	30	(1)
A Closer Look: Swords vs. Ecotels?	31	(1)
The Marginal Principle	32	(3)
Example: How Many Movie Sequels?	32	(2)
Using the Marginal Principle: Renting College Facilities, Emissions Standards	34	(1)
Economic Puzzle: Marginal Airlines Lives Up to Its Name	35	(1)
The Principle of Voluntary Exchange	35	(2)
Exchange and Markets	36	(1)
The Principle of Diminishing Returns	37	(1)
The Real--Nominal Principle	38	(1)
Economic Experiment: Producing Fold-Its	39	(1)
Using the Principle: Government Programs, Statistics, and Repaying College Loans	39	(1)
Using the Tools	40	(4)
Exchange and Markets	44	(16)
Comparative Advantage and Exchange	45	(6)
Specialization and the Gains from Trade	45	(2)
Production and Consumption Possibilities	47	(1)
Comparative Advantage Versus Absolute Advantage	48	(1)
The Division of Labor and Exchange	48	(1)
Comparative Advantage and International Trade	49	(2)
A Closer Look: Buzz Lightyear of China	51	(1)
Markets	51	(4)
Virtues of Markets	52	(2)
Example: Exchange in a Prisoner of War Camp	54	(1)
Shortcomings of Markets	54	(1)
A Closer Look: EverQuest and Fantasy Exchanges	55	(1)
The Role of Government in a Market Economy	55	(5)
Government Enforces the Rules of Exchange	56	(1)
Government Can Reduce Economic Uncertainty	56	(4)
Supply, Demand, and Market Equilibrium	60	(33)
The Demand Curve	61	(4)
The Individual Demand Curve and the Law of Demand	62	(2)
From Individual Demand to Market Demand	64	(1)
Economic Puzzle: Saving Money Wherever You Shop?	65	(1)
The Supply Curve	65	(4)
The Individual Supply Curve and the Law of Supply	66	(1)
Why Is the Individual Supply Curve Positively Sloped?	67	(1)
From Individual Supply to Market Supply	68	(1)
Market Equilibrium	69	(2)
Excess Demand Causes the Price to Rise	69	(1)
Excess Supply Causes the Price to Drop	70	(1)
Market Effects of Changes in Demand	71	(5)
Change in Quantity Demanded Versus Change in Demand	71	(1)
Increases in Demand	72	(2)
Decreases in Demand	74	(2)
Market Effects of Changes in Supply	76	(4)
Change in Quantity Supplied Versus Change in Supply	76	(1)
Increases in Supply	77	(2)
A Closer Look: Increasing the Supply of Wind Power	79	(1)
Decreases in Supply	79	(1)
Market Effects of Simultaneous Changes in Demand and Supply	80	(2)
Using the Model to Predict Changes in Price and Quantity	82	(2)
Population Growth and Apartment Prices	82	(1)
Product Safety and Apples	83	(1)
Technological Innovation and Computers	83	(1)
Weather and Coffee	84	(1)
Explaining Changes in Price or Quantity	84	(3)
An Increase in Poultry Consumption	85	(1)
A Decrease in Drug Prices	86	(1)
A Closer Look: Higher Platinum Prices	87	(1)
Economic Experiment: Market Equilibrium	87	(1)
Using the Tools	88	(5)
PART 2 A Closer Look at Supply and Demand	93	(76)
Elasticity: A Measure of Responsiveness	94	(26)
The Price Elasticity of Demand	95	(6)
Price Elasticity and the Demand Curve	96	(2)
What Determines the Price Elasticity of Demand?	98	(1)
Computing Price Elasticity: Initial Value Versus Midpoint	99	(1)
A Closer Look: How to Cut Teen Smoking by 60%	100	(1)
Elasticity Along a Linear Demand Curve	101	(2)
Using the Price Elasticity of Demand to Make Predictions	103	(4)
Predicting Changes in Quantity Demanded	103	(1)
Applications: College Education, Highway Deaths, and Medical Care	103	(1)
Predicting Changes in Total Revenue	104	(1)
A Closer Look: Pricing Medical Care in Developing Countries	104	(2)
Applications: Transit Deficits, Property Crime	106	(1)
Economic Puzzle: DVD Elasticity	107	(3)
Other Elasticities of Demand	108	(2)
The Price Elasticity of Supply	110	(2)
Predicting Changes in Quantity Supplied	111	(1)
Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply	111	(1)
Predicting Changes in Price Using Supply and Demand Elasticities	112	(4)
The Price Effects of a Change in Demand	112	(2)
The Price Effects of a Change in Supply	114	(2)
Using the Tools	116	(4)
Consumer Choice	120	(18)
Consumer Constraints and Preferences	121	(4)
Consumer Constraints: The Budget Line	122	(1)
Consumer Preferences: Indifference Curves	123	(2)
Maximizing Utility	125	(4)
The Tangency Condition	125	(1)
The Utility-Maximizing Rule: MRS = Price Ratio	126	(1)
Drawing the Demand Curve	127	(1)
Do Consumers Actually Do This?	128	(1)
Applications of the Consumer Choice Model	129	(6)
Music Piracy and Online Music Stores	129	(1)
A Closer Look: Modern Consumer Theory Versus Old Utility Theory	130	(1)
Inflation, the Real--Nominal Principle, and Consumer Choice	131	(2)
The Equimarginal Rule	133	(1)
A Closer Look: The Bang per Buck of Light Spirits	134	(1)
Using the Tools	135	(3)
Market Efficiency and Government Intervention	138	(31)
Consumer Surplus and Producer Surplus	140	(2)
The Demand Curve and Consumer Surplus	140	(1)
The Supply Curve and Producer Surplus	141	(1)
Market Equilibrium and Efficiency	142	(4)
Total Surplus Is Lower with a Price Below the Equilibrium Price	143	(2)
Total Surplus Is Lower with a Price Above the Equilibrium Price	145	(1)
Efficiency and the Invisible Hand	145	(1)
Government Intervention in Markets	146	(2)
Controlling the Price	148	(3)
Setting Maximum Prices	148	(1)
Application: Rent Control	148	(2)
Setting Minimum Prices	150	(1)
A Closer Look: Milk Mountains	151	(1)
Controlling the Quantity---Licensing and Import Restrictions	151	(3)
Application: Taxi Medallions	152	(1)
Licensing and Market Efficiency	153	(1)
Economic Puzzle: Shortfall from Medallion Sale	154	(3)
Winners and Losers from Licensing	154	(1)
Restricting Imports	154	(2)
A Closer Look: A Market For Used Human Organs?	156	(1)
Who Really Pays Taxes?	157	(6)
Tax Shifting: Forward and Backward	157	(2)
Predicting the Amount Shifted Forward and Backward	159	(1)
Applications: Cigarette and Luxury Taxes	160	(1)
Tax Burden and Deadweight Loss	161	(2)
A Closer Look: Taxes and December Babies	163	(1)
Economic Experiment: Government Intervention	163	(1)
Using the Tools	163	(6)
PART 3 Information and Externalities	169	(64)
Imperfect Information: Adverse Selection and Moral Hazard	170	(24)
The Lemons Problem	171	(5)
Uninformed Buyers and Knowledgeable Sellers	172	(1)
Equilibrium with All Low-Quality Goods	172	(2)
A Thin Market: Equilibrium with Some High-Quality Goods	174	(2)
Responding to the Lemons Problem	176	(3)
Buyers Invest in Information	177	(1)
Sellers Provide Guarantees	177	(1)
Lemons Laws	177	(1)
A Closer Look: Consumer Satisfaction Scores from ValueStar and eBay	178	(1)
Evidence of the Lemons Effect	179	(2)
The Price of a Week-Old Car	179	(1)
Used Pickup Trucks	179	(1)
California Kiwifruit	179	(1)
Used Baseball Pitchers	180	(1)
Uninformed Sellers and Knowledgeable Buyers: Insurance	181	(5)
Health Insurance	182	(1)
Equilibrium with All High-Cost Consumers	183	(1)
Responding to Adverse Selection in Insurance: Group Insurance	184	(1)
The Uninsured	185	(1)
Other Types of Insurance	185	(1)
A Closer Look: Genetic Testing, Thrill Seekers, and Insurance	186	(1)
Moral Hazard	186	(2)
Economic Puzzle: Bicycle Theft Insurance	188	(1)
Economic Experiment: Rolling for Lemons	189	(1)
Economic Experiment: Bike Insurance	189	(1)
Using the Tools	190	(4)
Environmental Policy	194	(24)
The Optimal Level of Pollution and Pollution Taxes	194	(7)
Application: Finding the Optimal Level of Sulfur Dioxide Emissions	197	(1)
A Firm's Response to a Pollution Tax	198	(1)
The Market Effects of a Pollution Tax	199	(2)
Traditional Regulation: Uniform Abatement and Command-and-Control Policies	201	(3)
Uniform Abatement with Permits	201	(1)
Command and Control	202	(1)
Market Effects of Pollution Regulations	202	(1)
A Closer Look: Dear Abby and Environmental Policy	203	(1)
Marketable Pollution Permits	204	(2)
Voluntary Exchange and Marketable Permits	204	(1)
Supply, Demand, and the Price of Marketable Permits	205	(1)
Application: Marketable Permits for Sulfur Dioxide	206	(1)
Economic Puzzle: Why Did the Price of Permits Drop?	206	(1)
Global Warming and Public Policy	207	(4)
The Consequences of Global Warming	207	(1)
The Kyoto Agreement and Developing Nations	208	(1)
The Effects of a Carbon Tax	209	(1)
Marketable Permits and Offsets for Carbon?	209	(1)
A Closer Look: Giving the Gift of CO2	210	(1)
Ozone Pollution and the Automobile	211	(2)
Economic Experiment: Pollution Permits	213	(1)
Using the Tools	214	(4)
Public Goods and Public Choice	218	(15)
An Overview of Government Spending and Taxes	219	(1)
External Benefits and Inefficiency	220	(3)
Public Goods and External Benefits	221	(1)
Private Goods with External Benefits	221	(1)
Public Goods and the Free-Rider Problem	222	(1)
Economic Puzzle: Why Build a Three-Faced Clock Tower?	223	(1)
Overcoming the Free-Rider Problem	223	(1)
Applications: Asteroids and Wildlife	224	(1)
Asteroid Diversion	224	(1)
Preservation of Wolves	224	(1)
Public Choice	225	(5)
Voting and the Median-Voter Rule	225	(2)
A Closer Look: Are Politicians Like Ice-Cream Vendors?	227	(1)
Alternative Models of Government: Self-Interests and Special Interests	228	(1)
Which Theory or Viewpoint Is Correct?	229	(1)
Economic Experiment: Voluntary Contributions	230	(1)
Using the Tools	230	(3)
PART 4 Market Structures and Pricing	233	(144)
Production Technology and Cost	234	(26)
Introduction	235	(2)
Economic Cost Is Opportunity Cost	236	(1)
Short-Run Versus Long-Run Costs	236	(1)
The Fixed Production Facility: Short-Run Costs	237	(7)
Production and Marginal Product	237	(2)
Short-Run Total Cost	239	(1)
Short-Run Average Costs	240	(2)
Short-Run Marginal Cost	242	(1)
The Relationship Between Marginal Cost and Average Cost	243	(1)
Economic Puzzle: Same Average Cost at Two or Three Quantities?	244	(2)
Production and Cost in the Long Run	246	(8)
Expansion and Replication	246	(2)
Scaling Down and Indivisible Inputs	248	(1)
A Closer Look: Indivisible Inputs and the Cost of Fake Killer Whales	249	(1)
Scaling Down and Labor Specialization	250	(1)
Economies of Scale	250	(1)
A Closer Look: Scale Economies in Wind Power	251	(1)
Diseconomies of Scale	252	(1)
Actual Long-Run Average-Cost Curves	252	(1)
Short-Run Versus Long-Run Average Cost	253	(1)
Information Goods and First-Copy Cost	254	(1)
Using the Tools	255	(5)
Perfect Competition	260	(28)
Preview: Alternative Market Structures	262	(1)
The Firm's Short-Run Output Decision	263	(5)
The Total Approach: Computing Total Revenue and Total Cost	264	(1)
The Marginal Approach	265	(2)
Economic Profit and the Break-Even Price	267	(1)
Economic Puzzle: Fewer Deliveries and More Profit?	268	(1)
The Firm's Shut-Down Decision	268	(4)
Total Revenue, Variable Cost, and the Shut-Down Decision	269	(1)
The Shut-Down Price	270	(1)
Fixed Costs and Sunk Costs	271	(1)
Application: Break-Even and Shut-Down Prices for Corn Farmer	271	(1)
Short-Run Supply Curves	272	(4)
The Firm's Short-Run Supply Curve	272	(1)
The Short-Run Market Supply Curve	273	(1)
Market Equilibrium	274	(1)
A Closer Look: Wireless Women	275	(1)
The Long-Run Supply Curve for an Increasing-Cost Industry	276	(3)
Production Cost and Industry Size	276	(1)
Drawing the Long-Run Market Supply Curve	277	(1)
Application: Increasing-Cost Industries---Wolfram, Sugar, Rental Housing	278	(1)
Short-Run and Long-Run Effects of Changes in Demand	279	(2)
The Short-Run Response to an Increase in Demand	279	(1)
The Long-Run Response to an Increase in Demand	280	(1)
Long-Run Supply for a Constant-Cost Industry	281	(2)
Long-Run Supply Curve for a Constant-Cost Industry	281	(1)
Application: Hurricane Andrew and the Price of Ice	282	(1)
Economic Experiment: Butter Prices	283	(1)
Using the Tools	284	(4)
Monopoly and Price Discrimination	288	(24)
The Monopolist's Output Decision	290	(6)
Total Revenue and Marginal Revenue	290	(2)
The Marginal Principle and the Output Decision	292	(2)
Using the Marginal Principle to Pick the Profit-Maximizing Quantity and Price	294	(2)
The Social Cost of Monopoly	296	(4)
Deadweight Loss from Monopoly	296	(2)
Application: Ending the Monopoly on Internet Registration	298	(1)
Rent Seeking: Using Resources to Get Monopoly Power	299	(1)
Monopoly and Public Policy	300	(1)
Patents and Monopoly Power	300	(2)
Incentives for Innovation	300	(1)
Trade-Offs from Patents	301	(1)
A Closer Look: Barriers to Generic Drugs	302	(1)
Price Discrimination	302	(4)
Application: Senior Discounts in Restaurants	304	(1)
Price Discrimination and the Elasticity of Demand	304	(1)
A Closer Look: Interacting with a Soda Vending Machine on a Hot Day	305	(1)
Application: Movie Admission and Popcorn	306	(1)
Economic Puzzle: Why Are Hardback Books So Expensive?	306	(1)
Economic Experiment: Price Discrimination	307	(1)
Using the Tools	308	(4)
Market Entry and Monopolistic Competition	312	(14)
The Effects of Market Entry	314	(4)
Entry Squeezes Profits from Three Sides	315	(1)
Application: Woofer, Tweeter, and the Stereo Business	316	(1)
Entry Effects in the Real World	316	(1)
A Closer Look: Restricting Entry of On-Line Wine Merchants	317	(1)
Monopolistic Competition	318	(3)
When Entry Stops: Long-Run Equilibrium	319	(1)
Trade-Offs Between Average Cost and Variety	319	(1)
Application: Location and Consumer Travel Costs	320	(1)
Economic Puzzle: Lower Profit per Unit Sold?	321	(1)
Economic Experiment: Fixed Costs and Entry	322	(1)
Using the Tools	322	(4)
Oligopoly and Strategic Behavior	326	(30)
What Is an Oligopoly?	327	(2)
Cartel Pricing and the Duopolists' Dilemma	329	(7)
Price Fixing and the Game Tree	331	(1)
Predicting the Outcome of the Price-Fixing Game	332	(1)
A Closer Look: Vitamin, Inc. Gets Busted	333	(1)
Representing a Game with a Payoff Matrix	334	(1)
The Prisoners' Dilemma	334	(2)
Overcoming the Duopolists' Dilemma	336	(3)
Guaranteed Price Matching	336	(1)
Repeated Pricing Games with Retaliation for Underpricing	337	(1)
Application: Different Airline Ticket Prices	338	(1)
Price Fixing and the Law	339	(1)
Alternative Models of Oligopoly Pricing	340	(2)
Price Leadership	340	(1)
The Kinked Demand-Curve Model	341	(1)
The Insecure Monopolist and Entry Deterrence	342	(5)
The Passive Approach: Do Nothing to Deter Entry	342	(1)
The Entry Deterrence Approach: Use Limit Pricing to Deter Entry	343	(1)
Limit Pricing	344	(1)
When Is the Passive Approach Better?	345	(1)
A Closer Look: Crafty--and Illegal--Entry Deterrence in Europe	345	(1)
Applications: Aluminum, Plane Tickets, and Campus Bookstores	346	(1)
Entry Deterrence and Contestable Markets	347	(1)
Economic Puzzle: Ballpoint Pens from R.I.P.	347	(1)
The Advertisers' Dilemma	348	(2)
Game Theory and Nash Equilibrium	350	(2)
Economic Experiment: A Price-Fixing Game	352	(1)
Using the Tools	352	(4)
Market Structure and Public Policy	356	(21)
Natural Monopoly	357	(4)
Picking an Output Level	357	(1)
Will a Second Firm Enter?	358	(1)
Price Controls for a Natural Monopoly	359	(2)
Economic Puzzle: A Decrease in Demand Decreases the Price?	361	(1)
A Closer Look: Will Satellite Radio Become a Natural Monopoly?	361	(1)
Antiturst Policy	362	(5)
Breaking Up Monopolies	362	(1)
Blocking Mergers	363	(2)
Application: Merger Remedies for Xidex and Wonder Bread	365	(1)
A Closer Look: Is Tripoly Better Than Duopoly?	365	(2)
Economic Puzzle: Check the Yellow Pages?	367	(2)
Regulating Business Practices: Price Fixing, Tying, and Cooperative Agreements	367	(1)
Application: The Microsoft Case	368	(1)
A Brief History of U.S. Antitrust Policy	368	(1)
Deregulation of Airlines and Telecommunications	369	(2)
Deregulation of Airlines	370	(1)
Deregulation of Telecommunications Services	370	(1)
Deregulation of Electricity	371	(3)
Electricity Deregulation in California	372	(1)
Electricity Deregulation in Other U.S. States	373	(1)
Using the Tools	374	(3)
PART 5 The Labor Market and Income Distribution	377	(42)
The Labor Market and the Distribution of Income	378	(26)
The Demand for Labor	379	(5)
Labor Demand by an Individual Firm in the Short Run	379	(3)
Market Demand for Labor in the Short Run	382	(1)
What About Labor Demand in the Long Run?	383	(1)
Short-Run versus Long-Run Demand	383	(1)
The Supply of Labor	384	(3)
The Individual Labor-Supply Decisions: How Many Hours to Work?	384	(1)
The Market Supply Curve for Labor	385	(2)
A Closer Look: The Economics of Not Working	387	(1)
Economic Puzzle: Response to a Wage Cut?	387	(1)
Labor Market Equilibrium	387	(4)
Changes in Demand and Supply for Labor	388	(1)
The Market Effects of the Minimum Wage Laws	389	(1)
A Closer Look: Foreign Sweatshops and Industry Codes of Conduct	390	(1)
The Trade-Offs from Immigration	390	(1)
Explaining Differences in Wages and Income	391	(5)
Why Do Wages Differ Across Occupations?	391	(2)
The Gender Pay Gap	393	(1)
Racial Discrimination	393	(1)
A Closer Look: Racial Discrimination in Hiring	394	(1)
Why Do College Graduates Earn Higher Wages?	395	(1)
The Distribution of Income	396	(4)
Income Distribution Facts	396	(1)
Recent Changes in the Distribution of Income	397	(1)
Changes in the Top End of Income Distribution: 1920--1998	398	(2)
Using the Tools	400	(4)
Beyond Perfect Competition: Unions, Monopsony, and Imperfect Information	404	(15)
Labor Unions	405	(4)
A Brief History of Labor Unions in the United States	406	(1)
Labor Unions and Wages	406	(1)
A Closer Look: Working Conditions and Unions	407	(1)
Effects of Unions on Worker Productivity and Turnover	408	(1)
Monopsony Power	409	(5)
Picking a Workforce and a Wage	409	(2)
Monopsony versus Perfect Competition	411	(1)
Monopsony and a Minimum Wage	412	(1)
Monopsony and the Real World	413	(1)
A Closer Look: Pubs and Labor-Supply Curve	414	(1)
Imperfect Information and Efficiency Wages	414	(1)
Economic Puzzle: Higher Wages at Ford Motor Company	415	(1)
Using the Tools	416	(3)
PART 6 The International Economy	419	(25)
International Trade and Public Policy	420	(24)
Benefits from Specialization and Trade	421	(5)
Production Possibilities Curve	422	(1)
Comparative Advantage and the Terms of Trade	423	(1)
The Consumption Possibilities Curve	424	(1)
The Employment Effects of Free Trade	425	(1)
Protectionist Policies	426	(4)
Import Ban	426	(1)
Quotas and Voluntary Export Restraints	427	(2)
Tariffs	429	(1)
Responses to Protectionist Policies	429	(1)
Rationales for Protectionist Policies	430	(3)
To Shield Workers from Foreign Competition	431	(1)
To Nurture Infant Industries	431	(1)
A Closer Look: The Cost of Protecting Jobs	431	(1)
A Closer Look: Protection for Candle Makers	432	(1)
To Help Domestic Firms Establish Monopolies in World Markets	432	(1)
A Brief History of International Tariff and Trade Agreements	433	(1)
Recent Policy Debates and Trade Agreements	434	(6)
Are Foreign Producers Dumping Their Products?	435	(1)
Do Trade Laws Inhibit Environmental Protection?	436	(2)
Does Trade Cause Inequality?	438	(1)
Why Do People Protest Against Free Trade?	438	(2)
Economic Experiment: Protectionist Policies	440	(1)
Using the Tools	440	(4)
Glossary	444	(6)
Answers to Odd-Numbered Problems and Discussion Questions	450	(7)
Index	457