Microeconomics Theory and Applications

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  • Edition: 4th
  • Format: Hardcover
  • Copyright: 2002-12-05
  • Publisher: Oxford University Press
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Fully revised and expanded in this fourth edition, Microeconomics: Theory and Applications presents all the standard topics of traditional microeconomic theory while offering a modern approach that reflects the many recent developments in the field. With its student-friendly writing style andclear presentation of graphs, this is an ideal text for undergraduate courses in intermediate microeconomics and business programs. Unique Features * Offers a balance of traditional microeconomic topics while addressing contemporary issues and concerns * Introduces an important international dimension to microeconomics, reflecting the strong trend toward globalization in tastes, production, and distribution in today's world * Presents an "At the Frontier" section in each chapter that highlights the most exciting recent examples of advanced theoretical developments in microeconomics New and Expanded Treatment in the Fourth Edition * Includes a new chapter, "Choice Under Uncertainty," which examines consumer choices, risk, and uncertainty * Provides more than 130 new and updated real-world examples of how microeconomic theory can be used to analyze and possibly resolve important present-day economic problems * Offers expanded treatment of important topics such as game theory, financial microeconomics, the new international economies of scale, economics of information, and market structure, efficiency, and regulation * Features Internet site addresses for the most important topics in each chapter Web Site A companion web site is now available at www.oup.com/us/salvatore. New to this fourth edition, this practical learning tool offers updated material, additional examples, and PowerPoint lecture slides for each textbook chapter.

Table of Contents

Introduction To Microeconomics
Wants and Scarcity
Can Human Wants Ever Be Fully Satisfied?
Scarcity: The Pervasive Economic Problem
More Health Care Means Less of Other Goods and Services
Functions of an Economic System
Microeconomic Theory and the Price System
The Circular Flow of Economic Activity
Determination and Function of Prices
Drought in Kansas Sends Wheat Prices Soaring
What Role for the Government?
Economic Inefficiencies Cause Collapse of Communist Regimes
The Margin: The Key Unifying Concept in Microeconomics
The Crucial Importance of the Concept of the Margin
Marginal Analysis in TV Advertising
Some Clarification on the Use of the Margin
Specializing, Exchange, and the International Framework of Microeconomics
Specialization and Exchange
The International Framework of Miocroeconomics
Even the IBM PC and the Boeing 777 Are Not All American!
Models, Methodology, and Value Judgments
Models and Methodology
Positive and Normative Analysis
At the Frontier Do Economists Ever Agree on Anything?
Basic Demand and Supply Analysis
Market Analysis
Market Demand
Demand Schedule and Demand Curve
Changes in Demand
Market Supply
Supply Schedule and Supply Curve
Changes in Supply
When Is a Market in Equilibrium?
Adjustment to Changes in Demand and Supply: Comparative Static Analysis
Adjustments to Changes in Demand
Adjustments to Changes in Supply
Changes in Demand and Supply and Coffee Prices
Domestic Demand and Supply, Imports, and Prices
The Large U.S. Automotive Trade Deficit and U.S. Auto Prices
Interfering With Versus Working Through the Market.
Rent Control Harms the Housing Market
The Economics of U.S. Farm Support Programs
Working Through the Market with an Excise Tax
Fighting the Drug War by Reducing Demand and Supply
At the Frontier Nonclearing Market Theory
Theory Of Consumer Behavior and Demand
Consumer Preferences and Choice
Utility Analysis
Total and Marginal Utility
Cardinal or Ordinal Utility?
Does Money Buy Happiness?
Consumer's Tastes: Indifference Curves
Indifference Curves--What Do They Show?
Characteristics of Indifference Curves
The Marginal Rate of Subsititution
Some Special Types of Indifference Curves
How Ford Decided on the Characteristics of Its Taurus
International Convergence of Tastes
Gillette Introduces the Sensor and Mach3 Razors--Two Truly Global Products
The Consumer's Income and Price Constraints: The Budget Line
Definition of the Budget Line
Changes in Income and Prices and the Budget Line
Time as a Constraint
Consumer's Choice
Utility Maximization
Utility Maximization and Government Warnings on Junk Food
Corner Solutions
Water Rationing in the West
Marginal Utility Approach to Utility Maximization
At the Frontier The Theory of Revealed Preference
Consumer Behavior and Individual Demand
Changes in Income and the Engel Curve
Income-Consumption Curve and Engel Curve
Engel's Law After a Century
Normal and Inferior Goods
Many People Are Blowing Their Pension Money Long Before Retirement
Changes in Price and the Individual Demand Curve
Higher Alcohol Prices Would Sharply Reduce Youth Alcohol Use and Traffic Deaths
Substitution and Income Effects
How Are the Substitution and Income Effects Separated?
The Substitution and Income Effects of a Gasoline Tax
Substitution and Income Effects for Inferior Goods
Substitution Between Domestic and Foreign Goods
What Is an ""American"" car?
Some Applications of Indifference Curve Analysis
Is a Cash Subsidy Better Than Food Stamps?
Consumer Surplus Measures Unpaid Benefits
Benefits from Exchange
At the Frontier The Characteristics Approach to Consumer Theory
Market Demand and Elasticities
The Market Demand for a Commodity
The Demand for Big Macs
Measuring the Price Elasticity of Demand
Price Elasticity of Market Demand
Price Elasticity Graphically
Price Elasticity and Total Expenditures
What Determines Price Elasticity?
The Price Elasticity of Demand for Clothing Increaces with Time
Income Elasticity of Demand
Transatlantic Air Travel Is a Luxury, Flour an Inferior Good
Cross Elasticity of Demand
Margarine and Butter are Substitutes, Cereals and Fresh Fish Complements
Price and Income Elasticities of Imports and Exports
Price and Income Elasticities of Imports and Exports in the Real World
Marginal Revenue and Elasticity
Demand, Total Revenue, and Marginal Revenue
Geometry of Marginal Revenue Determination
Marginal Revenue, Price, and Elasticity
The U.S. Consumer Demand for Alcoholic Beverages
At the Frontier The Marketing Revolution with Micromarketing
Choice Under Uncertainty
Risk and Uncertainty in Demand Choices
The Risk that Coca Cola Faced in Changing Its Secret Formula
Measuring Risk
Probability Distributions
The Standard Deviation
Risk and Crime Deterrence
Utility Theory and Risk Aversion
Different Preferences Toward Risk
Maximizing Expected Utility
America's Gambling Craze
Insurance and Gambling
Why Do Some Individuals Buy Insurance?
Why Do Some Individuals Gamble?
Gambling and Insuring by the Same Individual--A Seeming Contradiction
Risk Aversion and Indefference Curves
Spreading Risks in the Choice of a Portfolio
Reducing Risk
Gathering More Information
Some Disasters Are Non-Diversifiable
At the Frontier Foreign Exchange Risk and Hedging
Production, Costs, and Competitive Markets
Production Theory
Relating Outputs to Inputs
Organization of Production
Classification of Inputs
Production with One Variable Input
Total, Average, and Marginal Product
The Geometry of Average and Marginal Product Curves
The Law of Diminishing Returns
Economics--The Dismal Science Because of Diminishing Returns
Production with Two Variable Inputs
What Do Isoquants Show?
Derivation of Total Product Curves from the Isoquant Map
The Shape of Isoquants
Characteristics of Isoquants
Economic Region of Production
Fixed-Proportions Production Functions
Trading Traveling Time for Gasoline Consumption on the Nation's Highways
Constant, Increasing, and Decreasing Returns to Scale.
General Motors Decides Smaller is Better
Technological Progress and International Competitiveness
Meaning and Importance of Innovations
How Do Firms Get New Technology?
Innovations and the International Competitiveness of U.S. Firms
How Xerox Lost, Regained, but Is now Struggling to Remain Internationally Competitive
Score Card on American Industry
At the Frontier The New Computer-Aided Production Revolution and the International Competitiveness of U.S. Firms
Costs of Production
The Nature of Production Costs
The Cost of Attending College
Cost in the Short Run
Total Costs
Per-Unit Costs
Geometry of Per-Unit Cost Curves
Per-Unit Cost Curves in Corn Production
Cost in the Long Run
Isocost Lines
Least-Cost Input Combination
Cost Minimization in the Long Run and in the Short Run
The Least-Cost Combination of Gasoline and Driving Time
Expansion Path and Long Run Cost Curves
Expansion Path and Long-Run Total Cost Curves
Derivation of the Long-Run Average and Marginal Cost Curves
The Relationship Between Short- and Long-Run Average Cost Curves
Long-Run Average Cost Curve in Electricity Generation
Shape of the Long-Run Average Cost Curve
L-Shaped Long-Run Average cost Curves in Various Industries
The Minimum Efficient Scale in Various U.S. Food Industries
Multiproduct Firms and Dynamic Changes in Costs
Economies of Scope
The Learning Curve
The Learning Curve for the Lockheed L-1011 Aircraft and for Semiconductors
At the Frontier Minimizing Costs Internationally--The New Economies of Scale
Price and Output Under Perfect Competition
Market Structure: Perfect Competition
Competition in the New York Stock Market
Price Determination in the Market Period
Short-Run Equilibrium of the firm
Total Approach: Maximizing the Positive Difference Between Total Revenue and Total Costs
Marginal Approach: Equating Marginal Revenue and Marginal Cost
Profit Maximization or Loss Minimiaztion?
Short-Run Supply Curve and Equilibrium
Short-Run Supply Curve of the Firm and Industry
The Supply Curve of Petroleum from Tar Sands
The Short-Run World Supply Curve of Copper
Short-Run Equilibrium of the Industry and Firm
Long-Run Equilibrium of the Firm and Industry
Long-Run Equilibrium of the Firm
Long-Run Equilibrium of the Industry and Firm
Efficiency Implications of Perfect Competition
Long-Run Adjustment in the U.S. Cotton Textile Industry
Constant, Increasing, and Decreasing Cost Industries
Constant Cost Industries
Increasing Cost Industries
Decreasing Cost Industries
International Competition in the Domestic Economy
Analysis of Competitive Markets
Producer Surplus
Consumers' and Producers' Surplus, and the Efficiency of Perfect Competition
Welfare Effects of an Excise Tax
Effects of an Import Tariff
At the Frontier Auctioning Airwaves
Appendix The Foreign Exchange Market and the Dollar Exchange Rate
Foreign Exchange Quotations
Depreciation of the Dollar and Profitability of U.S. Firms
Imperfectly Competitive Markets
Price and Output Under Pure Monopoly
Pure Monopoly--The Opposite Extreme from Perfect Competition
Definition and Sources of Monopoly
Barriers to Entry and Monopoly by Alcoa
The Monopolist Faces the Market Demand Curve for the Commodity
DeBeers Abandons Its Diamond Monopoly
Short-Run Equilibrium Price and Output
Total Approach: Maximizing the Positive Difference Between Total Revenue and Total Costs
Margianl Approach: Equating Marginal REvenue and Marginal Cost
Profit Maximization or Loss Minimization?
Short-Run Marginal Cost and Supply
Long-Run Equilibrium price and Output
Profit Maximization in the Long Run
Monopoly Profits in the New York Taxi Industry
Comparison with Perfect Competition: The Social Cost of Monopoly
Estimates of the Social Cost of Monopoly in the United States
Profit Maximization by the Muliplant Monopolist
Short-Run Equilibrium
Long-Run Equilibrium
Price Discrimination--A Monopolist's Method of Increasing Profits
Charging Different Prices for Different Quantities
First Degree Price Discrimination in Undergraduate Financial Aid at American Colleges
Charging Different Prices in Different Markets
Price discrimination by Con Edison
International Price Discrimination and Dumping
Kodak Antidumping Victory Over Fuji--But Still Faces Competitive Problems
Two-Part Tariff, Tying, and Bundling
Two-Part Tariff
Tying and Bundling
Bundling in the Leasing of Movies
Analysis of Monopoly Markets
Per-Unit Tax: Perfect Competition and Monopoly Compared
Price Discrimination and the Existence of the Industry
Do Monopolists Suppress Inventions?
At the Frontier Windows 95--A Software Near Monopoly--Lands Microsoft in the Courts
Price and Output Under Monopolistic Competition and Oligopoly
Monopolistic Competition: Many Sellers of a Differentiated Product
Monopolistic Competition: Short-Run and Long-Run Analysis
Price and Output Decisions Under Monopolistic Competition
Product Variation and Selling Expenses
Advertisers Are Taking on Competitors by Name . . . and Being Sued
How Useful Is the Theory of Monopolistic Competition?
Oligopoly: Interdepenence Among the Few Producers in the Industry
Industiral concentration in the United States
The Cournot and the Kinked-Demand Curve Models
The Cournot Model: Interdependence Not Recognized
The Kinked-Demand Curve Model: Interdependence Recognized
Collusion: Cartels and Price Leadership Models
A Centralized Cartel Operates as a Monopolist
The Organization of Petroleum Exporting Countries (OPEC) Cartel
Market-Sharing Cartel
The Market-Sharing Ivy Cartel
Price Leadership
Long-Run Adjustments and Efficiency Implications of Oligopoly
Long-Run Adjustments in Oligopoly
Nonprice Competition Among Oligopolists
Welfare Effects of Oligopoly
Firm Size and Profitability
Other Oligopolistic Pricing Practices
Limit Pricing as a Barrier to Entry
Cost-Plus Pricing: A Common Short-Cut Pricing Practice
At The Frontier The Art of Devising Air Fares
The March of Global Oligopolists
Risin Competition in Global Banking
Globalization of the Pharmaceutial Industry
Appendix The Cournot and Stackelberg Models
The Cournot Model--An Extended Treatment
The Stackelberg Model
Game Theory and Oligopolistic Behavior
Game Theory: Definition, Objectives, and Usefulness
Military Strategy and Strategic Business Decisions
Dominant Strategy and Nash Equilibrium
Dominant Strategy
Nash Equilibrium
Dell Computers and Nash Equilibrium
The Prisoners' Dilemma, Price and Nonprice Competition, and Cartel Cheating
The Prisoners' Dilemma: Definition and Importance
Price and Nonprice Competition, Cartel Cheating, and the Prisoners' Dilemma
The Airlines' Fare War and the Prisoners' Dilemma
Repeated Games and Tit-for-Tat Strategy
Strategic Moves
Threats, Commitments, and Credibility
Entry Deterrence
Wal-Mart's Preemptive Expansion Marketing Strategy
Strategic Moves and International Competitiveness
Companies' Strategic Mistakes and Failures
At the Frontier The Virtual Corporation
Market Structure, Efficiency, and Regulation
Market Structure and Efficiency
Measuring Monopoly Power
The Lerner Index as a Measure of Monopoly Power
Concentration and Monopoly Power: The Herfindahl Index
Contestable Markets: Effective Competition Even with Few Firms
At the Frontier Functioning of Markets and Experimental Economics
Social Costs and Dynamic Benefits of Monopoly Power
Controlling Monopoly Power: Antitrust Policy
Antitrust Policy in Action--The Breakup of AT&T and the Creation of Competition in the Long-Distance Telephone Service
Regulation and the Price of International Telephone Calls in Europe
Public-Utility Regulation
Public Utilities as Natural Monopolies
Difficulties in Public-Utility Regulation
Regulated Electricity Rates for Con Edison--A Thing of the Past
The Deregulation Movement
Deregulation of the Airline Industry: An Assessment
Deregulation and the New Merger Boom
Regulating International Competition: Voluntary Export Restraints on Japanese Automobiles to the United States
Some Applications of Market Structure, Efficiency, and Regulation
Regulating Monopoly Price
Regulation and Peak-Load Pricing
Regulation and Transfer Pricing
Pricing and Employment Of Inputs
Input Price and Employment Under Perfect Competition
Profit Maximization and Optimal Input Employment
The Demand Curve of a Firm for an Input
The Demand Curve of a Firm for One Variable Input
The Demand Curve of a Firm for One of Several Variable Inputs
The Market Demand Curve for an Input and its Elasticity
The Market Demand Curve for an Input
The Increase in the Demand for Temporary Workers
Determinants of the Price Elasticity of Demand for an Input
Price Elasticity of Demand for Inputs in Manufacturing Industries
The Supply Curve of an Input
The Supply of Labor by an Individual
Substitution and Income Effects of a Wage Increase
Labor Force Participation Rates
The Market Supply Curve for an Input
Backward-Bending Supply Curve of Physicians' Services and Other Labor
Pricing and Employment of an Input
Labor Productivity and Total Compensation in the United States and Abroad
Input Price Equalitzation Among Industries, Regions, and Countries
Input Price Equalitzation Among Industries and Regions of a Country
Input Price Equalitzation Among Countries
Convergence in Hourly Compensation in the Leading Industrial Countries
Economic Rent: An Unnecessary Payment to Bring Forth the Supply of an Input
Analysis of Labor Markets Under Perfect Competition
Substitution and Income Effects of a Wage Rate Change
Overtime Pay and the Supply of Labor Services
Wage Differentials
Effect of Minimum Wages
At the Frontier Do Minimum Wages Really Reduce Employment
Input Price and Employment Under Imperfect Competition
Profit Maximization and Optimal Input Employment
The Demand Curve of a Firm for an Input
The Demand Curve of a Firm for One Variable Input
The Demand Curve of a Firm for One of Several Variable Inputs
The Market Demand Curve, and Input Price and Employment
the Dynamics of the Engineers' Shortage
Monopsony: A Single Firm Hiring an Input
Occupational Licensing, Mobility, and Imperfect Labor Markets
Monopsony Pricing and Employment of One Variable Input
Monopsonistic Exploitation in Major League Baseball
Monopsony Pricing and Employment of Several Variable Inputs
Imperfect Competition in Labor Markets and the Pay of Top Executives
International Migration and the Brain Drain
British and Russian Brain Drain Is U.S. Brain Gain
The Debate Over U.S. Immigration Policy
Analysis of Imperfect Input Markets
Regulation of Monopsony
Bilateral Monopoly: A Monopsonistic Buyer Facing a Monopolistic Seller
Effect of Labor Unions on Wages
Economics of Discrimination in Employment
At the Frontier Discrimination, and Gender and Race Wage Differentials
Financial Microeconomics: Interest, Investment, and the Cost of Capital
Lending-Borrowing Equilibrium
The Market Rate of Interest with Borrowing and Lending
Personal Savings in the United States
Saving-Investment Equilibrium
Saving-Investment Equilibrium Without Borrowing and Lending
Saving-Investment Equilibrium With Borrowing and Lending
The Market Rate of interest with Saving and Investment, Borrowing and Lending
Personal and Business Savings, and Gross and Net Private Domestic Investment in the United States
Investment Decisions
Net Present Value Rule for Investment Decisions: The Two-Period Case
Net Present Value Rule for Investment Decisions: The Multiperiod Case
Fields of Education and Higher Lifetime Earnings in the United States
Determinants of the Market Rates of Interest
Nominal and REal Interest RAtes in the United States: 1981-2000
Investment Risks and Returns in the United States
The Cost of Capital
Cost of Debt
Cost of Equity Capital: The Risk-Free Rate Plus Premium
Cost of Equity Capital: The Dividend Valuation Model
Cost of Equity Capital: The Capital Asset Pricing Model (CAPM)
Weighted Cost of Capital
At the Frontier Derivatives: Useful But Dangerous
Effects of Foreign Investments on the Receiving Nation
Fluctuations in the Flow of Foreign Direct Investments to the United States
Some Applications of Financial Microeconomics
Investment in Human Capital
Investment in Human Capital and Hours of Work
Pricing of Exhaustible Resources
Management of Nonexhaustible Resources
General Equilibrium, Efficiency, and Public Goods
General Equilibrium and Welfare Economics
Partial Versus General Equilibrium Analysis
Effect of a Reduction in Demand for Domestically Produced Automobiles in the United States
General Equilibrium of Exchange and Production
General Equilibrium of Exchange
General Equilibrium of Production
Derivation of the Production-Possibilities Frontier
General Equilibrium of Production and Exchange and Pareto Optimality
General Equilibrium of Production and Exchange Simultaneously
Marginal Conditions for Economic Efficiency and Pareto Optimality
Perfect Competition, Economic Efficiency, and Equity
Perfect Competition and Economic Efficiency
Efficiency and Equity
Watering Down Efficiency in the Pricing of Water
General Equilitbrium of Production and Exchange with International Trade
The Basis and the Gains from International Trade
Welfare Economics and Utility-Possibilities Frontiers The Meaning of Welfare Economics
""The Painful Prescription: Rationing Hospital Care""
Utility-Possibilities Frontier
Grand Utility-Possibilities Frontier
From Welfare to Work--The Success of Welfare Reform in the United States
Social Policy Criteria
Measuring Changes in Social Welfare
Arrow's Impossibility Theorem
At the Frontier: The Hotly-Debated Issue of Income Inequality in the United States
Trade Protection and Economic Welfare
Welfare Effects of Removing U.S. Trade Restrictions
Externalities, Public Goods, and the Role of Government
Externalities Defined
Externalities and Market Failure
The Case for Government Support for Basic Research
Externalities and Property Rights
Commercial Fishing: Fewer Boats but Exclusive Rights?
Public Goods
Nature of Public Goods
The Economics of a Lighthouse and Other Public Goods
Provision of Public Goods
At the Frontier Efficiency Versus Equity in U.S. Tax System
Benefit-Cost Analysis
Benefit-Cost Analysis and the SST
The Theory of Public Choice
Meaning and Importance of Public-Choice Theory
The Public-Choice Process
Policy Implications of Public-Choice Theory
Strategic Trade Policy
Strategic and Industrial Policy in the United States
Government Control and Regulation of Environmental Pollution
Environmental Pollution
Optimal Pollution Control
Direct Regulation and Effluent Fees for Optimal Pollution Control
The Market for Dumping Rights
The Economics of Information
The Economics of Search
Search Costs
Searching for the Lowest Price
Search and Advertising
No Haggling Value Pricing in Car Buying
At the Frontier The Internet and the Information Revolution
Asymmetric Information: The Market for Lemons and Adverse Selection
Asymmetric Information and the Market for Lemons
The Insurance MArket and Adverse Selection
Market Signaling
The Problem of Moral Hazard
Increased Disability Payments Reduce Labor-Force Participation
Medicare and Medicaid and Moral Hazard
The Principal-Agent Problem
Do Golden Parachutes Reward Failure?
The Efficiency Wage Theory
The Efficiency Wage at Ford
Mathematical Appendix
Answers to Selected Problems
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