Price Theory and Applications: Decisions, Markets, and Information

by Jack Hirshleifer , Amihai Glazer , David Hirshleifer

• ISBN13: 9780521523424
• ISBN10: 0521523427
• eBook ISBN(s): 9780511343285
• Edition: 7th
• Format: Paperback
• Copyright: 2005-09-12
• Publisher: Cambridge University Press
• More Book Details

Summary

This new seventh edition of the book offers extensive discussion of information, uncertainty, and game theory. It contains over a hundred examples illustrating the applicability of economic analysis not only to mainline economic topics but also issues in politics, history, biology, the family, and many other areas. These discussions generally describe recent research published in scholarly books and articles, giving students a good idea of the scientific work done by professional economists. In addition, at appropriate places the text provides 'applications' representing more extended discussions of selected topics including rationing in wartime (Chapter 5), import quotas (Chapter 7), alleged monopolistic suppression of inventions (Chapter 9), minimum wage laws (Chapter 11), the effects of Social Security upon saving (Chapter 15), fair division of disrupted property (Chapter 16) and whether individuals should pay ransom to a kidnapper (Chapter 17).

Table of Contents

Preface	xiii
PART ONE. INTRODUCTION
The Nature and Scope of Economics	3	(24)
Economics as a Social Science	4	(5)
``Economic Man''	9	(7)
Rationality	9	(3)
Human Goals -- The Self-Interest Assumption	12	(4)
Ignorance and Uncertainty	16	(1)
Market and Nonmarket Interactions	16	(2)
Allocation by Prices -- The Market System	18	(2)
Behavior within Organizations	20	(1)
Positive and Normative Analysis: ``Is'' versus ``Ought''	20	(1)
Elements of the Economic System	21	(2)
Decision-Making Agents in the Economy	21	(1)
Scarcity, Objects of Choice, and Economic Activities	22	(1)
Microeconomics and Macroeconomics	23	(4)
Summary	23	(1)
Questions	24	(3)
Working Tools	27	(42)
Equilibrium: Supply-Demand Analysis	28	(21)
Balancing Supply and Demand	28	(2)
How Changes in Supply and Demand Affect Equilibrium	30	(6)
Algebra of Supply-Demand Analysis	36	(2)
An Application: Introducing a New Supply Source	38	(1)
Taxes on Transactions	39	(4)
An Application: Interdicting Supply	43	(3)
Price Ceilings and Price Floors	46	(3)
Finding an Optimum	49	(20)
The Logic of Total, Average, and Marginal Concepts	50	(4)
How Total, Average, and Marginal Magnitudes Are Related	54	(5)
An Application: Foraging -- When Is It Time to Pack Up and Leave?	59	(2)
Summary	61	(1)
Questions	62	(7)
PART TWO. PREFERENCE, CONSUMPTION, AND DEMAND
Utility and Preference	69	(24)
The Laws of Preference	70	(2)
Utility and Preference	72	(7)
Cardinal versus Ordinal Utility	73	(4)
Utility of Commodity Baskets	77	(2)
Characteristics of Indifference Curves	79	(4)
More on Goods and Bads	83	(3)
An Application: Charity	85	(1)
The Sources and Content of Preferences	86	(7)
Summary	90	(1)
Questions	90	(3)
Consumption and Demand	93	(34)
The Optimum of the Consumer	94	(10)
The Geometry of Consumer Choice	94	(3)
Optimum of the Consumer (Cardinal Utility)	97	(3)
Optimum of the Consumer (Ordinal Utility)	100	(4)
Complements and Substitutes	104	(3)
The Consumer's Response to Changing Opportunities	107	(8)
The Income Expansion Path	107	(3)
The Engel Curve	110	(2)
Price Expansion Path and Demand Curve	112	(3)
Income and Substitution Effects of a Price Change	115	(3)
An Application: How Can the Giffen Case Come About? How Likely Is It?	117	(1)
From Individual Demand to Market Demand	118	(2)
An Application: Subsidy versus Voucher	120	(7)
Summary	122	(2)
Questions	124	(3)
Applications and Extensions of Demand Theory	127	(30)
The Engel Curve and the Income Elasticity of Demand	128	(4)
The Demand Curve and the Price Elasticity of Demand	132	(4)
The Cross-Elasticity of Demand	136	(1)
Fitting a Demand Curve	137	(5)
Constant Slope versus Constant Elasticity	138	(1)
General Demand Functions	139	(3)
Determinants of Responsiveness of Demand to Price	142	(2)
Multiple Constraints -- Rationing	144	(13)
Coupon Rationing	144	(2)
Point Rationing	146	(5)
Summary	151	(1)
Questions	152	(5)
PART THREE. THE FIRM AND THE INDUSTRY
The Business Firm	157	(34)
Why Firms? Entrepreneur, Owner, Manager	158	(7)
Economic Profit versus Accounting Profit	160	(1)
The Separation of Ownership and Control	160	(5)
The Optimum of the Firm in Pure Competition	165	(11)
The Shutdown Decision	172	(2)
An Application: Division of Output among Plants	174	(2)
Cost Functions	176	(6)
Short Run versus Long Run	176	(4)
Rising Costs and Diminishing Returns	180	(2)
An Application: Peak versus Off-Peak Operation	182	(9)
Summary	186	(1)
Questions	187	(4)
Equilibrium in the Product Market -- Competitive Industry	191	(30)
The Supply Function	192	(9)
From Firm Supply to Market Supply: The Short Run	192	(3)
Long-Run and Short-Run Supply	195	(4)
External Economies and Diseconomies	199	(2)
Firm Survival and the Zero-Profit Theorem	201	(2)
The Benefits of Exchange: Consumer Surplus and Producer Surplus	203	(4)
An Application: The Water-Diamond Paradox	205	(1)
An Application: Benefits of an Innovation	206	(1)
Transaction Taxes and Other Hindrances to Trade	207	(14)
Transaction Taxes	208	(1)
Supply Quotas	209	(1)
An Application: Import Quotas	210	(3)
Price Ceilings and ``Shortages''	213	(4)
Summary	217	(1)
Questions	218	(3)
Monopolies, Cartels, and Networks	221	(36)
The Monopolist's Profit-Maximizing Optimum	222	(9)
Price-Quantity Solution	222	(4)
Monopoly versus Competitive Solutions	226	(2)
An Application: Author versus Publisher	228	(3)
An Application: Monopolist with Competitive Fringe	231	(1)
Monopoly and Economic Efficiency	231	(3)
Regulation of Monopoly	234	(4)
Monopolistic Price Discrimination	238	(6)
Market Segmentation	238	(3)
Block Pricing	241	(2)
Perfect Discrimination	243	(1)
Cartels	244	(4)
Network Externalities	248	(9)
Demand for a Network Good	248	(2)
Monopoly or Competition?	250	(1)
The Lock-in Issue	250	(3)
Summary	253	(1)
Questions	254	(3)
Product Quality and Product Variety	257	(22)
Quality	258	(8)
Quality under Competition and Monopoly	259	(4)
An Application: Suppression of Inventions	263	(2)
Cartels and Quality	265	(1)
Variety	266	(13)
Product Variety under Monopoly	268	(2)
Blending Monopoly and Competition -- Monopolistic Competition	270	(5)
Summary	275	(1)
Questions	276	(3)
Competition Among the Few: Oligopoly and Strategic Behavior	279	(28)
Strategic Behavior: The Theory of Games	280	(8)
Patterns of Payoffs	280	(2)
An Application: Public Goods -- Two-Person versus Multiperson Prisoners' Dilemma	282	(1)
Pure Strategies	283	(3)
Mixed Strategies	286	(2)
Duopoly -- Identical Products	288	(9)
Quantity Competition	289	(4)
Price Competition	293	(2)
An Application: ``Most-Favored-Customer'' Clause	295	(2)
Duopoly -- Differentiated Products	297	(3)
Quantity Competition	297	(1)
Price Competition	298	(2)
Oligopoly, Collusion, and Numbers	300	(7)
An Application: The ``Kinked'' Demand Curve	300	(2)
Oligopoly and Numbers	302	(2)
Summary	304	(1)
Questions	304	(3)
Dealing with Uncertainty -- The Economics of Risk and Information	307	(32)
Decisions under Uncertainty	308	(8)
Expected Gain versus Expected Utility	308	(1)
Risk Aversion	309	(3)
Risk-Bearing and Insurance	312	(4)
The Value of Information	316	(1)
Asymmetric Information	317	(8)
Adverse Selection -- The Lemons Problem	317	(4)
Conveying Quality through Reputation	321	(2)
Do Prices Signal Quality? Information as a Public Good	323	(2)
Conveying Information -- Advertising	325	(1)
Herd Behavior and Informational Cascades	325	(3)
Copyright, Patents, and Intellectual Property Rights	328	(11)
Summary	332	(2)
Questions	334	(5)
PART FOUR. FACTOR MARKETS AND INCOME DISTRIBUTION
The Demand for Factor Services	339	(36)
Production and Factor Employment with a Single Variable Input	340	(9)
The Production Function	340	(1)
Diminishing Returns	340	(3)
From Production Function to Cost Function	343	(2)
The Firm's Demand for a Single Variable Input	345	(4)
Production and Factor Employment with Several Variable Inputs	349	(13)
The Production Function	350	(5)
Factor Balance and Factor Employment	355	(3)
The Firm's Demand for Inputs	358	(4)
The Industry's Demand for Inputs	362	(2)
Monopsony in the Factor Market	364	(2)
An Application: Minimum-Wage Laws	366	(9)
Summary	371	(2)
Questions	373	(2)
Resource Supply and Factor-Market Equilibrium	375	(34)
The Optimum of the Resource-Owner	376	(9)
An Application: The Incentive Effects of ``Welfare'' and Social Security	382	(3)
Personnel Economics: Managerial Applications of Employment Theory	385	(5)
The Principal-Agent Problem	385	(1)
Paying by the Piece	386	(3)
Signalling	389	(1)
Factor-Market Equilibrium	390	(5)
From Individual Supply to Market Supply	390	(1)
Demand and Supply Together	391	(1)
An Application: Sources of Growing Wage Inequality	392	(3)
Monopolies and Cartels in Factor Supply	395	(2)
The ``Functional'' Distribution of Income	397	(5)
The Traditional Classification: Land, Labor, and Capital	397	(1)
Capital, Rate of Return, and Interest	398	(4)
Economic Rent	402	(7)
Summary	403	(1)
Questions	404	(5)
PART FIVE. EXCHANGE
Exchange, Transaction Costs, and Money	409	(46)
Pure Exchange: The Edgeworth Box	410	(6)
Supply and Demand in Pure Exchange	416	(7)
An Application: Market Experiments in Economics	420	(3)
Exchange and Production	423	(7)
Imperfect Markets: Costs of Exchange	430	(10)
How Perfect Are Markets?	430	(3)
Proportional Transaction Costs	433	(4)
Lump-Sum Transaction Costs	437	(3)
The Role of Money	440	(3)
Money as Medium of Exchange	440	(2)
Money as Temporary Store of Value	442	(1)
An Application: Auctions	443	(12)
The English Auction	445	(1)
Sealed-Bid Second-Price Auction	445	(1)
Sealed-Bid First-Price Auction	445	(1)
The Dutch Auction	446	(2)
Summary	448	(1)
Questions	449	(6)
PART SIX. ECONOMICS AND TIME
The Economics of Time	455	(42)
Present versus Future	456	(3)
Consumption Choices over Time: Pure Exchange	459	(5)
Borrowing-Lending Equilibrium with Zero Net Investment	459	(2)
An Application: Double Taxation of Saving?	461	(3)
Production and Consumption over Time: Saving and Investment	464	(4)
Investment Decisions and Project Analysis	468	(11)
The Separation Theorem	468	(1)
The Present-Value Rule	469	(6)
The Rate of Return (ROR) Rule	475	(4)
Real Interest and Monetary Interest: Allowing for Inflation	479	(3)
The Multiplicity of Interest Rates	482	(4)
An Application: The Discount Rate for Project Analysis	485	(1)
The Fundamentals of Investment, Saving, and Interest	486	(11)
Summary	490	(1)
Questions	491	(6)
PART SEVEN. POLITICAL ECONOMY
Welfare Economics: The Market and the State	497	(40)
Goals of Economic Policy	498	(8)
Efficiency versus Equity	498	(2)
Utilitarianism	500	(1)
Efficiency as the Sum of Consumer Surplus and Producer Surplus	500	(1)
Efficient Allocations in the Edgeworth Box	501	(1)
``Equity'' Reconsidered	502	(2)
An Application: How to Divide a Cake	504	(2)
The Theorem of the Invisible Hand: The Role of Prices	506	(2)
Efficient Consumption	506	(1)
Efficient Production	506	(1)
Efficient Balance between Production and Consumption	507	(1)
``Market Failures''	508	(7)
Monopoly	508	(1)
Externalities	508	(5)
The Coase Theorem	513	(2)
The Commons: The Consequences of Unrestricted Access	515	(3)
Public Goods	518	(11)
Efficient Production and Consumption of Public Goods	518	(3)
Voluntary Provision of Nonexcludable Public Goods -- Free-Riding	521	(4)
An Extension: Weakest-Link versus Best-Shot Models of Public Goods	525	(4)
Appropriative Activity and Rent-Seeking	529	(8)
Summary	533	(1)
Questions	534	(3)
Government, Politics, and Conflict	537	(30)
The Other Side of the Coin: Government Failures	538	(5)
Corruption as Government Failure	538	(1)
Political Competition and Its Limits	539	(2)
Politics and Special Interests	541	(2)
Voting as an Instrument of Control	543	(7)
Majority and Minority -- ``Log-Rolling''	544	(1)
The Cycling Paradox	545	(1)
The Median-Voter Theorem	546	(4)
Conflict and Cooperation	550	(17)
Sources of Cooperation and Conflict	550	(7)
Conflict and Game Theory	557	(4)
An Application: Should You Pay Ransom?	561	(2)
Summary	563	(1)
Questions	564	(3)
Answers to Selected Questions	567	(30)
Name Index	597	(4)
Subject Index	601