Microeconomics

Cover......Page 1
Title Page......Page 4
Copyright Page......Page 5
Contents......Page 10
Preface......Page 18
PART ONE: Introduction: Markets and Prices......Page 26
1 Preliminaries......Page 28
1.1 The Themes of Microeconomics......Page 29
1.2 What Is a Market?......Page 32
1.3 Real versus Nominal Prices......Page 37
1.4 Why Study Microeconomics?......Page 41
Summary......Page 43
Exercises......Page 44
2 The Basics of Supply and Demand......Page 46
2.1 Supply and Demand......Page 47
2.2 The Market Mechanism......Page 50
2.3 Changes in Market Equilibrium......Page 51
2.4 Elasticities of Supply and Demand......Page 58
2.5 Short-Run versus Long-Run Elasticities......Page 64
*2.6 Understanding and Predicting the Effects of Changing Market Conditions......Page 73
2.7 Effects of Government Intervention—Price Controls......Page 83
Summary......Page 85
Questions for Review......Page 86
Exercises......Page 87
PART TWO: Producers, Consumers, and Competitive Markets......Page 90
3 Consumer Behavior......Page 92
3.1 Consumer Preferences......Page 94
3.2 Budget Constraints......Page 107
3.3 Consumer Choice......Page 111
3.4 Revealed Preference......Page 117
3.5 Marginal Utility and Consumer Choice......Page 120
*3.6 Cost-of-Living Indexes......Page 125
Summary......Page 130
Questions for Review......Page 131
Exercises......Page 132
4 Individual and Market Demand......Page 136
4.1 Individual Demand......Page 137
4.2 Income and Substitution Effects......Page 144
4.3 Market Demand......Page 149
4.4 Consumer Surplus......Page 157
4.5 Network Externalities......Page 160
*4.6 Empirical Estimation of Demand......Page 164
Summary......Page 168
Questions for Review......Page 169
Exercises......Page 170
Utility Maximization......Page 174
The Method of Lagrange Multipliers......Page 175
Marginal Rate of Substitution......Page 176
Marginal Utility of Income......Page 177
An Example......Page 178
Duality in Consumer Theory......Page 179
Income and Substitution Effects......Page 180
Exercises......Page 182
5 Uncertainty and Consumer Behavior......Page 184
5.1 Describing Risk......Page 185
5.2 Preferences Toward Risk......Page 190
5.3 Reducing Risk......Page 195
*5.4 The Demand for Risky Assets......Page 201
5.5 Bubbles......Page 210
5.6 Behavioral Economics......Page 214
Questions for Review......Page 222
Exercises......Page 223
6 Production......Page 226
6.1 Firms and Their Production Decisions......Page 227
6.2 Production with One Variable Input (Labor)......Page 231
6.3 Production with Two Variable Inputs......Page 241
6.4 Returns to Scale......Page 248
Questions for Review......Page 251
Exercises......Page 252
7.1 Measuring Cost: Which Costs Matter?......Page 254
7.2 Cost in the Short Run......Page 262
7.3 Cost in the Long Run......Page 268
7.4 Long-Run versus Short-Run Cost Curves......Page 278
7.5 Production with Two Outputs—Economies of Scope......Page 283
*7.6 Dynamic Changes in Costs—The Learning Curve......Page 286
7.7 Estimating and Predicting Cost......Page 290
Summary......Page 294
Questions for Review......Page 295
Exercises......Page 296
Cost Minimization......Page 298
Marginal Rate of Technical Substitution......Page 299
Duality in Production and Cost Theory......Page 300
The Cobb-Douglas Cost and Production Functions......Page 301
Exercises......Page 303
8.1 Perfectly Competitive Markets......Page 304
8.2 Profit Maximization......Page 307
8.3 Marginal Revenue, Marginal Cost, and Profit Maximization......Page 309
8.4 Choosing Output in the Short Run......Page 312
8.5 The Competitive Firm’s Short-Run Supply Curve......Page 317
8.6 The Short-Run Market Supply Curve......Page 320
8.7 Choosing Output in the Long Run......Page 325
8.8 The Industry’s Long-Run Supply Curve......Page 331
Questions for Review......Page 339
Exercises......Page 340
9.1 Evaluating the Gains and Losses from Government Policies—Consumer and Producer Surplus......Page 342
9.2 The Efficiency of a Competitive Market......Page 348
9.3 Minimum Prices......Page 353
9.4 Price Supports and Production Quotas......Page 357
9.5 Import Quotas and Tariffs......Page 365
9.6 The Impact of a Tax or Subsidy......Page 370
Summary......Page 376
Exercises......Page 377
PART THREE: Market Structure and Competitive Strategy......Page 380
10 Market Power: Monopoly and Monopsony......Page 382
10.1 Monopoly......Page 383
10.2 Monopoly Power......Page 393
10.3 Sources of Monopoly Power......Page 400
10.4 The Social Costs of Monopoly Power......Page 402
10.5 Monopsony......Page 407
10.6 Monopsony Power......Page 410
10.7 Limiting Market Power: The Antitrust Laws......Page 414
Questions for Review......Page 420
Exercises......Page 421
11 Pricing with Market Power......Page 424
11.1 Capturing Consumer Surplus......Page 425
11.2 Price Discrimination......Page 426
11.3 Intertemporal Price Discrimination and Peak-Load Pricing......Page 435
11.4 The Two-Part Tariff......Page 439
*11.5 Bundling......Page 444
*11.6 Advertising......Page 454
Questions for Review......Page 459
Exercises......Page 460
Why Vertically Integrate?......Page 464
Transfer Pricing in the Integrated Firm......Page 468
A Numerical Example......Page 474
Exercises......Page 475
12 Monopolistic Competition and Oligopoly......Page 476
12.1 Monopolistic Competition......Page 477
12.2 Oligopoly......Page 481
12.3 Price Competition......Page 489
12.4 Competition versus Collusion: The Prisoners’ Dilemma......Page 494
12.5 Implications of the Prisoners’ Dilemma for Oligopolistic Pricing......Page 497
12.6 Cartels......Page 502
Questions for Review......Page 507
Exercises......Page 508
13.1 Gaming and Strategic Decisions......Page 512
13.2 Dominant Strategies......Page 515
13.3 The Nash Equilibrium Revisited......Page 517
13.4 Repeated Games......Page 523
13.5 Sequential Games......Page 527
13.6 Threats, Commitments, and Credibility......Page 530
13.7 Entry Deterrence......Page 535
*13.8 Auctions......Page 541
Summary......Page 549
Exercises......Page 550
14.1 Competitive Factor Markets......Page 554
14.2 Equilibrium in a Competitive Factor Market......Page 567
14.3 Factor Markets with Monopsony Power......Page 571
14.4 Factor Markets with Monopoly Power......Page 575
Summary......Page 580
Exercises......Page 581
15 Investment, Time, and Capital Markets......Page 584
15.1 Stocks versus Flows......Page 585
15.2 Present Discounted Value......Page 586
15.3 The Value of a Bond......Page 589
15.4 The Net Present Value Criterion for Capital Investment Decisions......Page 594
15.5 Adjustments for Risk......Page 598
15.6 Investment Decisions by Consumers......Page 603
15.7 Investments in Human Capital......Page 605
*15.8 Intertemporal Production Decisions—Depletable Resources......Page 609
15.9 How Are Interest Rates Determined?......Page 613
Summary......Page 615
Exercises......Page 616
PART FOUR: Information, Market Failure, and the Role of Government......Page 618
16.1 General Equilibrium Analysis......Page 620
16.2 Efficiency in Exchange......Page 627
16.3 Equity and Efficiency......Page 635
16.4 Efficiency in Production......Page 638
16.5 The Gains from Free Trade......Page 643
16.6 An Overview—The Efficiency of Competitive Markets......Page 648
16.7 Why Markets Fail......Page 650
Summary......Page 652
Exercises......Page 653
17 Markets with Asymmetric Information......Page 656
17.1 Quality Uncertainty and the Market for Lemons......Page 657
17.2 Market Signaling......Page 663
17.3 Moral Hazard......Page 668
17.4 The Principal–Agent Problem......Page 670
*17.5 Managerial Incentives in an Integrated Firm......Page 676
17.6 Asymmetric Information in Labor Markets: Efficiency Wage Theory......Page 679
Summary......Page 681
Exercises......Page 682
18.1 Externalities......Page 686
18.2 Ways of Correcting Market Failure......Page 692
18.3 Stock Externalities......Page 703
18.4 Externalities and Property Rights......Page 709
18.5 Common Property Resources......Page 712
18.6 Public Goods......Page 715
18.7 Private Preferences for Public Goods......Page 719
Questions for Review......Page 721
Exercises......Page 722
An Example......Page 725
Estimation......Page 726
Statistical Tests......Page 727
Economic Forecasting......Page 729
Summary......Page 732
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M......Page 737
N......Page 738
P......Page 739
R......Page 740
T......Page 741
Z......Page 742
Answers to Selected Exercises......Page 743
Photo Credits......Page 756
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H......Page 761
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Z......Page 768