Price Theory and Applications

Contents
About the Author
Preface
Chapter 1. Supply, Demand, and Equilibrium
	1.1 DEMAND
		1.1.1 Demand versus Quantity Demanded
		1.1.2 Demand Curves
		1.1.3 Changes in Demand
		1.1.4 Effect of a Sales Tax
		1.1.5 Market Demand
		1.1.6 The Shape of the Demand Curve
		1.1.7 The Wide Scope of Economics
	1.2 SUPPLY
		1.2.1 Supply versus Quantity Supplied
		1.2.2 Effect of an Excise Tax
	1.3 EQUILIBRIUM
		1.3.1 The Equilibrium Point
		1.3.2 Changes in the Equilibrium Point
	1.4 SUMMARY
	REVIEW QUESTIONS
	NUMERICAL EXERCISES
	PROBLEM SET
Chapter 2. Prices, Costs, and the Gains from Trade
	2.1 PRICES
		2.1.1 Absolute versus Relative Prices
	2.2 COSTS, EFFICIENCY, AND GAINS FROM TRADE
		2.2.1 Costs and Efficiency
		2.2.2 Specialization and the Gains from Trade
		2.2.3 Why People Trade
	2.3 SUMMARY
	REVIEW QUESTIONS
	NUMERICAL EXERCISES
	PROBLEM SET
Chapter 3. The Behavior of Consumers
	3.1 TASTES
		3.1.1 Indifference Curves
		3.1.2 Marginal Values
		3.1.3 The Composite-Good Convention
	3.2 THE BUDGET LINE AND THE CONSUMER'S CHOICE
		3.2.1 The Budget Line
		3.2.2 The Consumer's Choice
	3.3 APPLICATIONS OF INDIFFERENCE CURVES
		3.3.1 Standards of Living
		3.3.2 Differences in Tastes
		3.3.3 The Least Bad Tax
	3.4 SUMMARY
	REVIEW QUESTIONS
	NUMERICAL EXERCISES
	PROBLEM SET
Chapter 4. Consumers in the Marketplace
	4.1 CHANGES IN INCOME
		4.1.1 Changes in Income and Changes in the Budget Line
		4.1.2 Changes in Income and Changes in the Optimum Point
		4.1.3 The Engel Curve
	4.2 CHANGES IN PRICE
		4.2.1 Changes in the Price and Changes in the Budget Line
		4.2.2 Changes in Price and Changes in the Optimum Point
		4.2.3 The Demand Curve
	4.3 INCOME AND SUBSTITUTION EFFECTS
		4.3.1 Two Effects of a Price Increase
		4.3.2 Why Demand Curves Slope Downward
		4.3.3 The Compensated Demand Curve
	4.4 ELASTICITIES
		4.4.1 Income Elasticity of Demand
		4.4.2 Price Elasticity of Demand
	4.5 SUMMARY
	REVIEW QUESTIONS
	NUMERICAL EXERCISES
	PROBLEM SET
Chapter 5. The Behavior of Firms
	5.1 WEIGHING COSTS AND BENEFITS
		5.1.1 A Farmer's Problem
		5.1.2 The Equimarginal Principle
	5.2 FIRMS IN THE MARKETPLACE
		5.2.1 Revenue
		5.2.2 Costs
	5.3 SUMMARY
	REVIEW QUESTIONS
	NUMERICAL EXERCISES
	PROBLEM SET
Chapter 6. Production and Costs
	6.1 PRODUCTION AND COSTS IN THE SHORT RUN
		6.1.1 The Total, Marginal, and Average Products of Labor
		6.1.2 Costs in the Short Run
	6.2 PRODUCTION AND COSTS IN THE LONG RUN
		6.2.1 Isoquants
		6.2.2 Choosing a Production Process
		6.2.3 The Long-Run Cost Curves
		6.2.4 Returns to Scale and the Shape of the Long-Run Cost Curves
	6.3 RELATIONS BETWEEN THE SHORT RUN AND THE LONG RUN
		6.3.1 From Isoquants to Short-Run Total Cost
		6.3.2 From Isoquants to Long-Run Total Cost
		6.3.3 Short-Run Total Cost versus Long-Run Total Cost
		6.3.4 A Multitude of Short Runs
		6.3.5 Short-Run Average Cost versus Long-Run Average Cost
	6.4 SUMMARY
	REVIEW QUESTIONS
	PROBLEM SET
Chapter 7. Competition
	7.1 THE COMPETITIVE FIRM
		7.1.1 Revenue
		7.1.2 The Firm's Supply Decision
		7.1.3 Shutdowns
		7.1.4 The Elasticity of Supply
	7.2 THE COMPETITIVE INDUSTRY IN THE SHORT RUN
		7.2.1 Defining the Short Run
		7.2.2 The Competitive Industry's Short-Run Supply Curve
		7.2.3 Supply, Demand, and Equilibrium
		7.2.4 Competitive Equilibrium
		7.2.5 The Industry's Costs
	7.3 THE COMPETITIVE FIRM IN THE LONG RUN
		7.3.1 Long-Run Marginal Cost and Supply
		7.3.2 Profit and the Exit Decision
		7.3.3 The Firm's Long-Run Supply Curve
	7.4 THE COMPETITIVE INDUSTRY IN THE LONG RUN
		7.4.1 The Industry's Long-Run Supply Curve
		7.4.2 Equilibrium
		7.4.3 Changes in Equilibrium
		7.4.4 Application: The Government as a Supplier
		7.4.5 Some Lessons Learned
	7.5 RELAXING THE ASSUMPTIONS
		7.5.1 The Break-Even Price
		7.5.2 Constant-Cost Industries
		7.5.3 Increasing-Cost Industries
		7.5.4 Decreasing-Cost Industries
		7.5.5 An Analogy
		7.5.6 Equilibrium
	7.6 APPLICATIONS
		7.6.1 Removing a Rent Control
		7.6.2 A Tax on Motel Rooms
		7.6.3 Tipping the Dishwasher
	7.7 USING THE COMPETITIVE MODEL
	7.8 SUMMARY
	REVIEW QUESTIONS
	NUMERICAL EXERCISES
	PROBLEM SET
Chapter 8. Welfare Economics and the Gains from Trade
	8.1 MEASURING THE GAINS FROM TRADE
		8.1.1 The Consumers' Surplus
		8.1.2 The Producer's Surplus
		8.1.3 Social Gain
	8.2 THE EFFICIENCY CRITERION
		8.2.1 Consumers' Surplus and the Efficiency Criterion
	8.3 EXAMPLES AND APPLICATIONS
		8.3.1 Subsidies
		8.3.2 Price Ceilings
		8.3.3 Tariffs
		8.3.4 Theories of Value
	8.4 GENERAL EQUILIBRIUM AND THE INVISIBLE HAND
		8.4.1 The Fundamental Theorem of Welfare Economics
		8.4.2 An Edgeworth Box Economy
		8.4.3 General Equilibrium with Production
	8.5 SUMMARY
	REVIEW QUESTIONS
	NUMERICAL EXERCISES
	PROBLEM SET
Chapter 9. Knowledge and Information
	9.1 THE INFORMATION CONTENT OF PRICES
		9.1.1 Prices and Information
		9.1.2 The Costs of Misallocation
	9.2 ASYMMETRIC INFORMATION
		9.2.1 Signaling: Should Colleges Be Outlawed?
		9.2.2 Adverse Selection and the Market for Lemons
		9.2.3 Moral Hazard
		9.2.4 Principal–Agent Problems
		9.2.5 A Theory of Unemployment
	9.3 FINANCIAL MARKETS
		9.3.1 Efficient Markets for Financial Securities
		9.3.2 Stock Market Crashes
	9.4 SUMMARY
	REVIEW QUESTIONS
	PROBLEM SET
Chapter 10. Monopoly
	10.1 PRICE AND OUTPUT UNDER MONOPOLY
		10.1.1 Monopoly Pricing
		10.1.2 Elasticity and Marginal Revenue
		10.1.3 Measuring Monopoly Power
		10.1.4 Welfare
		10.1.5 Monopoly and Public Policy
	10.2 SOURCES OF MONOPOLY POWER
		10.2.1 Natural Monopoly
		10.2.2 Patents
		10.2.3 Resource Monopolies
		10.2.4 Economies of Scope
		10.2.5 Legal Barriers to Entry
	10.3 PRICE DISCRIMINATION
		10.3.1 First-Degree Price Discrimination
		10.3.2 Third-Degree Price Discrimination
		10.3.3 Two-Part Tariffs
	10.4 SUMMARY
	REVIEW QUESTIONS
	NUMERICAL EXERCISES
	PROBLEM SET
Chapter 11. Market Power, Collusion, and Oligopoly
	11.1 ACQUIRING MARKET POWER
		11.1.1 Mergers
		11.1.2 Horizontal Integration
		11.1.3 Vertical Integration
		11.1.4 Predatory Pricing
		11.1.5 Resale Price Maintenance
	11.2 COLLUSION AND THE PRISONER'S DILEMMA
		11.2.1 Game Theory and the Prisoner's Dilemma
		11.2.2 The Prisoner's Dilemma and the Breakdown of Cartels
	11.3 REGULATION
		11.3.1 Examples of Regulation
		11.3.2 What Can Regulators Regulate?
		11.3.3 Creative Response and Unexpected Consequences
		11.3.4 Positive Theories of Regulation
	11.4 OLIGOPOLY
		11.4.1 Contestable Markets
		11.4.2 Oligopoly with a Fixed Number of Firms
	11.5 MONOPOLISTIC COMPETITION AND PRODUCT DIFFERENTIATION
		11.5.1 Monopolistic Competition
		11.5.2 The Economics of Location
	11.6 SUMMARY
	REVIEW QUESTIONS
	NUMERICAL EXERCISES
	PROBLEM SET
Chapter 12. The Theory of Games
	12.1 GAME MATRICES
		12.1.1 Pigs in a Box
		12.1.2 The Prisoner's Dilemma Revisited
		12.1.3 Pigs in a Box Revisited
		12.1.4 The Copycat Game
		12.1.5 Nash Equilibrium as a Solution Concept
		12.1.6 Mixed Strategies
		12.1.7 Pareto Optima
		12.1.8 Pareto Optima Versus Nash Equilibria
	12.2 SEQUENTIAL GAMES
		12.2.1 An Oligopoly Problem
	12.3 SUMMARY
	PROBLEM SET
Chapter 13. External Costs and Benefits
	13.1 THE PROBLEM OF POLLUTION
		13.1.1 Private Costs, Social Costs, and Externalities
		13.1.2 Government Policies
	13.2 THE COASE THEOREM
		13.2.1 The Doctor and the Confectioner
		13.2.2 The Coase Theorem
		13.2.3 The Coase Theorem in the Marketplace
		13.2.4 External Benefits
		13.2.5 Income Effects and the Coase Theorem
	13.3 TRANSACTIONS COSTS
		13.3.1 Trains, Sparks, and Crops
		13.3.2 The Reciprocal Nature of the Problem
		13.3.3 Sources of Transactions Costs
	13.4 THE LAW AND ECONOMICS
		13.4.1 The Law of Torts
		13.4.2 A Positive Theory of the Common Law
		13.4.3 Normative Theories of the Common Law
		13.4.4 Optimal Systems of Law
	13.5 SUMMARY
	REVIEW QUESTIONS
	PROBLEM SET
Chapter 14. Common Property and Public Goods
	14.1 THE TRAGEDY OF THE COMMONS
		14.1.1 The Springfield Aquarium
		14.1.2 It Can Pay to Be Different
		14.1.3 Common Property
	14.2 PUBLIC GOODS
		14.2.1 Market Failures
		14.2.2 The Provision of Public Goods
		14.2.3 The Role of Government
		14.2.4 Schemes for Eliciting Information
	14.3 SUMMARY
	REVIEW QUESTIONS
	NUMERICAL EXERCISES
	PROBLEM SET
Chapter 15. The Demand for Factors of Production
	15.1 THE FIRM'S DEMAND FOR FACTORS IN THE SHORT RUN
		15.1.2 The Algebra of Profit Maximization
		15.1.3 The Effect of Plant Size
	15.2 THE FIRM'S DEMAND FOR FACTORS IN THE LONG RUN
		15.2.1 Constructing the Long-Run Labor Demand Curve
		15.2.2 Substitution and Scale Effects
		15.2.3 Relationships Between the Short Run and the Long Run
	15.3 THE INDUSTRY'S DEMAND CURVE FOR FACTORS OF PRODUCTION
		15.3.1 Monopsony
	15.4 THE DISTRIBUTION OF INCOME
		15.4.1 Factor Shares and Rents
		15.4.2 Producers' Surplus
	15.5 SUMMARY
	REVIEW QUESTIONS
	NUMERICAL EXERCISES
	PROBLEM SET
Chapter 16. The Market for Labor
	16.1 INDIVIDUAL LABOR SUPPLY
		16.1.1 Consumption versus Leisure
		16.1.2 Changes in the Budget Line
		16.1.3 The Worker's Supply of Labor
	16.2 LABOR MARKET EQUILIBRIUM
		16.2.1 Changes in Nonlabor Income
		16.2.2 Changes in Productivity
	16.3 DIFFERENCES IN WAGES
		16.3.1 Human Capital
		16.3.2 Compensating Differentials
		16.3.3 Access to Capital
	16.4 DISCRIMINATION
		16.4.1 Theories of Discrimination
		16.4.2 Wage Differences Due to Worker Preferences
		16.4.3 Human Capital Inheritance
	16.5 SUMMARY
	REVIEW QUESTIONS
	PROBLEM SET
Chapter 17. Allocating Goods Over Time
	17.1 BONDS AND INTEREST RATES
	17.2 THE MARKET FOR CURRENT CONSUMPTION
	17.3 PRODUCTION AND INVESTMENT
	17.4 SUMMARY
	REVIEW QUESTIONS
	PROBLEM SET
Chapter 18. Risk and Uncertainty
	18.1 ATTITUDES TOWARD RISK
	18.2 THE MARKET FOR INSURANCE
	18.3 FUTURES MARKETS
	18.4 MARKET FOR RISKY ASSETS
	18.5 RATIONAL EXPECTATIONS
	18.6 SUMMARY
	REVIEW QUESTIONS
	PROBLEM SET
Chapter 19. What is Economics?
	19.1 THE NATURE OF ECONOMIC ANALYSIS
	19.2 THE RATIONALITY ASSUMPTION
	19.3 WHAT IS AN ECONOMIC EXPLANATION?
	19.4 THE SCOPE OF ECONOMIC ANALYSIS
	PROBLEM SET
Appendix A. Answers to All the Exercises
Appendix B. Answers to Selected Problems
Glossary