Price Theory and Applications: Decisions, Markets, and Information

Cover......Page 1
Half-title......Page 3
Title......Page 5
Copyright......Page 6
Contents......Page 7
Preface......Page 15
I Introduction......Page 19
1 The Nature and Scope of Economics......Page 21
1.1 Economics as a Social Science......Page 22
Rationality......Page 27
Human Goals – The Self-Interest Assumption......Page 30
1.3 Market and Nonmarket Interactions......Page 34
1.4 Allocation by Prices – The Market System......Page 36
1.6 Positive and Normative Analysis: ''Is'' Versus ''Ought''......Page 38
Decision-Making Agents in the Economy......Page 39
Scarcity, Objects of Choice, and Economic Activities......Page 40
SUMMARY......Page 41
QUESTIONS......Page 42
2 Working Tools......Page 45
Balancing Supply and Demand......Page 46
How Changes in Supply and Demand Affect Equilibrium......Page 48
Algebra of Supply-Demand Analysis......Page 54
An Application: Introducing a New Supply Source......Page 56
Taxes on Transactions......Page 57
An Application: Interdicting Supply......Page 61
Price Ceilings and Price Floors......Page 64
2.2 Finding an Optimum......Page 67
The Logic of Total, Average, and Marginal Concepts......Page 68
How Total, Average, and Marginal Magnitudes Are Related......Page 72
An Application: Foraging – When Is It Time to Pack Up and Leave?......Page 77
SUMMARY......Page 79
QUESTIONS......Page 80
II Preference, Consumption, and Demand......Page 85
3 Utility and Preference......Page 87
3.1 The Laws of Preference......Page 88
3.2 Utility and Preference......Page 90
Cardinal versus Ordinal Utility......Page 91
Utility of Commodity Baskets......Page 95
3.3 Characteristics of Indifference Curves......Page 97
3.4 More on Goods and Bads......Page 101
An Application: Charity......Page 103
3.5 The Sources and Content of Preference......Page 104
QUESTIONS......Page 108
4 Consumption and Demand......Page 111
The Geometry of Consumer Choice......Page 112
Optimum of the Consumer (Cardinal Utility)......Page 115
Optimum of the Consumer (Ordinal Utility)......Page 118
4.2 Complements and Substitutes......Page 122
The Income Expansion Path......Page 125
The Engel Curve......Page 128
Price Expansion Path and Demand Curve......Page 130
4.4 Income and Substitution Effects of a Price Change......Page 133
An Application: How Can the Giffen Case Come About? How Likely Is It?......Page 135
4.5 From Individual Demand to Market Demand......Page 136
4.6 An Application: Subsidy versus Voucher......Page 138
SUMMARY......Page 140
QUESTIONS......Page 142
5 Applications and Extensions of Demand Theory......Page 145
5.1 The Engel Curve and the Income Elasticity of Demand......Page 146
5.2 The Demand Curve and the Price Elasticity of Demand......Page 150
5.3 The Cross-Elasticity of Demand......Page 154
5.4 Fitting a Demand Curve......Page 155
Constant Slope versus Constant Elasticity......Page 156
General Demand Functions......Page 157
5.5 Determinants of Responsiveness of Demand to Price......Page 160
Coupon Rationing......Page 162
Point Rationing......Page 164
SUMMARY......Page 169
QUESTIONS......Page 170
III The Firm and the Industry......Page 173
6 The Business Firm......Page 175
6.1 Why Firms? Entrepeneur, Owner, Manager......Page 176
The Separation of Ownership and Control......Page 178
6.2 The Optimum of the Firm in Pure Competition......Page 183
The Shutdown Decision......Page 190
An Application: Division of Output among Plants......Page 192
Short Run versus Long Run......Page 194
Rising Costs and Diminishing Returns......Page 198
6.4 An Application: Peak versus Off-Peak Operation......Page 200
SUMMARY......Page 204
QUESTIONS......Page 205
7 Equilibrium in the Product Market – Competitive Industry......Page 209
From Firm Supply to Market Supply: The Short Run......Page 210
Long-Run and Short-Run Supply......Page 213
External Economies and Diseconomies......Page 217
7.2 Firm Survival and the Zero-Profit Theorem......Page 219
7.3 The Benefits of Exchange: Consumer Surplus and Producer Surplus......Page 221
An Application: The Water-Diamond Paradox......Page 223
An Application: Benefits of an Innovation......Page 224
7.4 Transaction Taxes and Other Hindrances to Trade......Page 225
Transaction Taxes......Page 226
Supply Quotas......Page 227
An Application: Import Quotas......Page 228
Price Ceilings and "Shortages"......Page 231
SUMMARY......Page 235
QUESTIONS......Page 236
8 Monopolies, Cartels, and Networks......Page 239
Price-Quantity Solution......Page 240
Monopoly versus Competitive Solutions......Page 244
An Application: Author versus Publisher......Page 246
8.2 Monopoly and Economic Efficiency......Page 249
8.3 Regulation of Monopoly......Page 252
Market Segmentation......Page 256
Block Pricing......Page 259
Perfect Discrimination......Page 261
8.5 Cartels......Page 262
Demand for a Network Good......Page 266
The Lock-in Issue......Page 268
SUMMARY......Page 271
QUESTIONS......Page 272
9 Product Quality and Product Variety......Page 275
9.1 Quality......Page 276
Quality under Competition and Monopoly......Page 277
An Application: Suppression of Inventions......Page 281
Cartels and Quality......Page 283
9.2 Variety......Page 284
Product Variety under Monopoly......Page 286
Blending Monopoly and Competition – Monopolistic Competition......Page 288
SUMMARY......Page 293
QUESTIONS......Page 294
10 Competition Among the Few: Oligopoly and Strategic Behavior......Page 297
Patterns of Payoffs......Page 298
An Application: Public Goods – Two-Person versus Multiperson Prisoners' Dilemma......Page 300
Pure Strategies......Page 301
Mixed Strategies......Page 304
10.2 Duopoly – Identical Products......Page 306
Quantity Competition......Page 307
Price Competition......Page 311
An Application: "Most-Favored-Customer" Clause......Page 313
Quantity Competition......Page 315
Price Competition......Page 316
An Application: The "Kinked" Demand Curve......Page 318
Oligopoly and Numbers......Page 320
QUESTIONS......Page 322
11 Dealing with Uncertainty – The Economics of Risk and Information......Page 325
Expected Gain versus Expected Utility......Page 326
Risk Aversion......Page 327
Risk-Bearing and Insurance......Page 330
11.2 The Value of Information......Page 334
Adverse Selection – The Lemons Problem......Page 335
Conveying Quality through Reputation......Page 339
Do Prices Signal Quality? Information as a Public Good......Page 341
11.4 Herd Behavior and Informational Cascades......Page 343
11.5 Copyright, Patents, and Intellectual Property Rights......Page 346
IV Factor Markets and Income Distribution......Page 355
12 The Demand for Factor Services......Page 357
Diminishing Returns......Page 358
From Production Function to Cost Function......Page 361
The Firm's Demand for a Single Variable Input......Page 363
12.2 Production and Factor Employment with Several Variable Inputs......Page 367
The Production Function......Page 368
Factor Balance and Factor Employment......Page 373
The Firm's Demand for Inputs......Page 376
12.3 The Industry's Demand for Inputs......Page 380
12.4 Monopsony in the Factor Market......Page 382
12.5 An Application: Minimum-Wage Laws......Page 384
SUMMARY......Page 389
QUESTIONS......Page 391
13 Resource Supply and Factor-Market Equilibrium......Page 393
13.1 The Optimum of the Resource-Owner......Page 394
An Application: The Incentive Effects of "Welfare" and Social Security......Page 400
The Principal-Agent Problem......Page 403
Paying by the piece......Page 404
Signalling......Page 407
From Individual Supply to Market Supply......Page 408
Demand and Supply Together......Page 409
An Application: Sources of Growing Wage Inequality......Page 410
13.4 Monopolies and Cartels in Factor Supply......Page 413
The Traditional Classification: Land, Labor, and Capital......Page 415
Capital, Rate of Return, and Interest......Page 416
13.6 Economic Rent......Page 420
SUMMARY......Page 421
QUESTIONS......Page 422
V Exchange......Page 425
14 Exchange, Transaction Costs, and Money......Page 427
14.1 Pure Exchange: The Edgeworth Box......Page 428
14.2 Supply and Demand in Pure Exchange......Page 434
An Application: Market Experiments in Economics......Page 438
14.3 Exchange and Production......Page 441
How Perfect Are Markets?......Page 448
Proportional Transaction Costs......Page 451
Lump-Sum Transaction Costs......Page 455
Money as Medium of Exchange......Page 458
Money as Temporary Store of Value......Page 460
14.6 An Application: Auctions......Page 461
Sealed-Bid First-Price Auction......Page 463
The Dutch Auction......Page 464
SUMMARY......Page 466
QUESTIONS......Page 467
VI Economics and Time......Page 471
15 The Economics of Time......Page 473
15.1 Present versus Future......Page 474
Borrowing-Lending Equilibrium with Zero Net Investment......Page 477
An Application: Double Taxation of Saving?......Page 479
15.3 Production and Consumption Over Time: Saving and Investment......Page 482
The Separation Theorem......Page 486
The Present-Value Rule......Page 487
The Rate of Return (ROR) Rule......Page 493
15.5 Real Interest and Monetary Interest: Allowing for Inflation......Page 497
15.6 The Multiplicity of Interest Rates......Page 500
An Application: The Discount Rate for Project Analysis......Page 503
15.7 The Fundamentals of Investment, Saving, and Interest......Page 504
SUMMARY......Page 508
QUESTIONS......Page 509
VII Political Economy......Page 513
16 Welfare Economics: The Market and the State......Page 515
Efficiency versus Equity......Page 516
Efficiency as the Sum of Consumer Surplus and Producer Surplus......Page 518
Efficient Allocations in the Edgeworth Box......Page 519
"Equity" Reconsidered......Page 520
An Application: How to Divide a Cake......Page 522
Efficient Production......Page 524
Efficient Balance between Production and Consumption......Page 525
Externalities......Page 526
The Coase Theorem......Page 531
16.4 The Commons: The Consequences of Unrestricted Access......Page 533
Efficient Production and Consumption of Public Goods......Page 536
Voluntary Provision of Nonexcludable Public Goods – Free-Riding......Page 539
An Extension: Weakest-Link Versus Best-Shot Models of  Public Goods......Page 543
16.6 Appropriative and Rent-Seeking......Page 547
SUMMARY......Page 551
QUESTIONS......Page 552
17 Government, Politics, and Conflict......Page 555
Corruption as Government Failure......Page 556
Political Competition and Its Limits......Page 557
Politics and Special Interests......Page 559
17.2 Voting as an Instrument of Control......Page 561
Majority and Minority – "Log-Rolling"......Page 562
The Cycling Paradox......Page 563
The Median-Voter Theorem......Page 564
Sources of Cooperation and Conflict......Page 568
Conflict and Game Theory......Page 575
An Application: Should You Pay Ransom?......Page 579
SUMMARY......Page 581
QUESTIONS......Page 582
CHAPTER 1......Page 585
CHAPTER 2......Page 587
CHAPTER 4......Page 589
CHAPTER 5......Page 591
CHAPTER 6......Page 593
CHAPTER 7......Page 595
CHAPTER 8......Page 596
CHAPTER 9......Page 598
CHAPTER 10......Page 599
CHAPTER 11......Page 601
CHAPTER 12......Page 602
CHAPTER 13......Page 604
CHAPTER 14......Page 606
CHAPTER 15......Page 608
CHAPTER 16......Page 609
CHAPTER 17......Page 612
Name Index......Page 615
Subject Index......Page 619