Principles of Microeconomics

Title
Contents
PART ONE introduction
	1 WHAT IS MICROECONOMICS
		What Is Economics?
		Assumption 1: People Are Self-Interested
			A Test of Your Self-Interestedness
			Self-Interestedness Is Usually Not a Bad Thing
		Assumption 2: People Are Rational
			Rational People Respond to Incentives
		Assumption 3: People Have Unlimited Desires but Limited Resources
			Trade-Off s
			Production Possibility Frontiers
			Opportunity Costs
			Increasing Wealth
		The Diff erence between Microeconomics and Macroeconomics
		Jobs for Undergraduate Economics Majors
		Organization of the Textbook
			Extra Reading
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
PART TWO The Magic of the Marketplace
	2 INTRODUCING SUPPLY AND DEMAND
		A Fictional Desert Tale
			An Economics Major to the Rescue
			New Sources of Water
			Extra Income Changes the Miners’ Behavior
			Conclusion to the Fictional Desert Tale
		Demand
			Market Demand
			Moving along a Demand Curve versus Moving to a New Demand Curve
			Behind Demand Curves: Substitutes
			Behind Demand Curves: Complements
			Complements and Substitutes
			Behind Demand Curves: Income
			Behind Demand Curves: Expectations and the Osborne Eff ect
			Behind Demand Curves: Fear of Shortages
			Behind Demand Curves: Everything Else
		Supply
			Supply Curves in Competitive Markets
			The Supply of Apples
			A Common Mistake
			The Supply of Oil
			Behind Supply Curves: Expectations
			Behind Supply Curves: Input Prices
			Behind Supply Curves: Innovation
			Behind Supply Curves: Joint Production
			Behind Supply Curves: Everything Else
		Summary of Some Eff ects on Supply, Demand, Quantity Supplied, and Quantity Demanded
		So What?
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
	3 SUPPLY AND DEMAND INTERTWINED
		How Supply and Demand Determine Prices
			When Supply and Demand Intersect
			When Quantity Supplied Is Greater than Quantity Demanded
			When Quantity Supplied Is Less than Quantity Demanded
			Quantity Supplied Equals Quantity Demanded
		The Babysitting Market
			When the Price of Sitters Is $10/Hour
			When the Price of Sitters Is $7/Hour
			Equilibrium
			Summary of Why Price Adjusts until Quantity Supplied Equals Quantity Demanded
		Equilibria
			Moving toward Equilibrium
			Economists Love Equilibria
		Markets in Times of Crises
			A Fictional Smuggler’s Tale
			Pests Destroy the Wheat Crop
			Markets to the Rescue
			War in the Middle East Reduces Supply of Oil
			Alternatives to the Market
			Hurricane Damage Aff ects the Supply and Demand for Bottled Water
			Price Gouging
			Conclusion to Markets in Times of Crisis
		The Invisible Hand
			Babysitter Certifi cation
		Two More Applications of Supply and Demand
			Why Diamonds Cost More than Water
			Marginal Value
			Environmental Protection and Housing Markets
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
	4 ELASTICITIES
		Price Elasticities of Demand
			Categorizing Elasticity
			Elasticities and the Shape of Demand Curves
			Price Elasticities of Demand and Total Revenue
			Behind Price Elasticity of Demand: Substitutes
			Behind Price Elasticity of Demand: Broad Product Defi nitions
			Behind Price Elasticity of Demand: Necessities
			Behind Price Elasticity of Demand: Strong Complements
			Behind Price Elasticity of Demand: Time
			Behind Price Elasticity of Demand: Share of Income Spent on a Good
			Why Addiction First Increases and Then Decreases Elasticity
			How Elasticity Subverted a Luxury Tax
			An Elasticity Mystery
			Summary of What Aff ects Price Elasticities of Demand
		Income Elasticity of Demand
			Economic Development, the Environment, and Income Elasticities
		Cross Elasticity of Demand
			Free versus Slave Sugar
		Price Elasticity of Supply
			Categorizing Price Elasticity of Supply
			Behind Price Elasticity of Supply: Costs
			Behind Price Elasticity of Supply: Capacity
			Behind Price Elasticity of Supply: Government Permission
			Behind Price Elasticity of Supply: Specialized Inputs
			Behind Price Elasticity of Supply: Ability to Fire Workers
			Behind Price Elasticity of Supply: Time
			Billionaires Bankrupted by Elasticity
			Can the Supply of Land Be Elastic?
			The Elasticity of Slaves
		Review of Important Formulas
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
		Appendix: Calculating Elasticity of Demand between Two Points
		Study Problem for Appendix
	5 POLICY ANALYSIS WITH SUPPLY AND DEMAND
		Price Floors
		The Minimum Wage
			Minimum Wage’s Winners and Losers
			Unemployment and the Minimum Wage
			Perfectly Inelastic Demand and the Minimum Wage
			Elastic Demand and the Minimum Wage
			French Grocery Bag Packers
			ACORN’s Minimum Wage Fight
			Worse Working Conditions
			Explaining the Harm Caused by a Minimum Wage
			Minimum Wages and Highly Skilled Workers
			Minimum Wage: Facilitator of Racism?
			Black Markets with Minimum Wages
			Administrative Costs
		Price Ceilings
			Guillotines and Price Ceilings
			Price Ceilings During the American Revolutionary War
		Rent Control
			No Roommates Needed
			Reductions in Mobility
			Reductions in Quality, Again
			Administrative Costs, Again
			Black Markets, Again
			Discrimination, Again
			Restrictions on Housing Construction
			Politics and Rent Control
		The Draft versus Voluntary Enlistment
			Do Soldiers in Drafted Armies Receive Better Treatment?
		The Market for Human Organs
			Black Markets, Again
			Legal Means around Organ-Sale Ban
		Health Care
			Rationing
		Healthy Canadian Pets and Good-Looking Americans
		Parking Meters
			The Deadweight Loss of Waiting
			What Private Owners of Parking Meters Would Do
		Agricultural Subsidies
			Farm Subsidies for the Rich and Famous
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
		Crossword Puzzle for Chapters 1–5
	6 WEALTH CREATION AND DESTRUCTION
		What Is Wealth?
			Sales and Money Transfers
			Why Free Trade Promotes Wealth Creation
			Increasing Wealth through Production
			Wally the Wealth Creator
			Wealth Creation and Growth
		Seven Ways Governments Destroy Wealth
			1. Rent Control
			2. Minimum Wages
			3. Taxes
			4. Subsidies
			5. Forced Sharing
			6. Theft
			7. Eminent Domain
		Supply, Demand, and Wealth
			Demand Curves and the Maximum Amount Consumers Are Willing to Pay
			Consumer’s Surplus
			Producer’s Surplus
			Consumers’ and Producers’ Surplus Combined
			The Deadweight Loss of a Government- Dictated Price
			Why the Supply-and-Demand-Determined Equilibrium Price Maximizes Wealth
		Supply, Demand, and Taxation
			The Deadweight Loss of the Tax
			Who Pays the Tax?
		Supply, Demand, and Subsidies
		Innovation
			Super-Vision
			Rationing Funds for Innovators
			Silly Science
			If at First You Don’t Succeed (You Can) Try, Try Again
			Small-Scale Innovation
			Feedback and Innovation
			Resistance to Innovation
			Luddites
		Freedom and Wealth Creation
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
	7 TRADE
		Neanderthals and Trade
			A Model of Primitive Production
			Why Didn’t Neanderthals Trade?
		International Trade
			Absolute Advantage
			Comparative Advantage
			Roundabout Production
			Your Comparative Advantage
			Everyone Has a Comparative Advantage
			Where Do Comparative Advantages Come From?
		Supply and Demand
			Exports
			Imports
			Consumers versus Producers
			Tariff s
			Quotas
		Four Additional Benefi ts of Trade
			Additional Benefi t of Trade #1: Specialization
			Additional Benefi t of Trade #2: Innovation
			Additional Benefi t of Trade #3: Reduced Corruption
			Additional Benefi t of Trade #4: Brain Gain
		Six Objections to Trade
			Objection to Trade #1: Trade Harms Workers in Poor Countries
			Objection to Trade #2: Trade Harms Workers in Rich Countries
			Objection to Trade #3: Nations Need Trade Restrictions to Protect Infant Industries
			Objection to Trade #4: Nations Shouldn’t Trade with Potential Military Enemies
			Objection to Trade #5: Nations CAN Use the Threat of Retaliatory Trade Restrictions to Promote Free Trade
			Objection to Trade #6: The Santa Claus Problem
		Trade: The Basis for Civilization
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
	8 COSTS
		The Importance of Costs
		The Cost of Space Travel
			A Space Elevator
			Average Total Costs
		Three Examples of High Fixed-Costs Goods
			High Fixed-Costs Good #1: Pharmaceuticals
			High Fixed-Costs Good #2: Movies
			High Fixed-Costs Good #3: Jet Fighters
		A Cost-Based Science Fiction Story
			Average Total Costs
		Increasing Marginal Costs
			How Fixed Inputs Cause the Average Total Costs Curve to Have a “U” Shape
			The Marginal Costs Curve Goes through the Low Point on the U-Shaped Average Total Costs Curve
			Diminishing Marginal Returns and Starvation
			More Long-Run Analysis
			Economies and Diseconomies of Scale
		Review of Costs
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
	9 PERFECT COMPETITION
		Market Structure
		Auctioning Money
		The Seven Assumptions of Perfect Competition
			1. There Are Many Buyers and Sellers
			2. Firms Can Enter and Exit the Market Freely in the Long Run
			3. Everyone Has Perfect Information about the Product Sold
			4. All Firms Make Exactly the Same Product
			5. All Firms Face Exactly the Same Costs
			6. Average Total Costs Do Not Continually Decrease
			7. All Buyers and Sellers Are Price Takers
		Perfect Competition as an Approximation
		Firms’ Behavior in Perfectly Competitive Markets
			Price and Marginal Cost
			Short-Run Profi t in Perfect Competition
			Firms Ignore Sunk Costs When Deciding Whether to Shut Down
			Costs Curves and the Shut-Down Decision
			Shutting Down versus Exiting the Market
			Profi ts and Opportunity Costs
			In the Long Run, a Firm Will Exit if Profi ts Are Negative
			In the Long Run, Firms Will Enter if Profi ts Are Positive
			In the Long Run, Profi ts Are Zero
		The Social Benefi ts of Perfect Competition
			Markets Produce the Optimal Number of Goods When Price Equals Marginal Cost
			Adam Smith’s Invisible Hand Works Perfectly When Price Equals Marginal Cost
		Limited Innovation in Perfect Competition
		The Internet and Perfect Competition
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
PART THREE Imperfect Markets/ Imperfect Governments
	10 CHALLENGE TO MARKET EFFECTIVENESS 1: MONOPOLIES
		MonoplySki
		What Is a Monopoly?
		Monopolists’ Long-Run Profi ts
		Six Barriers to Entry
			1. The Government
			2. Unions
			3. Control of a Vital Resource
			4. Incompatibility
			5. Economies of Scale
			6. Intellectual Property
		Monopolist Pricing
		Marginal Revenue and Monopolist Pricing
		Profi t Is Maximized When Marginal Revenue � Marginal Cost
		The Social Cost of Monopolies
			Monopolist’s Don’t Produce at the Lowest Possible Average Total Cost
			Deadweight Loss of the Monopolist
		Three Ways to Reduce the Deadweight Loss of Monopoly
			1. How Competition Reduces the Harm of Monopolies
			2. How Price Discrimination Reduces the Harm of Monopolies
			3. How Antitrust Laws Reduce the Harm of Monopolies
		Monopolies’ Incentive to Innovate
			Innovation, Monopolies, and Laziness: A More Complex View of the Firm
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
	11 CHALLENGES TO MARKET EFFECTIVENESS 2: OLIGOPOLIES
		A Market Example: Oligo-Razor
			Antitrust Obstacles
			An Implicit Agreement to Raise Prices
			The Challenge of Maintaining High Prices
			The Implicit-Agreement Frays
			Wal-Mart’s Always Low Prices
			Using Trade Barriers to Counter Wal-Mart’s Chinese Strategy
			Why You Diff erentiate Your Razors
			How You Diff erentiate Your Razors
			Complicated Pricing
			Incompatibility and Lock-In
			Conclusion to Oligo-Razor Story
		Confessions of an Economist
		The Prisoners’ Dilemma
			Defi nition of a Prisoners’ Dilemma Game
			Students’ Dilemma
			Athletes’ Steroid Dilemma
			Economics Majors and the Prisoners’ Dilemma
			The Pricing Prisoners’ Dilemma
			Using the Prisoners’ Dilemma
		Escaping the Prisoners’ Dilemma through Collusion
			Cartels
			Colluding to Keep Down Wages
			A Tutoring Cartel
			Antitrust Laws and Collusion
			The Diffi culty of Using Collusion to Escape the Pricing Prisoners’ Dilemma
			Using “Pro-Consumer” Policies to Promote Collusion
			The Social Harm of Collusion
			Overcoming the Wealth-Destroying Eff ect of Collusion
		More on Escaping the Prisoners’ Dilemma
			Product Diff erentiation
			Using Confusing Prices to Escape the Prisoners’ Dilemma
		Oligopolies’ Incentive to Innovate
			Disruptive Innovation
			Prisoners’ Dilemma and Disruptive Oligopolistic Innovation
		Antitrust Laws
			Benefi cial Antitrust Enforcement
			Should Antitrust Laws Be Used against the NCAA?
			Harmful Antitrust Rulings
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
	12 GOVERNMENT IMPERFECTIONS
		Public Choice Theory
		A Fictional but True-to-Life Political Tale
			Sugar and Textile Tariff s
			The Elderly versus College Students
			Allocating Television Licenses
			Military Bases
			Football Politics
			Loan Guarantee
			Our Fictional Tale’s Conclusion
		Economists Are Not Anarchists, but
			Taking from the Weak in Dictatorships
			Taking from the Weak in Democracies
			Secretly Taking from Peter
		Concentrated Interest Groups Beat Diff use Ones
		Destruction of Wealth
			Rent-Seeking
		Spending Other People’s Money
			If Others Pay, Order the Expensive Appetizer
		Corruption
			Ancient Corruption
			The Mexico City Police
			More Government Power Means More Corruption
			Corruption, Wealth Creation, and Wealth Destruction
			When Governments Are Extremely Corrupt
			Corruption
			Abundant Natural Resources Increase Corruption
			Competitive Politics Reduce Corruption
			Corruption Breeds Corruption
		Problems with Democracy
			Voting Is Irrational!
			Politicians Have Short Time Horizons
			Government Programs Don’t Always Have to Satisfy Consumers
			Incumbents Rarely Lose
			But at Least Democracies Don’t Have Famines
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
	13 CHALLENGE TO MARKET EFFECTIVENESS 3: EXTERNALITIES AND THE ENVIRONMENT
		The Pollution Problem
			Negative Externalities
			Products with Negative Externalities Are Overused
		Positive Externalities
			Products with Positive Externalities Are Underused
		Externalities and Antitheft Devices
		The Negative Externalities of Leaded Gasoline
		Five Methods of Reducing the Harm of Pollution
			Method 1 of Reducing Pollution: Forbid All Pollution
			Method 2 of Reducing Pollution: Command and Control
			Method 3 of Reducing Pollution: Pigovian Taxes
			Method 4 of Reducing Pollution: Tradable Permits
			Method 5 of Reducing Pollution: The Coase Theorem
		Are Poor Countries Underpolluted?
		Global Warming
			A Technological Argument for Doing Nothing about Global Warming
			A Technological Argument for Taking Immediate Action against Global Warming
			Wealth Creation—The Best Defense against Global Warming
		Traffi c Jams
			Method 1 of Reducing Traffi c Jams: Gas Taxes
			Method 2 of Reducing Traffi c Jams: Toll Roads
			Method 3 of Reducing Traffi c Jams: Subsidize Mass Transportation
			Method 4 of Reducing Traffi c Jams: Build More Roads
		Politics and Externalities
			Accidents and Car Weight
			Driving While Elderly
			Driving While Drunk
			Driving While Cell-Phoning
		Government-Caused Environmental Problems
			Hooray for DDT’s Lifesaving Comback
			Forests Paying the Price for Biofuels
		Technological Spillovers
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
	14 CHALLENGE TO MARKET EFFECTIVENESS 4: INADEQUATE PROPERTY RIGHTS
		Why Cambodian Girls Need Property Rights
		Pain before Pleasure
			Russian Investments
			Grade Stealers
			Hiding Wealth
			Collective Ownership
		Dr. Seuss’s The Lorax
			A Property Rights Interpretation of The Lorax
		Tragedy of the Commons
			The Buff alo Tragedy
			Lake Commons
			Property Rights to the Rescue
			When Economics Majors Fall in Love
		Public Goods
			Free-Riding Mice
			Property Rights Not to the Rescue
			National Defense
			Governments to the Rescue
			But Sometimes Governments Can Solve the Public Goods Problem
		Intellectual Property
			Charlie and the Chocolate Factory
			Internet Piracy
			The Intellectual Property of French Chefs
		Real Estate Property Rights
			Real Estate in Rich Countries
			Tribal Land of American Indians
			Informal Business Ownership
			Property Rights of the Dead
			What Happened to Srey Neth?
		Where Property Rights Are Not Needed
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
	15 CHALLENGE TO MARKET EFFECTIVENESS 5: INCOMPLETE INFORMATION
		1. Incomplete Information about Products
			Brand Names
			Money-Back Guarantees
			eBay Ratings
			Hiding Information
			Adverse Selection
		2. Incomplete Information about Employees’ Activities
			Frequent Flyer Miles
			Bribing Pilots with Meat
			Agency Costs Are Everywhere
		3. Incomplete Information about Potential Employees
			Hiring and Adverse Selection
			Resume Omission
			Statistical Discrimination
		4. Incomplete Information about Insurance Customers
			Health Insurance and Adverse Selection
			Genetic Testing and Adverse Selection
		5. Incomplete Information about Romantic Dates
			Dating and Adverse Selection
			Online Dating
		6. Incomplete Information about Politicians
			George Washington
			Cincinnatus, Caesar, and the U.S. Constitution
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
	16 CHALLENGE TO MARKET EFFECTIVENESS 6?: INEQUALITY
		300X—Why Are Some Workers Worth So Much More than Others?
		Fairness
		Choice and Inequality
			But Not Everyone Has Comparable Choices
		Problems with Giving Money to the Poor
		Problems with Taking Away Money from the Rich
			Grade Redistribution
		Public Choice Theory and Inequality
		So Should the Government Reduce Income Inequality?
		The Rich: Heroes or Villains?
		Three Paths to Great Wealth
			Tournaments
		Sex and Income Inequality
			The Mommy Wars
			Assortative Mating
		Racial Discrimination
			When Markets Don’t Fight Racism
			Baseball in Black and White
		Educational Premiums
		Generational Mobility
		High Fixed-Cost Goods and Inequality
			Envy and Mental Externalities
		Dating-Market Inequities
		Extreme Methods of Reducing Inequality
		Credits: The Fictional Cast of Chapter 16
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
PART FOUR Economics Is Everywhere
	17 ECONOMICS IS EVERYWHERE
		Part A: Using Adam Smith’s Invisible Hand Al: Strengthening Airport Security
			A2: Rehabilitating Ex-Cons
			A3: A Billion for Bin Laden
			A4: School Choice
			A5: Prizes
			A6: Curing Cancer with Auctions
		Part B: An Economic Analysis of Some Diverse Topics
			B1: The Economics of Crime
			B2: Gift Giving
			B3: The Stock Market
			B4: Education and Signaling
		Part C: The Future
			C1: Intelligence Enhancements
			C2: A Technological Utopia by 2050
		Questions You Should Be Able to Answer after Reading This Chapter
		Study Problems
Glossary
Endnotes
Photo Credits
Index