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Book Details
Abstract
For Intermediate Microeconomics courses.
Microeconomics and its role in decision making and public policy
Microeconomics exposes students to topics that play a central role in microeconomics. From game theory and competitive strategy, to the roles of uncertainty and information, and the analysis of pricing by firms with market power, the text helps students understand what’s going on in the world of business. It also shows students how microeconomics can be used as a practical tool for decision-making and for designing and understanding public policy. The 9th Edition further illustrates microeconomics’ relevance and usefulness with new coverage and examples, and an improved exposition that is clear and accessible as well as lively and engaging. With Microeconomics, readers will be able to fully appreciate how a modern economy functions.
MyLabTM Economics not included. Students, if MyLab Economics is a recommended/mandatory component of the course, please ask your instructor for the correct ISBN and course ID. MyLab Economics should only be purchased when required by an instructor. Instructors, contact your Pearson rep for more information.
MyLab Economics is an online homework, tutorial, and assessment product designed to personalize learning and improve results. With a wide range of interactive, engaging, and assignable activities, students are encouraged to actively learn and retain tough course concepts.
Table of Contents
Section Title | Page | Action | Price |
---|---|---|---|
Cover | Cover | ||
Title Page | 3 | ||
Copyright Page | 4 | ||
About the Authors | 6 | ||
Brief Contents | 7 | ||
Contents | 9 | ||
Preface | 15 | ||
Part One Introduction: Markets and Prices | 23 | ||
1 Preliminaries | 25 | ||
1.1 The Themes of Microeconomics | 26 | ||
Trade-Offs | 26 | ||
Prices and Markets | 27 | ||
Theories and Models | 27 | ||
Positive versus Normative Analysis | 28 | ||
1.2 What Is a Market? | 29 | ||
Competitive versus Noncompetitive Markets | 30 | ||
Market Price | 30 | ||
Market Definition—The Extent of a Market | 31 | ||
1.3 Real versus Nominal Prices | 34 | ||
1.4 Why Study Microeconomics? | 39 | ||
Corporate Decision Making: The Toyota Prius | 39 | ||
Public Policy Design: Fuel Efficiency Standards for the Twenty-First Century | 40 | ||
Summary | 41 | ||
Questions for Review | 41 | ||
Exercises | 42 | ||
2 The Basics of Supply and Demand | 43 | ||
2.1 Supply and Demand | 44 | ||
The Supply Curve | 44 | ||
The Demand Curve | 45 | ||
2.2 The Market Mechanism | 47 | ||
2.3 Changes in Market Equilibrium | 48 | ||
2.4 Elasticities of Supply and Demand | 55 | ||
Point versus Arc Elasticities | 58 | ||
2.5 Short-Run versus Long-Run Elasticities | 62 | ||
Demand | 62 | ||
Supply | 67 | ||
*2.6 Understanding and Predicting the Effects of Changing Market Conditions | 71 | ||
2.7 Effects of Government Intervention—Price Controls | 80 | ||
Summary | 83 | ||
Questions for Review | 83 | ||
Exercises | 84 | ||
Part Two Producers, Consumers, and Competitive Markets | 87 | ||
3 Consumer Behavior | 89 | ||
Consumer Behavior | 89 | ||
3.1 Consumer Preferences | 91 | ||
Market Baskets | 91 | ||
Some Basic Assumptions about Preferences | 92 | ||
Indifference Curves | 93 | ||
Indifference Maps | 94 | ||
The Shape of Indifference Curves | 95 | ||
The Marginal Rate of Substitution | 96 | ||
Perfect Substitutes and Perfect Complements | 98 | ||
3.2 Budget Constraints | 104 | ||
The Budget Line | 104 | ||
The Effects of Changes in Income and Prices | 106 | ||
3.3 Consumer Choice | 108 | ||
Corner Solutions | 111 | ||
3.4 Revealed Preference | 114 | ||
3.5 Marginal Utility and Consumer Choice | 117 | ||
Rationing | 120 | ||
*3.6 Cost-of-Living Indexes | 122 | ||
Ideal Cost-of-Living Index | 123 | ||
Laspeyres Index | 124 | ||
Paasche Index | 125 | ||
Price Indexes in the United States: Chain Weighting | 126 | ||
Summary | 127 | ||
Questions for Review | 128 | ||
Exercises | 128 | ||
4 Individual and Market Demand | 131 | ||
4.1 Individual Demand | 132 | ||
Price Changes | 132 | ||
The Individual Demand Curve | 132 | ||
Income Changes | 134 | ||
Normal versus Inferior Goods | 135 | ||
Engel Curves | 136 | ||
Substitutes and Complements | 138 | ||
4.2 Income and Substitution Effects | 139 | ||
Substitution Effect | 140 | ||
Income Effect | 141 | ||
A Special Case: The Giffen Good | 142 | ||
4.3 Market Demand | 144 | ||
From Individual to Market Demand | 144 | ||
Elasticity of Demand | 146 | ||
Speculative Demand | 149 | ||
4.4 Consumer Surplus | 152 | ||
Consumer Surplus and Demand | 152 | ||
4.5 Network Externalities | 155 | ||
Positive Network Externalities | 155 | ||
Negative Network Externalities | 157 | ||
*4.6 Empirical Estimation of Demand | 159 | ||
The Statistical Approach to Demand Estimation | 160 | ||
The Form of the Demand Relationship | 161 | ||
Interview and Experimental Approaches to Demand Determination | 163 | ||
Summary | 164 | ||
Questions for Review | 164 | ||
Exercises | 165 | ||
5 Uncertainty and Consumer Behavior | 179 | ||
5.1 Describing Risk | 180 | ||
Probability | 180 | ||
Expected Value | 181 | ||
Variability | 181 | ||
Decision Making | 183 | ||
5.2 Preferences Toward Risk | 185 | ||
Different Preferences Toward Risk | 186 | ||
5.3 Reducing Risk | 190 | ||
Diversification | 190 | ||
Insurance | 191 | ||
The Value of Information | 194 | ||
*5.4 The Demand for Risky Assets | 196 | ||
Assets | 196 | ||
Risky and Riskless Assets | 197 | ||
Asset Returns | 197 | ||
The Trade-Off Between Risk and Return | 199 | ||
The Investor’s Choice Problem | 200 | ||
Summary | 205 | ||
Questions for Review | 205 | ||
Exercises | 205 | ||
6 Production | 209 | ||
The Production Decisions of a Firm | 209 | ||
6.1 Firms and Their Production Decisions | 210 | ||
Why Do Firms Exist? | 211 | ||
The Technology of Production | 212 | ||
The Production Function | 212 | ||
The Short Run versus the Long Run | 213 | ||
6.2 Production with One Variable Input (Labor) | 214 | ||
Average and Marginal Products | 214 | ||
The Slopes of the Product Curve | 215 | ||
The Average Product of Labor Curve | 217 | ||
The Marginal Product of Labor Curve | 217 | ||
The Law of Diminishing Marginal Returns | 218 | ||
Labor Productivity | 222 | ||
6.3 Production with Two Variable Inputs | 224 | ||
Isoquants | 224 | ||
Input Flexibility | 226 | ||
Diminishing Marginal Returns | 226 | ||
Substitution Among Inputs | 226 | ||
Production Functions—Two Special Cases | 228 | ||
6.4 Returns to Scale | 231 | ||
Describing Returns to Scale | 232 | ||
Summary | 234 | ||
Questions for Review | 234 | ||
Exercises | 235 | ||
7 The Cost of Production | 237 | ||
7.1 Measuring Cost: Which Costs Matter? | 237 | ||
Economic Cost versus Accounting Cost | 238 | ||
Opportunity Cost | 238 | ||
Sunk Costs | 239 | ||
Fixed Costs and Variable Costs | 241 | ||
Fixed versus Sunk Costs | 242 | ||
Marginal and Average Cost | 244 | ||
7.2 Cost in the Short Run | 245 | ||
The Determinants of Short-Run Cost | 245 | ||
The Shapes of the Cost Curves | 246 | ||
7.3 Cost in the Long Run | 251 | ||
The User Cost of Capital | 251 | ||
The Cost-Minimizing Input Choice | 252 | ||
The Isocost Line | 253 | ||
Choosing Inputs | 253 | ||
Cost Minimization with Varying Output Levels | 257 | ||
The Expansion Path and Long-Run Costs | 258 | ||
7.4 Long-Run versus Short-Run Cost Curves | 261 | ||
The Inflexibility of Short-Run Production | 261 | ||
Long-Run Average Cost | 262 | ||
Economies and Diseconomies of Scale | 263 | ||
The Relationship between Short-Run and Long-Run Cost | 266 | ||
7.5 Production with Two Outputs—Economies of Scope | 267 | ||
Product Transformation Curves | 267 | ||
Economies and Diseconomies of Scope | 268 | ||
The Degree of Economies of Scope | 269 | ||
*7.6 Dynamic Changes in Costs— The Learning Curve | 270 | ||
Graphing the Learning Curve | 270 | ||
Learning versus Economies of Scale | 271 | ||
*7.7 Estimating and Predicting Cost | 275 | ||
Cost Functions and the Measurement of Scale Economies | 276 | ||
Summary | 278 | ||
Questions for Review | 279 | ||
Exercises | 280 | ||
8 Profit Maximization and Competitive Supply | 289 | ||
8.1 Perfectly Competitive Markets | 289 | ||
When Is a Market Highly Competitive? | 291 | ||
8.2 Profit Maximization | 292 | ||
Do Firms Maximize Profit? | 292 | ||
Alternative Forms of Organization | 293 | ||
8.3 Marginal Revenue, Marginal Cost, and Profit Maximization | 294 | ||
Demand and Marginal Revenue for a Competitive Firm | 295 | ||
Profit Maximization by a Competitive Firm | 297 | ||
8.4 Choosing Output in the Short Run | 297 | ||
Short-Run Profit Maximization by a Competitive Firm | 297 | ||
When Should the Firm Shut Down? | 299 | ||
8.5 The Competitive Firm’s Short-Run Supply Curve | 302 | ||
The Firm’s Response to an Input Price Change | 303 | ||
8.6 The Short-Run Market Supply Curve | 305 | ||
Elasticity of Market Supply | 306 | ||
Producer Surplus in the Short Run | 308 | ||
8.7 Choosing Output in the Long Run | 310 | ||
Long-Run Profit Maximization | 310 | ||
Long-Run Competitive Equilibrium | 311 | ||
Economic Rent | 314 | ||
Producer Surplus in the Long Run | 315 | ||
8.8 The Industry’s Long-Run Supply Curve | 316 | ||
Constant-Cost Industry | 317 | ||
Increasing-Cost Industry | 318 | ||
Decreasing-Cost Industry | 319 | ||
The Effects of a Tax | 320 | ||
Long-Run Elasticity of Supply | 321 | ||
Summary | 324 | ||
Questions for Review | 324 | ||
Exercises | 325 | ||
9 The Analysis of Competitive Markets | 327 | ||
9.1 Evaluating the Gains and Losses from Government Policies—Consumer and Producer Surplus | 327 | ||
Review of Consumer and Producer Surplus | 328 | ||
Application of Consumer and Producer Surplus | 329 | ||
9.2 The Efficiency of a Competitive Market | 333 | ||
9.3 Minimum Prices | 338 | ||
9.4 Price Supports and Production Quotas | 342 | ||
Price Supports | 342 | ||
Production Quotas | 344 | ||
9.5 Import Quotas and Tariffs | 351 | ||
9.6 The Impact of a Tax or Subsidy | 355 | ||
The Effects of a Subsidy | 359 | ||
Summary | 362 | ||
Questions for Review | 362 | ||
Exercises | 363 | ||
Part Three Market Structure and Competitive Strategy | 367 | ||
10 Market Power: Monopoly and Monopsony | 369 | ||
10.1 Monopoly | 370 | ||
Average Revenue and Marginal Revenue | 370 | ||
The Monopolist’s Output Decision | 371 | ||
An Example | 373 | ||
A Rule of Thumb for Pricing | 375 | ||
Shifts in Demand | 377 | ||
The Effect of a Tax | 378 | ||
*The Multiplant Firm | 379 | ||
10.2 Monopoly Power | 380 | ||
Production, Price, and Monopoly Power | 383 | ||
Measuring Monopoly Power | 383 | ||
The Rule of Thumb for Pricing | 384 | ||
10.3 Sources of Monopoly Power | 387 | ||
The Elasticity of Market Demand | 388 | ||
The Number of Firms | 388 | ||
The Interaction Among Firms | 389 | ||
10.4 The Social Costs of Monopoly Power | 389 | ||
Rent Seeking | 390 | ||
Price Regulation | 391 | ||
Natural Monopoly | 392 | ||
Regulation in Practice | 393 | ||
10.5 Monopsony | 394 | ||
Monopsony and Monopoly Compared | 397 | ||
10.6 Monopsony Power | 398 | ||
Sources of Monopsony Power | 398 | ||
The Social Costs of Monopsony Power | 399 | ||
Bilateral Monopoly | 400 | ||
10.7 Limiting Market Power: The Antitrust Laws | 401 | ||
Restricting What Firms Can Do | 402 | ||
Enforcement of the Antitrust Laws | 404 | ||
Antitrust in Europe | 404 | ||
Summary | 408 | ||
Questions for Review | 409 | ||
Exercises | 409 | ||
11 Pricing with Market Power | 413 | ||
11.1 Capturing Consumer Surplus | 414 | ||
11.2 Price Discrimination | 415 | ||
First-Degree Price Discrimination | 415 | ||
Second-Degree Price Discrimination | 418 | ||
Third-Degree Price Discrimination | 418 | ||
11.3 Intertemporal Price Discrimination and Peak-Load Pricing | 424 | ||
Intertemporal Price Discrimination | 425 | ||
Peak-Load Pricing | 426 | ||
11.4 The Two-Part Tariff | 428 | ||
*11.5 Bundling | 433 | ||
Relative Valuations | 434 | ||
Mixed Bundling | 436 | ||
Bundling in Practice | 440 | ||
Tying | 443 | ||
*11.6 Advertising | 443 | ||
A Rule of Thumb for Advertising | 445 | ||
Summary | 448 | ||
Questions for Review | 448 | ||
Exercises | 449 | ||
12 Monopolistic Competition and Oligopoly | 465 | ||
12.1 Monopolistic Competition | 466 | ||
The Makings of Monopolistic Competition | 466 | ||
Equilibrium in the Short Run and the Long Run | 467 | ||
Monopolistic Competition and Economic Efficiency | 468 | ||
12.2 Oligopoly | 470 | ||
Equilibrium in an Oligopolistic Market | 471 | ||
The Cournot Model | 472 | ||
The Linear Demand Curve—An Example | 475 | ||
First Mover Advantage—The Stackelberg Model | 477 | ||
12.3 Price Competition | 478 | ||
Price Competition with Homogeneous Products—The Bertrand Model | 478 | ||
Price Competition with Differentiated Products | 479 | ||
12.4 Competition versus Collusion: The Prisoners’ Dilemma | 483 | ||
12.5 Implications of the Prisoners’ Dilemma for Oligopolistic Pricing | 486 | ||
Price Rigidity | 486 | ||
Price Signaling and Price Leadership | 487 | ||
The Dominant Firm Model | 490 | ||
12.6 Cartels | 491 | ||
Analysis of Cartel Pricing | 492 | ||
Summary | 496 | ||
Questions for Review | 497 | ||
Exercises | 497 | ||
13 Game Theory and Competitive Strategy | 501 | ||
13.1 Gaming and Strategic Decisions | 501 | ||
Noncooperative versus Cooperative Games | 502 | ||
13.2 Dominant Strategies | 504 | ||
13.3 The Nash Equilibrium Revisited | 506 | ||
Maximin Strategies | 508 | ||
*Mixed Strategies | 510 | ||
13.4 Repeated Games | 512 | ||
13.5 Sequential Games | 517 | ||
The Extensive Form of a Game | 517 | ||
The Advantage of Moving First | 518 | ||
13.6 Threats, Commitments, and Credibility | 519 | ||
Empty Threats | 520 | ||
Commitment and Credibility | 520 | ||
Bargaining Strategy | 522 | ||
13.7 Entry Deterrence | 524 | ||
Strategic Trade Policy and International Competition | 527 | ||
*13.8 Auctions | 530 | ||
Auction Formats | 531 | ||
Valuation and Information | 531 | ||
Private-Value Auctions | 532 | ||
Common-Value Auctions | 533 | ||
Maximizing Auction Revenue | 535 | ||
Bidding and Collusion | 535 | ||
Summary | 538 | ||
Questions for Review | 538 | ||
Exercises | 539 | ||
14 Markets for Factor Inputs | 543 | ||
14.1 Competitive Factor Markets | 543 | ||
Demand for a Factor Input When Only One Input Is Variable | 544 | ||
Demand for a Factor Input When Several Inputs Are Variable | 547 | ||
The Market Demand Curve | 548 | ||
The Supply of Inputs to a Firm | 551 | ||
The Market Supply of Inputs | 553 | ||
14.2 Equilibrium in a Competitive Factor Market | 556 | ||
Economic Rent | 556 | ||
14.3 Factor Markets with Monopsony Power | 560 | ||
Monopsony Power: Marginal and Average Expenditure | 560 | ||
Purchasing Decisions with Monopsony Power | 561 | ||
Bargaining Power | 562 | ||
14.4 Factor Markets with Monopoly Power | 564 | ||
Monopoly Power over the Wage Rate | 564 | ||
Unionized and Nonunionized Workers | 566 | ||
Summary | 569 | ||
Questions for Review | 569 | ||
Exercises | 570 | ||
15 Investment, Time, and Capital Markets | 573 | ||
15.1 Stocks versus Flows | 574 | ||
15.2 Present Discounted Value | 575 | ||
Valuing Payment Streams | 576 | ||
15.3 The Value of a Bond | 578 | ||
Perpetuities | 579 | ||
The Effective Yield on a Bond | 580 | ||
15.4 The Net Present Value Criterion for Capital Investment Decisions | 583 | ||
The Electric Motor Factory | 584 | ||
Real versus Nominal Discount Rates | 585 | ||
Negative Future Cash Flows | 586 | ||
15.5 Adjustments for Risk | 587 | ||
Diversifiable versus Nondiversifiable Risk | 588 | ||
The Capital Asset Pricing Model | 589 | ||
15.6 Investment Decisions by Consumers | 592 | ||
15.7 Investments in Human Capital | 594 | ||
*15.8 Intertemporal Production Decisions—Depletable Resources | 598 | ||
The Production Decision of an Individual Resource Producer | 598 | ||
The Behavior of Market Price | 599 | ||
User Cost | 599 | ||
Resource Production by a Monopolist | 600 | ||
15.9 How Are Interest Rates Determined? | 602 | ||
A Variety of Interest Rates | 603 | ||
Summary | 604 | ||
Questions for Review | 605 | ||
Exercises | 605 | ||
Part Four Information, Market Failure, and the Role of Government | 607 | ||
16 General Equilibrium and Economic Efficiency | 609 | ||
16.1 General Equilibrium Analysis | 609 | ||
Two Interdependent Markets—Moving to General Equilibrium | 610 | ||
Reaching General Equilibrium | 611 | ||
Economic Efficiency | 615 | ||
16.2 Efficiency in Exchange | 616 | ||
The Advantages of Trade | 617 | ||
The Edgeworth Box Diagram | 617 | ||
Efficient Allocations | 618 | ||
The Contract Curve | 620 | ||
Consumer Equilibrium in a Competitive Market | 621 | ||
The Economic Efficiency of Competitive Markets | 623 | ||
16.3 Equity and Efficiency | 624 | ||
The Utility Possibilities Frontier | 624 | ||
Equity and Perfect Competition | 626 | ||
16.4 Efficiency in Production | 627 | ||
Input Efficiency | 627 | ||
The Production Possibilities Frontier | 628 | ||
Output Efficiency | 629 | ||
Efficiency in Output Markets | 631 | ||
16.5 The Gains from Free Trade | 632 | ||
Comparative Advantage | 632 | ||
An Expanded Production Possibilities Frontier | 633 | ||
16.6 An Overview—The Efficiency of Competitive Markets | 637 | ||
16.7 Why Markets Fail | 638 | ||
Market Power | 639 | ||
Incomplete Information | 639 | ||
Externalities | 639 | ||
Public Goods | 640 | ||
Summary | 641 | ||
Questions for Review | 641 | ||
Exercises | 642 | ||
17 Markets with Asymmetric Information | 645 | ||
17.1 Quality Uncertainty and the Market for Lemons | 646 | ||
The Market for Used Cars | 646 | ||
Implications of Asymmetric Information | 648 | ||
The Importance of Reputation and Standardization | 649 | ||
17.2 Market Signaling | 653 | ||
A Simple Model of Job Market Signaling | 654 | ||
Guarantees and Warranties | 656 | ||
17.3 Moral Hazard | 658 | ||
17.4 The Principal–Agent Problem | 660 | ||
The Principal–Agent Problem in Private Enterprises | 660 | ||
The Principal–Agent Problem in Public Enterprises | 663 | ||
Incentives in the Principal–Agent Framework | 664 | ||
*17.5 Managerial Incentives in an Integrated Firm | 666 | ||
Asymmetric Information and Incentive Design in the Integrated Firm | 666 | ||
Applications | 668 | ||
17.6 Asymmetric Information in Labor Markets: Efficiency Wage Theory | 669 | ||
Summary | 671 | ||
Questions for Review | 672 | ||
Exercises | 672 | ||
18 Externalities and Public Goods | 675 | ||
18.1 Externalities | 675 | ||
Negative Externalities and Inefficiency | 676 | ||
Positive Externalities and Inefficiency | 678 | ||
18.2 Ways of Correcting Market Failure | 681 | ||
An Emissions Standard | 682 | ||
An Emissions Fee | 682 | ||
Standards versus Fees | 683 | ||
Tradeable Emissions Permits | 686 | ||
Recycling | 689 | ||
18.3 Stock Externalities | 693 | ||
Stock Buildup and Its Impact | 694 | ||
18.4 Externalities and Property Rights | 699 | ||
Property Rights | 699 | ||
Bargaining and Economic Efficiency | 700 | ||
Costly Bargaining—The Role of Strategic Behavior | 701 | ||
A Legal Solution—Suing for Damages | 701 | ||
18.5 Common Property Resources | 703 | ||
18.6 Public Goods | 705 | ||
Efficiency and Public Goods | 706 | ||
Public Goods and Market Failure | 708 | ||
Summary | 709 | ||
Questions for Review | 710 | ||
Exercises | 711 | ||
19 Behavioral Economics | 713 | ||
19.1 Reference Points and Consumer Preferences | 714 | ||
19.2 Fairness | 718 | ||
19.3 Rules of Thumb and Biases in Decision Making | 719 | ||
19.4 Bubbles | 726 | ||
Informational Cascades | 728 | ||
19.5 Behavioral Economics and Public Policy | 731 | ||
Summing Up | 733 | ||
Summary | 733 | ||
Questions for Review | 734 | ||
Exercises | 734 | ||
Appendix: The Basics of Regression | 735 | ||
Glossary | 743 | ||
Answers to Selected Exercises | 753 | ||
Photo Credits | 768 | ||
Index | 769 | ||
List of Examples | 783 |