Preface iii

Acknowledgments viii

Chapter 1: An Introduction to Microeconomics 1

1.1 The Scope of Microeconomic Theory 2

1.2 The Nature and Role of Theory 2

1.3 Positive versus Normative Analysis 3

1.4 Market Analysis and Real versus Nominal Prices 4

1.5 Basic Assumptions about Market Participants 5

1.6 Opportunity Cost 6

1.7 Production Possibility Frontier 9

Chapter 2: Supply and Demand 13

2.1 Demand and Supply Curves 14

2.2 Determination of Equilibrium Price and Quantity 21

2.3 Adjustment to Changes in Demand or Supply 22

2.4 Government Intervention in Markets: Price Controls 25

2.5 Elasticities 30

Chapter 3: The Theory of Consumer Choice 42

3.1 Consumer Preferences 43

3.2 The Budget Constraint 52

3.3 The Consumer’s Choice 56

3.4 Changes in Income and Consumption Choices 61

3.5 Are People Selfish? 67

3.6 The Utility Approach to Consumer Choice 69

Chapter 4: Individual and Market Demand 75

4.1 Price Changes and Consumption Choices 76

4.2 Income and Substitution Effects of a Price Change 80

4.3 Income and Substitution Effects: Inferior Goods 85

4.4 From Individual to Market Demand 88

4.5 Consumer Surplus 89

4.6 Price Elasticity and the Price–Consumption Curve 95

4.7 Network Effects 97

4.8 The Basics of Demand Curve Estimation 100

Chapter 5: Using Consumer Choice Theory 107

5.1 Excise Subsidies, Health Care, and Consumer Welfare 108

5.2 Subsidizing Health Insurance: ObamaCare 112

5.3 Public Schools and the Voucher Proposal 116

5.4 Paying for Garbage 121

5.5 The Consumer’s Choice to Save or Borrow 124

5.6 Investor Choice 130

Chapter 6: Exchange, Efficiency, and Prices 140

6.1 Two-Person Exchange 141

6.2 Efficiency in the Distribution of Goods 147

6.3 Competitive Equilibrium and Efficient Distribution 151

6.4 Price and Nonprice Rationing and Efficiency 154

Chapter 7: Production 160

7.1 Relating Output to Inputs 161

7.2 Production When Only One Input is Variable: The Short Run 161

7.3 Production When All Inputs are Variable: The Long Run 167

7.4 Returns to Scale 173

7.5 Functional Forms and Empirical Estimation of Production Functions 176

Chapter 8: The Cost of Production 182

8.1 The Nature of Cost 183

8.2 Short-Run Cost of Production 183

8.3 Short-Run Cost Curves 186

8.4 Long-Run Cost of Production 192

8.5 Input Price Changes and Cost Curves 197

8.6 Long-Run Cost Curves 199

8.7 Learning by Doing 202

8.8 Importance of Cost Curves to Market Structure 204

8.9 Using Cost Curves: Controlling Pollution 206

8.10 Economies of Scope 208

8.11 Estimating Cost Functions 209

Chapter 9: Profit Maximization in Perfectly Competitive Markets 213

9.1 The Assumptions of Perfect Competition .214

9.2 Profit Maximization 215

9.3 The Demand Curve for a Competitive Firm 217

9.4 Short-Run Profit Maximization 218

9.5 The Perfectly Competitive Firm’s Short-Run Supply Curve 223

9.6 The Short-Run Industry Supply Curve 226

9.7 Long-Run Competitive Equilibrium 227

9.8 The Long-Run Industry Supply Curve 231

9.9 When Does the Competitive Model Apply? 239

Chapter 10: Using the Competitive Model 244

10.1 The Evaluation of Gains and Losses 244

10.2 Excise Taxation 250

10.3 Airline Regulation and Deregulation 258

10.4 City Taxicab Markets 263

10.5 Consumer and Producer Surplus, and the Net Gains from Trade 267

10.6 Government Intervention in Markets: Quantity Controls 271

Chapter 11: Monopoly 279

11.1 The Monopolist’s Demand and Marginal Revenue Curves 280

11.2 Profit-Maximizing Output of a Monopoly 282

11.3 Further Implications of Monopoly Analysis 287

11.4 The Measurement and Sources of Monopoly Power 290

11.5 The Efficiency Effects of Monopoly 297

11.6 Public Policy toward Monopoly 300

Chapter 12: Product Pricing with Monopoly Power 308

12.1 Price Discrimination 309

12.2 Three Necessary Conditions for Price Discrimination 313

12.3 Price and Output Determination with Price Discrimination 315

12.4 Intertemporal Price Discrimination and Peak-Load Pricing 318

12.5 Two-Part Tariffs 324

Chapter 13: Monopolistic Competition and Oligopoly 332

13.1 Price and Output under Monopolistic Competition 333

13.2 Oligopoly and the Cournot Model 338

13.3 Other Oligopoly Models 342

13.4 Cartels and Collusion 347

Chapter 14: Game Theory and the

Economics of Information 360

14.1 Game Theory 361

14.2 The Prisoner’s Dilemma Game 364

14.3 Repeated Games 369

14.4 Asymmetric Information 373

14.5 Adverse Selection and Moral Hazard 377

14.6 Limited Price Information 381

14.7 Advertising 383

Chapter 15: Using Noncompetitive Market Models 389

15.1 The Size of the Deadweight Loss of Monopoly 389

15.2 Do Monopolies Suppress Inventions? 393

15.3 Natural Monopoly 396

15.4 More on Game Theory: Iterated Dominance and Commitment 400

Chapter 16: Employment and Pricing of Inputs 406

16.1 The Input Demand Curve of a Competitive Firm 407

16.2 Industry and Market Demand Curves for an Input 412

16.3 The Supply of Inputs 415

16.4 Industry Determination of Price and Employment of Inputs 417

16.5 Input Price Determination in a Multi-Industry Market 420

16.6 Input Demand and Employment by an Output Market Monopoly 422

16.7 Monopsony in Input Markets 424

Chapter 17: Wages, Rent, Interest, and Profit 429

17.1 The Income–Leisure Choice of the Worker 429

17.2 The Supply of Hours of Work 432

17.3 The General Level of Wage Rates 437

17.4 Why Wages Differ 439

17.5 Economic Rent 443

17.6 Monopoly Power in Input Markets: The Case of Unions 445

17.7 Borrowing, Lending, and the Interest Rate 448

17.8 Investment and the Marginal Productivity of Capital 449

17.9 Saving, Investment, and the Interest Rate 452

17.10 Why Interest Rates Differ 454

Chapter 18: Using Input Market Analysis 457

18.1 The Minimum Wage 458

18.2 Who Really Pays for Social Security? 464

18.3 The Hidden Cost of Social Security 467

18.4 The NCAA Cartel 470

18.5 Discrimination in Employment 476

18.6 The Benefits and Costs of Immigration 480

Chapter 19: General Equilibrium Analysis and Economic Efficiency 486

19.1 Partial and General Equilibrium Analysis Compared 487

19.2 Economic Efficiency 490

19.3 Conditions for Economic Efficiency 492

19.4 Efficiency in Production 492

19.5 The Production Possibility Frontier and Efficiency in Output 496

19.6 Competitive Markets and Economic Efficiency 501

19.7 The Causes of Economic Inefficiency 504

Chapter 20: Public Goods and Externalities 509

20.1 What are Public Goods? 510

20.2 Efficiency in the Provision of a Public Good 512

20.3 Externalities 516

20.4 Externalities and Property Rights 522

20.5 Controlling Pollution, Revisited 524

The Market for Los Angeles Smog 527

Answers to Selected Problems 532

Glossary G-1

Index 1 

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