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Microeconomics: Principles, Applications, and Tools

by: O'Sullivan, Arthur; Sheffrin, Steven M.; Perez, Steve

Microeconomics: Principles, Applications, and Tools

by: O'Sullivan, Arthur; Sheffrin, Steven M.; Perez, Steve

ISBN 13:
9780131536067
ISBN 10:
0131536060
Edition: 4th
Format: Hardcover
Copyright: 01/01/2007
Publisher: Prentice Hall
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Summary

The book provides a clear, concise, and accessible presentation of key points.Its hallmark feature includes a focus on the 5 Key Principles of Economics1) Opportunity Cost, 2) The Marginal Principle (comparing marginal benefits and marginal costs), 3) Diminishing Returns, 4) The Spillover Principle (for externalities in production and consumption), 5) The Reality Principle (distinguishing real from nominal magnitudes).For financial professionals and analysts.

PART 1 Introduction and Key Principles

(92)

Introduction: What Is Economics?

(24)

What Is Economics?

(3)

Positive Versus Normative Analysis

(1)

Decisions in a Modern Economy: The Invisible Hand?

(1)

A Closer Look: When Do Economists Agree?

(1)

Economic Analysis and Modern Problems

(2)

Example 1: Traffic Congestion

(1)

Example 2: Poverty in Africa

(1)

Example 3: Japan's Economic Problems

(1)

The Economic Way of Thinking

(4)

Rational People Respond to Incentives

(1)

Application: Thinking About Congestion

(1)

Preview of Coming Attractions: Microeconomics

(2)

A Closer Look: Even Kids Respond to Incentives

(1)

To Understand Markets and Predict Changes

(1)

To Make Personal and Managerial Decisions

(1)

To Evaluate Public Policies

(1)

Preview of Coming Attractions: Macroeconomics

(3)

To Understand Why Economies Grow

(1)

To Understand Economic Fluctuations

(1)

To Make Informed Business Decisions

(1)

A Closer Look: ``Dismal'' Depends On Your Point of View

(2)

Appendix: Using Graphs and Formulas

(1)

Using Graphs to Show Relationships

(9)

The Key Principles of Economics

(18)

The Principle of Opportunity Cost

(5)

Opportunity Cost and the Production Possibilities Curve

(1)

Using the Principle: Military Spending, Collectibles

(1)

Using the Principle: The Cost of College

(1)

A Closer Look: Swords vs. Ecotels?

(1)

The Marginal Principle

(3)

Example: How Many Movie Sequels?

(2)

Using the Marginal Principle: Renting College Facilities, Emissions Standards

(1)

Economic Puzzle: Marginal Airlines Lives Up to Its Name

(1)

The Principle of Voluntary Exchange

(2)

Exchange and Markets

(1)

The Principle of Diminishing Returns

(1)

The Real--Nominal Principle

(1)

Economic Experiment: Producing Fold-Its

(1)

Using the Principle: Government Programs, Statistics, and Repaying College Loans

(1)

Using the Tools

(4)

Exchange and Markets

(16)

Comparative Advantage and Exchange

(6)

Specialization and the Gains from Trade

(2)

Production and Consumption Possibilities

(1)

Comparative Advantage Versus Absolute Advantage

(1)

The Division of Labor and Exchange

(1)

Comparative Advantage and International Trade

(2)

A Closer Look: Buzz Lightyear of China

(1)

Markets

(4)

Virtues of Markets

(2)

Example: Exchange in a Prisoner of War Camp

(1)

Shortcomings of Markets

(1)

A Closer Look: EverQuest and Fantasy Exchanges

(1)

The Role of Government in a Market Economy

(5)

Government Enforces the Rules of Exchange

(1)

Government Can Reduce Economic Uncertainty

(4)

Supply, Demand, and Market Equilibrium

(33)

The Demand Curve

(4)

The Individual Demand Curve and the Law of Demand

(2)

From Individual Demand to Market Demand

(1)

Economic Puzzle: Saving Money Wherever You Shop?

(1)

The Supply Curve

(4)

The Individual Supply Curve and the Law of Supply

(1)

Why Is the Individual Supply Curve Positively Sloped?

(1)

From Individual Supply to Market Supply

(1)

Market Equilibrium

(2)

Excess Demand Causes the Price to Rise

(1)

Excess Supply Causes the Price to Drop

(1)

Market Effects of Changes in Demand

(5)

Change in Quantity Demanded Versus Change in Demand

(1)

Increases in Demand

(2)

Decreases in Demand

(2)

Market Effects of Changes in Supply

(4)

Change in Quantity Supplied Versus Change in Supply

(1)

Increases in Supply

(2)

A Closer Look: Increasing the Supply of Wind Power

(1)

Decreases in Supply

(1)

Market Effects of Simultaneous Changes in Demand and Supply

(2)

Using the Model to Predict Changes in Price and Quantity

(2)

Population Growth and Apartment Prices

(1)

Product Safety and Apples

(1)

Technological Innovation and Computers

(1)

Weather and Coffee

(1)

Explaining Changes in Price or Quantity

(3)

An Increase in Poultry Consumption

(1)

A Decrease in Drug Prices

(1)

A Closer Look: Higher Platinum Prices

(1)

Economic Experiment: Market Equilibrium

(1)

Using the Tools

(5)

PART 2 A Closer Look at Supply and Demand

(76)

Elasticity: A Measure of Responsiveness

(26)

The Price Elasticity of Demand

(6)

Price Elasticity and the Demand Curve

(2)

What Determines the Price Elasticity of Demand?

(1)

Computing Price Elasticity: Initial Value Versus Midpoint

(1)

A Closer Look: How to Cut Teen Smoking by 60%

100

(1)

Elasticity Along a Linear Demand Curve

101

(2)

Using the Price Elasticity of Demand to Make Predictions

103

(4)

Predicting Changes in Quantity Demanded

103

(1)

Applications: College Education, Highway Deaths, and Medical Care

103

(1)

Predicting Changes in Total Revenue

104

(1)

A Closer Look: Pricing Medical Care in Developing Countries

104

(2)

Applications: Transit Deficits, Property Crime

106

(1)

Economic Puzzle: DVD Elasticity

107

(3)

Other Elasticities of Demand

108

(2)

The Price Elasticity of Supply

110

(2)

Predicting Changes in Quantity Supplied

111

(1)

Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply

111

(1)

Predicting Changes in Price Using Supply and Demand Elasticities

112

(4)

The Price Effects of a Change in Demand

112

(2)

The Price Effects of a Change in Supply

114

(2)

Using the Tools

116

(4)

Consumer Choice

120

(18)

Consumer Constraints and Preferences

121

(4)

Consumer Constraints: The Budget Line

122

(1)

Consumer Preferences: Indifference Curves

123

(2)

Maximizing Utility

125

(4)

The Tangency Condition

125

(1)

The Utility-Maximizing Rule: MRS = Price Ratio

126

(1)

Drawing the Demand Curve

127

(1)

Do Consumers Actually Do This?

128

(1)

Applications of the Consumer Choice Model

129

(6)

Music Piracy and Online Music Stores

129

(1)

A Closer Look: Modern Consumer Theory Versus Old Utility Theory

130

(1)

Inflation, the Real--Nominal Principle, and Consumer Choice

131

(2)

The Equimarginal Rule

133

(1)

A Closer Look: The Bang per Buck of Light Spirits

134

(1)

Using the Tools

135

(3)

Market Efficiency and Government Intervention

138

(31)

Consumer Surplus and Producer Surplus

140

(2)

The Demand Curve and Consumer Surplus

140

(1)

The Supply Curve and Producer Surplus

141

(1)

Market Equilibrium and Efficiency

142

(4)

Total Surplus Is Lower with a Price Below the Equilibrium Price

143

(2)

Total Surplus Is Lower with a Price Above the Equilibrium Price

145

(1)

Efficiency and the Invisible Hand

145

(1)

Government Intervention in Markets

146

(2)

Controlling the Price

148

(3)

Setting Maximum Prices

148

(1)

Application: Rent Control

148

(2)

Setting Minimum Prices

150

(1)

A Closer Look: Milk Mountains

151

(1)

Controlling the Quantity---Licensing and Import Restrictions

151

(3)

Application: Taxi Medallions

152

(1)

Licensing and Market Efficiency

153

(1)

Economic Puzzle: Shortfall from Medallion Sale

154

(3)

Winners and Losers from Licensing

154

(1)

Restricting Imports

154

(2)

A Closer Look: A Market For Used Human Organs?

156

(1)

Who Really Pays Taxes?

157

(6)

Tax Shifting: Forward and Backward

157

(2)

Predicting the Amount Shifted Forward and Backward

159

(1)

Applications: Cigarette and Luxury Taxes

160

(1)

Tax Burden and Deadweight Loss

161

(2)

A Closer Look: Taxes and December Babies

163

(1)

Economic Experiment: Government Intervention

163

(1)

Using the Tools

163

(6)

PART 3 Information and Externalities

169

(64)

Imperfect Information: Adverse Selection and Moral Hazard

170

(24)

The Lemons Problem

171

(5)

Uninformed Buyers and Knowledgeable Sellers

172

(1)

Equilibrium with All Low-Quality Goods

172

(2)

A Thin Market: Equilibrium with Some High-Quality Goods

174

(2)

Responding to the Lemons Problem

176

(3)

Buyers Invest in Information

177

(1)

Sellers Provide Guarantees

177

(1)

Lemons Laws

177

(1)

A Closer Look: Consumer Satisfaction Scores from ValueStar and eBay

178

(1)

Evidence of the Lemons Effect

179

(2)

The Price of a Week-Old Car

179

(1)

Used Pickup Trucks

179

(1)

California Kiwifruit

179

(1)

Used Baseball Pitchers

180

(1)

Uninformed Sellers and Knowledgeable Buyers: Insurance

181

(5)

Health Insurance

182

(1)

Equilibrium with All High-Cost Consumers

183

(1)

Responding to Adverse Selection in Insurance: Group Insurance

184

(1)

The Uninsured

185

(1)

Other Types of Insurance

185

(1)

A Closer Look: Genetic Testing, Thrill Seekers, and Insurance

186

(1)

Moral Hazard

186

(2)

Economic Puzzle: Bicycle Theft Insurance

188

(1)

Economic Experiment: Rolling for Lemons

189

(1)

Economic Experiment: Bike Insurance

189

(1)

Using the Tools

190

(4)

Environmental Policy

194

(24)

The Optimal Level of Pollution and Pollution Taxes

194

(7)

Application: Finding the Optimal Level of Sulfur Dioxide Emissions

197

(1)

A Firm's Response to a Pollution Tax

198

(1)

The Market Effects of a Pollution Tax

199

(2)

Traditional Regulation: Uniform Abatement and Command-and-Control Policies

201

(3)

Uniform Abatement with Permits

201

(1)

Command and Control

202

(1)

Market Effects of Pollution Regulations

202

(1)

A Closer Look: Dear Abby and Environmental Policy

203

(1)

Marketable Pollution Permits

204

(2)

Voluntary Exchange and Marketable Permits

204

(1)

Supply, Demand, and the Price of Marketable Permits

205

(1)

Application: Marketable Permits for Sulfur Dioxide

206

(1)

Economic Puzzle: Why Did the Price of Permits Drop?

206

(1)

Global Warming and Public Policy

207

(4)

The Consequences of Global Warming

207

(1)

The Kyoto Agreement and Developing Nations

208

(1)

The Effects of a Carbon Tax

209

(1)

Marketable Permits and Offsets for Carbon?

209

(1)

A Closer Look: Giving the Gift of CO2

210

(1)

Ozone Pollution and the Automobile

211

(2)

Economic Experiment: Pollution Permits

213

(1)

Using the Tools

214

(4)

Public Goods and Public Choice

218

(15)

An Overview of Government Spending and Taxes

219

(1)

External Benefits and Inefficiency

220

(3)

Public Goods and External Benefits

221

(1)

Private Goods with External Benefits

221

(1)

Public Goods and the Free-Rider Problem

222

(1)

Economic Puzzle: Why Build a Three-Faced Clock Tower?

223

(1)

Overcoming the Free-Rider Problem

223

(1)

Applications: Asteroids and Wildlife

224

(1)

Asteroid Diversion

224

(1)

Preservation of Wolves

224

(1)

Public Choice

225

(5)

Voting and the Median-Voter Rule

225

(2)

A Closer Look: Are Politicians Like Ice-Cream Vendors?

227

(1)

Alternative Models of Government: Self-Interests and Special Interests

228

(1)

Which Theory or Viewpoint Is Correct?

229

(1)

Economic Experiment: Voluntary Contributions

230

(1)

Using the Tools

230

(3)

PART 4 Market Structures and Pricing

233

(144)

Production Technology and Cost

234

(26)

Introduction

235

(2)

Economic Cost Is Opportunity Cost

236

(1)

Short-Run Versus Long-Run Costs

236

(1)

The Fixed Production Facility: Short-Run Costs

237

(7)

Production and Marginal Product

237

(2)

Short-Run Total Cost

239

(1)

Short-Run Average Costs

240

(2)

Short-Run Marginal Cost

242

(1)

The Relationship Between Marginal Cost and Average Cost

243

(1)

Economic Puzzle: Same Average Cost at Two or Three Quantities?

244

(2)

Production and Cost in the Long Run

246

(8)

Expansion and Replication

246

(2)

Scaling Down and Indivisible Inputs

248

(1)

A Closer Look: Indivisible Inputs and the Cost of Fake Killer Whales

249

(1)

Scaling Down and Labor Specialization

250

(1)

Economies of Scale

250

(1)

A Closer Look: Scale Economies in Wind Power

251

(1)

Diseconomies of Scale

252

(1)

Actual Long-Run Average-Cost Curves

252

(1)

Short-Run Versus Long-Run Average Cost

253

(1)

Information Goods and First-Copy Cost

254

(1)

Using the Tools

255

(5)

Perfect Competition

260

(28)

Preview: Alternative Market Structures

262

(1)

The Firm's Short-Run Output Decision

263

(5)

The Total Approach: Computing Total Revenue and Total Cost

264

(1)

The Marginal Approach

265

(2)

Economic Profit and the Break-Even Price

267

(1)

Economic Puzzle: Fewer Deliveries and More Profit?

268

(1)

The Firm's Shut-Down Decision

268

(4)

Total Revenue, Variable Cost, and the Shut-Down Decision

269

(1)

The Shut-Down Price

270

(1)

Fixed Costs and Sunk Costs

271

(1)

Application: Break-Even and Shut-Down Prices for Corn Farmer

271

(1)

Short-Run Supply Curves

272

(4)

The Firm's Short-Run Supply Curve

272

(1)

The Short-Run Market Supply Curve

273

(1)

Market Equilibrium

274

(1)

A Closer Look: Wireless Women

275

(1)

The Long-Run Supply Curve for an Increasing-Cost Industry

276

(3)

Production Cost and Industry Size

276

(1)

Drawing the Long-Run Market Supply Curve

277

(1)

Application: Increasing-Cost Industries---Wolfram, Sugar, Rental Housing

278

(1)

Short-Run and Long-Run Effects of Changes in Demand

279

(2)

The Short-Run Response to an Increase in Demand

279

(1)

The Long-Run Response to an Increase in Demand

280

(1)

Long-Run Supply for a Constant-Cost Industry

281

(2)

Long-Run Supply Curve for a Constant-Cost Industry

281

(1)

Application: Hurricane Andrew and the Price of Ice

282

(1)

Economic Experiment: Butter Prices

283

(1)

Using the Tools

284

(4)

Monopoly and Price Discrimination

288

(24)

The Monopolist's Output Decision

290

(6)

Total Revenue and Marginal Revenue

290

(2)

The Marginal Principle and the Output Decision

292

(2)

Using the Marginal Principle to Pick the Profit-Maximizing Quantity and Price

294

(2)

The Social Cost of Monopoly

296

(4)

Deadweight Loss from Monopoly

296

(2)

Application: Ending the Monopoly on Internet Registration

298

(1)

Rent Seeking: Using Resources to Get Monopoly Power

299

(1)

Monopoly and Public Policy

300

(1)

Patents and Monopoly Power

300

(2)

Incentives for Innovation

300

(1)

Trade-Offs from Patents

301

(1)

A Closer Look: Barriers to Generic Drugs

302

(1)

Price Discrimination

302

(4)

Application: Senior Discounts in Restaurants

304

(1)

Price Discrimination and the Elasticity of Demand

304

(1)

A Closer Look: Interacting with a Soda Vending Machine on a Hot Day

305

(1)

Application: Movie Admission and Popcorn

306

(1)

Economic Puzzle: Why Are Hardback Books So Expensive?

306

(1)

Economic Experiment: Price Discrimination

307

(1)

Using the Tools

308

(4)

Market Entry and Monopolistic Competition

312

(14)

The Effects of Market Entry

314

(4)

Entry Squeezes Profits from Three Sides

315

(1)

Application: Woofer, Tweeter, and the Stereo Business

316

(1)

Entry Effects in the Real World

316

(1)

A Closer Look: Restricting Entry of On-Line Wine Merchants

317

(1)

Monopolistic Competition

318

(3)

When Entry Stops: Long-Run Equilibrium

319

(1)

Trade-Offs Between Average Cost and Variety

319

(1)

Application: Location and Consumer Travel Costs

320

(1)

Economic Puzzle: Lower Profit per Unit Sold?

321

(1)

Economic Experiment: Fixed Costs and Entry

322

(1)

Using the Tools

322

(4)

Oligopoly and Strategic Behavior

326

(30)

What Is an Oligopoly?

327

(2)

Cartel Pricing and the Duopolists' Dilemma

329

(7)

Price Fixing and the Game Tree

331

(1)

Predicting the Outcome of the Price-Fixing Game

332

(1)

A Closer Look: Vitamin, Inc. Gets Busted

333

(1)

Representing a Game with a Payoff Matrix

334

(1)

The Prisoners' Dilemma

334

(2)

Overcoming the Duopolists' Dilemma

336

(3)

Guaranteed Price Matching

336

(1)

Repeated Pricing Games with Retaliation for Underpricing

337

(1)

Application: Different Airline Ticket Prices

338

(1)

Price Fixing and the Law

339

(1)

Alternative Models of Oligopoly Pricing

340

(2)

Price Leadership

340

(1)

The Kinked Demand-Curve Model

341

(1)

The Insecure Monopolist and Entry Deterrence

342

(5)

The Passive Approach: Do Nothing to Deter Entry

342

(1)

The Entry Deterrence Approach: Use Limit Pricing to Deter Entry

343

(1)

Limit Pricing

344

(1)

When Is the Passive Approach Better?

345

(1)

A Closer Look: Crafty--and Illegal--Entry Deterrence in Europe

345

(1)

Applications: Aluminum, Plane Tickets, and Campus Bookstores

346

(1)

Entry Deterrence and Contestable Markets

347

(1)

Economic Puzzle: Ballpoint Pens from R.I.P.

347

(1)

The Advertisers' Dilemma

348

(2)

Game Theory and Nash Equilibrium

350

(2)

Economic Experiment: A Price-Fixing Game

352

(1)

Using the Tools

352

(4)

Market Structure and Public Policy

356

(21)

Natural Monopoly

357

(4)

Picking an Output Level

357

(1)

Will a Second Firm Enter?

358

(1)

Price Controls for a Natural Monopoly

359

(2)

Economic Puzzle: A Decrease in Demand Decreases the Price?

361

(1)

A Closer Look: Will Satellite Radio Become a Natural Monopoly?

361

(1)

Antiturst Policy

362

(5)

Breaking Up Monopolies

362

(1)

Blocking Mergers

363

(2)

Application: Merger Remedies for Xidex and Wonder Bread

365

(1)

A Closer Look: Is Tripoly Better Than Duopoly?

365

(2)

Economic Puzzle: Check the Yellow Pages?

367

(2)

Regulating Business Practices: Price Fixing, Tying, and Cooperative Agreements

367

(1)

Application: The Microsoft Case

368

(1)

A Brief History of U.S. Antitrust Policy

368

(1)

Deregulation of Airlines and Telecommunications

369

(2)

Deregulation of Airlines

370

(1)

Deregulation of Telecommunications Services

370

(1)

Deregulation of Electricity

371

(3)

Electricity Deregulation in California

372

(1)

Electricity Deregulation in Other U.S. States

373

(1)

Using the Tools

374

(3)

PART 5 The Labor Market and Income Distribution

377

(42)

The Labor Market and the Distribution of Income

378

(26)

The Demand for Labor

379

(5)

Labor Demand by an Individual Firm in the Short Run

379

(3)

Market Demand for Labor in the Short Run

382

(1)

What About Labor Demand in the Long Run?

383

(1)

Short-Run versus Long-Run Demand

383

(1)

The Supply of Labor

384

(3)

The Individual Labor-Supply Decisions: How Many Hours to Work?

384

(1)

The Market Supply Curve for Labor

385

(2)

A Closer Look: The Economics of Not Working

387

(1)

Economic Puzzle: Response to a Wage Cut?

387

(1)

Labor Market Equilibrium

387

(4)

Changes in Demand and Supply for Labor

388

(1)

The Market Effects of the Minimum Wage Laws

389

(1)

A Closer Look: Foreign Sweatshops and Industry Codes of Conduct

390

(1)

The Trade-Offs from Immigration

390

(1)

Explaining Differences in Wages and Income

391

(5)

Why Do Wages Differ Across Occupations?

391

(2)

The Gender Pay Gap

393

(1)

Racial Discrimination

393

(1)

A Closer Look: Racial Discrimination in Hiring

394

(1)

Why Do College Graduates Earn Higher Wages?

395

(1)

The Distribution of Income

396

(4)

Income Distribution Facts

396

(1)

Recent Changes in the Distribution of Income

397

(1)

Changes in the Top End of Income Distribution: 1920--1998

398

(2)

Using the Tools

400

(4)

Beyond Perfect Competition: Unions, Monopsony, and Imperfect Information

404

(15)

Labor Unions

405

(4)

A Brief History of Labor Unions in the United States

406

(1)

Labor Unions and Wages

406

(1)

A Closer Look: Working Conditions and Unions

407

(1)

Effects of Unions on Worker Productivity and Turnover

408

(1)

Monopsony Power

409

(5)

Picking a Workforce and a Wage

409

(2)

Monopsony versus Perfect Competition

411

(1)

Monopsony and a Minimum Wage

412

(1)

Monopsony and the Real World

413

(1)

A Closer Look: Pubs and Labor-Supply Curve

414

(1)

Imperfect Information and Efficiency Wages

414

(1)

Economic Puzzle: Higher Wages at Ford Motor Company

415

(1)

Using the Tools

416

(3)

PART 6 The International Economy

419

(25)

International Trade and Public Policy

420

(24)

Benefits from Specialization and Trade

421

(5)

Production Possibilities Curve

422

(1)

Comparative Advantage and the Terms of Trade

423

(1)

The Consumption Possibilities Curve

424

(1)

The Employment Effects of Free Trade

425

(1)

Protectionist Policies

426

(4)

Import Ban

426

(1)

Quotas and Voluntary Export Restraints

427

(2)

Tariffs

429

(1)

Responses to Protectionist Policies

429

(1)

Rationales for Protectionist Policies

430

(3)

To Shield Workers from Foreign Competition

431

(1)

To Nurture Infant Industries

431

(1)

A Closer Look: The Cost of Protecting Jobs

431

(1)

A Closer Look: Protection for Candle Makers

432

(1)

To Help Domestic Firms Establish Monopolies in World Markets

432

(1)

A Brief History of International Tariff and Trade Agreements

433

(1)

Recent Policy Debates and Trade Agreements

434

(6)

Are Foreign Producers Dumping Their Products?

435

(1)

Do Trade Laws Inhibit Environmental Protection?

436

(2)

Does Trade Cause Inequality?

438

(1)

Why Do People Protest Against Free Trade?

438

(2)

Economic Experiment: Protectionist Policies

440

(1)

Using the Tools

440

(4)

Glossary

444

(6)

Answers to Odd-Numbered Problems and Discussion Questions

450

(7)

Index

457

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Microeconomics: Principles, Applications, and Tools

Microeconomics: Principles, Applications, and Tools

9780131536067

0131536060

Summary

Table of Contents

Supplemental Materials

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Amazon no longer offers textbook rentals. We do!

Microeconomics: Principles, Applications, and Tools

Microeconomics: Principles, Applications, and Tools

9780131536067

0131536060

Summary

Table of Contents

Supplemental Materials

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