Upload
others
View
7
Download
0
Embed Size (px)
Citation preview
EIGHTH EDITION
exploring
MICROECONOMICS
Robert L. Sexton
Pepperdine University
(DSAGE
Los Angeles | London j New Delhi Singapore | Washington DC | Melbourne
Detailed Contents
Preface xxxi
Visual Learning Features xxxiv
Applications xxxv
SAGE edge and Online Resources xxxviii
About the Author xxxix
Acknowledgments xl
Parti. Introduction i
Chapteri. The Role and Method of Economics 2
Learning Outcomes 2
1.1 Economics: A Brief Introduction 3
Economics—A Word with Many Different Meanings 3
Economics Is All Around Us 4
1.2 Economic Behavior 5
Self-Interest 5
What Is Rational Behavior? 6
1.3 Economic Theories and Models 8
Economic Theories and Models 8
Abstraction Is Important 9
Developing a Testable Proposition 9
The Ceteris Paribus Assumption io
Why Are Observation and Prediction Härder in the Social Sciences? 10
Why Do Economists Predict on a Group Level? 10
The Two Branches of Economics: Microeconomics and Macroeconomics 11
1.4 Pitfalls to Avoid in Scientific Thinking 12
Confusing Correlation and Causation 12
The Fallacy of Composition 13
1.5 Positive Statements and Normative Statements 14
Positive Statement 14
Normative Statement 14
Positive versus Normative Analysis 14
Disagreement Is Common in Most Disciplines 15
Often Economists Do Agree 16
Interactive Summary 19
Key Terms and Concepts 20
Additional Section Quiz Answers 20
Problems 22
Appendix: Workingwith Graphs 24
Chapter2. Economics: Eight Powerful Ideas 32
Learning Outcomes 32
2.1 Idea I: People Face Scarcity and Costly Trade-offs 33
Human Wants Exceed Available Resources 33
Scarcity and Resources 33
What Are Goods and Services? 34
What Are Bads? 35
Does Everyone Face Scarcity? 35
Will Scarcity Ever Be Eradicated? 35
Wants versus Needs 35
Scarcity Forces Us to Choose 36
Trade-offs 36
To Choose Is to Lose 36
Money Costs and Non-money Costs 37
The Opportunity Cost of Going to College or Having a Child 38
2.2 Idea 2: People Engage in Rational Decision Making and Marginal Thinking 40
What Is Rational Decision Making? 40
Many Choices We Face Involve Marginal Thinking 40
2.3 Idea 3: People Respond Predictably to Changes
in Incentives 44
Changes in Incentives Change Individual Behavior 44
Positive and Negative Incentives 44
2.4 Idea 4: Specialization and Trade Can Make People
Better Off 47
Why Do People Specialize? 47
Absolute versus Comparative Advantage 47
We All Specialize 48
The Advantages of Specialization 48
Specialization and Trade Lead to Greater Wealth and Prosperity 49
2.5 Idea 5: Markets Can Improve Economic Efficiency 52
How Does the Market Work to Allocate Resources? 52
Market Prices Provide Important Information 52
What Effect Do Price Controls Have on the Market System? 53
2.6 Idea 6: Appropriate Government Policies Can Improve Market Outcomes 54
Property Rights and the Legal System 54
Market Failure 54
2.7 Idea 7: Government Policies May Help Stabilize the Economy 56
Inflation 56
Unemployment 57
2.8 Idea 8: Increasing Productivity Leads to Economic Growth 58
Defining Economic Growth 58
Economic Growth, Productivity, and the Standard of Living 59
What Factors Contribute to Increases in Productivity? 59
Interactive Summary 60
Key Terms and Concepts 62
Additional Section Quiz Answers 62
Problems 67
Chapterg. Scarcity, Trade-OfFs, and Production Possibilities 70
Learning Outcomes 70
3.1 The Three Economic Questions Every Society Faces 71
The Three Economic Questions 72
What Goods and Services Will Be Produced? 72
How Will the Goods and Services Be Produced? 73
Who Will Get the Goods and Services Produced? 73
3.2 The Circular Flow Model 77
Product Markets 77
Factor Markets 77
The Simple Circular Flow Model 77
3.3 The Production Possibilities Curve 79
The Production Possibilities Curve 79
Inefficiency and Efficiency 81
The Law of Increasing Opportunity Cost 81
3.4 Economic Growth and the Production Possibilities Curve 84
Generating Economic Growth 84
Growth Does Not Eliminate Scarcity 84
The Effects of a Technological Change on the Production Possibilities Curve 85
Summing up the Production Possibilities Curve 86
Interactive Summary 87
Key Terms and Concepts 88
Additional Section Quiz Answers 88
Problems 90
Part 2. Supply and Demand 93
Chapter4. Demand, Supply, and Market Equilibrium 94
Learning Outcomes 94
4.1 Markets 95 Defining a Market 95 Buyers and Seilers 95
4.2 Demand 96 The Law of Demand 96 Individual Demand 97 What Is a Market Demand Curve? 97 Ceteris Paribus and the Law of Demand 98
4.3 Shifts in the Demand Curve IOO
A Change in Demand versus a Change in Quantity Demanded 100
Shifts in Demand ("PYNTE") 101
Changes in the Prices of Related Goods and Services (P) 101
Changes in Income (Y) 103 Changes in the Number of Buyers (N) 105
Changes in Tastes (T) 105 Changes in Expectations (E) 106
Changes in Demand versus Changes in Quantity Demanded—Revisited 106
4.4 Supply 109
The Law of Supply 109 A Positive Relationship between Price and Quantity Supplied 109
An Individual Supply Curve 109
The Market Supply Curve 110
4.5 Shifts in the Supply Curve in
A Change in Quantity Supplied versus a Change in Supply m
Shifts in Supply ("SPENT") 112
Change in Supply versus Change in Quantity Supplied—Revisited 115
4.6 Market Equilibrium Price and Quantity 117
Equilibrium Price and Quantity 117
Shortages and Surpluses 117
Don't Confuse Scarcity and Shortages 118
Interactive Summary 120
Key Terms and Concepts 121
Additional Section Quiz Answers 121
Problems 124
Chapter 5. Markets in Motion and Price Controls 130
Learning Outcomes 130
5.1 Changes in Market Equilibrium 131
The Effects of a Change in Demand 131
The Effects ofa Change in Supply 132
The Effects of Changes in Both Supply and Demand 133
The Combinations of Supply and Demand Shifts 136
Supply, Demand, and the Market Economy 136
5.2 Price Controls 141
Price Controls 141
Price Ceilings: Rent Controls 142
Price Floors: The Minimum Wage 143
Price Ceilings: Price Controls on Gasoline 145
Unintended Consequences 146
Interactive Summary 150
Key Terms and Concepts 150
Additional Section Quiz Answers 150
Problems 152
Chapter 6. Elasticities 154
Learning Outcomes 154
6.1 Price Elasticityof Demand 155
ls the Demand Curve Elastic or Inelastic? 155
Types of Demand Curves 156
Calculating the Price Elasticity of Demand: The Midpoint Method 157
The Determinants of the Price Elasticity of Demand 158
6.2 Total Revenue and the Price Elasticity of Demand 162
How Does the Price Elasticity of Demand Impact Total Revenue? 162
Price Elasticity Changes along a Linear Demand Curve 163
6.3 Other Types of Demand Elasticities
The Cross-Price Elasticity of Demand
167
167
Cross-Price Elasticity and Sodas 167
The Income Elasticity of Demand 167
6.4 Price Elasticity ofSupply 169
What Is the Price Elasticity of Supply? 169
Interactive Summary 177
Key Terms and Concepts 178
Additional Section Quiz Answers 178
Problems 180
Part 3. Market Efficiency, Market Failure,
and the Public System 183
Chapter 7. Market Efficiency and Weifare 184
Learning Outcomes 184
7.1 Consumer Surplus and Producer Surplus 185
Consumer Surplus 185
Marginal Willingness to Pay Falls as More Is Consumed 185
Price Changes and Changes in Consumer Surplus 186
Producer Surplus 187
Market Efficiency and Producer and Consumer Surplus 188
Market Efficiency and Market Failure: A Caveat 190
7.2 The Weifare Effects of Taxes, Subsidies, and
Price Controls 193
Using Consumer and Producer Surplus to Find the Weifare Effects of a Tax 193
Elasticity and the Size of the Deadweight Loss 195
Deadweight Loss and Tax Revenues When Tax Size Changes 195
The Weifare Effects of Subsidies 197
Price Controls and Weifare Effects 200
Price Ceilings 200
Rent Controls 201
Rent Controls—Short Run versus Long Run 201
Price Floors 202
The Weifare Effects of a Price Floor When the Government Guys the Surplus 203
Deficiency Payment Program 204
Interactive Summary 207
Key Terms and Concepts 207
Additional Section Quiz Answers 208
Problems 210
Chapter 8. Market Failure 212
LearningOutcomes 212
8.1 Externalities 213
Negative Externalities in Production 213
What Can the Government Do to Correct for Negative Externalities? 215
Positive Externalities in Consumption 216
What Can the Government Do to Correct for Positive Externalities? 217
Nongovernmental Solutions to Externalities 218
8.2 Public Policy and the Environment 220
Why Is a Clean Environment Not Free? 220
The Costs and Benefits of Pollution Control 220
Command and Control Policies: Regulation 221
Corrective Taxes: A Market-Based Policy 222
Transferable Pollution Rights 222
8.3 Property Rights and the Environment 224
The Coase Theorem 224
Transaction Costs and the Coase Theorem 224
8.4 Public Goods 225
Private Goods versus Public Goods 226
Public Goods and the Free-Rider Problem 226
The Government and Benefit-Cost Analysis 227
Common Resources and the Tragedy of the Commons 227
8.5 Asymmetrie Information 230
What Is Asymmetrie Information? 230
What Is Moral Hazard? 233
Interactive Summary 235
Key Terms and Concepts 237
Additional Section Quiz Answers 237
Problems 239
Chapter 9. Public Finance and Public Choice 241
Learning Outcomes 241
9.1 Public Finance: Government Spending and Taxation 242
Growth in Government 242
State and Local Spending 244
Generating Government Revenue 244
Financing State and Local Government Activities 247
Should We Have a Fiat Tax? 247
Taxes: Efficiency and Equity 248
9.2 Public Choice 252
What Is Public Choice Theory? 252
Scarcity and the Public Sector 253
The Individual Consumption-Payment Link 253
Majority Rule and the Median Voters 253
Voters and Rational Ignorance 254
Special Interest Croups 255
Interactive Summary 257
Key Terms and Concepts 257
Additional Section Quiz Answers 258
Problems 259
Part 4. Households and Market Structure 261
Chapter 10. Consumer Choice Theory 262
Learning Outcomes 262
10.1 Consumer Behavior 263
Utility 264
Utility Is a Personal Matter 265
Total Utility and Marginal Utility 265
Diminishing Marginal Utility 267
10.2 The Consumer's Choice 268
What Is the "Best" Decision for Consumers? 268
Consumer Equilibrium 269
The Law of Demand and the Law of Diminishing Marginal Utility 270
10.3 Behavioral Economics 272
Bounded Rationality and Rule of Thumb 272
Self-Control 273
Compartmentalizing 273
Framing 273
Anchoring 274
The Endowment Effect 274
Fairness Matters 274
Interactive Summary 276
Key Terms and Concepts 277
Additional Section Quiz Answers 277
Problems 278
Appendix: A More Advanced Theory of Consumer Choice 281
Chaptern. The Firm: Production and Costs 291
Learning Outcomes 291
n.i Costs and Profits 292
Explicit Costs 292
Implicit Costs 292
Profits 293
Are Accounting Profits the Same as Economic Profits? 293
A Zero Economic Profit Is a Normal Profit 294
Sunk Costs 295
n.2 Production in the Short Run 297
The Short Run versus the Long Run 297
Production in the Short Run 298
Diminishing Marginal Product 298
11.3 Costs in the Short Run 301
Fixed Costs, Variable Costs, and Total Costs 301
Ave rage Costs 301
Marginal Costs 302
How Are These Costs Related? 302
11.4 The Shape of the Short-Run Cost Curves 305
The Relationship between Marginal Costs and Marginal Product 305
The Relationship between Marginal and Ave rage Amounts 306
The Average Total Cost Curve Is Usually U-Shaped 306
The Relationship between Marginal Costs and Average and Average Total Costs 306
11.5 Cost Curves: Short Run versus Long Run 309
Long-Run Cost Curves 309
The Shape of the Long-Run Average Total Cost Curve 310
Why Do Economies and Diseconomies of Scale Occur? 310
Interactive Summary 312
Key Terms and Concepts 313
Additional Section Quiz Answers 313
Problems 315
Chapter 12. Firms in Perfectly Competitive Markets 320
Learning Outcomes 32°
i2.i A Perfectly Competitive Market 321
Many Buyers and Seilers 321
Identical (Homogeneous) Products 321
Easy Entry and Exit 321
12.2 An Individual Price Taker's Demand Curve
An Individual Firm's Demand Curve
323 323
12.3 Profit Maximization 325
Revenues in a Perfectly Competitive Market 325
Total Revenue 325
Average Revenue and Marginal Revenue 325
How Do Firnis Maximize Profits? 326
Equating Marginal Revenue and Marginal Cost 326
12.4 Short-Run Profits and Losses 328
The Three-Step Method 328
Evaluating Economic Losses in the Short Run 329
Deriving the Short-Run Market Supply Curve 331
12.5 Long-Run Equilibrium 335
Economic Profits and Losses Disappear in the Long Run 335
The Long-Run Equilibrium for the Competitive Firm 335
12.6 Long-Run Supply 339
A Constant-Cost Industry 339
An Increasing-Cost Industry 339
A Decreasing-Cost Industry 342
Perfect Competition and Economic Efficiency 342
Interactive Summary 345
Key Terms and Concepts 346
Additional Section Quiz Answers 346
Problems 349
Chapter-13. Monopoly and Antitrust 354
Learning Outcomes 354
13.1 Monopoly: The Price Maker 355
What Is a Monopoly? 355
Pure Monopoly Is a Rarity 355
Barriens to Entry 356
13.2 Demand and Marginal Revenue in Monopoly 359
The Monopolist's Price in the Elastic Portion of the Demand Curve 362
13.3 The Monopolist^ Equilibrium 363
How Does the Monopolist Determine the Profit-Maximizing Output? 363
The Three-Step Method for the Monopolist 364
Profits for a Monopolist 364
Losses for the Monopolist 364
Patents 365
13.4 Monopol/ and Weifare Loss 368
Does Monopoly Promote Inefficiency? 368
Does Monopoly Retard Innovation? 369
13.5 Monopol/ Polle/ 371
Antitrust Policies 371
Antitrust Laws 372
Have Antitrust Policies Been Successful? 372
Government Regulation 373
Public Ownership 375
13.6 Price Discrimination 377
Price Discrimination 377
Conditions for Price Discrimination 377
Price Discrimination and the Profit-Maximization Motive 377
Examples of Price Discrimination 378
Interactive Summary 381
Key Terms and Concepts 382
Additional Section Quiz Answers 382
Problems 385
Chapter 14. Monopolistic Competition and Product Differentiation 390
Learning Outcomes 390
14.1 Monopolistic Competition 391
What Is Monopolistic Competition? 391
The Three Basic Characteristics of Monopolistic Competition 392
14.2 Price and Output Determination in Monopolistic Competition 393
Determining Short-Run Equilibrium 393
Short-Run Profits and Losses in Monopolistic Competition 394
Determining Long-Run Equilibrium 395
Achieving Long-Run Equilibrium 396
14.3 Monopolistic Competition versus Perfect Competition 397
The Significance of Excess Capacity 397
Failing to Achieve Productive Efficiency 397
Failing to Meet Allocative Efficiency, Too 398
What Are the Real Costs of Monopolistic Competition? 398
14.4 Advertising 399 Why Do Firnis Advertise? 399
Is Advertising "Good" or "Bad" from Society's Perspective? 400
Interactive Summary 402
Key Terms and Concepts 403
Additional Section Quiz Answers 403
Problems 405
Chapter-15. Oligopoly and Strategie Behavior 408
Learning Outcomes 408
15.1 Oligopoly 409
What Is Oligopoly? 409
Mutual Interdependence 409
Why Do Oligopolies Exist? 409
Economies of Scale as a Barrier to Entry 409
Other Barriers to Entry 410
Equilibrium Price and Quantity in Oligopoly 410
15.2 Collusion and Cartels 411
Uncertainty and Pricing Decisions 411
Collusion 412
Joint Profit Maximization 412
Why Are Most Collusive Oligopolies Short Lived? 412
15-3 Other Oligopoly Models 414
Price Leadership 414
What Happens in the Long Run if Entry Is Easy? 414
How Do Oligopolists Deter Market Entry? 415
Antitrust and Mergers 415
Antitrust and Pricing Strategies 416
Is Oligopoly Efficient? 417
15.4 Game Theory and Strategie Behavior 418
Some Strategies for Non-collusive Oligopolies 418
What Is Game Theory? 418
Cooperative and Non-cooperative Games 418
The Prisoners' Dilemma 419
Profits under Different Pricing Strategies 420
Advertising 421
Repeated Games 423
Network Externalities 423
Interactive Summary 427
Key Terms and Concepts 428
Additional Section Quiz Answers 428
Problems 431
Part 5. Input Markets and Microeconomic
Policy Issues 435
Chapter 16. The Markets for Labor, Capital, and Land 436
Learning Outcomes 436
16/1 Supply and Demand in the Labor Market 437
Determining the Price of a Productive Factor: Derived Demand 437
Will Hiring That Input Add More to Revenue Than to Costs? 437
The Demand Curve for Labor Slopes Downward 438
How Many Workers Will an Employer Hire? 44°
The Market Labor Supply Curve 44">
16.2 Labor Market Equilibrium 444
Determining Equilibrium in the Competitive Labor Market 444
Shifts in the Labor Demand Curve 444
Shifting the Labor Supply Curve 44&
Monopsony 447
16.3 Labor Unions 450
Labor Unions in the United States 45°
Why Are There Labor Unions? 452
Union Impact on Labor Supply and Wages 452
Wage Differences for Similarly Skilied Workers 453
Can Unions Lead to Increased Productivity? 453
16.4 The Markets for Land and Capital 454
The Supply of and Demand for Land 454
What Causes High Rents? 454
Supply and Demand in the Capital Market 454
The Interdependence of Input Markets 455
Income Distribution and Marginal Productivity 456
Interactive Summary 457
Key Terms and Concepts 458
Additional Section Quiz Answers 458
Problems 460
Chapter 17. Income, Poverty, and Health Care 464
Learning Outcomes 464
17.1 Income Distribution 465
Measuring Income Inequality 465
The Lorenz Curve 466
Are We Overstating the Disparity in the Distribution of Income? 467
Why Do Some Earn More Than Others? 469
Income Distribution in Other Countries 471
17.2 Income Redistribution 472
Equality 472
Income Redistribution Can Reduce Incentives to Work, Invest, and Save 473
Revisiting Marginal Productivity Theory 474
17-3 The Economicsof Discrimination 475
Job-Entry Discrimination 475
Wage Discrimination 475
Discrimination or Differences in Productivity? 476
Why Do People Discriminate? 477
The Costs of Discrimination 477
17.4 Poverty 479
Defining Poverty 479
Income Redistribution 480
17.5 Health Gare 483
Introduction 483
The Rising Cost of Health Care 484
The Economics of Rising Health Care Costs 485
The Health Care Market 486
Income 486
Insurance and Third-Party Payers 486
Demographic Changes 488
Obesity 488
The Supply of Health Care 488
Effects of Health Insurance 488
Technological Progress and Quality of Care 488
Shortages 489
The Market for Human Organs 490
Health Care Reform 49°
Interactive Summary 493
Key Terms and Concepts 494
Additional Section Quiz Answers 495
Problems 498
Part 6. The Global Economy 501
Chapter 18. International Trade 5°2
LearningOutcomes 502
18.1 The Growth in World Trade 503
Importance of International Trade 503
U.S. Exports and Imports 503
Trading Partners 504
18.2 Comparative Advantage and Gains from Trade 504
Economic Growth and Trade 504
The Principle of Comparative Advantage 505
Comparative Advantage, Specialization, and the Production Possibilities Curves 505
Why Does Comparative Advantage Occur? 509
Regional Comparative Advantage 509
18.3 Supply and Demand in International Trade 512
The Importance of Trade: Producer and Consumer Surplus 512
Free Trade and Exports—Domestic Producers Gain More Than Domestic Consumers Lose 513 Free Trade and Imports—Domestic Consumers Gain More Than Domestic Producers Lose 5H
18.4 Tariffs, Import Quotas, and Subsidies 516
Tarifs 516
The Domestic Economic Impact of Tariffs 516
Arguments for Tariffs 518
Import Quotas 519 The Domestic Economic Impact of an Import Quota 520
The Economic Impact of Subsidies 521
GATT Agreements and the World Trade Organization 521
Regional Trading Areas 522
Interactive Summary 525
Key Terms and Concepts 526
Additional Section Quiz Answers 526
Problems 528
Chapter 19. International Finance 532
Learning Outcomes 532
i9-i The Balance of Payments 533
Balance of Payments 533
The Current Account 533
The Financial Account 536
19.2 Exchange Rates 538
The Need for Foreign Currencies 538
The Exchange Rate 538
Changes in Exchange Rates Affect the Domestic Demand for Foreign Goods 538
The Demand for Foreign Currency 539
The Supply of Foreign Currency 539
Determining Exchange Rates 539
The Demand Curve for Foreign Currency 539
The Supply Curve for Foreign Currency 540
Equilibrium in the Foreign Exchange Market 540
The Loanable Funds Market in an Open Economy 540
19.3 Equilibrium Changes in the Foreign Exchange Market 542
Determinants in the Foreign Exchange Market 542
Increased Tastes for Foreign Goods 542
Relative Income Increases or Reductions in U.S. Tariffs 543
Increases in European Incomes, Reductions in European Tariffs, or Changes in European Tastes 544
How Do Changes in Relative Real Interest Rates Affect Exchange Rates? 544
Changes in the Relative Inflation Rate 544
Expectations and Speculation 546
19.4 Flexible Exchange Rates 548
The Flexible Exchange Rate System 548
Are Exchange Rates Managed at All? 548
When Exchange Rates Change 548
The Advantages of Flexible Rates 54§
Fixed Exchange Rates Can Result in Currency Shortages 549
Flexible Rates Solve the Currency Shortage Problem 549
Flexible Rates Affect Macroeconomic Policies 549
The Disadvantages of Flexible Rates 55°
Interactive Summary 552
Key Terms and Concepts 553
Additional Section Quiz Answers 553
Problems 55&
Glossary 55&
Index 563