Principles of Microeconomics Asia-Pacific Edition

Contents......Page 6
Guide to the text......Page 13
Guide to the online resources......Page 15
Preface to this edition......Page 17
Preface to the original edition......Page 20
To the students......Page 21
About the authors......Page 22
Acknowledgements......Page 24
Part 1 Introduction......Page 26
Chapter 1 Ten principles of economics......Page 28
Principle 1: People face trade-offs......Page 29
Principle 2: The cost of something is what you give up to get it......Page 30
Principle 3: Rational people think at the margin......Page 31
Principle 4: People respond to incentives......Page 33
Case study: Choosing when the stork comes......Page 34
Principle 5: Trade can make everyone better off......Page 35
In the news: Outsourcing your own job......Page 36
Principle 6: Markets are usually a good way to organise economic activity......Page 37
FYI: Adam Smith and the role of markets......Page 38
Principle 7: Governments can sometimes improve market outcomes......Page 39
Principle 9: Prices rise when the government prints too much money......Page 41
Principle 10: Society faces a short-term trade-off between inflation and unemployment......Page 42
Conclusion......Page 44
Multiple choice......Page 45
Problems and applications......Page 46
Chapter 2 Thinking like an economist......Page 48
The scientific method: Observation, theory and more observation......Page 49
The role of assumptions......Page 50
Economic models......Page 51
Our first model: The circular-flow diagram......Page 52
Our second model: The production possibilities frontier......Page 53
Microeconomics and macroeconomics......Page 55
Positive versus normative analysis......Page 57
Economists in government......Page 58
Why economists' advice is not always followed......Page 59
Differences in values......Page 60
Let's get going......Page 61
Multiple choice......Page 63
Problems and applications......Page 64
Graphs of two variables: The coordinate system......Page 66
Curves in the coordinate system......Page 68
Slope and elasticity......Page 71
Cause and effect......Page 73
Chapter 3 Interdependence and the gains from trade......Page 76
A parable for the modern economy......Page 77
Production possibilities......Page 78
Specialisation and trade......Page 79
Opportunity cost and comparative advantage......Page 81
Comparative advantage and trade......Page 82
FYI: The legacy of Adam Smith and David Ricardo......Page 83
Should Roger Federer mow his own lawn?......Page 84
Should Australia trade with other countries?......Page 85
In the news: Who has a comparative advantage in slaying ogres?......Page 86
Conclusion......Page 87
Multiple choice......Page 88
Problems and applications......Page 89
Part 2 Supply and demand I: How markets work......Page 92
Chapter 4 The market forces of supply and demand......Page 94
What is competition?......Page 95
The demand curve: The relationship between price and quantity demanded......Page 96
Market demand versus individual demand......Page 98
FYI: Ceteris paribus......Page 99
Shifts in the demand curve......Page 100
Case study: Are smartphones and tablets substitutes or complements?......Page 101
Case study: Two ways to reduce the quantity of smoking demanded......Page 102
The supply curve: The relationship between price and quantity supplied......Page 104
Market supply versus individual supply......Page 105
Shifts in the supply curve......Page 106
Equilibrium......Page 109
Three steps for analysing changes in equilibrium......Page 111
Conclusion: How prices allocate resources......Page 114
In the news: Mother Nature shifts the supply curve......Page 116
Questions for review......Page 117
Multiple choice......Page 118
Problems and applications......Page 119
Chapter 5 Elasticity and its application......Page 121
The price elasticity of demand and its determinants......Page 122
Computing the price elasticity of demand......Page 123
The variety of demand curves......Page 124
FYI: The midpoint method: A better way to calculate percentage changes and elasticities......Page 126
Total revenue and the price elasticity of demand......Page 127
Elasticity and total revenue along a linear demand curve......Page 129
Other demand elasticities......Page 131
Computing the price elasticity of supply......Page 132
Three applications of supply, demand and elasticity......Page 133
Can good news for farming be bad news for farmers?......Page 135
Why did OPEC fail to keep the price of oil high?......Page 137
Do drug bans increase or decrease drug-related crime?......Page 138
Conclusion......Page 140
Questions for review......Page 141
Problems and applications......Page 142
Chapter 6 Supply, demand and government policies......Page 145
How price ceilings affect market outcomes......Page 146
Case study: Lines at the petrol station......Page 148
Case study: Rent control in the short run and long run......Page 149
How price floors affect market outcomes......Page 150
Case study: Minimum wage rates......Page 152
Evaluating price controls......Page 154
Taxes......Page 155
How taxes on sellers affect market outcomes......Page 156
How taxes on buyers affect market outcomes......Page 157
Case study: Who pays the payroll tax?......Page 159
Elasticity and tax incidence......Page 160
Subsidies......Page 161
How subsidies affect market outcomes......Page 162
Case study: Who gets the benefits from the First Home Owner Grant scheme?......Page 164
Conclusion......Page 165
Questions for review......Page 166
Problems and applications......Page 167
Part 3 Supply and demand II: Markets and welfare......Page 170
Chapter 7 Consumers, producers and the efficiency of markets......Page 172
Willingness to pay......Page 173
Using the demand curve to measure consumer surplus......Page 174
What does consumer surplus measure?......Page 177
Case study: How parking meters help you find a parking space......Page 179
Cost and the willingness to sell......Page 180
Using the supply curve to measure producer surplus......Page 181
How a higher price raises producer surplus......Page 182
The benevolent social planner......Page 184
Evaluating the market equilibrium......Page 185
Case study: Should there be a market for organs?......Page 187
Conclusion: Market efficiency and market failure......Page 188
Multiple choice......Page 190
Problems and applications......Page 191
Chapter 8 Application: The costs of taxation......Page 194
How a tax affects market participants......Page 195
Deadweight losses and the gains from trade......Page 199
The determinants of the deadweight loss......Page 200
Case study: The deadweight loss debate......Page 202
Deadweight loss and tax revenue as taxes vary......Page 203
Case study: The Laffer curve and supply-side economics......Page 205
Conclusion......Page 207
Multiple choice......Page 208
Problems and applications......Page 209
The welfare economics of subsidies......Page 212
The cost of a subsidy......Page 213
The deadweight loss from a subsidy......Page 214
Understanding the deadweight loss from overproduction......Page 215
Chapter 9 Application: International trade......Page 216
The equilibrium without trade......Page 217
The world price and comparative advantage......Page 218
The gains and losses of an exporting country......Page 219
The gains and losses of an importing country......Page 222
The effects of a tariff......Page 224
The lessons for trade policy......Page 226
Other benefits of international trade......Page 227
In the news: Trade as a tool for economic development......Page 228
The arguments for restricting trade......Page 229
The national security argument......Page 230
In the news: Should the winners from free trade compensate the losers?......Page 231
The protection-as-a-bargaining-chip argument......Page 232
Case study: Trade agreements and the World Trade Organization......Page 233
Conclusion......Page 234
What Australian economists think......Page 235
Multiple choice......Page 236
Problems and applications......Page 237
Part 4 The economics of the public sector......Page 240
Chapter 10 Externalities......Page 242
Negative externalities......Page 244
Positive externalities......Page 246
Case study: Technology spillovers, industrial policy and patent protection......Page 247
What Australian economists think......Page 248
Command-and-control policies: Regulation......Page 249
Market-based policy 1: Corrective taxes and subsidies......Page 250
Case study: Taking out the garbage......Page 251
Market-based policy 2: Tradeable pollution permits......Page 252
Case study: British Columbia adopts a broad-based carbon tax......Page 253
Objections to the economic analysis of pollution......Page 255
The Coase theorem......Page 256
Why private solutions do not always work......Page 257
Conclusion......Page 258
Multiple choice......Page 259
Problems and applications......Page 260
Chapter 11 Public goods and common resources......Page 263
The different kinds of goods......Page 264
The free-rider problem......Page 266
Some important public goods......Page 267
Case study: Are lighthouses public goods?......Page 268
The difficult job of cost–benefit analysis......Page 269
Case study: How much is a life worth?......Page 270
Private provision of public goods......Page 271
Case study: Is music a public good?......Page 272
The Tragedy of the Commons......Page 273
Some important common resources......Page 274
In the news: The case for toll roads......Page 275
What Australian economists think......Page 277
Case study: Why the cow is not extinct......Page 278
Conclusion: The importance of property rights......Page 279
Multiple choice......Page 280
Problems and applications......Page 281
Chapter 12 The design of the tax system......Page 284
Taxes collected by the federal government......Page 285
Taxes collected by state and local governments......Page 288
Deadweight losses......Page 289
Case study: Should income or consumption be taxed?......Page 290
Marginal tax rates versus average tax rates......Page 291
Lump-sum taxes......Page 292
The benefits principle......Page 293
The ability-to-pay principle......Page 294
Case study: How the tax burden is distributed......Page 295
Case study: Who should pay for higher education?......Page 296
Case study: Who pays company income tax?......Page 297
Conclusion: The trade-off between equity and efficiency......Page 298
Multiple choice......Page 299
Problems and applications......Page 300
Part 5 Firm behaviour and the organisation of industry......Page 302
Chapter 13 The costs of production......Page 304
Total revenue, total cost and profit......Page 305
The cost of capital as an opportunity cost......Page 306
Economic profit versus accounting profit......Page 307
FYI: How long is the long run?......Page 308
The production function......Page 309
From the production function to the total-cost curve......Page 311
The various measures of cost......Page 312
Fixed and variable costs......Page 313
Cost curves and their shapes......Page 314
Typical cost curves......Page 316
The relationship between short-run and long-run average total cost......Page 318
Economies and diseconomies of scale......Page 319
FYI: Lessons from a pin factory......Page 320
Questions for review......Page 322
Problems and applications......Page 323
Chapter 14 Firms in competitive markets......Page 327
The meaning of competition......Page 328
The revenue of a competitive firm......Page 329
A simple example of profit maximisation......Page 330
The marginal-cost curve and the firm's supply decision......Page 331
The firm's short-run decision to shut down......Page 333
FYI: Spilt milk and sunk costs......Page 334
Case study: Near-empty restaurants and off-season ski lodges......Page 335
The firm's long-run decision to exit or enter a market......Page 336
Measuring profit in our graph for the competitive firm......Page 337
The supply curve in a competitive market......Page 338
The long run: Market supply with entry and exit......Page 339
A shift in demand in the short run and long run......Page 341
Why the long-run supply curve might slope upwards......Page 343
Conclusion: Behind the supply curve......Page 344
Multiple choice......Page 345
Problems and applications......Page 346
Chapter 15 Monopoly......Page 350
Why monopolies arise......Page 351
Case study: The gas industry in south-eastern Australia......Page 352
Natural monopolies......Page 353
Monopoly versus competition......Page 355
A monopoly's revenue......Page 356
Profit maximisation......Page 358
A monopoly's profit......Page 360
Case study: Monopoly pharmaceuticals versus generic pharmaceuticals......Page 361
The welfare cost of monopoly......Page 362
The deadweight loss......Page 363
The monopoly's profit: A social cost?......Page 365
A parable about pricing......Page 366
The moral of the story......Page 367
The analytics of price discrimination......Page 368
Examples of price discrimination......Page 369
In the news: Why do Australians pay more for digital downloads?......Page 371
Conclusion: The prevalence of monopoly......Page 373
Multiple choice......Page 374
Problems and applications......Page 375
Chapter 16 Monopolistic competition......Page 380
Between monopoly and perfect competition......Page 381
The monopolistically competitive firm in the short run......Page 383
The long-run equilibrium......Page 384
Monopolistic versus perfect competition......Page 386
Monopolistic competition and the welfare of society......Page 388
The debate about advertising......Page 389
Case study: Advertising and the price of glasses......Page 390
Advertising as a signal of quality......Page 391
Brand names......Page 392
Conclusion......Page 393
Multiple choice......Page 395
Problems and applications......Page 396
Chapter 17 Oligopoly and business strategy......Page 399
Markets with only a few sellers......Page 400
Competition, monopolies and cartels......Page 401
The equilibrium for an oligopoly......Page 402
How the size of an oligopoly affects the market outcome......Page 403
Case study: OPEC and the world oil market......Page 404
The economics of cooperation......Page 405
The prisoners' dilemma......Page 406
Oligopolies as a prisoners' dilemma......Page 407
Other examples of the prisoners' dilemma......Page 408
The prisoners' dilemma and the welfare of society......Page 409
Why people sometimes cooperate......Page 410
Case study: The prisoners' dilemma tournament......Page 411
Conclusion......Page 412
Multiple choice......Page 413
Problems and applications......Page 414
Cournot quantity competition......Page 418
Bertrand price competition......Page 422
Comparing Cournot and Bertrand competition......Page 423
Chapter 18 Competition policy......Page 424
Using the law to increase competition......Page 425
Case study: The ACCC – Australia's competition regulator......Page 426
Regulation......Page 428
Public ownership and privatisation......Page 429
Doing nothing......Page 430
In the news: How to form a cartel......Page 432
Controversies over competition policy......Page 434
In the news: When is the price of milk too low?......Page 435
Case study: The Baxter case......Page 437
Conclusion......Page 439
Multiple choice......Page 440
Problems and applications......Page 441
Part 6 The economics of labour markets......Page 444
Chapter 19 The markets for the factors of production......Page 446
The demand for labour......Page 447
The competitive, profit-maximising firm......Page 448
The production function and the marginal product of labour......Page 449
The value of the marginal product and the demand for labour......Page 450
What causes the labour demand curve to shift?......Page 451
FYI: Input demand and output supply – two sides of the coin......Page 452
The trade-off between work and leisure......Page 453
What causes the labour supply curve to shift?......Page 454
In the news: The economy needs you......Page 455
Shifts in labour supply......Page 456
Shifts in labour demand......Page 458
Case study: Productivity and wages......Page 459
Equilibrium in the markets for land and capital......Page 460
FYI: What is capital income?......Page 461
Case study: The economics of the Black Death......Page 462
Conclusion......Page 463
Multiple choice......Page 464
Problems and applications......Page 465
Appendix: The demand for labour under imperfect competition and monopoly......Page 468
Chapter 20 Earnings and discrimination......Page 470
Compensating differentials......Page 471
Human capital......Page 472
Ability, effort and chance......Page 473
Case study: The benefits of beauty......Page 474
An alternative view of education: Signalling......Page 475
The superstar phenomenon......Page 476
Above-equilibrium wages: Minimum-wage laws, unions and efficiency wages......Page 477
Measuring labour-market discrimination......Page 478
Case study: Is Jennifer more employable than Nuying?......Page 479
Discrimination by employers......Page 480
Discrimination by customers and governments......Page 481
Case study: Discrimination in sports......Page 482
Conclusion......Page 483
Questions for review......Page 484
Problems and applications......Page 485
Unions as monopolists......Page 487
Bilateral monopoly......Page 489
Are unions good or bad for the economy?......Page 491
Chapter 21 Income inequity and poverty......Page 492
Australian income inequality......Page 493
Income inequality around the world......Page 495
The poverty rate......Page 496
Problems in measuring inequality......Page 498
Case study: Alternative measures of inequality......Page 499
Utilitarianism......Page 500
Liberalism......Page 502
Libertarianism......Page 503
Minimum-wage laws......Page 504
Negative income tax......Page 505
In the news: Thinking innovatively about income redistribution......Page 506
In-kind transfers......Page 507
Antipoverty programs and work incentives......Page 508
Conclusion......Page 509
Multiple choice......Page 510
Problems and applications......Page 511
Part 7 Topics for further study......Page 514
Chapter 22 The theory of consumer choice......Page 516
The budget constraint: What the consumer can afford......Page 517
Representing preferences with indifference curves......Page 519
Four properties of indifference curves......Page 520
Two extreme examples of indifference curves......Page 522
FYI: Utility – an alternative way to describe preferences and optimisation......Page 524
How changes in income affect a consumer's choices......Page 526
How changes in prices affect a consumer's choices......Page 527
Income and substitution effects......Page 529
Deriving the demand curve......Page 530
Do all demand curves slope downwards?......Page 532
How do wages affect labour supply?......Page 533
Case study: Income effects on labour supply – historicaltrends, lottery winners and the Carnegie conjecture......Page 536
How do interest rates affect household saving?......Page 537
Conclusion: Do people really think this way?......Page 540
Questions for review......Page 541
Problems and applications......Page 542
Chapter 23 Frontiers of microeconomics......Page 545
Hidden actions: Principals, agents and moral hazard......Page 546
FYI: Corporate management......Page 547
Hidden characteristics: Adverse selection and the lemons problem......Page 548
Signalling to convey private information......Page 549
Screening to induce information revelation......Page 550
Asymmetric information and public policy......Page 551
The Condorcet voting paradox......Page 552
Arrow's impossibility theorem......Page 553
The median voter is king......Page 554
People aren't always rational......Page 556
In the news: Our inertia may be costing lives......Page 558
People care about fairness......Page 559
People are inconsistent over time......Page 560
Conclusion......Page 561
Multiple choice......Page 562
Problems and applications......Page 563
Glossary......Page 566
Suggestions for reading......Page 570
Index......Page 573