Microeconomics

Preface
PART • ONE Introduction: Markets and Prices
1 Preliminaries
1.1 The Themes of Microeconomics
Trade-Offs
Prices and Markets
Theories and Models
Positive versus Normative Analysis
1.2 What Is a Market?
Competitive versus Noncompetitive Markets
Market Price
Market Definition—The Extent of a Market
1.3 Real versus Nominal Prices
1.4 Why Study Microeconomics?
Corporate Decision Making: Ford’s Sport Utility Vehicles
Public Policy Design: Automobile Emission Standards for the Twenty-First Century
Summary
Questions for Review
Exercises
2 The Basics of Supply and Demand
2.1 Supply and Demand
The Supply Curve
The Demand Curve
2.2 The Market Mechanism
2.3 Changes in Market Equilibrium
2.4 Elasticities of Supply and Demand
Point versus Arc Elasticities
2.5 Short-Run versus Long-Run Elasticities
Demand
Supply
*2.6 Understanding and Predicting the Effects of Changing Market Conditions
2.7 Effects of Government Intervention—Price Controls
Summary
Questions for Review
Exercises
PART • TWO Producers, Consumers, and Competitive Markets
3 Consumer Behavior
Consumer Behavior
3.1 Consumer Preferences
Market Baskets
Some Basic Assumptions about Preferences
Indifference Curves
Indifference Maps
The Shape of Indifference Curves
The Marginal Rate of Substitution
Perfect Substitutes and Perfect Complements
3.2 Budget Constraints
The Budget Line
The Effects of Changes in Income and Prices
3.3 Consumer Choice
Corner Solutions
3.4 Revealed Preference
3.5 Marginal Utility and Consumer Choice
*3.6 Cost-of-Living Indexes
Ideal Cost-of-Living Index
Laspeyres Index
Paasche IndexPrice Indexes in the United Statics: Chain Weighting
Summary
Questions for Review
Exercises
4 Individual and Market Demand
4.1 Individual Demand
Price Changes
The Individual Demand Curve
Income Changes
Normal versus Inferior Goods
Engel Curves
Substitutes and Complements
4.2 Income and Substitution Effects
Substitution Effect
Income Effect
A Special Case: The Giffen Good
4.3 Market Demand
From Individual to Market Demand
Elasticity of Demand
4.4 Consumer Surplus
Consumer Surplus and Demand
4.5 Network Externalities
The Bandwagon Effect
The Snob Effect
*4.6 Empirical Estimation of Demand
The Statistical Approach to Demand Estimation
The Form of the Demand Relationship
Interview and Experimental Approaches to Demand Determination
Summary
Questions for Review
Exercises
Appendix to Chapter 4: Demand Theory—A Mathematical Treatment
Utility Maximization
The Method of Lagrange Multipliers
The Equal Marginal Principle
Marginal Rate of Substitution
Marginal Utility of Income
An Example
Duality in Consumer Theory
Income and Substitution Effects
Exercises
5 Uncertainty and Consumer Behavior
5.1 Describing Risk
Probability
Expected Value
Variability
Decision Making
5.2 Preferences Toward Risk
Different Preferences Toward Risk
5.3 Reducing Risk
Diversification
Insurance
The Value of Information
*5.4 The Demand for Risky Assets
Assets
Risky and Riskless Assets
Asset Returns
The Trade-Off Between Risk and Return
The Investor’s Choice Problem
5.5 Behavioral Economics
More Complex Preferences
Rules of Thumb and Biases in Decision Making
Probabilities and Uncertainty
Summing Up
SummaryQuestions for Review
Exercises
6 Production
The Production Decisions of a Firm
6.1 The Technology of Production
The Production Function
The Short Run versus the Long Run
6.2 Production with One Variable Input (Labor)
Average and Marginal Products
The Slopes of the Product Curve
The Average Product of Labor Curve
The Marginal Product of Labor Curve
The Law of Diminishing Marginal Returns
Labor Productivity
6.3 Production with Two Variable Inputs
Isoquants
Input Flexibility
Diminishing Marginal Returns
Substitution Among Inputs
Production Functions—Two Special Cases
6.4 Returns to Scale
Describing Returns to Scale
Summary
Questions for Review
Exercises
7 The Cost of Production
7.1 Measuring Cost: Which Costs Matter?
Economic Cost versus Accounting Cost
Opportunity Cost
Sunk Costs
Fixed Costs and Variable Costs
Fixed versus Sunk Costs
Marginal and Average Cost
7.2 Cost in the Short Run
The Determinants of Short-Run Cost
The Shapes of the Cost Curves
7.3 Cost in the Long Run
The User Cost of Capital
The Cost-Minimizing Input Choice
The Isocost Line
Choosing Inputs
Cost Minimization with Varying Output Levels
The Expansion Path and Long-Run Costs
7.4 Long-Run versus Short-Run Cost Curves
The Inflexibility of Short-Run Production
Long-Run Average Cost
Economies and Diseconomies of Scale
The Relationship between Short-Run and Long-Run Cost
7.5 Production with Two Outputs—Economies of Scope
Product Transformation Curves
Economies and Diseconomies of Scope
The Degree of Economies of Scope
*7.6 Dynamic Changes in Costs—The Learning Curve
Graphing the Learning Curve
Learning versus Economies of Scale
*7.7 Estimating and Predicting Cost
Cost Functions and the Measurement of Scale Economies
Summary
Questions for Review
Exercises
Appendix to Chapter 7: Production and Cost Theory—A Mathematical Treatment
Cost Minimization
Marginal Rate of Technical Substitution
Duality in Production and Cost Theory
The Cobb-Douglas Cost and Production FunctionsExercises
8 Profit Maximization and Competitive Supply
8.1 Perfectly Competitive Markets
When Is a Market Highly Competitive?
8.2 Profit Maximization
Do Firms Maximize Profit?
Alternative Forms of Organization
8.3 Marginal Revenue, Marginal Cost, and Profit Maximization
Demand and Marginal Revenue for a Competitive Firm
Profit Maximization by a Competitive Firm
8.4 Choosing Output in the Short Run
Short-Run Profit Maximization by a Competitive Firm
The Short-Run Profit of a Competitive Firm
8.5 The Competitive Firm’s Short-Run Supply Curve
The Firm’s Response to an Input Price Change
8.6 The Short-Run Market Supply Curve
Elasticity of Market Supply
Producer Surplus in the Short Run
8.7 Choosing Output in the Long Run
Long-Run Profit Maximization
Long-Run Competitive Equilibrium
Economic Rent
Producer Surplus in the Long Run
8.8 The Industry’s Long-Run Supply Curve
Constant-Cost Industry
Increasing-Cost Industry
Decreasing-Cost Industry
The Effects of a Tax
Long-Run Elasticity of Supply
Summary
Questions for Review
Exercises
9 The Analysis of Competitive Markets
9.1 Evaluating the Gains and Losses from Government Policies—Consumer and Producer Surplus
Review of Consumer and Producer Surplus
Application of Consumer and Producer Surplus
9.2 The Efficiency of a Competitive Market
9.3 Minimum Prices
9.4 Price Supports and Production Quotas
Price Supports
Production Quotas
9.5 Import Quotas and Tariffs
9.6 The Impact of a Tax or Subsidy
The Effects of a Subsidy
Summary
Questions for Review
Exercises
PART • THREE Market Structure and Competitive Strategy
10 Market Power: Monopoly and Monopsony
10.1 Monopoly
Average Revenue and Marginal Revenue
The Monopolist’s Output Decision
An Example
A Rule of Thumb for Pricing
Shifts in Demand
The Effect of a Tax
*The Multiplant Firm
10.2 Monopoly Power
Measuring Monopoly Power
The Rule of Thumb for Pricing
10.3 Sources of Monopoly Power
The Elasticity of Market Demand
The Number of FirmsThe Interaction Among Firms
10.4 The Social Costs of Monopoly Power
Rent Seeking
Price Regulation
Natural Monopoly
Regulation in Practice
10.5 Monopsony
Monopsony and Monopoly Compared
10.6 Monopsony Power
Sources of Monopsony Power
The Social Costs of Monopsony Power
Bilateral Monopoly
10.7 Limiting Market Power: The Antitrust Laws
Enforcement of the Antitrust Laws
Antitrust in Europe
Summary
Questions for Review
Exercises
11 Pricing with Market Power
11.1 Capturing Consumer Surplus
11.2 Price Discrimination
First-Degree Price Discrimination
Second-Degree Price Discrimination
Third-Degree Price Discrimination
11.3 Intertemporal Price Discrimination and Peak-Load Pricing
Intertemporal Price Discrimination
Peak-Load Pricing
11.4 The Two-Part Tariff
*11.5 Bundling
Relative Valuations
Mixed Bundling
Bundling in Practice
Tying
*11.6 Advertising
A Rule of Thumb for Advertising
Summary
Questions for Review
Exercises
Appendix to Chapter 11: Transfer Pricing in the Integrated Firm
Transfer Pricing When There Is No Outside Market
Transfer Pricing with a Competitive Outside Market
Transfer Pricing with a Noncompetitive Outside Market
A Numerical Example
Exercises
12 Monopolistic Competition and Oligopoly
12.1 Monopolistic Competition
The Makings of Monopolistic Competition
Equilibrium in the Short Run and the Long Run
Monopolistic Competition and Economic Efficiency
12.2 Oligopoly
Equilibrium in an Oligopolistic Market
The Cournot Model
The Linear Demand Curve—An Example
First Mover Advantage—The Stackelberg Model
12.3 Price Competition
Price Competition with Homogeneous Products—The Bertrand Model
Price Competition with Differentiated Products
12.4 Competition versus Collusion: The Prisoners’ Dilemma
12.5 Implications of the Prisoners’ Dilemma for Oligopolistic Pricing
Price Rigidity
Price Signaling and Price Leadership
The Dominant Firm Model
12.6 Cartels
Analysis of Cartel PricingSummary
Questions for Review
Exercises
13 Game Theory and Competitive Strategy
13.1 Gaming and Strategic Decisions
Noncooperative versus Cooperative Games
13.2 Dominant Strategies
13.3 The Nash Equilibrium Revisited
Maximin Strategies
*Mixed Strategies
13.4 Repeated Games
13.5 Sequential Games
The Extensive Form of a Game
The Advantage of Moving First
13.6 Threats, Commitments, and Credibility
Empty Threats
Commitment and Credibility
Bargaining Strategy
13.7 Entry Deterrence
Strategic Trade Policy and International Competition
*13.8 Auctions
Auction Formats
Valuation and Information
Private-Value Auctions
Common-Value Auctions
Maximizing Auction Revenue
Bidding and Collusion
Summary
Questions for Review
Exercises
14 Markets for Factor Inputs
14.1 Competitive Factor Markets
Demand for a Factor Input When Only One Input Is Variable
Demand for a Factor Input When Several Inputs Are Variable
The Market Demand Curve
The Supply of Inputs to a Firm
The Market Supply of Inputs
14.2 Equilibrium in a Competitive Factor Market
Economic Rent
14.3 Factor Markets with Monopsony Power
Monopsony Power: Marginal and Average Expenditure
Purchasing Decisions with Monopsony Power
Bargaining Power
14.4 Factor Markets with Monopoly Power
Monopoly Power over the Wage Rate
Unionized and Nonunionized Workers
Summary
Questions for Review
Exercises
15 Investment, Time, and Capital Markets
15.1 Stocks versus Flows
15.2 Present Discounted Value
Valuing Payment Streams
15.3 The Value of a Bond
Perpetuities
The Effective Yield on a Bond
15.4 The Net Present Value Criterion for Capital Investment Decisions
The Electric Motor Factory
Real versus Nominal Discount Rates
Negative Future Cash Flows
15.5 Adjustments for Risk
Diversifiable versus Nondiversifiable Risk
The Capital Asset Pricing Model15.6 Investment Decisions by Consumers
15.7 Investments in Human Capital
*15.8 Intertemporal Production Decisions—Depletable Resources
The Production Decision of an Individual Resource Producer
The Behavior of Market Price
User Cost
Resource Production by a Monopolist
15.9 How Are Interest Rates Determined?
A Variety of Interest Rates
Summary
Questions for Review
Exercises
PART • FOUR Information, Market Failure, and the Role of Government
16 General Equilibrium and Economic Efficiency
16.1 General Equilibrium Analysis
Two Interdependent Markets—Moving to General Equilibrium
Reaching General Equilibrium
16.2 Efficiency in Exchange
The Advantages of Trade
The Edgeworth Box Diagram
Efficient Allocations
The Contract Curve
Consumer Equilibrium in a Competitive Market
The Economic Efficiency of Competitive Markets
16.3 Equity and Efficiency
The Utility Possibilities Frontier
Equity and Perfect Competition
16.4 Efficiency in Production
Input Efficiency
The Production Possibilities Frontier
Output Efficiency
Efficiency in Output Markets
16.5 The Gains from Free Trade
Comparative Advantage
An Expanded Production Possibilities Frontier
16.6 An Overview—The Efficiency of Competitive Markets
16.7 Why Markets Fail
Market Power
Incomplete Information
Externalities
Public Goods
Summary
Questions for Review
Exercises
17 Markets with Asymmetric Information
17.1 Quality Uncertainty and the Market for Lemons
The Market for Used Cars
Implications of Asymmetric Information
The Importance of Reputation and Standardization
17.2 Market Signaling
A Simple Model of Job Market Signaling
Guarantees and Warranties
17.3 Moral Hazard
17.4 The Principal-Agent Problem
The Principal-Agent Problem in Private Enterprises
The Principal-Agent Problem in Public Enterprises
Incentives in the Principal-Agent Framework
*17.5 Managerial Incentives in an Integrated Firm
Asymmetric Information and Incentive Design in the Integrated Firm
Applications
17.6 Asymmetric Information in Labor Markets: Efficiency Wage Theory
SummaryQuestions for Review
Exercises
18 Externalities and Public Goods
18.1 Externalities
Negative Externalities and Inefficiency
Positive Externalities and Inefficiency
18.2 Ways of Correcting Market Failure
An Emissions Standard
An Emissions Fee
Standards versus Fees
Tradeable Emissions Permits
Recycling
18.3 Stock Externalities
Stock Buildup and Its Impact
18.4 Externalities and Property Rights
Property Rights
Bargaining and Economic Efficiency
Costly Bargaining—The Role of Strategic Behavior
A Legal Solution—Suing for Damages
18.5 Common Property Resources
18.6 Public Goods
Efficiency and Public Goods
Public Goods and Market Failure
18.7 Private Preferences for Public Goods
Summary
Questions for Review
Exercises
Appendix: The Basics of Regression
An Example
Estimation
Statistical Tests
Goodness of Fit
Economic Forecasting
Summary
Glossary
Answers to Selected Exercises
Photo Credits
Index