Principles of Microeconomics Scarcity and Social Provisioning Contents

CONTENTS Preface About About Resources About Principles of Economics About Our Team Copyright CHAPTER . WELCOME TO ECONOMICS ! Introduction What Is Economics , and Why Is It Important ?

The Problem of Scarcity The Division Specialization Why the Division of Labor Increases Production Trade and Markets Why Study Economics ?

Key Concepts and Summary References and Key Concepts and Summary How Economists Use Theories and Models to Understand Economic Issues Key Concepts and Summary How Economies Can Be Organized An Overview of Economic Systems Regulations The Rules of the Game The Rise of Globalization Key Concepts and Summary References CHAPTER . CHOICE IN A WORLD or SCARCITY Introduction to Choice in a World of Scarcity . 15 18 21 21 23 24 28

vi How Individuals Make Choices Based on Their Budget Constraint The Concept of Opportunity Cost Identifying Opportunity Cost Marginal and Diminishing Marginal Utility Sunk Costs From a Model with Two Goods to One Goods Key Concepts and Summary References The Production Possibilities Frontier and Social Choices The Shape of the and the Law of Diminishing Returns Productive Efficiency and Efficiency Why Society Must Choose The and Comparative Advantage Key Concepts and Summary Confronting Objections to the Economic Approach First Objection People , Firms , and Society Do Like This Second Objection People , Firms , and Society Should This Way Key Concepts and Summary References CHAPTER 32 DEFINING ECONOMICS A PLURALISTIC APPROACH Defining Economics A Pluralistic Approach The Importance of Definitions Multiple Perspectives Require Multiple Definitions A Brief Synopsis of Different Economic Perspectives Deconstructing the Orthodox Definition of Economics A Critical Examination of the Orthodox Definition of Economics and its Resultant Impacts Glossary An Alternative Approach to Defining Economics CHAPTER . DEMAND AND SUPPLY Introduction to Demand and Supply Demand , Supply , and Equilibrium in Markets for Goods and Services Demand for Goods and Services Supply of Goods and Services Demand and Supply Intersect Key Concepts and Summary References 30 31 33 34 35 35 35 37 39 41 42 43 43 45 47 47 48 51 51 54 55 56 57 60 62 72 73 76 79 79 81 82 84 86

Shifts in Demand and Supply for Goods and Services 88 What Factors Affect Demand ?

88 The Assumption 89 How Does Income Affect Demand ?

89 Other Factors That Shift Demand Curves 91 Summing Up Factors That Change Demand 93 How Production Costs Affect Supply 94 Other Factors Supply 96 Summing Up Factors That Change Supply 98 Key Concepts and Summary 99 References 101 Changes in Equilibrium Price and Quantity The Process 104 Good Salmon Fishing 105 Newspapers and the Internet 106 The and Speed in Real Markets 107 A Combined Example 107 Key Concepts and Summary 11 References 13 Price Ceilings and Price Floors 114 Price Ceilings 114 Price Floors 16 Key Concepts and Summary 117 Demand , Supply , and Efficiency 120 Consumer Surplus , Producer Surplus , Social Surplus 120 Inefficiency of Price Floors and Price Ceilings 122 Demand and Supply as a Social Adjustment Mechanism 123 Key Concepts and Summary 124 CHAPTER . LABOR AND FINANCIAL MARKETS Introduction to Labor and Financial Markets 128 Demand and Supply at Work in Labor Markets 130 Equilibrium in the Labor Market 130 Shifts in Labor Demand 132 Shifts in Labor Supply 133 Technology and Wage Inequality The Process 134 Price Floors in the Labor Market Living Wages and Minimum Wages 136 The Minimum Wage as an Example ofa Price Floor 137 Key Concepts and Summary 139 References 140

viii Demand and Supply in Financial Markets Who Demands and Who Supplies in Financial Markets ?

Equilibrium in Financial Markets Shifts in Demand and Supply in Financial Markets The United States as a Global Borrower Price Ceilings in Financial Markets Usury Laws Key Concepts and Summary References The Market System as an Efficient Mechanism for Information Key Concepts and Summary CHAPTER . ELASTICITY Introduction to Elasticity Price Elasticity of Demand and Price Elasticity of Supply Calculating Price Elasticity of Demand Calculating the Price Elasticity of Supply Key Concepts and Summary Polar Cases of Elasticity and Constant Elasticity Key Concepts and Summary Elasticity and Pricing Does Raising Price Bring in More Revenue ?

Can Costs Be Passed on to Consumers ?

Elasticity and Tax Incidence Impact Key Concepts and Summary Elasticity in Areas Other Than Price Income Elasticity of Demand Elasticity of Demand Elasticity in Labor and Financial Capital Markets Expanding the Concept Key Concepts and Summary References CHAPTER . CONSUMER CHOICES Introduction to Consumer Choices Consumption Choices Total Utility and Diminishing Marginal Utility Choosing with Marginal Utility A Maximizing Utility Measuring Utility with Numbers Key Concepts and Summary References 142 142 144 144 145 147 148 150 152 154 162 165 166 169 171 178 181 183 185 186 188 190 191 194 194 195 195 196 198 199 204 206 207 209 211 212 213 215

How Changes in Income and Prices Affect Consumption Choices How Changes in Income Affect Consumer Choices How Price Changes Affect Consumer Choices The Foundations of Demand Curves Applications in Government and Business Key Concepts and Summary Choices The Budget Constraint Applications of Utility Maximizing with the Budget Constraint Key Concepts and Summary Choices in Financial Capital Markets Using Marginal Utility to Make Choices Applications of the Model of Choice The Power of the Budget Set Framework Behavioral Economics An Alternative Viewpoint Key Concepts and Summary References CHAPTER . CHALLENGING THE ROLE OF UTILITARIANISM The Role of Value ( in the Economics Discipline Economics and Value Utilitarianism The Philosophy Behind Orthodox Economics Utility and The Orthodox Economic View of Social Welfare Abandoning the Normative Constraints of Utilitarianism Glossary Conclusion CHAPTER . AN INSTITUTIONAL ANALYSIS OF MODERN CONSUMPTION Introduction to An Institutional Analysis of Modern Consumption Institutional Analysis Conspicuous Consumption The Complex World of Modern Consumption Conclusion CHAPTER 10 . COST AND INDUSTRY STRUCTURE Introduction to Cost and Industry Structure Explicit and Implicit Costs , and Accounting and Economic Profit Key Concepts and Summary References ix 218 218 220 221 222 224 226 227 229 231 233 234 237 238 238 241 241 244 245 247 251 255 260 261 264 267 269 272 275 278 281 283 284

The Structure of Costs in the Short Run Fixed and Variable Costs Average Total Cost , Average Variable Cost , Marginal Cost Lessons from Alternative Measures of Costs A Variety of Cost Patterns Key Concepts and Summary The Structure of Costs in the Long Run Choice Technology Economies of Scale Shapes of Average Cost Curves The Size and Number in an Industry Shifting Patterns of Average Cost Key Concepts and Summary Problems CHAPTER 11 . PERFECT COMPETITION Introduction to Perfect Competition Perfect Competition and Why It Matters Key Concepts and Summary How Perfectly Competitive Firms Make Output Decisions Determining the Highest Profit by Comparing Total Revenue and Total Cost Comparing Marginal Revenue and Marginal Costs Profits and Losses with the Average Cost Curve The Shutdown Point Outcomes for Perfectly Competitive Firms Marginal Cost and the Firm Supply Curve Key Concepts and Summary Entry and Exit Decisions in the Long Run How Entry and Exit Lead to Zero in the Long Run The Adjustment and Industry Types Key Concepts and Summary Efficiency in Perfectly Competitive Markets Key Concepts and Summary References CHAPTER 12 . MONOPOLY Introduction to a Monopoly 285 285 287 289 290 291 295 295 297 298 300 303 304 305 308 310 311 313 313 315 318 322 325 326 329 333 334 335 335 338 340 340 344

How Monopolies Form Barriers to Entry Natural Monopoly Control of a Physical Resource Legal Monopoly Promoting Innovation Intimidating Potential Competition Summing Up Barriers to Entry Key Concepts and Summary How a Monopoly Chooses Output and Price Demand Curves Perceived by a Perfectly Competitive Firm and by a Monopoly Total Cost and Total a Monopolist Marginal Revenue and Marginal Cost for a Monopolist Illustrating Monopoly Profits The Inefficiency of Monopoly Key Concepts and Summary References CHAPTER 13 . MONOPOLISTIC COMPETITION AND OLIGOPOLY Introduction to Monopolistic Competition and Oligopoly Monopolistic Competition Differentiated Products Perceived Demand for a Monopolistic Competitor How a Monopolistic Competitor Chooses Price and Quantity Monopolistic Competitors and Entry Monopolistic Competition and Efficiency The Benefits of Variety and Product Differentiation Key Concepts and Summary References Oligopoly Why Do Exist ?

Collusion or Competition ?

The Prisoners Dilemma The Oligopoly Version of the Prisoner Dilemma How to Enforce Cooperation of Imperfect Competition Key Concepts and Summary References CHAPTER 14 . THE RISE OF BIG BUSINESS Introduction to the Rise of Big Business The Corporation and Long Distance Trade Mercantilism xi 347 347 349 349 349 351 351 352 355 355 357 358 361 364 365 367 370 373 373 374 375 377 379 380 381 383 385 385 386 387 388 389 390 392 394 398 399 400

Big Business in American History Business Enterprise and Property Rights Colonial legal institutions The Supreme Court Canals , Steamboats and Railroads Glossary Industrialization and the Factory technologies that make up the core of the economic system Integrated chains of production that link markets and industries Big Business and Organized Labor The Knights The Great Railway Strike of 1877 Regulation of Big Business The Sherman Act Conclusion CHAPTER 15 . COSTS AND PRICES THE EVIDENCE Introduction to Costs and Prices Testing the Neoclassical Theory of the Firm Testing the Theory Designing the Average Total Cost Curve Costing and Pricing A Heterodox Alternative Depreciation and the Going Concern Prices from Pricing Comparing Neoclassical and Heterodox Theory CHAPTER 16 . THE Introduction to the The Imperatives of Technology Business Models , Plural Aims and Methods of the Stabilizing Unstable Markets The High Price of College Textbooks CHAPTER 17 . MONOPOLY AND ANTITRUST POLICY Introduction to Monopoly and Antitrust Policy 402 402 403 406 407 410 412 412 412 415 415 416 418 419 420 422 423 424 424 428 428 429 433 436 439 443 448 450 454

Corporate Mergers Regulations for Approving Mergers The Concentration Ratio The Index New Directions for Antitrust Key Concepts and Summary Regulating Behavior Restrictive Practices Key Concepts and Summary Regulating Natural Monopolies The Choices in Regulating a Natural Monopoly versus Price Cap Regulation Key Concepts and Summary The Great Deregulation Experiment Doubts about Regulation of Prices and Quantities The Effects of Deregulation Key Concepts and Summary References CHAPTER 18 . ENVIRONMENTAL PROTECTION AND NEGATIVE Introduction to Environmental Protection and Negative The Economics of Pollution Pollution as a Negative Externality Key Concepts and Summary References Regulation Key Concepts and Summary Environmental Tools Pollution Charges Marketable Permits Property Rights Applying Environmental Tools Key Concepts and Summary Questions References The Benefits and Costs of Environmental Laws Benefits and Costs of Clean Air and Clean Water Making Environmentalism Pay Marginal Benefits and Marginal Costs Key Concepts and Summary References xiii 457 457 459 460 461 463 466 466 468 470 470 473 473 476 476 477 478 479 482 484 485 485 488 490 492 493 495 495 497 498 499 500 500 501 503 503 504 504 506 508

xiv International Environmental Issues Key Concepts and Summary References The Tradeoff between Economic Output and Environmental Protection Key Concepts and Summary CHAPTER 19 . POSITIVE AND PUBLIC GOODS Introduction to Positive and Public Goods Why the Private Sector Under Invests in Innovation The Positive of New Technology Why Invest in Human Capital ?

Other Examples of Positive Key Concepts and Summary References How Governments Can Encourage Innovation Intellectual Property Rights Policy Government Spending on Research and Development Policy Tax Breaks for Research and Development Policy Cooperative Research Key Concepts and Summary References Public Goods The Definition ofa Public Good The Free Rider Problem Goods The Role of Government in Public Goods Common Resources and the Tragedy of the Commons Positive in Public Health Programs Key Concepts and Summary References CHAPTER 20 . POVERTY AND ECONOMIC INEQUALITY Introduction to Poverty and Economic Inequality Drawing the Poverty Line Key Concepts and Summary References The Poverty Trap Key Concepts and Summary 510 511 512 514 515 520 523 524 525 526 527 530 532 532 534 535 535 535 536 538 538 539 540 541 542 543 544 548 550 553 554 556 560

The Safety Net Temporary Assistance for Needy Families The Earned Income Tax Credit ( Supplemental Nutrition Assistance Program ( SNAP ) Medicaid Key Concepts and Summary References Income Inequality Measurement and Causes Measuring Income Distribution by Curve Causes of Growing Inequality The Changing Composition ofAmerican Households Causes of Growing Inequality A Shift in the Distribution of Wages Key Concepts and Summary References Government Policies to Reduce Income Inequality Redistribution The Ladder of Opportunity Inheritance Taxes The Tradeoff between Incentives and Income Equality Key Concepts and Summary References CHAPTER 21 . ISSUES IN LABOR MARKETS UNIONS , DISCRIMINATION , IMMIGRATION Introduction to Issues in Labor Markets Unions , Discrimination , Immigration Unions Facts about Union Membership and Pay Higher Wages for Union Workers The Decline in Union Membership Key Concepts and Summary References Employment Discrimination Earnings Gaps by Race and Gender Investigating the Earnings Gap Investigating the Earnings Gap Competitive Markets and Discrimination Public Policies to Reduce Discrimination An Increasingly Diverse Workforce Key Concepts and Summary References 564 564 565 566 567 569 570 572 573 573 576 576 578 580 584 585 585 586 586 588 589 592 595 595 596 599 602 604 606 606 607 608 609 610 611 611 613

Xvi Immigration Historical Patterns Economic Effects of Immigration Proposals for Immigration Reform Key Concepts and Summary References CHAPTER 22 . INFORMATION , RISK , AND INSURANCE Introduction to Information , Risk , and Insurance The Problem of Imperfect Information and Asymmetric Information Lemons and Other Examples of Imperfect Information How Imperfect Information Can Affect Equilibrium Price and Quantity When Price Mixes with Imperfect Information about Mechanisms to Reduce the Risk of Imperfect Information Key Concepts and Summary References Insurance and Imperfect Information How Insurance Works Government and Social Insurance Risk Groups and Actuarial Fairness The Moral Hazard Problem The Adverse Selection Problem US . Health Care in an International Context Government Regulation of Insurance The Patient Protection and Affordable Care Act Key Concepts and Summary References CHAPTER 23 . FINANCIAL MARKETS Introduction to Financial Markets How Businesses Raise Financial Capital Early Stage Financial Capital Profits as a Source Capital Borrowing Banks and Bonds Corporate Stock and Public Firms How Firms Choose between Sources of Financial Capital Key Concepts and Summary References 616 616 617 618 619 620 622 624 625 626 626 627 630 631 633 634 635 635 636 637 638 639 641 642 644 648 651 651 652 652 653 654 655 657

How Households Supply Financial Capital Expected Rate of Return , Risk , and Actual Rate of Return Bank Accounts Bonds Stocks Mutual Funds Housing and Other Tangible Assets The between Return and Risk Key Concepts and Summary References How to Accumulate Personal Wealth Why It Is Hard to Get Rich Quick The Random Walk Theory Getting Rich the Slow , Boring Way How Capital Markets Transform Financial Flows Key Concepts and Summary References CHAPTER 24 . PUBLIC ECONOMY Introduction to Public Economy Voter Participation and Costs of Elections Key Concepts and Summary References Special Interest Politics Identifiable Winners , Anonymous Losers Pork Barrels and Logrolling Key Concepts and Summary References Flaws in the Democratic System of Government Where Is Governments Mechanism ?

A Balanced View of Markets and Government Key Concepts and Summary References CHAPTER 25 . MONEY AND THE THEORY OF THE FIRM Introduction to Money and the Theory of the Firm The and the Barter Myth Glossary Smith , Marx , Keynes , and Modern Money Theory Glossary 659 659 660 662 664 667 668 671 672 674 676 676 677 679 680 681 684 686 688 689 691 693 693 694 696 697 699 700 701 703 706 709 711 712 713 717 717

The Money Hierarchy and the False Duality of the State and Market Local Currency Systems Social Money and Community Currencies CHAPTER INTERNATIONAL TRADE Introduction to International Trade Absolute and Comparative Advantage A Numerical Example of Absolute and Comparative Advantage Gains from Trade Key Concepts and Summary References What Happens When a Country Has an Absolute Advantage in All Goods Production Possibilities and Comparative Advantage Mutually Beneficial Trade with Comparative Advantage How Opportunity Cost Sets the Boundaries of Trade Comparative Advantage Goes Camping Key Concepts and Summary References Trade between Similar Economies The Prevalence Trade between Similar Economies Specialization and Learning Economies of Scale , Competition , Variety Dynamic Comparative Advantage Key Concepts and Summary References The Benefits of Reducing Barriers to International Trade From Interpersonal to International Trade Key Concepts and Summary References CHAPTER 27 . GLOBALIZATION AND PROTECTIONISM Introduction to Globalization and Protectionism Protectionism An Indirect Subsidy from Consumers to Producers Demand and Supply Analysis of Protectionism Who Benefits and Who Pays ?

Key Concepts and Summary References 718 722 723 724 728 730 731 733 736 737 739 739 740 742 743 744 746 747 747 748 749 750 750 752 754 755 756 757 760 762 763 768 769 770 International Trade and Its Effects , Wages , and Working Conditions Fewer jobs ?

Trade and Wages Labor Standards and Working Conditions Key Concepts and Summary References Arguments in Support of Restricting Imports The Infant Industry Argument The Argument The Environmental Protection Argument The Unsafe Consumer Products Argument The National Interest Argument Key Concepts and Summary References How Trade Policy Is Enacted Globally , Regionally , and Nationally The World Trade Organization Regional Trading Agreements Trade Policy at the National Level Term Trends in Barriers to Trade Key Concepts and Summary References The of Trade Policy Key Concepts and Summary References CHAPTER 28 . THE ECONOMICS or GLOBALIZATION AND TRADE A PLURALISTIC APPROACH Introduction to Globalization and Trade from a Pluralistic Perspective The Orthodox Story of Trade A Synopsis A Critical Examination of the Orthodox Depiction of Free Trade Challenging Functionality A More Penetrating Critique Glossary An Alternative Presentation of International Trade Path Dependency 772 772 774 775 776 777 779 779 781 782 784 784 786 788 790 790 791 792 793 793 794 796 797 799 802 804 807 813 818 819