Preface v
Acknowledgments x
Chapter 1: An Introduction to Microeconomics 1
1.1 The Scope of Microeconomic Theory 2
1.2 The Nature and Role of Theory 2
1.3 Positive versus Normative Analysis 4
1.4 Market Analysis and Real versus Nominal Prices 5
1.5 Basic Assumptions about Market Participants 6
1.6 Opportunity Cost 6
1.7 Production Possibility Frontier 10
Chapter 2: Supply and Demand 15
2.1 Demand and Supply Curves 16
2.2 Determination of Equilibrium Price and Quantity 23
2.3 Adjustment to Changes in Demand or Supply 25
2.4 Government Intervention in Markets: Price Controls 28
2.5 Elasticities 33
2.6 The Mathematics Associated with Elasticities 42
Chapter 3: The Theory of Consumer Choice 48
3.1 Consumer Preferences 50
3.2 The Budget Constraint 59
3.3 The Consumer’s Choice 63
3.4 Changes in Income and Consumption Choices 68
3.5 Are People Selfish? 74
3.6 The Utility Approach to Consumer Choice 77
Chapter 4: Individual and Market Demand 85
4.1 Price Changes and Consumption Choices 86
4.2 Income and Substitution Effects of a Price Change 91
4.3 Income and Substitution Effects: Inferior Goods 96
4.4 From Individual to Market Demand 99
4.5 Consumer Surplus 101
4.6 Price Elasticity and the Price–Consumption Curve 107
4.7 Network Effects 109
4.8 The Basics of Demand Estimation 113
4.9 Deriving the Consumer’s Demand Curve Mathematically 117
Chapter 5: Using Consumer Choice Theory 122
5.1 Excise Subsidies, Health Care, and Consumer Welfare 123
5.2 Subsidizing Health Insurance: ObamaCare 128
5.3 Public Schools and the Voucher Proposal 133
5.4 Paying for Garbage 137
5.5 The Consumer’s Choice to Save or Borrow 141
5.6 Investor Choice 147
Chapter 6: Exchange, Efficiency, and Prices 158
6.1 Two-Person Exchange 159
6.2 Efficiency in the Distribution of Goods 165
6.3 Competitive Equilibrium and Efficient Distribution 169
6.4 Price and Nonprice Rationing and Efficiency 173
*6.5 Some of the Mathematics behind Efficiency in Exchange 176
Chapter 7: Production 180
7.1 Relating Output to Inputs 181
7.2 Production When Only One Input Is Variable: The Short Run 182
7.3 Production When All Inputs Are Variable: The Long Run 189
7.4 Returns to Scale 194
7.5 Functional Forms and Empirical Estimation of Production Functions 197
*7.6 The Mathematics behind Production Theory 201
Chapter 8: The Cost of Production 207
8.1 The Nature of Cost 208
8.2 Short-Run Cost of Production 209
8.3 Short-Run Cost Curves 213
8.4 Long-Run Cost of Production 218
8.5 Input Price Changes and Cost Curves 224
8.6 Long-Run Cost Curves 227
8.7 Learning by Doing 230
8.8 Importance of Cost Curves to Market Structure 232
8.9 Using Cost Curves: Controlling Pollution 234
8.10 Economies of Scope 237
8.11 Estimating Cost Functions 238
*8.12 The Mathematics behind Production Cost 240
Chapter 9: Profit Maximization in Perfectly Competitive Markets 245
9.1 The Assumptions of Perfect Competition 246
9.2 Profit Maximization 248
9.3 The Demand Curve for a Competitive Firm 250
9.4 Short-Run Profit Maximization 252
9.5 The Perfectly Competitive Firm’s Short-Run Supply Curve 257
9.6 The Short-Run Industry Supply Curve 260
9.7 Long-Run Competitive Equilibrium 262
9.8 The Long-Run Industry Supply Curve 266
9.9 When Does the Competitive Model Apply? 274
*9.10 The Mathematics behind Perfect Competition 276
Chapter 10: Using the Competitive Model 280
10.1 The Evaluation of Gains and Losses 281
10.2 Excise Taxation 287
10.3 Airline Regulation and Deregulation 296
10.4 City Taxicab Markets 301
10.5 Consumer and Producer Surplus, and the Net Gains from Trade 304
10.6 Government Intervention in Markets: Quantity Controls 310
Chapter 11: Monopoly 316
11.1 The Monopolist’s Demand and Marginal Revenue Curves 317
11.2 Profit-Maximizing Output of a Monopoly 319
11.3 Further Implications of Monopoly Analysis 325
11.4 The Measurement and Sources of Monopoly Power 329
11.5 The Efficiency Effects of Monopoly 335
11.6 Public Policy toward Monopoly 339
*11.7 The Math behind Monopoly 343
Chapter 12: Product Pricing with Monopoly Power 348
12.1 Price Discrimination 350
12.2 Three Necessary Conditions for Price Discrimination 354
12.3 Price and Output Determination with Price Discrimination 356
12.4 Intertemporal Price Discrimination and Peak-Load Pricing 360
12.5 Two-Part Tariffs 366
*12.6 The Mathematics behind Price Discrimination 371
Chapter 13: Monopolistic Competition and Oligopoly 375
13.1 Price and Output under Monopolistic Competition 376
13.2 Oligopoly and the Cournot Model 382
13.3 Other Oligopoly Models 386
13.4 Cartels and Collusion 392
Chapter 14: Game Theory and the Economics of Information 405
14.1 Game Theory 407
14.2 The Prisoner’s Dilemma Game 411
14.3 Repeated Games 416
14.4 Asymmetric Information 421
14.5 Adverse Selection and Moral Hazard 425
14.6 Limited Price Information 430
14.7 Advertising 431
Chapter 15: Using Noncompetitive Market Models 437
15.1 The Size of the Deadweight Loss of Monopoly438
15.2 Do Monopolies Suppress Inventions? 442
15.3 Natural Monopoly 445
15.4 More on Game Theory: Iterated Dominance and Commitment 449
Chapter 16: Employment and Pricing of Inputs 456
16.1 The Input Demand Curve of a Competitive Firm 457
16.2 Industry and Market Demand Curves for an Input 463
16.3 The Supply of Inputs 466
16.4 Industry Determination of Price and Employment of Inputs 468
16.5 Input Price Determination in a Multi-Industry Market 471
16.6 Input Demand and Employment by an Output Market Monopoly 474
16.7 Monopsony in Input Markets 476
*16.8 The Calculus behind Input Demand by Competitive and Monopoly Firms 478
Chapter 17: Wages, Rent, Interest, and Profit 482
17.1 The Income–Leisure Choice of the Worker 483
17.2 The Supply of Hours of Work 486
17.3 The General Level of Wage Rates 491
17.4 Why Wages Differ 493
17.5 Economic Rent 497
17.6 Monopoly Power in Input Markets: The Case of Unions 499
17.7 Borrowing, Lending, and the Interest Rate 503
17.8 Investment and the Marginal Productivity of Capital 504
17.9 Saving, Investment, and the Interest Rate 507
17.10 Why Interest Rates Differ 509
Chapter 18: Using Input Market Analysis 513
18.1 The Minimum Wage 514
18.2 Who Really Pays for Social Security? 521
18.3 The Hidden Cost of Social Security 524
18.4 The NCAA Cartel 528
18.5 Discrimination in Employment 534
18.6 The Benefits and Costs of Immigration 538
Chapter 19: General Equilibrium Analysis and Economic Efficiency 545
19.1 Partial and General Equilibrium Analysis Compared 546
19.2 Economic Efficiency 550
19.3 Conditions for Economic Efficiency 552
19.4 Efficiency in Production 552
19.5 The Production Possibility Frontier and Efficiency in Output 556
19.6 Competitive Markets and Economic Efficiency 562
19.7 The Causes of Economic Inefficiency 565
Chapter 20: Public Goods and Externalities 571
20.1 What Are Public Goods? 573
20.2 Efficiency in the Provision of a Public Good 575
20.3 Externalities 579
20.4 Externalities and Property Rights 585
20.5 Controlling Pollution, Revisited 589
Answers to Selected Problems 596
Glossary 604
Index 611