Microeconomics: Principles, Applications, and Tools / Edition 9

by Arthur O'Sullivan, Steven Sheffrin, Stephen Perez

Overview

For courses in the Principles of Economics.

Introduces Readers to the Basic Concepts of Economics with Timely, Engaging Stories and Applications

Readers hoping to gain a better understanding of the world around them, often leave with their questions unanswered. Microeconomics: Principles, Applications, and Tools isbuilt upon the author’s philosophy of using the basic concepts of economics to explain a wide variety of timely, engaging, real-world economic applications.

The Ninth Edition incorporates updated figures and data, while also emphasizing current topics of interest–including the severe economic downturn of recent years and the latest developments in economic thinking. It also includes newly refined Learning Objectives that introduce the concepts explored in each chapter, along with new applications and chapter-opening stories related to the most up-to-date developments in microeconomics.

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Product Details

ISBN-13:	9780134061467
Publisher:	Pearson Education
Publication date:	01/08/2016
Edition description:	9th ed.
Pages:	472
Product dimensions:	8.30(w) x 10.80(h) x 0.60(d)

About the Author

Arthur O’Sullivan is a professor of economics at Lewis and Clark College in Portland, Oregon. After receiving his B.S. in economics at the University of Oregon, he spent two years in the Peace Corps, working with city planners in the Philippines. He received his Ph.D. in economics from Princeton University in 1981 and has taught at the University of California, Davis, and Oregon State University, winning teaching awards at both schools. He is the author of the best-selling textbook Urban Economics, currently in its eighth edition, with translations into Russian, Chinese, Korean, and Greek.

Professor O’Sullivan’s research explores economic issues concerning urban land use, environmental protection, and public policy. His articles have appeared in many economics journals, including the Journal of Urban Economics, Journal of Environmental Economics and Management, National Tax Journal, Journal of Public Economics, and Journal of Law and Economics.

Professor O’Sullivan lives with his family in Portland, Oregon. For recreation, he enjoys hiking, kiteboarding, and squash.

Steven M. Sheffrin is professor of economics and executive director of the Murphy Institute at Tulane University. Prior to joining Tulane in 2010, he was a faculty member at the University of California, Davis, and served as department chairman of economics and dean of social sciences. He has been a visiting professor at Princeton University, Oxford University, London School of Economics, and Nanyang Technological University, and he has served as a financial economist with the Office of Tax Analysis of the United States Department of the Treasury. He received his B.A. from Wesleyan University and his Ph.D. in economics from the Massachusetts Institute of Technology.

Professor Sheffrin is the author of 10 other books and monographs and over 100 articles in the fields of macroeconomics, public finance, and international economics. His most recent books include Rational Expectations (second edition) and Property Taxes and Tax Revolts: The Legacy of Proposition 13 (with Arthur O’Sullivan and Terri Sexton).

Professor Sheffrin has taught macroeconomics and public finance at all levels, from general introduction to principles classes (enrollments of 400) to graduate classes for doctoral students. He is the recipient of the Thomas Mayer Distinguished Teaching Award in economics. He lives with his wife Anjali (also an economist) in New Orleans, Louisiana, and has two daughters who have studied economics. In addition to a passion for current affairs and travel, he plays a tough game of tennis.

Stephen J. Perez is a professor of economics and NCAA faculty athletics representative at California State University, Sacramento. After receiving his B.A. in economics at the University of California, San Diego, he was awarded his Ph.D. in economics from the University of California, Davis, in 1994. He taught economics at Virginia Commonwealth University and Washington State University before coming to California State University, Sacramento, in 2001. He teaches macroeconomics at all levels as well as econometrics, sports economics, labor economics, and mathematics for economists.

Professor Perez’s research explores most macroeconomic topics. In particular, he is interested in evaluating the ability of econometric techniques to discover the truth, issues of causality in macroeconomics, and sports economics. His articles have appeared in many economics journals, including the Journal of Monetary Economics; Econometrics Journal; Economics Letters; Journal of Economic Methodology; Public Finance and Management; Journal of Economics and Business; Oxford Bulletin of Economics and Statistics; Journal of Money, Credit, and Banking; Applied Economics; and Journal of Macroeconomics.

Table of Contents

Preface     xiv
Introduction and Key Principles
Introduction: What Is Economics?     2
What Is Economics?     4
Positive Versus Normative Analysis     5
The Three Key Economic Questions: What, How, and Who?     6
Economic Models     6
Economic Analysis and Modern Problems     7
Economic View of Traffic Congestion     7
Economic View of Poverty in Africa     7
Economic View of Japan's Economic Problems     8
The Economic Way of Thinking     9
Use Assumptions to Simplify     9
Isolate Variables-Ceteris Paribus     9
Think at the Margin     10
Rational People Respond to Incentives     10
Pedaling for Television Time     11
Preview of Coming Attractions: Macroeconomics     11
To Understand Why Economies Grow     11
London Solves its Congestion Problem     12
To Understand Economic Fluctuations     13
To Make Informed Business Decisions     13
Preview of Coming Attractions: Microeconomics     13
To Understand Markets and Predict Changes     13
To Make Personal and Managerial Decisions     14
To Evaluate PublicPolicies     14
Summary     15
Key Terms     15
Exercise     15
Using Graphs and Percentages     17
Using Graphs     17
Computing Percentage Changes and Using Equations     24
The Key Principles of Economics     28
The Principle of Opportunity Cost     30
The Cost of College     30
The Opportunity Costs of Time and Invested Funds     31
Opportunity Cost and the Production Possibilities Curve     31
The Marginal Principle     33
The Opportunity Cost of Military Spending     34
How Many Movie Sequels?     35
Renting College Facilities     36
Automobile Emissions Standards     36
Continental Airlines Uses the Marginal Principle     37
The Principle of Voluntary Exchange     37
Exchange and Markets     37
Online Games and Market Exchange     38
The Principle of Diminishing Returns     38
Tiger Woods and Weeds     39
Diminishing Returns from Sharing a Production Facility     39
Fertilizer and Crop Yields     40
The Real-Nominal Principle     40
The Declining Real Minimum Wage      41
Repaying Student Loans     42
Summary     43
Key Terms     43
Exercises     43
Economic Experiment     47
Exchange and Markets     48
Comparative Advantage and Exchange     50
Specialization and the Gains from Trade     50
Comparative Advantage Versus Absolute Advantage     52
The Division of Labor and Exchange     52
Comparative Advantage and International Trade     53
Moving Jobs to Different States and Different Countries     54
Movie Exports     54
Candy Cane Makers Move to Mexico for Cheap Sugar     55
Markets     56
Virtues of Markets     56
Markets in a Prisoner of War Camp     57
Market Failure and the Role of Government     58
Government Enforces the Rules of Exchange     59
Government Can Reduce Economic Uncertainty     60
Summary     61
Key terms     61
Exercises     61
Demand, Supply, and Market Equilibrium     66
The Demand Curve     68
The Individual Demand Curve and the Law of Demand     68
From Individual Demand to Market Demand      69
The Supply Curve     70
The Individual Supply Curve and the Law of Supply     71
Why Is the Individual Supply Curve Positively Sloped?     72
From Individual Supply to Market Supply     73
Why Is the Market Supply Curve Positively Sloped?     74
Market Equilibrium: Bringing Demand and Supply Together     74
Excess Demand Causes the Price to Rise     75
Excess Supply Causes the Price to Drop     76
Market Effects of Changes in Demand     76
Change in Quantity Demanded Versus Change in Demand     76
Increases in Demand Shift the Demand Curve     77
Decreases in Demand Shift the Demand Curve     78
A Decrease in Demand Decreases the Equilibrium Price     80
Market Effects of Changes in Supply     80
Change in Quantity Supplied Versus Change in Supply     80
Increases in Supply Shift the Supply Curve     81
An Increase in Supply Decreases the Equilibrium Price     82
Decreases in Supply Shift the Supply Curve     83
A Decrease in Supply Increases the Equilibrium Price     83
Simultaneous Changes in Demand and Supply     84
Predicting and Explaining Market Changes     85
Applications of Demand and Supply     86
Hurricane Katrina and Baton Rouge Housing Prices     86
Ted Koppel Tries to Explain Lower Drug Prices     87
Electricity from the Wind     88
The Bouncing Price of Vanilla Beans     89
Platinum, Jewelry, Catalytic Converters     90
Summary     91
Key Terms     91
Exercises     91
Economic Experiment     96
A Closer Look at Demand and Supply
Elasticity: A Measure of Responsiveness     98
The Price Elasticity of Demand     100
Computing Percentage Changes and Elasticities     100
Price Elasticity and the Demand Curve     102
Elasticity and the Availability of Substitutes     102
Other Determinants of the Price Elasticity of Demand     105
Using Price Elasticity to Predict Changes in Quantity     105
Beer Taxes and Highway Deaths     106
Subsidized Medical Care in Cote d'Ivoire and Peru     107
Price Elasticity and Total Revenue     107
How to Cut Teen Smoking by 60 Percent     108
Elastic Versus Inelastic Demand     109
Market Elasticity Versus Elasticity for a Firm     110
Transit Fares and Deficits     110
A Bumper Crop Is Bad News for Farmers     111
Drug Prices and Property Crime     112
Elasticity and Total Revenue for a Linear Demand Curve     112
Price Elasticity Along a Linear Demand Curve     112
Elasticity and Total Revenue for a Linear Demand Curve     114
Other Elasticities of Demand     114
Income Elasticity of Demand     115
Cross-Price Elasticity of Demand     115
The Price Elasticity of Supply     116
What Determines the Price Elasticity of Supply?     117
The Role of Time: Short-Run Versus Long-Run Supply Elasticity     117
Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply     118
Predicting Changes in Quantity Supplied     119
Using Elasticities to Predict Changes in Equilibrium Price     119
The Price Effects of a Change in Demand     119
The Price Effects of a Change in Supply     121
Metropolitan Growth and Housing Prices     121
An Import Ban and Shoe Prices     123
Summary     123
Key Terms     124
Exercises     124
Market Efficiency and Government Intervention     128
Consumer Surplus and Producer Surplus     130
The Demand Curve and Consumer Surplus     131
The Supply Curve and Producer Surplus     131
Market Equilibrium and Efficiency     132
Total Surplus Is Lower with a Price Below the Equilibrium Price     133
Total Surplus Is Lower with a Price Above the Equilibrium Price     134
Efficiency and the Invisible Hand     134
Government Intervention in Efficient Markets     135
Controlling Prices-Maximum and Minimum Prices     135
Setting Maximum Prices     135
Rent Control     136
Milk Mountains     138
Setting Minimum Prices     138
Controlling Quantities-Licensing and Import Restrictions     138
Taxi Medallions     139
Licensing and Market Efficiency     139
Winners and Losers from Licensing     140
Import Restrictions     140
U.S. and European Consumers Pay for Import Restrictions     142
Who Really Pays Taxes?     142
Tax Shifting: Forward and Backward     142
Supply and Demand for Human Organs     143
Tax Shifting and the Price Elasticity of Demand     144
Cigarette Taxes and Tobacco Land     145
Tax Burden and Deadweight Loss     145
Boat Workers and the Tax on Luxury Boats     145
Taxes and December Babies     147
Summary     147
Key Terms     148
Exercises     148
Economic Experiment     151
Consumer Choice Using Utility Theory     152
Total and Marginal utility     154
Consumer Choice     155
Consumer Constraints: The Budget Line     155
Making Choices Using the Equimarginal Rule     156
New Zealand's Tax on Light Spirits     157
Online Music Stores and Piracy     158
The Individual Demand Curve     159
The Income and Substitution Effects of a Price Change     159
Points on the Demand Curve     160
The Substitution Effect of a Gas Tax Decreases Gas Consumption     161
Application of Consumer Choice     162
Inflation Doesn't Change Consumption or Utility     162
Television Versus Radio Advertising     163
Summary     164
Key Terms     164
Exercises     164
Consumer Choice with Indifference Curves     168
Consumer Constraints and Preferences     168
Maximizing Utility     171
What's Your MRS?      172
Online Music and Piracy     173
Inflation Doesn't Change Consumption or Utility     174
Drawing the Individual Demand Curve     175
The Substitution Effect of a Gas Tax Decreases Gas Consumption     178
Summary     179
Exercises     180
Key Terms     180
Market Structures and Pricing
Production Technology and Cost     184
Economic Cost and Economic Profit     186
A Firm with a Fixed Production Facility: Short-Run Costs     187
Production and Marginal Product     187
Short-Run Total Cost     188
Short-Run Average Costs     190
Short-Run Marginal Cost     191
The Relationship Between Marginal Cost and Average Cost     192
Production and Cost in the Long Run     193
Expansion and Replication     193
Reducing Output with Indivisible Inputs     195
Scaling Down and Labor Specialization     195
Economies of Scale     196
Diseconomies of Scale     196
Actual Long-Run Average-Cost Curves     196
Short-Run Versus Long-Run Average Cost     197
Applications of Production Cost     198
The Production Cost of an iPod Nano      198
Indivisible inputs and the Cost of Fake Killer Whales     199
Scale Economies in Wind Power     200
Information Goods and First-Copy Cost     200
The Average Cost of Producing Airplanes     201
Summary     202
Key Terms     203
Exercises     203
Perfect Competition     206
Preview of the Four Market Structures     208
The Firm's Short-Run Output Decision     210
The Total Approach: Computing Total Revenue and Total Cost     210
The Marginal Approach     211
Economic Profit and the Break-Even Price     213
The Firm's Shut-Down Decision     213
Total Revenue, Variable Cost, and the Shut-Down Decision     213
The Shut-Down Price     215
Fixed Costs and Sunk Costs     215
The Break-Even Price for a Corn Farmer     216
Short-Run Supply Curves     216
The Firm's Short-Run Supply Curve     216
The Short-Run Market Supply Curve     217
Market Equilibrium     218
Wireless Women in Pakistan     219
The Long-Run Supply Curve for an Increasing-Cost Industry     219
Production Cost and Industry Size      220
Drawing the Long-Run Market Supply Curve     220
Wolfram Miners Obey the Law of Supply     221
The Worldwide Supply of Sugar     222
Short-Run and Long-Run Effects of Changes in Demand     222
The Short-Run Response to an Increase in Demand     222
The Long-Run Response to an Increase in Demand     223
Zoning, Land Prices, and the Supply Curve for Apartments     224
Long-Run Supply for a Constant-Cost Industry     225
Long-Run Supply Curve for a Constant-Cost Industry     225
Hurricane Andrew and the Price of Ice     225
Summary     227
Key Terms     227
Exercises     227
Monopoly and Price Discrimination     232
The Monopolist's Output Decision     234
Total Revenue and Marginal Revenue     235
A Formula for Marginal Revenue     236
Using the Marginal Principle     236
The Social Cost of Monopoly     239
Deadweight Loss from Monopoly     239
Rent Seeking: Using Resources to Get Monopoly Power     241
Monopoly and Public Policy     241
Ending the Monopoly on Internet Registration     242
Patents and Monopoly Power      242
Incentives for Innovation     242
Trade-Offs from Patents     243
Price Discrimination     243
Bribing the Makers of Generic Drugs     244
Senior Discounts in Restaurants     245
Price Discrimination and the Elasticity of Demand     246
Paying for a Cold Soft Drink on a Hot Day     246
The Pricing of Movie Admission and Popcorn     247
Hardback Books Are Relatively Expensive     248
Summary     249
Key Terms     250
Exercises     250
Economic Experiment     252
Market Entry and Monopolistic Competition     254
The Effects of Market Entry     256
Entry Squeezes Profits from Three Sides     257
Woofer, Tweeter, and the Stereo Business     258
Deregulation and Entry in Trucking     258
Name Brands Versus Store Brands     259
Monopolistic Competition     259
When Entry Stops: Long-Run Equilibrium     260
Differentiation by Location     261
Trade-Offs with Entry and Monopolistic Competition     261
Average Cost and Variety     261
Opening a Dunkin' Donuts Shop     262
Monopolistic Competition Versus Perfect Competition     263
Advertising for Product Differentiation     264
Celebrity Endorsements and Signaling     264
Advertising and Movie Buzz     265
Summary     266
Key Terms     266
Exercises     266
Economic Experiment     269
Oligopoly and Strategic Behavior     270
What Is an Oligopoly?     272
Cartel Pricing and the Duopolists' Dilemma     273
Price-Fixing and the Game Tree     275
Equilibrium of the Price-Fixing Game     276
Nash Equilibrium     277
Overcoming the Duopolists' Dilemma     277
Low-Price Guarantees     277
Vitamin Inc. Gets Busted     273
Repeated Pricing Games with Retaliation for Underpricing     279
Low-Price Guarantees and Empty Promises     280
Price-Fixing and the Law     281
Alternative Models of Oligopoly Pricing     282
Price Leadership     282
The Kinked Demand Curve Mode     282
Simultaneous Decision Making and the Payoff Matrix     283
Simultaneous Price-Fixing Game     283
The Prisoners' Dilemma     284
The Insecure Monopolist and Entry Deterrence     285
The Passive Approach     285
Entry Deterrence and Limit Pricing     286
Legal and Illegal Entry Deterrence     288
Examples: Microsoft Windows and Campus Bookstores     288
Entry Deterrence and Contestable Markets     289
When Is the Passive Approach Better?     289
The Advertisers' Dilemma     289
Reynolds International Takes the Money and Leaves the Market     290
Summary     292
Key Terms     292
Exercises     292
Economic Experiment     297
Controlling Market Power: Antitrust and Regulation     298
Natural Monopoly     300
Picking an Output Level     300
Will a Second Firm Enter?     301
Price Controls for a Natural Monopoly     302
XM and Sirius Satellite Radio     303
A Decrease in Demand Increases The Price of Cable TV     304
Antitrust Policy     304
Breaking Up Monopolies     304
Blocking Mergers     305
Merger Remedy for Wonder Bread     306
Heinz and Beech-Nut Battle for Second Place     307
Regulating Business Practices: Price-Fixing, Tying, and Cooperative Agreements     308
Xidex Recovers Its Acquisition Cost in Two Years     309
The Microsoft Cases     309
A Brief History of U.S. Antitrust Policy     309
Deregulation: Airlines, Telecommunications, and Electricity     310
Deregulation of Airlines     310
Deregulation of Telecommunication Services     311
Deregulation of Electricity     311
Electricity Deregulation in California     312
Electricity Deregulation in Other U.S. States     313
Summary     313
Key Terms     313
Exercises     313
Externalities and Information
Imperfect Information: Adverse Selection and Moral Hazard     316
The Lemons Problem     318
Uninformed Buyers and Knowledgeable Sellers     318
Equilibrium with All Low-Quality Goods     319
A Thin Market: Equilibrium with Some High-Quality Goods     320
Responding to the Lemons Problem     322
Buyers Invest in Information     322
Consumer Satisfaction Scores from ValueStar and eBay     322
Guarantees and Lemons Laws     322
Evidence of the Lemons Effect     323
The Resale Value of a Week-Old Car     323
Used Pickup Trucks     324
Regulation of the California Kiwifruit Market     324
Baseball Pitchers Are Like Used Cars     325
Uninformed Sellers and Knowledgeable Buyers: Insurance     326
Health Insurance     326
Equilibrium with All High-Cost Consumers     326
Responding to Adverse Selection in Insurance: Group Insurance     328
The Uninsured     328
Genetic Testing Benefits Low-Risk People     329
Other Types of Insurance     330
Insurance and Moral Hazard     330
Deposit Insurance for Savings & Loans     331
People with Insurance Take More Risks     331
Summary     332
Key Terms     332
Exercises     332
Economic Experiments     336
Public Goods and Public Choice     338
External Benefits and Public Goods     340
Public Goods and the Free-Rider Problem     341
Free Riders and the Three-Clock Tower     343
Overcoming the Free-Rider Problem     343
Paying Landowners to Host Wolves     344
Asteroid Diversion as a Public Good     344
Private Goods with External Benefits     345
External Benefits from Education     345
External Benefits and the Marginal Principle     345
Other Private Goods That Generate External Benefits     346
External Benefits from LoJack     347
Public Choice     347
Voting and the Median-Voter Rule     347
Alternative Models of Government: Self-Interest and Special Interests     349
Politicians Are Like Ice-Cream Sellers     350
Which Theory Is Correct?     351
Summary     351
Key Terms     351
Exercises     351
Economic Experiment     353
External Costs and Environmental Policy     354
The Optimal Level of Pollution     356
Using the Marginal Principle     356
The Optimal of Level Sulfur Dioxide Emissions     357
Taxing Pollution     358
A Firm's Response to a Pollution Tax     358
The Market Effects of a Pollution Tax     358
Traditional Regulation     360
Uniform Abatement with Permits     360
The Effects of a Carbon Tax     361
Command and Control     362
Market Effects of Pollution Regulations     362
Marketable Pollution Permits     362
Dear Abby and Environmental Policy     363
Voluntary Exchange and Marketable Permits     364
Supply, Demand, and the Price of Marketable Permits     364
External Costs from Automobiles     365
External Costs from Pollution     365
Marketable Permits for Sulfur Dioxide     366
Chicago Climate Exchange     367
External Costs from Congestion     368
External Costs from Collisions     369
Young Drivers and Collisions     369
Summary     370
Key Terms     370
Exercises     370
Economic experiment     373
The Labor Market and Income Distribution
The Labor Market, Income, and Poverty     374
The Demand for Labor     376
Labor Demand by an Individual Firm in the Short Run     376
Market Demand for Labor in the Short Run     379
Labor Demand in the Long Run     379
Short-Run Versus Long-Run Demand     379
The Supply of Labor     380
The Individual Labor-Supply Decision: How Many Hours?     380
Different Responses to a Higher Wage     381
The Market Supply Curve for Labor     381
Labor Market Equilibrium     382
Changes in Demand and Supply     382
The Market Effects of the Minimum Wage     383
Codes of Conduct and Living Wages     384
Trade-Offs from Immigration     385
Explaining Differences in Wages and Income     385
Why Do Wages Differ Across Occupations?     386
The Gender Pay Gap     386
Wage Premiums for Dangerous Jobs     387
Racial Discrimination     388
Why Do College Graduates Earn Higher Wages?     388
Lakisha Washington Versus Emily Walsh     389
The Distribution of Income     390
Income Distribution Facts     390
Recent Changes in the Distribution of Income     391
Changes in the Top End of Income Distribution: 1920-1998     392
Poverty and Public Policy     393
Poverty Rates for Different Groups     393
Redistribution Programs for the Poor     394
Welfare Reform and TANF     394
Welfare and Work Incentives     395
Summary     396
Key Terms     396
Exercises     396
Unions, Monopsony, and Imperfect Information     400
Labor Unions     402
A Brief History of Labor Unions in the United States      402
Labor Unions and Wages     403
Truckers Trade Off Wages and Jobs     404
Market Structure and the Wage-Jobs Trade-Off     405
The Effects of Unions on Worker Productivity and Turnover     405
Competition Reduces Trucker Wages     406
Monopsony Power     406
Marginal Labor Cost Exceeds the Wage     407
Picking a Quantity of Labor and a Wage     407
Monopsony Versus Perfect Competition     408
Monopsony and a Minimum Wage     409
Monopsony and the Real World     410
Pubs and the Labor-Supply Curve     411
Imperfect Information and Efficiency Wages     411
The Mixed Market for Labor     411
Efficiency Wages at Ford Motor Company     413
Summary     413
Key Terms     414
Exercises     414
The International Economy
International Trade and Public Policy     416
Benefits from Specialization and Trade     418
Production Possibilities Curve     418
Comparative Advantage and the Terms of Trade     419
The Consumption Possibilities Curve     420
How Free Trade Affects Employment     421
Protectionist Policies      422
Import Bans     422
Quotas and Voluntary Export Restraints     422
Responses to Protectionist Policies     424
The Impact of Tariff31s on the Poor     424
What Are the Rationales for Protectionist Policies?     425
To Shield Workers from Foreign Competition     425
To Nurture Infant Industries     425
Measuring the Costs of Protecting Jobs     426
To Help Domestic Firms Establish Monopolies in World Markets     426
Protection for Candle Makers     427
A Brief History of International Tariff and Trade Agreements     428
Ongoing Trade Negotiations     429
Recent Policy Debates and Trade Agreements     429
Are Foreign Producers Dumping Their Products?     429
Do Trade Laws Inhibit Environmental Protection?     430
Do Outsourcing and Trade Cause Inequality?     431
Why Do People Protest Against Free Trade?     432
Summary     433
Key Terms     433
Exercises     433
Glossary     436
Photo Credits     441
Index     442