1.2 Brief Contents
Section 1
Basic Economic Concepts 1
MODULE 1 The Study of Economics 2
MODULE 2 Models and the Circular Flow 10
MODULE 3 The Production Possibility Frontier Model 15
MODULE 4 Comparative Advantage and Trade 22
Section 2
Supply and Demand 35
MODULE 5 Demand 36
MODULE 6 Supply and Equilibrium 47
MODULE 7 Changes in Equilibrium 60
Section 3
Elasticity and the Law of Demand 71
MODULE 8 Income Effects, Substitution Effects, and Elasticity 72
MODULE 9 Interpreting Price Elasticity of Demand 80
MODULE 10 Other Elasticities 89
Section 4
Market Efficiency 101
MODULE 11 Consumer and Producer Surplus 102
MODULE 12 Efficiency and Markets 114
Section 5
Government Policy and Taxes 127
MODULE 13 Price Controls (Ceilings and Floors) 128
MODULE 14 Quantity Controls (Quotas) 140
MODULE 15 Taxes 146
Section 6
International Trade 165
MODULE 16 Gains from Trade 166
MODULE 17 Supply, Demand, and International Trade 175
Section 7
Economics and Decision Making 191
MODULE 18 Making Decisions 192
MODULE 19 Behavioral Economics 204
MODULE 20 Maximizing Utility 210
Section 8
Production and Costs 229
MODULE 21 The Production Function 230
MODULE 22 Firm Costs 237
MODULE 23 Long-
Section 9
Market Structure and Perfect Competition 259
MODULE 24 Introduction to Market Structure 260
MODULE 25 Perfect Competition 270
MODULE 26 Graphing Perfect Competition 277
MODULE 27 Long-
Section 10
Monopoly 301
MODULE 28 Monopoly in Practice 302
MODULE 29 Monopoly and Public Policy 311
MODULE 30 Price Discrimination 317
Section 11
Imperfect Competition 329
MODULE 31 Oligopoly 330
MODULE 32 Game Theory 335
MODULE 33 Oligopoly in Practice 343
MODULE 34 Monopolistic Competition 349
MODULE 35 Product Differentiation and Advertising 358
Section 12
Market Failure and the Role of Government 371
MODULE 36 Externalities 372
MODULE 37 Externalities and Public Policy 379
MODULE 38 Public Goods and Common Resources 389
MODULE 39 The Econonomics of the Welfare State 400
Section 13
Factor Markets and the Distribution of Income 423
MODULE 40 Factor Markets 424
MODULE 41 Marginal Productivity Theory 432
MODULE 42 The Market for Labor 440
Section 14
Additional Topics in Microeconomics 453
MODULE 43 The Cost-
MODULE 44 The Time Value of Money 459
MODULE 45 The Economics of Information 465
1.2.1 Preface
Preface xvi
Section 1
Basic Economic Concepts 1
Thinking Like An Economist 1
Module 1 The Study of Economics 2
Individual Choice: The Core of Economics 2
Resources Are Scarce 2
Opportunity Cost: The Real Cost of Something Is What You Must Give Up to Get It 3
ECONOMICS IN ACTION: Got a Penny? 4
Microeconomics versus Macroeconomics 5
Positive versus Normative Economics 6
When and Why Economists Disagree 7
ECONOMICS IN ACTION: When Economists Agree 8
Module 1 Review 8
Module 2 Models and the Circular Flow 10
Models Take Flight in Economics 10
ECONOMICS IN ACTION: The Model That Ate the Economy 11
The Circular-
One Person’s Spending Is Another Person’s Income 13
Module 2 Review 14
Module 3 The Production Possibility Frontier Model 15
Trade-
Efficiency 17
Opportunity Cost 18
Economic Growth 19
Module 3 Review 20
Module 4 Comparative Advantage and Trade 22
Gains from Trade 22
Comparative Advantage and Gains from Trade 23
ECONOMICS IN ACTION: Rich Nation, Poor Nation 26
Comparative Advantage and International Trade, in Reality 27
Module 4 Review 27
BUSINESS CASE: Efficiency, Opportunity Cost, and the Logic of Lean Production at Boeing 29
Section 1 Review 30
Section 2
Supply and Demand 35
Blue Jean Blues 35
Module 5 Demand 36
Supply and Demand: A Model of a Competitive Market 36
The Demand Curve 37
The Demand Schedule and the Demand Curve 37
Shifts of the Demand Curve 38
Understanding Shifts of the Demand Curve 40
ECONOMICS IN ACTION: Beating the Traffic 45
Module 5 Review 45
Module 6 Supply and Equilibrium 47
The Supply Curve 47
The Supply Schedule and the Supply Curve 47
Shifts of the Supply Curve 48
Understanding Shifts of the Supply Curve 50
ECONOMICS IN ACTION: Only Creatures Small and Pampered 54
Supply, Demand, and Equilibrium 54
Finding the Equilibrium Price and Quantity 55
Why Do All Sales and Purchases in a Market Take Place at the Same Price? 56
Why Does the Market Price Fall if It Is Above the Equilibrium Price? 56
Why Does the Market Price Rise if It Is Below the Equilibrium Price? 56
Using Equilibrium to Describe Markets 58
Module 6 Review 58
Module 7 Changes in Equilibrium 60
Changes in Supply and Demand 60
What Happens When the Demand Curve Shifts 60
What Happens When the Supply Curve Shifts 61
Simultaneous Shifts of Supply and Demand Curves 62
ECONOMICS IN ACTION: The Rice Run of 2008 64
Module 7 Review 64
BUSINESS CASE: The Chicago Board of Trade 66
Section 2 Review 67
ix
Section 3
Elasticity and the Law of Demand 71
More Precious than a Flu Shot 71
Module 8 Income Effects, Substitution Effects, and Elasticity 72
Explaining the Law of Demand 72
The Substitution Effect 72
The Income Effect 73
ECONOMICS IN ACTION: Giffen Goods 74
Defining and Measuring Elasticity 74
Calculating the Price Elasticity of Demand 75
An Alternative Way to Calculate Elasticities: The Midpoint Method 76
ECONOMICS IN ACTION: Estimating Elasticities
Module 8 Review 78
Module 9 Interpreting Price Elasticity of Demand 80
A Closer Look at the Price Elasticity of Demand 80
How Elastic is Elastic? 80
Price Elasticity Along the Demand Curve 85
What Factors Determine the Price Elasticity of Demand? 86
ECONOMICS IN ACTION: Responding to Your Tuition Bill 87
Module 9 Review 87
Module 10 Other Elasticities 89
Using Other Elasticities 89
The Cross-
The Income Elasticity of Demand 90
ECONOMICS IN ACTION: Will China Save the U.S. Farming Sector? 91
The Price Elasticity of Supply 91
Measuring the Price Elasticity of Supply 92
What Factors Determine the Price Elasticity of Supply? 92
An Elasticity Menagerie 94
Module 10 Review 95
BUSINESS CASE: The Airline Industry: Fly Less, Charge More 96
Section 3 Review 97
Section 4
Market Efficiency 101
Making Gains by the Book 101
Module 11 Consumer and Producer Surplus 102
Consumer Surplus and the Demand Curve 102
Willingness to Pay and the Demand Curve 102
Willingness to Pay and the Consumer Surplus 104
How Changing Prices Affect Consumer Surplus 106
ECONOMICS IN ACTION: A Matter of Life and Death 108
Producer Surplus and the Supply Curve 108
Cost and Producer Surplus 108
How Changing Prices Affect Produce Surplus 111
Module 11 Review 112
Module 12 Efficiency and Markets 114
Consumer Surplus, Producer Surplus, and Efficiency 114
The Gains from Trade 114
The Efficiency of Markets 115
Equity and Efficiency 118
A Market Economy 119
Why Markets Typically Work So Well 119
Why Markets Can Sometimes Get It Wrong 120
Module 12 Review 121
BUSINESS CASE: StubHub Shows Up the Boss 122
Section 4 Review 123
x
Section 5
Government Policy and Taxes 127
Big City, Not-
Module 13 Price Controls (Ceilings and Floors) 128
Why Governments Control Prices 128
Price Ceilings 129
Modeling a Price Ceiling 129
How a Price Ceiling Causes Inefficiency 131
So Why Are There Price Ceilings? 133
ECONOMICS IN ACTION: Hunger and Price Controls in Venezuela 133
Price Floors 134
ECONOMICS IN ACTION: Price Floors and School Lunches 135
How a Price Floor Causes Inefficiency 136
So Why Are There Price Floors? 137
Module 13 Review 138
Module 14 Quantity Controls (Quotas)140
Controlling Quantities 140
How Quantity Controls Work 141
The Costs of Quantity Controls 144
ECONOMICS IN ACTION: The Clams of the Jersey Shore 144
Module 14 Review 145
Module 15 Taxes 146
Equity, Efficiency, and Taxes 146
The Effects of Taxes on Total Surplus 147
The Effect of an Excise Tax on Quantities and Prices 147
Price Elasticities and Tax Incidence 150
ECONOMICS IN ACTION: Who Pays the FICA? 152
The Benefits and Costs of Taxation 153
The Revenue from an Excise Tax 153
The Costs of Taxation 154
Module 15 Review 157
BUSINESS CASE: Medallion Financial: Cruising Right Along 159
Section 5 Review 160
Section 6
International Trade 165
Car Parts and Sucking Sounds 165
Module 16 Gains from Trade 166
Comparative Advantage and International Trade 166
Production Possibilities and Comparative Advantage, Revisited 167
The Gains from International Trade 169
Comparative Advantage versus Absolute Advantage 170
Sources of Comparative Advantage 171
ECONOMICS IN ACTION: Skill and Comparative Advantage 172
Module 16 Review 173
Module 17 Supply, Demand, and International Trade 175
Imports, Exports, and Wages 175
The Effects of Imports 175
The Effects of Exports 177
International Trade and Wages 178
The Effects of Trade Protection 180
The Effects of a Tariff 180
The Effects of an Import Quota 182
Challenges to Globalization 182
Globalization and Inequality 183
Outsourcing 183
ECONOMICS IN ACTION: Beefing Up Exports 184
Module 17 Review 185
BUSINESS CASE: Li & Fung: From Guangzhou to You 186
Section 6 Review 187
xi
Section 7
Economics and Decision Making 191
Going Back to School 191
Module 18 Making Decisions 192
Costs, Benefits, and Profits 192
Explicit versus Implicit Costs 192
Accounting Profit versus Economic Profit 193
Making “Either-
Making “How Much” Decisions: The Role of Marginal Analysis 195
Marginal Cost 196
Marginal Benefit 197
Marginal Analysis 198
ECONOMICS IN ACTION: The Cost of a Life 201
Sunk Costs 201
Module 18 Review 202
Module 19 Behavioral Economics 204
How People Make Economic Choices 204
Rational, but Human, Too 205
Irrationality: An Economist’s View 205
Rational Models for Irrational People? 207
ECONOMICS IN ACTION: “The Jingle Mail Blues” 208
Module 19 Review 208
Module 20 Maximizing Utility 210
Utility: It’s All About Getting Satisfaction 210
Utility and Consumption 210
The Principle of Diminishing Marginal Utility 212
Budgets and Optimal Consumption 212
Budget Constraints and Budget Lines 212
The Optimal Consumption Bundle 214
Spending the Marginal Dollar 216
Marginal Utility per Dollar 216
Optimal Consumption 218
ECONOMICS IN ACTION: Buying Your Way Out of Temptation 219
Module 20 Review 220
BUSINESS CASE: Citi Puts Card Holders “inControl”222
Section 7 Review 223
Section 8
Production and Costs 229
The Farmer’s Margin 229
Module 21 The Production Function 230
The Production Function 230
Inputs and Output 230
ECONOMICS IN ACTION: The Mythical Man-
Module 21 Review 235
Module 22 Firm Costs 237
From the Production Function to Cost Curves 237
Two Key Concepts: Marginal Cost and Average Cost 239
Marginal Cost 239
Average Total Cost 241
Minimum Average Total Cost 244
ECONOMICS IN ACTION: Don’t Put Out the Welcome Mat 245
Does the Marginal Cost Curve Always Slope Upward? 245
Module 22 Review 246
Module 23 Long-
Short-
Returns to Scale 251
ECONOMICS IN ACTION: There’s No Business Like Snow Business 252
Summing Up Costs: The Short and Long of It 252
Module 23 Review 253
BUSINESS CASE: Kiva Systems’ Robots versus Humans: The Challenge of Holiday Order Fulfillment 254
Section 8 Review 255
xii
Section 9
Market Structure and Perfect Competition 259
Doing What Comes Naturally 259
Module 24 Introduction to Market Structure 260
Types of Market Structure 260
Perfect Competition 261
Defining Perfect Competition 261
Two Necessary Conditions for Perfect Competition 262
ECONOMICS IN ACTION: What’s a Standardized Product? 263
Free Entry and Exit 263
Monopoly 263
Defining Monopoly 264
Why Do Monopolies Exist? 264
Oligopoly 266
Is It an Oligopoly or Not? 266
Monopolistic Competition 267
Defining Monopolistic Competition 268
Module 24 Review 269
Module 25 Perfect Competition 270
Production and Profits 270
Using Marginal Analysis to Choose the Profit-
When Is Production Profitable? 273
Module 25 Review 275
Module 26 Graphing Perfect Competition 277
Interpreting Perfect Competition Graphs 277
The Short-
The Shut-
Changing Fixed Cost 282
ECONOMICS IN ACTION: Prices Are Up … but So Are Costs 283
Summing Up: The Perfectly Competitive Firm’s Profitability and Production Conditions 283
Module 26 Review 284
Module 27 Long-
The Industry Supply Curve 286
The Short-
The Long-
ECONOMICS IN ACTION: Baling In, Bailing Out 290
The Cost of Production and Efficiency in Long-
Module 27 Review 293
BUSINESS CASE: TheFind Finds the Cheapest Price 295
Section 9 Review 296
Section 10
Monopoly 301
Everybody Must Get Stones 301
Module 28 Monopoly in Practice 302
The Monopolist’s Demand Curve and Marginal Revenue 302
The Monopolist’s Profit-
Monopoly versus Perfect Competition 306
Monopoly: The General Picture 307
ECONOMICS IN ACTION: Shocked by the High Price of Electricity 308
Module 28 Review 309
Module 29 Monopoly and Public Policy 311
Welfare Effects of Monopoly 311
Preventing Monopoly 312
Dealing with a Natural Monopoly 313
Public Ownership 313
Regulation 313
Must Monopoly Be Controlled? 315
ECONOMICS IN ACTION: Chained by Your Cable 315
Module 29 Review 316
Module 30 Price Discrimination 317
Price Discrimination Defined 317
The Logic of Price Discrimination 318
Price Discrimination and Elasticity 319
Perfect Price Discrimination 320
ECONOMICS IN ACTION: Sales, Factory Outlets, and Ghost Cities 322
Module 30 Review 323
BUSINESS CASE: Newly Emerging Markets: A Diamond Monopolist’s Best Friend 324
Section 10 Review 325
xiii
Section 11
Imperfect Competition 329
Illegal and Legal Practices 329
Module 31 Oligopoly 330
Interdependence and Oligopoly 330
Understanding Oligopoly 331
A Duopoly Example 331
Collusion and Competition 332
ECONOMICS IN ACTION: Bitter Chocolate? 333
Module 31 Review 334
Module 32 Game Theory 335
Games Oligopolists Play 335
The Prisoners’ Dilemma 335
ECONOMICS IN ACTION: Prisoners of the Arms Race 338
Overcoming the Prisoners’ Dilemma: Repeated Interaction and Tacit Collusion 339
Module 32 Review 341
Module 33 Oligopoly in Practice 343
The Legal Framework 343
Tacit Collusion and Price Wars 344
ECONOMICS IN ACTION: The Price Wars of Christmas 346
Product Differentiation and Price Leadership 346
How Important Is Oligopoly? 347
Module 33 Review 348
Module 34 Monopolistic Competition 349
Understanding Monopolistic Competition 349
Monopolistic Competition in the Short Run 350
Monopolistic Competition in the Long Run 351
ECONOMICS IN ACTION: The Housing Bust and the Demise of the 6% Commission 353
Monopolistic Competition versus Perfect Competition 354
Price, Marginal Cost, and Average Total Cost 354
Is Monopolistic Competition Inefficient? 355
Module 34 Review 356
Module 35 Product Differentiation and Advertising 358
How Firms Differentiate Their Products 358
Differentiation by Style or Type 359
Differentiation by Location 359
Differentiation by Quality 359
ECONOMICS IN ACTION: Any Color, So Long As It’s Black 360
Controversies About Product Differentiation 360
The Role of Advertising 361
Brand Names 362
Module 35 Review 363
BUSINESS CASE: Virgin Atlantic Blows the Whistle … or Blows It? 364
Section 11 Review 365
Section 12
Market Failure and the Role of Government 371
Who’ll Stop the Rain? 371
Module 36 Externalities 372
Externalities: An Overview 372
The Economics of Pollution 372
Costs and Benefits of Pollution 373
Pollution: An External Cost 374
ECONOMICS IN ACTION: Talking, Texting, and Driving 375
The Inefficiency of Excess Pollution 376
Private Solutions to Externalities 376
Module 36 Review 377
Module 37 Externalities and Public Policy 379
Policies Toward Pollution 379
Environmental Standards 379
Emissions Taxes 380
Tradable Emissions Permits 382
ECONOMICS IN ACTION: Cap and Trade 384
Positive Externalities 384
Preserved Farmland: An External Benefit 385
Positive Externalities in the Modern Economy 386
Network Externalities 386
Module 37 Review 387
xiv
Module 38 Public Goods and Common Resources 389
Private Goods—
Characteristics of Goods 389
Why Markets Can Supply Only Private Goods Efficiently 390
Public Goods 392
Providing Public Goods 392
How Much of a Public Good Should Be Provided? 393
ECONOMICS IN ACTION: Voting as a Public Good 395
Common Resources 395
The Problem of Overuse 395
The Efficient Use and Maintenance of a Common Resource 396
Artificially Scarce Goods 397
Module 38 Review 398
Module 39 The Economics of the Welfare State 400
Poverty, Inequality, and Public Policy 400
The Logic of the Welfare State 400
The Problem of Poverty 401
Economic Inequality 404
Economic Insecurity 406
ECONOMICS IN ACTION: Long-
The U.S. Welfare State 408
Means-
Social Security and Unemployment Insurance 409
The Effects of the Welfare State on Poverty and Inequality 409
Health Care in the United States 410
The Need for Health Insurance 411
Medicare and Medicaid 411
The Debate over the Welfare State 412
Problems with the Welfare State 412
The Politics of the Welfare State 413
Module 39 Review 413
BUSINESS CASE: A Tale of Two Research Clusters 415
Section 12 Review 415
Section 13
Factor Markets and the Distribution of Income 423
The Value of a Degree 423
Module 40 Factor Markets 424
The Economy’s Factors of Production 424
The Factors of Production 424
Why Factor Prices Matter: The Allocation of Resources 424
Factor Incomes and the Distribution of Income 425
ECONOMICS IN ACTION: The Factor Distribution of Income in the United States 425
Marginal Productivity and Factor Demand 426
Value of the Marginal Product 426
Value of the Marginal Product and Factor Demand 426
Shifts of the Factor Demand Curve 429
Module 40 Review 431
Module 41 Marginal Productivity Theory 432
The Marginal Productivity Theory of Income Distribution 432
ECONOMICS IN ACTION: Help Wanted! 433
Is the Marginal Productivity Theory of Income Distribution Really True? 434
Wage Disparities in Practice 434
Marginal Productivity and Wage Inequality 434
Market Power 436
Efficiency Wages 437
Discrimination 437
So Does Marginal Productivity Theory Work? 438
Module 41 Review 438
Module 42 The Market for Labor 440
The Supply of Labor 440
Work versus Leisure 440
Wages and Labor Supply 441
Shifts of the Labor Supply Curve 443
ECONOMICS IN ACTION: The Overworked American? 444
Equilibrium in the Labor Market 444
When the Product Market Is Not Perfectly Competitive 444
When the Labor Market Is Not Perfectly Competitive 446
Module 42 Review 447
BUSINESS CASE: Alta Gracia: Can Fair Trade Work? 448
Section 13 Review 449
xv
Section 14
Additional Topics in Microeconomics 453
Module 43 The Cost-
Alternative Input Combinations 454
Substitutes and Complements in Factor Markets 455
Determining the Optimal Input Mix 455
Cost Minimization 455
The Cost-
Module 43 Review 457
Module 44 The Time Value of Money 459
The Concept of Present Value 459
Borrowing, Lending, and Interest 459
Defining Present Value 460
Using Present Value 462
ECONOMICS IN ACTION: How Big Is That Jackpot, Anyway? 463
Module 44 Review 464
Module 45 The Economics of Information 465
Private Information: What You Don’t Know Can Hurt You 465
Adverse Selection: The Economics of Lemons 466
Moral Hazard 467
Module 45 Review 469
Section 14 Review 470
Appendix A
Graphs in Economics A-
Solutions to “Check Your Understanding” Questions S-
Glossary G-
Index I-
xvi