Ebook Microeconomics (10th edition): Part 2

(BQ) Part 2 book Microeconomics has contents: Perfect competition, monopoly and monopolistic competition, oligopoly and antitrust policy, work and the labor market, thinking like a modern economist; microeconomic policy, economic reasoning, and beyond,...and other contents.

www.downloadslide.com chapter 13 Perfect Competition “ T There’s no resting place for an enterprise in a competitive economy ” —Alfred P Sloan he concept competition is used in two ways in economics One way is as a process Competition as a process is a rivalry among firms and is prevalent throughout our economy It involves one firm trying to figure out how to take away market share from another firm An example is my publishing firm ­giving me a contract to write a great book like this in order for the firm to take market share away from other publishing firms that are also selling economics textbooks The other use of competition is as a perfectly competitive market structure It is this use that is the subject of this chapter © JP Laffont/Sygma/Corbis Perfect Competition as a Reference Point Although perfect competition has highly restrictive assumptions, it provides us with a reference point for thinking about various market structures and ­competitive processes Why is such a reference point important? Think of the following analogy In physics when you study the laws of gravity, you initially study what would happen in a vacuum Perfect vacuums don’t exist, but talking about what would happen if you dropped an object in a perfect vacuum makes the analysis easier So too with economics Our equivalent of a perfect vacuum is perfect competition In perfect competition, the invisible hand of the market operates unimpeded In this chapter, we’ll consider how perfectly competitive markets work and see how to apply the cost analysis developed in the previous two chapters Conditions for Perfect Competition A perfectly competitive market is a market in which economic forces ­operate unimpeded For a market to be called perfectly competitive, it must meet some ­stringent conditions Some of them are: Both buyers and sellers are price ­takers The number of firms is large There are no barriers to entry Firms’ products are identical There is complete information Selling firms are profit-maximizing entrepreneurial firms These and other similar conditions After reading this chapter, you should be able to: Explain how perfect competition serves as a reference point LO13-2 Explain why producing an output at which marginal cost equals price maximizes total profit for a perfect competitor LO13-3 Determine the output and profit of a perfect competitor graphically and numerically LO13-4 Explain the adjustment process from short-run equilibrium to long-run equilibrium LO13-1 www.downloadslide.com 266 Microeconomics ■ Market Structure Q-1  Why is the assumption of no barriers to entry important for the existence of perfect competition? are needed to ensure that economic forces operate instantaneously and are unimpeded by political and social forces To give you a sense of these conditions, let’s consider some of these ­conditions a bit more carefully Both buyers and sellers are price takers A price taker is a firm or ­individual who takes the price determined by market supply and ­demand as given When you buy, say, toothpaste, you go to the store and find that the price of toothpaste is, say, $2.33 for the medium-size tube; you’re a price taker The firm, however, is a price maker since it set the price at $2.33 So even though the toothpaste industry is highly competitive, it’s not a perfectly competitive market In a perfectly competitive market, market supply and demand determine the price; both firms and consumers take the market price as given There are no barriers to entry Barriers to entry are social, political, or economic impediments that prevent firms from entering a market They might be legal barriers such as patents for products or processes Barriers might be technological, such as when the minimum efficient level of production allows only one firm to produce at the lowest average total cost Or ­barriers might be created by social forces, such as when bankers will lend only to individuals with specific racial characteristics Perfect competition can have no barriers to entry Firms’ products are identical This requirement means that each firm’s output is indistinguishable from any other firm’s output Corn bought by the bushel is relatively homogeneous One kernel is indistinguishable from any other kernel In contrast, you can buy 30 different brands of many goods—soft drinks, for instance: Pepsi, Coke, 7UP, and so on They are all slightly different from one another and thus not identical Generally these conditions aren’t met and firms are less than perfectly competitive Demand Curves for the Firm and the Industry Q-2  How can the demand curve for the market be downward-sloping but the demand curve for a competitive firm be perfectly elastic? The market demand curve is downward-sloping, but each individual firm in a competitive industry is so small that it perceives that its actions will not affect the price it can get for its product Price is the same no matter how much the firm produces Think of an individual firm’s actions as removing one piece of sand from a beach Does that lower the level of the beach? For all practical, and even most impractical, purposes, we can assume it doesn’t Similarly for a perfectly competitive firm That is why we consider the demand curve facing the firm to be perfectly elastic (horizontal) The price the firm can get is determined by the market, and the competitive firm takes the market price as given This difference in perception is extremely important It means that firms will increase their output in response to an increase in market demand even though that increase in output will cause the market price to fall and can make all firms collectively worse off But since, by the assumptions of perfect competition, they don’t act collectively, each firm follows its self-interest Let’s now consider that self-interest in more detail The Profit-Maximizing Level of Output The goal of a firm is assumed to be maximizing profits—to get as much for itself as possible So when it decides what quantity to produce, it will continually ask, “How will profit change with changes in the quantity I produce?” Since profit is the difference between total revenue and total cost, what happens to profit in response to a change in output is ­determined by marginal revenue (MR), the change in total revenue associated with a change in quantity, and marginal cost (MC), the change in total cost associated with www.downloadslide.com Chapter 13 ■ Perfect Competition 267 a change in quantity That’s why marginal revenue and marginal cost are key concepts in determining the profit-maximizing or loss-minimizing level of output of any firm To emphasize the importance of MR and MC, those are the only cost and revenue figures shown in Figure 13-1 Notice that we don’t illustrate profit at all We’ll calculate profit later All we want to determine now is the profit-maximizing level of output To this, you need only know MC and MR Specifically, a firm maximizes profit when MC = MR To see why, let’s look at MC and MR more closely To determine the profit-maximizing output, all you need to know is MC and MR Firms maximize profits where MC = MR Marginal Revenue Let’s first consider marginal revenue Since a perfect competitor accepts the market price as given, marginal revenue is simply the market price In the example shown in Figure 13-1, if the firm increases output from to 3, its revenue rises by $35 (from $70 to $105) So its marginal revenue is $35, the price of the good Since at a price of $35 it can sell as much as it wants, for a competitive firm, MR = P Marginal revenue is given in column of Figure 13-1(a) As you can see, MR equals $35 for all levels of output For a competitive firm, MR = P Marginal Cost Now let’s move on to marginal cost I’ll be brief since I discussed marginal cost in detail in an earlier chapter Marginal cost is the change in total cost that accompanies a change in output Figure 13-1(a) shows marginal cost in column Notice that initially in this example, marginal cost is falling, but after the fifth unit of output, it’s increasing This is consistent with our discussion in earlier chapters Notice also that the marginal cost figures are given for movements from one quantity to another That’s because marginal concepts tell us what happens when there’s a change in something, so marginal concepts are best defined between numbers The numbers in column are the marginal costs So the marginal cost of increasing output from to is $20, and the marginal cost of increasing output from to is $16 The marginal cost right at (which the marginal cost graph shows) would be between $20 and $16, at approximately $18 FIGURE 13-1 (A AND B)  Marginal Cost, Marginal Revenue, and Price The profit-maximizing output for a firm occurs where marginal cost equals marginal revenue Since for a competitive firm P = MR, its profit-maximizing output is where MC = P At any other output, it is forgoing profit $35.00  0  35.00  1  35.00  2  35.00  3  35.00  4  35.00  5  35.00  6  35.00  7  35.00  8  35.00  9  35.00 10 (a)  MC/Price Table $28.00  20.00  16.00  14.00  12.00  17.00  22.00  30.00  40.00  54.00 Costs (1) (2) (3) Quantity Marginal Price = MR Produced Cost $70 65 60 55 50 45 40 35 30 25 20 15 10 MC C A A C B 10 Quantity (b) MC /Price Graph P = D = MR www.downloadslide.com REAL-WORLD APPLICATION The Internet and the Perfectly Competitive Model Recent technological developments are making the perfectly competitive model more directly relevant to our economy Specifically, the Internet has eliminated the spatial dimension of competition (except for shipping), allowing individuals to compete globally rather than locally When you see a bid on the Internet, you don’t care where the supplier is (as long as you not have to pay ­shipping fees) Because it allows access to so many buyers and sellers, the Internet r­educes the number of seller-set posted price markets (such as found in ­retail stores), and replaces them with auction markets The Internet has had its biggest impact in firms’ buying practices Today, when firms want to buy standardized Source: priceline.com products, they will often post their technical requirements for desired components on the Net and allow suppliers from all over the world to bid to fill their orders Firms have found that buying in this fashion over the Internet has, on average, lowered the prices they pay by over 10 percent Similar changes are occurring in consumer markets With sites like Priceline.com, individuals can set the price they are willing to pay for goods and services (such as hotel rooms and airline ­tickets) and see if anyone wants to supply them (Recently, I successfully bid $150 for a $460 retail price hotel room in New York City.) With sites such as eBay, you can buy and sell almost anything The Internet even has its own payment systems, such as PayPal In short, with the Internet, entry and exit are much easier than in traditional brick-and-mortar business, and that makes the market more like a perfectly competitive market As Internet search engines become better designed for commerce, and as more people become Internet savvy, the economy will more and more closely resemble the perfectly competitive model Profit Maximization: MC = MR Q-3  What are the two things you must know to determine the profitmaximizing output? 268 As I noted above, to maximize profit, a firm should produce where marginal cost equals marginal revenue Looking at Figure 13-1(b), we see that a firm following that rule will produce at an output of 8, where MC = MR = $35 Now let me try to convince you that is indeed the profit-maximizing output To so, let’s consider three different possible quantities the firm might look at Let’s say that initially the firm decides to produce widgets, placing it at point A in Figure 13-1(b) The firm receives $35 for each widget, so the marginal revenue for ­producing the fifth unit is $35 The marginal cost of doing so is $12 By producing 5 rather than units, profit has increased by $23 ($35 − $12) So it makes sense to have produced units rather than Notice that we don’t know total profit, just the change in total profit as we change production levels Should the firm increase production to 6? Again, marginal revenue is $35 This time marginal cost is $17 Profit increases by $18 Again it makes sense to increase production As long as MC < MR, it makes sense to increase production The blue shaded area (A) represents the entire increase in profit the firm can get by increasing output beyond units Now let’s say that the firm decides to produce 10 widgets, placing it at point C Here the firm gets $35 for each widget The marginal cost of producing that 10th unit is $54 So, MC > MR If the firm decreases production by unit, its cost decreases by $54 and its revenue decreases by $35 Profit increases by $19 ($54 − $35 = $19), so at point C, it makes sense to decrease output This reasoning holds true as long as the marginal cost is above the marginal revenue The redish shaded area (C) represents the increase in profits the firm can get by decreasing output At point B (output = 8) the firm gets $35 for each widget, and its marginal cost is $35, as you can see in Figure 13-1(b) The marginal cost of increasing output by unit www.downloadslide.com Chapter 13 ■ Perfect Competition is $40 and the marginal revenue of selling more unit is $35, so its profit falls by $5 If the firm decreases output by unit, its MC is $30 and its MR is $35, so its profit falls by $5 Either increasing or decreasing production will decrease profit, so at point B, an output of 8, the firm is maximizing profit Since MR is just market price, we can state the profit-maximizing condition of a competitive firm as MC = MR = P So, if MR > MC, increase production; if MR < MC, decrease production If MR = MC, the firm is maximizing profit You should commit this profit-maximizing condition to memory You should also be sure that you understand the intuition behind it If marginal revenue isn’t equal to marginal cost, a firm obviously can increase profit by changing output If that isn’t obvious, the marginal benefit of an additional hour of thinking about this condition will exceed the marginal cost (whatever it is), meaning that you should right, you guessed it study some more 269 Profit-maximizing condition for a competitive firm: MC = MR = P If marginal revenue does not equal marginal cost, a firm can increase profit by changing output The Marginal Cost Curve Is the Supply Curve Now let’s consider again the definition of the supply curve as a schedule of quantities of goods that will be offered to the market at various prices Notice that the upwardsloping portion of the marginal cost curve fits that definition It tells how much the firm will supply at a given price Figure 13-2 shows the various quantities the firm will supply at different market prices beginning at the upward-sloping portion at point A If the price is $35, we showed that the firm would supply (point C) If the price had been $19.50, the firm would have supplied (point B); if the price had been $61, the firm would have supplied 10 (point D) Because the marginal cost curve tells us how much of a produced good a firm will supply at a given price, the marginal cost curve is the firm’s supply curve The MC curve tells the competitive firm how much it should produce at a given price (As you’ll see later, there’s an addendum to this statement Specifically, the marginal cost curve is the firm’s supply curve only if price exceeds average variable cost.) Marginal cost D $70 Cost 61 C 35 B 19.50 A 13.00 Quantity 10 FIGURE 13-2  The Marginal Cost Curve Is a Firm’s Supply Curve Since the marginal cost curve tells the firm how much to produce, the marginal cost curve is the perfectly competitive firm’s supply curve This exhibit shows four points on a firm’s supply curve; as you can see, the quantity the firm chooses to supply depends on the price For example, if market price is $19.50, the firm produces units Because the marginal cost curve tells us how much of a produced good a firm will supply at a given price, the marginal cost curve is the firm’s supply curve www.downloadslide.com 270 Microeconomics ■ Market Structure Firms Maximize Total Profit Q-4  Why firms maximize total profit rather than profit per unit? Notice that when you talk about maximizing profit, you’re talking about maximizing total profit, not profit per unit Profit per unit would be maximized at a much lower output level than is total profit Profit-maximizing firms don’t care about profit per unit; as long as an increase in output will increase total profits, a profit-maximizing firm should increase output That’s difficult to grasp, so let’s consider a concrete example Say two people are selling T-shirts that cost $4 each One sells T-shirts at a price of $6 each and makes a profit per shirt of $2 His total profit is $4 The second person sells T-shirts at $5 each, making a profit per unit of only $1 but selling Her total profit is $8, twice as much as the fellow who had the $2 profit per unit In this case, $5 (the price with the lower profit per unit), not $6, yields more total profit An alternative method of determining the profit-maximizing level of output is to look at the total revenue and total cost curves directly Figure 13-3 shows total cost and total revenue for the firm we’re considering so far The table in Figure 13-3(a) shows total revenue in column 2, which is just the number of units sold times market price Total cost is in column Total cost is the cumulative sum of the marginal costs from Figure 13-1(a) plus a fixed cost of $40 Total profit (column 4) is the difference between total revenue and total cost Looking down column of Figure 13-3(a), you can quickly see that the profit-maximizing level of output is 8, since total profit is highest at an ­output of This is also where MR = MC In Figure 13-3(b) we plot the firm’s total revenue and total cost curves from the table in Figure 13-3(a) The total revenue curve is a straight line; each additional unit sold increases revenue by the same amount, $35 The total cost curve is bowed upward at most quantities, reflecting the increasing marginal cost at different levels of output The firm’s profit is represented by the distance between the total revenue curve and the total cost curve For example, at output 5, the firm makes $45 in profit FIGURE 13-3 (A AND B)  Determination of Profits by Total Cost and Total Revenue Curves The profit-maximizing output level also can be seen by considering the total cost curve and the total revenue curve Profit is maximized at the output where total revenue exceeds total cost by the largest amount This occurs at an output of TC Loss TR   (1) (2) (3) (4) Total Total Total Quantity Revenue Cost Profit  0 $  0  1  35  2  70  3 105  4 140  5 175  6 210  7 245  8 280  9 315 10 350 $ 40 68 88 104 118 130 147 169 199 239 293 $−40 −33 −18 22 45 63 76 81 76 57 Total cost, total revenue $385 Maximum profit 280 $81 199 175 $45 130 Loss Quantity (a)  Total Revenue and Total Cost Table (b) Total Revenue and Total Cost Curves 10 11 12 www.downloadslide.com Chapter 13 ■ Perfect Competition 271 Total profit is maximized where the vertical distance between total revenue and total cost is greatest In this example, total profit is maximized at output 8, just as in the alternative approach At that output, marginal revenue (the slope of the total ­revenue curve) and marginal cost (the slope of the total cost curve) are equal Total Profit at the Profit-Maximizing Level of Output In the initial discussion of the firm’s choice of output, given price, I carefully presented only marginal cost and price We talked about maximizing profit, but nowhere did I mention what profit, average total cost, average variable cost, or average fixed cost was I mentioned only marginal cost and price to emphasize that marginal cost is all that’s needed to determine a competitive firm’s supply curve (and a competitive firm is the only firm that has a supply curve) and to determine the output that will maximize profit Now that you know that, let’s turn our attention more closely to profit Marginal cost is all that is needed to determine a competitive firm’s supply curve Determining Profit from a Table of Costs and Revenue The P = MR = MC condition tells us how much output a competitive firm should produce to maximize profit It does not tell us the profit the firm makes Profit is determined by total revenue minus total cost Table 13-1 expands Figure 13-1(a) and presents a table of all the costs relevant to the firm Going through the columns and reminding yourself of the definition of each is a good review of the two previous chapters If the definitions don’t come to mind immediately, you need a review If you don’t know the definitions of MC, AVC, ATC, FC, and AFC, go back and reread those chapters The firm is interested in maximizing profit Looking at Table 13-1, you can quickly see that the profit-maximizing position is 8, as it was before, since at an output of 8, total profit (column 10) is highest Using the MC = MR = P rule, you can also see that the profit-maximizing level of output is Increasing output from to has a marginal cost of $30, which is less than $35, so it makes sense to so Increasing output from to has a marginal cost of $40, which is more than $35, so it does not make sense to so The output is the profit-maximizing output At that profit-maximizing level of output, the profit the firm earns is $81, which is calculated by subtracting total cost of $199 from total revenue of Profit is determined by total revenue minus total cost TABLE 13-1  Costs Relevant to a Firm (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Price = Total Average Total Average Average Marginal Quantity Fixed Fixed Variable Variable Total Marginal Total Total Total Revenue Produced Cost Cost Cost Cost Cost Cost Cost Revenue Profit $35.00 $40.00 —   0     —   $ 40.00 —   0    $−40.00 $28.00 35.00 40.00 $40.00 $ 28.00 $28.00 68.00 $68.00 $ 35.00 −33.00 20.00 35.00 40.00 20.00 48.00 24.00 88.00 44.00 70.00 −18.00 16.00 35.00 40.00 13.33 64.00 21.33 104.00 34.67 105.00 1.00 14.00 35.00 40.00 10.00 78.00 19.50 118.00 29.50 140.00 22.00 12.00 35.00 40.00 8.00 90.00 18.00 130.00 26.00 175.00 45.00 17.00 35.00 40.00 6.67 107.00 17.83 147.00 24.50 210.00 63.00 22.00 35.00 40.00 5.71 129.00 18.43 169.00 24.14 245.00 76.00 30.00 35.00 40.00 5.00 159.00 19.88 199.00 24.88 280.00 81.00 40.00 35.00 40.00 4.44 199.00 22.11 239.00 26.56 315.00 76.00 54.00 35.00 10 40.00 4.00 253.00 25.30 293.00 29.30 350.00 57.00 www.downloadslide.com 272 Microeconomics ■ Market Structure FIGURE 13-4 (A, B, AND C)  Determining Profits Graphically The profit-maximizing output depends only on where the MC and MR curves intersect The total amount of profit or loss that a firm makes depends on the price it receives and its average total cost of producing the profit-maximizing output This exhibit shows the case of (a) a profit, (b) zero profit, and (c) a loss $55 $55 50 50 MC Price 35 P = MR D Profit 30 25 20 C B E AVC 40 ATC 35 ATC P = MR 30 25 AVC 25 15 15 10 5 0 Quantity (a) Profit Case AVC 20 20 10 P = MR 30 15 ATC Loss 35 10 MC 45 40 A Price 40 50 MC 45 Price 45 $55 Quantity (b) Zero-Profit Case Quantity (c) Loss Case $280 Notice also that average total cost is lowest at an output of about 7, and the average variable cost is lowest at an output of about 6.1 Thus, the profit-maximizing p­ osition (which is 8) is not necessarily a position that minimizes either average variable cost or average total cost It is only the position that maximizes total profit Determining Profit from a Graph The profit-maximizing output can be determined in a table (as in Table 13-1) or in a graph (as in Figure 13-4) Q-5  If the firm described in Figure 13-4 is producing units, what would you advise it to do, and why? These relationships can be seen in a graph In Figure 13-4(a) I add the average total cost and average variable cost curves to the graph of marginal cost and price first ­presented in Figure 13-1 Notice that the marginal cost curve goes through the lowest points of both average cost curves (If you don’t know why, it would be a good idea to go back and review the previous chapters.) Find Output Where MC = MR  The way you find profit graphically is first to find the point where MC = MR (point A) That intersection determines the quantity the firm will produce if it wants to maximize profit Why? Because the vertical ­distance between a point on the marginal cost curve and a point on the marginal revenue curve represents the additional profit the firm can make by changing output For example, if it increases production from to 7, its marginal cost is $22 and its marginal revenue is $35 By increasing output it can increase profit by $13 (from $63 to $76) The same reasoning holds true for any output less than For outputs higher than 8, the opposite reasoning holds true Marginal cost exceeds marginal revenue, so it pays to decrease output So, to maximize profit, the firm must see that marginal revenue equals marginal costs, which occurs where the two curves intersect I say “about 6” and “about 7” because the table gives only whole numbers The actual minimum point occurs at 5.55 for average variable cost and 6.55 for average total cost The nearest whole numbers to these are and www.downloadslide.com F ind P rofit per Unit Where MC = MR  After having determined the profit-maximizing quantity, drop a vertical line down to the horizontal axis and see what average total cost is at that output level (point B) Next extend a line back to the vertical axis (point C) That tells us that the average total costs per unit are $25 Next go up the price axis to the price that the firm receives (point D) For a competitive firm, that price is the marginal revenue as well as its average revenue, since the price is constant The difference between this price and ­average cost is profit per unit Connecting these points gives us the shaded rectangle, ABCD, which is the total profit earned by the firm (the total quantity times the profit per unit) Notice that at the profit-maximizing position, the profit per unit isn’t at its highest because average total cost is not at its minimum point Profit per unit of output would be highest at point E A common mistake that students make is to draw a line up from point E when they are finding profits That is wrong It is important to remember: To determine maximum profit, you must first determine what output the firm will choose to produce by seeing where MC equals MR and then determine the average total cost at that quantity by dropping a line down to the ATC curve Only then can you determine what maximum profit will be Zero P rofit or L oss Where MC = MR  Notice also that as the Chapter 13 ■ Perfect Competition 273 Thinking Like a Modern Economist Profit Maximization and Real-World Firms Most real-world firms not have profit as their only goal The reason is that, in the real world, the decision maker’s income is part of the cost of production For example, a paid manager has an incentive to hold down costs but has little incentive to hold down his income, which, for the firm, is a cost Alternatively, say that a firm is a worker-managed firm If workers receive a share of the profits, they’ll push for higher profits, but they’ll also see to it that in the process of maximizing profits they don’t hurt their own interest—maximizing their wages In short, real-world firms will hold down the costs of factors of production except the cost of the decision maker In real life, this problem of the lack of incentives to hold down costs is important For example, firms’ managerial expenses often balloon even as firms are cutting “costs.” Similarly, CEOs and other highranking officers of the firm often have enormously high salaries How and why the lack of incentives to hold down costs affects the economy is best seen by first considering the nature of an economy with incentives to hold down all © Comstock Images/Alamy costs That’s why we use as our standard model the traditional profitmaximizing firm (Standard model means the model that economists use as our basis of reasoning; from it, we branch out.) Using what are called game theory models, modern economists work with firms to devise i­ncentive-compatible contracts that align the goals of decision makers in the firm with the goals of the owners of firms curves in Figure 13-4(a) are drawn, ATC at the profit-maximizing position is below the price, so the firm makes a profit The choice of short-run average total cost curves was arbitrary and doesn’t affect the firm’s profit-maximizing condition: MC = MR It could have been assumed that fixed cost was higher, which would have shifted the ATC curve up In ­Figure 13-4(b) it’s assumed that fixed cost is $81 higher than in Figure 13-4(a) Instead of $40, it’s $121 The appropriate average total cost curve for a fixed cost of $121 is drawn in Figure 13-4(b) Notice that in this case economic profit is zero and the marginal cost curve intersects the minimum point of the average total cost curve at an output of 8 and a price of $35 (Remember from the last chapter that even though economic profit is zero, all resources, including entrepreneurs, are being paid their opportunity cost.) In Figure 13-4(c), fixed cost is even higher Profit-maximizing output is still 8, but now at an output of average total cost is $41 and the firm is making an economic When the ATC curve is below the marginal revenue curve, the firm makes a profit When the ATC curve is above the marginal revenue curve, the firm incurs a loss www.downloadslide.com 274 Microeconomics ■ Market Structure Q-6  What is wrong with the following diagram? What is wrong here? MC loss of $6 on each unit sold The loss is given by the shaded rectangle In this case, the profit-maximizing condition is actually a loss-minimizing condition So MC = MR = P is both a profit-maximizing condition and a loss-minimizing condition I draw these three cases to emphasize to you that determining the profit-maximizing output level doesn’t depend on fixed cost or average total cost It depends only on where marginal cost equals price ATC P = MR Profit Quantity Q-7  In the early 2000s, many airlines were making losses, yet they continued to operate Why? The shutdown point is the point below which the firm will be better off if it shuts down than it will if it stays in business If P > minimum of AVC, the firm will continue to produce in the short run If P < minimum of AVC, the firm will shut down Earlier I stated the supply curve of a competitive firm is its marginal cost curve More specifically, the supply curve is the part of the marginal cost curve that is above the average variable cost curve Considering why this is the case should help the analysis stick in your mind Let’s consider Figure 13-5(a)—a reproduction of Figure 13-4(c)—and the firm’s decision at various prices At a price of $35, it’s incurring a loss of $6 per unit If it’s making a loss, why doesn’t it shut down? The answer lies in the fixed costs There’s no use crying over spilt milk In the short run, a firm knows these fixed costs are sunk costs; it must pay them regardless of whether or not it produces The firm considers only the costs it can save by stopping production, and those costs are its variable costs As long as a firm is covering its variable costs, it pays to keep on producing By ­producing, its loss is $48; if it stopped producing, its loss would be all the fixed costs ($169) So it makes a smaller loss by producing However, once the price falls below average variable costs (below $17.80), it will pay to shut down [point A in Figure 13-5(a)] In that case, the firm’s loss from producing would be more than $169, and it would better to simply stop producing temporarily and avoid paying the variable cost Thus, the point at which price equals AVC is the shutdown point (that point below which the firm will be better off if it temporarily shuts down than it will if it stays in business) When price falls below the shutdown point, the average variable cost the firm can avoid paying by shutting down exceeds the price it would get for selling the good When price is above average variable cost, in the short run a firm should keep on producing even though it’s making a loss As long as a firm’s total revenue is covering its total variable cost, temporarily producing FIGURE 13-5  The Shutdown Decision and Long-Run Equilibrium MC MC ATC $41 Price A firm should continue to produce as long as price exceeds average variable cost Once price falls below that, it will better by temporarily shutting down and saving the variable costs This occurs at point A in (a) In (b), the long-run equilibrium position for a firm in a competitive industry is shown In that long-run equilibrium, only normal profits are made 35 SRATC LRATC Loss P = MR Price Price The Shutdown Point $35 P = MR AVC 17.80 A 0 8 Quantity (a) The Shutdown Decision Quantity (b) Long-Run Equilibrium www.downloadslide.com International supply of labor, 356 International trade; see also Balance of trade; Trade restrictions antiglobalization forces, 215 and comparative advantage, 30–34 benefits, 32–34 exchange rates, 36–37 law of one price, 37 markets, specialization and growth, 32 timing benefits of trade, 37 comparative advantage of U.S concerns about future, 192 equalizing balance of trade, 193–194 gain and loss of sources of, 193 inherent or transferable advantages, 192 and law of one price, 192–193 sources of, 190–191 creditor and debtor nations, 206–208 and determinants of exchange rates, 194–198 dividing up gains from trade, 186–187 dumping, 219 economists’ view of, 184 effects of resource curse, 197–198 and exchange rates, 36–37 expanded by globalization, 814, 815 gains from trade, 184–186 and globalization, 34–36 historical perspective, 207 importance attached by nations to, 204 import/export contingent, 187 increase in value 1928–2012, 203 increasing but fluctuating, 203 institutions supporting free trade, 218–220 laypeople vs economists on, 188–190 under mercantilism, 72–73 national comparisons, 203–204 with partially flexible rates, 776 principle of comparative advantage, 184–187 restrictions opposed by economists, 217–218 social and cultural dimensions, 207 strategic trade policies, 214 timing benefits of, 37 trade adjustment assistance programs, 213 trading companies, 189 transshipments, 218 of United States, 204–208 ■ Index ■ IND-13 Internet, 36 as perfectly competitive market, 265 for tracking consumer information, 293–294 Internet sales taxes, 149 Interpolation assumption, 44 Inventories and accounting fraud, 59 Inverse relationship, 44 Invisible hand, 11, 73 framework for economic policy government failures, 162 market failure, 162 in perfect competition, 265 Invisible hand theorem, 14–15 Iran, 217 Isabella, Queen of Spain, 73 Isocost/isoquant analysis definition, 260 economically efficient point of production, 263 isocost line, 262–263 isoquant curve, 260–262 isoquant map, 261 marginal rate of substitution, 261 Isocost line, 262 Isoquant curve, 260 Isoquant map, 261 iTunes, 134 J Japan CEO compensation, 334 changes in auto industry, 245 collusion in, 316 land prices, 244 voluntary trade agreements, 210 Java, 325 Jefferson, Thomas, 307 Jenkins, Robert R., 517 Jevons, Stanley, 407 Jimenéz-Jimenéz, Francisca, 442n Job creation from trade, 189 Job losses in manufacturing, 369 in recession of 2009, 216 Jobs and college degrees, 369–370 cost of saving, by trade restrictions, 213 effects of globalization in U.S., 189 increased in service sector, 189–190 in information technology transferable, 193 middle class, 394 outsourcing, 190 requiring special abilities, 370 Jobs, Steve, 331 Johnson, Lyndon B., 222 Judgment by performance, 321 reality of, 322–324 Standard Oil case, 322 Judgment by structure, 321 Alcoa case, 322 reality of, 322–324 United States Steel case ruling, 322 Juvenal, Bertrand de, 395 K Kahneman, Daniel, 438, 446 Kaplan, Robert S., 256 Kaseman, David L., 112 Kay, James, 74 Ken doll, 35 Key money, 104, 105 Keynes, John Maynard, 17n, 122, 503–504 Keynes, John Neville, 17n Keynesian AS/AD model; see AS/AD model Kia, 205 Kiam, Victor, 312 Kieboom, Aad, 483, 489 Kinked demand curve, 315 Kinnaman, Thomas C., 179 Kmart, 455 Knights of Labor, 368 Knutson, Brian, 446 Korenman, Sanders, 374 Kosovo, 187 Kroc, Ray, 331 Kruger, Alan, 14, 372 Kuhn, Harold, 474 L Labor derived demand for, 375–379 and entrepreneurship, 357 as factor of production, 357 households as suppliers of, 60 Marx’s view, 365 Laboratory experiments, 13 Labor costs comparative advantage from, 34 decline in, 256 Labor force, 535 skilled in United States, 191 Labor force participation rate, 353 Labor laws child labor, 75, 367 National Labor Relations Act, 368 Taft-Hartley Act, 368, 369 www.downloadslide.com IND-14 Labor market, 351; see also Demand for labor; Supply of labor derived demand, 356–360, 375–379 discrimination in direct demand-side, 365–366 institutional, 366–367 education and earnings, 369–370 equilibrium, 358 evolution of, 367–370 labor laws, 367–368 unions and collective bargaining, 368–369 factors affecting demand, 377–379 imperfect competition bilateral monopoly, 362 monopsony, 361 union monopoly power, 361 institutional constraints on, 353 and marginal productivities, 377 political and social forces, 362 starting salaries for selected occupations, 369 supply of labor, 352–356 unskilled, and minimum wage, 105 wage determination, 360–364 Labor productivity, 375 Labor theory of value, 74 Labor unions American Federation of Labor, 368 closed shop, 368 government employees in, 369 Knights of Labor, 368 loss of bargaining power, 369 membership changes 1930–2010, 368 monopoly power, 340, 361 opposed by business, 368 secondary boycotts forbidden, 369 union shop, 368 United Auto Workers, 379 weakened in 1980s, 369 Laissez-faire, 32, 73, 487, 496 Laissez-faire policy, 466 Land as factor of production, 352 Landier, Augustin, 334 Landlord’s Game, 297 Landsburg, Steven, 22, 464, 465, 466, 467, 469, 473, 478 LAS; see Long-run aggregate supply curve Law of demand, 78 bases of, 86 and demand curve, 78–79 equations for, 117 other things constant assumption, 79 and principle of rational choice, 415 ■ Index ■ Law of diminishing marginal productivity, 229–230 with addition of variable inputs, 230 inapplicable in long run, 244 Law of diminishing marginal rate of substitution, 428 Law of one price, 37 effect on comparative advantage, 192 Law of supply, 84 equations for, 116 and rational choice, 417–418 Lazy monopolists, 335 limited by competition restructuring threat, 335–336 takeover threat, 336 and technological development, 347 and X-inefficiency, 335 Learning by doing, 215, 253 and comparative advantage, 215 infant industry argument, 216 related to technological change, 254 Swiss watches, 215 Legal influences, 12 Legal market activities, 352 Leisure, 352 changes over time, 353 versus work, 354–355 Lerner, Abba, 504 Levine, David, 258 Levitt, Steven D., 457, 517 Lewis, Michael, 471 LG Corporation, 325 Libertarian economists, on incomeredistribution, 394 Libertarian paternalistic criterion, 495 Libertarian paternalistic policy, 489 Licensing, 108–109 of doctors, 174–175 inadequacy of current laws on, 176 informational alternative, 175–176 and surgery, 175 Limited liability, 58n Lindt Chocolate, 128 Linear curve, 44 slope of, 44 Line graph, 47 Linux, 325 Living wage laws, 364 Living-wage movement, 107 Lloyd, Henry Demarest, 285 Lobbying, 151–152 and general rule of political economy, 153 Local government income and expenditures, 61 number of employees, 61 Local taxes income taxes, 399 property taxes, 400 sales taxes, 399 Long run adjustments from short run to increase in demand, 277–278 long-run market supply curve, 278–279 income elasticity in, 134 options for firms, 246 problem of price controls in, 155 production decisions in, 228 Long-run average total cost, and envelope relationship, 248–249 Long-run average total cost curve, 249 Long-run competitive equilibrium, 275–277 Long-run cost curve constant returns to scale, 248 diminishing marginal productivity inapplicable, 244 diseconomies of scale, 246–247 economies of scale, 244–246 envelope relationship, 248–249 importance of economies and diseconomies of scale, 248 indivisible setup costs, 245 minimum efficient level of production, 246 monitoring costs, 247 table and graph, 246 U shape, 248 Long-run decisions, 228, 243 importance of economies and diseconomies of scale, 248 isocost/isoquant analysis, 260–262 Long-run equilibrium monopolistic competition, 303 perfect competition, 303 Long-run market supply curve, 278–279 Long-run profit, 332 Lorenz curve, 383–384 of U.S income, 384 for U.S in 1929, 1970, and 2010, 384–386 of wealth distribution, 391 of world income, 390 Loss, by monopoly, 291–292 Lott, John, 484 Louis XIV, 142 Lower class, 393 Low price guarantees, 455 L3C corporations, 58 Luddite reasoning, 358 Luxuries, 133, 136 substitution factor, 130 Luxury fever, 494 www.downloadslide.com Luxury Fever (Frank), 495 Luxury tax, 496 impact on boat industry, 148 M Macroeconomic costs of trade, 216 Macroeconomic externalities, 64 Macroeconomics, 5–6 and fallacy of composition, 94 pattern-finding models, 471 relation to microeconomics, Maddison, Angus, 32 Magie, Lizzie, 297 Maine’s Own Organic Milk Company, 58 Mali, 187 Malthus, Thomas, 10 Managers incentive-compatible contracts, 333 lack of incentives for maximizing profit, 333 stock options, 333 views on takeovers, 336 Mandeville, Bernard, 465 Mansard roofs, 145 Manufacturing decline of demand for labor, 359 effects of globalization in U.S., 189 by global corporations, 66 job losses in, 369 multicountry contributions, 35 and supply of labor, 356 trade broader than, 188–189 Mao Zedong, 76 Marcuse, Herbert, 495 Marginal benefits, and economic decision rule, Marginal cost, 7, 231, 232–233, 266–267 and economic decision rule, equal to marginal revenue, 268–269 equation, 238 for monopoly, 287 in perfect competition, 267 and price controls, 295 Marginal cost curve, 234 in duopoly, 453 of monopoly, 288 relation to average cost curve, 236–237 relation to marginal productivity, 235–236 as supply curve, 269 upward-sloping, 234 Marginal factor cost, 361 Marginal physical product, 375, 376 Marginal private cost, 164 Marginal product, 228 versus average product, 228 ■ Index ■ IND-15 Marginal productivity diminishing, 607 relation to marginal cost curve, 235–236 Marginal rate of substitution, 261, 428 Marginal revenue, 266–267 equal to marginal cost, 268–269 for monopoly, 287 in perfect competition, 267 and price controls, 295 Marginal revenue curve determining, 310–311 graphing, 288 of monopoly, 286–289 Marginal revenue product, 375–376 Marginal social benefit, 164, 165 Marginal social cost, 164 Marginal tax rates, 354–355 Marginal total cost curve, in duopoly, 453 Marginal utility, 408 diminishing, 410 and rational choice, 410–412 related to total utility, 408–409 Market(s) based on institutions, 51 benefits of, 53 dynamic nature of, 295 economic efficiency, 508–509 effect of disasters or shocks for apples, 100, 101 for edible oils, 100, 101 for SUVs, 100, 101 government adjustments of, 64–65 in information, 174 informational, 172 information-gathering mechanisms, 486 and law of one price, 192 as means of organizing society, 224 nature of, 32 not in equilibrium excess demand, 89 excess supply, 89 price adjustments, 89–90 and Pareto optimality, 163 real-world, 331 social and moral incentives, 487 theory of, 14 and tragedy of the commons, 167 Market definition, substitution factor, 129–130 Market demand curve, 82 and elasticity, 132 for private goods, 170–171 for public goods, 170–171 Market economy, 52 benefits, 53 capitalism, 53 diagrammatic representation, 56 economic institutions businesses, 56–59 government, 61–66 households, 59–60 sectors, 55–56 fairness issue, 52 global institutions, 66–67 and socialism, 53–55 transition from socialism to, 76 Market failure, 65–66, 162 dealing with externalities from direct regulation, 165–166 incentive policies, 166–168 optimal policy, 168–169 voluntary reductions, 168 externalities, 162–165 negative, 164 positive, 165 handling informational problems in licensing, 174–176 market for information, 174 regulatory agencies, 173–174 imperfect information adverse selection problem, 172–173 moral hazard problem, 173 in real-world markets, 172 resolved by signaling and screening, 173 insufficient provision of positive externalities, 165 polluting industries, 513 Market forces, 11, 93 political and legal influences, 11–13 and social forces, 11–13 Market incentive plan, 167 to deal with externalities, 167–168 Market position by initial public offering, 342 in winner-take-all markets, 342 Market price effect of price controls, 295 as marginal revenue, 267 in perfect competition, 266 and value of total output, 544–545 Market structure comparisons of, 318 competition as, 331 duopoly, 453 monopolistic competition, 299–300 monopoly, 285 network externalities, 345 oligopoly, 312 perfectly competitive markets/ industries, 265 and technological development, 343–345 www.downloadslide.com IND-16 Market supply curve, 87–88, 275 and incentive effects, 352–353 Marshall, Alfred, 4, 10, 121, 448 Marshallian economics, 10 Marshall Plan, 193 Martin, William, 647 Marx, Groucho, 40 Marx, Karl, 10 critique of capitalism, 74 failure of revolution predicted by, 74–75 on shove policy, 495 view of labor, 364 on wants and needs, 495 Marxian (radical) model, 501 Maskin, Eric, 485 Materialism, relative vs absolute, 494 Mathematical economics, 121 Mathematics to improve models, 473 mistakes in, 48 Mazda Miata, 245 MC; see Marginal cost McCain, John, 486 McDonald’s, 60, 366, 413–414 McGoldrick, Kim Marie, 48 McKesson, 333, 382 MC = MR, 268–269 profit determinationcost per unit, 273 output, 272 zero profit or loss, 273–274 profit-maximizing output of monopoly, 288–289 Measurement problems; see Consumer price index Mechanism design, 486 behavioral economics, 486–487 coordinating mechanisms, 485 economic policy theory, 485 incentive compatibility problem, 485 information-gathering, 486 models used, 485 policy implications of traditional economics, 487–488 shadow prices, 489 tool for firms and government, 485 Mechanism design engineers, 484–485, 497 Median income, 60 by age, 392 by race, 392 by sex, 392 Median pay, 60 Medicaid, 110, 111 Medical licensure, 174–175 Medicare, 110, 111, 400 ■ Index ■ Medicare tax, 149 Mencken, H L., 382, 483 Mental accounting, 419 Mercantilism, 72–73 Mercosur, 219 Merger opposed by courts, 324 opposed by Justice Department, 324–325 Merit goods or activities, 65 Meritocracy, 389 Mexico U.S trade with, 205 Microeconomics, and neuroeconomics, 463 relation to macroeconomics, traditional building blocks, 459 Microsoft Corporation, 64, 317, 391 antitrust case, 296, 324 Microsoft Zune, 331 Middle class, 393–394 Military draft, 152 Mill, John Stuart, 10 Mind and Society (Pareto), 502n Minimum efficient level of production, 246 Minimum wage economic reasoning, disagreements among economists, 107 general discussion of, 105–107 increases since 1938, 105–106 Krueger-Card study of, 14 and living-wage movement, 106 monopsony, 361 nonmarket activities, 353–354 other things changing, 508 and price elasticity of supply, 126 winners and losers, 105–106 Minimum wage laws, 75, 105 effect on unskilled labor, 106 income distribution, 395 living wage laws, 364 origin of, 106 Mises, Ludwig von, 203, 451 Mixed strategy, 439 Models, 13, 457; see also Supply/demand model from advances in mathematics, 473 agent-based computational economics, 443 for aggregate economy, 474 anchor points, 477 based on traditional rationality, 461 in behavioral economics, 459–464 building blocks, 459 Classical growth model, 607 data mining, 472 deductive approach, 459 demand-side, 596 of economists vs textbooks, 331 empirical, 469–470 empirical and formal agent-based computational, 475 application, 476–477 butterfly effects, 474 game theory, 474–475 importance of, 469–472 regression models, 470–471 role of, 472–478 simple data models, 471–472 simplicity-completeness trade-off, 473–475 testing, 475–476 types, 473 engineering, 459 evolutionary, 462 fiscal policy, 584 game theory, 273, 433 globalized AS/AD model, 807–812 government reliance on, 706 heuristic, 458 limits of, 468–469 using behavioral building blocks, 467–468 using traditional building blocks, 464–466 inductive approach, 458–459 of monopoly, 285–292 multiplier model, 569 path-dependent, 465–466, 473 pattern-finding, 471 relevance for policy, 478–480 scientific, 459 with shadow price analysis, 484 for social policy Marxian (radical), 503 public choice, 503 structure, 458 supply-side, 594 tipping-point, 473, 475 using graphs, 42–43 Modern behavioral economists, 476 Modern economics deviations from traditional approach, 459 importance of empirical work, 469–472 Modern economists, 458 contrasted with traditional economists, 476 and economic policies, 478–479 as mechanism design engineers, 484–485 www.downloadslide.com modeling approach, 457 models used by, 473 move toward engineering, 484 Modern traditional economists, 476 Moneyball (Lewis), 471 Monitoring costs, 247 Monitoring problem, 332 Monopolistic competition, 299–300 advertising and benefits or harm to society, 301 goals, 301 compared to monopoly, 301 compared to other market structures, 318 difficulty of collusion in, 312 distinguishing characteristics compared to perfect competition, 301 competitive dimensions, 299 ease of entry in long run, 300 many sellers, 299 output, prices, and profit, 301–302 product differentiation, 299 production element, 313 and technological development, 344 Monopolistic forces versus competitive forces, 337–341 effect on perfect competition, 337 Monopoly, 64, 288 algebraic representation, 310–311 and barriers to entry, 294 based on advertising, 299 based on natural ability, 296 by branding, 342 breaking even of making a loss, 291–292 compared to monopolistic competition, 299–300 compared to other market structures, 317 compared to perfect competition, 285–286, 289 consumer surplus, 292–294 cost of creating and maintaining, 341 created by government, 298 demand for labor in, 377–378 effect of competitive forces on breakdown, 338–339 reverse engineering, 339 effect of price controls, 295 example of output and price, 289 and government policy, 298–299 making a profit, 290–291 marginal cost, 287 marginal revenue, 287 marginal revenue product, 375 natural monopoly, 296–298 normative arguments against, 298 ■ Index ■ IND-17 output and price determined graphically, 287–289 determined numerically, 286–287 producer surplus, 292–293 profit determination, 290 protection of cost/benefit analysis of maintaining, 341 establishing market position, 342 reasons for existence, 285 regulated, 326 and technological development, 343 welfare loss from normal monopolist, 292–293 price-discriminating monopolist, 293–294 Monopoly Game, 297 Monopoly power of labor unions, 337, 361, 362 Monopsony, 361 Moore, Stephen, 519 Moore’s law, 252, 344 Moral hazard problem, 172 Moral incentives, 487 More Sex Is Safer Sex (Landsburg), 465 Most-favored nation, 220 Motivation, for efficiency vs profit, 336–337 Movement along a demand curve, 79 equations for, 117 Movement along a supply curve, 86 equations for, 117 Movie theaters, price discrimination, 293 MR; see Marginal revenue Multitiered wage contracts, 379 Murphy, Kevin, 386 Murray, Charles, 349 Music downloads, 172 Mutual funds, 333 advertising of, 447–448 Mutual interdependence in oligopoly, 312 Myerson, Roger, 485 N Nalebuff, Barry, 442–444, 519 Nanotechnology, 36 Napoleon, 350 Napster, 172 Nash, John, 432, 442 Nash equilibrium, 436, 441–442 in trust game, 446 National Bureau of Economic Research Business Cycle Committee, 531 on dates of contractions and expansions, 531 National defense, 170 Nationalistic appeals, 211 National Labor Relations Act, 368 National League, 484 National Residency Matching Program, 485 National security argument abuse of, 218 export restrictions, 216 import restrictions, 216 Nations comparing income distribution across, 389 debtor vs creditor, 206–207 differing importance of trade among, 203 haggling over trade restrictions, 213 income distribution among, 389 per capita income comparisons, 390 total income in selected countries, 390 value of money and assets, 197 NATO, 187 Natural ability, monopoly based on, 297 Natural experiments, 14, 472 Natural monopoly, 296 average cost, 296 and competition deregulation, 340–341 regulation, 340 impossibility of perfect competition, 298 passing on all costs, 340 profit-maximizing level of output, 297 profit of, 296 single vs multiple standards, 297 in telephone service, 296–297 welfare gain from, 297 Natural resources China, 65 European Union, 65 United States, 65, 190 NBER; see National Bureau of Economic Research Necessities, 130, 133 Needs, Marxian view of, 495 Negative externalities, 63, 64, 163, 164 example, 164 Negative incentive effect, 354 Netflix, 123 Network externalities, 345 development of standards, 345 from Facebook, 345 and market structure, 345 and technological lock-in, 346 and winner-take-all industries, 345–346 Neuroeconomics, 463 Neutral technological change, 29 www.downloadslide.com IND-18 New York City effects of rent control, 154 experience with rent control, 103 Public School Match program, 485 taxi medallion costs, 108–109 New York Stock Exchange, 59, 383 New York Times, 444 Niederle, Muriel, 372 Nietzsche, Friedrich, 100, 395 Nippon, 325 Nirvana criticism of perfect competition, 163 Noell, Ed, 373 Noncooperative game, 436 Nonlinear curve, 43 maximum and minimum points, 44 slope of, 44–45 Nonmarket activities, 352 and supply of labor, 353–354 Nonprice rationing, 105 Nonprofit organizations as lazy monopolists, 335 Nonstrategic decision making, 311 Nonwage income and property rights, 363 Normal goods, 80, 133, 136 Normal monopolist, welfare loss from, 292–293 Normal profit, 275 Normative economics, 17 arguments against monopoly, 298 criticism of perfect competition, 161 in policy analysis, 399 North, Douglass, 51 North American Free Trade Agreement, 67, 219 North American Industry Classification System, 317–318 industry groupings, 317 North Korea, 13 Novo Nordisk, 251 Nudge, 489 advertising as, 489 RECAP, 488 Nudge policy, 489 government as decision maker, 496 and government failure, 496–497 and libertarian paternalism, 489–490 libertarian paternalistic criterion, 495 RECAP, 492 versus shove policy, 495 Nudge (Thaler & Sunstein), 388 Numb3rs, 458 O Oakland Athletics, 471 Obama, Barack, 486, 501 ■ Index ■ Occupational Safety and Health Administration, 171 Oil supply, and Hurricane Katrina, 86 Oligopoly, 312 cartel model, 313–316 compared to other market structures, 318 comparison of models new entry as limit on cartels, 316 price wars, 317 pricing extremes, 316 contestable market model, 315–316 distinguishing characteristics retail stores, 313 small number of firms, 312 strategic decision making, 312–313 and game theory, 452–455 duopoly and payoff matrix, 452–453 low price guarantees, 457 precommitment rules, 457 prisoner’s dilemma and duopoly, 453–455 lacking production element, 313 models and estimates of industry structure, 320–321 mutual interdependence, 312 precommitment rules, 455 and technological development, 344–345 two extremes on pricing, 316 Omaha Steaks, 342 Open borders policy, European Union, 356 Opportunity, equality of, 397 Opportunity cost, and government decisions, implications, 10 and no-free-lunch theory, of not supplying, 84–85 in production possibilities curve, 25–27 and rational choice, 418 relative among nations, 186 of Saudi production, 182–183 unmeasured cost, 255 Opportunity cost of work, 352–353 Optimal level of pollution, 169 Optimal policy, 168 to deal with externalities, 168–169 Optimal rollback strategy, 440 Orange County, NC, Board of Commissioners, 149 Organizational buyers, effect of Internet on, 267 Organizational structure and manager incentives, 332 monitoring problem, 332–334 Organization of Petroleum Exporting Countries, U.S trade with, 205 Organ transplants, 517 Ostrom, Elinor, 166 Other things changing, 509 Other things constant in law of demand, 79, 80 in law of supply, 85 Output; see also Potential output aggregate effect of price controls, 295 finding, for monopoly, 289–290 increased by free trade, 217 isocost/isoquant analysis, 260–263 in monopolistic competition, 302–303 of monopoly determined graphically, 287–289 determined numerically, 286–287 of normal monopolist, 292–293 oligopoly decisions on, 313 profit-maximizing level in perfect competition, 266–271 variable cost increase, 230–231 Outsourcing, 190 changing nature of, 206 to China and India, 195, 206 and demand for labor, 359–360 of production and services, 205 via Internet, 226 Overfishing problem, 167 Owens, Nicole, 517 Owens Corning, 314 P Pabst Brewing case, 324 Pacific Rim, U.S trade with, 204 Pareto, Vilfredo, 502 Pareto optimal policies, 502, 508 criticisms of, 162 Paris, France experience with rent control, 101 property tax effects, 145 Parker Brothers, 298 Parker Pens, 324 Partnerships, 58, 226 advantages and disadvantages, 59 percent of business firms, 58 Patents, 292, 606 getting around, 340 incentive for innovation, 344 and reverse engineering, 340 Path-dependent models, 465, 473 Pattern-finding models, 471 Pay gap, 364 Payoff matrix, 435, 437 PayPal, 268 Pension funds, 333 Pentagonal class structure, 396 www.downloadslide.com Per capita income national comparisons, 392 Perdue, 224, 342 Perfect competition; see also Perfectly competitive industry; Perfectly competitive markets invisible hand unimpeded in, 265 nirvana criticism, 161 normative criticism, 161 reference point for market structure, 264 second-best criticism, 161 Perfectly competitive industry adjustments from short run to long run increase in demand, 277–278 long-run market supply, 278–279 long-run competitive equilibrium, 275–277 versus monopolistic competition, 303–304 short-run market supply and demand, 275 summary on, 279 Perfectly competitive markets, 265 adjustments from short to long run increase in demand, 277–278 long-run profit or loss, 278–279 algebraic representation, 310–311 compared to monopolistic competition, 289 compared to other market structures, 318 conditions of, 264–265 identical products, 265 no barriers to entry, 265 price takers, 265 consumer surplus, 292–293 demand curves, 265 effect of monopolistic forces, 341 effect of price controls, 295 impossible with natural monopoly, 299 Internet as, 271 producer surplus, 292–293 profit-maximizing condition, 272 profit-maximizing level of output long-run competitive equilibrium, 275–277 marginal cost, 267 marginal cost curve as supply curve, 269 marginal revenue, 267 MC = MR, 268–269 profit determination from, 271–274 short-run supply and demand, 273–274 shutdown point graph, 273 total profit maximization, 269–270 ■ Index ■ IND-19 real-world example, 279–280 and technological development, 344 Perfectly elastic, 126, 128 Perfectly inelastic, 126, 128 Personal Responsibility and Work Opportunity Act, 400 Per-unit output cost curve, 232 Petr, Jerry L., 48 Petty, William, 469 Physical infrastructure, 190 Pickett, Ben, 98 Pickett, Bill, 98 Pie chart, 40 Policy makers and government failure, 515–516 value of, 506–507 Political economy, 15 Political forces effect on economic policies, 19 effect on equilibrium, 91–92 and labor market, 361 Political influences, 11–12 Politics of income redistribution, 398 Polluting industries, 513 Pollution environmentalists vs economists, 169 optimal level, 169 Pontiac, 245 Poor, the benefits of capitalism for, 60 fall in income of, 386 Population China, 65 European Union, 65 United States, 65 Positive economics, 17 Positive externalities, 63–64, 165, 165 example, 166 Poverty absolute vs relative, 391 absolute vs relative measures, 392 costs of, 392–393 debates about definition, 391–392 incentive for crime, 389 number and percentages of persons in, 392 official definition, 391 Poverty initiatives, 16 Poverty threshold, 391 and food budget, 391–392 Precepts, 13, 479 Precommitment rules, 456 Precommitment strategy, 464 Predatory pricing, dumping as, 222 Predictable irrationality, 461–462, 488 Predictably Irrational (Ariely), 464 Prescott, Edward, 158, 371 Presley, Elvis, 150 Price(s) basis of rational choice, 410 as collective judgment, 487 cream-skimming, 326 determination of quantity demanded, 73–78 determination of quantity supplied, 79–84 effect of excess demand, 89 effect of tariffs and quotas, 209 effects of government intervention excise taxes and tariffs, 106–107 price ceilings, 103–104 price floors, 105–106 quantity restrictions, 107–108 of factors of production, 278 finding, for monopoly, 290–291 implicit collusion, 313 income effect, 422 irrational reaction to, 124 kinked demand curve, 314 and law of one price, 33 lowered in Great Depression, 338 and marginal revenue and marginal cost, 265 in monopolistic competition, 305–306 of monopoly determined graphically, 287–289 determined numerically, 286–287 of normal monopolist, 292–293 oligopoly decisions on, 312 in oligopoly models, 315 in perfect competition, 263 and quantity demanded, 415–416 as rationing mechanism, 10–11 set at zero, 122 and shutdown point, 273 sticky in cartels, 314 substitution effect, 416–417 supply and demand analysis of, 87–88 Price ceilings, 104, 150, 295 equations for, 115 in military draft, 155 rent control, 104–105 Price changes effect on quantity demanded, 76 effect on quantity supplied, 82 Price controls compared to taxation, 150 effect on output and market price, 295 with inelastic supplies, 155 price ceilings, 150 price floors, 151 Price-discriminate, 293 www.downloadslide.com IND-20 Price discrimination by airlines, 293 definition, 133 elimination of welfare loss, 294 examples of, 134 by movie theaters, 293 Price elasticity, information provided by, 118 Price elasticity of demand, 122 calculating, 124–125 and endpoint problem, 124–125 examples, 126 factors determining substitutes, 128–131 geometric tricks for estimating, 129 and price discriminating monopolists, 293 total revenue and, 131–133 Price elasticity of supply, 122 calculating, 124–125 examples, 126 and minimum wage, 124–126 Price-fixing by Archer Daniels Midland, 324 fines for, 324 Price floors, 106, 151 and elasticity of supply and demand, 154, 156 equations for, 115 minimum wage, 106–107 Price increase, supply and demand analysis, 138 Price leaders, 315 Price level and law of demand, 79 and substitutes, 72 Priceline.com, 266, 332 Price mechanism, 53 to coordinate demand, 77–78 distortions of excise taxes and tariffs, 107–108 price ceilings, 104–105 price floors, 108 quantity restrictions, 109–110 Price-setting and elasticities, 133 and price controls, 296 by retailers, 133 Prices of other goods, 80–81 Price taker, 268 Price wars, in oligopoly, 317 Pricing mechanism, 13 Pricing policies public vs private goods, 171–172 Principle of diminishing marginal utility, 410 ■ Index ■ Principle of rational choice, 412 extending, 414–415 and law of demand, 415–416 and law of supply, 423 Principles of Economics (Marshall), 10, 121 Prisoner’s dilemma, 434 campaign finance reform proposal, 446 cheap talk, 441 dominant strategy, 441 duopoly example, 453–454 example, 434–436 Nash equilibrium, 436 noncooperative game, 436 payoff matrix, 435 strategic options, 435 Private equity firms, 336 Private goods, 64 excludability of cost of pricing, 171–172 Private property rights, 50 Privatization, in Europe, 343 Producer surplus, 142 effect of rent-seeking activities, 151–156 effect of taxation, 147 from monopoly, 292 from perfect competition, 292 and price-discriminating monopolist, 298 Product(s) changes in demand for, 378 identical in perfect competition, 264 Product differentiation from advertising, 308 benefits to consumers, 308 in monopolistic competition, 301 Production, 57, 224; see also Long-run cost curve changes since 1933, 251 cost advantage of China, 192 economically efficient, 243 economically efficient point of, 261 economies of scope in, 252–253 and land prices, 244 learning by doing, 253 location options, 223 long- vs short-run options for firms, 243 low levels of long-run planning decisions, 244 minimum efficient level, 247 many components of, 251 negative externalities from, 161 real-world, 333 requirements in cartels, 317 role of firms in, 225–227 specialized, 214–216 technical efficiency, 248 technological change, 253 technology changes in auto industry, 249 time and costs to change or move, 192 value added in stages of, 225 wealth from past, 190 Production decisions importance of economies and diseconomies of scale, 248 long-run, 244 multiple dimensions of, 258–259 role of economies of scope, 251–252 Production function, 228–229 graph, 229 Production possibilities curve, 24–25 and comparative advantage, 28–30 conclusions on, 37–38 creation of, 25 and decision trees, 29 examples of shifts in, 30 and gains from trade, 32 meaning of efficiency, 29 and productive efficiency, 28 Saudi Arabia, 183 for scarcity, 25–27 summary of, 29 trade and comparative advantage, 30–34 trade-offs, 34 United States, 184 Production possibilities table, 25 creation of production possibilities curve, 26 increasing opportunity cost of trade-offs, 26–27 production possibilities curve for individuals, 25–26 Production process; see also Costs of production average product, 229 law of diminishing marginal productivity, 230–231 long- vs short-run, 228 marginal product, 228 production function, 232 production tables, 232 Production tables, 228 graph, 229 real-world applications, 229 Productive efficiency, 28 and distribution, 31–32 from division of labor, 31 relation to costs, 236 www.downloadslide.com Professional degrees, 370 Profit, 57, 225 accounting, 225, 255 determination of from graphs, 275 output where MC = MR, 275 per unit MC = MR, 276 from table of costs, 274 by total cost and revenue curves, 273 zero profit or loss where MC = MR, 273–274 economic, 225–227, 255 of lazy monopolists, 335, 336 in monopolistic competition, 302–303 of monopoly breaking even or making a loss, 292–293 making a profit, 295 motivation for efficiency other than, 337–338 of natural monopoly, 295 normal, 275 zero, 273–274, 275–277 Profit maximization, 225–226 lack of manager incentives for, 332 MC = MR, 269–270 problems with manager incentives, 336 need for monitoring, 336–338 in real-world firms, 273 short- vs long-run, 332 total, 270–271 Profit-maximizing condition, 269 Profit-maximizing level of output in monopolistic competition, 301 in natural monopoly, 298 in perfect competition marginal cost, 263 marginal cost curve as supply curve, 269 marginal revenue, 266 MC = MR, 269–270 total profit maximization, 270–271 Progressive tax, 399 and income inequality, 391 Property rights, 512–513 and income distribution, 402–403 and nonwage income, 363 Property taxes, 145, 400 effect on rents, 147 Proportional tax, 399 Protectionism; see Trade restrictions Psychic income, 370 Public assistance, 403 general assistance, 403 Medicaid, 403 ■ Index ■ IND-21 Supplemental Nutritional Assistance Program, 403 Temporary Assistance for Needy Families, 403 Public choice economists, 153 on farm lobby, 153 on government failure, 516 Public choice model, 504 Public goods, 64, 169 effect of technology on, 169 excludability of cost of pricing, 171–172 free rider problem, 171 market value, 169–171 national defense, 169 Public School Match program, New York City, 486 Purposeful behavior, 460, 467 Push policy, 493 Pyramid class structure, 393 Q Quantitative literacy, 48 Quantity demanded, 77, 79 and demand curve, 79 income effect, 416–417 in law of demand, 78 and market demand curve, 82–83 substitution effect, 416–417 time dimension, 81–82 Quantity of labor demanded, 356 Quantity supplied, 85 effect of price changes, 86 effect of price elasticity, 123 in law of supply, 84–85 Quintiles of income, 383 Quotas, 209 compared to tariffs, 209 equations for, 118 quantity restrictions, 108–109 small-country assumption, 210 QWERTY keyboard, 346 R Rabin, Matt, 460 Race, median income by, 394 Radical economists, on income redistribution, 394–395 Rational, 511 Rational choice behavioral economists on, 408 and budget constraint, 410–411 extending principle of, 414–415 focal point equilibria, 419 follow-the-leader approach, 419 income effect, 416–417 indifference curve analysis, 427–431 and law of demand, 415–416 and law of supply, 417–418 and marginal utility, 410–412 opportunity cost, 417 principle of, 412 real-world applications cost of decision making, 418–420 given tastes, 420 utility maximization, 421–422 simultaneous decisions, 412 substitution effect, 416–417 using bounded rationality, 419 utility-maximizing rule, 412–413 Rational choice theory diminishing marginal utility, 410 marginal utility, 408–411 reasons for choices, 407 and self-interest, 407–408 based on price, 408 based on utility, 408 total utility, 408–410 Rationality assumption in game theory, 438 in behavioral economics, 445, 447 failure of individuals, 511 Rationing, nonprice, 105 Rationing mechanism, 10–11 Rawls, John, 395–396 Reagan, Ronald W., 369 Real wage, and opportunity cost of work, 353 Real-world competition costs of preventing, 341 economic insights and, 338 as process, 337 Real-world data, on graphs, 46–49 Real-world firms goals, 332 and lazy monopolists, 335–336 motivation for efficiency vs profit, 336–337 profit-maximization problem manager incentives, 332 need for monitoring, 333–334 short- vs long-run, 332 and X-inefficiency, 335 Real-world markets, 331, 337 Real-world production, 332 RECAP nudge, 492 Recession reason for trade restrictions, 216 Regional free trade associations, 220 Regression model, 470–471 www.downloadslide.com IND-22 Regressive tax, 399 Regulation cost/benefit analysis, 505, 507 of natural monopolies, 340 views of economists on, 339–340 Regulatory trade restrictions, 211 Reinsch family farm, 247 Relative poverty, 386 Relevant market, in antitrust policy, 324 Rembrandt, 285 Rent control, 103 effect on New York City, 154 effects of, 104–105 and key money, 105 in New York City, 104 in Paris, 104 shortages created by, 154 Rents impact of property taxes, 149 Rent-seeking activities, 151 government reasons, 150–151 inelastic demand and incentive to restrict supply, 153–154 inelastic supply and incentive to restrict prices, 154 long- and short-run problem of price controls, 154–156 Reputation, of firms, 332 Resource curse, 197–198 Resources effect of rent-seeking on, 151, 153 and tragedy of the commons, 166 Restructuring of lazy monopolists, 336 Revenue, implicit, 226 Reverse engineering, 339 Ricardo, David, 10, 192, 201 Rich, the, 60 Rights agreement, 515 Right to work laws, 368 Rivoli, Pietra, 247 Robber barons, 322 Robbins, Lionel, 17n Robinson, Joan, 301, 335 Robinson-Patman Act, 337 Rockefeller, John D., 307, 322 Rodero-Cosano, Javier, 442n Rogers, Will, 162 Rollback strategy, 439–442 in trust game, 446 Romer, Paul, 171 Romney, Mitt, 60 Roth, Al, 485 Rule of 72 ■ Index ■ Russia Marxism in, 55, 75–76 Ryanair, 344 S Safety net, 75, 511 Saffer, Henry, 139, 519 Sales, corporations’ percent of, 58 Sales taxes, 404 and economic policy, 149–150 Samsung Electronics, 205 Santa Fe Institute, 487 SAS; see Short-run aggregate supply curve Saudi Arabia, 212–213, 220 production possibilities curve, 185 trade with United States, 185–187 Savings, 479, 490 Scales, 47 Scarcity, changing degree of, coercion to deal with, and economic forces, 11 elements of, and invisible hand, 11, 14–15 and market forces, 11 and rationing mechanism, 11 Schelling, Thomas, 441, 443, 460 Schuhmann, Peter, 48 Schumann, Robert, 156 Schumpeter, Joseph, 60 Schwarzenegger, Arnold, 98 Scientific models, 459, 476 Scottish Enlightenment, 516 Screening, 173 Screening question, 434 Secondary boycotts, 369 Second-best criticism of perfect competition, 163 Second Life, 458 Segregation game, 443 Self-confirming equilibrium, 474 Self-employment, 356 Self-interest in cost/benefit analysis, 508 opposed to competition, 337 Sellers many, in monopolistic competition, 300 price takers, 266 Semco, 365 Sen, Amartya, 397, 512 Separation of ownership and control, 58, 333 Sequential games, 437–438 mixed strategy, 439–450 Services, 57 job increases, 189 nontradable types, 190 Sex, median income by, 392 Sexual activity decisions, 465 Sexual harassment, 368 Shadow prices, 484 Shampanies, Kristina, 128 Share distribution of income, 383 Sharp Corporation, 325 Shepherd, Joanne, 472 Sherman Antitrust Act, 322 and Microsoft case, 326 Shift factors in demand for labor costs of competing factors, 357 demand for firm’s goods, 358 focal point phenomenon, 359 international competitiveness, 359–360 monopoly, 358 new technology, 358–359 Shift factors of demand, 80–81 Shift factors of supply, 86–87 Shift in demand, 79–80, 92 and elasticity, 137 equations for, 117–118 Shift in supply, 85–86, 92 and elasticity, 137 equations for, 117–118 Shifts in supply and demand, 92–93, 101–103, 137 Shortages, created by rent control, 151 Short run adjustments to long run from, 277–278 income elasticity in, 134 options for firms, 243 output fixed in, 595 problem of price controls in, 154–159 production decisions in, 227–229 Short-run average total cost, and envelope relationship, 249 Short-run average total cost curve, 249 Short-run cost curve, U shape, 248 Short-run decision, 228 Short-run marginal cost curve, 249 Short-run market supply, 275–277 Short-run profit, 332, 341 Shove policy, 495 Shutdown decision and long-run equilibrium, 277–278 real-world example, 279 relevant costs, 278 www.downloadslide.com Shutdown point, 274 Signaling, 173 Simon, Herbert, 418, 460 Simultaneous decisions, 412 Simultaneous move games, 438 Singapore, 79–80 Single-tax movement, 297 Sin taxes, 168, 511 SIRIUS Satellite Radio, 171 Skeath, Susan, 433 Skype, 226 Slavery, partial, 365 Slesnick, Daniel, 387 Sloan, Alfred P., 265 Slope, 44 of average fixed cost curve, 234 of demand curve, 78 versus elasticity, 123 of linear curves, 44 of nonlinear curves, 44–45 of supply curve, 85 Small-country assumption, and trade restrictions, 209, 210 Smith, Adam, 10, 17, 22, 24, 31, 34, 40, 73, 201, 258, 298, 329, 432, 488, 515–516 Smith, Vernon, 438 Smoot-Hawley Tariff of 1930, 208 Social classes, 383 lower class, 393 middle class, 393–394 upper class, 393–394 Social entrepreneurship, 251 Social forces, 11, 266 effect on economic policies, 19 effect on equilibrium, 91–92 and labor market, 362–363 Social goals, 502 Social incentives, 487 Socialism, 53 central economic planning, 75 and China, 55 development in 20th century, 54 out of favor as a term, 55 and Soviet Union collapse, 55 theoretical ideas of, 54 transition from feudalism, 75–76 transition to market economy from, 76 as welfare system, 54 in Western Europe, 54 Social norms, and production decisions, 252 Social policy agreement among economists, 504 choice of models for, 503 ■ Index ■ IND-23 differing views of economists, 502 interpretation of empirical evidence, 503 need for worldview, 503–504 and policy makers’ values, 502–503 survival of the fittest approach, 509 Social Register, 393 Social responsibility for employment, 728 Social Security system, 400 privatized in Sweden, 422 Social Security taxes, 61, 355, 399 and economic policy, 149 Society, economic efficiency and goals of, 510 Socioeconomic distribution of income, 383 Socrates, 522 Solar energy subsidies, 377 Sole proprietorships, 58, 226 advantages and disadvantages, 59 percent of business firms, 58 Solomon, 201 Solow, Robert, 433 Somalia, 63 South America, U.S trade with, 205 South Korea, 214 Special interests, lobbying by, 151 Specialization and gains from trade, 32–34 and globalization, 34–35 leading to technological change, 343 Specialized production, 214–216 economies of scale, 215–216 infant industry argument, 216 learning by doing, 215 Stable institutional framework, 63 Stages of production, value added in, 226 Stalin, Joseph, 75–76 Standard model, 256 of cost analysis, 243–249 definition, 273 with real-world complications, 256 Standard Oil Trust case, 322 Starbucks, 224, 232, 342 State government income and expenditures, 61 number of employees, 61 State laws on competition, 323 right to work laws, 368 State socialism, 75–76 State taxes income tax, 399 property taxes, 400 sales taxes, 399 Status quo bias, 422 Steel imports, effect of trade restrictions, 218 Steel tariff, 218 Steinem, Gloria, 241, 373 Stern, Nicholas, 18 Sticky prices, 315 Stigler, George, 426 Stock options, 333 Stories Economists Tell (Colander), 474n Strategic bargaining, 214 Strategic decision making, 312 Strategic interaction in duopoly, 453 game theory as tool to study cooperative game, 437–438 sequential games, 438–439 simultaneous move games, 438–439 strategies of players, 438–441 Strategic thinking, 432 Strategic trade policies, 214 Structure, form of models, 458 Structure of production, auto industry, 245 Structure of the firm, and demand for labor, 377–378 Stupid decisions, 421 Subsidies effect on demand, 81 equations for, 118 for solar energy, 377 Substitutes, 78, 135, 136 and elasticities, 128–131 demand, 130 effects on decision making, 130–131 factors affecting number of degree of luxury, 130 market definition, 130 proportion of one’s budget, 130 time period, 130 and prices of other goods, 80–81 Substitution effect, 416 and supply of labor, 354 Summers, Lawrence, 513 Sumo wrestlers, 470 Sunk costs, fixed costs as, 230, 274 Sunstein, Cass, 488–489, 490–493 Sun Tzu, 432 Super Crunchers (Ayres), 471 Supplemental Nutritional Assistance Program, 400 Supplemental Security Income, 401 www.downloadslide.com IND-24 Supply, 84 characteristics, 84 derived from individuals, 224 of factors of production, 224–225 law of, 84–85 pressure to limit, 153–154 of produced goods, 224–225 shift factors, 87 labor supply, 87 technology, 87 shifts in, 86 Supply and demand, 77 for children, 93 and consumer surplus, 142 and fallacy of composition, 94 versus modeling, 458 other things constant assumption, 94 problem of other things changing, 508 and producer surplus, 142 short run, 274–275 Supply and demand analysis CEO compensation, 334 characteristics of, 92–93 effect of disasters or shocks edible oils market, 101–103 and elasticities price increases, 136 and shifts in demand/supply, 137 of exchange rates, 195–196 government intervention, 103–109 excise taxes and tariffs, 107–108 price ceilings, 103–105 price floors, 105–107 quantity restrictions, 108–109 of industry, 274–279 limitations of, 94 of military draft, 152 of prices, 89–90 of rent-seeking activities government reasons, 151–152 inelastic demand and incentive to restrict supply, 153–154 inelastic supply and incentive to restrict prices, 154–155 long- and short-run problem of price controls, 155–156 of tariffs and quotas, 209–210 of tax incidence, 143–149 third-party-payer markets, 110–111 of trade and exchange rates, 194–195 of wage determination, 360–364 Supply and demand interactions, 88–93 equilibrium, 89–90 graphical illustration, 90, 91 limitations of equilibrium, 90–91 political and social forces and equilibrium, 91–92 shifts in, 92–93 ■ Index ■ Supply chain, T-shirt production, 247 Supply curve, 85 change in elasticity along, 126–128 individual, 87–88 of labor, 353, 362 long-run, 278–279 marginal cost curve as, 269 market, 87–88 movement along, 86 in perfect competition, 163 summary on, 89 in supply table, 87 Supply decisions, by entrepreneurs, 250–251 Supply/demand model, 474n versus behavioral model, 485 chocolate futures example, 477–478 and cost/benefit analysis, 508–509 distributional issues, 509–511 logic of, 509 rationality aspect, 511 for social policy, 503 used in context, 501 Supply of labor in China elasticity of, 355–356 immigration, 356 incentive effect, 352–353 and income effect, 354 income taxes, work, and leisure, 354–355 as individual choice, 352 international, 356 and nonmarket/illegal activities, 353–354 real wage and opportunity cost, 353 and substitution effect, 354 in United States, 244 Supply table, and supply curve, 87, 88 Surgery, licensing for, 175 Surplus value, 74 Survival of the fittest approach to social policy, 509 Survivor, 443 SUVs, 101 market for, 100–101 Sweden privatization of Social Security, 422 T Taft-Hartley Act, 368 Tanner, Michael, 519 TANSTAAFL (no-free-lunch theory), Tariffs, 64, 107, 208 compared to quotas, 209 effect on prices, 209 effect on trade patterns, 209 and GATT, 209 on imported steel, 108 national rate comparisons, 208 reason for trade restrictions, 217 retaliatory, 212 small-country assumption, 209, 210 Smoot-Hawley Act of 1930, 209 on steel imports, 218 and strategic trade policies, 214 supply and demand analysis, 107–108 U.S rates 1920–2012, 208 and World Trade Organization, 209 Tastes and conspicuous consumption, 420 given, 419 individual choice, 420 Taxation allocation of, 147 to change behavior, 512 Colbert on, 142 compared to price controls, 151 costs of, 145 deadweight loss, 145 deciding on objects of distributional issues, 146 government goals, 146 effect on demand, 81 effluent fees, 167 equations for, 116 flat tax, 146 impact on consumer and producer surplus, 144–146 incentive effects, 397 for income redistribution federal income tax, 399 state and local taxes, 399–400 types of rates, 399 luxury tax, 148 sin taxes, 168, 511, 512 by state and local government, 61 supply and demand analysis, 107–108 welfare loss triangle, 145 Taxi medallions, 108–109 Tax incentive program, 168 Tax incidence and relative elasticity, 146–148 sales taxes, 149–150 Social Security taxes, 149 Tax rates flat rate, 397 marginal rate, 354–355 progressive, 397 proportional, 397 regressive, 397 Team spirit, 247 Technical efficiency, 244 Technological change, 253 in auto industry, 245 biased, 29 www.downloadslide.com and cartels, 314 and declining costs, 254 effect on supply, 87 effect on trade patterns, 205 and efficiency or inefficiency, 29 Moore’s law, 254 neutral, 29 new products from, 255 positive externalities from, 609 Technological development, 343 causes, 343 dynamic efficiency of, 343 and market structures, 343–346 Moore’s law, 344 outcome of specialization, 343 Technological infrastructure, 191 Technological lock-in, 346 Technology, challenge of China and India, 36 in chicken production, 254 computational, 254 and demand for labor decline in manufacturing, 359 Luddite reasoning, 358 effect on demand for labor, 378 effect on income distribution, 385 related to learning by doing, 254 Telephone industry, 340 Temporary Assistance for Needy Families, 400 Textbook publishing costs of production and length of, 250 indivisible setup costs, 245 Textile industry, 34 Thaler, Richard, 463, 488 Thatcher, Margaret, 160 Theorems, 12–13, 478, 487–488 Theory; see Economic theory Theory of Moral Sentiments (Smith), 515–516 Third-party-payer markets, 109 in college costs, 110–111 in health care, 109–110 Third-party sales, 218 Tic-tac-toe game, 438 Time period for substitutes, 128 Tipping-point models, 465 Tocqueville, Alexis de, 328 Total cost, 225, 226, 231 and average costs, 231 decrease in, 135 equation, 238 Total cost curve, 233–234 Total profit maximization, 270–271 Total revenue, 225, 226 along demand curve, 132–133 and elasticity of demand, 131–134 increase in, 137 ■ Index ■ IND-25 Total surplus, 144 Total utility, 408 related to marginal utility, 408–409 Towse, Ruth, 372 Toyota Motor Corporation, 210 Trade adjustment assistance program, 213 Trade balance; see Balance of trade Trade deficits, 188, 193, 197 reduced by trade restrictions, 208 of U.S 1970–2012, 206 Trade-offs, in production possibilities curve, 24–27 Trade restrictions, 194 costs to society of relaxing, 213 cost to consumers of saving jobs, 213 and demand for labor, 359 on dumping, 219 by European Union on food imports, 213 opposed by economists, 203 abuse of national security argument, 218 addictive nature of restrictions, 218 competition increased by trade, 217–218 output increased by trade, 217 reasons for, 211–218 haggling by companies over gains from trade, 213–214 haggling by countries over restrictions, 214 infant industry argument, 216 international politics, 216–217 macroeconomic costs of trade, 216 national security, 216 recession, 216 revenues from tariffs, 217 specialized production, 214–216 unequal distribution of gains from trade, 212–213 retaliation, 217 on steel imports, 217–218 varieties of embargoes, 210–211 nationalistic appeals, 211 quotas, 209–210 regulation, 211 tariffs, 208–210 voluntary restraint agreements, 210 Trade surplus, 193 of U.S after World War II, 207 Trade wars, 208–209 Trading blocs, 65 Trading companies, 73, 187 in United States, 189 Trading zones, 219–220 Traditional economics policy frames, 494–495 policy implications, 487–488 Traditional economists, 14, 459; see also Classical economists contrasted with modern economists, 476 critique of behavioral economics and government failure, 496–497 critique of behavioral models, 462 versus economic engineers, 497 opposition to government-created monopoly, 298 Traditional model advantages of behavioral models over, 463–464 and behavioral economics, 447 endowment effects, 446 fairness/trust game, 446 framing effects, 446–447 challenge to standard assumptions endowment effects, 446 on fairness, 446 framing effects, 446–447 on rationality, 445–446 compared to behavioral models, 460 versus government intervention, 466 importance of, 447–448 simplicity and insight from, 462–463 Traditional societies, 53 problems of, 72 Tragedy of the commons, 166 Transaction costs, lowered by Internet, 226 Transferable comparative advantage, 192 effect of law of one price, 192–193 Transportation costs and demand for labor, 359 Transshipments, 218 Travels of a T-Shirt in the Global Economy (Rivoli), 247 Triple bottom line, 251 Trust game, 446 Tullock, Gordon, 514 Turner, Robert W., 181 Tversky, Amos, 446 Two-thirds game, 440–441 Tyson, Laura, 258 U Ultimatum game, 421 single-play, 440 Unemployment and government spending, 64 Unemployment compensation, 401 Unfair Practices Act, Arkansas, 323 Union of Soviet Socialist Republics, 75–76 collapse of, 76 www.downloadslide.com IND-26 Union shop, 368 United Nations, 66–67 United States amount of government spending, 75 class structure, 383 cultural trendsetter, 191 as debtor nation, 207–208 English as language of business, 191 immigration policy, 191 labor supply, 244 land prices, 244 as meritocracy, 388 number and percentages of persons in poverty, 388–389 open immigration policy, 191 property rights, 363 stable institutions, 191 statistics on, 65 tariff on steel imports, 218 tension over income redistribution, 394–395 wealth distribution, 391 United States economy balance of trade, 188 CEO compensation, 334 changing nature of outsourcing, 192–193 versus China in wages, 188 comparative advantage concerns about future, 192 equalizing trade balance, 193–194 gain and loss of advantage, 193 inherent vs transferable, 192 and law of one price, 192–193 control of distribution and market, 35 decline in wage premium, 36–37 disappearing comparative advantage, 34 distributional effects of globalization, 189–190 fourth sector, 251 income distribution across time, 383–384 income mobility, 388 international competitors, 65 and international trade balance of trade 1970–2012, 205 change in kinds of imports, 205 changing nature of, 204–205 effect of technological change, 205 exports and imports by region, 205 historical perspective, 206 main trading partners, 204 outsourcing of services, 205–206 outsourcing to China and India, 206 job losses in manufacturing, 370 labor market characteristics, 362 ■ Index ■ larger government role, 55 largest exporters, 220 and law of one price, 37 median income, 60 narrowing wage gap, 194 postwar trade surpluses, 193 production possibilities curve, 185 reactions to globalization, 35–36 recent trade deficits, 193 role of tradition, 54 sectors of businesses, 56–59 government, 61–66 households, 59–60 interconnections, 55–56 size of labor force, 60 sources of comparative advantage, 190–191 infrastructure, 191 intellectual property rights, 191 natural resources, 191 production location advantage, 191 skilled labor force, 191 wealth from past production, 191 stagnant wages, 190 strength of, 51 technology leadership challenged, 36 trade conflict with European Union, 212 trade with Saudi Arabia, 184–186 trading companies, 189 United States Patent Office, 291 United States Postal Service, 11 United States Steel, 218 antitrust case, 322 United States Supreme Court Standard Oil case, 322 United States Steel case, 322 United States Tax Code, 399 Unit elastic, 126–127 Unit elastic demand, 126–127 University of North Carolina, 149 University of Phoenix, 32 Unlimited liability, 58 Unskilled labor effect of minimum wage, 106 Upper class, 393 Upward-sloping, 44 Used car market, 101, 180 U shape of average cost curve, 234–235 of long- and short-run cost curves, 249 Utility, 408 Utility maximization example, 413–414 status quo bias, 422 ultimatum game, 421 Utility-maximizing rule, 412–413 following, 413–414 and law of demand, 415–416 and law of supply, 417–418 V Value added, 227 Value judgments of policy makers, 502–503 Value of life, 505–507 Value of marginal product, 375–376 Values of policy makers, 502–503 Variable costs, 230–231 average, 231–232 equation, 238 Variables, goodness of fit, 470 Vault cash, 648 Veblen, Thorstein, 40, 307, 328, 420, 425, 494 Velcro shoes, 469 Venezuela, 55, 76 Vermont Pure, 342 Vesterlund, Lise, 372 Vickrey, William, 445 Vickrey auction, 445 Viner, Jacob, 250n, 259 Voltaire, 351 Voluntary reductions, to deal with externalities free rider problem, 168 operation of, 168 during times of crisis, 168 Voluntary trade agreements, 32, 215 W Wage gap, narrowing, 194 Wage rates and quantity of labor, 352 and quantity of labor demanded, 359 Wages in China, 601 China vs United States, 188 and derived demand curve for labor, 375 determination of comparable worth laws, 364 efficiency wages, 364 living wage laws, 364 in developing countries, 356 effects of globalization in U.S., 189 imperfect competition, 361–362 and law of one price, 37 median pay, 60 multitiered contracts, 379 political and social forces, 362 and Social Security taxes, 149 www.downloadslide.com stagnant in U.S., 190 trend toward inequality, 384 Wagner Act, 368 Walmart, 23, 241, 258, 279–280, 337, 391, 455 state laws on competition, 323 Walton family, 391 Wants, Marxian view of, 495 Warhol, Andy, 285 Watt, James, 74 Wealth, 394 billionaires, 391 distribution of, 391–392 Lorenz curve, 391 nominal, 558 from past production, 191 Wealth of Nations (Smith), 10, 22, 31, 34, 73, 201, 488, 515 Wegmans Food Markets, 378 Welfare capitalism, development of, 74–75 Welfare gain, from natural monopoly, 297 Welfare loss, of monopoly eliminated by price discrimination, 293–294 Welfare loss triangle, 145, 292 military draft, 152 Welfare of society, 163, 295 ■ Index ■ IND-27 Welfare versus work, 355 Western Europe, 54, 75 growth rate 1940–2010, 529 Whitney, Eli, 74 Wicksteed, Phillip, 426 Wilcox, Claire, 223 Winner-take-all industries, 345–346 Women pay gap, 364 Work and income tax, 354–355 versus leisure, 354–355 Workers bargaining power, 334 country differences, 359–360 firm’s consideration of welfare of, 378–379 interests of the firm and, 377 Workers’ rights, 365 Workplace democracy, 365 Workweek, 60 World Bank, 67, 180, 504, 513 World Court, 65 World economy, 65 World Trade Organization, 67, 209 on dumping, 219 protests against, 215 ruling on EU ban on beef imports, 212 support for free trade, 215 and voluntary trade agreements, 210 Worldview, 503–504 Wulfers, Justin, 472 X Xerox Corporation, 314, 333 X-inefficiency, 335 in natural monopolies, 340 Y Yahoo!, 485 Yuan, 65 Yuengert, Andrew M., 21, 518 Z Zero price, 128 Zero-profit condition, 276 Zero profit or loss, 275–277, 292 in long run, 278 in long run for monopolistic competition, 304 Zielinski, Anthony, 517 ... 118.00 29 .50 140.00 22 .00 12. 00 35.00 40.00 8.00 90.00 18.00 130.00 26 .00 175.00 45.00 17.00 35.00 40.00 6.67 107.00 17.83 147.00 24 .50 21 0.00 63.00 22 .00 35.00 40.00 5.71 129 .00 18.43 169.00 24 .14... 24 .14 24 5.00 76.00 30.00 35.00 40.00 5.00 159.00 19.88 199.00 24 .88 28 0.00 81.00 40.00 35.00 40.00 4.44 199.00 22 .11 23 9.00 26 .56 315.00 76.00 54.00 35.00 10 40.00 4.00 25 3.00 25 .30 29 3.00 29 .30 350.00... $48.00 −15   27 2 2  30   60    50 25 .00   10   21  4 3 27    81   54 18.00   27   15  8 4   24   96     62 15.50   34    9  16 5   21  105    78 15.60   27    3 24 6  18  108  1 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