Microeconomics

Microeconomics

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Hubbard & O'Brien is the only book that motivates students to learn economics through real business examples. The #1 question students of economics ask themselves is: "Why am I here, and will I ever use this"? Hubbard & O'Brien answer this question by demonstrating that real business use economics to make real decisions on a daily basis. This is motivating to all students, whether they are business majors or not. All students can relate to businesses they encounter in their lives. Whether they open an art studio, do social work, trade on Wall Street, work for the government, or bartend at the local pub, students will benefit from understanding the economic forces behind their work.show more

Product details

  • Paperback | 640 pages
  • 213.4 x 271.8 x 20.3mm | 1,179.35g
  • Pearson Education (US)
  • Prentice Hall
  • Upper Saddle River, United States
  • English
  • 0130348260
  • 9780130348265

About Anthony P. O'Brien

R. Glenn Hubbard R.Glenn Hubbard is the Dean and Russell L. Carson Professor of Finance and Economics in the Graduate School of Business at Columbia University and Professor of Economics in Columbia's Faculty of Arts and Sciences. He is also a research associate of the National Bureau of Economic Research and a director of Automatic Data Processing, Black Rock Closed-End Funds, Dex Media, Duke Realty, KKR Financial Corporation, and Ripplewood Holdings. He received his Ph.D. in economics from Harvard University in 1983. From 2001--2003, he served as Chairman of the White House Council of Economic Advisers, and from 1991--1993, he was Deputy Assistant Secretary of the U.S. Treasury Department. Glenn Hubbard's fields of specialization are public economics, financial markets and institutions, corporate finance, macroeconomics, industrial organization, and public policy. He is the author of more than 90 articles in leading journals, including the American Economic Review, Journal of Finance, Journal of Financial Economics, Journal of Political Economy, Journal of Public Economics, Quarterly Journal of Economics, RAND Journal of Economics, and Review of Economics and Statistics. His research has been supported by grants from the National Science Foundation, the National Bureau of Economic Research, and numerous private foundations. Anthony Patrick O'Brien Anthony Patrick O'Brien is a professor of economics at Lehigh University. He received his Ph.D. from the University of California, Berkeley, in 1987. He has taught principles of economics for more than 15 years, in both large sections and small honors classes. He received the Lehigh University Award for Distinguished Teaching. He was formerly the director of the Diamond Center for Economic Education and was named a Dana Foundation Faculty Fellow and Lehigh Class of 1961 Professor of Economics. He has been a visiting professor at the University of California, Santa Barbara, and the Graduate School of Industrial Administration at Carnegie Mellon University. Anthony O'Brien's research has dealt with such issues as the evolution of the U.S. automobile industry, the sources of U.S. economic competitiveness, the development of U.S. trade policy, the causes of the Great Depression, and the causes of black--white income differences. His research has been published in leading journals, including the American Economic Review, the Quarterly Journal of Economics, the Journal of Money, Credit, and Banking, Industrial Relations, and the Journal of Economic History. His research has been supported by grants from government agencies and private foundations. In addition to teaching and writing, Anthony O'Brien also serves on the editorial board of the Journal of Socio-economics.show more

Table of contents

Preface iv Acknowledgments xvii Part 1: Introduction CHAPTER 1: Economics: Foundations and Models 2 WHAT HAPPENS WHEN U.S.FIRMS MOVE TO CHINA? 2 Building a Foundation: Economics and Individual Decisions 5 People Are Rational 5 People Respond to Economic Incentives 5 Optimal Decisions Are Made at the Margin 5 Solved Problem 1-1: Apple Computer Makes a Decision at the Margin 6 The Economic Problem That Every Society Must Solve 7 What Goods and Services Will Be Produced? 7 How Will the Goods and Services Be Produced? 7 Who Will Receive the Goods and Services Produced? 7 Centrally Planned Economies versus Market Economies 8 The Modern "Mixed" Economy 8 Efficiency and Equity 9 Economic Models 10 The Role of Assumptions in Economic Models 10 Forming and Testing Hypotheses in Economic Models 10 Making the Connection 1-1: When Economists Disagree: A Debate over Outsourcing 11 Normative and Positive Analysis 12 Microeconomics and Macroeconomics 13 "Don't Let This Happen To You!" Don't Confuse Positive Analysis with Normative Analysis 13 A Preview of Important Economic Terms 14 Conclusion 15 AN INSIDE LOOK: How Does Economic Growth in China Affect Other Countries? 16 *Summary 18 *Key Terms 18 *Review Questions 19 *Problems and Applications 19 *End-of-chapter resource materials repeat in all chapters. CHAPTER 1 APPENDIX: Using Graphs and Formulas 21 Graphs of One Variable 22 Graphs of Two Variables 23 Slopes of Lines 23 Taking Into Account More Than Two Variables on a Graph 24 Positive and Negative Relationships 25 Slopes of Nonlinear Curves 25 Formulas 28 Formula for a Percentage Change 28 Formulas for the Areas of a Rectangle and a Triangle 28 Summary of Using Formulas 29 Problems and Applications 29 CHAPTER 2: Trade-offs, Comparative Advantage, and the Market System 32 MANAGERS MAKING CHOICES AT BMW 32 Production Possibilities Frontiers and Real-World Trade-offs 34 Graphing the Production Possibilities Frontier 34 Solved Problem 2-1: Drawing a Production Possibilities Frontier for Rosie's Boston Bakery 36 Making the Connection 2-1: Trade-offs and Tsunami Relief 38 Increasing Marginal Opportunity Costs 38 Economic Growth 39 Trade 40 Specialization and Gains from Trade 40 Absolute Advantage versus Comparative Advantage 42 "Don't Let This Happen To You!" Don't Confuse Absolute Advantage and Comparative Advantage 44 Comparative Advantage and the Gains from Trade 44 Solved Problem 2-2: Comparative Advantage and the Gains from Trade 44 The Market System 46 The Circular Flow of Income 46 The Gains from Free Markets 48 The Market Mechanism 48 Making the Connection 2-2: Story of the Market System in Action: "I, Pencil" 49 The Role of the Entrepreneur 50 The Legal Basis of a Successful Market System 50 Making the Connection 2-3: Property Rights in Cyberspace: Napster, Kazaa, and iTunes 51 Conclusion 53 AN INSIDE LOOK: Choosing the Production Mix at BMW 54 CHAPTER 3: Where Prices Come From: The Interaction of Demand and Supply 62 HOW HEWLETT-PACKARD MANAGES THE DEMAND FOR PRINTERS 62 The Demand Side of the Market 64 The Demand of an Individual Buyer 64 Demand Schedules and Demand Curves 64 Individual Demand and Market Demand 65 The Law of Demand 66 What Explains the Law of Demand? 66 Holding Everything Else Constant: The Ceteris Paribus Condition 67 Variables That Shift Market Demand 68 Making the Connection 3-1: Why Supermarkets Need to Understand Substitutes and Complements 69 Making the Connection 3-2: Companies Respond to a Growing Hispanic Population 70 A Change in Demand versus a Change in Quantity Demanded 72 Making the Connection 3-3: Estimating the Demand for Printers at Hewlett-Packard 72 The Supply Side of the Market 73 Supply Schedules and Supply Curves 73 Individual Supply and Market Supply 74 The Law of Supply 74 Variables That Shift Supply 75 A Change in Supply versus a Change in Quantity Supplied 76 Market Equilibrium: Putting Demand and Supply Together 77 How Markets Eliminate Surpluses and Shortages 78 Demand and Supply Both Count 79 Solved Problem 3-1: Demand and Supply Both Count: A Tale of Two Letters 80 The Effect of Demand and Supply Shifts on Equilibrium 81 The Effect of Shifts in Supply on Equilibrium 81 Making the Connection 3-4: The Falling Price of Large Flat-Screen Televisions 82 The Effect of Shifts in Demand on Equilibrium 83 The Effect of Shifts in Demand and Supply over Time 84 Solved Problem 3-2: High Demand and Low Prices in the Lobster Market? 85 Shifts in a Curve versus Movements along a Curve 86 "Don't Let This Happen To You!" Remember: A Change in a Good's Price Does Not Cause the Demand orSupply Curve to Shift. 87 Conclusion 87 AN INSIDE LOOK: Hewlett-Packard Cuts PC Prices to Sell More Printers 88 CHAPTER 4: Economic Efficiency, Government Price Setting, and Taxes 96 SHOULD THE GOVERNMENT CONTROL APARTMENT RENTS? 96 Consumer Surplus and Producer Surplus 98 Consumer Surplus 99 Making the Connection 4-1: The Consumer Surplus from Satellite Television 100 Producer Surplus 101 What Consumer Surplus and Producer Surplus Measure 101 The Efficiency of Competitive Markets 102 Marginal Benefit Equals Marginal Cost in Competitive Equilibrium 102 Economic Surplus 103 Deadweight Loss 103 Economic Surplus and Economic Efficiency 104 Government Intervention in the Market: Price Floors and Price Ceilings 104 Price Floors: The Example of Agricultural Markets 105 Making the Connection 4-2: Price Floors in Labor Markets: The Minimum Wage 106 Price Ceilings: The Example of Rent Controls 107 "Don't Let This Happen To You!" Don't Confuse "Scarcity" with a "Shortage" 108 Black Markets 109 Solved Problem 4-1: What's the Economic Effect of a "Black Market" for Apartments? 109 Making the Connection 4-3: Does Holiday Gift Giving Have a Deadweight Loss? 110 The Results of Government Intervention: Winners, Losers, and Inefficiency 111 Positive and Normative Analysis of Price Ceilings and Price Floors 111 The Economic Impact of Taxes 112 The Effect of Taxes on Economic Efficiency 112 Tax Incidence: Who Actually Pays a Tax? 112 Solved Problem 4-2: When Do Consumers Pay All of a Sales Tax Increase? 114 Making the Connection 4-4: Is the Burden of the Social Security Tax Really Shared Equally between Workers and Firms? 116 Conclusion 117 AN INSIDE LOOK: Dealing with Rent Control 118 CHAPTER 4 APPENDIX: Quantitative Demand and Supply Analysis 125 Demand and Supply Equations 125 Calculating Consumer Surplus and Producer Surplus 126 Review Questions 128 Problems and Applications 129 Part 2: Markets in Action CHAPTER 5: Externalities, Environmental Policy, and Public Goods 130 ECONOMIC INCENTIVES SPUR DUKE ENERGY CORPORATION TO REDUCE POLLUTION 130 Externalities and Efficiency 132 The Effect of Externalities 132 Externalities Can Result in Market Failure 134 What Causes Externalities? 134 Private Solutions to Externalities: The Coase Theorem 135 The Economically Efficient Level of Pollution Reduction 135 Making the Connection 5-1: The Reduction in Infant Mortality Due to the Clean Air Act 136 "Don't Let This Happen To You!" Remember That It's the Net Benefit That Counts 138 The Basis for Private Solutions to Externalities 138 Making the Connection 5-2: The Fable of the Bees 140 Do Property Rights Matter? 140 The Problem of Transactions Costs 141 The Coase Theorem 141 Government Solutions to Externalities 141 Solved Problem 5-1: Using a Tax to Deal with a Negative Externality 142 Command and Control versus Tradeable Emissions Allowances 144 Licenses to Pollute? 145 Making the Connection 5-3: Can Tradeable Permits Reduce Global Warming? 145 Four Categories of Goods 146 Making the Connection 5-4: Should the Government or the Airlines Screen Luggage at Airports? 147 Public Goods and Common Resources 148 The Demand for a Public Good 149 The Optimal Quantity of a Public Good 150 Solved Problem 5-2: Determining the Optimal Level of Public Goods 151 Common Resources 153 Conclusion 155 AN INSIDE LOOK: Two Approaches to Fighting Global Warming: Kyoto Protocol and the Chicago Climate Exchange 156 CHAPTER 6: Elasticity: The Responsiveness of Demand and Supply 164 DO PEOPLE CARE ABOUT THE PRICES OF BOOKS? 164 The Price Elasticity of Demand and Its Measurement 166 Measuring the Price Elasticity of Demand 166 Elastic Demand and Inelastic Demand 167 An Example of Computing Price Elasticities 167 The Midpoint Formula 168 Solved Problem 6-1: Calculating the Price Elasticity of Demand for Wheat Using the Midpoint Formula 169 When Demand Curves Intersect, the Flatter Curve Is More Elastic 170 Polar Cases of Perfectly Elastic and Perfectly Inelastic Demand 170 "Don't Let This Happen To You!" Don't Confuse Inelastic with Perfectly Inelastic 172 What Determines the Price Elasticity of Demand for a Product? 172 Availability of Close Substitutes 172 Passage of Time 173 Luxuries versus Necessities 173 Definition of the Market 173 Making the Connection 6-1: The Price Elasticity of Demand for Breakfast Cereal 173 Share of the Good in the Consumer's Budget 174 Is the Demand for Books Perfectly Inelastic? 174 The Relationship between Price Elasticity and Total Revenue 174 Elasticity and Revenue with a Linear Demand Curve 175 Solved Problem 6-2: Price and Revenue Don't Always Move in the Same Direction 176 Estimating Price Elasticity of Demand 178 Making the Connection 6-2: Determining the Price Elasticity of Demand for DVDs by Market Experiment 178 Other Demand Elasticities 178 Cross-Price Elasticity of Demand 179 Income Elasticity of Demand 180 Making the Connection 6-3: Price Elasticity, Cross-Price Elasticity, and Income Elasticity in the Market for Alcoholic Beverages 180 Using Elasticity to Analyze the Disappearing Family Farm 181 Solved Problem 6-3: Using Price Elasticity to Analyze the Drug Problem 182 The Price Elasticity of Supply 183 Measuring the Price Elasticity of Supply 183 Determinants of the Price Elasticity of Supply 184 Making The Connection 6-4: Why Are Oil Prices So Unstable? 184 Polar Cases of Perfectly Elastic and Perfectly Inelastic Supply 185 Using Price Elasticity of Supply to Predict Changes in Price 185 Conclusion 187 AN INSIDE LOOK: Do People Care about the Prices of Books on Amazon.com? 190 Part 3: Firms in the Domestic and International Economies CHAPTER 7: Firms, the Stock Market, and Corporate Governance 198 GOOGLE: FROM DORM ROOM TO WALL STREET198 Types of Firms 200 Who Is Liable? Limited and Unlimited Liability 200 Making the Connection 7-1: What's in a "Name"? Lloyd's of London Learns about Unlimited Liability the Hard Way 201 Corporations Earn the Majority of Revenue and Profits 202 The Structure of Corporations and the Principal-Agent Problem 202 Corporate Structure and Corporate Governance 202 Solved Problem 7-1: Does the Principal-Agent Problem Also Apply to the Relationship between Managers and Workers? 203 How Firms Raise Funds 204 Sources of External Funds 204 Stock and Bond Markets Provide Capital--and Information 205 "Don't Let This Happen To You!" When Google Shares Change Hands, Google Doesn't Get the Money 206 Making the Connection 7-2: Following General Electric's Stock and Bond Prices in the Financial Pages 207 Using Financial Statements to Evaluate a Corporation 208 Making the Connection 7-3: A Bull in China's Financial Shop 209 The Income Statement 210 The Balance Sheet 211 Understanding the Business Scandals of 2002 211 Solved Problem 7-2: What Makes a Good Board of Directors? 212 Conclusion 213 AN INSIDE LOOK: Google's Initial Public Offering 214 CHAPTER 7 APPENDIX: Tools to Analyze Firms' Financial Information 220 Using Present Value to Make Investment Decisions 220 Solved Problem 7A-1: How to Receive Your Contest Winnings 222 Using Present Value to Calculate Bond Prices 223 Using Present Value to Calculate Stock Prices 223 A Simple Formula for Calculating Stock Prices 224 Going Deeper into Financial Statements 225 Analyzing Income Statements 225 Analyzing Balance Sheets 226 Key Terms 227 Review Questions 227 Problems and Applications 228 CHAPTER 8: Comparative Advantage and the Gains from International Trade 230 SUGAR QUOTA DRIVES U.S.CANDY MANUFACTURERS OVERSEAS 230 An Overview of International Trade 232 The Importance of Trade to the U.S. Economy 232 U.S. International Trade in a World Context 233 Making the Connection 8-1: Has Outsourcing Hurt the U.S. Economy? 234 Comparative Advantage: The Basis of All Trade 235 A Brief Review of Comparative Advantage 235 Comparative Advantage in International Trade 235 The Gains from Trade 236 Increasing Consumption through Trade 237 Solved Problem 8-1: The Gains from Trade 238 Why Don't We See Complete Specialization? 240 Does Anyone Lose as a Result of International Trade? 240 "Don't Let This Happen To You!" Remember That Trade Creates Both Winners and Losers 241 Where Does Comparative Advantage Come From? 241 Making the Connection 8-2: Why Is Dalton, Georgia, the Carpet-Making Capital of the World? 242 Comparative Advantage Over Time: The Rise and Fall--and Rise--of the U.S. Consumer Electronics Industry 242 Government Policies That Restrict Trade 243 Tariffs 245 Quotas 246 Measuring the Economic Impact of the Sugar Quota 247 Solved Problem 8-2: Measuring the Economic Effect of a Quota 247 The High Cost of Preserving Jobs with Tariffs and Quotas 249 Gains from Unilateral Elimination of Tariffs and Quotas 249 Other Barriers to Trade 250 The Argument over Trade Policies and Globalization 250 Why Do Some People Oppose the World Trade Organization? 250 Making the Connection 8-3: The Unintended Consequences of Banning Goods Made with Child Labor 251 Making the Connection 8-4: Has NAFTA Helped or Hurt the U.S. Economy? 253 Dumping 254 Positive versus Normative Analysis (Once Again) 255 Conclusion 255 AN INSIDE LOOK: The United States and Australia Reduce Trade Barriers 256 CHAPTER 8 APPENDIX: Multinational Firms 263 Multinational Firms 263 A Brief History of Multinational Enterprises 263 Strategic Factors in Moving from Domestic to Foreign Markets 264 Making the Connection 8A-1: Have Multinational Corporations Reduced Employment and Lowered Wages in the United States? 266 Challenges to U.S. Firms in Foreign Markets 267 Competitive Advantages of U.S. Firms 267 Key Terms 268 Review Questions 268 Problems and Applications 268 Part 4: Microeconomic Foundations: Consumers and Firms CHAPTER 9: Consumer Choice and Behavioral Economics 270 CAN LEBRON JAMES GET YOU TO DRINK POWERADE? 270 Utility and Consumer Decision Making 272 The Economic Model of Consumer Behavior in a Nutshell 272 Utility 272 The Principle of Diminishing Marginal Utility 273 The Rule of Equal Marginal Utility per Dollar Spent 273 Solved Problem 9-1: Finding the Optimal Level of Consumption 277 What If the Rule of Equal Marginal Utility per Dollar Does Not Hold? 278 "Don't Let This Happen To You!" Equalize Marginal Utilities per Dollar 279 The Income Effect and Substitution Effect of a Price Change 280 Where Demand Curves Come From 281 Social Influences on Decision Making 282 The Effects of Celebrity Endorsements 283 Making the Connection 9-1: Why Do Firms Pay Tiger Woods to Endorse Their Products? 283 Network Externalities 283 Does Fairness Matter? 284 Making the Connection 9-2: Professor Krueger Goes to the Super Bowl 287 Behavioral Economics: Do People Make Their Choices Rationally? 287 Ignoring Nonmonetary Opportunity Costs 287 Business Implications of Consumers Ignoring Nonmonetary Opportunity Costs 288 Failing to Ignore Sunk Costs 289 Being Unrealistic about Future Behavior 289 Making the Connection 9-3: Why Don't Students Study More? 290 Solved Problem 9-2: How Do You Get People to Save More of Their Income? 290 Conclusion 291 AN INSIDE LOOK: Can Whoopi Goldberg Get You to Buy Slim-Fast? 292 CHAPTER 9 APPENDIX: Using Indifference Curves and Budget Lines to Understand Consumer Behavior 298 Consumer Preferences 298 Indifference Curves 298 The Slope of an Indifference Curve 299 Can Indifference Curves Ever Cross? 300 The Budget Constraint 300 Choosing the Optimal Consumption of Pizza and Coke 301 Making the Connection 9A-1: Dell Determines the Optimal Mix of Products 302 How a Price Change Affects Optimal Consumption 303 Solved Problem 9A-1: When Does a Price Change Make a Consumer Better Off? 304 Deriving the Demand Curve 305 The Income Effect and the Substitution Effect of a Price Change 305 How a Change in Income Affects Optimal Consumption 307 The Slope of the Indifference Curve, the Slope of the Budget Line, and the Rule of Equal Marginal Utility per Dollar 307 The Rule of Equal Marginal Utility per Dollar Revisited 309 Key Terms 310 Problems and Applications 310 CHAPTER 10: Technology, Production, and Costs 312 SONY USES A COST CURVE TO DETERMINE THE PRICE OF RADIOS 312 Technology: An Economic Definition 314 Making the Connection 10-1: Improving Inventory Control at Wal-Mart 314 The Short Run and the Long Run 315 The Difference between Fixed Costs and Variable Costs 315 Making the Connection 10-2: Fixed Costs in the Publishing Industry 316 Implicit Costs versus Explicit Costs 316 The Production Function 317 A First Look at the Relationship between Production and Cost 318 The Marginal Product of Labor and the Average Product of Labor 319 The Law of Diminishing Returns 319 Graphing Production 320 Making the Connection 10-3: Adam Smith's Famous Account of the Division of Labor in a Pin Factory 320 The Relationship between Marginal and Average Product 320 An Example of Marginal and Average Values: College Grades 322 The Relationship between Short-Run Production and Short-Run Cost 323 Marginal Cost 323 Why Are the Marginal and Average Cost Curves U-Shaped? 323 Solved Problem 10-1: The Relationship between Marginal Cost and Average Cost 325 Graphing Cost Curves 325 Costs in the Long Run 327 Economies of Scale 327 Long-Run Average Total Cost Curves for Bookstores 327 Solved Problem 10-2: Using Long-Run Average Cost Curves to Understand Business Strategy 329 Making the Connection 10-4: The Colossal River Rouge: Diseconomies of Scale at the Ford Motor Company 331 "Don't Let This Happen To You!" Don't Confuse Diminishing Returns with Diseconomies of Scale 332 Conclusion 332 AN INSIDE LOOK: Using Long-Run Average Cost Curves to Analyze Expansion at Sony and Samsung 334 CHAPTER 10 APPENDIX: Using Isoquants and Isocosts to Understand Production and Cost 342 Isoquants 342 An Isoquant Graph 342 The Slope of an Isoquant 342 Isocost Lines 343 Graphing the Isocost Line 343 The Slope and Position of the Isocost Line 343 Choosing the Cost-Minimizing Combination of Capital and Labor 344 Different Input Price Ratios Lead to Different Input Choices 345 Making the Connection 10A-1: The Changing Input Mix in Walt Disney Film Animation 346 Another Look at Cost Minimization 347 Solved Problem 10A-1: Determining the Optimal Combination of Inputs 348 The Expansion Path 349 Key Terms 350 Problems and Applications 350 Part 5: Market Structure and Firm Strategy CHAPTER 11: Firms in Perfectly Competitive Markets 352 PERFECT COMPETITION IN THE MARKET FOR ORGANIC APPLES 352 Perfectly Competitive Markets 355 A Perfectly Competitive Firm Cannot Affect the Market Price 355 The Demand Curve for the Output of a Perfectly Competitive Firm 356 How a Firm Maximizes Profit in a Perfectly Competitive Market 356 Revenue for a Firm in a Perfectly Competitive Market 357 "Don't Let This Happen To You!" Don't Confuse the Demand Curve for Farmer Whaples's Wheat with the Market Demand Curve for Wheat 357 Determining the Profit-Maximizing Level of Output 358 Illustrating Profit or Loss on the Cost Curve Graph 360 Showing a Profit on the Graph 361 Solved Problem 11-1: Determining Profit-Maximizing Price and Quantity 361 Illustrating When a Firm Is Breaking Even or Operating at a Loss 363 "Don't Let This Happen To You!" Remember That Firms Maximize Total Profit, Not Profit per Unit 364 Making the Connection 11-1: Losing Money in the Medical Screening Industry 365 Deciding Whether to Produce or to Shut Down in the Short Run 366 Making the Connection 11-2: When to Close a Laundry 366 The Supply Curve of the Firm in the Short Run 367 The Market Supply Curve in a Perfectly Competitive Industry 368 "If Everyone Can Do It, You Can't Make Money At It"-- The Entry and Exit of Firms in the Long Run 368 Economic Profit and the Entry or Exit Decision 369 Long-Run Equilibrium in a Perfectly Competitive Market 372 The Long-Run Supply Curve in a Perfectly Competitive Market 372 Increasing-Cost and Decreasing-Cost Industries 374 Perfect Competition and Efficiency 374 Making the Connection 11-3: The Decline of Apple Production in New York State 374 Productive Efficiency 375 Solved Problem 11-2: How Productive Efficiency Benefits Consumers 375 Allocative Efficiency 377 Conclusion 377 AN INSIDE LOOK: Firms Crank Out Organic Snacks 378 CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting 386 STARBUCKS: GROWTH THROUGH PRODUCT DIFFERENTIATION 386 Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market 388 The Demand Curve for a Monopolistically Competitive Firm 388 Marginal Revenue for a Firm with a Downward-Sloping Demand Curve 389 How a Monopolistically Competitive Firm Maximizes Profits in the Short Run 391 Solved Problem 12-1: How Not to Maximize Profits 392 What Happens to Profits in the Long Run? 393 How Does Entry of New Firms Affect the Profits of Existing Firms? 393 "Don't Let This Happen To You!" Don't Confuse Zero Economic Profit with Zero Accounting Profit 394 Making the Connection 12-1: The Rise and Fall of Apple's Macintosh Computer 395 Solved Problem 12-2: The Short Run and the Long Run for the Macintosh 396 Is Zero Economic Profit Inevitable in the Long Run? 397 Making the Connection 12-2: Staying One Step Ahead of the Competition: Eugene Schueller and L'Oreal 398 Comparing Perfect Competition and Monopolistic Competition 399 Excess Capacity under Monopolistic Competition 400 Is Monopolistic Competition Inefficient? 400 How Consumers Benefit from Monopolistic Competition 400 Making the Connection 12-3: Abercrombie and Fitch: Can the Product Be Too Differentiated? 400 How Marketing Differentiates Products 401 Brand Management 401 Advertising 401 Defending a Brand Name 402 What Makes a Firm Successful? 403 Conclusion 403 AN INSIDE LOOK: Starbucks and McDonald's Cater to Insomniacs 404 CHAPTER 13: Oligopoly: Firms in Less Competitive Markets 412 COMPETING WITH WAL-MART 412 Oligopoly and Barriers to Entry 414 Barriers to Entry 415 Economies of Scale 415 Ownership of a Key Input 416 Government-Imposed Barriers 416 Using Game Theory to Analyze Oligopoly 417 A Duopoly Game: Price Competition between Two Firms 418 Making the Connection 13-1: A Beautiful Mind: Game Theory Goes to the Movies 419 Firm Behavior and the Prisoners' Dilemma 419 "Don't Let This Happen To You!" Don't Misunderstand Why Each Manager Ends Up Charging a Price of $150 420 Solved Problem 13-1: Is Advertising a Prisoners' Dilemma for Coca-Cola and Pepsi? 420 Making the Connection 13-2: Is There a Dominant Strategy for Bidding on eBay? 421 Can Firms Escape the Prisoners' Dilemma? 422 Making the Connection 13-3: American Airlines and Northwest Airlines Fail to Cooperate on a Price Increase 423 Cartels: The Case of OPEC 424 Sequential Games 426 Deterring Entry 426 Solved Problem 13-2: Is Deterring Entry Always a Good Idea? 427 Bargaining 428 The Five Competitive Forces Model 430 Competition from Existing Firms 430 The Threat from New Entrants 430 Competition from Substitute Goods or Services 430 Bargaining Power of Buyers 431 Bargaining Power of Suppliers 431 Making the Connection: Is Southwest's Business Strategy More Important Than the Structure of the Airline Industry? 431 Conclusion 433 AN INSIDE LOOK: Finding a Market Niche against Wal-Mart 434 CHAPTER 14: Monopoly and Antitrust Policy 442 TIME WARNER RULES MANHATTAN 442 Is Any Firm Ever Really a Monopoly? 444 Making the Connection 14-1: Is Xbox a Close Substitute for PlayStation 2? 444 Where Do Monopolies Come From? 445 Entry Blocked by Government Action 445 Making the Connection 14-2: The End of the Christmas Plant Monopoly 446 Control of a Key Resource 447 Making the Connection 14-3: Are Diamond (Profits) Forever? The De Beers Diamond Monopoly 447 Network Externalities 448 Natural Monopoly 449 Solved Problem 14-1: Is the "Proxy Business" a Natural Monopoly? 450 How Does a Monopoly Choose Price and Output? 451 Marginal Revenue Once Again 451 Profit Maximization for a Monopolist 453 Solved Problem 14-2: Finding Profit-Maximizing Price and Output for a Monopolist 454 "Don't Let This Happen To You!" Don't Assume That Charging a Higher Price Is Always More Profitable for a Monopolist 455 Does Monopoly Reduce Economic Efficiency? 455 Comparing Monopoly and Perfect Competition 455 Measuring the Efficiency Losses from Monopoly 456 How Large Are the Efficiency Losses Due to Monopoly? 457 Market Power and Technological Change 458 Government Policy toward Monopoly 458 Antitrust Laws and Antitrust Enforcement 460 Mergers: The Trade-off between Market Power and Efficiency 460 The Department of Justice and the Federal Trade Commission Merger Guidelines 461 Making the Connection 14-4: The Antitrust Case against Microsoft 463 Regulating Natural Monopolies 464 Conclusion 465 AN INSIDE LOOK: A "Monopoly Mindset" in the Cable Industry? 466 CHAPTER 15: Pricing Strategy 474 GETTING INTO WALT DISNEY WORLD: ONE PRICE DOES NOT FIT ALL 474 Pricing Strategy and the Law of One Price 476 Arbitrage 476 Solved Problem 15-1: Is Arbitrage Just a Rip-off? 477 Why Don't All Firms Charge the Same Price? 477 Price Discrimination: Charging Different Prices for the Same Product 478 The Requirements for Successful Price Discrimination 478 Solved Problem 15-2: How Dell Computer Uses Price Discrimination to Increase Profits 480 Airlines: The Kings of Price Discrimination 481 Making the Connection 15-1: How Colleges Use Yield Management 482 Perfect Price Discrimination 483 Price Discrimination across Time 484 Can Price Discrimination Be Illegal? 484 Other Pricing Strategies 485 "Don't Let This Happen To You!" Don't Confuse Price Discrimination with Other Types of Discrimination 486 Odd Pricing: Why Is the Price $2.99 instead of $3.00? 486 Why Do Firms Use Cost-Plus Pricing? 487 Making the Connection 15-2: Cost-Plus Pricing in the Publishing Industry 487 Pricing with Two-Part Tariffs 488 Conclusion 491 AN INSIDE LOOK: Increasing Business at Walt Disney World 492 Part 6: Markets for Factors of Production CHAPTER 16: The Markets for Labor and Other Factors of Production 498 WHY ARE THE NEW YORKMETS PAYING CARLOS BELTRAN A $17 MILLION SALARY? 498 The Demand for Labor 500 The Marginal Revenue Product of Labor 500 Solved Problem 16-1: Hiring Decisions by a Firm That Is a Price Maker 502 Factors That Shift the Labor Demand Curve 503 The Supply of Labor 504 Factors That Shift the Labor Supply Curve 506 Equilibrium in the Labor Market 507 The Effect on Equilibrium Wages of a Shift in Labor Demand 507 Making the Connection 16-1: Will Your Future Income Depend on Which Courses You Take in College? 508 The Effect on Equilibrium Wages of a Shift in Labor Supply 509 Making the Connection 16-2: Why Didn't the Great Immigration Waves of the Early Twentieth Century Cause Wages to Fall? 510 Explaining Differences in Wages 511 "Don't Let This Happen To You!" Remember That Prices and Wages Are Determined at the Margin 512 Making the Connection 16-3: Technology and the Earnings of "Superstars" 513 Compensating Differentials 513 Is Job Safety Legislation Good for Workers? 514 Discrimination 514 Solved Problem 16-2: Is "Comparable Worth" Legislation the Answer to Closing the Gap between Men's and Women's Pay? 516 Labor Unions 519 Personnel Economics 520 Should Workers' Pay Depend on How Much They Work or on How Much They Produce? 520 Making the Connection 16-4: Raising Pay, Productivity, and Profits at Safelite AutoGlass 521 Other Considerations in Setting Compensation Schemes 522 The Markets for Capital and Natural Resources 523 The Market for Capital 523 The Market for Natural Resources 523 Monopsony 525 The Marginal Productivity Theory of Income Distribution 525 Conclusion 525 AN INSIDE LOOK: Is a College Football Coach Worth a $1.1 Million Salary? 526 Part 7: Information, Taxes, and the Distribution of Income CHAPTER 17: The Economics of Information 534 STATE FARM EXPERIENCES THE HAZARDS OF SELLING INSURANCE 534 Asymmetric Information 536 Adverse Selection and the Market for "Lemons" 536 Reducing Adverse Selection in the Car Market 537 Asymmetric Information in the Market for Insurance 537 Reducing Adverse Selection in the Insurance Market 538 Making the Connection 17-1: Adverse Selection, Annuities, and Social Security Reform 538 Moral Hazard 539 "Don't Let This Happen To You!" Don't Confuse Adverse Selection with Moral Hazard 539 Adverse Selection and Moral Hazard in Financial Markets 540 Reducing Adverse Selection and Moral Hazard in Financial Markets 540 Making the Connection 17-2: Moral Hazard, Big Time: The Accounting Scandals of 2002 541 Adverse Selection and Moral Hazard in Labor Markets 542 Solved Problem 17-1: Changing Workers' Compensation to Reduce Adverse Selection and Moral Hazard 543 The Winner's Curse: When Is It Bad to Win an Auction? 543 Making the Connection 17-3: Is There a Winner's Curse in the Marriage Market? 545 When Does the Winner's Curse Apply? 545 Solved Problem 17-2: Auctions, Available Information, and the Winner's Curse 545 Pacific Telesis Uses the Winner's Curse to Its Own Advantage 546 Making the Connection 17-4: Want to Make Some Money? Try Auctioning a Jar of Coins 547 Conclusion 547 AN INSIDE LOOK: Insurance Companies Wrestle with Asymmetric Information Problems 548 CHAPTER 18: The Tax System and the Distribution of Income 554 SHOULD THE GOVERNMENT USE THE TAX SYSTEM TO REDUCE INEQUALITY? 554 The Tax System 556 An Overview of the U.S. Tax System 556 Progressive and Regressive Taxes 557 Making the Connection 18-1: Which Groups Pay the Most in Federal Taxes? 558 Marginal and Average Income Tax Rates 560 The Corporate Income Tax 560 Evaluating Taxes 560 Making the Connection 18-2: Should the United States Shift to a Consumption Tax? 562 Tax Incidence Revisited: The Effect of Price Elasticity on Who Actually Bears the Burden of a Tax 564 "Don't Let This Happen To You!" Remember Not to Confuse Who Pays the Tax with Who Bears the Burden of the Tax 565 Making the Connection 18-3: Do Corporations Really Bear the Burden of the Federal Corporate Income Tax? 565 Solved Problem 18-1: The Effect of Price Elasticity on the Excess Burden of a Tax 566 The Distribution of Income 567 Measuring the Distribution of Income and Poverty 567 Explaining Income Inequality 568 Showing the Income Distribution with a Lorenz Curve 570 Problems in Measuring Poverty and the Distribution of Income 571 Solved Problem 18-2: Are Many Individuals Stuck in Poverty? 572 Poverty and the Distribution of Income around the World 573 Conclusion 575 AN INSIDE LOOK: Did More Progressive Taxes Make the Distribution of Income More Equal in the United Kingdom? 576 Glossary G-1 Company Index I-1 Subject Index I-3 Credits C-1show more

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