MICROECONOMICS - Willkommen · microeconomics principles and ... chapter 7 production, inputs, and...

MICROECONOMICSPrinciples and Policy

Eleventh Edition

William J. BaumolNew York University and Princeton University

Alan S. BlinderPrinceton University

SOUTH-WESTERNCENGAGE Learning-

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

BRIEF CONTENTS

P A R T I GETTING ACQUAINTED WITH ECONOMICS

CHAPTER I WHAT IS ECONOMICS? 3

CHAPTER 2 THE ECONOMY: MYTH AND REALITY 21

CHAPTER 3 THE FUNDAMENTAL ECONOMIC PROBLEM: SCARCITY AND CHOICE

CHAPTER 4 SUPPLY AND DEMAND: AN INITIAL LOOK 55

39

PART % •> THE BUILDING BLOCKS OF DEMAND AND SUPPLY

CHAPTER 5 CONSUMER CHOICE: INDIVIDUAL AND MARKET DEMAND 83

CHAPTER 6 DEMAND AND ELASTICITY 107

CHAPTER 7 PRODUCTION, INPUTS, AND COST: BUILDING BLOCKS FOR SUPPLYANALYSIS 127

CHAPTER 8 OUTPUT, PRICE, AND PROFIT: THE IMPORTANCE OF

MARGINAL ANALYSIS 155

CHAPTER 9 INVESTING IN BUSINESS: STOCKS AND BONDS 177

PART3

CHAPTER 10 THE FIRM AND THE INDUSTRY UNDER PERFECT COMPETITION

CHAPTER 11 MONOPOLY 217

CHAPTER 12 BETWEEN COMPETITION AND MONOPOLY 235

CHAPTER 13 LIMITING MARKET POWER: REGULATION AND ANTITRUST 263

197

PART 4 THE VIRTUES AND LIMITATIONS OF MARKETS

CHAPTER 14 THE CASE FOR FREE MARKETS I: THE PRICE SYSTEM 287

CHAPTER 15 THE SHORTCOMINGS OF FREE MARKETS 309

CHAPTER 16 THE MARKET'S PRIME ACHIEVEMENT: INNOVATION AND GROWTH 333

CHAPTER 17 EXTERNALITIES, THE ENVIRONMENT, AND NATURAL RESOURCES 355

CHAPTER is TAXATION AND RESOURCE ALLOCATION 377

PART5 TTIE^ISTMBUTI^OFINCOME

CHAPTER 19 PRICING THE FACTORS OF PRODUCTION 397

CHAPTER 20 LABOR AND ENTREPRENEURSHIP: THE HUMAN INPUTS 419

CHAPTER 21 POVERTY, INEQUALITY, AND DISCRIMINATION 445

PART 6 THE UNITED STATES IN THE WORLD ECONOMY

CHAPTER 22 INTERNATIONAL TRADE AND COMPARATIVE ADVANTAGE 467

TABLE OF CONTENTS

Preface xxv

PART i GETTING ACQUAINTED WITH ECONOMICS i

CHAPTER I W H A T IS ECONOMICS? 3

IDEAS FOR BEYOND THE FINAL EXAM 4Idea 1: How Much Does It Really Cost? 4Idea 2: Attempts to Repeal the Laws of Supply and Demand—The Market Strikes BackIdea 3: The Surprising Principle of Comparative Advantage 5Idea 4: Trade is a Win-Win Situation 5Idea 5: The Importance of Thinking at the Margin 6Idea 6: Externalities—A Shortcoming of the Market Cured by Market Methods 6Idea 7: The Trade-Off between Efficiency and Equality 7Epilogue 7

INSIDE THE ECONOMIST'S TOOL KIT 7Economics as a Discipline 7The Need for Abstraction 7The Role of Economic Theory 10What Is an Economic Model? 11Reasons for Disagreements: Imperfect Information and Value Judgments 11

Summary 12Key Terms 13Discussion Questions 13

I APPENDIX I Using Graphs: A Review i3

GRAPHS USED IN ECONOMIC ANALYSIS i3

TWO-VARIABLE DIAGRAMS i3

THE DEFINITION AND MEASUREMENT OF SLOPE 14

RAYS THROUGH THE ORIGIN AND 450 LINES 16

SQUEEZING THREE DIMENSIONS INTO TWO: CONTOUR MAPS 17

Summary 18Key Terms 18Test Yourself 19

CHAPTER 2 T H E ECONOMY: MYTH AND REALITY 21

THE AMERICAN ECONOMY: ATHUMBNAIL SKETCH wA Private-Enterprise Economy 23A Relatively "Closed" Economy 23A Growing Economy . . . 24But with Bumps along the Growth Path 24

IX

CONTENTS

THE INPUTS: LABOR AND CAPITAL 36The American Workforce: Who Is in It? 27The American Workforce: What Does It Do? 28The American Workforce: What It Earns 29Capital and Its Earnings 30

THE OUTPUTS: WHAT DOES AMERICA PRODUCE? 3o

THE CENTRAL ROLE OF BUSINESS FIRMS 31

WHAT'S MISSING FROM THE PICTURE? GOVERNMENT 3*The Government as Referee 33 v __The Government as Business Regulator 33Government Expenditures 34Taxes in America 35The Government as Redistributor 36

CONCLUSION: IT'S A MIXED ECONOMY 36


CHAPTER 3 T H E FUNDAMENTAL ECONOMIC PROBLEM: SCARCITY AND CHOICE 39

ISSUE: WHATTO DO ABOUT THE BUDGET DEFICIT? 40

SCARCITY, CHOICE, AND OPPORTUNITY COST 40Opportunity Cost and Money Cost 41Optimal Choice: Not Just Any Choice 42

SCARCITY AND CHOICE FORA SINGLE FIRM 4?The Production Possibilities Frontier 43The Principle of Increasing Costs 44

SCARCITY AND CHOICE FOR THE ENTIRE SOCIETY 45Scarcity and Choice Elsewhere in the Economy 45

ISSUE REVISITED: COPING WITH THE BUDGET DEFICIT 46

THE CONCEPT OF EFFICIENCY 47

THE THREE COORDINATION TASKS OF ANY ECONOMY 47

TASK 1. HOWTHE MARKET FOSTERS EFFICIENT RESOURCE ALLOCATION 48The Wonders of the Division of Labor 48

The Amazing Principle of Comparative Advantage 49

TASK %. MARKET EXCHANGE AND DECIDING HOW MUCH OF EACH GOOD TO PRODUCE 50

TASK3. HOWTO DISTRIBUTE THE ECONOMY'S OUTPUTS AMONG CONSUMERS 50Summary 52Key Terms 53Test Yourself 53Discussion Questions 53

CHAPTER 4 SUPPLY AND DEMAND: A N INITIAL LOOK 55

PUZZLE: WHAT HAPPENED TO OIL PRICES? 56

THE INVISIBLE HAND 56

CONTENTS

DEMAND AND QUANTITY DEMANDED 57The Demand Schedule 58The Demand Curve 58Shifts of the Demand Curve 58

SUPPLY AND QUANTITY SUPPLIED 61The Supply Schedule and the Supply Curve 61Shifts of the Supply Curve 62

SUPPLY AND DEMAND EQUILIBRIUM 64The Law of Supply and Demand, 66

EFFECTS OF DEMAND SHIFTS ON SUPPLY-DEMAND EQUILIBRIUM 66

SUPPLY SHIFTS AND SUPPLY-DEMAND EQUILIBRIUM 67THOSE LEAPING OIL PRICES: PUZZLE RESOLVED 68

Application: Who Really Pays that Tax? 69

BATTLING THE INVISIBLE HAND: THE MARKET FIGHTS BACK 70Restraining the Market Mechanism: Price Ceilings 70Case Study: Rent Controls in New York City 72Restraining the Market Mechanism: Price Floors 73Case Study: Farm Price Supports and the Case of Sugar Prices 73A Can of Worms 74

A SIMPLE BUT POWERFUL LESSON 76

Summary 76Key Terms 77Test Yourself 77Discussion Questions 78

PART % THE BUILDING BLOCKS OF DEMAND AND SUPPLY 81

CHAPTER 5 CONSUMER CHOICE: INDIVIDUAL AND MARKET DEMAND 83

PUZZLE: WHY SHOULDN'T WATER BE WORTH MORE THAN DIAMONDS? 84

SCARCITY AND DEMAND 84

UTILITY: A TOOL TO ANALYZE PURCHASE DECISIONS 85

The Purpose of Utility Analysis: Analyzing How People Behave, Not What They Think 85Total versus Marginal Utility 86The "Law" of Diminishing Marginal Utility 86Using Marginal Utility: The Optimal Purchase Rule 87From Diminishing Marginal Utility to Downward-Sloping Demand Curves 90

BEHAVIORAL ECONOMICS: ARE ECONOMIC DECISIONS REALLY MADE "RATIONALLY?" 93

CONSUMER CHOICE AS ATRADE-OFF: OPPORTUNITY COST 93Consumer's Surplus: The Net Gain from a Purchase 93

RESOLVING THE DIAMOND-WATER PUZZLE 95Income and Quantity Demanded 95

FROM INDIVIDUAL DEMAND CURVES TO MARKET DEMAND CURVES 96Market Demand as a Horizontal Sum of the Demand Curves of Individual Buyers 96The "Law" of Demand 97Exceptions to the "Law" of Demand 97

xii CONTENTS


I APPENDIX I Analyzing Consumer Choice Graphically: Indifference Curve Analysis 99

GEOMETRY OF AVAILABLE CHOICES: THE BUDGET LINE 100Properties of the Budget Line 100Changes in the Budget Line 101 i

WHAT THE CUSTOMER PREFERS: PROPERTIES OF THE INDIFFERENCE CURVE 101

THE SLOPES OF INDIFFERENCE CURVES AND BUDGET LINES io3Tangency Conditions 104Consequences of Income Changes: Inferior Goods 104Consequences of Price Changes: Deriving the Demand Curve 105


CHAPTER 6 D E M A N D A N D ELASTICITY 107

ISSUE: WILL TAXING CIGARETTES MAKE TEENAGERS STOP SMOKING? 108

ELASTICITY: THE MEASURE OF RESPONSIVENESS 108Price Elasticity of Demand and the Shapes of Demand Curves 111

PRICE ELASTICITY OF DEMAND: ITS EFFECT ON TOTAL REVENUE AND TOTALEXPENDITURE n 3

ISSUE REVISITED: WILL A CIGARETTE TAX DECREASE TEENAGE SMOKING SIGNIFICANTLY? 114

WHAT DETERMINES DEMAND ELASTICITY? 115

ELASTICITY AS A GENERAL CONCEPT 1161. Income Elasticity 1162. Price Elasticity of Supply 117

3. Cross Elasticity of Demand 117

THE TIME PERIOD OF THE DEMAND CURVE AND ECONOMIC DECISION MAKING 118

REAL-WORLD APPLICATION: POLAROID VERSUS KODAK 130

IN CONCLUSION 12!iSummary 121Key Terms 121Test Yourself 121Discussion Questions 122

I APPENDLX I How Can We Find A Legitimate Demand Curve From Historical Statistics? 7??

AN ILLUSTRATION: DID THE ADVERTISING PROGRAM WORK? i*3

HOW CAN WE FIND A LEGITIMATE DEMAND CURVE FROM THE STATISTICS? 134

CHAPTER 7 PRODUCTION, INPUTS, AND COST: BUILDING BLOCKS FOB. SUPPLY ANALYSIS 127

PUZZLE: How CAN WE TELL IF LARGER FIRMS ARE MORE EFFICIENT? 138

CONTENTS

SHORT-RUN VERSUS LONG-RUN COSTS: WHAT MAKES AN INPUT VARIABLE?The Economic Short Run Versus the Economic Long Run 129Fixed Costs and Variable Costs 129

PRODUCTION, INPUT CHOICE, AND COST WITH ONE VARIABLE INPUT i3oTotal, Average, and Marginal Physical Products 130Marginal Physical Product and the "Law" of Diminishing Marginal Returns 131The Optimal Quantity of an Input and Diminishing Returns 132

MULTIPLE INPUT DECISIONS: THE CHOICE OF OPTIMAL INPUT COMBINATIONS i33Substitutability: The Choice of InputiProportions 134The Marginal Rule for Optimal Input Proportions 135Changes in Input Prices and Optimal Input Proportions 136

COST AND ITS DEPENDENCE ON OUTPUT i 3 7

Input Quantities and Total, Average, and Marginal Cost Curves 137The Law of Diminishing Marginal Productivity and the U-Shaped Average Cost Curve 140The Average Cost Curve in the Short and Long Run 141

ECONOMIES OF SCALE 143The "Law" of Diminishing Returns and Returns to Scale 143Historical Costs versus Analytical Cost Curves 144

RESOLVING THE ECONOMIES OF SCALE PUZZLE 145Cost Minimization in Theory and Practice 146


I APPENDIX I Production Indifference Curves 149

CHARACTERISTICS OF THE PRODUCTION INDIFFERENCE CURVES, OR ISOQUANTS 149

THE CHOICE OF INPUT COMBINATIONS 150

COST MINIMIZATION, EXPANSION PATH, AND COST CURVES 151


CHAPTER 8 OUTPUT, PRICE, AND PROFIT: T H E IMPORTANCE OF MARGINAL ANALYSIS ISS

PUZZLE: CAN A COMPANY MAKE A PROFIT BY SELLING BELOW ITS COSTS? 157

PRICE AND QUANTITY: ONE DECISION, NOT TWO 157

TOTAL PROFIT: KEEP YOUR EYE ON T H E GOAL 158

ECONOMIC PROFIT AND OPTIMAL DECISION MAKING 158Total, Average, and Marginal Revenue 159Total, Average, and Marginal Cost 161Maximizat ion of Total Profit 161Profit Maximizat ion: A Graphical Interpretat ion 162

MARGINAL ANALYSIS AND MAXIMIZATION O F TOTAL PROFIT i 6 3Marginal Revenue a n d Marginal Cost: Guides to Opt imiza t ion 165Finding the Opt imal Price from Opt ima l O u t p u t 167

CONTENTS

GENERALIZATION: THE LOGIC O F MARGINAL ANALYSIS AND MAXIMIZATION 168Application: Fixed Cost a n d the profit-Maximizing Price 168

PUZZLE RESOLVED: USING MARGINAL ANALYSIS TO UNRAVEL THE CASE OFTHE "UNPROFITABLE" CALCULATOR 169

CONCLUSION: THE FUNDAMENTAL ROLE O F MARGINAL ANALYSIS 170

THE THEORY AND REALITY: A W O R D OF CAUTION 171

Summary 171Key Terms 172Test Yourself 172 '^Discussion Quest ions 172 —-

I APPENDIX I The Relationships Among Total, Average, And Marginal Data i?3

GRAPHICAL REPRESENTATION OF MARGINAL AND AVERAGE CURVES 174

Test Yourself 175

CHAPTER 9 INVESTING IN BUSINESS: STOCKS AND BONDS 177

PUZZLE #i: WHAT IN THE WORLD HAPPENED TO THE STOCK MARKET? 178

PUZZLE #3: THE STOCK MARKET'S UNPREDICTABILITY 178

CORPORATIONS AND THEIR UNIQUE CHARACTERISTICS 179Financing Corpora te Activity: Stocks and Bonds 180Plowback, or Retained Earnings 182Wha t Determines Stock Prices? The Role of Expected C o m p a n y Earnings 183

BUYING STOCKS AND BONDS i 8 3Selecting a Portfolio: Diversification 184

STOCK EXCHANGES AND THEIR FUNCTIONS 185Regulat ion of the Stock Market 186Stock Exchanges and Corpora te Capital N e e d s 187

SPECULATION 189

PUZZLE*? RESOLVED: UNPREDICTABLE STOCKPRICESAS "RANDOM WALKS" 190

PUZZLE # i REDUX: THE BOOM AND BUST OF THE U.S. STOCK MARKET 193

S u m m a r y 193Key Terms 193Test Yourself 193 'Discussion Quest ions 194

PART 3 MARKETS AND THE PRICE SYSTEM 195

CHAPTER 10 THE FIRM AND THE INDUSTRY UNDER PERFECT COMPETITION 197

PUZZLE: POLLUTION REDUCTION INCENTIVES THAT ACTUALLY INCREASE POLLUTION 198

PERFECT COMPETITION DEFINED 198

THE PERFECTLY COMPETITIVE FIRM 199The Firm's Demand Curve under Perfect Competition 199

CONTENTS

Short-Run Equilibrium for the Perfectly Competi t ive Firm 200Short-Run Profit: Graphic Representation 201The Case of Short-Term Losses 202Shutdown and Break-Even Analysis 202The Perfectly Competit ive Firm's Short-Run Supply Curve 204

THE PERFECTLY COMPETITIVE INDUSTRY 305The Perfectly Competit ive Industry 's Short-Run Supply Curve 205Industry Equilibrium in the Short Run 205Industry and Firm Equilibrium in the Long Run 206Zero Economic Profit: The Oppor tuni ty Cost of Capital 209The Long-Run Industry Supply Curve 210

PERFECT COMPETITION AND ECONOMIC EFFICIENCY 311PUZZLE RESOLVED: WHICH MORE EFFECTIVELY CUTS POLLUTION-THE CARROT OR THE STICK? 31a


C H A P T E R 11 M O N O P O L Y 217

PUZZLE: WHAT HAPPENED TO AT&T'S "NATURAL MONOPOLY" IN TELEPHONE SERVICE? 318

MONOPOLY DEFINED 318Sources of Monopoly: Barriers to Entry and Cost Advantages 219Natural Monopoly 220

THE MONOPOLIST'S SUPPLY DECISION 55211Determining the Profit-Maximizing Output 223Comparing Monopoly and Perfect Competi t ion 224Monopoly Is Likely to Shift Demand 225Monopoly Is Likely to Shift Cost Curves 226

CAN ANYTHING GOOD BE SAID ABOUT MONOPOLY?Monopoly May Aid Innovation 227Natural Monopoly: Where Single-firm Production Is Cheapest 227

PRICE DISCRIMINATION UNDER MONOPOLY 55257Is Price Discrimination Always Undesirable? 230

THE PUZZLE RESOLVED: COMPETITION IN TELEPHONE SERVICE a3o


C H A P T E R 12 B E T W E E N C O M P E T I T I O N A N D M O N O P O L Y 235

THREE PUZZLING ORSERVATIONS A36PUZZLE 1: WHY ARE THERE So MANY RETAILERS? ?36

PUZZLE a: WHY DO OLIGOPOLISTS ADVERTISE MORE THAN "MORE COMPETITIVE" FIRMS? a36

PUZZLE 3: WHY DO OLIGOPOLISTS SEEM TO CHANGE THEIR PRICES SO INFREQUENTLY? a36

MONOPOLISTIC COMPETITION $36Characteristics of Monopolistic Competi t ion 237Price and Output Determination under Monopolistic Competit ion 238

CONTENTS

The Excess Capaci ty Theorem and Resource Allocation 239

1ST PUZZLE RESOLVED: EXPLAINING THE ABUNDANCE OF RETAILERS a4o

OLIGOPOLY 2141

aND PUZZLE RESOLVED: WHY OLIGOPOUSTS ADVERTISE BUT PERFECTLY COMPETITIVE FIRMS GENERAUY DO NOT 341

W h y Oligopolistic Behavior Is So Difficult to Analyze 242A Shopping List 242

Sales Maximization: A n Oligopoly Mode l wi th In te rdependence Ignored 246

3RD PUZZLE RESOLVED: THE KINKED DEMAND CURVE MODEL 347

The Game-Theory A p p r o a c h 250 ,. Games wi th Dominan t Strategies 250 ^ -—

Games wi thou t Dominan t Strategies 252Other Strategies: The N a s h Equil ibrium 253Zero-Sum Games 253Repeated G a m e s 254

MONOPOLISTIC COMPETITION, OLIGOPOLY, AND PUBLIC WELFARE 2,57

A GLANCE BACKWARD: COMPARING THE FOUR MARKET FORMS 358

S u m m a r y 259Key Terms 260Test Yourself 260Discussion Quest ions 260

CHAPTER 13 LIMITING MARKET POWER: REGULATION AND ANTITRUST 263

THE PUBLIC INTEREST ISSUE: MONOPOLY POWER VERSUS MERE SIZE 2164

PART 1: ANTITRUST LAWS AND POLICIES 2165

MEASURING MARKET POWER: CONCENTRATION 2167Concentration: Definition and Measurement—The Herfindahl-Hirschman Index 267The Evidence of Concentration in Reality 269

A CRUCIAL PROBLEM FOR ANTITRUST: THE RESEMBLANCE OF MONOPOLIZATION AND VIGOROUSCOMPETITION 369

ANTICOMPETITIVE PRACTICES AND ANTITRUST 370Predatory Pricing 270

The Microsoft Case: Bottlenecks, Bundling, and Network Externalities 270

USE OF ANTITRUST LAWS TO PREVENT COMPETITION 371

PART as: REGULATION 273

WHAT IS REGULATION? 273PUZZLE: WHY DO REGULATORS OFTEN RAISE PRICES? a?3

SOME OBJECTIVES O F REGULATION 374Control of Market Power Resul t ing from Economics of Scale and Scope 274Universal Service and Rate Averaging 275

TWO KEY ISSUES THAT FACE REGULATORS 2,75Setting Prices to Protect C o n s u m e r s ' Interests and Al low Regulated Firms to Cover Their Cost 275Marginal versus Average Cost Pricing 276Prevent ing Monopo ly Profit b u t Keeping Incentives for Efficiency a n d Innovat ion 277

THE PROS AND CONS OF "BIGNESS" 278Economies of Large Size 278Required Scale for Innovation 279

CONTENTS xvii

DEREGULATION 279The Effects of Deregu la t ion 279

THE PUZZLE REVISITED: WHY REGULATORS OFTEN PUSH PRICES UPWARD

CONCLUDING OBSERVATIONS 2182


PART 4 THE VIRTUES AND LIMITATIONS OF MARKETS 385

CHAPTER 14 THE CASE FOR FREE MARKETS I: THE PRICE SYSTEM 287

PUZZLE: CROSSING THE SAN FBANCISCO-OAKLAND BAY BRIDGE: IS THE PRICE RIGHT? a88

EFFICIENT RESOURCE ALLOCATION AND PRICING 388Pricing to Promote Efficiency: An Example 289Can Price Increases Ever Serve the Public Interest? 290

SCARCITY AND THE NEED TO COORDINATE ECONOMIC DECISIONS 292Three Coordination Tasks in the Economy 292Input-Output Analysis: The Near Impossibility of Perfect Central Planning 295Which Buyers and Which Sellers Get Priority? 297

HOW PERFECT COMPETITION ACHIEVES EFFICIENCY: A GRAPHIC ANALYSIS 299

HOW PERFECT COMPETITION ACHIEVES OPTIMAL OUTPUT: A MARGINAL ANALYSIS 3oiThe Invisible Hand at Work 303Other Roles of Prices: Income Distribution and Fairness 304Yet Another Free-Market Achievement: Growth versus Efficiency 305

PUZZLE RESOLVED: SAN FRANCISCO BRIDGE PRICING REVISITED 3O6

TOWARD ASSESSMENT OF THE PRICE MECHANISM 3o6


CHAPTER 15 T H E SHORTCOMINGS OF FREE MARKETS 309

PUZZLE: WHY ARE HEALTH-CARE COSTS IN CANADA RISING? 3 I O

WHAT DOES THE MARKET DO POORLY? 3 io

EFFICIENT RESOURCE ALLOCATION: A REVIEW 3 n

EXTERNALITIES: GETTING THE PRICES WRONG 3 i2Externalities and Inefficiency 312Externalities Are Everywhere 314Government Policy and Externalities 315

PROVISION OF PUBLIC GOODS 3 i 6

ALLOCATION OF RESOURCES BETWEEN PRESENT AND FUTURE 3 i 8The Role of the Interest Rate 318How Does It Work in Practice? 319

SOME OTHER SOURCES OF MARKET FAILURE 32oImperfect Information: "Caveat Emptor" 320Rent Seeking 320

xviii CONTENTS

Moral Haza rd 320Principals, Agents , and Recent Stock Opt ion Scandals 321

MARKET FAILURE AND GOVERNMENT FAILURE 323

THE COST DISEASE O F SOME VITAL SERVICES: INVITATION TO GOVERNMENT FAILUREDeteriorat ing Personal Services 325Personal Services Are Get t ing More Expensive 325W h y Are These "In-Person" Services Cost ing So Much More? 326Uneven Labor Productivi ty Growth in the Economy 327A Future of More Goods b u t Fewer Services: Is It Inevitable? 327Government M a y Make the Problem Worse 32~8

THE PUZZLE RESOLVED: EXPLAINING THE RISING COSTS OF CANADIAN HEALTH CARE 3a9

THE MARKET SYSTEM ON BALANCE 329

EPILOGUE: THE UNFORGIVING MARKET, ITS GIFT OF ABUNDANCE, AND ITS DANGEROUS FRIENDS 33o

Summary 331Key Terms 331Test Yourself 332Discussion Quest ions 332

CHAPTER 16 T H E MARKET'S P R I M E ACHIEVEMENT: INNOVATION AND GROWTH 333

PUZZLE: How DID THE MARKET ACHIEVE ITS UNPRECEDENTED GROWTH? 334

THE MARKET ECONOMY'S INCREDIBLE GROWTH RECORD 334

INNOVATION, NOT INVENTION, IS THE UNIQUE FREE-MARKET ACCOMPLISHMENT 338

SOURCES O F FREE-MARKET INNOVATION: ROLE O F THE ENTREPRENEUR 3 3 9

Breakthrough Invent ion a n d the Entrepreneuria l Firm 340

MICROECONOMIC ANALYSIS O F T H E INNOVATIVE FIRM 3 4 0The Large Enterprises and Their Innovat ion "Assembly Lines" 340The Profits of Innovat ion: Schumpete r ' s Mode l 343

Financing the Innovat ion " A r m s Race": H i g h R&D Costs and "Monopo ly Profits" 345H o w Much Will a Profit-Maximizing Fi rm Spend on Innovat ion? 346A Kinked Revenue Curve Mode l of Spending on Innovat ion 346Innovat ion as a Public Good 348Effects of Process Research o n O u t p u t s a n d Prices 348

DO FREE MARKETS SPEND ENOUGH ON R&D ACTIVITIES? 3 4 9Innovat ion as a Beneficial Externality 350

W h y the Shortfall in Innovat ion Spend ing M a y N o t Be So Big After All 351

THE MARKET ECONOMY AND T H E SPEEDY DISSEMATION O F NEW TECHNOLOGY 3 5 !

CONCLUSION: THE MARKET ECONOMY AND ITS INNOVATION ASSEMBLY LINE 353

Summary 353Key Terms 354Discussion Quest ions 354

C H A P T E R 17 E X T E R N A L I T I E S , T H E E N V I R O N M E N T , A N D N A T U R A L R E S O U R C E S 355

PUZZLE: THOSE RESILIENT NATURAL RESOURCE SUPPLIES 356

PART 1: THE ECONOMICS OF ENVIRONMENTAL PROTECTION 356

CONTENTS

REVIEW-EXTERNALITIES: A CRITICAL SHORTCOMING OF THE MARKET MECHANISM 356The Facts: Is the World Really Getting Steadily More Polluted? 357The Role of Individuals and Governments in Environmental Damage 360Pollution and the Law of Conservation of Matter and Energy 361

BASIC APPROACHES TO ENVIRONMENTAL POLICY 363Emissions Taxes versus Direct Control 364Another Financial Device to Protect the Environment: Emissions Permits 366

TWO CHEERS FOR THE MARKET 36 7 (

PART 21: THE ECONOMICS OF NATURAL RESOURCES 368

ECONOMIC ANALYSIS: THE FREE MARKET AND PRICING OF DEPLETABLE RESOURCES 3 6 9

Scarcity and Rising Prices 369Supply-Demand Analysis and Consumption 369

ACTUAL RESOURCE PRICES IN THE TWENTIETH CENTURY 3 7 iInterferences wi th Price Pat terns 372Is Price Interference Justified? 374On the Virtues of Rising Prices 374

THE PUZZLE REVISITED: GROWING RESERVES OF EXHAUSTIHLE NATURAL RESOURCES 375


CHAPTER is TAXATION AND RESOURCE ALLOCATION 377

ISSUE: SHOULD THE BUSH TAX CUTS BE PARTLY REPEALED? 378

THE LEVEL AND TYPES OF TAXATION 378Progressive, Proportional, and Regressive Taxes 379Direct versus Indirect Taxes 379

THE FEDERAL TAX SYSTEM 379The Federal Personal Income Tax 380The Payroll Tax 381The Corporate Income Tax 381Excise Taxes 381The Payroll Tax and the Social Security System 381

THE STATE AND LOCAL TAX SYSTEM 383Sales and Excise Taxes 383Property Taxes 383Fiscal Federalism 384

THE CONCEPT OF EQUITY IN TAXATION 384Horizontal Equity 384Vertical Equity 384The Benefits Principle 385

THE CONCEPT OF EFFICIENCY IN TAXATION 385Tax Loopholes and Excess Burden 387

SHIFTING THE TAX BURDEN: TAX INCIDENCE 38 7

The Incidence of Excise Taxes 389The Incidence of the Payroll Tax 390

CONTENTS

WHEN TAXATION CAN IMPROVE EFFICIENCY 3 9 i

EQUITY, EFFICIENCY, AND THE OPTIMAL TAX 391ISSUE REVISITED: THE PROS AND CONS OF REPEALING THE BUSH TAX CUTS 393


PARTV THE DISTRIBUTION OF INCOME 895

CHAPTER 19 PRICING THE FACTORS OF PRODUCTION 397

PUZZLE: WHY DOES A HIGHER RETURN TO SAVINGS REDUCE THE AMOUNT SOME PEOPLE SAVE? 398

THE PRINCIPLE OF MARGINAL PRODUCTIVITY 3 9 8

INPUTS AND THEIR DERIVED DEMAND CURVES 3 9 9

INVESTMENT, CAPITAL, AND INTEREST 401The Demand for Funds 402The Downward-Sloping Demand Curve for Funds 403

PUZZLE RESOLVED: THE SUPPLY OF FUNDS 404The Issue of Usury Laws: Are Interest Rates Too High? 404

THE DETERMINATION OF RENT 405Land Rents: Further Analysis 406Generalization: Economic Rent Seeking 408Rent as a Component of an Input's Compensation 409An Application of Rent Theory: Salaries of Professional Athletes 410Rent Controls: The Misplaced Analogy 410

PAYMENTS TO ENTREPRENEURSHIP: ARE PROFITS TOO HIGH OR TOO LOW? 411What Accounts for Profits? 412Taxing Profits 414

CRITICISMS OF MARGINAL PRODUCTIVITY THEORY 414


APPENDIX: DISCOUNTING AND PRESENTVALUE 417

Summary 418Key Term 418Test Yourself 418

CHAPTER 20 LABOR AND ENTREPRENEURSHIP: THE HUMAN INPUTS 419

PART 1: THE MARKETS FOR LABOR 420PUZZLE: ENTREPRENEURS EARN LESS THAN MOST PEOPLE THINK—WHY SO LITTLE? 420

WAGE DETERMINATION IN COMPETITIVE LABOR MARKETS 421The Demand for Labor and the Determination of Wages 422Influences on MRPL: Shifts in the Demand for Labor 422

CONTENTS

Technical Change, Productivity Growth, and the Demand for Labor 423The Service Economy and the Demand for Labor 423

THE SUPPLY OF LABOR 4 3 4Rising Labor-Force Participation 425An Important-Labor Supply C o n u n d r u m 425The Labor Supply C o n u n d r u m Resolved 427

WHY DO WAGES DIFFER? 4 2 8Labor Demand in General 428Labor Supply in General 429 'Investment in H u m a n Capital 429 "~~Teenagers: a Disadvantaged Group in the Labor Market 429

UNIONS AND COLLECTIVE BARGAINING 43oUnions as Labor Monopolies 431Monopsony and Bilateral Monopoly 433Collective Bargaining and Strikes 433

PART % THE ENTREPRENEUR: THE OTHER HUMAN INPUT 435

ENTREPRENEURSHIP AND GROWTH 435The Entrepreneur 's Prices and Profits 436Fixed Costs and Public Good Attributes in Invention and Entrepreneurship 437Discriminatory Pricing of an Innovative Product over Its Life Cycle 437Negative Financial Rewards for Entrepreneurial Activity 439

THE PUZZLE RESOLVED: WHY ARE ENTREPRENEURIAL EARNINGS SURPRISINGLY LOW? 439

INSTITUTIONS AND THE SUPPLY OF INNOVATIVE ENTREPRENEURSHIP 440


C H A P T E R 21 POVERTY, I N E Q U A L I T Y , A N D D I S C R I M I N A T I O N 445

ISSUE: WERE THE BUSH TAX CUTS UNFAIR? 446

THE FACTS: POVERTY 4 4 6Counting the Poor: The Poverty Line 447Absolute versus Relative Poverty 448

THE FACTS: INEQUALITY 4 4 9

SOME REASONS FOR UNEQUAL INCOMES 450

THE FACTS: DISCRIMINATION 452

THE TRADE-OFF BETWEEN EQUALITY AND EFFICIENCY 453

POLICIES TO COMBAT POVERTY 454Education as a Way Out 455The Welfare Debate and the Trade-Off 455The Negative Income Tax 456

OTHER POLICIES TO COMBAT INEQUALITY 457The Personal Income Tax 457Death Duties and Other Taxes 457

xxii CONTENTS

POLICIES TO COMBAT DISCRIMINATION 458

A LOOK BACK 459


APPENDLX: THE ECONOMIC THEORY OF DISCRIMINATION 461

DISCRIMINATION BY EMPLOYERS 461 ^

DISCRIMINATION BY FELLOW WORKERS 461

STATISTICAL DISCRIMINATION 462

THE ROLES OF THE MARKET AND THE GOVERNMENT 462

Summary 463Key Term 463

PART 6 THE UNITED STATES IN THE WORLD ECONOMY 465

CHAPTER 22 INTERNATIONAL TRADE AND COMPARATIVE ADVANTAGE 467

ISSUE: How CAN AMERICANS COMPETE WITH "CHEAP FOREIGN LAHOR"? 4 6 8

WHYTRADE? 4 6 9

Mutual Gains from Trade 469

INTERNATIONAL VERSUS INTRANATIONAL TRADE 470Political Factors in International Trade 470The Many Currencies Involved in International Trade 470Impediments to Mobility of Labor and Capital 470

THE LAW OF COMPARATIVE ADVANTAGE 471The Ari thmetic of Compara t ive Advan tage 471The Graphics of Compara t ive Advan tage 472Must Specialization Be Complete? 475

ISSUE RESOLVED: COMPARATIVEADVANTAGEEXPOSESTHE "CHEAP FOREIGN LABOR" FALLACY 475

TARIFFS, QUOTAS, AND OTHER INTERFERENCES WITH TRADE 476Tariffs versus Quotas 477

WHY INHIBIT TRADE? 478Gaining a Price Advantage for Domestic Firms 478Protecting Particular Industries 478National Defense and Other Noneconomic Considerations 479The Infant-Industry Argument 480Strategic Trade Policy 481

CAN CHEAP IMPORTS HURT A COUNTRY? 4 8 1ISSUE: A LAST LOOK AT THE "CHEAP FOREIGN LABOR" ARGUMENT 483


MICROECONOMICS - Willkommen · microeconomics principles and ... chapter 7 production, inputs, and...

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Transcript of MICROECONOMICS - Willkommen · microeconomics principles and ... chapter 7 production, inputs, and...