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The Addison-Wesley Series in Economics, ii
Copyright, iv
Dedication, iv
Preface, xiv
Features, xiv
Widget-Free Economics, xiv
Modern Theories, xv
Step-by-Step Problem Solving, xvi
Changes in the Fourth Edition, xvi
Alternative Organizations, xviii
MyEconLab, xviii
Instructors and MyEconLab, xviii
Supplements to Accompany Microeconomics, xix
Acknowledgments, xx
1. Introduction, 3
1.1. Microeconomics: The Allocation of Scarce Resources, 3
Trade-Offs, 3
Who Makes the Decisions, 4
Prices Determine Allocations, 4
1.2. Models, 5
Simplifications by Assumption, 6
Testing Theories, 7
Positive Versus Normative, 8
1.3. Uses of Microeconomic Models, 9
Summary, 12
Part One. Supply and Demand, 13
2. Supply and Demand, 13
2.1. Demand, 14
The Demand Curve, 14
The Demand Function, 18
Summing Demand Curves, 20
2.2. Supply, 21
The Supply Curve, 21
The Supply Function, 23
Summing Supply Curves, 24
Effects of Government Import Policies on Supply Curves, 25
2.3. Market Equilibrium, 26
Using a Graph to Determine the Equilibrium, 26
Using Math to Determine the Equilibrium, 27
Forces That Drive the Market to Equilibrium, 28
2.4. Shocking the Equilibrium, 29
Effects of a Shift in the Demand Curve, 29
Effects of a Shift in the Supply Curve, 29
Effects of a Shift in the Supply and Demand Curves, 31
2.5. Effects of Government Interventions, 34
Policies that Shift Supply Curves, 34
Policies that Cause Demand to Differ from Supply, 36
Why Supply Need Not Equal Demand, 40
2.6. When to Use the Supply-and-Demand Model, 41
Summary, 42
Questions, 42
Problems, 44
3. Applying the Supply-and-Demand Model, 46
3.1. How Shapes of Demand and Supply Curves Matter, 47
3.2. Sensitivity of Quantity Demanded to Price, 48
Price Elasticity of Demand, 48
Elasticity Along the Demand Curve, 50
Other Demand Elasticities, 52
3.3. Sensitivity of Quantity Supplied to Price, 55
Elasticity of Supply, 55
Elasticity Along the Supply Curve, 56
3.4. Long Run Versus Short Run, 57
Demand Elasticities Over Time, 57
Supply Elasticities Over Time, 57
3.5. Effects of a Sales Tax, 60
Two Types of Sales Taxes, 60
Equilibrium Effects of a Specific Tax, 61
Tax Incidence of a Specific Tax, 63
The Same Equilibrium No Matter Who Is Taxed, 66
The Similar Effects of Ad Valorem and Specific Taxes, 66
Summary, 69
Questions, 70
Problems, 72
Part Two. Consumer Theory, 74
4. Consumer Choice, 74
4.1. Preferences, 75
Properties of Consumer Preferences, 76
Preference Maps, 77
4.2. Utility, 84
Utility Function, 84
Ordinal Preferences, 84
Utility and Indifference Curves, 85
Utility and Marginal Utility, 85
Utility and Marginal Rates of Substitution, 87
4.3. Budget Constraint, 87
Slope of the Budget Constraint, 88
Purchasing Fractional Quantities, 89
Effect of a Change in Price on Consumption, 89
Effect of a Change in Income on Consumption, 90
4.4. Constrained Consumer Choice, 92
The Consumer’s Optimal Bundle, 92
Optimal Bundles on Convex Sections of Indifference Curves, 96
Buying Where More Is Better, 97
Food Stamps, 99
Summary, 102
Questions, 103
Problems, 105
5. Applying Consumer Theory, 106
5.1. Deriving Demand Curves, 107
5.2. How Changes in Income Shift Demand Curves, 109
Effects of a Rise in Income, 109
Consumer Theory and Income Elasticities, 112
5.3. Effects of a Price Change, 118
Income and Substitution Effects with a Normal Good, 118
Income and Substitution Effects with an Inferior Good, 120
5.4. Cost-of-Living Adjustments, 123
Inflation Indexes, 123
Effects of Inflation Adjustments, 125
5.5. Deriving Labor Supply Curves, 129
Labor-Leisure Choice, 129
Income and Substitution Effects, 130
Shape of the Labor Supply Curve, 135
Income Tax Rates and Labor Supply, 137
Summary, 139
Questions, 139
Problems, 142
Cross-Chapter Analysis: Child-Care Subsidies, 143
Background, 143
Task, 144
Analysis, 144
Questions, 145
Part Three. Theory of the Firm, 146
6. Firms and Production, 146
6.1. The Ownership and Management of Firms, 147
The Ownership of Firms, 147
The Management of Firms, 148
What Owners Want, 148
6.2. Production, 149
Production Functions, 149
Time and the Variability of Inputs, 150
6.3. Short-Run Production: One Variable and One Fixed Input, 151
Total Product, 151
Marginal Product of Labor, 152
Average Product of Labor, 152
Graphing the Product Curves, 152
Law of Diminishing Marginal Returns, 155
6.4. Long-Run Production: Two Variable Inputs, 158
Isoquants, 158
Substituting Inputs, 163
6.5. Returns to Scale, 166
Constant, Increasing, and Decreasing Returns to Scale, 166
Varying Returns to Scale, 169
6.6. Productivity and Technical Change, 170
Relative Productivity, 170
Innovations, 171
Summary, 173
Questions, 174
Problems, 176
7. Costs, 177
7.1. Measuring Costs, 178
Economic Cost, 178
Capital Costs, 180
7.2. Short-Run Costs, 181
Short-Run Cost Measures, 181
Short-Run Cost Curves, 183
Production Functions and the Shape of Cost Curves, 185
Effects of Taxes on Costs, 188
Short-Run Cost Summary, 191
7.3. Long-Run Costs, 191
Input Choice, 191
How Long-Run Cost Varies with Output, 200
The Shape of Long-Run Cost Curves, 202
Estimating Cost Curves Versus Introspection, 206
7.4. Lower Costs in the Long Run, 206
Long-Run Average Cost as the Envelope of Short-Run Average Cost Curves, 207
Short-Run and Long-Run Expansion Paths, 210
How Learning by Doing Lowers Costs, 210
7.5. Cost of Producing Multiple Goods, 213
Summary, 215
Questions, 215
Problems, 217
Part Four. Perfect Competition, 219
8. Competitive Firms and Markets, 219
8.1. Competition, 220
Price Taking, 220
Why the Firm’s Demand Curve Is Horizontal, 220
Why We Study Perfect Competition, 221
8.2. Profit Maximization, 222
Profit, 222
Two Steps to Maximizing Profit, 224
8.3. Competition in the Short Run, 226
Short-Run Competitive Profit Maximization, 227
Short-Run Firm Supply Curve, 232
Short-Run Market Supply Curve, 235
Short-Run Competitive Equilibrium, 237
8.4. Competition in the Long Run, 239
Long-Run Competitive Profit Maximization, 239
Long-Run Firm Supply Curve, 240
Long-Run Market Supply Curve, 240
Long-Run Competitive Equilibrium, 252
8.5. Zero Profit for Competitive Firms in the Long Run, 255
Zero Long-Run Profit with Free Entry, 255
Zero Long-Run Profit When Entry Is Limited, 256
The Need to Maximize Profit, 258
Summary, 258
Questions, 259
Problems, 263
9. Applying the Competitive Model, 264
9.1. Consumer Welfare, 265
Measuring Consumer Welfare Using a Demand Curve, 265
Effect of a Price Change on Consumer Surplus, 269
9.2. Producer Welfare, 272
Measuring Producer Surplus Using a Supply Curve, 272
Using Producer Surplus, 274
9.3. Competition Maximizes Welfare, 275
Why Producing Less than the Competitive Output Lowers Welfare, 276
Why Producing More than the Competitive Output Lowers Welfare, 277
9.4. Policies That Shift Supply Curves, 279
Restricting the Number of Firms, 280
Raising Entry and Exit Costs, 283
9.5. Policies that Create a Wedge Between Supply and Demand, 284
Welfare Effects of a Sales Tax, 284
Welfare Effects of a Price Floor, 288
Welfare Effects of a Price Ceiling, 292
9.6. Comparing Both Types of Policies: Imports, 294
Free Trade Versus a Ban on Imports, 294
Free Trade Versus a Tariff, 296
Free Trade Versus a Quota, 298
Rent Seeking, 298
Summary, 300
Questions, 300
Problems, 303
10. General Equilibrium and Economic Welfare, 305
10.1. General Equilibrium, 306
Feedback Between Competitive Markets, 307
Minimum Wages with Incomplete Coverage, 310
10.2. Trading Between Two People, 313
Endowments, 313
Mutually Beneficial Trades, 315
Bargaining Ability, 317
10.3. Competitive Exchange, 318
Competitive Equilibrium, 318
The Efficiency of Competition, 320
Obtaining Any Efficient Allocation Using Competition, 320
10.4. Production and Trading, 321
Comparative Advantage, 321
Efficient Product Mix, 325
Competition, 325
10.5. Efficiency and Equity, 327
Role of the Government, 327
Efficiency, 330
Equity, 331
Efficiency Versus Equity, 336
Summary, 337
Questions, 337
Problems, 339
Cross-Chapter Analysis: Outsourcing and the World Trade Organization, 340
Background, 340
Task, 343
Analysis, 343
Questions, 344
Part Five. Market Power and Market Structure, 345
11. Monopoly, 345
11.1. Monopoly Profit Maximization, 346
Marginal Revenue, 346
Choosing Price or Quantity, 349
Graphical Approach, 350
Mathematical Approach, 352
11.2. Effects of a Shift of the Demand Curve, 353
11.3. Market Power, 353
Market Power and the Shape of the Demand Curve, 354
Lerner Index, 355
Sources of Market Power, 358
11.4. Welfare Effects of Monopoly, 359
Graphing the Welfare Loss, 360
Welfare Effects of Ad Valorem Versus Specific Taxes, 362
11.5. Cost Advantages that Create Monopolies, 363
Sources of Cost Advantages, 363
Natural Monopoly, 364
11.6. Government Actions that Create Monopolies, 366
Barriers to Entry, 366
Patents, 367
11.7. Government Actions that Reduce Market Power, 371
Regulating Monopolies, 371
Increasing Competition, 376
11.8. Monopoly Decisions over Time, 377
Network Externalities, 377
Network Externalities as an Explanation for Monopolies, 378
A Two-Period Monopoly Model, 379
Summary, 379
Questions, 380
Problems, 382
12. Pricing, 385
12.1. Why and How Firms Price Discriminate, 386
Why Price Discrimination Pays, 386
Who Can Price Discriminate, 389
Preventing Resales, 390
Not All Price Differences Are Price Discrimination, 390
Types of Price Discrimination, 391
12.2. Perfect Price Discrimination, 391
How a Firm Perfectly Price Discriminates, 391
Perfect Price Discrimination: Efficient but Hurts Consumers, 393
Transaction Costs and Perfect Price Discrimination, 397
12.3. Quantity Discrimination, 399
12.4. Multimarket Price Discrimination, 400
Multimarket Price Discrimination with Two Groups, 401
Identifying Groups, 406
Welfare Effects of Multimarket Price Discrimination, 408
12.5. Two-Part Tariffs, 409
A Two-Part Tariff with Identical Consumers, 409
A Two-Part Tariff with Nonidentical Consumers, 410
12.6. Tie-In Sales, 412
Requirement Tie-In Sales, 412
Bundling, 413
Summary, 414
Questions, 415
Problems, 417
13. Oligopoly and Monopolistic Competition, 419
13.1. Market Structures, 420
13.2. Game Theory, 422
A Single-Period, Two-Firm, Quantity-Setting Game, 422
Why Firms Do Not Cooperate in a Single-Period Game, 424
Collusion in Repeated Games, 424
13.3. Cooperative Oligopoly Models, 426
Laws Against Cartels, 426
Why Cartels Form, 427
Why Cartels Fail, 429
Maintaining Cartels, 430
Entry and Cartel Success, 432
Mergers, 432
13.4. Cournot Model of Oligopoly, 433
Cournot Model of an Airline Market, 434
Comparing the Cournot and Cartel Models, 438
The Cournot Equilibrium and the Number of Firms, 440
13.5. Stackelberg Model of Noncooperative Behavior, 442
Stackelberg Game Tree, 443
Stackelberg Graphical Model, 444
Why Moving Sequentially Is Essential, 447
Strategic Trade Policy, 447
13.6. Comparison of Collusive, Cournot, Stackelberg, and Competitive Equilibria, 452
13.7. Monopolistic Competition, 453
Monopolistically Competitive Equilibrium, 454
Fixed Costs and the Number of Firms, 454
13.8. Bertrand Price-Setting Model, 457
Bertrand Equilibrium with Identical Products, 457
Bertrand Equilibrium with Differentiated Products, 458
Differentiating Products, 461
Summary, 463
Questions, 464
Problems, 465
Cross-Chapter Analysis: Frequent Flier Programs, 468
Background, 468
Task, 469
Analysis, 469
Questions, 470
14. Strategy, 471
14.1. Preventing Entry: Simultaneous Decisions, 472
Room for Two Firms, 473
Room for Only One Firm, 474
Summary of the Simultaneous-Decision Entry Game, 475
14.2. Preventing Entry: Sequential Decisions, 476
To Act or Not to Act?, 476
Commitment and Entry Prevention, 480
Commitment and Fixed Costs, 483
14.3. Creating and Using Cost Advantages, 489
Lowering Marginal Cost While Raising Total Cost, 489
Learning by Doing, 490
Raising Rivals’ Costs, 490
Raising All Firms’ Costs, 492
Advantages and Disadvantages to Moving First, 493
Preventing Entry: Summary, 493
14.4. Advertising, 494
Monopoly Advertising, 494
Strategic Advertising, 498
14.5. Auctions, 499
Elements of Auctions, 500
Bidding Strategies in Private-Value Auctions, 501
Summary, 503
Questions, 503
Problems, 505
Cross-Chapter Analysis: Magazine Subscriptions, 507
Background, 507
Task, 507
Analysis, 508
Questions, 508
Part Six. Factor Markets, 510
15. Factor Markets and Vertical Integration, 510
15.1. Competitive Factor Market, 511
Short-Run Factor Demand of a Firm, 511
Long-Run Factor Demand, 516
Factor Market Demand, 517
Competitive Factor Market Equilibrium, 520
15.2. Effect of Monopolies on Factor Markets, 521
Market Structure and Factor Demands, 521
A Model of Market Power in Input and Output Markets, 522
15.3. Monopsony, 528
Monopsony Profit Maximization, 528
Welfare Effects of Monopsony, 531
Monopsony Price Discrimination, 533
15.4. Vertical Integration, 534
Stages of Production, 534
Degree of Vertical Integration, 535
Produce or Buy, 535
Summary, 538
Questions, 539
Problems, 540
16. Interest Rates, Investments, and Capital Markets, 542
16.1. Comparing Money Today to Money in the Future, 543
Interest Rates, 543
Using Interest Rates to Connect the Present and Future, 545
Stream of Payments, 548
Inflation and Discounting, 551
16.2. Choices over Time, 553
Investing, 554
Rate of Return on Bonds, 556
Durability, 557
Human Capital, 558
Time-Varying Discounting, 561
16.3. Exhaustible Resources, 562
When to Sell an Exhaustible Resource, 562
Price of a Scarce Exhaustible Resource, 563
Why Price May Be Constant or Fall, 567
16.4. Capital Markets, Interest Rates, and Investments, 569
Increased Savings, More Investment, 569
Increased Government Demand, Less Private Investment, 570
Summary, 571
Questions, 571
Problems, 571
Part Seven. Uncertainty, Missing Markets, and Limited Information, 574
17. Uncertainty, 574
17.1. Degree of Risk, 575
Probability, 575
Expected Value, 577
Variance and Standard Deviation, 579
17.2. Decision Making Under Uncertainty, 580
Expected Utility, 581
Risk Aversion, 582
Risk Neutrality, 584
Risk Preference, 585
17.3. Avoiding Risk, 588
Just Say No, 588
Obtain Information, 588
Diversify, 589
Insure, 591
17.4. Investing Under Uncertainty, 594
How Investing Depends on Attitudes Toward Risk, 595
Investing with Uncertainty and Discounting, 597
Investing with Altered Probabilities, 597
Summary, 598
Questions, 599
Problems, 600
18. Externalities, Open-Access, and Public Goods, 602
18.1. Externalities, 603
18.2. The Inefficiency of Competition with Externalities, 605
Supply-and-Demand Analysis, 605
Cost-Benefit Analysis, 612
18.3. Market Structure and Externalities, 614
Monopoly and Externalities, 614
Monopoly Versus Competitive Welfare with Externalities, 614
Taxing Externalities in Noncompetitive Markets, 616
18.4. Allocating Property Rights to Reduce Externalities, 616
Coase Theorem, 617
Markets for Pollution, 619
18.5. Open-Access Common Property, 621
Overuse of Open-Access Common Property, 621
Solving the Commons Problem, 622
18.6. Public Goods, 623
Types of Goods, 623
Markets for Public Goods, 624
Reducing Free Riding, 627
Valuing Public Goods, 628
Summary, 630
Questions, 631
Problems, 632
Cross-Chapter Analysis: Emissions Fees Versus Standards Under Uncertainty, 634
Background, 634
Task, 634
Analysis, 634
Question, 635
19. Asymmetric Information, 636
19.1. Problems Due to Asymmetric Information, 637
19.2. Responses to Adverse Selection, 639
Controlling Opportunistic Behavior Through Universal Coverage, 639
Equalizing Information, 639
19.3. How Ignorance About Quality Drives Out High-Quality Goods, 640
Lemons Market with Fixed Quality, 641
Lemons Market with Variable Quality, 644
Limiting Lemons, 644
19.4. Price Discrimination Due to False Beliefs About Quality, 647
19.5. Market Power from Price Ignorance, 649
Tourist-Trap Model, 649
Advertising and Prices, 651
19.6. Problems Arising from Ignorance When Hiring, 651
Information About Employment Risks, 652
Cheap Talk, 653
Education as a Signal, 654
Screening in Hiring, 658
Summary, 660
Questions, 661
Problems, 662
20. Contracts and Moral Hazards, 664
20.1. Principal-Agent Problem, 665
A Model, 665
Types of Contracts, 666
Efficiency, 667
20.2. Production Efficiency, 667
Efficient Contract, 668
Full Information, 668
Asymmetric Information, 672
20.3. Trade-Off Between Efficiency in Production and in Risk Bearing, 674
Contracts and Efficiency, 674
Choosing the Best Contract, 677
20.4. Payments Linked to Production or Profit, 679
Piece-Rate Hire Contracts, 680
Contingent Contract Rewards Linked to a Firm’s Success, 680
20.5. Monitoring, 681
Bonding, 682
Deferred Payments, 684
Efficiency Wages, 684
After-the-Fact Monitoring, 686
20.6. Checks on Principals, 690
20.7. Contract Choice, 692
Summary, 694
Questions, 694
Problems, 696
Chapter Appendixes, A-1
Appendix 2A: Regressions, A-1
Estimating Economic Relations, A-1
Confidence in Our Estimates, A-2
Multiple Regression, A-3
Appendix 3A: Effects of a Specific Tax on Equilibrium, A-3
Appendix 4A: Utility and Indifference Curves, A-4
Appendix 4B: Maximizing Utility, A-5
Appendix 5A: The Slutsky Equation, A-7
Appendix 5B: Labor-Leisure Model, A-8
Appendix 6A: Properties of Marginal and Average Product Curves, A-9
Appendix 6B: Cobb-Douglas Production Function, A-10
Appendix 7A: Minimum of the Average Cost Curve, A-10
Appendix 7B: U.S. Furniture Manufacturer’s Short-Run Cost Curves, A-10
Appendix 7C: Minimizing Cost, A-12
Appendix 8A: Profit Maximization, A-13
Appendix 8B: The Elasticity of the Residual or Excess Supply Curve, A-14
Appendix 9A: Demand Elasticities and Surplus, A-15
Appendix 11A: Relationship Between a Linear Demand Curve and Its Marginal Revenue Curve, A-15
Appendix 11B: Incidence of a Specific Tax on a Monopoly, A-16
Appendix 12A: Perfect Price Discrimination, A-16
Appendix 12B: Quantity Discrimination, A-17
Appendix 12C: Multimarket Price Discrimination, A-17
Appendix 12D: Two-Part Tariffs, A-18
Appendix 13A: Cournot Equilibrium, A-18
General Model, A-18
Linear Example, A-19
Different Costs, A-20
Appendix 13B: Stackelberg Equilibrium, A-21
Appendix 13C: Bertrand Equilibrium, A-21
Appendix 14A: Mixed Strategies, A-23
Appendix 14B: Profit-Maximizing Advertising and Production, A-23
Appendix 15A: Factor Demands, A-24
Appendix 15B: Monopsony, A-25
Appendix 16A: Perpetuity, A-26
Appendix 18A: Welfare Effects of Pollution in a Competitive Market, A-26
Appendix 20A: Nonshirking Condition, A-27
Answers to Selected Problems, A-29
Chapter 2, A-29
Chapter 3, A-29
Chapter 4, A-30
Chapter 5, A-30
Chapter 6, A-31
Chapter 7, A-32
Chapter 8, A-33
Chapter 9, A-34
Chapter 10, A-34
Chapter 11, A-35
Chapter 12, A-35
Chapter 13, A-36
Chapter 14, A-37
Chapter 15, A-38
Chapter 16, A-38
Chapter 17, A-38
Chapter 18, A-39
Chapter 19, A-39
Chapter 20, A-39
Answers to Questions for Cross-Chapter Analysis, A-41
Child-Care Subsidies, A-41
Outsourcing and the World Trade Organization, A-41
Docking Their Pay, A-41
Frequent Flier Programs, A-41
Magazine Subscriptions, A-41
Emissions Fees Versus Standards Under Certainty, A-42
Definitions, A-43
References, A-48
Sources for Applications, A-56
Chapter 1, A-56
Chapter 2, A-56
Chapter 3, A-56
Chapter 4, A-57
Chapter 5, A-57
Chapter 6, A-57
Chapter 7, A-58
Chapter 8, A-58
Chapter 9, A-58
Chapter 10, A-58
Chapter 11, A-59
Chapter 12, A-59
Chapter 13, A-59
Chapter 14, A-60
Chapter 15, A-60
Chapter 16, A-60
Chapter 17, A-61
Chapter 18, A-61
Chapter 19, A-61
Chapter 20, A-62
Cross-Chapter Analyses, A-62
InsideBackCover, i-64
Symbols Used in This Book, i-64
Abbreviations, Variables, and Function Names, i-64
Featured Applications in This Book, i-65
Cross-Chapter Analyses, i-65
Applications on the Perloff Web Site, i-66
Chapter 1, i-66
Chapter 2, i-66
Chapter 3, i-66
Chapter 4, i-66
Chapter 5, i-66
Chapter 6, i-66
Chapter 7, i-66
Chapter 8, i-66
Chapter 9, i-66
Chapter 10, i-66
Chapter 11, i-66
Chapter 12, i-66
Chapter 13, i-66
Chapter 14, i-66
Chapter 15, i-66
Chapter 16, i-66
Chapter 17, i-66
Chapter 18, i-66
Chapter 19, i-66
Chapter 20, i-66
Supplemental Material on the Perloff Web Site, i-67
Chapter 3, i-67
Chapter 4, i-67
Chapter 5, i-67
Chapter 6, i-67
Chapter 7, i-67
Chapter 8, i-67
Chapter 9, i-67
Chapter 10, i-67
Chapter 12, i-67
Chapter 13, i-67
Chapter 14, i-67
Chapter 16, i-67
Chapter 17, i-67
Chapter 18, i-67
Chapter 19, i-67
Chapter 20, i-67
Index, a-64

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