Explore the concept of division of labor
Principles of Microeconomics
By Libby Rittenberg and Timothy Tregarthen
28239-1
Principles of Microeconomics
Libby Rittenberg and Timothy Tregarthen
Published by:
Flat World Knowledge, Inc. One Bridge Street Irvington, NY 10533
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Printed in North America
Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Chapter 20 Chapter 21
Brief Contents
About the Authors Acknowledgments Preface
Economics: The Study of Choice Confronting Scarcity: Choices in Production Demand and Supply Applications of Demand and Supply Elasticity: A Measure of Response Markets, Maximizers, and Efficiency The Analysis of Consumer Choice Production and Cost Competitive Markets for Goods and Services Monopoly The World of Imperfect Competition Wages and Employment in Perfect Competition Interest Rates and the Markets for Capital and Natural Resources Imperfectly Competitive Markets for Factors of Production Public Finance and Public Choice Antitrust Policy and Business Regulation International Trade The Economics of the Environment Inequality, Poverty, and Discrimination Socialist Economies in Transition Appendix A: Graphs in Economics
Index
1
2
4
7Chapter 1
7 8
12 17 21 23
25Chapter 2
25 26 30 40 49 55
57Chapter 3
57 58 65 72 83 88
89Chapter 4
89 90 97
102 107 110
111Chapter 5
111
112 123
Contents
About the Authors
Acknowledgments
Preface
Economics: The Study of Choice
Start Up: Economics in the News Defining Economics The Field of Economics The Economists’ Tool Kit Review and Practice Endnotes
Confronting Scarcity: Choices in Production
Start Up: Tightening Security at the World’s Airports Factors of Production The Production Possibilities Curve Applications of the Production Possibilities Model Review and Practice Endnotes
Demand and Supply
Start Up: Crazy for Coffee Demand Supply Demand, Supply, and Equilibrium Review and Practice Endnotes
Applications of Demand and Supply
Start Up: A Composer Logs On Putting Demand and Supply to Work Government Intervention in Market Prices: Price Floors and Price Ceilings The Market for Health-Care Services Review and Practice Endnotes
Elasticity: A Measure of Response
Start Up: Raise Fares? Lower Fares? What’s a Public Transit Manager To Do? The Price Elasticity of Demand Responsiveness of Demand to Other Factors
127 132 137
139Chapter 6
139 140 149 155 161 165
167Chapter 7
167 168 174 183
192 197
199Chapter 8
199 200 214 219 223
225Chapter 9
225 226 229 239 247 251
253Chapter 10
253 253 258 266 271
275Chapter 11
275
Price Elasticity of Supply Review and Practice Endnotes
Markets, Maximizers, and Efficiency
Start Up: A Drive in the Country The Logic of Maximizing Behavior Maximizing in the Marketplace Market Failure Review And Practice Endnotes
The Analysis of Consumer Choice
Start Up: A Day at the Grocery Store The Concept of Utility Utility Maximization and Demand Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice Review and Practice Endnotes
Production and Cost
Start Up: Street Cleaning Around the World Production Choices and Costs: The Short Run Production Choices and Costs: The Long Run Review and Practice Endnotes
Competitive Markets for Goods and Services
Start Up: Life on the Farm Perfect Competition: A Model Output Determination in the Short Run Perfect Competition in the Long Run Review and Practice Endnotes
Monopoly
Start Up: Surrounded by Monopolies The Nature of Monopoly The Monopoly Model Assessing Monopoly Review and Practice
The World of Imperfect Competition
Start Up: eBay Needs Google, Google Needs eBay, and Neither Trusts the Other
276 283 290 295 298
299Chapter 12
299 301 308 315 322 326
327Chapter 13
327 328 333 341 347 350
351Chapter 14
351 352 362 365 370 374
375Chapter 15
375 375 385 394 398 401
403Chapter 16
403 404 409 412 418 420
Monopolistic Competition: Competition Among Many Oligopoly: Competition Among the Few Extensions of Imperfect Competition: Advertising and Price Discrimination Review and Practice Endnotes
Wages and Employment in Perfect Competition
Start Up: College Pays The Demand for Labor The Supply of Labor Labor Markets at Work Review and Practice Endnotes
Interest Rates and the Markets for Capital and Natural Resources
Start Up: Building the “Internet in the Sky” Time and Interest Rates Interest Rates and Capital Natural Resources and Conservation Review and Practice Endnotes
Imperfectly Competitive Markets for Factors of Production
Start Up: Hockey Players Frozen Out Price-Setting Buyers: The Case of Monopsony Monopsony and the Minimum Wage Price Setters on the Supply Side Review and Practice Endnotes
Public Finance and Public Choice
Start Up: Where Your Tax Dollars Go The Role of Government in a Market Economy Financing Government Choices in the Public Sector Review and Practice Endnotes
Antitrust Policy and Business Regulation
Start Up: The Plastic War Antitrust Laws and Their Interpretation Antitrust and Competitiveness in a Global Economy Regulation: Protecting People from the Market Review and Practice Endnotes
421Chapter 17
421 422 431 433 440 443
445Chapter 18
445 446 455 462 466
467Chapter 19
467 469 474 484 489 493
495Chapter 20
495 496 500 504 510 512
513Chapter 21
513 523 529
539
International Trade
Start Up: Trade Winds The Gains from Trade Two-Way Trade Restrictions on International Trade Review and Practice Endnotes
The Economics of the Environment
Start Up: A Market for Carbon Emissions Maximizing the Net Benefits of Pollution Alternatives in Pollution Control Review and Practice Endnotes
Inequality, Poverty, and Discrimination
Start Up: Poverty in the United States Income Inequality The Economics of Poverty The Economics of Discrimination Review and Practice Endnotes
Socialist Economies in Transition
Start Up: The Collapse of Socialism The Theory and Practice of Socialism Socialist Systems in Action Economies in Transition: China and Russia Review and Practice Endnotes
Appendix A: Graphs in Economics
How to Construct and Interpret Graphs Nonlinear Relationships and Graphs without Numbers Using Graphs and Charts to Show Values of Variables
Index
About the Authors
LIBBY RITTENBERG Libby Rittenberg has been a Professor of Economics at Colorado College in Colorado Springs since 1989. She teaches principles of economics, intermediate macroeconomic theory, comparative economic systems, and international political economy. She received her B. A. in economics-mathematics and Spanish from Simmons College and her Ph.D. in economics from Rutgers University.
Prior to joining the faculty at Colorado College, she taught at Lafayette College and at the Rutgers University Graduate School of Management. She served as a Fulbright Scholar in Istanbul, Turkey, and as a research economist at Mathematica, Inc. in Prin- ceton, New Jersey.
Dr. Rittenberg specializes in the internationally oriented areas of economics, with numerous articles in journals and books on comparative and development economics. Much of her work focuses on transition issues and on the Turkish economy.
She has been very involved in study abroad education and has directed programs in central Europe and Turkey.
TIM TREGARTHEN There is one word that captures the essence of Dr. Timothy Tregarthen—inspiring. Tim was first diagnosed with multiple sclerosis (MS) in 1975. Yet, he continued a remarkable academic career of teaching and research. In 1996, he published the first edition of his principles of economics textbook to great acclaim, and it became widely used in colleges around the country. That same year, MS made him wheelchair-bound. The disease forced his retirement from teaching at the University of Colorado at Colorado Springs in 1998. He lost the use of his arms in 2001 and has been quadriplegic ever since. In 2002, Tim’s doctor expected him to die.
He was placed in the Pikes Peak Hospice program and was twice given his last rites by his priest. UCCS Chancellor Shockley- Zalabak says, “I really thought that Tim would die in hospice. That’s what the doctors told me, and I really believed that. I remember one day they called me and told me to try to come see him. They didn't expect him to live through the night.”
Not only did he live through the night, but he eventually recovered to the point that he moved from hospice to a long-term care facility. There, he never let his disease get him down. In fact, he turned back to his love of writing and teaching for inspiration. He obtained a voice-activated computer, recruited a coauthor, Libby Rittenberg of Colorado College, and turned his attention to revis- ing his principles of economics book. Flat World Knowledge is honored to publish a new, first edition relaunch of this wonderful book, and proud to bring Tim’s incredible talents as a teacher back to life for future generations of students to learn from.
In addition to completing the rewrite of his textbook, Tim recently completed an autobiography about the thirty-two years he has had MS, titled Suffering, Faith, and Wildflowers. He is nearing completion of a novel, Cool Luck, based on the life of a friend. It is the story of a young couple facing the husband’s diagnosis of ALS—Lou Gehrig’s disease. Remarkably, in 2007, he was able to return to the classroom at UCCS, where he had taught economics for twenty-seven years. In January of 2009, Tim married Dinora Montenegro (now Dinora Tregarthen); the couple lives in San Gabriel, California.
Perhaps Tim’s approach to life is best summed up by an observation by UCCS English Professor Thomas Naperierkowski: “One of the remarkable things is, heck, I can wake up with a headache and be a pretty grouchy character, but given his physical trials, which he faces every minute of his life these days, I’ve never seen him grouchy, I’ve never seen him cranky.” Carry on, Tim.
Acknowledgments The authors would like to thank to the following individuals who reviewed the text and whose contributions were invaluable in shaping the final product:
Carlos Aguilar El Paso Community College
Jeff Ankrom Wittenberg University
Lee Ash Skagit Valley Community College
Randall Bennett Gonzaga University
Joseph Calhoun Florida State University
Richard Cantrell Western Kentucky University
Gregg Davis Flathead Valley Community College
Kevin Dunagan Oakton Community College
Mona El Shazly Columbia College
Jose Esteban Palomar College
Maurita Fawls Portland Community College
Fred Foldvary Santa Clara University
Richard Fowles University of Utah
Doris Geide-Stevenson Weber State University
Sarmila Ghosh University of Scranton, Kania School of Management
David Gordon Illinois Valley Community College
Clinton Greene University of Missouri-St. Louis
James Holcomb University of Texas at El Paso
Phil Holleran Mitchell Community College
Yu Hsing Southeastern Louisiana University
Thomas Hyclak Lehigh University
Bruce Johnson Centre College
James Kahiga Georgia Perimeter College
Andrew Kohen James Madison University
Monaco Kristen California State University–Long Beach
Mark Maier Glendale Community College
David McClough Bowling Green State University
Ann McPherren Huntington University
John Min Northern Virginia Community College
Shahriar Mostashari Campbell University, Lundy-Fetterman School of Business
Francis Mummery Fullerton College
Robert Murphy Boston College
Kathryn Nantz Fairfield University
Paul Okello Tarrant County College-South Campus
Nicholas Peppes St. Louis Community College
Ramoo Ratha Diablo Valley College
Teresa Riley Youngstown State University
Michael Robinson Mount Holyoke College
Anirban Sengupta Texas A&M University
John Solow The University of Iowa
John Somers Portland Community College
Charles Staelin Smith College
Richard Stratton The University of Akron
Kay E. Strong Bowling Green State University–Firelands
Della Sue Marist College
John Vahaly University of Louisville
Robert Whaples Wake Forest University
Mark Wheeler Western Michigan University
Leslie Wolfson The Pingry School
Sourushe Zandvakili University of Cincinnati
We would like to extend a special thank you to the following instructors who class tested the text in their courses:
Johnathan Millman University of Massachusetts–Boston
John Min Northern Virginia Community College
Kristen Monaco California State University–Long Beach
Steve Skinner Western Connecticut State University
Richard Stratton University of Akron
ACKNOWLEDGMENTS 3
Preface Greek philosopher Heraclitis said over 2500 years ago that “Nothing endures but change.” Forecasting is a tricky business, but this sentiment strikes us as being as safe a bet as one can make. Change—rapid change—underlies all our lives. As we were completing this textbook, the world entered a period of marked economic uncertainty that led many students, and indeed people from all walks of life, to tune into economic events as never before to try to understand the economic world around them. So, while we as econom- ists have the public’s attention, we see an opportunity to share economics principles and the economic way of thinking in a way that emphasizes their relevance to today’s world. We use applications from sports, politics, campus life, current events, and other familiar settings to illustrate the links between theoretical principles and common experiences. Because of the increasingly global nature of economic activity, we also recognize the need for a clear and consistent international focus throughout an economics text. In addi- tion, we have tried to provide a sense of the intellectual excitement of the field and an appreciation for the gains it has made, as well as an awareness of the challenges that lie ahead.
To ensure students realize that economics is a unified discipline and not a bewildering array of seemingly unrelated topics, we develop the presentation of microeconomics and of macroeconomics around integrating themes.
The integrating theme for microeconomics is the marginal decision rule, a simple approach to choices that maximize the value of some objective. Following its presentation in an early microeconomics chapter, the marginal decision rule becomes an integrating device throughout the discussion of microeconomics. Instead of a hodgepodge of rules for different market conditions, we give a single rule that can be applied within any market setting.
The integrating theme for macroeconomics is the model of aggregate demand and aggregate supply. Following its presentation in an early macroeconomics chapter, this model allows us to look at both short-run and long-run concepts and to address a variety of policy issues and debates.
Recognizing that a course in economics may seem daunting to some students, we have tried to make the writing clear and enga- ging. Clarity comes in part from the intuitive presentation style, but we have also integrated a number of pedagogical features that we believe make learning economic concepts and principles easier and more fun. These features are very student-focused.
The chapters themselves are written using a “modular” format. In particular, chapters generally consist of three main content sections that break down a particular topic into manageable parts. Each content section contains not only an exposition of the ma- terial at hand but also learning objectives, summaries, examples, and problems. Each chapter is introduced with a story to motivate the material and each chapter ends with a wrap-up and additional problems. Our goal is to encourage active learning by including many examples and many problems of different types.
A tour of the features available for each chapter may give a better sense of what we mean: < Start Up—Chapter introductions set the stage for each chapter with an example that we hope will motivate readers to study
the material that follows. These essays, on topics such as the value of a college degree in the labor market or how policy makers reacted to a particular economic recession, lend themselves to the type of analysis explained in the chapter. We often refer to these examples later in the text to demonstrate the link between theory and reality.
< Learning Objectives—These succinct statements are guides to the content of each section. Instructors can use them as a snapshot of the important points of the section. After completing the section, students can return to the learning objectives to check if they have mastered the material.
< Heads Up!—These notes throughout the text warn of common errors and explain how to avoid making them. After our combined teaching experience of more than fifty years, we have seen the same mistakes made by many students. This fea- ture provides additional clarification and shows students how to navigate possibly treacherous waters.
< Key Takeaways—These statements review the main points covered in each content section. < Key Terms—Defined within the text, students can review them in context, a process that enhances learning. < Try It! questions—These problems, which appear at the end of each content section and which are answered completely in
the text, give students the opportunity to be active learners. They are designed to give students a clear signal as to whether they understand the material before they go on to the next topic.
< Cases in Point—These essays included at the end of each content section illustrate the influence of economic forces on real issues and real people. Unlike other texts that use boxed features to present interesting new material or newspaper articles, we have written each case ourselves to integrate them more clearly with the rest of the text.
< Summary—In a few paragraphs, the information presented in the chapter is pulled together in a way that allows for a quick review of the material.
< End-of-chapter concept and numerical problems—These are bountiful and are intended to check understanding, to pro- mote discussion of the issues raised in the chapter, and to engage students in critical thinking about the material. Included are not only general review questions to test basic understanding but also examples drawn from the news and from results of economics research. Some have students working with real-world data.
< Chapter quizzes—Each chapter also includes online, supplementary multiple choice questions that provide students with feedback on both correct and incorrect responses. These provide yet another way for students to test themselves on the material.
ADDITIONAL MATERIAL FOR INSTRUCTORS The authors have been personally involved in the generation of a huge Test Bank that includes multiple choice, true/false, and short essays questions. These questions are scored in terms of level of difficulty and include multiple ways of testing the material.
The Solutions Manual, with which the authors were also involved, contains answers for all concept and numerical problems found at the end of each text chapter.
The PowerPoint Slides include all the exhibits contained in the text to allow ease of use in class. We hope that users will find this text an engaging and enjoyable way of becoming acquainted with economics principles and
that mastery of the material will lead to looking at the world in a deeper and more meaningful way. We welcome all feedback. Libby Rittenberg Timothy Tregarthen
PREFACE 5
6 PRINCIPLES OF MICROECONOMICS