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