Microeconomics

Edgar K. Browning is the Alfred F. Chalk Professor of Economics at Texas A&M University; his specialty is Public Economics.  He earned a B.A. in Economics from the University of Virginia and a Ph.D. in Economics from Princeton University in 1971. A selected list of his publications include “ A Neglected Welfare Cost of Monopoly- and Most other Product Market Distortions,” Journal of Public Economics, 1997; The Non-Tax Wedge,” Journal of Public Economics, 1994; “The Marginal Cost of Redistribution,” Public Finance Quarterly, 1993; “On the Marginal Welfare Cost of Taxation,” American Economic Review, 1987; “The Trade-Off Between Equality and Efficiency,” Journal of Political Economy, 1984.

Preface v

Acknowledgments x

Chapter 1: An Introduction to Microeconomics 1

1.1 The Scope of Microeconomic Theory 2

1.2 The Nature and Role of Theory 2

1.3 Positive Versus Normative Analysis 4

1.4 Market Analysis and Real Versus Nominal Prices 5

1.5 Basic Assumptions about Market Participants 6

1.6 Opportunity Cost 7

1.7 Production Possibility Frontier 10

Chapter 2: Supply and Demand 15

2.1 Demand and Supply Curves 16

2.2 Determination of Equilibrium Price and Quantity 23

2.3 Adjustment to Changes in Demand or Supply 25

2.4 Government Intervention in Markets: Price Controls 29

2.5 Elasticities 34

2.6 The Mathematics Associated with Elasticities 43

Chapter 3: The Theory of Consumer Choice 48

3.1 Consumer Preferences 50

3.2 The Budget Constraint 58

3.3 The Consumer’s Choice 63

3.4 Changes in Income and Consumption Choices 67

3.5 Are People Selfish? 74

3.6 The Utility Approach to Consumer Choice 77

3.7 The Mathematics Behind Consumer Choice 80

Chapter 4: Individual and Market Demand 85

4.1 Price Changes and Consumption Choices 86

4.2 Income and Substitution Effects of a Price Change 90

4.3 Income and Substitution Effects: Inferior Goods 96

4.4 From Individual to Market Demand 99

4.5 Consumer Surplus 101

4.6 Price Elasticity and the Price-Consumption Curve 107

4.7 Network Effects 109

4.8 The Basics of Demand Estimation 113

4.9 Deriving the Consumer’s Demand Curve Mathematically 117

Chapter 5: Using Consumer Choice Theory 122

5.1 Excise Subsidies, Health Care, and Consumer Welfare 123

5.2 Public Schools and the Voucher Proposal 128

5.3 Paying for Garbage 132

5.4 The Consumer’s Choice to Save or Borrow 135

5.5 Investor Choice 142

Chapter 6: Exchange, Efficiency, and Prices 152

6.1 Two-Person Exchange 153

6.2 Efficiency in the Distribution of Goods 159

6.3 Competitive Equilibrium and Efficient Distribution  163

6.4 Price and Nonprice Rationing and Efficiency 167

6.5 Some of the Mathematics Behind Efficiency in Exchange 170

Chapter 7: Production 174

7.1 Relating Output to Inputs 175

7.2 Production When Only One Input Is Variable: The Short Run 176

7.3 Production When All Inputs Are Variable: The Long Run 183

7.4 Returns to Scale 188

7.5 Functional Forms and Empirical Estimation of Production Functions 191

7.6 The Mathematics behind Production Theory 195

Chapter 8: The Cost of Production 201

8.1 The Nature of Cost 202

8.2 Short-Run Cost of Production 203

8.3 Short-Run Cost Curves 206

8.4 Long-Run Cost of Production 212

8.5 Input Price Changes and Cost Curves 218

8.6 Long-Run Cost Curves 221

8.7 Learning by Doing 224

8.8 Importance of Cost Curves to Market Structure 226

8.9 Using Cost Curves: Controlling Pollution 229

8.10 Economies of Scope 232

8.11 Estimating Cost Functions 233

8.12 The Mathematics Behind Production Cost 234

Chapter 9: Profit Maximization in Perfectly Competitive Markets 240

9.1 The Assumptions of Perfect Competition  241

9.2 Profit Maximization 243

9.3 The Demand Curve Facing the Competitive Firm 244

9.4 Short-Run Profit Maximization 246

9.5 The Perfectly Competitive Firm’s Short-Run Supply Curve 251

9.6 The Short-Run Industry Supply Curve 255

9.7 Long-Run Competitive Equilibrium 257

9.8 The Long-Run Industry Supply Curve 261

9.9 When Does the Competitive Model Apply? 269

9.10 The Mathematics Behind Perfect Competition 270

Chapter 10: Using the Competitive Model 275

10.1 The Evaluation of Gains and Losses 276

10.2 Excise Taxation 282

10.3 Airline Regulation and Deregulation 291

10.4 City Taxicab Markets 297

10.5 Consumer and Producer Surplus, and the Net Gains from Trade 300

10.6 Government Intervention in Markets: Quantity Controls 306

Chapter 11: Monopoly 312

11.1 The Monopolist’s Demand and Marginal Revenue Curves 313

11.2 Profit-Maximizing Output of a Monopoly 315

11.3 Further Implications of Monopoly Analysis. 321

11.4 The Measurement and Sources of Monopoly Power 325

11.5 The Efficiency Effects of Monopoly 331

11.6 Public Policy Toward Monopoly 335

11.7 The Mathematics Behind Monopoly 339

Chapter 12: Product Pricing with Monopoly Power 344

12.1 Price Discrimination 346

12.2 Three Necessary Conditions for Price Discrimination 350

12.3 Price and Output Determination with Price Discrimination 352

12.4 Intertemporal Price Discrimination and Peak-Load Pricing 356

12.5 Two-Part Tariffs 362

12.6 The Mathematics Behind Price Discrimination 367

Chapter 13: Monopolistic Competition and Oligopoly 371

13.1 Price and Output under Monopolistic Competition  372

13.2 Oligopoly and the Cournot Model 378

13.3 Other Oligopoly Models 384

13.4 Cartels and Collusion 390

Chapter 14: Game Theory and the Economics of Information 403

14.1 Game Theory 405

14.2 The Prisoner’s Dilemma Game 409

14.3 Repeated Games 414

14.4 Asymmetric Information 419

14.5 Adverse Selection and Moral Hazard 423

14.6 Limited Price Information 428

14.7 Advertising 430

Chapter 15: Using Noncompetitive Market Models 435

15.1 The Size of the Deadweight Loss of Monopoly 436

15.2 Do Monopolies Suppress Inventions? 440

15.3 Natural Monopoly 443

15.4 More on Game Theory: Iterated Dominance and Commitment 447

Chapter 16: Employment and Pricing of Inputs 456

16.1 The Input Demand Curve of a Competitive Firm 457

16.2 Industry and Market Demand Curves for an Input 463

16.3 The Supply of Inputs 466

16.4 Industry Determination of Price and Employment of Inputs 468

16.5 Input Price Determination in a Multi-Industry Market 471

16.6 Input Demand and Employment by an Output Market Monopoly 474

16.7 Monopsony in Input Markets 476

16.8 The Calculus Behind Input Demand by Competitive and Monopoly Firms 478

Chapter 17: Wages, Rent, Interest, and Profit 482

17.1 The Income-Leisure Choice of the Worker 483

17.2 The Supply of Hours of Work 486

17.3 The General Level of Wage Rates 491

17.4 Why Wages Differ 495

17.5 Economic Rent 498

17.6 Monopoly Power in Input Markets: The Case of Unions 500

17.7 Borrowing, Lending, and the Interest Rate 504

17.8 Investment and the Marginal Productivity of Capital 505

17.9 Saving, Investment, and the Interest Rate 508

17.10 Why Interest Rates Differ 510

Chapter 18: Using Input Market Analysis 513

18.1 The Minimum Wage 514

18.2 Who Really Pays for Social Security? 521

18.3 The Hidden Cost of Social Security 524

18.4 The NCAA Cartel 528

18.5 Discrimination in Employment 534

18.6 The Benefits and Costs of Immigration 538

Chapter 19: General Equilibrium Analysis and Economic Efficiency 545

19.1 Partial and General Equilibrium Analysis Compared 547

19.2 Economic Efficiency 550

19.3 Conditions for Economic Efficiency 553

19.4 Efficiency in Production 553

19.5 The Production Possibility Frontier and Efficiency in Output 557

19.6 Competitive Markets and Economic Efficiency 563

19.7 The Causes of Economic Inefficiency 566

Chapter 20: Public Goods and Externalities 571

20.1 What Are Public Goods? 573

20.2 Efficiency in the Provision of a Public Good 575

20.3 Externalities 579

20.4 Externalities and Property Rights 585

20.5 Controlling Pollution, Revisited 590

Glossary 605

Index 612