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Principles of MICROECONOMICS an Open Text by Douglas Curtis and Ian Irvine with Open Texts Principles of MICROECONOMICS an Open Text by Douglas Curtis and Ian Irvine VERSION 2017 – REVISION B ADAPTABLE | ACCESSIBLE | AFFORDABLE Creative Commons License (CC BY-NC-SA) advancing learning Champions of Access to Knowledge OPEN TEXT ONLINE ASSESSMENT All digital forms of access to our high- We have been developing superior on- quality open texts are entirely FREE! All line formative assessment for more than content is reviewed for excellence and is 15 years. Our questions are continuously wholly adaptable; custom editions are pro- adapted with the content and reviewed for duced by Lyryx for those adopting Lyryx as- quality and sound pedagogy. To enhance sessment. Access to the original source files learning, students receive immediate per- is also open to anyone! sonalized feedback. Student grade reports and performance statistics are also provided. SUPPORT INSTRUCTOR SUPPLEMENTS Access to our in-house support team is avail- Additional instructor resources are also able 7 days/week to provide prompt resolu- freely accessible. Product dependent, these tion to both student and instructor inquiries. supplements include: full sets of adaptable In addition, we work one-on-one with in- slides and lecture notes, solutions manuals, structors to provide a comprehensive sys- and multiple choice question banks with an tem, customized for their course. This can exam building tool. include adapting the text, managing multi- ple sections, and more! Contact Lyryx Today! [email protected] advancing learning Principles of Microeconomics an Open Text by Douglas Curtis and Ian Irvine Version 2017 — Revision B BE A CHAMPION OF OER! Contribute suggestions for improvements, new content, or errata: A new topic A new example An interesting new question Any other suggestions to improve the material Contact Lyryx at [email protected] with your ideas. Lyryx Learning Team Bruce Bauslaugh Martha Laflamme Peter Chow Jennifer MacKenzie Nathan Friess Tamsyn Murnaghan Stephanie Keyowski Bogdan Sava Claude Laflamme Ryan Yee LICENSE Creative Commons License (CC BY-NC-SA): This text, including the art and illustrations, are available under the Creative Commons license (CC BY-NC-SA), allowing anyone to reuse, revise, remix and redistribute the text. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/3.0/ advancing learning Principles of Microeconomics an Open Text by Douglas Curtis and Ian Irvine Base Text Revision History Current Revision: Version2017 — RevisionB Edits and revisions have been completed by the authors together with the editorial staff at Lyryx Learning. All new content (text and images) is released under the same license as noted above. • Data, tables, and figures have been updated to the latest available data. Applications and discus- sions have been edited to discuss and comment on these current observations. • New content added including zero-sum games, teams and services, market design and matching, 2017 B and returns to scale for the production of intermediate goods. • Discussion of climate change in relation to externalities is expanded and updated to reflect current events. 2017 A • Front matter has been updated including cover, copyright, and revision pages. Table of Contents Table of Contents iii About the Authors 1 Part One: The Building Blocks 3 1 Introduction to key ideas 5 1.1 What’s it all about? .................................. 5 1.2 Understanding through the use of models ...................... 9 1.3 Opportunity cost and the market ........................... 10 1.4 A model of exchange and specialization ....................... 11 1.5 Economy-wide production possibilities ....................... 15 1.6 Aggregate output, growth and business cycles .................... 17 Conclusion ......................................... 22 Key Terms .......................................... 23 Exercises for Chapter 1 ................................... 24 2 Theories, data and beliefs 27 2.1 Data analysis ..................................... 27 iii iv Table of Contents 2.2 Data, theory and economic models .......................... 33 2.3 Ethics, efficiency and beliefs ............................. 36 Key Terms .......................................... 40 Exercises for Chapter 2 ................................... 41 3 The classical marketplace – demand and supply 43 3.1 The marketplace – trading .............................. 43 3.2 The market’s building blocks ............................. 44 3.3 Demand and supply curves .............................. 48 3.4 Non-price influences on demand ........................... 49 3.5 Non-price influences on supply ............................ 53 3.6 Simultaneous supply and demand impacts ...................... 56 3.7 Market interventions – governments and interest groups ............... 57 3.8 Individual and market functions ........................... 62 3.9 Useful techniques – demand and supply equations .................. 63 Conclusion ......................................... 64 Key Terms .......................................... 65 Exercises for Chapter 3 ................................... 67 Part Two: Responsiveness and the Value of Markets 71 4 Measures of response: Elasticities 73 4.1 Price responsiveness of demand ........................... 73 4.2 Price elasticities and public policy .......................... 79 Table of Contents v 4.3 The time horizon and inflation ............................ 83 4.4 Cross-price elasticities – cable or satellite ...................... 83 4.5 The income elasticity of demand ........................... 84 4.6 Elasticity of supply .................................. 86 4.7 Elasticities and tax incidence ............................. 87 4.8 Technical tricks with elasticities ........................... 90 Key Terms .......................................... 91 Exercises for Chapter 4 ................................... 92 5 Welfare economics and externalities 97 5.1 Equity and efficiency ................................. 97 5.2 Consumer and producer surplus ........................... 98 5.3 Efficient market outcomes ..............................102 5.4 Taxation, surplus and efficiency ...........................104 5.5 Market failures – externalities ............................106 5.6 Other market failures .................................110 5.7 Environmental policy and climate change ......................110 Conclusion .........................................117 Key Terms ..........................................118 Exercises for Chapter 5 ...................................120 Part Three: Decision Making by Consumer and Producers 123 6 Individual choice 125 vi Table of Contents 6.1 Rationality .......................................125 6.2 Choice with measurable utility ............................126 6.3 Choice with ordinal utility ..............................134 6.4 Applications of indifference analysis .........................142 Key Terms ..........................................147 Exercises for Chapter 6 ...................................148 7 Firms, investors and capital markets 151 7.1 Business organization .................................151 7.2 Profit .........................................154 7.3 Risk and the investor .................................157 7.4 Risk pooling and diversification ...........................158 Conclusion .........................................161 Key Terms ..........................................162 Exercises for Chapter 7 ...................................164 8 Production and cost 167 8.1 Efficient production ..................................167 8.2 Thetimeframe ....................................169 8.3 Production in the short run ..............................170 8.4 Costs in the short run .................................174 8.5 Fixed costs and sunk costs ..............................178 8.6 Long-run production and costs ............................179 8.7 Technological change and globalization .......................184 Table of Contents vii 8.8 Clusters, learning by doing, scope economies ....................186 Conclusion .........................................187 Key Terms ..........................................188 Exercises for Chapter 8 ...................................190 Part Four: Market Structures 193 9 Perfect competition 195 9.1 The perfect competition paradigm ..........................195 9.2 Market characteristics .................................196 9.3 The firm’s supply decision ..............................197 9.4 Dynamics: Entry and exit ...............................203 9.5 Long-run industry supply ...............................207 9.6 Globalization and technological change .......................210 9.7 Efficient resource allocation .............................211 Key Terms ..........................................212 Exercises for Chapter 9 ...................................213 10 Monopoly 215 10.1 Monopolies ......................................215 10.2 Profit maximizing behaviour .............................219 10.3 Long-run choices ...................................227 10.4 Output inefficiency ..................................229 10.5 Price discrimination ..................................230 viii Table of Contents 10.6 Cartels: Acting like a monopolist ...........................235 10.7 Invention, innovation and rent seeking ........................238 Conclusion .........................................240 Key Terms ..........................................241 Exercises for Chapter 10 ..................................242
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