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Microeconomics .-'•• i Foundations of MICROECONOMICS ROBIN BADE MICHAEL PARKIN University of Western Ontario FOURTH EDITION PEARSON Addison Wesley Boston San Francisco New York London Toronto Sydney Tokyo Singapore Madrid Mexico City Munich Paris Cape Town Hong Kong Montreal Contents PART 1 INTRODUCTION CHAPTER 1 CHAPTER 2 Getting Started 1 The U.S. and Global Economies 33 CHAPTER CHECKLIST 1 CHAPTER CHECKLIST 33 1.1 Definition and Questions 2 2.1 What, How, and For Whom? 34 Scarcity, 2 What Do We Produce? 34 Economics Defined, 3 How Do We Produce? 36 What, How, and For Whom? 3 For Whom Do We Produce? 39 When Is the Pursuit of Self-interest in the CHECKPOINT 2.1 41 Social Interest? 4 2.2 The Circular Flows 42 CHECKPOINT 1.1 9 Households and Firms, 42 1.2 The Economic Way of Thinking 10 Markets, 42 Core Economic Ideas, 10 Real Flows and Money Flows, 42 Rational Choice, 10 Governments, 44 Cost: What You Must Give Up, 11 Governments in the Circular Flow, 45 Benefit: Gain Measured by What You Are Willing to Federal Government Expenditures and Revenue, 46 Give Up, 11 State and Local Government Expenditures and On the Margin, 12 Revenue, 47 Responding to Incentives, 13 CHECKPOINT 2.2 48 The Micro and Macro Views of the World, 14 Economics as Social Science, 15 2.3 The Global Economy 49 Economics as Policy Tool, 16 The People, 49 CHECKPOINT 1.2 18 The Countries, 49 What in the Global Economy? 50 CHAPTER SUMMARY 19 How in the Global Economy? 53 CHAPTER CHECKPOINT 20 For Whom in the Global Economy? 54 Appendix: Making and Using Graphs 23 CHECKPOINT 2.3 56 Basic Idea, 23 CHAPTER SUMMARY 57 Interpreting Data Graphs, 24 CHAPTER CHECKPOINT 58 Interpreting Graphs Used in Economic Models, 26 The Slope of a Relationship, 29 • EYE on the PAST Relationships Among More Than Two Variables, 30 Changes in What We Produce, 36 APPENDIX CHECKPOINT 32 • EYE on the U.S. ECONOMY Changes in How We Produce in the • EYE on the PAST New Economy, 38 Adam Smith and the Birth of Economics as a Modern Social Science, 17 • EYE on the PAST Growing Government, 48 3 EYE on YOUR LIFE The U.S. and Global Economies in Your Life, 56 CONTENTS CHAPTER 3 CHAPTER 4 The Economic Problem 6i ^ Demand and Supply 83 CHAPTER CHECKLIST 61 CHAPTER CHECKLIST 83 3.1 Production Possibilities 62 Competitive Markets 84 Production Possibilities Frontier, 62 4.1 Demand 85 CHECKPOINT 3.1 67 The Law of Demand, 85 3.2 Opportunity Cost 68 Demand Schedule and Demand Curve, 85 The Opportunity Cost of a Cell Phone, 68 Individual Demand and Market Demand, 87 Increasing Opportunity Cost, 69 Changes in Demand, 88 Slope of the PPF and Opportunity Cost, 69 Change in Quantity Demanded Versus Change in Opportunity Cost Is a Ratio, 70 Demand, 90 Increasing Opportunity Costs Are Everywhere, 70 CHECKPOINT 4.1 91 CHECKPOINT 3.2 72 4.2 Supply 92 3.3 Economic Growth 73 The Law of Supply, 92 CHECKPOINT 3.3 74 Supply Schedule and Supply Curve, 92 Individual Supply and Market Supply, 94 3.4 Specialization and Trade 75 Changes in Supply, 95 Comparative Advantage, 75 Change in Quantity Supplied Versus Change in Achieving Gains from Trade, 76 Supply, 97 CHECKPOINT 3.4 78 CHECKPOINT 4.2 98 CHAPTER SUMMARY 79 4.3 Market Equilibrium 99 CHAPTER CHECKPOINT 80 Price: A Market's Automatic Regulator, 99 Predicting Price Changes: Three Questions, 100 • EYE on YOUR LIFE Effects of Changes in Demand, 101 Your Production Possibilities Frontier, 66 Effects of Changes in Supply, 102 • EYE on the U.S. ECONOMY Changes in Both Demand and Supply, 104 Guns Versus Butter, 71 CHECKPOINT 4.3 106 • EYE on the GLOBAL ECONOMY CHAPTER SUMMARY 107 Hong Kong's Rapid Economic Growth, 74 • EYE on YOUR LIFE CHAPTER CHECKPOINT 108 Your Comparative Advantage, 77 • EYE on the GLOBAL ECONOMY A Change in the Demand for Roses, 103 • EYE on the GLOBAL ECONOMY A Change in the Supply of Flat Panel TVs, 103 B EYE on YOUR LIFE Using Demand and Supply, 105 CONTENTS PART 2 A CLOSER LOOK AT MARKETS CHAPTER 5 CHAPTER 6 n Elasticities of Efficiency and Fairness Demand and Supply 111 of Markets 137 CHAPTER CHECKLIST 111 CHAPTER CHECKLIST 137 5.1 The Price Elasticity of Demand 112 6.1 Allocation Methods and Efficiency 138 Percentage Change in Price, 112 Resource Allocation Methods, 138 Percentage Change in Quantity Demanded, 113 Using Resources Efficiently, 141 Elastic and Inelastic Demand, 114 CHECKPOINT 6.1 145 Influences on the Price Elasticity of Demand, 114 Computing the Price Elasticity of Demand, 116 6.2 Value, Price, and Consumer Surplus 146 Interpreting the Price Elasticity of Demand Demand and Marginal Benefit, 146 Number, 117 Consumer Surplus, 147 Elasticity Along a Linear Demand Curve, 118 CHECKPOINT 6.2 148 Total Revenue and the Price Elasticity of 6.3 Cost, Price, and Producer Surplus 149 Demand, 120 Supply and Marginal Cost, 149 Applications of the Price Elasticity of Demand, 122 Producer Surplus, 150 CHECKPOINT 5.1 123 CHECKPOINT 6.3 151 5.2 The Price Elasticity of Supply 124 6.4 Are Markets Efficient? 152 Elastic and Inelastic Supply, 124 Marginal Benefit Equals Marginal Cost, 152 Influences on the Price Elasticity of Supply, 124 Total Surplus Is Maximized, 153 Computing the Price Elasticity of Supply, 126 The Invisible Hand, 153 CHECKPOINT 5.2 128 Underproduction and Overproduction, 155 5.3 Cross Elasticity and Income Elasticity 129 Obstacles to Efficiency, 156 Cross Elasticity of Demand, 129 Alternatives to the Market, 157 Income Elasticity of Demand, 130 CHECKPOINT 6.4 158 CHECKPOINT 5.3 132 6.5 Are Markets Fair? 159 CHAPTER SUMMARY 133 It's Not Fair If the Rules Aren't Fair, 159 It's Not Fair If the Result Isn't Fair, 160 CHAPTER CHECKPOINT 134 Price Hike in a Natural Disaster: Is it Fair? 160 • EYE on the GLOBAL ECONOMY Compromise, 161 Price Elasticities of Demand, 119 CHECKPOINT 6.5 162 • EYE on YOUR LIFE CHAPTER SUMMARY 163 Your Price Elasticities of Demand, 121 CHAPTER CHECKPOINT 164 • EYE on the GLOBAL ECONOMY Income Elasticities of Demand, 131 • EYE on the U.S. ECONOMY The Invisible Hand and e-Commerce, 154 • EYE on YOUR LIFE Allocation Methods, Efficiency and Fairness, 161 CONTENTS PART 3 HOW GOVERNMENTS INFLUENCE THE ECONOMY Incidence, Inefficiency, and the Elasticity CHAPTER 7 Markets in Action 167 of Supply, 194 CHECKPOINT 8.1 195 CHAPTER CHECKLIST 167 8.2 Income Tax and Social Security Tax 196 7.1 Price Ceilings 168 The Personal Income Tax, 196 A Rent Ceiling, 168 The Effects of the Income Tax, 198 Are Rent Ceilings Efficient? 172 The Social Security Tax, 202 Are Rent Ceilings Fair? 173 CHECKPOINT 8.2 205 If Rent Ceilings Are So Bad, Why Do We 8.3 Fairness and the Big Tradeoff 206 Have Them? 173 The Benefits Principle, 206 CHECKPOINT 7.1 174 The Ability-to-Pay Principle, 206 7.2 Price Floors 175 The Marriage Tax Problem, 207 The Minimum Wage, 176 The Big Tradeoff, 208 Is the Minimum Wage Efficient? 178 CHECKPOINT 8.3 208 Is the Minimum Wage Fair? 179 CHAPTER SUMMARY 209 If the Minimum Wage Is So Bad, Why Do We Have It? 179 CHAPTER CHECKPOINT 210 CHECKPOINT 7.2 180 • EYE on the U.S. ECONOMY 7.3 Price Supports in Agriculture 181 Taxes in the United States Today, 196 How Governments Intervene in Markets for Farm • EYE on the U.S. ECONOMY Products, 181 President Bush's Tax Cuts, 200 Price Support: An Illustration, 181 • EYE on the PAST CHECKPOINT 7.3 184 The Origins and History of the U.S. Income Tax, 204 CHAPTER SUMMARY 185 • EYE on YOUR LIFE CHAPTER CHECKPOINT 186 Tax Freedom Day, 204 • EYE on the PAST An Earthquake and a Rent Ceiling: A Tale of Two Eras in One City, 171 CHAPTER 9 • EYE on the U.S. ECONOMY Global Markets in Action 213 The Federal Minimum Wage, 178 S CHAPTER CHECKLIST 213 U EYE on YOUR LIFE Price Ceilings and Price Floors, 183 9.1 How Global Markets Work 214 International Trade Today, 214 What Drives International Trade? 214 CHAPTER 8 Why the United States Imports T-shirts, 216 n Taxes 189 Why the United States Exports Airplanes, 217 CHECKPOINT 9.1 218 CHAPTER CHECKLIST 189 9.2 Winners, Losers, and Net Gains 8.1 Taxes on Buyers and Sellers 190 from Trades 219 Tax Incidence, 190 Gains and Losses from Imports, 220 Taxes and Efficiency, 191 Gains and Losses from Exports, 221 Incidence, Inefficiency, and Elasticity, 192 CHECKPOINT 9.2 222 Incidence, Inefficiency, and the Elasticity of Demand, 193 CONTENTS XIII 9.3 International Trade Restrictions 223 CHAPTER CHECKPOINT 262 Tariffs, 223 • EYE on the U.S. ECONOMY Quotas, 227 U.S. Air Pollution Trends, 249 Other Import Barriers, 229 Export Subsidies, 229 • EYE on the GLOBAL ECONOMY Global Temperature and CO2 Trends, 249 CHECKPOINT 9.3 230 • EYE on the GLOBAL ECONOMY 9.4 The Case Against Protection 231 A Carbon Fuel Tax?, 252 Three Traditional Arguments for Protection, 231 • EYE on YOUR LIFE Four Newer Arguments for Protection, 233 Externalities in Your Life, 252 Why Is International Trade Restricted?, 234 CHECKPOINT 9.4 236 CHAPTER SUMMARY 237 CHAPTER 1 1 CHAPTER CHECKPOINT 238 S Public Goods and Common Resources 265 • EYE on the U.S. ECONOMY U.S. Exports and Imports, 215 CHAPTER CHECKLIST 265 • EYE on the GLOBAL ECONOMY 11.1 Classifying Goods and Resources 266 Winners and Losers from Globalization, 219 Excludable, 266 • EYE on the PAST Rival, 266 The History of U.S.
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