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Microeconomics Markets, Methods & Models an Open Text by Douglas Curtis and Ian Irvine with Open Texts Microeconomics Markets, Methods & Models an Open Text by Douglas Curtis and Ian Irvine BASE TEXTBOOK VERSION 2017 – REVISION A 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 Microeconomics an Open Text by Douglas Curtis and Ian Irvine Version 2017 — Revision A Version 2017 – Revision A: Updates include new cover and back pages, new front matter. Version 2015 – Revision A: The content in this version has been revised in several respects. The content has been updated to include discussion about the role Uber has played in undermining taxi cartels in numerous cities. A new section regarding wealth inequality, and based on the best selling book of Thomas Piketty published in 2014. 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 Jennifer MacKenzie Peter Chow Tamsyn Murnaghan Nathan Friess Bogdan Sava Stephanie Keyowski Larissa Stone Claude Laflamme Ryan Yee Martha Laflamme Ehsun Zahedi 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/ Table of Contents Table of Contents iii 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 ........................... 11 1.4 A model of exchange and specialization ....................... 12 1.5 Economy-wide production possibilities ....................... 15 1.6 Aggregate output, growth and business cycles .................... 17 Key terms .......................................... 23 End of chapter exercises .................................. 24 2 Theories, models and data 27 2.1 Observations, theories and models .......................... 27 2.2 Variables, data and index numbers .......................... 29 2.3 Testing economic models & analysis ......................... 39 2.4 Diagrams and economic analysis ........................... 42 iii iv Table of Contents 2.5 Ethics, efficiency and beliefs ............................. 45 Key terms .......................................... 50 End of chapter exercises .................................. 51 3 The classical marketplace – demand and supply 57 3.1 Trading ........................................ 57 3.2 The market’s building blocks ............................. 58 3.3 Demand and supply curves .............................. 62 3.4 Other influences on demand ............................. 65 3.5 Other influences on supply .............................. 70 3.6 Simultaneous supply and demand impacts ...................... 73 3.7 Market interventions ................................. 75 3.8 Individual and market functions ........................... 79 Key terms .......................................... 81 End of chapter exercises .................................. 82 Part Two: Responsiveness and the Value of Markets 87 4 Measures of response: elasticities 89 4.1 Price responsiveness of demand ........................... 89 4.2 Price elasticity and expenditure ............................ 98 4.3 The time horizon and inflation ............................101 4.4 Cross-price elasticities ................................101 4.5 The income elasticity of demand ...........................102 Table of Contents v 4.6 Elasticity of supply ..................................104 4.7 Elasticities and tax incidence .............................105 4.8 Identifying demand and supply elasticities ......................108 Key terms ..........................................110 End of chapter exercises ..................................110 5 Welfare economics and externalities 117 5.1 Equity and efficiency .................................117 5.2 Consumer and producer surplus ...........................118 5.3 Efficient market outcomes ..............................123 5.4 Taxation, surplus and efficiency ...........................124 5.5 Market failures – externalities ............................128 5.6 Other market failures .................................132 5.7 Environmental policy and climate change ......................132 5.8 Equity, justice, and efficiency .............................140 Key terms ..........................................144 End of chapter exercises ..................................145 Part Three: Decision Making by Consumer and Producers 151 6 Individual choice 153 6.1 Rationality .......................................153 6.2 Choice with measurable utility ............................155 6.3 Choice with ordinal utility ..............................162 vi Table of Contents 6.4 Applications of indifference analysis .........................172 Key terms ..........................................179 End of chapter exercises ..................................180 7 Firms, investors and capital markets 185 7.1 Business organization .................................185 7.2 Profit, ownership and corporate goals .........................189 7.3 Risk and the investor .................................190 7.4 Diminishing marginal utility and risk .........................193 7.5 Real returns to investment ..............................196 7.6 Financing the risky firm: diversification .......................198 Key terms ..........................................202 End of chapter exercises ..................................203 8 Production and cost 207 8.1 Efficient production ..................................207 8.2 Thetimeframe ....................................209 8.3 Production in the short run ..............................209 8.4 Costs in the short run .................................214 8.5 Fixed costs and sunk costs ..............................219 8.6 Long run production and costs ............................220 8.7 Technological change and globalization .......................225 8.8 Clusters, learning by doing, scope economies ....................227 Key terms ..........................................229 Table of Contents vii End of chapter exercises ..................................230 Part Four: Market Structures 235 9 Perfect competition 237 9.1 The perfect competition paradigm ..........................237 9.2 Market characteristics .................................238 9.3 The firm’s supply decision ..............................240 9.4 Dynamics: entry and exit ...............................246 9.5 Long run industry supply ...............................249 9.6 Globalization and technological change .......................252 9.7 Efficient resource allocation .............................253 Key terms ..........................................254 End of chapter exercises ..................................255 10 Monopoly 261 10.1 Monopolies ......................................261 10.2 Profit maximizing behaviour .............................265 10.3 Long run choices ...................................271 10.4 Output inefficiency ..................................273 10.5 Price discrimination ..................................275 10.6 Cartels: acting like a monopolist ...........................280 10.7 Rent-seeking .....................................283 10.8 Technology and innovation ..............................284 viii Table of Contents Key terms ..........................................286 End of chapter exercises ..................................286 11 Imperfect competition 291 11.1 Imperfect competitors .................................291 11.2 Performance-based measures of structure – market power ..............295 11.3 Monopolistic competition ...............................296 11.4 Oligopoly and games .................................298 11.5 Duopoly and Cournot games .............................303 11.6 Comparing market structures .............................307 11.7 Entry, exit & potential competition
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