Ragan Microeconomics, Sixteenth Canadian Edition
By Christopher T.S. Ragan
Contents
List of Boxes ix
To the Instructor x
To the Student xiv
Acknowledgements xv
About the Author xvi
Chapter 1 Economic Issues and Concepts 1
1.1 What Is Economics? 3
Resources 4
Scarcity and Choice 4
Four Key Economic Problems 8
Microeconomics and Macroeconomics 9
Economics and Government Policy 9
1.2 The Complexity of Modern Economies 10
The Nature of Market Economies 11
The Decision Makers and Their Choices 13
Production and Trade 15
1.3 Is There an Alternative to the Market Economy? 17
Types of Economic Systems 17
The Great Debate 19
Government in the Modern Mixed Economy 20
Summary 21
Key Concepts 22
Study Exercises 22
Chapter 2 Economic Theories, Data, and Graphs 26
2.1 Positive and Normative Statements 27
Disagreements Among Economists 28
2.2 Building and Testing Economic Theories 30
What Are Theories? 30
Testing Theories 31
2.3 Economic Data 34
Index Numbers 34
Graphing Economic Data 37
2.4 Graphing Economic Theories 38
Functions 38
Graphing Functions 39
A Final Word 44
Summary 44
Key Concepts 45
Study Exercises 45
Chapter 3 Demand, Supply, and Price 49
3.1 Demand 50
Quantity Demanded 50
Quantity Demanded and Price 51
Demand Schedules and Demand Curves 52
3.2 Supply 57
Quantity Supplied 57
Quantity Supplied and Price 58
Supply Schedules and Supply Curves 58
3.3 The Determination of Price 62
The Concept of a Market 62
Market Equilibrium 63
Changes in Market Equilibrium 65
A Numerical Example 67
Relative Prices 68
Summary 69
Key Concepts 70
Study Exercises 70
Chapter 4 Elasticity 74
4.1 Price Elasticity of Demand 75
The Measurement of Price Elasticity 76
What Determines Elasticity of Demand? 79
Elasticity and Total Expenditure 82
4.2 Price Elasticity of Supply 83
Determinants of Supply Elasticity 84
4.3 Elasticity Matters for Excise Taxes 86
4.4 Other Demand Elasticities 88
Income Elasticity of Demand 88
Cross Elasticity of Demand 90
Summary 92
Key Concepts 93
Study Exercises 93
Chapter 5 Price Controls and Market Efficiency 97
5.1 Government-Controlled Prices 98
Disequilibrium Prices 98
Price Floors 98
Price Ceilings 99
5.2 Rent Controls: A Case Study of Price Ceilings 102
The Predicted Effects of Rent Controls 103
Who Gains and Who Loses? 105
Policy Alternatives 105
5.3 An Introduction to Market Efficiency 106
Demand as “Value” and Supply as “Cost” 106
Economic Surplus and Market Efficiency 108
Market Efficiency and Price Controls 109
One Final Application: Output Quotas 110
A Cautionary Word 111
Summary 112
Key Concepts 113
Study Exercises 113
Chapter 6 Consumer Behaviour 117
6.1 Marginal Utility and Consumer Choice 118
Diminishing Marginal Utility 118
Utility Schedules and Graphs 119
Maximizing Utility 119
The Consumer’s Demand Curve 123
Market Demand Curves 123
6.2 Income and Substitution Effects of Price Changes 124
The Substitution Effect 124
The Income Effect 125
The Slope of the Demand Curve 126
6.3 Consumer Surplus 128
The Concept 128
The Paradox of Value 130
Summary 132
Key Concepts 132
Study Exercises 133
Appendix to Chapter 6 Indifference Curves 138
Chapter 7 Producers in the Short Run 148
7.1 What Are Firms? 149
Organization of Firms 149
Financing of Firms 150
Goals of Firms 150
7.2 Production, Costs, and Profits 151
Production 151
Costs and Profits 153
Profit-Maximizing Output 155
Time Horizons for Decision Making 155
7.3 Production in the Short Run 157
Total, Average, and Marginal Products 157
Diminishing Marginal Product 159
The Average–Marginal Relationship 160
7.4 Costs in the Short Run 161
Defining Short Run Costs 161
Short-Run Cost Curves 162
Capacity 165
Shifts in Short-Run Cost Curves 165
Summary 167
Key Concepts 168
Study Exercises 168
Chapter 8 Producers in the Long Run 173
8.1 The Long Run: No Fixed Factors 174
Profit Maximization and Cost Minimization 174
Long-Run Cost Curves 177
8.2 The Very Long Run: Changes in Technology 181
Technological Change 182
Firms’ Choices in the Very Long Run 185
Summary 186
Key Concepts 186
Study Exercises 187
Appendix to Chapter 8 Isoquant Analysis 190
Chapter 9 Competitive Markets 195
9.1 Market Structure and Firm Behaviour 196
Competitive Markets 196
Competitive Behaviour 196
9.2 The Theory of Perfect Competition 197
The Assumptions of Perfect Competition 197
The Demand Curve for a Perfectly Competitive Firm 198
Total, Average, and Marginal Revenue 199
9.3 Short-Run Decisions 200
Should the Firm Produce at All? 201
How Much Should the Firm Produce? 202
Short-Run Supply Curves 204
Short-Run Equilibrium in a Competitive Market 205
9.4 Long-Run Decisions 208
Entry and Exit 208
Long-Run Equilibrium 212
Changes in Technology 213
Declining Industries 215
Summary 216
Key Concepts 217
Study Exercises 217
Chapter 10 Monopoly, Cartels, and Price Discrimination 221
10.1 A Single-Price Monopolist 222
Revenue Concepts for a Monopolist 222
Short-Run Profit Maximization 225
Why Are Monopolies Rare? 227
Entry Barriers 227
The Very Long Run and Creative Destruction 229
10.2 Cartels and Monopoly Power 230
The Effects of Cartelization 232
Problems That Cartels Face 232
10.3 Price Discrimination 235
When Is Price Discrimination Possible? 236
Different Forms of Price Discrimination 237
The Consequences of Price Discrimination 241
Summary 243
Key Concepts 243
Study Exercises 244
Chapter 11 Imperfect Competition and Strategic Behaviour 248
11.1 Imperfect Competition 249
Between the Two Extremes 249
Defining Imperfect Competition 251
11.2 Monopolistic Competition 253
The Assumptions of Monopolistic Competition 254
Predictions of the Theory 254
11.3 Oligopoly and Game Theory 256
Profit Maximization Is Complicated 256
The Basic Dilemma of Oligopoly 257
Some Simple Game Theory 258
Extensions in Game Theory 260
11.4 Oligopoly in Practice 261
Cooperative Behaviour 261
Competitive Behaviour 262
The Importance of Entry Barriers 263
Oligopoly and the Economy 265
Summary 267
Key Concepts 268
Study Exercises 268
Chapter 12 Economic Efficiency and Public Policy 272
12.1 Productive and Allocative Efficiency 273
Productive Efficiency 274
Allocative Efficiency 276
Which Market Structures Are Efficient? 277
Allocative Efficiency and Total Surplus 279
Allocative Efficiency and Market Failure 282
12.2 Economic Regulation to Promote Efficiency 283
Regulation of Natural Monopolies 284
Regulation of Oligopolies 287
12.3 Canadian Competition Policy 289
The Canadian Competition Act of 1986 289
The Reforms of 2009 292
Future Challenges 293
Summary 294
Key Concepts 294
Study Exercises 295
Chapter 13 How Factor Markets Work 299
13.1 The Demand for Factors 300
Marginal Revenue Product 300
The Firm’s Demand Curve for a Factor 301
The Market Demand Curve for a Factor 303
13.2 The Supply of Factors 305
The Supply of Factors to the Economy 305
The Supply of Factors to a Particular Industry 307
The Supply of Factors to a Particular Firm 309
13.3 Factor Markets in Action 310
Differentials in Factor Prices 311
Economic Rent 314
A Final Word 318
Summary 319
Key Concepts 320
Study Exercises 320
Chapter 14 Labour Markets and Income Inequality 324
14.1 Wage Differentials 326
Wage Differentials in Competitive Labour Markets 326
Wage Differentials in Non-competitive Labour Markets 330
Legislated Minimum Wages 333
14.2 Labour Unions 335
Collective Bargaining 336
14.3 Income Inequality 339
Measuring Income Inequality 339
Causes of Rising Income Inequality 343
Policy Implications 347
Summary 349
Key Concepts 349
Study Exercises 349
Chapter 15 Interest Rates and the Capital Market 354
15.1 A Brief Overview of the Capital Market 355
15.2 Present Value 356
The Present Value of a Single Future Sum 357
The Present Value of a Stream of Future Sums 359
Summary 359
15.3 The Demand for Capital 361
The Firm’s Demand for Capital 361
The Economy’s Demand for Investment 365
15.4 The Supply of Capital 365
Households’ Supply of Saving 365
The Economy’s Supply of Saving 367
15.5 Equilibrium in the Capital Market 367
The Equilibrium Interest Rate 367
Changes in the Market Equilibrium 368
Long-Run Trends in the Capital Market 371
Summary 373
Key Concepts 374
Study Exercises 374
Chapter 16 Market Failures and Government Intervention 377
16.1 Basic Functions of Government 378
16.2 The Case for Free Markets 379
Automatic Coordination 380
Innovation and Growth 381
Decentralization of Power 382
16.3 Market Failures 382
Market Power 383
Externalities 383
Non-Rivalrous and Non-Excludable Goods 386
Asymmetric Information 390
Summary 391
16.4 Broader Social Goals 393
Income Distribution 393
Preferences for Public Provision 394
Protecting Individuals from Others 395
Paternalism 395
Social Responsibility 396
A General Principle 396
16.5 Government Intervention 396
The Tools of Government Intervention 397
The Costs of Government Intervention 398
Government Failure 399
How Much Should Government Intervene? 401
Summary 402
Key Concepts 403
Study Exercises 403
Chapter 17 The Economics of Environmental Protection 407
17.1 The Economic Rationale for Reducing Pollution 408
Pollution as an Externality 408
The Optimal Amount of Pollution Abatement 409
17.2 Pollution-Reduction Policies 411
Direct Regulatory Controls 411
Emissions Taxes 413
Tradable Pollution Permits: “Cap and Trade” 415
Pricing Pollution 417
17.3 The Challenge of Global Climate Change 418
Greenhouse-Gas Emissions 418
The Case for Global Collective Action 420
Energy Use, GDP, and Greenhouse-Gas Emissions 422
Significant Policy Challenges 425
Summary 427
Summary 428
Key Concepts 429
Study Exercises 429
Chapter 18 Taxation and Public Expenditure 434
18.1 Taxation in Canada 435
Progressive Taxes 435
The Canadian Tax System 436
18.2 Evaluating the Tax System 440
Taxation and Equity 440
Taxation and Efficiency 442
18.3 Public Expenditure in Canada 445
Government Purchases and Transfers 446
Canadian “Fiscal Federalism” 446
Canadian Social Programs 449
18.4 Evaluating the Role of Government 454
Public Versus Private Sector 455
Scope of Government Activity 455
Evolution of Policy 456
Summary 456
Key Concepts 457
Study Exercises 457
Chapter 32 The Gains from International Trade 803
32.1 The Gains from Trade 804
Interpersonal, Interregional, and International Trade 805
Illustrating the Gains from Trade 806
The Gains from Trade with Variable Costs 811
Sources of Comparative Advantage 814
32.2 The Determination of Trade Patterns 816
The Law of One Price 817
The Pattern of Foreign Trade 818
Is Comparative Advantage Obsolete? 819
The Terms of Trade 821
Summary 824
Key Concepts 824
Study Exercises 825
Chapter 33 Trade Policy 828
33.1 Free Trade or Protection? 829
The Case for Free Trade 829
The Case for Protection 830
Invalid Arguments for Protection 833
33.2 Methods of Protection 836
Tariffs 837
Import Quotas 839
Tariffs Versus Quotas: An Application 839
Trade-Remedy Laws and Non-Tariff Barriers 840
33.3 Current Trade Policy 842
The GATT and the WTO 842
Regional Trade Agreements 842
Trade Creation and Trade Diversion 843
The North American Free Trade Agreement 844
Summary 848
Key Concepts 849
Study Exercises 849
Mathematical Notes M-1
Timeline of Great Economists T-1
List of Boxes
Applying Economic Concepts
1-1 The Opportunity Cost of Your University Degree 6
2-1 Where Economists Work 29
3-1 Why Apples but Not iPhones? 63
5-1 Minimum Wages and Unemployment 100
6-1 Rationality, Nudges, and Behavioural Economics 122
7-1 Is It Socially Responsible to Maximize Profits? 152
7-2 Three Examples of Diminishing Returns 160
7-3 The Digital World: When Diminishing Returns Disappear
Altogether 166
8-1 The Significance of Productivity Growth 183
9-1 Why Small Firms Are Price Takers 199
9-2 The Parable of the Seaside Inn 209
10-1 Network Effects as Entry Barriers 228
12-1 Are Google and Facebook the Standard Oil of the Twenty-First
Century? 290
14-1 The Rise of the “Gig” Economy 345
15-1 Inflation and Interest Rates 369
16-1 The World’s Endangered Fish 388
16-2 Used Cars and the Market for “Lemons” 392
18-1 Poverty Traps and the Negative Income Tax 453
Lessons from History
4-1 Economic Development and Income Elasticities 90
8-1 Jacob Viner and the Clever Draftsman 181
10-1 Disruptive Technologies and Creative Destruction 231
13-1 David Ricardo and “Economic Rent” 316
Extensions in Theory
3-1 The Distinction Between Stocks and Flows 51
11-1 The Prisoners’ Dilemma 260
16-1 Arthur Okun’s “Leaky Bucket” 394
18-1 Who Really Pays the Corporate Income Tax? 438