Principles of Microeconomics, 7th Edition PDF by Joshua Gans, Stephen King, Martin Byford and N Gregory Mankiw


By Joshua Gans, Stephen King, Martin Byford and N Gregory Mankiw


Guide to the text xiii

Guide to the online resources xv

Preface to this edition xvii

Preface to the original edition xx

To the students xxi

About the authors xxii

Acknowledgements xxiv

Part 1 Introduction 2

Chapter 1 Ten principles of economics 4

How people make decisions 5

Principle 1: People face trade-offs 5

Principle 2: The cost of something is what you give up to get it 6

Principle 3: Rational people think at the margin 7

Principle 4: People respond to incentives 9

Case study: Choosing when the stork comes 10

How people interact 11

Principle 5: Trade can make everyone better off 11

In the news: Outsourcing your own job 12

Principle 6: Markets are usually a good way to organise economic activity 13

FYI: Adam Smith and the role of markets 14

Case study: Adam Smith would have loved Uber 15

Principle 7: Governments can sometimes improve market outcomes 15

How the economy as a whole works 17

Principle 8: A country’s standard of living depends on its

ability to produce goods and services 17

Principle 9: Prices rise when the government prints too much money 17

Principle 10: Society faces a short-term trade-off between

inflation and unemployment 18

Conclusion 20

Summary 21

Key concepts 21

Questions for review 21

Multiple choice 21

Problems and applications 22

Chapter 2 Thinking like an economist 24

The economist as scientist 25

The scientific method: Observation, theory and more

observation 25

The role of assumptions 26

Economic models 27

Our first model: The circular-flow diagram 28

Our second model: The production possibilities

frontier 29

Microeconomics and macroeconomics 31

The economist as policy adviser 33

Positive versus normative analysis 33

Economists in government 34

Why economists’ advice is not always

followed 35

Why economists disagree 36

Differences in scientific judgements 36

Differences in values 36

What Australian economists think 37

What Australian economists think 37

Let’s get going 37

Summary 39

Key concepts 39

Questions for review 39

Multiple choice 39

Problems and applications 40

Appendix: Graphing – a brief review 42

Graphs of a single variable 42

Graphs of two variables: The coordinate system 42

Curves in the coordinate system 44

Slope and elasticity 47

Cause and effect 49

Chapter 3 Interdependence and the gains from

trade 52

A parable for the modern economy 53

Production possibilities 54

Specialisation and trade 55

The principle of comparative advantage 57

Absolute advantage 57

Opportunity cost and comparative advantage 57

Comparative advantage and trade 58

FYI: The legacy of Adam Smith and David

Ricardo 59

The price of trade 60

Applications of comparative advantage 60

Should Roger Federer mow his own lawn? 60

Should Australia trade with other countries? 61

In the news: Who has a comparative advantage in

slaying ogres? 62

Conclusion 63

Summary 64

Key concepts 64

Questions for review 64

Multiple choice 64

Problems and applications 65

Part 2 Supply and demand I: How markets

work 68

Chapter 4 The market forces of supply and

demand 70

Markets and competition 71

What is a market? 71

What is competition? 71

Demand 72

The demand curve: The relationship between price and

quantity demanded 72

Market demand versus individual demand 74

FYI: Ceteris paribus 75

Shifts in the demand curve 76

Case study: Are smartphones and tablets substitutes or

complements? 77

Case study: Two ways to reduce the quantity of smoking

demanded 78

Supply 80

The supply curve: The relationship between price and

quantity supplied 80

Market supply versus individual supply 81

Shifts in the supply curve 82

Supply and demand together 85

Equilibrium 85

Three steps for analysing changes in equilibrium 87

Conclusion: How prices allocate resources 90

In the news: Mother Nature shifts the supply curve 92

Summary 93

Key concepts 93

Questions for review 93

Multiple choice 94

Problems and applications 95

Chapter 5 Elasticity and its application 97

The elasticity of demand 98

The price elasticity of demand and its determinants 98

Computing the price elasticity of demand 99

FYI: A few elasticities from the real world 100

The variety of demand curves 100

FYI: The midpoint method: A better way to calculate

percentage changes and elasticities 102

Total revenue and the price elasticity of demand 103

Case study: Pricing admission to an art gallery 105

Elasticity and total revenue along a linear demand

curve 105

Other demand elasticities 107

The elasticity of supply 108

The price elasticity of supply and its determinants 108

Computing the price elasticity of supply 108

The variety of supply curves 109

Three applications of supply, demand and elasticity 109

Can good news for farming be bad news for farmers? 111

Why did OPEC fail to keep the price of oil high? 113

Do drug bans increase or decrease drug-related crime? 114

Conclusion 116

Summary 117

Key concepts 117

Questions for review 117

Multiple choice 118

Problems and applications 118

Chapter 6 Supply, demand and government

policies 121

Controls on prices 122

How price ceilings affect market outcomes 122

Case study: Lines at the petrol station 124

Case study: Rent control in the short run and long

run 125

How price floors affect market outcomes 126

Case study: Minimum wage rates 128

What Australian economists think 130

Evaluating price controls 130

Taxes 131

How taxes on sellers affect market outcomes 132

How taxes on buyers affect market outcomes 133

Case study: Who pays the payroll tax? 135

Elasticity and tax incidence 136

Subsidies 137

How subsidies affect market outcomes 138

Case study: Who gets the benefits from the First Home Owner Grant scheme? 140

What Australian economists think 141

Conclusion 141

Summary 142

Key concepts 142

Questions for review 142

Multiple choice 143

Problems and applications 143

Part 3 Supply and demand II: Markets and welfare 146

Chapter 7 Consumers, producers and the efficiency of markets 148

Consumer surplus 149

Willingness to pay 149

Using the demand curve to measure consumer surplus 150

How a lower price raises consumer surplus 153

What does consumer surplus measure? 153

Case study: How parking meters help you find a parking space 155

Producer surplus 156

Cost and the willingness to sell 156

Using the supply curve to measure producer surplus 157

How a higher price raises producer surplus 158

Market efficiency 160

The benevolent social planner 160

Evaluating the market equilibrium 161

Case study: Should there be a market for organs? 163

Conclusion: Market efficiency and market failure 164

Summary 166

Key concepts 166

Questions for review 166

Multiple choice 166

Problems and applications 167

Chapter 8 Application: The costs of taxation 170

The deadweight loss of taxation 171

How a tax affects market participants 171

Deadweight losses and the gains from trade 175

The determinants of the deadweight loss 176

Case study: The deadweight loss debate 178

Deadweight loss and tax revenue as taxes vary 179

Case study: The Laffer curve and supply-side economics 181

Conclusion 183

Summary 184

Key concept 184

Questions for review 184

Multiple choice 184

Problems and applications 185

Appendix 188

The welfare economics of subsidies 188

The cost of a subsidy 189

The deadweight loss from a subsidy 190

Understanding the deadweight loss from Over production 191

Chapter 9 Application: International trade 192

The determinants of trade 193

The equilibrium without trade 193

The world price and comparative advantage 194

The winners and losers from trade 195

The gains and losses of an exporting country 195

The gains and losses of an importing country 198

The effects of a tariff 200

FYI: Import quotas: Another way to restrict trade 202

The lessons for trade policy 202

Other benefits of international trade 203

In the news: Trade as a tool for economic

development 204

The arguments for restricting trade 205

The jobs argument 206

The national security argument 206

In the news: Should the winners from free trade

compensate the losers? 207

The infant industry argument 208

The unfair competition argument 208

The protection-as-a-bargaining-chip argument 208

Case study: Trade agreements and the World Trade

Organization 209

Conclusion 210

What Australian economists think 211

Summary 212

Key concepts 212

Questions for review 212

Multiple choice 212

Problems and applications 213

Part 4 The economics of the public sector 216

Chapter 10 Externalities 218

Externalities and market inefficiency 220

Welfare economics: A recap 220

Negative externalities 220

Positive externalities 222

Case study: Technology spillovers, industrial policy and

patent protection 223

What Australian economists think 224

Public policies on externalities 225

What Australian economists think 225

Command-and-control policies: Regulation 225

Market-based policy 1: Corrective taxes and

subsidies 226

Case study: Taking out the garbage 227

Market-based policy 2: Tradeable pollution permits 228

Case study: British Columbia adopts a broad-based

carbon tax 229

What Australian economists think 231

Objections to the economic analysis of pollution 231

Private solutions to externalities 232

The types of private solutions 232

The Coase theorem 232

Why private solutions do not always work 233

Conclusion 234

Summary 235

Key concepts 235

Questions for review 235

Multiple choice 235

Problems and applications 236

Chapter 11 Public goods and common

resources 239

The different kinds of goods 240

Public goods 242

The free-rider problem 242

Some important public goods 243

Case study: Are lighthouses public goods? 244

The difficult job of cost–benefit analysis 245

Case study: How much is a life worth? 246

Private provision of public goods 247

Case study: Is music a public good? 248

Common resources 249

The Tragedy of the Commons 249

Some important common resources 250

In the news: The case for toll roads 251

What Australian economists think 253

Case study: Why the cow is not extinct 254

Conclusion: The importance of property rights 255

Summary 256

Key concepts 256

Questions for review 256

Multiple choice 256

Problems and applications 257

Chapter 12 The design of the tax system 260

An overview of Australian taxation 261

Taxes collected by the federal government 261

Taxes collected by state and local governments 264

Taxes and efficiency 265

Deadweight losses 265

Case study: Should income or consumption

be taxed? 266

Administrative burden 267

Marginal tax rates versus average tax rates 267

Lump-sum taxes 268

Taxes and equity 269

The benefits principle 269

The ability-to-pay principle 270

Case study: How the tax burden is distributed 271

Case study: Who should pay for higher education? 272

Tax incidence and tax equity 273

Case study: Who pays company income tax? 273

Conclusion: The trade-off between equity and

efficiency 274

Summary 275

Key concepts 275

Questions for review 275

Multiple choice 275

Problems and applications 276

Part 5 Firm behaviour and the organisation

of industry 278

Chapter 13 The costs of production 280

What are costs? 281

Total revenue, total cost and profit 281

Costs as opportunity costs 282

The cost of capital as an opportunity cost 282

Economic profit versus accounting profit 283

Production and costs 284

FYI: How long is the long run? 284

The production function 285

From the production function to the total-cost curve 287

The various measures of cost 288

Fixed and variable costs 289

Average and marginal cost 290

Cost curves and their shapes 290

Typical cost curves 292

Costs in the short run and in the long run 294

The relationship between short-run and long-run average

total cost 294

Economies and diseconomies of scale 295

Conclusion 296

FYI: Lessons from a pin factory 296

Summary 298

Key concepts 298

Questions for review 298

Multiple choice 299

Problems and applications 299

Chapter 14 Firms in competitive markets 303

What is a competitive market? 304

The meaning of competition 304

The revenue of a competitive firm 305

Profit maximization and the competitive firm’s supply

curve 306

A simple example of profit maximization 306

The marginal-cost curve and the firm’s supply

decision 307

The firm’s short-run decision to shut down 309

FYI: Spilt milk and sunk costs 310

Case study: Near-empty restaurants and off-season

ski lodges 311

The firm’s long-run decision to exit or enter a market 312

Measuring profit in our graph for the competitive firm 313

The supply curve in a competitive market 314

The short run: Market supply with a fixed number of

firms 315

The long run: Market supply with entry and exit 315

Why do competitive firms stay in business if they make

zero profit? 317

A shift in demand in the short run and long run 317

Why the long-run supply curve might slope upwards 319

Conclusion: Behind the supply curve 320

Summary 321

Key concepts 321

Questions for review 321

Multiple choice 321

Problems and applications 322

Chapter 15 Monopoly 326

Why monopolies arise 327

Monopoly resources 328

Case study: The gas industry in south-eastern

Australia 328

Government-created monopolies 329

Natural monopolies 329

How monopolies make production and pricing

decisions 331

Monopoly versus competition 331

A monopoly’s revenue 332

Profit maximisation 334

FYI: Why a monopoly does not have a supply curve 336

A monopoly’s profit 336

Case study: Monopoly pharmaceuticals versus generic

pharmaceuticals 337

The welfare cost of monopoly 338

The deadweight loss 339

The monopoly’s profit: A social cost? 341

Price discrimination 342

A parable about pricing 342

The moral of the story 343

The analytics of price discrimination 344

Examples of price discrimination 345

In the news: Why do Australians pay more for digital

downloads? 347

Conclusion: The prevalence of monopoly 349

Summary 350

Key concepts 350

Questions for review 350

Multiple choice 350

Problems and applications 351

Chapter 16 Monopolistic competition 356

Between monopoly and perfect competition 357

Competition with differentiated products 359

The monopolistically competitive firm in the short run 359

The long-run equilibrium 360

Monopolistic versus perfect competition 362

Monopolistic competition and the welfare of society 364

Advertising 365

The debate about advertising 365

Case study: Advertising and the price of glasses 366

Advertising as a signal of quality 367

Brand names 368

Conclusion 369

Summary 371

Key concepts 371

Questions for review 371

Multiple choice 371

Problems and applications 372

Chapter 17 Oligopoly and business

strategy 375

Markets with only a few sellers 376

A duopoly example 377

Competition, monopolies and cartels 377

The equilibrium for an oligopoly 378

How the size of an oligopoly affects the market

outcome 379

Case study: OPEC and the world oil market 380

The economics of cooperation 381

The prisoners’ dilemma 382

Oligopolies as a prisoners’ dilemma 383

Other examples of the prisoners’ dilemma 384

The prisoners’ dilemma and the welfare of society 385

Why people sometimes cooperate 386

Case study: The prisoners’ dilemma tournament 387

Conclusion 388

Summary 389

Key concepts 389

Questions for review 389

Multiple choice 389

Problems and applications 390

Appendix: Types of oligopolistic competition 394

Anticipating your competitor’s response 394

Cournot quantity competition 394

Bertrand price competition 398

Comparing Cournot and Bertrand competition 399

Chapter 18 Competition policy 400

Public policy towards monopolies 401

Using the law to increase competition 401

What Australian economists think 402

Case study: The ACCC – Australia’s competition

regulator 402

What Australian economists think 404

Regulation 404

Public ownership and privatisation 405

Doing nothing 406

Public policy towards oligopolies 408

Restraint of trade and competition laws 408

In the news: How to form a cartel 408

What Australian economists think 410

Controversies over competition policy 410

In the news: When is the price of milk too low? 411

Case study: The Baxter case 413

Conclusion 415

Summary 416

Key concepts 416

Questions for review 416

Multiple choice 416

Problems and applications 417

Part 6 The economics of labour markets 420

Chapter 19 The markets for the factors of

production 422

The demand for labour 423

The competitive, profit-maximising firm 424

The production function and the marginal product

of labour 425

The value of the marginal product and the demand

for labour 426

What causes the labour demand curve to shift? 427

FYI: Input demand and output supply – two sides

of the coin 428

The supply of labour 429

The trade-off between work and leisure 429

What causes the labour supply curve to shift? 430

In the news: The economy needs you 431

Equilibrium in the labour market 432

Shifts in labour supply 432

Shifts in labour demand 434

Case study: Productivity and wages 435

The other factors of production: Land and capital 436

Equilibrium in the markets for land and capital 436

FYI: What is capital income? 437

Linkages among the factors of production 438

Case study: The economics of the Black Death 438

Conclusion 439

Summary 440

Key concepts 440

Questions for review 440

Multiple choice 440

Problems and applications 441

Appendix: The demand for labour under imperfect

competition and monopoly 444

Chapter 20 Earnings and discrimination 446

Some determinants of equilibrium wages 447

Compensating differentials 447

Human capital 448

Case study: The changing value of skills 449

Ability, effort and chance 449

Case study: The benefits of beauty 450

An alternative view of education: Signalling 451

The superstar phenomenon 452

Above-equilibrium wages: Minimum-wage laws, unions

and efficiency wages 453

The economics of discrimination 454

Measuring labour-market discrimination 454

Case study: Is Jennifer more employable than

Nuying? 455

Discrimination by employers 456

Case study: Segregated streetcars and the profit

motive 457

Discrimination by customers and governments 457

Case study: Discrimination in sports 458

Conclusion 459

Summary 460

Key concepts 460

Questions for review 460

Multiple choice 461

Problems and applications 461

Appendix: Unions and imperfect competition in labour markets 463

Unions as monopolists 463

Bilateral monopoly 465

Are unions good or bad for the economy? 467

Chapter 21 Income inequity and poverty 468

The measurement of inequality 469

Australian income inequality 469

Case study: The women’s movement and income distribution 471

Income inequality around the world 471

The poverty rate 472

Problems in measuring inequality 474

Case study: Alternative measures of inequality 475

The political philosophy of redistributing income 476

Utilitarianism 476

Liberalism 478

Libertarianism 479

What Australian economists think 480

Policies to reduce poverty 480

Minimum-wage laws 480

Social security 481

Negative income tax 481

In the news: Thinking innovatively about income

redistribution 482

In-kind transfers 483

Antipoverty programs and work incentives 484

Conclusion 485

Summary 486

Key concepts 486

Questions for review 486

Multiple choice 486

Problems and applications 487

Part 7 Topics for further study 490

Chapter 22 The theory of consumer choice 492

The budget constraint: What the consumer can afford 493

Preferences: What the consumer wants 495

Representing preferences with indifference curves 495

Four properties of indifference curves 496

Two extreme examples of indifference curves 498

Optimization: What the consumer chooses 500

The consumer’s optimum choices 500

FYI: Utility – an alternative way to describe preferences and optimization 500

How changes in income affect a consumer’s choices 502

How changes in prices affect a consumer’s choices 503

Income and substitution effects 505

Deriving the demand curve 506

Three applications 508

Do all demand curves slope downwards? 508

Case study: The search for Giffen goods 509

How do wages affect labour supply? 509

Case study: Income effects on labour supply – historical

trends, lottery winners and the Carnegie

conjecture 512

What Australian economists think 513

How do interest rates affect household saving? 513

Conclusion: Do people really think this way? 516

Summary 517

Key concepts 517

Questions for review 517

Multiple choice 518

Problems and applications 518

Chapter 23 Frontiers of microeconomics 521

Asymmetric information 522

Hidden actions: Principals, agents and moral hazard 522

FYI: Corporate management 523

Hidden characteristics: Adverse selection and the lemons

problem 524

Signalling to convey private information 525

Case study: Gifts as signals 526

Screening to induce information revelation 526

Asymmetric information and public policy 527

Political economy 528

The Condorcet voting paradox 528

Arrow’s impossibility theorem 529

The median voter is king 530

Politicians are people too 532

Behavioural economics 532

People aren’t always rational 532

In the news: Our inertia may be costing lives 534

People care about fairness 535

People are inconsistent over time 536

What Australian economists think 537

Conclusion 537

Summary 538

Key concepts 538

Questions for review 538

Multiple choice 538

Problems and applications 539

Glossary 542

Suggestions for reading 546

Index 549

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