MICROECONOMICS - Worth Publishers

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GOOLSBEE • LEVITT • SYVERSON

P R E L I M I N A RY

A L L AT T H E U N I V E R S I T Y O F C H I C AG O/ B O OT H S C H O O L

MICROECONOMICS

EDITION

FALL

2012

F O R T H E I N T E R M E D I AT E M I C R O E CO N O M I C S CO U R S E

Contents PART 1 BASIC CONCEPTS 1 Basic Economic Issues 2 Supply and Demand 3 Using Supply and Demand to Analyze Markets Austan Goolsbee

Steven Levitt

Chad Syverson

PART 2 CONSUMPTION AND PRODUCTION

Interested in Class-Testing a Few Chapters (Free) in Fall 2012?

4 Consumer Behavior*

CHAPTERS 2-5 are available as a FREE CourseSmart eBook from August 1 through December 31, 2012. Worth Publishers will provide free access codes for you and your students. Let us know you’ll be class testing by emailing Kerri Russini at [email protected].

5 Individual and Market Demand*

Interested in Adopting the Preliminary Edition for Fall 2012?

PART 3 MARKETS AND PRICES

CHOOSE FROM TWO OPTIONS

8 Supply in a Competitive Market

1. Printed Version: $32 (net price to bookstore): Available July 31, 2012 This is a black-and-white version of Chapters 1-11. Ask your bookstore to order ISBN 1-4641-2901-0 and contact Kerri Russini ([email protected]) for your desk copy.

6 Producer Behavior* 7 Costs*

9 Market Power and Monopoly* 10 Market Power and Pricing Strategies 11 Imperfect Competition

2. Electronic Version: $39.99 (cost to students): Available July 31, 2012

12 Game Theory

This eBook features Chapters 1-11 in full color. Send your students to www.CourseSmart.com, where they will purchase the book directly. Students

PART 4 BEYOND THE BASICS

should search for “Goolsbee” and choose the text titled Microeconomics,

13 Investment, Time, and Uncertainty

Preliminary Edition.

To request your instructor’s complimentary copy of the CourseSmart eBook,

please contact Kerri Russini at [email protected].

14 General Equilibrium 15 Asymmetric Information 16 Market Failure

Which Ancillary Materials Will Be Available for Fall 2012?

17 Behavioral and Experimental Economics

COMPLETE SOLUTIONS FOR CHAPTERS 1-11 will be available to instructors upon

* with calculus appendix

request as of July 31, 2012.

Any Questions? • Visit the Goolsbee/Levitt/Syverson preview Website at • Contact Kerri Russini at [email protected].

www.ILikeIMic.com.

GOOLSBEE • LEVITT • SYVERSON A L L AT T H E U N I V E R S I T Y O F C H I C AG O/ B O OT H S C H O O L

MICROECONOMICS

P R E L I M I N A RY

EDITION

FALL

2012

P R E L I M I N A RY E D I T I O N TA B L E O F CO N T E N T S 2

Supply and Demand

2.1 Markets and Models What Is a Market? Key Assumptions of the Supply and Demand Model 2.2 Demand Factors That Influence Demand Demand Curves Shifts in Demand Curves Why Is Price Treated Differently from the Other Factors That Affect Demand? 2.3 Supply Factors That Influence Supply Theory and Data Changes in Taste and the Demand for Cigarettes Supply Curves Shifts in the Supply Curve Why Is Price Also Treated Differently for Supply? 2.4 Market Equilibrium The Mathematics of Equilibrium Make the Grade Does Quantity Supplied Equal Quantity Demanded in Equilibrium? Why Markets Move toward Equilibrium Figure It Out 2.1 2.5 Changes in Market Equilibrium When Only One Curve Shifts Demand Shifts Figure It Out 2.2 Freakonomics The Price of Fame: President Obama and the Paparazzi Supply Shifts Figure It Out 2.3 Summary of Effects Application: Supply Shifts and the Video Game Crash of 1983 Figure It Out 2.4 What Determines the Size of Price and Quantity Changes? Make the Grade Did the Curve Shift, or Was It Just a Movement along the Curve? Application: The Supply Curve of Housing and Housing Prices: A Tale of Two Cities 2.6 Changes in Market Equilibrium When Both Curves Shift 2.7 Elasticity Slope and Elasticity Are Not the Same The Price Elasticities of Demand and Supply Price Elasticities and Price Responsiveness Application: Demand Elasticities and the Availability of Substitutes Elasticities and Linear Demand and Supply Curves Figure It Out 2.5 Perfectly Inelastic and Perfectly Elastic Demand and Supply 2.8 The Price Elasticity of Demand, Expenditures, and Revenue 2.9 Other Elasticities Income Elasticity of Demand Cross-Price Elasticity of Demand Figure It Out 2.6 2.10 Conclusion

Chapters conclude with a Summary, Review Questions, and Problems

3

Using Supply and Demand to Analyze Markets

3.1 Consumer and Producer Surplus: Who Benefits in a Market? Consumer Surplus Producer Surplus Figure It Out 3.1 Application: The Value of Innovation Application: What Is LASIK Eye Surgery Worth to Patients? 3.2 The Distribution of Gains and Losses from Changes in Market Conditions Application: How Much Did 9/11 Hurt the Airline Industry? Figure It Out 3.2 3.3 Price Regulations Price Ceilings Price Floors 3.4 Quantity Regulations Quotas Government Provision of Goods and Services Theory and Data Does Public Health Insurance Crowd Out Private Insurance? 3.5 Taxes Tax Effects on Markets Why Taxes Create a Deadweight Loss Why a Big Tax Is Much Worse Than a Small Tax The Incidence of Taxation: The Payer Doesn’t Matter Make the Grade Did I Measure Deadweight Loss Correctly? Figure It Out 3.3 3.6 Subsidies Application: The Cost of the Black-Liquor Loophole Figure It Out 3.4 Freakonomics Can Economic Incentives Get You Pregnant? 3.7 Conclusion

4

Consumer Behavior

4.1 The Consumer’s Preferences and the Concept of Utility Assumptions about Consumer Preferences The Concept of Utility Marginal Utility Utility and Comparisons 4.2 Indifference Curves Characteristics of Indifference Curves Make the Grade Draw Some Indifference Curves to Really Understand the Concept 4.3 The Marginal Rate of Substitution Freakonomics Do Minnesotans Bleed Purple? The Marginal Rate of Substitution and Marginal Utility Figure It Out 4.1 4.4 The Shape of Indifference Curves, Perfect Substitutes, and Perfect Complements Steepness Curvature Theory and Data Indifference Curves of Phone Service Buyers Figure It Out 4.2 Application: Indifference Curves for “Bads” 4.5 The Consumer’s Income and the Budget Constraint The Slope of the Budget Constraint Factors That Affect the Budget Constraint’s Position

Figure It Out 4.3 Nonstandard Budget Constraints 4.6 Combining Utility, Income, and Prices: What Will the Consumer Consume? Solving the Consumer’s Optimization Problem Figure It Out 4.4 Implications of Utility Maximization Theory and Data Indifference Curves of Phone Service Buyers Revisited A Special Case: Corner Solutions Figure It Out 4.5 4.7 An Alternative Approach to Solving the Consumer’s Problem: Expenditure Minimization 4.8 Conclusion

5 Individual and Market Demand

5.1 How Income Changes Affect an Individual’s Consumption Choices Normal and Inferior Goods Income Elasticities and Types of Goods The Income Expansion Path The Engel Curve Application: Engel Curves and House Sizes Figure It Out 5.1 5.2 How Price Changes Affect Consumption Choices Deriving a Demand Curve Shifts in the Demand Curve Freakonomics Even Animals Like Sales Figure It Out 5.2 5.3 Decomposing Consumer Responses to Price Changes into Income and Substitution Effects Isolating the Substitution Effect Isolating the Income Effect Make the Grade Computing Substitution and Income Effects from a Price Change The Total Effects What Determines the Size of the Substitution and Income Effects? Figure It Out 5.3 Application: Backward-Bending Labor Supply and Income Effects in Leisure Theory and Data Golfers’ Backward-Bending Labor Supply Curves An Example of the Income Effect with an Inferior Good Giffen Goods Make the Grade Simple Rules to Remember about Income and Substitution Effects Application: In Search of Giffen Goods 5.4 The Impact of Changes in Another Good’s Price: Substitutes and Complements A Change in the Price of a Substitute Good Indifference Curve Shapes, Revisited Application: Movies in a Theater and at Home— Substitutes or Complements? 5.5 Combining Individual Demand Curves to Obtain the Market Demand Curve The Market Demand Curve Using Algebra to Move from Individual to Market Demand Make the Grade Adding Demand Curves Horizontally, Not Vertically Figure It Out 5.4 5.6 Conclusion