VviSh Public Off7CiAL J u

Grant programs from the federal government to state and local governments serve many purposes. One program might seek to increase school spending, another to redistribute income from relatively wealthy states and localities to those that are relatively poor, and a third to ensure that individual governments provide minimum service levels to their constituents. Which kinds of grant programs are best suited to achieve these different objectives The answer depends on the incentive effects that...

Utility and Satisfaction

Utility is the level of satisfaction that a person gets from consuming a good or undertaking an activity. Utility has an important psychological component because people obtain utility by getting things that give them pleasure and by avoiding things that give them pain. In economic analysis, however, utility is most often used to summarize the preference ranking of market baskets. If buying three books makes a person happier than the purchase of one shirt, then we say that the books give that...

The Statistical Approach to Demand Estimation

Firms often rely on market data based on actual studies of demand. Properly applied, the statistical approach to demand estimation can enable one to sort out the effects of variables, such as income and the prices of other products, on the quantity of a product demanded. Here we outline some of the conceptual issues involved in the statistical approach. The data in Table 4.5 describe the quantity of raspberries sold in a market each year. Information about the market demand for raspberries...

The Relationship Between Short Run and Long Run Cost

Figures 7.8 and 7.9 show the relationship between short-run and long-run cost. Assume a firm is uncertain about the future demand for its product and is considering three alternative plant sizes. The short-run average cost curves for FIGURE 7.8 Long-Run Cost with Constant Returns to Scale. The long-run average cost curve LAC, which is identical to the long-run marginal cost curve LMC, is the envelope of the short-run average cost curves (SACi, SAC2, and SAC3 are shown). With constant returns to...

The Extent of a Market

The extent of a market refers to its boundaries, both geographic and in terms of the range of products to be included in it. When we refer to the market for gasoline, for example, we must be clear about its geographic boundaries. Are we referring to downtown Los Angeles, southern California, or the entire United States And we must also be clear about the range of products we are referring to. Should regular octane and high octane premium gasoline be included in the same market Leaded and...

Production Functions Two Special Cases

Two extreme cases of production functions show the possible range of input substitution in the production process. In the first case, shown in Figure 6.6, inputs to production are perfectly substitutable for one another. Here the MRTS is constant at all points on an isoquant. As a result the same output (say Qi) can be produced with mostly capital (at A), mostly labor (at C), or a balanced combination of both (at B). For example, a toll booth on a road or bridge might be run automatically or...

Producer Surplus in the Long

When a firm is earning a positive accounting profit, but there is no incentive for other firms to enter or exit the industry, this profit must reflect economic rent. How then does rent relate to producer surplus Recall that producer surplus measures the difference between the market price a producer receives and the marginal cost of production. Thus, in the long run, in a competitive market, the producer surplus that a firm earns consists of the economic rent that it enjoys from all its scarce...

Dairy Indus Jg

Historically, the U.S. dairy industry has allocated its advertising expenditures more or less uniformly throughout (he year.10 But per-capita consumption of milk declined by 24 percent between 1955 and 1980, which stirred milk producers to look for a new sales strategy to encourage milk consumption. One strategy would be to increase advertising expenditures and to continue to advertise at a uniform rate throughout the year. A second strategy is to invest in market research to obtain more...

Changes in the Third Edition

The third edition of Microeconomics contains a number of important changes and additions. Chapters 3 and 4 on Consumer Demand, and Chapters 6, 7, and 8 on the Theory of the Firm and Competitive Supply have been rewritten with an eye toward greater clarity and accessibility. New material has been added in several places, including Hicksian substitution effects in Chapter 4, and an analysis of recycling in Chapter 18. Less extensive revisions were also made in other chapters of the book. Finally,...

Asset Returns

People buy and hold assets because of the monetary flows they provide. To compare assets with each other, it helps to think of this monetary flow relative to the asset's price or value. The return on an asset is the total monetary flow it yields as a fraction of its price. For example, a bond worth 1000 today that pays out 100 this year (and every year) has a return of 10 percent.12 If an apartment building was worth 10 million last year, increased in value to 11 million this year, and also...

Corporate Decision Making Ford Introduces the Taurus

In late 1985 Ford introduced the Taurus-a newly designed, aerodynamically styled, front-wheel-drive automobile. The car was a huge success at the time and helped Ford almost to double its profits by 1987. The design and efficient production of this car involved not only some impressive engineering advances, but a lot of economics as well. First, Ford had to think carefully about how the public would react to the Taurus' design. Would consumers be swayed by the styling and performance of the car...

The Bandwagon Effect

One example of a positive network externality is the bandwagon effect UThis refers to the desire to be in style, to have a good because almost everyone else has it, or to indulge in a fad. The bandwagon effect often arises with children's toys (Barbie dolls, for example). Creating this effect is a major objective in marketing and advertising these toys. Building a bandwagon effect is also often the key to success in selling clothing. The bandwagon effect is illustrated in Figure 4.14, where the...

Returns to Scale

The measure of increased output associated with increases in all inputs is fundamental to the long-ran nature of the firm's production process. How does the output of the firm change as its inputs are proportionately increased If output more than doubles when inputs are doubled, there are increasing returns to scale. This might arise because the larger scale of operation allows managers and workers to specialize in their tasks and make use of more sophisticated, large-scale factories and...

Dynamic Changes in Costs The Learning Curve

Our discussion has suggested one reason a large firm may have a lower long-run average cost than a small firm-increasing returns to scale in production. It is tempting to conclude that firms that enjoy lower average cost over time are growing firms with increasing returns to scale. But this need not be true. In some firms, long-run average cost may decline over time because workers and managers absorb new technological information as they become more experienced at their jdbs. As management and...

The Industrys Long Run Supply Curve

In our analysis of short-run supply, we first derived the firm's supply curve and then showed how the horizontal summation of individual firms' supply curves generated a market supply curve. We cannot analyze long-run supply in the same way, however, because in the long run firms enter and exit the market as the market price changes. This makes it impossible to sum up supply curves-we don't know which firms' supplies to add. To determine long-run supply, we assume all firms have access to the...

Increasing Cost Industry

Increasing Cost Industry Long Run Supply

In an increasing-cost industry, the prices of some or all inputs to production increase as the industry expands and the demand for the inputs grows. This might arise, for example, if the industry uses skilled labor, which becomes in short supply as the demand for it increases. Or the firm might require mineral resources that are available only on certain types of land, so that the cost of land as an input increases with output. Figure 8.16 shows the derivation of long-run supply, which is...

The Short Run Market Supplu Curue

The short-run market supply curve shows the amount of output that the industry will produce in the short run for every possible price. The industry's output is the sum of the quantities supplied by all the individual firms. Therefore, the market supply curve can be obtained by adding their supply curves. Figure 8.8 shows how this is done when there are only three firms, all of which have different short-run production costs. Each firm's marginal cost curve is drawn only for the portion that...

The Competitive Firms Short Run Supply Curve

Supply Curve Increase Same Line

A supply curve for a firm tells us how much output it will produce at every possible price. We have seen that competitive firms will increase output to the point at which price is equal to marginal cost, but they will shut down if price is below average variable cost. Therefore, for positive output the firm's supply curve is the portion of the marginal cost curve that lies above the average variable cost curve. Since the marginal cost curve cuts the average variable cost curve at its minimum...

Production with Two Outputs Economies of Scope

Many firms produce more than one product. Sometimes a firm's products are closely linked to one another-a chicken farm produces poultry and eggs, an automobile company produces automobiles and trucks, and a university produces teaching and research. Other times,firms produce products that are physically unrelated. In both cases, however, a firm is likely to enjoy production or cost advantages when it produces two or more products. These advantages could result from the joint use of inputs or...

The Snob Effect

Snob Effect

Network externalities are sometimes negative. Consider the snob effect, which refers to the desire to own exclusive or unique goods. The quantity demanded of a snob good is higher the fewer the people who own it. Rare works of art, specially designed sports cars, and made-to-order clothing are snob goods. Here, the value I get from a painting or sports car is in part the prestige, status, and exclusivity resulting from the fact that few other people own one like it. Figure 4.15 illustrates the...

Revealed Preference

Economics Revealed Preferred

In Section 3.1 we saw how an individual's preferences could be represented by a series of indifference curves. Then in Section 3.3, we saw how preferences determine choices, given a budget constraint. Can this process be reversed If we know the choices a consumer has made, can we determine her preferences We can, if we have information about a sufficient number of choices that are made when prices and income levels vary. The basic idea is simple. If a consumer chooses one market basket over...

Contents

PART I Introduction Markets and Prices 1.1 The Use and Limitations of Microeconomic Theory 4 1.2 Positive Versus Normative Analysis 5 1.3 Why Study Microeconomics 8 Corporate Decision Making Ford Introduces the Taurus 8 Public Policy Design Automobile- Emission Standards 9 Competitive Versus Noncompetitive Markets 11 1.5 Real Versus Nominal Prices 13 2 THE BASICS OF SUPPLY AND DEMAND 17 2.2 Shifts in Supply and Demand 20 2.3 Elasticities of Supply and Demand 28 2.4 Short-Run Versus Long-Run...