Study Guide for McEachern's Microeconomics: A Contemporary Introduction, 7th / Edition 7

Study Guide for McEachern's Microeconomics: A Contemporary Introduction, 7th / Edition 7

by William A. McEachern
Pub. Date:
Cengage Learning

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Study Guide for McEachern's Microeconomics: A Contemporary Introduction, 7th / Edition 7

Succeed with the Study Guide for MICROECONOMICS: A CONTEMPORARY INTRODUCTION. This Study Guide includes chapter outlines, definitions of all terms, a bonus section with supplemental material, and a variety of true-false, multiple-choice, and discussion questions with answers.

Product Details

ISBN-13: 9780324288681
Publisher: Cengage Learning
Publication date: 01/06/2005
Edition description: Older Edition
Pages: 357
Product dimensions: 8.40(w) x 10.80(h) x 0.90(d)

Table of Contents

Introduction to Economics
The Art and Science of Economic Analysis     1
The Economic Problem: Scarce Resources, Unlimited Wants     2
Resources     2
Goods and Services     3
Economic Decision Makers     4
A Simple Circular-Flow Model     4
The Art of Economic Analysis     6
Rational Self-Interest     6
Choice Requires Time and Information     6
Economic Analysis Is Marginal Analysis     7
Microeconomics and Macroeconomics     7
The Science of Economic Analysis     8
The Role of Theory     8
The Scientific Method     8
Normative Versus Positive     10
Economists Tell Stories     10
Case Study: A Yen for Vending Machines     11
Predicting Average Behavior     12
Some Pitfalls of Faulty Economic Analysis     12
If Economists Are So Smart, Why Aren't They Rich?     13
Case Study: College Major and Career Earnings     13
Understanding Graphs     18
Drawing Graphs     19
The Slopes of Straight Lines     20
The Slope, Units of Measurement, and Marginal Analysis     20
The Slopes of Curved Lines     22
Line Shifts     23
Some Tools of Economic Analysis     24
Choice and Opportunity Cost     25
Opportunity Cost     25
Case Study: The Opportunity Cost of College     25
Opportunity Cost Is Subjective     26
Sunk Cost and Choice     27
Comparative Advantage, Specialization, and Exchange     28
The Law of Comparative Advantage     28
Absolute Advantage Versus Comparative Advantage     28
Specialization and Exchange     29
Division of Labor and Gains from Specialization     30
Case Study: Specialization Abound     30
The Economy's Production Possibilities     31
Efficiency and the Production Possibilities Frontier     31
Inefficient and Unattainable Production     32
The Shape of the Production Possibilities Frontier     32
What Can Shift the Production Possibilities Frontier?     33
What Can We Learn from the PPF?     34
Three Questions Every Economic System Must Answer     35
Economic Systems     36
Pure Capitalism     36
Pure Command System     37
Mixed and Transitional Economies     38
Economies Based on Custom or Religion     38
Economic Decision Makers     40
The Household     41
The Evolution of the Household     41
Households Maximize Utility     41
Households as Resource Suppliers     42
Households as Demanders of Goods and Services     43
The Firm     43
The Evolution of the Firm     43
Types of Firms     44
Nonprofit Institutions     46
Why Does Household Production Still Exist?     46
Case Study: The Electronic Cottage     47
The Government     47
The Role of Government     48
Government's Structure and Objectives     49
The Size and Growth of Government     50
Sources of Government Revenue     51
Tax Principles and Tax Incidence     51
The Rest of the World     52
International Trade     52
Exchange Rates     54
Trade Restrictions     54
Case Study: Wheels of Fortune     34
Demand and Supply Analysis     57
Demand     58
The Law of Demand     58
The Demand Schedule and Demand Curve     59
Shifts of the Demand Curve      61
Changes in Consumer Income     61
Changes in the Prices of Related Goods     61
Changes in Consumer Expectations     62
Changes in the Number or Composition of Consumers     63
Changes in Consumer Tastes     63
Supply     63
The Supply Schedule and Supply Curve     64
Shifts of the Supply Curve     65
Changes in Technology     65
Changes in the Prices of Relevant Resources     65
Changes in the Prices of Alternative Goods     65
Changes in Producer Expectations     66
Changes in the Number of Producers     66
Demand and Supply Create a Market     67
Markets     67
Market Equilibrium     67
Changes in Equilibrium Price and Quantity     69
Shifts of the Demand Curve     69
Shifts of the Supply Curve     70
Simultaneous Shifts of Demand and Supply Curves     72
Case Study: The Market for Professional Basketball     73
Disequilibrium     74
Price Floors     74
Price Ceilings     74
Case Study: The Toy Business Is Not Child's Play     76
Introduction to the Market System
Elasticity of Demand and Supply     78
Price Elasticity of Demand     79
Calculating Price Elasticity of Demand     79
Categories of Price Elasticity of Demand     81
Elasticity and Total Revenue     81
Price Elasticity and the Linear Demand Curve     81
Constant-Elasticity Demand Curves     83
Determinants of the Price Elasticity of Demand     85
Availability of Substitutes     85
Proportion of the Consumer's Budget Spent on the Good     86
A Matter of Time     86
Elasticity Estimates     87
Case Study: Deterring Young Smokers     88
Price Elasticity of Supply     89
Constant Elasticity Supply Curves     90
Determinants of Supply Elasticity     92
Other Elasticity Measures     93
Income Elasticity of Demand     93
Case Study: The Market for Food and "The Farm Problem"     94
Cross-Price Elasticity of Demand     96
Price Elasticity and Tax Incidence     99
Demand Elasticity and Tax Incidence     99
Supply Elasticity and Tax Incidence     100
Consumer Choice and Demand     102
Utility Analysis     103
Tastes and Preferences     103
The Law of Diminishing Marginal Utility     104
Measuring Utility     104
Units of Utility     104
Utility Maximization in a World Without Scarcity     105
Utility Maximization in a World of Scarcity     106
Utility-Maximizing Conditions     107
Case Study: Water, Water, Everywhere     108
The Law of Demand and Marginal Utility     109
Consumer Surplus     111
Market Demand and Consumer Surplus     112
Case Study: The Marginal Value of Free Medical Care     114
The Role of Time in Demand     115
Indifference Curves and Utility Maximization     117
Consumer Preferences     117
The Budget Line     119
Consumer Equilibrium at the Tangency     120
Effects of a Change in Price     121
Income and Substitution Effects     122
Production and Cost in the Firm     124
Cost and Profit     125
Explicit and Implicit Costs     125
Alternative Measures of Profit     125
Production in the Short Run     127
Fixed and Variable Resources     127
The Law of Diminishing Marginal Returns      127
The Total and Marginal Product Curves     128
Costs in the Short Run     130
Total Cost and Marginal Cost in the Short Run     130
Average Cost in the Short Run     132
The Relationship Between Marginal Cost and Average Cost     133
Costs in the Long Run     134
The Long-Run Average Cost Curve     134
Economies of Scale     136
Diseconomies of Scale     136
Case Study: At the Movies     137
Economies and Diseconomies of Scale at the Firm Level     138
Case Study: Billions and Billions of Burgers     138
A Closer Look at Production and Costs     141
The Production Function and Efficiency     141
Isoquants     141
Isocost Lines     143
The Choice of Input Combinations     144
The Expansion Path     144
Market Structure and Pricing
Perfect Competition     146
An Introduction to Perfect Competition     147
Perfectly Competitive Market Structure     147
Demand Under Perfect Competition     148
Short-Run Profit Maximization     149
Total Revenue Minus Total Cost     149
Marginal Revenue Equals Marginal Cost      150
Economic Profit in the Short Run     152
Minimizing Short-Run Losses     152
Fixed Cost and Minimizing Losses     152
Marginal Revenue Equals Marginal Cost     153
Shutting Down in the Short Run     155
The Firm and Industry Short-Run Supply Curves     155
The Short-Run Firm Supply Curve     155
The Short-Run Industry Supply Curve     156
Firm Supply and Market Equilibrium     157
Case Study: Auction Markets     158
Perfect Competition in the Long Run     159
Zero Economic Profit in the Long Run     160
The Long-Run Adjustment to a Change in Demand     160
The Long-Run Industry Supply Curve     163
Constant-Cost Industries     163
Increasing-Cost Industries     164
Perfect Competition and Efficiency     166
Productive Efficiency: Making Stuff Right     166
Allocative Efficiency: Making the Right Stuff     166
What's So Perfect About Perfect Competition?     166
Case Study: Experimental Economics     168
Monopoly     171
Barriers to Entry     172
Legal Restrictions     172
Economies of Scale      173
Control of Essential Resources     173
Case Study: Is a Diamond Forever?     174
Revenue for the Monopolist     175
Demand, Average Revenue, and Marginal Revenue     175
The Gains and Loss from Selling One More Unit     176
Revenue Schedules     177
Revenue Curves     177
The Firm's Costs and Profit Maximization     179
Profit Maximization     179
Short-Run Losses and the Shutdown Decision     182
Long-Run Profit Maximization     182
Monopoly and the Allocation of Resources     183
Price and Output Under Perfect Competition     183
Price and Output Under Monopoly     184
Allocative and Distributive Effects     184
Problems Estimating the Deadweight Loss of Monopoly     185
Why the Deadweight Loss of Monopoly Might Be Lower     185
Why the Deadweight Loss Might Be Higher     185
Case Study: The Mail Monopoly     186
Price Discrimination     187
Conditions for Price Discrimination     187
A Model of Price Discrimination     187
Examples of Price Discrimination     188
Perfect Price Discrimination: The Monopolist's Dream      189
Monopolistic Competition and Oligopoly     192
Monopolistic Competition     193
Characteristics of Monopolistic Competition     193
Product Differentiation     193
Short-Run Profit Maximization or Loss Minimization     194
Zero Economic Profit in the Long Run     196
Case Study: Fast Forward     197
Monopolistic Competition and Perfect Competition Compared     198
An Introduction to Oligopoly     200
Varieties of Oligopoly     200
Case Study: The Unfriendly Skies     201
Economies of Scale     201
The High Cost of Entry     202
Crowding Out the Competition     202
Models of Oligopoly     203
Collusion and Cartels     203
Price Leadership     205
Game Theory     206
Comparison of Oligopoly and Perfect Competition     210
Resource Markets
Resource Markets     213
The Once-Over     214
Resource Demand     214
Resource Supply     214
The Demand and Supply of Resources     215
The Market Demand for Resources     215
The Market Supply of Resources     216
Temporary and Permanent Resource Price Differences     216
Opportunity Cost and Economic Rent     218
A Closer Look at Resource Demand     221
The Firm's Demand for a Resource     221
Marginal Revenue Product     222
Marginal Resource Cost     223
Shifts of the Demand for Resources     225
Case Study: The Derived Demand for Architects     226
The Optimal Use of More Than One Resource     227
Case Study: The McMinimum Wage     227
Labor Markets and Labor Unions     230
Labor Supply     231
Labor Supply and Utility Maximization     231
Wages and Individual Labor Supply     233
Nonwage Determinants of Labor Supply     234
Market Supply of Labor     236
Why Wages Differ     237
Case Study: Winner-Take-All Labor Markets     239
Unions and Collective Bargaining     241
Types of Unions     241
Collective Bargaining     242
The Strike     242
Union Wages and Employment     242
Inclusive, or Industrial, Unions: Negotiating a Higher Industry Wage     242
Exclusive, or Craft, Unions: Reducing Labor Supply     244
Increasing Demand for Union Labor     245
Recent Trends in Union Membership     246
Case Study: Unionizing Information Technology Workers     248
Capital, Interest, and Corporate Finance     251
The Role of Time in Production and Consumption     252
Production, Saving, and Time     252
Consumption, Saving, and Time     253
Optimal Investment     253
Case Study: The Value of a Good Idea-Intellectual Property     256
The Market for Loanable Funds     257
Why Interest Rates Differ     258
Present Value and Discounting     259
Present Value of Payment One Year Hence     260
Present Value for Payments in Later Years     260
Present Value of an Income Stream     261
Present Value of an Annuity     261
Case Study: The Million-Dollar Lottery?     262
Corporate Finance     263
Corporate Stock and Retained Earnings     263
Corporate Bonds     264
Securities Exchanges     264
Transaction Costs, Imperfect Information, and Market Behavior     266
Rationale for the Firm and Its Scope of Operation     267
The Firm Reduces Transaction Costs     267
The Boundaries of the Firm      268
Case Study: The Trend Towards Outsourcing     271
Economies of Scope     272
Market Behavior with Imperfect Information     272
Optimal Search with Imperfect Information     273
The Winner's Curse     274
Asymmetric Information in Product Markets     275
Hidden Characteristics: Adverse Selection     275
Hidden Actions: The Principal-Agent Problem     276
Asymmetric Information in Insurance Markets     277
Coping with Asymmetric Information     277
Asymmetric Information in Labor Markets     278
Adverse Selection in Labor Markets     278
Signaling and Screening     278
Case Study: The Reputation of a Big Mac     279
Market Failure and Public Policy
Economic Regulation and Antitrust Policy     282
Business Behavior, Public Policy, and Government Regulation     283
Regulating Natural Monopolies     284
Unregulated Profit Maximization     284
Setting Price Equal to Marginal Cost     284
Subsidizing the Natural Monopolist     285
Setting Price Equal to Average Cost     286
The Regulatory Dilemma     286
Alternative Theories of Economic Regulation      286
Producers' Special Interest in Economic Regulation     287
Case Study: Airline Regulation and Deregulation     287
Antitrust Law and Enforcement     289
Origins of Antitrust Policy     289
Antitrust Law Enforcement     291
Per Se Illegality and the Rule of Reason     291
Mergers and Public Policy     291
Merger Waves     292
Competitive Trends in the U.S. Economy     294
Market Competition over Time     294
Case Study: Microsoft on Trial     296
Recent Competitive Trends     297
Problems with Antitrust Policy     298
Public Goods and Public Choice     301
Public Goods     302
Private Goods, Public Goods, and In Between     302
Optimal Provision of Public Goods     303
Paying for Public Goods     305
Public Choice in a Representative Democracy     305
Median Voter Model     305
Special Interest and Rational Ignorance     306
Distribution of Benefits and Costs     307
Case Study: Farm Subsidies     309
Rent Seeking     311
Case Study: Campaign Finance Reform     312
The Underground Economy      313
Bureaucracy and Representative Democracy     314
Ownership and Funding of Bureaus     314
Ownership and Organizational Behavior     314
Bureaucratic Objectives     315
Private Versus Public Production     316
Externalities and the Environment     318
Externalities and the Common-Pool Problem     319
Renewable Resources     319
Resolving the Common-Pool Problem     320
Optimal Level of Pollution     321
External Costs with Fixed Technology     321
External Costs with Variable Technology     322
Case Study: Destruction of the Tropical RainForests     325
The Coase Theorem     326
Markets for Pollution Rights     327
Pollution Rights and Public Choice     328
Environmental Protection     329
Air Pollution     329
Case Study: City in the Clouds     330
Water Pollution     332
Hazardous Waste and the Superfund     332
Solid Waste: "Paper or Plastic?"     333
Positive Externalities     334
Income Distribution and Poverty     339
The Distribution of Household Income     340
Income Distribution by Quintiles     340
The Lorenz Curve     340
A College Education Pays More     341
Problems with Distribution Benchmarks     343
Why Incomes Differ     343
Poverty and the Poor     344
Official Poverty Level     344
Programs to Help the Poor     345
Who Are the Poor?     348
Poverty and Age     348
Poverty and Public Choice     348
The Feminization of Poverty     349
Poverty and Discrimination     351
Affirmative Action     352
Unintended Consequences of Income Assistance     353
Disincentives     353
Does Welfare Cause Dependency?     354
Welfare Reform     354
Case Study: Is Welfare-to-Work Working?     355
Recent Reforms     355
Case Study: Oregon's Program of "Tough Love"     357
International Microeconomics
International Trade     360
The Gains from Trade     361
A Profile of Exports and Imports     361
Production Possibilities Without Trade     363
Consumption Possibilities Based on Comparative Advantage     364
Reasons for International Specialization      366
Trade Restrictions and Welfare Loss     367
Tariffs     368
Import Quotas     369
Quotas in Practice     371
Tariffs and Quotas Compared     371
Other Trade Restrictions     371
Freer Trade by Multilateral Agreement     372
The World Trade Organization     372
Case Study: The WTO and the "Battle in Seattle"     373
Common Markets     374
Arguments for Trade Restrictions     375
National Defense Argument     375
Infant Industry Argument     375
Antidumping Argument     375
Jobs and Income Argument     376
Declining Industries Argument     377
Problems with Protection     377
Case Study: Bush's Steel Tariffs     378
Import Substitution Versus Export Promotion     379
Glossary     381
Index     389

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