Principles of
Microeconomics
Eugene
Silberberg
U n i v e r s i t y of W a s h i n g t o n
Prentice Hall
Englewood Cliffs, New Jersey 07632
o n t e nts
Preface
xiii
c H A P T E R ±^m B u t W i l l I t W o r k i n T h e o r y ?
1
1.1
Introduction
2
The Economy: Prices and Markets 3
Economics: Part of Social Science 5
Explanations and Refutable Propositions 8
1.2
The Economic Paradigm
Scarcity and Competition 15
Cost 16
14
1.3
Demand and Supply
18
Demand 19
Supply 21
Putting it Together 22
Microeconomics and Macroeconomics 23
1.4
Examples
24
The American Love Affair with Automobiles 24 / You
Can't Teach an Old Dog New Tricks 25 / The World War II
Baby Boom and Its Consequences 26 / The "Marriage
Squeeze" 28
Key Terms
30
Chapter Summary
30
Questions for Discussion
C H A P T E R
2^^. T h e P o s t u l a t e s
31
of Behavior
3 3
2.1
Axioms of Choice
34
Individual, not Group Preferences 35
The Postulates of Behavior 36
The Meaning of Value 39
Marginal Versus Total Values 41
2.2
M a r g i n a l V a l u e s a n d D e m a n d Curves
Total Value Versus Total Expenditure 45
43
VI
CONTENTS
2.3
The Law of Demand
47
Charity: Non-Economic Behavior? 52
2.4
Consumption Over Time
2.5
The D i a m o n d - W a t e r
Key Terms
Paradox
61
Questions for Discussion
J T ^
61
The Theory of Demand
3.1
56
61
Chapter Summary
CHAPTER
53
67
Relative Versus A b s o l u t e Prices
68
The Law of Demand and Inflation 73
3.2
Market
Demand Curves
3.3
E l a s t i c i t y of Demand
Elasticity and Total Expenditure 82
3.4
3.5
3.6
Shipping t h e Good Apples Out
102
Summary
Questions
j
102
for Discussion
^ E x ch an g e a n d S u p p l y
4.1
104
109
The Gains f r o m Exchange
Two Theorems Concerning Trade 112
4.2
Supply Curves
113
4.3
Seller's Rents
Production 117
115
4.4
84
A p p l i c a t i o n s of t h e Law of Demand
Is the Oil Industry Monopolistic? 87 / Sex 88 /
Fertility 89 / Religion 91 / Suicide 92 /
Smoking 93 / Crime and Punishment 95 /
Discrimination 96
Chapter
j
78
The Second Law of Demand
Key T e r m s
CHAPTER
76
Economic Efficiency
119
110
98
87
CONTENTS
4.5
VII
The F o r m a t i o n
Markets
of
Organized
121
4.6
The R o l e of M i d d l e m e n
126
Middlemen and the Costs of Transacting 129
4.7
Gifts
T h e Use o f M o n e y
Political
Key T e r m s
Exchange
134
138
Chapter Summary
^^m
131
133
4.8
C H A P T E R
for Exchange
139
Questions for Discussion
140
Supply
145
and Demand
5.1
C h a n g e in D e m a n d V e r s u s C h a n g e in
Quantity Demanded
146
Income and Cross Elasticities 149
Change in Supply Versus Changes in the Quantity Supplied 152
5.2
A n a l y s i s of I n t e r r e l a t e d
The Economics of Adoption 156
Markets
152
5.3
W h o Pays t h e Tax?
162
Subsidies 165
Taxes on Immobile Resources 166
Who Pays a New Sales Tax on Food? 168
Payroll Taxes 169
Other Effects of Taxes
Key T e r m s
Chapter
Questions
C H A P T E R
£ , „ _Cost
6.1
171
1 72
Summary
for
173
Discussion
and Production
173
177
The Gains f r o m S p e c i a l i z a t i o n
6.2
Comparative Advantage
The Robinson Crusoe Economy 181
The Arrival of Friday 183
6.3
Marginal
Cost and Supply
180
189
the
178
L
VIII
CONTENTS
6.4
I n c r e a s i n g C o s t s at t h e
Margin
191
Extensive
6.5
Supply Curves and Rents
The Source of Rents 199
195
6.6
Rents and Q u a s i - R e n t s
204
Quasi-Rents 205
Rent Payments: Sterile Transfers or Allocative Function?
Application: Greenbelt Legislation 208
6.7
Economic Efficiency
207
210
6.8
The D i v i s i o n of L a b o r Is L i m i t e d by t h e
E x t e n t of t h e M a r k e t
212
6.9
Concluding Remarks
Key T e r m s
217
Chapter Summary
217
Questions for Discussion
C H A P T E R
214
218
T h e L a w of D i m i n i s h i n g
Returns
221
7.1
I n p u t s and O u t p u t s ; M a r g i n a l
Product
222
The Law of Diminishing Marginal Product 224
7.2
P r o f i t M a x i m i z a t i o n and F a c t o r
Demand
228
More Than One Variable Factor 231
7.3
Applications
2 3 3
Emergency Medicine 233 / Health Care Rationing 234 /
Medical Research and Orphan Drugs 234 / Tradable Pollution
Rights 235 / Equalize Output per Worker or per Machine 237
7.4
T h e B e h a v i o r of F i r m s U n d e r D i f f e r e n t
R u l e s of O w n e r s h i p : The E f f e c t s of
Property
R i g h t s on R e s o u r c e A l l o c a t i o n
240
Common Ownership of the Land 240 / Socialist
Cooperative 240 / Application: Property Rights on the Navajo Reser
vation 246 / Application: Population Growth 248
Key T e r m s
248
CONTENTS
IX
Chapter
Summary
Questions
CHAPTER
^ ^ ^
for
249
Discussion
250
Su p p I y in
Competitive
Markets
253
8.1
Competitive
Markets
254
8.2
Diminishing Marginal
Rising M a r g i n a l Cost
255
"Fixed" Versus "Variable" Costs 259
Product
8.3
Firm
The Objectives
8.4
Marginal
Example
264
8.5
of t h e
An
The Cost Curves and Supply
and
Extensive
8.7
Shortages and Surpluses
The Oil "Shortage" 273
Rent Control 281
Agricultural and Other Surpluses
Key T e r m s
Chapter
266
Margins
273
284
287
Summary
Questions
^^m
262
Cost and S u p p l y :
8.6
The I n t e n s i v e
Combined
269
Returns to Scale 271
c H A P T "VR"
and
for
287
Discussion
289
Property Rights
Costs
2 9 5
a n d Transactions
9.1
Introduction
296
9.2
The Coase T h e o r e m
9.3
Highway
9.4
Public Goods
317
9.5
The
Dilemma
9.6
Signals
Congestion
Prisoner's
325
297
311
320
X
CONTENTS
9.7
The Nature
Key Terms
of t h e Firm
33 5
Chapter Summary
335
Questions f o r Discussion
C H A P T E R
^
^ Interest
Values
328
Rates
336
a n d Capital
3 3 9
10.1
Consumption Over Time
340
10.2
The Price of Present Consumption
10.3 Present and Future Values
Annuities 346
Perpetuities 356
The Meaning of Wealth 357
10.4
Determination
1 0 . 5 Real Versus N o m i n a l
Rates 3 6 3
Stocks and Bonds 365
Interest
10.6
T h e Price of Assets
369
10.7
The Fisher Separation
Key T e r m s
m
M 0 n Op O Iy
11.1
Theorem
379
380
389
Monopoly Versus Competition
Reasons for Monopoly 393
11.2
Monopolistic
Pricing
396
11.3 Monopoly and Efficiency 4 0 2
Monopoly and Factor Markets 403
Monopoly and the Characteristics of Goods 405
358
371
373
Questions f o r Discussion
^ ^
Rate
3 79
Chapter Summary
CHAPTER
342
of t h e Interest
1 0 . 8 Stocks and Flows
Inflation and Asset Prices 377
340
390
CONTENTS
XI
Monopolies and the Incentive to Invent 408
Patents and Market Structure 410
1 1 . 4 Price D i s c r i m i n a t i o n
Other Forms of Price Discrimination 415
Price Discrimination and Efficiency 419
Key
Terms
Chapter
CHAPTER
J U L _I
421
Summary
Questions
422
for Discussion
mperfect
12.1
12.3
423
Competition
425
Monopolistic Competition
Reasons for Product Differentiation
12.2
411
Cartels
428
and Collusion
Antitrust
Policy
426
434
439
Mergers, Acquisitions, and Industry Concentration 446
Predatory Pricing 451
Tie-In Sales and Block Booking 453
Key T e r m s
458
Chapter Summary
458
Questions for Discussion
CHAPTER
JLJL_
Labo r M a r k e t s
13.1
459
463
The Supply of Labor
464
1 3 . 2 Families: The New Home
Economics
469
Marriage 475
Divorce 478
13.3 The D e m a n d for Labor
13.4 The Market for Labor
480
485
Minimum Wage Laws 487
Compensating Differentials and the Value of Life 490
13.5
Labor Unions
494
13.6
Labor M a r k e t D i s c r i m i n a t i o n
497
XII
CONTENTS
Key Terms
502
Chapter Summary
502
Questions for Discussion
CHAPTER
^
^ The Macro Economy
503
507
14.1
The Aggregate Economy: Concepts
14.2
Measurement of the Economy
508
511
14.3 The Central Problem of
Macroeconomics
513
Prosperity and Depression 514
1 4 . 4 T h e R o l e of M o n e y in t h e M a c r o
Economy
516
The Demand for Money 517
The Supply of Money 519
How the Fed Changes the Money Supply 522
The Supply and Demand for Money Combined 523
1 4 . 5 M o n e t a r y P o l i c y : H o w t h e Fed A f f e c t s
the Economy
525
The Great Depression: Monetary Policy Gone Amok 528
Inflation and Unemployment 529
Rational Expectations Theory 531
1 4 . 6 Fiscal Policy 5 3 3
Does the Deficit Matter? 534
1 4 . 7 P o l i c y Issues
Key T e r m s
538
539
Chapter Summary
540
Questions f o r Discussion
Afterword
544
Hints & Answers
Glossary
Index
559
583
545
542