this page left intentionally blank GGoooollssbbeeee11ee__FFMM__FFuullll..iinndddd EEDD--vv 1111//22//1122 88::3322 AAMM microeconomics Austan Goolsbee The University of Chicago Booth School of Business Steven Levitt The University of Chicago Chad Syverson The University of Chicago Booth School of Business WORTH PUBLISHERS A Macmillan Higher Education Company GGoooollssbbeeee11ee__FFMM__FFuullll..iinndddd ii 1111//22//1122 88::3322 AAMM Senior Vice President, Editorial and Production: Catherine Woods Publisher: Charles Linsmeier Senior Acquisitions Editor: Sarah Dorger Developmental Editors: Jane Tufts, Bruce Kaplan Consulting Faculty Editor: Linda Ghent Media and Supplements Editors: Lukia Kliossis Assistant Editor: Mary Melis Associate Director of Digital Marketing: Scott Guile Senior Director of Market Research and Development: Steven Rigolosi Associate Market Development Manager: Kerri Russini Marketing Assistant: Lindsay Neff Art Directors: Babs Reingold, Kevin Kall Interior Designer: Amanda Kavanagh Photo Editor: Ted Szczepanski Photo Researcher: Elyse Rieder Director of Development for Print and Digital Products: Tracey Kuehn Associate Managing Editor: Lisa Kinne Project Editor: Robert Errera Production Manager: Barbara Anne Seixas Supplements Production Manager: Stacey Alexander Supplements Project Editor: Edgar Bonilla Composition and Illustrations: TSI Graphics Printing and Binding: RR Donnelley Library of Congress Control Number: 2012950731 ISBN-13: 978-0-7167-5975-1 ISBN-10: 0-7167-5975-6 © 2013 Worth Publishers All rights reserved. Printed in the United States of America First printing Worth Publishers 41 Madison Avenue New York, NY 10010 www.worthpublishers.com GGoooollssbbeeee11ee__FFMM__FFuullll..iinndddd iiii 1111//22//1122 88::3322 AAMM about the authors The Authors Austan Goolsbee is the Robert P. Gwinn Professor of Economics at the University of Chicago Booth School of Business. He earned a bachelor’s and a master’s degree from Yale University and a PhD in economics from the Massachusetts Institute of Technology. Goolsbee’s work focuses on the new economy, government policy, taxes, and technology. He was appointed chairman of the Council of Economic Advisers in 2010, returning to the University of Chicago in August 2011. Goolsbee serves as a member of the U.S. Census Advisory Committee, and as a research fellow for the American Bar Foundation. Steven Levitt is the William B. Ogden Distinguished Service Professor of Economics at the University of Chicago, where he directs the Becker Center on Chicago Price Theory. He earned a bachelor’s degree from Harvard University and his PhD from Massachusetts Institute of Technology. He has taught at the University of Chicago since 1997. In 2004, Levitt was awarded the John Bates Clark Medal, and in 2006, he was named one of Time magazine’s “100 People Who Shape Our World.” He co-authored Freakonomics and SuperFreakonomics, and is also the co-author of the popular Freakonomics blog. Chad Syverson is a Professor of Economics at the University of Chicago Booth School of Business. His research spans several topics, with a particular focus on the interactions of fi rm structure, market structure, and productivity. His work has earned multiple National Science Foundation awards. He serves on the editorial boards of several economics and business journals and is a research associate of the National Bureau of Economic Research. He earned bachelor’s degrees in economics and mechanical engineering from the University of North Dakota, and a PhD in economics from the University of Maryland. Syverson joined the Chicago faculty in 2001. About the Authors iii GGoooollssbbeeee11ee__FFMM__FFuullll..iinndddd iiiiii 1111//22//1122 88::3322 AAMM this page left intentionally blank GGoooollssbbeeee11ee__FFMM__FFuullll..iinndddd EEDD--vv 1111//22//1122 88::3322 AAMM From Austan To a young woman I met many years ago — the girl of my dreams. Thank you for marrying me. From Steve With love and appreciation to my dear wife, Jenny. From Chad To my wife, Genaya, and my children, Claire, Adam, and Victoria. Love you all. From all And to the University of Chicago, where people don’t just study economics, they live it, breathe it, eat it, and sleep it. The world of economics would never be the same without you, and neither would we. GGoooollssbbeeee11ee__FFMM__FFuullll..iinndddd vv 1111//22//1122 88::3322 AAMM microeconomics annotated contents PART 1 Basic Concepts 1 Adventures in Microeconomics The preferences of consumers (demand) combine with the 2 Supply and Demand decisions of fi rms (supply) to determine the quantity sold and price of goods. The benefi ts of market transactions at 3 this price are split between consumers and producers. Many U sing Supply and Demand to factors and policies can alter market outcomes. Analyze Markets PART 2 Consumption and Production 4 Consumer Behavior How do consumers decide which goods, and how much of each, to consume, in the face of an enormous set of goods 5 and services from which they can purchase? Individual and Market Demand 6 Producer Behavior How do companies decide which combination of inputs to use in production, and how does this decision aff ect their costs of production? Cost curves show how costs change 7 Costs with a fi rm’s output level and are crucial in determining what a market’s supply side looks like. PART 3 Markets and Prices In perfect competition, all fi rms take the market price as given, and industry supply refl ects the aggregation of the 8 Supply in a Competitive Market cost curves of individual fi rms. Industry supply combines with market demand to determine price and quantity movements in the short and long term. 9 Market Power and Monopoly In a monopoly, a fi rm has the ability to choose at what price it sells its product and this ability implies that the monopo- list chooses to produce less than the competitive industry 10 Market Power and Pricing does. Pricing power can be exerted on the market in many ways, including schemes that charge higher prices to con- Strategies sumers with a greater willingness to pay. GGoooollssbbeeee11ee__FFMM__FFuullll..iinndddd vvii 1111//22//1122 11::3355 PPMM Few fi rms are either pure monopolists or perfectly competi- 11 Imperfect Competition tive price takers. Oligopolies operate with some market power, but must also consider their competitors’ actions and strategize to maximize their profi ts. We use the tools 12 Game Theory of game theory to analyze the strategic interactions among fi rms and predict market outcomes. PART 4 Beyond the Basics In the real world, markets don’t always function as smoothly as models lead us to believe. In the remaining chapters, we 13 Investment, Time, and Insurance make our analysis more realistic. Understanding the role of investment, time, and uncertainty can help individuals and fi rms make better economic decisions. Markets are interconnected and we can analyze the condi- 14 General Equilibrium tions that must hold for an economy to operate effi ciently and maximize the social benefi t of a good or service. After seeing what must hold for markets to work well, we 15 Asymmetric Information look at situations in which markets might not work well. Problems arise when information is not equally shared by all potential parties in a transaction, when transactions aff ect 16 Externalities and Public Goods people who are neither the buying nor the selling party, and when a good’s benefi ts are shared across many people at the same time. The intersection of psychology and economics explores the notion that people can have deeply formed biases and social 17 preferences that limit their ability to act in the completely Behavioral and Experimental rational and self-interested way often assumed in economic Economics analysis. Such irrationality may mean that our basic analyti- cal models might be inadequate for explaining economic decision making. Annotated Contents for the Complete Microeconomics vii GGoooollssbbeeee11ee__FFMM__FFuullll..iinndddd vviiii 1111//22//1122 88::3322 AAMM brief contents Preface xxvii PART 1 Basic Concepts 1 Adventures in Microeconomics 1 2 Supply and Demand 13 3 Using Supply and Demand to Analyze Markets 61 PART 2 Consumption and Production 4 Consumer Behavior 111 5 Individual and Market Demand 165 6 Producer Behavior 215 7 Costs 261 PART 3 Markets and Prices 8 Supply in a Competitive Market 303 9 Market Power and Monopoly 347 10 Market Power and Pricing Strategies 395 11 Imperfect Competition 439 12 Game Theory 483 PART 4 Beyond the Basics 13 Investment, Time, and Insurance 527 14 General Equilibrium 563 15 Asymmetric Information 605 16 Externalities and Public Goods 643 17 Behavioral and Experimental Economics 685 Math Review Appendix MR-1 Solutions to Review Questions SA-1 Solutions to Select End-of-Chapter Problems SB-1 Glossary G-1 References R-1 Index I-1 viii Brief Contents GGoooollssbbeeee11ee__FFMM__FFuullll..iinndddd vviiiiii 1111//22//1122 88::3322 AAMM