About the authors Rod Hill grew up in Ontario, was educated at the University of Toronto, the University of Stockholm and the University of Western Ontario, where he obtained a PhD in economics. He has taught at the University of Windsor, the University of Regina and the University of New Brunswick, where he has been a professor of economics since 2003. His research interests have included inter national trade policy, taxation and the underground econ omy, and (as a result of growing dissatisfaction) the content of the introductory textbooks. He is a research associate with the Canadian Centre for Policy Alternatives and a member of Econom ists for Peace and Security and the Progressive Economics Forum. Tony Myatt received his PhD from McMaster University with distinction in theory. He has taught at McMaster University, the University of Western Ontario, the University of Toronto and the University of New Brunswick, where he has been professor of economics since 1992. His research interests have included the supply-side effects of interest rates, labour market discrimination, unemployment rate disparities, and the methods and content of economic education. He has developed several different introductory courses as vehicles for teaching principles of economics, including ‘Economics of every day life’, ‘Economics in the real world’ and ‘Economics through film’. Professor Myatt was the recipient of UNB’s Arts Faculty Award for Excellence in Teaching in 2008. The economics antitextbook A critical thinker’s guide to microeconomics Rod Hill and Tony Myatt Fernwood Publishing halifax | winnipeg Zed Books london | new york The Economics Antitextbook: A critical thinker’s guide to microeconomics was first published in 2010 Published in Canada by Fernwood Publishing Ltd, 32 Oceanvista Lane, Black Point, Nova Scotia b0j 1b0 <www.fernwoodpublishing.ca> Published in the rest of the world by Zed Books Ltd, 7 Cynthia Street, London n1 9jf, uk and Room 400, 175 Fifth Avenue, New York, ny 10010, usa <www.zedbooks.co.uk> Copyright © Rod Hill and Tony Myatt 2010 The rights of Rod Hill and Tony Myatt to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act, 1988 Designed and set by Ewan Smith, London <[email protected]> Index <[email protected]> Cover designed by David Bradshaw Printed and bound in Great Britain by the MPG Books Group Distributed in the usa exclusively by Palgrave Macmillan, a division of St Martin’s Press, llc, 175 Fifth Avenue, New York, ny 10010, usa All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without the prior permission of Zed Books Ltd. A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data available Library and Archives Canada Cataloguing in Publication: Hill, Roderick The economics antitextbook : a guide to critical thinking / Rod Hill and Tony Myatt. isbn 978-1-55266-360-8 1. Economics. 2. Critical thinking. I. Myatt, Anthony II. Title. hb171.h637 2010 330 c2010-900699-2 isbn 978 1 84277 938 5 hb (Zed Books) isbn 978 1 84277 939 2 pb (Zed Books) isbn 978 1 84813 548 2 eb (Zed Books) isbn 978 1 55266 360 8 (Fernwood Publishing) Contents Tables and figures | vi Acknowledgements | ix Introduction: our goals, audience and principal themes . . . . .1 1 What is economics? Where you start influences where you go . .9 2 Introducing economic models . . . . . . . . . . . . . . . . . 27 3 How markets work (in an imaginary world) . . . . . . . . . . 46 4 People as consumers . . . . . . . . . . . . . . . . . . . . . 74 5 The firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 6 Market structure and efficiency – or why perfect competition isn’t so perfect after all . . . . . . . . . . . . . . . . . . . 118 7 Externalities and the ubiquity of market failure . . . . . . . 150 8 The marginal productivity theory of income distribution –or you’re worth what you can get . . . . . . . . . . . . . . . 169 9 Government, taxation and the (re)distribution of income: is a just society just too expensive? . . . . . . . . . . . . . . 196 10 Trade and globalization without the rose-tinted glasses . . . 219 11 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . 243 Postscript: a case study on the global financial meltdown . . 256 Notes | 264 Bibliography | 274 Glossary | 291 Index | 297 Tables and figures Tables 2.1 Labour’s productivity in England and Canada . . . . . . . . . . . . . . 28 2.2 Changes in world output. . . . . . . . . . . . . . . . . . . . . . . . . 30 2.3 Percent in agreement with the proposition: ‘minimum wages increase unemployment among young and unskilled workers’ . . . . . . . . . . 33 3.1 Types of market structure . . . . . . . . . . . . . . . . . . . . . . . . 54 3.2 Tax incidence applications used in ten major North American textbooks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 4.1 Mary’s benefit from eating pizzas . . . . . . . . . . . . . . . . . . . . 75 5.1 Inputs and output in the short run. . . . . . . . . . . . . . . . . . . . 94 5.2 Costs in the short run . . . . . . . . . . . . . . . . . . . . . . . . . . 95 5.3 Downward-sloping demand and marginal revenue . . . . . . . . . . . 100 6.1 A pay-off matrix illustrating the prisoner’s dilemma . . . . . . . . . . 129 6.2 Repeated plays when Esso plays ‘tit-for-tat’. . . . . . . . . . . . . . . 130 7.1 Classification of types of goods . . . . . . . . . . . . . . . . . . . . 153 7.2 Percentage changes in age-standardized cancer incidence rates . . . . 163 8.1 Marginal cost of labour for a monopsonist . . . . . . . . . . . . . . . 175 9.1 Taxation as a percentage of GDP, OECD countries, 2005 . . . . . . . . 197 9.2 Measures of income inequality . . . . . . . . . . . . . . . . . . . . 199 9.3 Distribution of household net worth . . . . . . . . . . . . . . . . . . 200 9.4 Percentage of children in households with less than half of median household income, circa 2000 . . . . . . . . . . . . . . . . . . . . . 202 10.1 International trade, 2007 . . . . . . . . . . . . . . . . . . . . . . . 220 10.2 Estimates of the stock of foreign direct investment, by sector, 2006 . . 239 11.1 Conventional economics and the blank cells of Akerlof and Shiller . . . 244 11.2 Conventional textbook economics and the blank cells of Robert Prasch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 Figures 1.1 Marginal thinking . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.1 Wheat and cloth production in England and Canada . . . . . . . . . . 29 2.2 Expanded consumption possibilities . . . . . . . . . . . . . . . . . . 30 2.3 Different perceptions of reality . . . . . . . . . . . . . . . . . . . . . 41 3.1 Inelastic and elastic demand . . . . . . . . . . . . . . . . . . . . . . 47 3.2 Movement towards equilibrium . . . . . . . . . . . . . . . . . . . . . 48 3.3 Comparative static analysis . . . . . . . . . . . . . . . . . . . . . . . 49 3.4 The effect of rent control . . . . . . . . . . . . . . . . . . . . . . . . 50 3.5 The effect of a minimum wage . . . . . . . . . . . . . . . . . . . . . . 51 vi 3.6 The incidence of taxation . . . . . . . . . . . . . . . . . . . . . . . . . 52 3.7 Multiple equilibria in the labour market . . . . . . . . . . . . . . . . . 66 3.8 Self-fulfilling prophecies . . . . . . . . . . . . . . . . . . . . . . . . . 68 4.1 Marginal benefit and price . . . . . . . . . . . . . . . . . . . . . . . . 76 4.2 Market demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 4.3 Happiness in the United States, 1994–96, by income decile . . . . . . . . 88 4.4 Happiness and per capita income across countries, 1999–2004 . . . . . . 89 4.5 Happiness in the United States, 1946–2008 . . . . . . . . . . . . . . . . 90 5.1 The law of diminishing marginal returns . . . . . . . . . . . . . . . . . 95 5.2 Marginal and average costs . . . . . . . . . . . . . . . . . . . . . . . . 96 5.3 Marginal product and marginal cost . . . . . . . . . . . . . . . . . . . 96 5.4 Marginal benefit and market price . . . . . . . . . . . . . . . . . . . . 97 5.5 Long-run average cost relationships . . . . . . . . . . . . . . . . . . . 99 5.6 The long-run equilibrium for the competitive firm . . . . . . . . . . . 100 5.7 Relationship between demand and marginal revenue . . . . . . . . . . 101 5.8 Short-run marginal costs . . . . . . . . . . . . . . . . . . . . . . . . 103 5.9 Long-run average cost with increasing and then constant returns to scale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 5.10 Why the competitive firm should raise its price above the market price . 108 6.1 Derivation of the competitive firm’s supply curve . . . . . . . . . . . . 119 6.2 The short-run response to an increase in demand. . . . . . . . . . . . 120 6.3 The long-run response to an increase in demand . . . . . . . . . . . . 121 6.4 The optimal quantity . . . . . . . . . . . . . . . . . . . . . . . . . . 122 6.5 Non-competitive firms don’t have a supply curve . . . . . . . . . . . . 123 6.6 Monopoly versus perfect competition . . . . . . . . . . . . . . . . . . 124 6.7 Price ceilings and monopoly . . . . . . . . . . . . . . . . . . . . . . 126 6.8 Natural monopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 6.9 Monopolistic competition . . . . . . . . . . . . . . . . . . . . . . . 128 6.10 Estimating the deadweight loss . . . . . . . . . . . . . . . . . . . . . 139 6.11 Aggregate stock price bubbles . . . . . . . . . . . . . . . . . . . . . 147 7.1 Markets are inefficient in the presence of externalities . . . . . . . . . 151 7.2 Cancer incidence per 100,000 males, age-standardized rates . . . . . . 164