MICROECONOMICS - USP
MICROECONOMICS
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MICROECONOMICSEIGHTH EDITIONRobert S. PindyckMassachusetts Institute of TechnologyDaniel L. RubinfeldUniversity of California, BerkeleyBoston Columbus Indianapolis New York San Francisco Upper Saddle RiverAmsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal TorontoDelhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
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To our daughters,Maya, Talia, and ShiraSarah and Rachel
ABOUT THE AUTHORSThe authors, back again for anew edition, reflect on theiryears of successful textbookcollaboration. Pindyck is on theright and Rubinfeld on the left.Rvievising a textbook every three or four years is hard work, and the lastedition was well-liked by students. “So why is our publisher pushingfor a new edition?” the authors wondered. “Were some of the examplesbecoming stale? Or might it have something to do with the used book market?”Could be both. In any case, here they are again, with a new edition that has substantial improvements and lots of new examples.Robert S. Pindyck is the Bank of Tokyo-Mitsubishi Ltd. Professor of Economicsand Finance in the Sloan School of Management at M.I.T. Daniel L. Rubinfeldis the Robert L. Bridges Professor of Law and Professor of Economics Emeritusat the University of California, Berkeley, and Professor of Law at NYU. Bothreceived their Ph.Ds from M.I.T., Pindyck in 1971 and Rubinfeld in 1972. ProfessorPindyck’s research and writing have covered a variety of topics in microeconomics, including the effects of uncertainty on firm behavior and market structure;the behavior of natural resource, commodity, and financial markets; environmental economics; and criteria for investment decisions. Professor Rubinfeld, whoserved as chief economist at the Department of Justice in 1997 and 1998, is theauthor of a variety of articles relating to antitrust, competition policy, law andeconomics, law and statistics, and public economics.Pindyck and Rubinfeld are also co-authors of Econometric Models and EconomicForecasts, another best-selling textbook that makes a perfect gift (birthdays,weddings, bar mitzvahs, you name it) for the man or woman who has everything. (Buy several—bulk pricing is available.) These two authors are alwayslooking for ways to earn some extra spending money, so they enrolled as humansubjects in a double-blind test of a new hair restoration medication. Rubinfeldstrongly suspects that he is being given the placebo.This is probably more than you want to know about these authors, but forfurther information, see their Web sites: http://web.mit.edu/rpindyck/wwwand http://www.law.berkeley.edu/faculty/rubinfeldd.
BRIEF CONTENTS PART ONEIntroduction: Markets and Prices 112Preliminaries 3The Basics of Supply and Demand 21 PART TWOProducers, Consumers, and Competitive Markets 653456789Consumer Behavior 67Individual and Market Demand 111Uncertainty and Consumer Behavior 159Production 201The Cost of Production 229Profit Maximization and Competitive Supply 279The Analysis of Competitive Markets 317 PART THREEMarket Structure and Competitive Strategy 355101112131415Market Power: Monopoly and Monopsony 357Pricing with Market Power 399Monopolistic Competition and Oligopoly 451Game Theory and Competitive Strategy 487Markets for Factor Inputs 529Investment, Time, and Capital Markets 559 PART FOURInformation, Market Failure, and the Roleof Government 593161718General Equilibrium and Economic Efficiency 595Markets with Asymmetric Information 631Externalities and Public Goods 661Appendix: The Basics of Regression 700Glossary 708Answers to Selected Exercises 718Photo Credits 731Index 732vii
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CONTENTSPreface xvii P A RT ONEIntroduction: Markets and Prices 1Summary 60Questions for Review 61Exercises 621 Preliminaries 31.1 The Themes of Microeconomics 4Trade-Offs 4Prices and Markets 5Theories and Models 5Positive versus Normative Analysis 61.2 What Is a Market? 7Competitive versus Noncompetitive Markets 8Market Price 8Market Definition—The Extent of a Market 91.3 Real versus Nominal Prices 121.4 Why Study Microeconomics? 16Corporate Decision Making: The Toyota Prius 16Public Policy Design: Fuel Efficiency Standards forthe Twenty-First Century 17Summary 18Questions for Review 19Exercises 192 The Basics of Supply andDemand212.1 Supply and Demand 22The Supply Curve 22The Demand Curve 232.2 The Market Mechanism 252.3 Changes in Market Equilibrium 262.4 Elasticities of Supply and Demand 33Point versus Arc Elasticities 362.5 Short-Run versus Long-Run Elasticities 39Demand 40Supply 45*2.6 Understanding and Predicting the Effects ofChanging Market Conditions 482.7 Effects of Government Intervention—PriceControls 58 P A R T TWOProducers, Consumers, andCompetitive Markets 653 Consumer Behavior 67Consumer Behavior 673.1 Consumer Preferences 69Market Baskets 69Some Basic Assumptions about Preferences 70Indifference Curves 71Indifference Maps 72The Shape of Indifference Curves 73The Marginal Rate of Substitution 74Perfect Substitutes and PerfectComplements 753.2 Budget Constraints 82The Budget Line 82The Effects of Changes in Incomeand Prices 843.3 Consumer Choice 86Corner Solutions 893.4 Revealed Preference 923.5 Marginal Utility and Consumer Choice 95Rationing 98*3.6 Cost-of-Living Indexes 100Ideal Cost-of-Living Index 101Laspeyres Index 102Paasche Index 103Price Indexes in the United Statics: ChainWeighting 104Summary 105Questions for Review 106Exercises 107ix
x CONTENTS4 Individual and MarketDemand1114.1 Individual Demand 112Price Changes 112The Individual Demand Curve 112Income Changes 114Normal versus Inferior Goods 115Engel Curves 116Substitutes and Complements 1184.2 Income and Substitution Effects 119Substitution Effect 120Income Effect 121A Special Case: The Giffen Good 1224.3 Market Demand 124From Individual to Market Demand 124Elasticity of Demand 126Speculative Demand 1294.4 Consumer Surplus 132Consumer Surplus and Demand 1324.5 Network Externalities 135Positive Network Externalities 135Negative Network Externalities 137*4.6 Empirical Estimation ofDemand 139The Statistical Approach to Demand Estimation 139The Form of the Demand Relationship 140Interview and Experimental Approaches toDemand Determination 143Summary 143Questions for Review 144Exercises 145APPENDIX TO CHAPTER 4:Demand Theory—A MathematicalTreatment 149Utility Maximization 149The Method of Lagrange Multipliers 150The Equal Marginal Principle 151Marginal Rate of Substitution 151Marginal Utility of Income 152An Example 153Duality in Consumer Theory 154Income and SubstitutionEffects 155Exercises 1575 Uncertainty and ConsumerBehavior1595.1 Describing Risk 160Probability 160Expected Value 161Variability 161Decision Making 1635.2 Preferences Toward Risk 165Different Preferences Toward Risk 1665.3 Reducing Risk 170Diversification 170Insurance 171The Value of Information 174*5.4 The Demand for Risky Assets 176Assets 176Risky and Riskless Assets 177Asset Returns 177The Trade-Off Between Risk and Return 179The Investor’s Choice Problem 1805.5 Bubbles 185Informational Cascades 1875.6 Behavioral Economics 189Reference Points and Consumer Preferences 190Fairness 192Rules of Thumb and Biases in Decision Making 194Summing Up 196Summary 197Questions for Review 197Exercises 1986 Production 201The Production Decisions of a Firm 2016.1 Firms and Their Production Decisions 202Why Do Firms Exist? 203The Technology of Production 204The Production Function 204The Short Run versus the Long Run 2056.2 Production with One Variable Input (Labor) 206Average and Marginal Products 206The Slopes of the Product Curve 207The Average Product of Labor Curve 209The Marginal Product of Labor Curve 209The Law of Diminishing Marginal Returns 209Labor Productivity 2146.3 Production with Two Variable Inputs 216Isoquants 216
CONTENTS xiInput Flexibility 217Diminishing Marginal Returns 217Substitution Among Inputs 218Production Functions—Two Special Cases 2196.4 Returns to Scale 223Describing Returns to Scale 224Summary 226Questions for Review 226Exercises 2277 The Cost of Production 2297.1 Measuring Cost: Which Costs Matter? 229Economic Cost versus Accounting Cost 230Opportunity Cost 230Sunk Costs 231Fixed Costs and Variable Costs 233Fixed versus Sunk Costs 234Marginal and Average Cost 2367.2 Cost in the Short Run 237The Determinants of Short-Run Cost 237The Shapes of the Cost Curves 2387.3 Cost in the Long Run 243The User Cost of Capital 243The Cost-Minimizing Input Choice 244The Isocost Line 245Choosing Inputs 245Cost Minimization with Varying Output Levels 249The Expansion Path and Long-Run Costs 2507.4 Long-Run versus Short-Run Cost Curves 253The Inflexibility of Short-Run Production 253Long-Run Average Cost 254Economies and Diseconomies of Scale 255The Relationship between Short-Runand Long-Run Cost 2577.5 Production with Two Outputs—Economies ofScope 258Product Transformation Curves 258Economies and Diseconomies of Scope 259The Degree of Economies of Scope 259*7.6 Dynamic Changes in Costs—The LearningCurve 261Graphing the Learning Curve 261Learning versus Economies of Scale 262*7.7 Estimating and Predicting Cost 265Cost Functions and the Measurement of ScaleEconomies 267Summary 269Questions for Review 270Exercises 271APPENDIX TO CHAPTER 7:Production and Cost Theory—AMathematical Treatment 273Cost Minimization 273Marginal Rate of Technical Substitution 274Duality in Production and Cost Theory 275The Cobb-Douglas Cost and ProductionFunctions 276Exercises 2788 Profit Maximization andCompetitive Supply2798.1 Perfectly Competitive Markets 279When Is a Market Highly Competitive? 2818.2 Profit Maximization 282Do Firms Maximize Profit? 282Alternative Forms of Organization 2838.3 Marginal Revenue, Marginal Cost, and ProfitMaximization 284Demand and Marginal Revenue for a CompetitiveFirm 285Profit Maximization by a Competitive Firm 2878.4 Choosing Output in the Short Run 287Short-Run Profit Maximization by a CompetitiveFirm 287When Should the Firm Shut Down? 2898.5 The Competitive Firm’s Short-Run SupplyCurve 292The Firm’s Response to an Input PriceChange 2938.6 The Short-Run Market Supply Curve 295Elasticity of Market Supply 296Producer Surplus in the Short Run 2988.7 Choosing Output in the Long Run 300Long-Run Profit Maximization 300Long-Run Competitive Equilibrium 301Economic Rent 304Producer Surplus in the Long Run 3058.8 The Industry’s Long-Run SupplyCurve 306Constant-Cost Industry 307Increasing-Cost Industry 308Decreasing-Cost Industry 309The Effects of a Tax 310Long-Run Elasticity of Supply 311Summary 314Questions for Review 314Exercises 315
xii CONTENTS9 The Analysis of CompetitiveMarkets3179.1 Evaluating the Gains and Losses fromGovernment Policies—Consumer and ProducerSurplus 317Review of Consumer and Producer Surplus 318Application of Consumer and ProducerSurplus 3199.2 The Efficiency of a Competitive Market 3239.3 Minimum Prices 3289.4 Price Supports and Production Quotas 332Price Supports 332Production Quotas 3339.5 Import Quotas and Tariffs 3409.6 The Impact of a Tax or Subsidy 345The Effects of a Subsidy 348Summary 351Questions for Review 352Exercises 352 P A R T T HRE EMarket Structure and CompetitiveStrategy 35510 Market Power: Monopolyand Monopsony35710.1 Monopoly 358Average Revenue and Marginal Revenue 358The Monopolist’s Output Decision 359An Example 361A Rule of Thumb for Pricing 363Shifts in Demand 365The Effect of a Tax 366*The Multiplant Firm 36710.2 Monopoly Power 368Production, Price, and Monopoly Power 371Measuring Monopoly Power 371The Rule of Thumb for Pricing 37210.3 Sources of Monopoly Power 375The Elasticity of Market Demand 376The Number of Firms 376The Interaction Among Firms 37710.4 The Social Costs of Monopoly Power 377Rent Seeking 378Price Regulation 379Natural Monopoly 380Regulation in Practice 38110.5 Monopsony 382Monopsony and Monopoly Compared 38510.6 Monopsony Power 385Sources of Monopsony Power 386The Social Costs of Monopsony Power 387Bilateral Monopoly 38810.7 Limiting Market Power: The AntitrustLaws 389Restricting What Firms Can Do 390Enforcement of the Antitrust Laws 391Antitrust in Europe 392Summary 395Questions for Review 395Exercises 39611 Pricing with Market Power 39911.1 Capturing Consumer Surplus 40011.2 Price Discrimination 401First-Degree Price Discrimination 401Second-Degree Pri
Forecasting for Economics and Business Gordon Macroeconomics* Greene Econometric Analysis Gregory Essentials of Economics . 8th ed. p. cm. – (The Pearson series in economics) ISBN-13: 978-0-13-285712-3 ISBN-10: 0-13-285712-X 1. Microeconomics. I. Rubinfeld, Daniel L. II. . economics, law and statistics, and public economics. .
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