Daniel l. Rubinfeld

More documents

Recommendations

Info

Introduction: Markets and Prices Preliminaries 8 6 2 o ~~"-'~"-'''''-'''''-'rT'''-''IT'''''TTI'I'''TTIi'Il' TTliIiTTIi'-TTIi-'IIITTlilili 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 In nominal terms, the minimum wage has increased steadily over the past 60 years. However, in real terms its 1999 level is below that of the 1970s. living for those 'i,\'orkers 'who had been paid below the minimum, some analysts feared that it would also lead to increased unemployment among young and unskilled workers. The decision to increase the minimum wage, therefore, raises both normative and positive issues. The normative issue is whether any loss of teenage and low-skilled jobs is outweighed by two factors: (1) the direct benefits to those workers 'who nov\' earn more as a result; and (2) any indirect benefits to other workers whose wages might be increased along with the "wages of those at the bottom of the pay scale. An important positive issue is how many fewer workers (if any) would be able to get jobs with a higher minimum wage. As we 'will see in Chapter 14, this issue is still hotly debated. Statistical studies have suggested that an increase in the minimum wage of about 10 percent would increase teenage unemployment by 1 to 2 percent. (nle actual increase from 54.25 to $5.15 represents a $0.90/$4.25 or 21 percent increase.) However, one recent review of the evidence questions whether there are any significant unemployment effects at all. JO !OIhe first stud\' is Da\"id Neumark and William Wascher, "Employment Effects of Minimum and Subminimum \~Tages: Panel Data on State Minimum \Vage laws," Industria/and Labor Relations RCL'icIl,,16 (October 1992): 33-81 A re\'ie\\' of the literahlre appears in Da\'id Card and Alar~ Krueger, I'vll/th and McasurclIlcllt: Thc Nc,t' Ecollolllics of thc Millilllulll Wagc (Princeton: Pnnceton Ul11\"erslty Press, 1993) We think that after reading this book you will have no doubt about the importance and broad applicability of microeconomics, In fact, one of our major goals is to show you how to apply microeconomic principles to actual decision-making problems. Nonetheless, some extra motiv~ti~n early on ~1e\:er hurt:, Here are two examples that not only show the use ot microeconomiCS 111 prachce but also provide a previe'w of this book. Decision Making: Sport Utility Vehicles Bv the mid 1990s, the Ford Explorer had become the best-selling sport utility vehicle (SUV) in the United States, Then, in 1997, Ford inh'oduced the Expedition-a newly designed, larger, and roomier SUv. This car was also a huge success, and conh:ibuted sio-nificantly to Ford's profits. The success of these cars led Ford to introduce an ;;en larg~r and heavier SUV in 1999-the Excursion, The design and efficient production of these cars involved not only some impressive engineerino- advances, but a lot of economics as welL Firs~, Ford had to think carefully about hoy\' the public would react to the desio-n and performance of its new products. How strong would demand be inib h . tially, and how fast would it grow How would demand depend on t e pnces that~ Ford charged Understanding consumer preferences and trade-offs and predicting demand and its responsiveness to price are essential to Ford and every other automobile manufacturer. (We discuss consumer preferences and demand in Chapters 3, 4, and 5.) Next, Ford had to be concerned with the cost of manufacturing these cars. How high would production costs be How would costs depend on the number of cars produced each year How would union "wage negotiations or, the prices of steel and other raw materials affect costs How much and how fast would costs decline as managers and workers gained experience with the production process And to maximize profits, how many of these cars should Ford plan to produce each year (We discuss production and cost in Chapters 6 and 7 and the profit-maximizing choice of output in Chapter 8.) Ford also had to design a pricing strategy and consider how competitors \YOLlld react to it. For example, should Ford charge a low price for the basic stripped-down \'ersion of the Explorer but high prices for individual options, such as leather seats Or would it be more profitable to make these options "standard" items and charge a higher price for the whole package Whatever strategy Ford chose, how were competitors likely to react Would DaimlerChrysler try to undercut Ford by lo'wering the price of its Jeep Grand Cherokee ~1io-ht F~rd be able to deter DaimlerChrysler or GM from lowering prices by thre:'tening to respond with its own price cuts (We discuss pricing in Chapters 10 and 11 and competitive strategy in Chapters 12 and 13,) Because its SUV product line required large investments in new capital equipment, Ford had to consider both the risks and possible outcomes of its decisions. Some of this risk was due to uncertainty over the future price of gasoline (higher o-asoline prices would reduce the dem~nd for heavy vehicles). Some was due to b ~ uncertainty o\'er the wages that Ford would ha\'e to pay its workers. What would happen if world oil prices doubled or tripled, or if the U.s. government imposed a heavy tax on gasoline How much bargaining pO'i,\'er would the
16 Part 'I Introduction: Markets and Prices unions have, and how might union demands affect wage rates Hovv should Ford take these uncertainties into account when making ilwestment decisions (Commodity markets and the effects of taxes are discussed in Chapters 2 and 9. Labor markets and union power are discussed in Chapter H. Investment decisions and the role of uncertainty are discussed in Chapters 5 and 15.) Ford also had to worry about organizational problems. Ford is an integrated firm in "which separate divisions produce engines and parts and then assemble finished cars. How should managers of different divisions be rewarded What price should the assembly division be charged for engines that it receives from another division Should all parts be obtained from the upstream divisions, or should some be purchased from outside firms (We discuss internal pricing and organizational incentives for the integrated firm in Chapters 11 and 17.) Finally, Ford had to think about its relationship to the government and the effects of regulatory policies. For example, all of Ford's cars must meet federal emissions standards, and production-line operations must comply with health and safety regulations. How might these regulations and standards change over time How might they affect costs and profits (We discuss the role of government in limiting pollution and promoting health and safety in Chapter 18.) Public Policy Design: Automobile Emission Standards for the Twenty-first Century In 1970, the Federal Clean Air Act imposed strict tailpipe emission standards on new automobiles. These standards have become increasingly stringent-the 1970 levels of nitrogen oxides, hydrocarbons, and carbon monoxide emitted by automobiles had been reduced by about 90 percent by 1999. Nm'l', as the number of cars on the roads keeps increasing, the government must consider how stringent these standards should be in the coming years. The design of a program like the Clean Air Act involves a careful analysis of the ecological and health effects of auto emissions. But it also involves a good deal of economics. First, the government must evaluate the monetary impact of the program on consumers. Emission standards affect the cost both of purchasing a car (catalytic converters would be necessary, which would raise the cost of cars) and of operating it (gas mileage would be lower, and converters would have to be repaired and maintained). Because consumers ultimately bear much of this added cost, it is important to know how it affects their standards of living. This means analyzing consumer preferences and demand. For example, would consumers drive less and spend more of their income on other goods If so, ,·vould they be nearly as well off (Consumer preferences and demand are discussed in Chapters 3 and 4.) To answer these questions, the government must determine how new standards will affect the cost of producing cars. Might automobile producers minimize cost increases by using new lightweight materials (Production and cost are discussed in Chapters 6 and 7.) Then the government needs to know how changes in production costs will affect the production levels and prices of new automobiles. Are the additional costs absorbed or passed on to consumers in the form of higher prices (Output determination is discussed in Chapter 8, and pricing in Chapters 10 through 13.) Finally, the government must ask why the problems related to air pollution are not solved by our market-oriented economy. The answer is that much of the cost of air pollution is external to the firm. If firms do not find it in their selfinterest to deal adequately with auto emissions, what is the best Ivay to alter their incentives Should standards be set, or is it more economical to impose air pollution fees How do we decide what people will pay to clean up the environment when there is no explicit market for clean air Is the political process likely to solve these problems The ultimate question is whether the auto emissions control program makes sense on a cost-benefit basis. Are the aesthetic, health, and other benefits of clean air worth the higher cost of automobiles (These problems are discussed in Chapter 18.) These are just two examples of how rnicroeconomics can be applied in the arenas of private and public policy decision making. You will see many more applications as you read this book 1. Microeconomics is concerned with the decisions made by sInall economic lUlits-consumers, workers, investors, owners of resources, and business firms. It is also concerned with the interaction of consumers and firms to form markets and industries. 2. Microeconomics relies heavily on the use of theory, which can (by simplification) help to explain how economic units behave and predict what behavior will occur in the future. Models are mathematical representations of theories that can help in this explanation and prediction process 3. Microeconomics is concerned with positive questions that have to do with the explanation and prediction of phenomena. But microeconomics is also important for normative analysis, in which we ask \vhat choices are best-for a firm or for society as a whole. Normative analyses must often be combined with individual value judgments because issues of equity and fairness as well as of economic efficiency may be involved. 4. A llIarket refers to a collection of buyers and sellers who interact, and to the possibility for sales and pur- 1. It is often said that a good theory is one that can in principle be refuted by an empirical, data-oriented study Explain why a theory that cannot be eyaluated empirically is not a good theory. 2. Which of the following two statements in\'oh'es positive economic analysis and which nonnative How do the two kinds of analysis differ a. Gasoline rationing (allocating to each individual a maximum amount of gasoline that can be purchased each year) is a poor social policy because it interferes with the workings of the competitive market system '1 Preliminaries 7 chases that results from that interaction. Microeconomics involves the study of both perfectly competitive markets, in which no single buyer or seller has an impact on price, and noncompetitive markets, in which individual entities can affect price. 5. The market price is established by the interaction of buyers and sellers. In a perfectly competitive market, a single price will usually prevaiL In markets that are not perfectly competitive, different sellers might charge different prices. In this case, the market price refers to the average prevailing price. 6. \Alhen discussing a market, we must be clear about its extent in terms of both its geographic bOlUldaries and the range of products to be included in it. Some markets (e.g, housing) are highly localized, whereas others (e.g., gold) are global in nature. 7. To eliminate the effects of int1ation, we measure real (or constant-dollar) prices, rather than nominal (or current-dollar) prices" Real prices use an aggregate price index, such as the CPr, to correct for inflation. b. Gasoline rationing is a policy under which more people are made worse off than are made better off. 3. Suppose the price of lmleaded regular octane gasoline were 20 cents per gallon higher in New Jersey than in Oklahoma. Do you think there would be an opportunity for arbitrage (Leo, that firms could buy gas in Oklahoma and then sell it at a profit in Jersey) Why or why not 4. In Example 1.2, what economic forces explain why the real price of eggs has fallen, while the real price of a college education has increased How have these changes affected consumer choices
Page 1 and 2: 0-13-016583-2 TOO
Page 3 and 4: Iii Iii iii Iii Iii Iii Iii Iii Iii
Page 5 and 6: PART 1 Introduction: Marl
Page 7 and 8: x Contents Contents xi 2 Producers
Page 9 and 10: xiv Contents Contents 3 9.2 111e Ef
Page 11 and 12: - Contents Contents 17 18 16.4 Effi
Page 13 and 14: F xxii Contents Example 17.3 Reduci
Page 15 and 16: --.. -~---.--.. '~~~~~~-~----------
Page 17 and 18: PART 1 surveys the scope of microec
Page 19 and 20: 4 Part '1 Introduction: Markets and
Page 21 and 22: 8 Part 1 Introduction: Markets and
Page 23: 12 Part 1 Introduction: Markets and
Page 33 and 34: 32 Part 1 Introduction. Markets and
Page 35 and 36: 36 Part '1 Introduction Markets and
Page 47 and 48: few years ago, General Mills decide
Page 49 and 50: 64 Part 2 Producers, Consumers, and
Page 53 and 54: 72 Part '2 Producers, Consumers, an
Page 65 and 66: --------~ 96 Part 2 Producers, Cons
Page 67 and 68: 100 Part 2 Producers, Consumers, an
Page 75 and 76:
116 Part 2 Producers, Consumers, an
Page 77 and 78:
Page 79 and 80:
Page 81 and 82:
Page 83 and 84:
Page 85 and 86:
1136 Part 2 Producers, Consumers, a
Page 87 and 88:
Part 2 Producers, Consumers, and Co
Page 89 and 90:
144 Part:2 Producers, Consumers, an
Page 91 and 92:
- O far, we have assumed that price
Page 93 and 94:
Page 95 and 96:
Page 97 and 98:
Page 99 and 100:
Page 101 and 102:
Page 103 and 104:
1172 Part 2 Producers, Consumers, a
Page 105 and 106:
Page 107 and 108:
Page 109 and 110:
Page 111 and 112:
88 Part 2 Producers, Consumers, and
Page 113 and 114:
Page 115 and 116:
Page 117 and 118:
Page 119 and 120:
Page 121 and 122:
5 :; 208 Part 2 Producers, Consumer
Page 123 and 124:
$ 212 Part 2 Producers, Consumers,
Page 125 and 126:
Page 127 and 128:
Page 129 and 130:
Page 131 and 132:
Page 133 and 134:
Page 135 and 136:
Page 137 and 138:
Page 139 and 140:
Page 141 and 142:
Page 143 and 144:
Page 145 and 146:
Page 147 and 148:
Page 149 and 150:
Page 151 and 152:
Page 153 and 154:
Page 155 and 156:
Page 157 and 158:
Page 159 and 160:
Page 161 and 162:
Page 163 and 164:
Page 165 and 166:
Page 167 and 168:
Page 169 and 170:
Page 171 and 172:
Page 173 and 174:
Page 175 and 176:
Page 177 and 178:
Page 179 and 180:
F PART 3 examines a broad range of
Page 181 and 182:
I I n a perfectly competitive marke
Page 183 and 184:
Price Dollars per 7 I Unit of Outpu
Page 185 and 186:
334 Part 3 Market Structure and Com
Page 187 and 188:
Page 189 and 190:
Page 191 and 192:
Page 193 and 194:
Page 195 and 196:
Page 197 and 198:
Page 199 and 200:
show all

Daniel l. Rubinfeld

Create successful ePaper yourself

Delete template?

Save as template?