Table of Contents
Introduction 1
About This Book 2
Foolish Assumptions 2
Icons Used in This book 3
Beyond the Book 4
Where to Go from Here 4
Part I Getting Started With Microeconomics 5
Chapter 1 Discovering Why Microeconomics Is a Big Deal 7
Peering into the Economics of Smaller Units 8
Making Decisions, Decisions and More Decisions! 9
Addressing how individuals and firms make decisions 10
Seeing how decisions come together to make markets 11
Understanding the Problems of Competition and Co-operation 12
Realising why authorities regulate competition 13
Considering Competition Law 14
Investigating Why Markets Can Fail 15
Chapter 2 Considering Consumer Choice: Why Economists Find You Fascinating! 17
Studying Utility: Why People Choose What They Choose 18
Introducing the idea of utility 18
Contrasting two ways of approaching utility: Cardinal and ordinal 18
Modelling Consumer Behaviour: Economic Agents 20
Acting rationally in economic terms: A mathematical tool 21
Addressing an objection to the representative economic agent 22
Pursuing Preferences and Investigating Indifferences 23
Becoming bothered with indifference curves 24
Bowing to convex curves 25
Staying interesting with monotonicity 28
Noting issues with the preference model 28
Chapter 3 Looking at Firm Behaviour: What They Are and What They Do 31
Delving into Firms and What They Do 31
Recognising the importance of profit 32
Discovering types of firms 33
Considering How Economists View Firms: The Black Box 33
Seeing why economists think as they do 34
Peering inside the Black Box: Technologies 34
Minimising costs 36
Maximising profits 37
From Firm to Company: Why People Form Limited Liability Companies 38
Part II Doing the Best You Can: Consumer Theory 43
Chapter 4 Living a Life without Limits 45
Eating Until You're Sick! Assuming that More Is Always Better 46
Making your choice: The consumption bundle 46
Thinking about utility in another way: Possible sets 47
Drawing a utility function 48
Deciding How Low You'll Go! Marginal Utility 50
Considering the last in line: The marginal unit 50
Creating a formula to model utility 52
Chapter 5 Considering the Art of the Possible: The Budget Constraint 55
Taking It to the Limit! Introducing the Budget Constraint 56
Introducing the budget line 56
Shifting the curve when you get a rise 57
Twisting the curve when the price of one good changes 58
Pushing the line: Utility and the budget constraint 60
Getting the Biggest Bang for Your Buck 61
Exploring relative price changes with the numeraire 62
Using the budget line to look at taxes and subsidies 63
Putting the Utility Model to Work 66
Chapter 6 Achieving the Optimum in Spite of Constraints 67
Investigating the Equilibrium: Coping with Price and Income Changes 68
Dealing with Price Changes for One Good 69
Pivoting the budget line 69
Seeing substitution in practice 71
Adding in the income effect 72
'It takes different strokes': Different goods have different income and substitution effects 73
Discerning a Consumer's Revealed Preference 75
Decomposing Income and Substitution Effects 77
Unpacking the effect of a price change in a model with two goods 77
Getting what you prefer 79
Developing the substitution effect in numbers 79
Calculating the substitution effect from a demand function 80
Totting up the income effect 82
Putting the two effects together using the Slutsky equation 83
Part III Uncovering the Alchemy of Firms' Inputs and Outputs 85
Chapter 7 Working with Different Costs and Cost Curves 87
Understanding Why Accountants and Economists View Costs Differently 88
Looking at a Firm's Cost Structure 89
Taking in the big picture: Total costs 89
Measuring by unit: Average costs 91
Adding only the cost of the last unit: Marginal cost 93
Putting it together: Cost structure of a simple firm 95
Relating Cost Structure to Profits 98
Looking at firm revenue 98
Hitting the sweet spot: When MC = MR 99
Viewing profits and losses 100
Staying in business and shutting down 101
Chapter 8 Squeezing Out Every Last Drop of Profit 105
Asking Whether Firms Really Maximise Profits 105
Talking about efficiency, in the long and short run 106
Going Large! The Goal of Profit Maximisation 110
Understanding a production function 110
Maximising profit in the long run 113
Slimming Down! Minimising Costs 114
Chapter 9 Supplying the Demand Information on Supply and Demand 117
Producing Stuff to Sell: The Supply Curve 117
Moving from marginal costs to firm supply 118
Totting up the numbers from firm to industry 120
Giving the People What They Want: The Demand Curve 121
Going from preferences to demand 122
Seeing what a demand curve looks like 125
Identifying Where Supply and Demand Meet 128
Returning to where you started: Equilibrium 128
Reading off revenue from under the demand curve 130
Summing the gains to consumer and producer: Welfare 131
Testing the responsiveness of demand using elasticities 133
Chapter 10 Dreaming of the Consumer's Delight: Perfect Competition 137
Viewing the 'Perfect' in Perfect Competition 138
Defining perfect competition 138
Identifying the conditions of perfect competition 138
Putting the Conditions Together for the Perfectly Competitive Marketplace 140
Seeing the supply side 140
Digging into the demand side 143
Returning to equilibrium in perfect competition 144
Examining Efficiency and Perfect Competition 146
Understanding that perfect competition is a boundary case 146
Considering perfect competition in the (imperfect) real world 147
Part IV Delving into Markets, Market Failure and Welfare Economics 149
Chapter 11 Stepping into the Real World: Oligopoly and Imperfect Competition 151
Outlining the Features of an Oligopoly 152
Discussing Three Different Approaches to Oligopoly 153
Investigating how firms interact in a duopoly 153
Competing by setting quantity: The Cournot model 154
Following the leader: The Stackelberg model 157
Competing over prices: The Bertrand model 158
Comparing the output levels and price for the three types of oligopoly 159
Making Your Firm Distinctive from the Competition 160
Reducing the effects of direct competition 161
Competing on brand: Monopolistic competition 162
Seeing how brands compete 162
Trading efficiency for diversity: Monopolistic competition for consumers 163
Understanding differentiation: The median voter 165
Chapter 12 Appreciating the Fundamental Theorems of Welfare Economics 167
Getting the Welfare Back into Welfare Economics 168
Meeting two social welfare functions 169
Understanding why markets tend towards one price 169
Understanding Why Partial Equilibrium Isn't Enough 170
Modelling exchange with an Edgeworth box 171
Investigating Pareto efficiency 172
Trading Your Way to Efficiency with Two Fundamental Theorems 173
Bidding for the general equilibrium 174
Grasping for efficiency: How markets set prices through tattonment 174
The first fundamental theorem: A free market is efficient 175
The second fundamental theorem: Any efficient outcome will do 177
Putting the two theorems together: Equity and efficiency trade-offs 177
Chapter 13 Controlling Markets with a Monopoly 179
Entering the World of the Monopoly 180
Contrasting monopoly and competitive markets: The case of the missing supply curve 180
Thinking like a monopolist: It's mine … all mine! 182
Refusing to stretch a point: Inelastic demand 185
Counting the Costs of Monopolies 186
Carrying a deadweight 186
Using three degrees of price discrimination 188
Tweaking the product 191
Playing with time and space 191
Tackling Monopolies in the Real World 192
Appreciating a complex problem 192
Understanding the legal response 192
'You Make Me Feel Like a Natural Monopoly' 194
Chapter 14 Examining Market Failure: Pollution and Parks 197
Coming to Grips with Externality: Too Much of a Bad Thing 198
Reducing externalities with taxes 199
Compensating the affected party through contracts 200
Making the Market Produce What It Won't: Public Goods 203
Defining goods by rivalry and excludability 203
Seeing spillovers, considering public benefits and providing public goods 205
Considering a common (goods) tragedy 206
Preventing good things: Anti-commons 207
Chapter 15 Understanding the Dangers of Asymmetric Information 209
Seeing the Effects of Asymmetric Information 210
Visiting the market for lemons and plums 210
Signalling your risk by buying cover: Adverse selection 211
Changing Your Behaviour because of Asymmetric Information 214
Managing moral hazard 215
Incentivising! Asymmetric information in contracts 215
Part V Thinking Strategically: Life Is Just a Game! 219
Chapter 16 Playing Games with Economic Theory 221
Setting the Game: Mechanism Design 222
Locking Horns with the Prisoners' Dilemma 223
Reading the plot of the Prisoners' Dilemma 224
Solving the Prisoners' Dilemma with a payoff matrix 225
Finding the best outcome: The Nash equilibrium 226
Applying the Prisoners' Dilemma: The problem of cartels 226
Escaping the Prisoners' Dilemma 229
Looking at Collective Action: The Stag Hunt 230
Designing the Stag Hunt 230
Examining the Stag Hunt in action 232
Annoying People with the Ultimatum Game 233
Getting out of the Dilemma by Repeating a Game 234
Investigating a repeated game using the extensive form 235
Mixing signals: Looking at pure and mixed strategies 236
Chapter 17 Keeping Things Stable: The Nash Equilibrium 239
Defining the Nash Equilibrium Informally 240
Looking for Balance: Where a Nash Equilibrium Must Apply 241
Recognising that a Nash equilibrium must exist in mixed-strategy games 242
Finding a Nash equilibrium by elimination 243
Solving a repeated game by backward induction 244
Applying the Nash Equilibrium in Economics 246
Deterring entry: A monopolist's last resort 247
Analysing society with economic reasoning 248
Chapter 18 Knowing How to Win at Auctions 249
Spotting Different Kinds of Auction 250
Knowing the type of auction you're in 250
Designing an auction to get (most of) what you want 251
Bidding for Beginners 253
Modelling a simple auction 253
Bidding late: The Internet auction phenomenon 254
Gaming an auction 255
Suffering from the Winner's Curse 256
Making bidders honest with a Vickrey auction 257
Perusing the curse in public procurement 259
Chapter 19 Deciphering the Signals: Threats and Benefits 261
Refining the Nash Equilibrium to Deal with Threats 262
Finding a subgame-perfect Nash equilibrium by elimination 262
Exploring subgame perfection in an entry deterrence game 263
Deterring entry: A guide to the dark arts 264
Signalling your good intentions 265
Responding to Positive Economic Signals 266
Investigating signalling with a model 266
Setting up the basic model 267
Finding a signalling equilibrium 268
Evaluating the signalling equilibrium 269
Part VI The Part of Tens 271
Chapter 20 Meeting Ten Great Microeconomists 273
Alfred Marshall (1842-1924) 273
Joseph Alois Schumpeter (1883-1950) 274
Gary S Becker (1930-2014) 275
Ronald Coase (1910-2013) 275
Elinor Ostrom (1933-2012) 276
William Vickrey (1914-96) 277
George Akerlof (born 1940) 277
James Buchanan (1919-2013) 278
William Baumol (born 1922) 278
Arthur Cecil Pigou (1877-1959) 279
Chapter 21 Ten Top Tips to Take Away 281
Respecting Choice 281
Pricing a Good: Difficult but not Impossible 282
Competing on Price or Quality 282
Seeking Real Markets' Unique Features 283
Beating the Market in the Long Run is Very Difficult 283
Knowing a Tradeoff Always Exists Somewhere 284
Arguing about the Next Best Thing 285
Using Markets Isn't Always Costless 285
Believing that Competition is Good - Usually 286
Getting Co-operation and Organisation in the World 287
Glossary 289
Index 295