Principles of Microeconomics - Hawaii Edition Principles of Microeconomics - Hawaii Edition JOHN LYNHAM AND OPENSTAX Principles of Microeconomics - Hawaii Edition by John Lynham is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted. © May 21, 2018 John Lynham — Revised edition based on: — © May 18, 2016 OpenStax Economics. Textbook content produced by OpenStax Economics is licensed under a Creative Commons Attribution License 4.0 license. Under this license, any user of this textbook or the textbook contents herein must provide proper attribution as follows: The OpenStax College name, OpenStax College logo, OpenStax College book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the creative commons license and may not be reproduced without the prior and express written consent of Rice University. For questions regarding this license, please contact partners@openstaxcollege.org. • If you use this textbook as a bibliographic reference, then you should cite it as follows: OpenStax Economics, Principles of Economics. OpenStax CNX. May 18, 2016 http:/ /cnx.org/contents/ 69619d2b-68f0-44b0-b074-a9b2bf90b2c6@11.330. • If you redistribute this textbook in a print format, then you must include on every physical page the following attribution: “Download for free at http:/ /cnx.org/contents/ 69619d2b-68f0-44b0-b074-a9b2bf90b2c6@11.330.” • If you redistribute part of this textbook, then you must retain in every digital format page view (including but not limited to EPUB, PDF, and HTML) and on every physical printed page the following attribution: “Download for free at http:/ /cnx.org/contents/ 69619d2b-68f0-44b0-b074-a9b2bf90b2c6@11.330.” This book was produced using Pressbooks.com, and PDF rendering was done by PrinceXML. Contents Chapter 1. Welcome to Economics! Introduction 17 1.2 Microeconomics and Macroeconomics 20 1.1 What Is Economics, and Why Is It Important? 27 1.3 How Economists Use Theories and Models to Understand Economic Issues 42 1.4 How Economies Can Be Organized: An Overview of Economic Systems 50 Chapter 2. Choice in a World of Scarcity Introduction to Choice in a World of Scarcity 69 2.1 How Individuals Make Choices Based on Their Budget Constraint 73 2.2 The Production Possibilities Frontier and Social Choices 90 2.3 Confronting Objections to the Economic Approach 106 Chapter 3. Demand and Supply Introduction to Demand and Supply 121 3.1 Demand, Supply, and Equilibrium in Markets for Goods and Services 125 3.2 Shifts in Demand and Supply for Goods and Services 142 3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process 174 3.4 Price Ceilings and Price Floors 194 3.5 Demand, Supply, and Efficiency 207 Chapter 4. Labor and Financial Markets Introduction to Labor and Financial Markets 223 4.1 Demand and Supply at Work in Labor Markets 227 4.2 Demand and Supply in Financial Markets 253 4.3 The Market System as an Efficient Mechanism for Information 272 Chapter 5. Elasticity Introduction to Elasticity 293 5.1 Price Elasticity of Demand and Price Elasticity of Supply 297 5.2 Polar Cases of Elasticity and Constant Elasticity 318 5.3 Elasticity and Pricing 326 5.4 Elasticity in Areas Other Than Price 346 Chapter 6. Consumer Choices Introduction to Consumer Choices 361 6.1 Consumption Choices 365 6.2 How Changes in Income and Prices Affect Consumption Choices 389 6.3 Labor-Leisure Choices 405 6.4 Intertemporal Choices in Financial Capital Markets 419 Chapter 7. Cost and Industry Structure Introduction to Cost and Industry Structure 441 7.1 Explicit and Implicit Costs, and Accounting and Economic Profit 445 7.2 The Structure of Costs in the Short Run 453 7.3 The Structure of Costs in the Long Run 472 Chapter 8. Perfect Competition Introduction to Perfect Competition 499 8.1 Perfect Competition and Why It Matters 502 8.2 How Perfectly Competitive Firms Make Output Decisions 508 8.3 Entry and Exit Decisions in the Long Run 542 8.4 Efficiency in Perfectly Competitive Markets 552 Chapter 9. Monopoly Introduction to a Monopoly 563 9.1 How Monopolies Form: Barriers to Entry 567 9.2 How a Profit-Maximizing Monopoly Chooses Output and Price 583 Chapter 10. Monopolistic Competition and Oligopoly Introduction to Monopolistic Competition and Oligopoly 613 10.1 Monopolistic Competition 617 10.2 Oligopoly 641 Chapter 11. Monopoly and Antitrust Policy Introduction to Monopoly and Antitrust Policy 667 11.1 Corporate Mergers 671 11.2 Regulating Anticompetitive Behavior 689 11.3 Regulating Natural Monopolies 698 11.4 The Great Deregulation Experiment 710 Chapter 12. Environmental Protection and Negative Externalities Introduction to Environmental Protection and Negative Externalities 723 12.1 The Economics of Pollution 727 12.2 Command-and-Control Regulation 743 12.3 Market-Oriented Environmental Tools 748 12.4 The Benefits and Costs of U.S. Environmental Laws 766 12.5 International Environmental Issues 780 12.6 The Tradeoff between Economic Output and Environmental Protection 787 Chapter 13. Positive Externalities and Public Goods Introduction to Positive Externalities and Public Goods 799 13.1 Why the Private Sector Under Invests in Innovation 804 13.2 How Governments Can Encourage Innovation 821 13.3 Public Goods 832 Chapter 14. Poverty and Economic Inequality Introduction to Poverty and Economic Inequality 851 14.1 Drawing the Poverty Line 854 14.2 The Poverty Trap 865 14.3 The Safety Net 879 14.4 Income Inequality: Measurement and Causes 893 14.5 Government Policies to Reduce Income Inequality 916 Chapter 15. Issues in Labor Markets: Unions, Discrimination, Immigration Introduction to Issues in Labor Markets: Unions, Discrimination, Immigration 933 15.1 Unions 939 15.2 Employment Discrimination 960 15.3 Immigration 980 Chapter 16. Information, Risk, and Insurance Introduction to Information, Risk, and Insurance 993 16.1 The Problem of Imperfect Information and Asymmetric Information 997 16.2 Insurance and Imperfect Information 1018 Chapter 17. Financial Markets Introduction to Financial Markets 1045 17.1 How Businesses Raise Financial Capital 1050 17.2 How Households Supply Financial Capital 1067 17.3 How to Accumulate Personal Wealth 1100 Chapter 18. Public Economy Introduction to Public Economy 1117 18.1 Voter Participation and Costs of Elections 1121 18.2 Special Interest Politics 1130 18.3 Flaws in the Democratic System of Government 1143 Chapter 19. International Trade Introduction to International Trade 1161 19.1 Absolute and Comparative Advantage 1165 19.2 What Happens When a Country Has an Absolute Advantage in All Goods 1182 19.3 Intra-industry Trade between Similar Economies 1200 19.4 The Benefits of Reducing Barriers to International Trade 1215 Chapter 20. Globalization and Protectionism Introduction to Globalization and Protectionism 1225 20.1 Protectionism: An Indirect Subsidy from Consumers to Producers 1229 20.2 International Trade and Its Effects on Jobs, Wages, and Working Conditions 1250 20.3 Arguments in Support of Restricting Imports 1263 20.4 How Trade Policy Is Enacted: Globally, Regionally, and Nationally 1285 20.5 The Tradeoffs of Trade Policy 1298 Appendix 1307 Appendix A: The Use of Mathematics in Principles of Economics 1308 Appendix B: Indifference Curves 1338 Appendix C: Present Discounted Value 1370 Appendix D: The Expenditure-Output Model 1375 CHAPTER 1. WELCOME TO ECONOMICS! 15 Introduction Figure 1. Why do these Spam Musubi cost $1.95? Why not $1.45 or $2.45? What are the forces that determine prices in our economy? (Credit: “Janine”/Flickr Creative Commons) Decisions ... Decisions ... Decisions Spam Musubi or an açai bowl? Every day we are faced with a myriad of decisions, from what to have for breakfast, to which route to take to class, to the more complex—“Should I double major and add possibly another semester of study to my education?” Our response to 17 these choices depends on the information we have available at any given moment; information economists call “imperfect” because we rarely have all the data we need to make perfect decisions. Despite the lack of perfect information, we still make hundreds of decisions a day. This leads us to the topic of this chapter, an introduction to the world of making decisions, processing information, and understanding behavior in markets —the world of economics. Each chapter in this book will start with a discussion about current (or sometimes past) events and revisit it at chapter’s end—to “bring home” the concepts in play. Chapter Objectives Introduction In this chapter, you will learn about: • What Is Economics, and Why Is It Important? • Microeconomics and Macroeconomics • How Economists Use Theories and Models to Understand Economic Issues • How Economies Can Be Organized: An Overview of Economic Systems Introduction | 18 What is economics and why should you spend your time learning it? After all, there are other disciplines you could be studying, and other ways you could be spending your time. As the Bring it Home feature just mentioned, making choices is at the heart of what economists study, and your decision to take this course is as much as economic decision as anything else. Economics is probably not what you think. It is not primarily about money or finance. It is not primarily about business. It is not mathematics. What is it then? It is both a subject area and a way of viewing the world. 19 | Introduction 1.2 Microeconomics and Macroeconomics Learning Objectives By the end of this section, you will be able to: • Describe microeconomics • Describe macroeconomics • Contrast monetary policy and fiscal policy Carl Bonham from the University of Hawai ʻ i Economic Research Organization presents a macroeconomic forecast on the local news. 20