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Fourteenth Canadian Edition
Microeconomics McConnell
Brue
Flynn
Barbiero
The Last Word—Pitfalls to Sound Economic Reasoning
Contents Preface
xvi
Chapter Summary
23
Terms and Concepts
24
Questions
24
Problems
26 27
PART 1: An Introduction to Economics and the Economy
1
CHAPTER 1: Limits, Alternatives, and Choices
1
APPENDIX TO CHAPTER 1
Ten Key Concepts to Retain for a Lifetime The Individual Interaction Among Individuals The Economy as a Whole and the Standard of Living
2 2 3
A1.1
The Economic Way of Thinking Scarcity and Choice Purposeful Behaviour Consider This—Free for All? Marginal Analysis: Comparing Benefits and Costs Consider This—Fast Food Lines
3 4 4 4 5 5
1.3
Theories, Principles, and Models
1.4
1.1
1.2
22
3
Graphs and Their Meanings Construction of a Graph Direct and Inverse Relationships Dependent and Independent Variables Other Things Equal Slope of a Line Vertical Intercept Equation of a Linear Relationship Slope of a Non-linear Curve
27 27 28 28 28 28 30 30 31
Appendix Summary
31
Appendix Terms and Concepts
32
6
Appendix Discussion Questions
32
Microeconomics and Macroeconomics Microeconomics Macroeconomics Positive and Normative Economics
7 7 7 8
Appendix Review Questions
32
Appendix Problems
33
The Individual’s Economic Problem Limited Income Unlimited Wants The Budget Line
8 8 9 10
Society’s Economic Problem Scarce Resources Resource Categories
11 11 12
1.7
Production Possibilities Model Production Possibilities Table Production Possibilities Curve Law of Increasing Opportunity Costs Optimal Allocation
13 13 14 14 16
1.8
Unemployment, Growth, and the Future A Growing Economy Present Choices and Future Possibilities Consider This—Women, the Workforce, and Production Possibilities A Qualification: International Trade
17 18 19
1.5
1.6
20 20
CHAPTER 2: The Market System and the
Circular Flow
35
2.1
Economic Systems Laissez-Faire Capitalism The Command System The Market System
36 36 36 37
2.2
Characteristics of the Market System Private Property Freedom of Enterprise and Choice Self-Interest Competition Markets and Prices Technology and Capital Goods Specialization Use of Money Active but Limited Government
37 37 38 38 39 40 40 41 42 43
2.3
Five Fundamental Questions What Will Be Produced? Consider This—McHits and McMisses
43 43 44
viii
2.4
2.5
2.6
CONTENTS
How Will the Goods and Services Be Produced? Who Will Get the Output? How Will the System Accommodate Change? How Will the System Promote Progress?
45 45 45 46
The Invisible Hand The Demise of the Command System Consider This—The Two Koreas
47 48 48
The Circular Flow Model Households Businesses Product Market Factor Market
49 49 51 51 51
How the Market System Deals with Risk The Profit System Shielding Employees and Suppliers from Business Risk Consider This—Insurance Benefits of Restricting Business Risk to Owners The Last Word—Shuffling the Deck
52 52
3.5
3.6
52 53 53 54
Chapter Summary
55
Terms and Concepts
56
Questions
57
Problems
58
PART 2: Price, Quantity, and Efficiency
3.4
60
3.1
3.3
60
Markets Demand Law of Demand The Demand Curve Market Demand Determinants of Demand Changes in Demand Changes in Quantity Demanded
61 61 62 63 63 64 64 67
Supply Law of Supply The Supply Curve Market Supply
68 68 69 69
70 71 72
Market Equilibrium Equilibrium Price and Quantity Rationing Function of Prices Consider This—Ticket Scalping: Unfair Criticism! Efficient Allocation
73 73 73 75 75
Changes in Supply, Demand, and Equilibrium Changes in Demand Changes in Supply Complex Cases Consider This—Salsa and Coffee Beans
76 76 76 76 78
Application: Government-Set Prices Price Ceilings Price Floors The Last Word—A Legal Market for Human Organs?
79 79 80 82
Chapter Summary
83
Terms and Concepts
84
Questions
85
Problems
86
APPENDIX TO CHAPTER 3
88
A3.1
CHAPTER 3: Demand, Supply, and Market
Equilibrium
Determinants of Supply Changes in Supply Changes in Quantity Supplied
Additional Examples of Supply and Demand Changes in Supply and Demand
A3.2 Upsloping versus Vertical Supply Curves
Reactions to Demand Shifts Preset Prices
88 88 92 92 93
Appendix Summary
94
Appendix Questions
94
Appendix Problems
96
MATH APPENDIX TO CHAPTER 3
97
A3.1
The Mathematics of Market Equilibrium The Demand Curve The Supply Curve The Market Equilibrium Example
97 97 97 97 98
CONTENTS
ix
Appendix Summary
130
99
Appendix Terms and Concepts
130
Market Failures in Competitive Markets Demand-Side Market Failures Supply-Side Market Failures
100 100 100
Appendix Questions
131
Appendix Problems
131
Efficiently Functioning Markets Consumer Surplus Producer Surplus Efficiency Revisited Efficiency Losses (or Deadweight Losses)
101 101 103 105 107
Public Goods Private Goods Characteristics Public Goods Characteristics Consider This—Street Entertainers Optimal Quantity of a Public Good Demand for Public Goods Comparing MB and MC Cost–Benefit Analysis Consider This—Responding to Digital Free Riding
108 108 109 109 111 111 113 113
4.4
Externalities Negative Externalities Positive Externalities Government Intervention Consider This—The Fable of the Bees
115 115 117 117 118
4.5
Society’s Optimal Amount of Externality Reduction 120 MC, MB, and Equilibrium Quantity 121 Shifts in Locations of the Curves 121 Government’s Role in the Economy 122 The Last Word—Carbon Dioxide Emissions, Cap-and-Trade, and Carbon Taxes 122
CHAPTER 4: Market Failures: Public Goods
and Externalities 4.1
4.2
4.3
CHAPTER 5: Government’s Role and
Government Failure 5.1
5.2
114
Government’s Economic Role Government’s Right to Coerce Consider This—Market Failure and the Need for Government The Problem of Directing and Managing Government Consider This—Does Big Government Equal Bad Government? Government Failure Representative Democracy and the Principal–Agent Problem Clear Benefits, Hidden Costs Unfunded Liabilities Chronic Budget Deficits Misdirection of Stabilization Policy Limited and Bundled Choice Bureaucracy and Inefficiency Corruption Imperfect Institutions The Last Word—Singapore’s Efficient and Effective Health Care System
134 135 136 136 137 138 138 138 139 140 141 142 143
Terms and Concepts
145
Questions
145
Problems
146
147
Terms and Concepts
125
APPENDIX TO CHAPTER 5: PUBLIC CHOICE THEORY AND VOTING PARADOXES
Questions
125
A5.1
Problems
126
APPENDIX TO CHAPTER 4
128 128 128 129 130
133
144
124
Information Failures Inadequate Buyer Information About Sellers Inadequate Seller Information About Buyers Qualification
133 133
Chapter Summary
Chapter Summary
A4.1
132
Public Choice Theory Revealing Preferences Through Majority Voting Inefficient Voting Outcomes Interest Groups and Logrolling Paradox of Voting Median-Voter Model Consider This—Voter Failure
147 147 147 149 149 150 151
x
CONTENTS
Appendix Summary
152
CHAPTER 7: Consumer Choice and Utility
Appendix Terms and Concepts
152
Maximization
Appendix Questions
152
7.1
Appendix Problems
153
PART 3: Consumer Behaviour
154
CHAPTER 6: Elasticity
154
6.1
Price Elasticity of Demand The Price Elasticity Coefficient and Formula Interpretation of Ed Consider This—A Bit of a Stretch
6.3
Determinants of Price Elasticity of Demand Applications of Price Elasticity of Demand
163 164
6.4
Price Elasticity of Supply Price Elasticity of Supply: The Immediate Market Period Price Elasticity of Supply: The Short Run Price Elasticity of Supply: The Long Run Applications of Price Elasticity of Supply
165
6.6
Cross Elasticity and Income Elasticity of Demand Cross Elasticity of Demand Income Elasticity of Demand Elasticity and Real-World Applications Elasticity and Tax Incidence Elasticity Loss of a Tax The Last Word—Elasticity and Pricing Power: Why Different Consumers Pay Different Prices
183 184
7.2
The Theory of Consumer Choice Consumer Choice and the Budget Constraint Utility-Maximizing Rule A Numerical Example Algebraic Restatement
184 184 185 185 187
7.3
Utility Maximization and the Demand Curve 188 Deriving the Demand Schedule and Curve 188
7.4
Income and Substitution Effects
189
7.5
Applications and Extensions iPads The Diamond–Water Paradox Opportunity Cost and the Value of Time Cash and Noncash Gifts The Last Word—Criminal Behaviour
190 190 190 191 192 192
155 157 158 159 160 160 160
6.5
The Law of Diminishing Marginal Utility Terminology Total Utility and Marginal Utility Consider This—Vending Machines and Diminishing Marginal Utility Marginal Utility and Demand
155
The Total-Revenue Test Elastic Demand Inelastic Demand Unit Elasticity Price Elasticity Along a Linear Demand Curve Price Elasticity and the Total-Revenue Curve
6.2
161 162
166 167 167 167
168 168 169 171 171 173
175
180 181 181 181
Chapter Summary
193
Terms and Concepts
194
Questions
194
Problems
195
APPENDIX TO CHAPTER 7
197
A7.1
Indifference Curve Analysis The Budget Line: What Is Attainable Indifference Curves: What Is Preferred The Indifference Map Equilibrium at Tangency Equivalency at Equilibrium The Derivation of the Demand Curve Income and Substitution Effects Consider This—Indifference Maps and Topographical Maps
197 197 198 199 200 200 201 202 204
Chapter Summary
177
Appendix Summary
204
Terms and Concepts
178
Appendix Terms and Concepts
204
Questions
178
Appendix Questions
205
Problems
179
Appendix Problems
205
CONTENTS
PART 4: Microeconomics of Product Markets
206
9.5
Profit Maximization in the Short Run: Marginal-Revenue–Marginal-Cost Approach 244 Consider This—The “Still There” Motel 249
9.6
Marginal Cost and Short-Run Supply Generalized Depiction Diminishing Returns, Production Costs, and Product Supply Changes in Supply Firm and Industry: Equilibrium Price The Last Word—Fixed Costs: Digging Yourself Out of a Hole
CHAPTER 8: The Firm and the Costs of
Production 8.1
8.2
8.3
8.4
8.4
206
Economic Costs Explicit and Implicit Costs Accounting Profit and Normal Profit Economic Profit Short Run and Long Run
207 207 208 209 210
Short-Run Production Relationships Law of Diminishing Returns Consider This—Diminishing Returns from Study
211 212
252 252 253 255 256
212
Terms and Concepts
257
Short-Run Production Costs Fixed, Variable, and Total Costs Per-Unit, or Average, Costs Marginal Cost Consider This—Ignoring Sunk Costs Shifts of Cost Curves
215 215 217 219 219 223
Questions
257
Problems
258
Long-Run Production Costs Firm Size and Costs The Long-Run Cost Curve Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure
223 223 224 224
Applications and Illustrations The Last Word—3-D Printers
229 231
CHAPTER 10: Perfect Competition in
the Long Run 10.1
10.2
227
232
Terms and Concepts
233
Questions
233
Problems
235
10.3
10.4
CHAPTER 9: Perfect Competition in
the Short Run
237
9.1
Four Market Structures
9.2
Perfect Competition: Characteristics and Occurrence
239
Demand for a Firm in Perfect Competition Average, Total, and Marginal Revenue
240 240
Profit Maximization in the Short Run Total-Revenue–Total-Cost Approach
242 242
9.4
250 250
Chapter Summary
Chapter Summary
9.3
xi
238
10.5
260
The Long Run versus the Short Run in Perfect Competition Profit Maximization in the Long Run
261 261
The Long-Run Adjustment Process in Perfect Competition Long-Run Equilibrium
261 262
Long-Run Supply Curves Long-Run Supply for a Constant-Cost Industry Long-Run Supply for an Increasing-Cost Industry Long-Run Supply for a Decreasing-Cost Industry
264 264 264 266
Perfect Competition and Efficiency Productive Efficiency: P = Minimum ATC Allocative Efficiency: P = MC Maximum Consumer and Producer Surplus Dynamic Adjustments The “Invisible Hand” Revisited
267 267 269
Technological Advance and Competition Consider This—Running a Company Is Hard Business Creative Destruction The Last Word—A Patent Failure?
271
270 270 271
271 272 273
xii
CONTENTS
Chapter Summary
274
Terms and Concepts
275
Questions
275
Problems
276
CHAPTER 11: Monopoly
277
Characteristics of Monopoly Examples of Monopoly Dual Objectives of the Study of Monopoly
278 278 279
11.2
Barriers to Entry
279
11.3
Monopoly Demand
281
11.4
Output and Price Determination Cost Data MR = MC Rule No Monopoly Supply Curve Misconceptions About Monopoly Pricing Possibility of Losses by Monopolist
285 285 285 287 287 288
Economic Effects of Monopoly Price, Output, and Efficiency Monopoly and Deadweight Loss Income Transfer Cost Complications Assessment and Policy Options
289 289 290 290 291 293
Price Discrimination Conditions Examples of Price Discrimination Consider This—Price Discrimination at the Ballpark Graphical Analysis
295 295 295
Regulated Monopoly Socially Optimal Price: P = MC Fair-Return Price: P = ATC Dilemma of Regulation The Last Word—Monopoly Power in the Internet Age
297 298 299 299
11.1
11.5
11.6
11.7
Characteristics of Monopolistic Competition 307 Relatively Large Number of Sellers 307 Differentiated Products 307 Easy Entry and Exit 308 Advertising 309 Monopolistically Competitive Industries 309
12.2
Price and Output in Monopolistic Competition The Firm’s Demand Curve The Short Run: Profit or Loss The Long Run: Only a Normal Profit Complications
310 311 311 311 313
12.3
Monopolistic Competition and Efficiency
313
12.4
Product Variety Benefits of Product Variety Further Complexity
314 315 315
12.5
Oligopoly A Few Large Producers Homogeneous or Differentiated Products Control over Price, but Mutual Interdependence Entry Barriers Consider This—Creative Strategic Behaviour Mergers Oligopolistic Industries
315 316 316
12.6
296 296
300
Chapter Summary
302
Terms and Concepts
302
Questions
303
Problems
304
CHAPTER 12: Monopolistic Competition and
Oligopoly
12.1
306
12.7
12.8
Oligopoly Pricing Behaviour: A Game Theory Overview Basic Concepts Prisoner’s Dilemma Strategies in a Two-Firm Oligopoly Mutual Interdependence Revisited Collusion Incentive to Cheat The Incentives and Obstacles to Collusion: Two Oligopoly Strategies Cartels and Other Collusion: Cooperative Strategies Price Leadership Model: Another Cooperative Strategy Oligopoly and Advertising Positive Effects of Advertising Potential Negative Effects of Advertising
316 316 317 317 317
319 319 320 321 321 321 322
323 323 327 328 328 329
CONTENTS
12.9
Oligopoly and Efficiency The Last Word—Internet Oligopolies
330 331
Chapter Summary
332
Terms and Concepts
333
Questions
333
Problems
335
APPENDIX TO CHAPTER 12—ADDITIONAL GAME THEORY APPLICATIONS
336
Questions
355
Problems
356
PART 5: Microeconomics of Factor Markets
357
CHAPTER 14: The Demand for Factors of
Production
336 337 337
Factor Pricing and Demand
358
14.2
Marginal Productivity Theory of Factor Demand
358
14.3
Determinants of Factor Demand Consider This—Superstars Changes in Product Demand Changes in Productivity Changes in the Prices of Other Factors
363 364 364 364 365
14.4
Elasticity of Factor Demand Ease of Factor Substitutability Elasticity of Product Demand Ratio of Factor Cost to Total Cost
367 367 367 368
14.5
Optimal Combination of Factors The Least-Cost Rule The Profit-Maximizing Rule Numerical Illustration
368 368 369 370
14.6
Marginal Productivity Theory of Income Distribution The Last Word—Input Substitution: The Case of ABMs
338
Appendix Summary
340
Appendix Terms and Concepts
340
Appendix Questions
340
Appendix Problems
341
CHAPTER 13: Competition Policy and
Regulation 13.1
13.2
13.3
343
Industrial Concentration Competition Policy Merger Types Competition Law Merger Guidelines Consider This—Gas Price Fixing in Quebec
343 344 344 345 345 347
Industrial Regulation Natural Monopoly Problems with Industrial Regulation Legal Cartel Theory Deregulation
348 348 348 349 350
Social Regulation Distinguishing Features The Optimal Level of Social Regulation Two Reminders The Last Word—The United States versus Microsoft
350 351 351 352
355
Terms and Concepts
355
372 373
Chapter Summary
374
Terms and Concepts
374
Questions
375
Problems
376
CHAPTER 15: Wage Determination
378
15.1
Labour, Wages, and Earnings General Level of Wages Role of Productivity Real Wages and Productivity Long-Run Trend of Real Wages
379 379 380 381 381
15.2
A Perfectly Competitive Labour Market Market Demand for Labour Market Supply of Labour
382 382 382
353
Chapter Summary
357
14.1
A12.1 A One-Time Game: Strategies and
Equilibrium Credible and Empty Threats Repeated Games and Reciprocity Strategies First-Mover Advantages and Pre-emption of Entry
xiii
xiv
15.3
15.4
15.5
15.6
15.7
15.8
CONTENTS
Labour Market Equilibrium Consider This—Fringe Benefits versus Take-Home Pay
385
Monopsony Model Upsloping Labour Supply to a Firm MFC Higher than the Wage Rate Equilibrium Wage and Employment Examples of Monopsony Power
385 386 387 387 388
Unions and the Labour Market: Three Models Demand-Enhancement Model Exclusive or Craft Union Model Inclusive or Industrial Union Model Wage Increases and Job Loss
388 388 389 390 391
Equilibrium Rent and Changes in Demand Productivity Differences and Rent Differences Land Rent: A Surplus Payment Land Ownership: Fairness versus Allocative Efficiency
408 409
16.2
Interest Money Is Not a Resource Interest Rates and Interest Income Range of Interest Rates Pure Rate of Interest
410 410 410 411 411
16.3
Loanable Funds Theory of Interest Extending the Model
411 413
16.4
Time Value of Money Consider This—That Is Interest
414 415
16.5
Role of Interest Rates
416
16.6
Economic Profit Entrepreneurship and Profit Insurable and Uninsurable Risks Sources of Uninsurable Risks Profit as Compensation for Bearing Uninsurable Risks Sources of Economic Profit Profit Rations Entrepreneurship Entrepreneurs, Profits, and Corporate Stockholders Consider This—Apple CEO Steve Jobs The Last Word—Determining the Price of Credit
418 418 419 419
383
Bilateral Monopoly Model Indeterminate Outcome of a Bilateral Monopoly Desirability of Bilateral Monopoly
392 392
The Minimum Wage Controversy Case Against the Minimum Wage Case for the Minimum Wage Evidence and Conclusions
393 393 393 394
Wage Differentials Marginal Revenue Productivity Noncompeting Groups Consider This—My Entire Life Compensating Differences Market Imperfections
394 396 396 397 397 398
Pay for Performance The Principal–Agent Problem Addenda: The Negative Side Effects of Pay for Performance The Last Word—Are Top Executives in Canada Overpaid?
398 399
391
407
409
419 420 420 420 421 422
Chapter Summary
423
Terms and Concepts
424
400
Questions
424
401
Problems
425
Chapter Summary
402
CHAPTER 17: International Trade
427
Terms and Concepts
403
17.1
Questions
403
Problems
404
CHAPTER 16: Rent, Interest, and Profit
406
16.1
Economic Rent Perfectly Inelastic Supply
407 407
The Economic Basis for Trade 428 Comparative Advantage 428 The Basic Principle 429 Two Isolated Nations 430 Self-Sufficiency Output Mix 431 Specialization Based on Comparative Advantage 431 Terms of Trade 433 Gains from Trade 433
xv
CONTENTS
Trade with Increasing Costs Consider This—Misunderstanding the Gains from Trade The Case for Free Trade Restated 17.2
17.3
Supply and Demand Analysis of Exports and Imports Supply and Demand in Canada Supply and Demand in the United States Equilibrium World Price, Exports, and Imports Trade Barriers and Export Subsidies Economic Impact of Tariffs Economic Impact of Quotas Net Costs of Tariffs and Quotas The Last Word—Petition of the Candlemakers, 1845
436 436 437
437 438 439 440 441 442 444 445 445
Chapter Summary
446
Terms and Concepts
447
Questions
447
Problems
449
Credits
450
Glossary
451
Index
458
WEBSITE BONUS CHAPTERS AVAILABLE ON CONNECT CHAPTER 7B: Behavioural Economics CHAPTER 16B: Income Inequality, Poverty, and
Discrimination CHAPTER 17B: Natural Resource and Energy
Economics CHAPTER 18B: Canadian Agriculture: Economics
and Policy
Preface Welcome to the Fourteenth Canadian Edition of Microeconomics. Thousands of Canadian students have studied economics from the Canadian editions of Microeconomics and Macroeconomics. An estimated 15 million students worldwide have now used a version of the McConnell textbooks, making them the world’s best-selling economic principles textbooks.
A Note About the Cover We chose the cover for the Fourteenth Canadian Edition to reference global climate change, which many scientists believe has been due to human activity, particularly since the dawn of the Industrial Revolution.
Fundamental Objectives We have three main goals for Microeconomics:
• Help the beginning student master the principles essential for understanding economic problems, specific economic issues, and the policy alternatives.
• Help the student understand and apply the economic perspective, and reason accurately and objectively about economic matters.
• Promote a lasting student interest in economics and the economy. What’s New and Improved? One of the benefits of writing a successful text is the opportunity to revise—to delete outdated content and insert up-to-date information, to clarify ambiguous statements, to introduce relevant and interesting illustrations, to improve the organizational structure, and to enhance the learning aids. We trust you will agree that we have used this opportunity wisely and fully. Some of the more significant changes include the following:
Restructured Introductory Chapters We have divided the five introductory chapters common to Macroeconomics, and Microeconomics into two parts. Part 1 contains Chapter 1 (Limits, Alternatives, and Choices) and Chapter 2 (The Market System and the Circular Flow). The content in Part 2 has changed
PREFACE
xvii
and now consists of the following three chapters: Chapter 3 (Demand, Supply, and Market Equilibrium), Chapter 4 (Market Failures: Public Goods and Externalities), and Chapter 5 (Government’s Role and Government Failure). As restructured, the three chapters that now form Part 2 give students an overview of
• The efficiency and allocation benefits of competitive markets • How and why governments can help when there are cases of market failure • Issues of government failure so that students do not assume that government intervention is an easy or guaranteed panacea for the misallocations and inefficiencies caused by market failure Our new approach responds to suggestions by reviewers to boost the analysis of government failure so that students may better understand many of the problems currently besetting the Canadian economy.
New “Consider This” and “Last Word” Boxes CO N S ID ER THI S
A Bit of a Stretch
The following analogy might help you remember the distinction between elastic and inelastic. Imagine two objects—one an Ace elastic bandage used to wrap injured joints and the other a relatively firm bungee cord (rubber strap) used for securing items for transport. The Ace bandage stretches a great deal when pulled with a particular force; the bungee cord stretches some, but not a lot.
The
LAST WORD
Similar differences occur for the quantity demanded of various products when their prices change. For some products, a price change causes a substantial “stretch” of quantity demanded. When this stretch in percentage terms exceeds the percentage change in price, demand is elastic. For other products, quantity demanded stretches very little in response to the price change. When this stretch in percentage terms is less than the percentage change in price, demand is inelastic. In summary
• Elastic demand displays considerable “quantity stretch” (as with the Ace bandage).
• Inelastic demand displays relatively little “quantity stretch” (as with the bungee cord). And by extension
• Perfectly elastic demand has infinite quantity stretch. • Perfectly inelastic demand has zero quantity stretch.
3-D Printers 3-D printers are poised to replace mass production with mass customization.
Both a billionaire and your Average Joe can buy a pocketknife for $10. They can also both buy an iPhone for $199 (on a contract with a cellular phone provider). And they can both purchase a new compact car for under $15,000. The fact that all of these items are affordable to both a billionaire and your Average Joe is due to mass production and economies of scale. The iPhone, for instance, is one of the most complicated devices ever made. It contains cuttingedge technologies for graphics, voice recognition, battery length, screen durability, and many other features. Most of those technologies took hundreds of millions—if not billions— of dollars to develop and the factories that manufacture the iPhone and its components themselves cost many billions of dollars to set up. Yet the iPhone is so inexpensive that Average Joes can afford to buy one. That mass affordability is the result of mass production coupled with mass sales. Marginal costs are typically quite low with mass production. So if manufacturers can tap mass markets and sell their products in large numbers, they can achieve low per-unit costs by spreading the massive fixed costs (for developing the new technologies and setting up the factories) over many units. Doing so results in economies of scale, low average total costs per unit, and low prices that even average folks can afford. Mass production and mass sales first became possible during the Industrial Revolution, which began in England during the late 1700s and then spread through most of the rest of the world during the next two centuries. The Industrial Revolution occurred when steam-powered engines became powerful enough to drive factory equipment, propel ships, and pull trains. Engineers and inventors used steam power to automate factories and initiate the low-cost mass production of consumer goods. That process only accelerated when, in the late 19th century, the so-called Second
Industrial Revolution saw electricity harnessed to drive factories and provide lighting. Mass sales, however, are not easy. They require large distribution networks, massive advertising budgets, and perhaps most importantly, cheap ways of shipping products from factories to consumers. Thus it was crucially important that transportation was also vastly improved during the first and second Industrial Revolutions. If not for better ships, smoother roads, and cheap transportation by railroad, transportation costs would have been so high that consumers would not have been able to afford mass-produced products shipped from distant factories. Now, a new technology promises to deliver a Third Industrial Revolution that will feature not only low production costs but also zero transportation costs. Even better, both of those highly attractive features will be possible even if you make only a single unit of a product. In addition, each unit can be fully customized to a consumer’s wants and needs. As a result, our world of affordable mass production may soon be replaced by a world of affordable mass customization. The new technology is called additive manufacturing and it creates objects using computer-controlled devices known as 3-D printers. The 3-D (three-dimensional) printers contain a fine powder of metal or plastic particles that sit in a bin. A laser moves rapidly over the powder, the heat of its beam fusing small clumps of the powder together. Guided by a computerized blueprint, the rapidly moving laser can fuse a single layer of a complicated object together in just a few seconds. The bin is then lowered a bit, another layer of powder is placed on top, and the laser again begins to shoot, this time fusing together both the previous layer and the current layer. Doing this over and over, one layer atop another, results in a solid object
The Consider This boxes are used to provide analogies, examples, or stories that help drive home central economic ideas in a student-oriented, real-world manner. For instance, a Consider This box titled “McHits and McMisses” illustrates consumer sovereignty through a listing of successful and unsuccessful products. Another Consider This box looks at how street entertainers overcome the problem of being unable to exclude non-paying clients from enjoying the entertainment they provide. These brief vignettes, each accompanied by a photo, illustrate key points in a lively, colourful, and easy-to-remember way. We have added seven new Consider This boxes in this edition. The Last Word pieces are lengthier applications or case studies that are placed near the end of each chapter. For example, the Last Word section for Chapter 1 (Limits, Alternatives, and Choices) examines pitfalls to sound economic reasoning, while the Last Word section for Chapter 5 (Market Failures: Public Goods and Externalities) examines cap-and-trade versus carbon taxes as policy responses to excessive carbon dioxide emissions. There are six new Last Word sections in this edition. If you are unfamiliar with Microeconomics, we encourage you to thumb through the chapters to take a quick look at these highly visible features.
New Chapter on Government’s Role and Government Failure We have responded to instructor suggestions by placing this new chapter, Government’s Role and Government Failure, into the introductory section of the book. Its early placement gives students a taste of political economy and the practical difficulties with government regulation and intervention. Topics covered include the special-interest effect, rent seeking, regulatory capture, political corruption, and unintended consequences.
xviii
PREFACE
The chapter begins, however, by reminding students of government’s great power to improve equity and efficiency. When read along with Chapter 4 on market failure, this new chapter on government failure should provide students with a balanced perspective. After learning why government intervention is needed to counter market failures, they will also learn that governments often have difficulty in fulfilling their full potential for improving economic outcomes. An optional appendix incorporates the material on public choice theory and voting paradoxes that was formerly located in Microeconomics Chapter 17 of the thirteenth edition. Instructors wishing to give their students an even deeper appreciation of government failure may wish to assign this appendix. Meanwhile, the material on asymmetric information that was located in Chapter 17 of the thirteenth edition has been moved into an appendix attached to the current edition’s Chapter 4 on market failure. That way, instructors wishing to give their students a deeper look at market failure will have the material on asymmetric information located immediately after that chapter’s discussion of public goods and externalities.
New Chapter on Behavioural Economics By building upon the material on prospect theory that appeared in Chapter 6 of the thirteenth edition, we have created a new full-length chapter on behavioural economics for the fourteenth edition. Topics covered include time inconsistency, myopia, decision-making heuristics, framing effects, mental accounting, loss aversion, the endowment effect, and reciprocity. The discussion is couched in terms of consumer decision making and includes numerous concrete examples to bring the material home for students. We have also striven to make clear to students the ways in which behavioural economics builds upon and augments the insights of traditional neoclassical economics. The chapter opening compares and contrasts behavioural economics and neoclassical economics so that students will be able to see how they can be used in tandem to help understand and predict human choice behaviour. The chapter is designed, however, to be modular. So instructors may skip it completely without any fear that its concepts are needed to understand subsequent chapters.
Reorganized and Extended End-of-Chapter Questions and Problems The thirteenth edition featured separate sections for end-of-chapter Questions and Problems. Due to demand on the part of instructors for an increase in the number of problems that are both autogradable and algorithmic, we have for the fourteenth edition added about ten new questions per chapter and have, in addition, revised our organizational scheme for questions and problems. The questions and problems are now divided into three categories: Discussion Questions, Review Questions, and Problems.
• The Discussion Questions are analytic and often allow for free responses. • The Review Questions focus on the apprehension of key concepts but always require specific answers, thereby allowing for autograding.
• The Problems are quantitative and require specific answers so that they, too, are both autogradable and, where appropriate, algorithmic. All of the questions and problems are assignable through McGraw-Hill Ryerson’s Connect and we have additionally aligned all of the questions and problems with the learning objectives presented at the beginning of chapters.
PREFACE
xix
Current Discussions and Examples The fourteenth edition of Microeconomics refers to and discusses many current topics. Examples include surpluses and shortages of tickets at the Olympics, the myriad impacts of ethanol subsidies, creative destruction, applications of behavioural economics, applications of game theory, oil and gasoline prices, cap-and-trade versus carbon taxes, the value-added tax, lotteries, consumption versus income inequality, changes in exchange rates, and many other current topics.
Chapter-by-Chapter Changes Each chapter of Microeconomics, Fourteenth Canadian Edition, contains updated data reflecting the current economy, streamlined Learning Objectives, and reorganized end-ofchapter content. In addition to these changes, each chapter contains the following updates: Chapter 1: Limits, Alternatives, and Choices features three refreshed Consider This pieces, a more concise definition of macroeconomics, and wording improvements that clarify the main concepts. Chapter 2: The Market System and the Circular Flow contains a heavily revised introductory section on the different types of economic systems found in the world today as well as a new section on how the market system deals with risk and uncertainty. There is more material on risk and its effects on economic behaviour. This short section provides a brief, nontechnical framework for students to understand how the market economy deals with risk and uncertainty. There is also a new Consider This box on how insurance encourages investment by transferring risk from those who do not wish to bear it to those who are willing to bear it as a business proposition. Chapter 3: Demand, Supply, and Market Equilibrium contains a short new section in the appendix that introduces students to markets with vertical supply curves so that the concept of perfectly inelastic supply will come more easily to microeconomics students and the concept of vertical long-run aggregate supply will come more easily to macroeconomics students. Chapter 4: Market Failures: Public Goods and Externalities includes a new Consider This piece on how musicians have reacted to the reality that Internet file sharing has transformed recorded music from a private good into a public good. There is also a new appendix that explains market failures caused by asymmetric information. The appendix gives instructors the option of extending and deepening this chapter’s study of market failure. Its content previously appeared in Chapter 17 of the thirteenth edition. Chapter 5: Government’s Role and Government Failure is a new chapter that offers a balanced treatment of both the great benefits and the possible drawbacks of government economic intervention and regulation. The chapter includes topics of interest for both microeconomics and macroeconomics students: regulatory capture, the collective-action problem, bureaucratic inertia, the tendency for politicians to run budget deficits to please voters, and the special-interest effect. So while Chapter 4 makes the case for government regulation to compensate for market failures, this new chapter introduces students to the fact that government interventions are themselves susceptible to both allocative and productive inefficiency. As noted previously, the chapter also includes an appendix that incorporates the voting and public choice material that appeared in Chapter 17 of the thirteenth edition, for instructors who wish to present their students with the most prominent theoretical models dealing with government failure. Chapter 6: Elasticity This chapter was previously located in the thirteenth edition directly after Chapter 3 on supply and demand. It has been moved to this new location to serve as the first chapter of the new three-chapter Part 3 that deals with
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PREFACE
consumer behaviour. Along those lines, this chapter on elasticity explains in greater depth than Chapter 3 how consumers and producers react to changes in prices. Chapter 7: Consumer Choice and Utility Maximization contains the utility-maximization material that previously appeared as the first half of the thirteenth edition’s Chapter 6. This core content has been refreshed with a new example using iPads to explain consumer equilibrium. Chapter 7 Bonus: Behavioural Economics (available on Connect) is a new, chapterlength overview of behavioural economics. The chapter incorporates the short section on prospect theory that was located in Chapter 6 of the thirteenth edition. New concepts include a discussion of the human brain’s cognitive limitations and dependence on heuristics, how time inconsistency and myopia cause people to make suboptimal long-run decisions, and how people’s sense of fairness and reciprocity affects decision making. The discussion of prospect theory includes anchoring, mental accounting, loss aversion, and the endowment effect. Chapter 8: The Firm and the Costs of Production has a new Consider This box on sunk costs as well as a new Last Word on how additive manufacturing and 3-D printing may replace mass production with mass customization. Chapter 9: Perfect Competition in the Short Run is mostly unchanged from the thirteenth edition (where it appeared as Chapter 8). It contains several wording changes to improve clarity as well as a new Quick Review to increase retention. Chapter 10: Perfect Competition in the Long Run features a new Last Word that discusses the possibility that in certain industries patent protections may hinder rather than help innovation and the process of creative destruction. Chapter 11: Monopoly has a new Last Word on how network effects and economies of scale have driven the monopolistic growth of Internet giants such as Facebook, Google, and Amazon. We have also revised our explanation of barriers to entry in monopoly industries with high fixed costs. The revised presentation builds upon the new material in Chapter 2 that covers risk and its effects on economic decision making. Chapter 12: Monopolistic Competition and Oligopoly contains several updated examples as well as a new Last Word on the intense oligopolistic competition that has ensued between major Internet companies like Google, Apple, and Microsoft as they have attempted to compete in each other’s core lines of business. Chapter 13: Competition Policy and Regulation has a new Consider This box on gas price fixing in Quebec. It also features new examples of real-world collusive behaviour and an expanded explanation of cartel behaviour in the section on legal cartel theory. Chapter 14: The Demand for Factors of Production features extensive data updates and a new Quick Review summarizing the material toward the end of the chapter. Chapter 15: Wage Determination contains a new Consider This box on fringe benefits. It makes the point that if workers in a competitive labour market want higher fringe benefits, they must accept lower take-home pay (because total compensation is fixed by the equilibrium wage). Chapter 16: Rent, Interest, and Profit features data updating and several new examples in addition to additional Quick Reviews and nearly a dozen new Review Questions. Chapter 16 Bonus: Income Inequality, Poverty, and Discrimination (available on Connect) contains major data updates, and new review questions and problems. Chapter 17: International Trade features data updates, several revised figure captions, and two new Quick Reviews.
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Chapter 17 Bonus: Natural Resource and Energy Economics (available on Connect) contains data updates, an additional Quick Review, and a new Consider This feature that introduces students to Garret Hardin’s “The Tragedy of the Commons” story as a way of understanding most resource-depletion crises. Chapter 18 Bonus: Agriculture: Economics and Policy (available on Connect) features numerous data updates as well as new Review Questions.
Integrated Text and Website We continue to integrate the book and our website by including icons in the text that direct readers to additional content. WORKED PROBLEM 2.1 Least Coast Production
Worked Problems are hyperlinked within the eBook and provide students with a step-by-step illustration of how to solve a problem. These pieces consist of side-by-side computational questions and the computational procedures used to derive the answers. In essence, they extend the textbook’s explanations involving computations—for example, of real GDP, real GDP per capita, the unemployment rate, the inflation rate, per-unit production costs, and more. At relevant points in the text, the Worked Problem hyperlink directs the student to Connect for this additional support. MATH 4.1
The Optimal Amount of a Public Good
For those students who want to explore the mathematical details of the theoretical concepts covered in the text, Math icons direct the students to Connect. ORIGIN OF THE IDEA 3.1 Demand and Supply
Also on Connect are Origin of the Idea articles. These brief histories examine the origins of 70 major ideas identified in the book. Students will be interested in learning about economists who first developed such ideas as opportunity cost, equilibrium price, the multiplier, and comparative advantage and elasticity. Clicking on the Origin of the Idea title directs students to Connect for this extension material. To help students understand graphing concepts used in the text, Connect offers a Graphing Tool Introduction and assignable graphing exercises called Graphing Extras.
Bonus Chapters Bonus web chapters are available in the eBook. They are 7B, Behavioural Economics; 16B, Income Inequality, Poverty, and Discrimination; 17B, Natural Resource and Energy Economics; and 18B, Canadian Agriculture: Economics and Policy.
Organizational Alternatives Although instructors generally agree as to the content of principles of economics courses, they sometimes differ as to how to arrange the material. Microeconomics includes five parts, and that provides considerable organizational flexibility. Some instructors will prefer to intersperse the microeconomics of Parts 2 and 3 with the chapters of Parts 4 and 5. Chapter 18B on agriculture may follow Chapters 9 and 10 on perfect competition; Chapter 13 on competition policy and regulation may follow either Chapter 11 or 12 on imperfect competition models; Chapter 16B on income inequality may follow Chapter 16 on rent, interest, and profit. Chapter 17 on international trade can easily be covered immediately after Chapter 3 on supply and demand for instructors who want an early discussion of international trade.
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PREFACE
Pedagogical Aids Microeconomics is highly student oriented. The Fourteenth Canadian Edition is accompanied by a variety of high-quality supplements that help students master the subject and help instructors implement customized courses.
• Learning Objectives The Learning Objectives have
PART 1
AN INTRODUCTION TO ECONOMICS AND THE ECONOMY
CHAPTER 1
Limits, Alternatives, and Choices
CHAPTER 2
The Market System and the Circular Flow
been expanded in the fourteenth edition. We set out the Learning Objectives at the start of each chapter so the chapter’s main concepts can be easily recognized. We have also tied the Learning Objectives to each of the numbered sections in each chapter and the Questions and Problems at the end of each chapter. In addition, the chapter summaries are organized by Learning Objective.
• Terminology A significant portion of any introductory course is terminology. Key terms are highlighted in bold type the first time they appear in the text and a comprehensive list appears at the end of each chapter. A glossary of definitions can also be found at the end of the book. Users of the eBook can hover their cursor over each bolded term to see its definition.
CHAPTER 1
Limits, Alternatives, and Choices An appendix on understanding graphs follows this chapter. If you need a quick review of this mathematical tool, you might benefit from reading the appendix first.
LEARNING OBJECTIVES LO1.1
List the ten key concepts to retain for a lifetime.
• Ten Key Concepts Ten Key Concepts have been identi-
LO1.2 Define economics and the features of the economic way of thinking. LO1.3 Describe the role of economic theory in economics. LO1.4 Distinguish microeconomics from macroeconomics, and positive economics from normative economics.
fied to help students organize the main principles. The Ten Key Concepts are introduced in Chapter 1 and each one is reinforced throughout the textbook by an icon.
LO1.5 Explain the individual’s economic problem and how trade-offs, opportunity costs, and attainable combinations can be illustrated with budget lines. LO1.6 List the categories of scarce resources and delineate the economic problem. LO1.7
Apply the concepts of production possibilities analysis, increasing opportunity costs, and economic growth.
LO1.8 Explain how economic growth and international trade increase consumption possibilities. LOA1.1 Understand graphs, curves, and slopes as they relate to economics.
Interaction Among Individuals
People’s wants are numerous and varied. Biologically, people need only air, water, food, clothing, and shelter. But in modern society people also desire goods and services that provide a more comfortable standard of living. We want bottled water, soft drinks, and fruit juices, not just water from the creek. We want salads, burgers, and pizzas, not just berries and nuts. We want jeans, suits, and coats, not just woven reeds. We want apartments, condominiums, and houses, not just mud huts. And, as the saying goes, “That is not the half of it.” We also want flat-panel TVs, Internet service, education, cellphones, health care, and much more.
SPECIALIZATION AND TRADE
CONCEPT 5 (Specialization and Trade): Specialization and trade will
THE EFFECTIVENESS OF MARKETS
CONCEPT 6 (The Effectiveness of Markets): Markets usually do a good job
THE ROLE OF GOVERNMENTS
CONCEPT 7 (The Role of Governments): Governments can occasionally
improve the well-being of all participants.
of coordinating trade among individuals, groups, and nations.
improve the coordinating function of markets.
• Graphics with Supporting Data Where possible, we FIGURE 1-1
A Consumer’s Budget Line
The budget line (or budget constraint) shows all the combinations of any two products that can be purchased, given the prices of the products and the consumer’s money income. 12
THE BUDGET LINE: WHOLE-UNIT COMBINATIONS OF DVDS AND PAPERBACK BOOKS ATTAINABLE WITH AN INCOME OF $120 Units of books (price = $10)
Total expenditure
6
0
($120 = $120 + $0)
5
2
($120 = $100 + $20)
4
4
($120 = $80 + $40)
3
6
($120 = $60 + $60)
2
8
($120 = $40 + $80)
1
10
($120 = $20 + $100)
0
12
($120 = $0 + $120)
10 Quantity of DVDs
Units of DVDs (price = $20)
8
Income = $120 = 6 Pdvd = $20
6
Unattainable
4 2
Attainable
0
2
Income = $120 = 12 Pb = $10
4 6 8 10 Quantity of paperback books
12
14
have provided data to support our graphs. In such cases a data table now appears in the same figure with the graph.
PREFACE
xxiii
• Key Graphs We have labelled graphs having special KEY GRAPH FIGURE 3-6
Equilibrium Price and Quantity
The intersection of the downsloping demand curve D and the upsloping supply curve S indicates the equilibrium price and quantity, here $3 and 7000 bushels of corn. The shortages of corn at below-equilibrium prices (for example, 7000 bushels at $2) drive up price. These higher prices increase the quantity supplied and reduce the quantity demanded until equilibrium is achieved. The surpluses caused by above-equilibrium prices (for example, 6000 bushels at $4) push price down. As price drops, the quantity demanded rises and the quantity supplied falls until equilibrium is established. At the equilibrium price and quantity, there are neither shortages nor surpluses of corn. The arrows in the table indicate the effect on price.
$6
P S
Price (per bushel)
5
6000-bushel surplus
4 3 2 7000-bushel shortage
1
QUICK REVIEW 3.3
0
2
4 6 7 8 10 12 14 16 Bushels of corn (thousands per week)
(1) Total quantity supplied per week
(2) Price per bushel
(3) Total quantity demanded per week
(4) Surplus (+) or shortage (-)
12,000
$5
2,000
+10,000↓
10,000
4
4,000
+6,000↓
7,000
3
7,000
0
4,000
2
11,000
-7,000↑
1,000
1
16,000
-15,000↑
D Q 18
• In competitive markets, prices adjust to the equilibrium level at which quantity demanded equals quantity supplied.
• The equilibrium price and quantity are those indicated by the intersection of the supply and demand curves for any product or resource.
• An increase in demand increases equilibrium price and quantity; a decrease in demand decreases equilibrium price and quantity.
• An increase in supply reduces equilibrium price but
relevance as Key Graphs. There is a quick quiz of four questions related to each Key Graph, with answers provided at the bottom of the graph.
• Reviewing the Chapter Important things should be said more than once. You will find a Chapter Summary at the conclusion of every chapter as well as two or three Quick Reviews within each chapter. The summary at the end of each chapter is presented by Learning Objective. These review statements will help students to focus on the essential ideas of each chapter and also to study for exams.
increases equilibrium price but reduces equilibrium quantity.
• Over time, equilibrium price and quantity may change in directions that seem at odds with the laws of demand and supply because the other-things-equal assumption is violated.
• Government-controlled prices in the form of ceilings and floors stifle the rationing functions of prices, distort resource allocations, and cause negative side effects.
increases equilibrium quantity; a decrease in supply
• Global Perspective Boxes Each nation functions increasingly in a global economy. To help the students gain an appreciation of this wider economic environment, we provide Global Perspective features that compare Canada to other nations.
5.1 GLO BAL PERSPECTIVE Percentage of Households Paying a Bribe in the Past Year The Global Corruption Barometer is an international survey that asks individuals about their personal experiences with government corruption. The 2010–2011 survey of 105,507 people in 100 countries included a question that asked participants whether they or anyone in their respective households had paid a bribe in any form during the previous 12 months. Here are the results for 10 selected countries.
0
Percent of households paying a bribe in the past year 20 40 60 80 100
Liberia Nigeria Iraq Pakistan LIMITS, ALT ALTERNATIVES, T ERN ERNATI ATIVES VES,, A AND ND CHO CHOICE CHOICES ICES S
Kenya
CHAPTER 1
27
Mexico Russia
Appendix to Chapter 1
Italy United States Germany Source: Transparency International. All Rights Reserved. For more information visit www.transparency.org
• Appendix on Graphs Being comfortable with graphical analysis and a few related quantitative concepts will be a big advantage to students in understanding the principles of economics. The appendix to Chapter 1, which reviews graphing, line slopes, and linear equations, should not be skipped.
A1.1
Graphs and Their Meanings
LOA1.1 Understand graphs, curves, and slopes as they relate to economics.
If you glance quickly through this text, you will find many graphs. Some seem simple, while others are more complicated. All are included to help you visualize and understand economic relationships. Physicists and chemists sometimes illustrate their theories by building arrangements of multicoloured wooden balls, representing protons, neutrons, and electrons, which are held in proper relation to one another by wires or sticks. Economists use graphs to illustrate their models. By understanding these illustrations you can more readily make sense of economic relationships.
Construction of a Graph A graph is a visual representation of the relationship between two economic quantities or variables. Figure A1-1 is a hypothetical illustration showing the relationship between income and consumption for the economy as a whole. Without even studying economics, we would logically expect that people would buy more goods and services when their incomes go up. Thus, it is not surprising to find in
Figure A1-1 that total consumption in the economy increases as total income increases. The information in Figure A1-1 is expressed both graphically and in table form. Here is how it is done: We want to show graphically how consumption changes as income changes. We therefore represent income on the horizontal axis of the graph and consumption on the vertical axis. Now we arrange the vertical and horizontal scales of the graph to reflect the ranges of values of consumption and income, and mark the scales in convenient increments. As you can see in Figure A1-1, the values marked on the scales cover all the values in the table. The values on both axes are indicated in $100 increments. Because the graph has two dimensions, each point within it represents an income value and its associated consumption value. To find a point that represents one of the five income–consumption combinations in the table, we draw straight lines from the appropriate values on the vertical and horizontal axes. For example, to plot point c ($200 income, $150 consumption), draw straight lines up from the horizontal (income) axis at $200 and across from the vertical (consumption) axis at $150. These straight
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PREFACE
Discussion Questions
2. What are the determinants of demand? What happens to the demand curve when any of these determinants changes? Distinguish between a change in demand and a change in the quantity demanded, noting the cause(s) of each. [LO3.2] 3. Explain the law of supply. Why does the supply curve slope upward? How is the market supply curve derived from the supply curves of individual producers? [LO3.2] 4. What are the determinants of supply? What happens to the supply curve when any of these determinants changes? Distinguish between a change in supply and a change in the quantity supplied, noting the cause(s) of each. [LO3.3]
5. In 2001, an outbreak of foot-and-mouth disease in Europe led to the burning of millions of cattle carcasses. What impact do you think this had on the supply of cattle hides, hide prices, the supply of leather goods, and the price of leather goods? [LO3.5]
• Discussion Questions, Review Questions, and
6. For each stock in the stock market, the number of shares sold daily equals the number of shares purchased. That is, the quantity of each firm’s shares demanded equals the quantity supplied. So, if this equality always occurs, why do the prices of stock shares ever change? [LO3.5]
Problems The Study Questions have been split into Discussion Questions, Review Questions, and Problems, better aligning them with Learning Objectives, and adding new autogradable (through Connect) quantitative questions.
7. What do economists mean when they say “price floors and ceilings stifle the rationing function of prices and distort re-source allocation”? [LO3.6]
Review Questions 1. What effect will each of the following have on the demand for small automobiles such as the Mini-Cooper and Fiat 500? [LO3.2] a. Small automobiles become more fashionable. b. The price of large automobiles rises (with the price of small autos remaining the same). c. Income declines and small autos are an inferior good. d. Consumers anticipate that the price of small autos will greatly come down in the near future. e. The price of gasoline substantially drops. 2. True or False? A change in quantity demanded is a shift of the entire demand curve to the right or to the left. [LO3.2] 3. What effect will each of the following have on the supply of auto tires? [LO3.3] a. A technological advance in the methods of producing tires b. A decline in the number of firms in the tire industry c. An increase in the prices of rubber used in the production of tires d. The expectation that the equilibrium price of auto tires will be lower in the future than currently e. A decline in the price of the large tires used for semitrucks and earth-hauling rigs (with no change in the price of auto tires) f. The levying of a per-unit tax on each auto tire sold
Problems in response to changes in supply and demand.” In which of these two statements are the terms “supply” and “demand” used correctly? Explain. [LO3.3] 5. Suppose that in the market for computer memory chips, the equilibrium price is $50 per chip. If the current price is $55 per chip, then there will be ______________ of memory chips. [LO3.4]
1. Suppose there are three buyers of candy in a market: Tex, Dex, and Rex. The market demand and the individual demands of Tex, Dex, and Rex for candy are given in the table below. [LO3.2]
S1 $3
a. Fill in the missing values in the table below. b. Which buyer demands the least at a price of $5? The most at a price of $7?
Price
1. Explain the law of demand. Why does a demand curve slope downward? How is a market demand curve derived from individual demand curves? [LO3.2]
c. Which buyer’s quantity demanded increases the most when the price is lowered from $7 to $6?
a. A shortage b. A surplus c. An equilibrium quantity d. None of the above 6. Critically evaluate the following statement: “In comparing the two equilibrium positions in Figure 3.7b, I note that a smaller amount is actually demanded at a lower price. This refutes the law of demand.” [LO3.5] 7. Label each of the following scenarios with the set of symbols that best indicates the price change and quantity change that occur in the scenario. In some scenarios, it may not be possible from the information given to determine the direction of a particular price change or a particular quantity change. We will symbolize those cases as, respectively, P? and Q? The four possible combinations of price and quantity changes are [LO3.5]
Tex
$8
3
+
0
=
— 4
=
$3
4
=
19
2
2
1
0
+
2
+
+
3
+
+
— 5
+
6
=
27
+
+
8
=
—
5 4
23
S2 Quantity supplied
Price
8
P? Q↓
S1 Quantity supplied
— 12
7
P? Q↑
b. On a cold day, both the demand for ice cream and the supply of ice cream decrease.
Total quantity demanded
Rex
1
6
P↑Q?
4. “In the corn market, demand often exceeds supply and supply sometimes exceeds demand.” “The price of corn rises and falls
Dex +
5 10 15 Quantity supplied
a. Use the figure to fill in the quantity supplied on supply curve S1 for each price in the table below.
Individual quantities demanded
P↑ Q?
a. On a hot day, both the demand for lemonade and the supply of lemonade increase.
0
e. Suppose that, at a price of $6, the total quantity demanded increases from 19 to 38. Is this a change in the quantity demanded or a change in demand?
— 17
g. The granting of a 50-cent-per-unit subsidy for each auto tire produced
1
d. In which direction would the market demand curve shift if Tex withdrew from the market? What if Dex doubled his purchases at each possible price?
Price per candy
2
2. The figure that follows shows the supply curve for tennis balls, S1. Use the figure and the table to give your answers to the following questions. [LO3.3]
Change in quantity supplied
b. If production costs were to increase, the quantities supplied at each price would be as shown by the third column of the table (S2 Quantity supplied). Use that data to draw supply curve S2 on the same graph as supply curve S1.
Comprehensive Learning and Teaching Package The Fourteenth Canadian Edition is also accompanied by a variety of high-quality supplements that help students master the subject and help instructors implement customized courses.
MARKET LEADING TECHNOLOGY Learn without Limits McGraw-Hill Connect® is an award-winning digital teaching and learning platform that gives students the means to better connect with their coursework, with their instructors, and with the important concepts that they will need to know for success now and in the future. With Connect, instructors can take advantage of McGraw-Hill’s trusted content to seamlessly deliver assignments, quizzes and tests online. McGraw-Hill Connect is the only learning platform that continually adapts to each student, delivering precisely what they need, when they need it, so class time is more engaging and effective. Connect makes teaching and learning personal, easy, and proven.
Connect Key Features As the first and only adaptive reading experience, SmartBook is changing the way students read and learn. SmartBook creates a personalized reading experience by highlighting the most important concepts a student needs to learn at that moment in time. As a student
Discovering Diverse Content Through Random Scribd Documents
have settled upon it. Paraffin is a most satisfactory means of preserving jelly, and the only precaution necessary in using it is to put on two layers, the second one two or three hours after the first, or when all contraction has ceased.
BREAD The two most practicable methods of making bread are with yeast, and with cream of tartar and bicarbonate of soda. Yeast is a micro-organism—an exceedingly minute form of plant life—which by its growth produces carbonic acid and alcohol. When this growth takes place in a mass of flour dough, the carbonic acid generated, in its effort to escape, puffs it up, but, owing to the viscous nature of the gluten, it is entangled and held within. Each little bubble of gas occupies a certain space. When the bread is baked, the walls around these spaces harden in the heat, and thus we get the porous loaf. Barley, rye, and some other grains would be very useful for bread if it were not that they lack sufficient gluten to entangle enough carbonic acid to render bread made from them light. Good bread cannot be made without good flour. There are two kinds usually to be found in market, namely bread flour, and pastry flour. The former is prepared in such a way that it contains more gluten than the latter. In making Pastry, or St. Louis flour, as it is sometimes called, the grain is crushed in such a manner that the starch, being most easily broken, becomes finer than the gluten, and in the process of bolting some of the latter is lost. For pastry and cake this kind is best. Lacking gluten, bread made from it is more tender, whiter, but less nutritious than that made from so-called bread flour. New Process, or bread flour may be distinguished by the "feel," which is slightly granular rather than powdery, by its yellow color, and by the fact that it does not "cake" when squeezed in the hand; while St. Louis is white, powdery, and will "cake." The best method to pursue in buying flour is, first, to find a good dealer, upon whose advice you may rely. Next, take a sample of the flour recommended and, with a recipe which you have proved to be correct, try some; if the first loaf of bread is not satisfactory, try
another, and then another, until you are confident that the fault lies in the flour, and not in the method of making. Finally, having found a brand of flour from which you can make yellow-white instead of snow-white bread, which has a nutty, sweet flavor, which in mixing absorbs much liquid, and does not "run" after you think you have got it stiff enough, and which feels puffy and elastic to the hand after molding, keep it; it is probably good. Often the same flour is sold in different sections of the country under different names, so that it is impossible to recommend any special brand. Each buyer must ascertain for herself which brands in her locality are best. It is just as easy to have good bread as poor. It only requires a little care and a little intelligence on the part of the housekeeper. Having found a brand of good flour, next give your attention to yeast. In these days, when excellent compressed yeasts may be found in all markets, it is well to use them, bearing in mind that they are compressed, and that a very small quantity contains a great many yeast cells, and will raise bread as well, if not better, than a large amount. Home-made liquid yeast is exceedingly easy to prepare. It simply requires a mixture of water and some material in which the plant cells will rapidly grow. Grated raw potato, cooked by pouring on boiling water, flour, and sugar form an excellent food for their propagation. A recipe for yeast will be given later. Now we have come to the consideration of what will take place when the two, flour and yeast, are made into dough. According to some accounts of the subject, the yeast begins to act first upon the starch, converting it into sugar (glucose C6H12O6). While this is taking place there is no apparent change, for nothing else is formed except the glucose, or sugar. Then this sugar is changed into alcohol and carbonic acid; the latter, owing to its diffusive nature, endeavors to escape, but becomes entangled in the viscous mass and swells it to several times its original bulk.
This has been the accepted explanation; it is now, however, believed not to be correct. It is thought, and I believe demonstrated, that the yeast plant lives upon sugar; that it has not the power to act directly upon starch, but that it is capable of producing a substance which acts upon starch to convert it into sugar. The production of the carbonic acid is the end of desirable chemical change, and when it has been carried to a sufficient degree to fill the dough with bubbles, it should be stopped. Kneading bread is for the purpose of distributing the gas and breaking up the large bubbles into small ones, to give the loaf a fine grain. One will immediately see that kneading before the bread is raised is a more or less useless task. Kneading is a process which should be done gently, by handling the dough with great tenderness; for if it is pressed hard against the molding-board, the bubbles will be worked out through the surface, and the loaf consequently less porous than if all the gas is kept in it. The best temperature for the raising of bread (in other words, for the growing of yeast) during the first part of the process is from 70° to 75° Fahr. It may touch 80° without harm, but 90° is the limit. Above that acetic fermentation is liable to occur, and the bread becomes sour. When the bread is made into loaves, it may be placed in a very warm temperature, to rise quickly if it is intended for immediate baking. Besides killing the yeast, the object sought in baking is to form a sheath of cooked dough all over the outside, for a skeleton or support for the inside mass while it is cooking. Baking also expands the carbonic acid, and volatilizes the alcohol. The latter is lost. A good temperature in which to begin the baking of bread is 400° Fahr. This may gradually decrease to not lower than 250°, and the time, for a good-sized brick loaf, is one hour. If it is a large loaf, increase the time by a quarter or a half hour. "The expansion of water or ice into 1700 times its volume of steam, is sometimes taken advantage of in making snow bread,
water gems, etc. It plays a part in the lightening of pastry and crackers. Air at 70° Fahr. expands to about twice its volume at the temperature of a hot oven, so that if air is entangled in a mass of dough it gives a certain lightness when the whole is baked. This is the cause of the sponginess of cakes made with eggs. The viscous albumen catches the air and holds it."[41] There are other means of obtaining carbonic acid to lighten bread, besides by the growing of yeast. The most convenient, perhaps the most valuable, method is by causing cream of tartar and bicarbonate of soda to unite chemically. (The products of the union are carbonic acid and Rochelle salts.) The advantage of using these over everything else yet tried is, that they do not unite when brought in contact except in the presence of water and a certain degree of heat. Rochelle salts, taken in such minute quantities as it occurs in bread made in this way, is not harmful. Cream of tartar bread, if perfectly made, is more nutritious than fermented bread, for none of the constituents of the flour are lost, as when yeast is used.[42] The difficulty of obtaining good cream of tartar is very great. It is said to be more extensively adulterated than any other substance used for food. Moreover, in the practice of bread-making the cream of tartar and soda are generally mixed in the proportion of two to one—that is, two teaspoons of cream of tartar to every teaspoon of soda; but this is not the exact proportion in which they neutralize each other, so that under ordinary circumstances there is an excess of soda in the bread. To be exact they should always be combined by weight, as is done in making baking-powders, the proportion being 84 parts of soda to 188 of cream of tartar, or, reducing to lower terms, as 21 to 47—a little less than half as much soda as cream of tartar. For practical use in cooking there are no scales known to the author for the purpose of weighing these materials, so the proportion will have to be approximated with teaspoons, and a fairly accurate result for bread-
making may be obtained most easily by measuring a teaspoon of each in exactly the same manner, and then taking off a little from the soda. With good materials, care in measuring them, and a hot oven to set the bread before the gas escapes, cream of tartar biscuits are both wholesome and palatable. LIQUID YEAST (HOME-MADE WITH GRATED POTATO)
1 Medium-sized potato. 1 Tablespoon of sugar. 1 Tablespoon of flour. 1 Teaspoon of salt. 1½ Pints of boiling water. ⅕ of a two-cent cake of Fleischmann's yeast. First see that there is a supply of boiling water. Then put the salt, sugar, and flour together in a mixing-bowl. Wash and peel the potato, and grate it quickly into the bowl, covering it now and then with the flour to prevent discoloring. As soon as the potato is all grated, pour in the boiling water and stir. It will form into a somewhat thick paste at once. Set it aside to cool. Then dissolve the yeast in a little cold water, add it, and set the mixture to rise in a temperature of 70° to 80° Fahr. In a short time bubbles will begin to appear; these are carbonic acid, showing that the alcoholic stage of the fermentation has begun. In six or eight hours the whole will be a mass of yeast cells, which have grown in the nutrient liquid. It is then ready for use. It should be bottled in wide-mouthed glass or earthen jars, and kept in a cool place. It will remain good for two weeks. At the end of that time make a fresh supply. Yeast is an organism—a microscopic form of plant life—which grows by a species of budding with great rapidity when it finds
lodgment in material suitable for its food. The dissolved compressed yeast is like seed, which, when put into a fruitful soil, grows so long as sustenance lasts. WATER BREAD 1 Pint of boiling water. 1 Tablespoon of sugar. 1 Teaspoon of salt. 1 Tablespoon of butter. ⅓ Cup of liquid yeast, or ⅕ of a two-cent cake of Fleischmann's yeast. Enough sifted flour to make a stiff dough. Put the sugar, salt, and butter with the boiling water into a mixingbowl or bread-pan. Stir until the sugar is dissolved and the water lukewarm, then add the yeast (if compressed, it should be dissolved in a little water). Last, stir in the flour until a dough stiff enough to mold easily is made. Mold it for a minute or two to give it shape and to more thoroughly mix the ingredients, and then set it to rise in a room warm enough to be comfortable to live in—that is, having a temperature of 70° Fahr. It should remain in this temperature for eight hours. Cover it closely, that the top may not dry. It is often convenient to let bread rise over night. There is no objection to this, provided the bread is mixed late in the evening, and baked early the next morning. Care must be taken, however, that the room in which it is left is warm enough to insure rising in the time given. On the other hand, if allowed to rise too long, or at too high a temperature, the fermentation is carried so far that an acid is produced, and the dough becomes sour. Eight hours at 70° Fahr. is a good rule to keep in mind. During the time of raising the dough should double itself in bulk. If this does not happen, or it does not appear to have risen at all, either the yeast was not good, or the temperature was too low.
When the bread has risen sufficiently, cut it down, and knead it for five minutes on a bread-board, to distribute the gas and break the large bubbles, so that the bread may have an even grain; then shape it into a loaf, put it into an oiled baking-pan, and let it rise quickly in a warm place, until it again doubles itself. The amount of dough indicated in the rule will make one large loaf, or a mediumsized loaf and some biscuit. Multiply the rule by two if you want two loaves. Bake the bread in an oven which is hot at first, but gradually decreases in temperature, for an hour and a quarter. If you have an oven thermometer use it.[43] MILK BREAD 1 Pint of scalded milk. 1 Tablespoon of sugar. 1 Teaspoon of salt. ⅓ Cup of liquid yeast, or ⅕ Cake of Fleischmann's yeast. Measure the milk after scalding, but otherwise proceed exactly as in the making of water bread. STICKS 1 Cup of scalded milk. ½ Teaspoon of salt. 1 Tablespoon of sugar. 2 Tablespoons of butter. ⅕ Cake of yeast, or ¼ Cup of liquid yeast. White of one egg. Flour enough to make a slightly soft dough. Dissolve the salt and sugar, and soften the butter in the hot milk, which must be measured after heating. When it is cooled to
lukewarmness, put in the yeast (which, if compressed, should be dissolved in a little cold water), the beaten white of the egg, and flour enough to make a dough slightly softer than that for ordinary bread. Let it rise overnight, or until light. Then cut it into small pieces, shape the pieces into balls, and roll and stretch them into tiny slender sticks, from ten to twelve inches long, about half an inch thick in the middle, and tapering toward each end. Place them, two inches apart, in shallow, buttered pans, and put them in a warm place for an hour to rise; then bake them in a moderate oven fifteen or twenty minutes, or until they are a golden brown. Sticks are good at any time; they are especially nice served with soup, or for lunch, with cocoa or tea. This dough may also be made into tiny loaves for tea-rolls. RUSK 1 Tablespoon of sugar. ½ Teaspoon of salt. 1 Cup of scalded milk. ¼ Cup of liquid yeast, or ⅙ Cake of compressed yeast. Flour enough to make a soft dough. Mix the above ingredients together, and let the dough rise overnight in the usual time given to bread. Then beat one-fourth of a cup of butter, one-fourth of a cup of sugar, and one egg together, and work the mixture into the dough, adding a little more flour to make it stiff enough to mold. Set it to rise a second time; then shape it into rolls or tiny loaves, allow them to rise again until quite light, or for an hour in a warm place, and bake like bread. DRIED RUSK Cut the rusk when cold into thin slices, dry them slowly in the oven, and then brown them a delicate golden color.
Dried rusk is exceedingly easy of digestion, and makes a delicious lunch with a glass of warm milk or a cup of tea. GRAHAM BREAD 1 Pint of milk. 2 Tablespoons of sugar. 1 Teaspoon of salt. ⅕ Cake of compressed yeast. 2 Cups of white flour. Enough Graham flour to make a dough. Scald some milk, and from it measure a pint; to this add the sugar and salt. While it is cooling sift some Graham flour, being careful to exclude the chaff or outside silicious covering of the grain, but nothing else. When the milk has become lukewarm, put in the yeast, which has previously been dissolved in a little cold water, and the white flour (sifted), with enough of the Graham to make a dough which shall be stiff, but yet not stiff enough to mold. Mix thoroughly, and shape it with a spoon into a round mass in the dish. After this follow the same directions as for water bread, letting it rise the same time, and baking it in the same manner. After the dough has risen, although it is soft, it can be shaped into a loaf on the bread-board, but not molded. CREAM-OF-TARTAR BISCUIT First, attend to the fire; see that you have a clear, steady one, such as will give a hot oven by the time the biscuits are ready for baking. Then sift some flour, and measure a quart. Into it put two teaspoons of cream of tartar, and one of soda, the latter to be measured exactly like the teaspoons of cream of tartar, and then a very little taken off. This is a more accurate way of getting a scanted teaspoon than by taking some on the spoon and guessing at it. Add one teaspoon of salt, and sift all together four times, then with the fingers rub into the flour one spoon of butter.
At this point, if it has not been already done, get the baking-pans, rolling-pin, board, dredging-box, and cutter ready for use. Then with a knife stir into the flour enough milk to make a soft dough. Do this as quickly as convenient, and without any delay mold the dough just enough to shape it; roll it out, cut it into biscuits, and put them immediately into the oven, where they should bake for thirty minutes. Pocket-Books. Work or knead together the pieces that are left after making cream-of-tartar biscuit (or make a dough on purpose), roll it out very thin, cut it into rounds, brush them over with milk or melted butter, fold once so as to make a half-moon shape, and you will have "pocket-books." Twin Biscuit. Roll out some dough very thin, cut it into very small rounds, and place one on top of another, with butter between. Iced water may be substituted for milk in the above rule. In baking, however, the oven should be unusually hot, so as to take advantage of the expansion of the water. Also, baking-powder may be substituted for the cream of tartar and soda, using a fourth more of the baking-powder than of the two together. SNOW-CAKES ½ Tablespoon of butter. 1 Tablespoon of sugar. Whites of two eggs. 1½ Cups of flour. 1 Saltspoon of salt. 1½ Teaspoons of baking-powder. 1 Cup of milk. Measure each of the ingredients carefully, then sift the flour, salt, and baking-powder together four times. Cream the butter and sugar with a little of the milk, then add the whites of the eggs well beaten, the rest of the milk, and last the flour. Bake this batter in hot
buttered gem-pans from twenty minutes to half an hour. These cakes are delicious eaten hot for lunch or tea. This mixture may also be baked in small, round earthen cups. GRAHAM GEMS 1 Cup of milk. ½ Teaspoon of salt. ½ Cup of white flour. 1 Cup of Graham flour. 2 Tablespoons of sugar. 1 Teaspoon of cream of tartar. ½ Teaspoon of soda (slightly scanted). 1 Tablespoon of melted butter. Sift and measure the Graham flour, add the cream of tartar, soda, and white flour, and sift again. Mix the milk, salt, and sugar together, and stir it into the flour; last, put in the melted butter, beat for a minute, and then drop a spoonful in each division of a roll gem-pan, which should be well buttered, and made very hot on the top of the stove. Bake in a hot oven from twenty-five minutes to half an hour. Serve hot. OATMEAL MUFFINS