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Instructor’s Resource Manual Mark Rush, University of Florida

Microeconomics 14e

Michael Parkin

Table of Contents

Preface Perspective Flexibility  Part 1 Chapter 1 Chapter 2  Part 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7  Part 3 Chapter 8 Chapter 9  Part 4 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15  Part 5 Chapter 16 Chapter 17  Part 6 Chapter 18 Chapter 19 Chapter 20

MyLab Economics How to Assemble Your Course

v vii ix

Introduction What is Economics? The Economic Problem

1 9

How Markets Work Demand and Supply Elasticity Efficiency and Equity Government Actions in Markets Global Markets in Action

21 35 45 57 69

Households’ Choice Utility and Demand Possibilities, Preferences, and Choices

81 93

Firms and Markets Organizing Production Output and Costs Perfect Competition Monopoly Monopolistic Competition Oligopoly

103 113 125 137 151 159

Market Failure and Government Public Choices, Public Goods, and Healthcare Externalities

169 179

Factor Markets, Inequality, and Uncertainty Markets for Factors of Production Economic Inequality Uncertainty and Information

189 203 213

P e r s p e c t i v e

MYLAB ECONOMICS

It’s About Time What if you could spend less time grading, and more time teaching? And what if, at the same time, you could strengthen the incentives for your students to do their homework and come to class better prepared? With MyLab Economics, what sounds like a free lunch is now an achievable goal! MyLab Economics is a turn-key, online solution for your economics course. Using a new and powerful graphing tool and question bank, students can self-test and generate a study plan, and instructors can assign homework and capture grades. With a tight, everything-in-one-place organization around the new testing tool, questions include true-false, multiple choice, fill-ins, numerical, and complete the graph. Many of the questions are generated algorithmically, a feature that rewards understanding and penalizes rote learning. Practice tests for each section of the textbook enable students to test their ability and identify the areas in which they need further work. Based on a student’s performance on a practice test, a personalized study plan shows where further study is needed. Once students have received their study plan, additional practice exercises, keyed to the textbook, provide extensive practice and link directly to the eText with animated graphs, an electronic tutorial, and other resources. Users of MyLab Economics will revel in the powerful graphing tool integrated into both the practice tests and practice exercises. This tool enables students to manipulate graphs and see how the concepts, numbers, and graphs are connected. Questions that use the graphing tool (like all other questions) can be submitted and graded online. MyLab Economics saves your students time because it identifies what they have not yet mastered and creates a Personalized Study Plan. This study plan consists of a series of additional practice exercises. Using tutorial instruction launched directly from practice exercises, students can follow step-by-step solutions and tutorials that promote self-discovery. With an abundant collection of interactive resources, students will come to class better prepared. MyLab Economics saves instructors time in answering questions, tracking performance, and giving practice tests. Instructors can customize the practice tests or leave students to use the supplied pre-built tests. Additional MyLab Economics tools include:  eText 

Animated figures

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Electronic tutorials

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Glossary

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Glossary Flashcards

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Office Hours

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Daily Economics in the News updates and archives

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Links to the most useful economic data and information sources on the Internet

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Research Navigator—extensive help on the research process and four exclusive databases of credible and reliable source material including the New York Times, the Financial Times, and peer-reviewed journals © 2023 Pearson Education, Inc.

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MYLAB ECONOMICS

Registration for MyLab Economics To learn more, and to register for MyLab Economics, please go to www.myconlab.com and click on the link to request an access code. Your Pearson sales representative will then be in touch to help you get started.

Flexibility

HOW TO ASSEMBLE YOUR COURSE

Introduction Instructors who have already used Michael Parkin’s Microeconomics are aware of its flexibility: There are many ways to teach from this book, depending on your preferences. Because there is no necessarily right or wrong way to teach a principles of microeconomics class, the microeconomic part of the book can be used in a variety of ways. The most obvious one is the order in which the chapters are printed. Other paths are illustrated in Table 1.

Microeconomics Table 1 presents the flexibility in the microeconomic chapters. This is organized according to the three basic foundation chapters followed by a large selection of chapters you can next tackle. After finishing some or all of these chapters, more choices are presented. You can move quickly or slowly to the examining production and firms; quickly or slowly to efficiency and government policy in markets; quickly or slowly to consumer choice. The choice is up to you because you can shape the course you want to teach.

HOW TO ASSEMBLE YOUR COURSE

Table 1

C h a p t e r

WHAT IS ECONOMICS?

The Big Picture Where we are going: After completing Chapter 1, the student will have a good sense for the range of questions that economics addresses and will be on the path towards an economic way of thinking. The students will begin to think of cost as a forgone alternative—an opportunity cost—and also about making choices by balancing marginal costs and marginal benefits. Chapter 2 reinforces the central themes of Chapter 1 by laying out a core economic model, the production possibilities frontier (PPF), and using it to illustrate the concepts of tradeoff and opportunity cost. Chapter 2 also provides a deeper explanation, again with a model, of the concepts of marginal cost and marginal benefit, beginning with the concept of efficiency, and concluding with a review of the source of the gains from specialization and exchange.

New in the Fourteenth Edition When discussing the social interest and four major issues, the issue of financial instability has been replaced with a discussion of social interest issues surrounding the COVID pandemic. The emphasis in this discussion is that often self-interested decisions are not in the social interest (for example, whether to socially distance) so that rules governing behavior may need to be established. The last topic, dealing with Economists in the Economy, now includes a section covering the diversity challenge in economics. It points out that fewer women and minorities receive bachelor’s PhD degrees in economics than in STEM majors in general. It also discusses efforts being made to overcome this lack of diversity. The Economics in the News presenting Mark Zuckerberg’s vision to have the Internet available to the whole world has been eliminated to make room for the coverage of diversity in the profession. This important chapter is not one to gloss over as it lays down an important foundation that can be drawn from as you move through more specific applications later. Students relate well to the section on self and social interest which calls out issues of both efficiency and fairness and is great for class discussion.

CHAPTER 1

Lecture Notes

What Is Economics? I.

Definition of Economics  

Economic questions arise because we always want more than we can get, so we face scarcity, the inability to satisfy all our wants. Everyone faces scarcity because no one can satisfy all of his or her wants. Scarcity forces us to make choices over the available alternative. The choices we make depend on incentives, a reward that encourages a choice or a penalty that discourages a choice.

Forbes lists Bill Gates and Warren Buffet among some of the wealthiest Americans. Do these two men face scarcity? According to The Wall Street Journal, both men are ardent bridge players, yet they have never won one of the many national bridge tournaments they have entered as a team. These two men can easily afford the best bridge coaches in the world and but other duties keep them from practicing as much as they would need to in order to win. So even the wealthiest two Americans face scarcity (of time) and must choose how to spend their time. Economics  Economics is the social science that studies the choices that individuals, businesses, governments and entire societies make when they cope with scarcity and the incentives that influence and reconcile those choices.  Economists work to understand when the pursuit of self-interest advances the social interest  Economics is divided into microeconomics and macroeconomics:  Microeconomics is the study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of governments.  Macroeconomics is the study of the performance of the national economy and the global economy. On the first day do a “pop quiz.” Have your students write on paper the answer to “What is Economics?” Reassure them that this is their opinion since it is the first day. You will find most of the answers focused around money and/or business. Stress that Economics is a social science, a study of human behavior given the scarcity problem. All too often first-time students (especially business students) think that Economics is just about making money. Certainly, the discipline can and does outline reasons why workers work longer hours to increase their wage earnings, or why firms seek profit as their incentive. But Economics also explains why a terminally ill cancer patient might opt for pain medication as opposed to continued chemotherapy/radiation, or why someone no longer in the workforce wants to go to college and attain a Bachelor’s degree, in their sheer pleasure of learning and understanding. Stressing the social part of our science now will help later when relating details to the overall bigger picture (especially when time later in the semester seems scarce, no pun intended!). The definition in the text: “Economics is the social science that studies the choices that individuals, businesses, governments, and societies make as they cope with scarcity and the incentives that influence and reconcile these choices,” is a modern language version of Lionel Robbins famous definition, “Economics is the science which studies human behavior as a relationship between ends and scarce means that have alternative uses.” Other definitions include those of Keynes and Marshall: John Maynard Keynes: “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps it possessors to draw correct conclusions.” Alfred Marshall: “Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.” A “shorthand” definition that resonates with students is: “Economics is the study of trying to satisfy unlimited wants with limited resources.” Students can—and do—easily abbreviate this definition to “unlimited wants and limited resources,” which captures an essential economic insight.

WHAT IS ECONOMICS?

II. Two Big Economic Questions How do choices wind up determining what, how, and for whom goods and services are produced? What, How and For Whom?  Goods and services are the objects that people value and produce to satisfy human wants. What we produce changes over time—today we produce more streaming music than 5 years ago.  Goods and services are produced using the productive resources called factors of production. These are land (the “gifts of nature”, natural resources), labor (the work time and work effort people devote to production), capital (the tools, instruments, machines, buildings, and other constructions now used to produce goods and services), and entrepreneurship (the human resource that organizes labor, land, and capital).  The quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, work experience, and on-the-job training.  Owners of the factors of production earn income by selling the services of their factors. Land earns rent, labor earns wages, capital earns interest, and entrepreneurship earns profit. Do Choices Made in the Pursuit of Self-Interest also promote the social interest?  You make a choice in your self-interest if you think that choice is the best one available for you.  An outcome is in the social interest if it is best for society as a whole.  A major question economists explore is “Could it be possible that when each of us makes choices in our selfinterest, these choices are in the social interest?’ Students (and others!) often take the answers to the what, how, and for whom questions for granted. For instance, most of the time we do not bother to wonder “How does our economy determine how many light bulbs, automobiles, and pizzas to produce?” (what), or “Why does harvesting wheat from a plot of land in India occur with hundreds of laborers toiling with oxen pulling threshing machines, while in the United States, a single farmer streaming music and sitting in an air-conditioned cab of a $500,000 machine harvests the same quantity of wheat from the same sized plot of land?” (how), or “Why is the annual income of an inspiring and effective grade school teacher much less than that of an average major-league baseball player?” (for whom). Explaining the answers to these types of questions and determining whether the answers are in the social interest is a major part of microeconomics. Figure 1.1 in the textbook “What Three Countries Produce” ties in nicely with Chapter 2’s later discussion on the PPF. Figure 1.1 also links the three questions of what, how and for whom nicely to the component parts of those questions: goods and services, factors of production (land, labor, capital, entrepreneurship), and incomes economic agents earn (rent, wages, interest and profit). 

We can examine whether the self-interested choices serve the social interest for a variety topics:  Globalization: Buying an iPod allows workers overseas to earn a wage and provide for family  Information-Age Monopolies: A firm producing popular software leads to format standards  Climate Change: Carbon dioxide emissions led to higher global temperatures and climate change  The Covid pandemic: Covid-19 spreads through social contact, so a person who socially isolates avoids infection and avoids infecting others, but people may not choose the optimal degree of isolation

III. Economic Way of Thinking Scarcity requires choices and choices create tradeoffs. What is the difference between scarcity and poverty? Ask the students why they haven’t yet attained all of their personal goals. One reason will be that they lack sufficient money. Ask them if they could attain all of their goals if they were as rich as Bill Gates. They quickly realize that time is a big constraint—and the great leveler: we all have only 24 hours in a day. They have stumbled on the fact that scarcity, which even Bill Gates faces, is not poverty. © 2023 Pearson Education, Inc.

CHAPTER 1

A Choice is a Tradeoff  A tradeoff is an exchange—giving up one thing to get another.  Whatever choice you make, you could have chosen something else. Virtually every choice that can be thought of involves a tradeoff. Presenting a few of the following as examples can help your class better appreciate this key point:  Consumption and savings: If someone decides to save more of his or her income, savings can be funneled through the financial system to finance businesses new capital purchases. As a society, we trade off current consumption for economic growth and higher future consumption.  Education and training: A student remaining in school for another two years to complete a degree will need to forgo a significant amount of leisure time. But by doing so, he or she will be better educated and will be more productive. As a society, we trade off current production for greater future production.  Research and development: Factory automation brings greater productivity in the future, but means smaller current production. As a society, we trade off current production for greater future production. Making a Rational Choice  A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice.  But how do people choose rationally? Why do more people choose to stream movies rather than buy blurays? Why has the U.S. government chosen to build an interstate highway system and not an interstate highspeed railroad system? The answers turn on comparing benefits and costs. Benefit: What you Gain  The benefit of something is the gain or pleasure that it brings and is determined by preferences—by what a person likes and dislikes and the intensity of those feelings.  Some benefits are large and easy to identify, such as the benefit that you get from being in school. Much of that benefit is the additional goods and services that you will be able to enjoy with the boost to your earning power when you graduate.  Some benefits are small, such as the benefit you get from a slice of pizza. That benefit is just the pleasure and nutrition that you get from your pizza. Cost: What You Must Give Up Seeing choices as tradeoffs shows there is an opportunity cost of a choice. The opportunity cost of something is the highest-valued alternative that must be given up to get it. So, for instance, the opportunity cost of being in school is all the good things that you can’t afford and don’t have the spare time to enjoy. What is the Opportunity Cost of Getting a College Degree? When the students calculate their opportunity cost of being in school, be sure they place a value on their leisure time lost to studying on weekends and evenings. Most students are shaken when they realize that when lost leisure time and income is included in their calculations, the opportunity cost of a college degree approaches $200,000 or more. Don’t leave them hanging here though. Mention that a college education does yield a high rate of financial return over. To ensure that people do not die of any serious side effects, the Food and Drug Administration (FDA) requires all drug companies to thoroughly test newly developed medicines before allowing them to be sold in the United States. However, it takes many years to perform these tests and many people suffering from the terminal diseases these new medicines are designed to cure will die before good new medicines are eventually approved for use. Yet, if the FDA were to abandon this testing process, many others would die from the serious side effects of those bad medicines that made it to market. People’s lives will be at risk under either policy alternative. This stark example of a tradeoff reveals the idea that choices have opportunity costs.