Table of Contents
1 WHAT IS ECONOMICS? ..............................1-1
1.1.1 Normative and Positive Theories ..................1-2
1.1.2 Opportunity Cost ..........................................1-3
1.1.3 Economic Reasoning and Analysis................1-5
2 SUPPLY AND DEMAND...............................2-8
2.1 Supply and Demand.................................2-8
2.1.1 Demand and Consumer Surplus ...................2-8
2.1.2 Supply.........................................................2-13
2.2 The Market...............................................2-18
2.2.1 Market Demand and Supply .......................2-18
2.2.2 Equilibrium.................................................2-20
2.2.3 Efficiency of Equilibrium ............................2-22
2.3 Changes in Supply and Demand..........2-22
2.3.1 Changes in Demand ....................................2-22
2.3.2 Changes in Supply.......................................2-23
2.4 Elasticities................................................2-27
2.4.1 Elasticity of Demand...................................2-27
2.4.2 Elasticity of Supply .....................................2-30
2.5 Comparative Statics ...............................2-30
2.5.1 Supply and Demand Changes .....................2-30
2.6 Trade.........................................................2-32
2.6.1 Production Possibilities Frontier ................2-32
2.6.2 Comparative and Absolute Advantage ........2-36
2.6.3 Factors and Production...............................2-38
2.6.4 International Trade.....................................2-39
3 THE US ECONOMY.....................................3-41
3.1.1 Basic Demographics....................................3-41
3.1.2 Education....................................................3-47
3.1.3 Households and Consumption....................3-49
3.1.4 Production ..................................................3-56
3.1.5 Government................................................3-65
3.1.6 Trade...........................................................3-73
3.1.7 Fluctuations ................................................3-76
4 PRODUCER THEORY.................................4-79
4.1 The Competitive Firm............................4-79
4.1.1 Types of Firms ............................................4-79
4.1.2 Production Functions..................................4-81
4.1.3 Profit Maximization ....................................4-85
4.1.4 The Shadow Value.......................................4-91
4.1.5 Input Demand.............................................4-92
4.1.6 Myriad Costs ...............................................4-95
4.1.7 Dynamic Firm Behavior ..............................4-97
4.1.8 Economies of Scale and Scope ..................4-100
4.2 Perfect Competition Dynamics..........4-104
4.2.1 Long-run Equilibrium...............................4-104
4.2.2 Dynamics with Constant Costs..................4-105
4.2.3 General Long-run Dynamics.....................4-109
4.3 Investment.............................................4-114
4.3.1 Present value.............................................4-114
4.3.2 Investment................................................4-118
4.3.3 Investment Under Uncertainty .................4-120
4.3.4 Resource Extraction..................................4-125
4.3.5 A Time to Harvest .....................................4-127
4.3.6 Collectibles................................................4-130
4.3.7 Summer Wheat .........................................4-135
5 CONSUMER THEORY ............................. 5-139
5.1 Utility Maximization ........................... 5-139
5.1.1 Budget or Feasible Set .............................. 5-140
5.1.2 Isoquants ................................................. 5-143
5.1.3 Examples.................................................. 5-148
5.1.4 Substitution Effects .................................. 5-151
5.1.5 Income Effects.......................................... 5-155
5.2 Additional Considerations................. 5-158
5.2.1 Corner Solutions ...................................... 5-158
5.2.2 Labor Supply ............................................ 5-160
5.2.3 Compensating Differentials...................... 5-164
5.2.4 Urban Real Estate Prices .......................... 5-165
5.2.5 Dynamic Choice ....................................... 5-169
5.2.6 Risk .......................................................... 5-174
5.2.7 Search ...................................................... 5-178
5.2.8 Edgeworth Box......................................... 5-181
5.2.9 General Equilibrium................................. 5-188
6 MARKET IMPERFECTIONS................... 6-195
6.1 Taxes....................................................... 6-195
6.1.1 Effects of Taxes ........................................ 6-195
6.1.2 Incidence of Taxes.................................... 6-199
6.1.3 Excess Burden of Taxation ....................... 6-200
6.2 Price Floors and Ceilings ................... 6-202
6.2.1 Basic Theory............................................. 6-203
6.2.2 Long- and Short-run Effects..................... 6-207
6.2.3 Political Motivations ................................ 6-209
6.2.4 Price Supports.......................................... 6-210
6.2.5 Quantity Restrictions and Quotas ............ 6-211
6.3 Externalities ......................................... 6-213
6.3.1 Private and Social Value, Cost .................. 6-214
6.3.2 Pigouvian Taxes ....................................... 6-217
6.3.3 Quotas...................................................... 6-218
6.3.4 Tradable Permits and Auctions ................ 6-219
6.3.5 Coasian Bargaining .................................. 6-220
6.3.6 Fishing and Extinction ............................. 6-221
6.4 Public Goods......................................... 6-226
6.4.1 Examples.................................................. 6-226
6.4.2 Free-Riders .............................................. 6-227
6.4.3 Provision with Taxation ........................... 6-229
6.4.4 Local Public Goods................................... 6-230
6.5 Monopoly............................................... 6-232
6.5.1 Sources of Monopoly................................ 6-232
6.5.2 Basic Analysis........................................... 6-233
6.5.3 Effect of Taxes .......................................... 6-236
6.5.4 Price Discrimination ................................ 6-237
6.5.5 Welfare Effects ......................................... 6-240
6.5.6 Two-Part Pricing ...................................... 6-240
6.5.7 Natural Monopoly .................................... 6-241
6.5.8 Peak Load Pricing..................................... 6-242
6.6 Information .......................................... 6-245
6.6.1 Market for Lemons................................... 6-245
6.6.2 Myerson-Satterthwaite Theorem.............. 6-246
6.6.3 Signaling .................................................. 6-248
7 STRATEGIC BEHAVIOR ......................... 7-251
7.1 Games..................................................... 7-251
7.1.1 Matrix Games........................................... 7-251
7.1.2 Nash Equilibrium..................................... 7-255
7.1.3 Mixed Strategies....................................... 7-257
7.1.4 Examples.................................................. 7-262
7.1.5 Two Period Games ................................... 7-265
7.1.6 Subgame Perfection..................................7-266
7.1.7 Supergames ..............................................7-268
7.1.8 The Folk Theorem ....................................7-269
7.2 Cournot Oligopoly................................7-270
7.2.1 Equilibrium ..............................................7-271
7.2.2 Industry Performance...............................7-272
7.3 Search and Price Dispersion .............7-274
7.3.1 Simplest Theory........................................7-275
7.3.2 Industry Performance...............................7-277
7.4 Hotelling Model....................................7-279
7.4.1 Types of Differentiation ............................7-279
7.4.2 The Standard Model .................................7-280
7.4.3 The Circle Model.......................................7-280
7.5 Agency Theory ......................................7-283
7.5.1 Simple Model............................................7-284
7.5.2 Cost of Providing Incentives .....................7-286
7.5.3 Selection of Agent .....................................7-287
7.5.4 Multi-tasking ............................................7-288
7.5.5 Multi-tasking without Homogeneity.........7-292
7.6 Auctions..................................................7-295
7.6.1 English Auction.........................................7-295
7.6.2 Sealed-bid Auction....................................7-296
7.6.3 Dutch Auction...........................................7-298
7.6.4 Vickrey Auction.........................................7-299
7.6.5 Winner’s Curse..........................................7-301
7.6.6 Linkage .....................................................7-303
7.6.7 Auction Design..........................................7-304
7.7 Antitrust .................................................7-306
7.7.1 Sherman Act .............................................7-306
7.7.2 Clayton Act................................................7-308
7.7.3 Price-Fixing ..............................................7-309
7.7.4 Mergers.....................................................7-311
8 INDEX..........................................................8-315
8.1 List of Figures .......................................8-315
8.2 Index .......................................................8-317
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