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Microeconomics ... In A Nutshell
Microeconomics can clear up many mysteries about the world and provide the means to answer new questions. We created this guide to illustrate that economic theory has practical, problem-solving uses and is not an empty academic exercise.
This guide shows how individuals, policy makers, lawyers and judges, and firms can use microeconomic tools to analyze and resolve problems. For example, students learn that:
-- individuals can draw on microeconomic theories when deciding about issues such as whether to invest and whether to sign a contract that pegs prices to the government's measure of inflation;
-- policy makers (and voters) can employ microeconomics to predict the impact of taxes, regulations, and other measures before they are enacted;
-- lawyers and judges use microeconomics in antitrust, discrimination, and con tract cases; and
-- firms apply microeconomic principles to produce at minimum cost and maximize profit, select strategies, decide whether to buy from a market or to produce internally, and write contracts to provide optimal incentives for employees.
This guide differs from other microeconomics texts in three main ways:
-- It places greater emphasis than other texts on modern theories-such as industrial organization theories, game theory, transaction cost theory, information theory, contract theory, and behavioral economics-that are useful in analyzing actual markets.
-- It uses real-world economic examples to present the basic theory and offers extensive Applications to a variety of real-world situations.
-- It employs step-by-step problem-based learning to demonstrate how to use microeconomic theory to solve business problems and analyze policy issues.
This guide has all of the standard economic theory, of course. However, what sets it apart is its emphasis on modern theories that are particularly useful for understanding how firms behave and the effects of public policy.
Industrial Organization. How do firms differentiate their products to increase their profits? When does market outcome depend on whether firms set prices or quantities? What effects do government price regulations have on firms' behavior? These and many other questions are addressed by industrial organization theories.
Game Theory. What's the optimal way to bid in an auction? How do firms set prices to prevent entry of rival firms? What strategy should parents use when their college- graduate child moves back in with them? Game theory provides a way of thinking about strategies and it provides methods to choose optimal strategies.
Contract Theory. What kind of a contract should a firm offer a worker to induce the employee to work hard? How do people avoid being exploited by others who have superior information? Modern contract theory shows how to write contracts to avoid or minimize such problems.
Behavioral Economics. Should a firm allow workers to opt in or opt out of a retirement system? How should people respond to ultimatums? We address questions such as these using behavioral economics-one of the hottest new areas of economic theory-which uses psychological research and theory to explain why people deviate from rational behavior.
This guide demonstrates that economics is practical and provides a useful way to understand actual markets and firms' and consumers' decisions in two ways. First, it presents the basic theory using models estimated with real-world data. Second, it uses the theory to analyze hundreds of real-world applications.
Using Estimated Models to Illustrate Theory. The basic theory is presented using estimated demand curves, supply curves, production functions, and cost functions in most sections. For example, students see how imported oil limits pricing by U.S. oil producers using estimated supply and demand curves, derive a Korean car manufacturer's cost curve based on an estimated production function, examine regulation of natural gas monopolies using estimated demand and cost curves, and analyze oligopoly firms' strategies using estimated demand curves and cost and profit data from the real-world rivalries between Delta Airlines and Southwest Airlines and between Coke and Pepsi.
Applications. Applications use economic theory to predict the price effect of allowing drilling in the Arctic National Wildlife Refuge based on estimated demand and supply curves, demonstrate how iTunes price increases affect music downloads using survey data, explain why some top-end designers limit the number of designer bags customers can buy, measure the value of using the Internet, and analyze how a tariff on chickens affects the importation of cars.
People, firms, and policy makers have to solve economic problems daily. This guide uses a problem-solving approach to demonstrate how economic theory can help them make good decisions.
Solved Problems. After the introductory section, each section provides an average of over five Solved Problems. Each Solved Problem poses a qualitative or quantitative question and then uses a step-by-step approach to model good problem-solving techniques. These issues range from whether Google should have bought YouTube, how to determine Intel's and AMD's profit maximizing quantities and prices using their estimated demand curves and marginal costs, and how regulating a monopoly's price affects consumers and firms.