McConnell Campbell R., Brue Stanley L., Barbiero Thomas P. Microeconomics. Ninth Edition

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About the Authors

Campbell R. McConnell earned his Ph.D. from the University of Iowa after receiving

degrees from Cornell College and the University of Illinois. He taught at the Uni-

versity of Nebraska-Lincoln from 1953 until his retirement in 1990. He is also co-

author of Contemporary Labor Economics, 5th ed. (McGraw-Hill) and has edited

readers for the principles and labour economics courses. He is a recipient of both the

University of Nebraska Distinguished Teaching Award and the James A. Lake Aca-

demic Freedom Award, and is past-president of the Midwest Economics Associa-

tion. Professor McConnell was awarded an honorary Doctor of Laws degree from

Cornell College in 1973 and received its Distinguished Achievement Award in 1994.

His primary areas of interest are labour economics and economic education. He has

an extensive collection of jazz recordings and enjoys reading jazz history.

Stanley L. Brue did his undergraduate work at Augustana College (SD) and received

his Ph.D. from the University of Nebraska-Lincoln. He teaches at Paciﬁc Lutheran

University, where he has been honoured as a recipient of the Burlington Northern

Faculty Achievement Award. He has also received the national Leavey Award for

excellence in economic education. Professor Brue is past president and a current

member of the International Executive Board of Omicron Delta Epsilon Interna-

tional Economics Honorary. He is coauthor of Economic Scenes, 5th ed. (Prentice-

Hall) and Contemporary Labor Economics, 5th ed. (McGraw-Hill) and author of The

Evolution of Economic Thought, 5th ed. (HB/Dryden). For relaxation, he enjoys boat-

ing on Puget Sound and skiing trips with his family.

Thomas P. Barbiero received his Ph.D. from the University of Toronto after complet-

ing undergraduate studies at the same university. He has published papers on the

role of the agricultural sector in the industrial development of northern Italy in the

period 1861–1914. His research interest in the last few years has turned to economic

methodology and the application of economic theory to explain social phenomena.

Professor Barbiero spends part of his summer on the Amalﬁ Coast in Italy.

Preface

Welcome to the ninth edition of Microeconomics, North America’s best-selling eco-

nomics textbook. More than 7 million Canadian and U. S. students have now used

this book. It has been adapted into Australian, Italian, Russian, and Chinese edi-

tions, and translated into French, Spanish, and other languages.

We thoroughly revised, polished, and updated this edition. To use a software

analogy, this is version 9.0, not 8.1 or 8.2. The comments of reviewers and survey

correspondents provided encouragement, motivated improvements, and sparked

innovation.

Streamlined Presentations

A major revision goal was to streamline presentations, where possible, without com-

promising the thoroughness of our explanations. Our efforts resulted in a more efﬁ-

cient organization and greater clarity. An example is Chapter 4, “An Overview of the

Market System and the Canadian Economy,” which is both shorter and better

organized than before. You will ﬁnd similar kinds of improvements throughout the

ninth edition. Where needed, of course, the “extra sentence of explanation” remains

a distinguishing characteristic of Microeconomics. Brevity at the expense of clarity is

a false economy.

Improved Content

The Ten Key Concepts, which appeared in the eighth edition, have been reinforced

with margin icons when they are discussed later in the text. This serves to integrate

the key concepts throughout the text. We have made a number of micro discussions

less daunting and more interesting by changing abstract, axiomatic examples (such

as X and Y) to concrete examples familiar to students. Also, in keeping with our

goal of streamlining discussions, we have consolidated and deleted selected content

that was either peripheral to the discussion or was covered in further detail in later

chapters.

Instructors rarely assign all ﬁve micro application chapters (regulation and anti-

combines, agriculture, income inequality and poverty, and labour market issues),

but they appreciate the option to select two or three. We gave these chapters partic-

ular attention, revising and updating throughout. For example, Chapter 13 on com-

petition and government regulation is consolidated and now ends with a new Last

Word on the Microsoft case. Chapter 20 on agriculture reﬂects the recent decline in

the prices of some farm products. The discussion of income inequality in Chapter

17 is reorganized for greater clarity and smoother ﬂow.

What’s New and Improved?

xvi Preface

Other New Topics and Revised Discussions

Along with the improvements just discussed, there are many other revisions. Here

are some examples.

● Part 1. Chapter 1: Changed terminology from material wants to economic

wants; revised discussion of economic methodology, focusing on the scientiﬁc

method. Chapter 2: Reorganized section on applications; greatly consolidated

section on economic systems. Chapter 3: Several new examples including

increased demand for coffee drinks, soy-enhanced hamburger as an inferior

good, increased supply of Internet service provision. Chapter 4: New chapter

title and introduction; revised section on competition to generalize beyond

pure competition; consolidation of the Five Fundamental Questions to Four,

with discussion explicitly organized around each; briefer chapter. Chapter 5:

New Figure 5-3 showing the types of international ﬂows (trade ﬂows, resource

ﬂows, information and technology ﬂows, and money ﬂows); new discussion

of the euro; expanded discussion of the WTO.

● Part 2. Chapter 6: Title changed to reﬂect chapter content; added application

section on cross elasticity of demand; revamped section on government-

controlled prices. Chapter 7: Updated applications and extension section;

changed language from budget restraint to budget constraint. Chapter 8: Improved

explanation of explicit and implicit costs; added “learning-by-doing” to the list

of sources of economies of scale; new applications of economies of scale

(startup ﬁrms and newspapers). Chapter 9: Deleted the section on “Qualiﬁca-

tions” to shorten the chapter and because we discuss each in detail in later

chapters. Chapter 10: New, updated examples throughout; substantially

revised section “Assessment and Policy Options.” Chapter 11: greatly short-

ened the discussion of cartels by focusing on only recent, rather than histori-

cal, OPEC actions; changed the identities of ﬁrms in the discussion of kinked

demand from A, B, C to hypothetically named ﬁrms. Chapter 12: Edited down

some long lists of examples and added new examples; added a new section on

consumer surplus and producer surplus. Chapter 13: Pared the chapter by

eliminating the discussion of industrial concentration and industrial policy;

updated examples on anti-combines, including the Microsoft case; revised sec-

tion on industrial regulation for clarity and relevance to today’s regulatory and

deregulatory climate; reorganized the discussion of social regulation.

● Part 3. Chapter 15: Transposed the graphs in Figure 15-3; revised discussion

of the minimum wage; new Figure 15-9 shows how wage differentials can arise

on either the demand or supply side of labour markets, and added a section

on immigration. Chapter 16: Made the discussion of the single-tax proposal an

application of the idea of economic rent. Chapter 17: Reorganized discussion of

income inequality and trends in income inequality; new discussion of the

inequality of wealth.

● Part 4. Chapter 18: Revised Table 18-2 on cost-beneﬁt analysis; integrated the

discussion of speciﬁc antipollution policies within the analysis of negative

externalities; added a brief section on global warming; New Global Perspec-

tive 18-1 on carbon dioxide emissions. Chapter 19: Added recent Canadian tax

revenue data and a section on the 2000 federal tax reform. Chapter 20: Refo-

cused Table 20-1 from farm population to farm employment.

preface xvii

Internet Math Notes

Although most students in the principles course have only modest math skills, a few

have taken advanced high school courses in mathematics. For the latter group, see-

ing the algebra and, in a few cases, the calculus behind the economics is highly

revealing and useful. For those students, we have included on our Web site a set of

math notes. Written by Professor Peterson, these notes are creative, concise and to

the point. They undoubtedly will enhance the educational experience for math-

minded students.

This text embraces a number of distinguishing features.

● Comprehensive Explanations at an Appropriate Level. Microeconomics is

comprehensive, analytical, and challenging, yet fully accessible to a wide range

of students. Its thoroughness and accessibility enable instructors to select top-

ics for special classroom emphasis with conﬁdence that students can read and

comprehend independently other assigned material in the book.

● Fundamentals of the Market System. Many economies throughout the world

are making difﬁcult transition from planning to markets. Our detailed descrip-

tion of the institutions and operation of the market system in Chapter 4 is even

more relevant than before. We pay particular attention to property rights,

entrepreneurship, freedom of enterprise and choice, competition, and the

role of proﬁts because these concepts are poorly understood by beginning

students.

● Early Integration of International Economics. We give the principles and

institutions of the global economy early treatment. Chapter 5 examines the

growth of world trade, the major participants in world trade, specialization

and comparative advantage, the foreign exchange market, tariffs and subsi-

dies, and various trade agreements. This strong introduction to international

economics permits “globalization” of later microeconomics discussions.

● Early and Extensive Treatment of Government. Government is an integral

component of modern capitalism. This book introduces the economic func-

tions of government early and accords them systematic treatment in Chapter

4. Chapter 18 examines government and market failure in further detail and

Chapter 19 looks at salient facets of public choice theory and taxation.

● Stress on the Theory of the Firm and Technological Advance. We have given

much attention to the theory of the ﬁrm and technological advance. These con-

cepts are difﬁcult for most beginning students; too brief expositions usually

compound these difﬁculties by raising more questions than they answer. We

have also coupled analysis of the various market structures with a discussion

of the impact of each market arrangement on price, output levels, resource

allocation, and the rate of technological advance. And our Chapter 12 on the

microeconomics of technology is unique to principles books.

● Focus on Economic Issues. For many students, microeconomic issues are

where the action is. We sought to guide that action along logical lines through

the application of appropriate analytical tools.

Distinguishing Features

xviii Preface

Flexible Organization and Content

Microeconomics reﬂects the challenge that speciﬁc topics and concepts will likely pose

for average students. For instance, the theory of the ﬁrm and micro output and price

determination are carefully treated. Here, simplicity is correlated with comprehen-

siveness, not brevity.

Our experience suggests that in treating each basic topic—elasticity of demand

and supply, theory of the ﬁrm, and international economics—it is desirable to couple

analysis with policy. Generally, we use a three-step development of analytical tools:

(1) verbal descriptions and illustrations; (2) numerical examples, and (3) graphical

presentation based on these numerical illustrations.

All these considerations caused us to organize the book into four parts: Part 1:

An Introduction to Economics and the Economy; Part 2: Microeconomics of Prod-

uct Markets; Part 3: Microeconomics of Resource Markets; and Part 4: Microeco-

nomics of Government and Public Policy.

Although instructors generally agree as to the content of principles of microeco-

nomics course, they often differ as to how to arrange the material. Microeconomics

provides considerable organizational ﬂexibility. Previous users tell us they often

substantially rearrange chapters with little sacriﬁce of continuity. Some instructors

will prefer to intersperse the microeconomics of Parts 2 and 3 with the problems

chapters of Part 4. For example, Chapter 20 on agriculture may follow Chapter 9 on

pure competition.

Microeconomics has always been student oriented. Economics is concerned with efﬁ-

ciency—accomplishing goals using the best methods. Therefore, we offer the stu-

dent some brief introductory comments on how to improve their efﬁciency and

hence their grades.

● In This Chapter You Will Learn We set out the learning objectives at the start

of each chapter so the chapter’s main concepts can easily be recognized.

Pedagogical Aids for Students

IN THIS CHAPTER

OU WILL LEARN:

What markets are.

•

What demand is and

what factors affect it.

•

What supply is and

what factors affect it.

•

How demand and

supply together determine

market equilibrium.

ccording to an old joke, if you teach a

parrot to say “Demand and supply,”

you have an economist. There is much

truth in this quip. The tools of demand and

supply can take us far in understanding both

speciﬁc economic issues and how the entire

economy works.

With our circular ﬂow model in Chapter 2,

we identiﬁed the participants in the product

market and resource market. We asserted

that prices were determined by the “interac-

tion” between buyers and sellers in those

markets. In this chapter we examine that

interaction in detail and explain how prices

preface xix

● Web Links New to this edition are the addition of Web site references, a key

research tool directing students to Web sites that tie into the chapter material.

● Terminology A signiﬁcant portion of any introductory course is terminology.

In this edition key terms are highlighted in bold type the ﬁrst time they appear

in the text. Key terms are deﬁned in the margin 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 and on the Web site.

● Ten Key Concepts Ten Key Concepts have been identiﬁed to help students

organize the main principles. The Ten Key Concepts are introduced in Chap-

ter 1 and are reinforced throughout the textbook with an icon.

● Data updates can be found on the Web site www.mcgrawhill.ca/college/

mcconnell9 for selected Tables and Figures.

TRADEOFFS AND OPPORTUNITY COSTS

Many current controversies illustrate the tradeoffs and opportunity costs indicated

in movements along a particular production possibilities curve. (Any two categories

of “output” can be placed on the axes of production possibilities curves.) Should

scenic land be used for logging and mining or preserved as wilderness? If the land

is used for logging and mining, the opportunity cost is the forgone beneﬁts of

wilderness. If the land is used for wilderness, the opportunity cost is the lost value

of the wood and minerals that society forgoes.

Should society devote more resources to the criminal justice system (police,

courts, and prisons) or to education (teachers, books, and schools)? If society

devotes more resources to the criminal justice system, other things equal, the oppor-

tunity cost is forgone improvements in education. If more resources are allocated to

education, the opportunity cost is the forgone beneﬁts from an improved criminal

justice system.

Facing

Tradeoffs

TABLE 5-1 PRINCIPAL CANADIAN EXPORTS AND IMPORTS

OF GOODS, 2000

Exports % of Total Imports % of Total

Machinery and equipment 25 Machinery and equipment 34

Automotive products 23 Automotive products 21

Industrial goods and materials 15 Industrial goods and materials 19

Forestry products 10 Consumer goods 11

Energy products 13 Agricultural and ﬁshing products 5

Agricultural and ﬁshing products 7 Energy products 5

Source: Statistics Canada, www.statisticscanada.ca/english/Pgdb/Economy/International/gblec05.htm

Visit www.mcgrawhill.ca/college/mcconnell9 for data update.

xx Preface

● Key Graphs We have labelled graphs having special 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.

● Interactive Graphs (Java Applets) Developed under the supervision of Nor-

ris Peterson of Paciﬁc Lutheran University, this interactive feature depicts

major graphs and instructs students to shift the curves, observe the outcomes,

and derive relevant generalizations. For selected Key Graphs, Java Applets are

available on the McConnell Web site, www

.mcgrawhill.ca/college/mcconnell9.

●

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. These review statements will help you to

focus on the essential ideas of each chapter and also to study for exams.

Price (per bushel)

Bushels of corn (thousands per week)

2 4 6 8 1012141618

6000-bushel

surplus

7000-bushel

shortage

The intersection of the downsloping

demand curve

and the upsloping

supply curve

indicates the equi-

librium price and quantity, here $3

and 7000 bushels of corn. The short-

ages of corn at below-equilibrium

prices (for example, 7000 bushels

at $2), drive up price. These higher

prices increase the quantity sup-

plied and reduce the quantity

demanded until equilibrium is

achieved. The surpluses caused by

above-equilibrium prices (for exam-

ple, 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.

FIGURE 3-5 EQUILIBRIUM PRICE AND QUANTITY

Key Graph

Quick Quiz

1. Demand curve

is downsloping because:

a. producers offer less product for sale as the price of the product falls.

b. lower prices of a product create income and substitution effects, which lead

consumers to purchase more of it.

c. the larger the number of buyers in a market, the lower the product price.

d. price and quantity demanded are directly (positively) related.

The market system requires private ownership

of property, freedom of enterprise, freedom of

choice, and limited government.

The market system permits economic entities—

business, resource suppliers, and consumers—

to pursue and further their self-interest. It pre-

vents any single economic entity from dictating

the prices of products or resources.

The coor

dinating

mechanism of the market sys

tem is a system of markets and prices.

preface xxi

● Global Perspective boxes Each nation functions increasingly in a global

economy. To gain appreciation of this wider economic environment, be sure to

take a look at the Global Perspectives features, which compare Canada to

other nations.

● Appendix on graphs Being comfortable with graphical analysis and a few

related quantitative concepts will be a big advantage to students in under-

standing the principles of economics. The appendix to Chapter 1, which

reviews graphing, line slopes, and linear equations, should not be skipped.

● New Last Words About one fourth of the Last Words are new and others

have been revised and updated. The new topics are: the remarkable organiza-

tional ability of markets (Chapter 4—see page 95); the market for human

organs (Chapter 6—see page 150); the economics of criminal behaviour (Chap-

ter 7—see page 169); and the positive externalities of antitheft auto tracking

devices (Chapter 18—see page 479).

Comparative exports

The United States, Germany,

and Japan are the world’s

largest exporters. Canada

ranks seventh.

5.2

Exports of goods, 1999

(billions of dollars)

0 100 200 300 400 500 600

United States

Germany

Japan

France

Britain

Canada

Italy

China

Netherlands

Belgium-Lux.

South Korea

Singapore

Mexico

Taiwan

Spain

Source: World Trade Organization, www.wto.org

Through extension, the theory

of rational consumer behaviour

provides some useful insights on

criminal behaviour. Both the law-

ful consumer and the criminal try

to maximize their total utility (or

net beneﬁt). For example, you

can remove a textbook from the

campus bookstore either by pur-

chasing it or stealing it. If you buy

the book, your action is legal; you

have fully compensated the book-

criminal has several facets. First,

there are the guilt costs, which

for many people are substantial.

Such individuals would not steal

from others even if there were no

penalties for doing so; their moral

sense of right and wrong would

entail too great a guilt cost rela-

tive to the beneﬁt from the stolen

good. Other types of costs in-

clude the direct costs of the crim-

inal activity (supplies and tools)

will choose to steal the book be-

cause the marginal beneﬁt of $80

will exceed the marginal cost of

$50. In contrast, someone having

a guilt cost of, say, $40, will not

steal the book. The marginal ben-

eﬁt of $80 will not be as great as

the marginal cost of $90 (= $50 of

penalty cost + $40 of guilt cost).

This perspective on illegal be-

haviour has some interesting

implications. For example, other

CRIMINAL BEHAVIOUR

Although economic analysis is not particularly relevant in

explaining some crimes of passions and violence (for example,

murder and rape), it does provide interesting insights on

such property crimes as robbery, burglary, and auto theft.

xxii Preface

● Study Questions A comprehensive list of questions is located at the end

of each chapter. The old cliché that you “learn by doing” is very relevant to

economics. Use of these questions will enhance your understanding. We des-

ignate several of them as “Key Questions” and answer them in the Study

Guide.

● Internet Application Questions Students are presented with questions to

explore on the Internet relevant to the topic discussed in the chapter. From the

McConnell Web site, www

.mcgrawhill.ca/college/mcconnell9, students will

ﬁnd direct links to the Web sites included in these questions.

● Origin of the Idea These brief histories, which can be found on the Web site,

were written by Randy Grant of Linﬁeld College and examine the origins of

major ideas identiﬁed in the book. Students will ﬁnd it interesting to learn

about the person who ﬁrst developed such ideas as opportunity costs, equi-

librium price, the multiplier, comparative advantage, and elasticity.

● The Instructor Online Learning Centre (www.mcgrawhill.ca/college/

mcconnell9) includes a password-protected Web site for instructors. The site

offers downloadable supplements and PageOut, the McGraw-Hill Ryerson

course Web site development centre.

● Instructor’s Resource Manual Thomas Barbiero, Ryerson University, has

revised and updated the Instructor’s Resource Manual. It includes chapter sum-

maries, listings of “what’s new” in each chapter, teaching tips and suggestions,

learning objectives, chapter outlines, data and visual aid sources with sugges-

tions for classroom use, and questions and problems.

● Microsoft® PowerPoint® Slide Powernotes Prepared by Judith Skuce,

Georgian College, this presentation system is found on the Instructor’s

CD-ROM and on the Online Learning Centre. It offers visual presentations that

may be edited and manipulated to ﬁt a particular course format. They have

been signiﬁcantly revised for this edition and contain many animated graphs

and ﬁgures that have been imported from Excel.

● Test Bank 1 Prepared by Nargess Kayhani, Mount St. Vincent University, the

test bank includes more than 5400 questions and is available in printed format

and the electronic format can be found on the Instructor’s CD-ROM.

Supplements for Instructors

internet application questions

1. Check out the National Post 500 list of

the largest Canadian ﬁrms at <www.

nationalpostbusiness.com/datamining/top500/

top500.htm>. From the top ten proﬁt list, select

three ﬁrms from three different industries

and discuss the likely sources of economies

of scale that underlie their large size.

2. Use the Yahoo search engine at <www.

yahoo.ca> to locate a company’s homepage

of your choice. Find and review the com-

pany’s income statement in its annual report

and classify the nonrevenue items as either

ﬁxed or variable costs. Are all costs clearly

identiﬁable as either ﬁxed or variable? What

item would be considered as accounting

proﬁt? Would economic proﬁt be higher or

lower than this accounting proﬁt?