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MICROECONOMICS
MICROECONOMICS MICROECONOMICS
SEVENTH EDITION
MyEconLab
MyEconLab saves time and improves

your results by:
u DESIGNING a personalised study
plan
u PROVIDING unlimited practice and
immediate feedback
u SUPPLYING a graphing tool SEVENTH
EDITION
u OFFERING online experiments that
illustrate key economic concepts in a
fun and engaging way.
Visit www.pearson.com.au/mctaggart
Michael Parkin
Christopher Findlay
Douglas McTaggart
Want to Learn on the Go?
Link to Pearson’s unique Study on the Go content directly from your smartphone,
and study whenever and wherever you wish!
For more details read the preface inside this text.
ISBN 978-1-4425-5078-0 Douglas McTaggart

Christopher Findlay
Michael Parkin
9 781442 550780
Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442550780 - McTaggart/Microeconomics 7e
McTaggart MICRO full cover.indd 1 14/6/12 1:41:04 PM

Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page vii
Dedications
Douglas McTaggart dedicates this book to Pam, Cameron, Lachlan and especially Andrew.
Christopher Findlay dedicates this book to Tania, Marek and Kasia.
Michael Parkin dedicates this book to all his students.
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page viii
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page ix
BRIEF CONTENTS
PART ONE PART THREE

INTRODUCTION 1 DECISIONS AND STRATEGIES IN
CHAPTER 1 What Is Economics? 1 MARKETS 261
CHAPTER 2 The Economic Problem 29 CHAPTER 12 Consumer Choices and Constraints
CHAPTER 3 Demand and Supply 51 261
CHAPTER 4 Elasticity 79 CHAPTER 13 Producer Choices and Constraints 281
CHAPTER 14 Perfect Competition 305
PART TWO CHAPTER 15 Monopolistic Competition 331
HOW MARKETS WORK 101 CHAPTER 16 Oligopoly Games and Strategies 349
CHAPTER 5 Efficiency and Equity 101 CHAPTER 17 Decisions in Factor Markets 373
CHAPTER 6 Government Actions in Markets 123
CHAPTER 7 Global Markets in Action 147
CHAPTER 8 Public Choices and Public Goods 171
CHAPTER 9 Economics of the Environment 193
CHAPTER 10 Monopoly 215
CHAPTER 11 Economic Inequality 239
ix
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page x
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xi
PREFACE
The future is always uncertain. But at some times, ◆ The Seventh Edition Revision
and now is one such time, the range of possible
futures is enormous. As a small economy tightly Simpler where possible, stripped of some technical
detail, more copiously illustrated with well-chosen
integrated into the global economy, it is uncertainty
photographs, reinforced with improved chapter sum-
about external forces that dominates Australia’s maries and problem sets, and even more tightly inte-
outlook. grated with MyEconLab: These are the hallmarks of
There is uncertainty about monetary policy with this seventh edition of Economics.
the European Central bank and the U.S. Federal This comprehensive revision also incorporates and
Reserve Bank holding interest rates at historical lows responds to the detailed suggestions for improve-
and injecting billions of dollars of money in an ments made by reviewers and users, both in the broad
attempt to stimulate a flagging recovery from a global architecture of the text and in each chapter. The revi-
financial crisis. And there is extraordinary uncertainty sion builds on the improvements achieved in previ-
about fiscal policy as budget deficits in the United ous editions and retains its thorough and detailed
States and Europe seem ever harder to control. presentation of the principles of economics, its
Whether or when economic growth in China and emphasis on real-world examples and applications, its
India will slow and dampen the growth of the rest of development of critical thinking skills, its diagrams
the world is a big unknown. renowned for pedagogy and precision and its path-
Since the global financial crisis of August 2007 breaking technology.
moved economics from the business page of the news- Most chapters have been fine-tuned to achieve
paper to the front page, fear has gripped producers, even greater clarity and to present the material in a
consumers, financial institutions and governments. more straightforward, visual and intuitive way.
Even the idea that the market is an efficient mecha- Some chapters have been thoroughly reworked to
nism for allocating scarce resources came into ques- cover new issues, particularly those that involve
tion as some political leaders trumpeted the end of current policy problems. These changes are aimed at
capitalism and the dawn of a new economic order in better enabling students to learn how to use the
which tighter regulation reined in unfettered greed. economic toolkit to analyse their own decisions and
Rarely do teachers of economics have such a rich understand the events and issues they are confronted
feast on which to draw. And rarely are the principles with in the media and at the ballot box.
of economics more surely needed to provide the solid Current issues organise each chapter. News stories
foundation on which to think about economic events about today’s major economic events tie a chapter
and navigate the turbulence of economic life. together, from new, briefer chapter-opening questions
Although thinking like an economist can bring a
to end-of-chapter problems and online practice. Each
clearer perspective to and a deeper understanding of
chapter includes a discussion of a critical issue of our
today’s events, students don’t find the economic way
time to demonstrate how economic theory can be
of thinking easy or natural. Economics seeks to put
applied to explore a particular debate or question.
clarity and understanding in the grasp of the student
Among the many issues covered are
through its careful and vivid exploration of the
■ The rising cost of food in Chapter 2
tension between self-interest and the social interest,
the role and power of incentives – of opportunity cost ■ The fluctuating price of bananas and coffee in
and marginal benefit – and the possibility that Chapter 3

markets supplemented by other mechanisms might ■ Expanding the universities in Chapter 8
allocate resources efficiently.
■ Climate change and the carbon tax in Chapter 9
McTaggart, Findlay and Parkin students begin to
■ Monopoly and competition policy in Chapter 10
think about issues the way real economists do and
learn how to explore difficult policy problems and ■ The top 1 per cent, rising inequality in Australia
make more informed decisions in their own lives. and falling inequality across nations in Chapter 11
xi
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xii
xii PREFACE
Real-world examples and applications appear in ◆ Features to Enhance Teaching

the body of each chapter and in the end-of-chapter
problems and applications, which are available in and Learning
MyEconLab for assignment as homework, quizzes or
tests. Reading Between the Lines
A selection of the questions that appear weekly in This McTaggart, Findlay and Parkin hallmark helps
MyEconLab in Economics in the News is also available students think like economists by connecting chapter
for assignment as homework, quizzes or tests. tools and concepts to the world around them. In
Reading Between the Lines at the end of each chapter
students apply the tools they have just learned by
Highpoints of the Revision analysing an article from a newspaper or news
In addition to being thoroughly updated and revised website. Each article sheds additional light on the
to include the topics and features just described, the questions first raised in the chapter opener.
micro chapters feature the following five notable Questions about the article also appear with the
changes: end-of-chapter problems and applications.
1. What Is Economics? (Chapter 1): We have re-
worked the explanation of the economic way of
REA D ING BETWEEN THE LINES
thinking around six key ideas, all illustrated with
student-relevant choices. The graphing appendix to
this chapter has an increased focus on scatter diagrams Demand and Supply:
The Price of Coffee
and their interpretation and on understanding shifts
of curves. Coffee Surges on Poor Colombian Harvests
FT.com
2. Economics of the Environment (Chapter 9): This 30 July 2010
Coffee prices hit a 12-year high on Friday on the back of low supplies of premium Arabica
chapter has been revised to deal more thoroughly with coffee from Colombia after a string of poor crops in the Latin American country.
The strong fundamental picture has also encouraged hedge funds to reverse their previous
the economics of pollution and carbon emission and bearish views on coffee prices.
In New York, … Arabica coffee jumped 3.2 per cent to 178.75 cents per pound, the highest
the role of the carbon tax. The section on the tragedy since February 1998. It traded later at 177.25 cents, up 6.8 per cent on the week.
The London-based International Coffee Organization on Friday warned that the ‘current
of the commons has also been extensively revised to tight demand and supply situation’ was ‘likely to persist in the near to medium term’.
Coffee industry executives believe prices could rise towards 200 cents per pound in New York
explain the problem of overfishing using an analysis before the arrival of the new Brazilian crop later
this year.
ESSENCE OF THE STORY
that matches that of negative externalities. ‘Until October it is going to be tight on high
quality coffee,’ said a senior executive at one of
The price of premium Arabica coffee increased
Europe’s largest coffee roasters. He said: ‘The ■
by 3.2 per cent to almost 180 cents per pound in
3. Economic Inequality (Chapter 11): This chapter industry has been surprised by the scarcity of
high quality beans’.
July 2010, the highest price since February
1998.
now includes a section on inequality in the world Colombian coffee production, key for supplies
of premium beans, last year plunged to a
33-year low of 7.8 m bags, each of 60 kg, down
■ A sequence of poor crops in Colombia cut the
production of premium Arabica coffee to a
33-year low of 7.8 million 60 kilogram bags,
economy and compares Australian inequality with nearly a third from 11.1 m bags in 2008, tight-
ening supplies worldwide …
■
down from 11.1 million bags in 2008.
The International Coffee Organization said that
the ‘current tight demand and supply situation’
that in nations at the two extremes of equality and Excerpted from ‘Coffee Surges on Poor Colombian Harvests’ by Javier
Blas, Financial Times. © The Financial Times Limited (2010). All rights
reserved.
■
was ‘likely to persist in the near to medium term’.
Coffee industry executives say prices might
approach 200 cents per pound before the arrival
inequality. It also looks at the reasons why the super ■
of the new Brazilian crop later this year.
Hedge funds previously expected the price of
rich are getting richer. coffee to fall but now expect it to rise further.
ECONOMIC ANALYSIS
4. Consumer Choices and Constraints (Chapter 12): ■ This news article reports two sources of changes in
Students find the analysis of the price effect in terms

Price (cents per pound)
supply and demand that changed the price of coffee. Decrease in S1

200 Colombian crop ...
■ The first source of change is the sequence of poor S0
of an income effect and a substitution effect difficult, harvests in Colombia. These events decreased the
world supply of Arabica coffee. (Arabica is the type
that Starbucks uses.)
190
... raises
price ...
so we have reworked this material to make the expla- ■ Before the reported events, the world production of
Arabica was 120 million bags per year and its price
was 174 cents per pound.
180
174
nation clearer. We have omitted the work–leisure ■ The decrease in the Colombian harvest decreased
world production to about 116 million bags, which is
about 3 per cent of world production.
170
160
choice coverage of earlier editions and given the ■ Figure 1 shows the situation before the poor
Colombian harvests and the effects of those poor
... and
decreases
quantity
D
chapter a student-friendly application on choices harvests. The demand curve is D and initially the
supply curve was S0. The market equilibrium is at
120 million bags per year and a price of 174 cents
0 100
Figure 1 The Effects of the Colombian Crop

110 116 120 130 140
Quantity (millions of bags)
per pound.
about movies and DVDs. ■ The poor Colombian harvests decreased supply and
the supply curve shifted leftward to S1. The price
Price (cents per pound)
Rise in expected future

increased to 180 cents per pound and the quantity 230
5. Oligopoly Games and Strategies (Chapter 16):

price increases demand
decreased to 116 million bags. S2
and decreases supply ...
220
■ The second source of change influenced both supply
S1
and demand. It is a change in the expected future
We have omitted the kinked demand curve and ■
price of coffee.
The hedge funds referred to in the news article are
210
200
dominant firm coverage of earlier editions and given ■

speculators that try to profit from buying at a low price
and selling at a high price.
With the supply of coffee expected to remain low, the
190
180
... and raises
the chapter a stronger game theory focus. A price was expected to rise further – a rise in the
expected future price of coffee.
170
160
price further D1
Gillette–Schick battle for the razor market illustrates ■ When the expected future price of coffee rises, some
people want to buy more coffee (so they can sell it
later) – an increase in the demand today. And some 0 100 110 116 120 130
D0
140
people offer less coffee for sale (so they can sell it later
game theory in action. ■
for a higher price) – a decrease in the supply today.
Figure 2 shows the effects of these changes in the
Figure 2 The Effects of the Expected Future Price
Quantity (millions of bags)
demand and supply today.
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xiii
PREFACE xiii
Graphs That Show the Action Chapter Openers

Through the past six editions, this book has set new Each chapter opens with a carefully chosen photo-
standards of clarity in its graphs; the seventh edition graph, question and student-friendly vignette
continues to uphold this tradition. Our goal has designed to give students a quick sense of what the
always been to show ‘where the economic action is’. chapter is about and how it connects with their own
Our graphs continue to generate an enormously economic world and experience. The chapter opening
positive response, which confirms our view that story is woven into the body of the chapter and
graphical analysis is the most powerful tool available explored further in the Reading Between the Lines
for teaching and learning economics. feature that ends the chapter.
Because many students find graphs hard to work
with, we have developed the entire art program with
the study and review needs of the student in mind. Economics in Action Boxes
The graphs feature This new feature addresses current events and eco-
■ Original curves consistently shown in blue nomic occurrences that highlight and amplify the
topics covered in the chapter. Instead of simply
■ Shifted curves, equilibrium points and other
reporting the current events, the material applies the
important features highlighted in red event to an economics lesson, enabling students to see
■ Colour-blended arrows to suggest movement
how economics plays a part in the world around them
■ Graphs paired with data tables as they read through the chapter.
■ Graphs labelled with boxed notes Some of the many issues covered in this feature
include the global market for crude oil, the best afford-
■ Extended captions that make each graph and its
able choice of movies and DVDs, the cost of selling a
caption a self-contained object for study and pair of shoes, how Apple doesn’t make the iPhone, the
review. trends and cycles in real GDP and the price level, and
the size of the fiscal stimulus multipliers.
P
S2 S0 S1
Economics in Action The figure illustrates the effects of the increase in
demand on the global oil market. The supply of oil
Increase in The Global Market for Crude Oil remained constant along supply curve S. The demand
The demand and supply model provides insights into for oil in 2001 was D2001, so in 2001 the price was
quantity all competitive markets. Here, we’ll apply what you’ve $20 a barrel and the quantity was 65 million barrels
supplied learned about the effects of an increase in demand to
the global market for crude oil.
per day. The demand for oil increased and by 2008 it
had reached D2008. The price of oil increased to $127 a
Crude oil is like the life-blood of the global barrel and the quantity increased to 72 million barrels
economy. It is used to fuel our cars, aeroplanes, trains a day. The increase in the quantity is an increase in the
and buses, to generate electricity and to produce a quantity supplied, not an increase in supply.
Decrease in Increase in wide range of plastics. When the price of crude oil
rises, the costs of transportation, power and materials
Price (2010 dollars per barrel)
all increase. Rise in global

200
In 2001, the price of a barrel of oil was $20 (using incomes increases
supply supply the value of money in 2010). In 2008, before the 180
the demand for oil
global financial crisis ended a long period of eco- S

160
nomic expansion, the price peaked at $127 a barrel.
While the price of oil was rising, the quantity of 140
oil produced and consumed also increased. In 2001, 127
the world produced 65 million barrels of oil a day. By
100 Price of
2008, that quantity was 72 million barrels.
Decrease in Who or what has been raising the price of oil? Is it 80
oil rises ...
the action of greedy oil producers? Oil producers … and quantity

quantity might be greedy and some of them might be big 60 of oil supplied
increases
enough to withhold supply and raise the price, but it
supplied wouldn’t be in their self-interest to do so. The higher
40
20
price would bring forth a greater quantity supplied D2001 D2008
from other producers and the profit of the producer 0 60 65 72 80 85
limiting supply would fall. Quantity (millions of barrels per day)
Oil producers could try to cooperate and jointly
The Global Market for Crude Oil
withhold supply. The Organisation of Petroleum
Exporting Countries, OPEC, is such a group of pro-
0 Quantity ducers. But OPEC doesn’t control the world supply
and its members’ self-interest is to produce the quanti-
ties that give them the maximum attainable profit.
So even though the global oil market has some big
players, they don’t fix the price. Instead, the actions
of thousands of buyers and sellers and the forces of
Chapter Objectives demand and supply determine the price of oil.

So how have demand and supply changed?
Because both the price and the quantity have
increased, the demand for oil must have increased.
Each chapter begins with a list of learning objectives, Supply might have changed too, but here we’ll
suppose that supply has remained the same.
which enables students to see exactly where the The global demand for oil has increased for one
major reason: World income has increased. The
increase has been particularly large in the emerging
chapter is going and to set their goals before they economies of China, India and Brazil. Increased
world income has increased the demand for oil-using
embark on their detailed study. goods such as electricity, petrol and plastics, which in
turn has increased the demand for oil.
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xiv
xiv PREFACE
Key Terms Flexible Structure

Highlighted terms simplify the student’s task of learn- You have preferences for how you want to teach your
ing the vocabulary of economics. Each highlighted course. We have organised this book to enable you to
term appears in an end-of-chapter list with its page do so. The flexibility chart on p. xix illustrate the
number, in an end-of-book glossary with its page book’s flexibility. By following the arrows through the
number, bold-faced in the index, and in MyEconLab charts you can select the path that best fits your pref-
in the interactive glossary and flashcards. erence for course structure. Whether you want to
teach a traditional course that blends theory and
End-of-Chapter Summary policy, or one that takes a fast track through either
Each chapter closes with a concise summary organised theory or policy issues, Economics gives you the
by major topics and list of key terms with page refer- choice.
ences. These learning tools provide students with a
summary for review and exam preparation. Supplemental Resources
All instructor supplements are available via:
In-Text Review Quizzes and End-of-Chapter ■ the Pearson catalogue page
Problems and Applications (www.pearson.com.au/9781442550773)
A Review Quiz at the end of each major section ■ MyEconLab (www.pearson.com.au/mctaggart)
enables students to determine whether a topic needs
further study before moving on, and Problems and Computerised Test Banks The seventh edition test
Applications at the end of each chapter provide an bank (Test Item File) with more than 3,000 multiple-
opportunity to practise and apply the topics of the choice questions has been prepared by Mark Dodd of
chapter. the University of Adelaide and Tikiri Agalewatte of the
All the Review Quizzes and end-of-chapter University of Wollongong. Mark and Tikiri reviewed
Problems and Applications are in the MyEconLab all existing questions to ensure their clarity and consis-
Study Plan (see p. xv) where students can work them tency with the seventh edition. New questions follow
and receive instant feedback and explanations. the style and format of the end-of-chapter text prob-
lems and they provide the lecturer with a new set of
testing opportunities and/or homework assignments.
Test Item File questions are available in MyEconLab
◆ For the Lecturer for instructors to use in a test, a quiz or as homework.
Pearson’s TestGen enables instructors to view and
This book enables you to focus on the economic way edit test bank questions, generate tests, and print
of thinking and choose your own course structure. them in a variety of formats. Search and sort functions
make it easy to locate questions and arrange them in
Focus on the Economic Way of Thinking any order desired. TestGen also enables instructors to
As a teacher, you know how hard it is to encourage a administer tests on a local area network, have tests
student to think like an economist. But that is your graded electronically, and have the results prepared in
goal. Consistent with this goal, the text focuses on and electronic or printed reports.
repeatedly uses the central ideas: choice; tradeoff; Pearson TestGen is compatible with Windows or
opportunity cost; the margin; incentives; the gains Macintosh systems.
from voluntary exchange; the forces of demand,
supply and equilibrium; the pursuit of economic rent; Solutions Manual For ease of use and instructor refer-
the tension between self-interest and the social inter- ence, a comprehensive Solutions Manual provides
est; and the scope and limitations of government lecturers with detailed solutions to the Review
actions. Quizzes and the end-of-chapter Study Plan Problems
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xv
PREFACE xv
and Applications and Additional Problems and ■ The Custom Exercise Builder gives instructors the
Applications. John Snelling of the University of flexibility of creating their own problems for
Adelaide has prepared the Solutions Manual. For an assignment.
electronic version of the Solutions Manual go to ■ The Gradebook records each student’s
www.pearson.com.au/9781442550773. performance and the time spent on Tests, Study
Plan and Homework and generates reports by
PowerPoint Resources Robin Bade has developed the student or by chapter.
full-colour Microsoft PowerPoint Lecture Presen- ■ Economics in the News is a turn-key solution to
tation for each chapter, which includes animated
bringing daily news into the classroom. Updated
versions of the textbook figures, tables from the text-
weekly during the academic year, we upload two
book and speaking notes.
relevant articles (one micro, one macro) and
A separate set of PowerPoint files containing large-
provide links for further information and
scale animated versions of all the textbook’s figures
questions that may be assigned for homework or
and the tables from the text is available. Use the
for classroom discussion.
presentations electronically in the classroom or
■ A suite of ABC News (U.S.) videos, which address
printed to create hard-copy transparency masters.
This item is available for Macintosh and Windows. current topics such as education, energy, U.S.
Federal Reserve policy and business cycles, is
Instructor’s Resource Centre Lecturers can download available for classroom use. Video-specific exercises
supplements from a secure, instructor-only source at are available for instructor assignment.
www.pearson.com.au/9781442550773. Michael Parkin and Robin Bade, assisted by
Jeannie Gillmore and Laurel Davies, author and
oversee all of the MyEconLab content for Economics.
MyEconLab MyEconLab Our peerless MyEconLab team has worked hard to
MyEconLab’s assessment and tutorial system works ensure that it is tightly integrated with the book’s
hand-in-hand with Economics. With comprehensive content and vision. For more information go to
homework, quiz, test and tutorial options, lecturers www.pearson.com.au/mctaggart.
can manage all assessment needs in one program.
■ All of the Review Quiz questions and end-of-
Experiments in MyEconLab
chapter Problems and Applications are assignable
Experiments are a fun and engaging way to promote
and automatically graded.
active learning and mastery of important economic
■ Students can work the Review Quiz questions
concepts. Pearson’s experiments program is flexible
and end-of-chapter Study Plan Problems and and easy for lecturers and students to use.
Applications as part of the MyEconLab Study Plan. ■ Single-player experiments allow your students to
■ Instructors can assign the end-of-chapter
play against virtual players from anywhere at
Additional Problems and Applications as any time with an Internet connection.
autograded assignments. These Problems and ■ Multiplayer experiments allow you to assign and
Applications are not available to students in
manage a real-time experiment with your class.
MyEconLab unless assigned by the instructor.
■ Many of the Problems and Applications are
Pre- and post-questions for each experiment are
algorithmic, draw-graph and numerical exercises. available for assignment in MyEconLab.
■ Test Item File questions are available for
assignment as homework.
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xvi
xvi PREFACE
◆ For the Student Study on the Go

At the end of each chapter, you will find a unique QR
With this textbook, you get access to some powerful code providing access to Study on the Go, an unprece-
learning tools. dented mobile integration between text and online
content. You can link to Pearson’s unique Study on
MyEconLab MyEconLab the Go content directly from your smartphone, allow-
MyEconLab’s tutorial system provides lots of opportu- ing you to study whenever and wherever you wish! Go
nities to practise and review what you are learning. to one of the sites below to see how you can download
an app to your smartphone for free. Once the app is
■ Take a ‘Sample Test’ to create your personalised installed, scan the code and your phone will link to a
‘Study Plan’. website containing Pearson’s Study on the Go content,
■ Work the Review Quiz questions and end-of- including the popular study tools: glossary, flashcards,
chapter Study Plan Problems and Applications audio summaries and multiple-choice quizzes, which
in your MyEconLab Study Plan and get instant can be accessed at any time.
feedback. ScanLife: http://get.scanlife.com
NeoReader: http://get.neoreader.com
■ Use the ‘Help Me Solve This’ problem tools when
QuickMark: http://www.quickmark.com.tw
you need extra help.
■ Use the Pearson e-text version of your textbook to
search, make notes, view animated versions of the PowerPoint Lecture Notes
textbook figures and check a definition in the Robin Bade has developed the full-colour Microsoft
electronic glossary. PowerPoint Lecture Notes for each chapter, which
■ Use the ‘Ask the Authors’ tool to send an email to include animated versions of the textbook figures.
the authors and get help when you need it. Take these notes to class and edit them to create your
own personal summary for review.
Registering for MyEconLab with an access card If
your textbook came bundled with a MyEconLab VitalSource Edition
access code, refer to the card for registration instruc- VitalSource is an electronic version of the text to fit
tions. your mobile lifestyle. Download it to your computer
and search for key concepts, words and phrases, make
Purchasing access If your textbook did not come highlights and notes as you study and share your notes
bundled with a MyEconLab access code, you can with your friends.
purchase an access code at www.pearson.com.au/
mctaggart.
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xvii
PREFACE xvii
◆ Acknowledgements Finally, we are deeply grateful to the editorial team

at Pearson Australia. Vision, energy, enthusiasm, pro-
As we said in earlier editions, one of the great pleas- fessionalism, flair and commitment are just some of
ures of writing an introductory text is the opportunity the characteristics of the team. Editor in Chief Frances
it affords to learn from so many generous friends and Eden, Manager – Product Development Michael
colleagues. Although the extent of our debt cannot be Stone, Senior Acquisitions Editor Simone Bella, Senior
fully acknowledged here, it is nevertheless a joy to Project Editor Rebecca Pomponio and Editorial
record our gratitude to the many people who have Coordinator Germaine Silva have again confirmed
helped, some without realising just how helpful they with this new edition their reputation as Australia’s
have been. finest academic publishers. They have built a culture
We thank our many exceptional reviewers whose that brings out the best in their editors and authors.
names are listed on the following pages. Many of They have been supported by Copyright and
them spent much more time than we could have Pictures Editor Lisa Woodland, copy editor Felicity
reasonably expected and provided detailed comments McKenzie, proofreader Nicole Le Grand and typeset-
on drafts of the manuscript. Their comments and ter Leonie Ryan. We are grateful for their commitment
suggestions have been extremely helpful and we have to the project and their excellent attention to detail.
made every attempt to heed their advice. Classroom experience will test the value of this
We thank the several thousand students whom we book. We would appreciate hearing from instructors
have been privileged to teach. The instant response and students about how we can continue to improve it
that comes from the look of puzzlement or enlighten- in future editions.
ment has taught us how to teach economics.
We also thank Doon-Louise Williams and David Douglas McTaggart
Tucker, students at Griffith University, for pointing Queensland Investment Corporation
out an error in the sixth edition. email: d.mctaggart@qic.com
We thank Richard Parkin for his work on the elec-
tronic art manuscript, the PowerPoint animations and Christopher Findlay
the Flash animations of the figures in the e-text on University of Adelaide
MyEconLab. We thank Jeannie Gillmore and Laurel email: christopher.findlay@adelaide.edu.au
Davies for creating and managing our evergrowing
and ever more complex MyEconLab database. We also Michael Parkin
thank John Snelling of the University of Adelaide for University of Western Ontario
helping with news-based end-of-chapter problems email: michael.parkin@uwo.ca
and applications.
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xviii
xviii PREFACE
◆ Reviewers of the Seventh Edition Catherine Fletcher, Monash University

Gigi Foster, University of South Australia
Rod Duncan, Charles Sturt University Chris Gellar, Deakin University
Richard Dutu, Deakin University Mary Graham, Deakin University
Catherine Fletcher, Monash University Branka Krivokapic-Skoko, Charles Sturt University
Peter Harkness, Swinburne University Yun-Lok Lee, Southern Cross University
Yolanta Kwiecien, Monash University Elizabeth Manning, Deakin University
Paul Morris, University of Newcastle Ann Marsden, University of Tasmania
Munirul Nabin, Deakin University Stephen Mason, Southern Cross University
Peter Schuwalow, Monash University Pundarik Mukhopadhaya, Macquarie University
Zulfan Tadjoeddin, University of Western Sydney Muni Perumal, University of Canberra
Ella Reeks, University of Tasmania
John Rice, University of Adelaide
◆ Reviewers of the Sixth Edition Graham Richards, Trinity College, University
of Melbourne
Jayanath Ananda, La Trobe University Sveta Risman, Royal Melbourne Institute of
Siobhan Austen, Curtin Business School Technology
Carol Barry, Swinburne University of Technology Ali Saleh, University of Wollongong
John Bevacqua, Charles Sturt University Pasquale Sgro, Deakin University
Jonathan Boymal, Royal Melbourne Institute of Baljit Singh, La Trobe University
Technology Hazbo Skoko, Charles Sturt University
Mark Buchanek, Deakin University Sam Tang, University of Western Australia
Bob Catley, University of Newcastle Mehmet Ulubasoglu, Deakin University
Bronwyn Coate, Royal Melbourne Institute of Spiro George Vlachos, University of Adelaide
Technology Mark Weder, University of Adelaide
Maxine Darnell, University of New England
Sinclair Davidson, Royal Melbourne Institute of
Technology
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xix
ALTERNATIVE PATHWAYS THROUGH THE MICRO CHAPTERS
Micro Flexibility
Chapter 1 Chapter 5 Chapter 6 Chapter 8
What Is Economics? Efficiency and Equity Government Actions Public Choices and
in Markets Public Goods
Chapter 2 Chapter 7 Chapter 9
The Economic Problem Global Markets Economics of

in Action the Environment
Chapter 3 Chapter 4 Chapter 10
Demand and Supply Elasticity Monopoly
Chapter 15
Chapter 11
Monopolistic
Economic Inequality Competition
Chapter 12 Chapter 16
Consumer Choices Oligopoly Games

and Constraints and Strategies
Chapter 13 Chapter 17
Chapter 14
Producer Choices Decisions in
and Constraints Perfect Competition Factor Markets
Start here ... … then jump to … and jump to any of these after
any of these … doing the prerequisites indicated
xix
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xx
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xxi
TABLE OF CONTENTS
PART ONE MATHEMATICAL NOTE

INTRODUCTION 1 Equations of Straight Lines 24
A Linear Equation 24
Slope of Line 24
CHAPTER 1 ◆ WHAT IS ECONOMICS? 1
Position of Line 25
Definition of Economics 2 Positive Relationships 25
Negative Relationships 25
Two Big Economic Questions 3
Example 25
What, How and for Whom? 3 Summary 26
Can the Pursuit of Self-Interest Promote Study Plan Problems and Applications 27
the Social Interest? 5 Additional Assignable Problems and Applications 28
The Economic Way of Thinking 8
A Choice Is a Tradeoff 8 CHAPTER 2 ◆ THE ECONOMIC PROBLEM 29
Making a Rational Choice 8
Production Possibilities and Opportunity Cost 30
Benefit: What You Gain 8
Cost: What You Must Give Up 8 Production Possibilities Frontier 30
How Much? Choosing at the Margin 9 Production Efficiency 31
Choices Respond to Incentives 9 Tradeoff Along the PPF 31
Opportunity Cost 31
Economics as Social Science and Policy Tool 10
Using Resources Efficiently 33
Economist as Social Scientist 10
Economist as Policy Adviser 10 The PPF and Marginal Cost 33
Summary 11 Preferences and Marginal Benefit 34
Study Plan Problems and Applications 12 Allocative Efficiency 35
Additional Problems and Applications 12 Economic Growth 36
APPENDIX Graphs in Economics 13
The Cost of Economic Growth 36
A Nation’s Economic Growth 37
Graphing Data 13
Gains from Trade 38
Scatter Diagrams 14
Comparative Advantage and Absolute
Graphs Used in Economic Models 16 Advantage 38
Variables That Move in the Same Direction 16 Achieving the Gains from Trade 39
Variables That Move in Opposite Directions 17
Economic Coordination 41
Variables That Have a Maximum or a
Minimum 18 Firms 41
Variables That Are Unrelated 19 Markets 42
Property Rights 42
The Slope of a Relationship 20 Money 42
The Slope of a Straight Line 20 Circular Flows Through Markets 42
The Slope of a Curved Line 21 Coordinating Decisions 42
Graphing Relationships Among More Than READING BETWEEN THE LINES
Two Variables 22 The Rising Opportunity Cost of Food 44
Ceteris Paribus 22 Summary 46
When Other Things Change 23 Study Plan Problems and Applications 47
Additional Problems and Applications 49
xxi
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xxii
xxii CONTENTS
CHAPTER 3 ◆ DEMAND AND SUPPLY 51 CHAPTER 4 ◆ ELASTICITY 79

Markets and Prices 52 Price Elasticity of Demand 80
Calculating Price Elasticity of Demand 81
Demand 53
Inelastic and Elastic Demand 82
The Law of Demand 53
Elasticity Along a Linear Demand Curve 83
Demand Curve and Demand Schedule 53
Total Revenue and Elasticity 84
A Change in Demand 54
Your Expenditure and Your Elasticity 85
A Change in the Quantity Demanded Versus a
The Factors That Influence the Elasticity of
Change in Demand 56
Demand 85
Supply 58
More Elasticities of Demand 87
The Law of Supply 58
Cross Elasticity of Demand 87
Supply Curve and Supply Schedule 58
Income Elasticity of Demand 88
A Change in Supply 59
A Change in the Quantity Supplied Versus a Elasticity of Supply 90
Change in Supply 60 Calculating the Elasticity of Supply 90
The Factors That Influence the Elasticity of
Market Equilibrium 62
Supply 91
Price as a Regulator 62
Price Adjustments 63 READING BETWEEN THE LINES
Predicting Changes in Price and Quantity 64 Why a Crackdown on Illicit Drugs Increases
Crime 94
An Increase in Demand 64
A Decrease in Demand 64 Summary 96
An Increase in Supply 66 Study Plan Problems and Applications 97
A Decrease in Supply 66 Additional Problems and Applications 99
All the Possible Changes in Demand and
Supply 68
READING BETWEEN THE LINES
Demand and Supply: The Price of Coffee 70
MATHEMATICAL NOTE
Demand, Supply and Equilibrium 72
Demand Curve 72
Supply Curve 72
Market Equilibrium 73
An Example 73
Summary 74
Study Plan Problems and Applications 75
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xxiii
CONTENTS xxiii
PART TWO CHAPTER 6 ◆ GOVERNMENT ACTIONS IN

HOW MARKETS WORK 101 MARKETS 123
A Housing Market with a Rent Ceiling 124
CHAPTER 5 ◆ EFFICIENCY AND EQUITY 101 A Housing Shortage 124
Increased Search Activity 124
Resource Allocation Methods 102 A Black Market 124
Market Price 102 Inefficiency of a Rent Ceiling 125
Command 102 Are Rent Ceilings Fair? 126
Majority Rule 102
Contest 102 A Labour Market with a Minimum Wage 127
First-Come, First-Served 102 Minimum Wage Brings Unemployment 127
Lottery 103 Inefficiency of a Minimum Wage 127
Personal Characteristics 103 Is the Minimum Wage Fair? 128
Force 103 Taxes 129
Benefit, Cost and Surplus 104 Tax Incidence 129
Demand, Willingness to Pay and Value 104 A Tax on Sellers 129
Individual Demand and Market Demand 104 A Tax on Buyers 130
Consumer Surplus 105 Equivalence of Tax on Buyers and Sellers 130
Supply and Marginal Cost 105 Tax Incidence and Elasticity of Demand 131
Supply, Cost and Minimum Supply-Price 106 Tax Incidence and Elasticity of Supply 132
Individual Supply and Market Supply 106 Taxes and Efficiency 133
Producer Surplus 107 Taxes and Fairness 134
Is the Competitive Market Efficient? 108 Production Quotas and Subsidies 135
Efficiency of Competitive Equilibrium 108 Production Quotas 135
Market Failure 109 Subsidies 136
Sources of Market Failure 110 Markets for Illegal Goods 138
Alternatives to the Market 111 A Free Market for a Drug 138
Is the Competitive Market Fair? 112 A Market for an Illegal Drug 138
It’s Not Fair if the Result Isn’t Fair 112 Legalising and Taxing Drugs 139
It’s Not Fair if the Rules Aren’t Fair 114 READING BETWEEN THE LINES
Case Study: A Water Shortage in a Natural Creating a Fuel Shortage in China 140
Disaster 114
Summary 142
READING BETWEEN THE LINES Study Plan Problems and Applications 143
Is the Global Market for Roses Efficient? 116 Additional Problems and Applications 145
Summary 118
Prelims MICRO Aus 7e_ECO Prelims 7e 27/06/12 8:30 AM Page xxiv
xxiv CONTENTS
CHAPTER 7 ◆ GLOBAL MARKETS IN CHAPTER 8 ◆ PUBLIC CHOICES AND PUBLIC

ACTION 147 GOODS 171
How Global Markets Work 148 Public Choices 172
International Trade Today 148 Why Governments Exist 172
What Drives International Trade? 148 Government Failure 172
Why Australia Imports Cars 149 Public Choice and the Political Marketplace 172
Why Australia Exports Coal 150 Political Equilibrium 174
What Is a Public Good? 174
Winners, Losers and the Net Gain from
Problems That Require Public Choices 176
Trade 151
Gains and Losses from Imports 151 Providing Public Goods 177
Gains and Losses from Exports 152 The Free-Rider Problem 177
Gains for All 152 Marginal Social Benefit of a Public Good 177
Marginal Social Cost of a Public Good 178
International Trade Restrictions 153
Efficient Quantity of a Public Good 178
Tariffs 153
Inefficient Private Provision 178
Import Quotas 156
Efficient Public Provision 178
Other Import Barriers 158
Inefficient Public Overprovision 180
Export Subsidies 158
Providing Mixed Goods 181
The Case Against Protection 159
Private Benefits and Social Benefits 181
The Infant-Industry Argument 159
Government Actions in the Face of External
The Dumping Argument 159
Benefits 182
Saves Jobs 160
Bureaucratic Inefficiency 184
Allows Us to Compete with Cheap Foreign
Two Types of Political Equilibrium 185
Labour 160
Why Government Is Large and Growing 185
Penalises Lax Environmental Standards 160
Voters Strike Back 185
Prevents Rich Countries from Exploiting
Developing Countries 162 READING BETWEEN THE LINES
Avoiding Trade Wars 162 Reform of University Funding 186
Why Is International Trade Restricted? 162 Summary 188
Compensating Losers 163 Study Plan Problems and Applications 189
READING BETWEEN THE LINES Additional Problems and Applications 191
The Benefits of Free Trade 164
Summary 166
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(Original PDF) Microeconomics, 2nd edition by B.

Microeconomics 7th Edition by Jeffrey M. Perloff

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Christopher Findlay dedicates this book to Tania, Marek and Kasia.

Michael Parkin dedicates this book to all his students.

PART ONE PART THREE

and marginal benefit – and the possibility that Chapter 3

Real-world examples and applications appear in ◆ Features to Enhance Teaching

2. Economics of the Environment (Chapter 9): This 30 July 2010

Students find the analysis of the price effect in terms

supply and demand that changed the price of coffee. Decrease in S1

Figure 1 The Effects of the Colombian Crop

Rise in expected future

5. Oligopoly Games and Strategies (Chapter 16):

dominant firm coverage of earlier editions and given ■

demand and supply today.

Graphs That Show the Action Chapter Openers

all increase. Rise in global

global financial crisis ended a long period of eco- S

the action of greedy oil producers? Oil producers … and quantity

Chapter Objectives demand and supply determine the price of oil.

Key Terms Flexible Structure

◆ For the Student Study on the Go

◆ Acknowledgements Finally, we are deeply grateful to the editorial team

◆ Reviewers of the Seventh Edition Catherine Fletcher, Monash University

ALTERNATIVE PATHWAYS THROUGH THE MICRO CHAPTERS

Chapter 1 Chapter 5 Chapter 6 Chapter 8

Chapter 2 Chapter 7 Chapter 9

The Economic Problem Global Markets Economics of

Chapter 3 Chapter 4 Chapter 10

Demand and Supply Elasticity Monopoly

Consumer Choices Oligopoly Games

PART ONE MATHEMATICAL NOTE

CHAPTER 3 ◆ DEMAND AND SUPPLY 51 CHAPTER 4 ◆ ELASTICITY 79

PART TWO CHAPTER 6 ◆ GOVERNMENT ACTIONS IN

CHAPTER 7 ◆ GLOBAL MARKETS IN CHAPTER 8 ◆ PUBLIC CHOICES AND PUBLIC

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