: Publication

Microeconomics is the study of individual and firm motivations in the context of culturally influenced perceptions of the environment. The subject provides the foundation for understanding historical and current period economic outcomes. This text provides an explanation of the relationship between assumptions of behavioral motivations and the actions of economic agents, and it allows the reader to recognize how assumptions influence social norms and how social norms, in turn, then promote economic outcomes.

FOUNDATIONS IN MICROECONOMICS is part of The Framework in Sustainable Practices series, and consistent with the aims of the series, it engages students of economics in the significance of the relationship between microeconomic assumptions and economic outcomes as they relate to sustainability. The topics and discussions challenge the reader to contemplate the role of cultural norms and economic literacy in answering whether consumption decisions implicitly include values. The intent of the text is to raise awareness of the implications of individual purchasing decisions and, specifically, to initiate readers in the self-evaluation of their individual values and the values embedded in their consumption behavior. The perspective taken is that awareness of the holistic impact of consumption behavior may be a significant catalyst to promoting a culture of sustainability.

Introduction  xi

About the Author xiii

Chapter 1 Foundations and Context of Economic Thought 

Timeline of Economic Thought 1

Early Economic Thought 3

Plato and Aristotle 4

The Role of Biblical Verse 5

Middle Ages 5

The Protestant Reformation 6

Martin Luther (1483–1546) 6

John Calvin (1509–1564) 6

Mercantilism 7

Physiocrats 8

Classical Economics 9

Adam Smith (1723–1790) 9

Jeremy Bentham (1748–1832) 10

Thomas Malthus (1766–1834) 11

David Ricardo (1772–1823) 12

Karl Marx (1818–1883) 13

Principles of Economics 14

Chapter 2:  Defining Economics

Reconciling Economic Theory and Historical Context 22

Perception of Resource Value, Market Outcomes, and Price 24

Market Distortions, Externalities, and Failure of Market Equilibrium 24

Market Prices, Values, and Common Goods 30

Conscious Consumption and the Social Norm of Sustainability 32

Chapter 3:  Trade-offs, Opportunity Costs, and Cost Benefit Analysis

Production Possibilities Frontier 40

Cost-benefit Analysis 42

Efficiency 43

A Macroeconomics Perspective 44

Opportunity Cost 46

Chapter 4:  Rational Economic Agents: Consumer and Producer Theory

Theory of the Consumer 50

Utility 50

Income Constraint 52

Utility Maximization 54

Theory of the Firm 56

Economic Profit 57

Chapter 5:  Supply, Demand, and the Development of Market Systems

Types of Goods and Services 62

Rose of Graphs 62

Demand and the Law of Demand 62

Movements Along the Demand Curve 63

Shifts of Demand 63

Supply and the Law of Supply 66

Movements Along the Supply Curve 66

Shifts of Supply 66

Market Equilibrium 68

Chapter 6:  Elasticity

Elasticity of Demand 74

Determinants of Price Elasticity of Demand 74

Income Elasticity of Demand 76

Cross-price Elasticity of Demand 77

Elasticity of Supply 78

Price Elasticity of Supply 79

Chapter 7:  Public and Common Goods

The Tragedy of the Commons 84

The Role of Culture Is Averting and Promoting Tragedy 85

Indigenous Relationship with the Commons 85

Colonists’ Promotion of “Tragedy” 87

Chapter 8:  Maximizing Total Surplus

Regulatory Intervention 92

Price Controls 93

Price Ceilings 93

Price Floors 94

Taxation and Subsidies 96

Taxes 96

Tax and Elasticity 97

Tariffs and Trade 98

Subsidy 99

Chapter 9:  Externalities

Negative and Positive Externalities 103

Taxation and Externalities 106

Property Rights and Public Goods 107

Chapter 10:  Perfect Competition 

Perfect Competition 113

Price Taker 114

Price and Marginal Revenue 115

Costs 116

Profit Maximization 117

Economic Profit 117

Shutdown 119

Firm’s Short-run Supply Curve 120

Long-run Competitive Equilibrium 122

Efficiency of the Long-run Competitive Equilibrium 123

Long-run Industry Supply 124

Increasing Cost Industry 124

Constant Cost Industry 124

Decreasing Cost Industry 126

Chapter 11: Monopoly

Creating a Monopoly 129

Legal Barriers to Entry 130

Natural Monopoly and Monopoly 131

Price Searcher 132

Monopoly Compared to Perfect Competition 134

Deadweight Loss 135

X-inefficiency 135

Rent Seeking 135

Price Discrimination 136

Degrees of Price Discrimination 137

Monopolistic Competition 137

Chapter 12:  Oligopoly

Theories of Oligopoly 144

Kinked Demand Curve Theory 144

The Price Leadership Model 145

Cartel Theory 147

Game Theory and the Prisoner’s Dilemma 149

The Prisoner’s Dilemma: Business Application 151

Chaper 13:  Perception and Economic Outcomes: The Role of Microeconomics in Sustainability

Promoting Sustainable Outcomes 154

Economics and Sustainability 156

Concluding Comments 157

Index 161

Madhavi Venkatesan earned a PhD, MA, and BA in Economics from Vanderbilt University, a Masters in Sustainability and Environmental Management from Harvard University, and a Masters In Environmental Law and Policy from Vermont Law School. She has contributed to numerous books and journal articles on the subject of sustainability and economics. In 2017, she was awarded the Fulbright CySip Distinguished Lectureship to the Philippines and has been the recipient of other grants and awards related to her interests in sustainable economic development. Her present academic interests include the integration of sustainability into the economics curriculum.

Prior to re-entering academics, Madhavi held senior level positions in investor relations for three Fortune 250 companies. In this capacity she was a key point of contact for investors and stakeholders and was instrumental in the development of socially responsible investing strategies and corporate social responsibility reporting. She started her financial services career after completing her post-doctoral fellowship at Washington University in St. Louis.

Madhavi resides on Cape Cod, Massachusetts with her son and their two dogs, Oscar and Oliver.