000			27817nam a2200145Ia 4500
999			_c176135 _d176135
020			_a9788131759400
040			_cCUS
082			_a338.5 _bDWI/M
245		0	_aMicroeconomics/ _btheory and applications _cDwivedi, D.N.
250			_a2nd ed.
260			_aDelhi: _bPearson, _c2012.
300			_axxvii,649p.
505			_aPart I Introduction 1. Introduction to Microeconomics / What Is Economics?—3 Economics Is a Social Science 4 Why Economizing Behaviour? 4 Two Major Branches of Economics 5 What Is Microeconomics?—6 Is Microeconomics a Positive or a Normative Science?—7 Microeconomics As a Positive Science 7 Microeconomics As a Normative Science 8 Methodology of Positive Economics: Model Building andTheorization—8 The Uses and Limitations of Microeconomic Theories—10 The Uses of Microeconomic Theories 10 Limitations of Microeconomic Theories 11 Limitations Do Not Matter Much 12 Review Questions and Exercises 12 Endnotes 13 Further Readings 14 2, The Economy: Its Basic Problems and Working System 15 What Is an Economy?—16 Economic Activities Are Interrelated and Interdependent 16 The Economic System Works Automatically 16 How an Economy Works?—17 The Circular Flow Model of a Simple Economy 17 The Basic Problems of an Economy—19 Problems in Maximizing Production and Optimizing Distribution 19 Problems in Achieving Gro)wth, Full Employment and Stability 20 V ... How Market Mechanism Solves the Basic Economic Problems?—21 Drawbacks of the Free Enterprise System—22 The Government and the Economy—24 The Mixed Economy System Is the Order of the Day 25 The Production Possibility Frontier—26 Some Implications of PPF 28 Shift in PPF 29 Review Questions and Exercises 31 Endnotes 32 Further Readings 32 Part II Market Mechanism: How Markets Work N 3. The Market Forces: Demand and Supply 35 The Concept of Market—36 The Demand Side of the Market—36 ./ Meaning of Demand 36 The Law of Demand 37 The Demand Schedule 37 The Demand Curve 38 The Factors Behind the Law of Demand 38 Exceptions to the Law of Demand 40 The Market Demand 40 Determinants of Market Demand 42 Demand Function 47 Shift in Demand Curve 50 The Supply Side of the Market—52 ^ Market Supply 52 ^ The Law of Supply 52 The Supply Schedule and Supply Curve -52 Shift in the Supply Curve 53 Supply Function 55 The Market Equilibrium: The Equilibrium of Demand and Supply-55 Determination of Price in a Free Market 55 The Concept of Market Equilibrium 55 Detprmination of Market Price 56 Market Mechanism: How Market Brings About Balance 56 Graphical Illustration of Price Determination 57 Price Determination by Demand and Supply Functions 58 Shift in Demand and Supply Curves and Market Equilibrium—59 Shift in Demand Curve 59 Shift in Supply Curve 60 Parallel Shift in Demand and Supply Curves 60 Stability of Market Equilibrium—62 Market Equilibrium Under Dynamic Conditions 62 Conclusion—66 Review Questions and Exercises 66 Endnotes 69 Further Readings 69 4. Elasticity of Demand and Supply 70 The Elasticity of Demand—71 Price Elasticity of Demand—71 The Arc and Point Elasticity 73 Measuring Arc Elasticity 73 Measuring Point Elasticity 75 Price Elasticity Varies Along the Demand Curve 78 The Slope of Demand Curve and Price Elasticity 80 Determinants of Price Elasticity of Demand—84 Measuring Price Elasticity from a Demand Function—85 Measuring Price Elasticity from a Linear Demand Function 86 ^ Price Elasticity from a Non-linear Demand Function 87 Price Elasticity and Sales Revenue—88 Price Elasticity and Marginal Revenue 89 Relation Between MR and AR 90 Price Elasticity and Total Revenue 92 Price Elasticity and Consumption Expenditure—94 Other Elasticities of Demand—95 Cross-Elasticity of Demand 95 Income Elasticity of Demand 96 Application of Demand Elasticity—98 Price Elasticity of Supply—98 Definition and Measurement 98 Determinants of the Price Elasticity of Supply 100 ^ Review Questions and Exercises 100 Endnotes 104 Further Readings 104 5. Application of Market Laws and Elasticities 105 Excise Tax: Its Effects and Incidence—106 Luifip-Sum and Ad Valorem Excise Tax 106 The Effects of Excise Tax on Production and Price 107 Who Bears the Tax Burden? 107 Production Subsidy and Its Effects—109 The Effect of Production Subsidy 110 Who Benefits from Production Subsidy? 111 Import Tariffs and Export Subsidies—111 Import Tariffs 111 Export Subsidy 112 ^ Review Questions 113 Endnotes 114 Further Readings 114 Part III Theory of Consumer Demand 6, Theory of Consumer Demand: Cardinal Utility Approach 117 Introduction—117 Cardinal Utility Approach to Demand Analysis—118 The Concept of Cardinal Utility and its Measurement 118 The Total and Marginal Utility 119 The Law of Diminishing Marginal Utility—119 • ^ Numerical Example 120 Graphical illustration 120 Assumptions 120 Consumers's Equilibrium; Cardinal Utility Approach—122 X Assumptions 122 1 Consumer Equilibrium: A Single Commodity Case 122 ' - ' Consumer Equilibrium: The Multiple Commodity 124 Derivation of Demand Curve—125 Drawbacks of Cardinal Utility Approach—127 Review Questions and Exercises 127 Endnotes 128 Further Readings 129 7. Theory of Consumer Demand: Ordinal % Utility Approach ^ 130 Ordinal Utility Concept and Its Assumptions—131 Assumptions of the Qrdinal Utility Theory 131 Indifference Curve—132 indifference Map 133 The Concept of Marginal Rate of Substitution (MRS) 134 Postulates of Diminishing MRS 135 Why the MRS Declines 136 Properties of Indifference Curves—137 Indifference Curves Have a Negative Slope 138 Indifference Curves Are Convex with Reference to the Origin 138 indifference Curves Neither intersect Nor Are Tangential to One Another 138 Higher indifference Curves Represent a Higher Level of Satisfaction Than the Lower Ones 139 Other Types of Indifference Curves—140 Perfect Substitutes 140 Complementary goods 140 Goods, Bads and Neuters—141 What Are the Bads and the Neuters? 141 Indifference Maps for Goods, Bads and Neuters 142 Budgetary Constraint and the Budget Line—145 What Causes Shifts in the Budget Line 146 Slope of the Budget Line 146 Consumer Equilibrium; The Ordinal Utility Approach—148 Corner Solution: The Extreme Choice 150 Composite Goods Case 151 Changes in Income and Consumer Behaviour—152 Income Effects on Consumer Behaviour Towards Normal Goods 152 Inferior Goods 153 Income and Consumption: The Engel Curve 154 Engel and Demand Curves 155 Engel Curve and Income Elasticity of Demand 156 Changes in Prices and Consumer Behaviour—157 Changes in Price and Consumer Behaviour: Case of Normal Goods 157 Derivation of Consumer Demand Curve 158 Graphical Derivation of Demand Curve 160 / Income and Substitution Effects of Price Change: Normal Goods Case—161 Hicksian Approach 161 Slutskian Approach 164 Comparison of the Hicksian and Slutskian Methods 165 Measurability of Income and Substitution Effects 166 Income and Substitution Effects: Inferior Goods—167 Effect of Rise in Money Income 167 Income and Substitution Effects of Price Change: Case of Inferior Goods 167 Giffen Paradox 169 ^ Comparison of Cardinal and Ordinal Utility Approaches—171 Similarity Between the Two Approaches 171 Superiority of the Indifference Curve Approach 171 Drawbacks of Indifference Curve Approach—172 Appendix 173 Review Questions and Exercises 174 Endnotes 177 Further Readings 179 8. Application of Indifference Curve Analysis 180 Introduction—180 Measuring Welfare Effects of Income and Excise Taxes—181 Choice Between Taxes 181 Measuring Effects of Excise and Income Subsidies—182 Measuring the Financial Cost of Excise Subsidy 182 Measuring the Financial Cost of Lump-Sum Income Subsidy 183 Making Choice of Policy 184 Measuring Welfare Effect of Commodity Exchange Between Individuals—184 Derivation of Labour Supply Curve—186 Income-Leisure Choice 186 Wage-Labour Offer Curve and Labour Supply Curve 188 Evaluating Rationing of Consumer Good—190 Rationing of One Commodity 190 Rationing of More Commodities 191 Review Questions and Exercises 193 Endnotes 194 Further Readings 194 9. Revealed Preference Theory " ^ 195 Introduction—195 Revealed Preference: Assumptions and Axioms—196 Assumptions 196 / Revealed Preference Axiom 196 Decomposition of Substitution and Income Effects and Derivation of Demand Curve—198 Derivation of Indifference Curve—199 Appraisal of Revealed Preference Theory—201 Review Questions and Exercises 202 Endnotes 202 Further Readings 202 10. Consumer Surplus n 203 Introduction—203 > Marshallian Concept of Consumer Surplus and Its Measurement—204 Assumptions 205 Critical Appraisal 205 Hicksian Method of Measuring Consumer Surplus—206 Measuring Consumer Surplus under Constant ML) of Money 206 Measuring Consumer Surplus under Variable MU of Money 207 Extentions of Hicksian Approach to Consumer Surplus—208 Hicks'Four Concepts of Consumer Surplus 208 Application of Consumer Surplus—211 The Deadweight Loss of Commodity Taxation 212 Deadweight Loss from Sales Tax: Tax on Consumers 212 Measuring Gains of Subsidy 215 Deadweight Loss of Price Control 216 Deadweight Loss of Trade Barriers 217 Review Questions 219 Endnotes 219 Further Readings 220 Part IV Theory of Production and Analysis of Cost 11. Theory of Production: Laws of Returns to a Variable Input 223 Introduction—223 Some Basic Concepts—224 Meaning of Production 224 Input and Output 224 f Short Run and Long Run 225 Production Function—225 Short-run and Long-run Production Function 227 Assumptions 227 Production with One Variable Input: The Short-run Laws of Production—228 The Laws of Returns to Variable Input (Labour) 228 ' Assumptions 228 Marginal Productivity of Labour 229 Average Productivity of Labour 230 The Three Stages in the Law of Diminishing Returns 230 Factors Behind the Laws of Returns 231 Applicability of the Law of Diminishing Returns 231 Graphical Derivation of Marginal and Average Product Curves—231 Derivation of Marginal Product Curve (MP^) 232 Derivation of Average Product Curve (AP^^) 233 The Three Stages of Production—233 The Three Stages of Production and Production Decisions—235 What About Stage II? 235 Review Questions and Exercises 235 Endnotes 237 Further Readings 238 12. Theory of Production: Laws of Returns to Two Variable Inputs 239 Introduction—239 The Isoquant Curve—240 Derivation of Isoquant Curve—240 Assumptions 240 Properties of Isoquant Curves—241 Isoquants Have a Negative Slope 242 Isoquants Are Convex to the Origin 242 Isoquants Do Not Intersect or Are Tangent to Each Other 242 Upper Isoquants Represent a Higher Level of Output 243 Marginal Rate of Technical Substitution (MRTS)—244 Isoquant Map and Economic Region of Production—245 IsoquantMap 245 Economic Region of Production 246 Other Forms of Isoquants—247 Perfect Substitutes and Linear Isoquants 247 The Fixed Factor Technology and L-shaped Isoquant 248 The Kinked or Linear Programming Isoquants 249 Elasticity of Technical Substitution—251 The Laws of Returns to Scale—252 Three Laws of Return to Scale 252 The Law of Increasing Returns to Scale 253 ^ ^ The Law of Constant Returns to Scale 254 The Law of Decreasing Returns to Scale 255 Production Function and Returns to Scale—256 Cobb-Douglas Production Function and Returns to Scale 257 / Laws of Variable Proportions and Returns to Scale Compared—258 Graphic Comparison 259 Are the Laws of Returns Compatible? 260 Can the Two Kinds of Laws Operate Simultaneously? 260 Appendix 260 Review Questions and Exercises 262 Endnotes 264 Further Readings 265 13. Optimum Combination of Inputs ^ 266 Introduction—266 Derivation of Isocost—267 The Least Cost Criteria of Optimum Input Combination—269 Criterion in Value Terms 270 Choice of Optimal Expansion path—271 Effects of Change in Input Prices—272 Change in Input Prices and Isocosts 272 Change in Input Prices and Expansion Path 273 Change in Relative Price of Inputs 273 Substitution and Resource Effects of Change in Input Prices 274 Review Questions and Exercises 276 Further Readings 276 14. Theory of Cost 278 Introduction—278 Cost Concepts—279 j Contents | xiii Accounting Cost Concepts 279 Analytical Cost Concepts 280 Policy Related Cost Concepts: Private and Social Costs 281 Theory of Cost: An Overview—281 Theory of Short-run Cost—282 Short-run Cost Measures 282 The Short-run Cost-Output Relationship 283 Short-run Cost Function and Cost Curves—286 Numerical Example 286 Derivation of Behavioural Cost Equations 287 Long-run Cost-Output Relationship—290 Derivation of Total Long-run Cost (LTC) Curve 290 Derivation of Long-run Average Cost (LAC) curve 292 Derivation of Long-run Marginal Cost (LMC) Curve 293 Optimum Size of the Firm in the Long Run 293 Economies and Diseconomies of Scale: Factors Behind Cost Behaviour—294 The Economies of Scale: Factors Causing Decrease in LAC 294 Diseconomies of Scale: Why LAC Increases 296 / Modern Approach to the Theory of Cost—297 Modern Approach to Short-run Cost Behaviour 298 What Happens to the Average Variable Cost (AVC) ? 299 The SAVC and SMC Curves 299 The Short-run Average Cost (SAC) Curves 300 Modern Approach to Long-run Cost Behaviour: The L-shaped Scale Curve 301 Derivation of the LAC Curve 302 Review Questions and Exercises 304 Endnotes 305 Further Readings 306 Part V Theory of Firm: Determination of Price and Output 15. The Objectives of Business Firms and Their Market Powers 311 The Objectives of Business Firms—311 Profit Maximization as Business Objective 312 Profit-Maximization Conditions 312 Numerical Illustration 314 Graphical Instruction 315 Controversy on Profit-Maximization Objective 317 Alternative Objectives of Business Firms 318 Conclusion 321 The Market Structure and Power of Firms—321 Perfect Competition 322 Imperfect Competition 323 f/lonopoly 323 A Prelude to the Theory of Firm—324 Review Questions and Exercises 324 Endnotes 325 Further Readings 325 16. Price and Output Determination under Perfect Competition 327 Characteristics of Perfect Competition—328 Perfect versus Pure Competition 329 Role of a Firm in a Perfectly Competitive Market—329 What Are the Firm's Options 330 \ Short-run Equilibrium of the Firm—330 Assumptions 330 Does a Firm Always Make Profit in the Short-run? 331 Shut-down or Close-down Point 332 / Derivation of Supply Curve: A Digression—333 Derivation of Firm's Supply Curve 333 Derivation of Industry Supply Curve 334 Short-run Equilibrium of Industry and Firm—334 Link Between Short-run Equilibrium of the Industry and the Firm 335 Long-run Equilibrium of the Firm and Industry—336 Equilibrium of the Firm in the Long-run 336 Equilibrium of Industry 337 Long-run Supply Curve of a Competitive Industry—338 ^ Constant Cost Industry 338 Increasing Cost Industry 339 > Decreasing Cost Industry 340 ^ . Whether Decreasing Cost 341 ' Conclusion—341 Review Questions and Exercises 341 Endnotes 343 Further Readings 343 17. Price iand Output Determination Under Monopoly 344 Introduction—344 Monopoly and Sources of Monopoly Power—345 Definition and Features 345 Sources and Kinds of Monopolies 346 Cost and Revenue Curves Under Monopoly—346 AR and MR Curves under Monopoly 347 Short-run Equilibrium of the Monopoly: Price and Output Determination—348 Monopoly Equilibrium by Total Revenue-Total Cost Approach 349 Monopoly Equilibrium by MR-MC Approach 350 Algebra of Profit Maximization: A Numerical Illustration 351 Does a Monopoly Firm always Make Pure Profit? 352 Profit Maximization by Using MC and Price Elasticity 354 No Supply Curve Under Monopoly: A Digression—354 Monopoly Equilibrium in the Long Run—355 Capacity Utilization Under Monopoly—357 Equilibrium of a Multi-plant Monopoly—358 The Long-run Adjustments 359 Price Discrimination Under Monopoly—361 Price Discrimination 361 Necessary Conditions for Price Discrimination 361 Degrees of Price Discrimination 362 Is Price Discrimination Desirable? 365 / The Gain to Monopolist from Price Discrimination 367 Monopoly Vs. Perfect Competition—369 Comparison of Long-run Price and Output 369 The Deadweight Loss under Monopoly 370 Some Other Monopoly-related Issues—373 Incidence of Taxes and Effect of Subsidy Under Monopoly 373 Peak-Load Pricing by a Monopoly 376 Government Regulation of Monopoly Prices—378 Measures of Monopoly Power—379 Measures of Monopoly Power 379 Appendix 381 ^ n Review Questions and Exercises 384 ^ Endnotes 387 Further Readings 388 18. Price and Output Determination Under Monopolistic Competition 389 Introduction—389 Monopojistic Competition: Definition and Characteristics—390 Definition of Monopolistic Competition 390 Characteristics of Monopolistic Competition 391 Chamberlin's Theory of Monopolistic Competition—392 Basic Elements of Chamberlin's Theory 392 Product Differentiation and Firm's Perceived Demand Curve 392 Selling Costs and Firm's Cost Structure 394 Concept of Industry and Product Groups 397 Firm's Equlilbrlum Under Monopolistic Competition—397 Assumptions 398 Short-run Equilibrium of the Firm 398 Long-run Equilibrium of the Firm 400 Excess Capacity Under Monopolistic Competition—401 Ideal Output and Excess Capacity 401 Non-price Competition and Excess Capacity 403 Selling Cost and Firm's Equilibrium: Non-price Competition—404 Individual Equilibrium with Selling Cost 404 Group Equilibrium 405 Monopolistic Competition Versus Perfect Competition: A Comparison—407 Criticism of Chamberlin's Theory of Monopolistic Competition—408 Appendix 410 Review Questions and Exercises 414 Endnotes 416 y Further Readings 417 / 19. Price and Output Determine Oligopoly 418 Introduction—418 Oligopoly: A Market of Few Sellers—419 Definition of Oligopoly 419 Factors Causing Oligopoly 419 Features of Oligopoly 420 The Oligopoly Models: An Overview—421 Duopoly Models of Oligopoly—422 Cournot's Duopoly Model 422 > Bertrand's Duopoly Model 427 Edgeworth's Duopoly Model 428 Stackelberg's Leadership Model 429 Oligopoly Models—430 Non-Collusive Models of Oligopoly 430 Sweezy's Model of Oligopoly: Kinked-Demand Curve Model 432 Collusive Model of Oligopoly—436 What is a Cartel Form of Collusion? 436 Price Leadership Models 441 Price Leadership by a Low-Cost Firm 442 Price Leadership by the Dominant Firm 445 Tire Barometric Price Leadership 449 Baumou's Theory of Sales Maximization: An Alternative Theory—449 Baumol's Model without Advertising 450 Baumol's Model with Advertising 451 The Game Theory—453 The Nature of the Problem: Prisoners' Dilemma 453 Application of Game Theory to Oligopolistic Strategy 454 Concluding Remarks—456 Review Questions and Exercises 457 Endnotes 459 Further Readings 461 Part VI Factor Market and Factor Pricing 20. The Factor Market: Factor Demand and Supply 465 Introduction—465 The Theory of Distribution and Factor Pricing: An Overview—466 Peculiarities of Factor Demand and Supply 467 Development of Theories of Factor Pricing 467 Factor Demand: Why a Factor is Demanded—467 Factor Demand is a Derived Demand 468 tvlarginal Revenue Productivity: The Basic Determinant of Facto/Demand 468 Marginal Productivity and Factor Demand—469 Factor Supply: Supply of Labour—470 Derivation of Individual Labour Supply Curve 471 fiAarket Labour Supply Curve 472 Determination of Market Wage Rate: A Simple Theory—473 Shift in Factor Market Equilibrium and its Stability 474 Review Questions and Exercises 474 Endnotes 475 Further Readings 475 21. Wage Determination under Perfect Competjtion 477 Introduction—477 Wage Determination in a Perfectly Competitive Market—478 Derivation of Labour Demand Curve 478 Derivation of Labour Demand Curve with Two Variable Inputs 483 Industry Demand Curve for a Variable Factor: Labour 484 Determination of Market Wage Rate 485 Non-Homogeneous Labour and Wage Differentials—486 Dynamic Wage Differentials 487 Static Wage Differentials 487 Wage Differentials due to Heterogeneity of Labour 487 The Nature and Causes of Persisting Wage Differentials 489 Summary—490 Review Questions and Exercises 490 Endnotes 491 Further Readings 491 22. Wage and Employment Determination under Imperfect Competition 493 Introduction—493 Wage Determination Under Product Monopoly and Perfect Competition in Labour Market—494 Derivation of MRP^ Curve under Product Monopoly 495 Expioitation of Labour by Monopoly 498 Wage Determination Under Product Monopoly and Factor Monopsony—500 Marginal Cost of a Variable Factor (Labour) 501 Wages and Employment under Monopsony: Single Variable Factor (Labour) 502 Factor Price and Employment under Monopsony: Two Variable Factors Case 502 Perfect Competition In Commodity Market and Monopoly in Labour Market: The Case of Labour Union—505 Wage Determination Under Bilateral Monopoly: The Case of Cpllective Bargaining—506 Equilibrium under Bilateral Monopoly is Indeterminate 506 Indeterminateness of Bilateral Monopoly 507 Labour Union and Monopsonistic Exploitation 508 Application of the Wage Determination Theory—509 Effects of Minimum Wage Laws in Perfectly Competitive Markets 510 Why is Minimum Wage Law Justified? 512 Minimum Wage Laws, Monopsony and Trade Unions 512 Review Questions and Problems 514 Endnotes 514 Further Readings 515 > 23. Theory of Rent 516 Introduction—516 Land as a Factor of Production—516 Historical Background of Rent Theory—517 The Ricardian Theory of Rent—518 Ricardian Definition of Rent 518 Th§ Ricardian Theory of Rent 518 Criticism 519 Transfer Earning and Economic Rent: The Modern Approach—519 Elasticity of Factor Supply and Economic Rent 520 Quasi-rent: The Short-term Earning of Fixed Factors—522 Graphical lliustration of Quasi-rent 522 Is Rent Price Determined or Price is Rent Determined?—524 — A Classical Controversy 524 Modern View 524 Rent Controls: An Application of Rent Theory—525 Does This Happen in Reality? 526 'Who Loses and Who Benefits?' 526 Review Questions and Exercises 527 Endnotes 527 Further Readings 528 24. Theories of Interest and Investment Decisions 529 introduction—529 Capital as a Factor of Production—530 Some Early Thoughts on Interest Theory—530 Theories of Interest—531 Bohm-Bawerk's Theory of Interest 531 Fisher's Theory of Interest: The Time Preference Theory 532 Criticism 533 The Classical Theory of Interest 534 Keynes' Criticism of Classical Theory 535 / The Loanable Fund Theory of Interest 536 Classical vs Neo-Classical Theory of Interest 536 Criticism 537 Interest and Investment Decisions—538 The Time Value of Money 538 Present Value and Investment Decisions 538 NPV and Investment Decision 540 \RR and Investment Decision 540 IRRs vs Present Value 541 Risk, Uncertainty and Investment Decisions—544 Risk-Adjusted Discount Rate Approach 544 Properties 545 The Mean-Standard Deviation Method 545 . The Finite-Horizon Method 545 n n n Drawback 546 The Probability Theory Approach 546 Review Questions and Exercises 548 Endnotes 549 Further Readings 550 25. Theories of Profit 551 Introduction—551 Meaning of Pure Profit—551 Profit Theories: What Are the Sources of Profits?—552 Walker's Theory of Profit: Profit Is Rent of Ability 552 Clark's Theory of Profit: Profit Is Reward for Dynamic Entrepreneurship 553 Hawley's Risk Theory of Profit: Profit Is Reward for Risk Bearing 555 Knight's Theory of Profit: Profit Is a Return to Uncertainty Bearing 556 Schumpeter's Innovation Theory of Profit: Profit Is Reward for Innovations 557 Does Profit Enter the Cost of Production?—559 Review Questions and Exercises 559 Endnotes 560 Further Readings 560 26. Product Exhaustion Theorem 561 Introduction—561 The Adding-up Problem—562 Euler's Theorem—562 The Clark-Wicksteed-Walras Theorem—563 ^ Change in Relative Factor Shares and Income Distribution—565 The Elasticity of Factor Substitution and Relative Factor Shares 565 Technological Progress and Income Distribution—567 ^ Neutral Technological Progress 568 Capital Deepening 568 I Labour Deepening 568 Review Questions and Exercises 569 Endnotes 570 Further Readings 570 Part VII General Equilibrium and Welfare Economics 27. General Equilibrium Analysis ^ 573 introduction—573 Interrelationship and Interdependence of Markets—574 Interrelationship between the Markets 574 Interdependence of Markets 575 The Conditions of Static General Equilibrium—576 The Condition for Consumers' General Equilibrium 576 The Condition for Production General Equilibrium 577 The Condition for Producers' General Equilibrium 577 Thb Condition for Factor Qwners' General Equilibrium 577 General Equilibrium in Exchange—577 Edgeworth Box Diagram 578 The Condition for General Equilibrium in Exchange 579 Efficient Allocation of Goods 580 General Equilibrium in Production—581 The Condition for General Equilibrium in Production 582 - Producer's Equilibrium in a Competitive Input Market 583 The Production Possibility Frontier—584 The Slope of PPF and Marginal Rate of Transformation (MRT) 585 General Equilibrium in Competitive Product Market—586 Review Questions and Exercises 587 Endnote 588 Further Readings 588 28. Welfare Economics: Pareto Optimality 589 introduction—589 Definitions and Nature of Welfare Economics—590 Definition of Welfare Economics 590 is Welfare Economics a Positive or a Normative Science? 590 The Concept and Measurement of Social Welfare—591 Some Early Concepts of Welfare 591 Pareto's Concept of Welfare 591 Pareto's Welfare Economics—592 Pareto Optimum: Definition 592 ^ Pareto Optimality Conditions 593 Assumptions 594 Pareto Optimality in Exchange 594 Pareto Optimality in Production: Optimum Aiiocation of Factor inputs 596 Optimum Distribution of Goods Between Firms: Optimum Specialization of Firms 597 Summary of Pareto Optimally Conditions 600 Some Additional Conditions of Pareto Optimality 601 Total Conditions of Pareto Optimality 601 Perfect Competition and Pareto Optimality—601 Efficiency in Exchange 602 ^ Efficiency in Production 602 ^ Efficiency in Production and Exchange 602 Some Exceptions 603 Externalities and Pareto Optimality—604 Externalities in Production 604 External Economies in Production 605 External Diseconomies in Production 606 Externalities in Consumption 607 External Economies in Consumption 607 Extdrnai Diseconomies in Consumption 608 Externalities of Public Goods 609 indivisibility and Pareto Optimality 610 Conclusion—610 Review Questions and Exercises 611 Endnotes 613 Further Readings 614 29. New Welfare Economics 616 Introduction—616 . The Kaidor-Hlcks Compensation Criterion—617 . Shortcomings of Kaldor-Hicks Criterion 618 The Scitovsky Double Criteria—620 The Bergson Criterion: The Social Weifare Function—620 Weakness of Bergson Criterion 621 Arrow's Theorem of Democratic Group Decision—622 Problems in Arrow's Theorem 622 Grand Utility Possibility Frontier and Welfare Maximization—623 Derivation of Grand Utiiity Possibility Frontier 623 Determination of the Point of Bliss: The Point of Maximum Social Welfare 624 \ // The Theory of Second Best—625 Lipsey-Lancaster Refute the Second Best Theory 626 Conclusion—626 Review Questions and Problems 627 / Endnotes 627 30. Market Failures and Public Goods 629 Introduction—629 Growth of Monopoly Power and Market Failure—630 Imperfect Market Information—631 . Existence of Public Goods—632 What Are Public Goods? 632 Characteristics of Pure Public Goods 633 ^ 'j Public Goods and Market Failures 634 Externalities and Market Failure—635 > Public Provision of Public Goods—635 ,, • Externalities and Their Correction—636 Treatment of External Costs 637 '' Treatment of External Benefits 638 Review Questions and Exercises 639 Endnotes 639 ^ Further Readings 640 y Index Q41 /
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