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The new seventh edition of Price Theory and Applications adds extensive discussion of information, uncertainty, and game theory. It contains more than 100 real-world Examples illustrating the applicability of economic analysis not only to mainline economic topics but also to issues in politics, history, biology, the family, and many other areas. Price Theory and Applications uses recent published research to give students a glimpse into the scientific work done by professional economists and presents extended discussions of such far-ranging topics as rationing in wartime, import quotas, alleged monopolistic suppression of inventions, minimum wage laws, the effects of Social Security upon saving, fair division of disputed property, and whether one should pay ransom to a kidnapper.

Price Theory and Applications Cover

Theory is useless unless it leads to applications. But real-world problems remain a buzzing, blooming confusion absent a systematic theory to put them in intellectual order. Earlier editions Price Theory and Applications pioneered an approach, not totally new but given unusual emphasis by us, that weaves together economic theory and real-world applications. Most current intermediate microtheory texts have come to follow our lead, and also now try to enrich the theoretical exposition with selected applications. Our enthusiasm for and experience in discovering, describing, and analyzing how microtheory works out in the real world nevertheless lend a special strength to Price Theory and Applications.

To this end the many brief “Examples” that direct attention to specific applications remain a hallmark of Price Theory and Applications. These discussions generally describe recent research published in scholarly books and articles, and so also give students a better idea of the scientific work that professional economists actually do. (The media typically picture economists as a band of squabbling soothsayers – some saying business will be good, others always predicting doom. Students may be surprised to find that there are any scientifically validated results in economics.)

Two other key themes guide this text. First, that economics is not a body of facts or propositions to be memorized. It is instead a way of thinking about the world. There are diligent students who say, “Prof, just tell me what pages you want me to learn and I guarantee I’ll know every word.” But memorization is not enough. Even the ability to derive and prove logical or mathematical propositions does not suffice. Insight and intuition must also be cultivated. Insight and intuition tell us what theories or propositions apply in any given context. Yet not everything can be left to inspiration. Insight and intuition have to be earned by hard intellectual labor.

Second, economics as a universal science applies whenever humans (or even animals!) have to cope with resource scarcity. Traditional economic theory has been guilty of tunnel vision in focusing strictly upon rationalistic individual behavior and upon market interactions. Humans are not always entirely rational, and market interactions are only one of the many domains of social life. Market decisions are of course amenable to economic analysis. But so are personal choices (how many children to have, whether to live in the city or the suburbs, whom to seek as friends) and political ones (balancing between affluence and defense, between regulation of improper behavior and individual freedom, between relief for persons unable or unwilling to work versus providing incentives to those who are productive). Accordingly, the text employs a range of materials from scientific work in anthropology, psychology, political science, social biology, and other fields that all serve to illustrate economic principles.

Apart from meeting immediate classroom needs, we aimed to achieve growth potential. The material is ample enough in scope and rich enough in content to serve as reference and guide for additional self-study or coursework beyond the intermediate level. But perhaps the main reason for the wide coverage is to illustrate the wealth of fascinating implications and applications of economic theory.

A number of expository aids are provided to facilitate readability and comprehension. First, detailed descriptive legends accompany the diagrams. The analytical high points of a chapter can often be efficiently reviewed by studying the diagrams, with their legends, in sequence. Second, almost every chapter contains worked numerical exercises. Third, each chapter ends with a Summary and two groups of Questions – one group to test recollection and recall, the other to provide challenges for further thought and discussion. (Answers to about half of the questions appear at the back of the book.)

This seventh edition of Price Theory and Applications bears the subtitle Decisions, Markets, and Information. Reflecting recent exciting advances in economic analysis, the sub title highlights the increased emphasis in this edition upon the economics of information. There is new coverage of risk and its distribution in the economy, of information acquisition as a way of overcoming risk, and of rights in intellectual property – especially patents and copyright. Specific new topics include option value, the problem of “lemons,” herd behavior, and the informative content of advertising. The text employs game theory from time to time, with emphasis upon practical relevance rather thanonabstract theorems. Game theory is notably helpful in addressing topics such as oligopoly, public goods, and cooperation versus conflict.

Several additional features of this book improve upon conventional textbook coverage:

1. Traditional intermediate texts slight the topic of transaction costs. In Price Theory and Applications, the analysis of exchange subject to transaction costs shows, among other things, why and how a monetary commodity comes into being, why business firms exist, and how transaction costs affect the real-world relevance of the Coase Theorem.

2. Textbooks rarely discuss product quality and product variety. Price Theory and Applications examines how markets, under both competitive and monopolistic conditions, determine the quality levels and the product assortments that suppliers offer to consumers.

3. Saving and investment, often treated as topics entirely separate from mainline microeconomics, are explained in Price Theory and Applications in terms of the economic theory of choice and equilibrium over time. The analysis here provides a bridge to macroeconomics and to the business finance literature.

4. In addition to the traditional normative issues of welfare economics, Price Theory and Applications provides a unified treatment of public goods.

5. The final chapter of Price Theory and Applications presents a positive analysis of government. The same chapter puts forward a unique game-theoretic approach to the broad social problem of conflict versus cooperation.

As in previous editions, calculus is used only in marked mathematical footnotes.

As in past editions, The Instructor’s Manual for Price Theory and Applications, Seventh Edition contains teaching tips and expanded answers to a number of questions in the textbook, plus an assortment of additional numerical, essay, and multiple choice questions for each chapter.

Price Theory and Applications, Seventh Edition, is available now!

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