Oxford: Oxford University Press. Ellison Glenn Dixit, A. Lawlessness and Economics. Do, Q. Doing Business. Understanding regulations for small and mediumsize enterprises. The World Bank: Washington, D. Universal Economics shows the critical importance of property rights to the existence and success of market economies.
They show how the crucial role of prices in a market economy cannot be well understood without a firm grasp of the role of money in the modern world. The Alchian and Allen application of information and search-cost analysis to the subject of money, price determination, and inflation is unique in the teaching of economic principles.
Armen A. Alchian , one of the twentieth century's great teachers of economic science, taught at UCLA from to Jump to Page.
Search inside document. All rights reserved. Grass Foreword : This edition of University Economics is subtitled Elements of Inquiry to emphasize that economics enables a more accurate inquiry into how our economy works and how our behavior. This version is based on the earlier editions and on Exchange and Production, a paperback version of the rst portions of University Economics.
Still, economics, like any substantial body of analysis and information, is not something to be acquired by mere reading, any more than is i chemistry, biology, or physics. Carefu study and exercise are essential. The book is not intended to train professional economists. It is directed to the student who is interested in learning about economics in a one-semester or one-year course, The simplest funda- mentals are adequate for that puxpose.
A test of any theory or science is its ability to explain reality consistently. Economics passes that test. This book is an introductory exposition of economic analysis, with emphasis on its usefulness and validity. Students can casily learn the concepls and theorems, but application to real events and to their interpretation is difficult to master. The appropriateness of stressing the fundamentals of analysis is evidenced by the statement of an economist, Alain A.
Enthoven, who had filled a government position of great responsibility: ss the tools of analysis that we.. The requirements for success in this'line of work are a thorough understanding of and, if you like, belief in the relevance of such concepts as marginal products and costs in complex situations, combined with a good quantitative sense.
The reason Ph. In this edition, the theory covering choice, demand, exchange, and supply has been extended beyond the narrow, private-property, wealth-maximizing bebavior.
The analysis of cost and its relation to various dimensions of output has been modernized to include mass-production economies. The startling advances provided by the role of information and transaction costs have been integrated into the analysis, explaining much behavior as well as laying a foundation for analysis of fluctuations in national income and em- ployment and personal income.
The use of time in purchasing and consumption is also given more recognition. The chapter on costs and outputs the cost curves has been lightened in detail and depth. Study questions are referred to at appropriate places in the text so that the student will at that point read the questions and try to answer them as an exercise in applying the material, Instead of being cocktail conversation questions, they 1 reinforce the earning of concepts and principles, 2 develop a familiarity and ease in applying economic theory, 3 test the student's progress, and 4 stimulate exploration in slightly more advanced aspects not covered in the text.
Most novel to economics, though not to texts in other sciences, is the inclusion of answers to half of the questions. In the question sections, answered questions have a boldface number. Answers serve two Purposes: to guide and give the student confidence in his progress and to demonstrate that economic problems can have testable answers.
These will enable the instructor to give more detail in elasstoom discussion, Acknowledgment of aid to specific persons was made in earlier editions. But now so many have aided in so many ways that the fist would be too tong to print here.
We express our apologies for not listing them and our genuine gratitude for their aid—and make the usual disclaimer of attributing blame to them for any errors.
State University and David Ramsey of the University of Missouti In earlier printings of this third edition, the paragraph of acknowledgments was inexcusably and accidentally omitted.
If you can follow it, you are adequately prepared. The arithmetic, chart reading, and interpretation are presented by simple ex- amples in imaginary economic contexts. Numbers are chosen primarily to make computa- tions and relationships easy to see, rather than to reflect reality.
The more tees produced in a day, the greater the costs of that day's output. The change of two magnitudes in the same direction is called a positive relationship.
Nothing is assumed about causal connection in saying relationship exists. Whether or not any causality runs either way from one magnitude to the other is presently of no concert. Figure O-1 portrays that assumed between costs and number of tees. The height of each bar indicates tofal costs of the number of tees to which it corresponds.
The shaded part of the bar portrays the increment to total costs consequent to producing one more, We. Could draw a smooth line along the tops of the bars to indicate total costs without show- ing a lot of bars; this is done in Figure to make a cleaner looking chart.
You will see that the line passes through several dots, each representing a combination of an inte- gral ie. So fractional amounts of even non-divisible things do make sense, if interpreted as rate of production per day. Usually the graph can also be read the other way. How many could be produced? The total costs of Table are again shown in Teble , slong with average cost per tee and marginal cost of tees. The average cost is the total cost per day divided by the number of tees per day.
Compute the average cost of 5 and of 6 tees, If you agree with the numbers shown, proceed; if not, give up. Average costs are total costs divided by number of tees produced daily. It is the increase in total cost of six over the cost of 5. Unless you always keep these three concepts— 1 total, 2 average and 3 marginal—cleatly separated, you will almost certainly not acquire a good grasp of economic principles. What cost? Total, average, or marginal? Each is different.
But there lurks still another potential ambiguity. In the present example that seems clear enough. But to see how things can get muddied up in other contexts, we give you the following example. Add a fifth clerk, Mr. Now it is erroneous, but tempting, to infer that Mr. Relationship between total cost and tees produced ts Positive, for both increase or decresse together.
Not necessarily. Line Chart of Total-Cost-Output Relationship Line chart shows more clearly how total cost varies with daily output of tees. Hoight of line at each output measures. In fact, often it cannot even be detected or conceived, For example, you have a team of four men rowing a boat with a trailing net to catch fish. You add a fifth man to row or help tend the net.
How can you make any meaning of what the fifth man himself caught? You can't. If you think the average per man is interesting you may use it, too—but it has a clear name, the average.
Taking the total costs 2s the correct initial data, check the average cost and marginal costs calculations. Average costs are shown by line through dots, to avoid cluttering graph. What will be the average cost of 9? Won't it raise your aver- age? Area under marginal cost curve Is also measure of total cost. For all those, the marginal cost is greater than the average, and the average cost rises in that output range.
Af you examine all the marginal costs for tees of you will see that the marginal cost is less than the average, 30 the average falls with increases in outputs. Always, where the marginal value exceeds the average value, the average must be increasing, And if the marginal value of the variable is less than its average, the average must be decreasing.
The marginal cost bars are exactly the same as the shaded sections at the top of the total cost bars in Figure We quickly see that the marginal costs at first decrease and then increase, Note also that the sum of all the marginal costs up through 7 tees is the total cost of 7 units. This-general equality between the sum of marginal costs and the total cost is rue for every output, by definition. Also shown are average costs per unit of each output, as dots connected by a smoothed line.
The same figure is repeated as Figure but with lines rather than bars. The total cost of 7 units of output is shown in three ways. The average cost of 7 8. If you see that both the area under the marginal cost curve and the rectangular area formed by the average cost curve height at 7 units represent the total cost, then you have passed the hardest arithmetic and graphic interpretation test.
The lower the price, the mote that can be sold at any price. Do not be surprised to get some nega- tive marginal receipts. And in any event do the atithmetic without worrying much about why the relationship is shown asit is. TABLE Which has the larger area? We have some algebra!
You should know that 1. If so, fine! Exercise Graph for Recelpts-Units-Sold Relationship You are to complete set of dots afd draw lines of average revenue and marginal revenue.
Relationship of price and units sold is negative. Is relationship between total sales receipts positive, negative, or both? Its, You have demonstrated adequate knowledge of arithmetic, graphics, algebra, and analytic geometry. So long : as you understand it, later exercises will make it familiar and easy. It really is, or will be, i easy, if you'l just give a try. You will probably find that your instructor will help make i it easy and will cleverly take you on to more mathematics with no trouble at all.
Two villains—nature and other people—prevent us from having all we want. Nature is niggardly: it provides fewer resources than we could use, and much of what is available is made useful only by hard work. As for other people, the problem stems not from malevolence: their wants and ours simply exceed what is available. Do not suppose that if they were less greedy, more would be within our grasp. Greed impels them to produce more, not only for themselves, but, miraculously, more for us, too—provided that productivity-inducing arrangements exist.
To satisfy every conceivable whim and desire? Of every person? Itis a frustrating fact that the world is a poor place. But this expresses merely preference for one collection of output instead of another. Society can achieve a production point on or inside the GB boundary line but not outside that boundary, which denotes its present productive powers and tastes for leisure.
Point I has more guns; II, more butter. Which will be chosen? Or will it underproduce at a point inside the bounded area? Scarcity, Efficiency, and Choice Illustrated by Production- Possibility Boundary The curved tine portrays largest combinations of amounts of guns and butter producibie in the economy, Any point on the tine.
No combination of guns and butter outside the curved line eg, point IV can be achieved by the economy given its productive Powers and preference for leisure. Less would be produced if the pro- ductive resources were unemployed or used inefficiently—as, for example, at point Ill. In some manner society selects a point on the boundary or inside it. Productive efficiency means hat the economy is an the pro- duction boundary. We shall be studying the means for determining what Pushes the economy to that line and to what point on that line.
Why the Curve has the shape shown here will be discussed lator. This means society becomes richer by acquiring improved technology ot by more resources ot both. Even more is involved in the response to scarcity. What detetmines how much each person produces and gets of that totat? And what determines the particular mix of goods he consumes? These and more subtle issues, to be elaborated later, constitute the area of economic study. Growth of Economic Productive Powers of the Economy A richer, more praductive economy Is represented by a production-possi- bility boundary that is higher and more to the right, as for compared to , Growth can occur in several ways.
A greater production-possi- bility boundary is usually Induced by a larger labor force. That cannot be indicated by this diagram, which gives only the social totals. Which would represent greater productive power? You should refer to these questions when their numbers appear in the text—and to the selected answers, at the end of the book.
Who or what directs this vast production-and-distribution system? In small and intimate matters, willy- nilly individual decision making may be tolerable, but to resolve the vital, over-all, aggregate problems, it seems that someane must be in charge.
But American economic activity is not directed, planned, or controlled by any eco- nomic czar—governmental or private. No person or group poses detailed questions of how the community is to use its resources, and no one imposes comprehensive answers to the questions. Yet such problems—large and small—somehow are solved daily. No agency is appointed to ensure that adequate food reaches every city and is allocated among competing claimants—and yet the people eat.
No farmer adds up the total demands for food in a city, comparing the total with the amount being shipped to the city, to make sure becatse of his compassion that adequate supplies will be available. Comprehension of these larger effects sequires economic theory, even if virtually none is required for individual deci- sions. Three Attributes of Economic Analysis To help understand what economics is, three methodological attributes should be Aarified.
It is no more proper for the economist than for any other person to sit on Mt. Olympus and decree whiat is desirable, though everyone may in fact make such pronouncements. Valid economic theory exists and is applicable to al! For the present, it is sufficiently accurate to define capitalism as a system of exchangeable private-property rights in goods and services, with the central government protecting these rights.
Private-property rights, in turp, can be defined as the Tights of owners to choose the use of their goods and resources including labor and time as they see fit. If a rock is said to be my property and a piece of glass is yours, I have control over only the rock, and you over only the glass; for me to throw my rock through sour glass without your permission would exceed my rights to use only my goods as I wish because it would usurp your rights to use only your property as you see fit.
In socialism, rights to the uses of a good are not assigned to specified individuals but instead are divided among various people in government agencies, who decide about uses and consequences to be borne. The extent of and reliance on interpersonal market exchange is greater in a capitalistic system. In a socialist system, political power and exchange of nonprivate rights are used more widely to solve the economic questions.
Although applicable to all economic systems, eco- nomic theory has been more extensively and fruitfully applied to the analysis of capital- istic than of socialistic systems. However, some applications to noncapitalistic organiza- tions are given in this book. In sum, economics studies the competitive and cooperative behavior of people in resolving conflicts of interest that arise because wants exceed what is available. Introductory comments cannot adequately reveal all that economics is or the richness of applications of economic theory.
Only a study of economics can do that. Societies and open markets have grown and prospered in the face of almost universal illiteracy about economic theory, so there are limits to the significance and usefulness of the formal study of economics. But give it a fair try, anyway. Economics does deal with important things, Unless you fight it assiduously, it may well even be quite interesting. Summary A cautionary note: do not use these summaries as quick learning devices for examinations.
Instead treat them as listing in capsule, etyptic form the major ideas of the chapters. Eeonomic theory is explanatory and amoral, not moral or prescriptive. Questions Questions at the end of each chapter are a basic element in this book, Read each question, ponder it, and then read the selected answers at the end of the book.
Answers have been sup- plied for questions numbered in bali type. Do not skip the questions and answers; they con- tain some important ideas, applications, and interpretations you will find nowhere else in the book. This is nonsense. Abun- dance has arrived! The United States can produce 80 much that the basic problems are to see that the potential production is realized and distributed fairly and equitably. When a group of Russian offcials touring American farms persistently asked who told the farmers how much to produce in order to supply the appropriate amounts of goods, the farmers said that no one told them, But the Russians were convinced the farmers were concealing something.
What would you have told the Russians? Do you know anyone who does not specialize? Why do people specialize? No authority is responsible for seeing that these functions are performed and that the right.
Yet food is available every day. On the other hand, especially appointed authorities are responsible for seeing that such things as water, cedueation, and electricity are made available. Ts it not paradoxical that in the very areas where we consciously plan and control social output, we often find shortages and failure of service?
References to classroom and water shortages are rife; but who has heard of a shortage of restaurants, churches, furniture, beer, shoes, or paper? Even further, i it not sarprising that privately owned businesses, operating for the private gain of the owners, provide as good, if rot better, service to patrons and customers as do the post office, schools, and other publicly owned enterprises? Furthermore, wouldn't you expect public agencies to be less discriminating according to race and, creed than privately owned business?
Yet the fact is that they are not. Department of Commerce, Bureau of the Census, is a standard summary of statistics on the social, political, and economic organization of the United States. Every college library has a copy. For example, on page of the edition you will find some data about faculty salaries. Do you think your instructor is underpaid or overpaid? After thinking about that for three minutes, compare faculty salaries with the information on pages of that same edition about earnings in other industries, 9 What is meant by a the logical validity of a theory?
Scarcity forces a choice among limited options, and we compete for those options. Hence, in a society of more than one person, scarcity implies competition.
It induces cheating, conformity, discrimination, and the dominance of the lowest quality, while discouraging humane behavior. Competition exists in every social system. It is a result of conflicts of interest in a world of scarcity—not of the social, cultural, or economic system within which we live. However, there are many forms of competition. Violence as a Form of Competition Violence is an exceptionally important mode of competition—that is, of resolving inter- personal conflicts of interests.
Before rejecting or condemning violence, observe that it is highly respected and widely practiced—at least when applied successfully on a nation- wide scale. When Caesar conquered Egypt, he was praised and honored by the Romans; hhad he instead roughed up a few people in Rome, he might have been damned as a rofisey and thief. The white man. Lenin and his successors are not universally regarded in Russia as a line of gangsters. Violence snd its threat are, and have been, powerful in all human society.
Reservation cof violence or force to the government in fact defines, for all practical purposes, what is the government. A general dispersion not disappearance of violence or force negates the government and implies anarchy. Anyone who resorts ta force not sanctioned as part of the government's action is literally revolting against the government. These simple facts do not constitute a defense of every existing government; they constitute nonromantic statements about the role of violence and its threat.
To what purpose and in what manner force, or its threat, is to be put is the crucial issue. One can debate these purposes and modes of force.
But to deny that it should ever be used or its threat made believable is to ignore not only 2 central characteristic of life from time immemorial but an inevitable characteristic of any society and its government. Offers of Exchange as a Form of Competition As an alternative to violence, mutual exchange is available even though it, too, is someimes classed as improper. A free-caterprise economic system—in which the bulk of property is privately owned and assets typically can be freely traded—is a commonly used basis of competition.
We will be more likely to prevail if he can interest their self-love in his favor, and show them that it is for their own advantage 0 do for him what he requires of them. We address ourselves not to their humanity but to their selBlove.
What forms of competition would you use in assigning priorities for deciding to whom to award the tickets? That is, what system of rationing or allocation would you use? Males need not apply. We would select the prettiest —using our own standards—and ask them to appear in our offices for interviews.
Of these we would then select the most personable —using our own standards, Certainly this pleasant system is discriminatory. AU competition is discriminatory.
Beauty and personality as competitive, discriminatory factors are generally accepted and applied widely every day. Men and women select mates, in part, according to beauty and personality. You and J allocate money to the prettiest women for letting us see them perform in the movies, In fact, it is difficult to find situations in which beauty is not a competitive advantage. For instance, all the applicants could run a race with the tickets going to the first to arrive at the finish line.
Sounds silly. The only difference is that for Rose Bowl tickets there is no uniform starting time or place, so that some people start out earlier and then camp right at the finish line. In any case, economic theory does not say what form of competition is silly, nor what is fair.
An equal chance could be provided by putting everyone's name even those who did not take the time to apply for a ticket on cards, then drawing at random.
But, again, do you want to pick your mate that way? Do you want men selected for the armed forces that way?
Note a difficulty. After the goods Rose Bowl tickets in our example are initially distributed, what is to stop your selected recipients from handing the tickets on to other people, according to other preferred criteria? How you enforce that condition we leave to you.
In accordance with the clastic theory of selective survival of the fittest, that type of person would prevail.
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