Preface xiii
Acknowledgments xvii
Introduction 1
Rationale 1
Organization 2
Method 3
Reader Outcomes 3
Themes 4
Relevance and Applicability 5
References 6
Notes 6
1 Production 8
1.1 The Production Function 9
1.2 The “Law” of Variable Proportions 11
1.3 Substitution 13
1.4 Measuring Substitution 15
1.5 Specific “Functional Forms” for Production Functions 16
1.6 Attributing Products to Inputs: Distributing Income from Production 17
1.7 Efficiency and the Choice of How to Produce 18
1.8 Predictions of Production Theory 1: Input Price Changes 20
1.9 Predictions of Production Theory 2: Technological Changes 21
1.10 Stocks and Flows 22
1.11 The Distribution of Income 23
1.12 Production Functions in Achaemenid Babylonia 25
References 26
Suggested Readings 27
Notes 27
2 Cost and Supply 29
2.1 The Cost Function 31
2.2 Short Run and Long Run 32
2.3 The Relationship between Cost and Production 33
2.4 Producers’ Objectives 34
2.5 Supply Curves 35
2.6 Demands for Factors of Production 40
2.7 Factor Costs in General:Wages and Rents 41
2.8 Allocation of Factors across Activities 43
2.9 Organizing Production:The Firm 43
2.10 A More General Treatment of Cost Functions 46
2.11 The Economics of Mycenaean Vases, I: Supply and Cost 47
2.12 Accounting for Apparent Cost Changes in Minoan Pottery 49
2.13 Production in an Entire Economy: The Production Possibilities Frontier 50
References 52
Suggested Readings 53
Notes 53
3 Consumption 55
3.1 Rationality of the Consumer 57
3.2 The Budget 57
3.3 Utility and Indifference Curves 58
3.4 Demand 60
3.5 Demand Elasticities 63
3.6 Aggregate Demand 65
3.7 Evaluating Changes inWellbeing 66
3.8 Price and Consumption Indexes 70
3.9 Intertemporal Choice 73
3.10 Durable Goods and Discrete Choice 75
3.11 Variety and Differentiated Goods 79
3.12 Value of Time and Household Production 82
3.13 Risk, Risk Aversion, and Expected Utility 86
3.14 Irrational Behavior 88
3.15 Fixed Prices 90
3.16 Applying Demand Concepts: Relationships between Housing Consumption, Housing Prices, and Incomes in Pompeii 93
3.17 The Economics of Mycenaean Vases, II: Demand 96
References 99
Suggested Readings 99
Notes 100
4 Industry Structure and the Types of Competition 103
4.1 Perfect Competition 104
4.2 Competitive Equilibrium 106
4.3 Monopoly 108
4.4 Oligopoly 110
4.5 Monopolistic Competition 111
4.6 Contestable Markets 112
4.7 Buyer’s Power: Monopsony 113
4.8 The Economics of Mycenaean Vases, III: Industry Structure 114
4.9 Ancient Monopoly and Oligopoly: Religion and Foreign Trade 115
References 117
Suggested Readings 118
Notes 118
5 General Equilibrium 120
5.1 General Equilibrium as a Fact and as a Model 120
5.1.1 The facts 121
5.1.2 The models 121
5.1.3 The questions 123
5.2 TheWalrasian Model 124
5.3 Exchange 127
5.4 The Two-Sector Model 128
5.4.1 The basics with the Lerner–Pearce diagram 128
5.4.2 Growth in factor supplies 130
5.4.3 Technical change 132
5.5 Existence and Uniqueness of Equilibrium 133
5.6 Computable General Equilibrium Models 134
References 136
Suggested Readings 137
Notes 137
6 Public Economics 139
6.1 Government in the Economy: Scope of Activities, Modern and Ancient 139
6.2 Private Goods, Public Goods, and Externalities 141
6.2.1 Private goods 141
6.2.2 Public goods 142
6.2.3 Externalities 143
6.3 Raising Revenue 149
6.3.1 Taxation 1: rationales and instruments 149
6.3.2 Taxation 2: effects of taxes 154
6.3.3 Taxation 3: tax incidence (who really pays?) 165
6.3.4 Taxation 4: optimal tax systems 169
6.3.5 Other revenue sources 173
6.4 TheTheory of Second Best 174
6.5 Government Productive Activities 175
6.5.1 Public production and pricing 175
6.5.2 The supply of public goods and social choice mechanisms 181
6.5.3 Public investment and cost–benefit analysis 186
6.6 Regulation of Private Economic Activities 191
6.6.1 Rent seeking 192
6.6.2 The costs of regulation: the Averch–Johnson effect 193
6.7 The Behavior of Government and Government Agencies 194
6.7.1 Theories of government 194
6.7.2 Theories of bureaucracy 195
6.7.3 Levels of government 196
6.8 Suggestions for Using the Material of this Chapter 196
References 197
Suggested Readings 199
Notes 199
7 The Economics of Information and Risk 202
7.1 Risk 202
7.1.1 The ubiquity of risky decisions 203
7.1.2 Concepts and measurement 205
7.1.3 Risk and behavior: expected utility 209
7.1.4 Risk versus uncertainty: the substance of probabilities 215
7.2 Information and Learning 217
7.2.1 The structure of information 217
7.2.2 Learning as Bayesian updating 218
7.2.3 Experts and groups 223
7.3 Dealing with Nature’s Uncertainty 225
7.3.1 Contingent markets 225
7.3.2 Portfolios and diversification 230
7.4 Behavioral Uncertainty 235
7.4.1 Asymmetric information: problems and solutions 236
7.4.2 Strategic behavior 242
7.5 Expectations 246
7.5.1 The role of expectations in resource-allocation decisions 247
7.5.2 Adaptive models of expectations 247
7.5.3 The rational expectations hypothesis 249
7.6 Competitive Behavior under Uncertainty 252
7.6.1 Production behavior 252
7.6.2 Search problems 253
7.7 Suggestions for Using the Material of this Chapter 253
References 254
Suggested Readings 255
Notes 255
8 Capital 258
8.1 The Substance and Concepts of Capital 258
8.1.1 Capital as stuff 259
8.1.2 Capital in the production function 262
8.1.3 Stocks, flows, and accumulation 263
8.1.4 Prices and values 264
8.1.5 Temporal aspects of capital 265
8.1.6 Measuring capital 268
8.1.7 The labor theory of value 269
8.2 Quasi-Rents 270
8.3 Interest Rates 272
8.4 TheTheory of Capital 276
8.4.1 Present and future consumption, investment, and capital accumulation 276
8.4.2 Demand for and supply of capital: flows and stocks 279
8.4.3 Capital richness and interest rates 283
8.5 Use of Capital by Firms 284
8.5.1 Investment 284
8.5.2 Maintenance 287
8.5.3 Scrapping and replacement 289
8.6 Consumption and Saving 290
8.6.1 Intertemporal utility maximization 290
8.6.2 Hypotheses about consumption 291
8.6.3 Individual and aggregate savings 294
8.7 Capital Formation 294
8.8 Suggestions for Using the Material of this Chapter 296
References 297
Suggested Readings 298
Notes 298
9 Money and Banking 301
9.1 The Services of Money 302
9.1.1 Money as a medium of exchange 302
9.1.2 Money as a store of value 302
9.1.3 Money as a unit of account 303
9.1.4 Stability of value 303
9.1.5 Monetization prior to currency 303
9.2 The Types of Money 304
9.2.1 Commodity money 304
9.2.2 Credit money 304
9.2.3 One special case of credit money: bank money 305
9.3 Some Preliminary Concepts 305
9.3.1 The price level 305
9.3.2 Inflation 306
9.3.3 “Nominal” versus “real” distinctions 307
9.3.4 What people in antiquity knew 309
9.4 The Demand for Money 309
9.4.1 Measuring money 310
9.4.2 The distinctiveness of the demand for money 311
9.4.3 Monetary theory and macroeconomics for ancient economies?! 312
9.4.4 The neoclassical quantity theory 313
9.4.5 Keynesian monetary theory 315
9.4.6 The contemporary synthesis 317
9.5 The Supply of Money 318
9.5.1 Supply of a commodity money 320
9.5.2 Creation of money by banks 323
9.5.3 The banking firm 328
9.5.4 Financial intermediation 332
9.5.5 Exogeneity / endogeneity of money supply and foreign exchange 335
9.5.6 Seigniorage: making money by issuing money 336
9.5.7 Bimetallism 337
9.6 Inflation 337
9.6.1 Causes of inflation 338
9.6.2 Mechanisms of inflation 339
9.6.3 Consequences of inflation 340
9.7 Monetary Policy 342
9.7.1 The players and their motives 342
9.7.2 Choice of monetary standard 343
9.7.3 Influencing the supply of money 343
9.7.4 Influencing the demand for money 345
9.7.5 International monetary policies 345
9.8 Suggestions for Using the Material of this Chapter 345
References 345
Suggested Readings 347
Notes 347
10 Labor 350
10.1 Applying Contemporary Labor Models to Ancient Behavior and Institutions 350
10.2 Human Capital 353
10.2.1 Investment in human capital 354
10.2.2 Health 356
10.2.3 Guilds, occupational licensing, and entry restriction 356
10.3 Labor Supply 357
10.3.1 Utility analysis of individual and family labor supply 357
10.3.2 Lifecycle / dynamic labor supply 364
10.3.3 Supply of labor to activities 368
10.3.4 Household production 369
10.4 Labor Demand 375
10.4.1 The productive enterprise’s demand for labor 376
10.4.2 Derived demand 379
10.5 Labor Contracts 384
10.5.1 Information problems and incentives 384
10.5.2 The basis of pay 385
10.5.3 Sequencing of pay 387
10.5.4 Compensating differentials in wages 387
10.6 Migration 391
10.6.1 Economic incentives for migration 392
10.6.2 Consequences of migration 394
10.6.3 Refugee migration 396
10.6.4 Equilibrating migration flows when the wage rate doesn’t adjust 396
10.7 Families 398
10.7.1 Marriage 398
10.7.2 Intrafamily resource allocation 405
10.7.3 Children and the economics of fertility and child mortality 412
10.8 Labor and the Family Enterprise 414
10.8.1 The farm family household and the separability of production decisions from consumption decisions 415
10.8.2 Effects of missing markets on labor allocation 418
10.8.3 Restrictions on household activities 420
10.8.4 Implications of the family farm model 422
10.9 Slavery 423
10.9.1 The supply of slaves 424
10.9.2 The demand for slaves 426
10.9.3 Investment in slaves 427
10.9.4 Market consequences of slaves 427
10.9.5 Slaves’ incentives 427
10.10 Suggestions for Using the Material of this Chapter 428
References 429
Suggested Readings 432
Notes 433
11 Land and Location 440
11.1 The Special Characteristics of Land 440
11.2 Land as a Factor of Production 441
11.2.1 Supply 441
11.2.2 Demand 441
11.3 The Location of Land Uses 442
11.3.1 TheThünen model 442
11.3.2 The bid-rent function 447
11.3.3 Equilibrium in a region 450
11.3.4 Modifying the social context 451
11.4 The Location of Production Facilities 452
11.4.1 Individual facilities 452
11.4.2 Industries 455
11.5 Consumption and the Location of Marketing 457
11.5.1 The structure of transportation costs 457
11.5.2 The shopping tradeoff: frequency versus storage 458
11.5.3 Aggregate demand in a spatial market 460
11.5.4 Hierarchies of marketplaces: central place theory 461
11.5.5 Periodic markets 462
11.6 Transportation 463
11.6.1 Infrastructure 463
11.6.2 Equipment 465
11.6.3 Pricing of transportation services 465
11.7 Suggestions for Using the Material of this Chapter 467
References 468
Suggested Readings 469
Notes 470
12 Cities 472
12.1 Cities and their Analysis, Modern and Ancient 472
12.1.1 Classifying cities 472
12.1.2 Characteristics of cities 473
12.1.3 What goes on in cities 473
12.1.4 Ancient observations and contemporary analytical emphases 474
12.2 Economies of Cities 475
12.2.1 Scale economies in production 475
12.2.2 Externalities 477
12.2.3 Types of production 477
12.3 Housing 479
12.3.1 The Special Characteristics of Housing 479
12.3.2 Housing supply 480
12.3.3 Housing demand 481
12.4 Urban Spatial Structure 482
12.4.1 The monocentric city model 483
12.4.2 Multiple categories of residents 488
12.4.3 Working at home 489
12.4.4 Endogenous centers 490
12.4.5 Density gradients and the ancient city 491
12.4.6 Wage differentials across cities 491
12.5 Systems of Cities 492
12.5.1 Production and consumption within any city 493
12.5.2 Different types of cities 497
12.5.3 The city size distribution and its responses to various changes 499
12.6 Urban Finance 503
12.6.1 Local public goods 504
12.6.2 What to supply and how much 505
12.6.3 Raising revenue 506
12.7 Suggestions for Using the Material of this Chapter 507
References 508
Suggested Readings 510
Notes 511
13 Natural Resources 516
13.1 Exhaustible Resources 517
13.1.1 The theory of optimal depletion 517
13.1.2 Different deposits 520
13.1.3 Uncertainty 521
13.1.4 Exploration 521
13.1.5 Monopoly 523
13.2 Renewable Resources 524
13.2.1 Biological growth 524
13.2.2 Harvesting 525
13.2.3 The theory of optimal use 527
13.2.4 Open access and the fishery 528
13.3 Resource Scarcity 531
13.4 The Ancient Mining-Forestry Complex 531
13.5 Suggestions for Using the Material of this Chapter 532
References 533
Suggested Readings 533
Notes 533
14 Growth 535
14.1 Introduction 535
14.1.1 Economic growth: delimiting the scope 535
14.1.2 Growth in antiquity: is there anything to explain? 536
14.2 Essential Concepts 536
14.2.1 Production functions again 536
14.2.2 Technical change 537
14.2.3 Growth versus development 537
14.3 Neoclassical GrowthTheory 538
14.3.1 The Solow model 538
14.3.2 Technology and growth in the Solow model 541
14.3.3 Endogenizing technical change 543
14.3.4 Extent of the market, division of labor, and productivity 545
14.4 Structural Change 546
14.4.1 Sectoral concepts as organizing devices 546
14.4.2 A two-sector model of an economy 548
14.4.3 Some stylized facts 549
14.5 Institutions 551
14.5.1 Property rights 552
14.5.2 Governments 552
14.5.3 Stability and change 553
14.6 Studying Economic Growth in Antiquity 553
14.6.1 What there is to explain 554
14.6.2 Organizing inquiry about economic growth with the help of growth theory 554
14.6.3 Studying episodes of growth following declines: beyond growth theory 557
14.6.4 Summary 559
14.7 Suggestions for Using the Material of this Chapter 559
14.7.1 Evidence of growth 559
14.7.2 Sectoral structure 561
References 561
Suggested Readings 564
Notes 564
Index 569
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