Knowledge and Entrepreneurship:
A Textbook in Microeconomics
J. Patrick Gunning
November 28, 2004 (Under Construction)
Copyright (c) 2001 by James Patrick Gunning
All rights reserved
Published in Taiwan by Nomad Press
Library of Congress Cataloging-in-Publication Data
Gunning, James Patrick
Includes bibliographical references
1. Microeconomics
2. Austrian Economics
3. Economics
4. Human Capital
5. Entrepreneurship
Library of Congress Catalog Card Number:
ISBN
Brief Contents
Preface
Chapter 2: Wants, Goods, and Cost
Chapter 4: The Private Property System, Opportunity Costs and the Production of
Chapter 5: Human Capital in the Market Economy
Chapter 6: Coordination in the Absence of the Market Economy
Chapter 7: Coordination in the Market Economy
Chapter 8: The Entrepreneur Role and the Entrepreneurless Economy
Chapter 9: Demand, Supply and Market Equilibrium in the Entrepreneurless Economy
Chapter 10: The Firm and Industry in the Entrepreneurless Economy
Chapter 11: Economic Change in a Competitive Industry in the Entrepreneurless Economy
Chapter 13: Monopoly in the Market Economy
Chapter 14: Natural Monopoly and the Buyout Monopoly (forthcoming)
Chapter 15: The Modern Theory of the Firm
Chapter 16: Coordination by the Entrepreneur Role (forthcoming)
Chapter 17: Externality (forthcoming)
Chapter 18: The Common Property Resource (forthcoming)
Chapter 19: Public Goods (forthcoming)
Detailed Contents
Preface xi
Chapter 1: The Market Economy
1. The Conditions of the Market Economy
a. The Private Property System
(1) The Two Characteristics
(2) A Complete Property System
(3) Evolution of Private Property Rights
(4) The Right of First Possession
(5) The Right to Exchange and Equality Under the Law
b. Specialization
c. Money
(1) Money as a Medium of Exchange
(2) Money as a Store of Value
(3) Money as a Unit of Accounting
(4) Learning to Use Money
d. Free Enterprise
e. Remarks
2. Roles in the Market Economy
3. The Pure Market Economy
4. Impossibility of a Pure Market Economy
a. Incomplete Property System
b. Restrictions on Completely Free Enterprise
5. Why Study Economics
6. Plan of This Book
Chapter 2: Wants, Goods and Costs
1. Wants
a. The Special Meaning of Wants in Economics
b. Wants vs. Needs
2. Goods
a. Wants and Goods
(1) Generalized Wants and Specific Goods
(2) Wants Change Over Time
(3) Time Preference
(4) Wants for Specific Goods are Always Relative:
"Everything Has a Price"
(5) No Free Goods in Economics
(6) Preference Structure
b. Choices Express Wants for Marginal Units
(1) Inframarginal Units
(2) The Water-Diamond Paradox
(3) Marginal Characteristics or Qualities
c. Durable and Perishable Goods
(1) Depreciation and Appreciation
d. Differences Among Goods
e. Complementarity and Substitutability Among Goods
f. Goods That Satisfy Joint Wants
g. How Do we Know That X is a Good?
(1) Different Goods for Different People
(2) The Definition of a Good and Personal Value Judgments
3. Cost
a. Opportunity Cost
b. Opportunities to Use Time
Appendix: The Assumption That Wants Are Given
Chapter 3: Resources
1. Types of Resources
a. Labor
b. Land
c. Capital Goods
d. Human Capital
e. Resources, Planning and Costs: the Definition of a Resource
f. Specialized and Non-Specific Resources
2. Human Capital to the Solitary Actor
a. The Breadth and Depth of Human Capital in a Market
Economy
b. Types of Human Capital to the Solitary Actor
(1) Knowledge of Wants
(2) Technical Knowledge
(3) Knowledge of Knowledge
(4) Knowledge of How to Acquire Knowledge
c. The Complementary and Transformation Character of Human
Capital
(1) The Complementary Character
(2) The Transformation Character
d. The Structure of Technical Knowledge
(1) Orders of Technical Knowledge
(2) Structure of Technical Knowledge Instead of Orders
e. The Structure of Production
3. Human Capital and Entrepreneurship
a. Human Capital, Planning, and Want Satisfaction in Barter
(1) How Trade and Specialization Economize on the
Acquisition and Use of Human Capital
(2) Coordination and Synchronization
b. Human Capital, Planning, and Want Satisfaction in a Market
Economy
(1) Trade and the Incentive to Produce Human Capital
c. Entrepreneurship
(1) Entrepreneurs as Producers and Financiers
(2) Entrepreneurship and Human Capital
Chapter 4: The Private Property System, Opportunity Costs,
and the Production of Economic Knowledge
1. Adam Smith and the Wealth of Nations
a. The Division of Labor by an Employer
b. Division of Labor in Small Business and the Trades
c. Division of Labor vs. Diversity of Human Capital
2. Specialization According to the Principle of Lowest Opportunity
Cost
a. The Potential Benefit of Exchanging Legal Rights to Use
Resources
b. The Principle of Lowest Opportunity Cost
3. Specialization in Single-stage Production
a. Specialization Under Three Initial Ownership Situations
b. Creation of Rights
c. Apparent Exceptions
(1) Begrudging
(2) Satisfaction from the Work
d. Shared Specialization
e. Lowest Opportunity Cost vs. Highest Benefit
4. Specialization in Two-Stage Production
a. The Example
b. The Right to Exchange
5. Issues Related to Specialization
a. Trade, Comparative Advantage, and the Production of
Human Capital
(1) Absolute Advantage and Comparative Advantage
(2) Comparative Advantage and Opportunity Cost
(3) Comparative Advantage and Gains from Trade
(4) The Theory of International Trade Based on Comparative
Advantage
(5) The Production of Comparative Advantage
b. Intellectual Property Rights
c. Harm Due to Specialization
6. Conclusion
Chapter 5: Human Capital in the Market Economy
1. Knowledge of Wants
a. Wants and Demand
b. Knowledge of Horizontal Demands
(1) Diversity of Demands
(2) Emergence of Specialists
c. Knowledge of Vertical Demands: The Structure of
Production, Sales and Marketing Knowledge
d. Specialization in Production, Sales and Marketing
nowledge
(1) The Retailer
(2) The Wholesaler
(3) The Producer and Resource Supplier
e. Knowledge of Wants for Job Satisfaction
f. Changing Wants: The Need for Continuing Knowledge about
Consumers' Demands
g. Advertising
(1) Laws that Hamper Advertising
2. Technical Knowledge
a. The Growth of Technical Knowledge
b. How Technical Knowledge is Acquired: Directly and
Indirectly
c. Scientific Knowledge
d. Why Technical Knowledge is Acquired, Produced, and
Communicated
3. Knowledge of Others' Knowledge
a. Substitutes for Knowledge of Others’ Knowledge
b. Knowledge of Others' Knowledge is Indefinite
4. Knowledge of How to Acquire Knowledge
Chapter 6: Coordination in the Absence of the Market Economy
1. Coordination of Actions by the Solitary Actor
a. Coordination of Ordinary Actions
(1) Actions, Sub-Actions, and Coordination
b. Coordination of Learning Actions
c. Coordination of Learning and Non-Learning Actions
d. Coordination in a Utility Sense
(1) Coordination Requires the Choice of an Alternative that
the Subject Regards as Optimal
(2) Errors
(3) The Insider and the Outsider View
2. Types of Planning and Coordination in a Market Economy
a. Centralized Planning
b. Decentralized Planning
c. Types of Decentralized Planning
3. Coercive Planning and the Ideal Command Society
a. Distribution
(1) The Assumption of Omniscience
(2) Equal Distribution and Markets
b. Production
(1) Real Command Societies
(2) Agency Problems and Business Planning
(3) Agency Problems in Centralized Planning
c. The Command Society over Time
d. Market Economy Consumers as Principals
e. Conclusion
Chapter 7: Coordination in the Market Economy
1. Introduction
a. Two Fundamental Means of Interpersonal Coordination
b. Plan of the Chapter
2. Interpersonal Coordination
a. Illegitimacy of Interpersonal Comparisons of Utility and
Demonstrated Preference
b. The Elitist Approach to Coordination
c. Errors and Haggling
3. Coordination Among Many People in a Market Economy
a. Greater Market Coordination in a Utility Sense
(1) Compensation Models
b. The Concept of Full Coordination
4. Specialist Coordinating Roles
a. Coordination by the Intermediary Role
(1) The Intermediary Role and Specialization
(2) Markets and Prices
b. Coordination by the Undertaker Role
c. The Purviews of Intermediaries and Undertakers
d. Conclusion
5. Coordination of Learning Programs
a. Anticipated Coordination
Chapter 8: The Entrepreneur Role and the Entrepreneurless
Economy
1. The Entrepreneur Role
a. Non Entrepreneur Roles in the Market Economy
(1) The Consumer-Saver Role and Time Preference
(2) Consumer Borrowing and Lending
(3) The Resource Supplier Role
b. The Entrepreneur
(1) Three Functions
(2) Producing Entrepreneurs as Final Controllers of
Resources
(3) Entrepreneur Action as a Bet
(4) Profit and Loss
(5) Uncertainty and Risk
(6) Active and Passive Roles
c. The Role of the Entrepreneur
(1) The Pure Entrepreneur and the Entrepreneur Role
(2) Inventiveness and Distinctly Human Action
(3) Profit as the Exclusive Income of the Pure Entrepreneur
2. The Entrepreneurless Economy
a. Roles in the Entrepreneurless Economy
(1) Households, Firms, Industries, and the Structure of
Production
(2) Everyday Households
(3) Households in the Entrepreneurless Economy
(4) Everyday Firms
(5) Firms in the Entrepreneurless Economy
(6) Industries
b. Assumptions About the Alternatives
(1) Homogeneous Units of Heterogeneous Types
c. Productivity Differences Among Resources of the Same Type
d. Capital and Non-Capital Resources
e. Markets and Prices
f. Time
Chapter 9: Demand, Supply and The Benefits of Markets in the
Entrepreneurless Economy
1. Demand
a. Diminishing Marginal Utility
b. Consumers' Surplus
c. Applications
2. Supply and Cost
a. Why the Supply Curve Has an Upward Slope
(1) Resources Limited in Number
(2) Diminishing Marginal Utility Equals Rising Opportunity
Cost
(3) Firms Hire the Most Productive Resources First
(4) Increasing Marginal Disutility of Work
b. Suppliers' Gain
3. Full Coordination
a. Full Coordination in All Industries
b. Opportunity Cost and the Supply Curve of an Industry
c. Shortage and Surplus
4. The Benefits of Markets
5. Consumers’ Surplus and Suppliers’ Gain
6. Benefits in the Entrepreneurless Economy
7. Benefits in the Entrepreneur Economy
Chapter 10: Free Enterprise in the Entrepreneurless
Economy
1. The Traditional Model of The Firm as an Income Maximizer
a. Short Run Costs
(1) Average Cost
(2) Marginal Cost
(3) Relationship between Average and Marginal Cost
b. Long Run Costs
c. The Firm’s Revenue Situation
d. Income Maximization in the Short Run
(1) Deficit Minimization
(2) The Break-Even Firm
(3) Inter-Industry Long Run Equilibrium
2. The Firm and the Industry
a. Entering or Leaving an Industry
(1) The Firm’s Supply Curve
b. The Firm and Industry Supply Curves
c. Effects on Industry Supply of Firms Leaving and Entering the
Industry
d. Effects on Firms of Exit and Entry
e. The Firm and Industry in Long Run Equilibrium
3. How Freedom of Entry and Exit Benefits Consumers
a. Entrepreneurial Free Enterprise
Chapter 11: Signaling, Resource Prices, and Consumer-Oriented
Production in the Entrepreneurless Economy
1. The Effects of a Change in Preferences
a. Market Effects
(1) The Long Run and Short Run Industry Supply Curves
(2) From a Change in Preferences to Changes in Demand
(3) The Short Run Adjustment to an Increase in Demand
(4) The Long Run Adjustment to an Increase in Demand
(5) Other Industries
b. Welfare Effects of the Increase in Demand
(1) Economic Rent
(2) The Ricardian Theory of Land Rent
(3) The Surplus from Exchange in Long-Run Equilibrium
(4) Classifying the Welfare Effects of an Increase in Demand
2. The Effects of Innovation
a. Market Effects
b. Welfare Effects
3. Signaling, Resource Prices, and Consumer-oriented Production
a. Signaling
b. Resource Prices
c. Consumer-Oriented Production
Chapter 12: Price Controls
1. Determining Welfare Effects in the Entrepreneurless Economy
2. The Welfare Effects of a Minimum Price
a. A Simple Model
(1) Rent-Seeking Costs
(2) Enforcement Costs
b. An Illegal Market
c. Farm Price Supports
d. The Minimum Wage
(1) Deadweight Loss and Monopoly Rent
(2) Unemployment
(3) Total Wages
(4) Amount of Unemployment and Total Wages Depend on
the Shapes of Demand and Supply
(5) Discrimination Against the Less Desired and Less Able
Workers
(6) Emergence of Independent Contracting
(7) Substitution of Labor-Saving Methods of Production and
Reduction of Fringe Benefits
3. Welfare Effects of a Maximum Price
a. A Simple Model
b. A Resale Market
c. A Black Market
4. The Rent Ceiling
a. Deadweight Loss, Rationing Costs, and Enforcement Costs
b. The Shapes of the Demand and Supply Curves
(1) The Amount of Deadweight Loss
(2) The Shapes of the Curves and Time
(3) Do Renters as a Group Gain?
(4) The Rationing Problem
c. Circumventing the Intent of the Law
(1) Other Monies Paid by the Renter
(2) Maintenance and the Supply of Local Public Goods
d. Illegal Markets
e. Interpersonal Comparisons of Utility
Chapter 13: Monopoly in a Market Economy
1. Individual Rights In a Pure Market Economy
a. Trading Away Rights
(1) The Employment Agreement
(2) The Agreement Not to Compete
2. Introduction to the Monopoly Problem
a. Price and Marginal Revenue
b. Resource Misallocation Due to Monopoly
(1) Pareto Efficiency
(2) A Model of Monopoly Inefficiency
(3) Price Discrimination
(4) "Unfair" Prices
c. Proposed Solutions to the Monopoly Problem
3. The Buyout Monopoly and the Number of Sellers
a. A Simple Three-Person Model
b. Two Seller-Many Buyer Model
c. Transactions Costs
(1) Costs of Identifying Preferences
(2) Costs of Reaching an Agreement
(3) Policing Costs
Chapter 14: Natural Monopoly and the Buyout Monopoly
Chapter 15: Modern Theory of the Team Firm
1. Defining The Team Firm
a. The Three Characteristics
(1) Team Production
(2) Exchange of Rights to Output and Residual Claimancy
(3) Limited Authority of Employer over Employees
b. How the Team Firm Gets Created
2. The Special Problems of Team Firms
a. The Problem of Communication
b. The Problem of Agency
(1) The Principal and Agent in a General Context
(2) The Agency Problem in the Employment Compact of a
Team Firm
(3) Related Ideas
c. Investments in Firm-Specific Resources
(1) Non-Optimality of Investment in General
(2) Investment in Material Resources vs. Human Resources
(3) Inefficiency in the Production of Firm-Specific Human
Capital
3. The Governance Structure
a. Goals of Building a Governance Structure and Means of
Achieving Them
(1) Means of Solving the Communication Problem
(2) Means of Solving the Agency Problem
(3) Means of Raising the Profitability of Employer
Investment in Firm-Specific Human Capital
(4) The General Aim of a Governance Structure Builder
b. Governance and the Financial Structure of a Corporation
(1) From Birth to a Going Concern
(2) Division of Profits and Uncertainty-Bearing in a
Corporation
(3) The Stock Market
(4) Separation of Ownership from Control?
4. Objections to the Right to Freely Negotiate and Determine the
Conditions of the Employment Compact
a. How Employees May Gain from the Employment Compact
b. Advantages of Team Production Usually not Available in a
Worker-Manager Firm
(1) The Strict Worker-Managed Firm
(2) A Democratic Worker-Managed Firm with Variable Pay
Rates
c. Socialism vs. Capitalism
Chapter 16: Coordination by the Entrepreneur Role
Chapter 17: Externality
Chapter 18: The Common Property Resource
Chapter 19: Public Goods
Appendix: Further Explanation of Figure 13-3
References
Subject Index
Name Index Preface
Gunning’s Address
J. Patrick Gunning
Professor of Economics/ College of Business
Feng Chia University
100 Wenhwa Rd, Taichung
Taiwan, R.O.C.
Please send feedback
Email: gunning@fcu.edu.tw