Economics

Cover......Page 1
Title......Page 4
Copyright......Page 5
About the Authors
......Page 6
Preface
......Page 16
Brief Contents
......Page 8
Contents (direct linking)......Page 10
Part A: INTRODUCTION......Page 28
Why Economics is Good for You......Page 29
What is economics?......Page 30
Puzzles and stories......Page 31
Applying the principles......Page 32
1. Economics and Economies......Page 33
1.1 What do economists study?......Page 34
1.2 Different economic systems......Page 45
1.3 The nature of economic reasoning......Page 54
1.1 Looking at macroeconomic data......Page 37
1.2 The opportunity costs of studying......Page 40
1.3 Scarcity and abundance......Page 41
1.4 Command economies......Page 49
1.5 Adam Smith (1723–90)......Page 52
1.6 Ceteris paribus......Page 55
Part B: FOUNDATIONS OF MICROECONOMICS......Page 60
2. Supply and Demand......Page 61
2.1 Demand......Page 62
2.2 Supply......Page 69
2.3 Price and output determination......Page 72
2.4 Elasticity......Page 83
2.5 The time dimension......Page 97
2.1 The demand for lamb......Page 67
2.2 UK house prices......Page 77
2.3 Stock market prices......Page 81
2.4 Advertising and its effect on demand curves......Page 88
2.5 Any more fares?......Page 89
2.6 Using calculus to calculate the price elasticity of demand......Page 91
2.7 Short selling......Page 101
2.8 Dealing in futures markets......Page 102
3. Government and the Market......Page 106
3.1 The control of prices......Page 107
3.2 Indirect taxes and subsidies......Page 115
3.3 Government rejection of market allocation......Page 120
3.4 Agriculture and agricultural policy......Page 122
3.1 A minimum unit price for alcohol......Page 110
3.2 The rise in illegal lending......Page 111
3.3 How can ticket touts make so much money?......Page 113
3.4 Ashes to ashes?......Page 117
3.5 The fallacy of composition......Page 124
Part C: MICROECONOMIC THEORY......Page 130
4. Background to Demand: the Rational Consumer......Page 131
4.1 Marginal utility theory......Page 132
4.2 The timing of costs and benefits......Page 140
4.3 Indifference analysis......Page 142
4.1 Using calculus to derive a marginal utility function......Page 134
4.2 The marginal utility revolution: Jevons, Menger, Walras......Page 138
4.3 Taking account of time......Page 139
4.4 Love and caring......Page 147
4.5 Consumer theory: a further approach......Page 152
5. Consumer Behaviour in an Uncertain World......Page 155
5.1 Demand under conditions of risk and uncertainty......Page 156
5.2 Behavioural economics......Page 163
5.1 Experimental economics......Page 164
5.2 The endowment effect......Page 167
5.3 Modelling present bias......Page 169
5.4 Nudging people......Page 171
5.5 Is economics the study of selfish behaviour?......Page 172
6. Background to Supply......Page 175
6.1 The short-run theory of production......Page 176
6.2 Costs in the short run......Page 182
6.7 Cost curves in practice......Page 188
6.4 Costs in the long run......Page 199
6.5 Revenue......Page 203
6.6 Profit maximisation......Page 207
6.1 Malthus and the dismal science of economics......Page 177
6.2 Diminishing returns in the bread shop......Page 180
6.4 The relationship between TPP, MPP and APP......Page 181
6.5 The fallacy of using historic costs......Page 183
6.6 Are fixed costs always the same as sunk costs?......Page 184
6.8 The Cobb–Douglas production function......Page 193
6.9 Minimum efficient scale......Page 201
6.10 Using calculus to find the maximum profit output......Page 210
6.11 The logic of logistics......Page 212
7. Profit Maximising under Perfect Competition and Monopoly......Page 216
7.1 Alternative market structures......Page 217
7.2 Perfect competition......Page 218
7.3 Monopoly......Page 228
7.4 The theory of contestable markets......Page 238
7.1 Concentration ratios......Page 219
7.2 Is perfect best?......Page 220
7.3 E-commerce and market structure......Page 225
7.5 X inefficiency......Page 235
7.6 Cut-throat competition......Page 237
7.7 Airline deregulation in the USA and Europe......Page 241
8. Profit Maximising under Imperfect Competition......Page 244
8.1 Monopolistic competition......Page 245
8.2 Oligopoly......Page 248
8.3 Game theory......Page 261
8.4 Price discrimination......Page 268
8.1 Selling ice cream as a student......Page 246
8.2 Increasing concentration......Page 249
8.3 OPEC......Page 253
8.4 Buying power......Page 260
8.5 The prisoners’ dilemma......Page 264
8.6 What’s the train fare to London?......Page 269
8.7 Peak-load pricing......Page 270
8.8 Just the ticket?......Page 274
9. The Behaviour of Firms......Page 277
9.1 Problems with traditional theory......Page 278
9.1 What do you maximise?......Page 279
9.3 Alternative maximising theories......Page 282
9.4 Asymmetric information and the principal–agent problem......Page 292
9.5 Multiple aims......Page 295
9.6 Pricing in practice......Page 298
9.2 How firms increase profits by understanding ‘irrational’ consumers......Page 281
9.3 When is a theory not a theory?......Page 283
9.4 Merger activity......Page 289
9.5 The US sub-prime housing crisis......Page 293
9.6 Stakeholder power?......Page 296
9.7 How do companies set prices?......Page 299
10. The Theory of Distribution of Income......Page 304
10.1 Wage determination under perfect competition......Page 305
10.2 Wage determination in imperfect markets......Page 314
10.3 Capital and profit......Page 327
10.4 Land and rent......Page 337
10.1 Labour as a factor of production......Page 306
10.2 Using indifference curve analysis to derive the individual’s supply curve of labour......Page 308
10.3 Immigration and the UK labour market......Page 309
10.4 Life at the mill......Page 315
10.6 How useful is marginal productivity theory?......Page 319
10.7 The persistent gender pay gap?......Page 321
10.8 Flexible labour markets and the flexible firm......Page 323
10.9 Behaviour at work......Page 325
10.10 Stocks and flows......Page 330
10.11 The economics of non-renewable resources......Page 339
Part D: MICROECONOMIC POLICY......Page 342
11. Inequality, Poverty and Policies to Redistribute Income......Page 343
11.1 Inequality and poverty......Page 344
11.2 Taxes, benefits and the redistribution of income......Page 355
11.1 Poverty in the past......Page 353
11.2 Minimum wage legislation......Page 357
11.3 The Laffer curve......Page 364
11.4 Tax cuts and incentives......Page 366
11.5 UK tax credits......Page 369
11.6 What the future holds......Page 372
12. Markets, Efficiency and the Public Interest......Page 374
12.1 Efficiency under perfect competition......Page 375
12.2 The case for government intervention......Page 383
12.3 Forms of government intervention......Page 396
12.4 Cost–benefit analysis......Page 405
12.5 Government failure and the case for the market......Page 413
12.1 The police as a public service......Page 391
12.2 A commons solution......Page 392
12.3 Should health-care provision be left to the market?......Page 397
12.4 Deadweight loss from taxes on goods and services......Page 400
12.5 What price a human life?......Page 408
12.6 HS2: is it really worth it?......Page 409
12.7 Mises, Hayek and the Mont Pelerin Society......Page 415
13. Environmental Policy......Page 418
13.1 Economics of the environment......Page 419
13.2 Policies to tackle pollution and its effects......Page 424
13.3 The economics of traffic congestion......Page 435
13.4 Urban transport policies......Page 440
13.1 A Stern warning......Page 421
13.2 Green taxes......Page 427
13.3 International co-ordination on climate change......Page 431
13.4 Trading our way out of climate change......Page 433
13.5 Road pricing in Singapore......Page 443
13.6 The economy and the environment......Page 445
14. Government Policy towards Business......Page 448
14.1 Competition policy......Page 449
14.2 Privatisation and regulation......Page 459
14.1 Fixing prices at mini-golf meetings?......Page 453
14.2 Expensive chips?......Page 455
14.3 Megabrew......Page 458
14.4 Selling power to the people......Page 465
Part E: FOUNDATIONS OF MACROECONOMICS......Page 470
15. An Introduction to Macroeconomic Issues and Ideas......Page 471
15.1 An overview of key macroeconomic issues......Page 472
15.2 Measuring national income and output......Page 479
15.3 The business cycle......Page 484
15.4 The circular flow of income......Page 490
15.5 Unemployment......Page 493
15.6 Inflation......Page 499
15.7 The open economy......Page 505
Appendix: Calculating GDP......Page 512
15.1 Which country is better off?......Page 481
15.2 Can GDP measure national happiness?......Page 483
15.3 Output gaps......Page 487
15.4 The costs of unemployment......Page 494
15.5 The costs of inflation......Page 502
15.6 The Phillips curve......Page 503
15.7 Dealing in foreign exchange......Page 511
16. The Development of Macroeconomic Thinking: a Historical Perspective......Page 518
16.1 The macroeconomic environment and debates......Page 519
16.2 Classical macroeconomics......Page 520
16.3 The Keynesian revolution......Page 525
16.4 The rise of the monetarist and new classical schools......Page 529
16.5 The Keynesian response......Page 533
16.6 An emerging consensus up to the crisis of 2008......Page 537
16.7 The financial crisis and the search for a new consensus......Page 539
16.1 Balance the budget at all costs......Page 523
16.2 The crowding-out effect......Page 524
16.3 Will wage cuts cure unemployment?......Page 526
16.4 Menu costs......Page 535
16.5 The paradox of thrift......Page 542
Part F: MACROECONOMIC MODELS, THEORIES AND POLICY......Page 546
17. Short-run Macroeconomic Equilibrium......Page 547
17.1 Background to the theory......Page 548
17.2 The determination of national income......Page 560
17.3 The simple Keynesian analysis of unemployment and inflation......Page 565
17.4 The Keynesian analysis of the business cycle......Page 568
17.1 Using calculus to derive the MPC......Page 553
17.2 The household sector balance sheets......Page 555
17.3 Sentiment and spending......Page 557
17.4 Deriving the multiplier formula......Page 564
17.5 Allowing for inflation in the 45° line diagram......Page 569
17.6 Has there been an accelerator effect in the UK?......Page 573
18. Banking, Money and Interest Rates......Page 578
18.1 Money supply, national income and national wealth......Page 579
18.2 The financial system......Page 580
18.3 The supply of money......Page 599
18.4 The demand for money......Page 607
18.5 Equilibrium......Page 611
18.2 The growth of banks’ balance sheets......Page 585
18.3 The rise of securitisation......Page 589
18.4 UK and eurozone monetary aggregates......Page 600
18.5 Calculating the money multiplier......Page 603
19. The Relationship between the Money and Goods Markets......Page 614
19.1 The effects of monetary changes on national income......Page 615
19.2 The monetary effects of changes in the goods market......Page 627
19.3 Modelling the interaction of monetary policy and the goods market......Page 631
19.4 Credit cycles and the goods market......Page 637
Appendix: The IS/LM model......Page 642
19.1 Choosing the exchange rate or the money supply......Page 621
19.2 Party games and the velocity of money......Page 623
19.3 The stability of the velocity of circulation......Page 625
19.4 Crowding out in an open economy......Page 629
19.5 The financial accelerator and fluctuations in aggregate demand......Page 641
20. Aggregate Supply, Inflation and Unemployment......Page 649
20.1 The AD/AS model......Page 650
20.2 AD/AS and inflation......Page 653
20.3 Aggregate demand and supply with inflation targeting: The DAD/DAS model......Page 657
20.4 The labour market and aggregate supply......Page 661
20.5 AD/AS and macroeconomic controversies......Page 666
20.1 Short-run aggregate supply......Page 652
20.2 Cost-push inflation and supply shocks......Page 656
20.3 Analysing demand-pull and cost-push inflation using the DAD/DAS model......Page 660
20.4 Common ground between economists?......Page 670
21. The Relationship between Inflation, Unemployment and Output......Page 672
21.1 The EAPC and the inflation–unemployment relationship......Page 673
21.2 Inflation and unemployment: the monetarist perspective......Page 676
21.3 Inflation and unemployment: the new classical position......Page 679
21.4 Inflation and unemployment: the modern Keynesian position......Page 683
21.5 Inflation, unemployment and output: credibility and central banks......Page 687
21.1 Basing expectations on the past......Page 674
21.2 The accelerationist hypothesis......Page 678
21.3 The rational expectations revolution......Page 680
21.4 Forecasting the weather......Page 681
21.5 The boy who cried ‘Wolf’......Page 682
21.6 Inflation bias......Page 689
21.7 Inflation targeting......Page 691
21.8 Inflation shocks and central banks......Page 693
22. Fiscal and Monetary Policy......Page 696
22.1 Fiscal policy and the public finances......Page 697
22.2 The use of fiscal policy......Page 703
22.3 Monetary policy......Page 713
22.4 The policy-making environment......Page 731
22.5 Central banks, economic shocks and the macroeconomy: an integrated model......Page 734
22.1 Primary surpluses and sustainable debt......Page 702
22.2 The financial crisis and the UK fiscal policy yo-yo......Page 707
22.3 Riding a switchback......Page 710
22.4 The evolving fiscal framework in the European Union......Page 711
22.5 The operation of monetary policy in the UK......Page 717
22.6 Central banking and monetary policy in the USA......Page 719
22.7 Monetary policy in the eurozone......Page 723
22.8 Goodhart’s law......Page 727
22.9 Using interest rates to control both aggregate demand and the exchange rate......Page 728
22.10 Quantitative easing......Page 729
23. Long-term Economic Growth and Supply-side Policies......Page 740
23.1 Introduction to long-term economic growth......Page 741
23.2 Economic growth without technological progress......Page 745
23.3 Economic growth with technological progress......Page 750
23.4 Approaches to supply-side policy......Page 756
23.4 The supply-side revolution in the USA......Page 759
23.6 Supply-side policies in practice: interventionist policies......Page 765
23.1 Getting intensive with capital......Page 747
23.2 Labour productivity......Page 751
23.3 UK human capital......Page 755
23.5 A new approach to industrial policy......Page 766
23.6 Unemployment and supply-side policies......Page 770
Part G: THE WORLD ECONOMY......Page 772
24. International Trade......Page 773
24.1 The advantages of trade......Page 774
24.2 Arguments for restricting trade......Page 788
24.3 Preferential trading......Page 798
24.4 The European Union......Page 802
24.5 The UK and Brexit......Page 808
24.1 Trading places......Page 777
24.2 Sharing out the jobs......Page 780
24.3 Trade as exploitation?......Page 782
24.4 Free trade and the environment......Page 789
24.5 Strategic trade theory......Page 790
24.6 The optimum tariff or export tax......Page 792
24.7 Giving trade a bad name......Page 793
24.8 The Doha development agenda......Page 795
24.9 Mutual recognition: the Cassis de Dijon case......Page 804
24.10 Features of the single market......Page 805
25. The Balance of Payments and Exchange Rates......Page 813
25.1 Alternative exchange rate regimes......Page 814
25.2 Fixed exchange rates......Page 824
25.3 Free-floating exchange rates......Page 829
25.4 Exchange rate systems in practice......Page 837
Appendix: The open economy and ISLM analysis......Page 844
25.1 The balance of trade and the public-sector budget balance......Page 816
25.2 The UK’s balance of payments deficit......Page 817
25.3 The effectiveness of fiscal and monetary policies under fixed exchange rates......Page 826
25.4 The price of a Big Mac......Page 831
25.5 The euro/dollar seesaw......Page 833
25.6 The effectiveness of monetary and fiscal policies under floating exchange rates......Page 836
25.7 Sterling since the 1990s......Page 841
25.8 Do inflation rates explain longer-term exchange rate movements?......Page 843
26. Economies in an Interdependent World......Page 850
26.1 Globalisation and the problem of instability......Page 851
26.2 European economic and monetary union (EMU)......Page 857
26.3 Global inequality......Page 865
26.4 Trade and developing countries......Page 871
26.5 The problem of debt......Page 881
26.1 Economic and financial interdependencies: Trade imbalance in the US and China......Page 853
26.2 Optimal currency areas......Page 861
26.3 The Human Development Index (HDI)......Page 869
26.4 When driving and alcohol do mix......Page 876
26.5 The evolving comparative advantage of China......Page 879
26.6 A debt to the planet......Page 883
Postscript: The Castaways or Vote for Caliban......Page 889
1: Some Techniques of Economic Analysis......Page 892
2: Websites......Page 906
Threshold Concepts and Key Ideas......Page 910
A......Page 914
B......Page 915
C......Page 916
D......Page 918
E......Page 919
F......Page 921
G......Page 922
I......Page 923
L......Page 925
M......Page 926
N......Page 928
P......Page 929
R......Page 931
S......Page 933
T......Page 935
Y......Page 937
A......Page 938
B......Page 939
C......Page 941
D......Page 943
E......Page 945
F......Page 947
G......Page 949
H......Page 950
I......Page 951
L......Page 954
M......Page 955
N......Page 958
O......Page 959
P......Page 960
R......Page 962
S......Page 963
T......Page 965
V......Page 967
Z......Page 968
Back Cover......Page 969