Essentials of Economics

Cover
Essentials of Economics
About the Authors
In Memorium
Brief Contents
Contents
Preface
Acknowledgments
Reviewers
Part One: Introduction
Chapter One: Limits, Alternatives, and Choices
The Economic Perspective
Scarcity and Choice
Applying the Analysis Is Facebook Free?
Illustrating the Idea Did Zuckerberg, Seacrest, and Grande Make Bad Choices?
Marginal Analysis: Comparing Benefits and Costs
Applying the Analysis Fast-Food Lines
Theories, Principles, and Models
Microeconomics and Macroeconomics
Microeconomics
Macroeconomics
Individuals’ Economic Problem
Limited Income
Unlimited Wants
A Budget Line
Society’s Economic Problem
Scarce Resources
Resource Categories
Production Possibilities Model
Production Possibilities Table
Production Possibilities Curve
Law of Increasing Opportunity Costs
Optimal Allocation
Unemployment, Growth, and the Future
A Growing Economy
Applying the Analysis The Economics of Pandemics
Applying the Analysis Information Technology and Biotechnology
Present Choices and Future Possibilities
Summary
Terms and Concepts
Questions
Problems
Chapter One Appendix: Graphs and Their Meaning
Construction of a Graph
Direct and Inverse Relationships
Dependent and Independent Variables
Other Things Equal
Slope of a Line
Slope of a Nonlinear Curve
Appendix Summary
Appendix Terms and Concepts
Appendix Questions
Appendix Problems
Chapter Two: The Market System and the Circular Flow
Economic Systems
The Command System
The Market System
Applying the Analysis Korea by Night
Characteristics of the Market System
Private Property
Freedom of Enterprise and Choice
Self-Interest
Competition
Markets and Prices
Technology and Capital Goods
Specialization
Use of Money
Active, but Limited, Government
Four Fundamental Questions
What Will Be Produced?
Applying the Analysis Consumer Sovereignty in a Pandemic
How Will the Goods and Services Be Produced?
Who Will Get the Output?
How Will the System Promote Progress?
Applying the Analysis Bitcoin and Cheap Electons
Who Will Get the Output?
How Will the System Promote Progress?
Applying the Analysis The “Invisible Hand”
Applying the Analysis The Demise of the Command Systems
The Circular Flow Model
Households
Businesses
Product Market
Resource Market
Applying the Analysis Some Facts About U.S. Businesses
Applying the Analysis Some Facts About U.S. Households
Summary
Terms and Concepts
Questions
Problems
Part Two: Price, Quantity, and Efficiency
Chapter Three: Demand, Supply, and Market Equilibrium
Demand
Law of Demand
The Demand Curve
Market Demand
Changes in Demand
Changes in Quantity Demanded
Supply
Law of Supply
Market Supply
Determinants of Supply
Changes in Supply
Changes in Quantity Supplied
Market Equilibrium
Equilibrium Price and Quantity
Rationing Function of Prices
Applying the Analysis Emergent Equilibria
Changes in Demand, Supply, and Equilibrium
Changes in Demand
Changes in Supply
Complex Cases
Government-Set Prices
Applying the Analysis Price Ceilings on Gasoline
Applying the Analysis Rent Controls
Applying the Analysis Price Floors on Wheat
Summary
Terms and Concepts
Questions
Problems
Chapter Three Appendix: Additional Examples of Supply and Demand
Changes in Supply and Demand
Preset Prices
Applying the Analysis Uber and Dynamic Pricing
Appendix Summary
Appendix Questions
Appendix Problems
Chapter Four: Elasticity of Demand and Supply
Price Elasticity of Demand
The Price-Elasticity Coefficient and Formula
Interpretations of Ed
Illustrating the Idea A Bit of a Stretch
The Total-Revenue Test
Price Elasticity along a Linear Demand Curve
Determinants of Price Elasticity of Demand
Applying the Analysis The Southwest Effect
Applying the Analysis Price Elasticity of Demand and College Tuition
Applying the Analysis Decriminalization of Illegal Drugs
Applying the Analysis Excise Taxes and Tax Revenue
Applying the Analysis Large Crop Yields and Farm Income
Price Elasticity of Supply
Price Elasticity of Supply: The Immediate Market Period
Price Elasticity of Supply: The Short Run
Price Elasticity of Supply: The Long Run
Applying the Analysis Antiques and Reproductions
Applying the Analysis Volatile Gold Prices
Income Elasticity of Demand
Normal Goods
Inferior Goods
Applying the Analysis: Which Consumer Products Suffer the Greatest Demand Decreases duringRecessions?
Cross-Elasticity of Demand
Substitute Goods
Complementary Goods
Independent Goods
Applying the Analysis: Using Cross-Elasticity to Make Business and Regulatory Decisions
Summary
Terms and Concepts
Questions
Problems
Chapter Five: Market Failures: Public Goodsand Externalities
Market Failures in Competitive Markets
Demand-Side Market Failures
Supply-Side Market Failures
Efficiently Functioning Markets
Private and Public Goods
Private Goods Characteristics
Profitable Provision
Public Goods Characteristics
Illustrating the Idea Art for Art’s Sake
Comparing Marginal Benefit and Marginal Cost
Applying the Analysis Cost-Benefit Analysis
Externalities
Negative Externalities
Positive Externalities
Illustrating the Idea: Beekeepers and the Coase Theorem
Applying the Analysis Congestion Pricing
Government Intervention
Applying the Analysis Congestion Pricing
Society’s Optimal Amount of Externality Reduction
Financing the Public Sector: Taxation
Apportioning the Tax Burden
Benefits Received versus Ability to Pay
Progressive, Proportional, and Regressive Taxes
Tax Progressivity in the United States
Government’s Role in the Economy
Summary
Terms and Concepts
Questions
Problems
Part Three: Product Markets
Chapter Six: Businesses and Their Costs
Economic Costs
Explicit and Implicit Costs
Accounting Profit and Normal Profit
Economic Profit
Short Run and Long Run
Short-Run Production Relationships
Law of Diminishing Returns
Relevancy for Firms
Illustrating the Idea Diminishing Returns from Study
Tabular and Graphical Representations
Illustrating the Idea Exam Scores
Long-Run Production Costs
Firm Size and Costs
The Long-Run Cost Curve
Economies and Diseconomies of Scale
Applying the Analysis The Verson Stamping Machine
Minimum Efficient Scale and Industry Structure
Applying the Analysis Aircraft Assembly Plants versus Concrete Plants
Summary
Terms and Concepts
Questions
Problems
Chapter Seven: Pure Competition
Four Market Models
Pure Competition: Characteristics and Occurrence
Demand as Seen by a Purely Competitive Seller
Perfectly Elastic Demand
Average, Total, and Marginal Revenue
Profit Maximization in the Short Run
Profit-Maximizing Case
Loss-Minimizing Case
Shutdown Case
Applying the Analysis The Still There Motel
Marginal Cost and Short-Run Supply
Generalized Depiction
Firm and Industry: Equilibrium Price
Profit Maximization in the Long Run
Assumptions
Goal of Our Analysis
Long-Run Equilibrium
Applying the Analysis Running a Company Is Hard Business
Long-Run Supply for a Constant-Cost Industry
Long-Run Supply for an Increasing-Cost Industry
Long-Run Supply for a Decreasing-Cost Industry
Pure Competition and Efficiency
Productive Efficiency: P = Minimum ATC
Allocative Efficiency: P = MC
Summary
Terms and Concepts
Questions
Problems
Chapter Eight: Pure Monopoly
An Introduction to Pure Monopoly
Barriers to Entry
Economies of Scale
Legal Barriers to Entry: Patents and Licenses
Ownership or Control of Essential Resources
Pricing and Other Strategic Barriers to Entry
Monopoly Demand
Marginal Revenue Is Less than Price
The Monopolist Is a Price Maker
Output and Price Determination
Cost Data
MR = MC Rule
Misconceptions Concerning Monopoly Pricing
Applying the Analysis Salt Monopolies
Economic Effects of Monopoly
Price, Output, and Efficiency
Income Transfer
Cost Complications
Applying the Analysis Monopoly Power in the Internet Age
Price Discrimination
Conditions
Examples
Graphical Analysis
Applying the Analysis Price Discrimination at the Ballpark
Monopoly and Antitrust Policy
Not Widespread
Antitrust Policy
Applying the Analysis United States v. Microsoft
Summary
Terms and Concepts
Questions
Problems
Chapter Nine: Monopolistic Competition and Oligopoly
Monopolistic Competition
Differentiated Products
Easy Entry and Exit
Advertising
Monopolistically Competitive Industries
Price and Output in Monopolistic Competition
The Firm’s Demand Curve
The Short Run: Profit or Loss
The Long Run: Only a Normal Profit
Monopolistic Competition and Efficiency
Neither Productive nor Allocative Efficiency
Excess Capacity
Product Variety and Improvement
Applying the Analysis The Spice of Life
Oligopoly
A Few Large Producers
Homogeneous or Differentiated Products
Control over Price, but Mutual Interdependence
Control over Price, but Mutual Interdependence
Illustrating the Idea Creative Strategic Behavior
Entry Barriers
Mergers
Oligopoly Behavior: A Game-Theory Overview
Illustrating the Idea The Prisoner’s Dilemma
Mutual Interdependence Revisited
Collusion
Incentive to Cheat
Kinked-Demand Model
Kinked-Demand Curve
Price Inflexibility
Price Leadership
Applying the Analysis Breakdowns in Price Leadership: Price Wars
Collusion
Joint-Profit Maximization
Applying the Analysis Cartels and Collusion
Obstacles to Collusion
Oligopoly and Advertising
Positive Effects of Advertising
Potential Negative Effects of Advertising
Oligopoly and Efficiency
Inefficiency
Applying the Analysis Internet Oligopolies
Summary
Questions
Problems
Part Four: GDP, Growth, and Instability
Chapter Ten: GDP and Economic Growth
Gross Domestic Product
A Monetary Measure
Avoiding Multiple Counting
Excluding Secondhand Sales and Financial Transactions
Measuring GDP
Personal Consumption Expenditures (C)
Gross Private Domestic Investment (Ig)
Government Purchases (G)
Net Exports (Xn)
Adding It Up: GDP = C + Ig + G + Xn
Nominal GDP versus Real GDP
Applying the Analysis: The Underground Economy
Economic Growth
Arithmetic of Growth
Illustrating the Idea Growth Rates Matter!
Growth in the United States
Determinants of Growth
Supply Factors
Demand Factor
Efficiency Factor
Production Possibilities Analysis
Growth and Production Possibilities
Labor and Productivity
Accounting for Growth
Labor Inputs versus Labor Productivity
Technological Advance
Quantity of Capital
Education and Training
Economies of Scale and Resource Allocation
Institutional Structures That Promote Growth
Other Factors
Recent Fluctuations in Average Productivity Growth
Reasons for the Rise in the Average Rate of Productivity Growth Between 1995 and 2010
Implications for Economic Growth
The Recent Productivity Slowdown
Is Growth Desirable and Sustainable?
The Antigrowth View
In Defense of Economic Growth
Summary
Terms and Concepts
Questions
Problems
Chapter Eleven: Business Cycles, Unemployment, and Inflation
Business Cycles
Causes of Business Cycles
Cyclical Impact: Durables and Nondurables
Unemployment
Measurement of Unemployment
Types of Unemployment
Applying the Analysis: Downwardly Sticky Wages and Unemployment
Definition of Full Employment
Economic Cost of Unemployment
Inflation
Measurement of Inflation
Facts of Inflation
Types of Inflation
Illustrating the Idea Clipping Coins
Redistribution Effects of Inflation
Who Is Hurt by Inflation?
Who Is Unaffected or Helped by Inflation?
Anticipated Inflation
Does Inflation Affect Output?
Cost-Push Inflation and Real Output
Demand-Pull Inflation and Real Output
Applying the Analysis The Specter of Deflation
Applying the Analysis Hyperinflation
Summary
Terms and Concepts
Questions
Problems
Chapter Twelve: Aggregate Demand and Aggregate Supply
Aggregate Demand
Changes in Aggregate Demand
Consumer Spending
Applying the Analysis: What Wealth Effect?
Investment Spending
Government Spending
Net Export Spending
Aggregate Supply
Aggregate Supply in the Immediate Short Run
Aggregate Supply in the Short Run
Aggregate Supply in the Long Run
Focusing on the Short Run
Changes in Aggregate Supply
Input Prices
Productivity
Legal-Institutional Environment
Equilibrium Price Level and Real GDP
Changes in Equilibrium
Applying the Analysis: Demand-Pull Inflation
Applying the Analysis: Cost-Push Inflation
Downward Price-Level Inflexibility
Illustrating the Idea The Ratchet Effect
Applying the Analysis Recession and Cyclical Unemployment
The Multiplier Effect
Self-Correction?
Summary
Terms and Concepts
Questions
Problems
Chapter Thirteen: Fiscal Policy, Deficits, and Debt
Fiscal Policy and the AD–AS Model
Expansionary Fiscal Policy
Contractionary Fiscal Policy
Built-In Stability
Automatic or Built-In Stabilizers
Economic Importance
Evaluating Fiscal Policy
Applying the Analysis: Recent U.S. Fiscal Policy
Problems, Criticisms, and Complications
Problems of Timing
Political Considerations
Future Policy Reversals
Offsetting State and Local Finance
Crowding-Out Effect
The U.S. Public Debt
Ownership
Debt and GDP
International Comparisons
Interest Charges
False Concerns?
Bankruptcy
Burdening Future Generations
Substantive Issues
Income Distribution
Incentives
Foreign-Owned Public Debt
Crowding-Out Effect Revisited
The Long-Run Fiscal Imbalance: Social Security
The Social Security Shortfall
Policy Options
Summary
Terms and Concepts
Questions
Problems
Part Five: Money, Banking, and Monetary Policy
Chapter Fourteen: Money, Banking, and Financial Institutions
The Functions of Money
The Components of the Money Supply
Money Definition: M1
Money Definition: M2
What “Backs” the Money Supply?
The Value of Money
Illustrating the Idea: Are Credit Cards Money?
Money and Prices
The Federal Reserve and the Banking System
The Board of Governors
The 12 Federal Reserve Banks
FOMC
Commercial Banks and Thrifts
Fed Functions and Responsibilities
Federal Reserve Independence
The Financial Crisis of 2007 and 2008
Overview
Prelude
Causes
Crisis
Immediate Response
Post-Crisis Policy Changes
The Fractional Reserve System
Illustrating the Idea: The Goldsmiths
A Single Commercial Bank
Transaction 1: Creating a Bank
Transaction 2: Acquiring Property and Equipment
Transaction 3: Accepting Deposits
Transaction 4: Depositing Reserves in a Federal Reserve Bank
Transaction 5: Clearing a Check Drawn Against the Bank
Transaction 6: Granting a Loan (Creating Money)
The Banking System: Multiple-Deposit Expansion
The Banking System’s Lending Potential
The Monetary Multiplier
Applying the Analysis: The Bank Panics of 1930 to 1933
Summary
Terms and Concepts
Questions
Problems
Chapter Fifteen: Interest Rates and Monetary Policy
Interest Rates
The Demand for Money
The Equilibrium Interest Rate
Illustrating the Idea: That Is Interest
Tools of Monetary Policy
The Reserve Ratio
The Discount Rate
Interest on Reserves
Relative Importance
Easy Money and Tight Money
Monetary Policy, Real GDP, and the Price Level
The Cause-Effect Chain
Effects of an Easy Money Policy
Effects of a Tight Money Policy
Monetary Policy in Action
Fed Targets
Applying the Analysis: Recent U.S. Monetary Policy
Problems and Complications
Applying the Analysis: Less than Zero
Summary
Terms and Concepts
Questions
Problems
Part Six: International Economics
Chapter Sixteen: International Trade andExchange Rates
Trade Facts
The Economic Basis for Trade
Comparative Advantage and Specialization
Illustrating the Idea: A CPA and a House Painter
Comparative Advantage: Production Possibilities Analysis
Trade with Increasing Costs
The Foreign Exchange Market
Exchange Rates
Depreciation and Appreciation
Determinants of Exchange Rates
Government and Trade
Trade Barriers and Export Subsidies
Economic Impact of Tariffs
Net Costs of Tariffs
Illustrating the Idea: Buy American?
Three Arguments for Protection
Increased-Domestic-Employment Argument
Cheap-Foreign-Labor Argument
Protection-Against-Dumping Argument
Trade Adjustment Assistance
Applying the Analysis: Is Offshoring of Jobs Bad?
Multilateral Trade Agreements and Free-Trade Zones
General Agreement on Tariffs and Trade
World Trade Organization
European Union
North American Free Trade Agreement
Recent U.S. Trade Deficits
Causes of the Trade Deficits
Implications of U.S. Trade Deficits
Summary
Terms and Concepts
Questions
Problems
Part Seven: Resource Markets
Chapter Seventeen: Wage Determination
A Focus on Labor
Labor Demand
Marginal Revenue Product
Rule for Employing Labor: MRP = MRC
MRP as Labor Demand Schedule
Market Demand for Labor
Changes in Labor Demand
Changes in Product Demand
Changes in Productivity
Changes in the Prices of Other Resources
Applying the Analysis: Occupational Employment Trends
Elasticity of Labor Demand
Ease of Resource Substitutability
Elasticity of Product Demand
Ratio of Labor Cost to Total Cost
Market Supply of Labor
Wage and Employment Determination
Monopsony
Upward-Sloping Labor Supply to Firm
MRC Higher than the Wage Rate
Equilibrium Wage and Employment
Applying the Analysis: Monopsony Power
Union Models
Demand-Enhancement Model
The Exclusive or Craft Union Model
The Inclusive or Industrial Union Model
Wage Increases and Job Loss
Wage Differentials
Marginal Revenue Productivity
Noncompeting Groups
Illustrating the Idea: My Entire Life
Compensating Differences
Applying the Analysis: The Minimum Wage
Summary
Terms and Concepts
Questions
Problems
Chapter Eighteen: Income Inequality and Poverty
Facts about Income Inequality
Distribution by Income Category
Distribution by Quintiles (Fifths)
The Lorenz Curve and Gini Ratio
Income Mobility: The Time Dimension
Effect of Government Redistribution
Causes of Income Inequality
Ability
Education and Training
Discrimination
Preferences and Risks
Unequal Distribution of Wealth
Market Power
Luck, Connections, and Misfortune
Income Inequality over Time
Rising Income Inequality since 1980
Causes of Growing Inequality
Equality versus Efficiency
The Case for Equality: Maximizing Total Utility
The Case for Inequality: Incentives and Efficiency
The Equality-Efficiency Trade-Off
Illustrating the Idea: Slicing the Pizza
The Economics of Poverty
Definition of Poverty
Incidence of Poverty
Measurement Issues
The U.S. Income-Maintenance System
Social Insurance Programs
Public Assistance Programs
Applying the Analysis: Universal Basic Income
Summary
Terms and Concepts
Questions
Problems
Appendix Tables
Glossary
Index