Essentials of Economics

Front Cover
Half Title
Title Page
Copyright Page
About the authors
Brief contents
Detailed contents
Preface
Student and lecturer resources
Acknowledgements
Part A INTRODUCTION
1 Economic issues
1.1 Global Economic Issues
COVID-19 and the global health emergency
Global inflation
The environment and the global climate emergency
1.2 The Core of Economics
The problem of scarcity
Demand and supply
1.3 Dividing Up the Subject
Microeconomics
Macroeconomics
1.4 Modelling Economic Relationships
The production possibility curve
The circular flow of goods and incomes
Models and data
1.5 Economic Systems
The command economy
The free-market economy
The price mechanism
The mixed market economy
Chapter 1 Boxes
1.1 The Opportunity Costs of Studying: What are you sacrificing?
1.2 Business Cycles: The inherent volatility of economies
1.3 Nominal and Real House Prices: Going through the roof
1.4 Command Economies: Rise and fall of planning in Russia
Part B MICROECONOMICS
2 Markets, demand and supply
2.1 Demand
The relationship between demand and price
The demand curve
Other determinants of demand
Movements along and shifts in the demand curve
2.2 Supply
Supply and price
The supply curve
Other determinants of supply
Movements along and shifts in the supply curve
2.3 The Determination of Price
Equilibrium price and output
Movement to a new equilibrium
2.4 The Free-Market Economy
Advantages of a free-market economy
Problems with a free-market economy
Chapter 2 Boxes
2.1 UK House Prices: Unearthing the foundations of house price patterns
2.2 Stock Market Prices: Taking stock of share prices
2.3 Commodity Prices: Riding the commodities Big Dipper
3 Markets in action
3.1 Price Elasticity of Demand
The price elasticity of demand
Measuring the price elasticity of demand
Interpreting the figure for elasticity
Determinants of price elasticity of demand
3.2 Price Elasticity of Demand and Consumer Expenditure
3.3 Price Elasticity of Supply (PES)
The determinants of price elasticity of supply
3.4 Other Elasticities
Income elasticity of demand
Cross-price elasticity of demand
3.5 Markets and Adjustment over Time
Short-run and long-run adjustment
Price expectations and speculation
3.6 Markets Where Prices are Controlled
Setting a minimum (high) price
Setting a maximum (low) price
Chapter 3 Boxes
3.1 The Measurement of Elasticity
3.2 Advertising and its Effect on Demand Curves: How to increase sales and price
3.3 Elasticities and Relationships: Where there's a relationship, there's an elasticity
3.4 Short Selling: Gambling on a fall in share prices
3.5 A Minimum Unit Price for Alcohol: A way of reducing alcohol consumption
3.6 UK Payday Loan Cap: Capping the cost of short-term credit
3.7 The Effect of Imposing Taxes on Goods: Who ends up paying?
4 The demand decision
4.1 Consumer Choice
Utility and the rational consumer
The rational consumer's optimal combination of goods
4.2 The Timing of Costs and Benefits
Intertemporal choices
Maximising utility with intertemporal choices
4.3 Uncertainty and Risk
Choice under risk and uncertainty
Attitudes towards risk
Insurance: a way of removing risks
Choices under asymmetric information
4.4 Behavioural Economics
What is behavioural economics?
Processing limited information
Taking other people into account
Biased behaviour
Implications for economic policy
Chapter 4 Boxes
4.1 Satisfaction and Consumer Demand: Identifying the benefit drivers
4.2 Optimal Consumption Bundles: Equi-marginal principle in consumption
4.3 Intertemporal Decision Making and the Rational Consumer: Incorporating impatience into models of consumer choice
4.4 Futures Markets: A way of reducing uncertainty
4.5 Problems with Insurance Markets: Adverse selection and moral hazard
4.6 Nudging People: How to change behaviour without taking away choice
5 The supply decision
5.1 Production and Costs: Short Run
Short-run and long-run changes in production
Production in the short run: the law of diminishing returns
Measuring costs of production
Costs and output
5.2 Production and Costs: Long Run
The scale of production
Long-run average cost
The relationship between long-run and short-run average cost curves
Long-run cost curves in practice
Postscript: decision- making in different time periods
5.3 Revenue
Total, average and marginal revenue
Average and marginal revenue curves when price is not affected by the firm's output
Average and marginal revenue curves when price varies with output
Shifts in revenue curves
5.4 Profit Maximisation
Some qualifications
5.5 Problems with Traditional Theory
Explaining actual producer behaviour
Alternative aims
Chapter 5 Boxes
5.1 Diminishing Returns in the Bread Shop: Is the baker using his loaf?
5.2 Malthus and the Dismal Science of Economics: Population growth + diminishing returns = starvation
5.3 The Relationship Between Averages and Marginals
5.4 Costs and the Economic Vulnerability of Firms: The behaviour of costs and firms' financial well-being
5.5 The Optimum Combinations of Inputs: Equi-marginal principle in production
5.6 Minimum Efficient Scale: The extent of economies of scale in practice
6 Market structures
6.1 The Degree of Competition
6.2 Perfect Competition
Assumptions
The short-run equilibrium of the firm
The short-run supply curve
The long-run equilibrium of the firm
6.3 Monopoly
What is a monopoly?
Barriers to entry
Equilibrium price and output
Monopoly versus perfect competition: which best serves the public interest?
Potential competition or potential monopoly? The theory of contestable markets
6.4 Monopolistic Competition
Assumptions
Equilibrium of the firm
Non-price competition
Monopolistic competition and the public interest
6.5 Oligopoly
The two key features of oligopoly
Competition and collusion
Collusive oligopoly
Non-collusive oligopoly: the breakdown of collusion
Non-collusive oligopoly: assumptions about rivals' behaviour
Oligopoly and the consumer
6.6 Game Theory
Simultaneous single-move games
Repeated simultaneous-move games
Sequential-move games
6.7 Price Discrimination
Advantages to the firm
Price discrimination and the public interest
Chapter 6 Boxes
6.1 E-Commerce: Has technology shifted market power?
6.2 Breaking the Monopoly on live Premier League Football: The sky is the limit for the English Premier League
6.3 OPEC: The history of the world's most famous cartel
6.4 Buying Power: What's being served up by the UK grocery sector?
6.5 The Prisoners' Dilemma: Choosing whether to deny or confess
6.6 Profit-Maximising Prices and Output For a Third-Degree Price Discriminating Firm: Identifying different prices in different markets
7 Wages and the distribution of income
7.1 Wage Determination in a Perfect Market
Perfect labour markets
The supply of labour
The demand for labour: the marginal productivity theory
Wages and profits under perfect competition
7.2 Wage Determination in Imperfect Markets
Firms with power
The role of trade unions
Bilateral monopoly
The efficiency wage hypothesis
7.3 Inequality
Types of inequality
Measuring the size distribution of income
The functional distribution of income
The distribution of wealth
Causes of inequality
7.4 The Redistribution of Income
Taxation
Benefits
The tax/benefit system and the problem of disincentives: the 'poverty trap'
Chapter 7 Boxes
7.1 Labour Market Trends: Patterns in employment
7.2 Wages under Bilateral Monopoly: All to play for?
7.3 The Gender Pay Gap: Wage inequalities between men and women
7.4 Minimum Wage Legislation: A way of helping the poor?
7.5 Inequality and Economic Growth: Macroeconomic implications of income inequality
7.6 Uk Tax Credits: An escape from the poverty trap?
8 Market failures and government policy
8.1 Social Efficiency
8.2 Market Failures: Externalities and Public Goods
Externalities
Public goods
8.3 Market Failures: Monopoly Power
Deadweight loss under monopoly
Conclusions
8.4 Other Market Failures
Imperfect information
Immobility of factors and time lags in response
Protecting people's interests
Other objectives
How far can economists go in advising governments?
8.5 Government Intervention: Taxes and Subsidies
The use of taxes and subsidies
Assessing the use of taxes and subsidies
8.6 Government Intervention: Laws and Regulation
Laws prohibiting or regulating undesirable structures or behaviour
Regulatory bodies
8.7 Other Forms of Government Intervention
Changes in property rights
Provision of information
The direct provision of goods and services
Nationalisation and privatisation
8.8 More or Less Intervention?
Drawbacks of government intervention
Advantages of the free market
Should there be more or less intervention in the market?
8.9 The Environment: A Case Study in Market Failure
The environmental problem
Market failures
Policy alternatives
How much can we rely on governments?
Chapter 8 Boxes
8.1 The Tragedy of the Commons: The depletion of common resources
8.2 Should Health-Care Provision be Left to the Market?: A case of multiple market failures
8.3 Green Taxes: Are they the answer to the problem of pollution?
8.4 Trading our Way out of Climate Change: The EU carbon trading system
8.5 The Problem of Urban Traffic Congestion: Does Singapore have the answer?
Part C MACROECONOMICS
9 Aggregate demand and the business cycle
9.1 Introduction to Macroeconomics
Key macroeconomic issues
Government macroeconomic policy
9.2 Economic Volatility and the Business Cycle
The hypothetical business cycle
The business cycle in practice
Spending, output and the business cycle
9.3 The Circular Flow of Income Model
The inner flow, withdrawals and injections
The relationship between withdrawals and injections
Equilibrium in the circular flow
9.4 Simple Keynesian Model of National Income Determination
Showing equilibrium with a Keynesian diagram
The withdrawals and injections approach
The income and expenditure approach
9.5 The Multiplier
The withdrawals and injections approach
The income and expenditure approach
The multiplier: a numerical illustration
The multiplier and the full-employment level of national income
9.6 The Volatility of Private-Sector Spending
Consumption cycles
Instability of investment
The role of the financial sector
Why do booms and recessions come to an end? What determines the turning points?
9.7 Appendix Measuring National Income and Output
The product method
The income method
The expenditure method
From GDP to national income
Households' disposable income
Taking account of inflation
Chapter 9 Boxes
9.1 Output Gaps and the Business Cycle: An alternative measure of excess or deficient demand
9.2 The Consumption Function: The relationship between consumption and income
9.3 Confidence and Spending: Does confidence help to forecast spending?
9.4 Making Sense of Nominal and Real GDP: The interesting case of nominal and real Japanese GDP
10 Aggregate supply and economic growth
10.1 The AD/AS Model
The aggregate demand curve
The aggregate supply curve
Equilibrium
10.2 Alternative Perspectives on Aggregate Supply
The short-run aggregate supply curve
The long-run aggregate supply curve
Areas of general agreement
10.3 Introduction to Long-Term Economic Growth
Long-run growth and the AD/AS model
Comparing the growth performance of different countries
The causes of economic growth
10.4 Economic Growth without Technological Progress
Capital accumulation and capital deepening
A simple model of growth
The neoclassical growth model
10.5 Economic Growth with Technological Progress
Technological progress and the neoclassical model
Endogenous growth theory
Chapter 10 Boxes
10.1 Short-run Aggregate Supply: The importance of micro foundations
10.2 Measuring Labour Productivity: Mind the UK productivity gap
10.3 Getting Intensive with Physical Capital: Capital intensity and labour productivity
10.4 UK Human Capital: Estimating the capabilities of the labour force
11 The financial system, money and interest rates
11.1 The Meaning and Functions of Money
The functions of money
What should count as money?
11.2 The Financial System
The banking system
Deposit taking and lending
Profitability, liquidity and capital adequacy
Strengthening international regulation of capital adequacy and liquidity
The central bank
The role of the money markets
11.3 The Supply of Money
The creation of credit
The creation of credit: the real world
What causes money supply to rise?
The flow of funds equation
Credit cycles
The relationship between money supply and the rate of interest
11.4 The Demand for Money
What determines the size of the demand for money?
11.5 Equilibrium
Equilibrium in the money market
The link between the money and goods markets
11.6 Money Supply, Aggregate Demand and Inflation
The equation of exchange
Money and aggregate demand
Chapter 11 Boxes
11.1 Financial Intermediation: What is it that banks do?
11.2 The Growth of Banks' Balance Sheets: The rise of wholesale funding
11.3 The Rise of Securitisation: Spreading the risk or promoting a crisis?
11.4 Minsky's Financial Instability Hypothesis: Are credit cycles inevitable?
12 Output, unemployment and inflation
12.1 Unemployment
Measuring unemployment
Unemployment trends
Unemployment and the labour market
Types of disequilibrium unemployment
Types of equilibrium unemployment (or natural unemployment)
Long-term changes in unemployment
12.2 Inflation
Introduction to the causes of inflation
12.3 The Relationship Between Output, Unemployment and Inflation: The Short Run
The AD/AS model
The Phillips curve
12.4 The Relationship Between Inflation and Unemployment: Introducing Expectations
The expectations-augmented Phillips curve
Natural rate hypothesis
The accelerationist hypothesis
New classical perspective
Keynesian views
12.5 Inflation Rate Targeting
Chapter 12 Boxes
12.1 The Costs of Unemployment: Is it just the unemployed who suffer?
12.2 The Duration of Unemployment: Taking a dip in the unemployment pool
12.3 Inflation and Living Standards: The return of inflation
12.4 Cost-push Inflation: Cost-push inflation and supply shocks
12.5 Mind the Gap: Do output gaps explain inflation?
12.6 The Accelerationist Hypothesis: The race to outpace inflationary expectations
13 Macroeconomic policy
13.1 Fiscal Policy and the Public Finances
Roles for fiscal policy
Public-sector finances
Sustainability of public finances
The business cycle and the public finances
The fiscal stance
13.2 The Use of Fiscal Policy
The effectiveness of fiscal policy
Problems of magnitude
The problem of timing
Fiscal rules
13.3 Monetary Policy
The policy setting
Control of the money supply over the medium and long term
Short-term monetary measures
Techniques to control the money supply
Techniques to control interest rates
Using monetary policy
13.4 Demand-Side Policy
Attitudes towards demand management
The case for rules and policy frameworks
The case for discretion
Central banks and a Taylor rule
Conclusions
13.5 Supply-Side Policy
Market-orientated supply-side policies
Interventionist supply-side policies
The link between demand-side and supply-side policies
Chapter 13 Boxes
13.1 Primary Surpluses and Sustainable Public Finances: The fiscal arithmetic of government debt
13.2 The Fiscal Impulse: Assessing a country's fiscal stance
13.3 The Evolution of the Stability and Growth Pact in the EU: A supranational fiscal framework
13.4 The Operation of Monetary Policy in the UK: Managing the reserves
13.5 Monetary Policy in the Eurozone: The role of the ECB
13.6 Quantitative Easing: Rethinking monetary policy in hard times
13.7 Public Funding of Apprenticeships: Reforms to apprenticeships in England
Part D INTERNATIONAL ECONOMICS
14 Globalisation and international trade
14.1 Global Interdependence
Interdependence through trade
Financial interdependence
International business cycles
Global policy response
14.2 The Advantages of Trade
Trading patterns
Specialisation as the basis for trade
The law of comparative advantage
The gains from trade based on comparative advantage
Other reasons for gains from trade
The terms of trade
14.3 Arguments for Restricting Trade
Arguments in favour of restricting trade
Problems with protection
14.4 The World Trading System and the WTO
14.5 Trading Blocs
Types of preferential trading arrangement
The direct effects of a customs union: trade creation and trade diversion
Longer-term effects of a customs union
Preferential trading in practice
14.6 The European Union
From customs union to common market
The benefits and costs of the single market
Completing the internal market
The effect of the new member states
14.7 The UK and Brexit
Alternative trading arrangements
Long-term growth, trade and Brexit
14.8 Trade and Developing Countries
The relationship between trade and development
Trade strategies
Approach 1: Exporting primaries - exploiting comparative advantage
Approach 2: Import-substituting industrialisation (ISI)
Approach 3: Exporting manufactures - a possible way forward?
Chapter 14 Boxes
14.1 Trade Imbalance in the USA and China: An illustration of economic and financial interdependencies
14.2 Trading Places: Partners in trade
14.3 Do we Exploit Foreign Workers by Buying Cheap Foreign Imports?
14.4 The Doha Development Agenda: A new direction for the WTO?
14.5 Features of The Single Market
14.6 The Evolving Comparative Advantage of China: Riding the dragon
15 Balance of payments and exchange rates
15.1 The Balance of Payments Account
The current account
The capital account
The financial account
15.2 Exchange Rates
Determination of the rate of exchange in a free market
15.3 Exchange Rates and the Balance of Payments
Exchange rates and the balance of payments: no government or central bank intervention
Exchange rates and the balance of payments: with government or central bank intervention
15.4 Fixed Versus Floating Exchange Rates
Advantages of fixed exchange rates
Disadvantages of fixed exchange rates
Advantages of a free-floating exchange rate
Disadvantages of a free-floating exchange rate
Exchange rates in practice
15.5 The Origins of the Euro
The ERM
The Maastricht Treaty and the road to the single currency
15.6 Economic and Monetary Union (EMU) in Europe
Birth of the euro
Advantages of the single currency
Opposition to EMU
Future of the euro
15.7 Debt and Developing Countries
The oil shocks of the 1970s
Dealing with the debt
Chapter 15 Boxes
15.1 Nominal and Real Exchange Rates: Searching for a real advantage
15.2 Dealing in Foreign Currencies: A daily juggling act
15.3 The Importance of International Financial Movements: How a current account deficit can coincide with an appreciating exchange rate
15.4 The Euro/Dollar See-Saw: Ups and downs in the currency market
15.5 Optimal Currency Areas: When it pays to pay in the same currency
Websites appendix
Key ideas and glossary
Index
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