Economics Today - GBV
Transcript of Economics Today - GBV
EconomicsTodayFifteenth Edition
Roger LeRoy MillerInstitute for University Studies, Arlington, Texas
Addison-WesleyBoston San Francisco New York
London Toronto Sydney Tokyo Singapore Madrid
Mexico City Munich Paris Cape Town Hong Kong Montreal
Brief ContentsPreface
Part One Introduction1 The Nature of Economics2 Scarcity and the World of Trade-Offs3 Demand and Supply4 Extensions of Demand and Supply Analysis5 Public Spending and Public Choice6 Funding the Public Sector
Part Two Introduction to Macroeconomics and Economic Growth7 The Macroeconomy: Unemployment and Inflation8 Measuring the Economy's Performance9 Global Economic Growth and Development
Part Three Real GDP Determination and Fiscal Policy10 Real GDP and the Price Level in the Long Run11 Classical and Keynesian Macro Analyses12 Consumption, Real GDP, and the Multiplier13 Fiscal Policy14 Deficit Spending and the Public Debt
Part Four Money, Stabilization, and Growth15 Money, Banking, and Central Banking16 Money Creation, the Demand for Money, and Monetary Policy17 Domestic and International Dimensions of Monetary Policy18 Stabilization in an Integrated World Economy19 Policies and Prospects for Global Economic Growth
Part Five Dimensions of Microeconomics20 Demand and Supply Elasticity21 Consumer Choice22 Rents, Profits, and the Financial Environment of Business
Part Six Market Structure, Resource Allocation, and Regulation23 The Firm: Cost and Output Determination24 Perfect Competition25 Monopoly26 Monopolistic Competition27 Oligopoly and Strategic Behavior28 Regulation and Antitrust Policy in a Globalized Economy
Part Seven Labor Resources and the Environment29 The Labor Market: Demand, Supply, and Outsourcing30 Unions and Labor Market Monopoly Power31 Income, Poverty, and Health Care32 Environmental Economics
Part Eight Global Economics33 Comparative Advantage and the Open Economy34 Exchange Rates and the Balance of Payments
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Contents
Preface xx
EXAMPLEEarthly Rewards of Religiosity
"Neuroeconomics" Evaluates
Rational Choice
The Perceived Value of Gifts
Getting Directions
E-COMMERCE EXAMPLEThe New Online Dating Incentive:
Health Insurance
POLICY EXAMPLEHow Empirical Evidence Aids
in Thwarting Terrorism
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E-COMMERCE EXAMPLEA Comparative Advantage in
Grocery Shopping 42
INTERNATIONAL EXAMPLEThe Significant Opportunity Cost
of a Second of Time 31
Making Death Illegal—At Least,
Inside City Limits 35
POLICY EXAMPLESchooling Admirals in Entrepreneurship 29
The U.S. Military Confronts aTrade-Off 33
Part One Introduction
1 The Nature of Economics 1The Power of Economic Analysis 2Defining Economics 2Microeconomics versus Macroeconomics 3The Economic Person: Rational Self-interest 3Economics as a Science 7Positive versus Normative Economics 10
You Are There Herding Alpacas Toward a Tax Break 11
Issues and Applications Risking Life and Limb on MumbaiCommuter Trains 12
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 14
Problems 15Economics on the Net 17Answers to Quick Quizzes 17
Appendix A Reading and Working with Graphs 18Direct and Inverse Relationships 18Constructing a Graph 19Graphing Numbers in a Table 20The Slope of a Line (A Linear Curve) 21
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 25
Problems 26
2 Scarcity and the World of Trade-Offs 27Scarcity 28
Wants and N e e d s 30Scarcity, Choice, and Opportuni ty Cost 30
T h e World of Trade-Offs 3 2T h e Choices Society Faces 34Economic Growth and the Production Possibilities Curve 38T h e Trade-Off Between the Present and the Future 39Specialization and Greater Productivity 40Comparative Advantage and Trade Among Nations 43
You Are There Specializing in Providing Baggage-Free Business Trips 44
Issues and Applications Specialization and Division of Labor
at the Speedway 45
VI
CONTENTS VII
EXAMPLECollege Students Face Higher
Relative Prices 53
Diamonds May Not Really Be Forever 60
Mining Production s Direct Responseto Higher Prices for Minerals 63
Integrating Poisons intoPharmaceuticals Production 68
Keeping Price Expectations Updatedwith Forecasts of Forecasts 69
In Nursing, Quantity DemandedExceeds Quantity Supplied 13
E-COMMERCE EXAMPLEAdjusting the Price of Broadband
Service for Quality 54
Video Bloggers Generate a Takeoffin Toy Helicopter Demand 59
Digital Imaging Boosts the Supplyof Dentistry Services 61
INTERNATIONAL POLICY EXAMPLEGovernment Subsidies Generate
More Train Traffic in Europe 68
POLICY EXAMPLEShould Shortages in the Ticket
Market Be Solved by Scalpers? 13
EXAMPLEThe Rising Price of Using Old Songs
as Video Background Music
A Hot Market for a Cooling Element
Summer Internships for Sale
Zero-Priced Seats at Graduation
Ceremonies Become Hot Items
E-COMMERCE EXAMPLECellphone Services Reduce the
Transaction Costs of Dating
Helping People Keep Up with theFlood of Online Videos
INTERNATIONAL EXAMPLEThe Global Black Market for
Marathon Entry Numbers
POLICY EXAMPLEKing Cotton Receives Royal Government
Subsidies
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Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice
ProblemsEconomics on the NetAnswers to Quick Quizzes
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3 Demand and SupplyDemandThe Demand ScheduleShifts in DemandThe Law of SupplyThe Supply ScheduleShifts in SupplyPutting Demand and Supply Together
You Are There Beetle Factories Respond to Higher Demandfor Weed-Eating Bugs
Issues and Applications Why Are People Eating More?Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice
ProblemsEconomics on the NetAnswers to Quick Quizzes
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4 Extensions of Demand and Supply Analysis 82The Price System and Markets 83Changes in Demand and Supply 85The Rationing Function of Prices 88The Policy of Government-Imposed Price Controls 90The Policy of Controlling Rents 92Price Floors in Agriculture 94Price Floors in the Labor Market 97Quantity Restrictions 98
You Are There Finding a Spanish Instructor in the Midstof a Teacher Shortage 99
Issues and Applications Effects of the $0 Price Ceilingin the Market for Kidneys 100
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 102
Problems 103Economics on the Net 105Answers to Quick Quizzes 106
VIII CONTENTS
EXAMPLEBillboards That Catch Drivers' Eyes,
Sometimes for Too Long 109
E-COMMERCE EXAMPLEIs the "Nu" Internet Domain a
Public Good? 115
The Minuscule Payoff fromPublic School Internet Subsidies 122
INTERNATIONAL POLICY EXAMPLEChina's Government Struggles with
How to Regard Tobacco 111
1MTEBNAT1OMAL EXAMPLEWhy a Synonym for "Big Oil"
Is "Big Government" 125
POLICY EXAMPLEIncentives Coax Senior Citizens
from Behind the Wheel 112
If the Government Doesn't Pay for It,Physicians Don't Do It 121
5 Public Spending and Public Choice 107What a Price System Can and Cannot Do 108Correcting for Externalities 108The Other Economic Functions of Government 113The Political Functions of Government 116Public Spending and Transfer Programs 118Collective Decision Making: The Theory of Public Choice 123
You Are There Aiming to Prevent Cost from ExceedingValue per Dollar in Higher Education 126
Issues and Applications An Ethanol Bonanza,or an Ethanol Boondoggle? 126
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 128
Problems 130Economics on the Net 133Answers to Quick Quizzes 133
IMTERMATIGWAL POLICY EXAMPLEDefying One Agency, Illegal
Immigrants Pay Taxes to Another 139
How Iceland Slashed a Tax Rateand Boosted Tax Revenues 145
POLICY EXAMPLEStates Consider Shifting Tax Gears
to Satisfy Budget Constraints 135
The Same Tax Rate, but DifferentTax Bases for Different People 136
State-Sponsored Gambling—
Voluntary but Regressive Taxation 138
Connecticut's "Death Tax"May Induce Changes in Residency 143
6 Funding the Public SectorPaying for the Public SectorSystems of TaxationThe Most Important Federal TaxesTax Rates and Tax RevenuesTaxation from the Point of View of Producers
and ConsumersFinancing Social Security
You Are There For This Physician, the Tax Rate Is Too Highto Justify Working
Issues and Applications Progressive Income Taxationin the United States
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice
ProblemsEconomics on the NetAnswers to Quick Quizzes
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EXAMPLEWhy Older Men May Be More
Anxious Than in Years Past
Why Women Are ConfrontingHigher Inflation Than Men
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Part Two Introduction to Macroeconomicsand Economic Growth
7 The Macroeconomy:Unemployment and InflationUnemploymentThe Major Types of UnemploymentFull Employment and the Natural Rate of Unemployment
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CONTENTS IX
EXAMPLE (continued)A Flawless Leading Indicator
Suddenly Reveals a Flaw ' 116
INTERNATIONAL EXAMPLEHow Illegal Aliens Affect Measured
U.S. Cyclical Unemployment 165
POLICY EXAMPLEAre Seasonal Adjustments to the
CP1 Causing Seasonal Inflation? 110v
' EXAMPLEThe Upward Bias in Gross Domestic
Income Relative to GDP 196
Correcting GDP for Price IndexChanges, 1999-2009 200
INTERNATIONAL POLICY EXAMPLEGreece Pays a Price for Broadening
Its GDP Definition 190
INTERftfOTIONAL EXAMPLEHow Easter Complicates Measuring
Mexican GDP Growth 193
Purchasing Power Parity Comparisonsof World Incomes 203
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'EXAMPLEExplaining the U.S. Lead in Labor
Productivity Growth " 220
INTERNATIONAL EXAMPLEGrowth Rates Around the World 216
An Upswing in Global
Economic Growth 219
Saving and Growth in China 222
A Story of Different Choices RegardingTrade—and Economic Growth 225
POLICY EXAMPLEAre Growth Rates in China
and India Overstated? 211
EXAMPLEDoes Sustained Low Inflation
Depress Real GDP? 252
INTERNATIONAL EXAMPLE s
Will a "Brain Drain" FlattenGermany's Trend Growth Path? 242
Inflation and Deflation 167Anticipated versus Unanticipated Inflation 172Changing Inflation and Unemployment: Business Fluctuations 174
You Are There Staying Employed in Denmark—at the Taxpayers' Expense 176
Issues and Applications Explaining the Downtrendin Labor Force Participation 177
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 179
Problems 181Economics on the Net 183Answers to Quick Quizzes 183
8 Measuring the Economy's Performance i84The Simple Circular Flow 185National Income Accounting 187Two Main Methods of Measuring GDP 191Other Components of National Income Accounting 197Distinguishing Between Nominal and Real Values 200Comparing GDP Throughout the World 203
You Are There Housework's Exclusion from GDPIsNot Gender Neutral 204
Issues and Applications Is U.S. Fixed Investment Understated? 205Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 207
Problems 209Economics on the Net 212Answers to Quick Quizzes 212
9 Global Economic Growth and Development 213How Do We Define Economic Growth? - 214Productivity Increases: The Heart of Economic Growth 220Saving: A Fundamental Determinant of Economic Growth 221New Growth Theory and the Determinants of Growth 223Immigration, Property Rights, and Growth 227Economic Development 229
You Are There An Invention Becomes a Market Innovation—by Accident 233
Issues and Applications Governments Get Serious About "Child Support" 233Summary: What You Should Know/Key Terms andKey Figures /Where to Go to Practice 235
Problems 236Economics on the Net 238Answers to Quick Quizzes 238
Part Three Real GDP Determination and Fiscal Policy
10 Real GDP and the Price Levelin the Long Run 239Output Growth and the Long-Run Aggregate Supply Curve 240Total Expenditures and Aggregate Demand 243Shifts in the Aggregate Demand Curve 246Long-Run Equilibrium and the Price Level 248Causes of Inflation 250"
CONTENTS
INTERNATIONAL EXAMPLE (continued)For Greenland, a Warming
Climate Is Good Economic News ' 250
EXAMPLEAre the U.S. and European SRAS
Curves Horizontal? 210
INTERNATIONAL EXAMPLEIn a Global Economy, World Saving
Equals World Investment 265
POLICY EXAMPLEThe Aggregate Supply Impact of Cuts
in U.S. Marginal Tax Rates 214
EXAMPLEExplaining the Low U.S.
"Saving Rate" . 293
Consumption Effects of Changes in
Housing versus Financial Wealth 295
The Rise and Decline of IT Investment'sShare of Total Investment, 298
You Are There Another Day's Battle with Inflation in Zimbabwe 253
Issues and Applications Is U.S. Long-Run Real GDP Growth Declining? 254Summary: What You Should Know/Key Terms andKey Figures /Where to Go to Practice 256
Problems 258Economics on the Net 260Answers to Quick Quizzes 260
11 Classical and Keynesian Macro Analyses KAThe Classical Model 262Keynesian Economics and the Keynesian
Short-Run Aggregate Supply Curve 268Output Determination Using Aggregate Demand and
Aggregate Supply: Fixed versus Changing PriceLevels in the Short Run 271
Shifts in the Aggregate Supply Curve 272Consequences of Changes in Aggregate Demand 275Explaining Short-Run Variations in Inflation 276
You Are There Putting More Weight on StabilityThan Growth in Denmark 279
Issues and Applications Higher Oil Prices and (Usually)U.S. Recessionary Gaps 280
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 282
Problems 284Economics on the Net 286Answers to Quick Quizzes 286
12 Consumption, Real GDP, and the Multiplier 287Some Simplifying Assumptions in a Keynesian Model 288Determinants of Planned Consumption and Planned Saving 290Determinants of Investment 296Determining Equilibrium Real GDP 298Keynesian Equilibrium with Government and
the Foreign Sector Added 302The Multiplier 305How a Change in Real Autonomous Spending Affects
Real GDP When the Price Level Can Change 307The Relationship Between Aggregate Demand
and the C + I+G+X Curve 308
You Are There Listen to the German Chancellor:It's Time to Go Shopping! 310
Issues and Applications The Diminishing Effect of InterestRate Changes on U.S. Real Consumption Spending 311
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 312
Problems 314Economics on the Net 316Answers to Quick Quizzes 316
Appendix B The Keynesian Model and the Multiplier 317
CONTENTS XI
INTERNATIONAL POLICY EXAMPLEStruggling to Boost Government
Spending in Peru 320
POLICY EXAMPLEDirect Expenditure Offsets in
Florida Insurance Coverage
A Laffer Curve in the Mid-2000s?
POLICY EXAMPLEWhat Was the U.S. Treasury
Thinking?
A Short-Run Deficit-BoostingStimulus Is Set to Give Way to
Deficit-Fighting Tax Increases
Should Entitlement "Trust Funds"Be Included in Deficits and theNet Public Debt?
INTERNATIONAL EXAMPLEWhy Musical Chairs in the U.S. '-•
Treasury Make the $100 Bill aWeaker Store of Value Abroad
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INTERNATIONAL EXAMPLEWho Is Most Likely to Buy U.S.
Government Bonds "Indirectly"? 350
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E-COMMERCE EXAMPLEA Web Site That Specializes in
Identifying Double Coincidences
of Wants
Watch Out Banks! Here Come
Zopa and Circleone
Private Electronic Check ClearingMay Clear Out the Fed
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13 Fiscal Policy 318Discretionary Fiscal Policy 319Possible Offsets to Fiscal Policy 322Discretionary Fiscal Policy in Practice: Coping with Time Lags 328Automatic Stabilizers 329What Do We Really Know About Fiscal Policy? 330
You Are There A Derailed Effort to Move TowardAccounting for the Laffer Curve 331
Issues and Applications Does Government SpendingCrowd Out Private Health Care Expenditures? 332
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 333
Problems 335Economics on the Net 337Answers to Quick Quizzes 338
Append ix C Fiscal Policy: A Keynesian Perspective 339Changes in Government Spending 339Changes in Taxes 340The Balanced-Budget Multiplier 340The Fixed Price Level Assumption 341Problems 341
14 Deficit Spending and the Public Debt 342Public Deficits and Debts: Flows versus Stocks 343Government Finance: Spending More Than Tax Collections 344Evaluating the Rising Public Debt 346Federal Budget Deficits in an Open Economy 351Growing U.S. Government Deficits:
Implications for U.S. Economic Performance 352
You Are There Facing a Future Medicare Meltdown? 358
Issues and Applications Are the Budget andTrade Deficits Twins or Distant Cousins? 359
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 361
Problems 363Economics on the Net 3 64Answers to Quick Quizzes 364
Part Four Money, Stabilization, and Growth
15 Money, Bank ing, and Central Banking 365The Functions of Money 367Properties of Money 369Defining Money 371Financial Intermediation and Banks 374Federal Deposit Insurance 378The Federal Reserve System: The U.S. Central Bank 382
You Are There Would You Like Your Change in Fives,Tens, Melvilles, or Rockwells? - 386
Issues and Applications The Crash of 2008 and theDecline of Investment Banking 387
XII CONTENTS
INTERNATIONAL EXAMPLE (continued)A Virtual Money Becomes Widely
Acceptable in China 310
EXAMPLEWhy the Decline in Clearing of Paper
Checks Is Bad News forAirplane Pilots 400
E-COMMERCE EXAMPLEWhat Goes on Inside Envelope-Free
Automated Teller Machines 403
POLICY EXAMPLEInterest on Reserves at Federal
Reserve Banks 396
INTERNATIONAL POLICY EXAMPLEPaying Attention to Money Supply
Growth Rates in Europe 428
POLICY EXAMPLEReading the Tea Leaves of Fed Policy
Statements
Supplementing the Taylor Rule,with the Taylor Principle
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EXAMPLEThe U.S. Natural Rate of
Unemployment
Does the United States Face aStagflation Threat?
Measurement Issues ComplicateAssessing the Speed of U.S. PriceAdjustment
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Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 389
Problems 391Economics on the Net 393Answers to Quick Quizzes 393
1 6 Money Creation, the Demand forMoney, and Monetary Policy 394Banks and Money 395The Relationship Between Total Reserves and Total Deposits 397Money Expansion by the Banking System 400The Money Multiplier 406The Demand for Money 410How the Fed Influences Interest Rates 412
You Are There Scanning Checks Benefits a Bank's Small-Business Customer 415
Issues and Applications Together, Bankers Cry, "Please Deposit Your Cash!" 415Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 418
Problems 420Economics on the Net 421Answers to Quick Quizzes 421
1 7 Domestic and InternationalDimensions of Monetary Policy 422Effects of an Increase in the Money Supply 423Open Economy Transmission of Monetary Policy 425Monetary Policy and Inflation 427Monetary Policy in Action: The Transmission Mechanism 429The Way Fed Policy Is Currently Implemented 432Selecting the Federal Funds Rate Target 435
You Are There It's Time for the FOMC to Make a Tough Call 437
Issues and Applications The Fed Tackles a Credit Crisis 438Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 440
Problems 442Economics on the Net 444Answers to Quick Quizzes 444
Appendix D Monetary Policy: A Keynesian Perspective 445Increasing the Money Supply 445Decreasing the Money Supply 446Arguments Against Monetary Policy 446Problems 446
1 8 Stabilization in anIntegrated World Economy 448Active versus Passive Policymaking 449The Natural Rate of Unemployment 449Rational Expectations, the Policy Irrelevance
Proposition, and Real Business Cycles 457Modern Approaches to Justifying Active Policymaking 463Is There a New Keynesian Phillips Curve? 465
CONTENTS XIII
POLICY EXAMPLEWhen It Comes to Inflation, the Fed
Keeps Its Eyes Off the Headlines 456
INTERNATIONAL EXAMPLEIn Indonesia, Cutting Back on
Policing Might Enhance Growth 480
Small Lenders Meet with BigSuccesses—If Governments Do NotPut Them Out of Business 483
The IMF Rethinks Nations'Voting Shares 488
EXAMPLEThe Price Elasticity of Demand for
Oranges 503
What Do Real-World Price
Elasticities of Demand Look Like? 512
Sending Mail First Class orSecond Class? 513
Short-Run versus Long-Run Price 'Elasticities of Housing Supply 511
INTERNATIONAL EXAMPLE .,Why Hearing Aid Producers Settle for
a Low Rate of "Market Penetration" 508
The Income Elasticity of Demandfor Finnish City Bus Travel 515
POLICY EXAMPLEWho Pays Higher Beer Taxes? 505
EXAMPLENewspaper Vending Machines versus
Candy Vending Machines 530
Summing Up: Economic Factors FavoringActive versus Passive Policymaking
You Are There Inflation Targeting Catches On—Except at the Fed
Issues and Applications Are U.S. Inflation Expectations Rising?,Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice
ProblemsEconomics on the NetAnswers to Quick Quizzes
19 Policies and Prospects forGlobal Economic GrowthLabor Resources and Economic GrowthCapital Goods and Economic GrowthPrivate International Financial Flows as a
Source of Global GrowthInternational Institutions and Policies for Global Growth
You Are There A Microlender Succeeds in India—In Part by Avoiding Overexposure to Water Buffalo
Issues and Applications Private International Investment:Source of Instability or Engine of Economic Growth?
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice
ProblemsEconomics on the NetAnswers to Quick Quizzes
Part Five Dimensions of Microeconomics
20 Demand and Supply ElasticityPrice ElasticityPrice Elasticity RangesElasticity and Total RevenuesDeterminants of the Price Elasticity of DemandCross Price Elasticity of DemandIncome Elasticity of DemandPrice Elasticity of Supply
You Are There Using Cross Price Elasticities toAssess Brand and Supermarket "Loyalty"
Issues and Applications Price Elasticity of Demandand the Upswing in Marijuana Use
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice
ProblemsEconomics on the NetAnswers to Quick Quizzes
21 Consumer ChoiceUtility TheoryGraphical AnalysisDiminishing Marginal UtilityOptimizing Consumption Choices
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XIV CONTENTS
EXAMPLE (continued)Which Is Worse—Too Many. Choices
or No Choice? 532
E-COMMERCE EXAMPLEMoviemakers Try to Avoid Projecting
Negative Marginal Utility 529
Help, I'm Shopping, and I Can't Stop! 538
WTEBNATIQWAL EXAiWPLEA Consumer Optimum with One
Inflation-Adjusted Dollar a Day 534
EXAMPLEDo Entertainment Superstars Make
Super Economic Rents? 561
How Chalking Up Sports LossesRaises Schools' Profits 561
Efficient Markets or Adaptive Markets? 514
E-COMMERCE EXAMPLEAt GM, a Wireless Mechanic Helps
Cut the Present Value of FutureWarranty Costs 511
INTERNATIONAL POLICY EXAMPLEAn Interest Rate Policy Reallocates \
Iranian Financial Capital 569
POLICY EXAMPLEWhy It Can Pay to Form a Partnership
Instead of a Corporation 564
EXAMPLEToyota Finds Itself Just Beyond Its
Minimum Efficient Scale 602
E-COMMERCE EXAMPLERiding an Escalator to the Outer
Edge of a Production Function 585
Wal-Mart Encounters Interferencein Inventory Radio-Tracking 594
How a Price Change Affects Consumer OptimumThe Demand Curve RevisitedBehavioral Economics and Consumer Choice Theory
You Are There Opting Out of Company Health Plans
Issues and Applications A Renewed Interest in Measuring UtilitySummary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice
ProblemsEconomics on the NetAnswers to Quick Quizzes
Appendix E More Advanced Consumer Choice TheoryOn Being IndifferentProperties of Indifferences CurvesThe Marginal Rate of SubstitutionThe Indifference MapThe Budget ConstraintConsumer Optimum RevisitedEffects of Changes in IncomeThe Price-Consumption CurveDeriving the Demand Curve
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice
Problems
22 Rents, Profits, and the FinancialEnvironment of BusinessEconomic RentFirms and ProfitsInterestCorporate Financing MethodsThe Markets for Stocks and Bonds
You Are There In a Cold Twist, a Millionaire
Bequeaths His Wealth to Himself
Issues and Applications How Musicians IncreasinglyRely on Stocks and Bonds
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice
ProblemsEconomics on the NetAnswers to Quick Quizzes
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Part Six Market Structure, Resource Allocation, and Regulation
23 The Firm: Cost and Output Determination 583Short Run versus Long Run 584The Relationship Between Output and Inputs 585Diminishing Marginal Product 586Short-Run Costs to the Firm 589The Relationship Between Diminishing Marginal
Product and Cost Curves 595Long-Run Cost Curves 598Why the Long-Run Average Cost Curve Is U-Shaped "" 599Minimum Efficient Scale 602
CONTENTS XV
INTERNATIONAL EXAMPLEA French Handbag Manufacturer
Opts for Multitasking 588
Global Cargo Shippers Pursue
Scale Economies 601
EXAMPLESell the Livestock and Open the
Farm to Pheasant Hunters! 626
E-COMMERCE EXAMPLEBlogging Becomes a Business 612
INTERNATIONAL EXAMPLEIncreasing Costs and Future Prices
in the Oil Industry 628
EXAMPLEKeeping Customers Flowing to Mr.
Goodwrench Instead of IndependentAuto Mechanics 641
For Hewlett-Packard, Ink PatentsGenerate the Color of Money 643
Why Students Pay DifferentPrices to Attend College 654
E-COMMERCE EXAMPLE N
Online Retailers Are Watching 653
INTERNATIONAL POLICY EXAMPLEA Monopoly in the Assignment
of Internet Addresses 640
German Chimney-Sweep CompetitionGoes Up in Smoke 642
You Are There More Flights of Smaller Jets Translate intoHigher Long-Run Average Costs at Airports 603
Issues and Applications Family Physicians Downsize toReduce Long-Run Average Costs 604
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 606
Problems 607Economics on the Net 609Answers to Quick Quizzes 609
24 Perfect Competition 6ioCharacteristics of a Perfectly Competitive Market Structure 611The Demand Curve of the Perfect Competitor 612How Much Should the Perfect Competitor Produce? 613Using Marginal Analysis to Determine the Profit-Maximizing
Rate of Production 615Short-Run Profits 617The Short-Run Break-Even Price and the
Short-Run Shutdown Price 618The Supply Curve for a Perfectly Competitive Industry 621Price Determination Under Perfect Competition 623The Long-Run Industry Situation: Exit and Entry 625Long-Run Equilibrium 629Competitive Pricing: Marginal Cost Pricing 630
You Are There Conflicting Signals in the Crocodile Market 631
Issues and Applications The Data-Storage Industry Booms,and Price Declines 632
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 634
Problems 635Economics on the Net 638Answers to Quick Quizzes 638
25 Monopoly 639Definition of a Monopolist 640Barriers to Entry 641The Demand Curve a Monopolist Faces • 644Elasticity and Monopoly 647Costs and Monopoly Profit Maximization 648Calculating Monopoly Profit 651On Making Higher Profits: Price Discrimination 653The Social Cost of Monopolies 655
You Are There Why Pouring Vegetable Oil into a Car Is Illegal in Illinois 657
Issues and Applications The Predictable Consequences of EuropeanState Religion Monopolies 658
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 660
Problems 661Economics on the Net 663Answers to Quick Quizzes 663
Appendix F Consumer Surplus and the Losses Resulting from Monopoly 664Consumer Surplus 664Consumer Surplus in a Perfectly Competitive Market 665How Society Loses from Monopoly 666
XVI CONTENTS
EXAMPLEDifferentiation at the
Graveyard—High-Definition RIP 610
Firms Sell with Smell 611
E-COMMERCE EXAMPLEClicking a Phone Connection 616
EXAMPLEWar Games Catch on at Firms 694
The Prisoners' Dilemma 695
Trying to Coordinate a Potato Cartel 699
E-COMMERCE EXAMPLEMarket Concentration in the Personal
Computer Industry 692
Comcast Builds a Mini Internetfor Its Online Programming 103
E-COMMERCE EXAMPLEThe Justice Department Focuses on
Flash Memory Price Fixing 129
INTERNATIONAL POLICY EXAMPLEThe Long Arm of Europe's REACH
Slaps U.S. Firms 121
POLICY EXAMPLEHow Keeping Costs Low to Maintain
Low Electricity Rates CreatesSocial Spillovers 119
Trying to Satisfy One RegulationCan Violate Another Regulation 124
The Feedback Effect of Warning-Label Overkill 125
26 Monopolistic Competition 668Monopolistic Competition 669Price and Output for the Monopolistic Competitor 672Comparing Perfect Competition with Monopolistic Competition 674Brand Names and Advertising 675Information Products and Monopolistic Competition 678
You Are There Trademarked Differentiationat Polo Ralph Lauren Corporation 682
Issues and Applications What's in a Name?The Auto Name Game Heats Up 683
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 685
Problems 686Economics on the Net 688Answers to Quick Quizzes 688
27 Oligopoly and Strategic Behavior 689Oligopoly 690Strategic Behavior and Game Theory 693The Cooperative Game: A Collusive Cartel 697Network Effects 700Product Compatibility in Multiproduct
Oligopolies Facing Network Effects 701Comparing Market Structures 706
You Are There A Real Estate Cartel Corrals a "Cheater" 707
Issues and Applications Oligopoly in theGlobal Commercial Aircraft Industry 707
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 709
Problems 711Economics on the Net 713Answers to Quick Quizzes 713
28 Regulation and Antitrust Policyin a Globalized Economy 714Forms of Industry Regulation 715Regulating Natural Monopolies 718Regulating Nonmonopolistic Industries 721Incentives and Costs of Regulation 725Antitrust Policy 728Antitrust Enforcement 731
You Are There Regulation of U.S. Currency Moves into the Court System 733
Issues and Applications The Latest in SpiralingRegulation Costs: "Doc Fees" ' 734
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 736
Problems 738Economics on the Net 740Answers to Quick Quizzes 740
CONTENTS XVII
EXAMPLE
The Derived Demand for Railcars
Why Divers Are Supplying Labor
to Nuclear Reactors
Employing a New Nurse's Aide
E-COMMERCE EXAMPLEWhy Hire an Orchestra When a
Computer Program Will Do?
INTERNATIONAL EXAMPLEReal-Time Tutoring from the
Far Side of the World
EXAMPLEHigher Incomes Imply More Assets
for the Older Set
E-COMMERCE EXAMPLEHigh-Priced Pills and Future
Health Care Costs
iftSTEBNATIONAl EXAMPLEEvidence of a More Unequal
Distribution of Income in China
A Symptom of National HealthPlans—Long Queues
EU Governments Get Serious AboutEmissions—Or Do They?
150
152
160
151
154
EXAMPLELongshoremen's Unions Win Control
over Key Technologies 116
Advertising Against Wal-Mart 111
INTERNATIONAL EXAMPLENo Pay Raise, No Data! 113
POLICY EXAMPLECan Minimum Wage Laws Ever
Boost Employment? 182
191
806
194
809
821
Part Seven Labor Resources and the Environment
29 The Labor Market:Demand, Supply, and Outsourcing 741Labor Demand for a Perfectly Competitive Firm 742The Market Demand for Labor 746Wage Determination in a Perfectly Competitive Labor Market 749Labor Outsourcing, Wages, and Employment 752Monopoly in the Product Market 756The Utilization of Other Factors of Production 759
You Are There: "Reverse Outsourcing" Provides New Jobs in Ohio 761
Issues and Applications The Narrowing Male-Female Wage Gap 762Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 764
Problems . 766Economics on the Net 767Answers to Quick Quizzes 767
30 Unions and Labor Market Monopoly Power 768Industrialization and Labor Unions 769Union Goals and Strategies 772Economic Effects of Labor Unions 777Monopsony: A Buyer's Monopoly 779
You Are There In China, Consumers Seek to Act Together as a Monopsonist 784
Issues and Applications Can the U.S. Auto Industry and theUnited Auto Workers Union Remain Viable Enterprises? 784
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 786
Problems 788Economics on the Net 790Answers to Quick Quizzes 790
3 1 Income, Poverty, and Health Care 791Income 792Determinants of Income Differences 796Theories of Desired Income Distribution 799Poverty and Attempts to Eliminate It 800Health Care 804
You Are There The New Experimental Therapy: Prepaid Clinics 810
Issues and Applications The Volatility of U.S. Households'Incomes 811Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 813
Problems 815Economics on the Net 817Answers to Quick Quizzes 817
32 Environmental Economics sisPrivate versus Social Costs 819Correcting for Externalities 821Pollution 823Common Property 825Reducing Humanity's Carbon Footprint:
Restrainino1 PollnHnn-P.Qncino- Art-nntipc 897
xviii CONTENTS
POLICY EXAMPLEPassive Smoking Effects of Smoking
Bans versus Cigarette Taxes 822
Determining Whether SpeciesAre Distinct Can Have aDollar Value 830
Wild Species, Common Property, and Trade-Offs 829
You Are There A U.S. Senator Finds the Largest U.S. Carbon Footprint 831
Issues and Applications The Economics of Pollutionin China—Present and Future 831
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 833
. Problems 835Economics on the Net 837Answers to Quick Quizzes 837
EXAMPLEHow "Transfer Points" Contribute
to U.S. Competitiveness
E-COMMERCE EXAMPLECanadian Consumers Cheat to
Watch U.S. TV Programming
INTERNATIONAL EXAMPLEHave Seafood, Will Travel
The Comparative Advantage of
Desert Dairies
China Discovers a New ComparativeAdvantage
POLICY EXAMPLEPaying More for U.S.-Grown
Charitable Food Donations
848
850
839
841
846
851
INTERNATIONAL EXAMPLEGoing Loony over an Appreciating
Loonie 812
Measuring the Value of Zimbabwe'sDollar 881
Part Eight Global Economics
33 Comparative Advantageand the Open Economy 838The Worldwide Importance of International Trade 839Why We Trade: Comparative Advantage
and Mutual Gains from Exchange 840The Relationship Between Imports and Exports 847International Competitiveness 848Arguments Against Free Trade 849Ways to Restrict Foreign Trade 852International Trade Organizations 854
You Are There How Visa Rules Protect U.S. Pop Stars from aBritish Invasion 857
Issues and Applications Higher Shipping Costs: A Barrier to Tradeor a By-Product of Its Growth? 858
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 859
Problems 861Economics on the Net 862Answers to Quick Quizzes 862
34 Exchange Rates and theBalance of Payments 863The Balance of Payments and International Capital Movements 864Determining Foreign Exchange Rates 871The Gold Standard and the International Monetary Fund 878Fixed versus Floating Exchange Rates 879
You Are There Literally Betting the House on an Exchange Rate 884
Issues and Applications The Current Account Deficit forOne Group of Nations Is the Current Account Surplus for Another 884
Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 887
Problems 888Economics on the Net 890Answers to Quick Quizzes 890
Answers to Odd-Numbered Problems
Photo Credits
Glossary
Index
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C-l
G-l
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