Economics

Cover......Page 1
Title Page......Page 5
Copyright......Page 6
CONTENTS......Page 11
PREFACE......Page 37
PART 1 INTRODUCTION......Page 51
CHAPTER 1 MODERN ECONOMICS......Page 53
What Is Economics?......Page 56
THINKING LIKE AN ECONOMIST: Incentives and the Price of AOL......Page 59
INTERNET CONNECTION: Auction Sites......Page 61
The Three Major Markets......Page 65
Microeconomics and Macroeconomics: The Two Branches of Economics......Page 67
The Science of Economics......Page 68
Why Economists Disagree......Page 69
REVIEW AND PRACTICE......Page 71
The Basic Competitive Model......Page 75
e-INSIGHT: Markets, Exchange, and e-Commerce......Page 77
Incentives and Information: Prices, Property Rights, and Profits......Page 79
Alternatives to the Price System......Page 82
Opportunity Sets and Trade-Offs......Page 84
Costs......Page 87
THINKING LIKE AN ECONOMIST: Trade-Offs......Page 89
CASE IN POINT: The Opportunity Cost of Attending College......Page 90
INTERNET CONNECTION: The Economists’ Voice......Page 93
REVIEW AND PRACTICE......Page 95
APPENDIX: Reading Graphs......Page 97
PART 2 PERFECT MARKETS......Page 101
The Role of Prices......Page 103
Demand......Page 104
CASE IN POINT: Gasoline Prices and the Demand for SUVs......Page 109
Supply......Page 111
e-INSIGHT: The Demand for Computers and Information Technology......Page 112
Law of Supply and Demand......Page 117
Price, Value, and Cost......Page 120
INTERNET CONNECTION: The Demand and Supply in the Oil Market......Page 121
REVIEW AND PRACTICE......Page 122
The Price Elasticity of Demand......Page 127
The Determinants of the Elasticity of Demand......Page 130
The Price Elasticity of Supply......Page 132
INTERNATIONAL PERSPECTIVE: Comparing Reactions to the Oil Price Shock of 2000......Page 133
Using Demand and Supply Elasticities......Page 135
Shortages and Surpluses......Page 138
THINKING LIKE AN ECONOMIST: Incentives and the Window Tax......Page 140
CASE IN POINT: Rent Control in New York City......Page 143
INTERNET CONNECTION: Flawed Deregulation......Page 144
REVIEW AND PRACTICE......Page 146
APPENDIX: Elasticity and Slope......Page 148
The Basic Problem of Consumer Choice......Page 151
CASE IN POINT: The Fate of the BTU Tax......Page 157
A Closer Look at the Demand Curve......Page 159
THINKING LIKE AN ECONOMIST: Incentives, Income Effects, and Substitution Effects......Page 162
Utility and the Description of Preferences......Page 163
Looking Beyond the Basic Model......Page 168
REVIEW AND PRACTICE......Page 172
APPENDIX: Indifference Curves and the Consumption Decision......Page 174
Indifference Curves and Marginal Rates of Substitution......Page 176
Using Indifference Curves to Illustrate Choices......Page 177
CHAPTER 6 THE FIRM’S COSTS......Page 181
Profits, Costs, and Factors of Production......Page 182
Short-Run and Long-Run Cost Curves......Page 191
Production with Many Factors......Page 196
CASE IN POINT: The Principle of Substitution and Global Warming......Page 198
Economies of Scope......Page 200
REVIEW AND PRACTICE......Page 201
Revenue......Page 205
Costs......Page 206
INTERNET CONNECTION: Firms’ Profit-and-Loss Statements......Page 207
Basic Conditions of Competitive Supply......Page 208
Entry, Exit, and Market Supply......Page 210
Long-Run Versus Short-Run Supply......Page 214
e-INSIGHT: The 2001 Recession: Cutbacks Versus Shutdowns......Page 215
Accounting Profits and Economic Profits......Page 216
CASE IN POINT: Entering the Painting Business and Opportunity Costs......Page 219
The Theory of the Competitive Firm......Page 221
REVIEW AND PRACTICE......Page 222
The Labor Supply Decision......Page 225
INTERNET CONNECTION: Labor Force Data......Page 226
THINKING LIKE AN ECONOMIST: Trade-Offs......Page 229
Firms and the Demand for Labor......Page 231
Labor Supply, Demand, and the Equilibrium Wage......Page 234
REVIEW AND PRACTICE......Page 236
APPENDIX: Indifference Curves and the Labor Supply Decision......Page 238
Supply in the Capital Market......Page 241
THINKING LIKE AN ECONOMIST: Wealth Distribution and Interest Rates......Page 247
CASE IN POINT: Why is the U.S. Saving Rate So Low?......Page 248
Demand in the Capital Market......Page 250
A Behavioral Perspective on Saving......Page 252
Education and Human Capital......Page 253
e-INSIGHT: Financing the New Economy......Page 255
The Basic Competitive Model......Page 256
REVIEW AND PRACTICE......Page 257
APPENDIX A: Indifference Curves and the Saving Decision......Page 259
APPENDIX B: Calculating Present Discounted Value......Page 261
CHAPTER 10 THE EFFICIENCY OF COMPETITIVE MARKETS......Page 265
Competitive Markets and Economic Efficiency......Page 266
FUNDAMENTALS OF COMPETITIVE MARKETS 1: Households and Firms are Price Takers......Page 268
INTERNET CONNECTION: Digital Economist......Page 269
Efficiency......Page 271
THINKING LIKE AN ECONOMIST: Exchange and Distribution......Page 274
FUNDAMENTALS OF COMPETITIVE MARKETS 3: The Competitive Market Economy is Pareto Efficient......Page 275
General Equilibrium Analysis......Page 277
THINKING LIKE AN ECONOMIST: Indirect Trade-Offs and Air Safety for Children......Page 278
CASE IN POINT: The Labor Market and the Widening Wage Gap......Page 280
CASE IN POINT: The Minimum Wage and General Equilibrium......Page 281
Looking Beyond the Basic Model......Page 284
REVIEW AND PRACTICE......Page 285
PART 3 IMPERFECT MARKETS......Page 287
CHAPTER 11 INTRODUCTION TO IMPERFECT MARKETS......Page 289
Extending the Basic Competitive Model......Page 290
Imperfect Competition and Market Structure......Page 292
INTERNET CONNECTION: The Federal Trade Commission......Page 295
FUNDAMENTALS OF IMPERFECT MARKETS 2: Imperfect Competition......Page 296
Imperfect Information......Page 297
e-INSIGHT: Information, Competition, and the Internet......Page 299
FUNDAMENTALS OF IMPERFECT MARKETS 3: Imperfect Information......Page 301
Externalities......Page 302
THINKING LIKE AN ECONOMIST: Incentives and the Environment......Page 303
Public Goods......Page 304
FUNDAMENTALS OF IMPERFECT MARKETS 5: Public Goods......Page 305
Looking Ahead......Page 306
REVIEW AND PRACTICE......Page 307
Monopoly Output......Page 311
Economies of Scale and Natural Monopolies......Page 317
INTERNATIONAL PERSPECTIVE: South Africa, AIDS, and Price Discrimination......Page 318
Assessing the Degree of Competition......Page 320
e-INSIGHT: Network Externalities, the New Economy, and Monopoly Power......Page 322
Equilibrium with Monopolistic Competition......Page 323
Oligopolies......Page 324
INTERNET CONNECTION: Keeping Track of Oligopolies......Page 331
THINKING LIKE AN ECONOMIST: Trade-Offs, American Airlines, and Predation......Page 333
The Importance of Imperfections in Competition......Page 334
REVIEW AND PRACTICE......Page 335
The Drawbacks of Monopolies and Limited Competition......Page 339
Policies Toward Natural Monopolies......Page 343
INTERNATIONAL PERSPECTIVE: The Darker Side of Privatization......Page 346
CASE IN POINT: California Electricity Deregulation......Page 348
Antitrust Policies......Page 349
INTERNET CONNECTION: U.S. Department of Justice and Antitrust Laws......Page 351
THINKING LIKE AN ECONOMIST: Incentives and the Remedy to the Microsoft Monopoly Problem......Page 352
CASE IN POINT: Coke and Pepsi Play Merger......Page 356
REVIEW AND PRACTICE......Page 358
CHAPTER 14 STRATEGIC BEHAVIOR......Page 361
Review of the Prisoner’s Dilemma......Page 362
Strategic Behavior in More General Games......Page 366
INTERNATIONAL PERSPECTIVE: Beggar-Thy-Neighbor Tariff Policies......Page 367
Repeated Games......Page 369
INTERNET CONNECTION: The Prisoner’s Dilemma......Page 371
CASE IN POINT: Banking Panics......Page 372
Sequential Moves......Page 374
Time Inconsistency......Page 376
REVIEW AND PRACTICE......Page 379
The Market for Lemons and Adverse Selection......Page 383
The Incentive Problem......Page 387
CASE IN POINT: Buying Health Insurance......Page 391
The Search Problem......Page 392
THINKING LIKE AN ECONOMIST: Incentive and Information Problems in the Housing Market......Page 393
e-INSIGHT: Information Technology and Middlemen......Page 394
INTERNET CONNECTION: Job Search......Page 395
Advertising......Page 397
The Importance of Imperfect Information......Page 400
REVIEW AND PRACTICE......Page 401
Labor Unions......Page 405
INTERNET CONNECTION: Unions on the Internet......Page 408
Wage Differentials......Page 412
Motivating Workers......Page 414
CASE IN POINT: Minimum Wages......Page 417
e-INSIGHT: Labor Markets and the Internet......Page 419
REVIEW AND PRACTICE......Page 421
PART 4 ISSUES IN PUBLIC POLICY......Page 423
CHAPTER 17 THE PUBLIC SECTOR......Page 425
INTERNATIONAL PERSPECTIVE: The Size of Government in Different Countries......Page 427
The U.S. Tax System in Practice......Page 431
Transfers......Page 436
Designing Government Programs......Page 440
Government Failures......Page 441
Current and Recent Controversies in the Economics of the Public Sector......Page 445
INTERNET CONNECTION: Policy Analysis......Page 450
REVIEW AND PRACTICE......Page 451
Negative Externalities and Oversupply......Page 455
Property Rights Responses......Page 457
INTERNATIONAL PERSPECTIVE: Global Warming......Page 458
THINKING LIKE AN ECONOMIST: Environmental and Economic Trade-Offs......Page 460
CASE IN POINT: Reducing Acid Rain......Page 464
INTERNET CONNECTION: The National Center for Environmental Economics......Page 466
Merit Goods and the Environment......Page 468
REVIEW AND PRACTICE......Page 469
Trade Between Countries......Page 473
Comparative Advantage......Page 476
INTERNET CONNECTION: David Ricardo......Page 477
e-INSIGHT: The United States’ Comparative Advantage in the Internet Age......Page 479
THINKING LIKE AN ECONOMIST: Exchange and the Globalization Controversy......Page 482
Trade Policies......Page 484
INTERNATIONAL PERSPECTIVE: Surrogate Countries and Canadian Golf Carts......Page 488
Political and Economic Rationale for Protection......Page 489
THINKING LIKE AN ECONOMIST: Distribution and Trade Liberalization......Page 493
e-INSIGHT: Trade Liberalization in Information Technology and Financial Services......Page 494
International Cooperation......Page 495
CASE IN POINT: The Banana War......Page 497
INTERNET CONNECTION: The World Trade Organization......Page 499
REVIEW AND PRACTICE......Page 500
CHAPTER 20 TECHNOLOGICAL CHANGE......Page 503
Links Between Technological Change and Imperfect Competition......Page 504
e-INSIGHT: The New Economy and Innovation......Page 505
THINKING LIKE AN ECONOMIST: Intellectual Property Rights and Distribution......Page 506
CASE IN POINT: Eli Whitney and the Cotton Gin......Page 510
Basic Research as a Public Good......Page 514
Government Promotion of Technological Progress......Page 515
Technological Change and Economic Growth......Page 518
REVIEW AND PRACTICE......Page 519
PART 5 INTRODUCTION TO MACROECONOMICS......Page 521
CHAPTER 21 MACROECONOMICS AND THE ECONOMIC PERSPECTIVE......Page 523
The Commitment to Full Employment and Growth......Page 524
A Look Ahead......Page 532
REVIEW AND PRACTICE......Page 533
Measuring Output and Growth......Page 535
INTERNET CONNECTION: The Bureau of Economic Analysis......Page 539
CASE IN POINT: Is Software a Final Good or an Intermediate Good?......Page 541
INTERNATIONAL PERSPECTIVE: What Gets Measured in the GDP?......Page 545
Unemployment......Page 548
Flows and Stocks......Page 555
REVIEW AND PRACTICE......Page 556
The Costs of Inflation......Page 559
CASE IN POINT: Hyperinflation in Germany in the 1920s......Page 562
Measuring Inflation......Page 564
CASE IN POINT: The Price Index Makes a Difference......Page 566
INTERNET CONNECTION: The Inflation Calculator......Page 567
e-INSIGHT: Measuring the Price and Quantity of Software......Page 568
The American Experience with Inflation......Page 569
REVIEW AND PRACTICE......Page 571
PART 6 FULL-EMPLOYMENT MACROECONOMICS......Page 573
CHAPTER 24 THE FULL-EMPLOYMENT MODEL......Page 575
Macroeconomic Equilibrium......Page 576
The Labor Market......Page 577
CASE IN POINT: Mass Migration in the Nineteenth Century......Page 581
The Product Market......Page 582
The Capital Market......Page 586
The General Equilibrium Model......Page 590
REVIEW AND PRACTICE......Page 593
CHAPTER 25 GOVERNMENT FINANCE AT FULL EMPLOYMENT......Page 597
Extending the Basic Full-Employment Model......Page 598
Adding the Government......Page 599
INTERNATIONAL PERSPECTIVE: Deficits in Other Countries......Page 605
THINKING LIKE AN ECONOMIST: Distribution, Deficits and Intergenerational Transfers......Page 606
Evaluating Government Deficits and Surpluses......Page 607
Government Deficits and Surpluses: Our Recent Experiences......Page 608
Factors Affecting the Federal Budget......Page 611
REVIEW AND PRACTICE......Page 613
CHAPTER 26 THE OPEN ECONOMY AT FULL EMPLOYMENT......Page 617
The Open Economy......Page 618
The Basic Trade Identity......Page 622
INTERNET CONNECTION: U.S. Trade Data......Page 623
CASE IN POINT: The Trade Deficit......Page 624
e-INSIGHT: High-Tech Exports and Imports......Page 626
Exchange Rates......Page 627
THINKING LIKE AN ECONOMIST: Net Exports and the Exchange Rate......Page 629
Is the Trade Deficit a Problem?......Page 630
REVIEW AND PRACTICE......Page 633
CHAPTER 27 GROWTH AND PRODUCTIVITY......Page 635
Rising Standards of Living......Page 636
Explaining Productivity......Page 639
INTERNET CONNECTION: How Fast Is Modern Economic Growth?......Page 640
Total Factor Productivity: Measuring the Sources of Growth......Page 646
CASE IN POINT: Calculating Total Factor Productivity in the 1990s......Page 647
e-INSIGHT: Computers and Increased Productivity Growth......Page 648
FUNDAMENTALS OF GROWTH: Growth in the Economy’s Labor Force, Growth in the Economy’s Capital Stock, Technological Change......Page 649
Are There Limits to Economic Growth?......Page 650
THINKING LIKE AN ECONOMIST: Trade-Offs and the Costs of Economic Growth......Page 651
REVIEW AND PRACTICE......Page 652
CHAPTER 28 MONEY, THE PRICE LEVEL, AND THE FEDERAL RESERVE......Page 655
Prices and Inflation......Page 656
INTERNET CONNECTION: How Much Cash Do We Hold?......Page 660
The Financial System in Modern Economies......Page 662
CASE IN POINT: When Atlanta Printed Money......Page 664
Creating Money in Modern Economies......Page 665
CASE IN POINT: “Boggs Bills” and the Meaning of Money......Page 669
THINKING LIKE AN ECONOMIST: Exchange, Money, and the Internet......Page 670
e-INSIGHT: Electronic Cash......Page 673
The Federal Reserve......Page 676
INTERNET CONNECTION: The Federal Reserve Banks and International Central Banks......Page 679
The Stability of the U.S. Banking System......Page 680
REVIEW AND PRACTICE......Page 683
PART 7 MACROECONOMIC FLUCTUATIONS......Page 685
CHAPTER 29 INTRODUCTION TO MACROECONOMIC FLUCTUATIONS......Page 687
Economic Fluctuations......Page 688
CASE IN POINT: Estimating the Output Costs of a Recession......Page 692
Why Economies Experience Fluctuations......Page 693
THINKING LIKE AN ECONOMIST: Information and Measuring the Business Cycle......Page 697
Understanding Macroeconomic Fluctuations: Key Concepts......Page 698
Sticky Prices......Page 699
e-INSIGHT: Cyclical and Structural Productivity......Page 700
FUNDAMENTALS OF FLUCTUATIONS 2: Sticky Prices......Page 701
FUNDAMENTALS OF FLUCTUATIONS 3: Short-Run Inflation-Unemployment Trade-Off......Page 703
CASE IN POINT: Inflation Targeting......Page 705
REVIEW AND PRACTICE......Page 707
Income-Expenditure Analysis......Page 711
A Look Forward......Page 716
Consumption......Page 717
Investment......Page 722
Net Exports......Page 726
Calculating Equilibrium Output......Page 731
Aggregate Expenditures and the Real Interest Rate......Page 733
THINKING LIKE AN ECONOMIST: Incentives and the Real After-Tax Rate of Interest......Page 734
REVIEW AND PRACTICE......Page 735
CHAPTER 31 AGGREGATE DEMAND AND INFLATION......Page 739
The Real Interest Rate and the Capital Market......Page 740
The Aggregate Demand–Inflation Curve......Page 741
INTERNATIONAL PERSPECTIVE: How Do Other Central Banks React to Inflation?......Page 746
Using the ADI Curve......Page 747
CASE IN POINT: The Volcker Disinflation......Page 750
CASE IN POINT: The Kennedy Tax Cut......Page 751
THINKING LIKE AN ECONOMIST: Tough Trade-Offs......Page 753
Shifts in the Inflation Adjustment Curve......Page 754
CASE IN POINT: Oil Price Shocks of the 1970s......Page 755
CASE IN POINT: The 1990s......Page 757
e-INSIGHT: Productivity Growth and the Punch Bowl......Page 758
INTERNET CONNECTION: The FOMC......Page 760
REVIEW AND PRACTICE......Page 761
The Federal Funds Market......Page 765
Monetary Policy Operating Procedures......Page 771
REVIEW AND PRACTICE......Page 774
CHAPTER 33 THE ROLE OF MACROECONOMIC POLICY......Page 777
Inflation-Unemployment Trade-Offs......Page 778
Fiscal Policy......Page 779
INTERNET CONNECTION: The Economic Report of the President......Page 782
INTERNATIONAL PERSPECTIVE: Fiscal Transfers......Page 784
Monetary Policy......Page 786
CASE IN POINT: Announcing the Fed’s Decisions......Page 788
Real Interest Rates and Nominal Interest Rates......Page 789
The Central Bank Policy Rule......Page 790
THINKING LIKE AN ECONOMIST: Real Values Matter for Incentives......Page 792
CASE IN POINT: September 11, 2001......Page 793
e-INSIGHT: The Dot-Com Bubble and Macroeconomic Stability......Page 794
The Position of the Policy Rule......Page 795
The Slope of the Policy Rule......Page 798
Interactions Between Monetary and Fiscal Policies......Page 799
REVIEW AND PRACTICE......Page 802
PART 8 THE GLOBAL ECONOMY......Page 805
CHAPTER 34 THE INTERNATIONAL FINANCIAL SYSTEM......Page 807
Determining the Exchange Rate......Page 808
THINKING LIKE AN ECONOMIST: Incentives and the Real Exchange Rate......Page 814
Exchange Rate Management......Page 816
INTERNATIONAL PERSPECTIVE: Global Financial Crises......Page 820
Flexible Exchange Rate Systems......Page 821
CASE IN POINT: Currency Boards and Dollarization......Page 822
REVIEW AND PRACTICE......Page 825
CHAPTER 35 POLICY IN THE OPEN ECONOMY......Page 829
The ADI Curve and the Open Economy......Page 830
The Exchange Rate and Inflation......Page 833
THINKING LIKE AN ECONOMIST: Interest Parity and Incentives......Page 834
Comparing Monetary and Fiscal Policies in the Open Economy......Page 835
e-INSIGHT: New Technology and the Integration of World Financial Markets......Page 836
INTERNATIONAL PERSPECTIVE: Is a Strong Dollar Good for the United States?......Page 838
Policy Coordination......Page 839
REVIEW AND PRACTICE......Page 840
CHAPTER 36 DEVELOPMENT AND TRANSITION......Page 843
Development......Page 844
INTERNET CONNECTION: The World Bank’s Development Goals......Page 846
CASE IN POINT: A Historical Perspective on Globalization......Page 854
e-INSIGHT: Indian Engineers in Silicon Valley and Silicon Valley’s Capital in India......Page 856
Economies in Transition......Page 858
REVIEW AND PRACTICE......Page 864
PART 9 FURTHER TOPICS IN MACROECONOMICS......Page 867
CHAPTER 37 INFLATION AND UNEMPLOYMENT......Page 869
Short-Run Inflation Adjustment......Page 870
THINKING LIKE AN ECONOMIST: Distributional Effects of Inflation and Unemployment......Page 876
CASE IN POINT: Nobel Views on Inflation and Unemployment......Page 877
CASE IN POINT: The Baby Boomers and the Natural Rate......Page 879
Inflation Shocks......Page 880
FUNDAMENTALS OF INFLATION: Cyclical Unemployment, Expectations, Inflation Shocks......Page 881
Combining the Aggregate Demand–Inflation and Inflation Adjustment Curves......Page 882
REVIEW AND PRACTICE......Page 884
CHAPTER 38 CONTROVERSIES IN MACROECONOMIC POLICY......Page 887
Do Deficits Matter?......Page 888
The Goals of Macroeconomic Policy......Page 892
THINKING LIKE AN ECONOMIST: Trade-Offs and Choices......Page 895
Should the Federal Reserve Target Inflation?......Page 898
CASE IN POINT: Fed Policy Statements—Balancing Policy Goals......Page 901
INTERNET CONNECTION: Banks and Inflation Targeting......Page 902
Consequences of Inflation Targeting......Page 903
INTERNATIONAL PERSPECTIVE: Central Bank Mandates......Page 905
e-INSIGHT: e-Time and Macroeconomic Policy......Page 908
REVIEW AND PRACTICE......Page 910
APPENDIX: Price Level Targeting......Page 912
CHAPTER 39 A STUDENT’S GUIDE TO INVESTING......Page 915
Investment Alternatives......Page 916
INTERNET CONNECTION: Calculating Interest Rates......Page 917
INTERNET CONNECTION: Index Funds......Page 920
CASE IN POINT: PG&E Employees Learn Why Diversification Is Important......Page 922
Expectations and the Market for Assets......Page 928
THINKING LIKE AN ECONOMIST: The Distribution of Wealth and Ownership of Assets......Page 929
Efficient Market Theory......Page 931
Strategies for Intelligent Investing......Page 935
REVIEW AND PRACTICE......Page 937
GLOSSARY......Page 940
CREDITS......Page 952
INDEX......Page 954