Economics principles, applications, and tools

Cover
Title Page
Copyright Page
About the Authors
Contents
Preface
PART 1 Introduction and Key Principles
	1 Introduction: What Is Economics?
		What Is Economics?
			Positive versus Normative Analysis
			The Three Key Economic Questions: What, How, and Who?
			Economic Models
		Economic Analysis and Modern Problems
			Economic View of Traffic Congestion
			Economic View of Poverty in Africa
			Economic View of the Current World Recession
		The Economic Way of Thinking
			Use Assumptions to Simplify
			Isolate Variables—Ceteris Paribus
			Think at the Margin
			Rational People Respond to Incentives
			APPLICATION 1 Incentives to Buy Hybrid Vehicles
			Example: London Addresses Its Congestion Problem
			APPLICATION 2 Housing Prices in Cuba
		Preview of Coming Attractions: Macroeconomics
			Using Macroeconomics to Understand Why Economies Grow
			Using Macroeconomics to Understand Economic Fluctuations
			Using Macroeconomics to Make Informed Business Decisions
		Preview of Coming Attractions: Microeconomics
			Using Microeconomics to Understand Markets and Predict Changes
			Using Microeconomics to Make Personal and Managerial Decisions
			Using Microeconomics to Evaluate Public Policies
		SUMMARY
		KEY TERMS
		EXERCISES
		APPENDIX: Using Graphs and Percentages
			USING GRAPHS
			COMPUTING PERCENTAGE CHANGES AND USING EQUATIONS
			APPLICATION 3 The Perils of Percentages
	2 The Key Principles of Economics
		The Principle of Opportunity Cost
			The Cost of College
			The Cost of Military Spending
			Opportunity Cost and the Production Possibilities Curve
			APPLICATION 1 Don’t Forget the Costs of Time and Invested Funds
		The Marginal Principle
			How Many Movie Sequels?
			Renting College Facilities
			Automobile Emissions Standards
			Driving Speed and Safety
			APPLICATION 2 How Fast to Sail?
		The Principle of Voluntary Exchange
			Exchange and Markets
			Online Games and Market Exchange
			APPLICATION 3 Rory McIlroy and Weed-Wacking
		The Principle of Diminishing Returns
			APPLICATION 4 Fertilizer and Crop Yields
		The Real-Nominal Principle
			The Design of Public Programs
			The Value of the Minimum Wage
			APPLICATION 5 Repaying Student Loans
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
	3 Exchange and Markets
		Comparative Advantage and Exchange
			Specialization and the Gains from Trade
			Comparative Advantage versus Absolute Advantage
			The Division of Labor and Exchange
			Comparative Advantage and International Trade
			Outsourcing
			APPLICATION 1 Absolute Disadvantage and Comparative Advantage in Latvia
		Markets
			Virtues of Markets
			The Role of Entrepreneurs
			Example of the Emergence of Markets: POW Camps
			APPLICATION 2 The Market for Meteorites
		Market Failure and the Role of Government
			Government Enforces the Rules of Exchange
			Government Can Reduce Economic Uncertainty
			APPLICATION 3 Property Rights and Urban Slums
		SUMMARY
		KEY TERMS
		EXERCISES 88
	4 Demand, Supply, and Market Equilibrium
		The Demand Curve
			The Individual Demand Curve and the Law of Demand
			From Individual Demand to Market Demand
			APPLICATION 1 The Law of Demand for Young Smokers
		The Supply Curve
			The Individual Supply Curve and the Law of Supply
			Why Is the Individual Supply Curve Positively Sloped?
			From Individual Supply to Market Supply
			Why Is the Market Supply Curve Positively Sloped?
			APPLICATION 2 Law of Supply and Woolympics
		Market Equilibrium: Bringing Demand and Supply Together
			Excess Demand Causes the Price to Rise
			Excess Supply Causes the Price to Drop
			APPLICATION 3 Shrinking Wine Lakes
		Market Effects of Changes in Demand
			Change in Quantity Demanded versus Change in Demand
			Increases in Demand Shift the Demand Curve
			Decreases in Demand Shift the Demand Curve
			A Decrease in Demand Decreases the Equilibrium Price
			APPLICATION 4 Chinese Demand and Pecan Prices
		Market Effects of Changes in Supply
			Change in Quantity Supplied versus Change in Supply
			Increases in Supply Shift the Supply Curve
			An Increase in Supply Decreases the Equilibrium Price
			Decreases in Supply Shift the Supply Curve
			A Decrease in Supply Increases the Equilibrium Price
			Simultaneous Changes in Demand and Supply
			APPLICATION 5 The Harmattan and the Price of Chocolate
		Predicting and Explaining Market Changes
			APPLICATION 6 Why Lower Drug Prices?
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
PART 2 The Basic Concepts in Macroeconomics
	5 Measuring a Nation’s Production and Income
		The “Flip” Sides of Macroeconomic Activity: Production and Income
			The Circular Flow of Production and Income
			APPLICATION 1 Using Value Added to Measure the True Size of Walmart
		The Production Approach: Measuring a Nation’s Macroeconomic Activity Using Gross Domestic Product
			The Components of GDP
			Putting It All Together: The GDP Equation
			APPLICATION 2 Comparing Recoveries From Recessions
		The Income Approach: Measuring a Nation’s Macroeconomic Activity Using National Income
			Measuring National Income
			Measuring National Income through Value Added
			An Expanded Circular Flow
			APPLICATION 3 The Links Between Self-Reported Happiness and GDP
		A Closer Examination of Nominal and Real GDP
			Measuring Real versus Nominal GDP
			How to Use the GDP Deflator
		Fluctuations in GDP
		GDP as a Measure of Welfare
			Shortcomings of GDP as a Measure of Welfare
		SUMMARY
		KEY TERMS
		EXERCISES
	6 Unemployment and Inflation
		Examining Unemployment
			How Is Unemployment Defined and Measured?
			Alternative Measures of Unemployment and Why They Are Important
			Who Are the Unemployed?
			APPLICATION 1 Declining Labor Force Participation
		Categories of Unemployment
			Types of Unemployment: Cyclical, Frictional, and Structural
			The Natural Rate of Unemployment
			APPLICATION 2 Less Unemployment Insurance, More Employment?
		The Costs of Unemployment
			APPLICATION 3 Social Norms, Unemployment, And Perceived Happiness
		The Consumer Price Index and the Cost of Living
			The CPI versus the Chain Index for GDP
			APPLICATION 4 The Introduction of Cell Phones and the Bias in the CPI
			Problems in Measuring Changes in Prices
		Inflation
			Historical U.S. Inflation Rates
			The Perils of Deflation
		The Costs of Inflation
			Anticipated Inflation
			Unanticipated Inflation
		SUMMARY
		KEY TERMS
		EXERCISES
PART 3 The Economy in the Long Run
	7 The Economy at Full Employment
		Wage and Price Flexibility and Full Employment
		The Production Function
		Wages and the Demand and Supply for Labor
			Labor Market Equilibrium
			Changes in Demand and Supply
			APPLICATION 1 The Black Death and Living Standards in Old England
		Labor Market Equilibrium and Full Employment
		Using the Full-Employment Model
			Taxes and Potential Output
			Real Business Cycle Theory
			APPLICATION 2 Do European Soccer Stars Change Clubs to Reduce Their Tax-es?
			APPLICATION 3 Government Policies and Savings Rates
		Dividing Output among Competing Demands for GDP at Full Employment
			International Comparisons
			Crowding Out in a Closed Economy
			Crowding Out in an Open Economy
			Crowding In
		SUMMARY
		KEY TERMS
		EXERCISES
	8 Why Do Economies Grow?
		Economic Growth Rates
			Measuring Economic Growth
			Comparing the Growth Rates of Various Countries
			Are Poor Countries Catching Up?
			APPLICATION 1 Global Warming, Rich Countries, and Poor Countries
			APPLICATION 2 Behavioral Incentives in Development
		Capital Deepening
			Saving and Investment
			How Do Population Growth, Government, and Trade Affect Capital Deepening?
		The Key Role of Technological Progress
			How Do We Measure Technological Progress?
			Using Growth Accounting
			APPLICATION 3 Sources of Growth in China and India
			APPLICATION 4 The End of Growth?
		What Causes Technological Progress?
			Research and Development Funding
			Monopolies That Spur Innovation
			The Scale of the Market
			Induced Innovations
			Education, Human Capital, and the Accumulation of Knowledge
			New Growth Theory
			APPLICATION 5 The Role of Political Factors in Economic Growth
			APPLICATION 6 Culture, Evolution, and Economic Growth
		A Key Governmental Role: Providing the Correct Incentives and Property Rights
			APPLICATION 7 Lack of Property Rights Hinders Growth In Peru
		SUMMARY
		KEY TERMS
		EXERCISES 203
		APPENDIX: A Model of Capital Deepening
PART 4 Economic Fluctuations and Fiscal Policy
	9 Aggregate Demand and Aggregate Supply
		Sticky Prices and Their Macroeconomic Consequences
			Flexible and Sticky Prices
			How Demand Determines Output in the Short Run
			APPLICATION 1 Measuring Price Stickiness in Consumer Markets
		Understanding Aggregate Demand
			What Is the Aggregate Demand Curve?
			The Components of Aggregate Demand
			Why the Aggregate Demand Curve Slopes Downward
			Shifts in the Aggregate Demand Curve
			How the Multiplier Makes the Shift Bigger
			APPLICATION 2 Two Approaches to Determining the Causes of Reces-sions
		Understanding Aggregate Supply
			The Long-Run Aggregate Supply Curve
			The Short-Run Aggregate Supply Curve
			Supply Shocks
			APPLICATION 3 Oil Price Declines and the U.S. Economy
		From the Short Run to the Long Run
		SUMMARY
		KEY TERMS
		EXERCISES
	10 Fiscal Policy
		The Role of Fiscal Policy
			Fiscal Policy and Aggregate Demand
			The Fiscal Multiplier
			The Limits to Stabilization Policy
			APPLICATION 1 Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs
		The Federal Budget
			Federal Spending
			Federal Revenues
			The Federal Deficit and Fiscal Policy
			Automatic Stabilizers
			Are Deficits Bad?
			APPLICATION 2 The Confucius Curve?
		Fiscal Policy in U.S. History
			The Depression Era
			The Kennedy Administration
			The Vietnam War Era
			The Reagan Administration
			The Clinton and George W. Bush Administrations
			APPLICATION 3 How Effective was the 2009 Stimulus?
		SUMMARY
		KEY TERMS
		EXERCISES
	11 The Income-Expenditure Model
		A Simple Income-Expenditure Model
			Equilibrium Output
			Adjusting to Equilibrium Output
		The Consumption Function
			Consumer Spending and Income
			Changes in the Consumption Function
			APPLICATION 1 Falling Home Prices, the Wealth Effect, and Decreased Con-sumer Spending
		Equilibrium Output and the Consumption Function
			Saving and Investment
			Understanding the Multiplier
			APPLICATION 2 Multipliers in Good Times and Bad
		Government Spending and Taxation
			Fiscal Multipliers
			Using Fiscal Multipliers
			Understanding Automatic Stabilizers
			APPLICATION 3 The Broken Window Fallacy and Keynesian Economics
		Exports and Imports
			APPLICATION 4 The Locomotive Effect: How Foreign Demand Affects a Coun-try’s Output
		The Income-Expenditure Model and the Aggregate Demand Curve
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
		APPENDIX: Formulas for Equilibrium Income and the Multiplier
	12 Investment and Financial Markets
		An Investment: A Plunge into the Unknown
			APPLICATION 1 Energy Price Uncertainty Reduces Investment Spending
		Evaluating the Future
			Understanding Present Value
			Real and Nominal Interest Rates
			APPLICATION 2 The Value of an Annuity
		Understanding Investment Decisions
			Investment and the Stock Market
			APPLICATION 3 Underwater Homeowners and Debt Forgiveness
		How Financial Intermediaries Facilitate Investment
			When Financial Intermediaries Malfunction
			APPLICATION 4 Securitization: The Good, The Bad, and The Ugly
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
PART 5 Money, Banking, and Monetary Policy
	13 Money and the Banking System
		What Is Money?
			Three Properties of Money
			Measuring Money in the U.S. Economy
			APPLICATION 1 Cash as a Sign of Trust
		How Banks Create Money
			A Bank’s Balance Sheet: Where the Money Comes from and Where It Goes
			How Banks Create Money
			How the Money Multiplier Works
			How the Money Multiplier Works in Reverse
			APPLICATION 2 The Growth In Excess Reserves
		A Banker’s Bank: The Federal Reserve
			Functions of the Federal Reserve
			The Structure of the Federal Reserve
			The Independence of the Federal Reserve
		What the Federal Reserve Does during a Financial Crisis
			APPLICATION 3 Stress Tests for the Financial System
			APPLICATION 4 Coping with the Financial Chaos Caused by the Mortgage Crisis
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
		APPENDIX: Formula For Deposit Creation
	14 The Federal Reserve and Monetary Policy
		The Money Market
			The Demand for Money
			APPLICATION 1 Quantitative Easing and the Fed’s Balance Sheet
		How the Federal Reserve Can Change the Money Supply
			Open Market Operations
			Other Tools of the Fed
			APPLICATION 2 Did Fed Policy Cause the Commodity Boom?
		How Interest Rates Are Determined: Combining the Demand and Supply of Money
			Interest Rates and Bond Prices
			APPLICATION 3 The Effectiveness of Committees
		Interest Rates and How They Change Investment and Output (GDP)
			Monetary Policy and International Trade
		Monetary Policy Challenges for the Fed
			Lags in Monetary Policy
			Influencing Market Expectations: From the Federal Funds Rate to Interest Rates on Long-Term Bonds
		SUMMARY
		KEY TERMS
		EXERCISES
PART 6 INFLATION, UNEMPLOYMENT, AND ECONOMIC POLICY
	15 Modern Macroeconomics: From the Short Run to the Long Run
		Linking the Short Run and the Long Run
			The Difference between the Short and Long Run
			Wages and Prices and Their Adjustment over Time
			APPLICATION 1 Secular Stagnation?
		How Wage and Price Changes Move the Economy Naturally Back to Full Employment
			Returning to Full Employment from a Recession
			Returning to Full Employment from a Boom
			Economic Policy and the Speed of Adjustment
			Liquidity Traps or Zero Lower Bound
			Political Business Cycles
			APPLICATION 2 Elections, Political Parties, and Voter Expectations
		The Economics Behind the Adjustment Process
			The Long-Run Neutrality of Money
			Crowding Out in the Long Run
			APPLICATION 3 Increasing Health-Care Expenditures and Crowding Out
		Classical Economics in Historical Perspective
			Say’s Law
			Keynesian and Classical Debates
		SUMMARY
		KEY TERMS
		EXERCISES
	16 The Dynamics of Inflation and Unemployment
		Money Growth, Inflation, and Interest Rates
			Inflation in a Steady State
			How Changes in the Growth Rate of Money Affect the Steady State
			APPLICATION 1 Shifts in the Natural Rate of Unemployment
		Understanding the Expectations Phillips Curve: The Relationship between Unemployment and Inflation
			Are the Public’s Expectations about Inflation Rational?
			U.S. Inflation and Unemployment in the 1980s
			Shifts in the Natural Rate of Unemployment in the 1990s
			APPLICATION 2 Estimating the Natural Real Interest Rate
		How the Credibility of a Nation’s Central Bank Affects Inflation
			APPLICATION 3 The Ends of Hyperinflations
		Inflation and the Velocity of Money
		Hyperinflation
			How Budget Deficits Lead to Hyperinflation
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
	17 Macroeconomic Policy Debates
		Should We Balance the Federal Budget?
			The Budget in Recent Decades
			Five Debates about Deficits
			APPLICATION 1 Creating The U.S. Federal Fiscal System Through Debt Policy
		Should the Fed Target Both Inflation and Employment?
			Two Debates about Targeting
			APPLICATION 2 Would a Policy Rule Have Prevented the Housing Boom?
		Should We Tax Consumption Rather than Income?
			Two Debates about Consumption Taxation
			APPLICATION 3 Is A Vat in Our Future?
		SUMMARY
		KEY TERMS
		EXERCISES
PART 7 The International Economy
	18 International Trade and Public Policy
		Benefits from Specialization and Trade
			Production Possibilities Curve
			Comparative Advantage and the Terms of Trade
			The Consumption Possibilities Curve
			How Free Trade Affects Employment
		Protectionist Policies
			Import Bans
			Quotas and Voluntary Export Restraints
			Responses to Protectionist Policies
			APPLICATION 1 The Impact of Tariffs on the Poor
		What Are the Rationales for Protectionist Policies?
			To Shield Workers from Foreign Competition
			To Nurture Infant Industries until They Mature
			To Help Domestic Firms Establish Monopolies in World Markets
			APPLICATION 2 Chinese Imports and Local Economies
		A Brief History of International Tariff and Trade Agreements
		Recent Policy Debates and Trade Agreements
			Are Foreign Producers Dumping Their Products?
			APPLICATION 3 Does Losing in the WTO Really Matter?
			Do Trade Laws Inhibit Environmental Protection?
			APPLICATION 4 How American are American Cars?
			Do Outsourcing and Trade Cause Income Inequality?
			Why Do People Protest Free Trade?
		SUMMARY
		KEY TERMS
		EXERCISES
	19 The World of International Finance
		How Exchange Rates Are Determined
			What Are Exchange Rates?
			How Demand and Supply Determine Exchange Rates
			Changes in Demand or Supply
		Real Exchange Rates and Purchasing Power Parity
			APPLICATION 1 Big Macs in Switzerland
		The Current Account, the Financial Account, and the Capital Account
			Rules for Calculating the Current, Financial, and Capital Accounts
			APPLICATION 2 Tax Havens and Global Imbalances
		Fixed and Flexible Exchange Rates
			Fixing the Exchange Rate
			Fixed versus Flexible Exchange Rates
			The U.S. Experience with Fixed and Flexible Exchange Rates
			Exchange Rate Systems Today
		Managing Financial Crises
			APPLICATION 3 A Troubled Euro
			APPLICATION 4 The Argentine Financial Crisis
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
PART 8 A Closer Look at Demand and Supply
	20 Elasticity: A Measure of Responsiveness
		The Price Elasticity of Demand
			Computing Percentage Changes and Elasticities
			Price Elasticity and the Demand Curve
			Elasticity and the Availability of Substitutes
			Other Determinants of the Price Elasticity of Demand
			APPLICATION 1 A Closer Look at the Elasticity of Demand for Gasoline
		Using Price Elasticity
			Predicting Changes in Quantity
			Price Elasticity and Total Revenue
			Using Elasticity to Predict the Revenue Effects of Price Changes
			APPLICATION 2 Vanity Plates and the Elasticity of Demand
		Elasticity and Total Revenue for a Linear Demand Curve
			Price Elasticity along a Linear Demand Curve
			APPLICATION 3 Drones and the Lower Half of a Linear Demand Curve
			Elasticity and Total Revenue for a Linear Demand Curve
		Other Elasticities of Demand
			Income Elasticity of Demand
			Cross-Price Elasticity of Demand
			APPLICATION 4 I can Find that Elasticity in Four Clicks!
			The Price Elasticity of Supply
			What Determines the Price Elasticity of Supply?
			The Role of Time: Short-Run versus Long-Run Supply Elasticity
			Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply
			APPLICATION 5 The Short-Run and Long-Run Elasticity of Supply of Coffee
			Predicting Changes in Quantity Supplied
		Using Elasticities to Predict Changes in Prices
			The Price Effects of a Change in Demand
			The Price Effects of a Change in Supply
			APPLICATION 6 A Broken Pipeline and the Price of Gasoline
		SUMMARY
		KEY TERMS
		EXERCISES
	21 Market Efficiency and Government Intervention
		Consumer Surplus and Producer Surplus
			The Demand Curve and Consumer Surplus
			The Supply Curve and Producer Surplus
			APPLICATION 1 Consumer Surplus of Internet Service
		Market Equilibrium and Efficiency
			Total Surplus Is Lower with a Price below the Equilibrium Price
			Total Surplus Is Lower with a Price above the Equilibrium Price
			Efficiency and the Invisible Hand
			Government Intervention in Efficient Markets
			APPLICATION 2 Rent Control and Mismatches
		Controlling Prices—Maximum and Minimum Prices
			Setting Maximum Prices
			Rent Control
			APPLICATION 3 Price Controls and the Shrinking Candy Bar
			Setting Minimum Prices
		Controlling Quantities—Licensing and Import Restrictions
			Taxi Medallions
			Licensing and Market Efficiency
			Winners and Losers from Licensing
			Import Restrictions
			APPLICATION 4 The Cost of Protecting a Lumber Job
		Who Really Pays Taxes?
			Tax Shifting: Forward and Backward
			Tax Shifting and the Price Elasticity of Demand
			Cigarette Taxes and Tobacco Land
			The Luxury Boat Tax and Boat Workers
			Tax Burden and Deadweight Loss
			APPLICATION 5 Response to a Luxury Tax
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
	22 Consumer Choice: Utility Theory and Insights from Neuroscience
		Traditional Consumer Choice: Utility Theory
			Consumer Constraints: The Budget Line
			Total and Marginal Utility
			The Marginal Principle and the Equimarginal Rule
			Conditions for Utility Maximization
			APPLICATION 1 Measuring Diminishing Marginal Utility
		The Law of Demand and the Individual Demand Curve
			Effect of a Decrease in Price
			Income and Substitution Effects of a Decrease in Price
			The Individual Demand Curve
		The Neuroscience of Consumer Choice
			APPLICATION 2 A Revenue-Neutral Gasoline Tax
			The Neuroscience of Benefit Valuation
			The Neuroscience of Cost Valuation
			The Wisdom of Gut Feelings
			Cognition and Choice
			Predicting Consumer Choice
			Fuel for Cognition
			APPLICATION 3 Coke versus Pepsi in the Prefrontal Cortex
		Consumer Decisions: Insights from Neuroscience
			Dietary Choice: Donut versus Apple
			Present Bias: Spending versus Saving
			Present Bias and Credit Cards
			Present Bias and Smoking
			Gambling as a Consumer Good
			APPLICATION 4 Taxing Cigarettes to Offset Present Bias
		SUMMARY
		EXERCISES
		APPENDIX: Mental Shortcuts and Consumer Puzzles
			MENTAL ACCOUNTING AND BUNDLING
			ANCHORING
			THE DECOY EFFECT
			THE APPEAL OF PERCENTAGE CHANGES
			SUMMARY
PART 9 Market Structures and Pricing
	23 Production Technology and Cost
		Economic Cost and Economic Profit
			APPLICATION 1 Opportunity Cost and Entrepreneurship
		A Firm with a Fixed Production Facility: Short-Run Costs
			Production and Marginal Product
			Short-Run Total Cost
			Short-Run Average Costs
			Short-Run Marginal Cost
			The Relationship between Marginal Cost and Average Cost
			APPLICATION 2 The Rising Marginal Cost of Crude Oil
		Production and Cost in the Long Run
			Expansion and Replication
			Reducing Output with Indivisible Inputs
			Scaling Down and Labor Specialization
			Economies of Scale
			Diseconomies of Scale
			Actual Long-Run Average-Cost Curves
			Short-Run versus Long-Run Average Cost
			APPLICATION 3 Indivisible Inputs and the Cost of Fake Killer Whales
		Examples of Production Cost
			Scale Economies in Wind Power
			The Average Cost of a Music Video
			Solar versus Nuclear: The Crossover
		SUMMARY
		KEY TERMS
		EXERCISES
	24 Perfect Competition
		Preview of the Four Market Structures
			APPLICATION 1 Wireless Women in Pakistan
		The Firm’s Short-Run Output Decision
			The Total Approach: Computing Total Revenue and Total Cost
			The Marginal Approach
			Economic Profit and the Break-Even Price
			APPLICATION 2 The Break-Even Price for Switchgrass, a Feedstock For Biofuel
		The Firm’s Shut-Down Decision
			Total Revenue, Variable Cost, and the Shut-Down Decision
			The Shut-Down Price
			Fixed Costs and Sunk Costs
			APPLICATION 3 Straddling the Zinc Cost Curve
		Short-Run Supply Curves
			The Firm’s Short-Run Supply Curve
			The Short-Run Market Supply Curve
			Market Equilibrium
			APPLICATION 4 Short-Run Supply Curve for Cargo
		The Long-Run Supply Curve for an Increasing-Cost Industry
			Production Cost and Industry Size
			Drawing the Long-Run Market Supply Curve
			Examples of Increasing-Cost Industries: Sugar and Apartments
			APPLICATION 5 Chinese Coffee Growers Obey the Law of Supply
		Short-Run and Long-Run Effects of Changes in Demand
			The Short-Run Response to an Increase in Demand
			The Long-Run Response to an Increase in Demand
			APPLICATION 6 The Upward Jump and Downward Slide of Blueberry Prices
		Long-Run Supply for a Constant-Cost Industry
			Long-Run Supply Curve for a Constant-Cost Industry
			Hurricane Andrew and the Price of Ice
			APPLICATION 7 Economic Detective and the Case of Margarine Prices
		SUMMARY
		KEY TERMS
		EXERCISES
	25 Monopoly and Price Discrimination
		The Monopolist’s Output Decision
			Total Revenue and Marginal Revenue
			A Formula for Marginal Revenue
			Using the Marginal Principle
			APPLICATION 1 Marginal Revenue From a Baseball Fan
		The Social Cost of Monopoly
			Deadweight Loss from Monopoly
			Rent Seeking: Using Resources to Get Monopoly Power
			Monopoly and Public Policy
			APPLICATION 2 Rent Seeking for Tribal Casinos
		Patents and Monopoly Power
			Incentives for Innovation
			Trade-Offs from Patents
			APPLICATION 3 Bribing the Makers of Generic Drugs
		Price Discrimination
			Senior Discounts in Restaurants
			Price Discrimination and the Elasticity of Demand
			Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books
			APPLICATION 4 Why does Movie Popcorn Cost so Much?
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
	26 Market Entry and Monopolistic Competition
		The Effects of Market Entry
			Entry Squeezes Profits from Three Sides
			Examples of Entry: Car Stereos, Trucking, and Tires
			APPLICATION 1 Satellite versus Cable
		Monopolistic Competition
			When Entry Stops: Long-Run Equilibrium
			Differentiation by Location
			APPLICATION 2 Opening a Motel
		Trade-Offs with Entry and Monopolistic Competition
			Average Cost and Variety
			Monopolistic Competition versus Perfect Competition
			APPLICATION 3 Happy Hour Pricing
		Advertising for Product Differentiation
			APPLICATION 4 Picture of Man versus Picture of Woman
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
	27 Oligopoly and Strategic Behavior
		Cartel Pricing and the Duopolists’ Dilemma
			Price Fixing and the Game Tree
			Equilibrium of the Price-Fixing Game
			Nash Equilibrium
			APPLICATION 1 Failure of the Salt Cartel
		Overcoming the Duopolists’ Dilemma
			Low-Price Guarantees
			Repeated Pricing Games with Retaliation for Underpricing
			Price Fixing and the Law
			Price Leadership
			APPLICATION 2 Low-Price Guarantee Increases Tire Prices
		Simultaneous Decision Making and the Payoff Matrix
			Simultaneous Price-Fixing Game
			The Prisoners’ Dilemma
			APPLICATION 3 Cheating on the Final Exam: The Cheaters’ Dilemma
		The Insecure Monopolist and Entry Deterrence
			Entry Deterrence and Limit Pricing
			Examples: Aluminum and Campus Bookstores
			Entry Deterrence and Contestable Markets
			When Is the Passive Approach Better?
			APPLICATION 4 Microsoft as an Insecure Monopolist
		The Advertisers’ Dilemma
			APPLICATION 5 Got Milk?
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
	28 Controlling Market Power: Antitrust and Regulation
		Natural Monopoly
			Picking an Output Level
			Will a Second Firm Enter?
			Price Controls for a Natural Monopoly
			APPLICATION 1 Public versus Private Waterworks
			APPLICATION 2 Satellite Radio as a Natural Monopoly
		Antitrust Policy
			Breaking Up Monopolies
			Blocking Mergers
			Merger Remedy for Wonder Bread
			Regulating Business Practices
			A Brief History of U.S. Antitrust Policy
			APPLICATION 3 Merger of Pennzoil and Quaker State
			APPLICATION 4 Merger of Office Depot and OfficeMax
		SUMMARY
		KEY TERMS
		EXERCISES
PART 10 Externalities and Information
	29 Imperfect Information: Adverse Selection and Moral Hazard
		Adverse Selection for Buyers: The Lemons Problem
			Uninformed Buyers and Knowledgeable Sellers
			Equilibrium with All Low-Quality Goods
			A Thin Market: Equilibrium with Some High-Quality Goods
			APPLICATION 1 Are Baseball Pitchers Like Used Cars?
			Evidence of the Lemons Problem
		Responding to the Lemons Problem
			Buyers Invest in Information
			Consumer Satisfaction Scores from ValueStar and eBay
			Guarantees and Lemons Laws
			APPLICATION 2 Regulation of the California Kiwifruit Market
		Adverse Selection for Sellers: Insurance
			Health Insurance
			Equilibrium with All High-Cost Consumers
			Responding to Adverse Selection in Insurance: Group Insurance
			The Uninsured
			Other Types of Insurance
			APPLICATION 3 Genetic Discrimination
		Insurance and Moral Hazard
			Insurance Companies and Moral Hazard
			Deposit Insurance for Savings and Loans
			APPLICATION 4 Car Insurance and Risky Driving
		The Economics of Consumer Search
			Search and the Marginal Principle
			Reservation Prices and Searching Strategy
			The Effects of Opportunity Cost and Product Prices on Search Effort
			APPLICATION 5 Income and Consumer Search
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
	30 Public Goods and Public Choice
		External Benefits and Public Goods
			Public Goods and the Free-Rider Problem
			Overcoming the Free-Rider Problem
			APPLICATION 1 Clearing Space Debris
			APPLICATION 2 Global Weather Observation
		Private Goods with External Benefits
			External Benefits from Education
			External Benefits and the Marginal Principle
			Other Private Goods That Generate External Benefits
			APPLICATION 3 External Benefits from Lojack
			APPLICATION 4 The Private and External Benefit of Trees
		Public Choice and the Median Voter
			Voting and the Median-Voter Rule
			The Median Voter and the Median Location
			Alternative Models of Government: Self-Interest and Special Interests
			Which Theory Is Correct?
			APPLICATION 5 The Median Voter in the NBA
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
	31 External Costs and Environmental Policy
		The Optimal Level of Pollution
			Using the Marginal Principle
			Example: The Optimal Level of Water Pollution
			Coase Bargaining
			APPLICATION 1 Reducing Methane Emissions
		Taxing Pollution
			A Firm’s Response to a Pollution Tax
			The Market Effects of a Pollution Tax
			Example: A Carbon Tax
			APPLICATION 2 Washing Carbon Out of the Air
		Traditional Regulation
			Uniform Abatement with Permits
			Command and Control
			Market Effects of Pollution Regulations
			Lesson from Dear Abby: Options for Pollution Abatement
			APPLICATION 3 Options for Reducing CO2 Emissions From International Shipping
		Marketable Pollution Permits
			Voluntary Exchange and Marketable Permits
			Supply, Demand, and the Price of Marketable Permits
			APPLICATION 4 Weather and the Price of Pollution Permits
		External Costs from Automobiles
			External Costs from Pollution
			External Costs from Congestion
			External Costs from Collisions
			APPLICATION 5 Young Drivers and Collisions
		SUMMARY
		KEY TERMS
		EXERCISES
		ECONOMIC EXPERIMENT
PART 11 The Labor Market and Income Distribution
	32 The Labor Market and the Distribution of Income
		The Demand for Labor
			Labor Demand by an Individual Firm in the Short Run
			Market Demand for Labor in the Short Run
			Labor Demand in the Long Run
			Short-Run versus Long-Run Demand
			APPLICATION 1 Marginal Revenue Product in Major League Baseball
		The Supply of Labor
			The Individual Labor-Supply Decision: How Many Hours?
			An Example of Income and Substitution Effects
			The Market Supply Curve for Labor
			APPLICATION 2 Cabbies Respond to an Increase in the Wage
		Labor Market Equilibrium
			Changes in Demand and Supply
			The Market Effects of the Minimum Wage
			Why Do Wages Differ across Occupations?
			The Gender Pay Gap
			Racial Discrimination
			Why Do College Graduates Earn Higher Wages?
			Labor Unions and Wages
			APPLICATION 3 The Beauty Premium
		The Distribution of Income
			Income Distribution in 2007
			Recent Changes in the Distribution of Income
			APPLICATION 4 Trade-Offs From Immigration
		Public Policy and the Distribution of Income
			Effects of Tax and Transfer Policies on the Distribution of Income
			Poverty and Public Policy
			The Earned Income Tax Credit
			APPLICATION 5 Expanding the EITC
		SUMMARY
		KEY TERMS
		EXERCISES
Glossary
Photo Credits
Index