Essentials of Economics

Front Cover......Page 1
Title Page......Page 2
Copyright......Page 3
Table of Contents......Page 15
Preface: To the Student......Page 8
PART I: INTRODUCTION......Page 26
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS......Page 28
How People Make Decisions......Page 29
How People Interact......Page 33
IN THE NEWS: Incentive Pay......Page 34
FYI: Adam Smith and the Invisible Hand......Page 36
How the Economy as a Whole Works......Page 37
IN THE NEWS: Why You Should Study Economics......Page 39
Conclusion......Page 40
FYI: How to Read This Book......Page 41
Key Concepts......Page 42
Problems and Applications......Page 43
CHAPTER 2 THINKING LIKE AN ECONOMIST......Page 46
The Economist as Scientist......Page 47
FYI: Who Studies Economics?......Page 54
The Economist as Policy Adviser......Page 55
IN THE NEWS: Football Economics......Page 57
Why Economists Disagree......Page 59
Let’s Get Going......Page 61
IN THE NEWS: Environmental Economics......Page 62
Problems and Applications......Page 63
APPENDIX: Graphing: A Brief Review......Page 65
CHAPTER 3 INTERDEPENDENCE AND THE GAINS FROM TRADE......Page 74
A Parable for the Modern Economy......Page 75
Comparative Advantage: The Driving Force of Specialization......Page 79
FYI: The Legacy of Adam Smith and David Ricardo......Page 82
IN THE NEWS: The Changing Face of International Trade......Page 84
Key Concepts......Page 85
Problems and Applications......Page 86
PART II: HOW MARKETS WORK......Page 88
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND......Page 90
Markets and Competition......Page 91
Demand......Page 92
CASE STUDY: Two Ways to Reduce the Quantity of Smoking Demanded......Page 96
Supply......Page 98
Supply and Demand Together......Page 102
IN THE NEWS: The Helium Market......Page 108
IN THE NEWS: Price Increases after Natural Disasters......Page 109
Summary......Page 110
Questions for Review......Page 111
Problems and Applications......Page 112
CHAPTER 5 ELASTICITY AND ITS APPLICATION......Page 114
The Elasticity of Demand......Page 115
IN THE NEWS: Energy Demand......Page 123
The Elasticity of Supply......Page 124
Three Applications of Supply, Demand, and Elasticity......Page 127
Summary......Page 133
Questions for Review......Page 134
Problems and Applications......Page 135
CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES......Page 138
Controls on Prices......Page 139
CASE STUDY: Lines at the Gas Pump......Page 141
CASE STUDY: Rent Control in the Short Run and the Long Run......Page 142
CASE STUDY: The Minimum Wage......Page 144
IN THE NEWS: President Chavez versus the Market......Page 147
Taxes......Page 148
CASE STUDY: Can Congress Distribute the Burden of a Payroll Tax?......Page 152
Conclusion......Page 155
Questions for Review......Page 156
Problems and Applications......Page 157
PART III: MARKETS AND WELFARE......Page 160
CHAPTER 7 CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS......Page 162
Consumer Surplus......Page 163
Producer Surplus......Page 168
Market Efficiency......Page 172
CASE STUDY: Should There Be a Market in Organs?......Page 175
IN THE NEWS: Ticket Scalping......Page 176
Conclusion: Market Efficiency and Market Failure......Page 177
IN THE NEWS: The Miracle of the Market......Page 178
Summary......Page 179
Problems and Applications......Page 180
CHAPTER 8 APPLICATION: THE COSTS OF TAXATION......Page 184
The Deadweight Loss of Taxation......Page 185
The Determinants of the Deadweight Loss......Page 189
CASE STUDY: The Deadweight Loss Debate......Page 191
Deadweight Loss and Tax Revenue as Taxes Vary......Page 192
CASE STUDY: The Laffer Curve and Supply-Side Economics......Page 194
IN THE NEWS: On the Way to France......Page 195
Summary......Page 197
Problems and Applications......Page 198
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE......Page 202
The Determinants of Trade......Page 203
The Winners and Losers from Trade......Page 205
FYI: Import Quotas: Another Way to Restrict Trade......Page 210
IN THE NEWS: Should the Winners from Free Trade Compensate the Losers?......Page 212
The Arguments for Restricting Trade......Page 213
IN THE NEWS: Offshore Outsourcing......Page 214
CASE STUDY: Trade Agreements and the World Trade Organization......Page 217
Conclusion......Page 219
Summary......Page 220
Problems and Applications......Page 221
PART IV: THE ECONOMICS OF THE PUBLIC SECTOR......Page 226
CHAPTER 10 EXTERNALITIES......Page 228
Externalities and Market Inefficiency......Page 229
CASE STUDY: Technology Spillovers, Industrial Policy, and Patent Protection......Page 233
Public Policies toward Externalities......Page 234
CASE STUDY: Why Is Gasoline Taxed So Heavily?......Page 236
Private Solutions to Externalities......Page 240
IN THE NEWS: The Case for Taxing Carbon......Page 241
Conclusion......Page 244
Key Concepts......Page 245
Problems and Applications......Page 246
CHAPTER 11 PUBLIC GOODS AND COMMON RESOURCES......Page 250
The Different Kinds of Goods......Page 251
Public Goods......Page 252
CASE STUDY: Are Lighthouses Public Goods?......Page 255
CASE STUDY: How Much Is a Life Worth?......Page 256
Common Resources......Page 257
IN THE NEWS: The Bloomberg Plan......Page 259
CASE STUDY: Why the Cow Is Not Extinct......Page 261
Conclusion: The Importance of Property Rights......Page 262
Problems and Applications......Page 263
PART V: FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY......Page 266
CHAPTER 12 THE COSTS OF PRODUCTION......Page 268
What Are Costs?......Page 269
Production and Costs......Page 272
The Various Measures of Cost......Page 275
Costs in the Short Run and in the Long Run......Page 281
Conclusion......Page 283
Summary......Page 284
Questions for Review......Page 285
Problems and Applications......Page 286
CHAPTER 13 FIRMS IN COMPETITIVE MARKETS......Page 290
What Is a Competitive Market?......Page 291
Profit Maximization and the Competitive Firm’s Supply Curve......Page 293
CASE STUDY: Near-Empty Restaurants and Off-Season Miniature Golf......Page 298
The Supply Curve in a Competitive Market......Page 301
Conclusion: Behind the Supply Curve......Page 307
Questions for Review......Page 308
Problems and Applications......Page 309
CHAPTER 14 MONOPOLY......Page 312
Why Monopolies Arise......Page 313
How Monopolies Make Production and Pricing Decisions......Page 316
FYI: Why a Monopoly Does Not Have a Supply Curve......Page 321
CASE STUDY: Monopoly Drugs versus Generic Drugs......Page 322
The Welfare Cost of Monopolies......Page 323
Price Discrimination......Page 327
IN THE NEWS: TKTS and Other Schemes......Page 331
Public Policy toward Monopolies......Page 333
IN THE NEWS: Airline Mergers......Page 334
IN THE NEWS: Public Transport and Private Enterprise......Page 335
Conclusion: The Prevalence of Monopolies......Page 338
Summary......Page 339
Questions for Review......Page 340
Problems and Applications......Page 341
PART VI: THE DATA OF MACROECONOMICS......Page 346
CHAPTER 15 MEASURING A NATION’S INCOME......Page 348
The Economy’s Income and Expenditure......Page 349
The Measurement of Gross Domestic Product......Page 351
The Components of GDP......Page 353
FYI: Other Measures of Income......Page 354
Real versus Nominal GDP......Page 356
CASE STUDY: Real GDP Over Recent History......Page 359
Is GDP a Good Measure of Economic Well-Being?......Page 360
IN THE NEWS: The Underground Economy......Page 361
CASE STUDY: International Differences in GDP and the Quality of Life......Page 363
Conclusion......Page 364
Summary......Page 365
Problems and Applications......Page 366
CHAPTER 16 MEASURING THE COST OF LIVING......Page 370
The Consumer Price Index......Page 371
FYI: What Is In the CPI’s Basket?......Page 374
IN THE NEWS: Accounting for Quality Change......Page 375
Correcting Economic Variables for the Effects of Inflation......Page 378
FYI: Mr. Index Goes to Hollywood......Page 380
CASE STUDY: Interest Rates in the U.S. Economy......Page 382
Summary......Page 383
Problems and Applications......Page 384
PART VII: THE REAL ECONOMY IN THE LONG RUN......Page 388
CHAPTER 17 PRODUCTION AND GROWTH......Page 390
Economic Growth around the World......Page 391
FYI: A Picture Is Worth a Thousand Statistics......Page 393
Productivity: Its Role and Determinants......Page 395
FYI: The Production Function......Page 398
CASE STUDY: Are Natural Resources a Limit to Growth?......Page 399
Economic Growth and Public Policy......Page 401
IN THE NEWS: Promoting Hu man Capital......Page 405
IN THE NEWS: Escape from Malthus......Page 411
Conclusion: The Importance of Long-Run Growth......Page 413
Questions for Review......Page 414
Problems and Applications......Page 415
CHAPTER 18 SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM......Page 416
Financial Institutions in the U.S. Economy......Page 417
FYI: Key Numbers for Stock Watchers......Page 420
Saving and Investment in the National Income Accounts......Page 422
The Market for Loanable Funds......Page 424
IN THE NEWS: In Praise of Misers......Page 429
CASE STUDY: The History of U.S. Government Debt......Page 432
Conclusion......Page 434
Questions for Review......Page 435
Problems and Applications......Page 436
CHAPTER 19 THE BASIC TOOLS OF FINANCE......Page 438
Present Value: Measuring the Time Value of Money......Page 439
Managing Risk......Page 441
FYI: The Peculiarities of Health Insurance......Page 443
Asset Valuation......Page 447
CASE STUDY: Random Walks and Index Funds......Page 448
IN THE NEWS: Neurofinance......Page 449
Conclusion......Page 451
Problems and Applications......Page 452
CHAPTER 20 UNEMPLOYMENT......Page 454
Identifying Unemployment......Page 455
CASE STUDY: Labor-Force Participation of Men and Women in the U.S. Economy......Page 458
IN THE NEWS: The Rise of Adult Male Joblessness......Page 459
FYI: The Jobs Number......Page 464
IN THE NEWS: Unemployment Policy At Home and Abroad......Page 467
Minimum-Wage Laws......Page 468
FYI: Who Earns the Minimum Wage?......Page 470
The Theory of Efficiency Wages......Page 473
Conclusion......Page 475
Key Concepts......Page 476
Problems and Applications......Page 477
PART VIII: MONEY AND PRICES IN THE LONG RUN......Page 480
CHAPTER 21 THE MONETARY SYSTEM......Page 482
The Meaning of Money......Page 483
IN THE NEWS: Monetary Lessons from Iraq......Page 485
CASE STUDY: Where Is All the Currency?......Page 488
The Federal Reserve System......Page 489
Banks and the Money Supply......Page 490
IN THE NEWS: The Financial Crisis of 2008......Page 495
CASE STUDY: Bank Runs and the Money Supply......Page 498
Conclusion......Page 499
Key Concepts......Page 500
Problems and Applications......Page 501
CHAPTER 22 MONEY GROWTH AND INFLATION......Page 504
The Classical Theory of Inflation......Page 505
CASE STUDY: Money and Prices During Four Hyperinflations......Page 513
IN THE NEWS: A Recipe for Economic Disaster......Page 516
The Costs of Inflation......Page 517
CASE STUDY: The Wizard of Oz and the Free-Silver Debate......Page 523
Conclusion......Page 525
Questions for Review......Page 526
Problems and Applications......Page 527
PART IX: SHORT-RUN ECONOMIC FLUCTUATIONS......Page 530
CHAPTER 23 AGGREGATE DEMAND AND AGGREGATE SUPPLY......Page 532
Three Key Facts about Economic Fluctuations......Page 533
Explaining Short-Run Economic Fluctuations......Page 535
IN THE NEWS: Offbeat Indicators......Page 536
The Aggregate-Demand Curve......Page 539
IN THE NEWS: The 2008 Fiscal Stimulus......Page 543
The Aggregate-Supply Curve......Page 544
Two Causes of Economic Fluctuations......Page 554
FYI: Monetary Neutrality Revisited......Page 557
CASE STUDY: Two Big Shifts in Aggregate Demand: The Great Depression and World War II......Page 558
CASE STUDY: The Recession of 2001......Page 560
CASE STUDY: Oil and the Economy......Page 563
Conclusion......Page 564
Summary......Page 565
Problems and Applications......Page 566
CHAPTER 24 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND......Page 570
How Monetary Policy Influences Aggregate Demand......Page 571
FYI: Interest Rates in the Long Run and the Short Run......Page 575
CASE STUDY: Why the Fed Watches the Stock Market (and Vice Versa)......Page 579
How Fiscal Policy Influences Aggregate Demand......Page 580
FYI: How Fiscal Policy Might Affect Aggregate Supply......Page 586
CASE STUDY: Keynesians in the White House......Page 588
Conclusion......Page 590
Key Concepts......Page 591
Problems and Applications......Page 592
Glossary......Page 594
Index......Page 599