Principles of Economics, 10th Edition (The Pearson Series in Economics)

Cover......Page 1
Title Page......Page 4
Copyright Page......Page 5
About the Authors......Page 6
Contents......Page 8
1 The Scope and Method of Economics......Page 34
Why Study Economics?......Page 35
The Scope of Economics......Page 39
The Method of Economics......Page 42
Summary......Page 48
Problems......Page 49
Appendix: How to Read and Understand Graphs......Page 50
2 The Economic Problem: Scarcity and Choice......Page 58
Scarcity, Choice, and Opportunity Cost......Page 59
ECONOMICS IN PRACTICE: Frozen Foods and Opportunity Costs......Page 61
Economic Systems and the Role of Government......Page 72
Looking Ahead......Page 75
Review Terms and Concepts......Page 76
Problems......Page 77
Firms and Households: The Basic Decision-Making Units......Page 80
Input Markets and Output Markets: The Circular Flow......Page 81
Demand in Product/Output Markets......Page 83
ECONOMICS IN PRACTICE: Kindle in the College Market?......Page 88
Supply in Product/Output Markets......Page 93
Market Equilibrium......Page 99
ECONOMICS IN PRACTICE: High Prices for Tomatoes......Page 103
Looking Ahead: Markets and the Allocation of Resources......Page 105
ECONOMICS IN PRACTICE: Why Do the Prices of Newspapers Rise?......Page 106
Summary......Page 107
Review Terms and Concepts......Page 108
Problems......Page 109
The Price System: Rationing and Allocating Resources......Page 112
ECONOMICS IN PRACTICE: Prices and Total Expenditure: A Lesson From the Lobster Industry in 2008–2009......Page 114
Supply and Demand Analysis: An Oil Import Fee......Page 119
ECONOMICS IN PRACTICE: The Price Mechanism at Work for Shakespeare......Page 120
Supply and Demand and Market Efficiency......Page 122
Summary......Page 126
Problems......Page 127
5 Elasticity......Page 130
Price Elasticity of Demand......Page 131
Calculating Elasticities......Page 133
The Determinants of Demand Elasticity......Page 140
ECONOMICS IN PRACTICE: Who Are the Elastic Smokers?......Page 141
Other Important Elasticities......Page 142
Looking Ahead......Page 144
Review Terms and Concepts......Page 145
Problems......Page 146
Appendix: Point Elasticity (Optional)......Page 148
PART II: The Market System: Choices Made by Households and Firms......Page 150
Household Choice in Output Markets......Page 154
The Basis of Choice: Utility......Page 159
Income and Substitution Effects......Page 163
Household Choice in Input Markets......Page 165
ECONOMICS IN PRACTICE: Substitution and Market Baskets......Page 166
ECONOMICS IN PRACTICE: What Happens When the Cost of Self-Discovery Falls?......Page 169
A Review: Households in Output and Input Markets......Page 170
Problems......Page 171
Appendix: Indifference Curves......Page 174
7 The Production Process: The Behavior of Profit-Maximizing Firms......Page 180
The Behavior of Profit-Maximizing Firms......Page 181
The Production Process......Page 185
Choice of Technology......Page 189
ECONOMICS IN PRACTICE: How Fast Should a Truck Driver Go?......Page 190
Summary......Page 191
Problems......Page 192
Appendix: Isoquants and Isocosts......Page 195
8 Short-Run Costs and Output Decisions......Page 200
Costs in the Short Run......Page 201
ECONOMICS IN PRACTICE: Average and Marginal Costs at a College......Page 211
Output Decisions: Revenues, Costs, and Profit Maximization......Page 212
ECONOMICS IN PRACTICE: Case Study in Marginal Analysis: An Ice Cream Parlor......Page 215
Summary......Page 218
Problems......Page 219
9 Long-Run Costs and Output Decisions......Page 222
Short-Run Conditions and Long-Run Directions......Page 223
Long-Run Costs: Economies and Diseconomies of Scale......Page 228
ECONOMICS IN PRACTICE: Economies of Scale in the World Marketplace......Page 230
ECONOMICS IN PRACTICE: Economies of Scale in Solar......Page 231
Long-Run Adjustments to Short-Run Conditions......Page 233
ECONOMICS IN PRACTICE: The Long-Run Average Cost Curve: Flat or U-Shaped?......Page 234
ECONOMICS IN PRACTICE: The Fortunes of the Auto Industry......Page 237
ECONOMICS IN PRACTICE: Why Are Hot Dogs So Expensive in Central Park?......Page 238
Summary......Page 239
Problems......Page 240
Appendix: External Economies and Diseconomies and the Long-Run Industry Supply Curve......Page 243
Input Markets: Basic Concepts......Page 248
ECONOMICS IN PRACTICE: Sometimes Workers Play Hooky!......Page 250
Labor Markets......Page 252
ECONOMICS IN PRACTICE: What is Denzel Washington’s Marginal Revenue Product in Broadway’s Fences?......Page 256
Land Markets......Page 257
The Firm’s Profit-Maximizing Condition in Input Markets......Page 259
Input Demand Curves......Page 260
Looking Ahead......Page 261
Summary......Page 262
Problems......Page 263
Capital, Investment, and Depreciation......Page 266
ECONOMICS IN PRACTICE: Investment Banking, IPOs, and Electric Cars......Page 268
The Capital Market......Page 269
The Demand for New Capital and the Investment Decision......Page 274
ECONOMICS IN PRACTICE: Chinese Wind Power......Page 276
A Final Word on Capital......Page 278
Review Terms and Concepts......Page 279
Problems......Page 280
Appendix: Calculating Present Value......Page 281
12 General Equilibrium and the Efficiency of Perfect Competition......Page 286
Market Adjustment to Changes in Demand......Page 287
Allocative Efficiency and Competitive Equilibrium......Page 289
ECONOMICS IN PRACTICE: Ethanol and Land Prices......Page 290
The Sources of Market Failure......Page 295
Summary......Page 297
Problems......Page 298
Imperfect Competition and Market Power: Core Concepts......Page 302
Price and Output Decisions in Pure Monopoly Markets......Page 304
ECONOMICS IN PRACTICE: Managing the Cable Monopoly......Page 313
The Social Costs of Monopoly......Page 314
Price Discrimination......Page 316
Remedies for Monopoly: Antitrust Policy......Page 318
Imperfect Markets: A Review and a Look Ahead......Page 320
Summary......Page 321
Problems......Page 322
14 Oligopoly......Page 326
Market Structure in an Oligopoly......Page 327
ECONOMICS IN PRACTICE: Why Are Record Labels Losing Key Stars Like Madonna?......Page 329
Oligopoly Models......Page 330
Game Theory......Page 333
Oligopoly and Economic Performance......Page 339
The Role of Government......Page 340
Summary......Page 343
Problems......Page 344
15 Monopolistic Competition......Page 346
Industry Characteristics......Page 347
Product Differentiation and Advertising......Page 348
ECONOMICS IN PRACTICE: An Economist Makes Tea......Page 351
ECONOMICS IN PRACTICE: Can Information Reduce Obesity?......Page 354
Price and Output Determination in Monopolistic Competition......Page 355
Summary......Page 359
Problems......Page 360
Externalities and Environmental Economics......Page 362
ECONOMICS IN PRACTICE: Ban on Oil Drillers......Page 365
ECONOMICS IN PRACTICE: Externalities Are All Around Us......Page 371
Public (Social) Goods......Page 374
Social Choice......Page 379
Summary......Page 382
Problems......Page 383
Decision Making Under Uncertainty: The Tools......Page 386
Asymmetric Information......Page 390
ECONOMICS IN PRACTICE: Adverse Selection in the Health Care Market......Page 393
ECONOMICS IN PRACTICE: How to Read Advertisements......Page 394
Incentives......Page 396
Summary......Page 397
Problems......Page 398
The Sources of Household Income......Page 400
The Distribution of Income......Page 403
ECONOMICS IN PRACTICE: The New Rich Work!......Page 406
The Utility Possibilities Frontier......Page 409
The Redistribution Debate......Page 410
Redistribution Programs and Policies......Page 413
ECONOMICS IN PRACTICE: Does Price Matter in Charitable Giving?......Page 417
Summary......Page 418
Problems......Page 419
The Economics of Taxation......Page 422
ECONOMICS IN PRACTICE: Calculating Taxes......Page 425
Tax Incidence: Who Pays?......Page 429
Excess Burdens and the Principle of Neutrality......Page 435
The Principle of Second Best......Page 438
Summary......Page 439
Problems......Page 440
20 Introduction to Macroeconomics......Page 442
Macroeconomic Concerns......Page 443
The Components of the Macroeconomy......Page 445
A Brief History of Macroeconomics......Page 448
The U.S. Economy Since 1970......Page 450
ECONOMICS IN PRACTICE: John Maynard Keynes......Page 452
Summary......Page 453
Problems......Page 454
Gross Domestic Product......Page 456
Calculating GDP......Page 458
ECONOMICS IN PRACTICE: Where Does eBay Get Counted?......Page 460
ECONOMICS IN PRACTICE: GDP: One of the Great Inventions of the 20th Century......Page 464
Nominal versus Real GDP......Page 465
Limitations of the GDP Concept......Page 468
Summary......Page 470
Review Terms and Concepts......Page 471
Problems......Page 472
Unemployment......Page 474
ECONOMICS IN PRACTICE: A Quiet Revolution: Women Join the Labor Force......Page 478
Inflation......Page 480
ECONOMICS IN PRACTICE: The Politics of Cost-of-Living Adjustments......Page 483
Long-Run Growth......Page 485
Looking Ahead......Page 487
Problems......Page 488
PART V: The Core of Macroeconomic Theory......Page 490
23 Aggregate Expenditure and Equilibrium Output......Page 492
The Keynesian Theory of Consumption......Page 493
Planned Investment (I)......Page 497
The Determination of Equilibrium Output (Income)......Page 498
The Multiplier......Page 502
ECONOMICS IN PRACTICE: The Paradox of Thrift......Page 505
Looking Ahead......Page 506
Problems......Page 507
Appendix: Deriving the Multiplier Algebraically......Page 509
24 The Government and Fiscal Policy......Page 510
Government in the Economy......Page 511
Fiscal Policy at Work: Multiplier Effects......Page 515
The Federal Budget......Page 520
The Economy’s Influence on the Government Budget......Page 525
ECONOMICS IN PRACTICE: Governments Disagree on How Much More Spending Is Needed......Page 526
Summary......Page 527
Problems......Page 528
Appendix B: The Case in Which Tax Revenues Depend on Income......Page 530
An Overview of Money......Page 534
ECONOMICS IN PRACTICE: Dolphin Teeth as Currency......Page 536
How Banks Create Money......Page 538
The Federal Reserve System......Page 544
How the Federal Reserve Controls the Money Supply......Page 548
Review Terms and Concepts......Page 554
Problems......Page 555
Interest Rates and Bond Prices......Page 558
The Demand for Money......Page 559
ECONOMICS IN PRACTICE: ATMs and the Demand for Money......Page 564
The Equilibrium Interest Rate......Page 565
Summary......Page 568
Problems......Page 569
Appendix A: The Various Interest Rates in the U.S. Economy......Page 570
Appendix B: The Demand For Money: A Numerical Example......Page 572
27 Aggregate Demand in the Goods and Money Markets......Page 574
Planned Investment and the Interest Rate......Page 575
ECONOMICS IN PRACTICE: Small Business and the Credit Crunch......Page 576
Equilibrium in Both the Goods and Money Markets: The IS-LM Model......Page 577
Policy Effects in the Goods and Money Markets......Page 578
The Aggregate Demand (AD) Curve......Page 582
Summary......Page 586
Problems......Page 587
Appendix: The IS-LM Model......Page 588
The Aggregate Supply Curve......Page 592
The Equilibrium Price Level......Page 595
The Long-Run Aggregate Supply Curve......Page 596
ECONOMICS IN PRACTICE: The Simple “Keynesian” Aggregate Supply Curve......Page 597
Monetary and Fiscal Policy Effects......Page 598
Causes of Inflation......Page 600
ECONOMICS IN PRACTICE: Inflationary Expectations in China......Page 603
The Behavior of the Fed......Page 604
ECONOMICS IN PRACTICE: Markets Watch the Fed......Page 606
Summary......Page 609
Problems......Page 610
The Labor Market: Basic Concepts......Page 614
The Classical View of the Labor Market......Page 615
Explaining the Existence of Unemployment......Page 617
ECONOMICS IN PRACTICE: Does Unemployment Insurance Increase Unemployment or Only Protect the Unemployed?......Page 619
The Short-Run Relationship Between the Unemployment Rate and Inflation......Page 621
The Long-Run Aggregate Supply Curve, Potential Output, and the Natural Rate of Unemployment......Page 626
Summary......Page 628
Problems......Page 629
30 Financial Crises, Stabilization, and Deficits......Page 632
The Stock Market, the Housing Market, and Financial Crises......Page 633
ECONOMICS IN PRACTICE: Bubbles or Rational Investors?......Page 636
Time Lags Regarding Monetary and Fiscal Policy......Page 639
Government Deficit Issues......Page 643
Summary......Page 645
Problems......Page 646
Households: Consumption and Labor Supply Decisions......Page 648
ECONOMICS IN PRACTICE: Household Reactions to Winning the Lottery......Page 655
Firms: Investment and Employment Decisions......Page 657
Productivity and the Business Cycle......Page 662
The Short-Run Relationship Between Output and Unemployment......Page 663
The Size of the Multiplier......Page 664
Summary......Page 665
Problems......Page 666
32 Long-Run Growth......Page 668
The Growth Process: From Agriculture to Industry......Page 669
Sources of Economic Growth......Page 670
ECONOMICS IN PRACTICE: Education and Skills in the United Kingdom......Page 674
Growth and the Environment and Issues of Sustainability......Page 677
Summary......Page 679
Problems......Page 680
Keynesian Economics......Page 682
Monetarism......Page 683
Supply-Side Economics......Page 686
New Classical Macroeconomics......Page 688
ECONOMICS IN PRACTICE: How Are Expectations Formed?......Page 690
Summary......Page 693
Problems......Page 694
34 International Trade, Comparative Advantage, and Protectionism......Page 696
Trade Surpluses and Deficits......Page 697
The Economic Basis for Trade: Comparative Advantage......Page 698
The Sources of Comparative Advantage......Page 705
Trade Barriers: Tariffs, Export Subsidies, and Quotas......Page 706
Free Trade or Protection?......Page 709
ECONOMICS IN PRACTICE: A Petition......Page 712
Summary......Page 715
Problems......Page 716
35 Open-Economy Macroeconomics: The Balance of Payments and Exchange Rates......Page 720
The Balance of Payments......Page 721
ECONOMICS IN PRACTICE: The Composition of Trade Gaps......Page 724
Equilibrium Output (Income) in an Open Economy......Page 725
ECONOMICS IN PRACTICE: The Recession Takes Its Toll on Trade......Page 728
The Open Economy with Flexible Exchange Rates......Page 729
ECONOMICS IN PRACTICE: China’s Increased Flexibility......Page 735
ECONOMICS IN PRACTICE: Losing Monetary Policy Control......Page 737
Summary......Page 738
Review Terms and Concepts......Page 739
Problems......Page 740
Appendix: World Monetary Systems Since 1900......Page 741
36 Economic Growth in Developing and Transitional Economies......Page 746
Life in the Developing Nations: Population and Poverty......Page 747
Economic Development: Sources and Strategies......Page 748
ECONOMICS IN PRACTICE: Corruption......Page 751
ECONOMICS IN PRACTICE: Cell Phones Increase Profits for Fishermen in India......Page 755
Development Interventions......Page 756
The Transition to a Market Economy......Page 760
Summary......Page 764
Review Terms and Concepts......Page 765
Problems......Page 766
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Photo Credits......Page 814