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Economics Today Sixteenth Edition Roger LeRoy Miller Research Professor of Economics University of Texas–Arlington Addison-Wesley Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo The Pearson Series in Economics Abel/Bernanke/Croushore Macroeconomics* Cooter/Ulen Law & Economics Bade/Parkin Foundations of Economics* Downs An Economic Theory of Democracy Berck/Helfand The Economics of the Environment Bierman/Fernandez Game Theory with Economic Applications Blanchard Macroeconomics* Blau/Ferber/Winkler The Economics of Women, Men and Work Boardman/Greenberg/Vining/ Weimer Cost-Benefit Analysis Boyer Principles of Transportation Economics Branson Macroeconomic Theory and Policy Brock/Adams The Structure of American Industry Bruce Public Finance and the American Economy Carlton/Perloff Modern Industrial Organization Case/Fair/Oster Principles of Economics* Caves/Frankel/Jones World Trade and Payments: An Introduction Chapman Environmental Economics: Theory, Application, and Policy Ehrenberg/Smith Modern Labor Economics Hoffman/Averett Women and the Economy: Family, Work, and Pay Holt Markets, Games and Strategic Behavior Ekelund/Ressler/Tollison Economics* Hubbard/O’Brien Economics* Money, Banking, and the Financial System* Farnham Economics for Managers Hughes/Cain American Economic History Folland/Goodman/Stano The Economics of Health and Health Care Husted/Melvin International Economics Fort Sports Economics Jehle/Reny Advanced Microeconomic Theory Froyen Macroeconomics Johnson-Lans A Health Economics Primer Fusfeld The Age of the Economist Keat/Young Managerial Economics Gerber International Economics* Klein Mathematical Methods for Economics Gordon Macroeconomics* Greene Econometric Analysis Gregory Essentials of Economics Gregory/Stuart Russian and Soviet Economic Performance and Structure Krugman/Obstfeld/Melitz International Economics: Theory & Policy* Laidler The Demand for Money Leeds/von Allmen The Economics of Sports Leeds/von Allmen/Schiming Economics* Hartwick/Olewiler The Economics of Natural Resource Use Lipsey/Ragan/Storer Economics* Heilbroner/Milberg The Making of the Economic Society Lynn Economic Development: Theory and Practice for a Divided World Heyne/Boettke/Prychitko The Economic Way of Thinking Miller Economics Today* Perman/Common/McGilvray/Ma Natural Resources and Environmental Economics Understanding Modern Economics Miller/Benjamin The Economics of Macro Issues Phelps Health Economics Miller/Benjamin/North The Economics of Public Issues Pindyck/Rubinfeld Microeconomics* Mills/Hamilton Urban Economics Riddell/Shackelford/Stamos/ Schneider Economics: A Tool for Critically Understanding Society Mishkin The Economics of Money, Banking, and Financial Markets* The Economics of Money, Banking, and Financial Markets, Business School Edition* Macroeconomics: Policy and Practice* Murray Econometrics: A Modern Introduction Nafziger The Economics of Developing Countries O’Sullivan/Sheffrin/Perez Economics: Principles, Applications and Tools* Parkin Economics* Roberts The Choice: A Fable of Free Trade and Protection Silberberg Principles of Microeconomics Stock/Watson Introduction to Econometrics Introduction to Econometrics, Brief Edition Studenmund Using Econometrics: A Practical Guide Tietenberg/Lewis Environmental and Natural Resource Economics Environmental Economics and Policy Todaro/Smith Economic Development Rohlf Introduction to Economic Reasoning Waldman Microeconomics Ruffin/Gregory Principles of Economics Waldman/Jensen Industrial Organization: Theory and Practice Sargent Rational Expectations and Inflation Weil Economic Growth Sawyer/Sprinkle International Economics Williamson Macroeconomics Scherer Industry Structure, Strategy, and Public Policy Perloff Microeconomics* Microeconomics: Theory and Applications with Calculus* * denotes Ritter/Silber/Udell Principles of Money, Banking & Financial Markets* Sherman Market Regulation titles Schiller The Economics of Poverty and Discrimination Log onto www.myeconlab.com to learn more Dedication To the memory of Gaylord Jentz, A true professional as well as a good friend. I will miss you. — R. L. M. Editorial Director: Sally Yagan Editor in Chief: Donna Battista Acquisitions Editor: Noel Seibert Assistant Editor: Carolyn Terbush Editorial Assistant: Megan Cadigan Director of Marketing: Patrice Jones AVP/Executive Marketing Manager: Lori DeShazo Marketing Assistant: Kim Lovato Managing Editor: Nancy H. Fenton Senior Production Project Manager: Kathryn Dinovo Senior Manufacturing Buyer: Carol Melville Creative Director: Christy Mahon Senior Art Director: Jonathan Boylan Interior Designer: Delgado and Co. Cover Designer: Jonathan Boylan Manager, Visual Research: Karen Sanatar Manager, Rights and Permissions: Zina Arabia Permissions Project Supervisor: Michael Joyce Media Director: Susan Schoenberg Senior Media Producer: Melissa Honig MyEconLab Content Lead: Noel Lotz Supplements Editor: Alison Eusden Full-Service Project Management: Orr Book Services Composition: Nesbitt Graphics, Inc. Art Studio: ElectraGraphics, Inc. Printer/Binder: Courier / Kendallville Cover Printer: Lehigh-Phoenix Color / Hagerstown Text Font: 10/12 Janson Photo credits appear on page xxix, which constitutes a continuation of the copyright page. Copyright © 2012, 2011, 2010, 2008, 2006 Pearson Education, Inc., publishing as Addison-Wesley, 75 Arlington Street, Boston, MA 02116. All rights reserved. Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Rights and Contracts Department, 501 Boylston Street, Suite 900, Boston, MA 02116, fax your request to 617-671-3447, or email at www.pearsoned.com/legal/permissions.htm. Many of the designations by manufacturers and seller to distinguish their products are claimed as trademarks. Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps. Library of Congress Cataloging-in-Publication Data Miller, Roger LeRoy. Economics today / Roger LeRoy Miller. —16th ed. p. cm. — (The pearson series in economics) Includes index. ISBN 978-0-13-255461-9 (single volume edition; chapters 1-33) — ISBN 978-0-13-255451-0 (the macro view; chapters 1–18; 32–33) — ISBN 978-0-13-255441-1 (the micro view; chapters 1–6; 19–33) 1. Economics. 2. Microeconomics. 3. Macroeconomics. I. Title. HB171.5.M642 2012 330—dc22 2010049938 10 9 8 7 6 5 4 3 2 1 ISBN 10: 0-13-255461-5 ISBN 13: 978-0-13-255461-9 Brief Contents Preface PA RT I Introduction 1 2 3 4 5 6 PA RT 2 The Macroeconomy: Unemployment, Inflation, and Deflation Measuring the Economy’s Performance Global Economic Growth and Development Real GDP and the Price Level in the Long Run Classical and Keynesian Macro Analyses Consumption, Real GDP, and the Multiplier Fiscal Policy Deficit Spending and the Public Debt Money, Banking, and Central Banking Domestic and International Dimensions of Monetary Policy Stabilization in an Integrated World Economy Policies and Prospects for Global Economic Growth 415 435 462 The Firm: Cost and Output Determination Perfect Competition Monopoly Monopolistic Competition Oligopoly and Strategic Behavior Regulation and Antitrust Policy in a Globalized Economy 483 507 532 555 573 594 Labor Resources and the Environment 28 29 30 31 PA RT 8 317 345 373 397 Market Structure, Resource Allocation, and Regulation 22 23 24 25 26 27 PA RT 7 209 229 250 277 298 Dimensions of Microeconomics 19 Demand and Supply Elasticity 20 Consumer Choice 21 Rents, Profits, and the Financial Environment of Business PA RT 6 139 161 187 Money, Stabilization, and Growth 15 16 17 18 PA RT 5 1 26 48 74 98 121 Real GDP Determination and Fiscal Policy 10 11 12 13 14 PA RT 4 The Nature of Economics Scarcity and the World of Trade-Offs Demand and Supply Extensions of Demand and Supply Analysis Public Spending and Public Choice Funding the Public Sector Introduction to Macroeconomics and Economic Growth 7 8 9 PA RT 3 xx The Labor Market: Demand, Supply, and Outsourcing Unions and Labor Market Monopoly Power Income, Poverty, and Health Care Environmental Economics 618 642 663 688 Global Economics 32 Comparative Advantage and the Open Economy 33 Exchange Rates and the Balance of Payments 705 726 v Contents Preface PA RT 1 Example The Perceived Value of Gifts Getting Directions 7 8 International Example Indian Men Living in the United States Become Ineligible Bachelors 5 Policy Example The Government Gives Everyone an Incentive to Own a Golf Cart 6 Example Airlines Confront the Opportunity Cost of Legroom on Planes 31 International Example France Is the Sleeping Giant 30 Time as a Determinant of Comparative Advantage 40 xx Introduction 1 The Nature of Economics 2 2 3 5 7 Why Not… Try to Increase Blood Donations by Offering Small Payments to Donors? 9 Positive Versus Normative Economics 10 You Are There A Movie Producer Responds to Incentives 11 Issues & Applications In Many U.S. Industries, Command and Control Rules Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 12 13 14 16 16 Appendix A Reading and Working with Graphs Direct and Inverse Relationships Constructing a Graph Graphing Numbers in a Table The Slope of a Line (A Linear Curve) Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice Problems 17 17 17 19 21 2 Scarcity and the World of Trade-Offs 26 Scarcity Wants and Needs Scarcity, Choice, and Opportunity Cost The World of Trade-Offs The Choices Society Faces 24 24 27 28 29 30 32 Why Not… Provide “Free” Health Care to Everyone in the United States? Economic Growth and the Production Possibilities Curve The Trade-Off Between the Present and the Future Specialization and Greater Productivity Comparative Advantage and Trade Among Nations 33 35 36 38 40 You Are There Stopping Students’ Thursday Night Parties with Friday Classes 41 Issues & Applications Is Daylight Saving Time Efficient? Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes vi 1 The Power of Economic Analysis Defining Economics The Three Basic Economic Questions and Two Opposing Answers The Economic Approach: Systematic Decisions Economics as a Science 42 43 44 46 47 CONTENTS Example A Mistaken Price Change Confirms the Law of Demand 50 Why Even Low-Income Households Are Rushing to Buy iPhones 51 An Income Drop Reveals That Divorce Services Are a Normal Good 55 Computer Hardware Consumers Substitute in Favor of “Clouds” 56 How “Fracking” for Natural Gas Has Affected Its Supply 63 How the Housing Bust Created a Sawdust Shortage 66 International Example Why the Quantity of Brides Supplied Is Rising in China 59 Policy Example 3 Demand and Supply Demand The Demand Schedule Shifts in Demand The Law of Supply The Supply Schedule vii 48 49 51 54 58 59 Why Not… Help College Students by Requiring Publishers to Reduce Prices for All of the Textbooks They Currently Supply? Shifts in Supply Putting Demand and Supply Together 61 62 64 You Are There Adjusting to a Lower Market Clearing Price of Solar Cells 68 Issues & Applications How the Great Recession Identified Inferior Goods Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 68 69 71 73 73 4 Extensions of Demand and Supply Analysis 74 Should Shortages in the Ticket Market Be Solved by Scalpers? 67 International Policy Example The Rice Must Be White! 81 International Example Assisting Scattered Emigrants Who Want to Help Kin at Home 76 What Accounts for Rising Pork Prices in China? 78 Policy Example Bad Timing for Increasing the Minimum Wage 87 The Price System and Markets Changes in Demand and Supply The Rationing Function of Prices The Policy of Government-Imposed Price Controls The Policy of Controlling Rents 75 76 79 80 82 Why Not… Require Owners of Residential Buildings to Provide Low-Cost Housing So That All U.S. Residents Can “Afford” Roofs over Their Heads? Price Floors in Agriculture Price Floors in the Labor Market Quantity Restrictions 83 84 85 87 You Are There “Cash for Clunkers” Subsidies and the Market for “Liquid Glass” 88 88 Issues & Applications Contemplating Two Ways to Tackle Water Shortages Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 90 91 93 93 Appendix B Consumer Surplus, Producer Surplus, and Gains from Trade within a Price System Consumer Surplus Producer Surplus Gains from Trade Within a Price System Price Controls and Gains from Trade 94 94 95 96 97 viii CONTENTS Example Space Age Litterbugs Countdown to Private Production of Space Travel Valuable Charter School Services— for Those Who Can Get Them 100 104 111 International Example So Little Mail, So Little for So Many Post Offices to Do 113 Policy Example Seeking to Halt “Overuse” of Massachusetts Health Care 110 International Policy Example Ireland Collects Plenty of Corporate Taxes with a Low Rate 130 Policy Example Government Grinches Grab Gifts Will U.S. Consumers Pour Their Dollars into a Federal VAT? What the Typical Taxpayer Owes Out of the Next Dollar Earned 122 123 124 5 Public Spending and Public Choice 98 What a Price System Can and Cannot Do Correcting for Externalities The Other Economic Functions of Government The Political Functions of Government 99 99 103 105 Why Not… Classify Broadband Internet Access as a Government-Sponsored Good and Provide It to All U.S. Residents? Public Spending and Transfer Programs Collective Decision Making: The Theory of Public Choice 106 106 111 You Are There A Town Confronts a Parked Externality 114 Issues & Applications Uncle Sam Becomes an Investor in Clean-Energy Technology Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes Rethinking Rankings of Top-Selling Films Keeping Tabs on Economic Sentiment 121 Paying for the Public Sector Systems of Taxation The Most Important Federal Taxes Tax Rates and Tax Revenues 122 122 125 128 Why Not… Follow the Example of States such as Maryland by Creating a “Millionaires” Tax Bracket with Extra-High Tax Rates Applied to Incomes Exceeding $1 Million per Year? Taxation from the Point of View of Producers and Consumers 130 131 You Are There A Business Owner Responds to a Marginal Tax Rate Increase 133 PA RT 2 147 154 International Example A Source of “Nonregularity” in Japan’s Cyclical Unemployment 144 116 117 119 120 6 Funding the Public Sector Issues & Applications Raising Capital Gains Tax Rates Shrinks the Tax Base Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes Example 114 134 135 136 138 138 Introduction to Macroeconomics and Economic Growth 7 The Macroeconomy: Unemployment, Inflation, and Deflation Unemployment 139 140 Why Not… Provide Job Losers with Unemployment Benefits Indefinitely? The Major Types of Unemployment Full Employment and the Natural Rate of Unemployment Inflation and Deflation Anticipated versus Unanticipated Inflation Changing Inflation and Unemployment: Business Fluctuations 142 143 145 146 150 152 You Are There A Family Restaurant Regretfully Boosts the Unemployment Rate 154 Issues & Applications Bad News from the Misery Index 155 CONTENTS Example Is Failing to Include Hidden Intangibles Depressing Measured Business Fixed Investment? 169 Correcting GDP for Price Index Changes, 2001–2011 176 International Policy Example The French Government Seeks to De-emphasize GDP 167 International Example Purchasing Power Parity Comparisons of World Incomes 179 International Example Growth Rates Around the World Tracking a Global Economic Growth Divergence The High Chinese Saving Rate and Its Growth Implications What Economic Growth Success Stories Have in Common 189 191 194 197 Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 156 158 159 160 8 Measuring the Economy’s Performance 161 The Simple Circular Flow National Income Accounting Two Main Methods of Measuring GDP Other Components of National Income Accounting Distinguishing Between Nominal and Real Values How Much Might “Going Green” Reduce U.S. Economic Growth? 212 Explaining the Drop in Aggregate Demand in the Late 2000s 217 162 164 167 172 175 Why Not… Always Use the Most Recent Completed Calendar Year as the Base Year for Computing Real GDP? Comparing GDP Throughout the World 177 178 You Are There Questioning China’s Official Real GDP Statistics 180 Issues & Applications Can More Per Capita Real GDP Buy Additional Happiness? Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 181 183 186 186 9 Global Economic Growth and Development 187 How Do We Define Economic Growth? Productivity Increases: The Heart of Economic Growth Saving: A Fundamental Determinant of Economic Growth New Growth Theory and the Determinants of Growth 180 188 192 193 195 Why Not… Promote Innovation by Awarding More Patents? Immigration, Property Rights, and Growth Economic Development 196 199 200 You Are There A Nonabsorbable Fat Finally Finds a Market Niche 204 Issues & Applications China Discovers the Growth Benefits of Patents Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes Example ix PA RT 3 204 206 207 208 208 Real GDP Determination and Fiscal Policy 10 Real GDP and the Price Level in the Long Run 209 Output Growth and the Long-Run Aggregate Supply Curve Total Expenditures and Aggregate Demand Shifts in the Aggregate Demand Curve Long-Run Equilibrium and the Price Level Causes of Inflation 210 213 216 217 219 Why Not… Pass a Law That Prohibits Firms from Raising Their Prices? 219 You Are There Fighting Inflation in Pakistan 222 x CONTENTS Example The U.S. Economy Experiences a Decline in Aggregate Supply 242 Example A Great Inventory Buildup During the Great Recession 262 Policy Example Why Knowing Consumer Sentiment Aids Consumption Forecasts 255 Issues & Applications Japan’s Deflation Rate Switches from Steady to Volatile Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 224 225 227 228 11 Classical and Keynesian Macro Analyses 229 The Classical Model 222 230 Why Not… Always Require Low Interest Rates to Boost Investment Spending? Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Output Determination Using Aggregate Demand and Aggregate Supply: Fixed versus Changing Price Levels in the Short Run Shifts in the Aggregate Supply Curve Consequences of Changes in Aggregate Demand Explaining Short-Run Variations in Inflation 236 238 239 241 You Are There Putting More Weight on Stability Than Growth in Denmark 244 232 235 Issues & Applications Which Shocks Have the Greatest Effects on the Economy? Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 246 247 249 249 12 Consumption, Real GDP, and the Multiplier 250 Some Simplifying Assumptions in a Keynesian Model Determinants of Planned Consumption and Planned Saving Why Not… Help the Economy by Taking from the Rich and Giving to the Poor? Determinants of Investment Determining Equilibrium Real GDP Keynesian Equilibrium with Government and the Foreign Sector Added The Multiplier How a Change in Real Autonomous Spending Affects Real GDP When the Price Level Can Change The Relationship Between Aggregate Demand and the C  I  G  X Curve You Are There In Boise, Idaho, Inventories Accumulate as Desired Saving Rises 245 251 252 257 257 259 263 265 267 268 270 Issues & Applications Why U.S. Consumption Spending Dropped in the Late 2000s Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 272 273 275 275 Appendix C The Keynesian Model and the Multiplier 276 270 CONTENTS 13 Fiscal Policy Policy Example Which Affects Real GDP More—Spending or Tax Cuts? 284 International Policy Example Why European Governments Are Paying More Interest on Debt 304 How Do U.S. Residents’ Foreign Debt Obligations Compare? 306 Discretionary Fiscal Policy Mobile Payments Are Catching On 326 International Policy Example Venezuela Promotes Private Moneys—with Conditions Attached 321 Policy Example The Never-Ending Battle Against Counterfeiters 319 277 278 Why Not… End Our Economic Troubles by Borrowing to Finance Additional Discretionary Government Spending? Possible Offsets to Fiscal Policy Discretionary Fiscal Policy in Practice: Coping with Time Lags Automatic Stabilizers What Do We Really Know About Fiscal Policy? 279 280 285 286 287 You Are There Raising Tax Rates While Emerging from a Severe Recession 288 Issues & Applications Temporary Tax Rebates Prove to Be Nonstimulating Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 290 292 294 294 Appendix D Fiscal Policy: A Keynesian Perspective Changes in Government Spending Changes in Taxes The Balanced-Budget Multiplier The Fixed Price Level Assumption Problems 295 295 296 296 297 297 14 Deficit Spending and the Public Debt Public Deficits and Debts: Flows versus Stocks Government Finance: Spending More Than Tax Collections Evaluating the Rising Public Debt Federal Budget Deficits in an Open Economy Growing U.S. Government Deficits: Implications for U.S. Economic Performance 289 298 299 300 302 306 308 Why Not… Eliminate Deficits and the Debt by Taxing the Richest 1 Percent More? 309 You Are There Facing the Good News and the Bad 311 Issues & Applications The United States Is Vying for the “Lead” in Deficits and Debt Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes Example xi PA RT 4 312 313 314 316 316 Money, Stabilization, and Growth 15 Money, Banking, and Central Banking 317 The Functions of Money Properties of Money Defining Money Financial Intermediation and Banks The Federal Reserve System: The U.S. Central Bank Fractional Reserve Banking, the Federal Reserve, and the Money Supply 318 320 322 323 327 331 Why Not… Eliminate Open Market Operations? Federal Deposit Insurance 335 336 You Are There A River Currency for Riverwest, Wisconsin 339 xii CONTENTS International Policy Example North Korea Divides Its Money by 100 354 Example The U.S. Natural Rate of Unemployment Small Menu Costs in the U.S. Market for Imported Beer 375 386 Policy Example Moderating the Great Recession Is Harder Than Anticipated 387 Issues & Applications Entrepreneurs Boost FDIC Coverage—and Moral Hazard Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 341 343 344 344 16 Domestic and International Dimensions of Monetary Policy 345 The Demand for Money How the Fed Influences Interest Rates Effects of an Increase in the Money Supply Open Economy Transmission of Monetary Policy Monetary Policy and Inflation Monetary Policy in Action: The Transmission Mechanism The Way Fed Policy Is Currently Implemented Selecting the Federal Funds Rate Target 340 346 348 349 351 353 355 357 360 Why Not… Just Follow the Taylor Rule? 362 You Are There How Zimbabwe Undercut Collectors’ Hopes of Profits 363 Issues & Applications Explaining the Rise in the Quantity of Bank Reserves Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 363 365 367 368 369 Appendix E Monetary Policy: A Keynesian Perspective Increasing the Money Supply Decreasing the Money Supply Arguments Against Monetary Policy Problems 370 370 371 371 371 17 Stabilization in an Integrated World Economy 373 Active versus Passive Policymaking The Natural Rate of Unemployment Why Not… Ignore Newspaper Headlines About Inflation? Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Modern Approaches to Justifying Active Policymaking Is There a New Keynesian Phillips Curve? Summing Up: Economic Factors Favoring Active versus Passive Policymaking You Are There Fed Discretion—Based on What the Fed Forecasts or What It Observes? Issues & Applications Inflation Expectations and the “5yr5yr Rate” Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 374 374 380 381 385 388 390 391 392 393 394 396 396 CONTENTS International Policy Example Freedom of Information and Growth in Developing Nations 400 International Example How Cellphones Are Fueling Economic Development 406 418 424 427 International Example Price Elasticities of Salmon Supply in Norway Labor Resources and Economic Growth Capital Goods and Economic Growth Private International Financial Flows as a Source of Global Growth 429 Newspaper Vending Machines versus Candy Vending Machines 440 Does Consuming More Expensive Items Make People Happier? 442 398 400 403 404 405 You Are There Putting Meager Capital to Work in India 408 Issues & Applications Supporting Private Entrepreneurs with Public Funds Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 409 410 411 414 414 Dimensions of Microeconomics 19 Demand and Supply Elasticity 415 Price Elasticity Price Elasticity Ranges Elasticity and Total Revenues Determinants of the Price Elasticity of Demand 416 418 419 422 Why Not… Always Raise Prices When Demand Is Inelastic? Cross Price Elasticity of Demand Income Elasticity of Demand Price Elasticity of Supply 423 425 426 427 You Are There Pricing the iPad: Learning Lessons from the iPhone 430 Issues & Applications Measuring the Substitutability of Satellite and Cable TV Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes Example 397 Why Not… Direct More Foreign Aid to Poor Nations to Help Them Grow Faster? International Institutions and Policies for Global Growth PA RT 5 Example The Price Elasticity of Demand for Natural Gas What Do Real-World Price Elasticities of Demand Look Like? The Income Elasticity of Demand for Dental Services 18 Policies and Prospects for Global Economic Growth xiii 20 Consumer Choice Utility Theory Graphical Analysis Diminishing Marginal Utility Optimizing Consumption Choices 430 431 433 434 434 435 436 437 439 440 Why Not… Make Consumers Happier by Requiring Them to Purchase the Quantities the Government Chooses? How a Price Change Affects Consumer Optimum The Demand Curve Revisited Behavioral Economics and Consumer Choice Theory 443 443 445 446 You Are There Signing Up for “Free” Trial Offers with TrialPay 447 Issues & Applications Is the Utility from Using Credit Cards Really Negative? Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 448 449 450 451 452 xiv CONTENTS Appendix F More Advanced Consumer Choice Theory On Being Indifferent Properties of Indifference Curves The Marginal Rate of Substitution The Indifference Map The Budget Constraint Consumer Optimum Revisited Deriving the Demand Curve Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice Problems Example Do Entertainment Superstars Make Super Economic Rents? 464 Higher Future Taxes Reduce the Discounted Present Value of Profits 473 International Example British Law Firms Adopt Corporate Structures 467 Policy Example The Insider-Trading Regulator’s Insiders Require Regulating 476 21 Rents, Profits, and the Financial Environment of Business Economic Rent Firms and Profits Interest Corporate Financing Methods The Markets for Stocks and Bonds 462 463 465 470 474 475 475 You Are There Why New York City Provides the Homeless with One-Way Tickets 477 Example PA RT 6 Virtualization Expands Feasible Production at Many Firms 485 New Technologies Reshape the LAC Curve in Book Publishing 497 Why “Big-Box” Retailer Best Buy Has Begun to Shrink Its Stores 500 22 The Firm: Cost and Output Determination Pulling New Weapons off the Computer Games Shelf 491 460 461 Why Not…Compare Average Stock Prices Today with Average Stock Prices in Years Past? Issues & Applications The Recent Stock Market Meltdown versus Past Meltdowns Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes Policy Example 453 453 454 455 456 457 458 459 477 479 480 482 482 Market Structure, Resource Allocation, and Regulation Short Run versus Long Run The Relationship Between Output and Inputs Diminishing Marginal Product Short-Run Costs to the Firm Why Not…Force Firms to Reduce Their Fixed and, Hence, Total Costs by Cutting Their Energy Use? The Relationship Between Diminishing Marginal Product and Cost Curves Long-Run Cost Curves Why the Long-Run Average Cost Curve Is U-Shaped Minimum Efficient Scale You Are There During Hard Times for Borrowers, a Repo Man Also Has It Tough Issues & Applications Why Small Nuclear Reactors Are Fueling Big Dreams Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 483 484 485 487 488 489 493 496 498 499 501 501 502 504 506 506 CONTENTS 23 Perfect Competition Example Why Firms Stubbornly Produced Aluminum in the Late 2000s 517 International Example A Global Plunge in the Price of Iron Ore Leads to Shutdowns 516 Characteristics of a Perfectly Competitive Market Structure The Demand Curve of the Perfect Competitor How Much Should the Perfect Competitor Produce? Using Marginal Analysis to Determine the Profit-Maximizing Rate of Production Short-Run Profits The Short-Run Break-Even Price and the Short-Run Shutdown Price The Supply Curve for a Perfectly Competitive Industry Price Determination Under Perfect Competition The Long-Run Industry Situation: Exit and Entry Long-Run Equilibrium Inducing Patients to Switch from One Patented Drug to Another 536 Why Students Pay Different Prices to Attend College 545 International Example A Mexican Cement Monopoly Finds a Way to Incur Losses 544 Policy Example Congress Decides to License Tax Preparers 535 Example Is Punxsutawny Phil Hogging Too Much Attention? 557 507 508 508 509 511 513 515 517 519 520 523 Why Not… Eliminate Economic Profits Entirely? Competitive Pricing: Marginal Cost Pricing 524 524 You Are There The Coal Mining Industry Confronts a Changing Cost Structure 525 Issues & Applications A Higher Price Sets Off a New California Gold Rush Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes Example xv 24 Monopoly Definition of a Monopolist Barriers to Entry 526 527 529 531 531 532 533 533 Why Not…Stop Erecting Government Barriers to Entry? The Demand Curve a Monopolist Faces Elasticity and Monopoly Costs and Monopoly Profit Maximization Calculating Monopoly Profit On Making Higher Profits: Price Discrimination The Social Cost of Monopolies 534 536 538 539 542 544 546 You Are There A Texas Veterinary Board Whittles Down Vets’ Competition 547 Issues & Applications This Medallion Is Not Simply a Decorative Pendant Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 548 549 551 552 552 Appendix G Consumer Surplus and the Deadweight Loss Resulting from Monopoly Consumer Surplus in a Perfectly Competitive Market How Society Loses from Monopoly 553 553 554 25 Monopolistic Competition 555 Monopolistic Competition Price and Output for the Monopolistic Competitor Comparing Perfect Competition with Monopolistic Competition Brand Names and Advertising 556 558 560 561 Why Not…Outlaw Persuasive Advertising? Information Products and Monopolistic Competition 563 564 You Are There Stimulating Candy Sales by Adding Caffeine 567 xvi CONTENTS Example Market Concentration in the Cellphone Industry 576 The Prisoners’ Dilemma 578 Policy Example The U.S. Government Protects an Oligopoly—Or Is It a Cartel? 581 International Policy Example Antitrust Authorities Fine Intel for Its Low Prices 609 Policy Example Food Makers Respond to Regulation by Replacing Trans Fats 604 The Tobacco Industry Sees Benefits in Regulation 604 International Example Globalization of Tasks and the Elasticity of U.S. Labor Demand 625 An Increase in the Demand for Services of Icelandic Translators 627 Policy Example Payroll Regulations Spur the Hiring of Independent Contractors 635 568 Issues & Applications Finding a Band Name Between ABBA and ZZ Top Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 569 570 572 572 26 Oligopoly and Strategic Behavior 573 Oligopoly Strategic Behavior and Game Theory The Cooperative Game: A Collusive Cartel Network Effects Product Compatibility in Multiproduct Oligopolies Facing Network Effects 574 577 580 582 583 Why Not…Require Companies to Make Their Products Compatible? Comparing Market Structures 586 588 You Are There Apple Puts Adobe on Hold 588 Issues & Applications More Companies are “Going Vertical” Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 589 590 592 593 593 27 Regulation and Antitrust Policy in a Globalized Economy 594 Forms of Industry Regulation Regulating Natural Monopolies Regulating Nonmonopolistic Industries Incentives and Costs of Regulation Antitrust Policy Antitrust Enforcement 595 597 600 603 606 609 Why Not… Outlaw All Mergers Between Firms That Sell Similar Items? 610 You Are There A Church Loses a Pie Fight with Pennsylvania 611 Issues & Applications Food-Labeling Regulations Multiply Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 612 PA RT 7 613 615 616 617 Labor Resources and the Environment 28 The Labor Market: Demand, Supply, and Outsourcing Labor Demand for a Perfectly Competitive Firm The Market Demand for Labor Wage Determination in a Perfectly Competitive Labor Market Labor Outsourcing, Wages, and Employment 618 619 623 625 628 Why Not…Prohibit U.S. Firms from Outsourcing? Monopoly in the Product Market The Utilization of Other Factors of Production 631 631 634 You Are There At Staples, the Demand for Robotic Inputs Is Increasing 636 CONTENTS Issues & Applications The Incentives to Outsource Labor Internationally Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes International Example The Chinese Union Monopoly Expands to Include Employees of Foreign Firms 644 Policy Example Can Minimum Wage Laws Ever Boost Employment? 654 Women Discover Payoffs from Extra Education and Training 669 International Example The U.S. Health Care Program’s Benefits for Indian Workers 681 International Example Fisheries Hook a Solution to the Common Property Problem 698 Policy Example Why Higher Cigarette Taxes Might Be Preferable to Smoking Bans 692 636 638 639 641 641 29 Unions and Labor Market Monopoly Power 642 Industrialization and Labor Unions Union Goals and Strategies Economic Effects of Labor Unions 643 646 650 Why Not…Require Firms to Pay Union Wages to Nonunionized Workers? Monopsony: A Buyer’s Monopoly 650 651 You Are There Caught Up in an Unusual Jurisdictional Dispute in Michigan 656 Issues & Applications Tax Dollars Increasingly Pay Union Wages Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 657 30 Income, Poverty, and Health Care Example xvii Income Determinants of Income Differences Theories of Desired Income Distribution Poverty and Attempts to Eliminate It Health Care 658 660 661 662 663 664 667 670 671 675 Why Not…Have All Physicians Work for the Federal Government? 680 You Are There In Massachusetts, Public Health Care Means Price Controls 682 Issues & Applications Is Your College Degree Worth $1 Million? Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 682 684 685 686 687 31 Environmental Economics 688 Private versus Social Costs Correcting for Externalities Pollution Common Property Reducing Humanity’s Carbon Footprint: Restraining Pollution-Causing Activities 689 691 692 694 696 Why Not…Eliminate Nearly All U.S. Carbon Emissions? Wild Species, Common Property, and Trade-Offs 697 697 You Are There Fuel Efficiency Rules and the “Rebound Effect” 698 Issues & Applications Human Activities and Honeybee Colony Collapse Disorder Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 699 700 702 703 704 xviii CONTENTS International Policy Example Does the Spread of Regional Trade Blocs Reduce Protectionism? 720 International Example Gains from International Trade in Used Merchandise 711 Can Africa’s International Competitiveness Be Improved? 713 PA RT 8 Global Economics 32 Comparative Advantage and the Open Economy The Worldwide Importance of International Trade Why We Trade: Comparative Advantage and Mutual Gains from Exchange Current Account Balances and Currency Values 739 706 707 Why Not…Obtain Gains from Trade by Subsidizing Exports and Discouraging Imports? The Relationship Between Imports and Exports International Competitiveness Arguments Against Free Trade Ways to Restrict Foreign Trade International Trade Organizations 712 713 713 714 716 718 You Are There Union Workers Find Themselves on Opposing Sides on Trade 720 Issues & Applications A U.S. Effort to Expand Exports While Reducing Imports Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes International Example 705 33 Exchange Rates and the Balance of Payments The Balance of Payments and International Capital Movements Determining Foreign Exchange Rates 721 722 723 725 725 726 727 732 Why Not…Encourage U.S. Exports by Forcing the Dollar’s Value to Fall? The Gold Standard and the International Monetary Fund Fixed versus Floating Exchange Rates 737 740 740 You Are There Trading in the Real Estate Business for Trading Currencies 743 Issues & Applications Will the Euro’s Global Currency Status Be Short-Lived? Summary: What You Should Know/Key Terms and Key Figures/ Where to Go to Practice Problems Economics on the Net Answers to Quick Quizzes 745 747 748 748 Answers to Odd-Numbered Problems A-1 Glossary G-1 Index 744 I-1 One-Semester Course Outline MACROECONOMIC EMPHASIS THE MACRO VIEW MICROECONOMIC EMPHASIS THE MICRO VIEW 1. The Nature of Economics 2. Scarcity and the World of Trade-Offs 3. Demand and Supply 4. Extensions of Demand and Supply Analysis 5. Public Spending and Public Choice 6. Funding the Public Sector 7. The Macroeconomy. Unemployment, Inflation, and Deflation 8. Measuring the Economy’s Performance 9. Global Economic Growth and Development 10. Real GDP and the Price Level in the Long Run 11. Classical and Keynesian Macro Analyses 12. Consumption, Real GDP, and the Multiplier 13. Fiscal Policy 14. Deficit Spending and the Public Debt 1. The Nature of Economics 2. Scarcity and the World of Trade-Offs 3. Demand and Supply 4. Extensions of Demand and Supply Analysis 5. Public Spending and Public Choice 6. Funding the Public Sector 19. Demand and Supply Elasticity 20. Consumer Choice 21. Rents, Profits, and the Financial Environment of Business 22. The Firm: Cost and Output Determination 23. Perfect Competition 24. Monopoly 25. Monopolistic Competition 26. Oligopoly and Strategic Behavior 27. Regulation and Antitrust Policy in a Globalized Economy 28. The Labor Market: Demand, Supply, and Outsourcing 29. Unions and Labor Market Monopoly Power 30. Income, Poverty, and Health Care 31. Environmental Economics 32. Comparative Advantage and the Open Economy 33. Exchange Rates and the Balance of Payments 15. Money, Banking, and Central Banking 16. Domestic and International Dimensions of Monetary Policy 17. Stabilization in an Integrated World Economy 18. Policies and Prospects for Global Economic Growth 32. Comparative Advantage and the Open Economy 33. Exchange Rates and the Balance of Payments BALANCED MICRO-MACRO 1. The Nature of Economics 2. Scarcity and the World of Trade-Offs 3. Demand and Supply 4. Extensions of Demand and Supply Analysis 5. Public Spending and Public Choice 6. Funding the Public Sector 20. Consumer Choice 21. Rents, Profits, and the Financial Environment of Business 22. The Firm: Cost and Output Determination 23. Perfect Competition 24. Monopoly 28. The Labor Market: Demand, Supply, and Outsourcing 29. Unions and Labor Market Monopoly Power 7. The Macroeconomy. Unemployment, Inflation, and Deflation 10. Real GDP and the Price Level in the Long Run 11. Classical and Keynesian Macro Analyses 12. Consumption, Real GDP, and the Multiplier 13. Fiscal Policy 14. Deficit Spending and the Public Debt 15. Money, Banking, and Central Banking 16. Domestic and International Dimensions of Monetary Policy 32. Comparative Advantage and the Open Economy 33. Exchange Rates and the Balance of Payments xix
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