Principles of economics : a streamlined approach

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Cover Title Page Copyright Page Dedication About the Authors Preface Acknowledgments Brief Contents Contents PART 1 Introduction Chapter 1 Thinking Like an Economist Economics: Studying Choice in a World of Scarcity Applying the Cost-Benefit Principle Economic Surplus Opportunity Cost The Role of Economic Models Three Important Decision Pitfalls Pitfall 1: Measuring Costs and Benefits as Proportions Rather Than Absolute Dollar Amounts Pitfall 2: Ignoring Implicit Costs Pitfall 3: Failing to Think at the Margin Normative Economics versus Positive Economics Economics: Micro and Macro The Approach of This Text Economic Naturalism THE ECONOMIC NATURALIST 1.1 THE ECONOMIC NATURALIST 1.2 THE ECONOMIC NATURALIST 1.3 Summary Key Terms Review Questions Problems Answers to Self-Tests Appendix: Working with Equations, Graphs, and Tables Chapter 2 Supply and Demand What, How, and for Whom? Central Planning versus the Market Buyers and Sellers in Markets The Demand Curve The Supply Curve Market Equilibrium Rent Controls Reconsidered Pizza Price Controls? Predicting and Explaining Changes in Prices and Quantities Shifts in Demand THE ECONOMIC NATURALIST 2.1 Shifts in the Supply Curve THE ECONOMIC NATURALIST 2.2 Four Simple Rules THE ECONOMIC NATURALIST 2.3 Efficiency and Equilibrium Cash on the Table Smart for One, Dumb for All THE ECONOMIC NATURALIST 2.4 Summary Key Terms Review Questions Problems Answers to Self-Tests Appendix: The Algebra of Supply and Demand PART 2 Competition and the Invisible Hand Chapter 3 Demand and Elasticity The Law of Demand The Origins of Demand Needs versus Wants THE ECONOMIC NATURALIST 3.1 Applying the Law of Demand Substitution at Work THE ECONOMIC NATURALIST 3.2 THE ECONOMIC NATURALIST 3.3 THE ECONOMIC NATURALIST 3.4 The Importance of Income Differences THE ECONOMIC NATURALIST 3.5 Individual and Market Demand Curves Horizontal Addition Elasticity Price Elasticity of Demand Price Elasticity Defined Determinants of Price Elasticity of Demand Some Representative Elasticity Estimates Using Price Elasticity of Demand THE ECONOMIC NATURALIST 3.6 THE ECONOMIC NATURALIST 3.7 A Graphical Interpretation of Price Elasticity Price Elasticity Changes along a Straight-Line Demand Curve Two Special Cases Elasticity and Total Expenditure Income Elasticity and Cross-Price Elasticity of Demand Summary Key Terms Review Questions Problems Answers to Self-Tests Chapter 4 Perfectly Competitive Supply Thinking about Supply: The Importance of Opportunity Cost Individual and Market Supply Curves Profit-Maximizing Firms in Perfectly Competitive Markets Profit Maximization The Demand Curve Facing a Perfectly Competitive Firm Production in the Short Run Choosing Output to Maximize Profit Price Equals Marginal Cost: The Seller’s Supply Rule Graphing Marginal Cost The “Law” of Supply Applying the Theory of Supply THE ECONOMIC NATURALIST 4.1 Determinants of Supply Revisited Technology Input Prices The Number of Suppliers Expectations Changes in Prices of Other Products The Price Elasticity of Supply Determinants of Supply Elasticity THE ECONOMIC NATURALIST 4.2 Unique and Essential Inputs: The Ultimate Supply Bottleneck Summary Key Terms Review Questions Problems Answers to Self-Tests Chapter 5 Efficiency, Exchange, and the Invisible Hand in Action The Central Role of Economic Profit Three Types of Profit The Invisible Hand Theory Two Functions of Price Responses to Profits and Losses The Effect of Market Forces on Economic Profit The Importance of Free Entry and Exit The Invisible Hand in Action THE ECONOMIC NATURALIST 5.1 Economic Rent versus Economic Profit The Distinction between an Equilibrium and a Social Optimum Smart for One, Dumb for All THE ECONOMIC NATURALIST 5.2 Market Equilibrium and Efficiency The Cost of Preventing Price Adjustments Summary Key Terms Review Questions Problems Answers to Self-Tests PART 3 Market Imperfections Chapter 6 Monopoly, Oligopoly, and Monopolistic Competition Perfect and Imperfect Competition Different Forms of Imperfect Competition The Essential Difference between Perfectly and Imperfectly Competitive Firms Five Sources of Market Power Exclusive Control over Important Inputs Patents and Copyrights Government Licenses or Franchises Economies of Scale and Natural Monopolies Network Economies Economies of Scale and the Importance of Start-Up Costs THE ECONOMIC NATURALIST 6.1 Profit Maximization for the Monopolist Marginal Revenue for the Monopolist The Monopolist’s Profit-Maximizing Decision Rule Being a Monopolist Doesn’t Guarantee an Economic Profit Why the Invisible Hand Breaks Down under Monopoly Using Discounts to Expand the Market Price Discrimination Defined THE ECONOMIC NATURALIST 6.2 How Price Discrimination Affects Output The Hurdle Method of Price Discrimination Is Price Discrimination a Bad Thing? Examples of Price Discrimination THE ECONOMIC NATURALIST 6.3 Summary Key Terms Review Questions Problems Answers to Self-Tests Chapter 7 Games and Strategic Behavior Using Game Theory to Analyze Strategic Decisions The Three Elements of a Game Nash Equilibrium The Prisoner’s Dilemma The Original Prisoner’s Dilemma The Economics of Cartels THE ECONOMIC NATURALIST 7.1 Tit-for-Tat and the Repeated Prisoner’s Dilemma THE ECONOMIC NATURALIST 7.2 THE ECONOMIC NATURALIST 7.3 Games in Which Timing Matters Credible Threats and Promises Monopolistic Competition When Location Matters THE ECONOMIC NATURALIST 7.4 Commitment Problems Solving Commitment Problems with Psychological Incentives Summary Key Terms Review Questions Problems Answers to Self-Tests Chapter 8 An Introduction to Behavioral Economics Judgmental Heuristics or Rules of Thumb Availability Representativeness Regression to the Mean THE ECONOMIC NATURALIST 8.1 Anchoring and Adjustment Misinterpretation of Contextual Clues The Psychophysics of Perception The Difficulty of Actually Deciding Impulse-Control Problems THE ECONOMIC NATURALIST 8.2 Loss Aversion and Status Quo Bias THE ECONOMIC NATURALIST 8.3 Concerns about Relative Position THE ECONOMIC NATURALIST 8.4 THE ECONOMIC NATURALIST 8.5 Summary Key Terms Review Questions Problems Answers to Self-Tests Chapter 9 Externalities and Property Rights External Costs and Benefits How Externalities Affect Resource Allocation The Coase Theorem Remedies for Externalities Laws and Regulations THE ECONOMIC NATURALIST 9.1 The Optimal Amount of Negative Externalities Is Not Zero Compensatory Taxes and Subsidies THE ECONOMIC NATURALIST 9.2 Property Rights and the Tragedy of the Commons The Problem of Unpriced Resources The Effect of Private Ownership When Private Ownership Is Impractical THE ECONOMIC NATURALIST 9.3 THE ECONOMIC NATURALIST 9.4 Positional Externalities Payoffs That Depend on Relative Performance THE ECONOMIC NATURALIST 9.5 Positional Arms Races and Positional Arms Control Agreements Social Norms as Positional Arms Control Agreements Summary Key Terms Review Questions Problems Answers to Self-Tests PART 4 Economics of Public Policy Chapter 10 Using Economics to Make Better Policy Choices The Economics of Health Care The Case for Mandatory Immunization Laws Explaining Rising Health Care Costs Designing a Solution The HMO Revolution THE ECONOMIC NATURALIST 10.1 The Problem with Health Care Provision through Private Insurance The Affordable Care Act of 2010 Using Price Incentives in Environmental Regulation Taxing Pollution Auctioning Pollution Permits Climate Change and Carbon Taxes Methods of Income Redistribution Welfare Payments and In-Kind Transfers Means-Tested Benefit Programs The Negative Income Tax Minimum Wages The Earned-Income Tax Credit Public Employment for the Poor A Combination of Methods Summary Key Terms Review Questions Problems Answers to Self-Tests PART 5 International Trade Chapter 11 International Trade and Trade Policy Comparative Advantage as a Basis for Trade A Supply and Demand Perspective on Trade Winners and Losers from Trade THE ECONOMIC NATURALIST 11.1 Protectionist Policies: Tariffs and Quotas Tariffs Quotas THE ECONOMIC NATURALIST 11.2 The Inefficiency of Protectionism THE ECONOMIC NATURALIST 11.3 Summary Key Terms Review Questions Problems Answers to Self-Tests PART 6 Macroeconomics: Issues and Data Chapter 12 Macroeconomics: The Bird’s-Eye View of the Economy The Major Macroeconomic Issues Economic Growth and Living Standards Productivity Recessions and Expansions Unemployment Inflation Economic Interdependence among Nations Macroeconomic Policy Types of Macroeconomic Policy Positive versus Normative Analyses of Macroeconomic Policy Aggregation Studying Macroeconomics: A Preview Summary Key Terms Review Questions Problems Answers to Self-Tests Chapter 13 Measuring Economic Activity: GDP, Unemployment, and Inflation Gross Domestic Product: Measuring the Nation’s Output Market Value Final Goods and Services Produced in a Country during a Given Period Methods for Measuring GDP The Expenditure Method for Measuring GDP GDP and the Incomes of Capital and Labor Nominal GDP versus Real GDP THE ECONOMIC NATURALIST 13.1 Real GDP, Economic Growth, and Economic Well-Being Unemployment and the Unemployment Rate Measuring Unemployment The Costs of Unemployment The Duration of Unemployment The Unemployment Rate versus “True” Unemployment The Consumer Price Index and Inflation Inflation Adjusting for Inflation Deflating a Nominal Quantity Indexing to Maintain Buying Power THE ECONOMIC NATURALIST 13.2 Inflation Measurement and Quality Change The Costs of Inflation: Not What You Think The True Costs of Inflation Summary Key Terms Review Questions Problems Answers to Self-Tests PART 7 The Economy in the Long Run Chapter 14 Economic Growth, Productivity, and Living Standards The Remarkable Rise in Living Standards: The Record Why “Small” Differences in Growth Rates Matter Why Nations Become Rich: The Crucial Role of Average Labor Productivity The Determinants of Average Labor Productivity Human Capital THE ECONOMIC NATURALIST 14.1 Physical Capital Land and Other Natural Resources Technology THE ECONOMIC NATURALIST 14.2 Entrepreneurship and Management THE ECONOMIC NATURALIST 14.3 The Political and Legal Environment Real GDP and Economic Well-Being Why Real GDP Isn’t the Same as Economic Well-Being THE ECONOMIC NATURALIST 14.4 But GDP Is Related to Economic Well-Being THE ECONOMIC NATURALIST 14.5 Promoting Economic Growth Policies to Increase Human Capital THE ECONOMIC NATURALIST 14.6 Policies That Promote Saving and Investment Policies That Support Research and Development The Legal and Political Framework The Poorest Countries: A Special Case? Are There Limits to Growth? Summary Key Terms Review Questions Problems Answers to Self-Tests Chapter 15 The Labor Market: Workers, Wages, and Unemployment Five Important Labor Market Trends Trends in Real Wages Trends in Employment and Unemployment Supply and Demand in the Labor Market Wages and the Demand for Labor Shifts in the Demand for Labor THE ECONOMIC NATURALIST 15.1 The Supply of Labor Shifts in the Supply of Labor Explaining the Trends in Real Wages and Employment Large Increases in Real Wages in Industrialized Countries Real Wage Growth in the United States Has Stagnated since the Early 1970s, While Employment Growth Has Been Rapid Increasing Wage Inequality: The Effects of Globalization and Technological Change THE ECONOMIC NATURALIST 15.2 Unemployment Types of Unemployment and Their Costs Impediments to Full Employment Summary Key Terms Review Questions Problems Answers to Self-Tests Chapter 16 Saving and Capital Formation Saving and Wealth Stocks and Flows Capital Gains and Losses THE ECONOMIC NATURALIST 16.1 THE ECONOMIC NATURALIST 16.2 Why Do People Save? THE ECONOMIC NATURALIST 16.3 Saving and the Real Interest Rate Saving, Self-Control, and Demonstration Effects THE ECONOMIC NATURALIST 16.4 National Saving and Its Components The Measurement of National Saving Private and Public Components of National Saving Public Saving and the Government Budget Is Low Household Saving a Problem? Investment and Capital Formation Saving, Investment, and Financial Markets THE ECONOMIC NATURALIST 16.5 Summary Key Terms Review Questions Problems Answers to Self-Tests Chapter 17 Money, the Federal Reserve, and Global Financial Markets Money and Its Uses THE ECONOMIC NATURALIST 17.1 Measuring Money Commercial Banks and the Creation of Money The Money Supply with Both Currency and Deposits The Federal Reserve System The History and Structure of the Federal Reserve System Controlling the Money Supply: Open-Market Operations The Fed’s Role in Stabilizing Financial Markets: Banking Panics THE ECONOMIC NATURALIST 17.2 The Financial System and the Allocation of Saving to Productive Uses The Banking System THE ECONOMIC NATURALIST 17.3 Bonds and Stocks Bond Markets, Stock Markets, and the Allocation of Savings The Informational Role of Bond and Stock Markets Risk Sharing and Diversification THE ECONOMIC NATURALIST 17.4 International Capital Flows Capital Flows and the Balance of Trade The Determinants of International Capital Flows Saving, Investment, and Capital Inflows The Saving Rate and the Trade Deficit THE ECONOMIC NATURALIST 17.5 Summary Key Terms Review Questions Problems Answers to Self-Tests PART 8 The Economy in the Short Run Chapter 18 Short-Term Economic Fluctuations and Fiscal Policy THE ECONOMIC NATURALIST 18.1 Recessions and Expansions THE ECONOMIC NATURALIST 18.2 Some Facts about Short-Term Economic Fluctuations Output Gaps and Cyclical Unemployment Potential Output The Output Gap The Natural Rate of Unemployment and Cyclical Unemployment THE ECONOMIC NATURALIST 18.3 Why Do Short-Term Fluctuations Occur? A Preview and a Tale Alice’s Ice Cream Store: A Tale about Short-Run Fluctuations Recessions and Proposed Solutions: Keynes’s Analysis The Keynesian Model’s Crucial Assumption: Firms Meet Demand at Preset Prices THE ECONOMIC NATURALIST 18.4 Aggregate Output and Spending Hey Big Spender! Consumer Spending and the Economy The Multiplier Stabilizing Spending: The Role of Fiscal Policy Government Purchases and Spending THE ECONOMIC NATURALIST 18.5 Taxes, Transfers, and Aggregate Spending THE ECONOMIC NATURALIST 18.6 Fiscal Policy as a Stabilization Tool: Three Qualifications Fiscal Policy and the Supply Side The Problem of Deficits The Relative Inflexibility of Fiscal Policy Summary Key Terms Review Questions Problems Answers to Self-Tests Chapter 19 Stabilizing the Economy: The Role of the Fed The Federal Reserve and Interest Rates: The Basic Model The Demand for Money Macroeconomic Factors That Affect the Demand for Money The Money Demand Curve THE ECONOMIC NATURALIST 19.1 The Supply of Money and Money Market Equilibrium How the Fed Controls the Nominal Interest Rate The Role of the Federal Funds Rate in Monetary Policy Can the Fed Control the Real Interest Rate? The Federal Reserve and Interest Rates: A Closer Look Can the Fed Fully Control the Money Supply? Do Interest Rates Always Move Together? The Effects of Federal Reserve Actions on the Economy Aggregate Expenditure and the Real Interest Rate The Fed Fights a Recession THE ECONOMIC NATURALIST 19.2 The Fed Fights Inflation THE ECONOMIC NATURALIST 19.3 THE ECONOMIC NATURALIST 19.4 THE ECONOMIC NATURALIST 19.5 The Fed’s Policy Reaction Function THE ECONOMIC NATURALIST 19.6 Monetary Policymaking: Art or Science? Summary Key Terms Review Questions Problems Answers to Self-Tests Chapter 20 Aggregate Demand, Aggregate Supply, and Inflation Inflation, Spending, and Output: The Aggregate Demand Curve Inflation, the Fed, and Why the AD Curve Slopes Downward Other Reasons for the Downward Slope of the AD Curve Factors That Shift the Aggregate Demand Curve Shifts of the AD Curve versus Movements along the AD Curve Inflation and Aggregate Supply Inflation Inertia The Output Gap and Inflation The Aggregate Demand–Aggregate Supply Diagram The Self-Correcting Economy Sources of Inflation Excessive Aggregate Spending THE ECONOMIC NATURALIST 20.1 Inflation Shocks THE ECONOMIC NATURALIST 20.2 Shocks to Potential Output THE ECONOMIC NATURALIST 20.3 Controlling Inflation THE ECONOMIC NATURALIST 20.4 THE ECONOMIC NATURALIST 20.5 Summary Key Terms Review Questions Problems Answers to Self-Tests PART 9 The International Economy Chapter 21 Exchange Rates and the Open Economy Exchange Rates Nominal Exchange Rates Flexible versus Fixed Exchange Rates The Real Exchange Rate THE ECONOMIC NATURALIST 21.1 The Determination of the Exchange Rate in the Long Run A Simple Theory of Exchange Rates: Purchasing Power Parity (PPP) Shortcomings of the PPP Theory The Determination of the Exchange Rate in the Short Run The Foreign Exchange Market: A Supply and Demand Analysis Changes in the Supply of Dollars Changes in the Demand for Dollars THE ECONOMIC NATURALIST 21.2 Monetary Policy and the Exchange Rate THE ECONOMIC NATURALIST 21.3 The Exchange Rate as a Tool of Monetary Policy Fixed Exchange Rates How to Fix an Exchange Rate Speculative Attacks Monetary Policy and the Fixed Exchange Rate THE ECONOMIC NATURALIST 21.4 THE ECONOMIC NATURALIST 21.5 THE ECONOMIC NATURALIST 21.6 Should Exchange Rates Be Fixed or Flexible? THE ECONOMIC NATURALIST 21.7 Summary Key Terms Review Questions Problems Answers to Self-Tests Glossary Index