Economics: Principles, Applications, and Tools
Author: Arthur OSullivan
This modern, Micro first book has a strong foundation in demand and supply. Its thoughtful coverage of change in demand vs. change in quantity demanded (also in supply coverage) enables readers to better visualize and truly understand the difference between these 2 fundamental concepts. Its hallmark feature includes a focus on the 5 Key Principles of Economics: 1) Opportunity Cost, 2) The Marginal Principle (comparing marginal benefits and marginal costs), 3) Diminishing Returns, 4) The Spillover Principle (for externalities in production and consumption), and, 5) The Reality Principle (distinguishing real from nominal magnitudes). For economists, financial analysts and other finance professionals.
Table of Contents:
PrefaceIntroduction and Key Principles
Introduction: What Is Economics? 2
What Is Economics? 4
Positive Versus Normative Analysis 5
The Three Key Economic Questions: What, How, and Who? 6
Economic Models 6
Economic Analysis and Modern Problems 7
Economic View of Traffic Congestion 7
Economic View of Poverty in Africa 7
Economic View of Japan's Economic Problems 8
The Economic Way of Thinking 9
Use Assumptions to Simplify 9
Isolate Variables-Ceteris Paribus 9
Think at the Margin 10
Rational People Respond to Incentives 10
Pedaling for Television Time 11
Preview of Coming Attractions: Macroeconomics 11
To Understand Why Economies Grow 11
Application London Solves Its Congestion Problem 12
To Understand Economic Fluctuations 13
To Make Informed Business Decisions 13
Preview of Coming Attractions: Microeconomics 13
To Understand Markets and Predict Changes 13
To Make Personal and Managerial Decisions 14
To Evaluate Public Policies 14
Summary 15
Key Terms 15
Exercises 15
Appendix: Using Graphs and Percentages 17
Using Graphs 17
Computing Percentage Changes and Using Equations 24
The Key Principles of Economics 28
The Principle of Opportunity Cost 30
The Cost of College 30
The Opportunity Costs of Time and Invested Funds 31
Opportunity Cost and the Production Possibilities Curve 31
The Marginal Principle 33
The Opportunity Cost of Military Spending 34
How Many Movie Sequels? 35
Renting College Facilities 36
Automobile Emissions Standards 36
Continental Airlines Uses the Marginal Principle 37
The Principle of Voluntary Exchange 37
Exchange and Markets 37
Online Games and Market Exchange 38
The Principle of Diminishing Returns 38
Tiger Woods and Weeds 39
Diminishing Returns from Sharing a Production Facility 39
Fertilizer and Crop Yields 40
The Real-Nominal Principle 40
The Declining Real Minimum Wage 41
Repaying Student Loans 42
Summary 43
Key Terms 43
Exercises 43
Economic Experiment 47
Exchange and Markets 48
Comparative Advantage and Exchange 50
Specialization and the Gains from Trade 50
Comparative Advantage Versus Absolute Advantage 52
The Division of Labor and Exchange 52
Comparative Advantage and International Trade 53
Moving Jobs to Different States and Different Countries 54
Movie Exports 54
Candy Cane Makers Move to Mexico for Cheap Sugar 55
Markets 56
Virtues of Markets 56
Markets in a Prisoner of War Camp 57
Market Failure and the Role of Government 58
Government Enforces the Rules of Exchange 59
Government Can Reduce Economic Uncertainty 60
Summary 61
Key Terms 61
Exercises 61
Demand, Supply, and Market Equilibrium 66
The Demand Curve 68
The Individual Demand Curve and the Law of Demand 68
From Individual Demand to Market Demand 69
The Supply Curve 70
The Individual Supply Curve and the Law of Supply 71
Why Is the Individual Supply Curve Positively Sloped? 72
From Individual Supply to Market Supply 73
Why Is the Market Supply Curve Positively Sloped? 74
Market Equilibrium: Bringing Demand and Supply Together 74
Excess Demand Causes the Price to Rise 75
Excess Supply Causes the Price to Drop 76
Market Effects of Changes in Demand 76
Change in Quantity Demanded Versus Change in Demand 76
Increases in Demand Shift the Demand Curve 77
Decreases in Demand Shift the Demand Curve 78
A Decrease in Demand Decreases the Equilibrium Price 80
Market Effects of Changes in Supply 80
Change in Quantity Supplied Versus Change in Supply 80
Increases in Supply Shift the Supply Curve 81
An Increase in Supply Decreases the Equilibrium Price 82
Decreases in Supply Shift the Supply Curve 83
A Decrease in Supply Increases the Equilibrium Price 83
Simultaneous Changes in Demand and Supply 84
Predicting and Explaining Market Changes 85
Applications of Demand and Supply 86
Hurricane Katrina and Baton Rouge Housing Prices 86
Ted Koppel Tries to Explain Lower Drug Prices 87
Electricity from the Wind 88
The Bouncing Price of Vanilla Beans 89
Platinum, Jewelry, Catalytic Converters 90
Summary 91
Key Terms 91
Exercises 91
Economic Experiment 96
The Basic Concepts in Macroeconomics
Measuring a Nation's Production and Income 98
The "Flip" Sides of Macroeconomic Activity: Production and Income 100
The Circular Flow of Production and Income 101
The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product 102
The Components of GDP 103
Putting It All Together: The GDP Equation 107
The Income Approach: Measuring a Nation's Macroeconomic Activity Using National Income 107
Measuring National Income 108
Measuring National Income Through Value Added 109
An Expanded Circular Flow 109
Using Value Added to Measure the True Size of Wal-Mart 110
A Closer Examination of Nominal and Real GDP 111
Measuring Real Versus Nominal GDP 111
How to Use the GDP Deflator 112
Fluctuations in GDP 113
GDP as a Measure of Welfare 114
Shortcomings of GDP as a Measure of Welfare 114
The NBER and the 2001 Recession 115
The Links Between Self-Reported Happiness and GDP 117
Summary 118
Key Terms 118
Exercises 118
Unemployment and Inflation 122
Examining Unemployment 124
How Is Unemployment Defined and Measured? 124
After Growing Sharply, Women's Labor Force Participation Has Leveled Off 125
Alternative Measures of Unemployment and Why They're Important 126
NEETs Are the New Discouraged Workers in Japan 127
Who Are the Unemployed? 128
Categories of Unemployment 128
Types of Unemployment: Cyclical, Frictional, and Structural 129
The Natural Rate of Unemployment 130
The Costs of Unemployment 130
Finding the Optimal Level of Unemployment Insurance 131
The Consumer Price Index and The Cost of Living 132
The CPI Versus the Chain Index for GDP 133
Problems in Measuring Changes in Prices 133
Inflation 134
Historical U.S. Inflation Rates 135
Using the CPI to Adjust Social Security Benefits 136
The Perils of Deflation 136
The Costs of Inflation 137
Anticipated Inflation 137
Unanticipated Inflation 137
Summary 138
Key Terms 139
Exercises 139
The Economy in the Long Run
The Economy at Full Employment 142
Wage and Price Flexibility and Full Employment 144
Understanding Full Employment 144
The Production Function 144
Wages and the Demand and Supply for Labor 147
Labor Market Equilibrium 147
Changes in Demand and Supply 147
Immigration Affects Both the Demand and Supply for Labor 149
Labor Market Equilibrium and Full Employment 149
Labor Supply Varies Across Countries and Time 151
Using the Full-Employment Model 151
Taxes and Potential Output 151
A Nobel Laureate Explains Why Europeans Work Less Than Americans or the Japanese 153
Real Business Cycle Theory 153
Dividing Output Among Competing Demands for GDP at Full Employment 155
International Comparisons 155
Crowding Out in a Closed Economy 156
Crowding Out in an Open Economy 158
Crowding In 158
Summary 158
Key Terms 159
Exercises 159
Why Do Economies Grow? 162
Economic Growth Rates 164
Measuring Economic Growth 164
Comparing the Growth Rates of Various Countries 166
Increased Growth Leads to Less Child Labor in Developing Countries 167
Are Poor Countries Catching Up? 167
Capital Deepening 168
Saving and Investment 169
Growth Need Not Cause Increased Inequality 170
How Do Population Growth, Government, and Trade Affect Capital Deepening? 171
Limits to Capital Deepening 172
The Key Role of Technological Progress 172
How Do We Measure Technological Progress? 173
Using Growth Accounting 173
How Growth in Singapore and Hong Kong Differed 174
Worldwide Factors Slowed U.S. Productivity Growth 174
The Internet and Information Technology Raised Productivity Throughout the Economy 176
What Causes Technological Progress? 176
Research and Development Funding 177
Monopolies That Spur Innovation 177
The Scale of the Market 178
Induced Innovations 178
Education, Human Capital, and the Accumulation of Knowledge 178
A Virtuous Circle: GDP and Health 179
New Growth Theory 180
A Key Governmental Role: Providing the Correct Incentives and Property Rights 180
Lack of Property Rights Hinders Growth in Peru 181
Summary 182
Key Terms 182
Exercises 183
Appendix: A Model of Capital Deepening 186
Economic Fluctuations
Aggregate Demand and Aggregate Supply 190
Sticky Prices and Their Macroeconomic Consequences 192
Price Stickiness in Retail Catalogs 194
Understanding Aggregate Demand 194
What Is the Aggregate Demand Curve? 194
The Components of Aggregate Demand 195
Why the Aggregate Demand Curve Slopes Downward 195
Shifts in the Aggregate Demand Curve 196
How the Multiplier Makes the Shift Bigger 198
Understanding Aggregate Supply 200
The Long-Run Aggregate Supply Curve 201
The Short-Run Aggregate Supply Curve 202
Business Investment, Net Exports, and the 2001 Recession 203
Supply Shocks 204
How the U.S. Economy Has Coped with Oil Price Fluctuations 205
From the Short Run to the Long Run 205
Looking Ahead 207
Summary 207
Key Terms 207
Exercises 208
Fiscal Policy 210
The Role of Fiscal Policy 212
Fiscal Policy and Aggregate Demand 212
The Fiscal Multiplier 213
The Limits to Stabilization Policy 214
The Federal Budget 216
Federal Spending 216
Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs 218
Federal Revenues 219
The Federal Deficit and Fiscal Policy 220
Automatic Stabilizers 220
How Governments Use Budget Baselines to Forecast Deficits 221
Are Deficits Bad? 222
Fiscal Policy in U.S. History 222
The Depression Era 223
The Kennedy Administration 223
The Vietnam War Era 223
The Reagan Administration 224
The Clinton and George W. Bush Administrations 224
Surveys Show Much of the 2001 Tax Cuts Were Saved 225
Summary 226
Key Terms 227
Exercises 227
The Income-Expenditure Model 230
A Simple Income-Expenditure Model 232
Equilibrium Output 233
Adjusting to Equilibrium Output 234
The Consumption Function 235
Consumer Spending and Income 235
Changes in the Consumption Function 236
Rising Home Equity, the Wealth Effect, and Increased Consumer Spending 237
Equilibrium Output and the Consumption Function 238
Saving and Investment 239
Understanding the Multiplier 240
Increased Investment Spending Raises GDP After Natural Disasters 241
Government Spending and Taxation 242
Fiscal Multipliers 242
Using Fiscal Multipliers 244
John Maynard Keynes: A World Intellectual 246
Understanding Automatic Stabilizers 247
Exports and Imports 249
The Locomotive Effect: How Foreign Demand Affects a Country's Output 251
The Income-Expenditure Model and the Aggregate Demand Curve 252
Summary 253
Key Terms 254
Exercises 254
Economic Experiment 256
Appendix: Formulas for Equilibrium Income and the Multiplier 257
Investment and Financial Markets 262
An Investment: A Plunge into the Unknown 264
Evaluating the Future 265
Energy Price Uncertainty Reduces Investment Spending 266
Understanding Present Value 266
Options for a Lottery Winner 268
Real and Nominal Interest Rates 269
Interest Rates Vary by Risk and Length of Loan 270
Understanding Investment Decisions 271
Investment and the Stock Market 272
How Financial Intermediaries Facilitate Investment 274
When Financial Intermediaries Malfunction 275
Fannie Mae and Freddie Mac Facilitate Homeownership: But Do They Increase Risk? 276
Summary 277
Key Terms 277
Exercises 278
Economic Experiment 279
Money, Banking, and Monetary Policy
Money and the Banking System 280
What Is Money? 282
Three Properties of Money 282
Different Types of Monetary Systems 283
Measuring Money in the U.S. Economy 284
More Than Half of U.S. Currency Is Held Overseas 285
How Banks Create Money 286
A Bank's Balance Sheet: Where the Money Comes From and Where It Goes 286
How Banks Create Money 287
How the Money Multiplier Works 288
How the Money Multiplier Works in Reverse 289
A Banker's Bank: The Federal Reserve 290
The Structure of the Federal Reserve 290
Two Recent Major Leaders of the Federal Reserve Board 292
The Independence of the Federal Reserve 293
What the Federal Reserve does During a Financial Crisis 293
Coping with a Stock Market Crash; Black Monday, 1987 293
The Financial System Under Stress: September 11, 2001 294
Summary 295
Key Terms 295
Exercises 295
Economic Experiment 298
Appendix: Formula for Deposit Creation 299
The Federal Reserve and Monetary Policy 300
The Money Market 302
The Demand for Money 302
How the Federal Reserve Can Change the Money Supply 304
Open Market Operations 305
Other Tools of the Fed 305
How Interest Rates Are Determined: Combining the Demand and Supply of Money 306
Interest Rates and Bond Prices 307
Rising Interest Rates During an Economic Recovery 308
Interest Rates and How They Change Investment and Output (GDP) 310
Monetary Policy and International Trade 312
Monetary Policy Challenges for the Fed 313
Lags in Monetary Policy 313
The Effectiveness of Committees 314
Influencing Market Expectations: From the Federal Funds Rate to Interest Rates on Long-Term Bonds 315
Making the Federal Reserve More Transparent 316
Looking Ahead: From the Short Run to the Long Run 316
Summary 317
Key Terms 317
Exercises 317
Inflation, Unemployment, and Economic Policy
Modern Macroeconomics: From the Short Run to the Long Run 320
Linking the Short Run and the Long Run 322
The Difference Between the Short and Long Run 322
Wages and Prices and Their Adjustment over Time 322
How Wage and Price Changes Move the Economy Naturally Back to Full Employment 323
Returning to Full Employment from a Recession 324
Returning to Full Employment from a Boom 325
Economic Policy and the Speed of Adjustment 325
Liquidity Traps 327
Japan's Lost Decade 327
Political Business Cycles 328
Elections, Political Parties, and Voter Expectations 328
Understanding the Economics of the Adjustment Process 329
The Long-Run Neutrality of Money 330
Crowding Out in the Long Run 332
An Unfortunate Gamble 333
Classical Economics in Historical Perspective 334
Say's Law 334
Keynesian and Classical Debates 334
Summary 335
Key Terms 335
Exercises 336
The Dynamics of Inflation and Unemployment 338
Money Growth, Inflation, and Interest Rates 340
Inflation in a Steady State 340
How Changes in the Growth Rate of Money Affect the Steady State 341
Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation 342
Are the Public's Expectations About Inflation Rational? 343
U.S. Inflation and Unemployment in the 1980s 344
Shifts in the Natural Rate of Unemployment in the 1990s 345
Regional Differences in Unemployment Increase the Natural Rate 346
How the Credibility of a Nation's Central Bank Affects Inflation 347
Increased Political Independence for the Bank of England Lowered Inflation Expectations 349
Inflation and the Velocity of Money 349
Inflation-Indexed Bonds in the United States 350
Hyperinflation 352
How Budget Deficits Lead to Hyperinflation 353
Summary 354
Key Terms 354
Exercises 355
Economic Experiment 357
Macroeconomic Policy Debates 358
Should We Balance the Federal Budget? 360
The Budget in Recent Decades 360
The Budget and Social Security 361
Five Debates About Deficits 362
New Methods to Measure the Long-Term Fiscal Imbalances for the United States 365
Should the Fed Target Inflation? 366
Two Debates About Inflation Targeting 367
Bernanke on Inflation Targeting 368
Should We Tax Consumption Rather Than Income? 369
Two Debates About Consumption Taxation 370
The Flat Tax Is a Tax on Consumption 372
Summary 373
Key Terms 373
Exercises 373
The International Economy
International Trade and Public Policy 376
Benefits from Specialization and Trade 378
Production Possibilities Curve 378
Comparative Advantage and the Terms of Trade 379
The Consumption Possibilities Curve 380
How Free Trade Affects Employment 381
Protectionist Policies 382
Import Bans 382
Quotas and Voluntary Export Restraints 382
Responses to Protectionist Policies 384
The Impact of Tariffs on the Poor 384
What Are the Rationales for Protectionist Policies? 385
To Shield Workers from Foreign Competition 385
To Nurture Infant Industries 385
Measuring the Costs of Protecting Jobs 386
To Help Domestic Firms Establish Monopolies in World Markets 386
Protection for Candle Makers 387
A Brief History of International Tariff and Trade Agreements 388
Ongoing Trade Negotiations 389
Recent Policy Debates and Trade Agreements 389
Are Foreign Producers Dumping Their Products? 389
Do Trade Laws Inhibit Environmental Protection? 390
Do Outsourcing and Trade Cause Inequality? 391
Why Do People Protest Against Free Trade? 392
Summary 393
Key Terms 393
Exercises 393
The World of International Finance 396
How Exchange Rates Are Determined 398
What Are Exchange Rates? 398
How Demand and Supply Determine Exchange Rates 399
Changes in Demand or Supply 400
Real Exchange Rates and Purchasing Power Parity 401
The Current Account, the Financial Account, and the Capital Account 403
Big Macs and Purchasing Power Parity 404
Rules for Calculating the Current, Financial, and Capital Accounts 405
Fixed and Flexible Exchange Rates 407
Fixing the Exchange Rate 407
World Savings and U.S. Current Account Deficits 408
Fixed Versus Flexible Exchange Rates 408
The U.S. Experience with Fixed and Flexible Exchange Rates 410
Exchange Rate Systems Today 411
The First Decade of the Euro 411
Managing Financial Crises 412
The Argentinean Financial Crisis 413
Summary 414
Key Terms 414
Exercises 415
Economic Experiment 416
A Closer Look at Demand and Supply
Elasticity: A Measure of Responsiveness 418
The Price Elasticity of Demand 420
Computing Percentage Changes and Elasticities 420
Price Elasticity and the Demand Curve 422
Elasticity and the Availability of Substitutes 422
Other Determinants of the Price Elasticity of Demand 425
Using Price Elasticity to Predict Changes in Quantity 425
Beer Taxes and Highway Deaths 426
Subsidized Medical Care in Cote d'Ivoire and Peru 427
Price Elasticity and Total Revenue 427
How to Cut Teen Smoking by 60 Percent 428
Elastic Versus Inelastic Demand 429
Market Elasticity Versus Elasticity for a Firm 430
Transit Fares and Deficits 430
A Bumper Crop Is Bad News for Farmers 431
Drug Prices and Property Crime 432
Elasticity and Total Revenue for a Linear Demand Curve 432
Price Elasticity Along a Linear Demand Curve 432
Elasticity and Total Revenue for a Linear Demand Curve 434
Other Elasticities of Demand 434
Income Elasticity of Demand 435
Cross-Price Elasticity of Demand 435
The Price Elasticity of Supply 436
What Determines the Price Elasticity of Supply? 437
The Role of Time: Short-Run Versus Long-Run Supply Elasticity 437
Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply 438
Predicting Changes in Quantity Supplied 439
Using Elasticities to Predict Changes in Equilibrium Price 439
The Price Effects of a Change in Demand 439
The Price Effects of a Change in Supply 441
Metropolitan Growth and Housing Prices 441
An Import Ban and Shoe Prices 443
Summary 443
Key Terms 444
Exercises 444
Market Efficiency and Government Intervention 448
Consumer Surplus and Producer Surplus 450
The Demand Curve and Consumer Surplus 451
The Supply Curve and Producer Surplus 451
Market Equilibrium and Efficiency 452
Total Surplus Is Lower with a Price Below the Equilibrium Price 453
Total Surplus Is Lower with a Price Above the Equilibrium Price 454
Efficiency and the Invisible Hand 454
Government Intervention in Efficient Markets 455
Controlling Prices-Maximum and Minimum Prices 455
Setting Maximum Prices 455
Rent Control 456
Milk Mountains 458
Setting Minimum Prices 458
Controlling Quantities-Licensing and Import Restrictions 458
Taxi Medallions 459
Licensing and Market Efficiency 459
Winners and Losers from Licensing 460
Import Restrictions 460
U.S. and European Consumers Pay for Import Restrictions 462
Who Really Pays Taxes? 462
Tax Shifting: Forward and Backward 462
Supply and Demand for Human Organs 463
Tax Shifting and the Price Elasticity of Demand 464
Cigarette Taxes and Tobacco Land 465
Tax Burden and Deadweight Loss 465
Boat Workers and the Tax on Luxury Boats 465
Taxes and December Babies 467
Summary 467
Key Terms 468
Exercises 468
Economic Experiment 471
Consumer Choice Using Utility Theory 472
Total and Marginal Utility 474
Consumer Choice 475
Consumer Constraints: The Budget Line 475
Making Choices Using the Equimarginal Rule 476
New Zealand's Tax on Light Spirits 477
Online Music Stores and Piracy 478
The Individual Demand Curve 479
The Income and Substitution Effects of a Price Change 479
Points on the Demand Curve 480
The Substitution Effect of a Gas Tax Decreases Gas Consumption 481
Applications of Consumer Choice 482
Inflation Doesn't Change Consumption or Utility 482
Television Versus Radio Advertising 483
Summary 484
Key Terms 484
Exercises 484
Appendix: Consumer Choice with Indifference Curves 488
Consumer Constraints and Preferences 488
Maximizing Utility 491
What's Your MRS? 492
Online Music and Piracy 493
Inflation Doesn't Change Consumption or Utility 494
Drawing the Individual Demand Curve 495
The Substitution Effect of a Gas Tax Decreases Gas Consumption 498
Summary 499
Key Terms 500
Exercises 500
Market Structures and Pricing
Production Technology and Cost 504
Economic Cost and Economic Profit 506
A Firm with a Fixed Production Facility: Short-Run Costs 507
Production and Marginal Product 507
Short-Run Total Cost 508
Short-Run Average Costs 510
Short-Run Marginal Cost 511
The Relationship Between Marginal Cost and Average Cost 512
Production and Cost in the Long Run 513
Expansion and Replication 513
Reducing Output with Indivisible Inputs 515
Scaling Down and Labor Specialization 515
Economies of Scale 516
Diseconomies of Scale 516
Actual Long-Run Average-Cost Curves 516
Short-Run Versus Long-Run Average Cost 517
Applications of Production Cost 518
The Production Cost of an iPod Nano 518
Indivisible Inputs and the Cost of Fake Killer Whales 519
Scale Economies in Wind Power 520
Information Goods and First-Copy Cost 520
The Average Cost of Producing Airplanes 521
Summary 522
Key Terms 523
Exercises 523
Perfect Competition 526
Preview of the Four Market Structures 528
The Firm's Short-Run Output Decision 530
The Total Approach: Computing Total Revenue and Total Cost 530
The Marginal Approach 531
Economic Profit and the Break-Even Price 533
The Firm's Shut-Down Decision 533
Total Revenue, Variable Cost, and the Shut-Down Decision 533
The Shut-Down Price 535
Fixed Costs and Sunk Costs 535
The Break-Even Price for a Corn Farmer 536
Short-Run Supply Curves 536
The Firm's Short-Run Supply Curve 536
The Short-Run Market Supply Curve 537
Market Equilibrium 538
Wireless Women in Pakistan 539
The Long-Run Supply Curve for an Increasing-Cost Industry 539
Production Cost and Industry Size 540
Drawing the Long-Run Market Supply Curve 540
Wolfram Miners Obey the Law of Supply 541
The Worldwide Supply of Sugar 542
Short-Run and Long-Run Effects of Changes in Demand 542
The Short-Run Response to an Increase in Demand 542
The Long-Run Response to an Increase in Demand 543
Zoning, Land Prices, and the Supply Curve for Apartments 544
Long-Run Supply for a Constant-Cost Industry 545
Long-Run Supply Curve for a Constant-Cost Industry 545
Hurricane Andrew and the Price of Ice 545
Summary 547
Key Terms 547
Exercises 547
Monopoly and Price Discrimination 552
The Monopolist's Output Decision 554
Total Revenue and Marginal Revenue 555
A Formula for Marginal Revenue 556
Using the Marginal Principle 556
The Social Cost of Monopoly 559
Deadweight Loss from Monopoly 559
Rent Seeking: Using Resources to Get Monopoly Power 561
Monopoly and Public Policy 561
Ending the Monopoly on Internet Registration 562
Patents and Monopoly Power 562
Incentives for Innovation 562
Trade-Offs from Patents 563
Price Discrimination 563
Bribing the Makers of Generic Drugs 564
Senior Discounts in Restaurants 565
Price Discrimination and the Elasticity of Demand 566
Paying for a Cold Soft Drink on a Hot Day 566
The Pricing of Movie Admission and Popcorn 567
Hardback Books Are Relatively Expensive 568
Summary 568
Key Terms 569
Exercises 569
Economic Experiment 572
Market Entry and Monopolistic Competition 574
The Effects of Market Entry 576
Entry Squeezes Profits from Three Sides 577
Woofer, Tweeter, and the Stereo Business 578
Deregulation and Entry in Trucking 578
Name Brands Versus Store Brands 579
Monopolistic Competition 579
When Entry Stops: Long-Run Equilibrium 580
Differentiation by Location 581
Trade-Offs with Entry and Monopolistic Competition 581
Average Cost and Variety 581
Opening a Dunkin' Donuts Shop 582
Monopolistic Competition Versus Perfect Competition 583
Advertising for Product Differentiation 584
Celebrity Endorsements and Signaling 584
Advertising and Movie Buzz 585
Summary 586
Key Terms 586
Exercises 586
Economic Experiment 589
Oligopoly and Strategic Behavior 590
What Is an Oligopoly? 592
Cartel Pricing and the Duopolists' Dilemma 593
Price-Fixing and the Game Tree 595
Equilibrium of the Price-Fixing Game 596
Nash Equilibrium 597
Overcoming the Duopolists' Dilemma 597
Low-Price Guarantees 597
Vitamin Inc. Gets Busted 598
Repeated Pricing Games with Retaliation for Underpricing 599
Low-Price Guarantees and Empty Promises 600
Price-Fixing and the Law 601
Alternative Models of Oligopoly Pricing 602
Price Leadership 602
The Kinked Demand Curve Model 602
Simultaneous Decision Making and the Payoff Matrix 603
Simultaneous Price-Fixing Game 603
The Prisoners' Dilemma 604
The Insecure Monopolist and Entry Deterrence 605
The Passive Approach 605
Entry Deterrence and Limit Pricing 606
Legal and Illegal Entry Deterrence 608
Examples: Microsoft Windows and Campus Bookstores 608
Entry Deterrence and Contestable Markets 609
When Is the Passive Approach Better? 609
The Advertisers' Dilemma 609
Reynolds International Takes the Money Leaves the Market 610
Summary 612
Key Terms 612
Exercises 612
Economic Experiment 617
Controlling Market Power: Antitrust and Regulation 618
Natural Monopoly 620
Picking an Output Level 620
Will a Second Firm Enter? 621
Price Controls for a Natural Monopoly 622
XM and Sirius Satellite Radio 623
A Decrease in Demand Increases The Price of Cable TV 624
Antitrust Policy 624
Breaking Up Monopolies 624
Blocking Mergers 625
Merger Remedy for Wonder Bread 626
Heinz and Beech-Nut Battie for Second Place 627
Regulating Business Practices: Price-Fixing, Tying, and Cooperative Agreements 628
Xidex Recovers Its Acquisition Cost in Two Years 629
The Microsoft Cases 629
A Brief History of U.S. Antitrust Policy 629
Deregulation: Airlines, Telecommunications, and Electricity 630
Deregulation of Airlines 630
Deregulation of Telecommunication Services 631
Deregulation of Electricity 631
Electricity Deregulation in California 632
Electricity Deregulation in Other U.S. States 633
Summary 633
Key Terms 633
Exercises 633
Externalities and Information
Imperfect Information: Adverse Selection and Moral Hazard 636
The Lemons Problem 638
Uninformed Buyers and Knowledgeable Sellers 638
Equilibrium with All Low-Quality Goods 639
A Thin Market: Equilibrium with Some High-Quality Goods 640
Responding to the Lemons Problem 642
Buyers Invest in Information 642
Consumer Satisfaction Scores from ValueStar and eBay 642
Guarantees and Lemons Laws 642
Evidence of the Lemons Effect 643
The Resale Value of a Week-Old Car 643
Used Pickup Trucks 644
Regulation of the California Kiwifruit Market 644
Baseball Pitchers Are Like Used Cars 645
Uninformed Sellers and Knowledgeable Buyers: Insurance 646
Health Insurance 646
Equilibrium with All High-Cost Consumers 646
Responding to Adverse Selection in Insurance: Group Insurance 648
The Uninsured 648
Genetic Testing Benefits Low-Risk People 649
Other Types of Insurance 650
Insurance and Moral Hazard 650
Deposit Insurance for Savings & Loans 651
People with Insurance Take More Risks 651
Summary 652
Key Terms 652
Exercises 652
Economic Experiments 656
Public Goods and Public Choice 658
External Benefits and Public Goods 660
Public Goods and the Free-Rider Problem 661
Free Riders and the Three-Clock Tower 663
Overcoming the Free-Rider Problem 663
Paying Landowners to Host Wolves 664
Asteroid Diversion as a Public Good 664
Private Goods with External Benefits 665
External Benefits from Education 665
External Benefits and the Marginal Principle 665
Other Private Goods That Generate External Benefits 666
External Benefits from Lojack 667
Public Choice 667
Voting and the Median-Voter Rule 667
Alternative Models of Government: Self-Interest and Special Interests 669
Politicians Are Like Ice-Cream Sellers 670
Which Theory Is Correct? 671
Summary 671
Key Terms 671
Exercises 671
Economic Experiment 673
External Costs and Environmental Policy 674
The Optimal Level of Pollution 676
Using the Marginal Principle 676
The Optimal Level of Sulfur Dioxide Emissions 677
Taxing Pollution 678
A Firm's Response to a Pollution Tax 678
The Market Effects of a Pollution Tax 678
Traditional Regulation 680
Uniform Abatement with Permits 680
The Effects of a Carbon Tax 681
Command and Control 682
Market Effects of Pollution Regulations 682
Marketable Pollution Permits 682
Dear Abby and Environmental Policy 683
Voluntary Exchange and Marketable Permits 684
Supply, Demand, and the Price of Marketable Permits 684
External Costs from Automobiles 685
External Costs from Pollution 685
Marketable Permits for Sulfur Dioxide 686
Chicago Climate Exchange 687
External Costs from Congestion 688
External Costs from Collisions 689
Young Drivers and Collisions 689
Summary 690
Key Terms 690
Exercises 690
Economic Experiment 693
The Labor Market and Income Distribution
The Labor Market, Income, and Poverty 694
The Demand for Labor 696
Labor Demand by an Individual Firm in the Short Run 696
Market Demand for Labor in the Short Run 699
Labor Demand in the Long Run 699
Short-Run Versus Long-Run Demand 699
The Supply of Labor 700
The Individual Labor-Supply Decision: How Many Hours? 700
Different Responses to a Higher Wage 701
The Market Supply Curve for Labor 701
Labor Market Equilibrium 702
Changes in Demand and Supply 702
The Market Effects of the Minimum Wage 703
Codes of Conduct and Living Wages 704
Trade-Offs from Immigration 705
Explaining Differences in Wages and Income 705
Why Do Wages Differ Across Occupations? 706
The Gender Pay Gap 706
Wage Premiums for Dangerous Jobs 707
Racial Discrimination 708
Why Do College Graduates Earn Higher Wages? 708
Lakisha Washington Versus Emily Walsh 709
The Distribution of Income 710
Income Distribution Facts 710
Recent Changes in the Distribution of Income 711
Changes in the Top End of Income Distribution: 1920-1998 712
Poverty and Public Policy 713
Poverty Rates for Different Groups 713
Redistribution Programs for the Poor 714
Welfare Reform and TANF 714
Welfare and Work Incentives 715
Summary 716
Key Terms 716
Exercises 716
Unions, Monopsony, and Imperfect Information 720
Labor Unions 722
A Brief History of Labor Unions in the United States 722
Labor Unions and Wages 723
Truckers Trade Off Wages and Jobs 724
Market Structure and the Wage-Jobs Trade-Off 725
The Effects of Unions on Worker Productivity and Turnover 725
Competition Reduces Trucker Wages 726
Monopsony Power 726
Marginal Labor Cost Exceeds the Wage 727
Picking a Quantity of Labor and a Wage 727
Monopsony Versus Perfect Competition 728
Monopsony and a Minimum Wage 729
Monopsony and the Real World 730
Pubs and the Labor-Supply Curve 731
Imperfect Information and Efficiency Wages 731
The Mixed Market for Labor 731
Efficiency Wages at Ford Motor Company 733
Summary 734
Key Terms 734
Exercises 734
Glossary 737
Photo Credits 747
Index 749
New interesting book: Breaking the Food Seduction or Fat Smash Diet
Picture Personalities: The Emergence of the Star System in America
Author: Richard Decordov
Using a model of enunciation, Richard deCordova argues convincingly that the origins of movie stardom lie within a star system and a system of discourse developed by the fledgling movie industry and the press.
No comments:
Post a Comment