Economics + DiscoverEcon Online with Paul Solman Videos

by McConnell, Campbell R.; R, Campbell R.; Brue, Stanley L.

Edition:

16th

ISBN13:

9780072982718

ISBN10:

0072982713

Format:

Hardcover

Pub. Date:

4/5/2004

Publisher(s):

McGraw-Hill/Irwin

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Summary

McConnell-Brue's Principles of Economics, 16e is the best-selling Principles of Economics textbook and has been teaching students in a clear, unbiased way for 40 years. The 15th edition grew market share because of its clear and careful treatment of principles of economics concepts, its balanced coverage, and its patient explanations. More students have learned their principles of Economics from McConnell-Brue than any other text; 12 million of them. The 16th edition is a revision that delivers a tight and modern book. We are also pleased to introduce an exciting fully-integrated software system called DiscoverEcon featuring Paul Solman: DiscoverEcon software, brand-new videos that teach economic concepts in a fun and engaging way, and more, all in one convenient software package.

Author Biography

Campbell R. McConnell taught at the University of Nebraska- Lincoln from 1953 through 1990. Stanley L. Brue is a professor at Pacific Lutheran University.

List of Key Graphs

Preface

vii

Contributors

xiv

PART ONE An Introduction to Economics and the Economy

To the Student

(1)

The Nature and Method of Economics

(19)

The Economic Perspective

(1)

Scarcity and Choice

Rational Behavior

Marginalism: Benefits and Costs

Consider This: Free for All?

(1)

Why Study Economics?

(1)

Economics for Citizenship

Professional and Personal Applications

Economic Methodology

(3)

Theoretical Economics

Policy Economics

Macroeconomics and Microeconomics

(1)

Macroeconomics

Microeconomics

Positive and Normative Economics

Pitfalls to Sound Reasoning

(2)

Biases

Loaded Terminology

Definitions

Fallacy of Composition

Causation Fallacies

A Look Ahead

(1)

Last Word: Fast-Food Lines: An Economic Perspective

(3)

Appendix Chapter I: Graphs and Their Meaning

(7)

Construction of a Graph

Direct and Inverse Relationships

Dependent and Independent Variables

Other Things Equal

Slope of a Line

Vertical Intercept

Equation of a Linear Relationship

Slope of a Nonlinear Curve

The Economizing Problem

(17)

The Foundation of Economics

(2)

Unlimited Wants

Scarce Resources

Economics: Employment and Efficiency

(4)

Full Employment: Using Available Resources

Full Production: Using Resources Efficiently

Production Possibilities Table

Production Possibilities Curve

Law of Increasing Opportunity Cost

Allocative Efficiency Revisited

Unemployment, Growth, and the Future

(4)

Unemployment and Productive Inefficiency

A Growing Economy

A Qualification: International Trade

Examples and Applications

Consider This: A Matter of Degrees: Is College Worth the Cost?

(1)

Economic Systems

(1)

The Market System

The Command System

The Circular Flow Model

(1)

Last Word: September 11, 2001, and the War on Terrorism

(4)

Individual Markets: Demand and Supply

(20)

Markets

(1)

Demand

(5)

Law of Demand

The Demand Curve

Market Demand

Change in Demand

Changes in Quantity Demanded

Supply

(3)

Law of Supply

The Supply Curve

Determinants of Supply

Changes in Supply

Changes in Quantity Supplied

Supply and Demand: Market Equilibrium

(2)

Surpluses

Shortages

Equilibrium Price and Quantity

Rationing Function of Prices

Changes in Supply, Demand, and Equilibrium

A Reminder: ``Other Things Equal''

Consider This: The Cutting Edge

(2)

Application: Government-Set Prices

(3)

Price Ceilings and Shortages

Price Floors and Surpluses

Last Word: Ticket Scalping: A Bum Rap?

(4)

Applications and Extensions of Supply and Demand Analysis

(1)

Changes in Supply and Demand

(3)

Lettuce

American Flags

Pink Salmon

Gasoline

Sushi

Preset Prices

(1)

Olympic Figure Skating Finals

Olympic Curling Preliminaries

Consider This: Taking Back a ``Gift''

(1)

Nonpriced Goods: The American Bison

(1)

Consumer and Producer Surplus

(4)

Consumer Surplus

Producer Surplus

Efficiency Revisited

Efficiency Losses

Last Word: Efficiency Gains from Generic Drugs

(49)

The Market System

(13)

Characteristics of the Market System

(4)

Private Property

Freedom of Enterprise and Choice

Self-Interest

Competition

Markets and Prices

Reliance on Technology and Capital Goods

Specialization

Use of Money

Active, but Limited, Government

The Market System at Work

(2)

What Will Be Produced?

How Will the Goods and Services Be Produced?

Who Will Get the Goods and Services?

How Will the System Accommodate Change?

Consider This: McHits and McMisses

(3)

Competition and the ``Invisible Hand''

(1)

Last Word: Shuffling the Deck

(3)

The U.S. Economy: Private and Public Sectors

(18)

Households as Income Receivers

(1)

The Functional Distribution of Income

The Personal Distribution of Income

Households as Spenders

(1)

Personal Taxes

Personal Saving

Personal Consumption Expenditures

The Business Population

(1)

Legal Forms of Businesses

(3)

Advantages and Disadvantages

The Principal-Agent Problem

The Public Sector: Government's Role

(3)

Providing the Legal Structure

Maintaining Competition

Redistributing Income

Reallocating Resources

Promoting Stability

Government's Role: A Qualification

Consider This: Street Entertainers

(1)

The Circular Flow Revisited

(1)

Government Finance

(1)

Government Purchases and Transfers

Federal Finance

(2)

Federal Expenditures

Federal Tax Revenues

State and Local Finance

(1)

State Finances

Local Finances

Last Word: The Financing of Corporations

(3)

The United States in the Global Economy

(21)

International Linkages

(1)

The United States and World Trade

(4)

Volume and Pattern

Rapid Trade Growth

Participants in International Trade

Specialization and Comparative Advantage

(3)

Basic Principle

Comparative Costs

Terms of Trade

Gains from Specialization and Trade

The Foreign Exchange Market

(1)

Dollar-Yen Market

Changing Rates: Depreciation and Appreciation

Consider This: A Ticket to Ride

100

(1)

Government and Trade

101

(2)

Trade Impediments and Subsidies

Why Government Trade Interventions?

Costs to Society

Multilateral Trade Agreements and Free-Trade Zones

103

(3)

Reciprocal Trade Agreements Act

General Agreement on Tariffs and Trade

World Trade Organization

The European Union

North American Free Trade Agreement

Global Competition

106

(1)

Last Word: Petition of the Candlemakers, 1845

106

(6)

PART TWO Macroeconomic Measurement and Basic Concepts

Measuring Domestic Output and National Income

112

(19)

Assessing the Economy's Performance

112

(1)

Gross Domestic Product

112

(3)

A Monetary Measure

Avoiding Multiple Counting

GDP Excludes Nonproduction Transactions

Two Ways of Looking at GDP: Spending and Income

The Expenditures Approach

115

(2)

Personal Consumption Expenditures (C)

Gross Private Domestic Investment (Ig)

Government Purchases (G)

Net Exports (Xn)

Putting It All Together: GDP = C + Ig + G + Xn

Consider This: Stock Answers about Flows

117

(1)

The Income Approach

118

(2)

Compensation of Employees

Rents

Interest

Proprietors' Income

Corporate Profits

From National Income to GDP

Other National Accounts

120

(3)

Net Domestic Product

National Income

Personal Income

Disposable Income

The Circular Flow Revisited

Nominal GDP versus Real GDP

123

(2)

Adjustment Process in a One-Product Economy

An Alternative Method

Real-World Considerations and Data

Shortcomings of GDP

125

(2)

Nonmarket Activities

Leisure

Improved Product Quality

The Underground Economy

GDP and the Environment

Composition and Distribution of Output

Noneconomic Sources of Well-Being

Last Word: Feeding the GDP Accounts

127

(4)

Introduction to Economic Growth and Instability

131

(21)

Economic Growth

131

(2)

Growth as a Goal

Arithmetic of Growth

Main Sources of Growth

Growth in the United States

Relative Growth Rates

The Business Cycle

133

(2)

Phases of the Business Cycle

Causation: A First Glance

Cyclical Impact: Durables and Nondurables

Unemployment

135

(6)

Measurement of Unemployment

Types of Unemployment

Definition of Full Employment

Economic Cost of Unemployment

Noneconomic Costs

International Comparisons

Inflation

141

(2)

Meaning of Inflation

Measurement of Inflation

Facts of Inflation

Types of Inflation

Complexities

Consider This: Clipping Coins

143

(1)

Redistribution Effects of Inflation

144

(3)

Who Is Hurt by Inflation?

Who Is Unaffected or Helped by Inflation?

Anticipated Inflation

Addenda

Effects of Inflation on Output

147

(2)

Cost-Push Inflation and Real Output

Demand-Pull Inflation and Real Output

Hyperinflation and Breakdown

Last Word: The Stock Market and the Economy

149

(3)

Basic Macroeconomic Relationships

152

(20)

The Income-Consumption and Income-Saving Relationships

152

(7)

The Consumption Schedule

The Saving Schedule

Average and Marginal Propensities

Nonincome Determinants of Consumption and Saving

Terminology, Shifts, and Stability

Consider This: What Wealth Effect?

159

(1)

The Real Interest-Rate-Investment Relationship

159

(5)

Expected Rate of Return

The Real Interest Rate

Investment Demand Curve

Shifts of the Investment

Demand Curve

Instability of Investment

The Multiplier Effect

164

(3)

Rationale

The Multiplier and the Marginal Propensities

How Large Is the Actual Multiplier Effect?

Last Word: Squaring the Economic Circle

167

(5)

PART THREE Macroeconomic Models and Fiscal Policy

The Aggregate Expenditures Model

172

(21)

Simplifications

172

(1)

Consumption and Investment Schedules

172

(1)

Equilibrium GDP: C + Ig = GDP

173

(3)

Tabular Analysis

Graphical Analysis

Other Features of Equilibrium GDP

176

(1)

Saving Equals Planned Investment

No Unplanned Changes in Inventories

Changes in Equilibrium GDP and the Multiplier

177

(2)

Adding International Trade

179

(3)

Net Exports and Aggregate Expenditures

The Net Export Schedule

Net Exports and Equilibrium GDP

International Economic Linkages

Adding the Public Sector

182

(3)

Government Purchases and Equilibrium GDP

Taxation and Equilibrium GDP

Equilibrium versus Full-Employment GDP

185

(2)

Recessionary Gap

Application: The U.S. Recession of 2001

Inflationary Gap

Application: U.S. Inflation in the Late 1980s

Limitations of the Model

187

(1)

Last Word: Say's Law, the Great Depression, and Keynes

188

(5)

Aggregate Demand and Aggregate Supply

193

(21)

Aggregate Demand

193

(4)

Aggregate Demand Curve

Determinants of Aggregate Demand

Aggregate Supply

197

(4)

Aggregate Supply in the Long Run

Aggregate Supply in the Short Run

Determinants of Aggregate Supply

Equilibrium and Changes in Equilibrium

201

(4)

Increases in AD: Demand-Pull Inflation

Decreases in AD: Recession and Cyclical Unemployment

Decreases in AS: Cost-Push Inflation

Increases in AS: Full Employment with Price-Level Stability

Consider This: Ratchet Effect

205

(2)

Last Word: Why Is Unemployment in Europe So High?

207

(4)

Appendix Chapter 11: The Relationship of the Aggregate Demand Curve to the Aggregate Expenditures Model

211

(3)

Deriving the Aggregate Demand Curve from the Aggregate Expenditures Model

Aggregate Demand Shifts and the Aggregate Expenditures Model

Fiscal Policy

214

(18)

Legislative Mandates

214

(1)

Fiscal Policy and the AD-AS Model

215

(3)

Expansionary Fiscal Policy

Contractionary Fiscal Policy

Financing of Deficits and Disposing of Surpluses

Policy Options: G or T

Built-In Stability

218

(2)

Automatic or Built-In Stabilizers

Evaluating Fiscal Policy

220

(3)

Full-Employment Budget

Recent U.S. Fiscal Policy

Problems, Criticisms, and Complications

223

(4)

Problems of Timing

Political Considerations

Future Policy Reversals

Offsetting State and Local Finance

Crowding-Out Effect

Fiscal Policy in the Open Economy

Last Word: The Leading Indicators

227

(1)

Current Thinking on Fiscal Policy

228

(4)

PART FOUR Money, Banking, and Monetary Policy

Money and Banking

232

(20)

The Functions of Money

232

(1)

The Supply of Money

233

(3)

Money Definition M1

Money Definition M2

Money Definition M3

Consider This: Are Credit Cards Money?

236

(1)

What ``Backs'' the Money Supply?

236

(2)

Money as Debt

Value of Money

Money and Prices

Stabilization of Money's Value

The Demand for Money

238

(2)

Transactions Demand, Dt

Asset Demand, Da

Total Money Demand, Dm

The Money Market

240

(2)

Adjustment to a Decline in the Money Supply

Adjustment to an Increase in the Money Supply

The Federal Reserve and the Banking System

242

(3)

Historical Background

Board of Governors

FOMC

The 12 Federal Reserve Banks

Commercial Banks and Thrifts

Fed Functions and the Money Supply

Federal Reserve Independence

Recent Developments in Money and Banking

245

(3)

The Relative Decline of Banks and Thrifts

Consolidation among Banks and Thrifts

Convergence of Services Provided by Financial Institutions

Globalization of Financial Markets

Electronic Transactions

Last Word: The Global Greenback

248

(4)

How Banks and Thrifts Create Money

252

(16)

The Balance Sheet of a Commercial Bank

252

(1)

Prologue: The Goldsmiths

252

(1)

A Single Commercial Bank

253

(7)

Formation of a Commercial Bank

Money-Creating Transactions of a Commercial Bank

Profits, Liquidity, and the Federal Funds Market

The Banking System: Multiple-Deposit Expansion

260

(5)

The Banking System's Lending Potential

The Monetary Multiplier

Some Modifications

Need for Monetary Control

Last Word: The Bank Panics of 1930 to 1933

265

(3)

Monetary Policy

268

(24)

Consolidated Balance Sheet of the Federal Reserve Banks

268

(2)

Assets

Liabilities

Tools of Monetary Policy

270

(6)

Open-Market Operations

The Reserve Ratio

The Discount Rate

Easy Money and Tight Money

Relative Importance

Monetary Policy, Real GDP, and the Price Level

276

(3)

Cause-Effect Chain

Effects of an Easy Money Policy

Effects of a Tight Money Policy

Monetary Policy in Action

279

(3)

The Focus on the Federal Funds Rate

Recent Monetary Policy

Problems and Complications

``Artful Management'' or ``Inflation Targeting''?

Monetary Policy and the International Economy

Consider This: Pushing on a String

282

(4)

The ``Big Picture''

286

(1)

Last Word: For the Fed, Life Is a Metaphor

287

(5)

PART FIVE Long-Run Perspectives and Macroeconomic Debates

Extending the Analysis of Aggregate Supply

292

(16)

From Short Run to Long Run

292

(3)

Short-Run Aggregate Supply

Long-Run Aggregate Supply

Equilibrium in the Extended AD-AS Model

Applying the Extended AD-AS Model

295

(2)

Demand-Pull Inflation in the Extended AD-AS Model

Cost-Push Inflation in the Extended AD-AS Model

Recession and the Extended AD-AS Model

The Inflation-Unemployment Relationship

297

(3)

The Phillips Curve

Aggregate Supply Shocks and the Phillips Curve

The Long-Run Phillips Curve

300

(2)

Short-Run Phillips Curve

Long-Run Vertical Phillips Curve

Disinflation

Taxation and Aggregate Supply

302

(2)

Taxes and Incentives to Work

Incentives to Save and Invest

The Laffer Curve

Criticisms of the Laffer Curve

Rebuttal and Evaluation

Consider This: Sherwood Forest

304

(1)

Last Word: Has the Impact of Oil Prices Diminished?

305

(3)

Economic Growth

308

(17)

Ingredients of Growth

308

(1)

Supply Factors

Demand Factor

Efficiency Factor

Production Possibilities Analysis

309

(3)

Growth and Production Possibilities

Labor and Productivity

Growth in the AD-AS Model

U.S. Economic Growth Rates

312

(1)

Consider This: Economic Growth Rates Matter!

313

Accounting for Growth

312

(4)

Labor Inputs versus Productivity

Technological Advance

Quantity of Capital

Education and Training

Economies of Scale and Resource Allocation

Other Factors

The Productivity Acceleration: A New Economy?

316

(4)

Reasons for the Productivity Acceleration

Macroeconomic Implications

Skepticism about Permanence

What Can We Conclude?

Is Growth Desirable and Sustainable?

320

(2)

The Antigrowth View

In Defense of Economic Growth

Last Word: Women and Economic Growth

322

(3)

Deficits, Surpluses, and the Public Debt

325

(13)

Deficits, Surpluses, and Debt: Definitions

325

(1)

Budget Philosophies

325

(1)

Annually Balanced Budget

Cyclically Balanced Budget

Functional Finance

The Public Debt: Facts and Figures

326

(3)

Causes

Quantitative Aspects

Social Security Considerations

False Concerns

329

(1)

Bankruptcy

Burdening Future Generations

Substantive Issues

330

(2)

Income Distribution

Incentives

Foreign-Owned Public Debt

Crowding Out and the Stock of Capital

Deficits and Surpluses: 1992--2012

332

(2)

From Deficits to Surpluses

What to Do with the Surpluses?

Back to Deficits in 2002

The Tax Cuts of 2003

Last Word: The Long-Run Fiscal Imbalance: Social Security

334

(4)

Disputes over Macro Theory and Policy

338

(18)

Some History: Classical Economics and Keynes

338

(2)

The Classical View

The Keynesian View

What Causes Macro Instability?

340

(4)

Mainstream View

Monetarist View

Real-Business-Cycle View

Coordination Failures

Does the Economy ``Self-Correct''?

344

(3)

New Classical View of Self-Correction

Mainstream View of Self-Correction

Rules or Discretion?

347

(1)

In Support of Policy Rules

In Defense of Discretionary Stabilization Policy

Increased Macro Stability

Consider This: On the Road Again

348

(2)

Summary of Alternative Views

350

(1)

Last Word: The Taylor Rule: Could a Robot Replace Alan Greenspan?

351

(5)

PART SIX Microeconomics of Product Markets

Elasticity of Demand and Supply

356

(16)

Price Elasticity of Demand

356

(2)

The Price Elasticity Coefficient and Formula

Interpretations of Ed

Refinement: Midpoint Formula

Graphical Analysis

The Total-Revenue Test

Price Elasticity and the Total-Revenue Curve

Determinants of Price Elasticity of Demand

Applications of Price Elasticity of Demand

Consider This: A Bit of a Stretch

358

(6)

Price Elasticity of Supply

364

(3)

Price Elasticity of Supply: The Market Period

Price Elasticity of Supply: The Short Run

Price Elasticity of Supply: The Long Run

Applications of Price Elasticity of Supply

Cross Elasticity and Income Elasticity of Demand

367

(2)

Cross Elasticity of Demand

Income Elasticity of Demand

Last Word: Elasticity and Pricing Power: Why Different Consumers Pay Different Prices

369

(3)

Consumer Behavior and Utility Maximization

372

(20)

A Closer Look at the Law of Demand

372

(3)

Income and Substitution Effects

Law of Diminishing Marginal Utility

Consider This: Vending Machines and Marginal Utility

375

(1)

Theory of Consumer Behavior

376

(2)

Consumer Choice and Budget Constraint

Utility-Maximizing Rule

Numerical Example

Algebraic Restatement

Utility Maximization and the Demand Curve

378

(1)

Deriving the Demand Schedule and Curve

Income and Substitution Effects Revisited

Applications and Extensions

379

(3)

DVDs and DVD Players

The Diamond-Water Paradox

The Value of Time

Medical Care Purchases

Cash and Noncash Gifts

Last Word: Criminal Behavior

382

(4)

Appendix to Chapter 21: Indifference Curve Analysis

386

(6)

The Budget Line: What Is Attainable

Indifference Curves: What Is Preferred

The Indifference Map

Equilibrium at Tangency

The Measurement of Utility

The Derivation of the Demand Curve

The Costs of Production

392

(21)

Economic Costs

392

(2)

Explicit and Implicit Costs

Normal Profit as a Cost

Economic Profit (or Pure Profit)

Short Run and Long Run

Short-Run Production Relationships

394

(1)

Law of Diminishing Returns

Consider This: Diminishing Returns from Study

395

(3)

Short-Run Production Costs

398

(5)

Fixed, Variable, and Total Costs

Per-Unit, or Average, Costs

Marginal Cost

Shifts of the Cost Curves

Long-Run Production Costs

403

(5)

Firm Size and Costs

The Long-Run Cost Curve

Economies and Diseconomies of Scale

Minimum Efficient Scale and Industry Structure

Applications and Illustrations

408

(1)

Rising Cost of Insurance and Security

Successful Start-Up Firms

The Verson Stamping Machine

The Daily Newspaper

Aircraft and Concrete Plants

Last Word: Irrelevancy of Sunk Costs

409

(4)

Pure Competition

413

(25)

Four Market Models

413

(1)

Pure Competition: Characteristics and Occurrence

414

(1)

Relevance of Pure Competition

Demand as Seen by a Purely Competitive Seller

415

(1)

Perfectly Elastic Demand

Average, Total, and Marginal Revenue

Graphical Portrayal

Profit Maximization in the Short Run

416

(7)

Total-Revenue--Total-Cost Approach: Profit-Maximization Case

Marginal-Revenue--Marginal-Cost Approach

Consider This: The Still There Motel

423

(1)

Marginal Cost and Short-Run Supply

423

(4)

Generalized Depiction

Diminishing Returns, Production Costs, and Product Supply

Changes in Supply

Firm and Industry: Equilibrium Price

Profit Maximization in the Long Run

427

(4)

Assumptions

Goal of Our Analysis

Long-Run Equilibrium

Long-Run Supply for a Constant-Cost Industry

Long-Run Supply for an Increasing-Cost Industry

Long-Run Supply for a Decreasing-Cost Industry

Pure Competition and Efficiency

431

(3)

Productive Efficiency: P = Minimum ATC

Allocative Efficiency: P = MC

Last Word: Pure Competition and Consumer Surplus

434

(4)

Pure Monopoly

438

(22)

An Introduction to Pure Monopoly

438

(1)

Examples of Monopoly

Dual Objectives of the Study of Monopoly

Barriers to Entry

439

(2)

Economies of Scale

Legal Barriers to Entry: Patents and Licenses

Ownership or Control of Essential Resources

Pricing and Other Strategic Barriers to Entry

Monopoly Demand

441

(3)

Marginal Revenue Is Less Than Price

The Monopolist Is a Price Maker

The Monopolist Sets Prices in the Elastic Region of Demand

Output and Price Determination

444

(3)

Cost Data

MR = MC Rule

No Monopoly Supply Curve

Misconceptions Concerning Monopoly Pricing

Possibility of Losses by Monopolist

Economic Effects of Monopoly

447

(4)

Price, Output, and Efficiency

Income Transfer

Cost Complications

Assessment and Policy Options

Price Discrimination

451

(1)

Conditions

Examples of Price Discrimination

Price Discrimination Outcomes

Consider This: Price Discrimination at the Ballpark

452

(1)

Regulated Monopoly

453

(3)

Socially Optimal Price: P = MC

Fair-Return Price: P = ATC

Dilemma of Regulation

Last Word: De Beers' Diamonds: Are Monopolies Forever?

456

(4)

Monopolistic Competition and Oligopoly

460

(24)

Monopolistic Competition

460

(2)

Relatively Large Number of Sellers

Differentiated Products

Easy Entry and Exit

Advertising

Monopolistically Competitive Industries

Price and Output in Monopolistic Competition

462

(2)

The Firm's Demand Curve

The Short Run: Profit or Loss

The Long Run: Only a Normal Profit

Monopolistic Competition and Efficiency

464

(2)

Neither Productive nor Allocative Efficiency

Excess Capacity

Product Variety

466

(1)

Benefits of Product Variety

Further Complexity

Oligopoly

467

(2)

A Few Large Producers

Homogeneous or Differentiated Products

Control over Price, but Mutual Interdependence

Entry Barriers

Mergers

Measures of Industry Concentration

Oligopoly Behavior: A Game-Theory Overview

469

(1)

Mutual Interdependence Revisited

Collusive Tendencies

Incentive to Cheat

Consider This: Creative Strategic Behavior

470

(1)

Three Oligopoly Models

471

(6)

Kinked-Demand Theory: Noncollusive Oligopoly

Cartels and Other Collusion

Price Leadership Model

Oligopoly and Advertising

477

(2)

Positive Effects of Advertising

Potential Negative

Effects of Advertising

Oligopoly and Efficiency

479

(1)

Productive and Allocative Efficiency

Qualifications

Last Word: Oligopoly in the Beer Industry

480

(4)

Technology, R&D, and Efficiency

484

(20)

Invention, Innovation, and Diffusion

484

(2)

Invention

Innovation

Diffusion

R&D Expenditures

Modern View of Technological Advance

Role of Entrepreneurs and Other Innovators

486

(2)

Forming Start-Ups

Innovating within Existing Firms

Anticipating the Future

Exploiting University and Government Scientific Research

A Firm's Optimal Amount of R&D

488

(2)

Interest-Rate Cost of Funds

Expected Rate of Return

Optimal R&D Expenditures

Increased Profit via Innovation

490

(3)

Increased Revenue via Product Innovation

Reduced Cost via Process Innovation

Imitation and R&D Incentives

493

(1)

Benefits of Being First

Consider This: Trade Secrets

494

(1)

Role of Market Structure

495

(2)

Market Structure and Technological Advance

Inverted-U Theory

Market Structure and Technological Advance: The Evidence

Technological Advance and Efficiency

497

(1)

Productive Efficiency

Allocative Efficiency

Creative Destruction

Last Word: On the Path to the Personal Computer and Internet

498

(6)

PART SEVEN Microeconomics of Resource Markets

The Demand for Resources

504

(17)

Significance of Resource Pricing

504

(1)

Marginal Productivity Theory of Resource Demand

505

(4)

Resource Demand as a Derived Demand

Marginal Revenue Product

Rule for Employing Resources: MRP = MRC

MRP as Resource Demand Schedule

Resource Demand under Imperfect Product Market Competition

Market Demand for a Resource

Determinants of Resource Demand

509

(1)

Changes in Product Demand

Changes in Productivity

Changes in the Prices of Other Resources

Occupational Employment Trends

Consider This: She's The One

509

(4)

Elasticity of Resource Demand

513

(1)

Optimal Combination of Resources

514

(2)

The Least-Cost Rule

The Profit-Maximizing Rule

Numerical Illustration

Marginal Productivity Theory of Income Distribution

516

(1)

Last Word: Input Substitution: The Case of ATMs

517

(4)

Wage Determination

521

(21)

Labor, Wages, and Earnings

521

(1)

General Level of Wages

522

(2)

Role of Productivity

Real Wages and Productivity

Secular Growth of Real Wages

A Purely Competitive Labor Market

524

(2)

Market Demand for Labor

Market Supply of Labor

Labor Market Equilibrium

Monopsony Model

526

(2)

Upward-Sloping Labor Supply to Firm

MRC Higher than the Wage Rate

Equilibrium Wage and Employment

Examples of Monopsony Power

Three Union Models

528

(3)

Demand-Enhancement Model

Exclusive or Craft Union Model

Inclusive or Industrial Union Model

Wage Increases and Unemployment

Bilateral Monopoly Model

531

(1)

Indeterminate Outcome of Bilateral Monopoly

Desirability of Bilateral Monopoly

The Minimum-Wage Controversy

532

(1)

Case against the Minimum Wage

Case for the Minimum Wage

Evidence and Conclusions

Wage Differentials

533

(3)

Marginal Revenue Productivity

Noncompeting Groups

Compensating Differences

Market Imperfections

Consider This: My Entire Life

536

(1)

Pay for Performance

537

(2)

The Principal-Agent Problem Revisited

Addenda: Negative Side Effects of Pay for Performance

Last Word: Are Chief Executive Officers (CEOs) Overpaid?

539

(3)

Rent, Interest, and Profit

542

(16)

Economic Rent

542

(3)

Perfectly Inelastic Supply

Changes in Demand

Land Rent: A Surplus Payment

Application: A Single Tax on Land

Productivity Differences and Rent Differences

Alternative Uses of Land

Interest

545

(2)

Loanable Funds Theory of Interest

Extending the Model

Range of Interest Rates

Pure Rate of Interest

Role of the Interest Rate

Application: Usury Laws

Consider This: That Is Interest

547

(4)

Economic Profit

551

(2)

Role of the Entrepreneur

Sources of Economic Profit

Functions of Profit

Last Word: Determining the Price of Credit

553

(1)

Income Shares

554

(4)

PART EIGHT Microeconomics of Government

Government and Market Failure

558

(22)

Public Goods

558

(4)

Demand for Public Goods

Supply of Public Goods

Optimal Quantity of a Public Good

Cost-Benefit Analysis

Externalities

562

(10)

Spillover Costs

Spillover Benefits

Individual Bargaining: Coase Theorem

Liability Rules and Lawsuits

Government Intervention

A Market-Based Approach to Spillover Costs

Society's Optimal Amount of Externality Reduction

Recycling

Global Warming

Information Failures

572

(1)

Inadequate Information Involving Sellers

Inadequate Information Involving Buyers

Qualification

Consider This: ``Lemons''

572

(4)

Last Word: Lojack: A Case of Positive Externalities

576

(4)

Public Choice Theory and the Economics of Taxation

580

(18)

Revealing Preferences through Majority Voting

580

(4)

Inefficient Voting Outcomes

Paradox of Voting

Median-Voter Model

Government Failure

584

(2)

Special Interests and Rent Seeking

Clear Benefits, Hidden Costs

Limited and Bundled Choice

Bureaucracy and Inefficiency

Imperfect Institutions

Apportioning the Tax Burden

586

(3)

Benefits Received versus Ability to Pay

Progressive, Proportional, and Regressive Taxes

Tax Incidence and Efficiency Loss

589

(5)

Elasticity and Tax Incidence

Efficiency Loss of a Tax

Probable Incidence of U.S. Taxes

The U.S. Tax Structure

Last Word: ``Government Failure'' in the News

594

(4)

PART NINE Microeconomic Issues and Policies

Antitrust Policy and Regulation

598

(16)

The Antitrust Laws

598

(2)

Historical Background

Sherman Act of 1890

Clayton Act of 1914

Federal Trade Commission Act of 1914

Celler-Kefauver Act of 1950

Antitrust Policy: Issues and Impacts

600

(4)

Issues of Interpretation

Issues of Enforcement

Effectiveness of Antitrust Laws

Consider This: Of Catfish and Sneakers (and Other Things in Common)

604

(1)

Industrial Regulation

604

(2)

Natural Monopoly

Problems with Industrial Regulation

Legal Cartel Theory

Deregulation

606

(1)

Social Regulation

607

(3)

Distinguishing Features

The Optimal Level of Social Regulation

Two Reminders

Last Word: The United States v. Microsoft

610

(4)

Agriculture: Economics and Policy

614

(17)

Economics of Agriculture

614

(6)

Short-Run Problem: Price and Income Instability

Long-Run Problem: A Declining Industry

Economics of Farm Policy

620

(4)

Rationale for Farm Subsidies

Background: The Parity Concept

Economics of Price Supports

Reduction of Surpluses

Criticisms and Politics

624

(2)

Criticisms of the Price Support System

The Politics of Farm Policy

Recent Reform

626

(2)

Freedom to Farm Act of 1996

The Farm Act of 2002

Last Word: The Sugar Program: A Sweet Deal

628

(3)

Income Inequality and Poverty

631

(19)

Facts about Income Inequality

631

(3)

Distribution of Personal Income by Income Category

Distribution of Personal Income by Quintiles (Fifths)

The Lorenz Curve and Gini Ratio

Income Mobility: The Time Dimension

Effect of Government Redistribution

Causes of Income Inequality

634

(2)

Ability

Education and Training

Discrimination

Preferences and Risks

Unequal Distribution of Wealth

Market Power

Luck, Connections, and Misfortune

Trends in Income Inequality

636

(2)

Causes of Growing Inequality

Equality versus Efficiency

638

(2)

The Case for Equality: Maximizing Total Utility

The Case for Inequality: Incentives and Efficiency

The Equality-Efficiency Tradeoff

Consider This: Slicing the Pizza

640

(1)

The Economics of Poverty

640

(2)

Definition of Poverty

Incidence of Poverty

Poverty Trends

The ``Invisible'' Poor

The Income-Maintenance System

642

(2)

Social Insurance Programs

Public Assistance Programs

Welfare: Goals and Conflicts

644

(1)

Common Features

Conflicts among Goals

Welfare Reform

645

(1)

Temporary Assistance to Needy Families

Assessment of TANF

Last Word: U.S. Family Wealth and Its Distribution

646

(4)

Labor Market Institutions and Issues: Unionism, Discrimination, Immigration

650

(22)

Unionism in America

650

(2)

Business Unionism

Union Membership

The Decline of Unionism

Collective Bargaining

652

(2)

The Work Agreement

The Bargaining Process

Economic Effects of Unions

654

(3)

The Union Wage Advantage

Efficiency and Productivity

Labor Market Discrimination

657

(2)

Types of Discrimination

Costs of Discrimination

Economic Analysis of Discrimination

659

(4)

Taste-for-Discrimination Model

Statistical Discrimination

Occupational Segregation: The Crowding Model

Antidiscrimination Policies and Issues

663

(2)

The Affirmative Action Controversy

Recent Developments

Immigration

665

(3)

Number of Immigrants

Economics of Immigration

Complications and Modifications

Immigration: Two Views

Last Word: Orchestrating Impartiality

668

(4)

The Economics of Health Care

672

(18)

The Health Care Industry

672

(1)

Twin Problems: Costs and Access

672

(1)

High and Rising Health Care Costs

673

(3)

Health Care Spending

Quality of Care: Are We Healthier?

Economic Implications of Rising Costs

The Basic Problem

Limited Access

676

(1)

Why the Rapid Rise in Costs?

676

(6)

Peculiarities of the Health Care Market

The Increasing Demand for Health Care

Role of Health Insurance

Supply Factors in Rising Health Care Prices

Relative Importance

Consider This: What's Cold and Clammy and Out of Date?

682

(1)

Reform of the Health Care System

682

(4)

Universal Access

Cost Containment: Altering Incentives

Recent Laws and Proposals

Last Word: A Market for Human Organs?

686

(4)

PART TEN International Economics and the World Economy

International Trade

690

(21)

Some Key Facts

690

(1)

The Economic Basis for Trade

691

(1)

Comparative Advantage: Graphical Analysis

692

(5)

Two Isolated Nations

Specializing Based on Comparative Advantage

Terms of Trade

Gains from Trade

Trade with Increasing Costs

The Case for Free Trade

Supply and Demand Analysis of Exports and Imports

697

(3)

Supply and Demand in the United States

Supply and Demand in Canada

Equilibrium World Price, Exports, and Imports

Trade Barriers

700

(3)

Economic Impact of Tariffs

Economic Impact of Quotas

Net Costs of Tariffs and Quotas

Impact on Income Distribution

The Case for Protection: A Critical Review

703

(1)

Military Self-Sufficiency Argument

Increased Domestic Employment Argument

Diversification-for-Stability Argument

Infant Industry Argument

Protection-against-Dumping Argument

Cheap Foreign Labor Argument

A Summing Up

Consider This: Shooting Yourself in the Foot

704

(2)

Last Word: The WTO Protests

706

(1)

The World Trade Organization

707

(4)

Exchange Rates, the Balance of Payments, and Trade Deficits

711

(21)

Financing International Trade

711

(1)

U.S. Export Transaction

U.S. Import Transaction

The Balance of Payments

712

(3)

Current Account

Capital Account

Official Reserves Account

Payments, Deficits, and Surpluses

Flexible Exchange Rates

715

(2)

Depreciation and Appreciation

Determinants of Exchange Rates

Flexible Rates and the Balance of Payments

Disadvantages of Flexible Exchange Rates

Consider This: The Big Mac Index

717

(3)

Fixed Exchange Rates

720

(2)

Use of Reserves

Trade Policies

Exchange Controls and Rationing

Domestic Macroeconomic Adjustments

International Exchange-Rate Systems

722

(4)

The Gold Standard: Fixed Exchange Rates

The Bretton Woods System

The Current System: The Managed Float

Recent U.S. Trade Deficits

726

(2)

Causes of the Trade Deficits

Implications of U.S. Trade Deficits

Last Word: Speculation in Currency Markets

728

(4)

The Economics of Developing Countries

732

(1)

The Rich and the Poor

(2)

Classifications

Comparisons

Growth, Decline, and Income Gaps

The Human Realities of Poverty

Obstacles to Economic Development

(7)

Natural Resources

Human Resources

Capital Accumulation

Technological Advance

Sociocultural and Institutional Factors

The Vicious Circle

(1)

Role of Government

(1)

A Positive Role

Public Sector Problems

Role of Advanced Nations

(3)

Expanding Trade

Foreign Aid: Public Loans and Grants

Flows of Private Capital

Where from Here?

(1)

DVC Policies for Promoting Growth

IAC Policies for Fostering DVC Growth

Last Word: Famine in Africa

(717)

Transition Economies: Russia and China

733

Ideology and Institutions

(1)

State Ownership and Central Planning

(1)

Planning Goals and Techniques

Problems with Central Planning

(2)

The Coordination Problem

The Incentive Problem

Collapse of the Soviet Economy

(1)

Declining Growth

Poor Product Quality

Lack of Consumer Goods

Large Military Burden

Agricultural Drag

The Russian Transition to a Market System

(4)

Privatization

Price Reform

Promotion of Competition

Making the Ruble Fully Convertible

Price-Level Stabilization

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Table of Contents