Economics + DiscoverEcon Online with Paul Solman Videos

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

• ISBN13: 9780072982718
• ISBN10: 0072982713
• Edition: 16th
• Format: Hardcover
• Copyright: 2004-04-05
• Publisher: McGraw-Hill/Irwin

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.

Table of Contents

List of Key Graphs	vi
Preface	vii
Contributors	xiv
PART ONE An Introduction to Economics and the Economy
To the Student	2	(1)
The Nature and Method of Economics	3	(19)
The Economic Perspective	3	(1)
Scarcity and Choice
Rational Behavior
Marginalism: Benefits and Costs
Consider This: Free for All?	4	(1)
Why Study Economics?	5	(1)
Economics for Citizenship
Professional and Personal Applications
Economic Methodology	6	(3)
Theoretical Economics
Policy Economics
Macroeconomics and Microeconomics	9	(1)
Macroeconomics
Microeconomics
Positive and Normative Economics
Pitfalls to Sound Reasoning	10	(2)
Biases
Loaded Terminology
Definitions
Fallacy of Composition
Causation Fallacies
A Look Ahead	12	(1)
Last Word: Fast-Food Lines: An Economic Perspective	12	(3)
Appendix Chapter I: Graphs and Their Meaning	15	(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	22	(17)
The Foundation of Economics	22	(2)
Unlimited Wants
Scarce Resources
Economics: Employment and Efficiency	24	(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	28	(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?	32	(1)
Economic Systems	33	(1)
The Market System
The Command System
The Circular Flow Model	34	(1)
Last Word: September 11, 2001, and the War on Terrorism	35	(4)
Individual Markets: Demand and Supply	39	(20)
Markets	39	(1)
Demand	40	(5)
Law of Demand
The Demand Curve
Market Demand
Change in Demand
Changes in Quantity Demanded
Supply	45	(3)
Law of Supply
The Supply Curve
Determinants of Supply
Changes in Supply
Changes in Quantity Supplied
Supply and Demand: Market Equilibrium	48	(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	50	(2)
Application: Government-Set Prices	52	(3)
Price Ceilings and Shortages
Price Floors and Surpluses
Last Word: Ticket Scalping: A Bum Rap?	55	(4)
Applications and Extensions of Supply and Demand Analysis	59	(1)
Changes in Supply and Demand	1	(3)
Lettuce
American Flags
Pink Salmon
Gasoline
Sushi
Preset Prices	4	(1)
Olympic Figure Skating Finals
Olympic Curling Preliminaries
Consider This: Taking Back a ``Gift''	5	(1)
Nonpriced Goods: The American Bison	6	(1)
Consumer and Producer Surplus	7	(4)
Consumer Surplus
Producer Surplus
Efficiency Revisited
Efficiency Losses
Last Word: Efficiency Gains from Generic Drugs	11	(49)
The Market System	60	(13)
Characteristics of the Market System	60	(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	64	(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	66	(3)
Competition and the ``Invisible Hand''	69	(1)
Last Word: Shuffling the Deck	70	(3)
The U.S. Economy: Private and Public Sectors	73	(18)
Households as Income Receivers	73	(1)
The Functional Distribution of Income
The Personal Distribution of Income
Households as Spenders	74	(1)
Personal Taxes
Personal Saving
Personal Consumption Expenditures
The Business Population	75	(1)
Legal Forms of Businesses	76	(3)
Advantages and Disadvantages
The Principal-Agent Problem
The Public Sector: Government's Role	79	(3)
Providing the Legal Structure
Maintaining Competition
Redistributing Income
Reallocating Resources
Promoting Stability
Government's Role: A Qualification
Consider This: Street Entertainers	82	(1)
The Circular Flow Revisited	83	(1)
Government Finance	84	(1)
Government Purchases and Transfers
Federal Finance	85	(2)
Federal Expenditures
Federal Tax Revenues
State and Local Finance	87	(1)
State Finances
Local Finances
Last Word: The Financing of Corporations	88	(3)
The United States in the Global Economy	91	(21)
International Linkages	91	(1)
The United States and World Trade	92	(4)
Volume and Pattern
Rapid Trade Growth
Participants in International Trade
Specialization and Comparative Advantage	96	(3)
Basic Principle
Comparative Costs
Terms of Trade
Gains from Specialization and Trade
The Foreign Exchange Market	99	(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	1	(2)
Classifications
Comparisons
Growth, Decline, and Income Gaps
The Human Realities of Poverty
Obstacles to Economic Development	3	(7)
Natural Resources
Human Resources
Capital Accumulation
Technological Advance
Sociocultural and Institutional Factors
The Vicious Circle	10	(1)
Role of Government	11	(1)
A Positive Role
Public Sector Problems
Role of Advanced Nations	12	(3)
Expanding Trade
Foreign Aid: Public Loans and Grants
Flows of Private Capital
Where from Here?	15	(1)
DVC Policies for Promoting Growth
IAC Policies for Fostering DVC Growth
Last Word: Famine in Africa	16	(717)
Transition Economies: Russia and China	733
Ideology and Institutions	1	(1)
State Ownership and Central Planning	2	(1)
Planning Goals and Techniques
Problems with Central Planning	3	(2)
The Coordination Problem
The Incentive Problem
Collapse of the Soviet Economy	5	(1)
Declining Growth
Poor Product Quality
Lack of Consumer Goods
Large Military Burden
Agricultural Drag
The Russian Transition to a Market System	6	(4)
Privatization
Price Reform
Promotion of Competition
Making the Ruble Fully Convertible
Price-Level Stabilization
Other Major Problems
Recent Revival
Market Reforms in China	10	(1)
Agricultural and Rural Reform
Reform of Urban Industries
Special Economic Zones
Development of Supporting Institutions
Transformation of the SOEs
Outcomes and Prospects	11	(2)
Positive Outcomes of Reform
Problems
Conclusion	13	(1)
Last Word: Police Smash Down Smirnov's Doors	14
Glossary
Index	1