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Economics : Principles and Policy, 2004 Update

by ;
Edition:
9th
ISBN13:

9780324201635

ISBN10:
032420163X
Format:
Hardcover
Pub. Date:
7/8/2004
Publisher(s):
Cengage Learning

Questions About This Book?

What version or edition is this?
This is the 9th edition with a publication date of 7/8/2004.
What is included with this book?
  • The Used copy of this book is not guaranteed to include any supplemental materials. Typically, only the book itself is included.

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Summary

This text remains a proven leader in the world of economics. Since introducing the aggregate supply/ aggregate demand model as a fundamental tool for learning economics over two decades ago, in this edition William J. Baumol and Alan S. Blinder continue their long tradition of equipping students with the knowledge and tools they need to apply modern economics to their world. Hallmark features include one of the strongest policy treatments on the market and a careful and in-depth focus on the most important economic tools students should retain after the course is over.

Table of Contents

Preface xxix
PART I GETTING ACQUAINTED WITH ECONOMICS
1(56)
What is Economics?
3(16)
Ideas for Beyond the Final Exam
4(4)
Idea 1: How Much Does It Really Cost?
4(1)
Idea 2: Attempts to Repeal the Laws of Supply and Demand---The Market Strikes Back
5(1)
Idea 3: The Surprising Principle of Comparative Advantage
5(1)
Idea 4: Trade Is a Win-Win Situation
5(1)
Idea 5: The Importance of Thinking at the Margin
6(1)
Idea 6: Externalities: A Shortcoming of the Market Cured by Market Methods
6(1)
Idea 7: The Trade-Off Between Efficiency and Equality
7(1)
Idea 8: The Short-Run Trade-Off Between Inflation and Unemployment
7(1)
Idea 9: Productivity Growth Is (Almost) Everything in the Long Run
7(1)
Epilogue
8(1)
Inside the Economist's Tool Kit
8(4)
Economics as a Discipline
8(1)
The Need for Abstraction
8(2)
The Role of Economic Theory
10(1)
What Is an Economic Model?
11(1)
Reasons for Disagreements: Imperfect Information and Value Judgments
11(1)
Summary
12(1)
Key Terms
13(1)
Questions for Review
13(1)
Appendix: Using Graphs: A Review
13(6)
Graphs Used in Economic Analysis
13(1)
Two-Variable Diagrams
13(1)
The Definition and Measurement of Slope
14(2)
Rays Through the Origin and 45° Lines
16(1)
Squeezing Three Dimensions into Two: Contour Maps
17(1)
Summary
18(1)
Key Terms
18(1)
Questions for Review
18(1)
Scarcity and Choice: The Economic Problem
19(14)
Issue: What to Do about the Budget Deficit?
20(1)
Scarcity, Choice, and Opportunity Cost
20(2)
Opportunity Cost and Money Cost
21(1)
Scarcity and Choice for a Single Firm
22(2)
The Production Possibilities Frontier
22(1)
The Principle of Increasing Costs
23(1)
Scarcity and Choice for the Entire Society
24(1)
Scarcity and Choice Elsewhere in the Economy
24(1)
Issue Revisited: Coping with the Budget Deficit
25(1)
The Concept of Efficiency
25(1)
The Three Coordination Tasks of any Economy
26(1)
Specialization Fosters Efficient Resource Allocation
27(1)
The Wonders of the Division of Labor
27(1)
The Amazing Principle of Comparative Advantage
27(1)
Specialization Leads to Exchange
28(1)
Markets, Prices, and the Three Coordination Tasks
29(1)
Last Word: Don't Confuse Ends with Means
30(1)
Summary
31(1)
Key Terms
31(1)
Questions for Review
31(2)
Supply and Demand: An Initial Look
33(24)
Puzzle: What in the World Happened to Those Asian Currencies?
34(1)
The Invisible Hand
34(1)
Demand and Quantity Demanded
35(4)
The Demand Schedule
36(1)
The Demand Curve
36(1)
Shifts of the Demand Curve
36(3)
Supply and Quantity Supplied
39(3)
The Supply Schedule and the Supply Curve
40(1)
Shifts of the Supply Curve
40(2)
Supply and Demand Equilibrium
42(2)
The Law of Supply and Demand
43(1)
Effects of Demand Shifts on Supply-Demand Equilibrium
44(1)
Puzzle Revisited: The Fall of the Rupiah
45(1)
Supply Shifts and Supply-Demand Equilibrium
45(2)
Application: Who Really Pays That Tax?
46(1)
Fighting the Invisible Hand: The Market Fights Back
47(5)
Restraining the Market Mechanism: Price Ceilings
47(2)
Case Study: Rent Controls in New York City
49(1)
Restraining the Market Mechanism: Price Floors
50(1)
Case Study: Farm Price Supports and the Case of Sugar Prices
50(1)
A Can of Worms
51(1)
A Simple But Powerful Lesson
52(1)
Summary
52(1)
Key Terms
53(1)
Questions for Review
53(4)
PART II THE BUILDING BLOCKS OF DEMAND AND SUPPLY
57(96)
Consumer Choice: Individual and Market Demand
59(24)
Paradox: Should Water Be Worth More Than Diamonds?
60(1)
Scarcity and Demand
60(1)
Utility: A Tool to Analyze Purchase Decisions
61(6)
The Purpose of Utility Analysis: Analyzing How People Behave, Not What They Think
61(1)
Total Versus Marginal Utility
62(1)
The ``Law'' of Diminishing Marginal Utility
62(1)
Using Marginal Utility: The Optimal Purchase Rule
63(4)
From Diminishing Marginal Utility to Downward-Sloping Demand Curves
67(1)
Consumer Choice as a Trade-Off: Opportunity Cost
67(3)
Consumer's Surplus: The Net Gain from a Purchase
68(2)
Resolving the Diamond-Water Paradox
70(1)
Income and Quantity Demanded
70(1)
From Individual Demand Curves to Market Demand Curves
71(2)
Market Demand as a Horizontal Sum
71(1)
The ``Law'' of Demand
72(1)
Exceptions to the Law of Demand
72(1)
Summary
73(1)
Key Terms
73(1)
Questions for Review
73(1)
Appendix: Analyzing Consumer Choice Graphically: Indifference Curve Analysis
74(9)
Geometry of Available Choices: The Budget Line
74(1)
Properties of the Budget Line
75(1)
Changes in the Budget Line
75(1)
What the Consumer Prefers: Properties of the Indifference Curve
76(1)
The Slopes of Indifference Curves and Budget Lines
77(1)
Tangency Conditions
78(1)
Consequences of Income Changes: Inferior Goods
79(1)
Consequences of Price Changes: Deriving the Demand Curve
79(1)
Summary
80(1)
Key Terms
81(1)
Questions for Review
81(2)
Demand and Elasticity
83(20)
Issue: Will Taxing Cigarettes Make Teenagers Stop Smoking?
84(1)
Elasticity: The Measure of Responsiveness
84(4)
Price Elasticity of Demand and the Shapes of Demand Curves
87(1)
Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure
88(2)
Issue Revisited: Will a Cigarette Tax Decrease Teenage Smoking Significantly?
90(1)
What Determines Demand Elasticity?
91(1)
Elasticity as a General Concept
91(3)
Income Elasticity
92(1)
Price Elasticity of Supply
92(1)
Cross Elasticity of Demand
92(2)
Changes in Demand: Movements Along the Demand Curve Versus Shifts in the Demand Curve
94(1)
Demand Shifters
95(1)
The Time Period of the Demand Curve and Economic Decision Making
95(1)
Real-World Application: Polaroid Versus Kodak
96(1)
In Conclusion
97(1)
Summary
97(1)
Key Terms
98(1)
Questions for Review
98(1)
Appendix: How Can We Find a Legitimate Demand Curve From The Statistics?
99(4)
An Illustration: Did the Advertising Program Work?
100(1)
How Can We Find a Legitimate Demand Curve From the Statistics?
100(3)
Production, Inputs, and Cost: Building Blocks for Supply Analysis
103(28)
Puzzle: Right and Wrong Ways to Determine When Larger Firms Are More Efficient
104(1)
Short-Run Versus Long-Run Costs: What Makes an Input Variable?
105(1)
The Economic Short Run Versus the Economic Long Run
105(1)
Fixed Costs and Variable Costs
106(1)
Production, Input Choice, and Cost with One Variable Input
106(4)
Total, Average, and Marginal Physical Products
106(1)
Marginal Physical Product and the ``Law'' of Diminishing Marginal Returns
107(1)
The Optimal Quantity of an Input and Diminishing Returns
108(2)
Multiple Input Decisions: The Choice of Optimal Input Combinations
110(3)
Substitutability: The Choice of Input Proportions
110(1)
The Marginal Rule for Optimal Input Proportions
111(1)
Changes in Input Prices and Optimal Input Proportions
112(1)
Cost and Its Dependence on Output
113(5)
Input Quantities and Total, Average, and Marginal Cost Curves
114(2)
The Law of Diminishing Marginal Productivity and the U-Shaped Average Cost Curve
116(2)
The Average Cost Curve in the Short and Long Run
118(1)
Economies of Scale
118(3)
The ``Law'' of Diminishing Returns and Returns to Scale
120(1)
Historical Costs Versus Analytical Cost Curves
120(1)
Resolving the Economies of Scale Puzzle
121(3)
Cost Minimization in Theory and Practice
122(2)
Summary
124(1)
Key Terms
124(1)
Questions for Review
124(1)
Appendix: Production Indifference Curves
125(6)
Characteristics of the Production Indifference Curves, or Isoquants
126(1)
The Choice of Input Combinations
126(1)
Cost Minimization, Expansion Path, and Cost Curves
127(1)
Effects of Changes in Input Prices
128(1)
Summary
129(1)
Key Terms
129(1)
Questions for Review
129(2)
Output, Price, and Profit: The Importance of Marginal Analysis
131(22)
Two Puzzles
132(1)
Price and Quantity: One Decision, Not Two
133(1)
Total Profit: Keep Your Eye on the Goal
133(5)
Total, Average, and Marginal Revenue
134(1)
Total, Average, and Marginal Cost
135(2)
Maximization of Total Profit
137(1)
Profit Maximization: A Graphical Interpretation
137(1)
Marginal Analysis and Maximization of Total Profit
138(5)
Marginal Revenue and Marginal Cost: Guides to Optimization
140(1)
Finding the Optimal Price from Optimal Output
141(2)
Generalization: The Logic of Marginal Analysis and Maximization
143(2)
Application: Fixed Cost and the Profit-Maximizing Price
144(1)
Puzzles Resolved: Marginal Analysis in Real Decision Problems
145(3)
Conclusion: The Fundamental Role of Marginal Analysis
148(1)
The Theory and Reality: A Word of Caution
149(1)
Summary
149(1)
Key Terms
149(1)
Questions for Review
149(1)
Appendix: The Relationships Among Total, Average, and Marginal Data
150(3)
Graphical Representation of Marginal and Average Curves
151(1)
Questions for Review
152(1)
PART III MARKETS, FROM COMPETITION TO MONOPOLY: VIRTUES AND VICES
153(142)
The Firm and the Industry Under Perfect Competition
155(18)
Puzzle: Pollution Reduction Incentives That Actually Increase Pollution
156(1)
Perfect Competition Defined
156(1)
The Competitive Firm
157(5)
The Firm's Demand Curve under Perfect Competition
157(1)
Short-Run Equilibrium for the Perfectly Competitive Firm
158(1)
Short-Run Profit: Graphic Representation
159(1)
The Case of Short-Term Losses
159(1)
Shutdown and Break-Even Analysis
160(1)
The Competitive Firm's Short-Run Supply Curve
161(1)
The Competitive Industry
162(6)
The Competitive Industry's Short-Run Supply Curve
162(1)
Industry Equilibrium in the Short Run
163(1)
Industry and Firm Equilibrium in the Long Run
164(3)
Zero Economic Profit: The Opportunity Cost of Capital
167(1)
The Long-Run Industry Supply Curve
167(1)
Perfect Competition and Economic Efficiency
168(1)
Puzzle Resolved: Which Is Better to Cut Pollution---The Carrot or the Stick?
169(2)
Summary
171(1)
Key Terms
171(1)
Questions for Review
171(2)
The Price System and the Case for Free Markets
173(20)
Puzzle: How High Should the Price to Cross the San Francisco-Oakland Bay Bridge Be?
174(1)
Efficient Resource Allocation and Pricing
174(4)
Pricing to Promote Efficiency: An Example
175(1)
Can Price Increases Ever Serve the Public Interest?
176(2)
Scarcity and the Need to Coordinate Economic Decisions
178(7)
Three Coordination Tasks in the Economy
178(3)
Input-Output Analysis: The Near Impossibility of Perfect Central Planning
181(2)
Which Buyers and Which Sellers Get Priority?
183(2)
How Perfect Competition Achieves Efficiency
185(4)
Example: Efficient Resource Allocation in Output Selection
185(2)
The Invisible Hand at Work
187(1)
Other Roles of Prices: Income Distribution and Fairness
187(1)
Yet Another Free-Market Achievement: Growth Versus Efficiency
188(1)
San Francisco Bridge Pricing Revisited
189(2)
Toward Assessment of the Price Mechanism
191(1)
Summary
191(1)
Key Terms
191(1)
Questions for Review
191(2)
Monopoly
193(16)
Puzzle: Competition in Local Telephone Service Markets?
194(1)
Monopoly Defined
194(3)
Sources of Monopoly: Barriers to Entry and Cost Advantages
195(1)
Natural Monopoly
196(1)
The Monopolist's Supply Decision
197(5)
Determining the Profit-Maximizing Output
198(1)
Comparing Monopoly and Perfect Competition
199(2)
Monopoly Is Likely to Shift Demand
201(1)
Monopoly Is Likely to Shift Cost Curves
202(1)
Can Anything Good Be Said About Monopoly?
202(1)
Monopoly May Aid Innovation
202(1)
Natural Monopoly: Where Single-Firm Production Is Cheapest
202(1)
Price Discrimination Under Monopoly
203(3)
Is Price Discrimination Always Undesirable?
205(1)
The Puzzle Resolved: Competitive Local Telephone Service
206(1)
Summary
207(1)
Key Terms
207(1)
Questions for Review
207(2)
Between Competition and Monopoly
209(22)
Some Puzzling Observations
210(1)
Monopolistic Competition
211(3)
Characteristics of Monopolistic Competition
211(1)
Price and Output Determination under Monopolistic Competition
212(2)
The Excess Capacity Theorem and Resource Allocation
214(1)
The Puzzle Resolved: Explaining the Abundance of Retailers
214(1)
Oligopoly
215(1)
The Puzzle Resolved: Why Oligopolists Advertise but Perfectly Competitive Firms Generally Do Not
216(5)
Why Oligopolistic Behavior Is So Difficult to Analyze
216(1)
A Shopping List
217(2)
Sales Maximization: An Oligolopoly Model with Interdependence Ignored
219(2)
The Puzzle Resolved: The Kinked Demand Curve Model
221(5)
The Game-Theory Approach
223(3)
Monopolistic Competition, Oligopoly, and Public Welfare
226(2)
A Glance Backward: Comparing the Four Market Forms
228(1)
Summary
229(1)
Key Terms
229(1)
Questions for Review
229(2)
The Market Mechanism: Shortcomings and Remedies
231(20)
Puzzle: Why Are Health-Care Costs in Canada Rising?
232(1)
What Does the Market Do Poorly?
232(1)
Efficient Resource Allocation: A Review
232(2)
Externalities: Getting The Prices Wrong
234(3)
Externalities and Inefficiency
234(2)
Externalities Are Everywhere
236(1)
Government Policy and Externalities
236(1)
Provision of Public Goods
237(1)
Allocation of Resources Between Present and Future
238(2)
The Role of the Interest Rate
239(1)
How Does It Work in Practice?
240(1)
Market Failure and Government Failure
240(2)
The Cost Disease of the Service Sector
242(4)
Deteriorating Personal Services
242(1)
Personal Services Are Getting More Expensive
242(1)
Why Are Some Personal Services Getting Worse but Costing More?
243(1)
Uneven Labor Productivity Growth in the Economy
244(1)
A Future of More Goods but Fewer Services: Is It Inevitable?
245(1)
Government May Make the Problem Worse
245(1)
The Puzzle Resolved: Explaining the Rising Costs of Canadian Health Care
246(1)
Some Other Sources of Market Failure
246(2)
Imperfect Information
247(1)
Rent Seeking
248(1)
Moral Hazard
248(1)
The Market System on Balance
248(1)
Epilogue: The Unforgiving Market, Its Gift of Abundance, and Its Dangerous Friends
249(1)
Summary
249(1)
Key Terms
250(1)
Questions for Review
250(1)
Microeconomics of ``The New Economy'': Innovation and Growth
251(24)
The Big Puzzle: What Accounts for the Free Market's Incredible Growth Record?
252(2)
What's New About the New Economy?
254(7)
Growth in Spending on Innovation and Speeding Up of Dissemination
254(2)
Firms in an Innovation ``Arms Race'' and the Innovation Assembly Line
256(1)
Financing the Innovation Arms Race: Industries with High R&D Costs and Low Marginal Costs
257(1)
Networks in the New Economy
258(1)
Good Collusion Versus Bad Collusion
259(1)
Globalization
260(1)
Summary: Is There a ``New Economy''?
261(1)
Solving the Big Puzzle: Why Do All Rival Economic Systems Trail So Far Behind Free-Market Growth Rates?
261(1)
The Firm and Innovation
262(3)
How Much Will a Profit-Maximizing Firm Spend on Innovation?
262(1)
The Profits of Innovation
263(1)
A Kinked Revenue Curve Model of Spending on Innovation
263(2)
Three Growth-Creating Properties of Innovation
265(3)
Cumulative Innovation
266(1)
The Public Good Property of Innovation
266(1)
The Accelerator Property of Innovation
266(2)
Effects of Process Research on Outputs and Prices
268(1)
Do Free Markets Spend Enough on R&D Activities?
268(4)
Innovation as a Beneficial Externality
269(1)
Why the Shortfall in Innovation Spending May Not Be So Big After All
270(2)
Conclusion: The New Economy and the Innovation Assembly Line
272(1)
Summary
272(1)
Key Terms
273(1)
Questions for Review
273(2)
Real Firms and Their Financing: Stocks and Bonds
275(20)
Puzzle #1: What in the World Happened to the Stock Market?
276(1)
Puzzle #2: The Stock Market's Unpredictability
276(1)
Corporations and Their Financing
277(2)
The Effect of Double Taxation on Corporate Earnings
278(1)
Financing Corporate Activity: Stocks and Bonds
279(3)
Plowback, or Retained Earnings
281(1)
What Determines Stock Prices? The Role of Expected Company Earnings
282(1)
Buying Stocks and Bonds
282(2)
Selecting a Portfolio: Diversification
283(1)
Following a Portfolio's Performance
284(1)
Stock Exchanges and Their Functions
284(3)
Regulation of the Stock Market
286(1)
Stock Exchanges and Corporate Capital Needs
286(1)
Speculation
287(3)
Puzzle #2 Resolved: Unpredictable Stock Prices as ``Random Walks''
290(2)
Puzzle #1 Redux: The Boom and Bust of the U.S. Stock Market
292(1)
Summary
293(1)
Key Terms
294(1)
Questions for Review
294(1)
PART IV THE DISTRIBUTION OF INCOME
295(68)
Pricing the Factors of Production
297(22)
The Principle of Marginal Productivity
298(1)
Inputs and Their Derived Demand Curves
299(1)
Investment, Capital, and Interest
300(5)
The Demand for Funds
301(1)
The Downward-Sloping Demand Curve for Funds
302(1)
The Supply of Funds
303(1)
The Issue of Usury Laws: Are Interest Rates Too High?
304(1)
The Determination of Rent
305(6)
Land Rents: Further Analysis
306(1)
Generalization: Economic Rent Seeking
307(2)
Rent as a Component of an Input's Compensation
309(1)
An Application of Rent Theory: Salaries of Professional Athletes
309(1)
Rent Controls: The Misplaced Analogy
310(1)
Payments to Entrepreneurship: Are Profits Too High or Too Low?
311(3)
What Accounts for Profits?
311(3)
Taxing Profits
314(1)
Criticisms of Marginal Productivity Theory
314(1)
Summary
315(1)
Key Terms
316(1)
Questions for Review
316(1)
Appendix: Discounting and Present Value
316(3)
Summary
318(1)
Key Terms
318(1)
Questions for Review
318(1)
Labor: The Human Input
319(24)
Issue: Do Cheap Foreign Labor and Technological Progress Contribute to Lagging Wages?
321(1)
Wage Determination in Competitive Labor Markets
321(3)
The Demand for Labor and the Determination of Wages
321(1)
Influences on MRPL: Shifts in the Demand for Labor
322(1)
Technical Change, Productivity Growth, The Service Economy and the Demand for Labor
322(2)
The Supply of Labor
324(4)
Rising Labor-Force Participation
325(1)
An Important Labor Supply Puzzle
326(2)
The Labor Supply Puzzle Resolved
328(1)
Why Do Wages Differ?
328(6)
Labor Demand in General
329(1)
Labor Supply in General
329(1)
Ability and Earnings: The Rent Component of Wages
330(1)
Investment in Human Capital
330(1)
Education and Earnings: Dissenting Views
331(1)
The Effects of Minimum Wage Legislation
332(2)
Unions and Collective Bargaining
334(6)
Unions as Labor Monopolies
336(1)
Monopsony and Bilateral Monopoly
337(1)
Collective Bargaining and Strikes
338(2)
Issue Revisited: Foreign Competition, Technology, and American Jobs: Are Union Fears Justified?
340(1)
Summary
341(1)
Key Terms
341(1)
Questions for Review
341(2)
Poverty, Inequality, and Discrimination
343(20)
Issue: Ending Welfare as We Knew It
344(1)
The Facts: Poverty
344(3)
Counting the Poor: The Poverty Line
345(1)
Absolute versus Relative Poverty
346(1)
The Facts: Inequality
347(2)
Depicting Income Distributions: The Lorenz Curve
348(1)
Some Reasons for Unequal Incomes
349(2)
The Facts: Discrimination
351(1)
The Economic Theory of Discrimination
351(3)
Discrimination by Employers
352(1)
Discrimination by Fellow Workers
352(1)
Statistical Discrimination
352(1)
The Roles of the Market and the Government
353(1)
The Optimal Amount of Inequality
354(1)
The Trade-Off Between Equality and Efficiency
354(2)
Policies to Combat Poverty
356(3)
Education as a Way Out
356(1)
The Welfare Debate
357(1)
Welfare Reform and the Trade-Off
357(1)
The Negative Income Tax
358(1)
Other Policies to Combat Inequality
359(1)
The Personal Income Tax
359(1)
Death Duties and Other Taxes
359(1)
Policies to Combat Discrimination
360(1)
A Look Back
361(1)
Summary
361(1)
Key Terms
362(1)
Questions for Review
362(1)
PART V THE GOVERNMENT AND THE ECONOMY
363(78)
Limiting Market Power: Regulation and Antitrust
365(30)
The Public Interest Issue: Monopoly Power Versus Mere Size
366(1)
Part 1: Regulation
367(1)
What Is Regulation and Who Regulates What?
367(1)
Puzzle: Why Do Regulators Often Raise Prices?
368(1)
Some Objectives of Regulation
368(4)
Control of Market Power Resulting from Economies of Scale and Scope
369(1)
Monopoly Power and the Prices of ``Bottleneck'' Facilities
369(1)
Universal Service and Rate Averaging
370(2)
Two Key Issues That Face Regulators
372(3)
How Can Regulators Set Prices That Best Protect Consumers' Interests but Enable Regulated Firms to Cover Their Costs?
372(1)
Marginal versus Average Cost Pricing
372(2)
Preventing Monopoly Profit but Keeping Incentives for Efficiency and Innovation
374(1)
The Pros and Cons of ``Bigness''
375(1)
Economies of Large Size
375(1)
Required Scale for Innovation
376(1)
Deregulation
376(3)
The Effects of Deregulation
376(3)
The Puzzle Revisited: The Reason Why Regulators Often Push Prices Upward
379(1)
Part 2: Antitrust Laws And Policies
380(1)
The Antitrust Laws
380(2)
The Sherman Act
380(1)
The Clayton Act
381(1)
The Federal Trade Commission Act
382(1)
The Robinson-Patman Act
382(1)
Measuring Market Power: Concentration
382(4)
Concentration: Definition and Measurement---The Herfindahl-Hirschman Index
382(2)
The Evidence on Concentration in Reality
384(2)
A Crucial Problem for Antitrust: The Resemblance of Monopolization and Vigorous Competition
386(1)
Anticompetitive Practices and Antitrust
386(2)
Predatory Pricing
386(1)
The Microsoft Case: Bottlenecks, Bundling, and Network Externalities
387(1)
Mergers and Competition
388(2)
Horizontal Mergers
388(1)
Recent Surges in Merger Activity
389(1)
Are Mergers Anticompetitive?
389(1)
Do Mergers Improve Performance?
389(1)
Use of Antitrust Laws to Prevent Competition
390(1)
Concluding Observations
391(1)
Summary
391(1)
Key Terms
392(1)
Questions for Review
392(3)
Taxation and Resource Allocation
395(20)
Issue: Were the Tax Cuts of 2001-2003 Sound Policy?
396(1)
The Level and Types of Taxation
396(2)
Progressive, Proportional, and Regressive Taxes
397(1)
Direct versus Indirect Taxes
397(1)
The Federal Tax System
398(3)
The Federal Personal Income Tax
398(1)
The Payroll Tax
399(1)
The Corporate Income Tax
399(1)
Excise Taxes
399(1)
The Payroll Tax and the Social Security System
400(1)
The State and Local Tax System
401(1)
Sales and Excise Taxes
401(1)
Property Taxes
402(1)
Fiscal Federalism
402(1)
The Concept of Equity in Taxation
402(2)
Horizontal Equity
403(1)
Vertical Equity
403(1)
The Benefits Principle
403(1)
The Concept of Efficiency in Taxation
404(2)
Tax Loopholes and Excess Burden
405(1)
Shifting the Tax Burden: Tax Incidence
406(3)
The Incidence of Excise Taxes
407(1)
The Incidence of the Payroll Tax
408(1)
When Taxation Can Improve Efficiency
409(1)
Equity, Efficiency, and the Optimal Tax
410(1)
Issue Revisited: The Pros and Cons of the Bush Tax Cuts
410(1)
Summary
411(1)
Key Terms
412(1)
Questions for Review
412(3)
Externalities, The Environment, and Natural Resources
415(26)
Part 1: The Economics of Environmental Protection
416(1)
Externalities: A Critical Shortcoming of the Market Mechanism
416(6)
The Facts: Is the World Really Getting Steadily More Polluted?
417(3)
The Law of Conservation of Matter and Energy
420(1)
The Role of Individuals and Governments in Environmental Damage
421(1)
Environmental Damage as an Externality
422(1)
Supply-Demand Analysis of Environmental Externalities
422(1)
Basic Approaches to Environmental Policy
423(5)
Emissions Taxes versus Direct Controls
425(2)
Another Financial Device to Protect the Environment: Emissions Permits
427(1)
Two Cheers for the Market
428(1)
Part 2: The Economics of Natural Resources
429(2)
Puzzle: Those Resilient Resource Supplies
431(1)
Economic Analysis: The Free Market and Pricing of Depletable Resources
431(2)
Scarcity and Rising Prices
431(1)
Supply-Demand Analysis and Consumption
432(1)
Actual Resource Prices in the 20th Century
433(4)
Interferences with Price Patterns
434(2)
Is Price Interference Justified?
436(1)
On the Virtues of Rising Prices
436(1)
Growing Reserves of Exhaustible Resources: The Puzzle Revisited
437(1)
Summary
437(1)
Key Terms
438(1)
Questions for Review
438(3)
PART VI THE MACROECONOMY: AGGREGATE SUPPLY AND DEMAND
441(126)
The Realm of Macroeconomics
443(18)
Issue: Why Did Growth Slow Down So Sharply in 2000 and 2001?
444(1)
Drawing a Line Between Macroeconomics and Microeconomics
444(1)
Aggregation and Macroeconomics
444(1)
The Foundations of Aggregation
445(1)
The Line of Demarcation Revisited
445(1)
Supply and Demand in Macroeconomics
445(2)
A Quick Review
446(1)
Moving to Macroeconomic Aggregates
446(1)
Inflation
447(1)
Recession and Unemployment
447(1)
Economic Growth
447(1)
Gross Domestic Product
447(5)
Money as the Measuring Rod: Real Versus Nominal GDP
448(1)
What Gets Counted in GDP?
448(1)
Limitations of the GDP: What GDP Is Not
449(3)
The Economy on a Roller Coaster
452(6)
Growth, but with Fluctuations
452(1)
Inflation and Deflation
453(1)
The Great Depression
454(1)
From World War II to 1973
455(1)
The Great Stagflation, 1973-1980
456(1)
Reaganomics and Its Aftermath
456(1)
Clintonomics: Deficit Reduction and the ``New Economy''
457(1)
The First Year of the Bush Economy
457(1)
The Problem of Macroeconomic Stabilization: A Sneak Preview
458(1)
Combating Unemployment
458(1)
Combating Inflation
458(1)
Does It Really Work?
459(1)
Summary
459(1)
Key Terms
460(1)
Questions for Review
460(1)
The Goals of Macroeconomic Policy
461(28)
Part 1: The Goal of Economic Growth
462(1)
Productivity Growth: From Little Acorns
462(2)
Issue: Is Faster Growth Always Better?
464(1)
The Capacity to Produce: Potential GDP and the Production Function
464(1)
The Growth Rate of Potential GDP
465(1)
Alternative Measures of Economic Growth
466(1)
What Determines the Growth Rate?
467(1)
Issue Revisited: Is Faster Growth Always Better?
467(1)
Part 2: The Costs of Unemployment
468(1)
The Human Costs of High Unemployment
469(2)
Counting the Unemployed: The Official Statistics
471(1)
Types of Unemployment
471(1)
How Much Employment is ``Full Employment''?
472(1)
Unemployment Insurance: The Invaluable Cushion
473(1)
Part 3: The Costs of Inflation
474(1)
Inflation: The Myth and the Reality
474(3)
Inflation and Real Wages
474(2)
The Illusion of Traditional ``Fair'' Prices
476(1)
The Importance of Relative Prices
476(1)
Inflation as a Redistributor of Income and Wealth
477(1)
Real Versus Nominal Interest Rates
477(1)
Inflation Distorts Measurements
478(2)
Confusing Real and Nominal Interest Rates
478(1)
Public Utility Regulation
479(1)
The Malfunctioning Tax System
479(1)
Other Costs of Inflation
480(1)
The Costs of Low Versus High Inflation
480(2)
Low Inflation Does Not Necessarily Lead to High Inflation
482(1)
Summary
482(1)
Key Terms
483(1)
Questions for Review
483(1)
Appendix: How Statisticians Measure Inflation
484(5)
Index Numbers for Inflation
484(1)
The Consumer Price Index
484(1)
How to Use a Price Index to ``Deflate'' Monetary Figures
485(1)
The GDP Deflator
486(1)
Summary
486(1)
Key Terms
486(1)
Questions for Review
486(3)
Economic Growth: Theory and Policy
489(16)
Puzzle: Why Does College Education Keep Getting More Expensive?
490(1)
The Three Pillars of Productivity Growth
490(2)
Capital
490(1)
Technology
491(1)
Labor Quality: Education and Training
491(1)
Levels, Growth Rates, and the Convergence Hypothesis
492(2)
Growth Policy: Encouraging Capital Formation
494(2)
Growth Policy: Improving Education and Training
496(1)
Growth Policy: Spurring Technological Change
497(1)
The Productivity Slowdown and Speed-Up in the United States
498(3)
The Productivity Slowdown, 1973-1995
499(1)
The Productivity Speed-up, 1995-??
500(1)
Puzzle Resolved: Why the Relative Price of College Tuition Keeps Rising
501(1)
Linking the Long Run to the Short Run
502(1)
Summary
502(1)
Key Terms
503(1)
Questions for Review
503(2)
Aggregate Demand and the Powerful Consumer
505(22)
Issue: Demand Management and the Ornery Consumer
506(1)
Aggregate Demand, Domestic Product, and National Income
506(1)
The Circular Flow of Spending, Production, and Income
507(3)
Consumer Spending and Income: The Important Relationship
510(2)
The Consumption Function and the Marginal Propensity to Consume
512(1)
Factors That Shift the Consumption Function
513(1)
Issue Revisited: Why the Tax Rebates Failed in 1975 and 2001
514(2)
The Extreme Variability of Investment
516(1)
The Determinants of Net Exports
516(1)
National Incomes
517(1)
Relative Prices and Exchange Rates
517(1)
How Predictable is Aggregate Demand?
517(1)
Summary
518(1)
Key Terms
519(1)
Questions to Review
519(1)
Appendix: National Income Accounting
520(7)
Defining GDP: Exceptions to the Rules
520(1)
GDP as the Sum of Final Goods and Services
520(1)
GDP as the Sum of All Factor Payments
521(2)
GDP as the Sum of Values Added
523(1)
Summary
524(1)
Key Terms
524(1)
Questions for Review
524(3)
Demand-Side Equilibrium: Unemployment or Inflation?
527(24)
Issue: Why Does the Market Permit Unemployment?
528(1)
The Meaning of Equilibrium GDP
528(2)
The Mechanics of Income Determination
530(2)
The Aggregate Demand Curve
532(2)
Demand-Side Equilibrium and Full Employment
534(1)
The Coordination of Saving and Investment
535(1)
Changes on the Demand Side: Multiplier Analysis
536(5)
The Magic of the Multiplier
536(2)
Demystifying the Multiplier: How It Works
538(1)
Algebraic Statement of the Multiplier
539(2)
The Multiplier is a General Concept
541(1)
The Multiplier and the Aggregate Demand Curve
542(1)
Summary
543(1)
Key Terms
544(1)
Questions to Review
544(1)
Appendix A: The Simple Algebra of Income Determination and the Multiplier
545(2)
Questions for Review
546(1)
Appendix B: The Multiplier with Variable Imports
547(4)
Summary
549(1)
Questions for Review
549(2)
Supply-Side Equilibrium: Unemployment and Inflation?
551(16)
Puzzle: Why Did Inflation Fall While the Economy Boomed?
552(1)
The Aggregate Supply Curve
552(3)
Why the Aggregate Supply Curve Slopes Upward
552(1)
Shifts of the Aggregate Supply Curve
553(2)
Equilibrium of Aggregate Demand and Supply
555(1)
Recessionary and Inflationary Gaps Revisited
556(1)
Adjusting to a Recessionary Gap: Deflation Or Unemployment?
557(2)
Does the Economy Have a Self-Correcting Mechanism?
559(1)
An Example from Recent History: Deflation in Japan
559(1)
Adjusting to an Inflationary Gap: Inflation
559(2)
Demand Inflation and Stagflation
560(1)
A Recent Example
561(1)
Stagflation from a Supply Shock
561(1)
Puzzle Resolved: Explaining the Roaring Nineties
562(1)
Inflation and the Multiplier
563(1)
A Role for Stabilization Policy
564(1)
Summary
564(1)
Key Terms
565(1)
Questions for Review
565(2)
PART VII FISCAL AND MONETARY POLICY
567(116)
Managing Aggregate Demand: Fiscal Policy
569(18)
Issue: How to Stimulate Japan's Economy
570(1)
Income Taxes and the Consumption Schedule
570(2)
The Multiplier Revisited
572(3)
Automatic Stabilizers
573(1)
Multipliers for Tax Policy
574(1)
Issue Revisited: The Japanese Economy
575(1)
Government Transfer Payments
575(1)
Planning Expansionary Fiscal Policy
576(1)
Planning Contractionary Fiscal Policy
576(1)
The Choice Between Spending Policy and Tax Policy
577(1)
Some Harsh Realities
578(1)
The Idea Behind Supply-Side Tax Cuts
579(3)
Some Flies in the Ointment
580(1)
Toward an Assessment of Supply-Side Economics
581(1)
Summary
582(1)
Key Terms
582(1)
Questions for Review
583(1)
Appendix: Algebraic Treatment of Fiscal Policy and Aggregate Demand
583(4)
Questions for Review
585(2)
Money and the Banking System
587(20)
Issue: Why Are Banks so Heavily Regulated?
588(1)
The Nature of Money
588(4)
Barter versus Monetary Exchange
589(1)
The Conceptual Definition of Money
590(1)
What Serves as Money?
590(2)
How the Quantity of Money is Measured
592(2)
M1
592(1)
M2
593(1)
Other Definitions of the Money Supply
593(1)
The Banking System
594(3)
How Banking Began
594(2)
Principles of Bank Management: Profits versus Safety
596(1)
Bank Regulation
596(1)
The Origins of the Money Supply
597(1)
How Bankers Keep Books
597(1)
Banks and Money Creation
598(4)
The Limits to Money Creation by a Single Bank
598(1)
Multiple Money Creation by a Series of Banks
599(2)
The Process in Reverse: Multiple Contractions of the Money Supply
601(1)
Why the Money Creation Formula is Oversimplified
602(1)
The Need for Monetary Policy
603(1)
Summary
604(1)
Key Terms
604(1)
Questions for Review
605(2)
Monetary Policy and the National Economy
607(18)
Issue: Just Why Is Alan Greenspan so Important?
608(1)
Money and Income: The Important Difference
608(1)
America's Central Bank: The Federal Reserve System
609(2)
Origins and Structure
609(1)
Central Bank Independence
610(1)
Implementing Monetary Policy: Open-Market Operations
611(3)
Open-Market Operations, Bond Prices, and Interest Rates
613(1)
Other Methods of Monetary Control
614(2)
Lending to Banks
614(1)
Changing Reserve Requirements
615(1)
Supply-Demand Analysis of the Money Market
616(3)
The Money Supply Mechanism
616(1)
The Demand for Money
617(1)
Equilibrium in the Money Market
618(1)
How Monetary Policy Works
619(2)
Investment and Interest Rates
619(1)
Monetary Policy and Total Expenditure
620(1)
Money and the Price Level in the Keynesian Model
621(1)
Application: Why the Aggregate Demand Curve Slopes Downward
622(1)
From Models to Policy Debates
622(1)
Summary
623(1)
Key Terms
624(1)
Questions for Review
624(1)
The Debate Over Monetary and Fiscal Policy
625(20)
Issue: Should We Forsake Stabilization Policy?
626(1)
Velocity and the Quantity Theory of Money
626(3)
Some Determinants of Velocity
628(1)
Monetarism: The Quantity Theory Modernized
629(1)
Fiscal Policy, Interest Rates, and Velocity
629(2)
Application: The Multiplier Formula Revisited
630(1)
Application: The Government Budget and Investment
631(1)
Debate: Should We Rely On Fiscal Or Monetary Policy?
631(2)
Debate: Should the Fed Control the Money Supply Or Interest Rates?
633(2)
Two Imperfect Alternatives
634(1)
What Has the Fed Actually Done?
634(1)
Debate: The Shape of the Aggregate Supply Curve
635(2)
Debate: Should the Government Intervene?
637(2)
Lags and the Rules-versus-Discretion Debate
638(1)
Dimensions of the Rules-Versus-Discretion Debate
639(3)
How Fast Does the Economy's Self-Correcting Mechanism Work?
639(1)
How Long Are the Lags in Stabilization Policy?
639(1)
How Accurate Are Economic Forecasts?
640(1)
The Size of Government
640(1)
Uncertainties Caused by Government Policy
640(1)
A Political Business Cycle?
641(1)
Issue Revisited: What Should Be Done?
642(1)
Summary
642(1)
Key Terms
643(1)
Questions for Review
643(2)
Fiscal Policy, Monetary Policy, and Growth
645(18)
Issue: Did the September 2001 Terrorist Attacks Warrant Fiscal Stimulus?
646(1)
Should the Budget be Balanced? The Short Run
646(2)
The Importance of the Policy Mix
647(1)
Surpluses and Deficits: The Long Run
648(1)
Deficits and Debt: Terminology and Facts
649(2)
Some Facts about the National Debt
649(2)
Interpreting the Budget Deficit or Surplus
651(3)
The Structural Deficit or Surplus
651(2)
On-Budget versus Off-Budget Surpluses
653(1)
Conclusion: What Happened after 1981?
654(1)
Bogus Arguments About the Burden of the Debt
654(1)
Budget Deficits and Inflation
655(2)
The Monetization Issue
656(1)
Debt, Interest Rates, and Crowding Out
657(2)
The Bottom Line
658(1)
The True Burden of the National Debt: Slower Growth
659(1)
Issue Revisited: Was Fiscal Stimulus Warranted in 2001?
660(1)
The Economics and Politics of the U.S. Budget Deficit
661(1)
Summary
661(1)
Key Terms
662(1)
Questions for Review
662(1)
Inflation and Growth: The Phillips Curve
663(20)
Issue: Is the Trade-off Between Inflation and Unemployment a Relic of the Past?
664(1)
Demand-Side Inflation Versus Supply-Side Inflation: A Review
664(1)
Applying the Model to a Growing Economy
665(1)
Demand-Side Inflation and the Phillips Curve
666(2)
Supply-Side Inflation and the Collapse of the Phillips Curve
668(2)
Explaining the Fabulous 1990s
669(1)
Issue Resolved: Why Inflation and Unemployment Both Declined
670(1)
What the Phillips Curve Is Not
670(2)
Fighting Unemployment with Fiscal and Monetary Policy
672(1)
What Should be Done?
673(1)
The Costs of Inflation and Unemployment
673(1)
The Slope of the (Short-Run) Phillips Curve
673(1)
The Efficiency of the Economy's Self-Correcting Mechanism
674(1)
Inflationary Expectations and the Phillips Curve
674(2)
The Theory of Rational Expectations
676(2)
What Are Rational Expectations?
676(1)
Rational Expectations and the Trade-Off
677(1)
An Evaluation
678(1)
Why Economists (And Politicians) Disagree
678(1)
The Dilemma of Demand Management
679(1)
Attempts to Reduce the Natural Rate of Unemployment
679(1)
Indexing
680(1)
Summary
681(1)
Key Terms
682(1)
Questions for Review
682(1)
PART VIII THE UNITED STATES IN THE WORLD ECONOMY
683(62)
International Trade and Comparative Advantage
685(22)
Issue: How Can Americans Compete with ``Cheap Foreign Labor''?
686(1)
Why Trade?
687(1)
Mutual Gains from Trade
687(1)
International Versus International Trade
688(1)
Political Factors in International Trade
688(1)
The Many Currencies Involved in International Trade
688(1)
Impediments to Mobility of Labor and Capital
688(1)
The Law of Comparative Advantage
689(3)
The Arithmetic of Comparative Advantage
689(1)
The Graphics of Comparative Advantage
690(2)
Issue Resolved: Comparative Advantage Exposes the ``Cheap Foreign Labor'' Fallacy
692(1)
Supply, Demand, and Pricing in World Trade
693(1)
Tariffs, Quotas, and Other Interferences with Trade
694(4)
How Tariffs and Quotas Work
696(1)
Tariffs versus Quotas
697(1)
Why Inhibit Trade?
698(1)
Gaining a Price Advantage
698(1)
Protecting Particular Industries
698(1)
Other Arguments for Protection
699(3)
National Defense and Other Noneconomic Considerations
699(1)
The Infant-Industry Argument
700(1)
Strategic Trade Policy
701(1)
Can Cheap Imports Hurt a Country?
702(1)
A Last Look at the ``Cheap Foreign Labor'' Argument
702(2)
Summary
704(1)
Key Terms
704(1)
Questions for Review
704(3)
The International Monetary System: Order or Disorder?
707(22)
Puzzle: Whatever Happened to Argentina?
708(1)
What are Exchange Rates?
708(1)
Exchange Rate Determination in a Free Market
709(6)
Interest Rates and Exchange Rates: The Short Run
711(1)
The Medium Run: Economic Activity and Exchange Rates
712(1)
The Purchasing-Power Parity Theory: The Long Run
713(2)
Market Determination of Exchange Rates: Summary
715(1)
Fixed Exchange Rates and the Balance of Payments
715(2)
Defining the Balance of Payments in Practice
717(1)
A Bit of History: The Gold Standard and the Bretton Woods System
717(2)
The Classical Gold Standard
717(1)
The Bretton Woods System
718(1)
Adjustment Mechanisms Under Fixed Exchange Rates
719(1)
Why Try to Fix Exchange Rates?
720(1)
The Current ``Nonsystem''
721(4)
The Role of the IMF
722(1)
The Volatile Dollar
722(2)
The Birth of the Euro
724(1)
Puzzle Resolved: The Fate of the Argentine Currency Board
725(1)
Summary
725(1)
Key Terms
726(1)
Questions for Review
726(3)
Exchange Rates and the Macroeconomy
729(16)
Issue: Should the U.S. Government Try to Stop the Dollar from Falling?
730(1)
International Trade, Exchange Rates, and Aggregate Demand
730(2)
Relative Prices, Exports, and Imports
731(1)
The Effects of Changes in Exchange Rates
731(1)
Aggregate Supply in an Open Economy
732(1)
The Macroeconomic Effects of Exchange Rates
732(2)
Interest Rates and International Capital Flows
733(1)
Fiscal and Monetary Policies in an Open Economy
734(2)
Fiscal Policy Revisited
734(2)
Monetary Policy Revisited
736(1)
International Aspects of Deficit Reduction
736(2)
The Loose Link between the Budget Deficit and the Trade Deficit
737(1)
Is the Trade Deficit a Problem?
738(1)
On Curing the Trade Deficit
738(2)
Change the Mix of Fiscal and Monetary Policy
738(1)
More Rapid Economic Growth Abroad
739(1)
Raise Domestic Saving or Reduce Domestic Investment
739(1)
Protectionism
739(1)
Conclusion: No Nation is an Island
740(1)
Issue Revisited: Should the Dollar Be Allowed to Fall?
741(1)
Summary
741(1)
Key Terms
742(1)
Questions for Review
742(3)
Glossary 745(12)
Index 757


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