Microeconomics Principles and Policy (with InfoTrac)

by Baumol, William J.; Blinder, Alan S.

• ISBN13: 9780324221152
• ISBN10: 0324221150
• Edition: 10th
• Format: Paperback
• Copyright: 2005-06-21
• Publisher: South-Western College Pub

Summary

This microeconomics text is well known for using the Keynesian model in the teaching of economics; yet in recent editions, the authors have expanded coverage of the growth model considerably to achieve more balanced coverage. The text uses the aggregate supply/ aggregate demand model as a fundamental tool for learning macroeconomics. It achieves the right level of rigor and detail, presenting complicated concepts in a relatively straightforward manner and using timely economic data. Using puzzles, issues, and well-developed examples, the authors provide a good balance of theory to application. Homework Xpress and Aplia are available with the Anniversary Tenth Edition and two new sets of end of chapter questions have been added as well to help students prepare for exams: Test Yourself” and Discussion Questions”.

Table of Contents

Preface	xxiii
PART I GETTING ACQUAINTED WITH ECONOMICS	1	(74)
What is Economics?	3	(16)
Ideas for Beyond the Final Exam	4	(3)
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)
Epilogue	7	(1)
Inside the Economist's Tool Kit	7	(5)
Economics as a Discipline	7	(1)
The Need for Abstraction	8	(2)
The Role of Economic Theory	10	(1)
What Is an Economic Model?	10	(1)
Reasons for Disagreements: Imperfect Information and Value Judgments	11	(1)
Summary	12	(1)
Key Terms	12	(1)
Discussion Questions	12	(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	(1)
Rays Through the Origin and 45° Lines	15	(1)
Squeezing Three Dimensions into Two: Contour Maps	16	(1)
Summary	17	(1)
Key Terms	17	(1)
Test Yourself	18	(1)
The Economy: Myth and Reality	19	(16)
The American Economy: A Thumbnail Sketch	20	(3)
A Private-Enterprise Economy	21	(1)
A Relatively ``Closed'' Economy	21	(1)
A Growing Economy . . .	22	(1)
But with Bumps along the Growth Path	22	(1)
The Inputs: Labor and Capital	23	(5)
The American Workforce: Who Is in It?	23	(2)
The American Workforce: What Does It Do?	25	(2)
The American Workforce: What It Earns	27	(1)
Capital and Its Earnings	27	(1)
The Outputs: What Does America Produce?	28	(1)
The Central Role of Business Firms	28	(1)
What's Missing From the Picture? Government	29	(4)
The Government as Referee	30	(1)
The Government as Business Regulator	30	(1)
Government Expenditures	31	(1)
Taxes in America	31	(1)
The Government as Redistributor	32	(1)
Conclusion: It's a Mixed Economy	33	(1)
Summary	33	(1)
Key Terms	33	(1)
Discussion Questions	33	(2)
The Fundamental Economic Problem: Scarcity and Choice	35	(16)
Issue: What to Do about the Budget Deficit?	36	(1)
Scarcity, Choice, and Opportunity Cost	36	(2)
Opportunity Cost and Money Cost	37	(1)
Optimal Choice: Not Just Any Choice	38	(1)
Scarcity and Choice for a Single Firm	38	(3)
The Production Possibilities Frontier	39	(1)
The Principle of Increasing Costs	40	(1)
Scarcity and Choice for the Entire Society	41	(2)
Scarcity and Choice Elsewhere in the Economy	41	(1)
Issue Revisited: Coping with the Budget Deficit	42	(1)
The Concept of Efficiency	43	(1)
The Three Coordination Tasks of Any Economy	44	(1)
Specialization Fosters Efficient Resource Allocation	44	(2)
The Wonders of the Division of Labor	44	(1)
The Amazing Principle of Comparative Advantage	45	(1)
Specialization Leads to Exchange	46	(1)
Markets, Prices, and the Three Coordination Tasks	46	(2)
Last Word: Don't Confuse Ends with Means	48	(1)
Summary	48	(1)
Key Terms	49	(1)
Test Yourself	49	(1)
Discussion Questions	49	(2)
Supply and Demand: An Initial Look	51	(24)
Puzzle: What Happened to Oil Prices?	52	(1)
The Invisible Hand	52	(1)
Demand and Quantity Demanded	53	(4)
The Demand Schedule	54	(1)
The Demand Curve	54	(1)
Shifts of the Demand Curve	54	(3)
Supply and Quantity Supplied	57	(3)
The Supply Schedule and the Supply Curve	57	(1)
Shifts of the Supply Curve	58	(2)
Supply and Demand Equilibrium	60	(2)
The Law of Supply and Demand	62	(1)
Effects of Demand Shifts on Supply-Demand Equilibrium	62	(1)
Supply Shifts and Supply-Demand Equilibrium	63	(3)
Those Leaping Oil Prices: Puzzle Resolved	64	(1)
Application: Who Really Pays that Tax?	65	(1)
Battling the Invisible Hand: the Market Fights Back	66	(6)
Restraining the Market Mechanism: Price Ceilings	66	(2)
Case Study: Rent Controls in New York City	68	(1)
Restraining the Market Mechanism: Price Floors	69	(1)
Case Study: Farm Price Supports and the Case of Sugar Prices	69	(1)
A Can of Worms	70	(2)
A Simple But Powerful Lesson	72	(1)
Summary	72	(1)
Key Terms	72	(1)
Test Yourself	73	(1)
Discussion Questions	74	(1)
PART II THE BUILDING BLOCKS OF DEMAND AND SUPPLY	75	(116)
Consumer Choice: Individual and Market Demand	77	(24)
Puzzle: Why Shouldn't Water Be Worth More Than Diamonds?	78	(2)
Scarcity and Demand	80
Utility: A Tool to Analyze Purchase Decisions	79	(7)
The Purpose of Utility Analysis: Analyzing How People Behave, Not What They Think	79	(1)
Total Versus Marginal Utility	80	(1)
The ``Law'' of Diminishing Marginal Utility	80	(2)
Using Marginal Utility: The Optimal Purchase Rule	82	(2)
From Diminishing Marginal Utility to Downward-Sloping Demand Curves	84	(2)
Consumer Choice as a Trade-Off: Opportunity Cost	86	(3)
Consumer's Surplus: The Net Gain from a Purchase	86	(2)
Resolving the Diamond-Water Puzzle	88	(1)
Income and Quantity Demanded	89	(1)
From Individual Demand Curves to Market Demand Curves	89	(2)
Market Demand as a Horizontal Sum	89	(1)
The ``Law'' of Demand	90	(1)
Exceptions to the ``Law'' of Demand	91	(1)
Summary	91	(1)
Key Terms	92	(1)
Test Yourself	92	(1)
Discussion Questions	92	(1)
Appendix: Analyzing Consumer Choice Graphically: Indifference Curves	93	(6)
Geometry of Available Choices: The Budget Line	93	(1)
Properties of the Budget Line	93	(1)
Changes in the Budget Line	94	(1)
What the Customer Prefers: Properties of the Indifference Curve	95	(1)
The Slopes of Indifference Curves and Budget Lines	96	(1)
Tangency Conditions	97	(1)
Consequences of Income Changes: Inferior Goods	98	(1)
Consequences of Price Changes: Deriving the Demand Curve	98	(1)
Summary	99	(1)
Key Terms	99	(1)
Test Yourself	100	(1)
Demand and Elasticity	101	(20)
Issue: Will Taxing Cigarettes Make Teenagers Stop Smoking?	102	(1)
Elasticity: The Measure of Responsiveness	102	(5)
Price Elasticity of Demand and the Shapes of Demand Curves	105	(2)
Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure	107	(2)
Issue Revisited: Will a Cigarette Tax Decrease Teenage Smoking Significantly?	108	(1)
What Determines Demand Elasticity?	109	(1)
Elasticity as a General Concept	110	(2)
Income Elasticity	110	(1)
Price Elasticity of Supply	111	(1)
Cross Elasticity of Demand	111	(1)
Changes in Demand: Movements Along the Demand Curve Versus Shifts in the Demand Curve	112	(2)
Demand Shifters	113	(1)
The Time Period of the Demand Curve and Economic Decision Making	114	(1)
Real-World Application: Polaroid Versus Kodak	115	(1)
In Conclusion	116	(1)
Summary	116	(1)
Key Terms	117	(1)
Test Yourself	117	(1)
Discussion Questions	117	(1)
Appendix: How Can We Find a Legitimate Demand Curve From Historical Statistics?	118	(3)
An Illustration: Did the Advertising Program Work?	119	(1)
How Can We Find a Legitimate Demand Curve From the Statistics?	119	(2)
Production, Inputs, and Cost: Building Blocks for Supply Analysis	121	(28)
Puzzle: How Can We Tell If Larger Firms Are More Efficient?	122	(1)
Short-Run Versus Long-Run Costs: What Makes an Input Variable?	122	(2)
The Economic Short Run Versus the Economic Long Run	123	(1)
Fixed Costs and Variable Costs	123	(1)
Production, Input Choice, and Cost with One Variable Input	124	(3)
Total, Average, and Marginal Physical Products	124	(1)
Marginal Physical Product and the ``Law'' of Diminishing Marginal Returns	125	(1)
The Optimal Quantity of an Input and Diminishing Returns	126	(1)
Multiple Input Decisions: The Choice of Optimal Input Combinations	127	(4)
Substitutability: The Choice of Input Proportions	128	(1)
The Marginal Rule for Optimal Input Proportions	129	(1)
Changes in Input Prices and Optimal Input Proportions	130	(1)
Cost and Its Dependence on Output	131	(5)
Input Quantities and Total, Average, and Marginal Cost Curves	131	(3)
The Law of Diminishing Marginal Productivity and the U-Shaped Average Cost Curve	134	(1)
The Average Cost Curve in the Short and Long Run	135	(1)
Economies of Scale	136	(5)
The ``Law'' of Diminishing Returns and Returns to Scale	137	(1)
Historical Costs Versus Analytical Cost Curves	138	(1)
Resolving the Economies of Scale Puzzle	139	(1)
Cost Minimization in Theory and Practice	140	(1)
Summary	141	(1)
Key Terms	142	(1)
Test Yourself	142	(1)
Discussion Questions	143	(1)
Appendix: Production Indifference Curves	143	(6)
Characteristics of the Production Indifference Curves, or Isoquants	143	(1)
The Choice of Input Combinations	144	(1)
Cost Minimization, Expansion Path, and Cost Curves	145	(1)
Summary	146	(1)
Key Terms	146	(1)
Test Yourself	147	(2)
Output, Price, and Profit: The Importance of Marginal Analysis	149	(22)
Puzzle: Can a Company Make a Profit by Selling Below its Costs?	151	(1)
Price and Quantity: One Decision, Not Two	151	(1)
Total Profit: Keep Your Eye on the Goal	152	(1)
Economic Profit and Optimal Decision Making	152	(5)
Total, Average, and Marginal Revenue	153	(1)
Total, Average, and Marginal Cost	154	(1)
Maximization of Total Profit	155	(1)
Profit Maximization: A Graphical Interpretation	156	(1)
Marginal Analysis and Maximization of Total Profit	157	(4)
Marginal Revenue and Marginal Cost: Guides to Optimization	159	(1)
Finding the Optimal Price from Optimal Output	160	(1)
Generalization: The Logic of Marginal Analysis and Maximization	161	(3)
Application: Fixed Cost and the profit-Maximizing Price	162	(1)
Puzzle Resolved: Using Marginal Analysis to Unravel the Case of the ``Unprofitable'' Calculator	163	(1)
Conclusion: The Fundamental Role of Marginal Analysis	164	(1)
The Theory and Reality: A Word of Caution	165	(1)
Summary	165	(1)
Key Terms	166	(1)
Test Yourself	166	(1)
Discussion Questions	166	(1)
Appendix: The Relationships Among Total, Average, and Marginal Data	167	(4)
Graphical Representation of Marginal and Average Curves	168	(1)
Test Yourself	169	(2)
Investing in Business: Stocks and Bonds	171	(20)
Puzzle #1: What in the World Happened to the Stock Market?	172	(1)
Puzzle #2: The Stock Market's Unpredictability	172	(1)
Corporations and Their Unique Characteristics	173	(1)
Financing Corporate Activity: Stocks and Bonds	174	(3)
Plowback, or Retained Earnings	176	(1)
What Determines Stock Prices? The Role of Expected Company Earnings	177	(1)
Buying Stocks and Bonds	177	(3)
Selecting a Portfolio: Diversification	178	(1)
Following a Portfolio's Performance	179	(1)
Stock Exchanges and Their Functions	180	(4)
Regulation of the Stock Market	182	(1)
Stock Exchanges and Corporate Capital Needs	182	(2)
Speculation	184	(4)
Puzzle #2 Resolved: Unpredictable Stock Prices as ``Random Walks''	185	(3)
Puzzle #1 Redux: The Boom and Bust of the U.S. Stock Market	188	(1)
Summary	188	(1)
Key Terms	189	(1)
Test Yourself	189	(1)
Discussion Questions	189	(2)
PART III MARKETS AND THE PRICE SYSTEM	191	(88)
The Firm and the Industry Under Perfect Competition	193	(18)
Puzzle: Pollution Reduction Incentives That Actually Increase Pollution	194	(1)
Perfect Competition Defined	194	(1)
The Perfectly Competitive Firm	195	(5)
The Firm's Demand Curve under Perfect Competition	195	(1)
Short-Run Equilibrium for the Perfectly Competitive Firm	196	(1)
Short-Run Profit: Graphic Representation	197	(1)
The Case of Short-Term Losses	198	(1)
Shutdown and Break-Even Analysis	198	(2)
The Perfectly Competitive Firm's Short-Run Supply Curve	200	(1)
The Perfectly Competitive Industry	200	(7)
The Perfectly Competitive Industry's Short-Run Supply Curve	200	(1)
Industry Equilibrium in the Short Run	201	(1)
Industry and Firm Equilibrium in the Long Run	202	(3)
Zero Economic Profit: The Opportunity Cost of Capital	205	(1)
The Long-Run Industry Supply Curve	206	(1)
Perfect Competition and Economic Efficiency	207	(2)
Puzzle Resolved: Which Is Better to Cut Pollution--The Carrot or the Stick?	208	(1)
Summary	209	(1)
Key Terms	210	(1)
Test Yourself	210	(1)
Discussion Questions	210	(1)
Monopoly	211	(18)
Puzzle: What Happened to AT&T's ``Natural Monopoly'' in Telephone Service?	212	(1)
Monopoly Defined	212	(3)
Sources of Monopoly: Barriers to Entry and Cost Advantages	213	(1)
Natural Monopoly	214	(1)
The Monopolist's Supply Decision	215	(5)
Determining the Profit-Maximizing Output	216	(1)
Comparing Monopoly and Perfect Competition	217	(2)
Monopoly Is Likely to Shift Demand	219	(1)
Monopoly Is Likely to Shift Cost Curves	220	(1)
Can Anything Good Be Said About Monopoly?	220	(1)
Monopoly May Aid Innovation	220	(1)
Natural Monopoly: Where Single-firm Production is Cheapest	221	(1)
Price Discrimination Under Monopoly	221	(4)
Is Price Discrimination Always Undesirable?	223	(1)
The Puzzle Resolved: Competition in Telephone Service	224	(1)
Summary	225	(1)
Key Terms	226	(1)
Test Yourself	226	(1)
Discussion Questions	226	(3)
Between Competition and Monopoly	229	(28)
Three Puzzling Observations	230	(1)
Puzzle 1: Why Are There So Many Retailers?	230	(1)
Puzzle 2: Why Do Oligopolists Advertise More Than ``More Competitive'' Firms?	230	(1)
Puzzle 3: Why Do Oligopolists Seem to Change Their Prices So Infrequently?	230	(1)
Monopolistic Competition	230	(5)
Characteristics of Monopolistic Competition	231	(1)
Price and Output Determination Under Monopolistic Competition	232	(1)
The Excess Capacity Theorem and Resource Allocation	233	(1)
1st Puzzle Resolved: Explaining the Abundance of Retailers	234	(1)
Oligopoly	235	(14)
2nd Puzzle Resolved: Why Oligopolists Advertise but Perfectly Competitive Firms Generally Do Not	235	(1)
Why Oligopolistic Behavior Is So Difficult to Analyze	236	(1)
A Shopping List	236	(4)
Sales Maximization: An Oligopoly Model with Interdependence Ignored	240	(1)
3rd Puzzle Resolved: The Kinked Demand Curve Model	241	(2)
The Game-Theory Approach	243	(1)
Games with Dominant Strategies	244	(2)
Games without Dominant Strategies	246	(1)
Other Strategies: The Nash Equilibrium	246	(1)
Zero-Sum Games	247	(1)
Repeated Games	247	(2)
Monopolistic Competition, Oligopoly, and Public Welfare	249	(2)
A Glance Backward: Comparing the Four Market Forms	251	(2)
Summary	253	(1)
Key Terms	254	(1)
Test Yourself	254	(1)
Discussion Questions	254	(3)
Limiting Market Power: Regulation and Antitrust	257	(22)
The Public Interest Issue: Monopoly Power Versus Mere Size	258	(1)
Part 1: Regulation	259	(1)
What Is Regulation?	259	(1)
Puzzle: Why Do Regulators Often Raise Prices?	260	(1)
Some Objectives of Regulation	260	(2)
Control of Market Power Resulting from Economies of Scale and Scope	260	(1)
Universal Service and Rate Averaging	261	(1)
Two Key Issues That Face Regulators	262	(3)
Setting Prices to Protect Consumers' Interests and Allow Regulated Firms to Cover Their Costs	262	(1)
Marginal versus Average Cost Pricing	262	(2)
Preventing Monopoly Profit but Keeping Incentives for Efficiency and Innovation	264	(1)
The Pros and Cons of ``Bigness''	265	(1)
Economies of Large Size	265	(1)
Required Scale for Innovation	265	(1)
Deregulation	266	(3)
The Effects of Deregulation	266	(2)
The Puzzle Revisited: Why Regulators Often Push Prices Upward	268	(1)
Part 2: Antitrust Laws and Policies	269	(1)
Measuring Market Power: Concentration	270	(3)
Concentration: Definition and Measurement---The Herfindahl-Hirschman Index	270	(2)
The Evidence of Concentration in Reality	272	(1)
A Crucial Problem for Antitrust: The Resemblance of Monopolization and Vigorous Competition	273	(1)
Anticompetitive Practices and Antitrust	273	(2)
Predatory Pricing	273	(1)
The Microsoft Case: Bottlenecks, Bundling, and Network Externalities	274	(1)
Use of Antitrust Laws to Prevent Competition	275	(1)
Concluding Observations	276	(1)
Summary	277	(1)
Key Terms	278	(1)
Discussion Questions	278	(1)
PART IV THE VIRTUES AND LIMITATIONS OF MARKETS	279	(112)
The Case for Free Markets I: The Price System	281	(24)
Puzzle: Crossing the San Francisco-Oakland Bay Bridge: Is the Price Right?	282	(1)
Efficient Resource Allocation and Pricing	282	(4)
Pricing to Promote Efficiency: An Example	283	(1)
Can Price Increases Ever Serve the Public Interest?	284	(2)
Scarcity and the Need to Coordinate Economic Decisions	286	(7)
Three Coordination Tasks in the Economy	287	(3)
Input-Output Analysis: The Near Impossibility of Perfect Central Planning	290	(2)
Which Buyers and Which Sellers Get Priority?	292	(1)
How Perfect Competition Achieves Efficiency: A Graphic Analysis	293	(3)
How Perfect Competition Achieves Optimal Output: A Marginal Analysis	296	(5)
The Invisible Hand at Work	298	(1)
Other Roles of Prices: Income Distribution and Fairness	298	(2)
Yet Another Free-Market Achievement: Growth versus Efficiency	300	(1)
San Francisco Bridge Pricing Revisited	300	(1)
Toward Assessment of the Price Mechanism	301	(1)
Summary	302	(1)
Key Terms	302	(1)
Test Yourself	302	(1)
Discussion Questions	303	(2)
The Shortcomings of Free Markets	305	(24)
Puzzle: Why Are Health-Care Costs in Canada Rising?	306	(1)
What Does the Market Do Poorly?	306	(1)
Efficient Resource Allocation: A Review	306	(2)
Externalities: Getting the Prices Wrong	308	(4)
Externalities and Inefficiency	308	(2)
Externalities Are Everywhere	310	(1)
Government Policy and Externalities	311	(1)
Provision of Public Goods	312	(1)
Allocation of Resources Between Present and Future	313	(2)
The Role of the Interest Rate	313	(1)
How Does It Work in Practice?	314	(1)
Some Other Sources of Market Failure	315	(4)
Imperfect Information: ``Caveat Emptor''	315	(1)
Rent Seeking	315	(1)
Moral Hazard	316	(1)
Principals, Agents, and Recent Stock Option Scandals	317	(2)
Market Failure and Government Failure	319	(1)
The Cost Disease of the Service Sector in the Economy	320	(5)
Deteriorating Personal Services	320	(1)
Personal Services Are Getting More Expensive	321	(1)
Why Are These ``In-Person'' Services Costing So Much More?	322	(1)
Uneven Labor Productivity Growth in the Economy	322	(1)
A Future of More Goods but Fewer Services: Is It Inevitable?	323	(1)
Government May Make the Problem Worse	324	(1)
The Puzzle Resolved: Explaining the Rising Costs of Canadian Health Care	324	(1)
The Market System on Balance	325	(1)
Epilogue: The Unforgiving Market, Its Gift of Abundance, and Its Dangerous Friends	326	(1)
Summary	327	(1)
Key Terms	327	(1)
Test Yourself	328	(1)
Discussion Questions	328	(1)
The Case for Free Markets II: Innovation and Growth	329	(22)
The Market Economy's Incredible Growth Record	330	(2)
Innovation, Not Invention, is the Unique Free-Market Accomplishment	332	(1)
The Big Puzzle: What Accounts for the Free Market's Incredible Growth Record?	332	(1)
Sources of Free-Market Innovation: Role of the Entrepreneur	333	(7)
Breakthrough Invention and the Entrepreneurial Firm	334	(2)
The Large Enterprises and Their Innovation ``Assembly Lines''	336	(3)
The Market Economy and the Speedy Dissemination of New Technology	339	(1)
Microeconomic Analysis of the Innovative Firm	340	(5)
Financing the Innovation ``Arms Race'': Firms with High R&D Costs and Low Marginal Costs	340	(1)
The Profits of Innovation	341	(1)
How Much Will a Profit-Maximizing Firm Spend on Innovation?	342	(1)
A Kinked Revenue Curve Model of Spending on Innovation	343	(1)
Innovation as a Public Good	344	(1)
Effects of Process Research on Outputs and Prices	344	(1)
Do Free Markets Spend Enough on R&D Activities?	345	(2)
Innovation as a Beneficial Externality	346	(1)
Why the Shortfall in Innovation Spending May Not Be So Big After All	347	(1)
Conclusion: The Market Economy and Its Innovation Assembly Line	347	(2)
Toward Solution of the Puzzle: How the Market Achieved its Unprecedented Growth	348	(1)
Summary	349	(1)
Key Terms	349	(1)
Discussion Questions	350	(1)
Externalities, the Environment, and Natural Resources	351	(22)
Puzzle: Those Resilient Natural Resource Supplies	352	(1)
Part 1: The Economics of Environmental Protection	352	(1)
Externalities: A Critical Shortcoming of the Market Mechanism	352	(7)
The Facts: Is the World Really Getting Steadily More Polluted?	353	(3)
The Role of Individuals and Governments in Environmental Damage	356	(1)
Pollution and the Law of Conservation of Matter and Energy	356	(3)
Supply-Demand Analysis of Environmental Externalities	359	(1)
Basic Approaches to Environmental Policy	359	(5)
Emissions Taxes versus Direct Control	361	(2)
Another Financial Device to Protect the Environment: Emissions Permits	363	(1)
Two Cheers for the Market	364	(1)
Part 2: The Economics of Natural Resources	365	(1)
Economic Analysis: The Free Market and Pricing of Depletable Resources	365	(2)
Scarcity and Rising Prices	365	(1)
Supply-Demand Analysis and Consumption	366	(1)
Actual Resource Prices in the Twentieth Century	367	(4)
Interferences with Price Patterns	368	(2)
Is Price Interference Justified?	370	(1)
On the Virtues of Rising Prices	371	(1)
Growing Reserves of Exhaustible Natural Resources: The Puzzle Revisited	371	(1)
Summary	371	(1)
Key Terms	372	(1)
Test Yourself	372	(1)
Discussion Questions	372	(1)
Taxation and Resource Allocation	373	(18)
Issue: Were the Tax Cuts of 2001-2003 Sound Policy?	374	(1)
The Level and Types of Taxation	374	(1)
Progressive, Proportional, and Regressive Taxes	375	(1)
Direct versus Indirect Taxes	375	(1)
The Federal Tax System	375	(4)
The Federal Personal Income Tax	375	(2)
The Payroll Tax	377	(1)
The Corporate Income Tax	377	(1)
Excise Taxes	377	(1)
The Payroll Tax and the Social Security System	377	(2)
The State and Local Tax System	379	(1)
Sales and Excise Taxes	379	(1)
Property Taxes	379	(1)
Fiscal Federalism	380	(1)
The Concept of Equity in Taxation	380	(1)
Horizontal Equity	380	(1)
Vertical Equity	380	(1)
The Benefits Principle	381	(1)
The Concept of Efficiency in Taxation	381	(2)
Tax Loopholes and Excess Burden	383	(1)
Shifting the Tax Burden: Tax Incidence	383	(4)
The Incidence of Excise Taxes	385	(1)
The Incidence of the Payroll Tax	386	(1)
When Taxation Can Improve Efficiency	387	(1)
Equity, Efficiency, and the Optimal Tax	387	(1)
Issue Revisited: The Pros and Cons of the Bush Tax Cuts	388	(1)
Summary	388	(1)
Key Terms	389	(1)
Test Yourself	389	(1)
Discussion Questions	390	(1)
PART V THE DISTRIBUTION OF INCOME	391	(68)
Pricing the Factors of Production	393	(22)
Puzzle: Why Does a Higher Return to Savings Reduce the Amount Some People Save?	394	(1)
The Principle of Marginal Productivity	394	(1)
Inputs and Their Derived Demand Curves	395	(2)
Investment, Capital, and Interest	397	(4)
The Demand for Funds	398	(1)
The Downward-Sloping Demand Curve for Funds	399	(1)
The Supply of Funds: The Puzzle Resolved	400	(1)
The Issue of Usury Laws: Are Interest Rates Too High?	400	(1)
The Determination of Rent	401	(6)
Land Rents: Further Analysis	402	(2)
Generalization: Economic Rent Seeking	404	(1)
Rent as a Component of an Input's Compensation	405	(1)
An Application of Rent Theory: Salaries of Professional Athletes	406	(1)
Rent Controls: The Misplaced Analogy	407	(1)
Payments to Entrepreneurship: Are Profits Too High or Too Low?	407	(3)
What Accounts for Profits?	408	(2)
Taxing Profits	410	(1)
Criticisms of Marginal Productivity Theory	410	(1)
Summary	411	(1)
Key Terms	412	(1)
Test Yourself	412	(1)
Discussion Questions	412	(1)
Appendix: Discounting and Present Value	413	(2)
Summary	414	(1)
Key Terms	414	(1)
Test Yourself	414	(1)
Labor: The Human Input	415	(24)
Issue: Do Cheap Foreign Labor and Technological Progress Contribute to Lagging Wages?	417	(1)
Wage Determination in Competitive Labor Markets	417	(4)
The Demand for Labor and the Determination of Wages	418	(1)
Influences on MRPL: Shifts in the Demand for Labor	418	(1)
Technical Change, Productivity Growth, and the Demand for Labor	419	(1)
The Service Economy and the Demand for Labor	420	(1)
The Supply of Labor	421	(3)
Rising Labor-Force Participation	421	(1)
An Important Labor Supply Conundrum	422	(1)
The Labor Supply Conundrum Resolved	423	(1)
Why Do Wages Differ?	424	(5)
Labor Demand in General	425	(1)
Labor Supply in General	425	(1)
Ability and Earnings: The Rent Component of Wages	426	(1)
Investment in Human Capital	426	(1)
Education and Earnings: Dissenting Views	427	(1)
The Effects of Minimum Wage Legislation	428	(1)
Unions and Collective Bargaining	429	(8)
Unions as Labor Monopolies	431	(2)
Monopsony and Bilateral Monopoly	433	(1)
Collective Bargaining and Strikes	434	(2)
Issue Revisited: Foreign Competition, Technology, and American Jobs: Are Union Fears Justified?	436	(1)
Summary	437	(1)
Key Terms	438	(1)
Test Yourself	438	(1)
Discussion Questions	438	(1)
Poverty, Inequality, and Discrimination	439	(20)
Issue: Were the Bush Tax Cuts Unfair?	440	(1)
The Facts: Poverty	440	(3)
Counting the Poor: The Poverty Line	441	(1)
Absolute versus Relative Poverty	442	(1)
The Facts: Inequality	443	(1)
Some Reasons for Unequal Incomes	444	(2)
The Facts: Discrimination	446	(1)
The Trade-Off Between Equality and Efficiency	447	(2)
Policies to Combat Poverty	449	(3)
Education as a Way Out	449	(1)
The Welfare Debate and the Trade-Off	449	(1)
The Negative Income Tax	450	(2)
Other Policies to Combat Inequality	452	(1)
The Personal Income Tax	452	(1)
Death Duties and Other Taxes	452	(1)
Policies to Combat Discrimination	452	(2)
A Look Back	454	(1)
Summary	454	(1)
Key Terms	455	(1)
Test Yourself	455	(1)
Discussion Questions	455	(1)
Appendix: The Economic Theory of Discrimination	456	(1)
Discrimination by Employers	456	(1)
Discrimination by Fellow Workers	456	(1)
Statistical Discrimination	456	(1)
The Roles of the Market and the Government	457	(1)
Summary	458	(1)
Key Term	458	(1)
PART VI THE UNITED STATES IN THE WORLD ECONOMY	459	(24)
International Trade and Comparative Advantage	461	(22)
Issue: How Can Americans Compete with ``Cheap Foreign Labor''?	462	(1)
Why Trade?	463	(1)
Mutual Gains from Trade	463	(1)
International Versus Intranational Trade	464	(1)
Political Factors in International Trade	464	(1)
The Many Currencies Involved in International Trade	464	(1)
Impediments to Mobility of Labor and Capital	464	(1)
The Law of Comparative Advantage	465	(4)
The Arithmetic of Comparative Advantage	465	(1)
The Graphics of Comparative Advantage	466	(3)
Issue Resolved: Comparative Advantage Exposes the ``Cheap Foreign Labor'' Fallacy	469	(1)
Tariffs, Quotas, and Other Interferences with Trade	469	(2)
Tariffs versus Quotas	471	(1)
Why Inhibit Trade?	471	(4)
Gaining a Price Advantage for Domestic Firms	471	(1)
Protecting Particular Industries	472	(1)
National Defense and Other Noneconomic Considerations	473	(1)
The Infant-Industry Argument	474	(1)
Strategic Trade Policy	474	(1)
Can Cheap Imports Hurt a Country?	475	(2)
A Last Look at the ``Cheap Foreign Labor'' Argument	476	(1)
Summary	477	(1)
Key Terms	478	(1)
Test Yourself	478	(1)
Discussion Questions	478	(1)
Appendix: Supply, Demand, and Pricing in World Trade	479	(4)
How Tariffs and Quotas Work	480	(1)
Summary	481	(1)
Test Yourself	481	(2)
Glossary	483	(8)
Index	491