Principles of Economics, 10th Edition (The Pearson Series in Economics)

Cover......Page 1 Title Page......Page 4 Copyright Page......Page 5 About the Authors......Page 6 Contents......Page 8 1 The Scope and Method of Economics......Page 34 Why Study Economics?......Page 35 The Scope of Economics......Page 39 The Method of Economics......Page 42 Summary......Page 48 Problems......Page 49 Appendix: How to Read and Understand Graphs......Page 50 2 The Economic Problem: Scarcity and Choice......Page 58 Scarcity, Choice, and Opportunity Cost......Page 59 ECONOMICS IN PRACTICE: Frozen Foods and Opportunity Costs......Page 61 Economic Systems and the Role of Government......Page 72 Looking Ahead......Page 75 Review Terms and Concepts......Page 76 Problems......Page 77 Firms and Households: The Basic Decision-Making Units......Page 80 Input Markets and Output Markets: The Circular Flow......Page 81 Demand in Product/Output Markets......Page 83 ECONOMICS IN PRACTICE: Kindle in the College Market?......Page 88 Supply in Product/Output Markets......Page 93 Market Equilibrium......Page 99 ECONOMICS IN PRACTICE: High Prices for Tomatoes......Page 103 Looking Ahead: Markets and the Allocation of Resources......Page 105 ECONOMICS IN PRACTICE: Why Do the Prices of Newspapers Rise?......Page 106 Summary......Page 107 Review Terms and Concepts......Page 108 Problems......Page 109 The Price System: Rationing and Allocating Resources......Page 112 ECONOMICS IN PRACTICE: Prices and Total Expenditure: A Lesson From the Lobster Industry in 2008–2009......Page 114 Supply and Demand Analysis: An Oil Import Fee......Page 119 ECONOMICS IN PRACTICE: The Price Mechanism at Work for Shakespeare......Page 120 Supply and Demand and Market Efficiency......Page 122 Summary......Page 126 Problems......Page 127 5 Elasticity......Page 130 Price Elasticity of Demand......Page 131 Calculating Elasticities......Page 133 The Determinants of Demand Elasticity......Page 140 ECONOMICS IN PRACTICE: Who Are the Elastic Smokers?......Page 141 Other Important Elasticities......Page 142 Looking Ahead......Page 144 Review Terms and Concepts......Page 145 Problems......Page 146 Appendix: Point Elasticity (Optional)......Page 148 PART II: The Market System: Choices Made by Households and Firms......Page 150 Household Choice in Output Markets......Page 154 The Basis of Choice: Utility......Page 159 Income and Substitution Effects......Page 163 Household Choice in Input Markets......Page 165 ECONOMICS IN PRACTICE: Substitution and Market Baskets......Page 166 ECONOMICS IN PRACTICE: What Happens When the Cost of Self-Discovery Falls?......Page 169 A Review: Households in Output and Input Markets......Page 170 Problems......Page 171 Appendix: Indifference Curves......Page 174 7 The Production Process: The Behavior of Profit-Maximizing Firms......Page 180 The Behavior of Profit-Maximizing Firms......Page 181 The Production Process......Page 185 Choice of Technology......Page 189 ECONOMICS IN PRACTICE: How Fast Should a Truck Driver Go?......Page 190 Summary......Page 191 Problems......Page 192 Appendix: Isoquants and Isocosts......Page 195 8 Short-Run Costs and Output Decisions......Page 200 Costs in the Short Run......Page 201 ECONOMICS IN PRACTICE: Average and Marginal Costs at a College......Page 211 Output Decisions: Revenues, Costs, and Profit Maximization......Page 212 ECONOMICS IN PRACTICE: Case Study in Marginal Analysis: An Ice Cream Parlor......Page 215 Summary......Page 218 Problems......Page 219 9 Long-Run Costs and Output Decisions......Page 222 Short-Run Conditions and Long-Run Directions......Page 223 Long-Run Costs: Economies and Diseconomies of Scale......Page 228 ECONOMICS IN PRACTICE: Economies of Scale in the World Marketplace......Page 230 ECONOMICS IN PRACTICE: Economies of Scale in Solar......Page 231 Long-Run Adjustments to Short-Run Conditions......Page 233 ECONOMICS IN PRACTICE: The Long-Run Average Cost Curve: Flat or U-Shaped?......Page 234 ECONOMICS IN PRACTICE: The Fortunes of the Auto Industry......Page 237 ECONOMICS IN PRACTICE: Why Are Hot Dogs So Expensive in Central Park?......Page 238 Summary......Page 239 Problems......Page 240 Appendix: External Economies and Diseconomies and the Long-Run Industry Supply Curve......Page 243 Input Markets: Basic Concepts......Page 248 ECONOMICS IN PRACTICE: Sometimes Workers Play Hooky!......Page 250 Labor Markets......Page 252 ECONOMICS IN PRACTICE: What is Denzel Washington’s Marginal Revenue Product in Broadway’s Fences?......Page 256 Land Markets......Page 257 The Firm’s Profit-Maximizing Condition in Input Markets......Page 259 Input Demand Curves......Page 260 Looking Ahead......Page 261 Summary......Page 262 Problems......Page 263 Capital, Investment, and Depreciation......Page 266 ECONOMICS IN PRACTICE: Investment Banking, IPOs, and Electric Cars......Page 268 The Capital Market......Page 269 The Demand for New Capital and the Investment Decision......Page 274 ECONOMICS IN PRACTICE: Chinese Wind Power......Page 276 A Final Word on Capital......Page 278 Review Terms and Concepts......Page 279 Problems......Page 280 Appendix: Calculating Present Value......Page 281 12 General Equilibrium and the Efficiency of Perfect Competition......Page 286 Market Adjustment to Changes in Demand......Page 287 Allocative Efficiency and Competitive Equilibrium......Page 289 ECONOMICS IN PRACTICE: Ethanol and Land Prices......Page 290 The Sources of Market Failure......Page 295 Summary......Page 297 Problems......Page 298 Imperfect Competition and Market Power: Core Concepts......Page 302 Price and Output Decisions in Pure Monopoly Markets......Page 304 ECONOMICS IN PRACTICE: Managing the Cable Monopoly......Page 313 The Social Costs of Monopoly......Page 314 Price Discrimination......Page 316 Remedies for Monopoly: Antitrust Policy......Page 318 Imperfect Markets: A Review and a Look Ahead......Page 320 Summary......Page 321 Problems......Page 322 14 Oligopoly......Page 326 Market Structure in an Oligopoly......Page 327 ECONOMICS IN PRACTICE: Why Are Record Labels Losing Key Stars Like Madonna?......Page 329 Oligopoly Models......Page 330 Game Theory......Page 333 Oligopoly and Economic Performance......Page 339 The Role of Government......Page 340 Summary......Page 343 Problems......Page 344 15 Monopolistic Competition......Page 346 Industry Characteristics......Page 347 Product Differentiation and Advertising......Page 348 ECONOMICS IN PRACTICE: An Economist Makes Tea......Page 351 ECONOMICS IN PRACTICE: Can Information Reduce Obesity?......Page 354 Price and Output Determination in Monopolistic Competition......Page 355 Summary......Page 359 Problems......Page 360 Externalities and Environmental Economics......Page 362 ECONOMICS IN PRACTICE: Ban on Oil Drillers......Page 365 ECONOMICS IN PRACTICE: Externalities Are All Around Us......Page 371 Public (Social) Goods......Page 374 Social Choice......Page 379 Summary......Page 382 Problems......Page 383 Decision Making Under Uncertainty: The Tools......Page 386 Asymmetric Information......Page 390 ECONOMICS IN PRACTICE: Adverse Selection in the Health Care Market......Page 393 ECONOMICS IN PRACTICE: How to Read Advertisements......Page 394 Incentives......Page 396 Summary......Page 397 Problems......Page 398 The Sources of Household Income......Page 400 The Distribution of Income......Page 403 ECONOMICS IN PRACTICE: The New Rich Work!......Page 406 The Utility Possibilities Frontier......Page 409 The Redistribution Debate......Page 410 Redistribution Programs and Policies......Page 413 ECONOMICS IN PRACTICE: Does Price Matter in Charitable Giving?......Page 417 Summary......Page 418 Problems......Page 419 The Economics of Taxation......Page 422 ECONOMICS IN PRACTICE: Calculating Taxes......Page 425 Tax Incidence: Who Pays?......Page 429 Excess Burdens and the Principle of Neutrality......Page 435 The Principle of Second Best......Page 438 Summary......Page 439 Problems......Page 440 20 Introduction to Macroeconomics......Page 442 Macroeconomic Concerns......Page 443 The Components of the Macroeconomy......Page 445 A Brief History of Macroeconomics......Page 448 The U.S. Economy Since 1970......Page 450 ECONOMICS IN PRACTICE: John Maynard Keynes......Page 452 Summary......Page 453 Problems......Page 454 Gross Domestic Product......Page 456 Calculating GDP......Page 458 ECONOMICS IN PRACTICE: Where Does eBay Get Counted?......Page 460 ECONOMICS IN PRACTICE: GDP: One of the Great Inventions of the 20th Century......Page 464 Nominal versus Real GDP......Page 465 Limitations of the GDP Concept......Page 468 Summary......Page 470 Review Terms and Concepts......Page 471 Problems......Page 472 Unemployment......Page 474 ECONOMICS IN PRACTICE: A Quiet Revolution: Women Join the Labor Force......Page 478 Inflation......Page 480 ECONOMICS IN PRACTICE: The Politics of Cost-of-Living Adjustments......Page 483 Long-Run Growth......Page 485 Looking Ahead......Page 487 Problems......Page 488 PART V: The Core of Macroeconomic Theory......Page 490 23 Aggregate Expenditure and Equilibrium Output......Page 492 The Keynesian Theory of Consumption......Page 493 Planned Investment (I)......Page 497 The Determination of Equilibrium Output (Income)......Page 498 The Multiplier......Page 502 ECONOMICS IN PRACTICE: The Paradox of Thrift......Page 505 Looking Ahead......Page 506 Problems......Page 507 Appendix: Deriving the Multiplier Algebraically......Page 509 24 The Government and Fiscal Policy......Page 510 Government in the Economy......Page 511 Fiscal Policy at Work: Multiplier Effects......Page 515 The Federal Budget......Page 520 The Economy’s Influence on the Government Budget......Page 525 ECONOMICS IN PRACTICE: Governments Disagree on How Much More Spending Is Needed......Page 526 Summary......Page 527 Problems......Page 528 Appendix B: The Case in Which Tax Revenues Depend on Income......Page 530 An Overview of Money......Page 534 ECONOMICS IN PRACTICE: Dolphin Teeth as Currency......Page 536 How Banks Create Money......Page 538 The Federal Reserve System......Page 544 How the Federal Reserve Controls the Money Supply......Page 548 Review Terms and Concepts......Page 554 Problems......Page 555 Interest Rates and Bond Prices......Page 558 The Demand for Money......Page 559 ECONOMICS IN PRACTICE: ATMs and the Demand for Money......Page 564 The Equilibrium Interest Rate......Page 565 Summary......Page 568 Problems......Page 569 Appendix A: The Various Interest Rates in the U.S. Economy......Page 570 Appendix B: The Demand For Money: A Numerical Example......Page 572 27 Aggregate Demand in the Goods and Money Markets......Page 574 Planned Investment and the Interest Rate......Page 575 ECONOMICS IN PRACTICE: Small Business and the Credit Crunch......Page 576 Equilibrium in Both the Goods and Money Markets: The IS-LM Model......Page 577 Policy Effects in the Goods and Money Markets......Page 578 The Aggregate Demand (AD) Curve......Page 582 Summary......Page 586 Problems......Page 587 Appendix: The IS-LM Model......Page 588 The Aggregate Supply Curve......Page 592 The Equilibrium Price Level......Page 595 The Long-Run Aggregate Supply Curve......Page 596 ECONOMICS IN PRACTICE: The Simple “Keynesian” Aggregate Supply Curve......Page 597 Monetary and Fiscal Policy Effects......Page 598 Causes of Inflation......Page 600 ECONOMICS IN PRACTICE: Inflationary Expectations in China......Page 603 The Behavior of the Fed......Page 604 ECONOMICS IN PRACTICE: Markets Watch the Fed......Page 606 Summary......Page 609 Problems......Page 610 The Labor Market: Basic Concepts......Page 614 The Classical View of the Labor Market......Page 615 Explaining the Existence of Unemployment......Page 617 ECONOMICS IN PRACTICE: Does Unemployment Insurance Increase Unemployment or Only Protect the Unemployed?......Page 619 The Short-Run Relationship Between the Unemployment Rate and Inflation......Page 621 The Long-Run Aggregate Supply Curve, Potential Output, and the Natural Rate of Unemployment......Page 626 Summary......Page 628 Problems......Page 629 30 Financial Crises, Stabilization, and Deficits......Page 632 The Stock Market, the Housing Market, and Financial Crises......Page 633 ECONOMICS IN PRACTICE: Bubbles or Rational Investors?......Page 636 Time Lags Regarding Monetary and Fiscal Policy......Page 639 Government Deficit Issues......Page 643 Summary......Page 645 Problems......Page 646 Households: Consumption and Labor Supply Decisions......Page 648 ECONOMICS IN PRACTICE: Household Reactions to Winning the Lottery......Page 655 Firms: Investment and Employment Decisions......Page 657 Productivity and the Business Cycle......Page 662 The Short-Run Relationship Between Output and Unemployment......Page 663 The Size of the Multiplier......Page 664 Summary......Page 665 Problems......Page 666 32 Long-Run Growth......Page 668 The Growth Process: From Agriculture to Industry......Page 669 Sources of Economic Growth......Page 670 ECONOMICS IN PRACTICE: Education and Skills in the United Kingdom......Page 674 Growth and the Environment and Issues of Sustainability......Page 677 Summary......Page 679 Problems......Page 680 Keynesian Economics......Page 682 Monetarism......Page 683 Supply-Side Economics......Page 686 New Classical Macroeconomics......Page 688 ECONOMICS IN PRACTICE: How Are Expectations Formed?......Page 690 Summary......Page 693 Problems......Page 694 34 International Trade, Comparative Advantage, and Protectionism......Page 696 Trade Surpluses and Deficits......Page 697 The Economic Basis for Trade: Comparative Advantage......Page 698 The Sources of Comparative Advantage......Page 705 Trade Barriers: Tariffs, Export Subsidies, and Quotas......Page 706 Free Trade or Protection?......Page 709 ECONOMICS IN PRACTICE: A Petition......Page 712 Summary......Page 715 Problems......Page 716 35 Open-Economy Macroeconomics: The Balance of Payments and Exchange Rates......Page 720 The Balance of Payments......Page 721 ECONOMICS IN PRACTICE: The Composition of Trade Gaps......Page 724 Equilibrium Output (Income) in an Open Economy......Page 725 ECONOMICS IN PRACTICE: The Recession Takes Its Toll on Trade......Page 728 The Open Economy with Flexible Exchange Rates......Page 729 ECONOMICS IN PRACTICE: China’s Increased Flexibility......Page 735 ECONOMICS IN PRACTICE: Losing Monetary Policy Control......Page 737 Summary......Page 738 Review Terms and Concepts......Page 739 Problems......Page 740 Appendix: World Monetary Systems Since 1900......Page 741 36 Economic Growth in Developing and Transitional Economies......Page 746 Life in the Developing Nations: Population and Poverty......Page 747 Economic Development: Sources and Strategies......Page 748 ECONOMICS IN PRACTICE: Corruption......Page 751 ECONOMICS IN PRACTICE: Cell Phones Increase Profits for Fishermen in India......Page 755 Development Interventions......Page 756 The Transition to a Market Economy......Page 760 Summary......Page 764 Review Terms and Concepts......Page 765 Problems......Page 766 B......Page 768 C......Page 769 D......Page 770 E......Page 771 F......Page 772 I......Page 773 L......Page 774 M......Page 775 O......Page 777 P......Page 778 S......Page 780 T......Page 781 U......Page 782 Y......Page 783 A......Page 784 B......Page 785 C......Page 786 D......Page 788 E......Page 790 F......Page 792 G......Page 794 H......Page 795 I......Page 796 L......Page 799 M......Page 800 N......Page 802 O......Page 803 P......Page 804 R......Page 807 S......Page 808 T......Page 809 U......Page 811 W......Page 812 Z......Page 813 Photo Credits......Page 814 The scope and method of economics The economic problem : scarcity and choice Demand, supply, and market equilibrium Demand and supply applications Elasticity Household behavior and consumer choice The production process : the behavior of profit-maximizing firms Short-run costs and output decisions Long-run costs and output decisions Input demand : the labor and land markets Input demand : the capital market and the investment decision General equilibrium and the efficiency of perfect competition Monopoly and antitrust policy Oligopoly Monopolistic competition Externalities, public goods, and social choice Uncertainty and asymmetric information Income distribution and poverty Public finance : the economics of taxation International trade, comparative advantage, and protectionism Economic growth in developing and transitional economies.