Principles of Microeconomics 2013

Firm Behavior and the Organization of Industry 13 The Costs of Production 14 Firms in Competitive Markets The theory of the firm sheds light on the decisions that lie behind supply in competitive markets 15 Monopoly 16 Monopolistic Competition Firms with market power can cause market outcomes to be inefficient 17 Oligopoly The Economics of Labor Markets 18 The Markets for the Factors of Production 19 Earnings and Discrimination These chapters examine the special features of labor markets, in which most people earn most of their income 20 Income Inequality and Poverty Topics for Further Study 21 The Theory of Consumer Choice 22 Frontiers of Microeconomics Additional topics in microeconomics include household decision making, asymmetric information, political economy, and behavioral economics Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Seventh Edition Principles of Microeconomics N Gregory Mankiw Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it This is an electronic version of the print textbook Due to electronic rights restrictions, some third party content may be suppressed Editorial review has deemed that any suppressed content does not materially affect the overall learning experience The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Principles of Microeconomics, 7e N Gregory Mankiw Senior Vice President, Global Product Manager, Higher Education: Jack W Calhoun Vice President, General Manager, Social Science & Qualitative Business: Erin Joyner Product Director: Mike Worls Developmental Editor: Jane Tufts Product Development Manager: Jennifer E Thomas Content Developers: Clara Goosman and Elizabeth A Beiting-Lipps Product Assistant: Anne Merrill Sr Content Project Manager: Colleen A Farmer Sr Market Development Manager: John Carey © 2015, 2012 Cengage Learning WCN: 02-200-203 ALL RIGHTS RESERVED No part of this work covered by the 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online store www.cengagebrain.com Printed in the United States of America 1  2  3  4  5  6  7  17  16  15  14  13 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it To Catherine, Nicholas, and Peter, my other contributions to the next generation Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Jordi Cabre About the Author N Gregory Mankiw is the Robert M Beren ­Professor of Economics at Harvard University As a student, he studied economics at Princeton ­University and MIT As a teacher, he has taught macroeconomics, microeconomics, statistics, and principles of economics He even spent one summer long ago as a sailing instructor on Long Beach Island Professor Mankiw is a prolific writer and a regular participant in academic and policy ­debates His work has been published in scholarly journals, such as the American Economic Review, ­Journal of ­Political Economy, and Quarterly Journal of ­Economics, and in more popular forums, such as the New York Times and The Wall Street Journal He is also ­author of the best-selling intermediatelevel textbook ­Macroeconomics (Worth Publishers) In addition to his teaching, research, and writing, ­Professor Mankiw has been a research associate of the National Bureau of Economic Research, an adviser to the Congressional Budget Office and the Federal Reserve Banks of Boston and New York, and a member of the ETS test development committee for the Advanced ­Placement exam in economics From 2003 to 2005, he served as chairman of the President’s Council of Economic Advisers Professor Mankiw lives in Wellesley, Massachusetts, with his wife Deborah, three children, Catherine, Nicholas, and Peter, and their border terrier, Tobin vi Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Brief Contents Part I  Introduction  1 Ten Principles of Economics  Thinking Like an Economist  19 Interdependence and the Gains from Trade  47 Part II  How Markets Work  63 The Market Forces of Supply and Demand  65 Elasticity and Its Application  89 Supply, Demand, and Government Policies  111 Part III  Markets and Welfare  133 Consumers, Producers, and the Efficiency of Markets  135 Application: The Costs of Taxation  155 Application: International Trade  171 Part V  Firm Behavior and the Organization of Industry  257 13 The Costs of Production  259 14 Firms in Competitive Markets  279 15 Monopoly  299 16 Monopolistic Competition  329 17 Oligopoly  347 Part VI  The Economics of Labor Markets  371 18 The Markets for the Factors of Production  373 19 Earnings and Discrimination  395 20 Income Inequality and Poverty  413 Part VII  Topics for Further Study  433 21 The Theory of Consumer Choice  435 22 Frontiers of Microeconomics  461 Part IV  The Economics of the Public Sector  193 10 Externalities  195 11 Public Goods and Common Resources  215 12 The Design of the Tax System  233 vii Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 482 Glossary diseconomies of scale  the property whereby long-run average total cost rises as the quantity of output increases dominant strategy  a strategy that is best for a player in a game regardless of the strategies chosen by the other players E economic profit  total revenue minus total cost, including both explicit and implicit costs economics  the study of how society manages its scarce resources economies of scale  the property whereby long-run average total cost falls as the quantity of output increases efficiency  the property of society getting the most it can from its scarce resources efficiency wages  above-equilibrium wages paid by firms to increase worker productivity efficient scale  the quantity of output that minimizes average total cost elasticity  a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants exports  goods produced domestically and sold abroad externality  the uncompensated impact of one person’s actions on the well-being of a bystander F factors of production  the inputs used to produce goods and services fixed costs  costs that not vary with the quantity of output produced free rider  a person who receives the benefit of a good but avoids paying for it G game theory  the study of how people behave in strategic situations Giffen good  a good for which an increase in the price raises the quantity demanded H horizontal equity  the idea that taxpayers with similar abilities to pay taxes should pay the same amount equality  the property of distributing economic prosperity uniformly among the members of society human capital  the accumulation of investments in people, such as education and on-the-job training equilibrium  a situation in which the market price has reached the level at which quantity supplied equals quantity demanded I equilibrium price  the price that balances quantity supplied and quantity demanded implicit costs  input costs that not require an outlay of money by the firm equilibrium quantity  the quantity supplied and the quantity demanded at the equilibrium price imports  goods produced abroad and sold domestically excludability  the property of a good whereby a person can be prevented from using it explicit costs  input costs that require an outlay of money by the firm incentive  something that induces a person to act income effect  the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve income elasticity of demand  a measure of how much the quantity demanded of a good responds to a change in consumers’ income, computed as the percentage change in quantity demanded divided by the percentage change in income indifference curve  a curve that shows consumption bundles that give the consumer the same level of satisfaction inferior good  a good for which, other things being equal, an increase in income leads to a decrease in demand inflation  an increase in the overall level of prices in the economy in-kind transfers  transfers to the poor given in the form of goods and services rather than cash internalizing the externality  ­altering incentives so that people take account of the external effects of their actions L law of demand  the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises law of supply  the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises law of supply and demand  the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance liberalism  the political philosophy according to which the government should choose policies deemed just, as evaluated by an impartial observer behind a “veil of ignorance” libertarianism  the political philosophy according to which the government should punish crimes and enforce voluntary agreements but not redistribute income life cycle  the regular pattern of income variation over a person’s life lump-sum tax  a tax that is the same amount for every person Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it M macroeconomics  the study of economy-wide phenomena, including inflation, unemployment, and economic growth marginal change  a small incremental adjustment to a plan of action marginal cost  the increase in total cost that arises from an extra unit of production marginal product  the increase in output that arises from an additional unit of input marginal product of labor  the increase in the amount of output from an additional unit of labor marginal rate of substitution  the rate at which a consumer is willing to trade one good for another marginal revenue  the change in total revenue from an additional unit sold marginal tax rate  the amount that taxes increase from an additional dollar of income market  a group of buyers and sellers of a particular good or service market economy  an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services market failure  a situation in which a market left on its own fails to allocate resources efficiently market power  the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices maximin criterion  the claim that the government should aim to maximize the well-being of the worst-off person in society median voter theorem  a mathematical result showing that if voters are choosing a point along a line and each voter wants the point closest to his most preferred point, then majority rule will pick the most preferred point of the median voter Glossary microeconomics  the study of how households and firms make decisions and how they interact in markets monopolistic competition  a market structure in which many firms sell products that are similar but not identical monopoly  a firm that is the sole seller of a product without close substitutes moral hazard  the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior N Nash equilibrium  a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen natural monopoly  a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms negative income tax  a tax system that collects revenue from high-income households and gives subsidies to lowincome households normal good  a good for which, other things being equal, an increase in income leads to an increase in demand normative statements  claims that attempt to prescribe how the world should be O oligopoly  a market structure in which only a few sellers offer similar or identical products opportunity cost  whatever must be given up to obtain some item P perfect complements  two goods with right-angle indifference curves 483 perfect substitutes  two goods with straight-line indifference curves permanent income  a person’s normal income political economy  the study of government using the analytic methods of economics positive statements  claims that attempt to describe the world as it is poverty line  an absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty poverty rate  the percentage of the population whose family income falls below an absolute level called the poverty line price ceiling  a legal maximum on the price at which a good can be sold price discrimination  the business practice of selling the same good at different prices to different customers price elasticity of demand  a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price price elasticity of supply  a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price price floor  a legal minimum on the price at which a good can be sold principal  a person for whom another person, called the agent, is performing some act prisoners’ dilemma  a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial private goods  goods that are both excludable and rival in consumption producer surplus  the amount a seller is paid for a good minus the seller’s cost of providing it Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 484 Glossary production function  the relationship between quantity of inputs used to make a good and the quantity of output of that good production possibilities frontier  a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology productivity  the quantity of goods and services produced from each unit of labor input profit  total revenue minus total cost progressive tax  a tax for which highincome taxpayers pay a larger fraction of their income than low-income taxpayers property rights  the ability of an individual to own and exercise control over scarce resources proportional tax  a tax for which highincome and low-income taxpayers pay the same fraction of income public goods  goods that are neither excludable nor rival in consumption S scarcity  the limited nature of society’s resources screening  an action taken by an uninformed party to induce an informed party to reveal information Tragedy of the Commons  a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole shortage  a situation in which quantity demanded is greater than quantity supplied transaction costs  the costs that parties incur in the process of agreeing to and following through on a bargain signaling  an action taken by an informed party to reveal private information to an uninformed party social insurance  government policy aimed at protecting people against the risk of adverse events strike  the organized withdrawal of labor from a firm by a union substitutes  two goods for which an increase in the price of one leads to an increase in the demand for the other substitution effect  the change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution sunk cost  a cost that has already been committed and cannot be recovered Q quantity demanded  the amount of a good that buyers are willing and able to purchase quantity supplied  the amount of a good that sellers are willing and able to sell R rational people  people who systematically and purposefully the best they can to achieve their objectives regressive tax  a tax for which highincome taxpayers pay a smaller fraction of their income than low-income taxpayers rivalry in consumption  the property of a good whereby one person’s use diminishes other people’s use total revenue (in a market)  the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold supply curve  a graph of the relationship between the price of a good and the quantity supplied supply schedule  a table that shows the relationship between the price of a good and the quantity supplied surplus  a situation in which quantity supplied is greater than quantity demanded T tariff  tax on goods produced abroad and sold domestically tax incidence  the manner in which the burden of a tax is shared among participants in a market total cost  the market value of the inputs a firm uses in production total revenue (for a firm)  the amount a firm receives for the sale of its output U union  a worker association that ­bargains with employers over wages, benefits, and working conditions utilitarianism  the political philosophy according to which the government should choose policies to maximize the total utility of everyone in society utility  a measure of happiness or satisfaction V value of the marginal product  the marginal product of an input times the price of the output variable costs  costs that vary with the quantity of output produced vertical equity  the idea that taxpayers with a greater ability to pay taxes should pay larger amounts W welfare  government programs that supplement the incomes of the needy welfare economics  the study of how the allocation of resources affects economic well-being willingness to pay  the maximum amount that a buyer will pay for a good world price  the price of a good that prevails in the world market for that good Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it CHAPTER Page numbers in boldface refer to pages where key terms are defined A Ability, wages and, 399–400 Ability-to-pay principle, 247 Absolute advantage, 52 Absolute value, 91 Accidents, associated with driving, 204 Accountants, economists vs., 262 Accounting profit, 262 Adverse selection, 464 Advertising, 338–343 brand names, 342–343 critique of, 339–340 debate over, 339–340 defense of, 340 price of eyeglasses and, 340–341 signaling theory of, 401 as signal of quality, 341–342 Age, poverty correlated with, 418 Agent, 462, 462–464 Airline industry, example of price ­discrimination, 317 Algeria, OPEC as cartel, 356 Alm, Richard, 420 American Airlines, 361 American Indians, 338–339 Anarchy, State, and Utopia (Nozick), 423 Animals as common resources, 227 Antipoverty programs, 424–427 benefits principle argument for, 247 fighting poverty is public good, 220 in-kind transfers, 426 minimum-wage laws, 424–425 negative income tax, 425–426 welfare, 427 work incentives and, 427 Antitrust laws Clayton Antitrust Act, 319, 360 controversies over policy, 361–363 increasing competition with, 319 Microsoft case, 363–364 oligopolies and, 361–363 predatory pricing, 362–363 resale price maintenance, 361–362 restraint of trade, 360 Sherman Antitrust Act, 319, 360 tying, 363 Arbitrage, 315 Arms races as prisoners’ dilemma, 356–357 Arrow, Kenneth, 469 Arrow’s impossibility theorem, 469 Assumptions, 21–22 THE MARKET FORCES OF SUPPLY AND DEMAND Asymmetric information, 461, 462–467 adverse selection, 464 agents, 462–464 gifts as signals, 465–466 hidden actions, 462–464 hidden characteristics, 464 lemons problem, 464 moral hazards, 462–464 principals, 462–464 public policy and, 467 screening to uncover private ­information, 466 signaling to convey private ­information, 465 AT&T, 319 Automobile industry, safety laws, 7–8 Average cost, 6–7, 267–268 and marginal-cost curves, 269 pricing, deadweight losses and, 320 Average fixed cost, 268, 274 Average fixed cost (AFC) curve, 268, 270 Average revenue, 281, 283, 304, 305 Average tax rate, 245 Average total cost, 267, 274 related to marginal cost and, 270 related to short- and long-run, 271–272 U-shaped, 269–270 Average total cost (ATC) curve, 268, 270, 283 Average variable cost, 268, 274 Average variable cost (AVC) curve, 268, 270 B Bar graph, 37 Bartlett, Bruce, 429 Bauman, Yoram, 208 A Beautiful Mind, (Nash), 351 Beauty premium, 400–401 Behavioral economics, 471, 471–476 fairness and, 474–475 inconsistency and, 475 rationality and, 471–473 Benefits of beauty, 400–401 Benefits principle, 246, 246–247 Benevolent social planner, 145 Benham, Lee, 340 Bentham, Jeremy, 421 Bernanke, Ben, 33 Bertrand, Marianne, 405 Biddle, Jeff, 400–401 Black Death, economics of, 389 Blacks economics of discrimination, 403–408 poverty and, 418 Bloomfield, Robert, 33 Index Borda count, 469 Botswana, elephants as private good, 227 Bowles, Erskine B., 250 Brand-name product, 309 Brand names, economics of, 342–343 Braniff Airways, 361 Brazil, income inequality in, 416 Broken window fallacy, 14 Budget constraint, 436, 436–437 Budget deficit, 238 Federal government and, 238–240 fiscal challenge of, 238–240 life expectancy of elderly and rising cost of healthcare, 238–240 Budget surplus, 238 Bush, George H W., 429 Bush, George W., 253 Business cycle, 15 Business-stealing externality, 337 Buyers marginal, 137 number of, and shifts in demand, 71 taxes on, affect market outcomes, 123–125 variables that influence, 71 willingness to pay, 136 C Canada income inequality in, 416 NAFTA and, 187 tax burden in, 235 trade and distribution of income, 184 Capital, 387 cost of, 261–262 equilibrium in markets for, 387–388 factor of production, 386–389 human, 396–397, 404–405 Capital income, 388 Capone, Al, 233 Carbon emissions, 200 Carbon tax, 208–209 Carnegie, Andrew, 453–454 Carney, John, 84 Cartel, 349 See also Organization of ­Petroleum Exporting Countries (OPEC) markets with only few sellers, 349–350 public price fixing, 350 Cause and effect, 43–45 Centrally planned economies, 10 Chamberlin, Edward, 342 Chance, wages and, 399–400 Charities, private solution to externalities, 208–209 485 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 486 Index Chew, Victor, 148 Chile, unilateral approach to free trade, 187 China income inequality in, 416 trade and distribution of income, 185 Choice See Consumer choice; Optimization Christie, Chris, 84 Circular-flow diagram, 22, 22–24 Clayton Antitrust Act, 319, 360 Clean Air Act, 207, 209 Clean air and water as common resource, 226 Climate change, 208–209 Clinton, Bill tax rates raised by, 252 welfare reform bill signed by, 427 Club goods, 217, 302 Coase, Ronald, 209 Coase theorem, 209, 209–210 College education, cost of, 398–399 College sports cartel, 365 Collusion, 349 Combating inequality, reason, 428–429 Combs, Sean (Diddy), Command-and-control policies, 202 Common resource, example of prisoners’ dilemma, 357–358 Common resources, 214–215, 216, 216–217, 223–227 animals as, 227 clean air and water, 226 congested roads, 226 elephants, 227 importance of property rights, 228 as natural monopoly, 302 oceans least regulated, 226 Tragedy of the Commons, 223–225 wildlife as, 226 Communism, collapse in Soviet Union and Eastern Europe, 10–11 Comparative advantage, 52–58, 53 absolute advantage, 52, 57 applications of, 55–58 opportunity cost and, 52–53 trade and, 53–54 world price and, 173 Compensating differentials, 396 wage differences and, 404 Competition, 66–67 with differentiated products, 332–337 gender differences and, 408–409 imperfect, 330 international trade increases, 181 markets and, 66–67, 349–350 monopoly vs., 303–304, 322 perfect, 330 Competitive firms demand for labor, 374–380 long-run decision to exit or enter a market, 288 long-run supply curve, 289 marginal-cost curve, 283–285 market supply with entry and exit, 290–292 market supply with fixed number of, 290 measuring profit in graph, 288–289 vs monopoly, 303–304 profit maximization and, 282–289, 375 revenue of, 280–282 shift in demand in short run and long run, 293 short-run decision to shut down, 285–286 short-run supply curve, 287 sunk costs and, 286–287 supply curve, marginal cost as, 285 supply decision, 283–285 zero profit and, 292–293 Competitive market, 66, 280, 280–282 characteristics of, 280 firms in, 279–280 long-run supply curve, 293–295 market supply with entry and exit, 290–292 market supply with fixed number of firms, 290 meaning of, 280 revenue of competitive firm, 280–282 shift in demand in short run and long run, 293 supply curve in, 289–295 zero profit and, 292–293 Complements, 70 cross-price elasticity of demand, 98 perfect, 441 Concentration ratio, 330 Condorcet, Marquis de, 467 Condorcet paradox, 468 Congestion common resource and, 226 gas tax and, 204 traffic and toll roads, 226 Congestion pricing, 224–225 Congressional Budget Office, 29, 248 Constant returns to scale, 273 Consumer choice budget constraint, 436–437 consumer optimal choices, 442–443 deriving demand curve, 448–449 Giffen good, 449 income changes and, 444 income effect, 446–448 indifference curve, 438 inferior good, 444 interest rates and household saving, 454–456 marginal rate of substitution (MRS), 438, 443 normal good, 444 optimization, 442–449 perfect complements, 441 perfect substitutes, 441 preferences, 437–441 price changes and, 445–446 substitution effect, 446–448 theory of, 435–436, 449–456 wages affect labor supply, 450–453 Consumer surplus, 136–140, 137 evaluating market equilibrium, 146–148 lower price raises, 138-139 market efficiency and, 144–150 measure, 139–140 price affects, 140 using demand curve to measure, 137–138, 139 willingness to pay, 136–137 Consumption gap, 420 rivalry in, 216–217 tax, 243–244 trade expands set of opportunities, 51 Consumption-saving decision, 454 Cooper, Michael, 148 Cooperation economics of, 353–360 prisoners’ dilemma, 353–355 Coordinate system, 38–41 Coordination problems, 273 Copyright laws, 299–302 Corporate income tax, 241, 250–251 Corporate management, 463 Corporation, 236 principal-agent problem, 463 Corrective taxes, 203, 203–207 Correlation, positive and negative, 38–39 Costanza, George, 149 Cost-benefit analysis, 221, 221–223 Cost curves and their shapes, 268–270 typical, 270–271 Cost(s), 141, 260–262 average fixed, 268, 274 average total, 267, 271–272, 274, 290 average variable, 268, 274 budget deficit and healthcare, 239 of capital, 261–262 economic profit vs accounting profit, 262 economies of scale and, 180–182 explicit, 261, 274 fixed, 266, 266–267, 274 implicit, 261, 274 opportunity See Opportunity cost of possible sellers, 141 production and, 263–265 in short run and long run, 271–273 social, 198–199, 313 sunk, 285, 286, 286–287 of taxation, 155–156 total, 260, 263, 274 transaction, 212 variable, 266–267, 267, 274 various measures of, 265–271 welfare, 310–313 Council of Economic Advisers, 29 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Countries (OPEC) application of supply, demand, and elasticity, 104–105 failure to keep price of oil high, 104–105 increase in price of crude oil, 114–115 Cox, Michael, 420 Crandall, Robert, 361 Cross-price elasticity of demand, 98 Curves, 39–41 movements along, 40–41 shifts of, 40–41 slope of, 41–43 Customers, discrimination by, 406–407 D Dairy industry, 280–282 Deadweight loss, 159, 160 changes in welfare, 159 debate, 162–163 determinants of, 160–163 elasticity and, 160–163 gains from trade and, 159–160 monopoly and, 311–313 tariffs and, 178 of taxation, 156–160, 234, 243 tax effects on market participants, 157–159 tax revenue and, 163–165 triangle, 312–313 DeBeers, 301 Demand, 67–73 applications of, 101–107 change in, 79, 81 decrease in, 69 elastic, 90, 92, 97–98 elasticity of See Demand elasticity equilibrium of supply and, 77–79 excess, 78 expectations and, 70–71 income changes, 69–70 increase in, 69, 80, 294 individual, 68–69 inelastic, 90, 92 for labor, 374–380 law of, 67, 79, 449 market, 68–69 market forces of supply and, 65 number of buyers and, 71 perfectly elastic, 94 perfectly inelastic, 92 price elasticity of, 93 prices of related goods and, 70 reducing smoking, 71–73 relationship between price and quantity demanded, 67–68 supply and, 77–83, 111–112, 375 tastes and, 70 Demand curve(s), 39–40, 67–68, 68 demand schedule and, 138 deriving, 448–449 Index difference between competitive firm and monopoly, 303–304 elasticity of linear, 97 measuring consumer surplus with, 137–138, 139 for monopoly, 304, 306 price elasticity of demand and, 91, 93 shifts in, 40–41, 69–73 shifts in vs movements along, 72 slope of, 449 variety of, 92–94 Demand elasticity, 90–98 cross-price elasticity of, 98 income, 97–98 price, 90–91 Demand schedule, 67 demand curve and, 68, 138 for water, 348–349 Dennie, Christian, 365 Department of Justice, antitrust laws, 319 Derived demand, 374 Diamond, Peter, 166 Diminishing marginal product, 265, 376 Diminishing marginal utility, 421, 443 Discount coupons, 317 Discounting, 318 Discrimination, 403 by customers and governments, 406–407 earnings and, 395–396 economics of, 403–408 by employers, 405–406 in labor market, 405 measuring labor-market discrimination, 403–405 price, 314–318 profit motive and, 406 in sports, 407–408 Diseconomies of scale, 272–273, 273 Distribution of income in U.S., 415 neoclassical theory of, 390 Dominant strategy, 354 Downs, Anthony, 224 Drug interdiction, applications of supply, demand, and elasticity, 105–107 Duopoly, 348–349 E Earned Income Tax Credit (EITC), 121, 426, 427 Economic growth production possibilities frontier and, 24–26 Economic mobility, 420–421 Economic models, 22–26 Economic profit, 262 Economic Report of the President, 29 Economics, See also Welfare economics behavioral, 471, 471–476 of Black Death, 389 487 of brand names, 342–343 of cooperation, 353–360 of discrimination, 403–408 of immigration, 384–385 within a marriage, 56–57 reasons for studying, 14 supply-side, and Laffer curve, 164–165 ten principles of, Economic welfare price discrimination and, 315 total surplus and, 145 Economies of scale, 272–273, 273 as causes of monopoly, 302 lower costs through, 180–182 specialization and, 273 Economists vs accountants, 262 disagreement among, 30–31 as policy adviser, 27–30 propositions which most agree about, 32 as scientist, 20–27 thinking like, 19–20 and virtual realities, 33 in Washington, 28–29 Economy centrally planned, 10 market, 10–11 parable for modern, 48–52 political, 462, 467, 467–471 underground, 163 U.S deep economic downturn, 15 Ecuador, OPEC as cartel, 356 Education alternative view of, 401 cost of college, 5–6 as positive externality, 199–200 signaling theory of, 401 social optimum and, 200–201 state and local spending for, 241 type of human capital, 397 wages and, 397 Efficiency, 5, 145, 242–246 of equilibrium quantity, 147 government intervention and, 11–12 lump-sum taxes, 245–246 marginal tax rates vs average tax rates, 245 market See Market efficiency monopoly and, 311–313 production possibilities frontier and, 24 total surplus and, 145 trade-off between equity and, 252–253 Efficiency wages, 403 Efficiency-wage theories, 463 Efficient scale, 270, 291, 336 Effort, wages and, 399–400 Einstein, Albert, 20 Elasticity, 90 along a linear demand curve, 96–97 applications of, 89–107 deadweight loss and, 160–163 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 488 Index of demand See Demand elasticity income elasticity of demand, 97–98 real world, 94 of supply, 98–101 tax incidence and, 126–128 Elasticity, 166 Elephants, common resource, 227 Emmert, Mark, 365 Employers, discrimination by, 405–406 Employment See also Jobs moral hazard, 462–464 Employment gap, 398 Entry/exit into market firm’s long-run decision to, 288 free, 331 long run market supply with, 290–292 monopoly, 300–303 Environmental Protection Agency (EPA), 203 Environmental regulations, 202 Equality, 5, 146 government intervention and, 12 Equilibrium, 77, 77–79 analyzing changes in, 79–83 for an oligopoly, 351–352 consumer and producer surplus in market, 146 decrease in supply affects, 81 increase in demand affects, 80 in labor market, 381–386 long-run, 332–335 in markets for land and capital, 387–388 markets not in, 78 Nash, 351 of supply and demand, 77–78 without international trade, 172–173 zero-profit, 292–293 Equilibrium price, 77 Equilibrium quantity, 77, 147 Equilibrium wages, 396–403 Equity horizontal, 247, 249 tax, 249–251 taxes and, 246–251 trade-off between efficiency and, 252–253 vertical, 247 Evenett, Simon, 181 Eve Online, 33 Excess capacity, 335–336 Excess supply and demand, 77–78 Excise taxes, 237 Excludability, 216, 216–217 Expectations of free trade, 183 shifts in demand curve, 70–71 shifts in supply curve, 76 Explicit costs, 261, 274 Exports, 57 See also International trade gains and losses from exporting country, 174–175 Externalities, 12, 150, 195–196 carbon tax, 208–209 Coase theorem, 209–210 command-and-control policies, 202 corrective taxes and subsidies, 203–205 of country living, 200 education as, 199 gas tax and, 204–205 internalizing, 199 market inefficiency and, 197–202 negative, 196, 198–199 positive, 196, 199–202 private solutions to, 208–211 public policies toward, 202–207 technology spillovers, 201–202 tradable pollution permits, 205–207 transaction costs, 211 F Factors of production, 22–24, 374 competitive profit-maximizing firm, 375 demand for labor, 374–380 equilibrium in labor market, 381–386 land and capital, 386–389 linkages among, 388–389 markets for, 22–24, 373–390 production function and marginal product of labor, 375–376 shifting labor-demand curve, 378–380 supply of labor, 380–381 value of marginal product, 377–378 Fair Labor Standards Act of 1938, 117 Fairness, behavioral economics and, 474–475 Family tax liability, 236 Farming, applications of supply, demand, and elasticity, 102–104 Federal government budget deficit, 238–240 financial overview of, 234–241 receipts of, 235–237 spending, 237–240 Federal income tax rates (2013), 236 Federal Reserve (Fed), 29 Federal tax burden, 248 FICA (Federal Insurance Contributions Act), 125 Financial aid, 317 Firms in circular-flow diagram, 22–24 marginal, 295 market supply with fixed number of, 290 as a natural monopoly, 302–303 profit-maximizing, 375 Fiscal challenge, 238–240 Fiscal cliff approaches, 167 Fixed costs, 266, 266–267, 274 average, 268, 274 Flypaper theory of tax incidence, 249–251 Food Stamp program, 220, 426, 427 Ford, Gerald, 14 Ford Motor Company, 271–272 Foundations of Economic Analysis ­(Samuelson), 476 Foundations of Neuroeconomic Analysis (Glimcher), 476 France tax rate and labor taxes, 166 France, tax burden in, 235 Franklin, Ben, 233 Free rider, 218 Free To Be You and Me style, 56 Free trade, 171–188 Full-reserve banking, 33 G Gabon, OPEC as cartel, 356 Gains from trade comparative advantage, 52–58 deadweight losses and, 159–160 of exporting country, 174–175 of importing country, 175–177 production possibilities, 48–50 specialization, 50–51 Gale, William, 429 Game theory, 347–359, 348 Gasoline prices, incentive effects of, 8–9 Gasoline tax benefits principle and, 246–247 as corrective tax, 203–205 road congestion and, 204–205 Gates, Bill, 166, 167, 363–364 GDP See Gross domestic product Gender See also Women differences, 408–409 General Agreement on Tariffs and Trade (GATT), 187 Germany income inequality in, 416 inflation in, 14 tax burden in, 235 tax rate and labor taxes, 166 Giffen, Robert, 449 Giffen good, 449, 450 Gifts as signals, 465–466 Glaeser, Edward L., 200–201 Glimcher, Paul, 476–477 Global Trade Alert, 181 Good(s), 70 club, 217, 302 complements, 70 different kinds of, 216–217 excludability of, 216–217 Giffen, 449, 450 inferior, 70, 98, 444, 445 international trade increases variety of, 180 marginal utility of, 443 markets for, 22–24 normal, 70, 98, 444 private, 216, 216–217 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it public, 215–217, 216, 218–223 related, 70 rivalry in consumption, 216–217 substitutes, 70 types of, 217 Google, 300 Government See also Federal government benefits of, 11–12 discrimination by, 406–407 regulation, 301 revenue as percentage of GDP, 234 tax revenue as percentage of GDP, 235 Government-created monopolies, 301–302 Government policies price control and, 112–121 supply, demand, and, 111–112 taxes and, 121–128 Graphs, 37–45 cause and effect, 43–45 curves in, 39–41 measuring profit in, 288–289 of single variable, 37–38 slope of, 41–43 of two variables, 38–39 Great Britain unilateral approach to free trade, 187 Great Recession, 398 Greenspan, Alan, 244 Greenstone, Michael, 398 Gross domestic product (GDP) government revenue as percentage of, 234 government tax revenue as percentage of, 235 Gucht, Karel De, 181 Guðmundsson, Eyjólfur, 33 “Guns and butter” tradeoff, H Hamermesh, Daniel, 4400–401 Hamilton Project, 398–399 Health, federal spending and, 237–238 Healthcare costs, budget deficit and, 239–240 Obama’s healthcare reform bill, 249 Hispanics, poverty and, 418 Holmes, Oliver Wendell, Jr., 155 Homo economics, 471 Homo sapiens, 472 Hong Kong, trade and distribution of ­income, 185 Horizontal equity, 247, 249 Households in circular-flow diagram, 22–24 decisions faced by, interest rates affect savings of, 454–456 Housing rent control, 115–116 Hsu, Shi-Ling, 208 Huga, Katherine, 120 Index Human capital, 396–397, 397 education as, 397 role of, 404–405 Human-capital theory, 401 Human life, value of, 222–223 Human organs, market for, 148–150 I Immigration, 381 Imperfect competition, 330 Implicit costs, 261, 274 Import quota, 31 compared to tariff, 179 Imports, 57 See also International trade gains and losses of importing country, 175–177 Incentives, 7, 7–9 brand name quality, 342–343 work, 427 Income capital, 388 changes in affect consumer’s choices, 444 economic life cycle, 419 effect, 446, 446–448 increase in, 444 in-kind transfers as, 419 permanent, 419 political philosophy of redistributing, 421–424 shifts in demand and, 70 transitory vs permanent, 419 U.S distribution of, 414–416 Income effect, 446, 446–448 on labor supply, 453–454 Income elasticity of demand, 97, 97–98 Income inequality alternative measures of, 420 around world, 416–417 economic mobility, 420–421 measurement of, 414–421 poverty and, 413–414, 417 in U.S., 414–416 Income redistribution, international differences in, 428–429 Income tax, 243 corporate, 241, 250–251 individual, 241 negative, 425, 425–426 India, income inequality in, 416 Indifference curve(s), 438 extreme examples of, 440–441 four properties of, 439–440 income effect, 446–448 perfect complements, 411 perfect substitutes, 411 preferences, 438–439 substitution effect, 446–448 Individual demand, 68–69 Individual income tax, 241 489 Individual supply vs market supply, 74–75 Indonesia, OPEC as cartel, 356 Industrial organization, 260 Industrial policy, 201–202 Inefficiency externalities and, 197–200 of monopoly, 312–313 Inelastic demand, 90, 92 Inelastic supply, 98 Inequality alternative measures of, 420 around world, 416–417 Infant-industry argument for trade restrictions, 185–186 Inferior good, 70, 444, 445 income elasticity of demand and, 98 Inflation, 14 money supply and, 15 short-run-trade-off between unemployment and, 15 Information asymmetry, 462 In-kind transfers, 419 policies to reduce poverty, 426 problems in measuring inequality, 418–419 Input demand and output supply, 379 Input prices and supply, 75–76 An Inquiry into the Nature and Causes of the Wealth of Nations (Smith), 10, 55, 273 Insurance adverse selection, 464 moral hazard, 464 social See Social insurance taxes Interest rate(s) affect household saving, 459-461, 454–456 increase in, 455–456 Internalizing the externality, 199 International trade, 171–188 analysis of oligopoly and, 353 benefits of, 180–182 comparative advantage, 173 determinants of, 172–173 effects of tariffs, 177–179 equilibrium without, 172–173 gains and losses of exporting country, 174–175 gains and losses of importing country, 175–177 import quota compared to tariff, 179 lessons for policy of, 179–180 multilateral approach to free trade, 187 outsourcing and, 184–185 relative demand for skilled and ­unskilled labor and, 397–398 restriction of, 179 of United States, 57–58 winners and losers from, 174–182 world price, 173 Intuit, 319 Investment in people, 397 Investment, higher education as, 398–399 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 490 Index Invisible hand, 10–12, 14, 148–149 Iran, OPEC as cartel, 356 Iraq, OPEC as cartel, 356 Israel, shifts in labor supply and, 382–383 J Japan income inequality in, 416 tax rate, 167 trade and distribution of income, 184 work hours, 167 Jensen, Robert, 450 Jobs argument for trade restrictions, 182–183 characteristics of, 396–403 Jobs, Steve, 167 K Kahn, Mathew, 200 Kennedy, John F., 417 Kenya, elephant poaching, 227 Keynes, John Maynard, 29, 34, 477 Krugman, Paul, 184–185 Kuwait, 356 L Labor demand for, 374–380 international trade and demand for skilled and unskilled, 397–398 jobs argument for trade restrictions, 182–183 marginal product of, 375–376, 379 supply of, 380–381 taxes on, 162–163 technology and demand for skilled and unskilled, 397 Labor demand minimum wage and, 119 shifts in, 383–384 Labor market adverse selection, 464 discrimination, measuring, 403–405 equilibrium in, 381–386 minimum wage effects on, 118 racial discrimination in, 405 Labor supply income effects on, 453–454 shifts in, 381–383 wages and, 450–453 Labor tax, deadweight loss of, 162–163 Laffer, Arthur, 164–165, 208 Laffer curve, 164–165 Laissez faire, 147 Lamy, Pascal, 181 Land equilibrium in markets for, 387–388 factor of production, 386–389 Landsburg, Steven E., 183 Law of demand, 67, 449 Law of supply, 73 Law of supply and demand, 79 Learning by doing, 57 Left-digit bias, 473–474 Liberalism, 422, 422–423 Libertarianism, 423, 423–424 Libya, OPEC as cartel, 356 Life cycle, 419 Lighthouses as public goods, 221 Lindert, Peter, 428 Lindsay, Alistair, 350 Local government, 240–241 receipts for, 240–241 spendings for, 241 Logic of self-interest, 351 Long run costs in, 271–273 decision to exit or enter a market, 288 equilibrium, 332–335 market supply, 290–292 rent control, 115–116 shift in demand, 293 supply curve, 293–295 Looney, Adam, 398 Losses See also Deadweight loss of exporting country, 174–175 of importing country, 175–177 Lump-sum tax, 245, 245–246 Luxuries income elasticity of demand and, 98 price elasticity of demand and, 90 Luxury tax, 128 M Macroeconomics, 27 Malawi, elephants as private good, 227 Mankiw, N Gregory, 208, 250 Margin, Marginal benefits, Marginal buyer, 137 Marginal change, Marginal cost (MC), 6–7, 267–268, 268, 274, 379 markup over, monopolistic vs perfect competition, 336 pricing as regulatory system, 320 pricing for natural monopoly, 320 related to average total cost, 270 related to price, 336 rising, 268–269 Marginal cost (MC) curve, 268, 270, 283 and average-cost curves, 269 firm’s supply decision and, 283–285 Marginal firm, 295 Marginal product, 264 demand for labor and value of, 377–378 diminishing, 265, 376 Marginal product of labor (MPL), 376, 379 production function and, 375–376 value of, 378 Marginal rate of substitution (MRS), 438, 443 Marginal revenue (MR), 282, 283 for competitive firm, 281 curve for monopoly, 306 monopoly, 304, 305 Marginal seller, 142 Marginal tax rate, 162, 236, 245 Marginal utility diminishing, 421, 443 of goods, 443 Market demand, 68–69 Market economy, 10, 10–11 Market efficiency, 144 –151 Market equilibrium, evaluating, 146–150 Market failure, 12, 150–151, 321 See also Externalities insufficient variety as, 338–339 Market power, 12, 150, 280, 301 Market(s), 66 See also Competitive market adverse selection and, 464 competition and, 66–67 definition of, 90 efficiency of, 135–136 firm’s long-run decision to exit or enter, 288 free entry and exit of, 331 for goods and services, 22–24 for land and capital, equilibrium in, 387–388 with only few sellers, 348–349 perfectly competitive, 66 tyranny of, 338–339 Market supply with entry and exit, long run, 290–292 with fixed number of firms, short run, 290 vs individual supply, 74–75 as sum of individual supplies, 74 Markup over marginal cost, 336 Maximin criterion, 422 McGinty, Jo Craven, 148 McTeer, Robert D., Jr., 14 Median voter theorem, 469–471, 470 Medicaid, 426, 427 Medicare, 125, 162, 167, 236–239 Mexico income inequality in, 416 living standards in, 13 NAFTA and, 187 Microeconomics, 27, 461–462 Microsoft Corporation, 299–300, 319 antitrust case against, 363–364 Sherman Antitrust Act and, 319 Midpoint method, 91–92 Mill, John Stuart, 421 Miller, Nolan, 455 Minimum wage, 117–119 advocates and opponents of, 119 Fair Labor Standards Act of 1938, 117 labor market and, 118 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it price floor, 117 teenage labor market and, 118–119 Minimum-wage laws, 424–425 determinant of equilibrium wages, 402–403 evaluating price controls, 119–121 policies to reduce poverty, 424 Money supply, inflation and, 15 Monopolistic competition, 329–330, 330 advertising, 338–343 characteristics of, 334–335 competition with differentiated products, 332–337 excess capacity, 335–336 long-run equilibrium, 332–335 markup over marginal cost, 336 vs perfect competition, 330–332, 335–336, 344 in short run, 332 welfare of society and, 336–337 Monopoly, 67, 299–303, 300 antitrust laws, 319–321 vs competition, 303–304, 322 competition vs., 322 deadweight loss and, 311–313 drugs vs generic drugs, 309–310 economies of scale as, 302 government-created, 301–302 inefficiency of, 312–313 markets with only few sellers, 349–350 natural, 217, 302–303 perfect competition and, 330–332, 344 prevalence of, 322 price discrimination, 314–318 production and pricing decisions, 303–310 profit maximization, 306–308 profit of, 308–309 public ownership, 321 public policy toward, 319–321 regulation, 319–321 resources, 300, 301 revenue of, 304–306 social cost, 313 supply curve and, 308 welfare cost of, 310–313 Monopsony, 386 Montero, Jenny, 121 Moral hazard, 462, 462–464 insurance, 464 Morris, Eric A., 224 Movie industry, example of price discrimination, 317 Mullainathan, Sendhil, 405 Muskie, Edmund, 207 N Nader, Ralph, Namibia, elephants as private good, 227 Nash, John, 351 Nash equilibrium, 351 Index National Collegiate Athletic Association (NCAA), 365 National defense important public goods, 219 spending, 237 National Highway Traffic Safety Administration, 204 National Institutes of Health, 220, 237 National Science Foundation, 220 National-security argument for trade restrictions, 184–185 Natural disasters, price and, 84–85 Natural monopoly, 217, 302, 302–303 Negative correlation, 39 Negative externality, 196, 198–199 Negative income tax, 425, 425–426 Neoclassical theory of distribution, 390 Neuman, William, 120 Neuroeconomics revolution, 476–477 Newell, Gabe, 33 Newton, Isaac, 20 Nigeria income inequality in, 416 living standards in, 13 OPEC as cartel, 356 Nike, 338 Nocer, Joe, 365 Normal good, 70, 444 income change and, 444 income elasticity of demand and, 98 Normative statements, 28 North American Free Trade Agreement (NAFTA), 187 Nozick, Robert, 423 O Obama, Barack, 15, 167, 181, 249, 250, 253, 318, 428, 429 Observation, 20–21 Oceans, common resources, 226 Ohanian, Lee, 167 Ohanian, Lee E., 167 Oikonomos, Oligopoly, 330, 347 analysis of, and international trade, 353 cartels and, 349–350 competition and, 349–350 concentration ratio, 330 duopoly example, 348 economics of cooperation, 353–360 equilibrium for, 351–352 game theory and, 355 markets with only few sellers, 348–353 monopolies, 349–350 OPEC as cartel, 356 predatory pricing, 362–363 prisoners’ dilemma, 353–355 public policy toward, 360–364 public price fixing, 350 resale price maintenance, 361–362 restraint of trade and antitrust laws, 360 491 size affects market outcome, 352–353 tying, 363 Omitted variable, 43–44 OPEC and price of oil, 104–105 OPEC and world oil market, 356 price ceilings and lines at gas pump, 114–115 Opportunity cost(s), 6, 52, 52–53, 260–261 comparative advantage and, 52–53 cost of capital as, 261–262 economists vs accountants, 262 explicit and implicit costs, 261 production possibilities frontier and, 24–26 Optimization consumer optimal choices, 442–443 deriving demand curve, 448–449 income changes and, 444 income effect, 446–448 price changes and, 445–446 substitution effect, 446–448 utility and, 443 Optimum, 198, 442 Ordered pair, 38 Organization for Economic Cooperation and Development (OECD), 428 Organization of Petroleum Exporting Countries (OPEC) nations in, 356 world oil market and, 356 Organs (human), market for, 148–150 Origin, of graph, 38 Orrenius, Pia, 384–385 Orszag, Peter, 208 Oster, Emily, 56–57 Output efficient level of, 311 levels of, 307 Output effect, 305, 352 Output price, 378–379 Outsourcing, 183, 184–185 P Palestine, shifts in labor supply and, 382–383 Parking spots, 148–149 Patent, expiration of, 309–310 Patent protection, 201–202 Payroll tax, 236 burden of, 125–126 Peltzman, Sam, Perception vs reality, 31 Perfect competition monopolistic vs., 335–336 monopoly and, 330–332, 344 Perfect complements, 441 Perfectly competitive markets, 66, 280 Perfectly elastic demand, 94 Perfectly elastic supply, 99 Perfectly inelastic demand, 92 Perfectly inelastic supply, 99 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 492 Index Perfect price discrimination, 315–316 Perfect substitutes, 441 Permanent income, 419 Pharmaceutical drugs vs generic drugs, 309–310 Pie chart, 37 Pigou, Arthur, 203 Pigovian taxes, 203 Pin factory, 273 Plumer, Brad, 33 Political economy, 462, 467, 467–471 Arrow’s impossibility theorem, 468–469 Condorcet voting paradox, 467–468 median voter theorem, 469–471 politician’s behavior, 471 Pollution clean air and water as common resource, 226 corrective taxes and, 203–204 Environmental Protection Agency (EPA), 203 gas tax, 205 as negative externality, 226 objections to economic analysis of, 207 regulation and, 203 social optimum and, 198 tradable pollution permits, 205–207 Porter, Eduardo, 428 Positive correlation, 38 Positive externalities, 196, 199–202 technology spillovers, industrial policy, and patent protection, 201–202 Positive statements, 28 Poverty correlated with age, race, and family composition, 418 fighting, as public good, 220 income inequality and, 413–414 in-kind transfers and, 419 policies to reduce, 424–427 Poverty line, 417 Poverty rate, 417, 417–418 Predatory pricing, 362–363 Preferences consumer choice, 437–441 insufficient variety, 338–339 marginal rate of substitution, 433 representing with indifference curves, 438–439 utility and, 433 Prescott, Edward C., 167 Price ceiling, 112 binding constraint, 112 lines at gas pump, 114–115 market outcomes and, 112–113 not binding, 112 rent control, 115–116 Price controls food shortage and, 120–121 Price discrimination, 314, 314–318 analytics of, 315–317 economic welfare and, 315 examples of, 317–318 in higher education, 318 moral of story, 315 parable about pricing, 314–315 rational strategy for a profitmaximizing monopolist, 315 willingness to pay and, 315 Price effect, 305, 352 Price elasticity of demand, 90, 90–91 computing, 91 determinants of, 90–91 elasticity and total revenue along a linear demand curve, 96–97 midpoint method, 91–92 total revenue and, 94–96 variety of demand curves, 92–94 Price elasticity of supply, 98 computing, 99 determinants of, 98–99 variety of supply curves, 99–101 Price fixing, public, 350 Price floor, 112 market outcomes and, 116–117 minimum wage as, 117–119 Price maker, 300 Price(s) advertising effect on, 340–341 allocation of resources and, 83 change in, 444–445 control on, 112–121 equilibrium, 77 higher price raises producer surplus, 143–144 input prices and supply, 75–76 lower price raises consumer surplus, 138–139 marginal cost and, 336 market-clearing, 77 natural disasters and, 84–85 output, 378–379 purchase, of land or capital, 387 quantity demanded and, 67–68 quantity supplied and, 73 of related goods and demand, 70 relative, 437 rental, of land or capital, 387 shortages and, 78 surplus and, 77–78 of trade, 54 when supply and demand shifts, 82 willingness to pay, 136–137 world, 173 Price takers, 66, 174, 280, 300 Pricing average-cost, 320 congestion, 224–225 marginal-cost, 320 predatory, 362–363 resale price maintenance, 361–362 tying, 363 value, 224–225 Principal, 462, 462–464 Principles of Political Economy and Taxation (Ricardo), 55 Prisoners’ dilemma, 353, 353–355 dominant strategy, 354 economics of cooperation, 353–355 examples of, 356–358 oligopoly as, 355 tit-for-tat strategy, 359 tournament, 359 welfare of society and, 358 Private goods, 216, 216–217 Producer surplus, 141, 141–144 cost and willingness to sell, 141–142 evaluating market equilibrium, 146–148 higher price raises, 143–144 market efficiency and, 144–150 using supply curve to measure, 142–143 Product differentiation, 331 Production cost of, 259–260, 263–265 factors of, 22–24, 374 process, 301 resources, limited quantities of, 293–295 Production function, 263, 263–265, 376, 377 marginal product of labor and, 375–376 total cost and, 263, 265 Production possibilities frontier, 49 gains from trade, 48–50 Production possibilities frontier and, 24, 24–26 Productivity, 13 relationship between living standards and, 13 wages and, 384–386 Products advertising as signal of quality, 341–342 brand-name, 309 competition with differentiated, 332–337 Profit, 260 accounting, 262 as area between price and average total cost, 290 economic, 262 measuring in graph for competitive firm, 288–289 of monopoly, 308–309 Profit maximization, 282–283 competitive firm’s supply curve and, 282–289 monopoly, 306–308 Progressive tax, 247 Progressive tax code, 428–429 Property rights, 12 importance of, 228 technology and, 202 Property taxes, 240–241 Proportional tax, 247 Protection-as-a-bargaining-chip argument for trade restrictions, 186–187 Public choice, 467 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Public good(s), 215–217, 216, 218–223 antipoverty programs, 220 basic research, 219–220 cost-benefit analysis, 221–223 free-rider problem, 218 importance of property rights, 228 lighthouses as, 221 national defense, 219 as natural monopoly, 302 value of human life, 222–223 Public ownership, public policy toward monopolies, 321 Public policy, 12 See also Antitrust laws asymmetric information and, 466–467 toward externalities, 202–207 Putnam, Howard, 361 Q Qatar, OPEC as cartel, 356 Quality advertising as signal of, 341–342 brand names and, 342–343 Quantity equilibrium, 77 Quantity demanded, 67 change in, 80–81 relationship between price and, 67–68 Quantity discounts, 318 Quantity supplied, 73 Quintiles, 248 Quotas, import, 31, 179 R Race discrimination in labor market, 405 discrimination in sports, 407–408 median annual earnings by, 403 poverty correlated with, 418 segregated streetcars and, 406 Raffo, Andrea, 167 Randlett, Tom, 149 Rationality, behavioral economics and, 471–473 Rational people, Rawls, John, 422–423 Reagan, Ronald, 30, 429 tax cuts under, 165, 166, 252 Reality, perception vs., 31 Regressive tax, 247 Regulation of externalities, 202 public policy toward monopolies, 319–321 Relative price budget constraints and, 436–436 consumer’s choice and, 443 Index Rent control, 31 evaluating price controls, 120–121 price ceiling, 115–116 in short run and long run, 115–116 Rent subsidies, 120–121 Resale price maintenance, 361–362, 363–364 Resources common, 214–215, 216, 216–217, 223–227, 302 limited quantities of production, 293–295 monopoly, 300, 301 prices and allocation of, 83 prisoners’ dilemma, 357–358 scarcity of, Revenue See also Total revenue average, 281 of competitive firm, 280–282 marginal, 282 of monopoly, 304–306 tax, 157 Reverse causality, 44–45 Reyes, Nery, 120 Rhodes, Cecil, 301 Ricardo, David, 55 Rivalry in consumption, 216, 216–217 Road congestion, gasoline tax and, 204 Roback Jennifer, 406 Rodríguez, Francisco, 121 Rogerson, Richard, 167 Russia, income inequality in, 416 S Saez, Emmanuel, 166 Saldate, Edward, 149 Sales taxes, 240–241 Samsung, 300 Samuelson, Paul, 476 Satisficers, 472 Saudi Arabia, 356 Saving, interest rates affect household, 454–456 Scarcity, Scarcity index, 121 Scatterplot, 38 Schwarz, Andy, 365 Scientific judgments, differences among economists in, 30–31 Scientific method, 20–21 Screening, 466 Segregation, segregated streetcars and profit motive, 406 Sellers number of, and shifts in supply curve, 76 taxes on, 123–123 variables that influence, 76 Sensible tax, 208–209 Services, markets for, 22–24 Shaw, George Bernard, 30 493 Sherman Antitrust Act, 319, 360 Shiller, Robert J., 476–477 Shortage, 78 lines at gas pump, 114–115 price ceilings and, 113 Short run costs in, 271–273 increase in demand, 294 market supply with fixed number of firms, 290 monopolistically competitive firm in, 332 monopolistic competitors in, 333 rent control, 115–116 shift in demand, 293 Shoup, Donald, 149 Shutdown, 285 competitive firm’s short-run decision to, 285–286 near-empty restaurants and, 287 off-season miniature golf and, 287 Sierra Club, 208 Signaling, 401, 465 advertising, 401 to convey private information, 465 education, 401 gifts as, 465–466 Simon, Herbert, 472 Simpson, Alan K., 250 Singapore, trade and distribution of income in, 185 Slope, 41–43 Smith, Adam, 10, 11, 14, 55, 148, 209, 273, 361 Smith, Fred, 167 Smoking, reducing, 71-73 Social Choice and Individual Values (Arrow), 469 Social cost, 198 monopoly’s profit, 313 Social insurance, 423 Social insurance taxes, 236 Social Security, 125, 236, 248 budget deficit and, 238–240 federal spending and, 237 rise in government spending for, 238–239 tax, 162, 167 Society decisions faced by, 3–4 faces short-run trade-off between inflation and unemployment, 15 monopolistic competition and welfare of, 336–337 prisoners’ dilemma and welfare of, 358 Soltas, Evan, 318 South Africa, income inequality in, 416 South Korea trade and distribution of income, 185 unilateral approach to free trade, 187 Soviet Union arms race and Cold War, 356–357 collapse of communism in, 10 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 494 Index Specialization driving force of, 52–58 economies of scale and, 273 trade and, 50–51 Spending and taxes, blur between, 250–251 Sports, discrimination in, 407–408 Standard of living determinants of, 13 relationship between productivity and, 13 State government, 240–241 receipts for, 240–241 spendings for, 241 Steam, 33 Stigler, George, 321 Stiglitz, Joseph E., 208 Stockman, David, 165 Strike, 403 Subsidies market-based policy, 203–205 rent, 120–121 wage, 120–121 Substitutes, 70 cross-price elasticity of demand, 98 perfect, 441 price elasticity of demand, 90 Substitution effect, 446, 446–448 marginal rate of, 438, 443 Sunk costs, 285, 286, 286–287 Superstar phenomenon, 402 Supplemental Security Income (SSI), 425 Supply, 73–76 See also Money supply applications of, 101–107 change in, 80–81 decrease in, 75, 81 elasticity of, 98–101 equilibrium of demand and, 77–79 excess, 77–78 increase in, 75, 102 individual, 74–75 inelastic, 98 input prices and, 75–76 of labor, 380–381 law of, 73 market vs individual, 74–75 number of sellers and, 76 perfectly elastic, 99 perfectly inelastic, 99 price elasticity of, 99, 100, 101 relationship between price and ­quantity supplied, 73–74 technology and, 76 Supply and demand, 77–83, 111–112 equilibrium of, 77 law of, 79 market forces of, 65 shift in, 82 versatility of, 375 Supply curve(s), 74 in competitive market, 289–295 monopoly and, 308 price elasticity of supply, 99–101 shifts in, 75–76 shifts in vs movements along, 80 supply schedule and, 73–74, 142 using to measure producer surplus, 142–143 variety of, 99–101 Supply schedule, 74 supply curve and, 73–74, 142 Supply-side economics and Laffer curve, 165 Surplus, 77 See also Budget surplus; ­Consumer surplus; Total surplus price floors and, 117 producer See Producer surplus Sweden Laffer curve, 165 tax burden in, 235 Synergies, 319 T Taiwan, trade and distribution of income in, 185 Tanzania, elephant poaching, 227 Tariff(s), 31, 177 compared to import quotas, 179 deadweight loss and, 178 effects of in international trade, 177–179 Tastes, shifts in the demand curve and, 70 Taxation, costs of, 155–156 Tax burden distribution of, 248–249 divided, 127 of U.S compared to European companies, 235 Tax cuts, under Ronald Reagan, 252 Tax debate, 166 Tax equity, 249–251 Taxes, 121–128, 242–246 ability-to-pay principle, 247 Barack Obama pledged to raise taxes, 253 benefits principle and gasoline, 246–247 on buyers, market outcomes and, 123–125 carbon, 208–209 consumption, 243–244 corporate income, 241, 250–251 corrective, 203 cuts under Reagan, 165 deadweight loss of taxation, 156–160, 163–165, 234, 243 equity and, 246–251 excise, 237 expenditures, 250–251 gas, 204–205 high tax rates, 166 incidence, 122 income, 243 individual income, 241 on labor, 162–163 Laffer curve and supply-side economics, 165–166 lump-sum tax, 245, 245–246 luxury, 127 negative income, 425–426 payroll, 125–126 Pigovian, 203 progressive, 247 property, 240–241 proportional, 247 regressive, 247 sales, 240–241 on sellers, market outcomes and, 122–123 social insurance, 236 value-added, 244 Tax expenditures, 250–251 Tax incidence, 122, 249–251 elasticity and, 126–128 flypaper theory of, 249–251 Tax rates average, 245 marginal, 245 Tax revenue, 157, 163–166 Tax systems, 247 administrative burden of, 244–245 design of, 233–234 Team Fortress 2, 33 Technological change, 379 Technological knowledge specific, 219 Technology demand for skilled and unskilled labor and, 397–399 shifts in supply curve and, 76 spillovers, 201–202 Teenage labor market, minimum wage and, 118–119 Temporary Assistance for Needy Families (TANF), 220, 425 Textile market, 172–187 Theory, 20–21 Theory of Justice (Rawls), 422 Time horizon, price elasticity of demand, 91 Time-series graph, 37, 38 Tit-for-tat strategy, 359 Toll roads, 224–225 Total cost, 260, 274 average, 267, 274 production function and, 263–265 Total revenue, 94, 95, 260 along a linear demand curve, 96–97 for competitive firm, 281 monopoly, 304, 305 price elasticity of demand and, 94–96 Total surplus, 145, 147 Tradable pollution permits, 205–207 Trade See also Free trade; Gains from trade; International trade agreements and World Trade Organization, 187 benefits of, 10 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it comparative advantage and, 53–54 deadweight losses and gains from, 159–160 equilibrium without international, 172–173 interdependence and gains from, 47–48 price of, 54 restraint of, 360 specialization and, 50–51 Trade barriers, 31 Trade-offs, 4–5 between equity and efficiency, 252–253 between inflation and unemployment, 15 policy decisions and, 28 production possibilities frontier and, 24–26 Trade restrictions arguments for, 182–187 infant-industry argument for, 185–186 jobs argument for, 183–184 national-security argument, 184–185 protection-as-a-bargaining-chip argument, 186–187 tariffs, 31 unfair-competition argument for, 186 Traffic, congested roads as public goods or common resources, 226 Tragedy of the Commons, 223, 223–225 Transaction costs, 211 Transfer payments, 237, 248 Transitivity, 468, 469 Truman, Harry, 28–29 Tying, 363–364 Tyranny of market, 338–339 Tyranny of the Market, The (Waldfogel), 338 U Uganda, elephant poaching, 227 Ultimatum game, 474 Underground economy, 163 Unemployment short-run trade-off between inflation and, 15 Unfair-competition argument for trade restrictions, 186 Union, 402 determinant of equilibrium wages, 402–403 United Arab Emirates, OPEC as cartel, 356 United Kingdom income inequality in, 416 tax burden in, 235 United States carbon tax, 208–209 distribution of income in, 415 Index income inequality in, 414–416 inflation in, 14 international trade with, 57–58 living standards in, 13 NAFTA and, 187 tax burden compared to European countries, 235 tax rate, 166 trade and distribution of income, 184–185 trade restrictions, 181 various laws to manage use of fish and other wildlife, 226 Unsafe at Any Speed (Nader), U-shaped average total cost, 269–270 U.S Justice Department, 360, 363–364 U.S Supreme Court, antitrust laws, 319 Utilitarianism, 421, 421–422 Utility, 421, 443 Utility theory, 476–477 V Value-added (VAT) tax, 244 Value of human life, cost-benefit analysis, 222–223 Value of marginal product, 377, 377–378 Value pricing, 224–225 Values, differences among economists in, 31 Variable costs, 266–267, 267, 274 average, 268, 274 Variables graphs of single, 37–38 graphs of two, 38–39 omitted, 43–44 that influence buyers, 71 that influence sellers, 76 Variable tolling, 224–225 Varian, Hal R., 408–409 Varoufakis, Yanis, 33 Venezuela, OPEC as cartel, 356 Vertical equity, 247 Video games, economics of, 33 Voting systems, 468–469 Arrow’s impossibility theorem, 469 Condorcet voting paradox, 467–468 median voter theorem, 469–471 W Wages ability, effort, and chance, 399–400 adverse selection and, 464 beauty and, 400–401 495 Black Death and, 389 compensating differentials, 396 determinants of equilibrium, 396–403 education and, 397 efficiency, 402–403 free trade and, 184–185 human capital, 396–397 immigration and, 384–385 labor supply and, 450–453 minimum, 117–119 minimum-wage laws, unions, and ­efficiency wages, 402–403, 404-405 productivity and, 384–386 signaling, 401 superstar phenomenon, 402 Wage subsidies, 120–121 Waldfogel, Joel, 338–339 Wealth of Nations, The (Smith), 11, 361 Weil, David N., 495 Welfare, 237, 248, 425, 427 effects of free trade, 174 effects of tariffs, 177–179 policies to reduce poverty, 425 tax affects, 158–159 Welfare cost of monopoly, 310–313 deadweight loss, 311–313 Welfare economics, 135, 136–151, 157–159, 197, 313 Willingness to pay, 136, 136–137, 315 Willingness to sell, cost and, 141–142 Women, gender differences in ­competition, 408–409 Workfare, 427 Work incentives, antipoverty programs and, 427 World price, 173 World Trade Organization (WTO), 181, 187 trade agreements and, 187 X X-coordinate, 38 Y Y-coordinate, 38 Z Zero economic profit, 334 Zero profit competitive firms stay in business with, 292–293 condition, 336 equilibrium, 292–293 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Suggestions for Summer Reading If you enjoyed the economics course that you just finished, you might like to read more about economic issues in the following books Abijit Banerjee and Esther Duflo William Breit and Barry T Hirsch Poor Economics Lives of the Laureates (New York: Public Affairs, 2011) (Cambridge, MA: MIT Press, 2009) Two prominent development economists offer their proposal on how to fight global poverty Twenty-three winners of the Nobel Prize in Economics offer autobiographical essays about their life and work Yoram Bauman and Grady Klein Bryan Caplan The Cartoon Introduction to Economics The Myth of the Rational Voter: Why Democracies Choose Bad Policies (New York: Hill and Wang, 2010) Basic economic principles, with humor Nariman Behravesh Spin-Free Economics (New York: McGraw-Hill, 2008) A straightforward guide to major economic policy debates Alan Blinder After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (London: The Penguin Press HC, 2013) A former vice chair of the Federal Reserve offers his take on what we have learned from the financial crisis that shook the world in 2008 and 2009 (Princeton, NJ: Princeton University Press, 2008) An economist asks why elected leaders often fail to follow the policies that economists recommend Paul Collier The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It (New York: Oxford University Press, 2007) A former research director at the World Bank offers his insights into how to help the world’s poor Avinash Dixit and Barry Nalebuff The Art of Strategy: A Game Theorist’s Guide to Success in Business and Life (New York: Norton, 2008) This introduction to game theory discusses how all people—from corporate executives to criminals under arrest—should and make strategic decisions Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it [...]... is a study of mankind in the ordinary business of life.” So wrote Alfred Marshall, the great 19th-century economist, in his textbook, Principles of Economics Although we have learned much about the economy since Marshall’s time, this definition of economics is as true today as it was in 1890, when the first edition of his text was published Why should you, as a student at the beginning of the 21st... that guide the allocation of society’s resources An understanding of economics will help you carry out that responsibility And who knows: Perhaps someday you will end up as one of those policymakers yourself Thus, the principles of economics can be applied in many of life’s situations Whether the future finds you reading the newspaper, running a business, or sitting in the Oval Office, you will be glad... A&M International University Debasis Rooj, Kishwaukee College Larry Ross, University of Alaska Jeff Rubin, Rutgers University–New Brunswick Jason C Rudbeck, University of Georgia Jeff Ruggiero, University of Dayton Robert Rycroft, University of Mary Washington Allen Sanderson, University of Chicago Nese Sara, University of Cincinnati Naveen Sarna, Northern Virginia Community College–Alexandria Eric Sartell,... 288 14-2f Measuring Profit in Our Graph for the Competitive Firm  288 Part V  Firm Behavior and the Organization of Industry  257 Chapter 13 The Costs of Production  259 13-1 What Are Costs?  260 13-1a Total Revenue, Total Cost, and Profit  260 13-1b Costs as Opportunity Costs  260 13-1c The Cost of Capital as an Opportunity Cost  261 13-1d Economic Profit versus Accounting Profit  262 13-2 Production... about the economy of Los Angeles, the United States, or the whole world, an economy is just a group of people dealing with one another as they go about their lives Because the behavior of an economy reflects the behavior of the individuals who make up the economy, we begin our study of economics with four principles about individual decision making 1-1a Principle 1: People Face Trade-offs You may have... 1 TEN PRINCIPLES OF ECONOMICS When people are grouped into societies, they face different kinds of trade-offs One classic trade-off is between “guns and butter.” The more a society spends on national defense (guns) to protect its shores from foreign aggressors, the less it can spend on consumer goods (butter) to raise the standard of living at home Also important in modern society is the trade-off between... available to them Our study of economics, therefore, starts by acknowledging life’s trade-offs efficiency the property of society getting the most it can from its scarce resources equality the property of distributing economic prosperity uniformly among the members of society 1-1b Principle 2: The Cost of Something Is What You Give Up to Get It Because people face trade-offs, making decisions requires... reason to study economics is that it will give you a better understanding of both the potential and the limits of economic policy Economic questions are always on the minds of policymakers in mayors’ offices, governors’ mansions, and the White House What are the burdens associated with alternative forms of taxation? What are the effects of free trade with other countries? What is the best way to protect... users of this book The rest of the Cengage team was also consistently professional, enthusiastic, and dedicated I am grateful also to Lisa Mogilanski and Alex Sareyan, two star Harvard undergraduates, who helped me refine the manuscript and check the page proofs for this edition As always, I must thank my “in-house” editor, Deborah Mankiw As the first reader of most things I write, she continued to offer... 97 5-2 The Elasticity of Supply  98 5-2a The Price Elasticity of Supply and Its Determinants  98 5-2b Computing the Price Elasticity of Supply  99 5-2c The Variety of Supply Curves  99 Part II  How Markets Work  63 Chapter 4 The Market Forces of Supply and Demand  65 4-1 Markets and Competition  66 4-1a What Is a Market?  66 4-1b What Is Competition?  66 5-3 Three Applications of Supply, Demand, and ... pay for the factors of production, such as the wages of their workers What’s left is the profit of the firm owners, who themselves are members of households Let’s take a tour of the circular flow... Ross, University of Alaska Jeff Rubin, Rutgers University–New Brunswick Jason C Rudbeck, University of Georgia Jeff Ruggiero, University of Dayton Robert Rycroft, University of Mary Washington... 14-1a The Meaning of Competition  280 14-1b The Revenue of a Competitive Firm  280 14-2 Profit Maximization and the Competitive Firm’s Supply Curve  282 14-2a A Simple Example of Profit Maximization