Principles of Microeconomics Seventh Edition Fred M Gottheil University of Illinois Australia Brazil Japan Korea Mexico Singapore Spain United Kingdom United States Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part To my wife, Diane To my children, Lisa and Joshua, who grew up together, not just as sister and brother, but as best friends Principles of Microeconomics, 7e Fred M Gottheil ©2013, 2008 Cengage, a part of the Cengage Learning Cengage, the Star logo, and Atomic Dog are trademarks used herein under license Senior Acquisition Editor: Steve Scoble ALL RIGHTS RESERVED No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution or information storage and retrieval systems—without the written permission of the publisher Senior Marketing Manager: John Carey Managing Editor: Greg Albert Marketing Coordinator: Ilyssa Harbatkin Production/Manufacturing Manager: Donna M Brown For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 Rights and Permissions Specialists: Todd Osborne For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions Further permissions questions can be emailed to permissionrequest@cengage.com Production Editor: K.A Espy Cover Image: © Thinkstock, © Fuse/Thinkstock, © Hemera/Thinkstock, © istockphoto/Thinkstock Composition House: MPS Limited Library of Congress Control Number: 2012947868 BOOK ISBN 13: 978-1-2850-6444-4 BOOK ISBN 10: 1-2850-6444-5 South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning is a leading provider of customized learning solutions with office locations around the globe, including Singapore, the United Kingdom, Australia, Mexico, Brazil, and Japan Locate your local office at: international.cengage.com/region Cengage Learning products are represented in Canada by Nelson Education, Ltd For your lifelong learning solutions, visit academic.cengage.com Visit our corporate web site at cengage.com International Divisions List Asia (Including India): Latin America: UK/Europe/Middle East/Africa: Thomson Learning (a division of Thomson Asia Pte Ltd) Shenton Way #01-01 UIC Building Singapore 068808 Tel: (65) 6410-1200 Fax: (65) 6410-1208 Thomson Learning Seneca 53 Colonia Polano 11560 Mexico, D.F., Mexico Tel (525) 281-2906 Fax (525) 281-2656 Thomson Learning High Holborn House 50-51 Bedford Row London, WC1R 4LR United Kingdom Tel 44 (020) 7067-2500 Fax 44 (020) 7067-2600 Australia/New Zealand: Thomson Nelson 1120 Birchmount Road Toronto, Ontario Canada M1K 5G4 Tel (416) 752-9100 Fax (416) 752-8102 Thomson Learning Australia 102 Dodds Street Southbank, Victoria 3006 Australia Canada: Spain (Includes Portugal): Thomson Paraninfo Calle Magallanes 25 28015 Madrid España Tel 34 (0)91 446-3350 Fax 34 (0)91 445-621 Printed in the United States of America 09 08 07 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Brief Contents PART THE BASICS OF ECONOMIC ANALYSIS INTRODUCTION PRODUCTION POSSIBILITIES AND OPPORTUNITY COSTS DEMAND AND SUPPLY 52 27 PART INTRODUCTION TO MICROECONOMICS 81 ELASTICITY 82 HAPPINESS, UTILITY, AND CONSUMER CHOICE 108 PRICE CEILINGS AND PRICE FLOORS ENTREPRENEURSHIP AND BUSINESS OWNERSHIP PART THE MICROECONOMICS OF PRODUCT MARKETS 135 156 173 COSTS OF PRODUCTION MAXIMIZING PROFIT 10 IDENTIFYING MARKETS AND MARKET STRUCTURES 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION 175 203 223 12 PRICE AND OUTPUT DETERMINATION UNDER OLIGOPOLY 275 13 ANTITRUST AND REGULATION 303 14 EXTERNALITIES, MARKET FAILURE, AND PUBLIC CHOICE 331 249 PART THE MICROECONOMICS OF FACTOR MARKETS 355 15 WAGE RATES IN COMPETITIVE LABOR MARKETS 16 WAGES AND EMPLOYMENT: MONOPSONY AND LABOR UNIONS 357 17 INTEREST, RENT, AND PROFIT 18 INCOME DISTRIBUTION AND POVERTY 410 431 390 PART THE WORLD ECONOMY 457 19 INTERNATIONAL TRADE 459 20 EXCHANGE RATES, BALANCE OF PAYMENTS, AND INTERNATIONAL DEBT 488 21 THE ECONOMIC PROBLEMS OF LESSDEVELOPED ECONOMIES 513 PRACTICE TESTS ANSWER KEY GLOSSARY INDEX AK-1 G-1 I-1 v Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Contents Learning Guide xvi Letter to Students xviii Farewell xxvi Author xxix Acknowledgments xxx PART THE BASICS OF ECONOMIC ANALYSIS INTRODUCTION No One Ever Made an Ounce of Earth Are We Running Out of Natural Resources? Renewable and Nonrenewable Natural Resources Historical Perspective: Coal Then (1865) and Now (2011) How Do You Satisfy Insatiable Wants? Scarcity Forces Us to Make Choices What Is Economics? PRODUCTION POSSIBILITIES AND OPPORTUNITY COSTS Factors of Production Economics Is Part of Social Science Using Economic Models Interdisciplinary Perspective: What Jaya Lewis’ Drawing and the Circular Flow Model Have In Common Maslow and Model Building The Circular Flow Model of Goods and Money Interdisciplinary Perspective: Honey Bees and the Circular Flow Model Microeconomics and Macroeconomics 10 Theoretical Perspective: Consumer Sovereignty and Adams Smith’s “Invisible Hand” 11 Positive and Normative Economics 12 What Do Economists Know? The Only Thing We Have to Fear Is Fear Itself U-Shaped and Hill-Shaped Curves 23 Vertical and Horizontal Curves 24 28 30 Opportunity Cost 31 The Law of Increasing Costs 32 Applied Perspective: Did You Ever Find a Penny on a Sidewalk? 33 Once Rich, It’s Easy to Get Richer 34 Once Poor, It’s Easy to Stay Poor 35 The Productive Power of Advanced Technology 12 35 Applied Perspective: China’s Bold Move along Its Production Possibility Curve: More Capital, Less Consumption 36 Applied Perspective: The Production of Human Capital 37 The Indestructible Nature of Ideas 38 National Security, Conventional War, and Terrorism in the 21st Century 39 Historical Perspective: The Destruction and Reconstruction of Rotterdam 42 18 Possibilities, Impossibilities, and Less Than Possibilities 42 18 Production Possibilities and Economic Specialization 43 A Graphic Language 18 Know Your Point of Reference 18 Measuring Distances on Graphs 19 Graphing Relationships 20 Connecting Points to Form Curves 20 The Slope of a Curve 27 Labor 28 Capital 29 Land 29 Entrepreneurship 30 Robinson Crusoe’s Production Possibilities Nobel Laureates in Economics 12 Chapter Review 14 Key Terms 15 Questions 15 Practice Problem 16 Economic Consultants: Economic Research and Analysis by Students for Professionals 16 Practice Test 17 APPENDIX: ON READING GRAPHS Measuring the Slope of a Point on a Curve 25 Key Terms 26 Specialization on the Island 44 International Specialization 44 The Principle of Comparative Advantage 44 22 The Universality of the Production Possibilities Model 46 Chapter Review 47 Key Terms 47 vii Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part CONTENTS viii Questions 48 Practice Problems 48 Economic Consultants: Economic Research and Analysis by Students for Professionals 49 Practice Test 50 DEMAND AND SUPPLY Changes in Supply Changes Changes Changes Changes 52 Measuring Consumer Willingness 53 Measuring Consumer Demand 53 Measuring Individual Demand 53 Measuring Market Demand 54 Measuring Supply 54 Market-Day Supply 55 Determining Equilibrium Price 55 Suppose the Price Is $8 56 Suppose the Price Is $4 57 Price Always Tends Toward Equilibrium 57 Market-Day, Short-Run, and Long-Run Supply 58 60 63 Technology 64 Resource Prices 64 the Prices of Other Goods 65 the Number of Suppliers 65 Why the Price of an Orange Is 30 Cents at the Supermarket 65 Katrina and Gasoline Prices 67 Price as a Rationing Mechanism 68 Chapter Review 69 Key Terms 70 Questions 71 Practice Problems 71 Economic Consultants: Economic Research and Analysis by Students for Professionals 72 Practice Test 73 APPENDIX: THE MARKET FOR HUMAN ORGANS Theoretical Perspective: How Long Does It Take to Get to the Long Run? 60 Changes in Demand in in in in 74 How Much Is That Doggie in the Window? 74 The Case of the Guide Dog 75 From Dogs to Human Beings 76 The Market for Organ Transplants 76 Changes in Income 61 Changes in Taste 62 Changes in the Prices of Other Goods 62 Changes in Expectations About Future Prices 62 Changes in Population Size 62 A Change in Demand or a Change in Quantity Demanded? 63 Scalping Tickets at a Yankees’ Game 78 Key Term 79 Questions 79 Practice Problems 79 PART INTRODUCTION TO MICROECONOMICS 81 ELASTICITY Demand Sensitivities and Insensitivities 82 83 Cross Elasticity Expressing Demand Sensitivity Graphically 83 Are Our Demand Sensitivities Alike? 84 What Factors Influence Demand Sensitivity? Global Perspective: Global Elasticities of Demand for LDC Export Goods 93 84 Income Elasticity 96 Income Elasticity of Inferior Goods 98 Low-Priced Goods 85 Income Levels 85 Substitute Goods 86 Basic Goods 86 Linked Goods 87 Time to Adjust 87 Supply Elasticity From Sensitivity to Elasticity 87 Applied Perspective: Cross Elasticity in the Salmon Industry 99 Market-Day Supply Elasticity 99 Short-Run Supply Elasticity 100 Long-Run Supply Elasticity 100 Deriving Price Elasticities of Demand 88 Elasticities and Taxation Elasticity and Total Revenue 90 Elasticity and the Relevant Price Range 91 Estimates of Price Elasticities of Demand 92 Per-Unit Tax Shifts the Supply Curve 102 The Ultimate Per-Unit Tax? 102 Chapter Review 102 Key Terms 103 Questions 103 Practice Problems 104 Economic Consultants: Economic Research and Analysis by Students for Professionals 105 Practice Test 106 Price Elasticities for Selected Agricultural and Nonagricultural Goods 92 Short-Run and Long-Run Elasticities 92 93 Cross Elasticities among Substitute Goods 93 Cross Elasticities among Complementary Goods 95 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part 98 100 CONTENTS HAPPINESS, UTILITY, AND CONSUMER CHOICE Happiness and Utility Did the Price Control System Work? 140 108 There’s Also Reason for Price Floors 109 Setting a Floor on Price 142 Living with Chronic Excess Supply 142 The Law of Diminishing Marginal Utility 110 The Water–Diamond Paradox 111 French Cuisine and Marginal Utility 112 Interdisciplinary Perspective: A Philosophical Critique on the Marginal Utility of Money 112 Interdisciplinary Perspective: Napoleon and the Law of Diminishing Marginal Utility 113 Utility and the Law of Demand 113 Making Selections from a Given Budget 114 Theoretical Perspective: Are White Rats Rational Consumers? 116 The MU/P Equalization Principle 117 The MU/P Equalization Principle and the Law of Demand 117 Creating Consumer Surplus 119 Creating Producer Surplus 119 Changes in Consumer and Producer Surplus 120 Interpersonal Comparisons of Utility 121 Chapter Review 122 Key Terms 123 Questions 123 Practice Problems 123 Economic Consultants: Economic Research and Analysis by Students for Professionals 124 Practice Test 125 127 127 130 Price Changes Shift the Budget Constraint 131 Income Changes, Too, Shift the Budget Constraint 131 Deriving the Demand Curve for Amusement Goods 132 Relating Quantity Demanded to Price 133 Appendix Review 134 Questions 134 135 The Fishing Economy, Once Again 136 Now, a National Security Crisis 136 Mobilizing Fishermen 136 Who Can Afford a $10 Fish? 138 Living with Chronic Excess Demand 139 Price Ceilings and Ration Coupons during World War II 139 Global Perspective: Egypt and Tunisia and the Winter of Their Discontent 140 The Effect of Technological Change on Agricultural Supply 144 To Intervene or Not to Intervene: That Is the Question 145 Parity Pricing as a Price Floor 145 The Farm Bill of 2008 A Long Tradition of Price Ceilings and Price Floors 150 151 Chapter Review 151 Key Terms 152 Questions 152 Practice Problems 153 Economic Consultants: Economic Research and Analysis by Students for Professionals 153 Practice Test 154 156 Entrepreneurial Traits 157 Entrepreneurs and Business Ownership 157 Sole Proprietorship 158 Interdisciplinary Perspective: Entrepreneurship: Overcoming Adversity 159 Partnership 159 Corporation 160 The Security of Limited Liability 160 Setting Up the Corporation 160 The Sky’s the Limit in Stock Issues 161 Applied Perspective: Entrepreneurship and Häagen Dazs 162 The Issue of Corporate Governance 163 165 Theoretical Perspective: Want to Minimize Risk? Try a Mutual Fund 166 Profile of Stockholders 166 Indirect Stock Ownership 167 International and Multinational Corporations 138 147 The Freedom to Farm Act of 1996 148 Interdisciplinary Perspective: Politics at Work: Who Gets the Farm Subsidies? 149 Global Perspective: Farm Subsidies Around the World 150 How U.S Business Is Organized PRICE CEILINGS AND PRICE FLOORS Setting a Ceiling on Price 143 ENTREPRENEURSHIP AND BUSINESS OWNERSHIP Marginal Rate of Substitution 128 Constructing Indifference Maps 129 The Budget Constraint Agriculture’s Technological Revolution History of Government Farm Bills 118 Identifying Equally Preferred Sets of Goods 141 The Invention of Parity Pricing 145 The MU/P Guide to Auction Bidding APPENDIX: THE INDIFFERENCE CURVE APPROACH TO DEMAND CURVES ix Chapter Review 169 Key Terms 170 Questions 170 Economic Consultants: Economic Research and Analysis by Students for Professionals 171 Practice Test 172 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part 168 CONTENTS x PART THE MICROECONOMICS OF PRODUCT MARKETS 173 COSTS OF PRODUCTION Getting into the Fishing Business Total Fixed Costs 175 176 176 Committing to Fixed Costs 176 Calculating Fixed Costs 176 Total Variable Costs 178 The Cost of Labor 179 Theoretical Perspective: The cost of Labor and the Law of Diminishing Returns 180 The Cost of Fuel 181 Interdisciplinary Perspective: Economics of Scale and Nathaniel Hawthorne’s The Scarlet Letter 181 The Costs of Bait, Ice, and Equipment 182 Adding Up the Variable Costs 182 What’s the Average Cost of Producing Fish? 183 Average Fixed and Average Variable Costs 185 Average Total Cost 185 185 Theoretical Perspective: Explicit and Implicit Costs 187 Economies and Diseconomies of Scale 188 212 Do Firms Really Behave This Way? 214 216 Historical Perspective: Adam Smith: On the Pursuit of Wealth 217 Chapter Review 217 Key Terms 218 Questions 218 Practice Problems 219 Economic Consultants: Economic Research and Analysis by Students for Professionals 220 Practice Test 221 10 IDENTIFYING MARKETS AND MARKET STRUCTURES Courts and Markets 223 224 Is a Rose Is a Rose Is a Rose? 224 Movies and Entertainment 224 Automobiles and Transportation 224 225 Interdisciplinary Perspective: The Diamond Necklace 226 195 196 What Businesspeople Think About the Character of Their Average Total Costs 197 Chapter Review 199 Key Terms 199 Questions 199 Practice Problems 200 Economic Consultants: Economic Research and Analysis by Students for Professionals 201 Practice Test 202 Cross Elasticity Defines the Market 226 Cross Elasticities in the Flower Market 227 Applied Perspective: Redefining Nike: From Shoes to Swoosh 228 How High Is High Cross Elasticity? 228 Markets and Market Structures 229 The World of Monopoly 230 Size Is Not Important 230 The Firm Is the Industry 231 No Entry into the Industry 231 Historical Perspective: Shutting Out Foreign Competition 234 MAXIMIZING PROFIT Entrepreneurs and Profit Making 203 204 Profit-Maximizing Fishermen 205 Profit Depends on Price and Costs 205 Should You Produce More Fish? 205 Interdisciplinary Perspective: Simple Simon and Profit Maximization 206 Focusing on the Margin 207 Total, Average, and Marginal Revenue 207 Maximizing Profit and Minimizing Loss 193 What Is True for the Fishing Industry Is True for All Industries The MR ¼ MC Rule 211 190 Rightsizing or Downsizing Along the Long-Run Average Total Cost Curve 195 Outsourcing How Much Profit Is Maximum Profit? Defining the Relevant Market Applied Perspective: Big, Bigger, Biggest 193 Long-Run and Short-Run Average Total Cost Curves 210 What Survives of Marginalism? 183 Marginal Cost Applying the MR ¼ MC Rule The Lester–Machlup Controversy 214 Empire Building 214 Interdisciplinary Perspective: Profit Maximization and Greed 215 Total Cost To Produce or Not to Produce, That Is the Question Theoretical Perspective: Drawing the Marginal Revenue Curve 209 206 The World of Monopolistic Competition and Oligopoly 234 No Easy Entry, But Entry 235 Close Substitutes 235 As Firms Enter, Demand Curve Becomes More Elastic 236 Interdisciplinary Perspective: Loyal to a Trash Bag? 238 The Role of Advertising 238 The World of Perfect Competition Perfect Substitutes 240 Insignificant Market Share 240 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part 240 CONTENTS Free Entry 241 Firms Cannot Influence Price 241 Putting Together a Scorecard on Market Structures 12 PRICE AND OUTPUT DETERMINATION UNDER OLIGOPOLY Concentration Ratios 242 Chapter Review 243 Key Terms 244 Questions 244 Practice Problems 244 Economic Consultants: Economic Research and Analysis by Students for Professionals 246 Practice Test 247 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION Monopoly Price and Output 250 The Firm Is the Industry 250 No Entry 251 Finding the Profit-Maximizing Price and Quantity Combination 251 Less than Maximum Efficiency 252 Price and Output in Monopolistic Competition Firm Entry 253 Product Differentiation 253 Short-Run Equilibrium 254 Long-Run Equilibrium 254 Theoretical Perspective: Patents and Monopoly’s Deadweight Loss 256 Making Normal Profit 256 Price and Output in Perfect Competition 257 From Product Differentiation to Identical Goods 257 Applied Perspective: Substitute Good: Close and Even Closer 258 Short-Run Equilibrium 260 Interdisciplinary Perspective: From Thomas Hardy’s The Mayor of Casterbridge 261 Long-Run Equilibrium 262 Maximum Efficiency 263 Lowest Prices and Greatest Output 264 The Firm’s Supply Curve 264 The Market’s Supply Curve 265 Innovators and Imitators in the Perfectly Competitive Market 265 Historical Perspective: Perfect Competition in the 17th-Century Glass Engraving Industry: Imitation Galore 266 Does Competition Always Generate Lowest Prices and Highest Output? The Schumpeter Hypothesis 267 Some, But Not All, Economists Agree 269 Chapter Review 269 Key Terms 270 Questions 270 Practice Problems 271 Economic Consultants: Economic Research and Analysis by Students for Professionals 272 Practice Test 273 267 276 281 Horizontal Mergers 282 Vertical Mergers 282 Global Perspective: Canada: On Mergers and National Symbols 283 Conglomerate Mergers 283 Mergers Without Merging 284 Global Perspective: Cartel OPEC Cartel OPEC Cartel OPEC 285 Concentration Ratios and Oligopoly Prices 286 Theories of Oligopoly Pricing 253 275 The Herfindahl-Hirschman Index 277 Global Perspective: Banking and the Herfindhal-Hirschmann Index 277 Tracking Concentration Ratios 278 How Oligopolistic Is the U.S Economy? 279 Is the U.S Economy Becoming More Oligopolistic? 279 Concentration Ratios and Market Power 279 Does the United States Have a Monopoly on Oligopoly? 281 Concentrating the Concentration 249 xi 287 Game Theory Pricing 287 Suppose Dell Hires You As Its Price-Maker 288 Protecting Yourself against the Worst-Case Scenario 288 Pursuing an Alternative Strategy: Tit-for-Tat 289 Let’s Not Play Games, Let’s Just Collude 289 Historical Perspective: The Prisoners’ Dilemma 290 Godfathers and Price Leadership 290 The Kinked Demand Curve 292 Brand Multiplication 294 Price Discrimination 294 Segmenting the Market 295 Price Discrimination Almost Everywhere 296 Gray Area of Price Discrimination 297 Chapter Review 297 Key Terms 298 Questions 298 Practice Problems 299 Economic Consultants: Economic Research and Analysis by Students for Professionals 300 Practice Test 301 13 ANTITRUST AND REGULATION Learning to Cope Without Perfect Competition 303 304 Regulating Monopoly 304 Nationalizing the Industry 305 Taking a Laissez-Faire Approach 305 Encouraging Concentration 305 Interdisciplinary Perspective: Freedom and Regulation 306 Splitting Up Monopoly 306 The Economics of Regulation Regulating a City Bus Monopoly 307 Setting a “Fair” Price: P = ATC 308 Applying Marginal Cost Pricing: P = MC 309 Who Regulates the Regulators? 310 The Economics of Deregulation 310 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part 307 CONTENTS xii The Economics of Nationalization 312 Global Perspective: Countries and Airlines: Nationalization, Denationalization and Never Having Nationalized 312 Price Options Facing Government 313 Can the Government Run Industry Efficiently? 313 The Economics of Laissez-Faire 314 The Theory of Contestable Markets 314 Theoretical Perspective: Wal-Mart: Superman or Captain Evil? 315 The Theory of Countervailing Power 316 The Theory of Creative Destruction 316 The Economics of Encouraging Monopoly 317 The Economics of Splitting Up Monopoly 318 The History of Antitrust Legislation 318 The Sherman Antitrust Act of 1890 318 Historical Perspective: Chronology of Key Acts and Court Decisions 319 The Clayton Act of 1914 320 The Federal Trade Commission Act of 1914 320 Plugging the Loopholes 321 Funding Antitrust Legislation 321 Antitrust Goes to Court 321 The Rule of Reason 322 The Per Se Criterion 322 Rethinking the Reinterpretation 322 Conglomerates and the Court 323 But FTC and Justice Are Still in Business 323 Using the Herfindahl-Hirschman Index 323 Applied Perspective: How Do You Feel about Pharmaceutical Commercials on Television? 325 Applied Perspective: FTC in Cyberspace 325 Going After the Precedent 325 Do We Have a Policy on Monopoly? Economic Externalities 333 Externalities and Property Rights Applied Perspective: Celebrities and Property Rights: A Material View 334 Why Economists are Interested in Externalities 334 Defining Market Failure 335 Applied Perspective: Tragedy of the Commons 335 Too Many Chickens, Too Low a Price 336 Global Perspective: Canadians Know That Acid Rain Needs No Passport 338 What about the Pollution? 338 339 Correcting Market Failure Government’s Attempt to Correct Market Failure 339 Creating New Property Forms 339 Levying a Pollution Compensation Tax 340 Creating Obligatory Controls 340 The Environmental Protection Agency 340 Theoretical Perspective: Coase Theorem and Market Failure 341 Controlling Pollution by Allowing Pollution Trading 342 Asymmetric Information and Market Failure 342 Moral Hazard and Market Failure 343 Externalities and Public Goods 344 Positive Externalities and Market Failure 344 Positive Externalities and Public Goods 345 Public Goods and Near-Public Goods 346 346 Public Goods and Public Choice 325 Chapter Review 326 Key Terms 327 Questions 327 Economic Consultants: Economic Research and Analysis by Students for Professionals 328 Practice Test 329 14 EXTERNALITIES, MARKET FAILURE, AND PUBLIC CHOICE Identifying Positive Externalities 332 Voting Your Demand for Public Goods 347 Government Failure 347 Living with Government Failure 349 Chapter Review 349 Key Terms 350 Questions 350 Practice Problems 350 Economic Consultants: Economic Research and Analysis by Students for Professionals 351 Practice Test 352 331 332 Identifying Negative Externalities 332 PART THE MICROECONOMICS OF FACTOR MARKETS 355 15 WAGE RATES IN COMPETITIVE LABOR MARKETS You Load Sixteen Tons and What Do You Get? The Supply of Labor 357 358 Hiring Miners, One at a Time 358 Converting Tons into Revenue 360 Deriving the Firm’s Demand for Labor 361 Deriving Marginal Labor Cost 361 Demanding Miners Until MRP=w 362 What Shifts the Demand for Labor? 363 Industry Demand for Labor 365 366 Interdisciplinary Perspective: Bruce Springsteen on Work 367 What Shifts the Supply Curve for Labor? 367 The Backward-Bending Supply Curve 368 Deriving Equilibrium Wage Rates 369 Explaining Wage Rate Differentials 370 Narrowing Wage Rate Differences 370 Global Perspective: Immigrant Labor Supply: An American Tradition 373 Historical Perspective: The Iron Law of Wages: A 19th-Century View of Our Future 374 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part G-6 Find more at http://www.downloadslide.com GLOSSARY Personal income National income, plus income received but not earned, minus income earned but not received (Chapter 20) Positive economics A subset of economics that analyzes the way the economy actually operates (Chapter 1) Poverty threshold The level of income below which families are considered to be poor (Chapter 18) Present value The value today of the stream of expected future annual income a property generates The method of computing present value is to divide the annual income generated, R, by the rate of interest, r That is, PV ¼ R/r (Chapter 17) Price ceiling A maximum price set by government below the market-generated equilibrium price (Chapter 6) Price discrimination The practice of offering a specific good or service at different prices to different segments of the market (Chapter 12) Price elastic Quality of the range of a demand curve where elasticities of demand are greater than 1.0 (Chapter 4) Price elasticity of demand The ratio of the percentage change in quantity demanded to a percentage change in price Its numerical value expresses the percentage change in quantity demanded generated by a percent change in price (Chapter 4) Price elasticity of supply The ratio of the percentage change in quantity supplied to the percentage change in price (Chapter 4) Price floor A minimum price set by government above the market-generated equilibrium price (Chapter 6) Price inelastic Quality of the range of a demand curve where elasticities of demand are less than 1.0 (Chapter 4) Price leadership A firm whose price decisions are tacitly accepted and followed by other firms in the industry (Chapter 12) Price-maker A firm conscious of the fact that its own activity in the market affects price The firm has the ability to choose among combinations of price and output (Chapter 11) Price-taker A firm that views market price as a given and considers any activity on its own part as having no influence on that price (Chapter 11) Principal-agent problem A problem that arises when either demander or supplier in a labor market exercises an undisclosed personal interest or motive that undermines the efficacy of the market (Chapter 15) Producer surplus The difference between the minimum price a producer would be willing to accept for supplying a good or service and the market price (Chapter 5) Product differentiation The physical or perceived differences among goods in a market that make them close, but not perfect, substitutes for each other (Chapter 10) Production possibilities The various combinations of goods that can be produced in an economy when it uses its available resources and technology efficiently (Chapter 2) Profit Income earned by entrepreneurs (Chapters and 17) Profit maximization The primary goal of a firm: To achieve the most profit possible from its production and sale of goods or services (Chapter 9) Property rights The right to own a good or service and the right to receive the benefits that the use of the good or service provides (Chapter 14) Public choice The theory of collective decision making (Chapter 14) Public good A good whose benefits are not diminished even when additional people consume it and whose benefits cannot be withheld from anyone (Chapter 14) Q Quota A limit on the quantity of a specific good that can be imported (Chapter 19) R Ration coupon A coupon issued by the government, entitling the holder to purchase a specific quantity of a good at or below the price ceiling (Chapter 6) Reciprocity An agreement between countries in which trading privileges granted by one to the others are the same as those granted to it by the others (Chapter 19) Regulation Although ownership of the regulated firm remains in private hands, pricing and production decisions of the firm are monitored by a regulatory agency directly responsible to the government (Chapter 13) Relevant market The set of goods whose cross elasticities with others in the set are relatively high and whose cross elasticities with goods outside the set are relatively low (Chapter 10) Rent The difference between what a productive resource receives as payment for its use in production and the cost of bringing that resource into production (Chapter 17) Rent control Government-set price ceilings on rent (Chapter 6) Return to monopsony power The difference between the MRP and the wage rate of the last worker hired, multiplied by the number of workers hired (Chapter 16) Rightsizing Implementing a firm’s decision to adjust its plant size to produce in the most efficient manner its current volume of output (Chapter 8) Rule of reason A judicial standard or criterion by which a firm’s size within an industry is insufficient evidence for the court to rule against it in an antitrust suit Evidence must show that the firm actually used its size to violate antitrust laws (Chapter 13) S Scarcity The perpetual state of insufficiency of resources to satisfy people’s unlimited wants (Chapter 1) Short run The time interval during which producers are able to change the quantity of some but not all the resources they use to produce goods and services (Chapters and 8) Shutdown The cessation of the firm’s activity The firm’s loss minimization occurs at zero output (Chapter 9) Social cost The cost to society of producing a good This cost includes both the private costs associated with the good’s production and the externalities cost generated by its production (Chapter 14) Sole proprietorship A firm owned by one person who alone bears the responsibilities and unlimited liabilities of the firm (Chapter 7) Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Find more at http://www.downloadslide.com GLOSSARY Special-interest lobby A group organized to influence people in government concerning the costs and benefits of particular public goods (Chapter 14) Stakeholder Someone who has a personal and consequential interest in the viability of the firm (Chapter 9) Stock Ownership in a corporation, represented by shares that are claims on the firm’s assets and earnings (Chapter 7) Stockholder (shareholder) A person owning stock in a corporation, that is, a share of a corporation (Chapter 7) Strike The withholding of labor by a union when the collective bargaining process fails to produce a contract that is acceptable to the union (Chapter 16) Substitute goods Goods that can replace each other When the price of one increases, the demand for the other increases (Chapter 3) Supply curve A curve that depicts the relationship between price and quantity supplied (Chapter 3) Supply schedule A schedule showing the specific quantity of a good or service that suppliers are willing and able to provide at different prices (Chapter 3) G-7 Underground economy The unreported or illegal production of goods and services in the economy that is not counted in GDP (Chapter 20) Unilateral transfers Transfers of currency made by individuals, businesses, or government of one nation to individuals, businesses, or governments in other nations, with no designated return (Chapter 20) Union shop An arrangement in which a firm may hire nonunion labor, but every nonunion worker hired must join the union within a specified period of time (Chapter 16) Unit elastic Price elasticity is equal to 1.0 In this range, price cuts or increases not change total revenue (Chapter 4) Unlimited liability Personal responsibility of the owners for all debts incurred by sole proprietorships or partnerships The owners’ personal wealth is subject to appropriation to pay off the firm’s debt (Chapter 7) Util A hypothetical unit used to measure how much utility a person obtains from consuming a good (Chapter 5) Utility The satisfaction or enjoyment a person obtains from consuming a good (Chapter 5) T Tariff A tax on an imported good (Chapter 19) Terms of trade The amount of a good or service (export) that must be given up to buy a unit of another good or service (import) A country’s terms of trade are measured by the ratio of the country’s export prices to its import prices (Chapter 19) Third parties People upon whom externalities are imposed (Chapter 14) Tit-for-tat A pricing strategy in game theory in which a firm chooses a price and will change its price to match whatever price the competing firm chooses (Chapter 12) Total cost (TC) Cost to the firm that includes both fixed and variable costs (Chapter 8) Total labor cost Quantity of labor employed multiplied by the wage rate (Chapter 15) Total revenue (TR) The price of a good multiplied by the number of units sold (Chapters and 9) Total utility The total number of utils a person derives from consuming a specific quantity of a good (Chapter 5) U Unbalanced oligopoly An oligopoly in which the sales of the leading firms are distributed unevenly among them (Chapter 12) Underemployed resources The less-than-full utilization of a resource’s productive capabilities (Chapter 2) V Variable cost Cost that varies with the quantity of goods produced Variable costs include such items as wages and raw materials (Chapter 8) Vertical merger A merger between firms that have a supplier-purchaser relationship (Chapter 12) Vicious circle of poverty A country is poor because it does not produce capital goods It does not produce capital goods because it is poor (Chapter 2) W Wage rate The price of labor Typically, the wage rate is calculated in dollars per hour (Chapter 15) Wage-related rent The difference between what a resource receives and what it takes to bring the supply of that resource to market (Chapter 17) Wealth The accumulated assets owned by individuals (Chapter 18) World Trade Organization (WTO) The successor to GATT The WTO is the only global international organization dealing with the rules of trade between nations It promotes free trade Once negotiated and signed by member nations, WTO agreements are ratified by member nations’ parliaments (Chapter 19) Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Find more at http://www.downloadslide.com Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Find more at http://www.downloadslide.com Index A Absolute advantage, 45, 763–765 Abstraction, Academic model building, Maslow, Acid rain, 338 Acquisitions, monopoly and, 233–234 Adelman, M A., 420 Advantage absolute, 45, 763–765 comparative, 44–46, 763–765 Advertising deceptive, in cyberspace, 325 effect on firm’s demand curve, 239 role of, 238–240 Advocacy, 12 AFL-CIO immigration views, 402 merger, 400 women in unions, 404 Aging population, health care financing and, 452 Agricultural Adjustment Act, 145, 148 Agriculture effect of technological change on supply, 144–145 Farm Bill of 2008, 150–151 Farm Security and Rural Investment Act of 2002, 149–150 farm subsidies around the world, 150 Freedom to Farm Act of 1996, 148–150 government farm bills, 147–150 government intervention in, 145 growth of productivity in, 143 parity pricing as price floor, 145–147 subsidies, 145–147 technological revolution in, 143–144 Airline industry, deregulation of, 311 America Online (AOL) and Time Warner merger, 282 American Federation of Labor (AFL), 400 See also AFL-CIO American Telephone and Telegraph (AT&T), deregulation of, 311 Amusement goods, demand curve for, 132–134 Animal species, tool use by, 27–28 Antitrust policy, 318–321 chronology of, 319 Clayton Act, 320 court decisions on, 321–323 Federal Trade Commission Act, 320–321 funding, 321 Herfindahl-Hirschman index, 323–324 plugging loopholes in, 321 Sherman Antitrust Act, 318–320 Appreciation, 493–494 Arbitrage, 494 Aristotle, 335, 417, 432 Asian workers, wage rates of, 388 Assets foreign, in U.S, 502 U.S abroad, 502 Asymmetric information, 342–343 Auction bidding, 118 Australia exchange rates of, 493 Gini coefficient for, 440 Automobile emissions, 341 Automobiles, 224–225 Average fixed cost (AFC), 185 Average revenue (AR), 207 Average total cost (ATC), 183, 186 across industries, 196–197 business perspective on, 197–198 constant returns to scale, 190–193 curves on, 193–195 diseconomies of scale, 190–193 economies of scale, 190–193 less than maximum efficiency and, 252–253 long run, 195 long-run and short-run average total costs curves, 193–195 marginal cost and, 188–190 P = ATC rule, 308–309 profit and, 205 profit maximization and, 211–212 short run, 193–195 Average variable cost (AVC), 185 B Backward-bending supply curve of labor, 368–369 Backward linkages, 525 Balance of payments balance on capital account, 502 balance on current account, 498–502 deficits on, 504–505 interest rates, 504–505 problems, 502–504 U.S., 2010, 498 Balance of trade, 499, 500 Balance on current account balance of trade, 499 deficits on, 504–505 export of services, 499 import of services, 499 income payments on investments, 500 income receipts on investments, 499–500 merchandise exports, 498 merchandise imports, 499 unilateral transfers, 500–502 Balanced oligopoly, 280–281 Bank of America, 12 Baseball, monopsony power and, 396 Basic goods, 86 Baumol, William, 216 Beer industry, in Germany, 234 Belgium trade volume, 470 Berle, Adolf, 216 Big-push strategy, 523–524 Birth rate, China, 36 Black workers, wage rates of, 388 Bonds, corporate, 161 Brand loyalty, 237, 238 Brand multiplication, 294 Brandeis, Louis, 163–164 Brazil, 435–436 Brenner, Reuven, 159 Brown and Williamson, 343 Budget constraint, 130–132 income changes and, 131–132 price changes and, 131 I-1 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part I-2 Find more at http://www.downloadslide.com INDEX Budget deficits balance of payments and, 505 Bureau of Labor Statistics (BLS) women in unions, 404 Burnham, James, 216 Business Behavior and Economic Growth, 216 C Canada acid rain, 338 exchange rates of, 493 Gini coefficient for, 438 mergers and national symbols, 283 NAFTA, 479–480 US trade with, 470–471 wage rate in, 372 Canned pineapple industry, in Indonesia, 527 Capital defined, 29 human, 29 Capital equipment, 412 converting loanable funds to, 412 Capital goods, 29, 31 Carlyle, Thomas, 374 Carnegie, Andrew, 233–234, 282 Cartels, 284–286 government-sponsored, 286 Carter, Jimmy, 311 Cash assistance, on poverty, 449 Cause-and-effect relationship, Celebrities, property rights and, 334 Celler-Kefauver Merger Act, 321 CEO (chief executive officer), pay rate of, 164 CEO-to-worker ratio, wage rate, 164 Ceteris paribus, Change in demand, 60–63 future price expectations and, 62 income and, 61–62 population size and, 62–63 price of goods and, 62 taste changes and, 62 vs change in quantity demand, 63 Changes in quantity demanded, 53 vs change in demand, 63 Changes in supply number of suppliers and, 65 price of goods and, 65 resource prices and, 64–65 technology and, 64 Charles Edwards Coal Mining Company, 391, 394, 410 Chicken market, effect of externalities on, 336–337 China foreign exchange policy, 501 population policy, 36 US trade with, 470 Choices consumer sovereignty, scarcity, Chrysler, 239 Cigar Makers’ Union, 400 Cigarette market, 342–343 Cigarette taxes, 101–102 Circular flow model, 8–10 invisible hand in, 11 Civil Aeronautics Board (CAB), 310 Civil Rights Act of 1964, 403 Civil wars, in LDC, 518 Classical economics wage rate, 374 Clayton Act, 320 Close substitutes, 235–236, 258 Closed shop, 398 Coal, Coal Question, The (Jevons), Coase, Ronald, 341 Coase theorem, 341 Coca-Cola, 236–239 demand curve for, 237 Collective bargaining, 396–397 Collusion, 284, 289–290 Common good, self-interest versus, 335 Commons, tragedy of the, 335 Commonwealth v Hunt decision, 399 Comparable worth, 388 Comparative advantage, 44–46, 465–467 Competition See also Monopolistic competition; Perfect competition concentration ratio, 276–281 effect on price and output, 267–269 foreign, 473 invasion to energy market, 311 Competitive firm, cost structure, 259 Complementary goods, 62 cross elasticities among, 95–96 Concentration ratio, 276–281 defined, 276 Herfindahl-Hirschman index (HHI), 277–278, 323–324 market power and, 279–281 and oligopoly prices, 286–287 relationship with price, 286 tracking, 278–279 in U.S economy, 279, 281 Conglomerate mergers, 283, 323 Congress antiunion, 401 prolabor laws, 401 Congress of Industrial Organizations (CIO), 400 See also AFL-CIO merger with AFL, 400 Conservation principle, Constant returns to scale, 191–193, 267 Consumer behaviour, MU/P equalization principle, 117–119 Consumer demand, measuring, 53–54 Consumer sovereignty, 6, 11 Consumer surplus changes in, 120–121 creating, 119 defined, 119 Consumers willingness to buy and sell, 53 Consumption goods, 31 postponement of, 414 Contestable markets defined, 305 theory of, 314–315 Copper, depletion of, 3–4 Corn laws, 421 Corporate bonds, 161 Corporate governance, 163–164 Corporations, 160–164 board of directors, 164 bonds, 161 CEO earnings, 164 corporate governance, 163–164 defined, 160 international and multinational, 168–169 limited liability, 160 number of, 165 ownership of, 160 setting up, 160–161 stock issues, 161–163 takeover threat, 163 taxation of, 163 Cost structure, of competitive firms, 259 Costs See also Production costs average fixed cost, 183–185 average total cost, 183, 185 average variable cost, 185 dependence of profit on, 205 equipment, 182 explicit, 187 fixed, 176–178 fuel, 181–182 implicit, 187 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Find more at http://www.downloadslide.com INDEX labor, 179–181 law of diminishing returns, 180 law of increasing, 32–34 long-run and short-run average total costs curves, 193–195 marginal cost, 188–190 marginal labor, 361–362 opportunity, 31–32 opportunity, associated with migration, 375 social, 336 total cost (TC), 183, 184 total variable costs, 178–183 variable, 178–183 Countervailing power theory, 315 Court decisions on antitrust policy, 321–323 on conglomerates, 323 on markets, 225 per se criterion, 322 rethinking the reinterpretation, 322–323 rule of reason, 322 Crabbe, George, 434 Craft unions, 400 Creation narrative, Creative destruction theory, 316–317 Cross elasticity of demand, 93–96 among complementary goods, 95–96 among substitute goods, 93–95 high, 228–229 relevant markets and, 226–229 in salmon industry, 99 Currency See also Money borrowing foreign currencies, 497–498 diversity of, 489 in foreign exchange market, 489–492 Curves average total cost, 197–198 backward-bending supply, 368–369 downward-sloping, 23 graphing, 20–26 hill-shaped, 23–24 horizontal, 24–25 labor supply, 366–369 long-run and short-run average total costs, 193–195 marginal physical product, 359 marginal revenue, 208–209 market demand, 55 MLC, 361, 393 production possibilities, 31, 33, 34–35, 462 slope of, 22–26 total cost, 184 U-shaped, 23–24 upward-sloping, 23 vertical, 24–25 Customs unions, 477 Cyberspace fraud, 325 D Dead weight loss, 256 Debt forgiveness of LDC, 507 international, 505–506 service, 506 Deficiency payments, 149 Demand advertising and, 239–240 change in quantity demanded, 53 changes in, 61–64 chronic excess, 139 cross elasticity, 93–96, 226–229 equilibrium price and, 65–67 excess, 57 income elasticities of, 96–98 insatiable, 4–5 for labor, 361–365 law of, 53 loanable funds, 413–414 market, 54 measuring consumer, 53 price elasticity of demand, 87–93 for public goods, 346–349 Demand curves, 53 for amusement goods, 132–134 changes in consumer and producer surplus, 120–121 effect of advertising on, 239 foreign exchange market, 489, 490–491 horizontal, 257–259 indifference curve approach to, 127–134 kinked, 292–294 in monopolistic and oligopoly markets, 236–238 monopoly, 231 new firms enter market, 254 oligopoly, 292 perfect competition, 242 Demand schedules, 53 Demand sensitivity basic goods, 86 defined, 83 factors influencing, 84–87 graphing, 83–84 income level, 85–86 linked goods, 87 low-priced goods, 85 substitute goods, 86 I-3 time and, 87 Denmark unionization in, 403 Dependent variables, defined, 20 Depp, Johnny, 418 Depreciation, 493–494 Depression of 1930s, 400 Deregulation of airline industry, 310 defined, 310 economics of, 310–312 of energy industry, 311 of telephone industry, 310–312 Deserted Village, The (Goldsmith), 434 Devaluation, 497 Diamond Necklace, The (Maupassant), 226 Differential land rent, 420–422 Diminishing returns, law of, 360 Diseconomies of scale, 190–193 Diversity-of-industry argument, 472 Dividends, defined, 161 Double taxation, 163 Downsizing, 195 Dumping, 473 DuPont, 225 “Dutch Disease,” 520 E Econometrics, 14 Economic efficiency, 43 Economic forecasting, uncertainty in, 12–14 Economic growth comparative, 35 and inequality, 446 vs income equality, 445–447 Economic model ceteris paribus, circular flow model, 8–10 economic forecasting, 12–14 model building, Economic policy laissez-faire approach, 304, 305–306, 314–317 Economic profit, 251 in perfect competition markets, 260–262 zero, 255–256 Economic specialization, 460 international specialization, 44 labor specialization, 43–46 principle of comparative advantage, 44–46 production possibilities and, 43–46 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part I-4 Find more at http://www.downloadslide.com INDEX Economics defined, normative, 12 as part of social science, 5–6 positive, 12 Economies of scale, 190–193 Schumpeter hypothesis, 267–269 Economists interest in externalities, 334–339 knowledge of, 12–14 nobel laureates, 12–14 value judgements by, 12 view on Schumpeter hypothesis, 267–269 Edison, Thomas, 424–425 Education as positive externality, 346 wage rate and, 387 Efficiency government-run industry, 314 less than maximum, 252–253 ownership and, 314 Efficiency wages, 379 Eiteman, Wilford, 197 Elasticity cross elasticity of demand, 93–96, 226–229 defined, 87 of demand curve in monopolistic and oligopoly markets, 236–238 global elasticities of demand for LDC export goods, 93 income, 96–98 long-run, 92–93 price elastic, 91 price elasticity of demand, 87–93 price inelastic, 91 for selected agricultural and nonagricultural goods, 92 short-run, 92–93 taxation and, 100–102 total revenue, 90–91 unit elastic, 91 Empire building, 214–216 Employment See also Labor alternative opportunities for, 367–368 determination of, 394 higher wage rates vs more, 397 return to monopsony power, 394–395 in unionized labor market, 396 wage rate and, 394 wage rate combination with, 393–395 Energy conservation principle, industry, deregulation of, 311 Engel’s law, 97 England See also United Kingdom corn laws, 19th century, 421 poor laws in, 450 Entertainment, 224 Entrepreneurs defined, 30 profit maximization and, 203–204 Entrepreneurship, 30 Environmental Protection Agency (EPA), 340–342 Equality maximum utility and, 445–446 vs economic growth, 447 vs efficiency, 445–447 Equilibrium long run, 254–257 short run, 254 Equilibrium price defined, 57 determined, 55–57 long-run, 254–255 Nash equilibrium, 289 shifts in, 135–136 short-run, 254 supply and demand and, 65–67 Equilibrium rate of interest, 414, 415 Equilibrium wage rate, 369–370, 423–424 Equipment costs, 182 Ethical standards, 5–6 Euro, 503 Europe Gini coefficients for, 439 unionization in, 403 wage rate, 372–374 European Economic Community (EEC), 477 European Union (E.U.), 477 euro, 503 Excess demand, 56, 139 Excess supply, 56–57, 142–143 Exchange controls, 497 Exchange rate China, 501 defined, 489 devaluation, 496, 497 euro, 503 factors influencing, 489–492 fixed, 494–497 floating exchange rate, 492–498 selected countries, 493 Explicit costs, 187 Exports, 467, 468, 469, 470 balance on current account, 498 global elasticities of demand for, 93 services, 499 Externalities acid rain, 338 defined, 332 economists interest in, 334–339 effects on chicken market, 336–337 market failure, 335–336 negative, 332 positive, 332–333, 344–345 property rights and, 333–334 public goods and, 344–346 F Factors of production, 28–30 Family, as economic unit, 6–7 Farm Bill of 2008, 150–151 Farm subsidies, 145–147 Federal Communications Commission (FCC), 311, 312 Federal Trade Commission Act of 1914, 320–321 Federal Trade Commission (FTC) cyberspace fraud and, 325 precedent, 325 role of, 323–325 Firms in circular flow model, 8–10 collusion among, 284, 290–291 cost structure of competitive, 259 defined, demand for labor, 361–365 economies of scale and, 317 government-owned, 313–314 and industry, 231, 250 mergers between, 281–287 nationalization of, 312–314 shutdown of, 213 TLC of, 392 Fishing industry costs of production in, 176–188 price ceilings in, 138–141 price changes in, 135–136 price floors in, 142 profit maximization and, 205–212 salmon industry, cross elasticity of, 99 Fixed costs, 176–178 average, 183–185 Fixed exchange rate, 494–497 Flint, Floating exchange rate, 492–498 arbitrage, 494 depreciation and appreciation, 493–494 problems with, 494 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Find more at http://www.downloadslide.com INDEX Flower market, cross elasticity in, 227 Foreign assets, 502 Foreign competition, 234, 473 Foreign currencies, borrowing, 497–498 Foreign direct investments, 526–527, 529 Foreign economic aid, to LDC, 529 Foreign exchange market appreciation, 493–494 arbitrage, 494 borrowing foreign currencies, 497–498 defined, 489 demand curve, 490, 491–492 depreciation, 493–494 fixed exchange rate, 494–497 floating exchange rates, 492–498 supply curve, 490, 491–492 Foreign exchange reserves, 497–498 Foreign labor, 473 Forward linkages, 525 France marginal utility and French cuisine, 112–113 trade volume, 470 unionization in, 403 Free riders, 333 Free trade, 464–465, 469–470, 477 See also International trade advantage gained from, 44–45 antidumping argument, 473 areas, 479 cheap foreign labor argument, 472–473 diversity-of-industry argument, 473 gains from, 476–477 infant industries, 472 NAFTA, 495–496 national security argument, 471–472 retaliation argument, 474 Freedom, regulation and, 306 Freedom to Farm Act of 1996 (FFA), 148–150 Friedman, Milton, 214, 511, 512 Fuel costs, 181–182 Funding, antitrust policy, 321 G Galbraith, John Kenneth, 216, 269 Game theory, 290 pricing, 287–288 Garden of Eden, Gasoline prices, Hurricane Katrina and, 67–68 Gates, Bill, 121, 122, 269 Gender, wage rate and, 388–389 General Agreement on Tariffs and Trade (GATT), 477 General Motors, 11, 197, 276, 291, 297, 372, 443, 460 Genesis, 3, Geographic specialization, 463–464 Germany beer industry in, 234 trade volume, 469–470 US trade with, 470–471 Germinal (Zola), 374 Gini, Corrado, 433 Gini coefficients, of income distribution inequality, 437–438 aggregate household income, and, 438 for countries outside US, 438 Lorenz curve, and, 437–438 world map, 440 Glass engraving industry, in 17th-century, 266 Godfather pricing, 290–291 Goldsmith, Oliver, 434 Gompers, Samuel, 204, 400 Goods amusement, 132–134 basic, 86 capital, 29, 31 change in price of, 66, 363 circular flow model, 8–10 complimentary, 62, 95–96 consumption, 31 export, 93 identical, 263–266 identifying equally preferred, 128–131 inferior, 97–98 linked, 87 low-priced, 85 near-public, 346 normal, 62 substitute, 62, 86, 94–95, 258 Government attempt to correct market failure, 339 efficiency to run industry, 314 foreign exchange reserves, 497 nationalization of industry by, 312–314 price options facing, 313 Government failure, 347–348 defined, 347 derivation of, 347 Government-owned firms, 313 Government-sponsored cartels, 286 Graphs curves on, 20–26 I-5 graphing relationships, 20 measuring distances, 19 point of reference, 18–19 reading, 18–26 Great Depression, 400–401, 528 Greed, profit maximization and, 215 Guide dogs, 75–76 Guthrie, Glenn, 197 H Ha¨agen-Dazs, 162 Hamlet (Shakespeare), 441–442 Hardy, Thomas, 261 Hawthorne, Nathaniel, 181 Head Start program, 451 Health care financing, 452 Henry, Patrick, 306 Herfindahl-Hirschman index (HHI), 277–278 antitrust policy, 323–324 Hiring, of coal miners, 358–360 Hispanic workers, wage rates of, 388 Holtz-Eakin, Douglas, 455 Home insurance, 344 Horizontal mergers, 282 House of Saud, 420 Households in circular flow model, 8–10 defined, Human capital, 29, 37 Human kidneys market, 76–78 Hume, David, 506 Hurricane Katrina gasoline prices and, 67–68 I Ideas, indestructible nature of, 38–39 Identical goods, 240, 257–260 Imitators, in perfect competition, 265–267 Immigration AFL-CIO views on, 402 effects of laws, 375 labor and, 370–375, 377 Implicit costs, 187 Imports, 467, 471, 475, 501 balance on current account, 502 controls, 501 services, 502 In-kind assistance, on poverty, 449 Income See also National income after-tax, 451–452 budget constraint, 132–133 change in demand, 61–62 exchange rates and, 492 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part I-6 Find more at http://www.downloadslide.com INDEX Income (Continued) forms of, 432–433 independently derived, 451, 478 from interest, 415–416 interest-derived, 416 median, 448 from profits, 424–425 from rent, 418–424 Income distribution See also Poverty; Wealth case for equality, 441–445 case for inequality, 445–447 equality and maximum utility, 444–445 Gini coefficients, of inequality, 437–438 Lorenz curve, 433–436 measurement, 433–438 net wealth, 439–441 optimal, 441–447 randomness of personal misfortune, 441–442 Rawls’s theory of justice, 442 socialist view of, 442, 443 world income distribution, 436–437 Income elasticity, 96–98 defined, 96 of inferior goods, 98 Income equality and maximum utility, 444, 445 vs economic growth, 447 vs efficiency, 445–447 Income inelastic, 96 Income inequality and economic growth, 447 effect on national income, 446 Income level, demand sensitivity, 85–86 Income taxes See also Taxation negative income tax, 451–452 Increasing returns to scale, 268 Independent variable, 20 India debt service, 506 economic development in, 522 exchange rates of, 493 outsourcing to, 373 rat population in, 343–344 Indifference curves, 127–134 Indifference maps, 129–130 Indirect stock ownership, 170–171 Indonesia, canned pineapple industry in, 527 Industrial unions, 400 Industry concentration ratios, 276–281 defined, 231 demand for labor, 365–366 firm is, 231, 250 government efficiency to run, 313–314 nationalization of, 305, 312–314 no entry into, 231–234 relationship between firms, markets and, 236 Infant industries, 472 Inferior goods, 98 Infrastructure absence in LDC, 521–523 Internet and, 522 Innovation, 35–38 Innovators in perfect competition, 265–267 Insurance home, 344 Interest equilibrium rate of, 414–415 ethics of income from, 415–416 Interest-derived income, Marxist view, 416 Interest rate, 412 balance of payments, 515–519 changes in, 415 changing effect, 417–418 equilibrium rate, 414 exchange rates and, 491–492 Internal Revenue Service (IRS), 451 International corporations, 168–169 International debt, 505–506 International Monetary Fund (IMF), 497–498 International specialization, 44, 464, 471 International trade See also Free trade absolute advantage, 465–467 calculating terms of trade, 467 China, 481 comparative advantage, 465–467 customs unions, 479 GATT, 477 international specialization, 460 NAFTA, 479–480 negotiating tariff structures, 477–479 nontariff barriers, 477 quotas, 476 tariffs, 474–475 tracking, 469–470 US trading partners, 470–471 Internet infrastructure and, 522 scam, 325 Interpersonal comparison of utility, 121–122 Interstate Commerce Commission (ICC), 310 Interstate trade, 462–464 Investment foreign direct investment, 526–527, 529 income payments on, 500 income receipts on, 516–517 mutual funds, 166 Invisible hand, 11 Ireland zero-tariff access, 478 Iron law of wages, 374 Island economy, 418, 419 Italy trade volume, 470 US trade with, 470 J Japan concentration ratios in manufacturing industries, 281 exchange rates of, 510 Gini coefficient for, 438 trade volume, 465 US trade with, 471 Johnson, Lyndon B., 449 Joint ventures, 284 K Kahn, Alfred, 311 Kellog, 168 Kinked demand curve, 292–294 marginal revenue gap, 293 price rigidity and price fluctuations, 293–294 Knights of labor, 399 Korea exchange rates of, 493 US trade with, 470–471 Krikorian, Mark, 373 Kulikowski, Michael, 395, 396 L Labor backward-bending supply curve of, 368–369 cost of, 179–181 courts and Congress, 401 defined, 28–29 firm demand for, 361–365 immigration and, 370–375, 377 industry demand for, 365–366 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Find more at http://www.downloadslide.com INDEX marginal physical product of, 358, 359 marginal revenue product of, 360 monopsony, 391–393 price of, 181 price of goods and demand for, 363, 364 quality of, 179 race and, 388 sex and, 388–389 specialization, 44–46 Springsteen on, 367 supply curve for, 366–369 supply of, 366–369 technology and demand for, 361–365 Labor Management Relations Act, 402 Labor Management Reporting and Disclosure Act, 403 Labor productivity defined, 179 law of diminishing returns, 180 Laissez-faire policy, 304, 305 contestable markets, 305 contestable markets theory, 314–315 countervailing power theory, 316 creative destruction theory, 316 economics of, 314–317 Land, 29–30 rent, 418–420 Landrum-Griffin Act, 403 Lane, Robert, 112 Latin American economies, 439 Law of demand, 53 law of diminishing marginal utility, 110–111 marginal utility, 113–118 MU/P equalization principle, 117–118 Law of diminishing marginal utility, 110–111 Law of diminishing returns, 180, 360 MPP and, 360 Law of increasing costs, 32–33 Lebanon, debt service, 506 Less-developed countries (LDC) big-push strategy, 523–524 civil wars in, 518 debt forgiveness, 507 development strategies, 516 foreign direct investment, 526–527, 529 foreign economic aid, 529 natural resources in, 520–521 political instability in, 518–520 population growth, 516–518 terms of trade for, 489–491 unbalanced development strategy, 525–526 Lester, Richard, 214 Lester-Machlup controversy, 214 Lewis, Ruth and Oscar Lewis, 452 Liability limited, 160 unlimited, 158 Life-cycle wealth, 440 Limited liability, 160 Linkages, 525–526 Linked goods, demand sensitivity, 87 Lloyd, Henry D., 318 Lloyd, W F., 326 Loanable funds, 414 demands and supply, 413–414 demands for, 412–413 market, 414 Location rent, 422–423 Long run, 58, 193–195 supply, 58–60 Long-run average total cost (LRATC) curve, 193–195 downsizing, 195 rightsizing, 195 Long-run elasticities, 92–93 Long-run equilibrium, 254–255, 262–265 maximum efficiency, 263–264 Long-run supply curve, 263–264 Lorenz curve, 433–436 for communities, 435 for US and other three countries, 435–436 Loss, minimization, 212–214 Low-priced goods, 85 M Machlup, Fritz, 214 Macroeconomics defined, 11 Madden, J Patrick, 196 Madonna, 334 Major League Baseball Players Association, 396 Malthus, Thomas, 374 Management, business interests of, 215 Managerial Revolution, The, 216 Marginal cost (MC), 188–190 pricing, 309 Marginal labor cost (MLC), 361–362 curve, 301 Marginal physical product (MPP), 359, 360, 364 Marginal rate of substitution, 128–129 Marginal revenue (MR) curve, 208–209 I-7 defined, 207 gap, 289 Marginal revenue product (MRP), 362–365 of capital, 412 derivation using technology, 364 of labor, 360 Marginal unit, 214 Marginal utility curve, 444 defined, 109 French cuisine and, 112–113 law of demand, 113–118 law of diminishing marginal utility, 110–111 MU/P equalization principle, 117–119 water–diamond paradox, 111–112 Marginal-utility-to-price (MU/P) ratios, 115–116 Market-day supply, 55, 58–61 Market demand, 54 curves, 55 measuring, 54 Market entry in monopolistic and oligopoly, 235 perfect competition, 240 Market failure asymmetric information and, 342–343 chicken market, 336–337 Coase theorem and, 341 correcting, 339–342 creating new property forms, 339–340 creating obligatory controls, 340 defined, 335–336 government attempt to correct, 339 moral hazard and, 343–344 pollution and, 338–339 pollution compensation tax and, 340 positive externalities and, 344–345 Market power, and concentration ratio, 279–281 Market share brand multiplication, 294 defined, 239 increasing, 239 insignificant, 240–241 Market structure defined, 236 monopolistic competition, 230, 234–240 monopoly, 229, 230–234 mutual interdependence, 230 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part I-8 Find more at http://www.downloadslide.com INDEX Market structure (Continued) oligopoly, 229–230, 234–240 perfect competition, 240–242 scorecard on, 242–243 Market supply curve, 265 effects of shift in, 263 Marketable property, 418 Markets contestable, 305 court decisions on, 225 cross elasticity and, 226–229 demand curve, 242 relevant, 224–225 Marshall, Alfred, 269, 510 Marx, Karl, 279, 416 Marxist theory of income distribution, 442–443 of interest-derived income, 416 Maslow, Abraham, Mattus, Reuben, 162 Maximum efficiency, 263–264 Mayor of Casterbridge, The (Hardy), 261 Means, Gardiner, 216 Median income, 448 Merchandise exports, 498 Merchandise imports, 499 Mergers, 281–287 cartels, 284–286 conglomerate merger, 283 horizontal mergers, 282 joint ventures, 284 vertical merger, 282–283 without merging, 284–286 Mexico corn and oil consumption/ production, 463, 465, 466 NAFTA, 479–480 US trade with, 470–471 wage rate, 370–372 Microeconomics, 10 Military spending, 39–41 Miller, Marvin, 396 Mineral resources, finite nature of, 3–4 Minimum wage rate, 376–378, 397 Minorities, wage rate and, 388 Modern Corporation and Private Property, The, 216 Money marginal utility of, 112–113, 121–122 Monopolistic competition, 230, 234–240 close substitutes, 235–236 defined, 234 demand curve of, 236–237 entry into market, 235, 253 price and output in, 253–257 product differentiation, 236, 253 role of advertising, 237–240 Monopoly, 229, 230–234 acquisition and, 233–234 antitrust legislation, 318–321 defined, 230 demand curve, 231 encouragement of, 305–306, 317 exclusive access to resources, 233 firm is industry, 231, 250 firm size and, 230 laissez-faire approach, 304, 305, 314–317 nationalization of, 305, 312–314 natural, 231–233 no entry into industry, 231–234, 254 patent system, 233, 256, 317 policy on, 325–326 price and output, 250–253 price-maker, 251, 288 profit maximization, 251–253 regulation of, 304–305, 307–312 Schumpeter hypothesis, 267–269 splitting up, 306–307, 318 Monopsony, 391–393 defined, 391 return to power, 394–395 supply curve of labor and, 391–392 union and demands of, 397–399 wage rate combination with, 393–395 Moral hazard, 343–344 Morgan, J P., 241, 234, 282 Morocco debt service, Most-favored nation clause, 477 Movies, 224 MR = MC rule, 206–211 applying, 210–211 loss minimization and, 212–214 MRP = r rule, 413 MRP = w rule, 362–363 MU/P equalization principle, 117–119, 230 Multinational corporations, 168–169 Mutual funds, 166 Mutual interdependence, 230 N Nash equilibrium, 289 National income inequality effect on, 446 National Labor Relations Board (NLRB), 402 National security, 39–41 crisis, effect of, on fishing industry, 136 free trade and, 471–472 National Transplant Organ Act of 1984, 77 Nationalization, economics of, 312–314 Natural monopoly, 231–233 Natural resources, 3–5 coal supply and, finite natures, insatible wants and, 4–5 in LDC, 520–521 nonrenewable, 3–4 renewable, 3–4 transformation of, Near-public goods, 346 Negative externalities, 332 Negative income tax, 451–452 Net wealth distribution, 439–441 Netherlands trade volume, 470 US trade with, 470–471 New Industrial State, 216 Nike, 228, 299, 527 Nitrogen oxide emissions, 338 Nobel laureates, 12–14 Noncompeting labor markets, 375 Nonrenewable resources, 3–4 Normal goods, 62 Normal profit, 256–257 Normative economics, 12 Norris-La Guardia Act, 401 North American Free Trade Agreement (NAFTA), 479 O Oil spills, 334 Oil supply effect of Hurricane Katrina on, 67–68 Oligopoly, 229–230, 234–240 balanced, 280–281 brand multiplication, 294 close substitute, 235–236 collusion among, 284, 289–290 concentration ratios, 276–281, 286–287 conglomerate mergers, 283 defined, 234–235 encouragement of, 305–306 entry into market, 235 game theory pricing, 287–288 godfathers and price leadership, 290–291 horizontal merger, 282 joint ventures, 284 kinked demand curve, 292–294 mergers, 281–287 Nash equilibrium, 289 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Find more at http://www.downloadslide.com INDEX payoff matrix, 288–289 price discrimination, 294–297 pricing theories, 287–294 prisoner’s dilemma, 290 tit-for-tat strategy, 289 unbalanced, 280–281 vertical mergers, 282–283 On the Principles of Political Economy and Taxation (Ricardo), 421, 566 Opportunity cost defined, 31–32 of war, 39–40 Optimal income distribution, 441–447 Organ transplants, supply and demand for, 76–78 Organization of Petroleum Exporting Countries (OPEC), 285, 286 Origin, 18–19 Output cartel pricing, 284 under conditions of godfather oligopoly, 291 effect of competition on, 267–269 marginal physical product curves and, 359 in monopolistic competition, 253–257 in monopoly, 250–253 in perfect competition, 257–260, 264 Outsourcing, 195–196 Ownership of corporations, 160–161 and government efficiency, 313–314 P P = ATC rule, 308–309 P = MC rule, 309 P = MR rule, 257–260 Parity price ratio, 147 Parity pricing, as price floor, 145–147 Parks, national, 346 Partnerships, 159–160, 165 Patents, 233, 256, 317 Payoff matrix, 288–289 Pennies, 33 Pension funds, 168 Per se criterion, 322 Per-unit tax, 102 Perfect competition, 240–242 demand curve of, 242 firms cannot influence price, 241–242 free entry, 241 identical goods, 257–260 innovators and imitators in, 265–267 insignificant market share, 240–241 learn to cope without, 304–307 long-run equilibrium, 262–265 perfect substitutes, 240 price and output in, 257–260 price-taker, 257–260 product differentiation, 257–260 Schumpeter hypothesis, 267–269 short-run equilibrium, 260–262 in 17th-century glass engraving industry, 266 Perfect income equality, 433 inequality, 433 Plato, 432 Points, of curve, 20–22 Political instability, in LDC, 518–520 Pollution acid rain, 338 chicken market, 336–337 compensation tax, 340 EPA roles in controlling, 340–342 government attempt to control, 339–342 market failure and, 339 negative externalities, 332 Population growth, in LDC, 516–518 iron law of wages and, 374 migrant, 375 size, change in demand and, 62–63 size and labor supply, 368 Positive economics, 12 Positive externalities, 332–333 market failure and, 344–345 public goods and, 345–346 Poverty, 447–451 below poverty level, percentage of people, 449 cash assistance, 449 defining, 448 in-kind assistance, 449 median income, 448 negative income tax, 451–452 threshold, 448 war on, 449–451 Precedent, 325 Preemptive war, 39–41 Present value, of property, 416–418 Price budget constraint, 131 cartels, 297 change in supply, 63–65 changes in demand, 60–63 collusion, 284, 289–290 concentration ratios and oligopoly, 286 under conditions of godfather oligopoly, 291 demand sensitivity to, 83–87 I-9 dependence of profit on, 205 effect of competition on, 267–269 effect of Hurricane Katrina on gasoline, 67–68 elastic, 82 equilibrium, 55–57 expectations about future, 62 fluctuations, 293–294 free trade and, 466–467 game theory pricing, 287–288 inelastic, 91, 101 kinked demand curve, 292–294 of labor, 181 labor demand and change in, 363–365 leadership, 290–291 long run supply, 58–60 low-priced goods, 85 marginal cost pricing, 309 market day supply, 58–60 in monopolistic competition, 253–257 in monopoly, 250–253 Nash equilibrium, 289 nationalization, 312–314 payoff matrix, 288–289 in perfect competition, 241–242, 257–260, 264 as rationing mechanism, 68–69 relationship with concentration ratio, 286 resources, 64–65 rigidity, 293–294 setting “fair”, 308–309 short run supply, 58–60 tit-for-tat strategy, 289 Price ceiling, 138–140 defined, 138–139 effectiveness of, 138 long tradition of, 151 ration coupons during WWII, 139 rent control, 141 Price discrimination, 294–297 gray area of, 297 market segmentation, 295–296 universality of, 296 Price elasticity of demand, 83–90 defined, 87–88 deriving, 88–90 estimates of, 92–93 for export goods, 93 Hurricane Katrina and, 67 long run, 92–93 for selected agricultural and nonagricultural goods, 92 short run, 92–93 total revenue, 90–91 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part I-10 Find more at http://www.downloadslide.com INDEX Price elasticity of supply, 98–100 defined, 98 market day, 99–100 short run, 100 Price floors, 141–143 long tradition of, 151 parity pricing as, 145–147 and property value, 417–418 Price formation, 53 as measure of consumer willingness, 53, 54 measuring consumer demand, 53–54 measuring supply, 54–55 Price-maker, 251, 288 Price-taker, 257, 260, 261, 264 Pricing theories, of oligopoly, 287–294 game theory pricing, 287–288 godfathers and price leadership, 290–291 kinked demand curve, 292–294 Nash equilibrium, 289 payoff matrix, 288–289 price collusion, 289–290 tit-for-tat price strategy, 289 Principal-agent problem, 379–380 Prisoner’s dilemma, 290 Producer surplus changes in, 120–121 creating, 120 defined, 119–120 Product differentiation, 236, 239 monopolistic competition, 253 perfect competition, 257–260 Production factors of, 28–30 small-scale, 257 Production costs across industries, 193–195 average fixed cost, 185–186 average total cost, 192 average variable cost, 183–185 downsizing, 185 economies of scale, 190–193 explicit cost, 187 fixed costs, 176–178 implicit cost, 187 law of diminishing returns, 180 long-run and short-run average total costs curves, 193–195 marginal cost, 188–190 outsourcing, 195–196 rightsizing, 195 Production possibilities circle of poverty, 35 curve, 31, 33, 34–36, 136–137, 476–478 defined, 30–31 economic efficiency, 43 economic growth, 34–35 economic specialization and, 43–46 innovation, 35–36 law of increasing costs, 32–33 military spending, 33, 39–41 opportunity cost, 31–32 underemployed resources, 42–43 universality of, 46–47 wealth, 34–35 Profit, 424 defined, 204 dependence on price and cost, 205 Profit maximization criticisms of, 212–216 defined, 212 empire building, 214–216 entrepreneurs and, 204 greed and, 215 Lester-Machlup controversy, 214 maximizing profit and minimizing loss, 212–214 measuring, 212 MR = MC rule, 210–211 Property, 416 present value, 416–418 value, and price floors, 417–418 Property rights, 416 celebrities and, 334 externalities and, 333–334 Proprietorships, 156–157, 165 Public choice, 346–349 Public goods defined, 344 externalities and, 344–349 government failure, 347–348 near-public goods and, 346 positive externalities and, 345–346 public choice and, 346–349 voting demand for, 347 Puppies, supply and demand for, 74 Q Quotas, 474–476 R R J Reynolds, 291 Race, wage rate and, 388 Ration coupons, 139–140 Rationing mechanism, price as, 68–69 Rawls, John, 442 Rawls’s theory of justice, 442 Reciprocity, 477 Regulation applying marginal cost pricing, 309 economics of, 307–312 economics of deregulation, 310–312 freedom and, 306 of monopoly, 304–305, 307–308 of regulators, 310 setting “fair” price, 308–309 Regulators, regulation of, 310 Relationships, graphing, 20 Relevant market, 224–225 automobiles and transportation, 224–225 court decisions on, 225 cross elasticity and, 226–229 movies and entertainment, 224 Renewable resources, 3–4 Rent control, 141 defined, 418–419 differential land rent, 418–420 land rent, 418–420 location rent, 422–423 shopping malls, 423 wage-related rent, 423–424 yielding acres, 422 Resource prices, change in supply and, 64–65 Resources exclusive access to, in monopoly, 231–233 underemployed, 42–43 Retaliation, for protectionist policies, 473 Return to monopsony power, 394–395 Revenue average, 207 marginal, 207 total, 207 Ricardo, David, 374, 450 Rightsizing, 195 Rivalry (Brenner), 159 Rockefeller, John D., 318 Ronen, Joshua, 159 Rotterdam, 42 Rule of reason, 322 S Salmon industry, 99 Sandburg, Carl, 443 Sandefur, Thomas, 343 Saudi Arabia, relevant market and, 225 Scale constant returns to, 190–193 diseconomies of, 190–193 economies of, 190–193 Scalper’s market, 78 Scalping tickets at Yankee’s game, 78 Scarcity, Scarlet Letter, The (Hawthorne), 181 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Find more at http://www.downloadslide.com INDEX Scherer, F M., 228 Schumpeter hypothesis, 267–269 Seitz, Peter, 394 Self-interest as motivation, 11 Shapero, Albert, 159 Sherman Antitrust Act, 318 Shopping malls, and rent, 423 Short run, 58, 194–195 Short-run average total cost (SRATC) curve, 193–194 downsizing, 195 rightsizing, 195 Short-run elasticities, 92–93 of supply, 99–100 Short-run equilibrium, 254, 260–261 Short run supply, 58–60 changes in, 63–65 elasticity, 100 Shutdown, 213 Slope of a curve, 22–26 Slope of a tangent, 25 Small-scale production, 257 Smith, Adam, 11, 43, 217, 335, 419, 420 Social cost, 336 Social science, economics as part of, 5–6 Social values, 6, 12 Sole proprietorships, 158–159, 162 Spain, 506 trade volume, 470 Special-interest lobbying, 348 Springsteen, Bruce, 367 Sri Lanka, 525–526 Stakeholders, 216 State-supported terrorism, 41 Stigler, George, 250 Stock defined, 160 issues, 161 ownership, indirect, 167–168 portfolios, size distribution of, 167 Stockholders (shareholders), 160 goals of, 216 profile of, 166–168 Strike, 396 Subsidies farm, 145–147 Substitute goods, 62 demand sensitivity to, 86 perfect competition, 258 Supplemental Security Income (SSI), 449 Suppliers, change in supply and, 65 Supply change in, 63–65 effect of technological change on agricultural, 144–145 elasticity, 98–100 excess, 56–57, 142 of labor, 366–369 long run, 58–60 market-day, 55, 58–60 measuring, 54–55 schedule, 55 short run, 58–60 Supply curve, 55, 56 changes in consumer and producer surplus, 120–121 foreign exchange market, 489–490, 491 of labor, 366, 391–393 long-run, 264–265 market, 265 in perfect competition markets, 264–265 Surplus changes in, 120–121 consumer, 119 producer, 119–120 Sweden unionization in, 403 T Taft-Hartley Act of 1947, 402 Tangent, 25 Tariffs, 474 customs unions, 477–479 GATT, 477 history of, 480 negotiating, 476–480 regressive character of, 481–482 US tariff rates, 480 Tastes, change in demand, 62 Taxation of corporations, 163 elasticity and, 100–102 Technological innovations, 35–38 Technological revolution, in agriculture, 143–145 Technology changes in supply and, 64 demand for labor and, 364–365 improvements in, 364–365 MRP derivation using, 364 Telephone industry, deregulation of, 311 Temporary Assistance to Needy Families (TANF), 449 Terms of trade, 467–469 Terrorism, state-supported, 41 Third parties, 331–332 Ticket scalping, 78–79 I-11 Time, demand sensitivity and, 87 Time Warner, 282, 283 Tit-for-tat strategy, 289 Total cost (TC), 183 Total fixed costs, 176–178 Total labor cost (TLC), 362, 392 Total revenue (TR), 90–91, 207 Total utility, 109 Total variable costs (TVC), 178–183 Tourism, 65 Trade See also Free trade; International trade balance of, 499, 500 under free and fixed exchange rates, 495 interstate, 462–464 intrastate, 460–462 Trade protection arguments for, 471–473 economics of, 474–476 negotiating tariff structures, 476–480 nontariff barriers, 476 quotas, 474–476 tariffs, 474 Tragedy of the commons, 335 Transportation, 224–225 Turkey, debt service, 506 U Ukraine Chernobyl nuclear accident, 333–334 Unbalanced development strategy, LDC, 525–526 Unbalanced oligopoly, 280–281 Underemployed resources, 42–43 Unilateral transfers, 500–501 Union Carbide, 334 Union shop, 398–399 Unionized labor market, 396 Unions, 395–396 closed shop, 398 collective bargaining, 396–397 Congress and courts, 401–404 craft, 400 demands of monopsony and, 397–399 industrial, 400 new technology and, 398 strikes, 396 union shop, 398–399 unionization in Europe, 412 in united states, brief history, 399–404 women in, 404 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part I-12 Find more at http://www.downloadslide.com INDEX Unit elastic, 91 United Kingdom trade volume, 470 US trade with, 470 United Mine Workers union (UMW), 395–397 United States balance of trade, 499 changes in U.S assets abroad, 502 corn and oil consumption/ production, 463 effects of immigration laws, 375 foreign assets in, 502 immigrant labor supply, 371 mergers in, 282 trade volume, 470 trading partners, 470 unions in, 399–404 Unlimited liability, 158 Upward-sloping curves, 23 U.S businesses, organization of, 165 U.S economy concentration ratio in, 279, 281 oligopolistic nature of, 279 Usury, 151 historical perspective, 417 USX Corporation, 235 Util, 109 Utility defined, 109 interpersonal comparison of, 121 V Value system, Variable costs, 178–183 Variables dependent, 20 independent, 20 Vertical mergers, 282–283 Vicious circle of poverty, 37, 518 W Wachtel, Paul, 112 Wage rate determination of, 394 differentials in, 370–375 economics of minimum, 376–378 effects of minimum, 378–379 efficiency wages theory, 379 employment combination with, 393–395 equilibrium, 369–370 ethics of, 378–379 in Europe, 372–374 increases vs more employment, 397–399 iron law of wages, 374 marginal labor cost, 361–362 in unionized labor market, 396 Wage-related rent, 423–424 Wagner Act of 1935, 401–402 Wal-Mart, 315 Walden (Thoreau), 112 Wants, insatiable, 4–5 War destructive effect, 38 preemptive, 39–41 Wealth, 439 labor supply and changes in, 368 production possibilities, 34 Wealth of Nations, The (Smith), 11, 43 White workers, wage rates of, 388 Women, in unions, 404 World income distribution, 436–437 World Trade Organization (WTO), 469, 477 World War I union membership and, 401 World War II, 38 ration coupons during, 139–140 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part ... of Happiness and this new research is integrated into utility analysis As well, more attention is given in the principles of microeconomics to the role of entrepreneurship In the principles of. .. together, not just as sister and brother, but as best friends Principles of Microeconomics, 7e Fred M Gottheil ©2013, 2008 Cengage, a part of the Cengage Learning Cengage, the Star logo, and Atomic... Economics of Encouraging Monopoly 317 The Economics of Splitting Up Monopoly 318 The History of Antitrust Legislation 318 The Sherman Antitrust Act of 1890 318 Historical Perspective: Chronology of