“Mankiw & Taylor’s Economics is a superb book for all students approaching this subject for the first time The book is both intuitive, with plenty of examples enabling students to link economic theory and facts, and rigorous, with analytical supplements and extensive exercises allowing students to go into depth if they wish to This book will make students love this subject and it is simply excellent.” Dr Gaia Garino, Principal Teaching Fellow in Economics, University of Leicester, UK Now firmly established as one of the leading economics principles texts in the UK and Europe, this exciting, new third edition by N Gregory Mankiw (Harvard University) and Mark P Taylor (Warwick University), has undergone some significant restructuring and reorganization to more directly match economics students’ course structures and learning and assessment needs There are new sections covering microeconomic and macroeconomic topics and concepts in more depth, whilst at the same time retaining the book’s reputation for clarity, authority and real world relevance New to the third edition: > In direct response to user feedback, the chapter structure has been reorganized to better map to typical UK and European course structures > Brand new Case Studies, In the News features, and examples throughout > Supplementary maths content provided separately > Enhanced lecturer and student digital support resources including articles from The Economist with associated discussion questions linked to every chapter and new assessment practice questions which can be used for tutorial discussion and assignments > New coverage on information and behavioural economics, business cycles, supply-side policies the role of empirical evidence, and economic rent > Fully updated to reflect the economic arguments which have surfaced following the financial crisis > Fresh, modern text design with accessible layout and approach N Gregory Mankiw, Professor of Economics, Harvard University, USA Mark P Taylor, Professor of Economics and Dean of Warwick Business School, University of Warwick, UK Economics is essential reading for all students taking introductory economics modules on undergraduate courses and within an economics component of postgraduate and MBA courses For your lifelong learning solutions, visit www.cengage.co.uk Purchase your next print book, e-book or e-chapter at www.cengagebrain.com 93795_cvr_ptg01_hires.indd Mankiw Taylor About the Authors Economics “A very well written and modern text, covering a wide and exhaustive range of topics to be taught in introduction to economics classes The accessible language and approach is ideal for all students including those to whom English is a second language, and a key pedagogical strength of the book is the many examples which show students how to apply key economics topics within their everyday lives.” Prof Erich Ruppert, Faculty of Economics, Business and Law, University of Aschaffenburg, Germany N Gregory Mankiw Mark P Taylor Economics 12/20/13 5:13 PM $XVWUDOLDä%UD]LOä-DSDQä.RUHDä0H[LFRä6LQJDSRUHä6SDLQä8QLWHG.LQJGRPä8QLWHG6WDWHV Economics, 3rd Edition © 2014, Cengage Learning EMEA N Gregory Mankiw and Mark P Taylor ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced, transmitted, stored or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, or applicable copyright law of another jurisdiction, without the prior written permission of the publisher Publisher: Andrew Ashwin Commissioning Editor: Annabel Ainscow Senior Production Editor: Alison Burt Senior Manufacturing Buyer: Eyvett Davis Typesetter: diacriTech Cover design: Adam Renvoize Text design: Design Deluxe While the publisher has taken all 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Cengage Learning EMEA Cheriton House, North Way, Andover, Hampshire SP10 5BE United Kingdom Cengage Learning products are represented in Canada by Nelson Education Ltd For your lifelong learning solutions, visit www.cengage.co.uk Purchase your next print book, e-book or e-chapter at www.cengagebrain.com Printed by China by RR Donnelley 10 – 16 15 14 93795_fm_ptg01_hr_i-xiv.indd 26/12/13 7:36 PM BRIEF CONTENTS About the authors ix Preface x Supplements xi Acknowledgements xiii PART Inequality PART Trade PART Introduction to economics Ten principles of economics Thinking like an economist 17 PART 10 The data of macroeconomics The market forces of supply and demand 41 Elasticity and its applications 72 Background to demand: The theory of consumer choice 102 Background to supply: Firms in competitive markets 134 169 Consumers, producers and the efficiency of markets 169 Supply, demand and government policies 187 PART 11 The real economy in the long run 473 22 Production and growth 473 23 Unemployment 497 PART 12 Interest rates, money and prices in the long run 519 24 25 26 27 Saving, investment and the financial system 519 The basic tools of finance 539 The monetary system 558 Money growth and inflation 583 PART The economics of the public sector 203 PART 13 The macroeconomics of open economies 605 28 Open-economy macroeconomics: Basic concepts 605 29 A macroeconomic theory of the open economy 622 The tax system and the costs of taxation 203 PART Inefficient market allocations 221 10 Public goods, common resources and merit goods 221 11 Externalities and market failure 239 12 Information and behavioural economics 264 PART Firm behaviour and market structures 279 13 Firms’ production decisions 279 14 Market structures I: Monopoly 290 15 Market structures II: Monopolistic competition 314 16 Market structures III: Oligopoly 329 PART Factor markets 355 17 The economics of labour markets 355 437 20 Measuring a nation’s income 437 21 Measuring the cost of living 456 PART Markets, efficiency and welfare 405 19 Interdependence and the gains from trade 405 PART Supply and demand: How markets work 41 385 18 Income inequality and poverty 385 PART 14 Short-run economic fluctuations 637 30 31 32 33 Business cycles 637 Keynesian economics and IS-LM analysis 655 Aggregate demand and aggregate supply 679 The influence of monetary and fiscal policy on aggregate demand 702 34 The short-run trade-off between inflation and unemployment 721 35 Supply-side policies 745 PART 15 International macroeconomics 759 36 Common currency areas and european monetary union 759 37 The financial crisis and sovereign debt 782 iii CONTENTS About the authors ix Preface x Supplements xi Acknowledgements xiii PART INTRODUCTION TO ECONOMICS Ten principles of economics Thinking like an economist 17 Markets and competition 41 Demand 43 Supply 50 Supply and demand together 56 Conclusion: How prices allocate resources 67 iv Background to supply: Firms in competitive markets 134 The costs of production 134 Production and costs 135 The various measures of cost 138 Costs in the short run and in the long run 145 Summary 146 Returns to scale 147 What is a competitive market? 150 Profit maximization and the competitive firm’s supply curve 153 The supply curve in a competitive market 160 Conclusion: Behind the supply curve 164 PART SUPPLY AND DEMAND: HOW MARKETS WORK 41 The market forces of supply and demand 41 Background to demand: The theory of consumer choice 102 The standard economic model 102 The budget constraint: What the consumer can afford 104 Preferences: What the consumer wants 108 Optimization: What the consumer chooses 113 Summary: Do people really think this way? 126 Behavioural approaches to consumer behaviour 126 Introduction 17 The economist as scientist 17 The economist as policy advisor 23 Why economists disagree 24 Let’s get going 28 Appendix Graphing and the tools of economics: A brief review 30 72 The price elasticity of demand 72 Other demand elasticities 81 Price elasticity of supply 83 Applications of supply and demand elasticity 95 What is economics? How people make decisions How people interact How the economy as a whole works Conclusion 12 Elasticity and its applications PART MARKETS, EFFICIENCY AND WELFARE 169 Consumers, producers and the efficiency of markets 169 Consumer surplus 170 Producer surplus 176 Market efficiency 179 Conclusion: Market efficiency and market failure 183 CONTENTS v Supply, demand and government policies 187 12 Information and behavioural economics 264 Controls on prices 187 Taxes 192 Subsidies 198 Conclusion 199 Principal and agent 264 Asymmetric information 265 Deviations from the standard economic model 271 Conclusion 274 PART THE ECONOMICS OF THE PUBLIC SECTOR 203 PART FIRM BEHAVIOUR AND MARKET STRUCTURES 279 The tax system and the costs of taxation 203 13 Firms’ production decisions Isoquants and isocosts 279 The least-cost input combination 284 Conclusion 286 Taxes and efficiency 203 The deadweight loss of taxation 204 Administrative burden 210 The design of the tax system 211 Taxes and equity 214 Conclusion 216 14 Market structures I: Monopoly 290 Imperfect competition 290 Why monopolies arise 291 How monopolies make production and pricing decisions 294 The welfare cost of monopoly 300 Price discrimination 303 Public policy towards monopolies 307 Conclusion: The prevalence of monopoly 309 PART INEFFICIENT MARKET ALLOCATIONS 221 10 Public goods, common resources and merit goods 221 The different kinds of goods 222 Public goods 223 Common resources 230 Merit goods 232 Conclusion 234 11 Externalities and market failure 279 15 Market structures II: Monopolistic competition 314 Competition with differentiated products 315 Advertising and branding 319 Contestable markets 323 Conclusion 324 239 Externalities 239 Externalities and market inefficiency 240 Private solutions to externalities 244 Public policies towards externalities 248 Public/private policies towards externalities 251 Government failure 254 Conclusion 260 16 Market structures III: Oligopoly Characteristics of oligopoly 329 Game theory and the economics of cooperation 335 Models of oligopoly 344 Public policy toward oligopolies 347 Conclusion 350 329 vi CONTENTS PART FACTOR MARKETS 355 PART 10 THE DATA OF MACROECONOMICS 437 17 The economics of labour markets 355 The demand for labour 356 The supply of labour 360 Equilibrium in the labour market 364 Wage differentials 367 The economics of discrimination 373 The other factors of production: Land and capital 376 Economic rent 379 Conclusion 380 20 Measuring a nation’s income 21 Measuring the cost of living 456 The consumer prices index 456 Correcting economic variables for the effects of inflation 465 Conclusion 468 PART INEQUALITY 385 18 Income inequality and poverty 437 The economy’s income and expenditure 438 The measurement of gross domestic product 439 The components of GDP 441 Real versus nominal GDP 445 GDP and economic well-being 449 Conclusion 452 385 The measurement of inequality 386 The political philosophy of redistributing income 395 Conclusion 401 PART TRADE 405 19 Interdependence and the gains from trade 405 The production possibilities frontier 405 International trade 410 The principle of comparative advantage 414 The determinants of trade 418 The winners and losers from trade 420 Restrictions on trade 423 Conclusion 431 PART 11 THE REAL ECONOMY IN THE LONG RUN 473 22 Production and growth 473 Economic growth around the world 474 Growth theory 476 Productivity: Its role and determinants 477 Economic growth and public policy 482 Conclusion: The importance of long-run growth 493 23 Unemployment 497 Identifying unemployment 497 Job search 504 Minimum wage laws 506 Unions and collective bargaining 508 The theory of efficiency wages 510 The cost of unemployment 511 Conclusion 514 CONTENTS vii PART 12 INTEREST RATES, MONEY AND PRICES IN THE LONG RUN 519 24 Saving, investment and the financial system 519 Financial institutions in the economy 520 Saving and investment in the national income accounts 527 The market for loanable funds 530 Conclusion 535 25 The basic tools of finance 539 Present value: Measuring the time value of money 539 Managing risk 541 Asset valuation 548 Conclusion 554 26 The monetary system 29 A macroeconomic theory of the open economy 622 Supply and demand for loanable funds and for foreign currency exchange 622 Equilibrium in the open economy 625 How policies and events affect an open economy 628 Conclusion 634 PART 14 SHORT-RUN ECONOMIC FLUCTUATIONS 637 30 Business cycles 637 Trend growth rates 638 Causes of changes in the business cycle 645 Business cycle models 646 Conclusion 650 558 The meaning of money 559 The role of central banks 565 The European Central Bank and the Eurosystem 566 The Bank of England 567 Banks and the money supply 568 Conclusion 579 27 Money growth and inflation 31 Keynesian economics and IS-LM analysis 655 The Keynesian cross 655 The multiplier effect 659 The IS and LM curves 665 General equilibrium using the IS-LM model 667 From IS-LM to aggregate demand 669 Conclusion 675 583 The classical theory of inflation 584 The costs of inflation 594 Conclusion 599 PART 13 THE MACROECONOMICS OF OPEN ECONOMIES 605 28 Open-economy macroeconomics: Basic concepts 605 The international flows of goods and capital 606 The prices for international transactions: Real and nominal exchange rates 609 A first theory of exchange rate determination: Purchasing power parity 612 Conclusion 618 32 Aggregate demand and aggregate supply 679 Three key facts about economic fluctuations 679 Explaining short-run economic fluctuations 680 The aggregate demand curve 682 The aggregate supply curve 686 Two causes of economic fluctuations 691 New Keynesian economics 697 Conclusion 698 33 The influence of monetary and fiscal policy on aggregate demand 702 How monetary policy influences aggregate demand 702 How fiscal policy influences aggregate demand 709 Using policy to stabilize the economy 713 Conclusion 716 viii CONTENTS 34 The short-run trade-off between inflation and unemployment 721 The Phillips curve 721 Shifts in the Phillips curve: The role of expectations 724 The long-run vertical Phillips curve as an argument for Central Bank independence 730 Shifts in the Phillips curve: the role of supply shocks 732 The cost of reducing inflation 734 Inflation targeting 739 Conclusion 740 35 Supply-side policies 745 Shifts in the aggregate supply curve 745 Types of supply-side policies 749 Conclusion 756 PART 15 INTERNATIONAL MACROECONOMICS 759 36 Common currency areas and European monetary union 759 The euro 760 The single European market and the euro 760 The benefits and costs of a common currency 762 The theory of optimum currency areas 765 Is Europe an optimum currency area? 768 Fiscal policy and common currency areas 772 Conclusion 777 37 The financial crisis and sovereign debt 782 Bubbles and speculation 782 The sovereign debt crisis 793 Austerity policies – too far too quickly? 797 Glossary 805 Index 814 Credits 820 ABOUT THE AUTHORS AUTHORS N GREGORY MANKIW is Professor of Economics at Harvard University As a student, he studied economics at Princeton University and the Massachusetts Institute of Technology (MIT) As a teacher he has taught macroeconomics, microeconomics, statistics and principles of economics Professor Mankiw is a prolific writer and a regular participant in academic and policy debates In addition to his teaching, research and writing, Professor Mankiw has been a research associate of the National Bureau of Economic Research, an advisor to the Federal Reserve Bank of Boston and the Congressional Budget Office From 2003 to 2005, he served as chairman of the US President’s Council of Economic Advisors and was an advisor to Presidential candidate Mitt Romney during the 2012 US presidential election Professor Mankiw lives in Wellesley, Massachusetts, with his wife Deborah, their three children and their border terrier Tobin MARK P TAYLOR is Dean of Warwick Business School at the University of Warwick and Professor of International Finance He obtained his first degree in philosophy, politics and economics from Oxford University and his Master’s degree in economics from London University, from where he also holds a doctorate in economics and international finance Professor Taylor has taught economics and finance at various universities (including Oxford, Warwick and New York) and at various levels (including principles courses, advanced undergraduate and advanced postgraduate courses) He has also worked as a senior economist at the International Monetary Fund and at the Bank of England and, before becoming Dean of Warwick Business School, was a managing director at BlackRock, the world’s largest financial asset manager, where he worked on international asset allocation based on macroeconomic analysis His research has been extensively published in scholarly journals and he is today one of the most highly cited economists in the world Professor Taylor lives with his family in a 15th-century farmhouse near Stratford upon Avon, Warwickshire, where he collects clocks and keeps bees CONTRIBUTING AUTHOR ANDREW ASHWIN has over 20 years experience as a teacher of economics He has an MBA and is currently researching for a PhD investigating assessment and the notion of threshold concepts in economics Andrew is an experienced author, writing a number of texts for students at different levels and journal publications related to his PhD research, and learning materials for the website Biz/ed, which was based at the University of Bristol Andrew was Chair of Examiners for a major awarding body for business and economics in England and is a consultant for the UK regulator, Ofqual Andrew has a keen interest in assessment and learning in economics and has received accreditation as a Chartered Assessor with the Chartered Institute of Educational Assessors He is also Editor of the Economics, Business and Enterprise Association (EBEA) journal Andrew lives in Rutland with his wife Sue and their twin sons Alex and Johnny ix 808 GLOSSARY government purchases spending on goods and services by local, state and national governments gross domestic product (GDP) the market value of all final goods and services produced within a country in a given period of time gross domestic product per capita (head) the market value of all goods and services produced within a country in a given period of time divided by the population of a country to give a per capita figure gross investment the total spending on capital stock per period of time in an economy intertemporal choice where decisions made today can affect choices facing individuals in the future interventionist supply-side policies policies focused on improving the working of markets through investing in infrastructure, education and research and development investment spending on capital equipment, inventories and structures, including household purchases of new housing investment fund an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds isocost line a line showing the different combination of factor inputs which can be purchased with a given budget heuristics short cuts or rules of thumb that people use in decision making horizontal equity the idea that taxpayers with similar abilities to pay taxes should pay the same amount human capital the accumulation of investments in people, such as education and on-the-job training hysteresis the lagging effects of past economic events on future ones job search the process by which workers find appropriate jobs given their tastes and skills idiosyncratic risk risk that affects only a single economic actor imperfect competition exists where firms are able to differentiate their product in some way and so can have some influence over price implicit costs input costs that not require an outlay of money by the firm import quota a limit on the quantity of a good that can be produced abroad and sold domestically imports goods produced abroad and purchased for use in the domestic economy leading to an outflow of funds from a country 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 indexation the automatic correction of a money amount for the effects of inflation by law or contract indifference curve a curve that shows consumption bundles that give the consumer the same level of satisfaction indirect tax a tax levied on the sale of goods and services inferior good a good for which, ceteris paribus, an increase in income leads to a decrease in demand (and vice versa) inflation an increase in the overall level of prices in the economy inflation rate the percentage change in the price index from the preceding period inflation tax the revenue the government raises by creating money inflationary gap the difference between full employment output and actual expenditure when actual expenditure is greater than full employment output informationally efficient reflecting all available information in a rational way in-kind transfers transfers to the poor given in the form of goods and services rather than cash internalizing an externality altering incentives so that people take account of the external effects of their actions labour the human effort both mental and physical that goes in to production labour force the total number of workers, including both the employed and the unemployed labour force participation rate (or economic activity rate) the percentage of the adult population that is in the labour force Laffer curve the relationship between tax rates and tax revenue lagging indicator an indicator which occurs after changes in economic activity have occurred land all the natural resources of the earth law of demand the claim that, other things equal (ceteris paribus) the quantity demanded of a good falls when the price of the good rises law of supply the claim that, ceteris paribus, the quantity supplied of a good rises when the price of a 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 leading indicator an indicator which can be used to foretell future changes in economic activity liberalism the political philosophy according to which the government should choose policies deemed to be 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 liquidity the ease with which an asset can be converted into the economy’s medium of exchange logrolling the agreement between politicians to exchange support on an issue Lorenz curve the relationship between the cumulative percentage of households and the cumulative percentage of income lump-sum tax a tax that is the same amount for every person macroeconomics the study of economy-wide phenomena, including inflation, unemployment and economic growth marginal abatement cost the cost expressed in terms of the last unit of pollution not emitted (abated) marginal changes small incremental adjustments to a plan of action GLOSSARY 809 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 labour the increase in the amount of output from an additional unit of labour marginal propensity to consume the fraction of extra income that a household consumes rather than saves marginal propensity to save the fraction of extra income that a household saves rather than consumes marginal rate of substitution the rate at which a consumer is willing to trade one good for another marginal rate of technical substitution the rate at which one factor input can be substituted for another at a given level of output marginal revenue the change in total revenue from an additional unit sold marginal revenue product the extra revenue a firm gets from hiring an additional unit of a factor of production marginal tax rate the extra taxes paid on an additional unit of income marginal utility the addition to total utility as a result of consuming one extra unit of a good market a group of buyers and sellers of a particular good or service market economy an economy that addresses the three key questions of the economic problem through allocating resources through the decentralized decisions of many firms and households as they interact in markets for goods and services market failure a situation where scarce resources are not allocated to their most efficient use market for loanable funds the market in which those who want to save supply funds and those who want to borrow to invest demand funds market-orientated supply-side policies policies designed to free up markets to improve resource allocation through more effective price signals market power the ability of a single economic agent (or small group of agents) to have a substantial influence on market prices market segments the breaking down of customers into groups with similar buying habits or characteristics market share the proportion of total sales in a market accounted for by a particular firm maximin criterion the claim that the government should aim to maximize the well-being of the worst-off person in society medium of exchange an item that buyers give to sellers when they want to purchase goods and services menu costs the costs of changing prices merit goods goods which can be provided by the market but may be under-consumed as a result microeconomics the study of how households and firms make decisions and how they interact in markets minimum wage the lowest price an employer may legally pay to a worker model of aggregate demand and aggregate supply the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend monetary neutrality the proposition that changes in the money supply not affect real variables monetary policy the set of actions taken by the central bank in order to affect the money supply money the set of assets in an economy that people regularly use to buy goods and services from other people money market the market in which the commercial banks lend money to one another on a short-term basis money multiplier the amount of money the banking system generates with each unit of reserves money stock the quantity of money circulating in the economy money supply the quantity of money available in the economy 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 monopsony a market with a single buyer moral hazard the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behaviour multiplier effect the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending 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 national saving (saving) the total income in the economy that remains after paying for consumption and government purchases 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 natural-rate hypothesis the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation natural rate of output the output level in an economy when all existing factors of production (land, labour, capital and technology resources) are fully utilized and where unemployment is at its natural rate natural rate of unemployment the normal rate of unemployment around which the unemployment rate fluctuates natural resources the inputs into the production of goods and services that are provided by nature, such as land, rivers and mineral deposits negative externality the costs imposed on a third party of a decision negative income tax a tax system that collects revenue from high-income households and gives transfers to low-income households net capital outflow the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners net exports spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports) net investment spending on the capital stock taking into account spending on depreciation of the existing capital stock 810 GLOSSARY nominal exchange rate the rate at which a person can trade the currency of one country for the currency of another nominal interest rate the interest rate as usually reported without a correction for the effects of inflation nominal variables variables measured in monetary units non-price competition a situation where two or more firms seek to increase demand and market share by methods other than through changing price nonstationary data time series data where the mean value can either rise or fall over time normal good a good for which, ceteris paribus, an increase in income leads to an increase in demand (and vice versa) normal profit the minimum amount required to keep factors of production in their current use normative statements claims that attempt to prescribe how the world should be Okun’s law a ‘law’ which is based on observations that in order to keep the unemployment rate steady, real GDP needs to grow at or close to its potential oligopoly competition amongst the few – a market structure in which only a few sellers offer similar or identical products and dominate the market open economy an economy that interacts freely with other economies around the world open-market operations the purchase and sale of non-monetary assets from and to the banking sector by the central bank opportunity cost whatever must be given up to obtain some item; the value of the benefits foregone (sacrificed) optimum currency area a group of countries for which it is optimal to adopt a common currency and form a currency union outright open-market operations the outright sale or purchase of non-monetary assets to or from the banking sector by the central bank without a corresponding agreement to reverse the transaction at a later date Pareto improvement when an action makes at least one economic agent better off without harming another economic agent patent the right conferred on the owner to prevent anyone else making or using an invention or manufacturing process without permission payoff matrix a table showing the possible combination of outcomes (payoffs) depending on the strategy chosen by each player peak where economic activity reaches a high and real output begins to decline perfect complements two goods with right-angle indifference curves perfect price discrimination a situation in which the monopolist knows exactly the willingness to pay of each customer and can charge each customer a different price perfect substitutes two goods with straight-line indifference curves permanent income a person’s normal income Phillips curve a curve that shows the short-run trade-off between inflation and unemployment physical capital the stock of equipment and structures that are used to produce goods and services Pigovian tax a tax enacted to correct the effects of a negative externality planned spending, saving or investment the desired or intended actions of households and firms positional arms races a situation where individuals invest in a series of measures designed to gain them an advantage but which simply offset each other positional externality a situation which exists when the payoff to one individual is dependent on their relative performance to others positive externality the benefits to a third party of a decision positive statements claims that attempt to describe the world as it is poverty line an absolute level of income set by the government below which a family is deemed to be in poverty In the UK and Europe this is measured by earnings less than 60 per cent of median income poverty rate the percentage of the population whose family income falls below an absolute level called the poverty line predatory or destroyer pricing a situation where firms hold price below average cost for a period to try and force out competitors or prevent new firms from entering the market present value the amount of money today that would be needed to produce, using prevailing interest rates, a given future amount of money price ceiling a legal maximum on the price at which a good can be sold price-consumption curve a line showing the consumer optimum for two goods as the price of one of the goods changes assuming incomes and the price of the good are held constant 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 price level an average of prices of all goods and services in an economy as measured by the CPI or the GDP deflator 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 private saving the income that households have left after paying for taxes and consumption private sector that part of the economy where business activity is owned, financed and controlled by private individuals privatization the transfer of publicly owned assets to private sector ownership procyclical a variable that is above trend when GDP is above trend GLOSSARY 811 producer prices index a measure of the change in prices of a basket of goods and services bought by firms producer surplus the amount a seller is paid for a good minus the seller’s cost production function the relationship between the quantity of inputs used to make a good and the quantity of output of that good production isoquant a function representing all possible combinations of factor inputs that can be used to produce a given level of output production possibilities frontier a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and available production technology productivity the quantity of goods and services produced from each hour of a worker or factor of production’s time progressive tax a tax for which high-income taxpayers pay a larger fraction of their income than low-income taxpayers property rights the exclusive right of an individual, group or organization to determine how a resource is used proportional or flat tax a tax for which high-income and low-income taxpayers pay the same fraction of income prospect theory a theory that suggests people attach different values to gains and losses and so in relation to some reference point public choice theory the analysis of governmental behaviour, and the behaviour of individuals who interact with government public goods goods that are neither excludable nor rival public interest making decisions based on a principle where the maximum benefit is gained by the largest number of people at minimum cost public saving the tax revenue that the government has left after paying for its spending public sector that part of the economy where business activity is owned, financed and controlled by the state, and goods and services are provided by the state on behalf of the population as a whole purchasing power parity a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries quantity demanded the amount of a good that buyers are willing and able to purchase at different prices quantity equation the equation M × V = P × Y, which relates the quantity of money, the velocity of money, and the currency value of the economy’s output of goods and services quantity supplied the amount of a good that sellers are willing and able to sell at different prices quantity theory of money a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate random walk the path of a variable whose changes are impossible to predict rational expectations the theory according to which people optimally use all the information they have, including information about government policies, when forecasting the future rational ignorance effect the tendency of a voter to not seek out information to make an informed choice in elections reaction function the decision of one firm on a particular issue such as the profit maximizing output in response to the profit maximizing output decisions of its rivals real exchange rate the rate at which a person can trade the goods and services of one country for the goods and services of another real GDP the measure of the value of output in the economy which takes into account changes in prices over time real interest rate the interest rate corrected for the effects of inflation real money balances what money can actually buy given the ratio of the money supply to the price level M P real variables variables measured in physical units real wages the money wage adjusted for inflation measured by the ratio of the wage rate to price W P recession a period of declining real incomes and rising unemployment The technical definition gives recession occurring after two successive quarters of negative economic growth refinancing rate the interest rate at which the European Central Bank lends on a short-term basis to the euro area banking sector regressive tax a tax for which high-income taxpayers pay a smaller fraction of their income than low-income taxpayers relative poverty a situation where an individual is not able to access what would be considered acceptable standards of living in society rent seeking where individuals or groups take actions to redirect resources to generate income (rents) for themselves or the group repo rate the interest rate at which the Bank of England lends on a short-term basis to the UK banking sector repurchase agreement (repo) the sale of a non-monetary asset together with an agreement to repurchase it at a set price at a specified future date reserve ratio the fraction of deposits that banks hold as reserves reserve requirements regulations on the minimum amount of reserves that banks must hold against deposits reserves deposits that banks have received but have not loaned out residual demand the difference between the market demand curve and the amount supplied by other firms in the market risk the probability of something happening which results in a loss or some degree of hazard or damage risk averse exhibiting a dislike of uncertainty rival the property of a good whereby one person’s use diminishes other people’s use sacrifice ratio the number of percentage points of annual output lost in the process of reducing inflation by percentage point satisficers those who make decisions based on securing a satisfactory rather than optimal outcome scarcity the limited nature of society’s resources screening an action taken by an uninformed party to induce an informed party to reveal information shoeleather cost the resources wasted when inflation encourages people to reduce their money holdings 812 GLOSSARY shortage a situation in which quantity demanded is greater than quantity supplied at the going market price signalling an action taken by an informed party to reveal private information to an uninformed party Single European Market a (still not complete) EU-wide market throughout which labour, capital, goods and services can move freely social security government benefits that supplement the incomes of the needy social welfare function the collective utility of society which is reflected by consumer and producer surplus special-interest effect where benefits to a minority special-interest group are outweighed by the costs imposed on the majority specific tax a fixed rate tax levied on goods and services expressed as a sum per unit stagflation a period of falling output and rising prices standard of living refers to the amount of goods and services that can be purchased by the population of a country Usually measured by the inflation-adjusted (real) income per head of the population stationary data time series data that have a constant mean value over time stochastic trend where trend variables change by some random amount in each time period stock (or share or equity) a claim to partial ownership in a firm store of value an item that people can use to transfer purchasing power from the present to the future strike the organized withdrawal of labour from a firm by a union structural deficit a situation where a government’s deficit is not dependent on movements in the economic cycle structural unemployment unemployment that results because the number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one sub-prime market individuals not traditionally seen as being part of the financial markets because of their high credit risk subsidy payment to buyers and sellers to supplement income or lower costs and which thus encourages consumption or provides an advantage to the recipient 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 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 supply shock an event that directly alters firms’ costs and prices, shifting the economy’s aggregate supply curve and thus the Phillips curve surplus a situation in which the quantity supplied is greater than the quantity demanded at the going market price synergies where the perceived benefits of the combined operations of a merged organization are greater than those which would arise if the firms stayed separate tacit collusion when firm behaviour results in a market outcome that appears to be anti-competitive but has arisen because firms acknowledge that they are interdependent tariff a 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 technological knowledge society’s understanding of the best ways to produce goods and services the economy all the production and exchange activities that take place every day the long run the period of time in which all factors of production can be altered the short run the period of time in which some factors of production cannot be changed theory of liquidity preference Keynes’ theory that the interest rate adjusts to bring money supply and money demand into balance time series data observations on a variable over a time-period and which are ordered over time total expenditure the amount paid by buyers, computed as the price of the good times the quantity purchased total revenue the amount received by sellers of a good, computed as the price of the good times the quantity sold total surplus the total value to buyers of the goods, as measured by their willingness to pay, minus the total cost to sellers of providing those goods total utility the satisfaction gained from the consumption of a good toxic debt mortgage-backed securities and other debt (such as bonds) that are not able to be repaid in many cases because the value of the assets against which they are secured have fallen significantly trade balance the value of a nation’s exports minus the value of its imports; also called net exports trade deficit an excess of imports over exports trade policy a government policy that directly influences the quantity of goods and services that a country imports or exports trade surplus an excess of exports over imports Tragedy of the Commons a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole transaction cost the opportunity cost of carrying out a transaction in any market transaction costs the costs that parties incur in the process of agreeing and following through on a bargain transfer earnings the minimum payment required to keep a factor of production in its current use transfer payment a payment for which no good or service is exchanged trend the underlying long-term movement in a data series trough where economic activity reaches a low and the decline ends unemployment insurance a government programme that partially protects workers’ incomes when they become unemployed GLOSSARY 813 unemployment rate the percentage of the labour force that is unemployed union a worker association that bargains with employers over wages and working conditions union density a measure of the proportion of the workforce that is unionized unit of account the yardstick people use to post prices and record debts utilitarianism the political philosophy according to which the government should choose policies to maximize the total utility of everyone in society utility the satisfaction derived from the consumption of a certain quantity of a product value of the marginal product the marginal product of an input times the price of the output variable costs costs that are dependent on the quantity of output produced velocity of money the rate at which money changes hands vertical equity the idea that taxpayers with a greater ability to pay taxes should pay larger amounts wealth the total of all stores of value, including both money and non-monetary assets welfare economics the study of how the allocation of resources affects economic well-being well-being happiness or satisfaction with life as reported by individuals 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 INDEX ability-to-pay principle of taxation, 214–15 abnormal profit, 155 absolute advantage, 414–15 absolute poverty, 393 accelerator principle, 660 accounting profit, 152–3 actual spending, 656 AD see aggregate demand adaptive expectations, 735–6 ad valorem taxes, 192, 194–6 adverse selection, 266–8 advertising, 48, 319–22, 339 agents, 264–5 aggregate demand, 669–75, 693–4 fiscal policy, 709–13 monetary policy, 702–9 Phillips curve, 722–4 taxation, 711–13 aggregate demand curve, 681–5, 705–7 aggregate risk, 546 aggregate supply, 694–5, 722–4 aggregate supply curve, 682, 686–91, 745–9 airlines, 306 allocative efficiency, 169–70 amplitude, 641 anchoring, 127 anti-poverty policies, 400–1 appreciation, 610 arbitrage, 304, 613 AS (aggregate supply), 694–5, 722–4 asset valuation, 548–53 assumption of rational behaviour, 246–7 assumptions, 20 asymmetric information, 246–7, 265–71, 275 asymmetric shocks, 766 austerity, 676–7, 797–801 Austrian school of economics, 564 automatic stabilizers, 715–16 autonomous spending, 657 availability heuristics, 128 average costs, 140–6 average tax rate, 212 Axiom of Comparison, 108 Axiom of Transitivity, 108 balanced budgets, 716 balanced trade, 606 Banco Nacional de Desenvolvimento Econômico e Social, 536 bandwagon effects, 128 Bank of England, 567 banks, 522–3, 568–79 central, 565–7, 730–2, 790–2 financial crisis, 576–9 Barclays LIBOR scandal, 275 bargaining, 246 bar graphs, 32 barriers to entry, 291–4 barter, 558 basketball, 143 Becker’s employer taste model, 376–7 814 behavioural approaches to consumer behaviour, 126–9 behavioural economics, 264–76 benefits principle of taxation, 214 bequests, 363 Bertrand Model of oligopoly, 347 Big Mac Index, 616–17 BNDES (Banco Nacional de Desenvolvimento Econômico e Social), 536 bond market, 520–1 bonds, 520 borrowing, 536 bounded rationality, 126 brain drain, 487 branding, 322–3, 325–6 Brazil, 536 bubbles, 782–93 budget constraints, 104–7 bureaucrat incentives, 256 business cycles, 11–12, 637–52 changes in, 645–6 confidence, 646 expectations, 646 external forces, 645 government policy, 646 models, 646–8 real, 648–50 capital, capital flight, 632–3, 634–5 capital gains tax, 596 capital income, 378 capital market, 377–8 capital mobility, 766–7, 769 capital stock, 491–2 carbon price floors, 200 carbon trading permits, 252–3 Carnegie Conjecture, 363 cars, 175, 267–8 cartels, 331–2 catch-up effect, 486 cause and effect, 38–40 CDOs (collateralized debt obligations), 526 CDS (credit default swaps), 523–5, 787 central banks, 565–7, 730–2, 790–2 ceteris paribus, 35 charities, 244 China comparative advantage, 417 demand, 82 economic growth, 493–5 inflation, 699 LCD cartels, 332 open market operations, 580 seafood, 82 choice sets, 108 Christmas, 115–16, 269 cinema tickets, 306 circular-flow diagrams, 22–3 claimant counts, 498 classical dichotomy, 587–9 climate change, 235–6 Coase theorem, 245–6 coincident indicators, 643 collateralized debt obligations, 526 collective bargaining, 508 collusion, 331, 350–1 commodity money, 560–1 common currencies, 762–8 common currency areas, 614, 759, 772–7 common resources, 222, 230–2, 235–6, 339–40 comovement, 643 comparative advantage, 414–18, 431–3 Comparison, Axiom of, 108 compensating differentials, 368 competition, 6, 42–3 imperfect, 290–1 meaning of, 150 versus monopoly, 294–5 product differentiation, 315–19 competition law, 310–11, 348–50 competitive advantage, 324 competitive firms, 151–60 competitive markets, 42–3, 150–3, 160–4 complements, 47 compounding, 540 concentration ratio, 329 constant returns to scale, 147 constrained optimization, 40, 113–25 consumer choice, 116–26 consumer expectations, 48 consumer prices index, 456–63 consumer surplus, 170–5 consumption, 443 contestable markets, 323–4 contingent valuation methods, 226 contractions, 640–1 coordinate system, 33–6 copulas, 547 copyright, 292–3 corporate decision-making, 645 correlation, 33 cost–benefit analysis, 225–8 cost curves, 141–4 cost of living, 456–70 costs average, 140–6 of capital, 135 definitions, 146 explicit, 134–5 fixed, 139 implicit, 134–5 marginal, 140–1, 142–3, 165–6 measures of, 138–44 rising marginal, 142 sunk, 158 variable, 140 cotton, 68–9 countercyclical variables, 642–3 coupons, 306 Cournot Model of oligopoly, 345–6 CPI (consumer prices index), 456–63 cream-skimming, 324 INDEX 815 credit default swaps, 523–5, 787 cronyism, 259 cross-price elasticity of demand, 81–2, 93 crowding out, 535, 536, 709–11 currency, 561 curves, 35–6 customer preferences, 108–13 cyclical deficit, 776, 797–8 cyclical unemployment, 501 dark pools, 527 deadweight loss, 204–10, 213, 269, 301–2 decision-making, 2–6, 28, 129–31, 645 deductive reasoning, 18 deflation, 599 deflationary gap, 658 demand, 43–9 cross-price elasticity of, 81–2 factors affecting, 46–8 income elasticity of, 81 law of, 43 price elasticity of, 72–81 demand curves, 35–6, 43–8 consumer surplus, 171–2 derivation, 120–1 kinked, 334–5 linear, 80–1 movement along, 46, 48 shifts in, 46–7, 48 slope, 121–2 variety of, 76–7 demand deposits, 562 demand management, 658–9, 663–4 demand schedules, 43–4 demand-side policies, 647–8 de-merit goods, 234 depreciation, 610 depressions, 637 deregulation, 754–5, 783 derived demand, 355 destroyer pricing, 323 deterministic trends, 642 developing countries, 536 dilution of capital stock, 491–2 diminishing marginal product, 137–8 diminishing marginal utility, 111 diminishing returns, 485–6 direct taxes, 192 discount coupons, 306 discount rate, 573 discounts, 306 discrimination, 373–6 diseconomies of scale, 147–8 disposable personal income, 442 diversification, 544–7 dominant strategy, 337–8 double coincidence of wants, 558 duopolies, 330 ECB (European Central Bank), 566–7 economic activity, 2–3 economic activity rate, 499–500 Economic and Monetary Union, 760, 768–72 economic bubbles, 782–93 economic efficiency, 179–81 economic fluctuations, 679–82, 691–5 economic growth, 9, 474–7, 478–9, 482–95, 800–1 economic life cycles, 390–2 economic mobility, 392–3 economic problem, 1–2 economic profit, 152–3 economic rent, 379–80 economics meaning of, 1–2 relevance of, 431–3 10 principles of, 3–11 economic slowdown, 757 economic well-being see well-being economies equilibrium, 656–9 meaning of, 2–3 open, 605–19, 622–35 stabilization of, 713–16 economies of scale, 147–9 economists agreement, 26–7 as decision makers, 28 disagreement, 24–5 as policy advisors, 23–4 scientific judgements, 24–5 as scientists, 17–23 values, 25 education, 232–3, 369–70, 487, 755–6 efficiency, 180 efficiency wages, 372–3 efficiency wage theory, 510–11 efficient markets hypothesis, 549–56 efficient scale, 142 EFSF (European Financial Stability Fund), 796–7 elasticity, 72–99 applications of, 95–7 of demand, 72–82 mathematics of, 90–5 oil prices, 98–9 of supply, 83–9 tax incidence, 196–7 empiricism, 18–20 employment, 651–2 see also unemployment EMU (European Economic and Monetary Union), 760, 768–72 endogenous variables, 22 endowment effect, 272–3 Engel Curves, 124–5 entry limit pricing, 323 equilibrium in the goods market, 665 equilibrium in the money market, 705 equilibrium of the economy, 656–9 equilibrium price, 56–7 equilibrium quantity, 56–7 equity, 3, 182–3, 214–16 equity finance, 521 ESM (European Stability Mechanism), 796–7 Euro, 566, 760–2 Euro-Budget, 778–9 European Central Bank, 566–7 European Economic and Monetary Union, 760, 768–72 European Financial Stability Fund, 796–7 European Stability Mechanism, 796–7 European Union, 761 excess capacity, 317–18 exchange rates, 611–12, 618–19 exchange rate variability, 763 excludable goods, 222 exits, 157, 158–9 exogenous variables, 22 expansionary austerity, 676–7 expectations, 48, 646, 699 expected utility theory, 128–9 experiments, 20–1 explicit costs, 134–5 exports, 418, 607–8 externalities, 8, 239–54 gun crime, 260–1 internalizing, 242–3 and market inefficiency, 240–4 negative, 239, 241–3 positional, 247–8 positive, 239, 243–4 private solutions, 244–8 public policies, 248–51 types of, 240 factors of production, 378–9 fairness, 273 Fama, Eugene, 554–6 fiat money, 561 films, 466 finance, 539 financial capital mobility, 766–7, 769 financial crisis, 525, 576–9, 782–802 financial institutions, 520–6 financial intermediaries, 522–3 financial markets, 520 financial system, 519–20 fiscal compact, 776–7 fiscal consolidation, 798–800 fiscal federalism, 772–3 fiscal multipliers, 717–18 fiscal policy, 668, 709–13, 772–7 Fisher effect, 592–3 fishing, 231–2 fixed costs, 139 flat tax, 215 flexible labour markets, 753–4 foreign currency exchange, market for, 624–8 foreign direct investment, 486–7 foreign exchange rate variability, 763 foreign portfolio investment, 486–7 fracking, 55 fractional-reserve banking, 568–9 France, 381–2 free riders, 223–4 free trade, 490 frictional unemployment, 503, 504–5 full employment, 655–6 functions, 30–1 fundamental analysis, 548–9 future value, 540 game theory, 335–6 GDP see gross domestic product general equilibrium, 179 Gesell, Silvio, 710 Giffen goods, 122 Gini coefficient, 388–90, 391 global recession, 789–90 good governance, 488–9 goods excludable, 222 merit, 232–4 private, 222 public, 222, 223–30 rival, 222 types of, 222–3 816 INDEX goods market, equilibrium in, 665 governance, 488–9 government budget deficits, 628–30 government budgets, 534–5 government failure, 254–9 government policy, 187–200, 646 see also public policy government purchases, 443, 709 government spending reduction, 754 graphs, 30–40 single variable, 31–3 two variables, 33–40 types of, 31–3 Greece, 793–4 greenhouse gas emissions, 235–6 gross domestic product, 438–52 components of, 441–5, 528–9 at constant prices, 445–6 at current prices, 445–6 deflator, 447–8, 463 at market prices, 445–6 measurement, 439–41, 448 nominal, 446–7 per capita, 9–10, 445 real, 445–7 revisions, 444 and well-being, 449–52 gross investment, 479 gross national product, 442 growth see economic growth Gulf Cooperation Council states, 310–11 gun crime, 260–1 happiness, 449–51 harmonized indices of consumer prices, 463 health, 487–8, 510 healthcare, 233–4 hedonics, 469–70 herd mentality, 272 heuristics, 127–8 HICPs (harmonized indices of consumer prices), 463 horizontal equity, 214, 215 household spending, 645 house prices, 783–5 human capital, 368–70, 480 human life, valuation of, 226–8 hysteresis, 502 ice cream, 583, 598 Iceland, 696 idiosyncratic risk, 544–6 imperfect competition, 290–1 implicit costs, 134–5 import quotas, 425–7 imports, 418 incentives, 5–6, 12–14 income consumer choice, 116–17 demand curve, 47–8 inequality, 386–93, 402 redistribution of, 395–401 income effects, 118–19 income elasticity of demand, 81, 92–3 income expansion path, 122–4 inconsistency, 274 indexation, 465–6 India, 350–1 indicators, 643 indifference curves, 108–10 indirect taxes, 192 inductive reasoning, 18 industrial policies, 756 inequality, 386–93, 402 inferior goods, 48 inflation, 11, 583–98 China, 699 correction for, 465–7 cost of, 594–9 cost of reduction, 734–7 fear of, 726 and money supply, 600–2 targeting, 739–40, 741–2 theory of, 584–93 unemployment, 721–42 inflationary gap, 658 inflation rate, 458 inflation tax, 592 informational efficiency, 550 infrastructure investment, 755 in-kind transfers, 400 insurance, 233–4, 268, 542–3 interaction, 6–8 interest income, 596 interest rates, 467, 706, 709–10 internalizing an externality, 242–3 international trade, 410–14, 429 intertemporal choice, 232 interventionist supply-side policies, 749, 755–6 introduction of new goods, 459 investment, 443, 483–4, 527–30, 608–9 in education and training, 755–6 incentives, 533 in infrastructure, 755 investment funds, 523 Ireland, 525 IS (investment and saving) curve, 665–6 IS-LM model, 665, 667–9, 671–2 IS-MP model, 672–3 isocost lines, 282–4 isoquants, 279–82 job search, 504–6 Keynes, John Maynard, 553, 647, 655 Keynesian cross, 655–9 Keynesian economics, new, 697–8 Keynesian intervention, 673–5, 676–7 kinked demand curves, 334–5 Krugman, Paul, 674–5 Kydland, Finn E 649–50 labour, labour demand, 356–60, 365 labour force, 499 labour force participation rate, 499–500 labour force surveys, 499–500 labour markets, 268, 355–82, 753–4 labour mobility, 766, 769 labour productivity, 286 labour supply, 360–4, 365 labour unions, 371–2 Laffer curve, 752–3 lagging indicators, 643 land, land market, 377–8 law of demand, 43 law of supply, 50 law of supply and demand, 58 LCD (liquid crystal display panels), 332 leading indicators, 643 least-cost input combination, 284–6 Lehman Bros, 789 Li, David, 547–8 liberalism, 396–7 libertarianism, 397–8 libertarian paternalism, 398 LIBOR (London Interbank Offered Rate), 275, 577–8 life cycles, 390–2 linear demand curves, 80–1 linear equations, 31 line graphs, 33 liquid crystal display panels, 332 liquidity, 560 liquidity preference, theory of, 703–5 LM (liquidity and money) curve, 666–7 loanable funds, market for, 530–5, 623–4, 626–8 logrolling, 257–8 London Interbank Offered Rate, 577–8 long run, 136 long-term unemployment, 502 Lorenz curve, 386–8 lotteries, 363 lump-sum tax, 212 macroeconomics, 9, 437–53, 605–19, 622–35 Malthus, Thomas Robert, 491 marginal abatement cost, 235, 249 marginal changes, marginal cost curves, 155–7 marginal costs, 140–1, 142–3, 165–6 marginal product, 136–8 marginal product of labour, 356–9 marginal propensity to consume, 660–1 marginal propensity to save, 660–1 marginal rate of substitution, 111–12 marginal rate of technical substitution, 281 marginal revenue, 151–2 marginal revenue product, 358 marginal tax rate, 212 marginal utility, 110–11 market demand, 44–6 market economy, 6–8 market efficiency, 179–83 market entry, 158–9 market equilibrium, 59–62, 62–7, 181–2 market exit, 157, 158–9 market failure, market for foreign currency exchange, 624–8 market for loanable funds, 530–5, 623–4, 626–8 market inefficiency, 240–4 market irrationality, 552–3 market-orientated supply-side policies, 749–55 market power, 8, 290–1 market price, 56–7 markets, 41–3 market segments, 330 market share, 290–1 market supply, 50–1 maximin criterion, 396–7 mediums of exchange, 559 mental accounting, 271–2 menu costs, 595–6 merit goods, 232–4 INDEX 817 microeconomics, minimum efficient scale, 142 minimum wage, 26, 370–1, 398–9, 506–7 Minsky’s financial instability hypothesis, 552 misallocation of resources, 596 Mises, Ludwig von, 564 misperceptions theory, 690 model of aggregate demand and aggregate supply, 681–2 models, 21–3 monetary control, 571–3 monetary equilibrium, 584–7 monetary injection, 586–7 monetary neutrality, 588–9 monetary policy, 565, 618–19, 669, 702–9 money meaning of, 559–62 quantity theory of, 587 value of, 584 velocity of, 589–90 money demand, 584–6, 704–5 money markets, 572, 705 money multiplier, 570–1 money stock, 561 money supply, 564, 565, 575, 584–6, 600–2, 703–4, 707–8 monopolies, 43, 290–311 causes of, 291–4 versus competition, 294–5 competition law, 310–11 deadweight loss, 301–2 government-created, 292–3 natural, 293–4 pharmaceuticals, 299–300 prevalence of, 309–10 profit, 298 profit maximization, 297–8 public ownership, 309 public policy, 307–9 regulation, 308–9 revenue, 295–7 social cost, 302–3 supply curves, 297–8 welfare cost, 300–3 monopolistically competitive markets, 43 monopolistic competition, 314–26 monopoly resources, 292 monopsony, 366–7 moral hazard, 265–6, 275 MP (monetary policy) function, 672–3 multiplier effect, 659–64 naïve empiricism, 127 Nash equilibrium, 333, 340–2 national defence, 224 national income, 442 national savings, 528–9 natural experiments, 21 natural monopolies, 222, 293–4 natural-rate hypothesis, 729 natural rate of output, 687–8 natural rate of unemployment, 501–2, 726 natural resources, 480, 482 negative correlation, 33 negative externalities, 239, 241–3 negative income tax, 399–400 negative interest rates, 710 net capital outflow, 606–9, 625–6 net exports, 444–5, 607–8 net investment, 479 net national product, 442 neuroscience, 129–31 New Keynesian economics, 697–8 nominal exchange rates, 610 nominal gross domestic product, 446–7 nominal interest rates, 467 nominal values, 40 nominal variables, 587–8 non-price competition, 335 nonstationary data, 641 non-tariff barriers, 427 normal goods, 47–8 normal profit, 155 normative statements, 23–4 nutrition, 487–8 oil, 339–40 oil prices, 55, 98–9 Okun’s law, 680 oligopolies, 43, 329–51 characteristics of, 329–35 models of, 344–7 prisoners’ dilemma, 338–9 product differentiation, 330 public policy, 347–50 omitted variables, 38–9 open economy macroeconomics, 605–19, 622–35 open-market operations, 565, 571, 580 opportunity costs, 4, 135, 407, 415 optimum currency areas, 765–8, 768–72 output, 680 natural rate of, 687–8 output gap, 658 outright open-market operations, 571 overconfidence, 126 Pakistan, 175 Pareto improvement, 180–1 participation rate, 499–500 patents, 292–3 payoff matrix, 336 peaks, 640 pensions, 233–4 perfect complements, 112–13 perfect price discrimination, 305 perfect substitutes, 112 permanent income, 392 personal income, 442 persuasion heuristics, 128 pharmaceuticals, 299–300 Phillips curve, 11, 721–34 photocopying, 350–1 physical capital, 479–80 pie charts, 32 Pigovian taxes, 248–9 PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries, 771, 773, 795, 802 planned spending, 656 political stability, 488–9 politician incentives, 256 pollution, 231, 235–6 tradable permits, 249–51, 252–4 population, 48 population growth, 491–3 positional arms races, 248, 253 positional externalities, 247–8 positive correlation, 33 positive externalities, 239, 243–4 positive statements, 23–4 poverty, 225 poverty line, 393 poverty rate, 393 poverty reduction, 398, 400–1 PPS (purchasing power standard), 615 predatory pricing, 323, 349 Prescott, Edward C 649–50 present value, 539–41 price ceilings, 187–90 price-consumption curves, 120 price controls, 187–92 price discrimination, 303–6, 762–3 price elasticity of demand applications of, 95–7 arc method of calculation, 74–5 computing, 73–6 linear demand curves, 80–1 mathematics of, 90–1 midpoint method of calculation, 74–5 point method of calculation, 75–6 rules, 73 total expenditure, 78–81, 94–5 price elasticity of supply applications of, 95–7 arc method of calculation, 85 computing, 85 determinants of, 83–4 mathematics of, 93–4 midpoint method of calculation, 85 point method of calculation, 85–6 total revenue, 88–9, 94–5 price floors, 187, 190–2, 200 price indices, 456–63, 469–70 price levels, 681 prices consumer choice, 117–18 consumer surplus, 173 finding, 49 producer surplus, 178–9 resource allocation, 67 as signals, 58–9 principals, 264–5 prisoners’ dilemma, 337–44 private goods, 222 private savings, 529 private sector, 221 private solutions to externalities, 244–8 privatization, 258–9, 754–5 procyclical variables, 642–3 producer prices index, 458 producer surplus, 176–9 product differentiation, 315–19, 330 production costs, 134–8 production decisions, 287–8 production function, 136–8 production isoquants, 279–82 production possibilities frontier, 405–10 productivity, 10–11, 286, 477–81 profit maximization, 153–4, 297–8 profit measurement, 159–60 progressive tax, 215 property rights, 251–2, 488–9 proportional tax, 215 prospect theory, 272 public choice theory, 255 public goods, 222, 223–30 public interest, 255–6 818 INDEX public policy see also government policy asymmetric information, 270–1 economic growth, 482–93 externalities, 248–51 job search, 505 monopolies, 307–9 oligopolies, 347–50 public savings, 529 public sector, 221 purchasing power, 594–5 purchasing power parity, 612–17, 626 purchasing power standard, 615 returns to scale, 147 revenue, competitive firms, 151–2 reverse causality, 39–40 Ricardo, David, 416 rising marginal costs, 142 risk aversion, 541–2 risk management, 541–8 rival goods, 222 road congestion, 231, 255 Romer model, 672–3 RPI (retail prices index), 461–2 rule of 70, 476 Russia, 634–5 Qatar, 310–11 QE (quantitative easing), 574–5, 600–2, 618–19 quality of life, 451–2 quantitative easing, 574–5, 600–2, 618–19 quantity demanded, 43, 49 quantity discounts, 306 quantity equation, 590 quantity supplied, 50 quantity theory of money, 587 quants, 547–8 quotas, 25–6, 425–7 sacrifice ratio, 734–5 Saha, David, 674 satisficers, 271 savings, 483–4, 527–33, 608–9 scarcity, scatterplots, 33–5 scientific method, 19 screening, 270 seafood, 82 securitization of assets, 576–8 self-interest, 244 SEM (standard economic model), 102–3, 126, 271–4 SGP (Stability and Growth Pact), 775 shares, 521 ships, 287–8 shoeleather costs, 595 shortages, 57–8 short run, 136 short-termism, 258 shutdowns, 157 signalling, 268–70 simulation heuristics, 128 single currency, 762–8 Single European Market, 761–2 slope, 37–8 demand curves, 121–2 supply curves, 164 Smith, Adam, 7, 416 social contracts, 244–5 socially efficient outcomes, 242–3 social norms of moral behaviour, 244 social optimum, 242–3 social security, 399 social welfare function, 183 South Sea Bubble, 786 sovereign debt crisis, 793–7, 802 special-interest effect, 257 special purpose vehicles, 576–8 specific taxes, 192–4 spending, 656–7 SPV (special purpose vehicles), 576–8 Stability and Growth Pact, 775 stabilization of economies, 713–16 Stackelberg Model of oligopoly, 347 stagflation, 695–6 standard economic model, 102–3, 126, 271–4 standard of living, 10–11 stationary data, 641 sticky price theory, 690 sticky wage theory, 689–90 stochastic trends, 642 stock markets, 521–2, 553 stocks, 521 stores of value, 560 strikes, 372 random walks, 550 RAS (reticular activation system), 127 rational behaviour, assumption of, 246–7 rational expectations, 735 rational ignorance effect, 256 rationalism, 19–20 rationality, 126–9 reaction function, 346 real business cycles, 648–50 real exchange rates, 611–12 real gross domestic product, 445–7 real interest rates, 467 real money balances, 665 real values, 40 real variables, 587–8 real wage flexibility, 766, 768–9 real wages, 588 recessions, 452–3, 637 redistribution of income, 395–401 redistribution of wealth, arbitrary, 598 refinancing rate, 571–3 regional policies, 756 regressive tax, 215 regulation, 251, 308–9 relative poverty, 393 relative price variability, 596 rent control, 189–90 rent seeking, 258 repo rate, 572 representativeness heuristics, 128 repurchase agreements, 572 resale price maintenance, 348–9 research, 224–5 research and development, 490, 756 reserve ratio, 569 reserve requirements, 573 reserves, 568 residual demand, 345 resource allocation, 67 resources, misallocation of, 596 restraint of trade, 348 retail prices index, 461–2 reticular activation system (RAS), 127 structural deficit, 776, 797–8 structural unemployment, 503 sub-prime market, 526, 785–7 subsidies, 198–9 substitutes, 47 substitution bias, 459 substitution effects, 118–19 sunk costs, 158 superstars, 370 supply, 50–6, 83–9 supply and demand, 41, 56–67 supply curves competitive firms, 153–60 competitive markets, 160–4 factors affecting, 53–4 market supply, 50–1 monopolies, 297–8 price, 50 producer surplus, 177 quantity supplied, 50 shifts in, 51–4, 56 slope, 164 variety of, 86 supply schedules, 50 supply shocks, 732–4 supply-side policies, 646–7, 745–57 economic slowdown, 757 interventionist, 749, 755–6 market-orientated, 749–55 types of, 749–56 surpluses, 57–8 symmetric demand shocks, 767, 770–2 synergies, 307 tacit collusion, 344 tariffs, 25–6, 424–5 tastes, 48 taxation ability-to-pay principle, 214–15 administrative burden, 210–11 ad valorem, 192, 194–6 aggregate demand, 711–13 average rates, 212 benefits principle, 214 canons of, 211 capital gains tax, 596 deadweight loss, 204–10, 213 direct, 192 and efficiency, 203–4 and equity, 214–16 flat, 215 indirect, 192 inefficiencies, 259 interest income, 596 lump-sum, 212 marginal rates, 212 Pigovian, 248–9 principles of, 211 progressive, 215 proportional, 215 reform, 750–1 regressive, 215 specific, 192–4 system design, 211–12 and welfare, 204–7 tax avoidance, 217–18 tax distortions, 596–7 tax incidence, 192–3, 196–7, 215–16 Taylor rule, 712 technological knowledge, 480–1 technological progress, 492–3 INDEX 819 10 principles of economics, 3–11 text messaging, 165–6 theories, 18–19 theory of liquidity preference, 703–5 threshold concepts, 17 time series data, 638 time-series graphs, 32 tools, 30–40 total cost curves, 138 total expenditure, 78–81, 94–5 total revenue, 88–9, 94–5 total surplus, 180 total utility, 110–11 toxic debt, 578 tradable pollution permits, 249–51, 252–4 trade, 6, 405–33 determinants of, 418–20 restrictions on, 423–30 winners and losers, 420–3 trade balance, 606 trade deficit, 606 trade integration, 767–8 trade-offs, 3–4, 546–7 trade policy, 630–2 trade surplus, 606 trade unions, 508–9 Tragedy of the Commons, 230–1 training, 755–6 transaction costs, 246, 595, 762 transfer earnings, 379 transfer payments, 443 Transitivity, Axiom of, 108 trend growth, 476 trend growth rates, 638–43 trends, 641–2 troughs, 640 tying, 349–50 variable costs, 140 velocity of money, 589–91 vertical equity, 214–15 very large ships, 287–8 voter incentives, 256 unemployment, 497–515, 651–2, 680 cost of, 511–13 cyclical, 501 frictional, 503, 504–5 and inflation, 721–42 long-term, 502 natural rate of, 501–2, 726 structural, 503 and vacancies, 514–16 unemployment-inflation trade-off, 728–30 unemployment insurance, 505–6 unemployment rate, 499–500 union density, 508 unions, 371–2, 508–9 units of account, 559–60 unmeasured quality change, 459–61 used cars, 267–8 U-shaped average total cost, 142 utilitarianism, 395–6 utility, 103 wage curve theory, 737–9 wage differentials, 367–73 wage flexibility, 766, 768–9 waste, 179–80 wealth, 560 Weizsäcker, Jakob von, 674 welfare, 204–7, 318–19 see also well-being welfare economics, 169, 241 welfare policy, 750–1 well-being, 169, 184–5, 449–52 see also welfare whaling, 231–2 wildlife conservation, 231–2 willingness to pay, 170–1 willingness to sell, 176 worker effort, 510–11 worker health, 510 worker quality, 511 worker turnover, 511–13 work incentives, 400–1 world prices, 419–20 vacancies, 514–16 value, 102–3 stores of, 560 value of money, 584 value of the marginal product, 358 Xerox stores, 350–1 zero risk, 547–8 CREDITS All Figures, Tables and artwork not listed on this credit page are the authors’ own work and so not require any credit lines, permissions acknowledgements or referencing citations IMAGES The following Images have been reproduced with the kind permission of the copyright holders: Image 1.1 A typical supermarket shelf … p Source: © Kumar Sriskandan/Alamy Image 1.2 Adam Smith, p Source: © Classic Image/ Alamy Image 1.3 Providing a monetary incentive … p 13 Source: © Shutterstock Image 2.1 Models are used in many different disciplines … p. 21 Source: © Shutterstock Image 3.1 The fracking process … p 55 Source: © Shutterstock Image 3.2 Changes in the price of cotton … p 69 Source: © Andrew Ashwin Image 4.1 Fish farms like this in China … p 82 Source: © Shutterstock Image 4.2 As supplies of oil start to diminish … p 98 Source: © Shutterstock Image 5.A Would you pay €75 for these shoes … p 103 Source: © Shutterstock Image 5.1 Many stores provide information on their receipt … p. 116 Source: © Shutterstock Image 5.2 The brain plays a crucial role in decision making … p 131 Source: © Shutterstock Image 6.1 Thinking about average and marginal costs … p. 143 Source: © Shutterstock Image 6.1a Thinking at the margin means that famers … p. 154 Source: © Shutterstock Image 6.2 With 1/1000th of a cent being the average cost … p 165 Source: © Lana Rastro/Alamy Image 7.1 The car in Pakistan … p 175 Source: © Asianet-Pakistan/Alamy Image 7.2 Poverty and wealth often cohabit side-by-side … p 184 Source: © Shutterstock Image 8.1 Taxes on the sale of goods and services … p. 192 Source: © theodore liasi/Alamy Image 8.2 The carbon price floor … p 200 Source: © Shutterstock Image 9.1 The size of the deadweight loss … p 213 Source: © Shutterstock Image 9.2 Amazon, Google and Starbucks attracted a good deal of publicity … p. 218 Sources: © Marek Stepan/ Alamy (left); © Steve Stock/Alamy (center); and © Biz/ ed (right) Image 10.1 Accidents will happen … p 228 Source: © Shutterstock Image 10.2 The dumping of potentially hazardous waste … p 236 Source: © Shutterstock 820 Image 11.1 How does a village become carbon neutral … p 253 Source: © Dave Ellison/Alamy Images 11.2a and 11.2b The costs of gun crime can be substantial … p 261 Source: © Shutterstock Image 12.1 Giving gifts is fraught with difficulty … p 269 Source: © Caro/Alamy Image 12.2 Joseph Stiglitz won the Nobel Peace Prize … p 275 Source: © Gallo Images/Alamy Image 13.1 Levels of education have a significant impact on labour … p 286 Source: © Shutterstock Image 13.2 Very large ships help reduce unit costs … p. 287 Source: © Shutterstock Image 14.1 Pfizer held the patent for the drug Viagra until July 2013 … p 300 Source: © Shutterstock Image 14.2 Where competition law and regulation is weak … p 311 Source: © Shutterstock Image 15.1 Could you tell the difference between Pepsi and Coca-Cola … p. 320 Source: © Lux Igitur/Alamy Image 15.2 Staples Office Superstores … p 326 Source: © Ian Dagnall/Alamy Image 16.1 Go into any electronics retailer … p. 332 Source: © Shutterstock Image 16.2 Photocopying shops in one part of India … p. 351 Source: © Peter Horree/Alamy Images 17.1a and 17.1b If you won the lottery … p 363 Source: © Shutterstock Image 17.2 An empty platform at the Gare de l’Est railway station … p 381 Source: © Shutterstock Image 18.1 Countries with relatively high Gini coefficients … p 391 Source: © Shutterstock Image 18.2 Family relationship problems can have … p. 402 Source: © Shutterstock Image 19.1 A country’s comparative advantage changes over time … p 417 Source: © Henry Westheim Photography/Alamy Image 19.2 Lee Kuan Yew, the first prime minister of independent Singapore … p 433 Source: © Asia File/Alamy Image 20.1 The complexity of capturing data … p 444 Source: © Shutterstock Image 20.2 Observe the similarities between this 1930s Depression … p 453 Sources: © Everett Collection Historical/Alamy (left) and © Geoffrey Robinson/ Alamy (right) Image 21.1 The number one film of all time … p 466 Source: © Robert Harding Picture Library Ltd/Alamy Image 21.2 Technology changes over time … p 470 Source: © Shutterstock Image 22.1 Copper prices fluctuate over short periods of time … p 482 Source: © Shutterstock CREDITS 821 Image 22.2 Professor Justin Yifu Lin … p 494 Source: © Justin Yifu Lin Image 22.3 Thomas Robert Malthus … p 491 © The Print Collection/Alamy Image 23.1 The rise in youth unemployment … p 502 Source: © Shutterstock Image 23.2 In reality the labour market … p. 515 Source: © Shutterstock Image 24.1Austerity policies have affected … p 525 Source: © Shutterstock Image 24.2 An offshore oil rig … p. 536 Source: © Shutterstock Image 25.1 David Li was referred to by some … p 548 Source: © Ken Tam/Alamy Image 25.2 Eugene Fama was acknowledged … p. 555 Source: © Eugene Fama, 2012 Image 26.1 Ludwig von Mises … p 564 Source: © Ludwig von Mises Image 26.2 The People’s Bank of China … p 580 Source: © TAO Images Limited/Alamy Image 27.1 Some question whether quantitative easing … p 601 Source: © Copyright 2007-2013 Truth Alliance inc Image 28.1 Wherever you go in the world the Big Mac … p 617 Source: © incamerastock/Alamy Image 28.2 The Bank of England … p 619 Source: © Biz/ed Image 29.1 Money from criminal gangs … p. 634 Source: © Shutterstock Image 30.1 Finn E Kydland (left) and Edward C Prescott (right) … p 650 Source: © WOLFGANG RATTAY/ Reuters/Corbis Image 30.2 Productivity is a measure of output per worker … p 652 Source: © Shutterstock Image 31.1 To produce goods … p 660 Source: © MOHAMED ABD EL GHANY/Reuters/Corbis Image 31.2 Robert Skidelsky, Emeritus Professor … p 677 Source: © Robert Skidelsky Image 32.1 The collapse of the banking system … p 696 Sources: © Shutterstock (left) and © Ecojoe/Alamy (right) Image 32.2 New housing development in China … p 699 Source: © Shutterstock Image 33.1 Former Bank of England deputy governor … p. 710 Source: © epa european pressphoto agency b.v./Alamy Image 33.2 Large-scale investment … p 718 Source: © epa european pressphoto agency b.v./Alamy Image 34.1 Rising fuel prices … p 726 Source: © Shutterstock Image 34.2 Mervyn King … p 742 Source: © epa european pressphoto agency b.v./Alamy Image 35.1 Arthur Laffer … p 753 Source: © Bob Daemmrich/Cross/Alamy Image 35.2 Reform of planning laws … p 757 Source: © Shutterstock Image 36.1 Critics of the SGP … p 775 Source: © Cengage Learning EMEA Image 36.2 There are stark contrasts in economic welfare across Europe … p 779 Source: © Shutterstock Image 37.1 The South Sea Scheme … p 786 Source: © Falkensteinfoto/Alamy Image 37.2 One of the major fears of the problems … p. 802 Source: © Shutterstock FIGURES The following Figures have been reproduced with the kind permission of the copyright holders: Figure 18.5 Gini coefficient (measured on a scale from 0–100) for the EU 27 countries, 2011, p 390 Source: Eurostat Reproduction of Eurostat data/documents for both commercial and non-commercial dissemination are automatically authorised provided appropriate acknowledgement is given to Eurostat as the source Figure 18.8 People at Risk of Poverty and Social Exclusion in the EU in 2011, p 394 Source: Eurostat Reproduction of Eurostat data/documents for both commercial and non-commercial dissemination are automatically authorised provided appropriate acknowledgement is given to Eurostat as the source Figure 21.1 Two Measures of Inflation, p 464 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National Statistics and HM Treasury Crown Copyright and public domain Figure 26.1 Three Measures of the Money Stock for the Euro Area, p 563 Source: ECB Figure 27.3 The Velocity of Circulation, 1959–2013, p 591 Source: Economagic.org Figure 27.4 The UK Nominal Interest Rate and the Inflation Rate, p 594 Source: Bank of England and UK Office for National Statistics © Bank of England and public domain Figure 30.1 GDP in the UK and Europe, 1960–2011, p 639 Source: World Bank 822 CREDITS Figure 30.2 UK GDP Growth Rate, 1960–2011 (%), p 640 Source: World Bank Figure 30.3 OECD Area Composite Leading Indicators (CLI) Index, 2003–2013, p 644 Source: OECD Figure 36.3 Growth Rates in Germany, France and the Whole Euro area, p 770 Source: Eurostat Reproduction of Eurostat data/documents for both commercial and non-commercial dissemination are automatically authorised provided appropriate acknowledgement is given to Eurostat as the source Figure 36.4 Growth Rates in Ireland, Greece and the Whole Euro area, p 771 Source: Eurostat Reproduction of Eurostat data/documents for both commercial and non-commercial dissemination are automatically authorised provided appropriate acknowledgement is given to Eurostat as the source Figure 37.1 The Rise in House Prices, p 784 Source: Halifax House Price Index and Standard & Poors © Lloyds Banking Group and © 2013 Standard & Poor’s Financial Services LLC, a part of McGraw Hill Financial All rights reserved TABLES The following Tables have been reproduced with the kind permission of the copyright holders: Table 1.1, p 10 Source: Fair use, data compiled from a variety of sources including http://stats.oecd.org/index and http://data.worldbank.org/indicator Table 1.2, p 12 Source: This is a blog which has been confirmed to be in the public domain: http://signsofchaos.blogspot.com/2005/11 /price-elasticity-of-supply-and-web.html Table 2.1, p 26 Source: Adapted from Richard M Alston, J.R Kearl and Michael B Vaughn, ‘Is There Consensus among 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Meier, S & Ray-Biel, p (2011) ‘When and why incentives (don’t) work to modify behaviour’ In Journal of Economic Perspectives 25:4, pp. 191–210 Ch In The News The Future Price of Oil and Elasticity, p. 97 Source: www.washingtonpost.com by Brad Plumer, October 2012, © 1996–2013 The Washington Post Ch 10 In The News The Problem of the Commons: Still Unsettled after 100 Years, p 235 Source: Permission not needed as fair use but references used include Stavins, Robert N, (2011) The Problem of the Commons: Still Unsettled after 100 Years In The American Economic Review, 101, (1), pp 81–108 Ch 12 In The News Moral Hazard, p 275 Source: ‘None of them have gone to jail': man who ran World Bank calls for bankers to face the music’ The Independent (London, England) July 2nd 2012 © independent.co.uk Ch 13 In The News Production Decisions and the economics of v big ships, p 287 Source: ‘Economies of scale made steel: Shipping’, The Economist 12th November 2011 Copyright © The Economist Newspaper Limited 2013 Ch 15 In The News Best Brands are Disruptively Consistent, p 325 Source: Marketing Week, June 28, 2012, © 2012 Centaur Communications Limited Ch 18 In The News Concerns Over Rate of Young Male Suicides, p 402 Source: www.irishexaminer.com January 24th 2013 © Irish Examiner Ltd, City Quarter, Lapps Quay, Cork Ch 19 In The News Time to Review Economics Curriculum, p 431 Source: www.businessdayonline com 29th March 2012, Ejike Nwolisa, © Business Day Online, 2013 Ch 36 In The News Does The Eurozone Need a Budget? p. 778 Source: www.euractiv.com 22nd March 2013, Daniel Gros © EurActiv.com PLC, 2013 FYIS No FYI text required permission ... inflation and unemployment IN THE NEWS Latest Thinking in Economics – Incentives One of the Ten Principles of Economics is that people respond to incentives This should not be an entirely surprising... between inflation and unemployment using various policy instruments By changing the amount that the government spends, the amount it taxes and the amount of money it prints, policymakers can influence... a major awarding body for business and economics in England and is a consultant for the UK regulator, Ofqual Andrew has a keen interest in assessment and learning in economics and has received