Giáo trình principles of economics a streamlined approach 3e by frank 1

CONTENTS PART 1 Introduction Chapter 1 Thinking Like an Economist 1 Economics: Studying Choice in a World of Scarcity 2 Applying the Cost-Benefit Principle 3 Economic Surplus 4 Opportu

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Frank | Bernanke | antonovics | HeFFetz

A s t r e a m l i n e d A p p r o A c h

tHird edition

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Principles of

ECONOMICS

A STREAMLINED APPROACH

T H I R D E D I T I O N

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A Streamlined Approach for:

Principles of Economics, Principles of

McConnell, Brue, and Flynn

Brief Editions: Microeconomics

Samuelson and Nordhaus

Economics, Microeconomics, and Macroeconomics

Nineteenth Edition

Schiller

The Economy Today, The Micro Economy Today, and The Macro Economy Today

Fourteenth Edition

Slavin

Economics, Microeconomics, and Macroeconomics

Register and Grimes

Economics of Social Issues

Twenty-First Edition

ECONOMETRICS Gujarati and Porter

Managerial Economics and Business Strategy

Eighth Edition

Brickley, Smith, and Zimmerman

Managerial Economics and Organizational Architecture

Urban Economics

Eighth Edition

LABOR ECONOMICS Borjas

Labor Economics

Seventh Edition

McConnell, Brue, and Macpherson

Contemporary Labor Economics

Eleventh Edition

PUBLIC FINANCE Rosen and Gayer

Environmental Economics: An Introduction

Seventh Edition

INTERNATIONAL ECONOMICS Appleyard and Field

International Economics

Eighth Edition

King and King

International Economics, Globalization, and Policy: A Reader

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Brookings Institution [affiliated]

Former Chairman, Board of Governors of the Federal Reserve System

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PRINCIPLES OF ECONOMICS, A STREAMLINED APPROACH, THIRD EDITION

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ABOUT THE AUTHORS

ROBERT H FRANK

Robert H Frank is the H J

Louis Professor of ment and Professor of Eco-nomics at Cornell’s Johnson School of Management, where

Manage-he has taught since 1972 His

“Economic View” column

ap-pears regularly in The New

York Times. He is a guished Senior Fellow at Demos After receiving his B.S from Georgia Tech in 1966, he taught math and science for

Distin-two years as a Peace Corps Volunteer in rural Nepal He

re-ceived his M.A in statistics in 1971 and his Ph.D in economics

in 1972 from The University of California at Berkeley During

leaves of absence from Cornell, he has served as chief

econo-mist for the Civil Aeronautics Board (1978–1980), a Fellow at

the Center for Advanced Study in the Behavioral Sciences

(1992–93), Professor of American Civilization at l’École des

Hautes Études en Sciences Sociales in Paris (2000–01), and the

Peter and Charlotte Schoenfeld Visiting Faculty Fellow at the

NYU Stern School of Business in 2008–09 His papers have

appeared in the American Economic Review, Econometrica, the

Journal of Political Economy, and other leading professional

journals

Professor Frank is the author of a best-selling intermediate

economics textbook—Microeconomics and Behavior, Ninth

Edition (Irwin/McGraw-Hill, 2015) His research has focused

on rivalry and cooperation in economic and social behavior His

books on these themes include Choosing the Right Pond

(Ox-ford, 1995), Passions Within Reason (W W Norton, 1988),

What Price the Moral High Ground? (Princeton, 2004), Falling

Behind (University of California Press, 2007), The Economic

Naturalist (Basic Books, 2007), The Economic Naturalist’s

Field Guide (Basic Books, 2009), and The Darwin Economy

(Princeton, 2011), which have been translated into 22

lan-guages The Winner-Take-All Society (The Free Press, 1995),

co-authored with Philip Cook, received a Critic’s Choice

Award, was named a Notable Book of the Year by The New

York Times, and was included in BusinessWeek’s list of the 10

best books of 1995 Luxury Fever (The Free Press, 1999) was

named to the Knight-Ridder Best Books list for 1999.

Professor Frank has been awarded an Andrew W Mellon

Professorship (1987–1990), a Kenan Enterprise Award (1993),

and a Merrill Scholars Program Outstanding Educator Citation

(1991) He is a co-recipient of the 2004 Leontief Prize for

Ad-vancing the Frontiers of Economic Thought He was awarded

the Johnson School’s Stephen Russell Distinguished Teaching

Award in 2004, 2010, and 2012, and the School’s Apple

Distin-guished Teaching Award in 2005 His introductory

microeco-nomics course has graduated more than 7,000 enthusiastic

economic naturalists over the years

BEN S BERNANKE

Professor Bernanke received his B.A in economics from Harvard University in 1975 and his Ph.D in economics from MIT in 1979 He taught

at the Stanford Graduate School of Business from

1979 to 1985 and moved to Princeton University in 1985, where he was named the Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs, and where he served as Chairman of the Economics Department

Professor Bernanke was sworn in on February 1,

2006, as Chairman and a member of the Board of nors of the Federal Reserve System—his second term ex-pired January 31, 2014 Professor Bernanke also serves as Chairman of the Federal Open Market Committee, the Fed’s principal monetary policymaking body He was ap-pointed as a member of the Board to a full 14-year term, which expires January 31, 2020 Before his appointment as Chairman, Professor Bernanke was Chairman of the Presi-dent’s Council of Economic Advisers, from June 2005 to January 2006

Professor Bernanke’s intermediate textbook, with

Andrew Abel and Dean Croushore, Macroeconomics, Eighth

Edition (Addison-Wesley, 2011), is a best seller in its field

He has authored more than 50 scholarly publications in roeconomics, macroeconomic history, and finance He has done significant research on the causes of the Great Depres-sion, the role of financial markets and institutions in the busi-ness cycle, and measurement of the effects of monetary policy on the economy

mac-Professor Bernanke has held a Guggenheim Fellowship and a Sloan Fellowship, and he is a Fellow of the Economet-ric Society and of the American Academy of Arts and Sci-ences He served as the Director of the Monetary Economics Program of the National Bureau of Economic Research (NBER) and as a member of the NBER’s Business Cycle Dating Committee In July 2001, he was appointed editor of

the American Economic Review Professor Bernanke’s work

with civic and professional groups includes having served two terms as a member of the Montgomery Township (N.J.) Board of Education Visit Professor Bernanke’s blog at www.brookings.edu/blogs/ben-bernanke

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KATE ANTONOVICS

Professor Antonovics received her B.A from Brown Univer-sity in 1993 and her Ph.D in economics from the University

of Wisconsin in 2000 Shortly thereafter, she joined the fac-ulty in the Economics Depart-ment at the University of California, San Diego, where she has been ever since

Professor Antonovics is known for her superb teaching and

her innovative use of technology in the classroom Her highly

popular introductory-level microeconomics course regularly

enrolls over 450 students each fall She also teaches labor

eco-nomics at both the undergraduate and graduate level In 2012,

she received the UCSD Department of Economics award for

best undergraduate teaching

Professor Antonovics’s research has focused on racial

discrim-ination, gender discrimdiscrim-ination, affirmative action, intergenerational

income mobility, learning, and wage dynamics Her papers have

appeared in the American Economic Review, the Review of

Eco-nomics and Statistics, the Journal of Labor Economics, and the

Journal of Human Resources. She is a member of both the

Ameri-can Economic Association and the Society of Labor Economists

Although many millions of dollars are spent each year on introductory economics instruction in American colleges and universities, the return on this investment has been dis-turbingly low Studies have shown, for example, that several months after having taken a principles of economics course, former students are no better able to answer simple eco-nomics questions than others who never even took the course Most students, it seems, leave our introductory courses without having learned even the most important ba-sic economic principles

The problem, in our view, is that these courses almost always try to teach students far too much In the process, really important ideas get little more coverage than minor ones, and everything ends up going by in a blur The human brain tends to ignore new information unless it comes up repeatedly That’s hardly surprising, since only a tiny frac-tion of the terabytes of information that bombard us each day is likely to be relevant for anything we care about Only when something comes up a third or fourth time does the brain start laying down new circuits for dealing with it.Yet when planning their lectures, many instructors ask themselves, “How much can I cover today?” And because mod-ern electronic media enable them to click through upwards of

100 PowerPoint slides in an hour, they feel they’ve better served their students the more information they’ve put before them But that’s not the way learning works Professors should instead

be asking, “How much can my students absorb?”

Our approach to this text was inspired by our conviction that students will learn far more if we attempt to cover much less Our basic premise is that a small number of basic prin-ciples do most of the heavy lifting in economics, and that if

we focus narrowly and repeatedly on those principles, dents can actually master them in just a single semester.The enthusiastic reactions of users of previous editions

stu-of our textbook affirm the validity stu-of this premise ing excessive reliance on formal mathematical derivations,

Avoid-we present concepts intuitively through examples drawn from familiar contexts

ADAPTING TO CLASSROOM TRENDS

Baumol’s cost disease refers to the tendency for costs to rise more rapidly for goods and services for which growth in labor productivity is either slow or nonexistent For exam-ple, it still takes four musicians to perform Beethoven’s String Quartet Number 14 in C-sharp Minor today, just as when the piece debuted in 1826, even though labor produc-tivity has risen hundreds-fold for many other goods during the same period It is thus no surprise that the cost of stag-ing live music performances has been rising so much faster than the cost of producing many manufactured goods

vii

ORI HEFFETZ

Professor Heffetz received his B.A in physics and philosophy from Tel Aviv University in

1999 and his Ph.D in ics from Princeton University

econom-in 2005 He is an Associate Professor of Economics at the Samuel Curtis Johnson Gradu-ate School of Management at Cornell University, where he has taught since 2005

Bringing the real world into the classroom, Professor

Heffetz has created a unique macroeconomics course that

intro-duces basic concepts and tools from economic theory and

ap-plies them to current news and global events His popular

classes are taken by hundreds of students every year, on the

Cornell Ithaca campus and, via live videoconferencing, in

doz-ens of cities across the U.S., Canada, and beyond

Professor Heffetz’s research studies the social and cultural

aspects of economic behavior, focusing on the mechanisms that

drive consumers’ choices and on the links between economic

choices, individual well-being, and policymaking He has

pub-lished scholarly work on household consumption patterns,

indi-vidual economic decision making, and survey methodology and

measurement He was a visiting researcher at the Bank of Israel

during 2011, is currently a Faculty Research Fellow at the

Na-tional Bureau of Economic Research (NBER), and serves on

the editorial board of Social Choice and Welfare.

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To date, Baumol’s cost disease has applied with

con-siderable force in the case of classroom instruction, where

tuition increases have far exceeded even the rapid growth in

the cost of health care This is what we would expect if the

dominant teaching model remains as it was a century ago,

in which a learned instructor stands in front of a class

recit-ing truths cataloged in the assigned text

But as the late Herb Stein once remarked, “If something

cannot go on forever, it will stop.” And so it is with rising

tuitions Universities are already facing strong pressure to

moderate their rates of tuition growth An inevitable result

of this pressure will be that much of the content that

profes-sors have traditionally delivered in live lecture will instead

be delivered electronically Indeed, technological advances

have given today’s students an unparalleled ability to access

information via the Internet, YouTube, and social media

If early experience is any indication, the “flipped-

classroom” model is one of the most promising adaptations

to this new environment In this approach, students are

ex-pected to study basic concepts before coming to class and

then deepen their understanding of them through structured

classroom exercises and discussion The logic of the flipped

classroom is compelling because under this approach,

stu-dents have access to instructors precisely when stustu-dents are

engaged in those activities that students find the most

chal-lenging (for example, problem solving and policy

evalua-tion) Indeed, numerous studies have found that the

flipped-classroom approach increases both student

satisfac-tion and student learning

The streamlined approach of this text is aligned with

the goals of the flipped classroom Rather than trying to

bombard students with information they can easily access

online, our book seeks to promote a deeper understanding

of economics by focusing on core concepts In addition, one

of our central goals has been to create resources to help

instructors adopt the flipped-classroom approach, which

enables instructors to spend class time engaging,

facilitating, and answering questions related to higher-level

content and critical thinking Some instructors may find

these resources useful in completely overhauling the way

they teach, while others may be interested in using them to

make a few minor changes to their current courses In other

words, this edition is intended to support a variety of

teach-ing styles (and, indeed, our team of authors varies

consider-ably in our pedagogical approach)

The traditional approach has, of course, been to ask

students to read the relevant sections from the textbook

be-fore coming to class But instructors report that today’s

stu-dents are far less likely than their predecessors to complete

such assignments To ensure compliance, stronger incentives

are needed One effective approach has employed brief tests

administered at the start of class These might involve two

or three simple multiple-choice questions on the assigned

material that are administered and graded electronically Some professors have used purpose-built clickers (inexpen-sive handheld devices that enable students to transmit infor-mation to a server that tabulates it), while others use smartphone apps for this purpose

Perhaps the biggest hurdle to effective implementation

of the flipped-classroom approach has been a dearth of effective pre-class concept-delivery materials To help fill this gap, we have created a library of short videos that focus

on basic economic concepts Many students have found these videos and animations engaging enough to watch even if they’re not going to be tested on them, but we’ve also provided easily administered in-class questions that can boost compliance still further

The big payoff from the flipped-classroom approach comes from being able to use limited class time to actually apply and discuss the concepts that students have studied before coming to class One approach begins by asking stu-dents to answer a multiple-choice question requiring appli-cation of a concept, and then reporting the frequencies with which students selected the various multiple-choice op-tions Students are then given a few moments to discuss the question with their neighbors before having an opportunity

to change the answers they originally submitted Professors then call on students who’ve offered both correct and incor-rect answers to the question to defend their answers to the class and lead the ensuing discussion We’ve spent consid-erable effort drafting the kinds of questions that reliably provoke animated discussions of this sort

In summary, here are the resources we have developed

to support the flipped-classroom experience, all available within McGraw-Hill Connect® specific to the third edition:

Before Class (Exposure)

∙ SmartBook® Adaptive Reading Assignments: Book® contains the same content as the print book, but actively tailors that content to the needs of the individ-ual through adaptive probing and integrated learning resources Instructors can assign SmartBook reading assignments for points to create incentives for students

Smart-to come Smart-to class prepared

∙ Learning Glass Lecture Videos: A series of 3-5 minute lecture videos featuring the authors and utilizing excit-ing learning glass technology provide students with an overview of important concepts before coming to class These videos can be accessed as resources within SmartBook or are available for stand-alone assignments

In Class (Engagement)

∙ Clicker Questions: Classroom-tested by the authors, these multiple-choice questions are designed to facili-tate discussion and group work in class

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∙ Economic Naturalist Application-Focused Videos: A

known hallmark of this franchise, the Economic

Natu-ralist examples are now available as short, engaging

video vignettes within Connect and SmartBook

After Class (Reinforcement)

∙ Connect Exercises: All end-of-chapter homework

ex-ercises are available to be assigned within Connect

Many of these exercises include algorithmic variations

and require students to interact with the graphing tool

within the platform

∙ Test Bank Assessment: Hundreds of multiple-choice

questions are available for summative assessments of

the chapter content

All of the above assets can be implemented by

instruc-tors as preferred in order to satisfy as much or as little of the

flipped-classroom approach as is desired

AN EXPANDED TEAM OF AUTHORS

We are pleased to announce that we have expanded the list

of authors In addition to Robert Frank and Ben Bernanke,

Kate Antonovics, University of California, San Diego, and

Ori Heffetz, Cornell University, have joined the team These

two younger-generation authors bring with them a fresh

touch, side by side with many years of classroom experience

using previous editions of Principles of Economics and

Con-nect in their microeconomics (Kate) and macroeconomics

(Ori) classes Our expanded team of authors has enabled us

to increase the quality and range of digital materials that

accompany the textbook, keeping us at the forefront of the

latest developments in educational technology

KEY THEMES AND FEATURES

Economic Naturalism

In launching this new edition of a streamlined version of

our original text, we’ve doubled down on our efforts to

present concepts in narrative form Relying on examples

drawn from familiar contexts, we encourage students to

be-come “economic naturalists,” people who employ basic

economic principles to understand and explain what they

observe in the world around them An economic naturalist

understands, for example, that infant safety seats are

re-quired in cars but not in airplanes because the marginal cost

of space to accommodate these seats is typically zero in

cars but often hundreds of dollars in airplanes Scores of

such examples are sprinkled throughout the text Each one,

we believe, poses a question that should make any curious

person eager to learn the answer

These examples stimulate interest while encouraging

students to see each feature of their economic landscape as

the reflection of an explicit or implicit weighing of costs

and benefits Students talk about these examples with their friends and families Learning economics is like learning a language In each case, there is no substitute for actually speaking By inducing students to speak economics, the Economic Naturalist examples serve this purpose (For those who would like to learn more about the role of exam-ples in learning economics, Bob Frank’s lecture on this topic is posted on YouTube’s “Authors @ Google” series:

www.youtube.com/watch?v=QalNVxeIKEE; or search

“Authors @ Google Robert Frank.”)The economic naturalist sees mundane details of ordinary existence in a new light and becomes actively engaged in the attempt to understand them Some representative examples:

In Micro:

∙ Why do movie theaters offer discount tickets to students?

∙ Why do we often see convenience stores located on jacent street corners?

ad-∙ Why do supermarket checkout lines all tend to be roughly the same length?

In Macro:

∙ Why has investment in computers increased so much in recent decades?

∙ Why does news of inflation hurt the stock market?

∙ Why do almost all countries provide free public education?

We are very excited to offer for the first time an entire video series based on Economic Naturalist examples not found in this edition A series of videos covering some of our favorite micro- and macro-focused examples can be used as part of classroom presentations, or assigned for homework within Connect All of these videos can be shared on social media to encourage students to share these fascinating and thought-provoking applications of economics in everyday life

Active Learning Stressed

The only way to learn to hit an overhead smash in tennis is through repeated practice The same is true for learning eco-nomics Accordingly, we consistently introduce new ideas in the context of simple examples and then follow them with applications showing how they work in familiar settings At frequent intervals, we pose concept checks that both test and reinforce the understanding of these ideas The end-of- chapter questions and problems are carefully crafted to help students internalize and extend basic concepts, and are avail-able within Connect as assignable content so that instructors can require students to engage with this material Experience with earlier editions confirms that this approach really does prepare students to apply basic economic principles to solve economic puzzles drawn from the real world

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Modern Microeconomics

∙ The cost-benefit principle, which tells us to take only

those actions whose benefits exceed their costs, is the

core idea behind the economic way of thinking

Intro-duced in Chapter 1 and employed repeatedly thereafter,

this principle is more fully developed here than in any

other text It underlies the argument for economic

effi-ciency as an important social goal Rather than speak

of trade-offs between efficiency and other goals, we

stress that maximizing economic surplus—that is,

tak-ing those actions whose benefits exceed their costs—

facilitates the achievement of every goal we care about

∙ One of the biggest hurdles to the fruitful application of

cost-benefit thinking is to recognize and measure the

relevant costs and benefits Common decision pitfalls

identified by 2002 Nobel Laureate Daniel Kahneman

and others—such as the tendency to ignore implicit

costs, the tendency not to ignore sunk costs, and the

tendency to confuse average and marginal costs and

benefits—are introduced early in Chapter 1 and

in-voked repeatedly in subsequent chapters

∙ There is perhaps no more exciting toolkit for the

eco-nomic naturalist than a few principles of elementary

game theory. In Chapter 8, we show how these

princi-ples enable students to answer a variety of strategic

questions that arise in the marketplace and everyday

life We believe that the insights of the Nobel Laureate

Ronald Coase are indispensable for understanding a

host of familiar laws, customs, and social norms In

Chapter 9 we show how such devices function to

mini-mize misallocations that result from externalities

Modern Macroeconomics

The severe economic downturn that began in late 2007 has

renewed interest in cyclical fluctuations without challenging

the importance of such long-run issues as growth,

produc-tivity, the evolution of real wages, and capital formation

Our treatment of these issues is organized as follows:

∙ A four-chapter treatment of long-run issues, followed by

a modern treatment of short-term fluctuations and

stabi-lization policy, emphasizes the important distinction

be-tween short- and long-run behavior of the economy

∙ Designed to allow for flexible treatment of topics, these

chapters are written so that short-run material

(Chap-ters 18–20) can be used before long-run material

(Chapters 14–17) with no loss of continuity

∙ This book places a heavy emphasis on globalization,

starting with an analysis of its effects on real wage

in-equality and progressing to such issues as the costs and

benefits of trade, the role of capital flows in domestic capital formation, and the links between exchange rates and monetary policy

ORGANIZATION OF THE THIRD EDITION

eco-∙ An introduction to macroeconomics: In Chapter 3

we provide a sneak peak into macroeconomics, cially useful for students who won’t move on to take this portion of the course It provides some context around economics concepts that are widely discussed

espe-in media today like the causes and aftermath of the Great Recession and actions taken by the Fed

∙ Strong connection drawn between core concepts:

Chapter 6 makes strong connections among market librium and efficiency, the cost of preventing price ad-justments, economic profit, and the invisible hand theory

equi-∙ Using economics to help make policy decisions:

Chapter 10 features important policy decisions and uses economics to sort out the best options Health care, environmental regulation, international trade, and income redistribution are all discussed in this relevant and interesting chapter

∙ Flexible coverage of international economics:

Chap-ter 11 introduces the concept of comparative advantage

as a basis for trade Because international trade volves important micro principles and policy issues, this chapter is presented earlier in the book and is in-cluded in both the macro and micro splits

in-In Macroeconomics

∙ A preview of key macroeconomic material: Chapter

12 is new to this edition and serves to provide an view of core macroeconomic concepts that are to be discussed in further detail

over-∙ Flexible presentation: Part 6, “Macroeconomics:

Is-sues and Data,” is a self-contained group of chapters that cover definition and measurement issues This al-lows instructors to proceed to a discussion of either long-run concepts as discussed in Part 7 or short-run concepts as covered in Part 8 with no loss of continuity

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∙ Thorough discussion of labor markets: Trends in

employment, wages, and unemployment are covered

together in Chapter 15 to help students understand and

distinguish between long-term trends and short-term

fluctuations in the labor market

∙ Strong connection drawn between financial markets

and money: Chapter 17 brings together information on

financial intermediaries, bond and stock markets, and

money so that students can make the connections

among stock markets, bond markets, commercial

banks, and money

∙ Modular presentation of money and monetary policy:

Chapter 17 introduces students to the concepts of money

and financial intermediaries, which can be covered

sepa-rately or in direct conjunction with the discussion of

monetary policy in Chapter 19

∙ The presentation of aggregate demand and aggregate

supply: Chapter 20 has been completely rewritten The

AD-AS model is developed systematically (based on

con-cepts introduced in Chapters 18 and 19) using a graphical/

verbal approach, allowing students to better understand

the link among economic theory, real-world

macroeco-nomic behavior, and macroecomacroeco-nomic policymaking

∙ Flexible coverage of international economics:

Chap-ter 21 is a self-contained discussion of exchange rates

that can be used whenever an instructor thinks it best to

introduce this important subject

CHANGES IN THE THIRD EDITION

Changes Common to All Chapters

In all chapters, the narrative has been tightened and shortened

slightly Many of the examples have been updated, with a

fo-cus on examples that connect to current events such as the

fi-nancial crisis of 2008 and the Great Recession of 2007–2009

The examples and exercises from the previous edition have

been redesigned to provide more clarity and ease of use A

majority of the appendixes have been removed Several

num-bered examples in the macro portion of the book have been

turned back into Economic Naturalist examples as they were

originally intended Data have been updated throughout

Chapter-by-Chapter Changes

∙ Chapter 2: This is Chapter 3 from the previous

edi-tion The comparative advantage material that was in

the former Chapter 2 now appears in Chapter 11

∙ Chapter 3: New to this edition, this chapter serves as

an introduction to macroeconomics for those who will

not continue to take this course It provides context around economics concepts that are widely discussed

in the media

∙ Chapters 4–10: Content and data updates have been

added as needed

∙ Chapter 11: International trade material previously in

Chapter 10 has been moved here along with the tunity cost discussion that appeared in the former Chapter 2 on comparative advantage Production pos-sibilities curve material has been eliminated

oppor-∙ Chapter 12: New to this edition, this chapter serves to

provide a preview to the upcoming macroeconomic material that is to follow

∙ Chapter 13: Combining material from previous

Chap-ters 11, 12, and 13 this new chapter is entitled suring Economic Activity: GDP, Unemployment, and Inflation.” Women’s labor participation data have been added in the GDP section Economic well-being mate-rial has been moved to Chapter 14 The “Unemployment and the Unemployment Rate” section from the previous Chapter 13 has been retained here “The True Costs of Inflation” section has been streamlined Hyperinflation and the inflation and interest rates sections of the pre-vious Chapter 12 have been moved to Chapter 20

“Mea-∙ Chapter 14: Economic well-being material from

the previous Chapter 11 has been moved here The

“Promoting Economic Growth” and “Costs of nomic Growth” sections have been switched

Eco-∙ Chapter 15: This chapter is now entitled “Workers,

Wages, and Unemployment in the Modern Economy” and features content primarily from the previous Chap-ter 13 A fifth labor market trend and discussion of Eu-ropean unemployment has been added back into this chapter The “Unemployment and the Unemployment Rate” section has been moved to Chapter 13 Material

on minimum wage laws and unions has been deleted

∙ Chapter 16: Previously Chapter 15, the financial

mar-kets discussion has been moved to Chapter 17 The

“Why Do People Save” and “National Saving and Its Components” sections have been switched A new Economic Naturalist on why Chinese households save

so much has been added A portion of the “Inflation and Interest Rate” section from the previous Chapter

12 has been included here to highlight real interest rates and nominal interest rates

Chap-ters 16, 19, and 21, this new chapter is entitled “Money, the Federal Reserve, and Global Financial Markets.”

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We start with a discussion of money and its uses,

fol-lowed by commercial banks and the creation of money

from the previous Chapter 16 We then turn to previous

Chapter 19 and the discussion of the Fed, controlling

the money supply through open-market operations, but

we delay the mention of discount window lending and

changing reserve requirements to Chapter 19 Then we

return to previous Chapter 16 and discuss the financial

system and the allocation of saving We finish the

chapter with a discussion of trade balance and

interna-tional capital flows from the previous Chapter 21

Im-provements to Economic Naturalist examples include a

discussion of Bitcoins and a new Economic Naturalist

that details what happens to national economies during

banking crises Velocity material has been deleted

Chap-ters 17 and 18, this new chapter is entitled “Short-Term

Economic Fluctuations and Fiscal Policy.” A new

Eco-nomic Naturalist examines the effect of ecoEco-nomic

fluc-tuations on presidential elections Okun’s law coverage

has been removed The Economic Naturalist on menu

costs has been revised to include Uber and Lyft

Planned aggregate expenditure material has been

removed and replaced with a new section on aggregate

output and spending to help simplify the math

Con-sumption function coverage has also been streamlined

and shortened

∙ Chapter 19: This chapter has been renamed

“Stabiliz-ing the Economy: The Role of the Fed.” We start with

a discussion of the Federal Reserve and interest rates

which features new Examples 19.1 and 19.2 An

ex-ample of the effects of high inflation in Zimbabwe was

added to an Economic Naturalist example The section

on how the Fed controls the money supply has been

substantially revised A new subsection answers the

question “Do interest rates always move together?”

helps students understand what the Fed has been doing

“unconventionally” since 2008 Material on the zero

lower bound, quantitative easing, forward guidance,

and interest on reserves and monetary-policy

normal-ization has been added Planned aggregate expenditure

material has been revised to appear as aggregate

ex-penditure A discussion of the Fed’s policy reaction

function and the Taylor rule has been added

∙ Chapter 20: This chapter has been largely rewritten

and is now entitled “Inflation and Aggregate Supply.”

We have reverted back to the way this material was

pre-sented in the second edition of Principles of Economics.

∙ Chapter 21: This chapter is now entitled “Exchange

Rates and the Open Economy.” The section on

exchange rate determination in the long run has been moved toward the beginning of the chapter, with the real exchange rate material now appearing as part of the first section on exchange rates We then move to a discussion of exchange rate determination in the short run, followed by monetary policy and the exchange rate A new section on fixed exchange rates has been added Again, trade balance and international capital flow material has been moved to Chapter 17

ORGANIZED LEARNING IN THE THIRD EDITION

Chapter Learning Objectives

Students and professors can be confident that the tion of each chapter surrounds common themes outlined by four to seven learning objectives listed on the first page of each chapter These objectives, along with AACSB and Bloom’s Taxonomy Learning Categories, are connected to all test bank questions and end-of-chapter material to offer

organiza-a comprehensive, thorough teorganiza-aching organiza-and leorganiza-arning ence Reports available within Connect allow instructors to easily output data related to student performance across chapter learning objectives, AACSB criteria, and Bloom’s Taxonomy Learning Categories

experi-Assurance of Learning Ready

Many educational institutions today are focused on the notion

of assurance of learning, an important element of some

accred-itation standards Principles of Economics, A Streamlined

Ap-proach, 3/e, is designed specifically to support your assurance

of learning initiatives with a simple, yet powerful, solution.Instructors can use Connect to easily query for learning objectives that directly relate to the objectives of the course and then use the reporting features of Connect to aggregate student results in a similar fashion, making the collection and presentation of assurance of learning data simple and easy

AACSB Statement

The McGraw-Hill Companies is a proud corporate member

of AACSB International Recognizing the importance and

value of AACSB accreditation, the authors of Principles of

Economics, A Streamlined Approach, 3/e, have sought to recognize the curricula guidelines detailed in AACSB stan-dards for business accreditation by connecting questions in the test bank and end-of-chapter material to the general knowledge and skill guidelines found in AACSB standards

It is important to note that the statements contained in

Principles of Economics, A Streamlined Approach, 3/e are

provided only as a guide for the users of this text

Trang 14

A NOTE ON THE WRITING OF THIS EDITION

Ben Bernanke was sworn in on February 1, 2006, as

Chair-man and a member of the Board of Governors of the

Fed-eral Reserve System, a position to which he was reappointed

in January 2010 From June 2005 until January 2006, he

served as chairman of the President’s Council of Economic

Advisers These positions have allowed him to play an

ac-tive role in making U.S economic policy, but the rules of

government service have restricted his ability to participate

in the preparation of previous editions Now that his second

term as Chairman of the Federal Reserve is complete, we

are happy to announce that Ben has been actively involved

in the revision of the macro portion of the third edition

ACKNOWLEDGMENTS

Our thanks first and foremost go to our brand manager, Katie

Hoenicke, and our product developer, Christina Kouvelis

Katie encouraged us to think deeply about how to improve

the book and helped us transform our ideas into concrete

changes Christina shepherded us through the revision

pro-cess with intelligence, sound advice, and good humor We

are grateful as well to the production team, whose

profes-sionalism (and patience) was outstanding: Harvey Yep,

con-tent project manager; Kristin Bradley, assessment project

manager; Matt Diamond, lead designer; and all of those who

worked on the production team to turn our manuscript into

the book you see now Finally, we also thank Virgil Lloyd,

marketing manager, and Dave O’Donnell, marketing

spe-cialist, for getting our message into the wider world

Special thanks to Per Norander, University of North

Carolina at Charlotte, for his energy, creativity, and help in

refining the assessment material in both the text and

Con-nect; Sukanya Kemp, University of Akron, for her detailed

accuracy check of the learning glass videos; Anna Thompson

and Eric Schulman, Cornell University, for their efforts in

researching and collecting macro data updates; Alvin

Angeles and team at the University of California, San Diego,

for their efforts in the production and editing of the learning

glass videos; and Kevin Bertotti and the team at ITVK for

their creativity in transforming Economic Naturalist

exam-ples into dynamic and engaging video vignettes

Finally, our sincere thanks to the following teachers

and colleagues, whose thorough reviews and thoughtful

suggestions led to innumerable substantive improvements

to Principles of Economics, A Streamlined Approach, 3/e.

Mark Abajian, San Diego Mesa College

Richard Agesa, Marshall University

Seemi Ahmad, Dutchess Community College

Chris Azevedo, University of Central Missouri

Narine Badasyan, Murray State University

Sigridur Benediktsdottir, Yale University Brian C Brush, Marquette University Giuliana Campanelli Andreopoulos, William Paterson

University

J Lon Carlson, Illinois State University Joni Charles, Texas State University Anoshua Chaudhuri, San Francisco State University Nan-Ting Chou, University of Louisville

Manabendra Dasgupta, University of Alabama at Birmingham Craig Dorsey, College of DuPage

Dennis Edwards, Coastal Carolina University Roger Frantz, San Diego State University Mark Frascatore, Clarkson University Greg George, Macon State College Seth Gershenson, Michigan State University Amy D Gibson, Christopher Newport University Rajeev Goel, Illinois State University

Susan He, Washington State University John Hejkal, University of Iowa Kuang-Chung Hsu, Kishwaukee College Greg Hunter, California State University–Pomona Derek Johnson, University of Connecticut

Sukanya Kemp, University of Akron Brian Kench, University of Tampa Fredric R Kolb, University of Wisconsin–Eau Claire Donald J Liu, University of Minnesota–Twin Cities Ida Mirzaie, The Ohio State University

Diego Nocetti, Clarkson University Stephanie Owings, Fort Lewis College Martin Pereyra, University of Missouri Ratha Ramoo, Diablo Valley College Bill Robinson, University of Nevada–Las Vegas Brian Rosario, University of California–Davis Elyce Rotella, Indiana University

Jeffrey Rubin, Rutgers University Naveen Sarna, Northern Virginia Community College Sumati Srinivas, Radford University

Thomas Stevens, University of Massachusetts Carolyn Fabian Stumph, Indiana University and Purdue

University–Fort Wayne

Markland Tuttle, Sam Houston State University David Vera, California State University–Fresno Nancy Virts, California State University–Northridge Elizabeth Wheaton, Southern Methodist University William C Wood, James Madison University

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DISTINGUISHING FEATURES

Economic Naturalist

Examples

Each Economic Naturalist

ex-ample starts with a question

to spark interest in learning an

answer These examples fuel

interest while teaching

stu-dents to see economics in the

world around them Videos of

select Economic Naturalist

examples can be found within

Connect

ECONOMIC NATURALISM 15

Why don’t auto manufacturers make cars without heaters?

Virtually every new car sold in the United States today has a heater But not every car has a satellite navigation system Why this difference?

One might be tempted to answer that, although everyone needs a heater, people can get along without navigation systems Yet heaters are of little use in places like Hawaii and southern California What is more, cars produced as re- cently as the 1950s did not all have heaters (The classified ad that led one young economic naturalist to his first car, a 1955 Pontiac, boasted that the vehicle had a radio, heater, and whitewall tires.)

Although heaters cost extra money to manufacture and are not useful in all parts of the country, they do not cost much money and are useful on at least a few days each year in most parts of the country As time passed and people’s incomes grew, manufacturers found that people were ordering fewer and fewer cars without heaters At some point it actually became cheaper to put heaters in all cars, rather than bear the administrative expense of making some cars with heaters and others without No doubt a few buyers would still order a car without a heater if they could save some money in the process, but catering to these customers is just no longer worth it.

Similar reasoning explains why certain cars today cannot be purchased out a satellite navigation system Buyers of the 2015 BMW 750i, for example, got one whether they wanted it or not Most buyers of this car, which sells for more than $75,000, have high incomes, so the overwhelming majority of them would have chosen to order a navigation system had it been sold as an option Because

with-of the savings made possible when all cars are produced with the same ment, it would have actually cost BMW more to supply cars for the few who would want them without navigation systems.

equip-Buyers of the least-expensive makes of car have much lower incomes on average than BMW 750i buyers Accordingly, most of them have more pressing alternative uses for their money than to buy navigation systems for their cars, and this explains why some inexpensive makes continue to offer navigation systems only as options But as incomes continue to grow, new cars without navigation systems will eventually disappear.

The Economic Naturalist 1.2

The insights afforded by The Economic Naturalist 1.2 suggest an answer to the following strange question:

Why do the keypad buttons on drive-up automated teller machines have Braille dots?

Braille dots on elevator buttons and on the keypads of walk-up automated teller machines enable blind people to participate more fully in the normal flow

of daily activity But even though blind people can do many remarkable things, they cannot drive automobiles on public roads Why, then, do the manufacturers of automated teller machines install Braille dots on the machines at drive-up locations?

The answer to this riddle is that once the keypad molds have been tured, the cost of producing buttons with Braille dots is no higher than the cost of producing smooth buttons Making both would require separate sets of molds and

manufac-The Economic Naturalist 1.3

APPLYING THE COST-BENEFIT PRINCIPLE 3

Scarcity and the trade-offs that result also apply to resources other than money Bill Gates is one of the richest men on Earth His wealth was once estimated at over $100 bil-

lion That’s more than the combined wealth of the poorest 40 percent of Americans

Gates could buy more houses, cars, vacations, and other consumer goods than he could

possibly use Yet he, like the rest of us, has only 24 hours each day and a limited amount of

energy So even he confronts trade-offs Any activity he pursues—whether it be building

his business empire or redecorating his mansion or tending to his charitable foundation—

uses up time and energy that he could otherwise spend on other things Indeed, someone

once calculated that the value of Gates’s time is so great that pausing to pick up a $100 bill

from the sidewalk simply wouldn’t be worth his while.

APPLYING THE COST-BENEFIT PRINCIPLE

In studying choice under scarcity, we’ll usually begin with the premise that people are

rational, which means they have well-defined goals and try to fulfill them as best they

can The Cost-Benefit Principle is a fundamental tool for the study of how rational people

make choices.

As in the class-size example, often the only real difficulty in applying the benefit rule is to come up with reasonable measures of the relevant benefits and costs

cost-Only in rare instances will exact dollar measures be conveniently available But the

cost-benefit framework can lend structure to your thinking even when no relevant

market data are available.

To illustrate how we proceed in such cases, the following example asks you to decide whether to perform an action whose cost is described only in vague, qualitative terms.

rational person someone with well-defined goals who tries to fulfill those goals as best he or she can

EXAMPLE 1.1 Comparing Costs and Benefits

Should you walk downtown to save $10 on a $25 computer game?

Imagine you are about to buy a $25 computer game at the nearby campus store

when a friend tells you that the same game is on sale at a downtown store for only

$15 If the downtown store is a 30-minute walk away, where should you buy the game?

The Cost-Benefit Principle tells us that you should buy it downtown if the efit of doing so exceeds the cost The benefit of taking any action is the dollar value

ben-of everything you gain by taking it Here, the benefit ben-of buying downtown is exactly

$10, since that’s the amount you’ll save on the price of the game The cost of taking

any action is the dollar value of everything you give up by taking it Here, the cost of

buying downtown is the dollar value you assign to the time and trouble it takes to

make the trip But how do we estimate that value?

One way is to perform the following hypothetical auction Imagine that a stranger has offered to pay you to do an errand that involves the same walk down-

town (perhaps to drop off a letter for her at the post office) If she offered you a

pay-ment of, say, $1,000, would you accept? If so, we know that your cost of walking

downtown and back must be less than $1,000 Now imagine her offer being

re-duced in small increments until you finally refuse the last offer For example, if you’d

agree to walk downtown and back for $9.00 but not for $8.99, then your cost of

making the trip is $9.00 In this case, you should buy the game downtown because

the $10 you’ll save (your benefit) is greater than your $9.00 cost of making the trip.

But suppose your cost of making the trip had been greater than $10 In that case, your best bet would have been to buy the game from the nearby campus

store Confronted with this choice, different people may choose differently,

depend-ing on how costly they think it is to make the trip downtown But although there is no

uniquely correct choice, most people who are asked what they would do in this

situ-ation say they would buy the game downtown.

If Bill Gates saw a $100 bill lying

on the sidewalk, would it be worth his time to pick it up?

of an implicit or explicit benefit calculation

cost-PrEDiCtiNg AND ExPLAiNiNg ChANgES iN PriCES AND qUANtitiES 51

The following concept check asks you to consider a simple variation on the problem posed in the previous example.

P9

S P

0

D9 Q9 Q

S S9

Quantity (millions of bags/month)

0

CONCEPT CHECK 2.6

What will happen to the equilibrium price and quantity in the corn tortilla chip market if both of the following events occur: (1) researchers discover that a vita- min found in corn helps protect against cancer and heart disease and (2) a swarm

of locusts destroys part of the corn crop?

Why are some goods cheapest during the months of heaviest consumption, while others are most expensive during those months?

Seasonal Variation in the Air Travel and Corn Markets.

(a) Prices are highest during the period of heaviest consumption when heavy consumption is the result of high demand (b) Prices are lowest during the period

of heaviest consumption when heavy consumption is the result of high supply.

Why do the prices of some goods, like airline tickets to Europe, go up during the months of heaviest consumption, while others, like sweet corn, go down?

Seasonal price movements for airline tickets are primarily the result of seasonal tions in demand Thus, ticket prices to Europe are highest during the summer months because the demand for tickets is highest during those months, as shown in Figure 2.19(a), where the w and s subscripts denote winter and summer values, respectively.

varia-The Economic Naturalist 2.3

Concept Checks

These self-test questions in

the body of the chapter enable

students to determine whether

the preceding material has

been understood and reinforce

understanding before reading

further Detailed Answers to

Concept Checks are found at

the end of each chapter

The very idea of not being able to buy a pizza seems absurd, yet precisely such things happen routinely in markets in which prices are held below the equilibrium lev- els For example, prior to the collapse of communist governments, it was considered normal in those countries for people to stand in line for hours to buy bread and other basic goods, while the politically connected had first choice of those goods that were available.

PREDICTING AND EXPLAINING CHANGES

IN PRICES AND QUANTITIES

If we know how the factors that govern supply and demand curves are changing, we can make informed predictions about how prices and the corresponding quantities will change But when describing changing circumstances in the marketplace, we must take care to recognize some important terminological distinctions For example, we must dis-

tinguish between the meanings of the seemingly similar expressions change in the

quantity demanded and change in demand When we speak of a “change in the

quantity demanded,” this means the change in the quantity that people wish to buy that occurs in response to a change in price For instance, Figure 2.10(a) depicts an increase in the quantity demanded that occurs in response to a reduction in the price of tuna When the price falls from $2 to $1 per can, the quantity demanded rises from 8,000 to 10,000

cans per day By contrast, when we speak of a “change in demand,” this means a shift in

the entire demand curve For example, Figure 2.10(b) depicts an increase in demand, meaning that at every price the quantity demanded is higher than before In summary, a

“change in the quantity demanded” refers to a movement along the demand curve and a

“change in demand” means a shift of the entire curve.

change in the quantity

demanded a movement

along the demand curve that

occurs in response to a

change in price

change in demand a shift of

the entire demand curve

FIGURE 2.10

An Increase in the Quantity

Demanded versus an Increase

in Demand.

(a) An increase in quantity

demanded describes a

downward movement along

the demand curve as price falls

(b) An increase in demand

describes an outward shift of

the demand curve.

D

2 4 6 8 10 12 1

2 3 4 5 6

0

Quantity (1,000s of cans/day)

(b)

D9 D

Increase in demand

Recap

Sprinkled throughout each chapter are Recap boxes that underscore and summarize the importance of the preceding material and key concept takeaways

xiv

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The following ancillaries are available for quick download

and convenient access via the Instructor Resource material

available through McGraw-Hill Connect®

Solutions Manual

Prepared by the authors with assistance from Per Norander,

University of North Carolina at Charlotte, this manual

pro-vides detailed answers to the end-of-chapter review

ques-tions and problems

Test Bank

The test bank has been carefully revised and reviewed for

accuracy Thousands of questions have been categorized by

chapter learning objectives, AACSB learning categories,

Bloom’s Taxonomy objectives, and level of difficulty

Computerized Test Bank

McGraw-Hill’s EZ Test is a flexible and easy-to-use

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ex-ported for use with course management systems EZ Test

Online gives you a place to administer your EZ Test–

created exams and quizzes online Additionally, you can

access the test bank through McGraw-Hill Connect

PowerPoints

Presentation slides contain a detailed, chapter-by-chapter review of the important ideas presented in the textbook, ac-companied by animated graphs and slide notes You can edit, print, or rearrange the slides to fit the needs of your course

Customizable Micro Lecture Notes and PowerPoints

One of the biggest hurdles to an instructor considering changing textbooks is the prospect of having to prepare new lecture notes and slides For the microeconomics chapters,

this hurdle no longer exists A full set of lecture notes for

principles of microeconomics, prepared by Bob Frank for his award-winning introductory microeconomics course at Cornell University, is available as Microsoft Word files that instructors are welcome to customize as they see fit The challenge for any instructor is to reinforce the lessons of the text in lectures without generating student unrest by merely repeating what’s in the book These lecture notes address that challenge by constructing examples that run parallel to those presented in the book, yet are different from them in interesting contextual ways Also available is a complete set

of richly illustrated PowerPoint files to accompany these lecture notes Instructors are also welcome to customize these files as they wish

xv

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®

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Connect’s new, intuitive mobile interface gives students

and instructors flexible and convenient, anytime–anywhere

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Trang 18

SmartBook ®

Proven to help students improve grades and

study more efficiently, SmartBook contains the

same content within the print book, but actively

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BRIEF CONTENTS

PART 1 Introduction

PART 2 Competition and the Invisible Hand

PART 3 Market Imperfections

PART 4 Economics of Public Policy

PART 5 International Trade

11 International Trade and Trade Policy 249

PART 6 Macroeconomics: Issues and Data

18 Short-Term Economic Fluctuations and Fiscal Policy 449

19 Stabilizing the Economy: The Role of the Fed 479

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CONTENTS

PART 1 Introduction

Chapter 1 Thinking Like an Economist 1

Economics: Studying Choice in a World of

Scarcity 2

Applying the Cost-Benefit Principle 3

Economic Surplus 4

Opportunity Cost 4

The Role of Economic Models 4

Three Important Decision Pitfalls 5

Pitfall 1: Measuring Costs and Benefits as Proportions

Rather than Absolute Dollar Amounts 6

Pitfall 2: Ignoring Implicit Costs 6

Pitfall 3: Failure to Think at the Margin 8

Normative Economics versus Positive Economics 12

Economics: Micro and Macro 12

The Approach of This Text 13

Economic Naturalism 13

THE ECONOMIC NATURALIST 1.1 14

Summary 16 ∙ Key Terms 16 ∙ Review Questions 17 ∙

Problems 17 ∙ Answers to Concept Checks 18 ∙ Appendix:

Working with Equations, Graphs, and Tables 19

Chapter 2 Supply and Demand 29

What, How, and for Whom? Central Planning

versus the Market 31

Buyers and Sellers in Markets 32

The Demand Curve 33

The Supply Curve 34

Market Equilibrium 35

Rent Controls Reconsidered 39

Pizza Price Controls? 41

Predicting and Explaining Changes in

Prices and Quantities 42

Shifts in Demand 43

Shifts in the Supply Curve 46

Four Simple Rules 49

Efficiency and Equilibrium 52

Cash on the Table 52

Smart for One, Dumb for All 53

Problems 56 ∙ Answers to Concept Checks 57 ∙ Appendix: The Algebra of Supply and Demand 59

Chapter 3 A Brief Look at Macroeconomics 61

The Financial Crisis of 2008 62 Classical Macroeconomic Theory 64 The Keynesian Revolution and the New Deal 65 The Lessons of Post-Crisis Experience 68 Why Does the Dispute Linger? 69 Avoiding Protracted Downturns in the Future 70

Concluding Remarks 72

Problems 74 ∙ Answers to Concept Checks 74

PART 2 Competition and the

Invisible Hand

Chapter 4 Demand and Elasticity 75

The Law of Demand 76

The Origins of Demand 76 Needs versus Wants 77

Applying the Law of Demand 78

Substitution at Work 78

The Importance of Income Differences 80

Individual and Market Demand Curves 81

Horizontal Addition 81

Elasticity 82 Price Elasticity of Demand 83

Price Elasticity Defined 83 Determinants of Price Elasticity of Demand 84

Some Representative Elasticity Estimates 85 Using Price Elasticity of Demand 86

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xx CONTENTS

A Graphical Interpretation of Price Elasticity 88

Price Elasticity Changes along a Straight-Line

Demand Curve 90

Two Special Cases 91

Elasticity and Total Expenditure 92

Income Elasticity and Cross-Price Elasticity of

Demand 96

Chapter 5 Perfectly Competitive Supply 101

Thinking about Supply: The Importance of

Opportunity Cost 102

Individual and Market Supply Curves 103

Profit-Maximizing Firms in Perfectly

Competitive Markets 105

Profit Maximization 105

The Demand Curve Facing a Perfectly

Competitive Firm 106

Production in the Short Run 106

Choosing Output to Maximize Profit 107

Price Equals Marginal Cost: The Seller’s Supply Rule 110

Graphing Marginal Cost 111

The “Law” of Supply 113

Applying the Theory of Supply 113

Determinants of Supply Revisited 116

Technology 117

Input Prices 117

The Number of Suppliers 117

Expectations 117

Changes in Prices of Other Products 117

The Price Elasticity of Supply 118

Determinants of Supply Elasticity 120

Unique and Essential Inputs: The Ultimate Supply

Bottleneck 124

Summary 125 ∙ Key Terms 125 ∙

Review Questions 125 ∙ Problems 126 ∙

Answers to Concept Checks 127

Chapter 6 Efficiency, Exchange, and the

Invisible Hand in Action 129

The Central Role of Economic Profit 130

Three Types of Profit 130

The Invisible Hand Theory 134

Two Functions of Price 134

Responses to Profits and Losses 134

The Effect of Market Forces on Economic Profit 136

The Importance of Free Entry and Exit 137

The Invisible Hand in Action 137

Economic Rent versus Economic Profit 139 The Distinction between an Equilibrium and a Social Optimum 141

Smart for One, Dumb for All 142

Market Equilibrium and Efficiency 143

Efficiency Is Not the Only Goal 146 Why Efficiency Should Be the First Goal 146

The Cost of Preventing Price Adjustments 147

PART 3 Market Imperfections

Chapter 7 Monopoly, Oligopoly, and Monopolistic Competition 153

Perfect and Imperfect Competition 154

Different Forms of Imperfect Competition 154 The Essential Difference between Perfectly and Imperfectly Competitive Firms 155

Five Sources of Market Power 157

Exclusive Control over Important Inputs 157 Patents and Copyrights 157

Government Licenses or Franchises 157 Economies of Scale and Natural Monopolies 157 Network Economies 158

Economies of Scale and the Importance of Start-Up Costs 158

Profit Maximization for the Monopolist 162

Marginal Revenue for the Monopolist 162 The Monopolist’s Profit-Maximizing Decision Rule 165

Being a Monopolist Doesn’t Guarantee an Economic Profit 166

Why the Invisible Hand Breaks Down under Monopoly 167

Using Discounts to Expand the Market 168

Price Discrimination Defined 169

THE ECONOMIC NATURALIST 7.2 169 How Price Discrimination Affects Output 170 The Hurdle Method of Price Discrimination 172

Is Price Discrimination a Bad Thing? 174 Examples of Price Discrimination 175

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CONTENTS xxi

Chapter 8 Games and Strategic Behavior 181

Using Game Theory to Analyze Strategic Decisions 182

The Three Elements of a Game 182

Nash Equilibrium 183

The Prisoner’s Dilemma 185

The Original Prisoner’s Dilemma 186

The Economics of Cartels 187

Tit-for-Tat and the Repeated Prisoner’s Dilemma 190

Games in Which Timing Matters 193

Credible Threats and Promises 195

Monopolistic Competition When Location Matters 196

Commitment Problems 198

Solving Commitment Problems with Psychological

Incentives 200

Chapter 9 Externalities and Property

Rights 207

External Costs and Benefits 207

How Externalities Affect Resource Allocation 208

The Coase Theorem 209

Remedies for Externalities 213

Property Rights and the Tragedy of the Commons 216

The Problem of Unpriced Resources 216

The Effect of Private Ownership 219

When Private Ownership Is Impractical 220

Positional Externalities 222

Payoffs That Depend on Relative Performance 222

Positional Arms Races and Positional Arms

Control Agreements 223

Social Norms as Positional Arms Control Agreements 224

PART 4 Economics of Public Policy

Chapter 10 Using Economics to Make Better

Policy Choices 231

The Economics of Health Care 232

The Case for Mandatory Immunization Laws 232

Explaining Rising Health Care Costs 232

Designing a Solution 234 The HMO Revolution 235

THE ECONOMIC NATURALIST 10.1 235 The Problem with Health Care Provision through Private Insurance 236

The Affordable Care Act of 2010 237

Using Price Incentives in Environmental Regulation 238

Taxing Pollution 238 Auctioning Pollution Permits 240 Climate Change and Carbon Taxes 241

Methods of Income Redistribution 243

Welfare Payments and In-Kind Transfers 243 Means-Tested Benefit Programs 243 The Negative Income Tax 244 Minimum Wages 244 The Earned-Income Tax Credit 245 Public Employment for the Poor 245

A Combination of Methods 245

PART 5 International Trade

Chapter 11 International Trade and Trade Policy 249

Comparative Advantage as a Basis for Trade 250

A Supply and Demand Perspective on Trade 254

Winners and Losers from Trade 256

Protectionist Policies: Tariffs and Quotas 258

Tariffs 258 Quotas 260

THE ECONOMIC NATURALIST 11.1 262 The Inefficiency of Protectionism 263

PART 6 Macroeconomics: Issues and

Data

Chapter 12 Macroeconomics: The Bird’s-Eye View of the Economy 267

The Major Macroeconomic Issues 268

Economic Growth and Living Standards 269 Productivity 270

Recessions and Expansions 272 Unemployment 272

Inflation 274 Economic Interdependence among Nations 275

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xxii CONTENTS

Macroeconomic Policy 276

Types of Macroeconomic Policy 276

Positive versus Normative Analyses of

Macroeconomic Policy 277

Aggregation 278

Studying Macroeconomics: A Preview 281

Chapter 13 Measuring Economic Activity:

GDP, Unemployment, and Inflation 285

Gross Domestic Product: Measuring the Nation’s

Output 286

Market Value 286

Final Goods and Services 289

Produced within a Country during a Given Period 292

Different Methods for Measuring GDP 293

The Expenditure Method for Measuring GDP 293

GDP and the Incomes of Capital and Labor 297

Nominal GDP versus Real GDP 299

Real GDP, Economic Growth, and Economic

Well-Being 301

Unemployment and the Unemployment Rate 302

Measuring Unemployment 302

The Costs of Unemployment 304

The Unemployment Rate versus “True”

Unemployment 305

The Consumer Price Index: Measuring the Price

Level 305

Inflation 308

Adjusting for Inflation 309

Deflating a Nominal Quantity 309

Indexing to Maintain Buying Power 310

Inflation Measurement and Quality Change 312

The Costs of Inflation: Not What You Think 314

The True Costs of Inflation 315

PART 7 The Economy in the Long Run

Chapter 14 Economic Growth, Productivity,

and Living Standards 323

The Remarkable Rise in Living Standards:

The Record 325

Why “Small” Differences in Growth Rates Matter 326

Why Nations Become Rich: The Crucial Role of Average

Real GDP and Economic Well-Being 340

Real GDP Isn’t the Same as Economic Well-Being 341

THE ECONOMIC NATURALIST 14.4 341 But GDP Is Related to Economic Well-Being 343

The Costs of Economic Growth 345 Promoting Economic Growth 346

Policies to Increase Human Capital 346

THE ECONOMIC NATURALIST 14.6 346 Policies That Promote Saving and Investment 347 Policies That Support Research and Development 347 The Legal and Political Framework 348

The Poorest Countries: A Special Case? 348

Are There Limits to Growth? 349

Chapter 15 The Labor Market: Workers, Wages, and Unemployment 355

Five Important Labor Market Trends 356

Trends in Real Wages 356 Trends in Employment and Unemployment 357

Supply and Demand in the Labor Market 357

Wages and the Demand for Labor 358 Shifts in the Demand for Labor 360 The Supply of Labor 363

Shifts in the Supply of Labor 364

Explaining the Trends in Real Wages and Employment 365

Large Increases in Real Wages in Industrialized Countries 365

Real Wage Growth in the United States Has Stagnated since the Early 1970s, While Employment Growth Has Been Rapid 366

Increasing Wage Inequality: The Effects of Globalization and Technological Change 368

Unemployment 372

Types of Unemployment and Their Costs 373 Impediments to Full Employment 374

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CONTENTS xxiii

Chapter 16 Saving and Capital Formation 381

Saving and Wealth 382

Stocks and Flows 383

Capital Gains and Losses 384

Why Do People Save? 386

Saving and the Real Interest Rate 388

Saving, Self-Control, and Demonstration Effects 391

National Saving and Its Components 393

The Measurement of National Saving 394

Private and Public Components of National Saving 395

Public Saving and the Government Budget 396

Is Low Household Saving a Problem? 398

Investment and Capital Formation 399

Saving, Investment, and Financial Markets 403

Chapter 17 Money, the Federal Reserve, and

Global Financial Markets 411

Money and Its Uses 412

Measuring Money 414

Commercial Banks and the Creation of Money 415

The Money Supply with Both Currency and Deposits 418

The Federal Reserve System 420

The History and Structure of the Federal Reserve

The Financial System and the Allocation of Saving to

Productive Uses 425

The Banking System 425

Bonds and Stocks 427

Bond Markets, Stock Markets, and the

Allocation of Savings 432

The Informational Role of Bond and

Stock Markets 432

Risk Sharing and Diversification 432

International Capital Flows 434

Capital Flows and the Balance of Trade 435

The Determinants of International Capital Flows 437

Saving, Investment, and Capital Inflows 438 The Saving Rate and the Trade Deficit 440

PART 8 The Economy in the Short Run

Chapter 18 Short-Term Economic Fluctuations and Fiscal Policy 449

Recessions and Expansions 451

THE ECONOMIC NATURALIST 18.2 454 Some Facts about Short-Term Economic Fluctuations 455

Output Gaps and Cyclical Unemployment 457

Potential Output and the Output Gap 457 The Natural Rate of Unemployment and Cyclical Unemployment 458

Why Do Short-Term Fluctuations Occur?

A Preview and a Tale 461

Al’s Ice Cream Store: A Tale about Short-Run Fluctuations 461

Recessions and Proposed Solutions: Keynes’s Analysis 463

Keynes’s Crucial Assumption: Firms Meet Demand at Preset Prices 464

THE ECONOMIC NATURALIST 18.4 464 Aggregate Output and Spending 465 Hey Big Spender! Consumer Spending and the Economy 466

The Multiplier 467

Stabilizing Spending: The Role of Fiscal Policy 468

Government Purchases and Spending 469

THE ECONOMIC NATURALIST 18.5 470 Taxes, Transfers, and Aggregate Spending 471

Fiscal Policy as a Stabilization Tool:

Three Qualifications 473

Fiscal Policy and the Supply Side 473 The Problem of Deficits 474 The Relative Inflexibility of Fiscal Policy 474

Chapter 19 Stabilizing the Economy: The Role

of the Fed 479

The Federal Reserve and Interest Rates: The Basic Model 480

The Demand for Money 480

Macroeconomic Factors That Affect the Demand for

Money 484

The Money Demand Curve 485

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xxiv CONTENTS

The Supply of Money and Money Market Equilibrium 487

How the Fed Controls the Nominal Interest Rate 489

The Role of the Federal Funds Rate in Monetary

Policy 491

Can the Fed Control the Real Interest Rate? 491

The Federal Reserve and Interest Rates: A Closer

Look 493

Can the Fed Fully Control the Money Supply? 493

Do Interest Rates Always Move Together? 496

The Effects of Federal Reserve Actions on the

Economy 499

Aggregate Expenditure and the Real Interest Rate 500

The Fed Fights a Recession 502

The Fed Fights Inflation 504

The Fed’s Policy Reaction Function 508

Monetary Policymaking: Art or Science? 510

Chapter 20 Inflation and Aggregate

Factors That Shift the Aggregate Demand Curve 518

Shifts of the AD Curve versus Movements

along the AD Curve 520

Inflation and Aggregate Supply 522

Inflation Inertia 522

The Output Gap and Inflation 524

The Aggregate Demand–Aggregate Supply Diagram 526

The Self-Correcting Economy 529

Sources of Inflation 530

Excessive Aggregate Spending 530

PART 9 The International Economy

Chapter 21 Exchange Rates and the Open Economy 549

Exchange Rates 550

Nominal Exchange Rates 550 Flexible versus Fixed Exchange Rates 552 The Real Exchange Rate 553

The Determination of the Exchange Rate in the Long Run 556

A Simple Theory of Exchange Rates: Purchasing Power Parity (PPP) 556

Shortcomings of the PPP Theory 559

The Determination of the Exchange Rate in the Short Run 560

The Foreign Exchange Market: A Supply and Demand Analysis 560

Changes in the Supply of Dollars 562 Changes in the Demand for Dollars 563

Monetary Policy and the Exchange Rate 564

THE ECONOMIC NATURALIST 21.2 565 The Exchange Rate as a Tool of Monetary Policy 565

Fixed Exchange Rates 566

How to Fix an Exchange Rate 566 Speculative Attacks 570

Monetary Policy and the Fixed Exchange Rate 571

Should Exchange Rates Be Fixed or Flexible? 576

Glossary G-1

Index I-1

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