Ebook Economics - Principles, problems, and policies (20/E): Part 2

(BQ) Part 2 book Economics - Principles, problems, and policies has contents: The aggregate expenditures model, basic macroeconomic relationships, aggregate demand and aggregate supply, interest rates and monetary policy, financial economics,... and other contents.

WEB CHAPTER 13 Technology, R&D, and Efficiency www.mcconnell20e.com Learning Objectives LO13W.1 Differentiate between an invention, an innovation, and technological diffusion LO13W.2 Explain how entrepreneurs and other innovators further technological advance LO13W.3 Summarize how a firm determines its optimal amount of research and development (R&D) LO13W.4 Discuss how technological change can increase profits by raising revenues or lowering costs WEB CHAPTER 310 LO13W.5 Relate why firms can benefit from their innovation even though rivals have an incentive to imitate it LO13W.6 Discuss the role of market structure in promoting technological advance LO13W.7 Show how technological advance enhances productive efficiency and allocative efficiency Web Chapter 13 is a bonus chapter found at the book’s Web site, www.mcconnell20e.com It extends the analysis of Part 4, “Microeconomics of Product Markets,” by examining such topics as invention, innovation, R&D decision making, and creative destruction Your instructor may (or may not) assign all or part of this chapter PART FIVE MICROECONOMICS OF RESOURCE MARKETS AND GOVERNMENT CHAPTER 14 The Demand for Resources CHAPTER 15 Wage Determination CHAPTER 16 Rent, Interest, and Profit CHAPTER 17 Natural Resource and Energy Economics CHAPTER 18 Public Finance: Expenditures and Taxes CHAPTER 14 The Demand for Resources Learning Objectives LO14.1 Explain the significance of resource pricing LO14.2 Convey how the marginal revenue productivity of a resource relates to a firm’s demand for that resource LO14.3 List the factors that increase or decrease resource demand LO14.4 Discuss the determinants of elasticity of resource demand LO14.5 Determine how a competitive firm selects its optimal combination of resources LO14.6 Explain the marginal productivity theory of income distribution When you finish your education, you probably will look for a new job Employers have a demand for educated, productive workers like you To learn more about the demand for labor and other resources, we now turn from the pricing and production of goods 312 and services to the pricing and employment of resources Although firms come in various sizes and operate under different market conditions, each has a demand for productive resources Firms obtain needed resources from households—the direct or indirect owners of land, labor, capital, and entrepreneurial resources We shift our attention from the bottom loop of the circular flow model (p 43), where businesses supply products that households demand, to the top loop, where businesses demand resources that households supply This chapter looks at the demand for economic resources Although the discussion is couched in terms of labor, the principles developed also apply to land, capital, and entrepreneurial ability In Chapter 15 we will combine resource (labor) demand with labor supply to analyze wage rates In Chapter 16 we will use resource demand and resource supply to examine the prices of, and returns to, other productive resources Issues relating to the use of natural resources are the subject of Chapter 17 CHAPTER 14 The Demand for Resources 313 Significance of Resource Pricing LO14.1 Explain the significance of resource pricing Studying resource pricing is important for several reasons: • Money-income determination Resource prices are a major factor in determining the income of households. The expenditures that firms make in acquiring economic resources flow as wage, rent, interest, and profit incomes to the households that supply those resources • Cost minimization To the firm, resource prices are costs And to obtain the greatest profit, the firm must produce the profit-maximizing output with the most efficient (least costly) combination of resources Resource prices play the main role in determining the quantities of land, labor, capital, and entrepreneurial ability that will be combined in producing each good or service (see Table 2.1, p 39) • Resource allocation Just as product prices allocate finished goods and services to consumers, resource prices allocate resources among industries and firms In a dynamic economy, where technology and product demand often change, the efficient allocation of resources over time calls for the continuing shift of resources from one use to another Resource pricing is a major factor in producing those shifts • Policy issues Many policy issues surround the resource market Examples: To what extent should government redistribute income through taxes and transfers? Should government anything to discourage “excess” pay to corporate executives? Should it increase the legal minimum wage? Is the provision of subsidies to farmers efficient? Should government encourage or restrict labor unions? The facts and debates relating to these policy questions are grounded on resource pricing Marginal Productivity Theory of Resource Demand LO14.2 Convey how the marginal revenue productivity of a resource relates to a firm’s demand for that resource In discussing resource demand, we will first assume that a  firm sells its output in a purely competitive product market and hires a certain resource in a purely competitive resource market This assumption keeps things simple and is consistent with the model of a competitive labor market that we will develop in Chapter 15 In a competitive product market, the firm is a “price taker” and can dispose of as little or as much output as it chooses at the market price The firm is selling such a negligible fraction of total output that its output decisions exert no influence on product price Similarly, the firm also is a “price taker” (or “wage taker”) in the competitive resource market It purchases such a negligible fraction of the total supply of the resource that its buying (or hiring) decisions not influence the resource price Resource Demand as a Derived Demand Resource demand is the starting point for any discussion of resource prices Resource demand is a schedule or a curve showing the amounts of a resource that buyers are willing and able to purchase at various prices over some period of time Crucially, resource demand is a derived demand, meaning that the demand for a resource is derived from the demand for the products that the resource helps to produce This is true because resources usually not directly satisfy customer wants but so indirectly through their use in producing goods and services Almost nobody wants to consume an acre of land, a John Deere tractor, or the labor services of a farmer, but millions of households want to consume the food and fiber products that these resources help produce Similarly, the demand for airplanes generates a demand for assemblers, and the demands for such services as income-tax preparation, haircuts, and child care create derived demands for accountants, barbers, and child care workers Marginal Revenue Product Because resource demand is derived from product demand, the strength of the demand for any resource will depend on: • The productivity of the resource in helping to create a good or service • The market value or price of the good or service it helps produce Other things equal, a resource that is highly productive in turning out a highly valued commodity will be in great demand On the other hand, a relatively unproductive resource that is capable of producing only a minimally valued commodity will be in little demand And no demand whatsoever will exist for a resource that is phenomenally efficient in producing something that no one wants to buy Productivity Table 14.1 shows the roles of resource productivity and product price in determining resource demand Here we assume that a firm adds a single variable resource, labor, to its fixed plant Columns and give the number of units of the resource applied to production and the resulting total product (output) Column provides the marginal product (MP), or additional output, resulting 314 PART FIVE Microeconomics of Resource Markets and Government TABLE 14.1 The Demand for Labor: Pure Competition in the Sale of the Product (1) Units of Resource (2) Total Product (Output) (3) Marginal Product (MP) (4) Product Price $2 2 2 2 ] ] 13 ] 18 ] 22 ] 25 ] 27 ] 28 (5) Total Revenue, (2) (4) $ ] 14 ] 26 ] 36 ] 44 ] 50 ] 54 ] 56 (6) Marginal Revenue Product (MRP) $14 12 10 from using each additional unit of labor Columns through remind us that the law of diminishing returns applies here, causing the marginal product of labor to fall beyond some point For simplicity, we assume that these diminishing marginal returns—these declines in marginal product—begin with the first worker hired to total cost and what it adds to total revenue We have seen that MRP measures how much each successive unit of a resource adds to total revenue The amount that each additional unit of a resource adds to the firm’s total (resource) cost is called its marginal resource cost (MRC) In equation form, Product Price But the derived demand for a resource change in total (resource) cost Marginal resource cost unit change in resource quantity depends also on the price of the product it produces Column in Table 14.1 adds this price information Product price is constant, in this case at $2, because the product market is competitive The firm is a price taker and can sell units of output only at this market price Multiplying column by column provides the totalrevenue data of column These are the amounts of revenue the firm realizes from the various levels of resource usage From these total-revenue data we can compute marginal revenue product (MRP)—the change in total revenue resulting from the use of each additional unit of a resource (labor, in this case) In equation form, change in total revenue Marginal revenue product unit change in resource quantity The MRPs are listed in column in Table 14.1 Rule for Employing Resources: MRP MRC The MRP schedule, shown as columns and 6, is the firm’s demand schedule for labor To understand why, you must first know the rule that guides a profit-seeking firm in hiring any resource: To maximize profit, a firm should hire additional units of a specific resource as long as each successive unit adds more to the firm’s total revenue than it adds to the firm’s total cost Economists use special terms to designate what each additional unit of labor or other variable resource adds So we can restate our rule for hiring resources as follows: It will be profitable for a firm to hire additional units of a resource up to the point at which that resource’s MRP is equal to its MRC For example, as the rule applies to labor, if the number of workers a firm is currently hiring is such that the MRP of the last worker exceeds his or her MRC, the firm can profit by hiring more workers But if the number being hired is such that the MRC of the last worker exceeds his or her MRP, the firm is hiring workers who are not “paying their way” and it can increase its profit by discharging some workers You may have recognized that this MRP MRC rule is similar to the MR MC profit-maximizing rule employed throughout our discussion of price and output determination The rationale of the two rules is the same, but the point of reference is now inputs of a resource, not outputs of a product MRP as Resource Demand Schedule Let’s continue with our focus on labor, knowing that the analysis also applies to other resources In a purely competitive labor market, market supply and market demand establish the wage rate Because each firm hires such a small fraction of market supply, it cannot influence the market wage rate; it is a wage taker, not a wage maker This means that for each additional unit of labor hired, each firm’s total resource cost increases by exactly the CHAPTER 14 The Demand for Resources 315 Note that we plot the points in Figure 14.1 halfway between succeeding numbers of resource units because MRP is associated with the addition of more unit Thus in Figure 14.1, for example, we plot the MRP of the second unit ($12) not at or but at 112 This “smoothing” enables us to sketch a continuously downsloping curve rather than one that moves downward in discrete steps (like a staircase) as each new unit of labor is hired FIGURE 14.1 The purely competitive seller’s demand for a resource The MRP curve is the resource demand curve; each of its points relates a particular resource price (5 MRP when profit is maximized) with a corresponding quantity of the resource demanded Under pure competition, product price is constant; therefore, the downward slope of the D MRP curve is due solely to the decline in the resource’s marginal product (law of diminishing marginal returns) P Resource price (wage rate) amount of the constant market wage rate More specifically, the MRC of labor exactly equals the market wage rate Thus, resource “price” (the market wage rate) and resource “cost” (marginal resource cost) are equal for a firm that hires a resource in a competitive labor market As a result, the MRP MRC rule tells us that, in pure competition, the firm will hire workers up to the point at which the market wage rate (its MRC) is equal to its MRP In terms of the data in columns and of Table 14.1, if the market wage rate is, say, $13.95, the firm will hire only one worker This is so because only the hiring of the first worker results in an increase in profits To see this, note that for the first worker MRP (5 $14) exceeds MRC (5 $13.95) Thus, hiring the first worker is profitable For each successive worker, however, MRC (5 $13.95) exceeds MRP (5 $12 or less), indicating that it will not be profitable to hire any of those workers If the wage rate is $11.95, by the same reasoning we discover that it will pay the firm to hire both the first and second workers Similarly, if the wage rate is $9.95, three workers will be hired If it is $7.95, four If it is $5.95, five And so forth So here is the key generalization: The MRP schedule constitutes the firm’s demand for labor because each point on this schedule (or curve) indicates the number of workers the firm would hire at each possible wage rate In Figure 14.1, we show the D MRP curve based on the data in Table 14.1.1 The competitive firm’s resource demand curve identifies an inverse relationship between the wage rate and the quantity of labor demanded, other things equal The curve slopes downward because of diminishing marginal returns $14 12 10 D = MRP Quantity of resource demanded 1 (2) Total Product (Output) ] ] 13 ] 18 ] 22 ] 25 ] 27 ] 28 Q Resource Demand under Imperfect Product Market Competition Resource demand (here, labor demand) is more complex when the firm is selling its product in an imperfectly competitive market, one in which the firm is a price maker That is because imperfect competitors (pure monopolists, oligopolists, and monopolistic competitors) face downsloping product demand curves As a result, whenever an imperfect competitor’s product demand curve is fixed in place, the only way to increase sales is by setting a lower price (and thereby moving down along the fixed demand curve) The productivity data in Table 14.1 are retained in columns to in Table 14.2 But here in Table 14.2 we show in column that product price must be lowered to sell the TABLE 14.2 The Demand for Labor: Imperfect Competition in the Sale of the Product (1) Units of Resource (3) Marginal Product (MP) (4) Product Price (5) Total Revenue, (2) (4) $2.80 2.60 2.40 2.20 2.00 1.85 1.75 1.65 $ ] 18.20 ] 31.20 ] 39.60 ] 44.00 ] 46.25 ] 47.25 ] 46.20 (6) Marginal Revenue Product (MRP) $ 18.20 13.00 8.40 4.40 2.25 1.00 21.05 Microeconomics of Resource Markets and Government marginal product of each successive worker The MRP of the purely competitive seller of Table 14.1 falls for only one reason: Marginal product diminishes But the MRP of the imperfectly competitive seller of Table 14.2 falls for two reasons: Marginal product diminishes and product price falls as output increases We emphasize that the lower price accompanying each increase in output (total product) applies not only to the marginal product of each successive worker but also to all prior output units that otherwise could have been sold at a higher price Observe that the marginal product of the second worker is units of output These units can be sold for $2.40 each, or, as a group, for $14.40 But $14.40 is not the MRP of the second worker To sell these units, the firm must take a 20-cent price cut on the units produced by the first worker—units that otherwise could have been sold for $2.60 each Thus, the MRP of the second worker is only $13 [5 $14.40 (7 20 cents)], as shown Similarly, the third worker adds units to total product, and these units are worth $2.20 each, or $11 total But to sell these units, the firm must take a 20-cent price cut on the 13 units produced by the first two workers So the third worker’s MRP is only $8.40 [5 $11 (13 20 cents)] The numbers in column reflect such calculations In Figure 14.2 we graph the MRP data from Table 14.2 and label it “D MRP (imperfect competition).” The broken-line resource demand curve, in contrast, is that of the purely competitive seller represented in Figure 14.1 A comparison of the two curves demonstrates that, other things equal, the resource demand curve of an imperfectly competitive seller is less elastic than that of a purely competitive seller Consider the effects of an identical percentage decline in the wage rate (resource price) from $11 to $6 in Figure 14.2 Comparison of the two curves reveals that the imperfectly competitive seller (solid curve) does not expand the quantity of labor it employs by as large a percentage as does the purely competitive seller (broken curve) It is not surprising that the imperfectly competitive producer is less responsive to resource price cuts than the purely competitive producer When resource prices fall, MC per unit declines for both imperfectly competitive firms as well as purely competitive firms Because both types of firms maximize profits by producing where MR MC, the decline in MC will cause both types of firms to produce more But the effect will be muted for imperfectly competitive firms because their downsloping demand curves cause them to also face downsloping FIGURE 14.2 The imperfectly competitive seller’s demand curve for a resource An imperfectly competitive seller’s resource demand curve D (solid) slopes downward because both marginal product and product price fall as resource employment and output rise This downward slope is greater than that for a purely competitive seller (dashed resource demand curve) because the pure competitor can sell the added output at a constant price P $18 16 Resource price (wage rate) 316 PART FIVE 14 12 D = MRP (pure competition) 10 D = MRP (imperfect competition) –2 Q Quantity of resource demanded MR curves—so that for WORKED PROBLEMS each additional unit sold, MR declines By contrast, W14.1 MR is constant (and equal Resource to the market equilibrium demand price P) for competitive firms, so that they not have to worry about MR per unit falling as they produce more units As a result, competitive firms increase production by a larger amount than imperfectly competitive firms whenever resource prices fall Market Demand for a Resource The total, or market, demand curve for a specific resource shows the various total amounts of the resource that firms will purchase or hire at various resource prices, other things equal Recall that the total, or market, demand curve for a product is found by summing horizontally the demand curves of all individual buyers in the market The market demand curve for a particular resource is derived in  essentially the same way—by summing horizontally the individual demand or MRP curves for all firms hiring that resource CHAPTER 14 The Demand for Resources 317 QUICK REVIEW 14.1 • To maximize profit, a firm will purchase or hire a re- source in an amount at which the resource’s marginal revenue product equals its marginal resource cost (MRP MRC) • Application of the MRP MRC rule to a firm’s MRP curve demonstrates that the MRP curve is the firm’s resource demand curve In a purely competitive resource market, resource price (the wage rate) equals MRC • The resource demand curve of a purely competitive seller is downsloping solely because the marginal product of the resource diminishes; the resource demand curve of an imperfectly competitive seller is downsloping because marginal product diminishes and product price falls as output is increased Determinants of Resource Demand LO14.3 List the factors that increase or decrease resource demand What will alter the demand for a resource—that is, shift the resource demand curve? The fact that resource demand is derived from product demand and depends on resource productivity suggests two “resource demand shifters.” Also, our analysis of how changes in the prices of other products can shift a product’s demand curve (Chapter 3) suggests another factor: changes in the prices of other resources Changes in Product Demand Other things equal, an increase in the demand for a product will increase the demand for a resource used in its production, whereas a decrease in product demand will decrease the demand for that resource Let’s see how this works The first thing to recall is that a change in the demand for a product will change its price In Table 14.1, let’s assume that an increase in product demand boosts product price from $2 to $3 You should calculate the new resource demand schedule (columns and 6) that would result and plot it in Figure 14.1 to verify that the new resource demand curve lies to the right of the old demand curve Similarly, a decline in the product demand (and price) will shift the resource demand curve to the left This effect—resource demand changing along with product demand—demonstrates that resource demand is derived from product demand Example: Assuming no offsetting change in supply, a decrease in the demand for new houses will drive down CONSIDER THIS Superstars In what economist Robert Frank calls “winner-take-all markets,” a few highly talented performers have huge earnings relative to the average performers in the market Because consumers and firms seek out “top” performers, small differences in talent or popularity get magnified into huge differences in pay In these markets, consumer spending gets channeled toward a few performers The media then “hypes” these individuals, which further increases the public’s awareness of their talents Many more consumers then buy the stars’ products Although it is not easy to stay on top, several superstars emerge The high earnings of superstars result from the high revenues they generate from their work Consider Beyoncé Knowles If she sold only a few thousand songs and attracted only a few hundred fans to each concert, the revenue she would produce—her marginal revenue product—would be quite modest So, too, would be her earnings But consumers have anointed Beyoncé as queen of the R&B and hip-hop portion of pop culture The demand for her music and concerts is extraordinarily high She sells millions of songs, not thousands, and draws thousands to her concerts, not hundreds Her extraordinarily high net earnings derive from her extraordinarily high MRP So it is for the other superstars in the “winner-take-all markets.” Influenced by the media, but coerced by no one, consumers direct their spending toward a select few The resulting strong demand for these stars’ services reflects their high MRP And because top talent (by definition) is very limited, superstars receive amazingly high earnings house prices Those lower prices will decrease the MRP of construction workers, and therefore the demand for construction workers will fall The resource demand curve such as in Figure 14.1 or Figure 14.2 will shift to the left Changes in Productivity Other things equal, an increase in the productivity of a resource will increase the demand for the resource and a  decrease in productivity will reduce the demand for the resource If we doubled the MP data of column in 318 PART FIVE Microeconomics of Resource Markets and Government Table 14.1, the MRP data of column would also double, indicating a rightward shift of the resource demand curve The productivity of any resource may be altered over the long run in several ways: • Quantities of other resources The marginal productivity of any resource will vary with the quantities of the other resources used with it The greater the amount of capital and land resources used with, say, labor, the greater will be labor’s marginal productivity and, thus, labor demand • Technological advance Technological improvements that increase the quality of other resources, such as capital, have the same effect The better the quality of capital, the greater the productivity of labor used with it Dockworkers employed with a specific amount of real capital in the form of unloading cranes are more productive than dockworkers with the same amount of real capital embodied in older conveyor-belt systems • Quality of the variable resource Improvements in the quality of the variable resource, such as labor, will increase its marginal productivity and therefore its demand In effect, there will be a new demand curve for a different, more skilled, kind of labor All these considerations help explain why the average level of (real) wages is higher in industrially advanced nations (for example, the United States, Germany, Japan, and France) than in developing nations (for example, Nicaragua, Ethiopia, Angola, and Cambodia) Workers in industrially advanced nations are generally healthier, better educated, and better trained than are workers in developing countries Also, in most industries they work with a larger and more efficient stock of capital goods and more abundant natural resources This increases productivity and creates a strong demand for labor On the supply side of the market, labor is scarcer relative to capital in industrially advanced than in most developing nations A strong demand and a relatively scarce supply of labor result in high wage rates in the industrially advanced nations are substitutable A firm can produce some specific amount of output using a relatively small amount of labor and a relatively large amount of capital, or vice versa Now assume that the price of machinery (capital) falls The effect on the demand for labor will be the net result of two opposed effects: the substitution effect and the output effect • Substitution effect The decline in the price of machinery prompts the firm to substitute machinery for labor This allows the firm to produce its output at lower cost So at the fixed wage rate, smaller quantities of labor are now employed This substitution effect decreases the demand for labor More generally, the substitution effect indicates that a firm will purchase more of an input whose relative price has declined and, conversely, use less of an input whose relative price has increased • Output effect Because the price of machinery has fallen, the costs of producing various outputs must also decline With lower costs, the firm finds it profitable to produce and sell a greater output The greater output increases the demand for all resources, including labor So this output effect increases the demand for labor More generally, the output effect means that the firm will purchase more of one particular input when the price of the other input falls and less of that particular input when the price of the other input rises • Net effect The substitution and output effects are both present when the price of an input changes, but they work in opposite directions For a decline in the price of capital, the substitution effect decreases the demand for labor and the output effect increases it The net change in labor demand depends on the relative sizes of the two effects: If the substitution effect outweighs the output effect, a decrease in the price of capital decreases the demand for labor If the output effect exceeds the substitution effect, a decrease in the price of capital increases the demand for labor Changes in the Prices of Other Resources Complementary Resources Recall from Chapter Changes in the prices of other resources may change the demand for a specific resource For example, a change in the price of capital may change the demand for labor The direction of the change in labor demand will depend on whether labor and capital are substitutes or complements in production that certain products, such as computers and software, are complementary goods; they “go together” and are jointly demanded Resources may also be complementary; an increase in the quantity of one of them used in the production process requires an increase in the amount used of the other as well, and vice versa Suppose a small design firm does computer-assisted design (CAD) with relatively expensive personal computers as its basic piece of capital equipment Each computer requires exactly one design engineer to Substitute Resources Suppose the technology in a certain production process is such that labor and capital CHAPTER 14 The Demand for Resources 319 TABLE 14.3 The Effect of an Increase in the Price of Capital on the Demand for Labor, DL (2) Increase in the Price of Capital (1) Relationship of Inputs (a) Substitution Effect (b) Output Effect (c) Combined Effect Substitutes in production Labor substituted for capital Complements in production No substitution of labor for capital Production costs up, output down, and less of both capital and labor used Production costs up, output down, and less of both capital and labor used DL increases if the substitution effect exceeds the output effect; DL decreases if the output effect exceeds the substitution effect DL decreases (because only the output effect applies) operate it; the machine is not automated—it will not run itself—and a second engineer would have nothing to Now assume that a technological advance in the production of these computers substantially reduces their price There can be no substitution effect because labor and capital must be used in fixed proportions, one person for one machine Capital cannot be substituted for labor But there is an output effect Other things equal, the reduction in the price of capital goods means lower production costs Producing a larger output will therefore be profitable In doing so, the firm will use both more capital and more labor When labor and capital are complementary, a decline in the price of capital increases the demand for labor through the output effect We have cast our analysis of substitute resources and complementary resources mainly in terms of a decline in the price of capital Table 14.3 summarizes the effects of an increase in the price of capital on the demand for labor Please study it carefully Now that we have discussed the full list of the determinants of labor demand, let’s again review their effects Stated in terms of the labor resource, the demand for labor will increase (the labor demand curve will shift rightward) when: • The demand for (and therefore the price of ) the product produced by that labor increases • The productivity (MP) of labor increases • The price of a substitute input decreases, provided the output effect exceeds the substitution effect • The price of a substitute input increases, provided the substitution effect exceeds the output effect • The price of a complementary input decreases Be sure that you can “reverse” these effects to explain a decrease in labor demand Table 14.4 provides several illustrations of the determinants of labor demand, listed by the categories of determinants we have discussed You will benefit by giving them a close look Occupational Employment Trends Changes in labor demand have considerable significance since they affect wage rates and employment in specific occupations Increases in labor demand for certain occupational groups result in increases in their employment; decreases in labor demand result in decreases in their employment For illustration, let’s first look at occupations for which labor demand is growing and then examine occupations for which it is declining (Wage rates are the subject of the next chapter.) TABLE 14.4 Determinants of Labor Demand: Factors That Shift the Labor Demand Curve Determinant Examples Change in product demand Gambling increases in popularity, increasing the demand for workers at casinos Consumers decrease their demand for leather coats, decreasing the demand for tanners The federal government increases spending on homeland security, increasing the demand for security personnel An increase in the skill levels of physicians increases the demand for their services Computer-assisted graphic design increases the productivity of, and demand for, graphic artists An increase in the price of electricity increases the cost of producing aluminum and reduces the demand for aluminum workers The price of security equipment used by businesses to protect against illegal entry falls, decreasing the demand for night guards The price of cell phone equipment decreases, reducing the cost of cell phone service; this in turn increases the demand for cell phone assemblers Health-insurance premiums rise, and firms substitute part-time workers who are not covered by insurance for full-time workers who are Change in productivity Change in the price of another resource Index IND15 in purely competitive labor market, 333–335 wage differentials and, 343 Labor force, 594–595 See also Unemployment participation in See Labor-force participation rate Labor-force participation rate, 577–578, 579 Labor-intensive goods, 840 Labor market See also Labor; Labor demand curve; Labor force; Labor supply curve agricultural, 452 demand for highly skilled workers, 471–472, 514–515, 518 health care costs and, 494 immigration and, 513–527 offshoring of jobs, 494, 859–861 specialization of, 212, 859–861 Labor market equilibrium, 334–335 Labor productivity, 577 economic growth and, 578, 586 labor inputs versus, 577–578 taxation and, 813 Labor supply curve in monopsony model, 337 in purely competitive labor market, 333–335 wage differentials and, 343 Labor unions, 338–340, 353–358 antitrust policy and, 429 bilateral monopoly model, 340–341 collective bargaining and, 354–355 decline of unionism, 354, 472 demand-enhancement model, 338 economic effects of, 355–357 exclusive/craft union model, 338–339 inclusive/industrial union model, 339–340 income inequality and, 472 membership in, 353 offsetting factors, 357 wage contracts and, 674 wage determination, 338–340, 353–358 wage differentials and, 345 wage increases and unemployment, 340 Laffer, Arthur, 813–814 Laffer Curve, 813–815 Lags fiscal policy and, 694–695 monetary policy and, 768 Laissez-faire antitrust perspective, 432 Laissez-faire capitalism, 32 Land, 11 leasing agricultural, 451 ownership of, 363 quality of, 363 as resource, 11 single tax on, 363–364 Land-intensive goods, 840 Land rent alternative uses of land, 363 rent-seeking behavior and, 116–117 single-tax movement, 363–364 Landrum-Griffin Act of 1959, 355 Language skills, in decision to migrate, 517 Large crop yields, price elasticity of demand and, 142 Latinos See Hispanics Lauren, Ralph, 348 Law of demand, 55 Law of diminishing marginal utility, 55, 153–155 demand and, 153–155 marginal utility, 153–155 total utility, 153–155 utility, defined, 153 vending machines and, 155 Law of diminishing returns, 200–202 application of, 200–202 graphical expression of, 201–202, 203 rationale for, 200–201 tabular example of, 201 Law of increasing opportunity costs, 14 Law of supply, 59–60 Leader countries, 572–574, 575 Leakage, 641, 649–650 Learning by doing, 36, 583 Leasing land, 451 Least-cost combination of resources, 322–322 Least-cost production, 39 Legal cartel theory of regulation, 437 Legal immigrants, 514–515, 523–526 decision to migrate, 515–517 family reunification and, 514–515 origins of, 515 quotas for, 514–515, 526 specialty occupations and, 514–515, 518 Legal issues aggregate supply and, 669–670 forms of business See Corporations; Partnerships; Sole proprietorships legalization of drugs, price elasticity of demand and, 142–143 Legal tender, 714–715 Lehman 10-Year Corporate Bond Index, 783 Lehman Brothers, 722 Leisure economic growth and, 570 gross domestic product and, 561 Lender of last resort, 718, 719, 722–723, 756 Lenovo, 267, 415 Lerner, Abba, 829 Lettuce, market for, 75 Leverage, 742–743 LG, 435 Liabilities commercial bank, 733, 735 of Federal Reserve Banks, 751–752 LIBOR scandal, 724 Licenses as barrier to entry, 257 occupational licensing, 108–109, 339, 437 Lifestyle factors, health care costs and, 497 Limited and bundled choice, 118–119 Limited income, of individuals, Limited liability rule, 782 Limit pricing, in oligopoly, 296, 298 Linear relationship, equation of, 27 Linux, 255 Liquidity, 710 commercial bank, 738 money and, 710 Liquidity trap, 769 List, John, 183 Living standards, 381–382, 571–575 Loaded terminology, in economic reasoning, 18 Loan(s) See also Borrowing; Credit; Debt of commercial banks, 736–738 to commercial banks, 751 in creation of money, 736–738 demand for loanable funds, 366 lending potential of commercial banks and, 739–743 leverage and financial instability, 742–743 mortgage default crisis and, 720–721, 766 in multiple destruction of money, 743 predatory lenders, 375 repayment of, 743 size of, and interest rates, 365 subprime mortgage loans, 720–721, 766 Loanable funds theory of interest, 366–368 demand for loanable funds, 367 extending the model, 367–368 supply of loanable funds, 366 Loan guarantees, 121 Local government employment in, 412–413 finances in U.S., 411–412, 421–422 fiscal impact of immigration and, 524 fiscal policies of, 695–696 Localized markets, 287 Location, product differentiation through, 280 Lockouts, 355 Logrolling, 129, 458 London Interbank Offer Rate (LIBOR) scandal, 724 Long run, 145, 199, 800 aggregate supply in, 666–667, 801–802, 805–806 decline of agriculture in, 450–453 economies and diseconomies of scale and, 211–213 Phillips Curve in, 810–812 price and output in monopolistic competition, 283–284 price elasticity of supply and, 145 production costs in, 209–213 profit maximization in pure competition, 240 pure competition in, 239–251 real wages in, 333 variable plant in, 199 Long-run aggregate supply, 801–802, 805–806 Long-run aggregate supply curve, 666–667 Long-run competitive equilibrium, 242 IND16 Index Long-run supply curve, 242–244 for constant-cost industry, 242–243 for decreasing-cost industry, 244 for increasing-cost industry, 243–244 Long-term vertical Phillips Curve, 811–812 L’Oréal, 286, 297 Lorenz curve, 466–467, 473 Loss aversion, 181 Loss-minimization, 227–229 Lotteries income and payouts of, 410–411, 412 present value of lottery winnings, 781 Luck, income inequality and, 470 Lump-sum tax, 648 Luxuries necessities versus, 9, 141 price elasticity of demand and, 141 M1, 711–713 M2, 713–714 Macpherson, David A., 513n Macroeconomic instability, 821–825 aggregate supply shocks and, 808–810 coordination failures and, 824–825 monetarist view of, 821–823 real-business-cycle view of, 823–824 Macroeconomics, 8, 531–543, 614–632 See also Aggregate demand; Aggregate supply; Economic growth; Inflation; Unemployment alternative views of, 833 “big picture,” 769–771 business cycles, 532 discretionary stabilization policy, 830–831, 831–833 domestic macroeconomic adjustments, 878–879 expectations and, 536 fixed-exchange rate systems and, 878–879 income-consumption and income-saving relationships, 615–621 instability See Macroeconomic instability interest-rate-investment relationship, 622–627 microeconomics versus, models for, 533–534, 542 modern economic growth and, 533–534 multiplier effect, 628–630 performance and policy in, 532–533 policy rules and, 828–830 “self-correction” by economy and, 825–828 shocks and, 536–539 stability and, 621 sticky prices and, 539–542 uncertainty and, 536–539 Madoff, Bernie, 791 Magnet countries, 516 Mainstream macroeconomics, 833 Maintenance costs, 624–625 Majority voting, 127–129 implications of, 128 inefficient outcomes of, 127–129 median-voter model, 130–131 paradox of, 129–131 Major League Baseball immigration and, 518 monopsony power of, 337 price discrimination and, 269 as pure monopolies, 255 Make-work rules, 355–356 Malthus, Thomas, 381, 383 Managed care, 504 Managed floating exchange rates, 879–880 criticisms of, 880 support for, 879–880 Management labor unions and, 354 managerial specialization, 212 Managerial prerogatives, 354 Marginal analysis, 6–7 See also Cost-benefit analysis; Marginal utility; MB MC rule; MR MC rule; P MC rule comparing benefits and costs, 6–7 in competitive markets, 65 economics of war and, 15 fast-food lines and, optimal allocation and, 14–15, 65, 88–89 for public goods, 92, 94–95 in pure monopoly, 260–263, 269–270, 271 slopes and, 26 Marginal benefit (MB), 6–7 See also Costbenefit analysis; MB MC rule Marginal cost (MC), 206–208 See also P MC rule average total cost (ATC) and, 208 average variable cost (AVC) and, 208 calculating, 206 graphical expression of, 207 law of supply and, 59–60 marginal decisions and, 206–207 marginal product and, 207–208, 322 marginal-revenue-marginal-cost approach to profit maximization, 226–230 in pure monopoly, 264–265 short-run supply and, 230–235 Marginal-cost-marginal-benefit rule, 95 Marginal product (MP), 200, 313–314 law of diminishing returns and, 200, 201–202, 203 marginal cost and, 207–208, 322 Marginal productivity theory of income distribution, 324–326 Marginal productivity theory of resource demand, 313–316 Marginal propensity to consume (MPC), 618 multiplier effect and, 629–630 nature of, 618–619 as slope, 619 Marginal propensity to save (MPS), 618, 629–630 nature of, 618–619 as slope, 619 Marginal rate of substitution (MRS), 168 Marginal resource cost (MRC), 314, 336–337 See also MRP MRC rule Marginal revenue (MR), 223–224 graphical expression of, 223 marginal-revenue-marginal-cost approach to profit maximization, 226–230 in pure monopoly, 258–259, 264–265 Marginal-revenue-marginal-cost approach, 226–230 Marginal revenue product (MRP), 313–315, 314 See also MRP MRC rule labor demand, 356–357 market demand for a resource, 316 productivity and, 313–314 product price and, 314 as resource demand schedule, 314–315 resource demand under imperfect product market competition, 315–316 Marginal revenue productivity, 343 Marginal tax rate, 409–410, 813 Marginal utility, 153 algebraic generalizations, 157–158 applications and extensions, 159–162 demand and, 153–155, 158–159 income effects, 159 law of diminishing marginal utility, 55, 153–155 numerical examples, 156–157 substitution effects, 159 total utility and, 153–155 utility-maximizing rule, 156–159 Marginal utility per dollar, 156 Market(s), 35 See also Demand; Market systems; Supply in market systems See Market systems nature of, 54 role of, 54 Market demand, 56 for labor, 333 for private goods, 91 in pure monopoly, 257–259 for a resource, 316 Market economy, 40 Market equilibrium, 62–65 changes in demand and, 65–67, 75–78 changes in supply and, 65–67, 75–78 complex cases, 65–67 efficient allocation, 64–65 equilibrium price, 62–64, 233–235, 240–242, 849, 850–851 equilibrium quantity, 62–64 labor market, 334–335 rationing function of prices, 64 Market failures, 83–104 in competitive markets, 84–90 externalities and, 96–103 Index IND17 free-rider problem, 91–92 government involvement and, 37, 101–102, 113 information failure, 108–110, 496 nature of efficiently functioning markets, 85–90 public goods and, 91–96 Market for externality rights, 102–103 advantages of, 102–103 operation of market, 102–103 Market for money, 761 Market imperfections imperfect competition, 222 marginal productivity theory of income distribution and, 326 resource demand and, 315–316 wage differentials and, 345–346 Marketing loan program, 460–461 Market portfolio, 787 beta and, 787 Security Market Line and, 789–790 Market power See also Monopoly; Oligopoly elasticity and, 146–147 income inequality and, 470 relevant market and, 431–432 Market segregation, 268 Market shares, monopolistic competition and, 279 Market structure, 220–222, 221 See also Monopolistic competition; Oligopoly; Pure competition; Pure monopoly Market supply, 60, 333 Market systems, 33–47 bureaucratic inefficiency versus, 119–120 business risk in, 45–46 change in, 40 characteristics of, 33–37 circular flow model and, 43–45 competition in, 34–35, 38–39, 64–65 demise of command systems and, 41–43 efficiency in, 38–39, 41, 190 fundamental questions of, 37–40 imperfect institutions in, 122–123 “invisible hand” and, 41–43, 114, 247, 363 money in, 36–37 monopolistic competition See Monopolistic competition oligopoly See Oligopoly overview of, 221–222 progress in, 40 pure competition See Pure competition pure monopoly See Pure monopoly in the United States, 33 virtues of, 41 Marriott, 110 Martinez, Tracy, 287 Master Card, 713 Maturity Extension Program, 767 Maturity, interest rates and, 365 Maximum willingness to pay, 85–86, 88 MB MC rule See also Cost-benefit analysis; Marginal analysis comparing MB and MC, 94–95 in competitive markets, 65 economics of war, 15 for government efficiency, 114 health care costs and, 495 optimal allocation and, 14–15, 65, 88–89 for optimal immigration, 526 for optimal level of social regulation, 439 for optimal reduction of an externality, 101 for public goods, 92, 94–95 McConnell, Campbell R., 513n McDonald’s, 38, 286, 298 McDonnell Douglas, 433, 434 McKesson, 348 Means tests, 479 Measurement units, slopes and, 26 Median family wealth, 484 Median-voter model, 130–131 Medicaid, 477, 479, 493, 494–495, 498, 506 Medical care See Health care Medicare, 478, 494–495 cost containment through, 504 described, 492–493 health care, 477, 492–493, 498, 506, 507 payroll taxes, 410, 415–416, 419–420, 421 shortfalls in, 702–703 as social insurance, 477, 478 unfunded liabilities, 117 Medium of exchange, 36–37, 710 Mental accounting, 183 Menu costs, 673–674 Mergers See also Antitrust policy cross elasticity of demand and, 148 guidelines for, 434 in oligopoly, 287 types of, 433–434 Merrill Lynch, 722, 726 MetLife, 726 Mexico cheap foreign labor argument for trade protection, 856–857 comparative advantage, 842–847 exports of, 881 immigration to U.S from, 515, 517–521, 525 land-intensive goods, 840 North American Free Trade Agreement (NAFTA), 525, 583, 859 opportunity-cost ratio, 843 MFGlobal, 361 Michelin, 267 Microchips, productivity acceleration and, 582 Microeconomics, of government See Public choice theory; Public goods; Taxes and taxation macroeconomics versus, Micron, 435 Microporous, 434 Microsoft case, 257, 267, 431, 433, 440–441 Microsoft Corporation, 47, 214, 248, 255, 257, 265, 267, 298, 299, 373, 374, 431, 433, 440–441, 582 Middle East modern economic growth and, 571–572 oil cartel, 294, 607, 669, 808–809, 839 Midpoint formula, 135 Mihov, Illian, 541n Military self-sufficiency argument for trade protection, 854 Mill, John Stuart, 653 Minimum efficient scale (MES), 213, 265–266 Minimum wage, 341–342 case against, 341 case for, 341–342 decreases in aggregate demand and, 674 evidence and conclusions, 342 unemployment and, 341–342, 609 Minksey, Herman, 540 Minus sign, in price elasticity of demand, 136 Misery Index, 810 Misfortune, income inequality and, 470 Mishel, Lawrence, 484n Mitsubishi UFJ Financial, 718 Mixed effects, of inflation, 606 Mizuho Financial, 718 Mobility See also Immigration immobility versus, 345 income inequality and, 467–468, 515–522 Mobil Oil, 433 Mobil Travel Guide, 110 Modern economic growth, 533–534, 571–575 catching up and, 572–574 uneven distribution of, 571–572 Monetarism, 821–823, 833 Monetary multiplier, 741–743 Monetary policy, 118, 747–773 See also Federal Reserve System cause-effect chain and, 761–763 cyclical asymmetry, 768–769 discount rate, 718, 719, 722–723, 756 discretionary, 831 evaluating, 765–769 expansionary, 758–759, 763–764, 769, 792 Federal funds rate and, 738–739, 757–761, 766 Federal Reserve functions in, 719–720 government role in promoting stability and, 716, 821–823 interest on reserves, 756–757 interest rates and, 747–773 liquidity trap, 769 macroeconomic instability and, 821–823 misdirection of stabilization policy, 118 monetary rule and, 829–830 money supply and, 711–716, 719 open-market operations, 718, 752–755, 791–792 politicization of, 118 IND18 Index Monetary policy—Cont problems and complications, 768–769 recent U.S policy, 765–768 reserve ratio, 719, 734–735, 739–743, 755–756 restrictive, 759–760, 764–765 tools of, 752–757 Monetary rule, 829–830 Money, 36–37, 709–727 See also Currency; Interest creation of See Money creation functions of, 710–711 interest rates and demand for, 748–750 market for, 761 in market systems, 36–37 as medium of exchange, 36–37, 710 prices and, 715 purchasing power and, 715, 716 resource pricing and, 313 as store of value, 710, 714–716 time-value of money and, 368–369, 778–781 as unit of account, 710 value of, 364, 714–715 Money capital, 12 Money creation, 731–744 fractional reserve system, 732–733 multiple-deposit expansion, 739–743 multiple destruction of money, 743 Money laundering, 724 Money market deposit account (MMDA), 713 Money Market Investor Funding Facility (MMIFF), 723 Money market mutual funds (MMMF), 713–714, 723 Money supply See also Bank(s); Monetary policy “backing” for, 714–716 components of, 711–714 controlling, 719 Federal Reserve role in, 719 M1, 711–713 M2, 713–714 Monopolistic competition, 221, 279–285 characteristics of, 221, 279–280 efficiency and, 284–285 entry and exit, 280, 283 industries with, 280–281 price and output in, 281–284 product differentiation in, 279–280, 285 product variety and, 285 Monopoly See also Antitrust policy; Pure monopoly antitrust policy and, 429, 430–435 AT&T case, 433, 437–348 effectiveness of antitrust laws, 432–435 industrial regulation in perpetuating, 436–437 Microsoft case, 257, 267, 431, 433, 440–441 monopoly behavior versus monopoly structure, 431 natural, 213, 256–257, 268, 429, 436 near-monopolies, 255, 429 regulated monopolies, 270–273 Monopoly demand, 257–259 marginal revenue in, 258–259, 264–265 monopolist as price maker, 255, 259 output and price determination, 260–263 total-revenue test for price, 259 Monopoly power, 268, 272–273 Monopsony, 335–337, 336 equilibrium wage and employment, 337 examples of, 337 MRC higher than wage rate, 336–337 upsloping labor supply to firm, 336 Morale, 674 Moral hazard, 722 Moral hazard problem, 109 health care insurance and, 498–499 Troubled Asset Relief Program (TARP), 722, 723 Morgan Stanley, 722, 724, 726 Morgan, Theodore, 608n Mortgage-backed securities, 720–721, 722 Mortgage default crisis, 720–721, 766 Moving costs, of immigrants, 516 MP3 players, 250, 373 MR MC rule, 226 See also Marginal cost (MC); Marginal revenue (MR) antitrust policy and, 429 in the long run, 239 marginal cost and short-run supply, 230–235 in pure monopoly, 261–262, 264–267, 269–270, 271 resource demand and, 323 in the short run, 226–230 still there motel and, 232 MRP MRC rule, 314–315 See also Marginal resource cost (MRC); Marginal revenue product (MRP) in employing resources, 314 for monopsony model, 336–337 for purely competitive labor market, 333–335 Multilateral trade agreements, 857–861 Multinational corporations, 267 Multiple counting, 548 Multiple-deposit expansion, 739–743 Multiplier effect, 628–630 changes in equilibrium GDP and, 642 consumption and, 629–631 marginal propensities and, 629–630 monetary multiplier, 741–743 rationale for, 628–629 size of, 630 Murphy, Kevin, 495 Mutual funds, 783 as investment, 783 largest, 783 types of, 783, 793 in U.S financial services industry, 726 Mutual interdependence, 286 complications of, 291 in game theory, 289–290 noncollusive oligopoly and, 291–293 in oligopoly, 286 Myopia, 184–185 Nash equilibrium, 304–305 Nash, John F., 304n National, 447 National banks, 718 National Basketball Association (NBA), monopsony power of, 337 National Bureau of Economic Research (NBER), 592–593 National Credit Union Administration (NCUA), 715, 719, 735 National defense See also Terrorist attacks of September 11, 2001 economics of war, 15 immigration and, 524–526 imperfect institutions and, 122–123 military self-sufficiency argument for trade protection and, 854 National Education Association (NEA), 339 National Football League (NFL), monopsony power of, 337 National health insurance (NHI), 491 National income (NI), 546–564, 554 abroad, 664 gross domestic product (GDP) and, 556 National income accounting, 547–550, 562 See also Gross domestic product (GDP) National Income and Product Accounts (NIPA), 547, 562 National Labor Relations Act (NLRA), 355 National Labor Relations Board (NLRB), 355 National Monetary Commission, 716 National Safety Council, 439 Native American Arts and Crafts, 287 Natural gas, 388 Natural monopoly, 213, 256–257, 268, 429, 436 Natural rate of unemployment (NRU), 597 Natural resources, 380–401 economics of, 389–394 nonrenewable, 389–390, 391–394 optimal resource management, 390 renewable, 389–390, 394–400 resource supplies, 381–385 role in wage determination, 332 NCR, 325 Near-monies, 713–714 Near-monopolies, 255, 429 Necessities luxuries versus, 9, 141 price elasticity of demand and, 141 Negative externalities, 96–97 correcting for, 96–97, 98–100 government intervention, 98–100 Index IND19 market-based approach to, 102–103 optimal amount of externality reduction, 100–103 of taxation, 99, 419 Negative GDP gap, 597–598, 650–652, 674, 685, 763–764 Negative net exports, 645 Negative self-selection, 522 Negative slope, 26 Negative-sum game, 304 Neoclassical economics, 173–176 behavioral economics versus, 174–176 fairness and self-interest, 187–190 Nestlé, 267 Net benefits, 389 Net costs of import quotas, 854 of tariffs, 854 Net domestic product (NDP), 555–556 Net effect, 318 Net exports (X), 552–553, 643–645 aggregate expenditures and, 643–645 changes in aggregate demand and, 663–664 equilibrium GDP and, 644–645 in national accounting, 562 National Income and Product Accounts, 562 negative, 645 net export schedule, 643–645 positive, 645 Netflix, 250 Net foreign factor income, 554–555 Net investment income, 869 Net private domestic investment, 551–552 Netscape Navigator, 257, 440–441 Net taxes, 406–407, 689 Net transfers, 868–870 Network effects, 265–266, 273, 583 Net worth, of commercial banks, 733 New classical economics, 825–827 New Economy, 675 Newspapers, 215–216 New York Community Bank, 726 New York Life, 726 New York Stock Exchange, as market, 54 New York Times, 215 Nicaragua, inflation in, 609 90-10 ratio, 471 Nippon Cargo, 435 NLRB (National Labor Relations Board), 355 Nokia, 267 Nominal GDP, 532, 557–561, 559 adjustment for price changes, 559–560 real GDP versus, 557–561 Nominal income, 603–604 Nominal interest rates, 370, 606 Nominal wage, 331 Nomura Securities, 726 Noncash transfers, 468–469 Noncollusive oligopoly, 291–293 Noncompeting groups, 343–344 Nondiversifiable risk, 786 Nondurable goods, 550, 594 business cycles and, 594 nondurable consumer goods, defined, 594 Noneconomic costs, of unemployment, 599–600 Noneconomic sources of well-being, 563 Nonexcludability, 91 Nonexhaustive expenditures, 407 Nonincome determinants of consumption and saving, 619–621 Noninvestment transactions, in GDP, 551 Nonmarket activities, gross domestic product and, 561 Nonprice competition, 280 in monopolistic competition, 280 in pure monopoly, 255 Nonproduction transactions, 548–549 Nonrenewable natural resources, 389–390 conflict diamonds, 393–394 incomplete property rights and excessive present use, 393 present use versus future use of, 391–393 Nonrivalry, 91, 265 Nontariff barriers (NTB), 852 Nordhaus, William, 495 Normal goods, 58, 148 Normal profit, 197–198, 373 accounting profit versus, 197–198 break-even point and, 226 in monopolistic competition, 283 in profit rations entrepreneurship, 373 technological advance and, 248–251 Normative economics, North American Free Trade Agreement (NAFTA), 525, 583, 859 North Korea, command system in, 33, 42 Northwestern Mutual, 726 Novell, 441 NOW (negotiable order of withdrawal) accounts, 712 Number of buyers, change in demand and, 57, 59 Number of sellers change in supply and, 61–62 monopolistic competition and, 279 as obstacle to collusion, 295 in oligopoly, 295 Obama, Barack, 490, 505, 685, 693 Occupation(s) See also Education and training burden of unemployment and, 599 demand for highly skilled workers, 471–472, 514–515, 518 employment trends, 319–320 occupational licensing, 108–109, 339, 437 specialty occupations of immigrants, 514–515, 518 Occupational licensing, 108–109, 339, 437 Occupational Safety and Health Administration (OSHA), 438–439 Occupational segregation, 346, 482–483 crowding model, 482–483 economics of, 482–483 eliminating, 483 OECD (Organisation for Economic Cooperation and Development), 422 Office Depot, 434 Official reserves, 871, 877–878 Offshoring, 494, 859–861 Oil industry cartels in, 294, 607, 669, 808–809, 839 supply of cheap energy, 388–389 Okun, Arthur, 597 Okun’s law, 597 Oligopoly, 221, 286–299, 429 advertising and, 296–298 cartels and, 293–295 characteristics of, 221, 286–290, 289–290 efficiency and, 298 game theory and, 289–290 industries with, 287–289, 299 Internet, 299 kinked-demand theory and, 291–293 mergers and, 287 noncollusive, 291–293 price leadership model, 295–296 Olympics, preset ticket prices, 79–80 One-time game, 304–305 OPEC (Organization of Petroleum Exporting Countries), 294, 607, 669, 808–809, 839 Open economy, 643–646, 841 Open-market operations, 718, 752–755 buying securities, 752–754 increase in interest rates, 791–792 selling securities, 754–755 Open shop, 354 Operating costs, 624–625 Operational lag, 695 Operation Twist, 767, 772–773 Opportunity cost(s), See also Economic costs budget line, 10 choice and, 11 economic (pure) profit and, 198–199 explicit, 197 implicit, 197 law of increasing, 14 long run, 199 in marginal-revenue-marginal-cost approach to profit, 240–242 normal profit as cost, 198 short run, 199 in theory of consumer behavior, 160–162 of women in the workforce, 579 Opportunity-cost ratio, 843 Oprah Winfrey Show (TV program), 11 Optimal allocation, in marginal analysis, 14–15, 65, 88–89 Optimal immigration, 526 Optimal level of social regulation, 439–441 IND20 Index Optimal reduction of an externality, 100–103, 101 Oracle, 582 Organisation for Economic Cooperation and Development (OECD), 422 Organization of Petroleum Exporting Countries (OPEC), 294, 607, 669, 808–809, 839 Organ transplants, 68–69, 184, 502 Other-things-equal assumption (ceteris paribus), in graphical expression, 25–26 income-consumption relationship and, 615–621 Ottaviano, Gianmarco, 522n Outpayments, 868, 869 Output See also Total output in cartels, 293–294 coordination problem in command systems, 41–42 equilibrium real output, 670 impact of immigration on, 518–519 in market systems, 39 in monopolistic competition, 281–284 in oligopoly, 290–296 potential, 597 in pure monopoly, 260–263 short-run fluctuations in agricultural, 447–448, 451 Output effect, 318 Outsourcing health care costs and, 494 offshoring, 494, 859–861 Overconfidence bias, 179 Overt collusion, 294 Ownership of resources as barrier to entry, 257 conflict of interest, 346 land, 363 private property, 33–34, 47, 363 public, 436, 697–698, 700 restricting business risk to owners, 46 P ATC See also Average total cost (ATC); Price(s) dilemma of regulation and, 272–273 as fair-return price, 271–272 in monopolistic competition, 284 in oligopoly, 298 P MC rule See also Marginal cost (MC); Price(s) allocative efficiency in pure competition, 246–247 antitrust policy and, 429 dilemma of regulation and, 272–273 monopolistic competition and, 284 in oligopoly, 298 as socially optimal price, 271 Packaging product differentiation through, 280 size reductions, 181–182 Panasonic, 267, 294–295 Paper money, 711–712, 714–715, 732 Paradox of thrift, 621 Paradox of voting, 129–131 Parity concept, 454 criticisms of, 457 purchasing power parity, 534, 874 Parity ratio, 454 Partnerships, 44 Part-time workers health care costs and, 494 unemployment rate and, 595 Passively managed funds, 783, 793 Patents as barrier to entry, 257, 267 creative destruction and, 248–249 economic growth and, 574, 575 Patient Protection and Affordable Care Act (PPACA), 490, 491, 501, 503 alternatives, 507 implementation problems, 506 major provisions, 505–507 objections, 507 Pay for performance, 346–347 free-rider problem and, 91–92, 93 negative side effects of, 347 principal-agent problem, 346 Payoff matrix, 289 PayPal, 582 Payroll taxes, 410, 415–416, 419–420, 421 Peak, of business cycle, 592 Pension funds, in U.S financial services industry, 726 Pentagon Federal Credit Union, 726 PepsiCo, 148, 433, 542 Per capita GDP, 534, 569, 570–575 Per capita income, 572 Percentage rate of return, 783–784 Percentages interest rates as, 364 percentage rate of return, 783–784 in price elasticity of demand, 135–136 Perfectly elastic demand, 136, 222 Perfectly elastic supply, 243 Perfectly inelastic demand, 136 Perfectly inelastic supply, 361 Peri, Giovanni, 522n Permanent legal residents (green card recipients), 514 Perri, Fabrizio, 472n Per se violations, 434 Personal consumption expenditures (C), 383–385, 550, 662–663 Personal income (PI), 556 Personal income tax, 409–410, 415, 419, 421, 663 Personal mandate, 505–506 Personal saving, 615 Per-unit production costs, 602, 669 Petrobras, 267 Pfizer, 257 Philippines, immigration to U.S from, 515 Phillips, A W., 807 Phillips Curve, 807–112 aggregate supply shocks and, 808–810 disinflation and, 812 long-run, 810–812 nature of, 807–808 short-run, 811 vertical, 811–812 Physicians See also Health care demand for health care and, 497–498 limits to malpractice awards, 504 supply of health care and, 501 Physician’s Health Plan of Michigan, 434 Picasso, Pablo, 345 Picker, Les, 816n Piece rates, 346, 347 Pixar Animation Studios, 373 Pizza Hut, 433 Planned investment, 637, 639, 641 Planning fallacy, 179–180 Plant capacity in long run, 199 in short run, 199 Policy issues See also Antitrust policy; Fiscal policy; Government; Monetary policy farm policy, 453–459 macroeconomic, 831–833 pure monopoly and, 267–268 resource pricing and, 313 Political action committees (PACs), 458 Political business cycles, 695 Political corruption, 121–122 Political issues business cycles and, 593, 695 in farm policy, 458–459 in fiscal policy, 695 minimum wage, 341–342 modern economic growth and, 571 special interests, 128–129, 458 Pollution, air, 98, 102–103, 389 Polypore, 434 Ponzi, Charles, 791 Ponzi schemes, 791 Population Bomb, The (Ehrlich), 383 Population growth birthrates and, 381–382, 578 resource consumption per person, 383–385 single tax on land and, 363–364 trends in, 381–382 Pork-barrel politics, 116, 123 Portfolio, 783 diversification and, 785–786 market, 787, 789–790 Positive economics, Positive externalities, 97–98, 496 Positive GDP gap, 597–598, 802 Positive net exports, 645 Positive relationships See Direct relationships Positive slope, 26 Positive-sum game, 304 Index IND21 Post, 296 Post hoc, ergo propter hoc fallacy, 19 Postrel, Virginia, 47 Potential competition, 267, 437 Potential GDP, 597 Potential output, 597 Poverty, 475–479 entitlement programs and, 477–479, 522 health care and, 479, 493, 494–495, 498, 506 health-insurance coverage and, 506 incidence of, 475–476 income inequality and, 465–486 measurement of, 477 nature of, 475 trends in, 476–477, 484 Poverty rate, 475–477 Prante, Gerald, 422–423, 422n Precommitments, 185–186 automatic payroll deductions, 185–186 betting against yourself, 186 early withdrawal penalties, 186 salary smoothing, 186 weight-loss competitions, 186 Predatory lenders, 375 Preemption of entry, 306–307 Preexisting conditions, health insurance coverage for, 505 Preferences consumer, 155 income inequality and, 469–470 indifference curve, 167–168 limited and bundled choice, 118–119 paradox of voting and, 129 Preferred provider organizations (PPOs), 504 Prescription drugs innovation and economic growth, 575 patents and innovation, 575 Present value, 368, 390–391, 778–781 applications of, 781 calculating, 390 compound interest, 368, 779 in natural resource economics, 390–391 present value model, 779–781 Preset prices, 78–80 Price(s) See also Equilibrium price level; Inflation; MR MC rule; Price elasticity of demand; Price elasticity of supply agricultural, 459, 461 in cartels, 293–294 ceilings on, 67–69 change in demand and, 56–58, 59, 65–67, 75–78 change in prices of other resources, 318–319 change in supply and, 60–62, 61, 65–67, 75–78 consumer choice and, 156 control over, 280 demand shocks and, 536–539 efficiency and, 89–90 equilibrium price level, 62–64, 233–235, 240–242, 670–675, 801–802, 849 flexible, 536–542 floors on, 69–70 government-set, 67–70 immigration and, 524 of imported resources, 669 inflexible, 293, 536–542 inverse relationship with quantity, 55 law of demand and, 55 in marginal-revenue-marginal-cost approach to profit maximization, 233–235 marginal revenue product (MRP), 314 marginal revenue versus, 258–259 in market systems, 35, 39 money and, 715 in monopolistic competition, 281–284 in oligopoly, 286, 291 preset, 78–80 price-level surprises, 826–827 product differentiation through, 280 in pure monopoly, 255, 257, 258–260, 262–263, 268–270 rates of return and, 783–784 rationing function of, 64 in regulated monopoly, 270–273 of related goods, 58, 59 relative, 55 resource, 60–61, 62, 313 scalping and, 64, 79 short-run fluctuations in agricultural, 447–448, 451 sticky, 293, 536–542 in supply and demand analysis of exports and imports, 848–851 supply shocks and, 536 Price ceilings, 67–69, 370 black markets and, 68–69 graphical analysis, 67 rationing and, 64, 67–68 Price changes on budget line, 167 health care costs and, 496–497 nominal GDP versus real GDP, 557–561 in oligopoly, 291 Price discrimination, 268–270, 430, 434 conditions for, 268 examples of, 268–269 graphical analysis, 269–270 Price effects, of illegal immigration, 524 Price-elasticity coefficient, 135–137 Price elasticity of demand, 135–143 applications of, 142–143 determinants of, 141–143 formula for, 135–137 for health care, 496–498 interpretation of elasticity, 136–137 total-revenue curve and, 140–141 total-revenue test, 137–141, 259 Price elasticity of supply, 143–146 applications of, 145–146 immediate market period, 144 long run, 145 pricing power, 146–147 short run, 144–145 Price-fixing, 187, 434, 435 Price floors, 69–70 additional consequences of, 70 effect of, 69–70 graphical analysis, 70 on wheat, 69–70 Price index, 559 Consumer Price Index (CPI), 600–601, 605 dividing nominal GDP by, 559–560 GDP, 559 Price leadership, 295–296 Price-level stability, 603, 674–675 Price-level surprises, 826–827 Price makers, 222, 255, 259, 286, 315 Price supports, 454 criticisms of, 457–458 economics of agricultural, 454–455, 460–461 Price takers, 222, 224, 234 pure competition and, 255 resource markets and, 313 Price wars, 187, 293, 296, 541–542, 673 Pricing power as barrier to entry, 255, 257 elasticity and, 146–147 in pure monopoly, 255, 257, 258–260, 262–263 Primary Dealer Credit Facility (PDCF), 723 Primary markets, 79 Prime interest rate, 759 Principal-agent problem, 115, 346 Principle of comparative advantage, 843–844 See also Comparative advantage Prisoner’s dilemma, 289 Private bargaining, 98 Private closed economy, 637–640 Private goods, 91–92, 128 Private property, 33 land ownership, 363 in market systems, 33–34, 47 Private sector, 113–114, 119–123 Private transfer payments, 549 Probability-weighted average, 787 Procter & Gamble, 182, 297 Producer expectations change in supply and, 61, 62 changes in aggregate demand and, 663 Producer surplus, 86–88, 247, 454 Product attributes, in monopolistic competition, 279 Product demand changes in, 317 elasticity of, 321 Product development See Research and development (R&D) IND22 Index Product differentiation, 279–280 in monopolistic competition, 279–280 in oligopoly, 286 Production costs, 196–217 applications and illustrations, 213–216 economic, 198–199 least-cost, 39 long-run, 209–213 in market systems, 38–39 short-run, 200–209, 232–235, 664–665 Production, exchange rates and, 874 Production possibilities curve, 13–14 Production possibilities model, 12–20 assumptions of, 12 economic growth and, 16–19, 576–578, 806 economics of war and, 15 future and, 17–19 international trade and, 19–20 law of increasing opportunity costs, 14 optimal allocation and, 14–15 production possibilities curve, 13–14 production possibilities table, 12–13 Production possibilities table, 12–13 Productive efficiency, 64, 88, 246, 263–264, 284–285, 298 Productivity, 669 See also Economies of scale acceleration of, 581–584 aggregate supply and, 669 business cycles and, 593 changes in, 317–318 economic growth and, 582–583 general level of wages and, 331–332 health care prices and, 501–502 labor inputs versus labor productivity, 578 labor unions and, 355–357 marginal revenue product (MRP) and, 313–314 real wages and, 332–333 rent differences and, 362 resource demand derived from, 317 role of, 332 Productivity growth, 501–502, 578–584 Product markets, 44, 313 changes in product demand, 317 in circular flow model, 44 resource demand derived from, 317 Product variety benefits of, 285 in monopolistic competition, 285 Professional organizations craft union model for, 338–339 occupational licensing, 108–109, 339 Professional sports teams consumer expectations for, 58 Major League Baseball, 255, 269, 337, 355–356, 518 monopsony power of, 337 price discrimination and, 269 as pure monopolies, 255, 269 salary caps and deferred compensation, 781 Profit accounting profit, 198 commercial bank, 738 corporate, 554 discrimination and, 481 economic (pure), 198–199, 371–375 income approach to GDP and, 554 increasing returns, 582–583 investment demand and, 627 in market system, 45 in monopolistic competition, 283 normal profit See Normal profit in pure monopoly, 263 resource allocation and, 373–375 sources of, 372–373 start-up firms and, 518, 582–583 Profit maximization in long run, 240 marginal-revenue-marginal-cost approach, 226–230 in monopolistic competition, 283–284 for nonrenewable natural resources, 391–393 numerical illustration, 323–324 profit-maximizing combination of resources, 323 in pure competition, 224–235, 240 in pure monopoly, 260–263 in short run, 224–235 total-revenue-total-cost approach, 224–226 Profit-maximizing combination of resources, 323 Profit-sharing plans, 347 Progress and Poverty (George), 363 Progress, in market systems, 40 Progressive taxes, 409–410, 414, 421, 690 Property and equipment, commercial bank acquisition of, 733 Property rights economic growth and, 574 excessive present use of natural resources and, 393 fisheries management and, 396–400 forest management and, 394–396 in market systems, 33–34 Property taxes, 411–412, 420, 421–422 Proportional taxes, 414, 690 Proprietary income, 406 Proprietors’ income, income approach to GDP and, 554 Prospect theory, 180–184, 181 anchoring and credit card bills, 182–183 endowment effect and market transactions, 183 framing effects and advertising, 182 losses and shrinking packages, 181–182 mental accounting and overpriced warranties, 183 status quo bias, 183–184 Prosperity abroad, international economic linkages, 645 Protection-against-dumping argument for trade protection, 855 Protectionism, proponents of, 860 Protective tariffs, 851–852 Prudential, 726 Public assistance programs, 477, 478–479, 522 Public choice theory, 127–131 farm policy and, 458 government failure and, 118–119 majority voting in, 127–129 Public debt, 697–703 external, 700 false concerns, 699–700 foreign-owned, 700 future generations and, 699–700 government purchases and, 408 gross domestic product and, 698 interest on, 698–699 international comparisons, 698 money as debt, 714 ownership of, 697–698, 700 substantive issues, 700–701 Public finance, 405–424 apportioning tax burden, 413–416 employment, 412–413 federal, 409–410, 412–413 global perspective, 408, 415, 421 government and circular flow, 406, 407 government finance, 406–408 local, 411–413, 421–422 nature of, 406 state, 410–411, 412–413, 421–422 tax incidence, 416–423 Public goods, 91–106, 102 characteristics of, 91–92 cost-benefit analysis for, 94–95 demand for, 92–93 externalities and, 96–100 free-rider problem and, 91–92, 93 information failures, 108–110 marginal analysis, 92, 94–95 optimal quantity of, 92 preferences through majority voting, 128 private goods versus, 91–92 Public interest theory of regulation, 436 Public investments, 701 Public ownership of natural monopoly, 436 of public debt, 697–698, 700 Public-private complementarities, 701 Public regulation, of natural monopoly, 436 Public sector See also Government in aggregate expenditures (AE) model, 646–650 circular flow model and, 406, 407 government purchases, 552, 562, 646–648, 663, 686 income redistribution and, 419, 422–423, 468–469, 477–479 quasi-public goods and, 95–96 Index IND23 resource reallocation and, 95–96 taxation, 648–650 Public transfer payments, 549 Public utilities deregulation of, 437–438 as natural monopoly, 436 price discrimination in, 268 as regulated monopolies, 270–273 Purchasing power inflation and, 604–605, 715, 716 money and, 715–716 stabilizing, 716 Purchasing-power-parity theory, 534, 874 Pure capitalism, 32 Pure competition, 221, 222–235 antitrust law and, 429–430 characteristics of, 221, 222 demand in, 222–224 efficiency and, 244–247 free entry and exit in, 222, 240–242 “invisible hand” and, 41, 114, 247, 363 in long run, 239–251 loss-minimizing case, 227–229 marginal cost and short-run supply, 230–235 price takers in, 222, 255 profit maximization in long run, 240 profit maximization in short run, 224–235 profit-maximizing case, 227 purely competitive labor market, 333–335 resource demand and, 315–316 in short run, 226–235 shutdown case, 229–230, 234–235 Purely competitive labor market, 333–335 Pure monopoly, 221, 254–274, 255 barriers to entry, 255–257 characteristics of, 221, 255–257 economic effects of, 263–268 examples of, 255 marginal analysis, 260–263, 264–265, 269–270 monopoly demand, 257–259 objectives of study of, 255 output and price determination, 260–263 price discrimination, 268–270 pricing power in, 255, 257, 258–260, 262–263 regulated monopoly, 270–273 Pure profit See Economic (pure) profit Pure rate of interest, 365 Purposeful behavior, 5–6 Putin, Vladimir, 382 Putnam, 726 Qualification, information failures, 110 Quality of health care, 493–494 of labor, role in wage determination, 332 of land, 363 of products, gross domestic product and, 561 of resources, productivity changes and, 318 Quantitative easing (QE), 767–768, 772–773 Quantity of capital, 579–580 change in productivity and, 318 change in quantity demanded, 58–59, 65–67 change in quantity supplied, 62, 65–67 equilibrium, 62–64 inverse relationship with price, 55 Quasi-public banks, 717–718 Quasi-public goods, 95–96 Quotas in fisheries management, 398–400 immigration, 514–515, 526 import, 460, 852, 853–854 individual transferable quotas (ITQs), 398–400 for legal immigrants, 514–515, 526 Race See African Americans; Asians; Hispanics; Whites Railroads deregulation of, 121 price discrimination, 269 regulatory capture, 120 Ralph Lauren, 348 Ratchet effect, 673, 687–688 Rate regulation, 270–273 Rates of return arbitrage and, 784–785 asset prices and, 785 average expected rate of return, 787–788 calculating, 783–784 expected, 622, 663, 787–788 risk-free, 788 Rational, 174 Rational behavior, 155 Rational expectations theory (RET), 825–828, 833 Rational self-interest, purposeful behavior and, 5–6 Rationing prices and, 64, 67–68 usury laws and, 370–371 R&D See Research and development (R&D) Reagan, Ronald, 814, 815 Real-balances effect, 661 Real-business-cycle theory, 823–824 Real capital See Capital Real domestic output, 638 Real estate exchange rates and, 874 subprime mortgage crisis, 720–721, 766 Real GDP, 532, 557–561, 559 See also Gross domestic product (GDP) adjustment for price changes, 559–560 consumption and, 620 economic growth and, 569, 586–587 nominal GDP versus, 557–561 saving and, 620 taxation and, 816 Real GDP per capita, 569, 570–575 Real income, 603–604 Real interest rates, 370, 606, 622–623, 663 changes in aggregate demand and, 663 inflation and, 606 as nonincome determinant of consumption and saving, 620 RealNetworks, 441 Real wages, 331 long-run trend of, 333 productivity and, 332–333 Recession, 532, 592 See also Great Recession of 2007–2009 in aggregate demand-aggregate supply model, 807 in business cycle, 532, 533, 592, 593 decreases in aggregate demand and, 672–674 expansionary monetary policy, 758–759, 763–764, 769, 792 in extended AD-AS model, 807 as obstacle to collusion, 295 in the U.S., 592 Recessionary expenditure gap, 650–652 inflationary expenditure gap versus, 652 Keynes’ solution to, 650–652 Reciprocity strategies, 305–306 Recognition heuristic, 177–178 Recognition lag, 694–695 Recycling, 422–423 Redistribution of income, 419, 422–423, 604–605 Refinancing, of public debt, 699 Regressive taxes, 414, 421–422, 690 Regulation See Government regulation Regulatory agency, 120 Regulatory capture, 120–121 deregulation as alternative, 120–121 railroad industry, 120 Relative interest rates, exchange rates and, 874 Relative price, 55 Relative scarcity, 715 Remedies, for monopoly, 433 Remittances, 520–521 Renewable natural resources, 389–390, 394–400 fisheries management, 396–400 forest management, 394–396 Rent economic, 361–364 income approach to GDP and, 554 land, 116–117, 361–364 Rental income, 363–364 Rent controls, 68–69 Rent-seeking behavior, 116–117, 266, 458 Repeated games, 305–306 Replacement rate, 381 Representative democracy, median-voter problem, 130–131 Required reserves, 719, 734–735, 739–743, 751–752, 755–756 Resale, lack of, in pure monopoly, 268 IND24 Index Research and development (R&D) as barrier to entry, 257, 266–267 economies of scale and, 583 interest and, 370 oligopoly and, 297, 298 patents and, 248–249 Reserve(s) actual, 735 of commercial banks, 734–735, 739–743, 751–752, 755–756 excess, 735, 737–738 Reserve ratio, 734–735, 739–743, 755–756 discount rate and, 756 lowering, 756 raising, 755 term auction facility, 719 Reserve requirements, 719, 734–735, 739–743, 751–752, 755–756 Residual claimants, 371–372 Resource allocation See also Resource markets demand in See Resource demand economic growth and, 581 global, 461 marginal productivity theory of income distribution and, 324–326 profit and, 373–375 resource pricing and, 313 supply of energy in See Energy economics Resource demand, 312–327 consumption per person, 383–385 determinants of, 317–320 elasticity of, 320–321 marginal productivity theory of income distribution, 324–326 marginal productivity theory of resource demand, 313–316 optimal combination of resources, 322–324 resource pricing in, 313 Resource markets, 44 See also Interest; Natural resources; Profit; Rent; Resource demand; Supply of resources; Wage determination in circular flow model, 44–45 immigration and, 521 MRP MRC rule and, 314 public sector role in reallocation, 96 resource demand as derived demand, 313 resource prices and, 60–61, 62, 313 Restraints of trade, 429–430 Restrictive monetary policy, 759–760, 764–765 Retirement savings, 188–189 Revenue tariffs, 851 Reverse wealth effect, 619, 662 Ricardo, David, 653, 841 Right-to-work laws, 354 Risk, 785–788 See also Insurance; Uncertainty of agricultural operations, 451, 453 average expected rate of return and, 787–788 business, 45–46 comparing risky investments, 787–788 diversification and, 785–786 economic (pure) profit and, 372 exchange-rate, 882–883 government role in reducing private-sector risks, 113 income inequality and, 469–470 interest-rate, 365, 368 international investment risks, 786 in market system, 45–46 mutual funds and, 783 of pure monopoly, 263 restricting to owners, 46 risk-free rate of return, 788 Security Market Line and, 789–793 shielding employees and suppliers from, 45–46 shocks and, 536–539 types of, 372 Risk-free interest rate, 788 increase in, 791–792 Security Market Line and, 789–793 Risk premium, 789 Ritter, Joseph A., 562n Ritter, Lawrence S., 829n Rivalry, 91 Rivlin, Alice M., 585n Roman Empire, 533 Romer, Christina, 816, 816n Romer, David, 816, 816n Royal Bank of Scotland, 718 Royal Dutch/Shell, 267 Royalties, 346 Rule of 70, 570, 601 Rule of reason, 431, 433, 434 Russia command system in, 33, 42 immigration to U.S from, 517 population decline in, 382 U.S trade with, 449 Saffer, Henry, 143n Sahay, Ratna, 609n Salary caps, present value and, 781 Salary smoothing, 186 Sales taxes, 410, 415, 420, 421 Salmon, market for, 76–77 Samsung, 267, 298, 435 Savings, 535 average propensity to save (APS), 618 in equilibrium GDP, 641 income and, 615–621 inflation and, 605 marginal propensity to save (MPS), 618–619, 629–630 multiplier and, 629–631 nonincome determinants of, 619–621 paradox of thrift, 621 personal, 615 taxation and, 813 Savings accounts, 713 Savings and loan associations (S&Ls), 712, 717, 726 Saving schedule, 616–618 graphical expression of, 617 other considerations, 620–621 shifts in, 620, 621 Savings deposits, 713, 726, 743 Say, J B., 653 Say’s law, 653 Scale constant returns to, 213 diseconomies of, 212–213 economies of, 211–216 minimum efficient, 213, 265–266 Scalping, 64, 79 Scarce resources, 11 Scarcity, economic growth and, 569 economic perspective and, economic resources and, 11 marginal analysis and, relative, 715 Schneider, Friedrich, 563n Schumpeter, Joseph, 250n Scientific method, Secondary markets, 79 Secondhand sales, exclusion from GDP, 549 Securities firms, in U.S financial services industry, 726 Securitization, 721, 722 Security Market Line (SML), 789–793 Self-control problems, 185–186 Self-correction of economy, 825–828 mainstream view of, 827–828, 833 new classical economics view of, 825–827 Self-interest, 34, 41 Self-selection, 518 immigration and, 518, 522 negative, 522 Self-serving bias, 179 Self-sufficiency output mix, 843 Seniority, labor unions and, 354–355 September 11, 2001 terrorist attacks, 15, 675, 695, 831 Sequential game, 306–307 Service economy, 550 Services, 550 business cycles and, 594 private See Private goods product differentiation through, 280 public See Public goods Service Workers, 353 Shadow banking system, 721 Shadow heuristic, 178 Sharp, 435 Sherman Act of 1890, 429–430, 433, 440 Shierholz, Heidi, 484n Shirking, 212–213 Shocks, 536 demand, 536–542 expectations and, 536–539 Index IND25 importance of, 536 supply, 536, 602, 808–810, 821 Shortage, 64 Short run, 144, 199, 800 aggregate supply in, 664–665, 800 agricultural price and income instability in, 447–449, 451 fixed plant in, 199 law of diminishing returns and, 200–202 Phillips Curve in, 811 price and output in monopolistic competition, 283 price elasticity of supply and, 144 production costs in, 200–209, 232–235, 664–665 production relationships in, 200–202 profit maximization in pure competition, 224–235 pure competition in, 226–235 Short-run aggregate supply curve, 665–666, 800–801 Short-run supply curve, 232–235 Shutdown case, 229–230, 234–235 Silber, William L., 829n Simple multiplier, 661, 686 Simultaneous consumption, 265, 583 Simultaneous game, 304 Singapore, health care in, 507, 508–509 Single seller, in pure monopoly, 255 Single-tax movement, 363–364 Size of firm long-run production costs and, 209 in oligopoly, 286 Skill transferability, 518 Slope of a nonlinear curve, 27 Slope of a straight line, 26 infinite, 26 marginal analysis and, 26 measurement units and, 26 negative, 26 positive, 26 zero, 26 Small business See Entrepreneurs; Start-up firms Small Business Administration (SBA), 723 Smith, Adam, 41, 114, 160, 187, 363, 841, 841n Smith Barney, 724, 726 Smoot-Hawley Tariff Act of 1930, 856 Snyder’s of Hanover, 434 Social insurance programs, 477, 478 Socialism See Command systems Social issues, modern economic growth and, 571 Socially optimal price, 271, 272–273 Social regulation, 428, 438–442 characteristics of, 438–439 criticisms of, 440–441 industrial regulation versus, 438–439 nature of, 438 optimal level of, 439–441 regulatory commissions, 438–439 support for, 439–440 Social Security, 478 adjustment of benefits for inflation, 600–601 adverse selection problem, 110 Baby Boomers and, 587 financing, 410, 415–416 payroll taxes, 419–420, 421 shortfalls in, 702–703 as social insurance, 477, 478 unfunded liabilities, 117 Social Security Trust Fund, 702–703 Society, economizing problem of, 11–12 Sole proprietorships, 44 Solyndra, 121, 388 Sotheby’s, 435 South Korea immigration to U.S from, 517 international trade, 840 market system in, 42 Soviet Union, former See also Russia command system in, 33, 42–43 Spears, Brittany, 465 Special-interest effect, 115–116 Special interests farm policy and, 458 logrolling and, 129, 458 nature of, 128 rent seeking and, 116–117 special-interest effect, 115–116 Specialization, 35–36 comparative advantage and, 843–844 division of labor and, 36 gains from, 859–861 geographic, 36 international trade, 841 labor, 212, 859–861 managerial, 212 in market systems, 35–36 occupations of immigrants and, 514–515, 518 offshoring and, 859–861 Specialized inputs, 583 Specific excise tax, 420 Speculation in currency markets, 882–883 in determination of exchange rates, 874 Sports See Professional sports teams Sprint, 434 SSI See Supplemental Security Income (SSI) Stability fiscal policy and, 689–690 flexible exchange rates and, 877 government role in promoting, 689–690, 716, 719, 821–823 increases in aggregate supply and, 674–675 macroeconomic, 621 monetary policy and, 716, 821–823 of purchasing power of money, 716 self-correction of economy, 825–828 shifts in income and savings schedules, 621 shifts in investment demand curve, 626–627 sources of macroeconomic instability, 821–823 Stagflation, 808–810 Standardization, in pure competition, 222 Standard Oil, 267 Standard Oil case, 431 Standard & Poor’s 500 Index, 783 Staples, 434 Starbucks, 214, 250, 307 Start-up firms, 582–583 See also Entrepreneurs economic growth and, 582–583 entrepreneurial ability and, 12 immigrants as founders of, 518 information technology, 518, 582 life expectancy, 250 productivity acceleration and, 582–583 successful, 214–215 technological advance and, 248–251 State banks, 718 State government employment in, 412–413 finances in U.S., 410–411, 421–422 fiscal impact of immigration and, 524 fiscal policies of, 695–696 health care costs and, 494–495 lotteries, 410–411, 412, 781 State of Working America, The, 484 State taxes, 410–411, 421–422 Statistical discrimination, 481–482 Status quo, 180–181 Status quo bias, 183–184 Steam engine, 571 Steering heuristic, 177 StickK.com, 186 Sticky prices See Inflexible (“sticky”) prices Stock(s), 782 bonds versus, 782–783 corporate stockholders, 373–375 exchange rates and, 874 as investment, 782 limited liability rule, 782 Stock exchanges, 54 Stock market bubbles and, 692 crash of 1929, 19 exclusion from GDP, 549 Stock options, 347, 348 Store of value, 710, 714–716 Strategic behavior, 286 Street entertainers, 92 Strikes, 355, 356 Structural adjustment, 541 Structuralists, 431 Structural unemployment, 596 Subprime mortgage loans, 720–721, 766 Subsidies aggregate supply and, 660 agricultural, 453–454, 456 change in supply and, 61, 62 for consumers, 99–100 in correcting for positive externalities, 99–100 IND26 Index Subsidies—Cont criticisms of, 457–458 export, 852 as government intervention, 100 government provision, 100 for suppliers, 100, 453–454 tax subsidies for health care, 499 Substitute goods, 58, 147 ATMs, 325 change in demand and, 58 change in supply and, 61, 62 ease of resource substitutability, 321 lack of, in pure monopoly, 255 marginal rate of substitution (MRS), 168 prices of, 58 substitutability and price elasticity of demand, 141 Substitute resources, 318–319, 521 Substitution effect, 55, 159, 318 Sugar Program, 460–461 Sunk cost fallacy, 206 Sun Microsystems, 440–441, 518 Sunstein, Cass, 188n Supermarket behavior, neoclassical versus behavior economics explanations, 176 Superstars, 317, 465, 472 Supplemental Nutrition Assistance Program (SNAP), 477, 479 Supplemental Security Income (SSI), 477, 479, 493, 522 Supply, 59–62 See also Market supply aggregate See Aggregate supply change in demand and, 75–78 change in quantity supplied, 62, 65–67 change in supply, 60–62, 65–67, 75–78, 232–233, 367 determinants of, 60, 62 inelastic, 361 law of supply, 59–60 of loanable funds, 366 market supply, 60 price elasticity of, 143–146 resource See Supply of resources restricting agricultural, 456 short-run, 230–235 supply curve, 60–62 Supply curve, 60–62 labor, 333–335, 343 lack of, in pure monopoly, 262 reaction to demand shifts, 78 upsloping versus vertical, 78 Supply factors, 576 economic growth and, 576 health care, 501–503 Supply of resources, 381–400 energy economics, 383–385 environmental quality and, 398–399 increase in, 16 natural resource economics, 389–394 population growth and, 381–382 renewable resources, 394–400 resource consumption per person, 383–385 Supply schedule, 60 Supply shifters, 60 Supply shocks, 536, 602, 808–810, 821 Supply-side economics, 812–816 incentives to save and invest, 813 incentives to work, 813 Laffer Curve and, 813–815 Supply-side market failures, 84 Surplus, 63 balance-of-payments, 871 budget, 687 producer, 454 reduction of agricultural, 456–457 Surplus payment, land rent as, 362–363 Sushi, market for, 77–78 Switzerland, as magnet country for immigration, 516 Symantec (Norton), 214 Systematic errors, 174 TAC (total allowable catch), 398 Taco Bell, 155, 433 Taft-Hartley Act of 1947, 355 TANF (Temporary Assistance for Needy Families), 109, 477, 478–479, 493 Target, 296 Tariffs, 851–853 direct effects, 853 economic impact of, 852–853 indirect effects, 853 international economic linkages, 646 net costs of, 854 Taste-for-discrimination model, 480–481 Tastes change in demand and, 57, 59 in determination of exchange rates, 873 in market systems, 40 Taxable income, 409 Tax credit, 421, 477, 479 Taxes and taxation aggregate supply and, 660, 813–815 apportioning tax burden, 413–416 changes in aggregate demand and, 663 changes in supply and, 61, 62 clipping coins in, 603 corporate, 410, 415, 420, 421, 554, 625, 663, 670 earned-income tax credit (EITC), 477, 479 efficiency loss of tax, 418 elasticity of tax incidence, 416–418 equilibrium GDP and, 648–650 excise, 142, 410, 420, 421 federal tax revenues, 409–410, 418 fiscal policy and increase in, 688 fiscal policy and reduction of, 686 as government intervention, 99 health-insurance coverage and, 507 incentives and, 813 incidence of U.S taxes, 419–423 income distribution and, 419, 422–423, 468–469 interest rates and, 365 Laffer Curve and, 813–815 marginal tax rate, 409–410, 813 negative externalities and, 99, 419 payroll, 410, 415–416, 419–420, 421 personal, 409–410, 415, 419, 421, 663 on production and imports, 554 progressive, 409–410, 414, 421, 690 property, 411–412, 420, 421–422 proportional, 414, 690 public debt and, 699 public sector, 648–650 real GDP and, 816 regressive, 414, 421–422, 690 sales taxes, 410, 415, 420, 421 shifts in income and savings schedules, 621 shifts in investment demand curve and, 625 single tax on land, 363–364 specific taxes, 99, 419–420, 421 state taxes, 410–411, 421–422 supply-side economics, 813–815 Tax Freedom Day (U.S.), 407 tax structure in U.S., 420–423 underground economy and, 563 value-added, 415 Taxes on production and imports, 554 Tax Freedom Day (U.S.), 407 Tax incidence, 416–418 division of burden, 416–417 elasticity and, 416–418 in the U.S., 419–423 Tax subsidy, 499 Taylor, John, 832, 832n Taylor rule, 760–761, 832 Teamsters Union, 353, 726 Technology See also Innovation advances in, 16–17, 40, 248–251, 266–267, 298, 318, 332, 450–451, 502–503, 575, 576, 578–579, 582–583 agricultural supply increases and, 450–451 changes in aggregate demand and, 663 changes in supply and, 61, 62 competition and, 248–251 economic growth and, 16–17, 575, 578–579, 582–583 health care prices and, 502–503 impact of 3-D printers, 214–215 industrial regulation in perpetuating monopoly, 436–437 in market systems, 35, 40 oligopoly and, 298 in production possibilities model, 12 productivity changes and, 318, 582 pure monopoly and, 266–267 role in wage determination, 332 shifts in investment demand curve and, 625 Temporary Assistance for Needy Families (TANF), 109, 477, 478–479, 493 Temporary legal residents, 514 Index IND27 Temporary workers, health care costs and, 494 Tennessee Valley Authority (TVA), 436 Term Asset-Backed Securities Loan Facility (TALF), 723 Term auction facility, 719 Term Securities Lending Facility (TSLF), 723 Terms of trade, 844 comparative advantage and, 844–845 flexible exchange rates and, 877 Terrorist attacks of September 11, 2001, 15, 675, 695, 831 Thaler, Richard, 174, 183, 188n Theory of Moral Sentiments, The (Smith), 187 Third-party payments, health care, 496, 503 3-D printers, 214–215 Thrift institutions, 712 in Federal Reserve System, 718–719 required reserves of, 751–752 in U.S financial services industry, 726 TIAA-CREF, 724, 726 Ticket scalping, 64, 79 Till money/vault cash, 733 Time duration of unemployment, 599 ease of resource substitutability, 321 income distribution over, 471–473 income inequality and, 471–473 income mobility and, 467–468 marginal utility and, 160–162 price elasticity of demand and, 141 price elasticity of supply and, 144–145 specialization and, 36 supply-side economics and, 814 in theory of consumer behavior, 160–162 timing problems in fiscal policy, 694–695 Time deposits, 713 Time inconsistency, 185–186 Time preference, 788 Time-value of money, 368–369 applications, 781 compound interest, 368, 779 future value, 368 present value, 368, 390–391, 778–781 Time Warner Communications, 434, 437 Tobacco subsidies, 457 Token money, 712 Topel, Robert, 495 Topographical maps, indifference maps and, 170 Total allowable catch (TAC), 398 Total cost (TC), 204 average total cost (ATC), 206 graphical expression of, 227, 228 in market systems, 37–38 ratio of resource cost to, 321 short-run production, 204–205 Total demand See Demand curve; Demand schedule; Market demand Total fertility rate, 381, 586–587 Total money demand, 749–750 Total output See also Gross domestic product (GDP); Output interest and, 369 Total product (TP), 200 Total revenue (TR), 137, 223 graphical expression of, 223, 227, 228 in market systems, 37–38 price elasticity and, 140–141 total-revenue test for price elasticity, 137–141, 259 Total-revenue test, 137–141 Total-revenue-total-cost approach, 224–226 Total supply See Market supply; Supply curve; Supply schedule Total utility, 153 income equality in maximizing, 473–474 marginal utility and, 153–155 Toyota, 267, 298, 356, 547 Trade Adjustment Assistance Act of 2002, 859 Trade barriers, 851–861 net costs of, 854 trade barrier wars, 856 types of, 851–854 See also Import quotas; Tariffs Trade deficits, 839, 869 causes of, 881–882 implications of, 882–884 increased current consumption, 882 increased U.S indebtedness, 882–884 of the U.S., 880–884 Trademarks, 280 Trade-offs, 10 Trade surplus, 839, 869 Trade unions See Labor unions Trading possibilities line, 845–846 Tragedy of the commons, 400 Training See Education and training Transactions demand for money, 748 Transfer payments, 407 See also Income distribution built-in stability and, 689 exclusion from GDP, 549 income transfer in pure monopoly, 265 noncash transfers, 468–469 public debt as, 699–700 public versus private, 549 Treasury bills, 697–698 Treasury bonds, 697–698 Federal Reserve purchases of, 752 Federal Reserve sale of, 754–755 Treble damages, 430 Tropicana, 182 Troubled Asset Relief Program (TARP), 722, 723 Trough, of business cycle, 592 T Rowe Price, 726 Trucking, deregulation of, 121 Trump, Donald, Trusts, 429, 431 Truth in Lending Act of 1968, 375 Tying contracts, 430, 434 Tyson, 447 Ultimatum game, 189–190 Unanticipated inflation, 604 Unattainable combinations, 10 Uncertainty See also Risk flexible exchange rates and, 876–877 shocks and, 536–539 Underground economy See also Taxes and taxation exchange controls and, 878 gross domestic product and, 563 in human organs, 68–69 price ceilings and, 68 Undistributed corporate profits, 554, 556, 557 Unemployment, 15–20, 532, 594–600 cyclical, 596–597, 672–674 definition of full employment, 597 downward wage inflexibility and, 596 economic cost of, 597–599 education and, 599 gender and, 599 Great Depression and, 608 Great Recession of 2007–2009 and, 599, 608–609 immigration and, 521–522 income inequality and, 470 inflation and, 604, 609, 807–812 measurement of, 594–595 minimum wage and, 341–342, 609 noneconomic costs of, 599–600 in production possibilities model, 15–16 structural, 596 trends in, 809 types of, 595–596 unequal burdens, 597–599 union wage increases and, 340 in the U.S., 533, 594–595 Unemployment compensation, 477, 478 Unemployment equilibrium, 824–825 Unemployment rate, 594–595 Unfunded liabilities, 117 Uninsurable risks, 372 Unintended consequences, 119 Unionization rate, 353 Unions See Labor unions Union shop, 354 United Autoworkers, 353 United Kingdom Bank of England, 118, 717 modern economic growth and, 573–574 national health insurance, 500–501 U.S Bureau of Economic Analysis (BEA), 562 U.S Bureau of Engraving and Printing, 712, 731 U.S Bureau of Labor Statistics, 594–595 U.S Census Bureau, 467, 515, 562 U.S Department of Agriculture (USDA), 450, 456 IND28 Index U.S Department of Commerce, 461, 547, 562, 868 U.S Department of Defense, 123 U.S Department of Energy (DOE), 121 United States dollar See also Exchange rate(s) economic growth measures and, 533–534, 535–536 purchasing power of, 715–716 United States economy See also Federal government agriculture in, 447, 450–461 balance of payments, 867–871 business cycles in, 592 capital-intensive goods, 840 circular flow model and, 406, 407, 557, 558 commercial banks in, 718–719 comparative advantage, 842–847 covert collusion in, 294–295 economic growth in, 570–575, 581–584, 608–609 economics of war and, 15, 675, 695 energy economics in, 386–389 Environmental Performance Index (EPI), 398–399 executive pay in, 472 export supply, 848–849 fastest-growing occupations, 320 federal finances in, 409–410 fiscal policy in, 690–703 fisheries management in, 396–400 forest management in, 394–396 gasoline market in, 67–68, 77, 108 general level of wages in, 331–332 Great Depression and, 15–16, 19, 539, 540, 592, 596, 608, 636, 646, 652, 653, 677, 696, 720, 799, 821, 856 Great Recession of 2007–2009 See Great Recession of 2007–2009 gross domestic product (GDP) of, 532, 533–534 health care in, 415–416, 490–509 immigration and, 513–527 impact of taxes and transfer payments in, 468–469 import demand, 849 imports of, 449 income distribution in, 376, 471–473, 477–479, 484, 519–520 income shares in, 376, 519–520 inflation in, 601, 602, 608–609 infrastructure of, 579 international trade and, 449, 458–459, 839, 841–844 See also International trade labor unions in, 338–340, 353–358 local finances in, 412–413 as magnet for immigration, 516, 519–520 market system in, 33 minimum wage, 341–342 monetary policy in, 765–769 monopsony in, 337 mortgage default crisis, 766 multilateral trade agreements, 857–861 North American Free Trade Agreement (NAFTA), 525, 583, 859 offshoring of jobs and, 859–861 opportunity-cost ratio, 843 poverty measures in, 475–477 productivity acceleration and, 582–583 public sector, 646–650 rapidly-declining populations, 320 recent and projected fiscal policy, 692–694 recent monetary policy, 765–768 recessions in, 592 specialization and, 859–861 state finances in, 410–411, 412–413, 421–422 supply and demand analysis for international trade, 848–851 taxes in, 419–423 terrorist attacks of September 11, 2001, 15, 675, 695, 831 trade adjustment assistance, 859 trade deficits, 880–884 trash generation, 385 unemployment in, 533, 594–595 water use in, 384 wealth distribution in, 470, 484 U.S Environmental Protection Agency (EPA), 439, 442 U.S Federal Communications Commission (FCC), 257, 436 U.S Federal Trade Commission (FTC), 430, 434 U.S Food and Drug Administration (FDA), 120, 439, 442 U.S government securities, 697–698 assets of Federal Reserve Banks, 751 liabilities of Federal Reserve Banks, 751–752 open-market operations and, 752–755 purchase by commercial banks, 738 U.S Justice Department, 430, 440–441 U.S Mint, 712, 731 U.S Office of Personnel Management, 562 U.S Postal Service, 250, 267, 436 U.S savings bonds, 697–698 U.S Securities and Exchange Commission (SEC), 120 U.S Small Business Administration (SBA), 723 U.S Steel case, 431 U.S Supreme Court, 431–432 U.S Treasury Department, 697 United Steelworkers, 353 Unit elasticity, 136 Unit of account, 710 Unlimited wants, Unplanned changes, 641–642 Unrelated goods, 58 Upsloping supply curve, 78 Uruguay Round, 857 User cost, 391–393 Usury laws, 370–371 Utility, 5, 153 marginal utility See Marginal utility purposeful behavior and, 5–6 total utility, 153–155, 473–474 Utility maximization, 152–163 law of diminishing marginal utility, 153–155 theory of consumer behavior, 155–162 Utility-maximizing rule, 156–159 algebraic generalization, 157–158 demand curve and, 158–159 numerical example, 156–157 Utz Quality Foods, 434 Vale Canada Limited, 257 Value added, 548 Value-added tax (VAT), 415 Value judgment, Vanguard, 726 Variable costs (VC), 204 average (AVC), 205–206 short-run production, 204 Variables dependent, 25 independent, 25 Variety benefits of, 286 in monopolistic competition, 285 VAT (value-added tax), 415 Vault cash, 733 Végh, Carlos, 609n Velocity, of money, 822 Verizon, 297 Verson stamping machine, 215 Vertical axis, 24 Vertical intercept, 26 Vertical mergers, 433, 434 Vertical Phillips Curve, long-term, 811–812 Vertical supply curve, 78 Very large numbers, 222 Visa card, 713 Voice mechanism, 357 Voluntary export restriction (VER), 852 Vornado Realty, 348 Voting See Majority voting Wachovia, 722 Wage(s) See also Wage determination changes in productivity, 318 efficiency, 347, 827–828 fringe benefits, 335 general level of, 331–332 income approach to GDP and, 554 labor unions and, 354 long-run trend of, 333 minimum, 341–342, 609, 674 real, 332–333 unemployment and union wage increases, 340 Wage contracts, 674 Wage determination, 330–349 average wage of selected occupations, 342 bilateral monopoly model of, 340–341 Index IND29 CEO pay, 472 downward wage inflexibility and, 827–828 education and, 344, 471–472 general level of wages, 331–332 global perspective on wages of production workers, 331 immigration and, 518–519, 524 labor unions and, 338–340, 353–358 minimum-wage controversy in, 341–342 monopsony model of, 335–337 pay for performance, 91–92, 346–347 prejudice and market African-AmericanWhite wage ratio, 481 productivity and, 332–333 in purely competitive labor market, 333–335 wage differentials, 342–346 Wage differentials, 342–346 compensating, 523–524 marginal revenue productivity, 343 market imperfections, 345–346 noncompeting groups, 343–344 Wage effects, of illegal immigration, 524 Wage growth, health care costs and, 494 Wage rates, 331 impact of immigration on, 518–519, 524 labor unions and, 340, 345–346, 354 Wagner Act of 1935, 355 Walgreen, 307 Wall Street Reform and Consumer Protection Act, 725–726 Walmart, 44, 250, 296, 307, 361 Walt Disney Company, 297, 434 Wannamaker, John, 176 War See also National defense economics of, 15, 675, 695 price wars, 187, 293, 296, 541–542, 673 Warranties, overpriced, mental accounting and, 183 Washington Mutual, 722, 724 Water, use of, 384 Watt, James, 571 Wealth aggregate demand and, 662 changes in aggregate demand and, 662 household, 619 as nonincome determinant of consumption and saving, 619 unequal distribution of, 470, 484 Wealth effect, 619, 662 Wealth of Nations, The (Smith), 41, 187 Weight-loss competitions, 186 Well-being, noneconomic sources of, 563 Wells Fargo, 722, 724, 726 Wendy’s, 110 Western Union, 255 Wham-O, 255 Wheat, price floors on, 69–70 Wheeler-Lea Act of 1938, 430 Whirlpool, 294–295 Whites African-American-White wage ratio, 481 poverty among, 475–476 unionization rate, 353 Whole Foods Markets, 509 Williams, Raburn, 609n Winfrey, Oprah, 11, 465 Winner-take-all markets, 317 Women crowding model and, 482–483 economic growth and, 579 in the labor force, 579 poverty among, 476 unemployment and, 599 unions and, 353 Work rules, 355–356 WorldCom, 434 World Health Organization (WHO), 508 World price, 848, 850–851 World Trade Organization (WTO), 459, 583, 858 Xerox, 257 X-inefficiency, 265, 266, 436 Yahoo!, 299, 518, 546, 582 Yale University, Environmental Performance Index (EPI), 398–399 Yum! Brands, 433 Zero inflation, 607 Zero interest rate policy (ZIRP), 766–768, 772–773 Zero lower bound problem, 766–767 Zero slopes, 26 Zero-sum game, 304 Zimbabwe, hyperinflation in, 609 ZIRP (zero interest rate policy), 766–768, 772–773 Zuckerberg, Mark, 11 ... Semiconductor processors 20 10 20 20 Percentage Decrease* 53.4 1 42 66 73 34 48.5 48 .2 35.6 25 18 27 .8 163 143 121 110 25 .8 23 .3 15 12 21.8 23 18 18 .2 21 17 17.9 *Percentages and employment numbers... 1.75 1.65 $ ] 18 .20 ] 31 .20 ] 39.60 ] 44.00 ] 46 .25 ] 47 .25 ] 46 .20 (6) Marginal Revenue Product (MRP) $ 18 .20 13.00 8.40 4.40 2. 25 1.00 21 .05 Microeconomics of Resource Markets and Government... Demand for Labor: Pure Competition in the Sale of the Product (1) Units of Resource (2) Total Product (Output) (3) Marginal Product (MP) (4) Product Price $2 2 2 2 ] ] 13 ] 18 ] 22 ] 25 ] 27 ] 28