(BQ) Part 2 book Macroeconomics for today has contents: Fiscal policy, the public sector, federal deficits, surpluses, and the national debt, monetary policy, money creation, money and the federal reserve system, economies in transition, international trade and finance,...and other contents.
CHAPTER Monopoly © David Muir/Digital Vision/Getty Images P laying the popular board game of Monopoly monopoly is derived from two Greek words meaning teaches some of the characteristics of monopoly “single seller.” A monopoly has the market power to set theory presented in this chapter In the game version, its price and not worry about competitors Perhaps your players win by gaining as much economic power as possi- college or university has only one bookstore where you ble They strive to own railroads, utilities, Boardwalk, Park can buy textbooks If so, students are likely to pay higher Place, and other valuable real estate Then each player prices for textbooks than they would if many sellers tries to bankrupt opponents by having hotels that charge competed in the campus textbook market high prices A player who rolls the dice and lands on This chapter explains why firms not or cannot another player’s property has no choice—either pay the enter a particular market and compete with a monopolist price or lose the game Then we explore some of the interesting actual mono- In the last chapter, we studied perfect competition, polies around the world We study how a monopolist which may be viewed as the paragon of economic virtue determines what price to charge and how much to pro- Why? Under perfect competition, there are many sellers, duce The chapter ends with a discussion of the pros and each lacking any power to influence price Perfect com- cons of monopoly Most of the analytical tools required petition and monopoly are polar extremes The word here have been introduced in previous chapters 226 In this chapter, you will learn to solve these economic puzzles: • Why doesn’t the monopolist gouge consumers by charging the highest possible price? • How can price discrimination be fair? • Are medallion cabs in New York City monopolists? The Monopoly Market Structure The model at the opposite extreme from perfect competition is monopoly Under monopoly, the consumer has a simple choice—either buy the monopolist’s product or without it Monopoly is a market structure characterized by (1) a single seller, (2) a unique product, and (3) impossible entry into the market Unlike perfect competition, there are no close substitutes for the monopolist’s product Monopoly, like perfect competition, corresponds only approximately to real-world industries, but it serves as a useful benchmark model Following are brief descriptions of each monopoly characteristic Monopoly A market structure characterized by (1) a single seller, (2) a unique product, and (3) impossible entry into the market Single Seller In perfect competition, many firms make up the industry In contrast, a monopoly means that a single firm is the industry One firm provides the total supply of a product in a given market Local monopolies are more common real-world approximations of the model than national or world market monopolies For example, the campus bookstore, local telephone service, cable television company, and electric power company may be local monopolies The only gas station, drug store, and grocery store in Nowhere County, Utah, and a hotdog stand at a football game are also examples of monopolies Nationally, the U.S Postal Service monopolizes first-class mail Unique Product A unique product means there are no close substitutes for the monopolist’s product Thus, the monopolist faces little or no competition In reality, however, there are few, if any, products that have no close substitutes For example, students can buy used textbooks from sources other than the campus bookstore, and textbooks can be purchased over the Internet Natural gas and oil furnaces are good substitutes for electric heat Similarly, the fax machine and email are substitutes for mail service, and a satellite dish can replace your local cable television service Impossible Entry In perfect competition, there are no constraints to prevent new firms from entering an industry In the case of monopoly, extremely high barriers make it very difficult 227 228 PA RT MARKET STRUCTURES or impossible for new firms to enter an industry Following are the three major barriers that prevent new firms from entering a market and competing with a monopolist Ownership of a Vital Resource Sole control of the entire supply of a strategic input is one way a monopolist can prevent a newcomer from entering an industry A famous historical example is Alcoa’s monopoly of the U.S aluminum market from the late nineteenth century until the end of World War II The source of Alcoa’s monopoly was its control of bauxite ore, which is necessary to produce aluminum Today, it is very difficult for a new professional sports league to compete with the National Football League (NFL) and the National Basketball Association (NBA) Why? NFL and NBA teams have contracts with the best players and leases for the best stadiums and arenas Legal Barriers The oldest and most effective barriers protecting a firm from potential competitors are the result of government franchises and licenses The government permits a single firm to provide a certain product and excludes competing firms by law For example, water and sewer service, natural gas, and cable television operate under monopoly franchises established by state and local governments In many states, the state government runs monopoly liquor stores and lotteries The U.S Postal Service has a government franchise to deliver first-class mail Government-granted licenses restrict entry into some industries and occupations For example, the Federal Communications Commission (FCC) must license radio and television stations In most states, physicians, lawyers, dentists, nurses, teachers, real estate agents, hairstylists, taxicabs, liquor stores, funeral homes, and other professions and businesses are required to have a license Patents and copyrights are another form of government barrier to entry The government grants patents to inventors, thereby legally prohibiting other firms from selling the patented product for 20 years Copyrights give creators of literature, art, music, and movies exclusive rights to sell or license their works The purpose behind granting patents and copyrights is to encourage innovation and new products by guaranteeing exclusive rights to profit from new ideas for a limited period Economies of Scale Natural monopoly An industry in which the long-run average cost of production declines throughout the entire market As a result, a single firm can supply the entire market demand at a lower cost than two or more smaller firms Why might competition among firms be unsustainable so that one firm becomes a monopolist? Recall the concept of economies of scale from the chapter on production costs As a result of large-scale production, the long-run average cost (LRAC) of production falls This means a monopoly can emerge in time naturally because of the relationship between average cost and the scale of an operation As a firm becomes larger, its cost per unit of output is lower compared to a smaller competitor In the long run, this “survival of the fittest” cost advantage forces smaller firms to leave the industry Because new firms cannot hope to produce and sell output equal or close to that of the monopolist, thereby achieving the monopolist’s low costs, they will not enter the industry Thus, a monopoly can arise over time and remain dominant in an industry even though the monopolist does not own an essential resource or obtain legal barriers Economists call the situation in which one seller emerges in an industry because of economies of scale a natural monopoly A natural monopoly is an industry in which the long-run average cost of production declines throughout the entire C H AP T E R MONOPOLY market As a result, a single firm can supply the entire market demand at a lower cost than two or more smaller firms Public utilities, such as the natural gas, water, and local telephone companies, are examples of natural monopolies The government grants these industries an exclusive franchise in a geographic area so consumers can benefit from the cost savings that occur when one firm in an industry with significant economies of scale sells a large output The government then regulates these monopolies through a board of commissioners to prevent exploitation Exhibit depicts the LRAC curve for a natural monopoly A single firm can produce 100 units at an average cost of $15 and a total cost of $1,500 If two firms each produce 50 units, the total cost rises to $2,500 With five firms producing 20 units each, the total cost rises to $3,500 In the chapter on antitrust and regulation, regulation of a natural monopoly will be explored in greater detail Conclusion Because of economies of scale, a single firm in an industry will produce output at a lower per-unit cost than two or more firms Price and Output Decisions for a Monopolist A major difference between perfect competition and monopoly is the shape of the demand curve, not the shapes of the cost curves As explained in the previous EXHIBIT Minimizing Costs in a Natural Monopoly In a natural monopoly, a single firm in an industry can produce at a lower cost than two or more firms This condition occurs because the LRAC curve for any firm decreases over the relevant range For example, one firm can produce 100 units at an average cost of $15 and a total cost of $1,500 Two firms in the industry can produce 100 units of output (50 units each) for a total cost of $2,500, and five firms can produce the same output for a total cost of $3,500 45 40 Five firms 35 Cost 30 per 25 unit (dollars) 20 Two firms One firm 15 10 LRAC 20 40 60 80 Quantity of output 100 120 229 GLOBAL ECONOMICS Monopolies around the World © North Wind Picture Archives Applicable Concepts: monopoly Interesting examples of monopolies can be found in other countries Let’s begin with a historical example In the sixteenth through eighteenth centuries, monarchs granted monopoly rights for a variety of businesses For example, in 1600 Queen Elizabeth I chartered the British East India Company and gave it a monopoly over England’s trade with India This company was even given the right to coin money and to make peace or war with non-Christian powers As a result of its monopoly, the company made substantial profits from the trade in Indian cotton goods, silks, and spices In the late 1700s, the growing power of the company and huge personal fortunes of its officers provoked more and more government control Finally, in 1858, the company was abolished, ending its trade monopoly, great power, and patronage “Diamonds are forever,” and perhaps so is the diamond monopoly DeBeers, a South African corporation, was close to a world monopoly Through its Central Selling Organization (CSO) headquartered in London, DeBeers controlled 80 percent of all the diamonds sold in the world DeBeers controlled the price of jewelry-quality diamonds by requiring suppliers in Russia, Australia, Congo, Botswana, Namibia, and other countries to sell their rough diamonds through DeBeers’s CSO Why did suppliers of rough diamonds allow DeBeers to set the price 230 and quantity of diamonds sold throughout the world? The answer was that the CSO could put any uncooperative seller out of business All the CSO had to was to reach into its huge stockpile of diamonds and flood the market with the type of diamonds being sold by an independent seller As a result, the price of diamonds would plummet in the competitor’s market, and it ceased to sell diamonds In recent years, DeBeers lost some of its control of the market Mines in Australia became more independent, diamonds were found in Canada, and Russian mines began selling to independents To deal with the new conditions, DeBeers changed its policy in 2001 by closing the CSO and promoting DeBeers’ own brand of diamonds rather than trying to control the world diamond supply DeBeers proclaimed its strategy to be “the diamond supplier of choice.” Will this monopoly continue? It is an interesting question Genuine caviar, the salty black delicacy, is naturally scarce because it comes from the eggs of sturgeon harvested by fisheries from the Caspian Sea near the mouth of the Volga River After the Bolshevik revolution in Russia in 1917, a caviar monopoly was established under the control of the Soviet Ministry of Fisheries and the Paris-based Petrosian Company The Petrosian brothers limited exports of caviar and pushed prices up as high as $1,000 a pound for some varieties As a result of this worldwide monopoly, both the Soviet government and the Petrosian Company earned handsome profits It is interesting to note that the vast majority of the tons of caviar harvested each year was consumed at government banquets or sold at bargain prices to top Communist Party officials With the fall of the Soviet Union, it was impossible for the Ministry of Fisheries to control all exports of caviar Various former Soviet republics claimed jurisdiction and negotiated independent export contracts As a result, caviar export prices dropped sharply C H AP T E R 231 MONOPOLY chapter, a perfectly competitive firm is a price taker In contrast, the next sections explain that a monopolist is a price maker A price maker is a firm that faces a downward-sloping demand curve This means a monopolist has the ability to select the product’s price In short, a monopolist can set the price with its corresponding level of output, rather than being a helpless pawn at the mercy of the going industry price To understand the monopolist, we again apply the marginal approach to our hypothetical electronics company—Computech Marginal Revenue, Total Revenue, and Price Elasticity of Demand Suppose engineers at Computech discover an inexpensive miracle electronic device called SAV-U-GAS that anyone can easily attach to a car’s engine Once installed, the device raises gasoline mileage to over 100 miles per gallon The government grants Computech a patent, and the company becomes a monopolist selling this gas-saver gizmo Because of this barrier to entry, Computech is the only seller in the industry Although other firms try to compete with this invention, they create poor substitutes This means the downward-sloping demand curve for the industry and for the monopolist are identical Exhibit 2(a) illustrates the demand and the marginal revenue (MR) curves for a monopolist such as Computech As the monopolist lowers its price to increase the quantity demanded, changes in both price and quantity affect the firm’s total revenue (price times quantity), as shown graphically in Exhibit 2(b) If Computech charges $150, consumers purchase zero units, and, therefore, total revenue is zero To sell unit, Computech must lower the price to $138, and total revenue rises from zero to $138 Because the marginal revenue is the increase in total revenue that results from a 1-unit change in output, the MR curve at the first unit of output is $138 ($138 À 0) Thus, the price and the marginal revenue from selling unit are equal at $138 To sell units, the monopolist must lower the price to $125, and total revenue rises to $250 The marginal revenue from selling the second unit is $112 ($250 À $138), which is $13 less than the price received As shown in Exhibit 2(a), as the monopolist lowers its price, price is greater than marginal revenue after the first unit of output Like all marginal measurements, marginal revenue is plotted midway between the quantities Conclusion The demand and marginal revenue curves of the monopolist are downward sloping, in contrast to the horizontal demand and corresponding marginal revenue curves facing the perfectly competitive firm [compare Exhibit 2(a) with Exhibit 1(b) of the previous chapter] Starting from zero output, as the price falls, total revenue rises until it reaches a maximum at units, and then it falls, tracing the “revenue hill” drawn in Part (b) The explanation was presented earlier in the discussion of price elasticity of demand in Chapter Recall that a straight-line demand curve has an elastic (Ed > 1) segment along the upper half, a unit elastic (Ed ¼ 1) at the midpoint, and an inelastic (Ed < 1) segment along the lower half (see Exhibit in Chapter 5) Recall from Chapter that when Ed > 1, total revenue rises as the price drops, and total revenue reaches a maximum where Ed ¼ When Ed < 1, total revenue falls as the price falls As shown in Exhibit 2(b), total revenue for a monopolist is related to marginal revenue When the MR curve is above the quantity axis (elastic demand), total revenue Price maker A firm that faces a downward-sloping demand curve and therefore it can choose among price and output combinations along the demand curve 232 PA RT EXHIBIT MARKET STRUCTURES Demand, Marginal Revenue, and Total Revenue for a Monopolist Part (a) shows the relationship between the demand and the marginal revenue curves The MR curve is below the demand curve Between zero and units of output, MR > 0; at units of output, MR ¼ 0; beyond units of output, MR < The relationship between demand and total revenue is shown in Part (b) When the price is $150, total revenue is zero When the price is set at zero, total revenue is also zero In between these two extreme prices, the price of $75 maximizes total revenue This price corresponds to units of output, which is where the MR curve intersects the quantity axis, halfway between the origin and the intercept of the demand curve (a) Demand and marginal revenue curves 150 125 100 75 50 Output per Hour Total Price Revenue $150 $ Marginal Revenue $138 138 138 125 250 113 339 100 400 88 440 25 –25 –75 112 –100 89 –125 61 –150 75 450 63 441 50 400 38 342 10 25 250 (b) Total revenue curve 10 −9 −41 −58 −92 −107 11 13 143 12 0 Marginal revenue Quantity of output (units per hour) 40 Demand 10 11 12 –50 Price and marginal revenue (dollars) −143 500 400 Total revenue 300 (dollars) 200 100 Total revenue 10 11 12 Quantity of output (units per hour) C H AP T E R MONOPOLY is increasing At the intersection of the MR curve and the quantity axis (unit elastic demand), total revenue is at its maximum When the MR curve is below the quantity axis, total revenue is decreasing (inelastic demand) The monopolist will never operate on the inelastic range of its demand curve that corresponds to a negative marginal revenue The reason is that, in this inelastic range, the monopolist can increase total revenue by cutting output and raising price In our example, Computech would not charge a price lower than $75 or produce an output greater than units per hour Now we turn to the question of what price the monopolist will charge to maximize profit In Exhibit 2(a), observe that the MR curve cuts the quantity axis at units, which is half of 12 units Following an easy rule helps locate the point along the quantity axis where marginal revenue equals zero: The marginal revenue curve for a straight-line demand curve intersects the quantity axis halfway between the origin and the quantity axis intercept of the demand curve Short-Run Profit Maximization for a Monopolist Using the Total Revenue-Total Cost Method Exhibit reproduces the demand, total revenue, and marginal revenue data from Exhibit and adds cost data from the previous two chapters These data illustrate a situation in which Computech can earn monopoly economic profit in the short run Subtracting total cost in column from total revenue in column gives the total profit or loss in column that the firm earns at each level of output From zero to unit, the monopolist incurs losses, and then a break-even point occurs before units per hour If the monopolist produces units per hour, it earns the maximum profit of $190 per hour As output expands between and units of output, the monopolist’s profit diminishes After units of output, there is a second break-even point, and losses increase as output expands Exhibit illustrates graphically that where the vertical distance between the total revenue and total cost curves is maximum corresponds to the profit-maximizing output Note that the total revenue-maximizing output level of units is greater than the profit-maximizing output at units Short-Run Profit Maximization for a Monopolist Using the Marginal Revenue Equals Marginal Cost Method Exhibit reproduces the demand and cost curves from the table in Exhibit Like the perfectly competitive firm, a monopolist maximizes profit by producing the quantity of output where MR ¼ MC and charging the corresponding price on its demand curve In this case, units is the quantity at which MR ¼ MC As represented by point A on the demand curve, the price at units is $88 Point B represents an average total cost (ATC) of $50 at units Because the price of $88 is above the ATC curve at the MR ¼ MC output, the monopolist earns a profit of $38 per unit At the hourly output of units, total profit is $190 per hour, as shown by the shaded area ($38 per unit  units) Observe that a monopolist charges neither the highest possible price nor the total revenue-maximizing price In Exhibit 5(a), $88 is not the highest possible price Because Computech is a price maker, it could have set a price above $88 and sold less output than units However, the monopolist does not maximize profit by charging the highest possible price Any price above $88 does not correspond to the intersection of the MR and MC curves Now note that units is below the output level where MR intersects the quantity axis and total revenue reaches its peak Since MR ¼ and 233 234 PA RT EXHIBIT MARKET STRUCTURES Short-Run Profit-Maximization Schedule for Computech as a Monopolist (1) Output per Hour (Q) (2) Price per Unit (P) (3) Total Revenue (TR) $150 $ 138 125 113 100 75 450 10 11 12 38 25 13 112 34 89 24 61 19 40 23 25 10 25 30 À9 38 À41 48 À58 59 À92 75 À107 95 À143 117 400 50 $50 339 440 $138 250 88 63 (5) Marginal Cost (MC) 138 (4) Marginal Revenue (MR) 441 400 342 250 143 (6) Total Cost (TC) (7) Average Total Cost (ATC) (8) Profit (+) or Loss (−) $100 — 150 $150 À12 184 92 66 208 69 131 227 57 173 250 50 190 280 47 170 318 45 123 366 46 34 425 47 À83 500 50 À250 595 54 À452 712 59 À712 À$100 Ed ¼ when total revenue is maximum at units of output, MC ¼ must also hold to maximize revenue and profit at the same time A monopolist producing with zero marginal cost is an unlikely case Hence, the price charged to maximize profit is higher on the demand curve than the price that maximizes total revenue Conclusion The monopolist always maximizes profit by producing at a price on the elastic segment of its demand curve A Monopolist Facing a Short-Run Loss Having a monopoly does not guarantee profits A monopolist has no protection against changes in demand or cost conditions Exhibit shows a situation in which the demand curve is lower at any point than the ATC curve, and total cost C H AP T E R EXHIBIT 235 MONOPOLY Short-Run Profit Maximization for a Monopolist Using the Total Revenue-Total Cost Method The profit-maximizing level of output for Computech as a monopolist is shown in this exhibit Part (a) shows that maximum profit is earned by producing units per hour and charging a price of $88 per unit where the vertical distance between the total revenue and total cost curves is the greatest In Part (b), the maximum profit of $190 per hour corresponds to the profit-maximizing output of units per hour illustrated in Part (a) At output levels below or above 8, the monopolist incurs losses (a) Total revenue and total cost 800 700 Total cost 600 Maximum profit = $190 Total 500 revenue and 400 total cost (dollars) 300 Loss 200 Total revenue 100 Loss Maximum profit output 10 11 12 Quantity of output (units per hour) (b) Profit or loss 200 150 Profit (dollars) 100 Profit = $190 50 Loss –50 (dollars) 10 11 12 Loss Maximum profit output –100 –150 –200 –800 Quantity of output (units per hour) Loss Marginal tax rate The fraction of additional income paid in taxes Marginal utility The change in total utility from one additional unit of a good or service Market Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged Market economy An economic system that answers the What, How, and For Whom questions using prices determined by the interaction of the forces of supply and demand Market failure A situation in which market equilibrium results in too few or too many resources used in the production of a good or service This inefficiency may justify government intervention Market failure A situation in which market equilibrium results in too few or too many resources used in the production of a good or service Market structure A classification system for the key traits of a market, including the number of firms, the similarity of the products they sell, and the ease of entry into and exit from the market Means test A requirement that a family’s income not exceed a certain level to be eligible for public assistance Medium of exchange The primary function of money to be widely accepted in exchange for goods and services Microeconomics The branch of economics that studies decision making by a single individual, household, firm, industry, or level of government Mixed economy An economic system that answers the What, How, and For Whom questions through a mixture of traditional, command, and market systems Model A simplified description of reality used to understand and predict the relationship between variables Monetarism The theory that changes in the money supply directly determine changes in prices, real GDP, and employment Monetary Control Act A law, formally titled the Depository Institutions Deregulation and Monetary Control Act of 1980, that gave the Federal Reserve System greater control over nonmember banks and made all financial institutions more competitive Monetary policy The Federal Reserve’s use of open market operations, changes in the discount rate, and changes in the required reserve ratio to change the money supply (M1) Money multiplier The maximum change in the money supply (checkable deposits) due to an initial change in the excess reserves banks hold The money multiplier is equal to divided by the required reserve ratio 480 GLOSSARY Money Anything that serves as a medium of exchange, unit of account, and store of value Monopolistic competition A market structure characterized by (1) many small sellers, (2) a differentiated product, and (3) easy market entry and exit Monopoly A market structure characterized by (1) a single seller, (2) a unique product, and (3) impossible entry into the market Monopsony A labor market in which a single firm hires labor Mutual interdependence A condition in which an action by one firm may cause a reaction from other firms N National debt The total amount owed by the federal government to owners of government securities National income (NI) The total income earned by resource owners, including wages, rents, interest, and profits NI is calculated as gross domestic product minus depreciation of the capital worn out in producing output Natural monopoly An industry in which the long-run average cost of production declines throughout the entire market As a result, a single firm can supply the entire market demand at a lower cost than two or more smaller firms Natural rate hypothesis The hypothesis that argues the economy will self-correct to the natural rate of unemployment The long-run Phillips curve is therefore a vertical line at the natural rate of unemployment Negative income tax (NIT) A plan under which families below a certain break-even level of income would receive cash payments that decrease as their incomes increase Net exports effect The impact on total spending (real GDP) caused by the inverse relationship between the price level and the net exports of an economy Net public debt National debt minus all government interagency borrowing New-source bias Bias that occurs when regulations provide an incentive to keep assets past the efficient point Nominal GDP The value of all final goods based on the prices existing during the time period of production Nominal income The actual number of dollars received over a period of time Nominal interest rate The actual rate of interest without adjustment for the inflation rate Nonprice competition The situation in which a firm competes using advertising, packaging, product development, better quality, and better service, rather than lower prices Normal good Any good for which there is a direct relationship between changes in income and its demand curve Normal profit The minimum profit necessary to keep a firm in operation A firm that earns normal profits earns total revenue equal to its total opportunity cost Normative economics An analysis based on value judgment O Offset Reduction in an existing pollution source to counteract pollution from a new source Oligopoly A market structure characterized by (1) few sellers, (2) either a homogeneous or a differentiated product, and (3) difficult market entry Open market operations The buying and selling of government securities by the Federal Reserve System Opportunity cost The best alternative sacrificed for a chosen alternative P Peak The phase of the business cycle in which real GDP reaches its maximum after rising during a recovery Per se rule The antitrust doctrine that the existence of monopoly alone is illegal, regardless of whether or not the monopoly engages in illegal business practices Perfect competition A market structure characterized by (1) a large number of small firms, (2) a homogeneous product, and (3) very easy entry into or exit from the market Perfect competition is also referred to as pure competition Perfectly competitive firm’s short-run supply curve The firm’s marginal cost curve above the minimum point on its average variable cost curve Perfectly competitive industry’s long-run supply curve The curve that shows the quantities supplied by the industry at different equilibrium prices after firms complete their entry and exit Perfectly competitive industry’s short-run supply curve The supply curve derived from horizontal summation of the marginal cost curves of all firms in the industry above the minimum point of each firm’s average variable cost curve Perfectly elastic demand A condition in which a small percentage change in price brings about an infinite percentage change in quantity demanded Perfectly elastic demand A condition in which the quantity demanded does not change as the price changes Perfectly inelastic demand A condition in which the quantity demanded does not change as the price changes Personal income (PI) The total income received by households that is available for consumption, saving, and payment of personal taxes Phillips curve A curve showing an inverse relationship between the inflation rate and the unemployment rate Political business cycle A business cycle caused by policymakers to improve politicians’ reelection chances Positive economics An analysis limited to statements that are verifiable Poverty line The level of income below which a person or a family is considered to be poor Precautionary demand for money The stock of money people hold to pay unpredictable expenses Predatory pricing The practice of one or more firms temporarily reducing prices in order to eliminate competition and then raising prices Price ceiling A legally established maximum price a seller can charge Price discrimination The practice of a seller charging different prices for the same product that are not justified by cost differences Price elasticity of demand The ratio of the percentage change in the quantity demanded of a product to a percentage change in its price Price elasticity of supply The ratio of the percentage change in the quantity supplied of a product to the percentage change in its price Price floor A legally established minimum price a seller can be paid Price leadership A pricing strategy in which a dominant firm sets the price for an industry and the other firms follow Price maker A firm that faces a downward-sloping demand curve and therefore it can choose among price and output combinations along the demand curve Price system A mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices Price taker A seller that has no control over the price of the product it sells Private benefits and costs Benefits and costs to the decisionmaker, ignoring benefits and costs to third parties Third parties are people outside the market transaction who are affected by the product Producer surplus The value of the difference between the actual selling price of a product and the price producers are willing to sell it for on the supply curve Product differentiation The process of creating real or apparent differences between goods and services GLOSSARY 481 Production function The relationship between the maximum amounts of output that a firm can produce and various quantities of inputs Production possibilities curve A curve that shows the maximum combinations of two outputs an economy can produce in a given period of time with its available resources and technology Progressive tax A tax that charges a higher percentage of income as income rises Proportional tax A tax that charges the same percentage of income, regardless of the size of income Also called a flat-tax rate or simply a flat tax Protectionism The government’s use of embargoes, tariffs, quotas, and other restrictions to protect domestic producers from foreign competition Public choice theory The analysis of the government’s decision-making process for allocating resources Public good A good or service with two properties: (1) users collectively consume benefits, and (2) there is no way to bar people who not pay (free riders) from consuming the good or service Q Quantity theory of money The theory that changes in the money supply are directly related to changes in the price level Quota A limit on the quantity of a good that may be imported in a given time period R Rational expectations theory The belief that people use all available information to predict the future, including future monetary and fiscal policies Systematic and predictable macroeconomic policies can therefore be negated when businesses and workers anticipate the effects of these policies on the economy Rational ignorance The voter’s choice to remain uninformed because the marginal cost of obtaining information is higher than the marginal benefit from knowing it Real balances effect The impact on total spending (real GDP) caused by the inverse relationship between the price level and the real value of financial assets with fixed nominal value Real GDP The value of all final goods produced during a given time period based on the prices existing in a selected base year Real income The actual number of dollars received (nominal income) adjusted for changes in the CPI Real interest rate The nominal rate of interest minus the inflation rate 482 GLOSSARY Recession A downturn in the business cycle during which real GDP declines, and the unemployment rate rises Also called a contraction Recessionary gap The amount by which the aggregate expenditures curve must be increased to achieve fullemployment equilibrium Recovery An upturn in the business cycle during which real GDP rises Also called an expansion Regressive tax A tax that charges a lower percentage of income as income rises Required reserve ratio The percentage of deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed Required reserves The minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed Resources The basic categories of inputs used to produce goods and services Resources are also called factors of production Economists divide resources into three categories: land, labor, and capital Robinson-Patman Act A 1936 amendment to the Clayton Act that strengthens the Clayton Act against price discrimination Rule of reason The antitrust doctrine that the existence of monopoly alone is not illegal unless the monopoly engages in illegal business practices S Saving The part of disposable income households not spend for consumer goods and services Say’s Law The theory that supply creates its own demand Scarcity The condition in which human wants are forever greater than the available supply of time, goods, and resources Sherman Act The federal antitrust law enacted in 1890 that prohibits monopolization and conspiracies to restrain trade Short run A period of time so short that there is at least one fixed input Short-run aggregate supply curve (SRAS) The curve that shows the level of real GDP produced at different possible price levels during a time period in which nominal incomes not change in response to changes in the price level Shortage A market condition existing at any price where the quantity supplied is less than the quantity demanded Slope The ratio of the change in the variable on the vertical axis (the rise or fall) to the change in the variable on the horizontal axis (the run) Social benefits and costs The sum of benefits to everyone in society, including both private benefits and external benefits Social costs are the sum of costs to everyone in society, including both private costs and external costs Socialism An economic system characterized by government ownership of resources and centralized decision making Speculative demand for money The stock of money people hold to take advantage of expected future changes in the price of bonds, stocks, or other nonmoney financial assets Spending multiplier (SM ) The ratio of the change in real GDP to an initial change in any component of aggregate expenditures or aggregate demand, including consumption, investment, government spending, and net exports As a formula, the spending multiplier equals 1/(1ÀMPC) or 1/MPS Stagflation The condition that occurs when an economy experiences the twin maladies of high unemployment and rapid inflation simultaneously Stock A quantity measured at one point in time For example, an inventory of goods or the amount of money in a checking account Store of value The ability of money to hold value over time Structural unemployment Unemployment caused by a mismatch of the skills of workers out of work and the skills required for existing job opportunities Subprime mortgage loan A home loan made to borrowers with an above-average risk of default Substitute good A good that competes with another good for consumer purchases As a result, there is a direct relationship between a price change for one good and the demand for its “competitor” good Substitution effect The change in quantity demanded of a good or service caused by a change in its price relative to substitutes Supply A curve or schedule showing the various quantities of a product sellers are willing to produce and offer for sale at possible prices during a specified period of time, ceteris paribus Supply curve of labor A curve showing the different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus Supply-side fiscal policy A fiscal policy that emphasizes government policies that increase aggregate supply in order to achieve long-run growth in real output, full employment, and a lower price level Surplus A market condition existing at any price where the quantity supplied is greater than the quantity demanded T Tariff A tax on an import Tax incidence The share of a tax ultimately paid by consumers and sellers Tax multiplier The change in aggregate expenditures (total spending) resulting from an initial change in taxes As a formula, tax multiplier equals 1Àspending multiplier Tax multiplier The change in aggregate demand (total spending) resulting from an initial change in taxes As a formula, tax multiplier equals 1Àspending multiplier Technology The body of knowledge applied to how goods are produced Term auction facility (TAF) A monetary policy tool created in 2007 during the financial crisis to encourage banks to borrow reserves and thereby extend new loans Under this program, banks in sound financial condition are allowed to make interest rate bids for short-term collateralized Federal Reserve loans Total cost (TC ) The sum of total fixed cost and total variable cost at each level of output Total fixed cost (TFC ) Costs that not vary as output varies and that must be paid even if output is zero These are payments that the firm must make in the short run, regardless of the level of output Total revenue The total number of dollars a firm earns from the sale of a good or service, which is equal to its price multiplied by the quantity demanded Total utility The amount of satisfaction received from all the units of a good or service consumed Total variable cost (TVC ) Costs that are zero when output is zero and vary as output varies Traditional economy A system that answers the What, How, and For Whom questions the way they always have been answered Transactions costs The costs of negotiating and enforcing a contract Transactions demand for money The stock of money people hold to pay everyday predictable expenses Transfer payment A government payment to individuals not in exchange for goods or services currently produced Trough The phase of the business cycle in which real GDP reaches its minimum after falling during a recession Trust A combination or cartel consisting of firms that place their assets in the custody of a board of trustees U Unemployment compensation The government insurance program that pays income for a short time period to unemployed workers Unemployment rate The percentage of people in the civilian labor force who are without jobs and are actively seeking jobs GLOSSARY 483 Unit of account The function of money to provide a common measurement of the relative value of goods and services Unitary elastic demand A condition in which the percentage change in quantity demanded is equal to the percentage change in price Utility The satisfaction, or pleasure, that people receive from consuming a good or service V Variable input Any resource for which the quantity can change during the period of time under consideration Velocity of money The average number of times per year a dollar of the money supply is spent on final goods and services Vertical merger A vertical merger is a merger of a firm with its suppliers Vicious circle of poverty The trap in which countries are poor because they cannot afford to save and invest, but they cannot save and invest because they are poor 484 GLOSSARY W Wage and price controls Legal restrictions on wage and price increases Violations can result in fines and imprisonment Wage and price guidelines Voluntary standards set by the government for “permissible” wage and price increases Wage-price spiral A situation that occurs when increases in nominal wage rates are passed on in higher prices, which, in turn, result in even higher nominal wage rates and prices Wealth The value of the stock of assets owned at some point in time Wealth effect A decrease in consumption spending when the value of assets, such as stocks and homes, falls and an increase in consumption spending when the value of these assets rises World Bank The lending agency that makes long-term low-interest loans and provides technical assistance to less-developed countries World Trade Organization (WTO) An international organization of member countries that oversees international trade agreements and rules on trade disputes INDEX A Absolute advantage, 383–384 Accounting profit, 170–171 Acid rain, 363–364 Adirondack Park and Forest Preserve, 364 Ad valorem tax, 384 Advertising deceptive, 330 effect on average cost curves, 255 effect on demand, 94–95 effect on long-run average cost curve, 254–255 free, 331 in monopolistic competition, 254–256, 258–259 in monopoly, 254–256 nonprice competition, 253 as nonprice determinant of demand, 59 in oligopoly, 261–262, 269 pros and cons of, 254–255 social networking sites, 256 tobacco and, 132 Africa, 380, 433 African-Americans, 311, 319–320 Agency for International Development (AID), 448–449 Agricultural price supports, 101–102 AIDS vaccination market, 106–107 Airline Deregulation Act of 1978, 339, 344 Airline industry, 267, 339, 344 Air pollution rights market, 360 Alcoa, 228, 264, 333–334, 336 Alligator farms, 217–218 Aluminum Company of America See Alcoa American Airlines, 267 American Bar Association, 284 American Federation of Government Employees, 282 American Federation of State, County, and Municipal Employees, 321 American Greetings, 10 American Medical Association (AMA), 120, 284 American Tobacco, 329 American Tobacco Trust, 333 Amish, 412, 417 Amoco, 333 Antimerger Act, 331 Antipoverty programs cash transfer programs, 312–313 criticisms of, 314–315 in-kind transfers, 310, 312, 313–314 negative income tax, 316–317 reform proposals, 315–319 workfare, 317–318 Antitrust, 328–331, 337–338 Antitrust cases, 331–336 Alcoa case, 333–334, 336 AT&T case, 334–336, 339 IBM case, 334, 336 Microsoft case, 335–336 MIT case, 335–336 Standard Oil case, 328, 329, 333, 336 Apple Computer Company, 102, 186, 334 Appreciation of currency, 399 Arbitrage, 239 Archer Daniels Midland Company, 329 Asia, 380, 433 Asia-Pacific Economic Cooperation, 389 Associated Press, 70 Association vs causation, 9–10 AT&T, 334–335, 336, 339 Australia, 433–434 Austria, 391, 434 Automotive pollution, 358–359 Average cost curves, 175–178, 255 Average fixed cost, 175–176, 179 Average loss per unit, 206 Average private cost, 354–355 Average profit per unit, 206 Average social cost, 354–355 Average total cost, 177–179, 236 Average variable cost, 176–177, 179, 257 B Baby Bells, 334 Balance of payments, 390–395 Balance of trade, 390–391, 393–395 See also International trade Balance of trade deficit, 391, 394–395 Balance of trade surplus, 391 Banana imports, 388–389 Bangladesh, 434, 436, 437 Bank One Investment Advisers, 10 Barriers to entry, 200, 227–228, 253, 262 Baum, L Frank, 402 Belgium, 391, 434 Bell Laboratories, 334 Bell System, 334–335 Black market, 98 Bolivia, 434 Boston Globe, 427 Boston Snow Index, 10 Brain drain, 439–440 Brazil, 309, 434 Break-even income, 316 Break-even point, 202 Bretton Woods system, 403 British East India Company, 230 Brown University, 335 Bryan, William Jennings, 402 Budget line, 161–162 Bulgaria, 391 Burmester, Sven, 427 Bush, George H.W., 12 Bus Regulatory Reform Act of 1982, 339 Buyers, expectations of, 61, 62 C Cable television, 339 California auto emissions, 362–363 California electricity crisis, 342 Canada economic system of, 423–424 GDP per capita, 434 as industrially advanced nation, 433 NAFTA and, 388 trade deficit, 394–395 as trading partner, 379, 380 union membership, 288 Cap-and-Trade, 366–367 Capital accumulation of, 440–442 definition, 4–5 efficiency of, 185 human resources, 280, 303–304, 439–440 in industrially advanced countries, 433 in less-developed countries, 440–442, 444–445, 447–448 privately owned, 419, 420 production possibilities curve, 42–43 public, 43 publicly owned, 422, 423 Capital account, 392–394 Capital flight, 441 Capital formation, 43 Capital goods, 34–35, 42, 441, 445 Capitalism, 419–420 Caplan, Arthur, 75 Carbon taxes, 366–367 CARE, 448 Carlson, Chester, 39 Carnation, 332 Cartels, 264–266 Cash assistance, 312 Cash transfer programs, 312–313 Castro, Fidel, 422 Causation vs association, 9–10 Cause-and-effect relationships, 9–10 Caviar, 230 Celler-Kefauver Act, 331 Center for Clinical Medical Ethics, 74 Central American Free Trade Agreement (CAFTA), 389 Central authority, 412 Centralized decision making, 422, 423 Central planning, 412–416 Central Selling Organization, 230 Ceteris paribus assumption, 8–9 485 Chain Store Act, 330–331 Chan, Anthony, 10 Chaplin, Bill, 218 Chavez, Hugo, 425 Cheap foreign labor argument, 387 Chernobyl disaster, 365 Chevron, 333 Chicago Board of Trade, 362, 363 Chile, 434 China communism in, 421 economic system of, 423–424, 425–428, 426–427 free market reforms in, 426–427 free trade and, 389 GDP per capita, 434 Hong Kong and, 446 mixed economy, 417, 419 pollution in, 365 quality-of-life measures of development, 437 technological changes in, 442 trade deficit and, 394–395 as trading partner, 379, 380 Chiquita Brands International, 388 Choice, 5–6, 33 Chronicle of Higher Education, 319 Chrysler, 261, 263 Churchill, Winston, 411 Church World Relief, 448 Cigarette smoking, 132 See also Tobacco Civil Aeronautics Board, 338, 339, 340, 344 Clayton Act, 329–330, 331 Clean Air Act, 359–360, 364 Clean Air Interstate Act, 362 Coase, Ronald, 365, 367–368 Coase Theorem, 365–369 Collective bargaining, 285–286 See also Labor unions College athletes, 291 Columbia University, 335 Command-and-control regulations, 358–359, 364 Command economy, 412–416 Command socialism, 420 Common Market, 390 Communism, 420–421 Communist Manifesto (Marx), 421 Comparable worth, 320–321 Comparative advantage, 382–383 Competition, 102, 104, 253, 262, 354–355 Competitive markets, 352–357, 355–358 Complementary goods, 61, 63, 135 Conditional positive statements, 11 Conglomerate merger, 337 Constant-cost industry, 214–215 Constant returns to scale, 184, 186 486 INDEX Consumer choice theory consumer equilibrium, 148–150, 162–163 income effect, 150 substitution effect, 151, 152 utility, 145–150 Consumer equilibrium, 148–150, 162–163 Consumer goods, 36 Consumer indifference curve analysis, 159 Consumer Product Safety Commission (CPSC), 338, 340, 343 Consumer sovereignty, 419 Consumer surplus, 85–86 Consumption possibilities, 380 Continental Baking, 332 Copayment rate, 117 Cornell University, 335 Corporate Average Fuel Economy (CAFE) standards, 359, 361 Costa Rica, 389 Cost curves, average, 175–178, 255 Cost curves, total, 175 Costs, 170–174, 175, 179, 229, 343 See also Production costs Cowen & Co., 70 Cross-elasticity of demand, 134–135 Cuba, 423–425 Currency, 398, 399 Current account, 390–393 Cyprus, 391 Czech Republic, 309, 391 D Dairy price support program, 103 The Dallas Morning News, 218 Dartmouth University, 335 Das Kapital (Marx), 421 Davis, Gray, 342 Deadweight loss, 88, 89 DeBeers, 230 Debt See National debt Decentralized decision making, 419 Deceptive advertising, 330 Decreasing-cost industry, 215–216 Dell, 70, 102 Demand advertising on, effect on, 94–95 changes in quantity demanded vs changes in demand, 56–58 cross elasticity of, 134–135 derived, 280, 283 elastic, 124 excess quantity, 75 for foreign exchange, 396–401 health care market, 117–120 income elasticity of, 133–134, 136 individual, 55–56 inelastic, 124–125 for labor, 277–280 law of, 22, 55–56 market equilibrium and, 94 market price and, 201 nonprice determinants of, 57–63, 119 perfect inelastic, 126–127 perfectly elastic, 126, 200 price elasticity of See Price elasticity of demand unitary elastic, 125 white rats and, 151 Demand analysis, and market supply, 73–75 Demand curve definition, 55 elasticity, 128 example, 76 health care market and, 119 indifference curve analysis, 164–165 kinked, 262–264 for labor, 278–279, 283 market equilibrium, effects of shifts on, 95 movement along vs shift in demand, 59 price elasticity of demand variations, 127–130 Demand shifters, 57 Deng Xiaoping, 425–426 Denmark, 288, 391, 434 Depreciation of currency, 398 Deregulation, 338–339, 342, 344 Derived demand, 280, 283 Dessert pies, 332 Development, quality-of-life measures, 436–437 Diamonds, 230 Diamond-water paradox, 147 Digital Equipment, 334 Diminishing marginal utility, 145–146 Diminishing returns, law of, 173, 174, 277 Direct relationships, 19–20 Discrimination, 318–320 Diseconomies of scale, 185, 186 Division of labor, 184 Dole Food Company, 388 Dominical Republic, 389 Double dividend, 359 Drake, Edwin L., 238 Duke Power Company, 342 DuPont, 264 E Earned-Income Tax Credit (EITC), 313 Eastern Europe, 421 EconCentral Web site, 26 Economic efficiency, 352, 420 Economic freedom, 420 Economic growth, 37–42, 43 See also International growth and development Economic profit, 170–171 Economics See also Environmental economics careers in, 12–14 definition, 5–6 disagreement in, 11–12 fundamental questions, 32 graphs in, 19–26 methodology of, 6–8 normative, 11–13 positive, 11, 13 Economic systems capitalism, 419–420 command economy, 412–416 communism, 420–421 comparison of, 423–424, 426–427 market economy, 416–417 mixed economy, 417–419 socialism, 420–423 traditional economy, 412 in transition, 424–428 types of, 412–452 Economic way of thinking disagreements, 11–12 hazards of, 8–10 methodology, 6–8 scarcity, 3–5 scarcity and choice, 5–6 Economies of scale decreasing-cost industry and, 215 definition, 184–185 in monopolistic competition, 254 in natural monopoly, 340 in oligopoly, 262 Efficiency, economic, 352, 420 Efficiency of capital, 185 Efficient points, 35 Effluent taxes, 359–360, 366–367 Egypt, 434, 437 Einstein, Albert, Elastic demand, 124 Elasticity coefficient, 122, 129 Electric vehicles, 363 Electronic Data Systems Corporation, 337 El Salvador, 389 Embargo, 384 Emissions reductions, 355–356 Emissions trading, 359–362, 364, 366–367 Employer power, 286–292 Employment argument, 387 Energy Policy Act, 339 Engels, Friedrich, 421 Entitlement programs, 312 See also Antipoverty programs Entrepreneurship, 4, 41 Environmental economics, 351–369 achieving environmental efficiency, 357–369 Coase Theorem, 365–369 command-and-control regulations, 358–359 competition and external costs, 354–355 competitive market inefficiency when externalities exist, 355–358 competitive markets, 352–357 efficient quantity of pollution, 357 effluent tax and, 360 emissions trading, 359–362, 364, 366–367 environmental efficiency, 352–357 government and, 365–369 incentive-based regulations, 358–365 private and social costs, 353 regulation, 353 Environmental Protection Agency (EPA), 338, 340, 362 Equal Employment Opportunity Commission (EEOC), 321 Equality vs efficiency, 303–305 Equal Pay Act, 321 Equilibrium long-run competitive, 217–218 long-run for perfectly competitive firm, 212–213, 258–259 market, 94–97 market supply and demand analysis, 73–75 monopsony, 290 for perfectly competitive firm, 211–212 short-run competitive, 217–218 Equilibrium price, 98 Equilibrium wage rate, 280–282 Essential services, 97 Estonia, 391 Ethiopia, 433, 434 Euro, 390–391 European Central Bank, 391 European Economic and Monetary Union, 390 European Economic Community, 390 European Union, 366–367 banana imports, 388–389 economic system of, 423 free trade and, 388–389, 390 as trading partner, 380 Excess capacity, 260 Excess quantity of supply, 75 Exchange rates fluctuations in, 401–404 gold standard, 402–403 relative incomes and, 399 relative price level changes, impact of, 400–401 relative real interest rates and, 401 shifts in supply and demand for foreign exchange, 397–401 supply and demand for foreign exchange, 396–397 tastes and preferences, 398–399 Exclusive dealing, 330 Explicit costs, 170 External benefit, 105, 106, 343, 352 External cost, 105, 106, 343, 352, 354–355 External debt, 394 Externalities, 105–107, 343, 352, 355–358 Exxon, 333 F Facebook, 256 Factors of production, Fair Labor Standards Act, 13 Favorable balance of trade, 391 Featherbedding, 282 Federal Aviation Administration (FAA), 344 Federal Communications Commission (FCC), 334, 340 Federal debt See National debt Federal Energy Regulatory Commission (FERC), 342 Federal Express, 41 Federal Insurance Contribution Act (FICA), 313 Federal Trade Commission, 330–331 Finland, 391, 434 Fixed cost, average, 175–176, 179 Fixed input, 172 Fixed resources, 34–35 Food and Drug Administration (FDA), 120, 338, 340 Food stamps, 109, 310, 314 See also Antipoverty programs Ford, Gerald, 12 Ford, Henry, 39, 184 Ford Motor Company, 261, 263 Forecasts, Foreign aid, 447–448 Foreign labor, 387 Foreign loans, 448–449 Foreign private investment, 445, 447 45-degree line, 306–307 France economic system of, 423 free trade and, 391 GDP per capita, 434 mixed economy, 419 trade deficit and, 395 Free advertising, 331 Freeconomics, 185 Freedom, economic, 420 INDEX 487 Free enterprise system, 419–420 Free market reforms in China, 426–427 Freemiums, 185 Free-rider problem, 369 Free riders, 107, 356, 362 Free to Choose (Friedman), 108 Free trade, 384–386, 388–390 Free Trade Area of the Americas (FTAA), 389 Friedman, Milton, 32, 108–109, 185, 316, 420 Friedman, Rose, 108–109 Fully employed resources, 35 Future production possibilities curve, 42–44 G Galbraith, John Kenneth, 243 Game theory, 266–269 Gasoline price ceiling, 98–100 Gates, Bill, 336 Gateway, 102 Gatorland, 217 GDP per capita, 433–436 General Accounting Office (GAO), 364 General Agreement on Tariffs and Trade (GATT), 384–385, 388, 443 General Motors (GM), 261, 263, 264, 337 Georgia, 434 Germany antitrust policies, 337–338 free trade and, 391 GDP per capita, 434 income distribution, 309 trade deficit and, 395 union membership, 288 Gillette, King, 185 Glass, Mark, 218 Godwin, Frank, 217 Gold standard, 402–403 Goods capital, 34–35, 42, 441, 445 inferior, 59–62, 133 military, 36 normal, 59–60, 62, 133 public, 107–109 substitute, 61, 63, 130–131, 135 Goodyear Tire and Rubber, 264 Gosplan, 413 Government, 357–358, 365–369 Graphing Workshop, 26 Graphs, 19–26 direct relationship, 19–20 inverse relationship, 20–22 slope of a curve, 23–24 slope of a straight line, 22 study hint for using, 26 three-variable relationship, 24–26 488 INDEX Great Depression, 286, 314, 338 Greece, 391, 434 “Green” firms, 354, 355, 356 Gross domestic product (GDP), 433–436 Growth, economic, 37–42, 43 See also International growth and development Guatemala, 389 H Haiti, 434, 447 Harkin, Tom, 321 Harvard University, 335 Hayek, Friedrick von, 419 Health care market, 117–120 Health Economics, 132 Health insurance, 117–119 Heilbroner, Robert L., 412 Hewlett-Packard, 70 Hicks, John, 244 Hilltop Farms, 217–218 Hogan, Daniel E., 10 Homogeneous product, 199, 258, 261 Honduras, 389 Hong Kong, 389, 423–424, 434, 442, 446–447 Hoogewerft, Rupert, 427 Horizontal merger, 337 Housing and Urban Development, Department of (HUD), 314 Housing assistance, 310, 314 Hu Jintao, 427 Human capital, 280, 303–304, 439–440 Human Report, 427 Human resources, 439–440 Hungary, 391 I IBM, 102, 334, 336 If-then predictions, 11 Illegal market, 98 Illiteracy rates, 439 Imperfect information, 343, 345 Implicit costs, 170 Incentive-based regulations, 358, 359–365 Income, 59–62, 119, 150 Income distribution equality vs efficiency, 303–305 global comparisons, 308–309 Lorenz curve, 306–308, 309 trends in, 303, 307–308 Income effect, 150 Income elasticity of demand, 133–134, 136 Income inequality, 108–109 Increasing-cost industry, 216–218 Increasing opportunity costs, law of, 37, 38, 379 Independent relationship, 22–23 India, 434, 437 Indifference curve analysis budget line, 161–162 construction of, 158–165 of consumer, 159 consumer equilibrium graph, 162–163 derivation of demand curve, 164–165 indifference map, 160–161 marginal rate of substitution, 158–159 Indifference map, 160–161 Individual demand, 55–56 Indonesia, 434 Industrially advanced countries (IACs) assistance to less-developed countries, 444–449 capital in, 433 compared to less-developed nations, 433–437 GDP per capita, 433–435 Hong Kong, 446–447 quality-of-life measures of development, 436–437 Inelastic demand, 124–125 Infant industry argument, 386 Inferior goods, 59–62, 133 Infrastructure, 441, 443 In-kind transfers, 310, 312, 313–314 An Inquiry into the Nature and Causes of the Wealth of Nations See The Wealth of Nations (Smith) Intercept, 22 Interest, private, 422 Interest rate, 401 Interlocking directorates, 330 International Air Transport Association, 265 International debt of U.S., 394–395 International growth and development accumulation of capital, 440–442 determinants of, 444 human resources, 439–440 infrastructure, 441, 443 international trade See International trade law and order, 443 natural resources, 439 political environment, 442–444 production possibilities curve, 437–438, 441 technological progress, 442 International Monetary Fund (IMF), 403, 448 International Telecommunications Union (ITU), 265 International trade absolute advantage, 383–384 balance of payments, 390–395 International trade (Cont.) balance of trade, 390–391, 393, 394–395 benefits of, 381 cheap foreign labor argument, 387 comparative advantage, 382–383 economic growth and development, 443 embargo, 384 employment argument, 387 exchange rates, 396–404 free trade, arguments for, 388–390 free trade vs protectionism, 384–386 infant industry argument, 386 national security argument, 386–387 need for, 379–382 production possibilities curve and, 379 protectionism, arguments for, 386–388 quota, 386 specialization, 184, 380–382 tariffs, 384–385 U.S trading partners, 380 Internet Explorer browser, 336 Interstate Commerce Commission, 338, 340 Invention, 39 Inverse relationships, 20–22 Investment, 43, 445, 447 Invisible hand, 198, 416, 417, 418, 419 Iran, 434 Ireland, 391, 434 Israel, 423, 434 Italy as EU member, 391 GDP per capita, 434 income distribution, 309 trade deficit and, 395 union membership, 288 Ivy League, 335 J Jagger, Mick, 12 Japan antitrust policies, 337–338 economic system of, 423–424 free trade and, 389 GDP per capita, 434 as industrially advanced nation, 433 mixed economy, 419 production possibilities curve for, 39 quality-of-life measures of development, 436, 437 technological changes in, 442 trade deficit and, 394–395 as trading partner, 379, 380 union membership, 288 Jet Blue, 344 Jobs, Steven, 186 Jordan, 434 Justice, Department of, 335 K Kaiser Aluminum, 334 Kinked demand curve, 262–264 Knight Ridder/Tribune Business News, 218 L Labor, 4–5, 101, 184, 278–279, 283 See also Labor markets Labor markets demand for labor, 277–280 employer power, 286–292 equilibrium wage rate, 280–282 factors effecting supply and demand, 286 labor unions, 282–286 under perfect competition, 277–282 supply curve of, 280–281, 284 supply of labor, 280 Labor unions collective bargaining, 285–286 decrease supply of labor, 283–284 during Great Depression, 286 historical membership, 287 increase demand for labor, 282–283 international membership, 286, 288 Laissez-faire theory, 416, 446 Land, Latin America, 380, 388–389, 423, 433 Latvia, 391 Law and order, 443 Legal barriers, 228 Leonard, John, 291 Less-developed countries (LDCs) assistance from industrially advanced countries, 444–449 capital in, 440–442, 444–445, 447–448 compared to industrially advanced nations, 433–437 foreign aid, 447–448 foreign loans, 448–449 foreign private investment, 445, 447 GDP per capita, 433–435 production possibilities curve for, 445 quality-of-life measures of development, 436–437 Levi Strauss Company, Lithuania, 391 Long-distance telephone industry, 334–335 Long run, 172 Long-run average cost curve (LRAC), 180–184 advertising, effect of, 254–255 economies of scale, 228–229 in monopolistic competition, 258, 259–260, 265 in oligopoly, 265–266 for perfectly competitive firm, 212–213 Long-run competitive equilibrium, 217–218 Long-run equilibrium for perfectly competitive firm, 212–213, 258–259 Long-run production costs, 180–183 Long-run supply curves, 213–219 constant-cost industry, 214–215 decreasing-cost industry, 215–216 increasing-cost industry, 216–218 under perfect competition, 212–213 Lorenz curve, 306–308, 309 Los Angeles County, 318 Loss per unit, 206 Luxembourg, 391, 434 M Ma Bell, 334 Macroeconomics, 5–6 Mainframe computer market, 334 Malta, 391 Mantle, Mickey, 75 Mao Tse-Tung, 425 Marginal analysis, 34, 148, 202 Marginal-average rule, 178–179, 340 Marginal cost, 178, 179, 181, 236 Marginal cost pricing, 340 Marginal cost relationships, 178–180 Marginal factor cost, 287–290 Marginal private cost, 354–355, 355, 360 Marginal product, 174, 181, 277 Marginal product curve, 180 Marginal rate of substitution, 158–159 Marginal revenue, 204, 231–233, 236 Marginal revenue equals marginal cost method, 202–207, 233–234, 236–237, 257, 259 Marginal revenue product (MRP), 277–279, 289, 290 Marginal social costs, 355, 360 Marginal utility, 145–148 Marginal utility per dollar, 148 Market, 71 Market clearing, 74 Market demand, 55 Market demand curve, 57, 86 Market economy, 54, 416–417, 419 Market efficiency, 85, 88–89, 102 Market equilibrium, 94–97 Market failure definition, 88, 102 environmental efficiency, 357 externalities, 105–107 health care market and, 118 income inequality, 108–109 INDEX 489 lack of competition, 102, 104 public goods, 107–108 regulation and, 339 Market price, for perfectly competitive firm, 201 Market structures, 199, 269–270 See also Monopolistic competition; Monopoly; Oligopoly; Perfect competition Market supply, 65 Market supply and demand analysis, 71–77 Market supply curve, 65–66, 87 Marshall, Alfred, 74 Marx, Karl, 420–421 McDonald’s restaurants, 184–185 MCI, 334, 339 McKinley, William, 402 Means test, 312 Medicaid, 117, 310, 313 Medicare, 117, 313 Mercantilism, 416 Mergers, 337 Mexico economic system of, 423 free trade and, 389, 403–404 GDP per capita, 434 income distribution, 309 NAFTA and, 388 trade deficit and, 394–395 as trading partner, 379, 380 Microeconomics, 5–6 Microsoft Corporation, 335–336 Middle East, as trading partner, 380 Midpoint formula for price elasticity of demand, 122–124 Midwest, poverty in, 312 Military goods, 36 Milk industry, 103 Miller Brewing Company, 337 Minimum wage, 13, 100–101 Ministry of Economy, Trade, and Industry (METI), 419 MIT antitrust case, 335–336 Mixed economy, 417–419 Mobil, 333 Model, Model development, 6–7 Money income, 304–305 Money supply, 398–399 Monopolistic competition, 252–261 advertising in, 254–256, 258–259 average variable cost, 257 characteristics of, 252–253 economies of scale, 254 game theory, 266–269 less output for more, 258–261 in long run, 257–258, 259–260 long-run average cost curve, 258–260, 265 490 INDEX marginal revenue equals marginal cost method to maximize profit, 257, 259 overview of, 270 vs perfect competition, 258–261 price and output decisions, 256–258 as price maker, 253–256 as resource misallocator, 258 in short run, 256–257 Monopoly, 226–244 advertising, 254–256 average total cost, 236 characteristics of, 227–229 impact on industry, 243 international examples, 230 in long run, 238–239 marginal cost, 236 marginal revenue, 231–233, 236 marginal revenue equals marginal cost method of loss minimization, 237 marginal revenue equals marginal cost method of profit maximization, 233–234, 236 minimization of costs, 229 overview of, 270 vs perfect competition, 241–244 price and output decisions, 229–239 price discrimination, 239–241 price elasticity of demand, 231–233 pros and cons of, 243–244 regulation of, 341 as resource misallocator, 241 short-run cost minimization, 237 short-run loss, 234–238 short-run profit maximization, 233–234, 235–236 Standard Oil, 238, 328–329, 333, 336 total revenue, 231–233 total revenue-total cost method of profit maximization, 233, 235 Monopsonist equilibrium, 290 Monopsony, 286–287, 289, 291 Monroe, Dick, 217 Morocco, 434 Motor Carrier Act of 1980, 339 Mozambique, 434, 436, 437 Mutual interdependence, 261, 267 MySpace, 256 N National Aeronautics and Space Administration (NASA), 420 National Collegiate Athletic Association (NCAA), 268, 291 National debt, 394–395 National defense, 107, 386–387 National Education Association, 282 National Industrial Recovery Act, 286 National Labor Relations Act, 286 National Metal Industries, 10 National security argument, 386–387 National Transplant Organ Act of 1984, 74 Natural monopoly, 228, 334, 339–341 Natural resources, 439 NCAA basketball tournament, 268 Negative externality, 105 Negative income tax, 316–317 See also Antipoverty programs Negative slope, 22 Neighborhood effects, 105 Netherlands, 391, 434 New economy, 39 New-source bias, 362 New Source Performance Standards, 362 New York Times, 70 New Zealand, 433, 434 Nicaragua, 389 Nixon, Richard, 98, 403 Nonprice competition, 253, 262 Nonprice determinants of demand, 57–63 advertising and, 59 buyers, number of, 58, 62, 119 expectations of buyers, 61, 62 income, 59–61, 62, 119 personal computer prices and, 70 prices of related goods, 61, 63 prices of substitutes, 119 tastes and preferences, 59, 62, 119 terminology for changes in, 60 Nonprice determinants of supply definition, 66 expectations of producers, 69, 71–72 personal computer prices and, 70 prices of other goods the firm could produce, 71, 73 resource prices, 69, 72, 120 sellers, number of, 69, 72, 120 taxes and subsidies, 69, 72 technology, 69, 72 terminology for changes in, 68 Nonrenewable resources, Normal goods, 59–60, 62, 133 Normal profit, 171, 258 Normative economics, 11–13 North American Free Trade Agreement (NAFTA), 388, 403, 443 Northeast, poverty in, 312 North Korea, 423–424 Norway, 434 O Obama, Barack, 321 Occupational Safety and Health Administration (OSHA), 338, 340 O’Connor, Sandra Day, 12 Offset, 360 Oil companies, 39 Oil embargo, 99 Old Age, Survivors, and Disability Health Insurance (OASDHI) See Social Security Oligopoly advertising in, 261–262, 269 cartels, 264–266 characteristics of, 261–262 economies of scale, 262 evaluation of, 269 game theory, 266–268 kinked demand curve, 262–264 long-run average cost curve, 265–266 NCAA basketball example, 268 nonprice competition, 262 overview of, 270 price and output decisions, 262–269 price leadership, 264 as price maker, 263 OPEC (Organization of Petroleum Exporting Countries), 264–265, 291, 392 Opportunity cost, 32–34, 37, 38, 98 Organ transplants, 74–75 Output decisions, 229–239, 256–258, 262–269 Overpopulation, 440 Ownership, private, 419 Ownership, public, 422 P Package delivery service, 41 Pakistan, 434 Panama, 434 Pay inequities, 320 Payoff matrix, 266–267 Peace dividend, 41 Peck, Andrew, 70 People’s Republic of China See China Perfect competition characteristics of, 199–200 constant-cost industry, 214–215 decreasing-cost industry, 215–216 increasing-cost industry, 216–218 labor market in, 277–282 in long run, 260 long-run supply curves, 212–213 marginal revenue equals marginal cost method of profit maximization, 202–206 market price and demand, 201 vs monopolistic competition, 258–261 vs monopoly, 241–244 overview of, 270 as price taker, 200–201 short-run loss, 206 short-run loss minimization, 206–208 short-run profit maximization, 201–206 short-run supply curves, 209–212 shutting down, 206–207, 208 total revenue-total cost method of profit maximization, 201–202, 203, 233, 235 types of long-run supply curves, 213–219 Perfectly elastic demand, 126, 200 Perfectly inelastic demand, 126–127 Per se rule, 333–334 Personal computer market, 102, 104 Personal computer prices, 70 Personal computer software industry, 335–336 Personal Responsibility and Work Opportunity Act, 317, 318 Per-unit cost, 175 Pet Milk, 332 Petrosian Company, 230 Phase-out rate, 317 Phillip Morris, 337 Photovoltaic cells, 363 Poland, 391 Political environment, and economic growth, 442–444 Pollution air pollution rights market, 360 automotive, 358–359 efficient quantity, 357 emissions reductions, 355–356 emissions trading, 359–360, 361–362, 364, 366–367 as external cost, 343 graphical analysis of, 105–106 regulations, 105 Smog Exchange, 362 taxes and, 106 Population growth, 58 Portugal, 391, 434 Positive economics, 11, 13 Positive externality, 105 Positive slope, 22 Poverty antipoverty programs, 310, 312–315, 316–318 definition, 309–310 demographics, 310–312 vicious circle of, 441 welfare reform, 315–319 Poverty line, 310 Predatory pricing, 328 Predictions, Present investment, 42–44 Price changes in, 60 in monopolistic competition, 256–258 in monopoly, 229–230 in oligopoly, 262–269 rationing function of, 75, 77 of related goods, 61, 63 of substitute goods, 119 total revenue and, 125 Price ceilings, 97–100, 342 Price competition, 267 Price controls, 97–102, 342 Price discrimination, 239–241, 330 Price elasticity of demand, 122–127 adjustment to price changes over time, 131, 133 availability of substitutes, 130–131 cigarette smoking and, 132 cross-elasticity of demand, 134–135 determinants of, 130–133 elastic demand, 124 elasticity coefficient, 122, 129 income elasticity of demand, 133–134 inelastic demand, 124–125 midpoints formula, 122–124 monopoly and, 231–233 perfectly elastic demand, 126, 200 perfectly inelastic demand, 126–127 price decrease, impact of, 125 price elasticity of supply, 135–136 share of budget spent on product, 131 taxation, impact of, 136–138 taxes and, 136–138 terminology of, 127 total revenue, 129 total revenue test, 124 unitary elastic demand, 125 variations along a demand curve, 127–130 Price elasticity of supply, 135–136 Price floors, 100–102 Price leadership, 264 Price level, 352, 400–401 Price maker, 231, 233, 238–239, 253–256, 263 Prices, 98, 152, 415 Price supports, 101–103 Price system, 74–75, 77 Price taker, 200–201, 231, 253, 258 Price wars, 264 Pricing, predatory, 328 Princeton University, 335 Private benefits and costs, 352 Private cost, 355 Private cost, average, 354–355 Private interest, 422 Private ownership, 419 Problem identification, “The Problem of Social Cost” (Coase), 365 Producers, expectations of, 69, 71–72 Producer surplus, 86–88 INDEX 491 Product differentiation, 252–253, 256, 261 Production, scales of, 183–186 Production costs average cost curves, 175–178 costs and profit, 170–172 future, 42–44 long-run, 180–183 marginal cost relationships, 178–180 marginal product curve, 180 scales of production, 183–186 short-run, 172–174 short-run cost formulas, 175–178, 179 total cost curves, 175 Production function, 172–174, 277 Production possibilities curve capital and, 42–43 economic growth and, 437–438, 441 external financing, effect of, 445 future, 42–44 international trade and, 379 Japan and, 39 for less-developed countries, 445 for military goods, 36 outward shift of, 40 overview of, 34–37 Professionalism, standards of, 284 Profit, 170–172, 258 Profit maximization, 201–203, 233, 235 Profit motive, 416 Profit per unit, average, 206 Protectionism, 384–389 Public capital, economic growth and, 43 Public goods, 107–109 Public interest, 420, 422 Public ownership, 422 Public utilities, 229 Puma, John la, 74 Q Quality-of-life measures of development, 436–437 Quotas, 386 R S Racial discrimination, 318–320 Railroad industry, 339 Rationing, 77 Reagan, Ronald, 12 Real income, 150 Red Cross, 448 Red Lobster restaurants, 217 Reform proposals, for antipoverty programs, 315–318 Regulation AIDS vaccination and, 107 492 airline industry, 344 command-and-control, 358–359 environmental, 353 externalities, 343 during Great Depression, 338 imperfect information, 343, 345 incentive-based, 358, 359–365 of monopoly, 341 natural monopoly, 228, 334, 339–341 pollution and, 105 price ceilings and, 342 Relative incomes, 399 Relative price level, 400–401 Relative prices, 152 Relative real interest rates, 401 Renewable resources, Rent controls, 97–98, 99 Republic Steel, 261 Research and development, 39, 262 Resources definition, 3–5 economic growth and, 39 fixed, 34–35 fully employed, 35 misallocation of, 241 prices of, 69, 72, 120 Responsiveness, 124 Restraint of trade, 329 Reynolds Aluminum, 334 Rinehart, James R., 74 R.J Reynolds, 264 The Road to Serfdom (Hayek), 419 Robber barons, 328 Robinson-Patman Act, 330–332 Rockefeller, John D., 238, 243, 328, 333 Rolling blackouts, 342 Romania, 391, 434 Roosevelt, Franklin D., 286, 314, 402–403 Rule of reason, 333 Russia economic system of, 423–424, 425 foreign loans and, 449 free trade and, 389 GDP per capita, 434 technological changes in, 442 Rwanda, 434 Salaries, in various fields of economics, 14 Salt Lake City, 332 Saudi Arabia, 261 Scales of production, 183–186 Scarcity, 3–6, 33 School vouchers, 108–109 Schumpeter, Joseph, 243 Schwarzenegger, Arnold, 12 Securities and Exchange Commission (SEC), 338, 340 INDEX Self-interest, 416 Sellers, number of, 69, 72, 120 Shaw, George Bernard, 11 Sherman Antitrust Act of 1890, 238, 329, 331 Shortage, 71 Short run, 172 Short-run average total cost, 182, 212–213 Short-run competitive equilibrium, 217–218 Short-run cost curves, 177 Short-run cost formulas, 175–178, 179 Short-run cost minimization, 237 Short-run loss, 206, 234–238 Short-run loss minimization, 206–208 Short-run marginal cost curve, 213 Short-run production costs, 172–174 Short-run profit maximization, 202–206, 233–236 Short-run supply curves, 209–212 Shutting down, 206–208 Singapore, 434, 442, 447 Single seller, 227 Slope of a curve, 23–25 Slope of a straight line, 22 Slovakia, 391 Slovenia, 391 Smith, Adam diamond-water paradox, 147 economies of scale, 184 invisible hand, 198, 416–419 lack of competition, 102, 327, 337 laissez faire, 446 market economy, 416–417 vs Marx, 421 Smith, Frederick W., 41 “Smog” Exchange, 362 Smoot-Hawley Act of 1930, 385 Social benefits, 353 Social cost, 355 Social cost, average, 354–355 Socialism, 420–423 Socially efficient quantity, 360 Social-networking sites, 256 Social Security, 310, 313, 314–315 Social Security Trust Fund, 314 Software industry, 335–336 South, poverty in, 310, 312 South Africa, 434 South Korea, 434, 442, 447 Southwest Airline, 344 Soviet Ministry of Fisheries, 230 Soviet Union, 413, 421 Sowell, Thomas, 315 Spain, 391, 434 Specialization, 184, 380–382 Spillover effects, 105 Sprint, 334, 339 Staggers Rail Act of 1980, 339 Stalin, Josef, 422 Standard Oil, 238, 328, 329, 333, 336 Standex International Corporation, 10 Steel market, 105–106 Stock acquisition of competing companies, 330 Strauss, Levi, Subsidies, 107 Substitute goods, 61, 63, 130–131, 135 Substitution effect, 151, 152 Super Bowl, 10 Supply changes in quantity supplied vs changes in supply, 66–68 definition, 65 excess quantity, 75 for foreign exchange, 396–397, 397–401 health care market and, 117–120 law of, 63–66 market equilibrium and, 94–95 market supply, 65 nonprice determinants of, 66, 69–73, 120 price elasticity of, 135–136 Supply curve effects of shifts on market equilibrium, 96 example, 76 health care market and, 120 individual, 64 long-run, 213–219 movement along vs shift in supply, 67 Supply curve of labor, 280–281, 284 Supply shifters, 66 Supreme Court, 109 Surplus, 71 Sweden economic system of, 423 free trade and, 391 GDP per capita, 434 income distribution, 309 union membership, 288 Sweeney, John D., Jr., 314 Switzerland, 434 T Taiwan, 434, 442, 447 Tariffs, 384–385 Tastes and preferences, 59, 62, 119, 398–399 Taxes ad valorem, 384 carbon, 366–367 effluent, 359–360, 366–367 impact of, 136–138 negative income, 316–317 as nonprice determinant, 69, 72 pollution and, 106 price elasticity and, 136–138 Taxi and Limousine Commission, 244 Taxicabs, 244 Tax incidence, 136, 137 Teamsters, 282 Technology, 35, 39, 69, 72, 442 Telecommunications industry, 338–339 Temporary Assistance to Needy Families (TANF), 310, 313 Tennessee Valley Authority (TVA), 362, 420 Thailand, 434 Theory, 6, Third parties, 105, 117, 343 Three-variable relationship, 24–26 Time, 427 Tit-for-tat, 267–268 Tobacco, 132, 329, 333 Total cost, 175, 179 Total cost, average, 177–178, 179, 236 Total cost curves, 175 Total fixed cost, 175 Total revenue definition, 124 demand curve elasticity, variations in, 128 monopoly and, 231–233 price decrease, impact of, 125 price elasticity of demand, 129 Total revenue test, 124 Total revenue-total cost method, of profit maximization, 201–202, 203, 233, 235 Total utility, 145–148 Total variable cost, 175 Toyota, 261, 263, 363 Trade, restraint of, 329 Trading partners, 380 Traditional economy, 412 Transaction costs, 368 Transportation industry, 338–339 Truman, Harry, 11 Trust, 328 Tucker Motor Company, 263 Tuition policies, 239 Turkey, 434 Tying contracts, 330 U Ukraine, 434 Unemployment compensation, 109, 310, 313 Unfavorable balance of trade, 391 Unique product, 227 Unitary elastic demand, 125 United Arab Emirates, 433, 436 United Auto Workers, 282 United Kingdom free trade and, 391 GDP per capita, 434 Hong Kong and, 446 trade deficit and, 395 union membership, 288 United Network for Organ Sharing, 75 University of Pennsylvania, 335 U.N Population Fund, 427 Upshaw, David L., 10 USAirways, 266–267 USA Today, 70, 109, 218 U.S Forest Service, 365 U.S Postal Service, 420 U.S Steel, 333 Usury laws, 99 USX Corporation, 261, 264 Utah Pie Company, 332 Utility, 145–150 Utility companies, 339 V Vaccination market, 106–107 Variable cost, average, 176–177, 179, 257 Variable input, 172 Variables direct relationship, 19–20 independent relationship, 22–23 inverse relationship, 20–22 three-variable relationship, 24–26 Vehicles, electric, 363 Venezuela, 395, 425 Venture capital, 41 Vertical merger, 337 Vicious circle of poverty, 441 Vietnam, 434 Vital resource, ownership of, 228 Vouchers, 108–109 W Wage maker, 290 Wage rate, 280–282 Wages, 285–286, 289 Wage taker, 281 Wagner Act, 286 Wall Street Journal, 70 War of 1812, 387 War on terrorism, 41 Washington Post, 218, 318 The Wealth of Nations (Smith), 102, 147, 184, 416, 421 Web sites, 185 Wells, Lawler, 217 West, poverty in, 312 Western Electric Company, 334 Willingness to accept, 369 INDEX 493 Willingness to pay, 369 Windows operating system, 335–336 Women, 320–321 The Wonderful Wizard of Oz (Baum), 402 Woods, Tiger, 12 Work disincentives, 314 Workfare, 317–318 World Bank, 448 World Trade Organization (WTO), 385, 388–389, 425, 443 World War II, 286 494 INDEX X Z Xerox Corporation, 39 Zero economic profit, 202 Zimbabwe, 309 Y Yale University, 335 Yen, 398 YouTube, 256 ... 150 125 100 75 50 Output per Hour Total Price Revenue $150 $ Marginal Revenue $138 138 138 125 25 0 113 339 100 400 88 440 25 25 –75 1 12 –100 89 – 125 61 –150 75 450 63 441 50 400 38 3 42 10 25 25 0... 12 38 25 13 1 12 34 89 24 61 19 40 23 25 10 25 30 À9 38 À41 48 À58 59 À 92 75 À107 95 À143 117 400 50 $50 339 440 $138 25 0 88 63 (5) Marginal Cost (MC) 138 (4) Marginal Revenue (MR) 441 400 3 42. .. 400 3 42 250 143 (6) Total Cost (TC) (7) Average Total Cost (ATC) (8) Profit (+) or Loss (−) $100 — 150 $150 À 12 184 92 66 20 8 69 131 22 7 57 173 25 0 50 190 28 0 47 170 318 45 123 366 46 34 425 47