Ebook Macroeconomics (13th edition): Part 2

(BQ) Part 2 book Macroeconomics - Private and public choice hass contents: Money and the banking system, stabilization policy, output, and employment; stabilization policy, output, and employment; gaining from international trade; international finance and the foreign exchange market,...and other contents.

12 C H A P T E R The Supply of and Demand for Productive Resources C H A P T E R F O C U S ● Why business firms demand labor, machines, and other resources? Why is the demand for a productive resource inversely related to its price? ● How business firms decide which resources to employ and the quantity of each that will be used? ● How is the quantity supplied of a resource related to its price in the short run? In the long run? ● What determines the market price of a resource? How resource prices help a society allocate its resources efficiently among competing uses? James E Meade was a longtime professor of economics at Cambridge University It is necessary to attach price tags to the various factors of production in order to guide those who have the day-to-day decisions to make as to what is plentiful and what is scarce —James Meade R ecent chapters have focused on product markets, markets in which consumers purchase goods and services supplied by business firms Our analysis now shifts to resource markets, markets in which firms hire productive resources like machines and workers and use them to produce goods and services (Note: Because resources are also referred to as factors or inputs, these markets are also known as factor markets or input markets.) As in product markets, the forces of supply and demand combine to determine prices in resource markets The buyers and sellers in resource markets are just the reverse of what they are in product markets In resource markets, business firms are the purchasers; they demand resources used to produce goods and services Households are the sellers; they (and firms they own) supply resources in exchange for income The income from supplying productive resources, like the wages received from the sale of labor services, is the major source of income for most of us Prices in resource markets coordinate the choices of buyers and sellers and bring the amount of each resource demanded into harmony with the amount supplied Resource prices also help to channel factors of production into the areas where they are most productive This enables us to have higher incomes and a larger supply of consumer goods than would otherwise be the case As the circular flow diagram of EXHIBIT illustrates, there is a close relationship between product and resource markets Households earn income by selling factors of production—for example, the services of their EXHIBIT The Market for Resources S Product Business Firms Households s nt me ay $P $In com e$ $ Re cei pts $ Goo to 264 D Markets d Ser vices ds an res$ ditu en xp $E Until now, we have focused on product markets, in which households demand goods and services that are supplied by firms (upper loop) We now turn to resource markets, in which firms demand factors of production—human capital (like the skills and knowledge of workers) and physical capital (like machines, buildings, and land) Factors of production are supplied by households in exchange for income (bottom loop) In resource markets, firms are buyers and households are sellers—just the reverse of the case for product markets Fa cto Fac to rs of P rs of Production Resource rodu ction$ S D Markets CHAPTER 12 The Supply of and Demand for Productive Resources 265 labor and capital—to business firms Their offers to sell form the supply curve in resource markets (bottom loop) The income households get from the sale of resources gives them the buying power they need to purchase goods and services in product markets These expenditures by households generate revenue and motivate firms to produce goods and services (top loop) In turn, firms demand resources because they contribute to the production of goods and services that can be sold in product markets ■ Human and Nonhuman Resources Broadly speaking, there are two different types of productive inputs, nonhuman and human Nonhuman resources can be further broken down into physical capital, land, and natural resources Physical capital consists of human-made resources, like tools, machines, and buildings, that are used to produce other things Net investment can increase the supply of nonhuman resources However, it involves a cost Resources used to produce machines, upgrade the quality of land, or discover natural resources could be used to produce goods and services for current consumption instead of invested for the future Why take the roundabout path? The answer is that sometimes indirect methods of producing goods are less costly in the long run For example, Robinson Crusoe found he could catch more fish by taking some time off from hand-fishing to build a net Even though his initial investment of time to make the net reduced his current catch, once the net was completed he was able to more than make up for this loss Trade-offs like these influence what people will invest in, be it fishing nets or complex machines An investment will be undertaken only when the decision maker expects the benefits of a larger future output to more than offset the current reduction in the production of consumption goods Just as the supply of machines can be increased with investment, so, too, can investments in better land development and soil-conservation practices improve the quantity and quality of usable land Similarly, the supply of natural resources like oil and gas, for example, can be increased (to some extent) by making an investment in, or dedicating more resources to, exploration and development Human resources consist of the skills and knowledge of workers Investments in education, training, health, and experience can enhance the skills, abilities, and ingenuity of individuals and thereby increase their productivity Economists refer to activities like these as investment in human capital.2 Like physical capital, human capital also depreciates—people’s skills, for example, can decline with age or lack of use Education and training will add to the stock of human capital whereas depreciation detracts from it Decisions to invest in human capital are no different than other investment decisions we make Consider your decision about going to college As you know, an investment in a college education requires you to sacrifice some current earnings as well as pay for direct expenses, like tuition and books However, you are making the investment anyway because you expect it to lead to a better job and other benefits later A rational person will attend college only if the expected future benefits outweigh the current costs The contributions of T W Schultz and Gary Becker to the literature on human capital have been particularly significant See Ronald G Ehrenberg and Robert S Smith, Modern Labor Economics: Theory and Public Policy, 10th ed (Reading, MA: Addison Wesley, 2009), Chapter 9, for additional detail on human capital theory Resource markets Markets in which business firms demand factors of production (for example, labor, capital, and natural resources) from household suppliers The resources are then used to produce goods and services These markets are sometimes called factor markets or input markets Nonhuman resources The durable, nonhuman inputs used to produce both current and future output Machines, buildings, land, and raw materials are examples Investment can increase the supply of nonhuman resources Economists often use the term physical capital when referring to nonhuman resources Human resources The abilities, skills, and health of human beings that contribute to the production of both current and future output Investment in training and education can increase the supply of human resources Investment in human capital Expenditures on training, education, skill development, and health designed to increase human capital and people’s productivity 266 PART Core Microeconomics Human resources differ from nonhuman resources in two important respects First, human capital is embodied in the individual Individuals cannot be separated from their knowledge, skills, and health conditions in the same way that they can be separated from physical capital, like buildings or machines that they might own As a result, in addition to money, a person’s job choices are also affected by the job’s working conditions, location, prestige, and other nonmonetary factors Money, of course, influences people’s human capital decisions However, people will often choose to trade off some money income for better working conditions Second, human resources cannot be bought and sold in nonslave societies Workers sell only the services of their labor They have the option of quitting, selling their labor services to another employer, or using them in some other way Thus, we usually speak of the worker as selling (and the firm as buying) labor services In competitive markets, the price of resources, like the price of products, is determined by supply and demand We will begin our analysis of resource markets by focusing on the demand for resources, both human and nonhuman The Demand for Resources Derived demand The demand for a resource; it stems from the demand for the final good the resource helps produce Profit-seeking producers employ laborers, machines, raw materials, and other resources because they help produce goods and services The demand for a resource exists because there is a demand for goods that the resource helps to produce The demand for each resource is thus a derived demand; it is derived from the demand of consumers for products For example, an auto repair shop hires mechanics because customers demand repair service, not because the auto repair shop owner benefits simply from having mechanics around If customers did not demand repair service, mechanics would not be employed for long Similarly, the demand for inputs like carpenters, plumbers, lumber, and glass windows is derived from the demand of consumers for houses and other consumer products these resources help to make Most resources contribute to the production of numerous goods For example, glass is used to produce windows, ornaments, dishes, lightbulbs, and mirrors, among other things The total demand for a resource is the sum of the derived demands for each of its uses The demand curve for a resource shows the amount of the resource that will be used at different prices As EXHIBIT shows, there is an inverse relationship between the price of a resource and the amount demanded of it There are two major reasons why less of O U T S TA N D I N G E C O N O M I S T Gary Becker (1930–) This 1992 Nobel Prize recipient is best known for his role in the development of human capital theory and his innovative application of that theory to areas as diverse as employment discrimination, family development, and crime In his widely acclaimed book Human Capital,* Becker developed the theoretical foundation for human investment decisions in education, on-the-job training, migration, and health Becker is a past president of the American Economic Association and a longtime professor at the University of Chicago *Gary Becker, Human Capital (New York: Columbia University Press, 1964) CHAPTER 12 The Supply of and Demand for Productive Resources EXHIBIT Price of resource The Demand Cur ve for a Resource P2 P1 D Q2 Q1 Quantity of resource demanded a resource will be demanded as its price increases: (1) producers will turn to substitute resources and (2) consumers will buy less of goods that become more expensive as the result of higher resource costs Let us take a closer look at each of these factors Substitution in Production Firms will use the input combination that minimizes their costs When the price of a resource goes up, firms will use lower-cost substitute inputs and cut back on their use of the more expensive resource Typically, there are many ways producers can reduce their use of a more expensive resource For example, if the price of oak lumber increases, furniture manufacturers will use other wood varieties, metals, and plastics more intensely Similarly, if the price of copper tubing increases, construction firms and plumbers will substitute plastic pipe Sometimes, producers will alter the style and dimensions of a product in order to use less of a more expensive resource Relocation is also a substitution strategy For example, if the price of office space and land increases in the downtown area of a large city, firms may move to the suburbs The degree to which firms will be able to cut back on a more expensive resource will vary The easier it is to turn to substitutes, the more elastic the demand for a resource is Other things constant, the demand for a resource will be more elastic the more (and better) substitute resources are available for it Substitution in Consumption An increase in the price of a resource will lead to higher costs of production and thus higher prices for the products that the input helps to produce Faced with these higher prices, consumers will turn to substitute products and cut back on their purchases of the more expensive products In turn, a smaller quantity of resources (including less of the one that rose in price) will be required to produce the smaller amount of the product demanded by consumers at the now higher price To illustrate the substitution-in-consumption effect, suppose the United Auto Workers negotiates a substantial wage increase for employees of the Big Three American automakers—General Motors, Ford, and Chrysler The large wage increase will push the costs of the Big Three producers upward, causing them to increase their prices In turn, the price hikes will cause many consumers to switch to substitutes such as automobiles As the price of a resource increases, producers that use the resource intensely will (1) turn to substitute resources and (2) face higher costs, which will lead to higher product prices and lower output At the lower rate of output, producers will use less of the resource that increased in price Both of these factors contribute to the inverse relationship between the price and amount demanded of a resource 267 268 PART Core Microeconomics produced either abroad or by nonunion producers The sales of the Big Three American producers will fall, reducing the quantity demanded and employment of unionized workers in the American auto industry Other things constant, the more elastic the demand for a product is, the more elastic the demand for the resources used to make it This relationship stems from the derived nature of resource demand An increase in the price of a product for which consumer demand is highly elastic will cause a sharp fall in the sales of the good As a result, there will be a relatively sharp fall in the demand for the resources used to produce it In summary, the demand elasticity of a resource will vary with the ease of substitution when it comes to both production and consumption The demand for a resource will tend to be elastic when it is easy to substitute other resources for it in production and when the demand for goods produced with it are relatively elastic Conversely, the demand for a resource will tend to be inelastic when it is difficult to find good substitutes for it in production and the demand for the goods produced with it are more inelastic How Time Changes the Demand for Resources The elasticity of resource demand is also influenced by time It takes time for producers to adjust fully to a change in the price of a resource Typically, a producer will be unable immediately to alter a production process or redesign a product to use less of a more expensive input or more of an input that has declined in price Consumers may also find it difficult to alter their consumption patterns quickly in response to price changes For example, if the price of cigarettes rises due to a tax increase, cigarette smokers may find it initially hard to reduce their consumption of cigarettes very much Over time, however, the higher price will cause more and more smokers to smoke less Thus, the demand for a resource generally becomes more elastic with the passage of time EXHIBIT shows how time affects the elasticity of resource demand Because it is generally difficult to substitute quickly away from a more expensive resource, demand is relatively inelastic in the short run Notice how steep, or inelastic, the slope of the short-run demand curve (Dsr) is An increase in price from P1 to P2 will lead to only a small fall in the quantity of the resource used (from Q1 to Q2) Given more time, however, producers will be able to make a larger substitution away from the more expensive resource The increase in price to P2 causes a much larger fall in the quantity demanded (to Q3) over time The slope of the long-run demand curve (Dlr) is not so steep, as you can see, but is more elastic In the long run, the demand for a resource is nearly always more elastic than in the short run EXHIBIT Time and the Demand Elasticity of Resources P2 Price The demand for a resource will be more elastic (1) the easier it is for firms to switch to substitute inputs and (2) the more elastic the consumer demand for the products the resource helps produce As the graph here shows, demand for a resource in the long run (Dlr ) is nearly always more elastic than demand in the short run (Dsr ) P1 Dsr Q3 Q2 Q1 Quantity of resource Dlr CHAPTER 12 The Supply of and Demand for Productive Resources 269 Things That Change the Demand for Resources Like the demand schedule for a product, the entire demand curve for a resource may shift There are three major reasons why A CHANGE IN THE DEMAND FOR A PRODUCT WILL CAUSE A SIMILAR CHANGE IN THE DEMAND FOR THE RESOURCES USED TO MAKE THE PRODUCT An increase in the demand for a consumer good simultaneously increases the demand for resources needed to make it Conversely, a fall in the demand for a product will lower the demand for the resources used to make it Recent changes in the tax preparation industry illustrate this point Starting in the mid-1990s, the demand for tax preparation software increased sharply, driven by the introduction of easy-to-use software and the growing use of personal computers This led to an increase in the demand for programmers to produce the tax preparation software, and their employment increased rapidly as a result In contrast, the higher consumer demand for tax preparation software meant falling demand for tax accountants and other tax preparers This reallocation of resources is a natural and integral part of how markets respond to changes in product demands CHANGES IN THE PRODUCTIVITY OF A RESOURCE WILL ALTER DEMAND— THE HIGHER THE PRODUCTIVITY OF A RESOURCE, THE GREATER WILL BE THE DEMAND FOR IT As the productivity of a resource increases, so does its value to potential © Tribune Media Services, Inc All Rights Reserved Reprinted with Permission users Improvements in the quality of a resource—in the case of workers, their skill levels— will increase the productivity of the resource and therefore the demand for it For example, as workers gain valuable new knowledge and/or upgrade their skills, they enhance their productivity and essentially move into a different skill category—one in which demand is greater The productivity of a resource will also depend on the amount of other resources used with it in the production process In general, additional capital will tend to increase the productivity of labor For example, someone with a dump truck can haul more material than the same person with a wheelbarrow The quantity and quality of the tools with which employees work will significantly affect their productivity Improvements in technology also tend to increase the productivity of resources including labor For example, technological advances in word processing equipment have enhanced the productivity of secretaries, journalists, lawyers, and writers Similarly, The demand for resources is a derived demand A more complex tax code would increase the demand for (and thus the wages of) accountants, whereas a simpler tax code would have the opposite impact 270 PART Core Microeconomics computers have substantially increased the productivity of typesetters, telephone operators, scientific researchers, and workers in many other occupations The link between technological advances and worker productivity helps explain why improvements in technology generally not exert a large negative impact on employment, even in the occcupations most directly affected Of course, when firms substitute new technology for labor services, the demand for labor will fall However, the new technology also makes the labor more productive, which in turn increases the demand for labor services This second effect will partially, and sometimes more than completely, offset the first effect The productivity–demand link sheds light on why wage rates in the United States, Canada, Western Europe, and Japan are higher than in most other areas of the world Given the skill level of workers, the technology, and the capital equipment with which they work, individuals in these countries produce more goods and services per hour of labor than workers in most other countries In turn, the demand for their labor (relative to supply) is greater because of their high productivity Essentially, the workers’ greater productivity leads to their higher wage rates A CHANGE IN THE PRICE OF A RELATED RESOURCE WILL AFFECT THE DEMAND FOR THE ORIGINAL RESOURCE A rise in the price of a resource will cause the demand for substitute resources to expand For example, when the price of lumber increases, the demand for bricks will increase as home builders switch to building more brick homes and fewer wood homes Conversely, an increase in the price of a resource that is a complement to a given resource will decrease the demand for the given resource For example, higher lumber prices will tend to lower the demand for nails Marginal Productivity and the Firm’s Hiring Decision Marginal revenue product (MRP) The change in the total revenue of a firm that results from the employment of one additional unit of a resource The marginal revenue product of an input is equal to its marginal product multiplied by the marginal revenue of the good or service produced How does a producer decide whether to employ additional units of a resource? As with other decisions, the marginal benefit relative to the marginal cost provides the answer Because firms are mostly price takers in resource markets (meaning they can hire as many units of the resource as they wish without affecting the market price of the resource), the marginal cost of hiring one more worker is simply the worker’s wage, while the marginal cost of purchasing a machine is its price These represent the increase in the firm’s costs from employing one more unit of the resource But what about the marginal benefit of the resource to the firm? It is measured by the increase in the firm’s revenue from employing one more unit of the resource This is called the resource’s marginal revenue product (MRP) A profit-maximizing firm will hire an additional unit of the resource only if the marginal revenue product exceeds the cost of employing the resource Suppose a retail store was considering hiring a security guard for $25 per hour to help reduce shoplifting If the security guard could prevent $20 worth of shoplifting per hour, should the profit-maximizing firm hire the guard? Because the marginal cost of employing the security guard (the wage of $25) is higher than the guard’s marginal revenue product (the $20 reduction in shoplifting per hour), the wise decision is for the firm not to hire the security guard Hiring the guard will lower the firm’s profit by $5 per hour The guard should be employed only if the reduction in shoplifting exceeds the guard’s wage cost In most situations, the direct impact of hiring an additional resource on a firm’s revenue is not as clear, so let’s take a closer look at the firm’s decision and how marginal revenue product is determined Marginal product (MP) Using a Variable Resource with a Fixed Resource The change in total output that results from the employment of one additional unit of a resource When an additional unit of the resource is used relative to a fixed amount of other resources, the firm’s output will increase by an amount equal to the resource’s marginal product (MP) Because this is measured in units of physical output, it is sometimes referred CHAPTER 12 The Supply of and Demand for Productive Resources to as marginal physical product How much additional revenue can the firm derive from the employment of the resource? Recall that marginal revenue (MR) is the increase in the firm’s revenue that results from the sale of each additional unit of output Thus, a resource’s marginal revenue product is equal to the marginal product of the resource multiplied by the marginal revenue of the good or service produced Because of the law of diminishing returns, the marginal product of a resource will fall as employment of the resource expands As a result, the marginal revenue product of a resource will also decline as employment expands The relationship between the marginal revenue a firm gets from selling an additional unit of output and the price for which it is sold is different for price-taker firms than for price searchers, however Because a price-taker firm sells all units produced at the same price, the price taker’s marginal revenue will be equal to the market price of the product The price searcher, however, must reduce the price of all units in order to expand the number of units sold Consequently, the price searcher’s marginal revenue will be less than the sales price of the units The marginal product of a resource multiplied by the selling price of the product is called the resource’s value marginal product (VMP) For a price-taker firm, the MRP of a resource is equal to its VMP because price and marginal revenue are equal For a price-searcher firm, however, the MRP of a resource will be lower than its VMP because marginal revenue is less than price Using these measures, EXHIBIT illustrates how a firm decides how much of a resource to employ Compute-Accounting, Inc., uses computer equipment and data entry operators to supply clients with monthly accounting statements The firm is a price taker: It sells its service in a competitive market for $200 per statement Given the fixed quantity of computer equipment owned by Compute-Accounting, column shows how much total output (quantity of accounting statements) the firm can produce with different numbers of data entry operators One data entry operator can process five statements per week When two operators are employed, nine statements can be completed Column indicates how Marginal revenue (MR) The change in a firm’s total revenue that results from the production and sale of one additional unit of output Value marginal product (VMP) The marginal product of a resource multiplied by the selling price of the product it helps produce For a price-taker firm, marginal revenue product (MRP) will be equal to the value marginal product (VMP) EXHIBIT The Short-Run Demand Schedule of a Firm Compute-Accounting, Inc., uses computer technology and data-entry operators to provide accounting services in a competitive market For each accounting statement processed, the firm receives a $200 fee (column 4) Given the firm’s current fixed capital, column shows how total output changes as additional data entry operators are hired The marginal revenue product (MRP) schedule (column 6) indicates how hiring an additional operator affects the total revenue of the firm Because a profit-maximizing firm will hire an additional employee if, and only if, the employee adds more to revenues than to costs, the marginal revenue product curve is the firm’s short-run demand curve for the resource (see Exhibit 5) UNITS OF VARIABLE FACTOR (DATA-ENTRY OPERATORS) (1) TOTAL OUTPUT (ACCOUNTING STATEMENTS PROCESSED PER WEEK) (2) MARGINAL PRODUCT (CHANGE IN COLUMN DIVIDED BY CHANGE IN COLUMN 1) (3) 0.0 5.0 9.0 12.0 14.0 15.5 16.5 17.0 — 5.0 4.0 3.0 2.0 1.5 1.0 0.5 SALES PRICE STATEMENT (4) TOTAL REVENUE (2) ϫ (4) (5) MRP (3) ϫ (4) (6) $200 200 200 200 200 200 200 200 $0 1,000 1,800 2,400 2,800 3,100 3,300 3,400 — 1,000 800 600 400 300 200 100 PER 271 272 PART Core Microeconomics total output is expected to change as additional data entry operators are employed Column presents the marginal product schedule for data entry operators Column 6, the MRP schedule, shows how the employment of each additional operator affects total revenue Both the marginal product and the MRP of workers decline as additional operators are employed due to the law of diminishing returns Because Compute-Accounting is a price taker, the marginal revenue product and the value marginal product of labor are equal Thus, the marginal revenue product of labor (column 6) can be calculated by multiplying the marginal product (column 3) times the sales price of an accounting statement (column 4) How does Compute-Accounting decide how many operators to employ? It analyzes the benefits relative to the costs As additional operators are employed, the output of processed statements (column 2) will increase, which will expand total revenue (column 5) Employing additional operators, though, will also add to production costs because the operators must be paid Applying the profit-maximization rule, Compute-Accounting will hire additional operators as long as their employment adds more to revenues than to costs This will be the case as long as the MRP (column 6) of the data entry operators exceeds their wage rate At a weekly wage of $1,000, Compute-Accounting would hire only one operator If the weekly wage dropped to $800, two operators would be hired At still lower wage rates, additional operators would be hired Profit-maximizing firms, both price takers and price searchers, will expand their employment of each variable resource until the MRP of the resource (the firm’s additional revenue generated by the resource) is just equal to the price of the resource (the firm’s marginal cost of employing the resource) MRP and the Firm’s Demand Curve for a Resource Using the data in Exhibit 4, we can construct Compute-Accounting’s demand curve for data entry operators Recall that the height of a demand curve shows the maximum price (in this case, the wage) the buyer (the firm) would be willing to pay for the unit Because the marginal revenue product of the first data entry operator is $1,000, the firm would be willing to hire this worker only up to a maximum price of $1,000 Because of this relationship, as EXHIBIT shows, a firm’s short-run demand curve for a resource is precisely the EXHIBIT The Firm’s Demand Cur ve for a Resource Resource price (monthly wage) $1,000 The firm’s demand curve for a resource will reflect the marginal revenue product (MRP) of the resource In the short run, it will slope downward because the marginal product of the resource will fall as more of it is used with a fixed amount of other resources The location of the MRP curve will depend on (1) the price of the product, (2) the productivity of the resource, and (3) the quantity of other factors working with the resource 800 600 400 200 D ϭ MRP Quantity of resource demanded Index A A Beautiful Mind, 253 absolute advantage, 341 accounting costs, economic costs and, 177 accounting profit definition of, 177 economic profit and, 176–177 ACER, 213 actual incidence, 91 of tax, 93–94 Adams, Christopher P., 240 Adam Smith’s Wealth of Nations, 27 adaptation strategy, 490–491 adjustable rate mortgages (ARMs), 411, 412 African Americans employment discrimination of, 293 Social Security and, 389–390 age see also demographics aggregate consumption-payment link, 126 Agricultural Adjustment Act (AAA), 427, 429 agricultural technology, 483 agriculture subsidies, 101 Aguiar, Mark, 322 air quality, 488 Alban, Daniel L., 34 Alchian, Armen A., 218 Alessi, Michael De, 37 Algeria, 352, 353 Allen, Paul, 229 Allen, Scott, 228 Allen, William R., 218 Allgood, Sam, 331 allocative inefficiency, 252 Along Came Polly, 108 Alt-A loans, 410 Alt-A mortgages, 411 Aluminum Company of America, 240 Amazon.com, 32 American Enterprise Institute, 409 American Medical Association, 437 Americans with Disabilities Act, 189 An Inquiry into the Nature and Causes of the Wealth of Nations, 4, 74 Anderson, Terry L., 484 Annual Report of the Board of Trustees of the Federal Old Age and Survivors Insurance and Disability Insurance Trust Funds, 385 anticompetitive policies, during Great Depression, 427–429 antidumping argument, 354 antitrust action, 249 antitrust policy, 253–254 ARM loans, 412 Arnett, Grace-Marie, 433 Arrow, Kenneth, 127 Asian Americans, employment discrimination of, 293 asset values, 308–309 association, 17 ATC curve, 185 Australia, 341, 353, 370, 475 educational spending in, 450 government size of, 370, 371 science achievement scores in, 449 Austria, 370 government size of, 370, 371 science achievement scores in, 449 automation, 295, 297 Autor, David H., 381 average, 98 average cost pricing, 256 average fixed cost (AFC), 178, 179 average product, 181 average tax rate (ATR), 96, 97 average total cost (ATC), 179, 182 average variable cost (AVC), 178, 179 B baby boomers, 439 Social Security and, 387 bachelor’s degree, earnings and, 287 Bahrain, 352, 353 Bailey, Ronald, 484 Ballard, Charles L., 331 Bangladesh, 352, 353 bankruptcy, 138 bargaining power, 470 bargaining process, 468 Barnett, Harold, 481 Barone, Michael, 126 barriers to entry, 197 barter economy, consumer maximization in, 166 Basel I, 414 BASIC, 229 basis points, 409 Baskin-Robbins, 219 Baumol, William J., 224, 477, 478, 480, 481 Beach, William W., 390 Bear Stearns, 311, 414 Becker, Gary, 265, 266 Behrens, William W., 478 Belgium, 352, 353, 370 educational spending in, 450 government size of, 371 science achievement scores in, 449 Bell, F W 160 Ben and Jerry, 219 benefits and costs, distribution of, 132 Benjamin, Daniel K., Bernstam, Mikhail S., 280 Berry College, 34 Best Western Motels, 118 Bierce, Ambrose, Big Three, 223, 255, 267, 268, 380, 474 BizRate, 32 Black, Duncan, 127 Blackman, Sue Anne Batey, 477, 478, 480, 481 black markets, 86 definition of, 90 legal structure and, 90–91 in Russia, 91 in Soviet Union, 91 in Ukraine, 91 blacks, union membership and, 468 Black Tuesday, 422 Blau, Francine D., 293, 457 Block, Walter, 86 Bloemenveiling Aalsmeer, 196 Booker, Kevin, 454 Borenstein, Severin, 379 Brantner, Van V., 240 Brazil, 341 Brewer, Dominic J., 454 Breyers, 219 Browning, Edgar K., 331, 367 Buchanan, James, 28, 108, 127, 128 budget constraint, 167, 168 budget deficits Great Depression and, 430 Social Security and, 386 Buffett, Warren, 394 bureaucratic inefficiency, 138–139 Bureau of Economic Analysis, 123 Bureau of Mines, 478 Bureau of the Census, 319 Burkhauser, Richard V., 90 Burundi, 352, 353 Bush, George H W., 368 business decisions stock prices and, 395–396 uncertainty associated with, 191 business efficiency, internet improvement of, 380–381 business failures, 222–224 542 Index business firms See firms business-to-business transactions, 380 Byrd Amendment, 354 C cai li, 72 Calculus of Consent, The, 128 Calomiris, Charles W., 409 Canada, 340, 341, 357, 358, 483 government size of, 371 science achievement scores in, 449 “cap-and-trade” program, 492, 493 capital, 6, 301 capitalism, 45 capital markets financial bailouts and, 311 importance of, 314–315 carbon dioxide, 489 career objectives, of women, 460–462 careers, in economics, 18 cartels, 247, 427 Cast Away, 343 catastrophic health insurance, 443 Center for Responsive Politics, 409 Center for the Study of Public Choice, 128 Centers for Disease Control and Prevention, 434 Central Utah Project (CUP), 484 ceteris paribus, 16 charter schools, 453 cheating, incentives for, 247–248 chief executive officers (CEOs), 174, 287 salaries received by, 287 China, 72, 340, 356, 357, 489 supply and demand issues, 72 choice, economizing behavior and, incentives and, 10 information and, 12 marginal, 11 market prices and, 76 scarcity and, 5–6 secondary effects of, 12 trade-offs, see also consumer choice; producer choice Chrysler, 223, 254, 267, 474 Citi Group, 311 Civilian Conservation Corps (CCC), 428 Clark, J R., 99 Clawson, Marion, 483 Clayton Act, 254 Clean Air Act Amendments of 1990, 492 climate change See global warming coal, 479, 489 Coca-Cola, 118, 119 coffee production, in price-taker markets, 208 collective decision making, 46, 122, 126, 127 college degree, earnings and, 286, 287, 288 collusion, 246, 247 definition of, 246 incentives for, 247–248 obstacles to, 248–249 Colombia, 341 commercial banks, 416 Commission of Professionals in Science and Technology, 461 Committee on Ways and Means, 328 common cause, 409 Community Reinvestment Act (CRA), 410, 416 Compaq, 212 comparative advantage, 341 compensating wage differentials, 290 compensation, in corporations, 174 competition, 110–111 corporations and, 173–175 as dynamic process, 197 entry barriers and, 252 health care spending and, 441–442 and market prices, 441 price takers and, 213–214 property rights and, 77 significance of, 200 U.S education and, 452–454 competitive behavior, 7–8, 125 competitive markets, 77, 345–346, 376–378 gains from, 345–346, 376–378 Netherlands flower markets and, 196 competitive price-searcher markets, 219–220, 220–222, 230–232 competitive process, 224–225 real-world, 258–259 complements, 60 complex decision making, 225 computer revolution, earnings and productivity, 295–298 Congressional Budget Office, 369, 370 Congressional Favors, 135 conservation, 35 constant-cost industry, 209 constant returns to scale, 187 consumer benefits from imports, 347 consumer budgets, product share of, 157 consumer bundles, 165 consumer choice fundamentals of, 147–148 income elasticity and, 160–161 indifference curves and, 163–168 law of demand and, 54–58 marginal utility and demand curve of individual, 149–152 market demand and demand curve of individual, 152–153 price changes and demand elasticity, 159–160 price changes and, 151 price elasticity of demand and, 153–159 price elasticity of supply, 161 time costs and, 151–152 U.S education and, 452–454 consumer-driven health care, 442–444 consumer equilibrium, 150–151 consumer expectations, changes in, 60 consumer income, changes in, 58 consumer markets, Internet and, 379–380 consumer maximization, barter economy, 166, 166–167 consumer price Index (CPI), 439 Consumer Reports, 119 consumers, quantity of, 59 consumer surplus, 55–57 consumer tastes and preferences, changes in, 61 consumption nonrival in, 114–117 substitution in, 267–268 consumption bundle, 166 consumption opportunity constraint, 165, 168 consumption-payment link aggregate, 126 individual, 125–126 consumption possibilities, 342–345 trade, 342–345 consumption rate, marginal utility and, 148 contestable markets, 224–225 Cook, Phillip, 288 cooperation, in firms, 170–172 coordinating function, of resource prices, 280 co-payments, 443 Coronado, Julia Lynn, 389 corporate investments, 309 corporate takeover, threat of, 174–175 corporations, 172 costs and competition, 173–175 structure of, 175 cost curves diminishing returns and, 182–183 shifts in, 187–188 short-run, 179 cost minimization, multiple resources and, 273–274 cost shifting, 257 Costco, 223 costs accounting, 177 categories of, 178–180 corporations and, 173–175 economic, 176, 177 economic role of, 175–176 economic thinking and, 189–190 long-run, 183–186 production, 191 redistribution, 331 short-run, 180, 184 supply and, 170, 191–192 Index Council of Economic Advisers, 18 Counterproductive Legislation, 134 Countrywide, 174 Covisint, 380 Crandall, Robert W., 492 creative destruction, 41 “creative finance”, 410 Crisis of 2008, 405, 408–415, 415–416 caused, 408–415 events leading to, 406–408 Crosson, Mark, 227 crude oil, 481 market, 479–480 prices, 481 current account see also balance on current account current system, 387 customer-based discrimination, 293 customers, corporations and, 173–174 D Danko, William D., 291 David A Macpherson, 293, 466, 468, 469, 472, 473 Davis-Bacon Act, 428 Davis, Gareth, 390 Davis, Garth, 388 deadweight loss, 93, 349 caused by taxes, 93 elasticity and, 96 debt/capital ratio, 414–415 debt financing, 136 decision making, 122 collective, 126 monopoly model and, 244 oligopolistic, 250–251 see also choice; consumer choice decisions See business decisions decreasing-cost industries, 210 defense expenditures, 365 defense spending, 388 deficits See budget deficits defined-benefit plan, 443 deflation, 423–424 deforestation, 482 Dell Computers, 212, 213, 379, 380 Dell, Michael, 212, 213 Delta Airlines, 224 demand, 80 changes in, 58 collusion and, 249 international trade and, 346–348 market prices and, 68–71, 73, 74 productive resources, 278–280 supply and, 170 worker productivity and, 286 see also law of demand demand changes, market response to, 71–77 demand curve, 54 elastic and inelastic, 57–58 MRP and, 272–273 of individual, 149–152 of individual, market demand and, 152–153 of price takers, 198 productive resources, 267 demand decreases, price-taker markets and, 206–207, 208 demand elasticity deadweight loss and, 96 labor unions and, 472 subsidies and, 101 tax incidence and, 94–96 see also price elasticity of demand demand increases, price-taker markets and, 206, 207 demand schedule, 54 demand stimulus, expectations and short-run effects of, 170 demographics demand and, 61 health care and, 439–440 income inequality, 321 Social Security and demographics, 386 Denmark, 370 government size of, 370, 371 Department of Commerce, 354 Department of Housing and Urban Development (HUD), 409 deregulation, 472 derived demand, 266 differentiated products, 219 in oligopoly, 245 direct effects, 12 Direct Wage Discrimination, 292 discounting, 306 diseconomies of scale, 186–187 Disneyland, 115 division of labor, 42–43, 80 Dixit, Avinash, 251 doctoral degree, earnings and, 287 dollars see also Canadian dollar; U.S dollar doomsday forecasts incorrectness of, 478–480 reasons for, 478 Dow Jones Industrial Average, 401, 422 Dow Jones Industrials, 402, 423 Downs, Anthony, 127 dual-earner families, income inequality and, 323 dumping, 354 Duncan, Greg J., 325 Dutch auction, 229 Dutch auction system, 196 dynamic change adjustment to, 279 dynamic competition, 222–224 543 E earmarking, 133, 135 Earned Income Tax Credit, 331, 369 earning incentives, marginal tax rate and, 330 earnings differences, 457 earnings differentials, 285 education and, 287 employment discrimination and, 293–294 labor immobility and, 290, 291 nonidentical jobs and, 289–290 nonidentical workers and, 285–289 productivity and, 294–295 ratio, 458 sources of, 290–292 women and employment discrimination, 458–459 women and marital status, 459–460 worker skills and, 323–324 see also income inequality Eatwell, John, 227 eBay, 32, 54, 110, 379 economic costs accounting cost and, 177 calculation of, 176 economic Crisis of 2008 See Crisis of 2008 economic efficiency, 70–71, 106 economic growth, 42, 373 government size and, 371–373 production possibilities, 42 economic organization, 45–46 open economies, 352–353 economic pie, 44 economic profit, 176 accounting profit and, 176–177 definition of, 176–177 economic progress, 227 Economic Report of the President, 1964, 327–330, 327–328, 328, 364, 365, 366 economic role, costs, 175–176 economics, 348, 348–349 careers in, 18 employment discrimination, 292–293 experimental, 200 global warming, 488–491 positive and normative, 15 price controls, 83–90 scarcity and, 4–5 U.S educational system, 449–451 economics of health care, 433 economics of quotas, 349–351 economics of Social Security, 383 economic status, income mobility and inequality in, 324–326 economic theory, economic thinking, costs and, 189–190 544 Index economic way of thinking, 1, 8–15 about government, 139–141 pitfalls to avoid, 16–17 guideposts to, 8–15 economies of scale, 186–187 entry barriers and, 239 oligopoly and, 244–245 economizing behavior, education earnings differentials and, 287 see also U.S education educational spending, 450 cross-country comparison, 450 student performance and, 448–449 efficiency Internet improvement of, 380–381 market equilibrium and, 70–71 see also economic efficiency Egypt, 353 Ehrenberg, Ronald G., 265 Ehrlich, Paul, 482 elastic demand curves, 57–58 elasticity deadweight loss and, 96 subsidies and, 101 tax incidence and, 94–96 elasticity coefficient, 153 elasticity of demand, 472 see also price elasticity of demand elasticity of supply See price elasticity of supply elastic supply curves, 65–66 elderly population, health care and, 439–440 election, 126 emission standards, 492–493 Emmett, Ross B., 482 employee discrimination, 391 employee-employer matches, Internet and, 381 employee training, Internet and, 381–382 employee wages, union and nonunion, 473–474 employer-purchased health insurance, 442 employment labor unions and, 474 marginal productivity theory of, 274–275 employment discrimination, 289 and earnings of women, 458–459 economics of, 292–293 women, 458–459 endangered species, 37 Energy Information Administration, 481 England, 478 Enron, 174 entrepreneurial decision making, 227–230 entrepreneurs, 41, 225, 226, 228 supply and, 63 entrepreneurship, 225–227 uncertainty and, 311–313 entry barriers, 218 competitive process and, 258–259 market defects and, 252–253 market power and profit, 251–252 monopoly characteristics, 241 oligopoly and, 244, 245–247 policy alternatives, 253 reasons for, 239 environment global warming, 488–491 government ownership and, 494–495 marketlike schemes, 491–493 property rights and, 493 environmental cases, 487 Environmental Protection Agency, 492 environmental regulations, 491–493 Equal Employment Opportunity Commission, 293 equilibrium consumer, 150–151 definition of, 68 in long run, 205 resource market and, 278 see also market equilibrium equity mutual funds, 400 ethanol subsidies, 102 ethnicity, 391 Social Security and, 389–390 Europe, 354 European euro See euro European Union, 357, 358 excess burden of taxation, 93 exchange rate controls, 351 exclusionary practices, 292 expectations changes in, 60 expected future earnings, 308–309 expenditures, 386, 436 experience, consumer choice and, 147–148 experimental economics, 200 expert investors, 399–402 explicit costs, 176 external benefits, 111, 113–114, 115–116 external costs, 111–112 externalities, 111 F factor markets, 264 Fair Labor Standards Act, 88 Falaschetti, Dino, 175 fallacy of composition, 17 family status, income inequality related to, 321, 323 Fannie Mae, 318, 333, 409, 410, 416 Fed, 411–414, 414, 415, 417, 423, 430 Fed Policy, 412 federal debt See national debt Federal Deposit Insurance, 427 Federal government, 124, 125 Federal Home Loan Mortgage Corporation, 409 Federal National Mortgage Association, 409 Federal Oil Conservation Board, 478 Federal Reserve, 411, 424 Federal Trade Commission (FTC), 254 FedEx, 228 Feldstein, Martin, 389, 390 female/male (F/M) earnings, 458 Ferguson, Adam, 80 Ferris Bueller’s Day Off, Fetter, Frank Whitson, 425 few people, 324 FICO score, 410 Fifth Amendment, 140 financial bailouts, capital markets and, 311 financial crisis and recession of 2008–2009, 373 financial Crisis of 2008 See Crisis of 2008 Financial Services Roundtable Annual Housing Policy Meeting, 411 Firestone, 118 firms incentives and cooperation in, 170 number of, 248 organization of, 170 structure, size, and scope of, 227–230 types of, 172–173 see also corporations fiscal policy Great Depression, 429 see also discretionary fiscal policy Fisher, Andrew, 212 fishing rights, 493 Fitch, 415 fixed and adjustable rate mortgages, 413 fixed cost, 179 fixed resource, 270–272 “flexible standards”, 410 FloraHolland, 196 Folsom, Burton, 427, 429 Fong, Mei, 72 Food and Drug Administration, 117–118 food stamps, 101, 328, 329, 330, 331 Ford, 41, 223, 254, 267, 474 Ford, Henry, 41, 45, 297 foreclosure rate, 407, 413 foreign exchange rate see also exchange rates forests, 482, 482–483 former Soviet Union, 483 France, 340, 370, 475 government size of, 370, 371 France, tax rates in educational spending in, 450 science achievement scores in, 449 franchise, 118 Frank, Robert, 288, 291 Frankel, Jeffrey A., 353 Freddie Mac, 333, 409, 410, 416 free riders, 116, 117 Index free trade, 356 future of, 357–358 Freeman, Richard, 277 Fretwell, Holly L., 494 Friedberg, Leora, 298 Friedman, Milton, 27, 383, 419, 424, 425 Friedman, Rose, 27, 383, 419 fringe benefits, 285 Fuller, Howard, 447 Fullerton, Don, 389 future earnings, expected, 308–309 future income and costs, present value of, 305–307 future value of income, stock prices a, 397–399 G game theory, 251 Gap, The, 379 Gates, Bill, 41, 45, 117, 127, 375 gender earnings differentials and, 289 employment discrimination, 293 leisure time and, 322 Social Security and, 389–390 union membership and, 468 women’s career objectives, 460–462 women’s earnings and employment discrimination, 458–459 women’s earnings and marital status, 459–460 see also demographics General Agreement on Tariffs and Trade (GATT), 357 General Motors, 223, 254, 255, 267, 474 generational mobility, 326 geographic distribution, 377 Germany, 340, 370 educational spending in, 450 government size of, 370, 371 science achievement scores in, 449 Gill, Brian P., 454 Glass, Thomas, 389 Gleason, Jackie, 284 global financial data, 397 global trade, changing nature of, 356–357 global warming, economics of, 488–491 Godfrey, Arthur, 366 going out of business, 204 definition of, 204 losses and, 202–204 Goklany, Indur M., 483, 490, 491 Goldman Sachs, 414 Gompers, Paul, 175 goods consumer equilibrium with, 150–151 subjective value of, 14 trade and value creation, 31 Google, Inc., 229 government, 108–109, 108–110, 109–110 allocation, 51 markets and, 125–127 productive function of, 109–110 protective function of, 108–109 resource allocation by, 51 role of, 105, 487 size of, 371 government bureaucrat, incentives confronted by, 130–132 government debt, long-term growth and expenditures, 363–365 government finance, taxation and, 365–366 government grants, of monopoly power, 252 licensing, 239–240 government operations, inefficiency of, 138–139 government ownership, of resources and provision of services, 494–495 government production, supply market with, 257–258 government regulation See regulations government sector, union membership and, 468 size, 370 government spending, 123, 363, 373 by category, 124 Great Depression and, 430 taxes and, 367–368 government subsidies See subsidies “government-sponsored enterprise” (GSE), 409, 410 graduating from college, 1961–2008, 462 Graham, Ben, 394 Gramlich, Edward M., 411 Grau, Jeffrey, 376 Great Depression, 385, 419, 466 economic record of, 420–421 fiscal policy during, 429 length and severity of, 423–429 lessons from, 429–431 stock market crash and, 421–423 union membership and, 466–468 Greece government size of, 371 greenhouse gas, 489 Greenspan, Alan, 338, 411 Gregory, Anthony C., 330 gross domestic product (GDP) Great Depression and, 420 see also real GDP Grossman, David C., 16 Guatemala, 341 Guglielmo, Connie, 212 Gustman, Alan, 389 Gwartney, James, 131, 372 H H&R Block, 367 Häagen-Dazs, 219 545 Hall, Arthur, 367 Hamilton, Alexander, 352 Hardin, Garrett, 493 Hawley, 431 Hawley, Willis, 425 Hayek, F A von, 195 Hayek, Friedrich, 36, 52, 53, 81 Hayek, Friedrich A von, 213 health and retirement study, 389 health care, 365 consumer-driven, 442–444 coverage, first-dollar, 443 elderly population and, 439–440 industry, 434, 435–436 market, supply side of, 443–444 price indexes, 439 providers, out-of-state, 442 provisions, incentives for, 441 U.S crossroads of, 440–441 health care spending, 434 controlling, 441–442 healthcare subsidies, 102 health insurance catastrophic, 443 direct purchase of, 436–437 taxes and, 442 health savings accounts (HSAs), 442–443 Henderson, David R., 86, 146, 147, 227, 251, 429, 480, 481 Henry, George, 351 Hernando de Soto, 36 Hewitt, Jackson, 367 Hewlett-Packard, 212, 213 Higgs, Robert, 428, 429 high debt/income ratio of households, 415 high earnings, 324 high incomes See economic growth high school degree, earnings and, 286, 287 hiring decisions, 270 hiring practices, 292 Hirsch, Barry T., 293, 465, 466, 467, 468, 469, 472, 473, 474 Hispanics, 390 Ho, Mun S., 296 Hobbes, Thomas, Holcombe, Lora P., 118 Holcombe, Randall, 372 Holcombe, Randall G., 118, 408, 413 Holland, John H., 52, 53 Homestead Act of 1862, 333 Honda, 223 Hong Kong, 352, 353, 357, 370 government size of, 370, 371 Hooters, 293 Hoover, 426 Hoover and Roosevelt, 431 Hoover, Herbert, 425 household debt to Disposable Personal Income Ratio, 416 housing, 415–416 546 Index Housing and Urban Development (HUD), 415, 416 Housing prices, 406 housing subsidies, 329, 331 Houthakker, Hendrick S., 160 Hoxby, Caroline, 454 human capital, 266 investing in, 310 returns to, 313–314 human resources, 5, 265, 265–266 educational spending in, 450 science achievement scores in, 449 hurricanes, price ceilings and, 84–85 Hurst, Erik, 322 I IBM, 212, 229 identical products, in oligopoly, 245 IFQs, 493 in United States, 493 immobility of resources, 291 imperfection, marginal costs and benefits of, 107–108 implicit costs, 176 implicit marginal tax rates, 329, 330 import quota, 349 imports, 355–356 incentives choice and, 10 collusion and cheating, 247–248 corporations, 174 firms and, 170–172 government bureaucrat and, 130–132 health care provisions, 441 marginal tax rate and, 330 market prices and, 76–77 politician and, 129–130 property rights and, 34, 35 voters and, 127–129 incidence of tax, actual versus statutory, 93–94 elasticity and, 94–96 income, 353 consumer choice and, 147 governments versus markets, 127 see also earnings differentials; economic growth income differences See cross-country income differences income distribution, factors affecting, 320–323 income effect, 151, 167 income elasticity, 160–161 tax brackets and, 370 income inequality concluding thoughts on, 331–333 economic status, 324–326 increase in, 323–324 poverty in United States, 326–327 transfer programs, 332–333 United States, 319–320 income levels tax payments and, 369 income mobility, 324 economic status and, 324–326 income shares, of human and physical capital, 313 income tax tables, 98 income taxes, personal, 368–369, 370 Income transfers, 331, 365 see also redistribution, costs of increased demand, 470–471 increasing-cost industries, 209, 209–210 indexed equity mutual fund, 402 indexed mutual funds, advantages of, 402–403 India, 353, 357, 489 indifference curve, 163, 168 characteristics of, 164–165 consumer choice and, 163–168 defining, 163–164 indirect effects, 12 individual and market demand curves, 152 individual consumption-payment link, 125–126 individual fishing quotas, 493 individual’s demand curve See demand curve, of individual individual transferable quotas (ITQs), 493 Indonesia, 139 government control in, 139 industrial production, 1932–1936, 428 Industrial Revolution, 489 industry structure, antitrust policy and, 253–254 inefficiency bureaucratic, 138–139 rent controls and, 87 inelastic and elastic demand, 158 inelastic demand curves, 57–58 inelastic supply curves, 65–66 infant-industry argument, 352–353 inferior goods, 161 inflation, 437–439 health care, 437–439 inflationary premium, 304, 305 influence, governments versus markets, 127 influence wages, 468–469 information acquisition, 12 entry barrier regulation and, 256–257 market prices and, 76 problems, 117–118 profit opportunities through, 118–120 ingenuity, wealth creation through, 44–45 Ingrassia, Paul, 223 innovation, 41, 44, 222–224 input markets, 264 inputs, 264, 471 institutional reforms, 417 institutions, 346 intentions, outcomes and, 16–17 “interest only”, 416 interest rate policy, 411–414 interest rates, 302 determination of, 302–304 risk and, 304–305 stock prices and, 397–399 Interior Department, 478 Internal Revenue Service, 368 international economics, 337 International Monetary Fund (IMF), 371 international trade, 338, 356–357 Great Depression and, 425–426 supply and demand in, 346–348 International Trade Commission, 354 Internet, 376, 377 business efficiency and, 380–381 concluding thought on, 382 consumer markets and, 379–380 economic gains from, 376 labor markets and, 381 transaction costs, 32 use of, 376 invention, 40 invest, 301–302 investment, 40, 301 corporate, 309 human capital, 265, 310 profitability and, 307–308 investment banks, 414, 414–415 investment funds, corporations and, 173–174 investors corporate investments and, 309 ordinary versus expert, 399–402 invisible hand principle, 74–75 Iran, 352, 353 Ireland, 353, 370 government size of, 370, 371 IRS, 367 Ishii, Joy, 175 Italy, 370, 475 educational spending in, 450 government size of, 370, 371 science achievement scores in, 449 J Jackman, Michael, 146 Jagger, Mick, 18 James, LeBron, 29 James Peoples, 472 Japan, 340, 341, 342, 344, 354, 358, 223, 370 educational spending in, 450 government size of, 370, 371 science achievement scores in, 449 JCPenney and Sears, 223 Jefferson, Thomas, 362 Jencks, Christopher, 285 job-posting software, 381 job-posting Web sites, 381 Index jobs differences in, 291 earnings differentials and, 289–290 lifetime, 298 John, David C., 390 Johnson, William, 331 Johnson, William R., 293 Johnston, Brian D., 16 Joint Center for Housing Studies of Harvard University, 411 Jorgenson, Dale W., 296 JP Morgan Chase, 414 K Kahn, Lawrence M., 293, 457 Katherine Bradbury, 325 Katz, Jane, 325 Kaufman, Wallace, 478 Kennedy-Johnson, 369 Kennedy-Johnson tax cut, 368 key sectors of Internet growth, 378 Keynes, John Maynard, Keynes, John Neville, 15 Knowledge and Decisions, 30 knowledge, consumer choice and, 147–148 Korea, 354, 223 educational spending in, 450 Kroc, Ray, 41, 314 Krooss, Herman E., 428 Kyoto Protocol, 489, 490, 491 L Laband, David N., 85 labor force experience, 458 labor immobility, earnings differentials due to, 290, 291 labor market, 82 Internet and, 381 labor services, internet and, 381–382 labor union membership demographics of, 468 labor unions, 290, 465, 466 definition of, 466–468 demand elasticity and, 472 production costs and, 472–473 profitability and employment, 474 strength of, 471 substitute inputs and, 471 supply elasticity and, 473 wages and, 468–469, 473–474, 475 laboratory experiments, 14, 15 Laffer, Arthur, 97 Laffer curve, 97, 96–100 LaFranchi, Howard, 208 Lammont duPont, 428 land management, 483 Landrum, Gene N., 229 Landsburg, Steven E., 300 large-scale production, gains from, 345 Larry Page, 229 Latin America, 483 Latin-American Development and Managers Corporation, 115 Lavertu, Stephane, 454 law of comparative advantage, 42, 344 law of demand, 54 consumer choice and, 54–58 law of diminishing marginal utility, 148, 149 law of diminishing returns, 180 cost curve shape and, 182–183 short-run production and, 180–182 law of supply definition of, 64 producer choice and, 62–66 law See legal system; rule of law Lawson, Robert, 372 Lazear, Edward, 288 Leal, Don, 493 Leal, Donald R., 493, 494 Lee, Dwight, 99 left-out variable, 225–227 legal barriers to entry, 239–240 legal institutions, 41 legal structure, black markets and, 90–91 legal system, 41 legislation, voting and, 126 Leguizamon, J Sebastian, 330 Lehman Brothers, 414 leisure, 41 leisure time, 322 lending practices, 417 lessons from the Crisis, 416 level of education, 389 leverage ratio, 414 Lewin, David, 293 licensing, 239, 239–240 Liebman, Jeffrey B., 389, 390 Liebowitz, Stan J., 408, 413 life expectancy, Social Security and, 390–391 lifetime jobs, 298 Limits to Growth, The, 478 Lindbeck, Assar, 87 Lindzen, Richard, 490 Little Ice Age, 489 Liu, Liqun, 391, 401 living standards, 42–44 lobbyists, 351 Locke, John, 108, 109 logrolling, 133 long run (in production), 178 long-run average total cost curve (LRATC), 184, 185, 187 long-run costs, output and, 183–186 long-run equilibrium, 205 long-run market supply curve, 207, 207–210 long-run normal profit, 222 long-run supply, 276, 277–278 long-run time periods, 177–178 Loomis, Carol, 394 547 losses, 62, 63 definition of, 63 going out of business and, 202–204 monopolies and, 243 price takers and, 211–213 role of, 62 short-run, 203 LRAS2 Luxembourg, 353 Lynch, Merrill, 311 Lyndon Johnson’s, 328 M Macpherson, David, 294 Mae, Fannie, 333, 409, 410, 416 Magic Mound Mover, 226 majority rule, 126 majority voting, 135 Malaysia, 345, 352, 353 male earnings, 460 malinvestment, 414 Malkiel, Burton G., 403 managed equity mutual fund, 402 “managed-care movement”, 439 management incentives, in corporations, 174 marginal, 11 marginal/additional utility, 148 marginal benefits (MB), 12, 107–108, 149, 149 marginal cost (MC), 12,107–108, 179, 182 pricing, 256 short-run supply decisions and, 191 marginal decision making, 11 marginal income tax rates, 1925–1940, 426 marginal product (MP),181, 270 marginal productivity, 270 marginal productivity theory of employment, 274–275 marginal rate of substitution, 164, 168 marginal revenue (MR), 199, 202, 220, 271 marginal revenue product (MRP), 220, 270, 272–273 marginal tax rates (MTR), 97, 98, 368 implicit, 330 income inequality and, 324 marginal utility consumer choice and demand curve of individual, 149–152 consumption rate and, 148 marginal value, 56 marital status, 460 Social Security and, 389–390 women and earnings, 459–460 market defects, entry barriers and, 252–253 market demand, demand curve of individual, 152–153 market demand schedule, 54–55 market equilibrium, 68–69 efficiency and, 70–71 548 Index market for resources, 264 market order, 75–77 market organization, 45–46, 77 market power, 250 entry barriers and, 251–252 market prices, determination of, 68–71, 81 health care spending and, 441–442 invisible hand principle and, 74 market order and, 75–77 supply and demand changes, 73, 74 market process, price takers and, 212–213 market(s), 81, 105, 110–120 consumers in, 59 definition of, 68 demand and supply changes, 71–77 difficult cases for, 105 environmental regulations and, 491–493 governments and, 125–127 income inequality and, 324 natural resources and, 483 potential shortcomings of, 110–120 private ownership and, 36 public goods and, 114–117 resource allocation by, 51 market supply, 63–64 market supply schedule, 63–64 Marshall, Alfred, 66, 471 Marx, Karl, 45 mass production, 43, 186, 297 master’s degree, earnings and, 287 Maurice, Charles, 478 McClintick, David, 482 McDonald’s, 41, 118, 119, 314 McKibben, Bill, 483 McMurrer, Daniel P., 325 Meade, James E., 263 Meadows, Dennis L., 478 Meadows, Donella H., 478 means-tested income transfers, 125, 328 means-tested transfers, 138 Medicaid, 102, 328, 329, 330, 331, 365, 435, 436 medical expenses, out-of-pocket, 442 Medicare, 101, 102, 365, 374, 388, 391, 435, 436, 440 Medicare and Medicaid, 437, 439 Medicare Trustees, 440 Medieval Optimum, 489 Meiners, Roger E., 33 men, 457 leisure time of, 322 union membership and, 468 see also gender Metrick, Andrew, 175 Mexican Americans, employment discrimination of, 293 Mexico, 340, 356, 357, 358 Michael’t Sas-Rolfes, 37 Michael, Steven C., 226 microeconomics, 17 Microsoft, 229 middleman, 32 Miles, Greg, 212 millionaires, in United States, 291 minimum wage, 88, 88–90 minorities, 294 employment discrimination of, 293 Social Security and, 389–390 union membership and, 468 Mitchell, Olivia S., 293 mitigation, 490–491 Mohan-Neill, Sumaria, 226 monetary, 417 monetary and price stability, 417 money economy, consumer maximization in, 166–167 money interest, 305 money rate, 304 of interest, 304 money supply Great Depression and, 423–425 monopolistic competition, 219 monopoly, 241 characteristics of, 241 Monster.com, 381 Moody, 415 Moore, Thomas Gale, 490 Morgenson, Gretchen, 228 Morgenthau, Henry, 428 Morse, Chandler, 481 mortality rates, 389 mortgage-backed securities, 414 mortgage default rates, 407 mortgage defaults, 415–416 mortgage lending standards, 408–411 mortgages, 410, 412 motivation, market prices and, 76–77 multiple resources cost minimization and, 273–274 profit maximization and, 273 use of, 273 mutual agreement, 126 mutual funds indexed, 402–403 investment and past performance, 403 see also equity mutual funds Mystery of Capital, The, 36 N Nalebuff, Barry, 251 NASDAQ, 401 National-Defense Argument, 352 National Industrial Recovery Act (NIRA), 427, 428, 429 National Institutes of Health, 434 National Labor Relations Board, 427–428 National Park Service, 494 natural disasters, 67 price ceilings and, 84–85 natural gas, 489 natural monopoly, 254 natural resources, 6, 477, 478 availability of, 478–480 doomsday forecasts about, 478 government ownership of, 494–495 markets and, 483 proved reserves of, 480 scarcity of, 481–482 natural rights, 109 nature, elements of, 67 Neal, Derek A., 293 needs vs wants, Nelson, Fred, 37 net exports see also balance of merchandise trade Netherlands, The, 353 flower markets, 196 government size of, 371 networking, 378 Neumark, David, 89, 90 Neun, Stephen P., 152, 160 New Deal, 427, 429 New York Stock Exchange, 395 New Zealand, 370 government size of, 370, 371 Newman, Thomas B., 16 Nigeria, 139 government control in, 139 Niskanen, Jr., William A 130 No Child Left Behind Act, 453 Noel Quinton, 288 nonexcludability, 114–117, 116 nonexcludable, 114 nonhuman resources, 265–266 nonidentical jobs, earnings differentials and, 289–290 nonidentical workers, earnings differentials due to, 285–289 nonpecuniary job characteristics, 290 nonrenewable resources, 482 nonrival in consumption, 114–117 nonunion employees, wages of, 473–474 Nordhaus, William, 490 normal good, 160 normal profit rate, 177 normative economics, 15 North American Free Trade Agreement (NAFTA), 357, 358 Norway government size of, 371 nuclear power, 479 O O at Home, 228 O, the Oprah Magazine, 228 O’Rourke, P J., 136 Obama administration, 434 objective, occupations, 226 union membership and, 468 ocean fisheries, 493 Index OEC countries, educational spending in, 450 OECD countries, 373 educational spending in, 449 Office of Management and Budget, 367 oil, 478, 479, 480, 482, 489 Old Age and Survivors Insurance (OASI), 384 oligopolistic decision making, 250–251 oligopoly, 244 characteristics of, 244 price and output under, 245–247 uncertainty and, 250–251 One Man Band, 222 online market penetration, 378 open economies, performance of, 352–353 openness, 352 Opinion Research Corporation, 259 opportunity cost, 9, 28–29, 82, 345, 176, 203 of equity capital, 176 of production, 62 property rights and, 33–34 real-word decision making and, 29–30 Oprah’s Book Club, 228 ordinary investors, 399–402 Organization for Economic Cooperation and Development (OECD), 372, 450 Organization of the Petroleum Exporting Countries (OPEC), 247, 248, 249 Orwell, George, 318 outcomes, intentions and, 16–17 out-of-pocket health care expenses, 437 out-of-pocket medical expenses, 442 out-of-pocket payments, 438 output, 42–44, 220–222, 221 long-run costs and, 183–186 monopoly and, 241–244 oligopoly and, 245–247 price-taker markets and, 205–211 short-run, 180 output level, profit maximization and, 202 overfishing, 493 Owyang, Michael, 298 P Pakistan, 353 partnership, 172–173 patents, 240 Paulson, Henry, 414 payroll taxes, 366, 384, 386 Peden, Edgar, 373 perfect information, consumer choice and, 147–148 perfection, 107 marginal costs and benefits of, 107–108 perfectly elastic, 156 perfectly inelastic, 155 personal income tax brackets, 370 personal income taxes, 368–369, 370 personal retirement accounts (PRAs), 392 Bolivia, 392 Chile, 392 Columbia, 392 Germany, 392 Mexico, 392 Peru, 392 United Kingdom, 392 petroleum, 478, 479 physical capital, 265 returns to, 313–314 physical fallacy, 30 physical resources, Pixar, 222 Poland science achievement scores in, 449 policies, 417 entry barriers and, 253 environment and property rights, 493 see also fiscal policy; monetary policy political competition, 126 political contributions, 135, 351 political decision making, 127–130 political disruptions, 67 political planning, 46 political process bureaucratic inefficiency, 138–139 government operations, inefficiency of, 138–139 inefficiency, bureaucratic, 138–139 productive, 130–132 rent seeking, 136–138 shortsightedness effect, 136 special-interest effect, 132–136 unproductive, 132–139 political rationing, 441 of health care spending, 441–442 politician, incentives confronted by, 129–130 politics of trade restrictions, 354–355 polluters, 488 pollution, 492, 493 pollution charges or taxes, 491–492 pollution-control authority, 492 pollution tax, 491 population, 386 see also demographics pork-barrel legislation, 133 portfolio, 399 Portugal government size of, 371 positive economics, 15 positive rate of time preference, 302 post hoc propter ergo hoc, 17 pound See British pound poverty scarcity and, Social Security and, 388–389 in United States, 326–327 549 poverty rate, 329 calculation of, 328 transfer payments and, 327–330 poverty threshold income level, 326 Powell, Benjamin, 408, 413 predictive value, 14 preferences, changes in, 61 present value (PV), 305 future income and costs, 305–307 profitability and investment, 307–308 President’s Council of Economic Advisers, 195 Pretty Woman, 71 price ceilings impact of, 83–86 rent controls, 85–86 price changes consumer choice and, 151 demand curves and, 57–58 demand elasticity and, 159–160 income and substitution effects of, 167–168 supply curves and, 65–66 price controls, 83, 441 economics of, 83–90 Great Depression and, 427–429 health care spending and, 441–442 price discrimination, 232–235, 241 price/earnings (P/E) ratio, 398, 399 price elasticity of demand, 153, 156 consumer choice and, 153–159 graphic representation of, 155–156 price changes and, 159–160 products and, 156–157 time and, 158–159 variations in, 157–158 price elasticity of supply, 161 price floors, 87 impact of, 87–88 minimum wage, 88–90 PriceGrabber, 32 price regulation, 255–256 price(s), 220–222, 231, 397–399 changes in, 59 collusion and, 248 coordinating function of, 280 monopoly and, 241–244 oligopoly and, 245–247 price-taker markets and, 205–211 productive resources and, 278–280 proved reserves and, 480 resource demand and, 270 see also market prices, determination of; resource prices; stock prices price searcher, 197, 220, 221 definition of, 197 price takers and, 196–197 price-searcher markets, 218, 231 price-taker markets, 231 price takers, 196 competition and, 213–214 550 Index price takers (cont.) definition of, 196 demand curve, 198 market characteristics, 197 output and price, 205–211 price searchers and, 196–197 profit maximization by, 198–204 profits and losses, 211–213 short-run market supply curve, 205–211 short-run supply curve, 204–211 primary market, 395 prime borrowers, 413 principal-agent problems, 171 Principles of Economics, 66 private ownership, 32 importance of, 32–36 private-property rights, 33, 37, 77, 488 private-sector action, 126 private sector, union membership and, 468 producer benefits from exports, 346 producer choice, law of supply and, 62–66 producer surplus, 64, 65 product demand, resource demand and, 269 product markets resource markets and, 81–82 production, 41, 345 short-run, 180–182 substitution in, 267 production costs, 191 labor unions and, 472–473 production possibilities curve, 36–42 production possibilities of United States and Japan, 343 production process, time dimension of, 191 productive resources demand for, 266–267, 278–280 human and nonhuman resources, 265–266 marginal productivity and hiring decisions, 270 multiple, 273, 273–274 prices, 278–280 supply of, 275, 278–280 productivity earnings and, 294–295 “productivity-adjusted” minority/white wage ratio, 293 products consumer budgets and, 157 oligopoly and, 245 price changes and demand elasticities, 159–160 price elasticity of demand and, 156–157 professional degrees, 461 professional economist, 18 profitability labor unions and, 474 present value and, 307–308 profit maximization monopoly and, 242 multiple resources and, 273 numeric example of, 201–202 output level, 202 by price takers, 198–204 profit opportunity, information as, 118–120 profits, 62 calculations of, 176 definition of, 62 economic versus accounting, 176–177 entry barriers and, 251–252 price takers and, 211–213 role of, 62 uncertainty and, 311–313 Program of International Student Assessment, 448 progressive tax, 96 prohibition era, 90 property damage, 35–36 property rights, 32, 488 competition and, 77 environmental policy and, 493 importance of, 32–36 of shareholders, 417 proportional tax, 96 proprietorship, 172–173 protectionist, 358 proved reserves, 480 of natural resources, 480 public-choice analysis, 127, 135 public goods, 114 public-sector action, 126 pure competition, 197 pure interest, 305 Q quality rent controls and, 86 quantity demanded changes in, 58 market prices and, 73, 74 responsiveness of, 57–58 quantity supplied changes in, 66–67 market prices and, 73, 74 responsiveness of, 65–66 Qwest, 174 R race earnings differentials and, 289 Social security and, 389–390 union membership and, 468 random walk theory, 399 rational ignorance effect, 128 rationing, rent controls and, 87 Reagan, 368 Reagan, Ronald, 18 real earnings, 285 real rate of interest, 304 real-world subsidy, 101–102 redistribution, costs of, 331 Reedy Creek Improvement District, 115–116 Reedy Creek Ranch Corporation, 115 regime uncertainty, 428 regional trade agreements, 357 regressive tax, 96 regulations, 416–417 cost curves and, 189 entry barriers and, 255–256, 256–257 environment and, 488 environmental, 491–493 price, 255–256 problems with, 256–257 transfer programs and, 333 reimbursement, through Medicare, 443 Reinhardt, Uwe E., 435 related goods, 59 renewable resources, 482 rent controls, 85–86 rent seeking, 136–138, 351, 252 repeat-purchase items, 117 representative democracy, 127, 135 residual claimants, 170 resource allocation, 51 governments, 51 markets, 51 resource control, 240 resource market, 82, 264, 265 equilibrium in, 278 product markets and, 81–82 resource mobility, 276 resource prices, 66, 82, 188–189, 481, 482 coordinating function of, 280 resource demand and, 270 resources, 5, 51, 477 government ownership of, 494–495 property rights and, 33–34 trade and value creation, 31 see also natural resources; productive resources resource scarcity See scarcity resource supply, 275 responsiveness quantity demanded, 57–58 quantity supplied, 65–66 retirement benefits, 386, 388 retirement, of baby boomers, 387 Rettenmaier, Andrew J., 391 “reverse auctions”, 380 Ricardo, David, 42, 425 Richard and Maurice McDonald, 41 right-to-work laws, 468, 469 risk interest rates and, 304–305 premium, 305 Robbins, Lionel, Romer, David, 353 Index Roosevelt administration, 426 Roosevelt, Franklin Delano, 427–429 Rosen, Sherwin, 288 Ross, Karen E., 454 Rowley, Charles K., 136 Ruthen, Russell, 52 S S&P 212, 398, 401, 402 Sabia, Joseph J., 90 Sachs, Jeffrey D., 353 Saloner, Garth, 379 Samaritan’s dilemma, 329 Samuelson, Robert J., 429 San Francisco, school choice in, 455 Santerre, Rexford E., 152, 160 Sass, Tim R., 454 SAT scores, 448, 454 Saudi Arabia, 340, 341 saving, 301 Sawhill, Isabel V., 325 scarcity, 5, 7–8 aggregate consumption-payment link, 126 natural resources, 481–482 opportunity cost and, 28 shortage and, 85 trade-offs and, choice and, 5–6 poverty and, 6–7 Scherer, Peter D., 293 school choice education quality and, 454 programs for, 453–454 San Francisco, 455 students and, 453 school lunch subsidies, 330 schools See charter schools; U.S education school vouchers, 452–453 Schultz, T W., 265 Schumacher, Edward J., 465 Schumpeter, Joseph, 41, 223, 311, 313 Schwartz, Anna, 425 Schwartz, Anna J 424 Schwarzenegger, Arnold, 18 science achievement scores, 449 scientific thinking, 14 Scully, Gerald, 373 secondary effects, 12 secondary markets, 395 secondary mortgage market, 409 Secretary of the Interior, 478 sectors union membership and, 468 unionized, 474 Securities and Exchange Commission (SEC), 414 security rating, 414 Sedjo, Roger A., 483 Seldon, Arthur, 122 self-interest, 76 self-ownership, 109 sellers, 92 Sergey Brin, 229 services government provision of, 494–495 subjective value of, 14 sex, race, occupation, and sector, 468 Shannon, Fred A., 333 Sheflin, Neil, 466 Sherman Antitrust Act, 254 shirking, 171 Shlaes, Amity, 429 shortages, 83, 85, 86 short run (in production), 178 short-run cost curves, characteristics of, 179 short-run costs, 180, 184 short-run cost schedules, 183 short-run demand schedule, 271 short-run losses, 203 short-run market supply curve, 205–211 short-run output, 180 short-run production, diminishing returns and, 180–182 short-run supply, 276–277 short-run supply curve, 204–211 short-run supply decisions, marginal cost and, 191 short-run time periods, 177–178 shortsightedness effect, 136 short-term interest rates, 412 shutdown, 203 Sidgwick, Harry, 122 Siegel, Jeremy J., 402 Sierra Leone, 352, 353 Simon, Julian, 482, 483 Simon, Julian L., 481 Sinclair, Tara, 298 Singapore, 352, 353, 357, 370 government size of, 370, 371 single-parent families, income inequality and, 323 skills, income inequality and, 323–324 Skipton, Charles, 352, 353 Smiley, Gene, 429 Smith, 75 Smith, Adam, 4, 42, 74, 75, 80, 81, 214, 425 Smith, Fred, 228 Smith, James P., 459 Smith, Robert S., 265 Smithson, Charles, 478 Smith, Tim, 85 Smith, Vernon, 200 Smoot, Reed, 425, 431 Smoot-Hawley trade bill, 425–426 Snell, Lisa, 455 Snow, Arthur, 331 Sobel, Russell S., 99, 227, 330 551 Social Security, 124, 365, 374, 384 poverty and, 388–389 problems of, 385–387, 387–388 race and gender, 389–390 retirement program, 384 spousal benefit provision, 389 structure of, 391–392 taxes, 384, 388 Social Security Administration (SSA), 328, 386, 387, 389 Social Security Trust Fund (SSTF), 387 baby boomers and, 387 bonds, 387 socialism, 46 Sommers, Paul M., 288 sound, 346 sources of energy, 478 sources of water, 484 South Korea, 340, 345, 370 government size of, 370, 371 Soviet bloc, 139 government control in, 139 Sowell, Thomas, 6, 30, 169, 408 Spain government size of, 371 special-interest effect, 132–136 special-interest issue, 133, 135 special interests, 354–355 government regulation and, 257 specialization, 42–43 gains from, 341–342 specialized skills, 285 Standard and Poors, 415 212 Index (S&P 212), 396 Stanislaw, Joseph, 75 Stanley, Thomas J., 291 state and local governments, 124, 125 state residents, health care providers and, 442 Statistical Abstract of the United States, 54 statutory incidence, 91 of tax, 93–94 Steinmeier Thomas, 389 Stephenson, E Frank, 34 Steven Jobs (Apple Computer), 41 Stevenson, Betsey, 381 Stigler, George J., 238, 258 Stiroh, Kevin J., 294, 296 stockholder alertness, 396 stock issues, 395 stock market crash (1929), 421–423 stock market performance, 397 historical record of, 396–397 stock market, 395, 399, 422 economic functions of, 395–396 interest rates and, 397–399 ordinary versus expert investors, 399–402 stock prices and, 397–399 value of future income, 397–399 stock options, 396 552 Index stock prices, 397–399, 408 stocks riskier, 402 riskiness of, 401 Stoll, John D., 223 strike, 469 Stroup, Richard L., 99 student choices, in failing schools, 453 student performance, educational spending and, 448–449 subjective, subprime loans, 410 subprime mortgages, 411 subsidies, 134 cost of, 101 elasticity and, 101 impact of, 100–102 substitute inputs labor unions and, 471 supply elasticity of, 473 substitutes, 54, 57, 73, 471 availability of, 157 substitution, 147 consumption in, 267–268 effect, 151, 167 indifference curves and, 164 production, 267 sugar growers, 134 Summers, Lawrence, 75 Sun Microsystems, 380 sunk costs, 190–191 supply, 80 changes in, 66–67 costs and, 170, 191–192 demand and, 170 entrepreneurs and, 63 health care market and, 443–444 international trade and, 346–348 market prices and, 68–71, 73, 74 productive resources, 275, 278–280 rent controls and, 86 worker productivity and, 286 see also law of supply; money supply supply changes, market response to, 71–77 supply curve, 64 elastic and inelastic, 65–66 short-run, 204–211 supply elasticity deadweight loss and, 96 subsidies and, 101 substitute inputs and, 473 tax incidence and, 94 time and, 210–211 see also price elasticity of supply supply market, government production with, 257–258 supply restrictions, 469–470 surplus, 87 see also budget surplus Surplus Trading Corp., 226 Sweden, 370 educational spending in, 450 government size of, 370, 371 Syria, 139, 353 government control in, 139 Syrus, Publilius, 146, 147 T Taft-Hartley Act, 468 Taiwan, 345, 353 Tanner, Michael, 433 Tanzania, 353 target, 223 tariffs, 348, 348–349, 351, 425–426 tastes, changes in, 61 tax base, 92 taxes, 67, 91–96 cost curves and, 189 Earned Income Tax Credit, 331 government finance and, 365–366 government spending and, 367–368 Great Depression and, 426 health insurance and, 442 income growth and personal income tax brackets, 370 income levels and, 369 personal income tax, 368–369 types of, 366–367 see also future taxes; Social Security, taxes tax imposed on sellers, 92 tax incidence, 91 actual versus statutory, 93–94 elasticity and, 94–96 tax rates, 92, 96–100 income inequality and, 324 tax revenues, 96–100 Taylor, Lester D., 160 team production, 171 teamsters, 472 technological change, 190 technology, 40, 66–67, 483 cost curves and, 189 proved reserves and, 480 temperature increases See global warming templeton growth, 403 Thailand, 370 government size of, 370, 371 theories, predictive value of, 14 Theory of Moral Sentiments, The, third-party payments, for health care, 437–439 timber, 482 time price elasticity of demand and, 158–159 production process and, 191 resource demand and, 268 resource supply and, 276 supply elasticity and, 210–211 time costs, consumer choice and, 151–152 time periods, short-run and long-run, 177–178 Timpane, P Michael, 454 tin ore, 480 Tokarski, Joseph, 226 Tollison, Robert, 127 Tollison, Robert D., 136 total cost, 176, 179 total expenditures/revenues, price changes and demand elasticities, 159–160 total fixed cost (TFC), 178, 179 total product, 180–181 total revenue/total cost approach, 202 total value, 56 total variable cost (TVC), 178, 179, 182 tournament pay, 288, 289 Toyota, 223 tradable permits, 492–493 trade, 42–44, 341–342 value creation through, 30–32 see also international trade trade barriers, 355–356 artificial, 254–255 transaction costs, 31–32 trade fallacies, 355–356 trade-offs, 5, 8, 108 trade openness, 353 trade restriction, 13, 14, 348, 351 reasons for, 351 trade sector, of United States, 339–340 trading, 81 votes, 134 trading partners, of United States, 340 tragedy of the commons, 493 training, Internet and, 381–382 transaction costs, 31–32, 378 transfer benefits, 330 transfer payments, 124 growth of government, 125 poverty rate and, 327–330 transfer programs, 332–333 transitional gains trap, 332 transportation costs, 345 Tregarthen, Suzanne, 61 Triple-A rating, 415 Troy, Leo, 466 Tucker, William, 86 Tullock, Gordon, 122, 127, 136, 332, 333 Turk, Mike, 226 Twentieth Century Growth, 403 U U.S automobile industry, 254 U.S Census Bureau, 364, 378, 379, 380 U.S Congress, 126 U.S Constitution, 140, 363 U.S Declaration of Independence, 109 U.S Department of Commerce, 364 U.S Department of Education, 462 U.S Department of Justice, 254 Index U.S Department of Labor, 89 U.S education, 448 competition and consumer choice, 452–454 economics and, 449–451 spending and student performance, 448–449 structural change in, 454 U.S Geological Survey, 481, 482 U.S government, size and growth of, 123–125 U.S House of Representatives, 328 U.S states, labor unions and, 469 U.S tariff code, 355 U.S trade, 358 U.S Treasury, 494 U.S Treasury bills, 397 Ujifusa, Grant, 126 unalienable rights, 109 uncertainty, 428 in business decisions, 191 entrepreneurship and profit, 311–313 Great Depression and, 427–429 oligopoly and, 250–251 Underwriters Laboratories, Inc (UL), 118, 119, 120 unemployment automation and, 297 benefits, 124 unemployment rate Great Depression and, 420 minimum wage and, 89 unfunded liabilities, 391 unintended consequences, 13 union-management bargaining process, 468 unions See labor unions union-sponsored promotional campaigns, 470 unitary elasticity, 154 United Auto Workers (UAW), 267, 474 United Kingdom, 340, 370 educational spending in, 450 government size of, 370, 371 science achievement scores in, 449 United Nations, 484 United States, 102, 339–340, 341, 342, 344, 348, 350, 352, 357, 358, 478, 483, 489 educational spending, 450 government size, 370, 371 imposes quotas, 349–350 income inequality in, 319–320 millionaires in, 291 personal income tax in, 96 poverty in, 326–327 productivity and earnings, 296 science achievement scores in, 449 subsidy programs in, 101 University of California, 86 user charges, 131 utility, 10, 147 V value creation, through trade, 30–32 value marginal product (VMP), 271 Van Wagoner’s Emerging Growth, 403 variable cost, 179 variable rate mortgages, 416 variable resource, 270–272 Venezuela, 340, 341 Vergano, Dan, 484 voluntary exchange, 30–31 voters, 126, 127 distribution of benefits and costs among, 132 incentives confronted by, 127–129 vouchers, 452–453 Vroman, Wayne G., 466 W wage differentials See earnings differentials wage rates, 470 worker productivity and, 286 wages, 465 labor unions and, 468–469, 475 union and nonunion employees, 473–474 see also earnings differentials wages of all workers, 475 wages of Americans, 356 Wagner Act, 427 Wagner, Richard, 131 Wall Street (1987), 31 Wallison, Peter J., 405, 408, 409 Wal-Mart, 213, 223, 314 Walsh, Tom, 223 Walt Disney World, 115–116, 116 Walton, Sam, 314 Wang, Zijun, 391, 401 wants vs needs, war, 67 “War on Poverty”, 328 Ward, Michael P., 459 Warner, Andrew, 353 Wascher, William, 89, 90 water, 482 water markets, 484–485 wealth, 31 wealth creation, ingenuity and, 44–45 Web sites, number of, 377 Weidenbaum, Murray L., 354 welfare, 124 Wendy, 118 whale oil, 478 White, Lawrence H., 408 whites, union membership and, 468 Wicksell, Knut, 131 Wildavsky, Aaron, 487, 491 Wildavsky, Adam, 487 Will, George F., 223 William “Bill” Gates III, 229 Winfrey, Oprah, 228 Witte, John, 454 Wolf, Charles, 105 Wolf, Jr., Charles, 122 women, 457, 458, 461, 462 career objectives of, 460–462 earnings and employment discrimination, 458–459 earnings and marital status, 459–460 earnings differentials and, 289 employment discrimination of, 293 leisure time of, 322 Social Security and, 389–390 union membership and, 468 workforce discrimination, 391 see also gender wood, 478, 482 worker preferences, 289 worker productivity, 285 workers differences in, 291 earnings differentials and, 285–289 worker skills, income inequality and, 323–324 workers per Social Security beneficiary, 385 workforce discrimination, 391 labor unions and, 466–468 workforce share of, 466–468 working married women, Social Security and, 389–390 Works Progress Administration (WPA), 428 WorldatWork, 381 World Bank, 353 World Trade Organization (WTO), 354, 357 World War I, 364 World War II, 364, 385 Y Yandle, Bruce, 33 Yellowstone Park, 494 yen See Japanese yen Yergen, Daniel, 75 Young, David, 226 Z Zimmer, Ron, 454 553 17 Adam Smith (1723–1790) Smith’s book An Inquiry into the Nature and Causes of the Wealth of Nations provided the first comprehensive analysis of wealth and prosperity and introduced “the invisible hand” principle It also explained that the wealth of a nation was determined by its production of goods and services, not by its gold and silver © Hulton-Deutsch Collection / Corbis 1817 David Ricardo (1772–1823) In his book On the Principles of Political Economy and Taxation, Ricardo developed the law of comparative advantage and used it to explain why trade leads to mutual gains 18 1871 © Bettmann / Corbis William Stanley Jevons (1835–1882) Along with Carl Menger and Leon Walras, Jevons (in The Theory of Political Economy) introduced (1) the idea that the value of goods is determined subjectively rather than by the labor required for production, and (2) the law of diminishing marginal utility Independently, the same concepts were developed by Menger in Grundsätze (1871) and Walras in Elements of Pure Economics (1874) These two concepts are still an integral part of modern analysis Alfred Marshall (1842–1924) In his book The Principles of Economics, Marshall introduced and developed many of the key concepts of modern microeconomics, including concepts like supply and demand, equilibrium, short run and long run, elasticity, and consumer and producer surplus The book went through eight editions between 1890 and 1920 In his book The General Theory of Employment, Interest, and Money, Keynes developed the framework for modern macroeconomics He also developed an explanation for the widespread unemployment of the Great Depression, and he elevated the importance of fiscal policy © Bettmann / Corbis Friedrich von Hayek (1899–1992) 1940 19 John Maynard Keynes (1883–1946) In two vitally important publications, The Road to Serfdom (1944) and “The Use of Knowledge in Society,” an article in the American Economic Review in 1945, Hayek explained the role of knowledge in economics, enhanced our understanding of the market process, and highlighted the fatal defects of centrally planned economies © Hulton-Deutsch Collection / Corbis 1960s and 1970s Milton Friedman (1912–2006) Friedman’s work elevated the importance of monetary policy and convinced many that monetary instability was the major cause of both business fluctuations and inflation His book A Monetary History of the United States, 1867-1960 (with Anna Schwartz) was a particularly important publication © Bettmann / Corbis 1970s and 1980s Robert Lucas (1937– ) The role people’s expectations play in the macroeconomy dramatically altered prior economic analysis Although several economists made major contributions in this area, Lucas is generally recognized as the leading contributor © Ralf-Finn Hestoft / Corbis ... 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