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(BQ) Part 2 book Principles of economics has contents: Aggregate demand and aggregate supply, six debates over macroeconomic policy, a macroeconomic theory of the open economy, money growth and inflation, the monetary system, unemployment, measuring the cost of living,...and other contents.
www.downloadslide.com Part VI The Economics of Labor Markets Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Chapter 18 The Markets for the Factors of Production W hen you finish school, your income will be determined largely by what kind of job you take If you become a computer programmer, you will earn more than if you become a gas station attendant This fact is not surprising, but it is not obvious why it is true No law requires that computer programmers be paid more than gas station attendants No ethical principle says that programmers are more deserving What then determines which job will pay you the higher wage? Your income, of course, is a small piece of a larger economic picture In 2012, the total income of all U.S residents was about $15 trillion People earned this income in various ways Workers earned about two-thirds of it in the form of wages and fringe benefits The rest went to landowners and to the owners of capital—the economy’s stock of equipment and structures—in the form of rent, profit, and interest What determines how much goes to workers? To landowners? To the owners of capital? Why some workers earn higher wages than others, some landowners higher rental income than others, and 373 Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com 374 PART VI THE ECONOMICS OF LABOR MARKETS factors of production the inputs used to produce goods and services some capital owners greater profit than others? Why, in particular, computer programmers earn more than gas station attendants? The answers to these questions, like most in economics, hinge on supply and demand The supply and demand for labor, land, and capital determine the prices paid to workers, landowners, and capital owners To understand why some people have higher incomes than others, therefore, we need to look more deeply at the markets for the services they provide That is our job in this and the next two chapters This chapter provides the basic theory for the analysis of factor markets As you may recall from Chapter 2, the factors of production are the inputs used to produce goods and services Labor, land, and capital are the three most important factors of production When a computer firm produces a new software program, it uses programmers’ time (labor), the physical space on which its offices are located (land), and an office building and computer equipment (capital) Similarly, when a gas station sells gas, it uses attendants’ time (labor), the physical space (land), and the gas tanks and pumps (capital) In many ways factor markets resemble the markets for goods and services we analyzed in previous chapters, but they are different in one important way: The demand for a factor of production is a derived demand That is, a firm’s demand for a factor of production is derived from its decision to supply a good in another market The demand for computer programmers is inseparably linked to the supply of computer software, and the demand for gas station attendants is inseparably linked to the supply of gasoline In this chapter, we analyze factor demand by considering how a competitive, profit-maximizing firm decides how much of any factor to buy We begin our analysis by examining the demand for labor Labor is the most important factor of production, because workers receive most of the total income earned in the U.S economy Later in the chapter, we will see that our analysis of the labor market also applies to the markets for the other factors of production The basic theory of factor markets developed in this chapter takes a large step toward explaining how the income of the U.S economy is distributed among workers, landowners, and owners of capital Chapter 19 builds on this analysis to examine in more detail why some workers earn more than others Chapter 20 examines how much income inequality results from the functioning of factor markets and then considers what role the government should and does play in altering the income distribution 18-1 The Demand for Labor Labor markets, like other markets in the economy, are governed by the forces of supply and demand This is illustrated in Figure In panel (a), the supply and demand for apples determine the price of apples In panel (b), the supply and demand for apple pickers determine the price, or wage, of apple pickers As we have already noted, labor markets are different from most other markets because labor demand is a derived demand Most labor services, rather than being final goods ready to be enjoyed by consumers, are inputs into the production of other goods To understand labor demand, we need to focus on the firms that hire the labor and use it to produce goods for sale By examining the link between the production of goods and the demand for labor to make those goods, we gain insight into the determination of equilibrium wages Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION FIGURE The basic tools of supply and demand apply to goods and to labor services Panel (a) shows how the supply and demand for apples determine the price of apples Panel (b) shows how the supply and demand for apple pickers determine the wage of apple pickers (a) The Market for Apples The Versatility of Supply and Demand (b) The Market for Apple Pickers Price of Apples Supply P Wage of Apple Pickers Supply W Demand Demand Q Quantity of Apples 375 L Quantity of Apple Pickers 18-1a The Competitive Profit-Maximizing Firm Let’s look at how a typical firm, such as an apple producer, decides what quantity of labor to demand The firm owns an apple orchard and each week must decide how many apple pickers to hire to harvest its crop After the firm makes its hiring decision, the workers pick as many apples as they can The firm then sells the apples, pays the workers, and keeps what is left as profit We make two assumptions about our firm First, we assume that our firm is competitive both in the market for apples (where the firm is a seller) and in the market for apple pickers (where the firm is a buyer) A competitive firm is a price taker Because there are many other firms selling apples and hiring apple pickers, a single firm has little influence over the price it gets for apples or the wage it pays apple pickers The firm takes the price and the wage as given by market conditions It only has to decide how many apples to sell and how many workers to hire Second, we assume that the firm is profit maximizing Thus, the firm does not directly care about the number of workers it has or the number of apples it produces It cares only about profit, which equals the total revenue from the sale of apples minus the total cost of producing them The firm’s supply of apples and its demand for workers are derived from its primary goal of maximizing profit 18-1b The Production Function and the Marginal Product of Labor To make its hiring decision, the firm must consider how the size of its workforce affects the amount of output produced In other words, it must consider how the number of apple pickers affects the quantity of apples it can harvest and sell Table gives a numerical example In the first column is the number of workers In the second column is the quantity of apples the workers harvest each week Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com 376 PART VI THE ECONOMICS OF LABOR MARKETS Table How the Competitive Firm Decides How Much Labor to Hire Labor L Output Q workers bushels 100 180 240 280 300 production function the relationship between the quantity of inputs used to make a good and the quantity of output of that good marginal product of labor the increase in the amount of output from an additional unit of labor diminishing marginal product the property whereby the marginal product of an input declines as the quantity of the input increases Marginal Product of Labor MPL = ΔQ / ΔL Value of the Marginal Product of Labor VMPL = P × MPL Wage W Marginal Profit ΔProfit = VMPL − W 100 bushels $1,000 $500 $500 80 800 500 300 60 600 500 100 40 400 500 −100 20 200 500 −300 These two columns of numbers describe the firm’s ability to produce Recall that economists use the term production function to describe the relationship between the quantity of inputs used in production and the quantity of output from production Here the “input” is the apple pickers and the “output” is the apples The other inputs—the trees themselves, the land, the firm’s trucks and tractors, and so on—are held fixed for now This firm’s production function shows that if the firm hires worker, that worker will pick 100 bushels of apples per week If the firm hires workers, the workers together will pick 180 bushels per week And so on Figure graphs the data on labor and output presented in Table The number of workers is on the horizontal axis, and the amount of output is on the vertical axis This figure illustrates the production function One of the Ten Principles of Economics introduced in Chapter is that rational people think at the margin This idea is the key to understanding how firms decide what quantity of labor to hire To take a step toward this decision, the third column in Table gives the marginal product of labor, the increase in the amount of output from an additional unit of labor When the firm increases the number of workers from to 2, for example, the amount of apples produced rises from 100 to 180 bushels Therefore, the marginal product of the second worker is 80 bushels Notice that as the number of workers increases, the marginal product of labor declines That is, the production process exhibits diminishing marginal product At first, when only a few workers are hired, they can pick the low-hanging fruit As the number of workers increases, additional workers have to climb higher up the ladders to find apples to pick Hence, as more and more workers are hired, each additional worker contributes less to the production of apples For this reason, the production function in Figure becomes flatter as the number of workers rises Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION FIGURE Quantity of Apples Production function 300 280 240 180 100 377 The Production Function The production function shows how an input into production (apple pickers) influences the output from production (apples) As the quantity of the input increases, the production function gets flatter, reflecting the property of diminishing marginal product Quantity of Apple Pickers 18-1c The Value of the Marginal Product and the Demand for Labor Our profit-maximizing firm is concerned not about apples themselves but rather about the money it can make by producing and selling them As a result, when deciding how many workers to hire to pick apples, the firm considers how much profit each worker would bring in Because profit is total revenue minus total cost, the profit from an additional worker is the worker’s contribution to revenue minus the worker’s wage To find the worker’s contribution to revenue, we must convert the marginal product of labor (which is measured in bushels of apples) into the value of the marginal product (which is measured in dollars) We this using the price of apples To continue our example, if a bushel of apples sells for $10 and if an additional worker produces 80 bushels of apples, then the worker produces $800 of revenue The value of the marginal product of any input is the marginal product of that input multiplied by the market price of the output The fourth column in Table shows the value of the marginal product of labor in our example, assuming the price of apples is $10 per bushel Because the market price is constant for a competitive firm while the marginal product declines with more workers, the value of the marginal product diminishes as the number of workers rises Economists sometimes call this column of numbers the firm’s marginal revenue product: It is the extra revenue the firm gets from hiring an additional unit of a factor of production Now consider how many workers the firm will hire Suppose that the market wage for apple pickers is $500 per week In this case, as you can see in Table 1, the first worker that the firm hires is profitable: The first worker yields $1,000 in revenue, or $500 in profit Similarly, the second worker yields $800 in additional revenue, or $300 in profit The third worker produces $600 in additional revenue, value of the marginal product the marginal product of an input times the price of the output Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com 378 PART VI THE ECONOMICS OF LABOR MARKETS or $100 in profit After the third worker, however, hiring workers is unprofitable The fourth worker would yield only $400 of additional revenue Because the worker’s wage is $500, hiring the fourth worker would mean a $100 reduction in profit Thus, the firm hires only three workers It is instructive to consider the firm’s decision graphically Figure graphs the value of the marginal product This curve slopes downward because the marginal product of labor diminishes as the number of workers rises The figure also includes a horizontal line at the market wage To maximize profit, the firm hires workers up to the point where these two curves cross Below this level of employment, the value of the marginal product exceeds the wage, so hiring another worker would increase profit Above this level of employment, the value of the marginal product is less than the wage, so the marginal worker is unprofitable Thus, a competitive, profit-maximizing firm hires workers up to the point at which the value of the marginal product of labor equals the wage Having explained the profit-maximizing hiring strategy for a competitive firm, we can now offer a theory of labor demand Recall that a firm’s labor-demand curve tells us the quantity of labor that a firm demands at any given wage We have just seen in Figure that the firm makes that decision by choosing the quantity of labor at which the value of the marginal product equals the wage As a result, the value-of-marginal-product curve is the labor-demand curve for a competitive, profit-maximizing firm 18-1d What Causes the Labor-Demand Curve to Shift? We now understand that the labor-demand curve reflects the value of the marginal product of labor With this insight in mind, let’s consider a few of the things that might cause the labor-demand curve to shift The Output Price The value of the marginal product is marginal product times the price of the firm’s output Thus, when the output price changes, the value of the marginal product changes, and the labor-demand curve shifts An increase in FIGURE The Value of the Marginal Product of Labor This figure shows how the value of the marginal product (the marginal product times the price of the output) depends on the number of workers The curve slopes downward because of diminishing marginal product For a competitive, profit-maximizing firm, this value-of-marginal-product curve is also the firm’s labor-demand curve Value of the Marginal Product Market wage Value of marginal product (demand curve for labor) Profit-maximizing quantity Quantity of Apple Pickers Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION FYI I Input Demand and Output Supply: Two Sides of the Same Coin n Chapter 14, we saw how a competitive, profit-maximizing firm decides how much of its output to sell: It chooses the quantity of output at which the price of the good equals the marginal cost of production We have just seen how such a firm decides how much labor to hire: It chooses the quantity of labor at which the wage equals the value of the marginal product Because the production function links the quantity of inputs to the quantity of output, you should not be surprised to learn that the firm’s decision about input demand is closely linked to its decision about output supply In fact, these two decisions are two sides of the same coin To see this relationship more fully, let’s consider how the marginal product of labor (MPL) and marginal cost (MC) are related Suppose an additional worker costs $500 and has a marginal product of 50 bushels of apples In this case, producing 50 more bushels costs $500; the marginal cost of a bushel is $500 / 50, or $10 More generally, if W is the wage, and an extra unit of labor produces MPL units of output, then the marginal cost of a unit of output is MC = W /MPL This analysis shows that diminishing marginal product is closely related to increasing marginal cost When our apple orchard grows crowded with workers, each additional worker adds less to the production of apples (MPL falls) Similarly, when the apple firm is producing a large quantity of apples, the orchard is already crowded with workers, so it is more costly to produce an additional bushel of apples (MC rises) Now consider our criterion for profit maximization We determined earlier that a profit-maximizing firm chooses the quantity of labor so that the value of the marginal product (P × MPL) equals the wage (W ) We can write this mathematically as P × MPL = W If we divide both sides of this equation by MPL, we obtain P = W /MPL We just noted that W/MPL equals marginal cost, MC Therefore, we can substitute to obtain P = MC This equation states that the price of the firm’s output equals the marginal cost of producing a unit of output Thus, when a competitive firm hires labor up to the point at which the value of the marginal product equals the wage, it also produces up to the point at which the price equals marginal cost Our analysis of labor demand in this chapter is just another way of looking at the production decision we first saw in Chapter 14 the price of apples, for instance, raises the value of the marginal product of each worker who picks apples and, therefore, increases labor demand from the firms that supply apples Conversely, a decrease in the price of apples reduces the value of the marginal product and decreases labor demand Technological Change Between 1960 and 2012, the output a typical U.S worker produced in an hour rose by 192 percent Why? The most important reason is technological progress: Scientists and engineers are constantly figuring out new and better ways of doing things This has profound implications for the labor market Technological advance typically raises the marginal product of labor, which in turn increases the demand for labor and shifts the labor-demand curve to the right It is also possible for technological change to reduce labor demand The invention of a cheap industrial robot, for instance, could conceivably reduce the marginal product of labor, shifting the labor-demand curve to the left Economists call this labor-saving technological change History suggests, however, that most technological progress is instead labor-augmenting Such technological advance explains persistently rising employment in the face of rising wages: Even though wages (adjusted for inflation) increased by 152 percent in the last half century, firms nonetheless increased the amount of labor they employed by 88 percent Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 379 www.downloadslide.com PART VI THE ECONOMICS OF LABOR MARKETS The Supply of Other Factors The quantity available of one factor of production can affect the marginal product of other factors A fall in the supply of ladders, for instance, will reduce the marginal product of apple pickers and thus the demand for apple pickers We consider this linkage among the factors of production more fully later in the chapter Quick Quiz Define marginal product of labor and value of the marginal product of labor • Describe how a competitive, profit-maximizing firm decides how many workers to hire 18-2 The Supply of Labor Having analyzed labor demand in detail, let’s turn to the other side of the market and consider labor supply A formal model of labor supply is included in Chapter 21, where we develop the theory of household decision making Here we discuss briefly and informally the decisions that lie behind the labor-supply curve 18-2a The Trade-off between Work and Leisure © Peter C Vey/ The New Yorker Collection/www.cartoonbank.com 380 “I really didn’t enjoy working five days a week, fifty weeks a year for forty years, but I needed the money.” One of the Ten Principles of Economics in Chapter is that people face trade-offs Probably no trade-off is more obvious or more important in a person’s life than the trade-off between work and leisure The more hours you spend working, the fewer hours you have to watch TV, enjoy dinner with friends, or pursue your favorite hobby The trade-off between labor and leisure lies behind the labor-supply curve Another of the Ten Principles of Economics is that the cost of something is what you give up to get it What you give up to get an hour of leisure? You give up an hour of work, which in turn means an hour of wages Thus, if your wage is $15 per hour, the opportunity cost of an hour of leisure is $15 And when you get a raise to $20 per hour, the opportunity cost of enjoying leisure goes up The labor-supply curve reflects how workers’ decisions about the labor-leisure trade-off respond to a change in that opportunity cost An upward-sloping laborsupply curve means that an increase in the wage induces workers to increase the quantity of labor they supply Because time is limited, more work means less leisure That is, workers respond to the increase in the opportunity cost of leisure by taking less of it It is worth noting that the labor-supply curve need not be upward sloping Imagine you got that raise from $15 to $20 per hour The opportunity cost of leisure is now greater, but you are also richer than you were before You might decide that with your extra wealth you can now afford to enjoy more leisure That is, at the higher wage, you might choose to work fewer hours If so, your laborsupply curve would slope backward In Chapter 21, we discuss this possibility in terms of conflicting effects on your labor-supply decision (called the income and substitution effects) For now, we ignore the possibility of backward-sloping labor supply and assume that the labor-supply curve is upward sloping 18-2b What Causes the Labor-Supply Curve to Shift? The labor-supply curve shifts whenever people change the amount they want to work at a given wage Let’s now consider some of the events that might cause such a shift Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com 836 Index Loanable funds market for, 556–565, 684–686 supply and demand for, 557–558, 684–689 Local government, 240–241 receipts for, 240–241 spendings for, 241 Logic of self-interest, 351 Long run aggregate-supply curve, 719–723, 731–734 costs in, 271–273 decision to exit or enter a market, 288 disinflationary monetary policy in, 783 equilibrium, 332–335, 729 interest rates in, 750 market supply, 290–292 Phillips curve, 773–775 rent control, 115–116 shift in demand, 293 supply curve, 293–295 Looney, Adam, 398 Losses See also Deadweight loss of exporting country, 174–175 of importing country, 175–177 Lowrey, Annie, 510 Lucas, Robert, 784, 789 Lump-sum tax, 245, 245–246 Luxuries income elasticity of demand and, 98 price elasticity of demand and, 90 Luxury tax, 128 M Macroeconomics, 27, 484 analyzing fluctuations of, 729 quantities fluctuate together in, 710 six debates over policy for, 795–816 theory of open economy for, 683–684 Macroeconomic well-being, measuring, 500–501 Malawi, elephants as private good, 227 Mali, poor country, 528–529 Malmendier, Ulrike, 713 Malthus, Thomas Robert, 540–541 Mankiw, N Gregory, 208, 250 Margin, Marginal benefits, Marginal buyer, 137 Marginal change, Marginal cost (MC), 6–7, 267–268, 268, 274, 379 markup over, monopolistic vs perfect competition, 336 pricing as regulatory system, 320 pricing for natural monopoly, 320 related to average total cost, 270 related to price, 336 rising, 268–269 Marginal cost (MC) curve, 268, 270, 283 and average-cost curves, 269 firm’s supply decision and, 283–285 Marginal firm, 295 Marginal product, 264 demand for labor and value of, 377–378 diminishing, 265, 376 Marginal product of labor (MPL), 376, 379 production function and, 375–376 value of, 378 Marginal propensity to consume (MPC), 757 defined, 757 Marginal rate of substitution (MRS), 438, 443 Marginal revenue (MR), 282, 283 for competitive firm, 281 curve for monopoly, 306 monopoly, 304, 305 Marginal seller, 142 Marginal tax rate, 162, 236, 245 Marginal utility diminishing, 421, 443 of goods, 443 Market demand, 68–69 Market economy, 10, 10–11 Market efficiency, 144–151 Market equilibrium, evaluating, 146–150 Market failure, 12, 150–151, 321 See also Externalities insufficient variety as, 338–339 Market for loanable funds, 556, 556–565, 684–686 government budget deficits and surpluses, 561–563 investment incentives, 560–561 savings incentives, 558–560 supply and demand for loanable funds, 557–558 Market irrationality, 579 Market power, 12, 150, 280, 301 Market risk, 575 Market(s), 66 See also Competitive market adverse selection and, 464 bond, 548–549 competition and, 66–67 definition of, 90 efficiency of, 135–136 financial, 548, 548–550 firm’s long-run decision to exit or enter, 288 for foreign-currency exchange, 686–689 free entry and exit of, 331 for goods and services, 22–24 for insurance, 573–574 for land and capital, equilibrium in, 387–388 with only few sellers, 348–349 perfectly competitive, 66 stock, 549–550 tyranny of, 338–339 Market supply with entry and exit, long run, 290–292 with fixed number of firms, short run, 290 vs individual supply, 74–75 as sum of individual supplies, 74 Markup over marginal cost, 336 Maximin criterion, 422 McGinty, Jo Craven, 148 McTeer, Robert D., Jr., 14 Median voter theorem, 469–471, 470 Medicaid, 426, 427 Medicare, 125, 162, 167, 236–239 Medium of exchange, 551, 611 Menu costs, 648, 725 Mexico economic growth of, 525 effect of capital flight on economy, 697 GDP and quality of life in, 498 income inequality in, 416 living standards in, 13 middle-income country, 528–529 NAFTA and, 187 purchasing-power parity, 678 underground economy in, 498–499 Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Microeconomics, 27, 461–462, 484 Microsoft Corporation, 299–300, 319 antitrust case against, 363–364 Sherman Antitrust Act and, 319 Middle East, source of crude oil, 738–740 Midpoint method, 91–92 Mill, John Stuart, 421 Miller, Nolan, 455 Minimum wage, 117–119 advocates and opponents of, 119 Fair Labor Standards Act of 1938, 117 labor market and, 118 price floor, 117 teenage labor market and, 118–119 who earns, 599 Minimum-wage laws, 424–425, 596–598 determinant of equilibrium wages, 402–403 evaluating price controls, 119–121 policies to reduce poverty, 424 Misery index, 773 Misperceptions theory, aggregatesupply curve and, 726 Model of aggregate demand and aggregate supply, 712, 712–714 aggregate-demand curve, 714–719 aggregate-supply curve, 719–728 origins of, 739 Phillips curve, 771–773, 775 Monetary equilibrium, 635–636 Monetary neutrality, 639–640, 640 Fischer effect, 644–645 revisited, 731 Monetary policy, 616 aggregate demand and, 746–755 changes in money supply, 751–752 cost of reducing inflation, 783, 785–786 debate, policy made by rule or discretion, 802–804 disinflation, 783 effects of monetary injection, 637–638 expansionary, 753 free-silver debate, 652–653 inflation targeting, 804 monetary injection, 752 Phillips curve and, 773–775 Index role of interest-rate targets in Fed policy, 753–755 stabilization policy arguments, 760–763, 796–798 theory of liquidity preference, 747–749 zero lower bound, 753 Monetary system, 609–610 banks and the money supply, 617–622 Federal Reserve system, 615–617, 622–628 meaning of money, 610–615 Money, 610 commodity, 611 creation with fractional-reserve banking, 618–619 credit cards and, 614 fiat, 612 functions of, 611 future value, 570 during hyperinflations, 642 kinds of, 611–612 measuring time value of, 570–572 present value, 570–572 quantity theory of, 634, 637 stock, 613 in U.S economy, 613–614 value of, 635 velocity of, 640–642 Money demand, 635–636 theory of liquidity preference, 749 Money market equilibrium in, 748, 749 and slope of the aggregatedemand curve, 751 Money multiplier, 619–620, 620 Money stock, 613 Money supply, 616, 635–636 bank capital, leverage, and financial crisis of 2008-2009, 620–622 bank runs and, 625 banks and, 612–622 changes in, 751–752 creation with fractional-reserve banking, 618–619 discount rate, 623 Fed’s tools of monetary control, 622–628 Great Depression, 732–733 inflation and, 15 monetary neutrality, 640 money multiplier, 619–620 open-market operations, 622–623 837 problems in controlling, 624–625 reserve requirements, 624 theory of liquidity preference, 747–748 Monopolistic competition, 329–330, 330 advertising, 338–343 characteristics of, 334–335 competition with differentiated products, 332–337 excess capacity, 335–336 long-run equilibrium, 332–335 markup over marginal cost, 336 vs perfect competition, 330–332, 335–336, 344 in short run, 332 welfare of society and, 336–337 Monopoly, 67, 299–303, 300 antitrust laws, 319–321 vs competition, 303–304, 322 competition vs., 322 deadweight loss and, 311–313 drugs vs generic drugs, 309–310 economies of scale as, 302 government-created, 301–302 inefficiency of, 312–313 markets with only few sellers, 349–350 natural, 217, 302–303 perfect competition and, 330–332, 344 prevalence of, 322 price discrimination, 314–318 production and pricing decisions, 303–310 profit maximization, 306–308 profit of, 308–309 public ownership, 321 public policy toward, 319–321 regulation, 319–321 resources, 300, 301 revenue of, 304–306 social cost, 313 supply curve and, 308 welfare cost of, 310–313 Monopsony, 386 Montero, Jenny, 121 Moral hazard, 462, 462–464 insurance, 464, 574 Morris, Eric A., 224 Mortgage-backed securities, 733 Mortgage defaults, 734 Movie industry, example of price discrimination, 317 Mullainathan, Sendhil, 405 Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com 838 Index Multiplier effect, 756 aggregate demand, 756 formula for spending, 757 other applications of, 758 Multiplier effects, 799 Municipal bonds, 549 Muskie, Edmund, 207 Mutual funds, 551, 551–552 as financial intermediaries, 551–552 index funds, 552 portfolio, 551 Myth of the Great Depression, The (Potts), 713 N Nader, Ralph, Nagel, Stefan, 713 Namibia, elephants as private good, 227 NASDAQ (National Association of Securities Dealers Automated Quotation system), 550 Nash, John, 351 Nash equilibrium, 351 National Collegiate Athletic Association (NCAA), 365 National defense important public goods, 219 spending, 237 National Highway Traffic Safety Administration, 204 National income, 489 National income accounts, 554–556 National Institutes of Health, 220, 237, 540 National Labor Relations Board (NLRB), 600 National saving, 555, 809, 812–814 economic well-being and, 812 U.S trade deficit and, 668–670 ways to increase, 814 National Science Foundation, 220, 540 National-security argument for trade restrictions, 184–185 Natural disasters, price and, 84–85 Natural monopoly, 217, 302, 302–303 Natural-rate hypothesis, 778 natural experiment for, 778–779 Natural rate of output, 721 Natural rate of unemployment, 586, 588, 774 monetary policy and, 775 natural-rate hypothesis, 778 Natural resources, 527, 530 aggregate-supply curve shifts and, 721 limit to growth, 532 population growth stretching of, 540–541 Negative correlation, 39 Negative externality, 196, 198–199 Negative income tax, 425, 425–426 Negative public saving, 809 Neoclassical theory of distribution, 390 Net capital outflow, 664, 664–665 equality of net exports and, 665–666 link between two markets, 689 in United States, 668–670 Net exports, 490, 490–491, 660 aggregate-demand curve shifts due to changes in, 718 as component of GDP, 490–491 exchange-rate effect, 716–717 and net capital outflow, equality of, 665–666 price level and, aggregatedemand curve downward slope, 716–717 trade policy, 694–697 Net foreign investment, 664 Net national product (NNP), 489 Neuman, William, 120 Neuroeconomics revolution, 476–477 Newell, Gabe, 33 Newton, Isaac, 20 New York Stock Exchange, 550 Nigeria average income in, 531 GDP and quality of life in, 498 income inequality in, 416 living standards in, 13 OPEC as cartel, 356 Nike, 338 Nocer, Joe, 365 Nominal exchange rates, 670, 670–672 during hyperinflation, 676–677 Nominal GDP, 492, 641 numerical example of real vs., 492–494 real GDP vs., 491–496 velocity and the quantity equation, 640 Nominal interest rate, 515–517, 516, 747 Fisher effect, 645 inflation rate and, 646 in U.S economy, 517 Nominal variables, 639 Normal good, 70, 444 income change and, 444 income elasticity of demand and, 98 Normative statements, 28 North American Free Trade Agreement (NAFTA), 187, 664 Nozick, Robert, 423 Nunn, Nathan, 538 Nutrition, health and, 536–537 O Obama, Barack, 15, 167, 181, 249, 250, 253, 318, 428, 429, 662–663, 700, 736, 788, 798–800 Observation, 20–21 Oceans, common resources, 226 Ohanian, Lee, 167 Ohanian, Lee E., 167 Oikonomos, Oil industry, 738–740 Oligopoly, 330, 347 analysis of, and international trade, 353 cartels and, 349–350 competition and, 349–350 concentration ratio, 330 duopoly example, 348 economics of cooperation, 353–360 equilibrium for, 351–352 game theory and, 355 markets with only few sellers, 348–353 monopolies, 349–350 OPEC as cartel, 356 predatory pricing, 362–363 prisoners’ dilemma, 353–355 public policy toward, 360–364 public price fixing, 350 resale price maintenance, 361–362 restraint of trade and antitrust laws, 360 size affects market outcome, 352–353 tying, 363 Omitted variable, 43–44 Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com OPEC See Organization of Petroleum Exporting Countries OPEC and world oil market, 356 price ceilings and lines at gas pump, 114–115 Open economy, 554, 660 equality of net exports and net capital outflow, 665–666 equilibrium in, 689–691 Euro, 671 flow of financial resources, 664–665 flow of goods, 660–670 government budget deficits, 692–694 how policies and events affect, 692–700 increasing openness of U.S economy, 661–664 international flows of goods and capital, 660–670 market for foreign-currency exchange, 686–689 market for loanable funds, 684–686 nominal exchange rates, 670–672, 676–677 political instability and capital flight, 697–699 prices for international transactions, 670–673 purchasing-power parity, 673–378 real exchange rates, 672–673 trade policy, 694–697 Open-market operation, 616, 622, 622–623, 747–748, 753–754 Opportunity cost(s), 6, 52, 52–53, 260–261 comparative advantage and, 52–53 cost of capital as, 261–262 economists vs accountants, 262 explicit and implicit costs, 261 production possibilities frontier and, 24–26 Optimization consumer optimal choices, 442–443 deriving demand curve, 448–449 income changes and, 444 income effect, 446–448 price changes and, 445–446 substitution effect, 446–448 utility and, 443 Optimum, 198, 442 Index Ordered pair, 38 Organization for Economic Cooperation and Development (OECD), 428 Organization of Petroleum Exporting Countries (OPEC) nations in, 356 oil and economy, 738–740 and price of oil, 104–105 shifts in Phillips curve, 780, 782 supply shocks and, 780, 782 world oil market and, 356 Organs (human), market for, 148–150 Origin, of graph, 38 Orrenius, Pia, 384–385 Orszag, Peter, 208 Oster, Emily, 56–57 Output, 750 efficient level of, 311 full-employment, 721 levels of, 307 natural rate of, 721 potential, 721 unemployment rises as output falls, 711–712 Output effect, 305, 352 Output price, 378–379 Outsourcing, 183, 184–185 Outward-oriented policies, 539 P Pakistan economic growth of, 525 GDP and quality of life in, 498 Palestine, shifts in labor supply and, 382–383 Parker, Jonathan A., 712–713 Parking spots, 148–149 Patent, expiration of, 309–310 Patent protection, 201–202 Payroll tax, 236 burden of, 125–126 Pell grants, 597 Peltzman, Sam, Perception vs reality, 31 Perfect competition monopolistic vs., 335–336 monopoly and, 330–332, 344 Perfect complements, 441 Perfectly competitive markets, 66, 280 Perfectly elastic demand, 94 Perfectly elastic supply, 99 Perfectly inelastic demand, 92 839 Perfectly inelastic supply, 99 Perfect price discrimination, 315–316 Perfect substitutes, 441 Permanent income, 419 Perpetuity, bonds, 549 Personal income, 489 Peru, underground economy in, 498–499 Pharmaceutical drugs vs generic drugs, 309–310 Phelps, Edmund, 773–780, 784 Phillips, A W., 770 Phillips curve, 770 in 1960s, 779 aggregate demand, aggregate supply, and, 771–773 breakdown of, 780 during financial crisis, 788–789 long-run, 773–775 natural-rate hypothesis, 778–779 origins of, 770–771 rational expectations, 784 sacrifice ratio, 783–784 shifts in, 773–782 short-run, 777–778 supply shocks and, 780–782 Physical capital, 530 per worker, 530 Pie chart, 37 Pigou, Arthur, 203 Pigovian taxes, 203 Pin factory, 273 Plumer, Brad, 33 Poland, hyperinflation in, 642 Political business cycle, 802–803 Political economy, 462, 467, 467–471 Arrow’s impossibility theorem, 468–469 Condorcet voting paradox, 467–468 median voter theorem, 469–471 politician’s behavior, 471 Political instability, capital flight and, 697–699 Political stability, economic growth and, 537–539 Pollution clean air and water as common resource, 226 corrective taxes and, 203–204 Environmental Protection Agency (EPA), 203 gas tax, 205 as negative externality, 226 Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com 840 Index objections to economic analysis of, 207 regulation and, 203 social optimum and, 198 tradable pollution permits, 205–207 Population growth, economic growth and, 540–544 Porter, Eduardo, 428 Portfolio, mutual funds, 551 Positive correlation, 38 Positive externalities, 196, 199–202 technology spillovers, industrial policy, and patent protection, 201–202 Positive statements, 28 Potts, David, 713 Poverty correlated with age, race, and family composition, 418 fighting, as public good, 220 income inequality and, 413–414 in-kind transfers and, 419 policies to reduce, 424–427 Poverty line, 417 Poverty rate, 417, 417–418 Predatory pricing, 362–363 Preferences consumer choice, 437–441 insufficient variety, 338–339 marginal rate of substitution, 433 representing with indifference curves, 438–439 utility and, 433 Prescott, Edward, 167 Present value, 570, 570–572 Price ceiling, 112 binding constraint, 112 lines at gas pump, 114–115 market outcomes and, 112–113 not binding, 112 rent control, 115–116 Price controls, food shortage and, 120–121 Price discrimination, 314, 314–318 analytics of, 315–317 economic welfare and, 315 examples of, 317–318 in higher education, 318 moral of story, 315 parable about pricing, 314–315 rational strategy for a profit- maximizing monopolist, 315 willingness to pay and, 315 Price-earnings ratio, 551 Price effect, 305, 352 Price elasticity of demand, 90, 90–91 computing, 91 determinants of, 90–91 elasticity and total revenue along a linear demand curve, 96–97 midpoint method, 91–92 total revenue and, 94–96 variety of demand curves, 92–94 Price elasticity of supply, 98 computing, 99 determinants of, 98–99 variety of supply curves, 99–101 Price fixing, public, 350 Price floor, 112 market outcomes and, 116–117 minimum wage as, 117–119 Price level, 750 consumption and, 715 exchange-rate effect, 716–717 investment and, 715–716 net exports and, 716–717 Price maker, 300 Price(s), 551 See also Consumer Price Index advertising effect on, 340–341 allocation of resources and, 83 change in, 444–445 control on, 112–121 equilibrium, 77 higher price raises producer surplus, 143–144 during hyperinflations, 642 input prices and supply, 75–76 for international transactions, 670–673 law of one, 674 level of, 635 lower price raises consumer surplus, 138–139 marginal cost and, 336 market-clearing, 77 natural disasters and, 84–85 output, 378–379 purchase, of land or capital, 387 quantity demanded and, 67–68 quantity supplied and, 73 of related goods and demand, 70 relative, 437, 648–649 rental, of land or capital, 387 shortages and, 78 surplus and, 77–78 of trade, 54 when supply and demand shifts, 82 willingness to pay, 136–137 world, 173 Price takers, 66, 174, 280, 300 Pricing average-cost, 320 congestion, 224–225 marginal-cost, 320 predatory, 362–363 resale price maintenance, 361–362 tying, 363 value, 224–225 Principal, 462, 462–464 bonds, 549 Principles of Political Economy and Taxation (Ricardo), 55 Prisoners’ dilemma, 353, 353–355 dominant strategy, 354 economics of cooperation, 353–355 examples of, 356–358 oligopoly as, 355 tit-for-tat strategy, 359 tournament, 359 welfare of society and, 358 Private goods, 216, 216–217 Private saving, 555 Producer price index, 509 Producer surplus, 141, 141–144 cost and willingness to sell, 141–142 evaluating market equilibrium, 146–148 higher price raises, 143–144 market efficiency and, 144–150 using supply curve to measure, 142–143 Product differentiation, 331 Production cost of, 259–260, 263–265 within country, GDP measures value of, 487 factors of, 22–24, 374, 527 growth and, 523–524 process, 301 resources, limited quantities of, 293–295 within specific interval of time, GDP measures value of, 487 Production function, 263, 263–265, 376, 377, 531 illustration, 534 marginal product of labor and, 375–376 total cost and, 263, 265 Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Production possibilities frontier, 49 gains from trade, 48–50 Production possibilities frontier and, 24, 24–26 Productivity, 13, 527 determinants of, 526–532 health and nutrition affects, 536–537 human capital per worker, 530 importance of, 527 living standards and, 527 natural resources per worker, 530 physical capital per workers, 530 production function, 531 relationship between living standards and, 13 technological knowledge, 530–531 wages and, 384–386 Products advertising as signal of quality, 341–342 brand-name, 309 competition with differentiated, 332–337 Profit, 260 accounting, 262 as area between price and average total cost, 290 economic, 262 measuring in graph for competitive firm, 288–289 of monopoly, 308–309 Profit maximization, 282–283 competitive firm’s supply curve and, 282–289 monopoly, 306–308 Progressive tax, 247 Progressive tax code, 428–429 Property rights, 12 economic growth and, 537–539 importance of, 228 technology and, 202 Property taxes, 240–241 Proportional tax, 247 Protection-as-a-bargaining-chip argument for trade restrictions, 186–187 Public choice, 467 Public good(s), 215–217, 216, 218–223, 540 antipoverty programs, 220 basic research, 219–220 cost-benefit analysis, 221–223 free-rider problem, 218 Index importance of property rights, 228 lighthouses as, 221 national defense, 219 as natural monopoly, 302 value of human life, 222–223 Public ownership, public policy toward monopolies, 321 Public policy, 12 See also Antitrust laws; Fiscal policy; Monetary policy asymmetric information and, 466–467 diminishing returns and catch-up effect, 533–535 economic growth and, 532–544 education and, 536 free trade and, 539 health and nutrition, 536–537 investment from abroad, 535 job search and, 594–595 population growth and, 540–544 property rights and political stability, 537–539 research and development, 540 saving and investment, 533 toward externalities, 202–207 Public saving, 555, 809–814 budget deficit and, 814 negative, 809 saving incentives and, 814 Purchasing power, inflation and, 647 Purchasing-power parity, 673–678, 674 basic logic of, 674 hamburger standard, 677–678 implications of, 674–676 limitations of, 677 as special case, 688 Putnam, Howard, 361 Q Qatar, OPEC as cartel, 356 Qian, Nancy, 538 Quality advertising as signal of, 341–342 brand names and, 342–343 change in, and CPI, 511 efficiency wages and, 602 theory of efficiency wages and worker quality, 602 Quantity equilibrium, 77 of reserves, Fed influences, 622–623 841 Quantity demanded, 67 change in, 80–81 relationship between price and, 67–68 Quantity discounts, 318 Quantity equation, 640–642, 641 Quantity supplied, 73 Quantity theory of money, 634, 637 Quintiles, 248 Quotas, import, 31, 179 R Race discrimination in labor market, 405 discrimination in sports, 407–408 median annual earnings by, 403 poverty correlated with, 418 segregated streetcars and, 406 Raffo, Andrea, 167 Randlett, Tom, 149 Random walk, 578 index funds and, 578–579 Rational expectations, 784 and possibility of costless disinflation, 784–785 Rationality, behavioral economics and, 471–473 Rational people, Rawls, John, 422–423 Reagan, Ronald, 30, 429, 634, 701, 800, 803 government debt and, 564 tax cuts under, 165, 166, 252 Real exchange rates, 672, 672–673 Real GDP, 492 vs nominal GDP, 491–496 numerical example of nominal vs., 492–494 over recent history, 495–496 of various countries, 498 Real interest rate, 515–517, 516, 747 Fisher effect, 644–645 in U.S economy, 517 Reality, perception vs., 31 Real variables, 639 Recession, 564, 707, 708, 709, 710 cultural and social effect of, 712, 713 government debate over spending hikes or tax cuts, 798–801 real GDP and, 495 Volcker’s decision, 803 Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com 842 Index Recession (2008–2009), 733–736 Phillips curve during and after, 788 Reefer Madness: Sex, Drugs and Cheap Labor in the American Black Market (Schlosser), 499 Regressive tax, 247 Regulation of externalities, 202 public policy toward monopolies, 319–321 “Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom, 1861–1957” (Phillips), 770 Relative price budget constraints and, 436–436 consumer’s choice and, 443 variability and misallocation of resources, 648–649 Rent control, 31 evaluating price controls, 120–121 price ceiling, 115–116 in short run and long run, 115–116 Rent subsidies, 120–121 Resale price maintenance, 361–362, 363–364 Research and development, economic growth and, 540 Reserve ratio, 618, 623–624 Reserve requirements, 618, 624 Reserves, 617, 622–624 Resources common, 214–215, 216, 216–217, 223–227, 302 flow of financial, 664–665 limited quantities of production, 293–295 monopoly, 300, 301 natural, 527, 530, 721 prices and allocation of, 83 prisoners’ dilemma, 357–358 relative-price variability and misallocation of, 648–649 scarcity of, Retained earnings, 489 Revenue See also Total revenue average, 281 of competitive firm, 280–282 marginal, 282 of monopoly, 304–306 tax, 157 Reverse causality, 44–45 Reyes, Nery, 120 Rhodes, Cecil, 301 Ricardo, David, 55 Right-to-work laws, 600 Rigobon, Roberto, 511 Risk firm-specific, 575 managing, 572–576 market, 575 and return, trade-off between, 575–576 Risk aversion, 572, 572–573 Rivalry in consumption, 216, 216–217 Road congestion, gasoline tax and, 204 Roback Jennifer, 406 Robe, Jonathan, 597 Robinson Crusoe, (Defoe), 527 Rockefeller, John D., 526 Rodriguez, Alex, 505 Rodríguez, Francisco, 121 Rogerson, Richard, 167 “Role of Monetary Policy, The” (Friedman), 773 Romer, Christina D., 700–701 Ruhm, Christopher J., 713 Rule of 70, 572 Rumsfeld, Donald, 734 Russia capital flight, 699 GDP and quality of life in, 498 income inequality in, 416 inflation rate, 634 Ruth, Babe, 514 S Sachs, Jeffrey, 542 Sacks, Daniel, 500 Sacrifice ratio, 783–784 Saez, Emmanuel, 166 Saldate, Edward, 149 Sales taxes, 240–241 Samsung, 300 Samuelson, Paul, 476, 770–771, 773, 776–777, 779 Sargent, Thomas, 784–785 Sarkozy, Nicolas, 500 Satisficers, 472 Saudi Arabia, 356, 738–740 Saving(s), 547–548, 555, 812–814 defined, 556 economic growth and, 533 inflation raises tax burden on, 650 interest rates affect household, 454–456 international flows, 666–667 and investment in national income accounts, 554–556 national, 555, 668–670, 809, 812–814 negative public, 809 private, 555 public, 555, 809–814 as supply for loanable funds, 558–559 tax law reform debate to encourage saving, 812–814 Savings incentives, 558–560 Scarcity, Scarcity index, 121 Scatterplot, 38 Schlosser, Eric, 499 Schwarz, Andy, 365 Scientific judgments, differences among economists in, 30–31 Scientific method, 20–21 Screening, 466 Seasonal adjustment, 488 Sectoral shifts, 594 Securitization, 733 Segregation, segregated streetcars and profit motive, 406 Sellers number of, and shifts in supply curve, 76 taxes on, 123–123 variables that influence, 76 Sensible tax, 208–209 Services CPI basket of, 506–509 currently produced, GDP includes, 487 intangible, 487 markets for, 22–24 Shadow economy, 498–499 Shaw, George Bernard, 30, 528 Sherman Antitrust Act, 319, 360 Shi-Ling Hsu, 208 Shiller, Robert J., 476–477 Shoeleather costs, 647, 647–648 Shortage, 78 lines at gas pump, 114–115 price ceilings and, 113 Short run aggregate-supply curve slopes upward in, 722–726 costs in, 271–273 Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com disinflationary monetary policy in, 783 economic fluctuations, 721, 724–726, 709 increase in demand, 294 interest rates in, 750 market supply with fixed number of firms, 290 monopolistically competitive firm in, 332 monopolistic competitors in, 333 Phillips curve, 777–778 rent control, 115–116 shift in demand, 293 Shoup, Donald, 149 Shutdown, 285 competitive firm’s short-run decision to, 285–286 near-empty restaurants and, 287 off-season miniature golf and, 287 Sichel, Daniel, 492 Siegel, Jeremy, 580 Sierra Club, 208 Signaling, 401, 465 advertising, 401 to convey private information, 465 education, 401 gifts as, 465–466 Simon, Herbert, 472 Simpson, Alan K., 250 Singapore economic growth rate of, 524 pursued outward-oriented policies, 539 trade and distribution of income, 185 Slope, 41–43 Smith, Adam, 10, 11, 14, 55, 148, 209, 273, 361, 499 Smith, Fred, 167 Smoking, reducing, 71–73 Social Choice and Individual Values (Arrow), 469 Social cost, 198 monopoly’s profit, 313 Social insurance, 423 Social insurance taxes, 236 Social Security, 125, 236, 248 budget deficit and, 238–240 federal spending and, 237 indexation of benefits under, 514–515 rise in government spending for, 238–239 tax, 162, 167 Index Social security disability payments, 597 Society decisions faced by, 3–4 faces short-run trade-off between inflation and unemployment, 15 monopolistic competition and welfare of, 336–337 prisoners’ dilemma and welfare of, 358 Solow, Robert, 770–771, 773, 776–777, 779 Soltas, Evan, 318 South Africa, income inequality in, 416 South Korea caloric consumption and height of population, 537 capital flight, 699 economic growth rate of, 524 GDP to investment, 534 purchasing-power parity, 678 pursued outward-oriented policies, 539 trade and distribution of income, 185 unilateral approach to free trade, 187 Soviet Union arms race and Cold War, 356–357 collapse of communism in, 10 Specialization driving force of, 52–58 economies of scale and, 273 trade and, 50–51 Speculative bubble, 579 Spending and taxes, blur between, 250–251 Spending multiplier, formula for, 757 Sports, discrimination in, 407–408 Stabilization automatic stabilizers, 764–765 debate, 796–798 policy arguments, 760–765 Stagflation, 737, 780 Stagnation, 737 Standard of living determinants of, 13 relationship between productivity and, 13 Standard & Poor’s, 550 State government, 240–241 receipts for, 240–241 spendings for, 241 843 Statistical discrepancy, 488, 489 Steam, 33 Stevenson, Betsey, 500 Sticky-price theory, aggregate-supply curve and, 725 Sticky-wage theory, aggregate-supply curve and, 724–725 Stigler, George, 321 Stiglitz, Joseph E., 208 Stock, 549 diversification of firm-specific risk, 574–575 efficient markets hypothesis, 577–578 fundamental analysis, 577 market irrationality, 579 random walks and index funds, 578–579 Stock index, 550 Stockman, David, 165 Stock market, 549–550 Federal Reserve and, 754–755 Store of value, 551, 611 Strike, 403, 599 Structural unemployment, 593 minimum-wage laws and, 596–598 Subprime borrowers, 733 Subsidies market-based policy, 203–205 rent, 120–121 wage, 120–121 Substitutes, 70 cross-price elasticity of demand, 98 perfect, 441 price elasticity of demand, 90 Substitution bias, 509 effect, 446, 446–448 marginal rate of, 438, 443 Substitution effect, 814 Summers, Larry, 700 Sunk costs, 285, 286, 286–287 Superstar phenomenon, 402 Supplemental Security Income (SSI), 425 Supply, 73–76 See also Aggregate supply; Money supply applications of, 101–107 change in, 80–81 decrease in, 75, 81 elasticity of, 98–101 equilibrium of demand and, 77–79 Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com 844 Index excess, 77–78 increase in, 75, 102 individual, 74–75 inelastic, 98 input prices and, 75–76 of labor, 380–381 law of, 73 market vs individual, 74–75 number of sellers and, 76 perfectly elastic, 99 perfectly inelastic, 99 price elasticity of, 99, 100, 101 relationship between price and quantity supplied, 73–74 technology and, 76 Supply and demand, 77–83, 111–112 disentangling, 692 equilibrium of, 77 for foreign-currency exchange, 684–689 law of, 79 for loanable funds, 684–689 market forces of, 65 shift in, 82 versatility of, 375 Supply curve(s), 74 in competitive market, 289–295 monopoly and, 308 price elasticity of supply, 99–101 shifts in, 75–76 shifts in vs movements along, 80 supply schedule and, 73–74, 142 using to measure producer surplus, 142–143 variety of, 99–101 Supply schedule, 74 supply curve and, 73–74, 142 Supply shock(s), 780 of the 1970s, 782 accommodating adverse, 781–782 adverse shock to aggregate supply, 781 Phillips curve and, 780–782 role of, 780–782 Supply-side economics and Laffer curve, 165 Supply siders (economists), 760 Surplus, 77 See also Budget surplus; Consumer surplus; Total surplus; Trade surplus price floors and, 117 producer See Producer surplus Sweden Laffer curve, 165 purchasing-power parity, 678 tax burden in, 235 underground economy in, 498–499 Switzerland, underground economy in, 498–499 Synergies, 319 T Taiwan economic growth rate of, 524 pursued outward-oriented policies, 539 trade and distribution of income, 185 Tangible goods, GDP includes, 487 Tanzania, elephant poaching, 227 Tariff(s), 31, 177, 694 compared to import quotas, 179 deadweight loss and, 178 effects of in international trade, 177–179 Tastes, shifts in the demand curve and, 70 Taxation, costs of, 155–156 Tax burden distribution of, 248–249 divided, 127 of U.S compared to European companies, 235 Tax cuts under George W Bush, 798 under Kennedy, 762 under Ronald Reagan, 252 undex George H W Bush, 760 Tax debate, 166 Tax equity, 249–251 Taxes, 121–128, 242–246 ability-to-pay principle, 247 Barack Obama pledged to raise taxes, 253 benefits principle and gasoline, 246–247 on buyers, market outcomes and, 123–125 carbon, 208–209 changes in, 759–760 consumption, 243–244 corporate income, 241, 250–251 corrective, 203 cuts under Reagan, 165 deadweight loss of taxation, 156–160, 163–165, 234, 243 equity and, 246–251 excise, 237 expenditures, 250–251 gas, 204–205 high tax rates, 166 incidence, 122 income, 243 individual income, 241 inflation, 642–644 on labor, 162–163 Laffer curve and supply-side economics, 165–166 lump-sum tax, 245, 245–246 luxury, 127 negative income, 425–426 payroll, 125–126 Pigovian, 203 progressive, 247 property, 240–241 proportional, 247 regressive, 247 sales, 240–241 on sellers, market outcomes and, 122–123 social insurance, 236 value-added, 244 Tax expenditures, 250–251 Tax incidence, 122, 249–251 elasticity and, 126–128 flypaper theory of, 249–251 Tax laws debate, 812–814 Tax rates average, 245 marginal, 245 Tax revenue, 157, 163–166 Tax systems, 247 administrative burden of, 244–245 design of, 233–234 Tax treatment, bonds, 549 Team Fortress 2, 33 Technological change, 379 Technological knowledge, 529, 530, 530–531 changes in, 722 specific, 219 Technological progress population growth promoting of, 542–544 Technology demand for skilled and unskilled labor and, 397–399 shifts in supply curve and, 76 spillovers, 201–202 Teenage labor market, minimum wage and, 118–119 Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com Temporary Assistance for Needy Families (TANF), 220, 425 Term, bonds, 549 Term auction facility, 623 Textile market, 172–187 Thailand capital flight, 699 underground economy in, 498–499 Theory, 20–21 Theory of Justice (Rawls), 422 Theory of liquidity preference, 747–749 Time horizon, price elasticity of demand, 91 Time inconsistency of policy, 802–803 practical importance of, 803–804 Time-series graph, 37, 38 Time value of money, measuring, 570–572 Tit-for-tat strategy, 359 Toll roads, 224–225 Total cost, 260, 274 average, 267, 274 production function and, 263–265 Total revenue, 94, 95, 260 along a linear demand curve, 96–97 for competitive firm, 281 monopoly, 304, 305 price elasticity of demand and, 94–96 Total surplus, 145, 147 Tradable pollution permits, 205–207 Trade See also Free trade; Gains from trade; International trade agreements and World Trade Organization, 187 benefits of, 10 comparative advantage and, 53–54 deadweight losses and gains from, 159–160 equilibrium without international, 172–173 interdependence and gains from, 47–48 price of, 54 restraint of, 360 specialization and, 50–51 Trade balance, 660 Trade barriers, 31 Trade deficit, 661 Index measuring a nation’s income, 484 of U.S., 668–670 Trade-offs, 4–5 between equity and efficiency, 252–253 between inflation and unemployment, 15 policy decisions and, 28 production possibilities frontier and, 24–26 between risk and return, 575–576 Trade policy, 694, 694–697 import quota, 694 tariff, 694 Trade restrictions arguments for, 182–187 infant-industry argument for, 185–186 jobs argument for, 183–184 national-security argument, 184–185 protection-as-a-bargaining-chip argument, 186–187 tariffs, 31 unfair-competition argument for, 186 Trade surplus, 660 Traffic, congested roads as public goods or common resources, 226 Tragedy of the Commons, 223, 223–225 Transaction costs, 211 Transfer payments, 237, 248, 490 Transitivity, 468, 469 Transportation, 508 Truman, Harry, 28–29 Turnover, efficiency wages and, 602 Twin deficits, 694 Tying, 363–364 Tyranny of market, 338–339 Tyranny of the Market, The (Waldfogel), 338 U Uganda, elephant poaching, 227 Ultimatum game, 474 Underground economy, 163, 498–499 Unemployment, 585–586 benefits, 597 cyclical, 586, 589 845 efficiency wages and, 601–603 frictional, 593 how long without work, 592 identifying, 586–593 job search and, 593–595 measuring a nation’s income, 484 measuring of, 586–589 minimum-wage laws and, 596–598 natural rate of, 586, 588, 774 rises as output falls, 711–712 short-run trade-off between inflation and, 15, 773–792 structural, 593 wages of, 596–597 why some people always, 592–593 Unemployment insurance, 595 Unemployment rate, 587 measures, 590–591 since 1960, 588 Unfair-competition argument for trade restrictions, 186 Union, 402, 608 collective bargaining and, 598–601 determinant of equilibrium wages, 402–403 economics of, 599–600 good or bad for economy, 600–601 type of cartel, 599–600 United Arab Emirates, OPEC as cartel, 356 United Kingdom advanced economy, 528 economic growth of, 525 income inequality in, 416 tax burden in, 235 underground economy in, 498–499 United States average income in, 523 carbon tax, 208–209 changing nature of exports, 662–663 distribution of income in, 415 economic growth of, 525 financial institutions in, 548–553 GDP and quality of life in, 498 GDP to investment, 534 government debt, history of, 563–564 income inequality in, 414–416 Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com 846 Index inflation in, 14 inflation rate, 634 interest rates in, 517 international trade with, 57–58 living standards in, 13 money in, 613–614, 615 NAFTA and, 187 real GDP growth since 1900, 710 real GDP in, 495 tax burden compared to European countries, 235 tax rate, 166 trade and distribution of income, 184–185 trade deficit, 668–670 trade restrictions, 181 underground economy in, 498–499 various laws to manage use of fish and other wildlife, 226 Unit of account, 611 Unsafe at Any Speed (Nader), U.S Department of Commerce, 491 U.S exports, 662–663 U-shaped average total cost, 269–270 U.S Justice Department, 360, 363–364 U.S Supreme Court, antitrust laws, 319 Utilitarianism, 421, 421–422 Utility, 421, 443 concept of, 573 function, 573 Utility theory, 476–477 V Value-added (VAT) tax, 244 Value of human life, cost-benefit analysis, 222–223 Value of marginal product, 377, 377–378 Value pricing, 224–225 Values, differences among economists in, 31 Variable costs, 266–267, 267, 274 average, 268, 274 Variables graphs of single, 37–38 graphs of two, 38–39 nominal, 639 omitted, 43–44 real, 639 that influence buyers, 71 that influence sellers, 76 Variable tolling, 224–225 Varian, Hal, 408–409, 511 Varoufakis, Yanis, 33 Vedder, Richard, 596–597 Velocity of money, 640, 640–642 Venezuela inflation rate, 634 OPEC as cartel, 356 Vertical equity, 247 Video games, economics of, 33 Vissing-Jorgenson, Annette, 712–713 Volcker, Paul A., 701, 782–783, 784, 785–786, 787 decision led to recession, 803 disinflation, 785–786 Voting systems, 468–469 Arrow’s impossibility theorem, 469 Condorcet voting paradox, 467–468 median voter theorem, 469–471 W Wage-price spiral, 737 Wages $5-a-day, 603 ability, effort, and chance, 399–400 adverse selection and, 464 beauty and, 400–401 Black Death and, 389 compensating differentials, 396 determinants of equilibrium, 396–403 education and, 397 efficiency, 402–403, 601, 601–603 free trade and, 184–185 human capital, 396–397 immigration and, 384–385 labor supply and, 450–453 minimum, 117–119 minimum-wage laws, unions, and efficiency wages, 402–403, 404–405 productivity and, 384–386 signaling, 401 sticky-wage theory, 724–725 superstar phenomenon, 402 theory of efficiency, 601–603 of unemployment, 596–597 Wage subsidies, 120–121 Wagner Act, 600 Waldfogel, Joel, 338–339 Wealth arbitrary redistributions of, 651–652 effect, 715, 746 Wealth of Nations, The (Smith), 11, 361 Weil, David N., 846 Welfare, 237, 248, 425, 427 effects of free trade, 174 effects of tariffs, 177–179 policies to reduce poverty, 425 tax affects, 158–159 Welfare cost of monopoly, 310–313 deadweight loss, 311–313 Welfare economics, 135, 136–151, 157–159, 197, 313 Wessel, David, 734–735 Whitehouse, Mark, 500 Why gold, 612–613 Willingness to pay, 136, 136–137, 315 Willingness to sell, cost and, 141–142 Wolfers, Justin, 500–501 Women gender differences in competition, 408–409 labor-force participation in U.S economy of, 589–590 labor force participation rates since 1950, 590 Wonderful Wizard of Oz, The (Baum), 652–653 Worker discouraged, 591 effort, 603 health, 601–602 human capital per, 530 natural resources, 530 physical capital per, 530 quality, 602 turnover, 602 Workfare, 427 Work incentives, antipoverty programs and, 427 Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com World price, 173 World Trade Organization (WTO), 181, 187 trade agreements and, 187 World War II, shift in aggregate demand, 732–733 X X-coordinate, 38 Xi Jinping, 662 Index Y Y-coordinate, 38 Z Zero bound problem, 807 Zero economic profit, 334 Zero inflation, 804–808 Zero lower bound, 753 Zero profit competitive firms stay in business with, 292–293 condition, 336 equilibrium, 292–293 Zimbabwe economic growth rate of, 524 hyperinflation in, 644 inflation rate, 634 underground economy in, 498–499 Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 847 www.downloadslide.com Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Suggestions for Summer Reading www.downloadslide.com If you enjoyed the economics course that you just finished, you might like to read more about economic issues in the following books Abijit Banerjee and Esther Duflo William Breit and Barry T Hirsch Poor Economics Lives of the Laureates (New York: Public Affairs, 2011) (Cambridge, MA: MIT Press, 2009) Two prominent development economists offer their proposal on how to fight global poverty Twenty-three winners of the Nobel Prize in Economics offer autobiographical essays about their life and work Yoram Bauman and Grady Klein Bryan Caplan The Cartoon Introduction to Economics The Myth of the Rational Voter: Why Democracies Choose Bad Policies (New York: Hill and Wang, 2010) Basic economic principles, with humor Nariman Behravesh Spin-Free Economics (New York: McGraw-Hill, 2008) A straightforward guide to major economic policy debates Alan Blinder After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (London: The Penguin Press HC, 2013) A former vice chair of the Federal Reserve offers his take on what we have learned from the financial crisis that shook the world in 2008 and 2009 (Princeton, NJ: Princeton University Press, 2008) An economist asks why elected leaders often fail to follow the policies that economists recommend Paul Collier The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It (New York: Oxford University Press, 2007) A former research director at the World Bank offers his insights into how to help the world’s poor Avinash Dixit and Barry Nalebuff The Art of Strategy: A Game Theorist’s Guide to Success in Business and Life (New York: Norton, 2008) This introduction to game theory discusses how all people—from corporate executives to criminals under arrest—should and make strategic decisions Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.com William Easterly Michael Lewis The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics The Big Short: Inside the Doomsday Machine (Cambridge, MA: MIT Press, 2001) How a few savvy investors managed to make money during the financial crisis of 2008 and 2009 A former World Bank economist examines the many attempts to help the world’s poorest nations and why these attempts have so often failed Milton Friedman Capitalism and Freedom (Chicago: University of Chicago Press, 1962) In this classic book, one of the most important economists of the 20th century argues that society should rely less on the government and more on the free market (New York: Norton, 2010) Burton G Malkiel A Random Walk Down Wall Street (New York: Norton, 2012) This introduction to stocks, bonds, and financial economics is not a “get rich quick” book, but it might help you get rich slowly John McMillan Reinventing the Bazaar: A Natural History of Markets Robert L Heilbroner The Worldly Philosophers (New York: Touchstone, 1953, revised 1999) A classic introduction to the lives, times, and ideas of the great economic thinkers, including Adam Smith, David Ricardo, and John Maynard Keynes (New York: Norton, 2002) A deep and nuanced, yet still very readable, analysis of how society can make the best use of market mechanisms P J O’Rourke Eat the Rich: A Treatise on Economics Steven E Landsburg The Armchair Economist: Economics and Everyday Life (New York: Free Press, 2012) Why does popcorn cost so much at movie theaters? Steven Landsburg discusses this and other puzzles of economic life Steven D Levitt and Stephen J Dubner Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (New York: Morrow, 2005) (New York: Atlantic Monthly Press, 1998) A humorist asks why some nations prosper while others don’t He answers with a world tour that takes the reader from Albania to the New York Stock Exchange Richard H Thaler and Cass R Sunstein Nudge: Improving Decisions About Health, Wealth, and Happiness (New Haven: Yale University Press, 2008) Behavioral economics can help people, as well as companies and governments, make better decisions Economic principles and clever data analysis applied to a wide range of offbeat topics, including drug dealing, online dating, and sumo wrestling Copyright 2015 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... Growth Rate of Productivity Growth Rate of Real Wages 1959 20 12 2.1% 1.8% 1959–1973 1973–1995 1995 20 12 2.8 1.4 2. 3 2. 8 1.1 1.9 385 immigration has affected the wages of Americans, particularly... www.downloadslide.com PART VI THE ECONOMICS OF LABOR MARKETS The Supply of Other Factors The quantity available of one factor of production can affect the marginal product of other factors A fall in the supply of. .. the profit-maximizing amount of labor? b At the profit-maximizing level of output, the marginal product of the last worker hired is 30 boxes of pencils per day Calculate the price of a box of