McConnell economics, principles, problems and policies 18e

EIGHTEENTH EDITION Economics Principles, Problems, and Policies The McGraw-Hill Economics Series McConnell, Brue, and Flynn Brief Editions: Microeconomics and Macroeconomics First Edition ESSENTIALS OF ECONOMICS Miller Principles of Microeconomics First Edition Brue, McConnell, and Flynn Essentials of Economics Second Edition Mandel Economics: The Basics First Edition Schiller Essentials of Economics Seventh Edition PRINCIPLES OF ECONOMICS Colander Economics, Microeconomics, and Macroeconomics Seventh Edition Frank and Bernanke Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Fourth Edition Frank and Bernanke Brief Editions: Principles of Economics, Principles of Microeconomics, and Principles of Macroeconomics First Edition McConnell, Brue, and Flynn Economics, Microeconomics, and Macroeconomics Eighteenth Edition Samuelson and Nordhaus Economics, Microeconomics, and Macroeconomics Eighteenth Edition Schiller The Economy Today, The Micro Economy Today, and The Macro Economy Today Eleventh Edition Slavin Economics, Microeconomics, and Macroeconomics Ninth Edition ECONOMICS OF SOCIAL ISSUES Guell Issues in Economics Today Fourth Edition Sharp, Register, and Grimes Economics of Social Issues Eighteenth Edition ECONOMETRICS Gujarati and Porter Basic Econometrics Fifth Edition Gujarati and Porter Essentials of Econometrics Fourth Edition MANAGERIAL ECONOMICS LABOR ECONOMICS Baye Managerial Economics and Business Strategy Sixth Edition Borjas Labor Economics Fifth Edition Brickley, Smith, and Zimmerman Managerial Economics and Organizational Architecture Fifth Edition McConnell, Brue, and Macpherson Contemporary Labor Economics Eighth Edition Thomas and Maurice Managerial Economics Ninth Edition PUBLIC FINANCE INTERMEDIATE ECONOMICS Bernheim and Whinston Microeconomics First Edition Dornbusch, Fischer, and Startz Macroeconomics Tenth Edition Frank Microeconomics and Behavior Seventh Edition ADVANCED ECONOMICS Romer Advanced Macroeconomics Third Edition MONEY AND BANKING Cecchetti Money, Banking, and Financial Markets Second Edition URBAN ECONOMICS O’Sullivan Urban Economics Seventh Edition Rosen and Gayer Public Finance Eighth Edition Seidman Public Finance First Edition ENVIRONMENTAL ECONOMICS Field and Field Environmental Economics: An Introduction Fifth Edition INTERNATIONAL ECONOMICS Appleyard, Field, and Cobb International Economics Sixth Edition King and King International Economics, Globalization, and Policy: A Reader Fifth Edition Pugel International Economics Fourteenth Edition Instructors teaching a concise and digitally integrated principles course welcome the Brief Editions The Brief Editions of Microeconomics and Macroeconomicss simplify the core concepts and remodel the examples presented in Economics, 18e Not just cut-and-paste books, the Brief Editions are concise, highly integrated principles textbooks distinct in purpose, style, and coverage from Economics, 18e Microeconomics, Brief Edition Go to www.mcconnellbriefmicro1e.com for sample chapters, the text preface, and more information Macroeconomics, Brief Edition Go to www.mcconnellbriefmacro1e.com for sample chapters, the text preface, and more information For instructors teaching a one-semester Micro-Macro survey course, we present Essentials of Economics, 2e Go to www.brue2e.com for sample chapters, the text preface, and more information EIGHTEENTH EDITION Economics Principles, Problems, and Policies Campbell R McConnell University of Nebraska Stanley L Brue Pacifi fic Lutheran University Sean M Flynn Vassar College Boston Burr Ridge, IL Dubuque, IA New York San Francisco St Louis Bangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto To Mem and to Terri and Craig, and to past instructors ECONOMICS: PRINCIPLES, PROBLEMS, AND POLICIES Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020 Copyright © 2009, 2008, 2005, 2002, 1999, 1996, 1993, 1990, 1987, 1984, 1981, 1978, 1975, 1972, 1969, 1966, 1963, 1960 by The McGraw-Hill Companies, Inc All rights reserved No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper WCK/WCK ISBN MHID 978-0-07-337569-4 0-07-337569-1 Publisher: Douglas Reiner Developmental editor: Elizabeth Clevenger Developmental editor: Anne Hilbert Editorial coordinator: Noelle Fox Senior marketing manager: Jennifer Lambert Senior marketing manager: Melissa Larmon Senior project manager: Harvey Yep Lead production supervisor: Michael R McCormick Interior designer: Cara Hawthorne Senior photo research coordinator: Lori Kramer Photo researcher: Keri Johnson Senior media project manager: Kerry Bowler Cover design: Cara Hawthorne Cover image: © David Churchill/Arcaid/Corbis Typeface: 10/12 Janson Text 55 Roman Compositor: Aptara, Inc Printer: Quebecor World Versailles Inc Library of Congress Cataloging-in-Publication Data McConnell, Campbell R Economics: principles, problems, and policies / Campbell R McConnell, Stanley L Brue, Sean M Flynn — 18th ed p cm — (The McGraw-Hill series in economics) Includes index ISBN-13: 978-0-07-337569-4 (alk paper) ISBN-10: 0-07-337569-1 (alk paper) Economics I Brue, Stanley L., 1945- II Flynn, Sean Masaki III Title HB171.5.M47 2009 330—dc22 2008037520 www.mhhe.com About the Authors Campbell R McConnell earned his Ph.D from the University of Iowa after receiving degrees from Cornell College and the University of Illinois He taught at the University of Nebraska– Lincoln from 1953 until his retirement in 1990 He is also coauthor of Contemporary Labor Economics, eighth edition, and Essentials of Economics, second edition (both The McGraw-Hill Companies), and has edited readers for the principles and labor economics courses He is a recipient of both the University of Nebraska Distinguished Teaching Award and the James A Lake Academic Freedom Award and is past president of the Midwest Economics Association Professor McConnell was awarded an honorary Doctor of Laws degree from Cornell College in 1973 and received its Distinguished Achievement Award in 1994 His primary areas of interest are labor economics and economic education He has an extensive collection of jazz recordings and enjoys reading jazz history Stanley L Brue did his undergraduate work at Augustana College (South Dakota) and received its Distinguished Achievement Award in 1991 He received his Ph.D from the University of Nebraska–Lincoln He is a professor at Pacific Lutheran University, where he has been honored as a recipient of the Burlington Northern Faculty Achievement Award Professor Brue has also received the national Leavey Award for excellence in economic education He has served as national president and chair of the Board of Trustees of Omicron Delta Epsilon International vii Economics Honorary He is coauthor of Economic Scenes, fifth edition (Prentice-Hall), Contemporary Labor Economics, eighth edition, Essentials of Economics, second edition (both The McGraw-Hill Companies), and The Evolution of Economic Thought, seventh edition (South-Western) For relaxation, he enjoys international travel, attending sporting events, and skiing with family and friends Sean M Flynn did his undergraduate work at the University of Southern California before completing his Ph.D at U.C Berkeley, where he served as the Head Graduate Student Instructor for the Department of Economics after receiving the Outstanding Graduate Student Instructor Award He teaches at Vassar College in Poughkeepsie, New York, and is also the author of Economics for Dummiess (Wiley) and Essentials of Economics, second edition (The McGraw-Hill Companies) His research interests include finance and behavioral economics An accomplished martial artist, he has represented the United States in international aikido tournaments and is the author of Understanding Shodokan Aikido (Shodokan Press) Other hobbies include running, travel, and ethnic food viii List of Key Graphs 1.2 The Production Possibilities Curve 12 2.2 The Circular Flow Diagram 40 3.6 Equilibrium Price and Quantity 55 7.1 Total and Marginal Utility 136 8.2 The Law of Diminishing Returns 160 8.5 The Relationship of the Marginal-Cost Curve to the Average-Total-Cost and Average-Variable-Cost Curves 164 The Long-Run Average-Total-Cost Curve: Unlimited Number of Plant Sizes 167 Short-Run Profit Maximization for a Purely Competitive Firm 184 The P = MC Rule and the Competitive Firm’s Short-Run Supply Curve 187 8.8 9.3 9.6 9.12 Long-Run Equilibrium: A Competitive Firm and Market 194 10.4 Profit Maximization by a Pure Monopolist 208 11.1 A Monopolistically Competitive Firm: Short Run and Long Run 226 11.2 The Kinked-Demand Curve 235 13.3 Labor Supply and Labor Demand in (a) a Purely Competitive Labor Market and (b) a Single Competitive Firm 274 27.2 (a) Consumption and (b) Saving Schedules 544 27.5 The Investment Demand Curve 550 28.2 Equilibrium GDP 565 28.7 Recessionary and Infl flationary Expenditure Gaps 576 The Equilibrium Price Level and Equilibrium Real GDP 595 The Demand for Money, the Supply of Money, and the Equilibrium Interest Rate 662 33.5 Monetary Policy and Equilibrium GDP 674 33.6 The AD-AS Theory of the Price Level, Real Output, and Stabilization Policy 680 Trading Possibility Lines and the Gains from Trade 748 29.7 33.1 37.2 38.1 The Market for Foreign Currency (Pounds) 770 ix IND-14 Index Law of diminishing returns, 157–158 application of, 157 defi fined, 157 graphical portrayal of, 159 rationale for, 158 tabular example of, 158–159 Law of increasing opportunity costs, 12–13 economic rationale for, 13 shape of curve, 13 Law of supply, 51, 59 Leader countries, 502–504 Leading economic indicators, 623, 627 Leakage of spending, 566, 574 Learning by doing, 33, 169, 513 Leasing land, 396 Least-cost combination of resources defi fined, 263 numerical illustration, 264–265 Least-cost production, 35–36 Legal cartel theory of regulation, 383–384 Legal immigrants, 464 decision to migrate, 451–453 defi fined, 450 family reunification fi and, 450–451 origins of, 451 quotas for, 450–451, 461, 462 specialty occupations and, 450, 451, 454 Legal issues aggregate supply and, 593–594 forms of business, 75–78 See also Corporations; Partnerships; Sole proprietorships immigration reform, 461 legal forms of business, 75–78 legal framework for market economy, 78 liability rules and lawsuits, 341–342 limits on malpractice awards, 445 Legalization of drugs, price elasticity of demand and, 121–122 Legal tender, money as, 634 Legislation antitrust, 78, 125, 239, 376–377, 379–382 banking, 636 credit, 309 economic stimulus, 615 environmental, 342, 345 farm policy, 405–406 health care, 444–446 immigration, 461 international trade, 102–103, 758 labor market, 280, 292 national defense, 370 negative externalities and, 79, 342, 345 Lehman Brothers, 640 Leisure economic growth and, 500 gross domestic product and, 493 Lemon laws, 351 Lender of last resort, 637–638, 679, 682 Lerner, Abba, 734 Lettuce, market for, 66 Levitt, Steven D., 352n Liabilities commercial bank, 647, 649, 659 of Federal Reserve Banks, 664–665 Licenses as barrier to entry, 204 occupational licensing, 278, 349, 384 Life expectancy, 434 Lifestyle factors, health care costs and, 437 Limited-choice, bundled-goods problem, 361–362, 370 Limited income, of individuals, Limited liability, 76 Limited liability rule, 691 Limit pricing, in oligopoly, 239 Linear relationship, equation of, 25 Linux, 202 Liquidity bank panics and, 656 commercial bank, 652, 656 defi fined, 630 money and, 630 Living standards, 313–314 modern economic growth and, 501–504 Loaded terminology, in economic reasoning, 16 Loan(s) See also Borrowing; Credit; Debt of commercial banks, 650–657 to commercial banks, 664 in creation of money, 650–657 demand for loanable funds, 300–301 lending potential of commercial banks and, 653–655 mortgage debt crisis and, 670, 682–683, 737 in multiple destruction of money, 657 repayment of, 657 size of, and interest rates, 303 subprime mortgage loans, 670, 682–683, 737 Loanable funds theory of interest, 300–302 demand for loanable funds, 300–301 extending the model, 301–302 supply of loanable funds, 300 Local government finances in U.S., 88 fi fiscal impact of immigration and, 460 fi fiscal policies of, 618 fi Localized markets, 230–231 Location, product differentiation through, 223 Lockouts, 292, 293 Logrolling, 358, 403 Lojack, 352 Long run aggregate supply in, 590–591, 708–710 decline of agriculture in, 394–397 defi fined, 123, 156, 708 economies and diseconomies of scale and, 167–169 Phillips Curve in, 718–719 price and output in monopolistic competition, 226, 227 price elasticity of supply and, 123–124 production costs in, 166–170 profit fi maximization in pure competition, 189–193 real wages in, 272–273 variable plant in, 156 Long-run aggregate supply, 590–591 Long-run supply curve for constant-cost industry, 192 for decreasing-cost industry, 193 defined, fi 192 for increasing-cost industry, 192–193 Long-run vertical Phillips Curve, 719 L’Oreal, 230 Lorenz curve, 410, 411, 416 Loss-minimization, 183–185 Lottery winners, present value and, 690 Luck, income inequality and, 414 Lump-sum tax, 572–574 Luxuries necessities versus, 8, 120 price elasticity of demand and, 120 Luxury taxes, 368 M1, 631–632 components, 631–632 defined, fi 631 M2, 632–633 M components, 632–633 defined, fi 632 Macpherson, David A., 449n Macroeconomic instability aggregate demand change and, 727 aggregate supply shocks and, 716–718, 727 coordination failures and, 729–730 monetarist view of, 727–729 real-business-cycle view of, 729 Macroeconomics, 466–478 See also Aggregate demand; Aggregate supply; Economic growth; Inflation; fl Unemployment alternative views of, 726–741 “big picture” and, 680–681, 683 business cycles, 466, 474–475 causes of macroeconomic instability, 727–730 defined, fi 6–7 discretionary stabilization policy, 736 expectations and, 470 fixed-exchange rate systems and, 776–777 income-consumption and income-saving relationships, 542–548 increased stability and, 737 interest-rate-investment relationship, 548–554 microeconomics versus, 6–7 models for, 467–468, 475–476 modern economic growth and, 468–470 multiplier effect, 554–558 performance and policy in, 467–468 policy rules and, 734–736, 738 “self-correction” by economy and, 730–734 shocks and, 470–474, 522 stability and, 77, 81–82, 536, 548 sticky prices and, 472–474 stock market and, 77, 536 uncertainty and, 470–474 Magnet countries, 452 Mainstream macroeconomics, 727, 737 Maintenance costs, 551 Majority voting, 357–360 government failure and, 360–363 implications of, 358 inefficient fi outcomes of, 357–358 Index median-voter model, 359–360 paradox of, 358–359 Major League Baseball monopsony power of, 277 price discrimination and, 215 as pure monopolies, 202 Malthus, Thomas, 313, 314 Managed care, 444 Managed floating fl exchange rates, 777–778 criticisms of, 778 defi fined, 777 support for, 778 Management hierarchy of, 169 managerial specialization, 169 Marginal analysis See also Cost-benefi fit analysis; Marginal utility; MB = MC rule; MR = MC rule; P = MC in competitive markets, 57 defi fined, economics of war and, 14 effi ficiency and, 128–129 fast-food lines and, optimal allocation and, 13–14 for public goods and services, 337, 338–340 in pure monopoly, 207–208 of quotas, 101–102 of regulation, 78 slopes and, 24 of tariffs, 101–102 Marginal cost (MC) average total cost (ATC) and, 164–165 average variable cost (AVC) and, 164–165 defi fined, 163 graphical portrayal of, 163 law of supply and, 51 marginal decisions and, 163 marginal product and, 163–164, 263 marginal-revenue-marginal-cost approach to profit fi maximization, 181–193 in pure monopoly, 211 short-run supply and, 186–189 Marginal-cost-marginal-benefit fi rule Marginal product (MP) defi fined, 157, 255 law of diminishing returns and, 158–159 marginal cost and, 163–164, 263 Marginal productivity theory of income distribution, 265–266 of resource demand, 254–259 Marginal propensity to consume (MPC), 545–546 multiplier effect and, 556 as slope, 546 Marginal propensity to save (MPS), 545–546 multiplier effect and, 556 as slope, 546 Marginal rate of substitution (MRS), 149 Marginal resource cost (MRC) See also MRP = MRC rule defi fined, 255 Marginal revenue (MR) defi fined, 178 graphical portrayal of, 179 marginal-revenue-marginal-cost approach to profit fi maximization, 181–193 in pure monopoly, 205–206, 211 Marginal revenue product (MRP), 254–257 See also MRP = MRC rule defi fined, 255 market demand for a resource, 257 productivity and, 254–255 product price and, 255 as resource demand schedule, 255–256 resource demand under imperfect product market competition, 256–257 wage differentials and, 282 Marginal tax rate, 85 Marginal utility algebraic generalizations, 139–140 applications and extensions, 141–144 defi fined, 135 demand and, 137, 140–141 law of diminishing marginal utility, 135–137 numerical examples, 138–139 total utility and, 135–137 utility-maximizing rule, 138 Marginal utility per dollar, 138 Market(s) See also Demand; Supply defi fined, 32 in market systems See Market systems role of, 46 Market demand, 48, 49 for labor, 273 for private goods, 336 for a resource, 257 Market demand curve, in pure monopoly, 204–207 Market equilibrium, 54–59 changes in demand and, 57–58 changes in supply and, 57–58 complex cases, 57–58 effi ficient allocation, 56–57 equilibrium price, 54–56, 188–189, 190–192, 753 equilibrium quantity, 54–56 rationing function of prices, 56 Market failure, 79, 335 externalities, 79–80, 340–348, 352 free-rider problem, 80–81, 336 information failure, 348–353, 436 Market for externality rights, 344–345 advantages of, 344–345 operation of market, 344 real-world examples, 345 Market for money, 674–675 Market imperfections imperfect competition, 177 marginal productivity theory of income distribution and, 266 resource demand and, 256–257 wage differentials and, 284–285, 293–294 Marketing loan program, 406 Market intervention, defi fined, 79 Market period defi fined, 122–123 price elasticity of supply and, 122–123 IND-15 Market portfolio beta and, 695–696 defined, fi 695 Security Market Line and, 698–699 Market power elasticity and, 130 income inequality and, 414 Market price, in marginal-revenue-marginal-cost approach to profit fi maximization, 188–189 Market segregation, 214 Market shares, monopolistic competition and, 223 Market supply, 52 of labor, 273 Market systems, 30–42 bureaucratic inefficiency fi versus, 362, 370, 373 characteristics of, 30–34 circular flow fl model and, 39–42 competition in, 32, 56–57 defined, fi 30 demise of command systems and, 38–39 fundamental questions of, 34–37 government role in, 78–82 imperfect institutions in, 362–363 “invisible hand” and, 38, 197 monopolistic competition See Monopolistic competition oligopoly See Oligopoly overview of, 177 pure competition See Pure competition pure monopoly See Pure monopoly Martinez, Tracy, 233 Massachusetts, mandatory health insurance, 446 Massachusetts Mutual, 640 MasterCard, 633, 640, 641 Maturity, interest rates and, 303 Maximum willingness to pay, 128–129 MB = MC rule See also Cost-benefit fi analysis; Marginal analysis in competitive markets, 57 investment demand curve and, 551–552 optimal allocation and, 13–14 for optimal immigration, 462 for optimal level of social regulation, 385–388 for optimal reduction of an externality, 346–347 for public goods, 337, 338–340 vote-seeking and, 361 McCain, John, 370 McClendon, Aubrey K., 287 McConnell, Stanley L., 449n McDonald’s, 35, 108, 230, 239, 241, 772 McDonnell Douglas, 380, 381 Measurement units, slopes and, 24 Median-voter model, 359–360 Medicaid, 421, 422, 443, 448 described, 432–433 impact on government, 435 Medical care, marginal value of utility and, 144 Medicare, 421, 443, 448 cost containment through, 444 described, 432 impact on government, 435 payroll taxes, 364–365 prescription drug coverage, 444–445 IND-16 Index Medicare Part D, 445 Medicare Prescription Drug, Improvement, and Modernization Act of 2003, 445 Medium of exchange, money as, 33–34, 630 Menu costs, 597 Mercedes-Benz, 241 Mergers See also Antitrust policy of banks and thrift institutions, 639 cross elasticity of demand and, 125 guidelines for, 380–381 in oligopoly, 230, 242–243 types of, 380–381 Merrill Lynch, 640 Mexico immigration from, 451, 453–458, 461 North American Free Trade Agreement (NAFTA), 105, 513 offshoring jobs to, 435 oil industry of, 599 U.S trade with, 94–95 Michelin, 214 Microchips, 246–247 electronic payments and, 641 productivity acceleration and, 512 Microeconomics defi fined, of government See Public choice theory; Public goods and services; Taxation macroeconomics versus, 6–7 Micron, 381 Microsoft, 9, 108, 171, 201, 202, 204, 212, 214, 221, 241, 512 antitrust case, 78, 378, 379–380, 386–387 Middle East modern economic growth and, 501 oil cartel, 94–95, 237–238, 535, 592–593, 599, 717, 744, 779 Midpoint formula, 114 Military self-sufficiency fi argument for trade protection, 756 Mill, John Stuart, 578 Miller Brewing Company, 92, 243, 247 Minimum acceptable price, 128–129 ficient scale (MES), 170, Minimum effi 396–397 Minimum wage case against, 280 case for, 281 defi fined, 280–281 evidence and conclusions, 281 real output and, 597 Minus sign, in price elasticity of demand, 115 Misery Index, 717 Misfortune, income inequality and, 414 Mixed effects, of inflation, fl 534 M&M’s candy, 142–143 Mobil, 380 Mobility See also Immigration income inequality and, 411–412, 451–458 Mobil Travel Guide, 353 Modern economic growth, 468–470, 500–504 catching up and, 502–504 defi fined, 501 uneven distribution of, 501–502 Molson/Coors, 242 Monetarism, 727–729, 737 Monetary multiplier, 655–657 Monetary policy See also Federal Reserve System aggregate demand and, 673–678 cause-effect chain and, 674–676 defi fined, 81–82, 660 discount rate, 668–669 discretionary, 734, 736 evaluating, 678–683 expansionary, 671–672, 676, 677, 679, 737 Federal funds rate and, 652, 670–673 Federal Reserve functions in, 638–639 government role in promoting stability and, 81–82, 304, 635, 727–729, 736 interest rates and, 660–686 in Japan, 679, 682 macroeconomic instability and, 728–729 monetary rule and, 734–736, 738 money supply and, 630–635, 638–639 open-market operations, 638, 660, 665–667, 670–673, 682, 700–702 problems and complications of, 679–682 real GDP and, 673–678 reserve ratio, 638, 648–649, 653–657, 667–669 restrictive, 672, 676–678, 737 tools of, 665–670 Monetary rule, 734–736, 738 Money See also Currency; Interest creation of See Money creation defi fined, 33–34, 629 functions of, 630 interest rates and demand for, 661–663 in market systems, 33–34 as medium of exchange, 33–34, 630 purchasing power and, 634–635 resource pricing and, 254 as stock versus flow, 630–631 as store of value, 630, 633–635 time-value of money and, 302–303 as unit of account, 630 value of, 634 Money creation, 645–657 fractional reserve system, 646–647 multiple-deposit expansion, 653–657 multiple destruction of money, 657 single commercial bank and, 647–652 Money market deposits (MMDA), 632 Money market mutual funds (MMMF), 633 Money supply See also Bank(s); Monetary policy “backing” for, 633–635 components of, 630–635 Federal Reserve role in, 638–639 as leading indicator, 623 M1, 631–632 M2, 632–633 M Monopolistic competition, 223–229 characteristics of, 177, 223–225 defi fined, 177, 223 effi ficiency and, 227–228 industries with, 218, 224–225 price and output in, 225–227 product variety and, 228–229 Monopoly See also Antitrust policy; Pure monopoly antitrust policy and, 376, 379–382 AT&T case, 379, 384 defined, fi 78 economic (pure) profi fit and, 307 economies of scale and, 216–217 industrial regulation in perpetuating, 383 Microsoft case, 78, 378, 379–380, 386–387 monopoly behavior versus monopoly structure, 378 natural, 170, 214, 376, 382–383 near-monopolies, 202, 376 regulated monopolies, 78, 216–219 Monopoly demand, 204–207 marginal revenue in, 205–206 monopolist as price maker, 202, 204, 206–207 output and price determination, 207–210 total revenue test for price, 207 Monopoly power, 214 Monopsony, 275–277 defined, fi 275 equilibrium wage and employment, 276 examples of, 277 MRC higher than wage rate, 275–276 upward-sloping labor supply to firm, fi 275 Monsanto, 108 Moore, Kevin B., 427n Moral hazard problem described, 349–350 health care insurance and, 438–439 Morgan, Theodore, 537n Morgan Stanley, 640 Mortgage debt crisis, 670, 682–683, 737 Movie theaters, price discrimination in, 215 Moving costs, of immigrants, 452 Mozilo, Angelo R., 287 M-PESA, 641 MR = MC rule, 181–194 antitrust policy and, 376 defined, fi 182 demand for resources and, 263–264 in the long run, 189–193 marginal cost and short-run supply, 186–189 in pure monopoly, 207–208, 216–217 in the short run, 181–189 still there motel and, 185 MRP = MRC rule See also Marginal resource cost (MRC); Marginal revenue product (MRP) defined, fi 255 in employing resources, 255 for monopsony model, 275–276 for purely competitive labor market, 273–275 wage differentials and, 284–285, 293–294 Multilateral trade agreements, 102–105 Multiplant fi firms, 75 Multiple counting avoiding, 480–481 defined, fi 480 Multiple-deposit expansion, 655–657 Multiplier equilibrium GDP, 567 monetary, 655–657 Index Multiplier effect, 554–558 aggregate demand and, 585 changes in multiplier, 567 humorous approach to, 557 marginal propensities and, 556 multiplier, defined, fi 554 rationale for, 554–555 size of, 556–558, 582 Murphy, Kevin, 435 Mutual funds defi fined, 692 ethical investment, 700 as investment, 692 types of, 692, 701, 705 in the U.S., 639, 640 Mutual interdependence complications of, 234 defi fined, 230 in game theory, 232 noncollusive oligopoly and, 234–236 in oligopoly, 230 Nash, John F., 246n Nash equilibrium, 246, 248 National Basketball Association (NBA), monopsony power of, 277 National Bureau of Economic Research (NBER), 133 National Credit Union Administration (NCUA), 634, 649 National defense, 84, 370 See also Terrorism economics of war, 14 immigration and, 460–462 military self-suffi ficiency argument for trade protection and, 756 war on terrorism, 80–81 National Education Association (NEA), 278 National Football League (NFL), monopsony power of, 277 National health insurance (NHI), 442–443 National income (NI), 487–488 abroad, 587 defi fined, 486 gross domestic product (GDP) and, 486–487 National income accounting See also Gross domestic product (GDP) defi fined, 480 information sources for, 480, 494, 497 National Income and Product Accounts (NIPA), 480, 494, 497 National Labor Relations Act (NLRA), 292 National Labor Relations Board (NLRB), 292 National Monetary Commission, 636 National Safety Council, 386 Natural monopoly, 170, 214, 376, 382–383 Natural rate of unemployment (NRU), 525 Natural resources economics of, 321–329 nonrenewable, 321, 322–325 renewable, 321, 325–329 role in wage determination, 272 NCR, 266 Near-monies, 632–633 Near-monopolies, 202, 376 NEC, 214 Necessities luxuries versus, 8, 120 price elasticity of demand and, 120 Negative employment, 281 Negative externalities, 79–80, 340, 341–345 correcting for, 79–80 defi fined, 79 of economic growth, 515–517 government intervention, 342 individual bargaining, 341 liability rules and lawsuits, 341–342 market-based approach to, 343–345 of taxation, 368 tragedy of the commons and, 343–344, 517 Negative net exports, 570, 577–579 Negative self-selection, 458 Negative slope, 24 Negative-sum game, 246 Nestlé, 214 Net benefits, fi of natural resources, 321 Net costs of import quotas, 755–756 of tariffs, 755–756 Net domestic product (NDP), 487 Net effect, 259 Net exports (X), 484–485, 494 aggregate expenditures and, 568 changes in aggregate demand and, 587–588 defi fined, 568 equilibrium GDP and, 569–570 full-employment GDP with large negative net exports, 577–579 negative, 570, 577–579 net export schedule, 568–570 positive, 570 Net export schedule, 568–570 described, 568–569 Net foreign factor income, 486–487 Net private domestic investment, 483 Netscape Navigator, 204, 386, 387 Network effects, 212, 513 Net worth, of commercial banks, 647 New classical economics, self-correction and, 730–732 New Economy, 600 New York Life, 640 New York Stock Exchange, as market, 46 New York Times, 245 Nike, 247 Nokia, 214, 241 Nominal GDP adjustment for price changes, 490–492 defi fined, 467, 490 real GDP versus, 490–492, 497 transactions demand for money and, 661, 662 Nominal income, 532 Nominal interest rates, 304–305, 311, 534 Nominal wage, defined, fi 271 Nomura Securities, 640 Noncash transfers, 412 Noncollusive oligopoly, 234–236 Noncompeting groups defi fined, 282–283 IND-17 wage differentials and, 282–283 Nondiversifiable fi risk, 695 Nondurable goods, 75 business cycles and, 522–523 nondurable consumer goods, defined, fi 523 Noneconomic costs, of unemployment, 528 Noneconomic sources of well-being, 495 Noninvestment transactions, in GDP, 483 Nonmarket activities, gross domestic product and, 493 Nonprice competition defined, fi 224 in monopolistic competition, 177, 224 in pure monopoly, 202 Nonrenewable natural resources, 322–325 defined, fi 321 incomplete property rights and excessive present use, 324–325 present use versus future use of, 322–324 Nonrivalrous consumption, 212 Nontariff barriers (NTB), 101, 754 Nordhaus, William, 435 Normal goods defined, fi 49–50 income elasticity of demand and, 125 Normal profit, fi 306 break-even point and, 180–181 as a cost, 155 defined, fi 155 in monopolistic competition, 227 Normal-trade-relations (NTR) status, 103 Normative economics defined, fi political parties and, 21 North American Free Trade Agreement (NAFTA), 105, 513 North Korea, command system in, 30, 39 Norway, oil industry of, 599 Novell, 387 Number of buyers, change in demand and, 49, 50 Number of sellers change in supply and, 53–54 monopolistic competition and, 223 as obstacle to collusion, 238 pure competition and, 177 Occupation, burden of unemployment and, 526 Occupational licensing, 278, 349, 384 Occupational Safety and Health Administration (OSHA), 385 Occupational segregation, 425–428 crowding model, 425–428 defined, fi 425 economics of, 426 eliminating, 426–428 Office fi Depot, 381 Official fi reserves, 769 Offshoring, 106–107, 434–435 Oil industry cartels in, 94–95, 237–238, 535, 592–593, 599, 717, 744, 779 daily production, 237 price changes in, 599 supply of cheap energy, 319–320 IND-18 Index Okun, Arthur, 526 Okun’s law, 526 Oligopoly, 229–243 advertising and, 233, 240–241 antitrust policy and, 376 cartels and, 236–239, 283–284 characteristics of, 177, 229–230, 233–234 defi fined, 177, 229 effi ficiency and, 241 game-theory overview, 232–233 industries with, 230–232, 242–243 interest and allocation of capital, 304 kinked-demand theory and, 234–236 mergers and, 230, 242–243 noncollusive, 234–236 price leadership model, 239 Olympics, preset ticket prices, 69–70 One-time game, 246 Open economy, 96 Open-market operations, 638, 660, 665–667, 670– 673, 682 buying securities, 665–666 defi fined, 665 increase in interest rates, 700–702 selling securities, 666–667 Open shop, 291 Operating costs, 551 Operational lag, 617 Opportunity cost(s) See also Economic costs budget line, 9–10 choice and, defi fined, 4, 155 economic (pure) profit fi and, 156 explicit, 155 implicit, 155 law of increasing, 12–13 long run, 156 in marginal-revenue-marginal-cost approach to profit, fi 190–191 in market systems, 34–35 normal profit fi as cost, 155 short run, 156 of women in the workforce, 509 Opportunity-cost ratio, 746 Oprah Winfrey Show, Optimal allocation, in marginal analysis, 13–14 Optimal reduction of an externality, 346 Oracle, 287, 512 Organizational structure, 75 Organization of Petroleum Exporting Countries (OPEC), 94–95, 237–238, 535, 592–593, 599, 717, 744, 779 Organ transplants, 60–61, 441 Other-things-equal assumption (ceteris paribus) s defi fined, in graphical expression, 23–24 income-consumption relationship and, 542–548 law of demand and, 47 Ottaviano, Gianmarco, 458n Output See also Total output coordination problem in command systems, 38–39 equilibrium real output, 594 impact of immigration on, 454–455 inflation fl and, 535 in market systems, 36 in oligopoly, 233–239 potential, 525 in pure monopoly, 207–211 short-run fluctuations in agricultural, 392–393 Output effect, 259 Outsourcing, health care costs and, 434–435 Overt collusion, 237–238 Ownership of resources, as barrier to entry, 204 Packaging, product differentiation through, 223 Paradox of voting, 358–359 outcomes and, 359 preferences, 358–359 Parity concept criticisms of, 402 defi fined, 399 purchasing power parity, 468–469, 771, 772 Parity ratio, 399 Partnerships in business population, 76 corporations versus, 76–77 defi fined, 75 income approach to GDP and, 486 Part-time workers health care costs and, 434 unemployment rate and, 524 Passively managed funds, 692 P = ATC dilemma of regulation and, 219 as fair-return price, 217–219 Patents, 31, 196 as barrier to entry, 203–204 economic growth and, 504, 505 Pay-as-you go, 616 Pay for performance, 285–286 free-rider problem and, 81, 336 negative side effects of, 286, 287 principal-agent problem, 285–286 PayPal, 641 Payroll taxes, 86, 364–365, 368 Peak, of business cycle, 521 Pension funds pension and income security, 84 relative decline of banks and thrifts, 639 in the U.S., 639, 640 PepsiCo, 125, 247, 380, 474 Percentage rate of return, 693 Percentages, in price elasticity of demand, 115 Perfectly elastic demand, 115–116, 178 Perfectly inelastic demand, 115, 116 Perfectly inelastic supply, 297–299 Peri, Giovanni, 458n Perrl, Fabrizio, 416n Per se violations, 381 Personal consumption expenditures (C), 74–75, 314–317, 482, 494, 585–586 Personal distribution of income, 73–74, 90 Personal income (PI), 488 Personal income tax, 74, 85–87, 364, 368, 369, 373, 586 Personal saving, 74, 542 Personal taxes, 74 Per-unit costs, defi fined, 162–163 Per-unit production costs, 531, 593 Pet, 238 Pfizer, fi 75, 172, 204 Philip Morris Company, 243 Philippines, immigration from, 451 Phillips, A W., 714–715 Phillips Curve, 714–719 aggregate supply shocks and, 716–718 defined, fi 714–715 disinfl flation and, 719 long-run, 718–719 nature of, 714–716 short-run, 718 Physicians See also Health care cost containment and, 443–444, 445 demand for health care and, 437–438 limits on malpractice awards, 445 national health insurance (NHI) and, 443 supply of health care and, 440 Picasso, Pablo, 284 Picker, Les, 722n Piece rates, 285, 286 PIMCO, 692 Pizza Hut, 380 Planned changes, 552, 567 Planned investment, 562 Planning curve, 166–167 Plant capacity, 156 in long run, 156 in monopolistic competition, 228 in short run, 156 Plants, 75 Play-or-pay approach to health care, 442, 446 P = MC, 195–197 antitrust policy and, 376 dilemma of regulation and, 219 monopolistic competition and, 227 as socially optimal price, 217 Policy issues See also Fiscal policy; Government; Monetary policy change in policy, 307 macroeconmic, 734–736, 738 pure monopoly and, 213–214 resource pricing and, 254 Political action committees (PACs), 403 Political business cycles, 617 Political issues in farm policy, 403–406 in fiscal policy, 617 government failure, 360–363 government trade intervention and, 101–102 minimum wage, 281 modern economic growth and, 501 special interests, 358 Pollack, Andrew, 441n Pollution air, 320, 333, 342, 344–345, 347, 386 water, 345 Population Bomb, The (Ehrlich), 314–315 Index Population growth, 313–317 birthrates and, 313–314, 315, 508 resource consumption per person, 74–75, 314–317 single tax on land and, 298–299 trends in, 313–314 Pork-barrel politics, 360–361, 370 Portfolio defi fined, 692 diversification fi and, 694–695 market, 695–696, 698–699 Poses, Frederic M., 287 Positive economics, defined, fi Positive externalities, 340–341 correcting for, 80, 343 defi fined, 80 health care costs and, 436 Lojack, 352 subsidies and, 343 Positive net exports, 570 Positive-sum game, 246 Post, 239 Post hoc fallacy, in economic reasoning, 17 Postrel, Virginia, 41 Potential GDP, 526, 527, 575 Potential output, 525 Poverty, 418–423 defi fined, 418–419 economic growth and, 477–478, 515 entitlement programs and, 420–423 incidence of, 419 income inequality and, 410–418 measuring, 418–420 trends in, 419–420, 430 Poverty rate, 418–420 Preemption of entry, 248–249 Preferences consumer, 137 income inequality and, 413 limited-choice, bundled-goods problem, 361– 362, 370 paradox of voting and, 358–359 Preferred provider organizations (PPOs), 444 Prejudice, discrimination and, 424 Prescription drugs generic drugs, gains from entry, 196 health care prices and, 441 innovation and economic growth, 505 Medicare coverage for, 444–445 Present value, 302–303, 688–691 applications of, 690–691 calculating, 321–322, 705 compound interest, 302, 688–689 defi fined, 321, 689 in natural resource economics, 321–322 present value model, 689–690 Preset prices, 69–70 President’s Council of Economic Advisers, 508 Price(s) See also Equilibrium price; Inflation; fl MR = MC rule; Price elasticity of demand; Price elasticity of supply agricultural, 170–171, 381, 408 ceilings on, 59–60 change in demand and, 48–50, 51, 57–58, 66–69 change in prices of other resources, 259–260 change in supply and, 52–54, 57–58, 66–69 consumer choice and, 137–138 control over, 223–224 demand shocks and, 470–474 doubling of corn price, 170–171 effi ficiency and, 128–129 equilibrium price, 54–56, 188–189, 190–192, 753 equilibrium price level, 594 equilibrium world price, 753 flexible, 472, 473–474 fl floors on, 61–62 fl government-set, 59–62 immigration and, 460 of imported resources, 592–593 inflexible, fl 236, 472–476, 522 law of demand and, 47 in market systems, 32, 36 monetary policy and, 673–678 money and, 634–635 in monopolistic competition, 225–228 in oligopoly, 233–239 preset, 69–70 price-level surprises, 732 product differentiation through, 223–224 in pure monopoly, 202, 204, 205–207, 209–213, 214–216 rates of return and, 693 rationing function of, 56 in regulated monopoly, 78, 216–219 of related goods, 50 relative, 47 scalping and, 56 sticky, 236, 472–476, 522 in supply and demand analysis of exports and imports, 750–753 supply shocks and, 470–472 Price ceilings, 59–60, 305 black markets and, 60–61 defi fined, 59 graphical analysis, 59–60 rationing and, 60 Price changes on budget line, 148 in determination of exchange rates, 771 health care costs and, 437 nominal GDP versus real GDP, 490–492 in oligopoly, 234–235, 239 Price discrimination, 130, 214–216, 381 conditions for, 214–215 defi fined, 214 examples of, 215 graphical analysis, 215–216 Price elasticity of demand, 114–122 applications of, 121–122, 133 defi fined, 114 determinants of, 120–121 formula for, 114–115 interpretation of elasticity, 115–116 pricing power and, 130 total-revenue curve, 119–120 total-revenue test, 116–119, 207 IND-19 Price elasticity of supply, 122–124 applications of, 124 defined, fi 122 long run, 123–124 market period, 122–123 short run, 123 Price-fixing, fi 381 Price floors, 61–62 additional consequences of, 62 defined, fi 61 effect of, 61–62 graphical analysis, 62 Price index Big Mac Index, 772 Consumer Price Index (CPI), 529, 533 defined, fi 490–491 dividing nominal GDP by, 491 GDP, 490–492 Price leadership breakdowns in, 239 defined, fi 239 leadership tactics, 239 Price makers in oligopoly, 230 in pure monopoly, 202, 204, 206–207 Price supports criticisms of, 402–403 defined, fi 399 economics of agricultural, 399–400, 404–405 “Price takers,” pure competition and, 178, 202 Price wars, 236, 239, 597 Pricing, resource, 254 Pricing power as barrier to entry, 202, 204 elasticity and, 130 in pure monopoly, 202, 204, 205–207, 209 Primary markets, 69 Prime interest rate, defi fined, 671–672 Principal-agent problem nature of, 77–78 pay for performance and, 285–286 Principle of comparative advantage, 747 See also Comparative advantage Prisoner’s dilemma, 234 Private closed economy, 562 Private goods and services characteristics of, 80, 336 demand for, 336 private goods, defined, fi 80, 336 Private property, in market systems, 30–31 Private transfer payments, defined, fi 481 Probability weighted average, 695 Procter & Gamble, 108, 240 Producer expectations change in supply and, 53, 54 changes in aggregate demand and, 587 Producer surplus, 127–128, 195–197, 400–401 Product demand, elasticity of, 262 Product development See Research and development (R&D) Product differentiation, 177 defi fined, 223 in monopolistic competition, 223–224 IND-20 Index Production costs, 154–175 applications and illustrations, 170–171 in determination of exchange rates, 771–772 economic, 155–156 least-cost, 35–36 long-run, 166–170 in market systems, 34–36 short-run, 157–165, 188, 590 sunk costs in decision making, 172 Production possibilities curve, 11–14 defi fined, 11–12 law of increasing opportunity costs, 12–13 sample, 12 Production possibilities model, 11–18 assumptions of, 11 comparative advantage and, 96–99 economic growth and, 15–16, 506–507, 713 economics of war and, 14 future and, 17–18 international trade and, 18, 96–99 law of increasing opportunity costs, 12–13 optimal allocation and, 13–14 production possibilities curve, 11–14 production possibilities table, 11 unemployment and, 14–15 Production possibilities table, 11 Productive efficiency, fi 211, 227–228 defi fined, 56, 128, 195 in oligopoly, 241 Productivity See also Economies of scale acceleration of, 511–514 aggregate supply and, 593 changes in, 258–259 defi fined, 593 economic growth and, 511–514, 519 general level of wages and, 271–272 health care prices and, 440–441 labor inputs versus labor productivity, 508 labor unions and, 292–293 marginal revenue product (MRP) and, 254–255 real wages and, 272, 289, 597 rent differences and, 299 resource demand derived from, 258 specialization and, 96 Product markets, 254 changes in product demand, 258 in circular flow fl model, 42 resource demand derived from, 258 Product variety benefi fits of, 229 in monopolistic competition, 228–229 Professional Golf Association (PGA), 289 Professional organizations craft union model for, 278 occupational licensing, 278, 349, 384 Professional sports teams monopsony power of, 277 price discrimination and, 215 as pure monopolies, 202, 215 salary caps and deferred compensation, 690–691 Profit fi commercial bank, 652 corporate, 311, 486 discrimination and, 425 economic (pure), 156, 306–308 income approach to GDP and, 486 increasing returns, 512–513 investment demand and, 553 normal profit, fi 155, 180–181, 306 start-up firms and, 454, 512–513 Profit fi maximization in long run, 189–193 marginal-revenue-marginal-cost approach, 181–194 in monopolistic competition, 225–227 for nonrenewable natural resources, 322–324 numerical illustration, 265 profit-maximizing fi combination of resources, 254, 263–264 in pure competition, 189–193 in pure monopoly, 207–210 in short run, 179–189 Profit-sharing fi plans, 286 Progress, in market systems, 37 Progress and Poverty (George), 298–299 Progressive taxes, 85, 86, 364, 368, 371, 612–613 Projections, budget deficits fi and, 615–616 Property and equipment, commercial bank acquisition of, 647 Property rights Coase theorem and, 341 economic growth and, 504 excessive present use of natural resources and, 324–325 fisheries management and, 327–329 fi forest management and, 326–327 individual bargaining and, 341 in market systems, 30–31 Property taxes, 88, 365, 369–370 Proportional taxes, 364, 612–613 Proprietors’ income, income approach to GDP and, 486 Prosperity abroad, international economic linkages, 570 Protection-against-dumping argument for trade protection, 757–758 Protective tariffs, 101, 754 Prudential, 640 Public assistance programs, 350, 420, 421, 422– 423, 458 Public choice theory, 356–373 defi fined, 356 farm policy and, 403 government failure and, 360–363 majority voting in, 357–360 taxation and, 363–371 Public debt, 619–624 defi fined, 619 external, 622 false concerns, 620–621 foreign-owned, 622 gross domestic product and, 620 interest on, 84, 620 international comparisons, 620 money as debt, 633–634 ownership of, 619–620, 622 substantive issues, 621–624 trade deficits fi and, 780–781 Public goods and services, 80–81, 335–355 characteristics of, 80, 336 cost-benefit fi analysis for, 338–340 demand for, 337–338 externalities and, 340–348, 352 free-rider problem and, 80–81, 336 information failures, 348–353 optimal quantity of, 337 private goods versus, 336 public goods, defined, fi 80, 336 war on terrorism as, 80–81 Public interest theory of regulation, 383 Public investments, 622–624, 736 Publicly owned capital, 483–484 Public ownership of natural monopoly, 382 of public debt, 619–620, 622 Public-private complementarities, 624 Public regulation, of natural monopoly, 382 Public sector See also Government in aggregate expenditures (AE) model, 571–574 circular flow model and, 82–83 competition maintenance and, 78 defined, fi 78 government finance and, 83–88 government purchases, 571–572 income redistribution and, 78–79, 412–413, 420–423 legal framework for market economy, 78 quasi-public goods and, 81 resource reallocation and, 79–81 role of government, 82 stability promotion and, 81–82 taxation, 572–574 Public transfer payments, defined, fi 481 Public utilities deregulation of, 384 as natural monopoly, 382 price discrimination in, 215 as regulated monopolies, 216–219 regulatory commissions, 221 Purchasing power inflation fl and, 534 money and, 634–635 stabilizing, 635 Purchasing power parity, 468–469 Big Mac Index and, 772 purchasing-power-parity theory, 771 Pure capitalism, 30 Pure competition, 176–200 characteristics of, 177–178 defined, fi 177 demand in, 178–179 dynamic adjustments and, 197 efficiency fi and, 193–197 free entry and exit in, 178, 190–192, 196, 200 industries with, 218 “invisible hand” and, 38, 197 loss-minimizing case, 183–185 marginal cost and short-run supply, 186–189 as market model, 177 occurrence of, 177–178 profit fi maximization in long run, 189–193 profit fi maximization in short run, 179–189 Index purely competitive labor market, 273–275 pure monopoly versus, 204, 210 resource demand and, 256–257 shutdown case, 185–186 Pure monopoly, 201–221 barriers to entry, 202–204 characteristics of, 177, 202–204 defi fined, 177, 202 economic effects of, 210–214 examples of, 202 monopoly demand, 204–207 objectives of study of, 202 output and price determination, 207–210 price discrimination, 214–216 pure competition versus, 204, 210 regulated monopoly, 78, 216–219 Pure monopsony, 275 Pure profit fi See Economic (pure) profit fi Pure rate of interest, 304 Purposeful behavior, 4–5 Putin, Vladimir, 314 Putnam, 640 Pyramid, 243 Qualification fi information failures, 351–353 taxation, 368 Quality of health care, 433–434, 436 of labor, role in wage determination, 272 of land, 299 of products, gross domestic product and, 493 of resources, productivity changes and, 258–259 Quantity change in productivity and, 258 change in quantity demanded, 51, 57–58 change in quantity supplied, 54, 57–58 equilibrium, 54–56 Quasi-public banks, 637 Quasi-public goods, defined, fi 81 Quit rates, 294 Quotas in fi fisheries management, 329 immigration, 450–451, 461, 462 import, 101, 102, 404–405, 754, 755–756 individual transferable quotas (ITQs), 329 marginal analysis of, 101–102 Race See also African Americans; Hispanics unemployment and, 526, 528 Ratchet effect, 598, 609 Rate regulation, 78, 216–219 Rates of return arbitrage and, 693–694 asset prices and, 693 average expected rate of return, 695, 696 calculating, 693 expected, 549, 587, 695–696 risk-free, 696–697 Rational behavior consumer, 137 defi fined, 137 Rational expectations theory (RET), 730–732, 736, 737 Rational self-interest, purposeful behavior and, 4–5 Rationing prices and, 56 usury laws and, 305 Reagan, Ronald, 721, 723 Real-balances effect, 584–585 Real-business-cycle theory, 729 Real estate, in determination of exchange rates, 771–772 Real GDP See also Gross domestic product (GDP) adjustment for price changes, 490–492 consumption and, 547 defi fined, 467, 490 economic growth and, 499, 500–504, 508, 520 leading indicators and, 623 monetary policy and, 673–678 nominal GDP versus, 490–492, 497 saving and, 547 taxation and, 722 Real GDP per capita defi fined, 499 economic growth and, 500–504 as measure of well-being, 478, 495, 500 Real income, 532 Real interest rates, 311 changes in aggregate demand and, 587 defi fined, 305, 534, 549 inflation fl and, 721 as nonincome determinant of consumption and saving, 547 RealNetworks, 387 Real wages defi fined, 271 long-run trend of, 272–273 productivity and, 272, 289 Recession in aggregate demand-aggregate supply model, 712 in business cycle, 466, 521, 523 decreases in aggregate demand and, 596–597 defi fined, 466, 521 expansionary monetary policy, 671–672, 676, 677 inventory management and, 474–475 as obstacle to collusion, 238 in the U.S., 521, 577, 597, 603 Recessionary expenditure gap, 575–576 defi fined, 575, 576 inflationary fl expenditure gap versus, 576 Keynes’ solution to, 575–576 Reciprocal Trade Agreements Act of 1934, 102–103 Reciprocity strategies, 247–248 Recognition lag, 617 Recycling, 320 Refinancing, fi of public debt, 621 Regressive taxes, 364–365, 371, 612–613 Regulation competition as regulatory mechanism, 32 prices in regulated monopoly, 78, 216–219 IND-21 Regulatory agencies, antitrust policy and, 376 Relative price, 47 Relative scarcity, 634 Remittances, 456–457 Renewable natural resources, 325–329 defined, fi 321 fisheries management, 327–329 fi forest management, 326–327 Rent economic, 297–299 income approach to GDP and, 486 land, 297, 298–299 Rent controls, 60–61 Rent-seeking behavior, 213, 361, 400, 403 Repeated games, 247–248 Replacement rate, 313–314 Republican Party, 21 Required reserves, 638, 648–649, 653–657, 664, 667–668 Resale, lack of, in pure monopoly, 215 Research and development (R&D) advertising and, 240 as barrier to entry, 204 economies of scale and, 513 gains from entry, 196 interest and, 304 Reserve(s) of commercial banks, 638, 648–649, 653–657, 659, 664, 667–668 currency, 646 currency interventions using, 775–776 excess, 649, 651–652 Reserve ratio, 638, 648–649, 653–657 defined, fi 667 discount rate and, 668–669 lowering, 668 raising, 667–668 term auction facility, 669 Reserve requirements, 638, 648–649, 653–657, 659, 664, 667–668 Resource allocation See also Resource markets demand in See Demand for resources economic growth and, 511 global, 405 marginal productivity theory of income distribution and, 265–266 profit fi and, 307–308 resource pricing and, 254 supply in, 313–317 See also Energy economics Resource fl flows, 92 Resource markets See also Demand for resources; Interest; Natural resources; Profi fit; Rent; Supply of resources; Wage determination in circular flow model, 40 immigration and, 457 MRP = MC rule and, 255 public sector role in reallocation, 79–81 resource demand as derived demand, 254 resource pricing in, 254 Restraints of trade, 376–377 Restricted choice, exchange controls and, 776 Restrictive monetary policy defi fined, 672 effects of, 676–678, 737 IND-22 Index Retained earnings, income approach to GDP and, 486 Retirement, marginal value of utility and, 143 Revenue tariff, 754 Reverse wealth effect, 547, 548, 586 Ricardo, David, 96, 578 Right-to-work laws, 291 Risk, 694–697 See also Uncertainty of agricultural operations, 396, 398 average expected rate of return and, 695, 696 comparing risky investments, 695–696 currency speculation and, 780–781 defi fined, 694 diversification fi and, 694–695 economic (pure) profit fi and, 306–307 exchange-rate, 642 income inequality and, 413 interest rates and, 303 international investment risks, 696 mutual funds and, 692, 701, 705 risk-free rate of return, 696–697 Security Market Line and, 697–702 shocks and, 470–474 types of, 306–307 Risk-free interest rate increase in, 700–702 nature of, 696–697 Security Market Line and, 697–702 Risk premium, 697–698 Ritter, Joseph A., 494n Ritter, Lawrence S., 735n Rivalry private goods and, 80 private versus public goods and, 336 Rivlin, Alice M., 515n Rodriguez, Alex, Roman Empire, 468 Romer, Christina, 722, 722n Romer, David, 722, 722n Romer, Paul, 508 Roosevelt, Franklin, 656 Royal Dutch/Shell, 214 Royal Philips, 214 Royalties, 285 Rule of 70, 499–500, 529–530 Rule of reason, 378, 379 Russia command system in, 30, 39 immigration from, 453 oil industry of, 599 population decline in, 313, 314 U.S dollars in, 642 U.S trade with, 394 SABMiller, 242, 243 Saffer, Henry, 122n Sahay, Ratna, 537n Salary caps, present value and, 690–691 Sales taxes, 86–87, 364, 368–369 Salmon, market for, 67 Samsung, 381 Samuel Adams, 243 Savings average propensity to save (APS), 545 defi fined, 469 in equilibrium GDP, 566 income and, 542–548 inflation fl and, 533, 537 marginal propensity to save (MPS), 545–546, 556 multiplier and, 556 nonincome determinants of, 546–547 personal, 74, 542 taxation and, 720 trade deficits fi and, 779 Savings accounts, 632 Savings and loan associations (S&Ls), 632 Saving schedule, 543–545 defi fined, 543 shifts in, 547–548 Say, J B., 578 Say’s law, 578 Scale constant returns to, 170 diseconomies of, 169 economies of, 167–169, 175 minimum effi ficient, 170, 171 Scalping, 56 Scarcity economic growth and, 499 economic perspective and, economic resources and, 10 marginal analysis and, relative, 634 Schneider, Friedrich, 493n Schotter, Andrew, 429n Schultz, Howard D., 287 fic method Scientifi defi fined, elements of, 5–6 Search unemployment, 524 Sears, 641 Secondary markets, 69 Secondhand sales, exclusion from GDP, 481 Securities fi firms, in the U.S., 639, 640 Security Market Line (SML), 697–702 Self-correction of economy, 730–732 mainstream view of, 732–734 new classical economics view of, 730–732 Self-interest, in market systems, 31–32, 37, 38 Self-selection defi fined, 454 immigration and, 454, 458 negative, 458 Self-sufficiency fi output mix, 746 Seniority, labor unions and, 291 September 11, 2001, terrorist attacks, 14, 80–81, 600, 615, 617, 637–638, 678, 737 Sequential game, 248–249 Services defi fined, 75 private See Private goods and services product differentiation through, 223 public See Public goods and services Services Survey, 494 Service Workers, 290 Shell Oil, 75, 77, 125, 156 Sherman Act of 1890, 78, 376–377, 379, 386 Shocks aggregate supply, 716–718, 727 business cycles and, 522 defined, fi 470 demand, 470–474 supply, 470–472, 531, 599 Shortage, defined, fi 56 Short run aggregate supply in, 588–590, 591, 708, 709 agricultural price and income instability in, 392–394 defined, fi 123, 156, 708 fixed plant in, 156 law of diminishing returns and, 157–159 Phillips Curve in, 718 price and output in monopolistic competition, 225–227 price elasticity of supply and, 123 production costs in, 157–165, 188, 590 production relationships in, 157–159 profit fi maximization in pure competition, 179–189 Short-run aggregate supply curve, 589–590, 591 Shutdown, 185–186 Silber, William L., 735n Simultaneous consumption, 212, 513 Simultaneous game, 246 Single seller, in pure monopoly, 202 Single-tax movement, 298–299 Size of fi firm See also Small business long-run production costs and, 166 Size of firm, long-run production costs and, 167 Skill transferability, 454 Slope of a nonlinear curve, 25–26 Slope of a straight line, 24–25 infi finite, 24–25 marginal analysis and, 24 measurement units and, 24 negative, 24 zero, 24–25 fi Small business See also Start-up firms health care costs and, 434–435, 436 income approach to GDP and, 486 Smart cards, 641 Smith, Adam, 96, 96n, 142 Smith Barney, 640 Smithfield, fi 392 Smoot-Hawley Tariff Act of 1930, 102, 758 Social insurance programs, 420–422 Socialism See Command systems Social issues, modern economic growth and, 501 Socially optimal price dilemma of regulation and, 219 formula for, 217 Social regulation, 385–388 characteristics of, 385 criticisms of, 387–388 debate over, 388 defined, fi 375, 385 industrial regulation versus, 385 optimal level of, 385–388 support for, 386–387 Social Security program, 84, 421 Index adjustment of benefits fi for infl flation, 529, 533 adverse selection problem, 350 budget deficits fi and, 615 financing, 86–87, 615 fi fiscal concerns, 616 fi limited-choice, bundled-goods problem, 361– 362, 370 marginal value of utility and, 143 payroll taxes, 364–365, 368 Society, economizing problem of, 10–11 Sole proprietorships in business population, 76 corporations versus, 76–77 defi fined, 75 income approach to GDP and, 486 Sony, 214 Sotheby’s, 381 South Korea executive pay in, 287 market system in, 39 Soviet Union, former See also Russia command system in, 30, 39 Spain, unemployment in, 529 Special interests farm policy and, 403 nature of interest groups, 358 political logrolling and, 358, 403 rent seeking and, 361 special-interest effect, 360–361, 370 Specialization comparative advantage and, 97, 746–747, 749 division of labor and, 33 gains from, 98–99 geographic, 33 labor, 168–169 managerial, 169 in market systems, 33 occupations of immigrants and, 450, 451, 454 offshoring and, 106–107, 434–435 productivity and, 96 Specialized inputs, 513 Speculation in currency, 780–781 in determination of exchange rates, 772 Spillover, 79, 343, 352, 368, 439 Sprint, 381 Stability fiscal policy and, 611–613, 727, 736 fi flexible exchange rates and, 775 fl government role in promoting, 81–82, 304, 611–613, 635, 638–639, 727–729 increases in aggregate supply and, 598–300 macroeonomic, 77, 81–82, 536, 548 monetary policy and, 81–82, 304, 635, 727–729, 736 of purchasing power of money, 635 self-correction of economy, 730–734 shifts in income and savings schedules, 548 shifts in investment demand curve, 552–554, 560 sources of macroeconomic instability, 727–730 Stagflation, fl 717–718 Standardized budget defi ficits and, 614–616 defi fined, 613 Standardized product, pure competition and, 177–178 Standard Oil, 214 Standard Oil case, 378 Staples, 381 Starbucks, 108, 171, 249, 287, 641 Start-up firms fi See also Small business defi fined, 512 economic growth and, 512–514 economic (pure) profi fit and, 306 entrepreneurial ability and, 10–11 immigrants as founders of, 454 information technology, 454, 512, 577 Internet-related, 577 legal forms of business, 75–78 productivity acceleration and, 512–514 successful, 171 State government finances in U.S., 87–88, 90 fi fiscal impact of immigration and, 460 fi fiscal policies of, 618 fi mandatory health insurance in Massachusetts, 446 Static economy defi fined, 306 economic profit fi and, 306 Statistical discrimination, 425 Steam engine, 501 Sticky (inflexible) fl prices, 472–476 business cycles and, 522 in categorizing macroeconomic models, 475–476 defi fined, 473 demand shocks and, 472–474 in oligopoly, 236 Stock(s) defi fined, 76, 691 in determination of exchange rates, 771–772 financing through sale of, 76 fi nature of, 691 Stock exchanges, 46, 76 Stock market bubbles and, 77, 536 exclusion from GDP, 481 as leading indicator, 623 macroeconomic instability and, 77, 536 Stock market crash of 1929, 17 Stock options, 286 Stored-value cards, 641 Store of value, money as, 630, 633–635 Strategic behavior advertising and, 233 defi fined, 230 in oligopoly, 230, 233 Strategic trade policy, 757 Street entertainers, 81 Strikes, 292–293 Structuralists, 378 Structural unemployment, 524–525 Subprime mortgage loans, 670, 682–683, 737 Subsidies aggregate supply and, 593 agricultural, 398–400, 401 change in supply and, 53, 54 IND-23 for consumers, 80, 343 in correcting for positive externalities, 80 criticisms of, 402–403 export, 101 government provision of, 343, 439–440 spillover benefits fi and, 343, 439 for suppliers, 80, 343, 398, 399–400 Substitute goods ATMs, 266 change in demand and, 50 change in supply and, 53, 54 cross elasticity of demand and, 125 defined, fi 50 ease of resource substitutability, 262 lack of, in pure monopoly, 202 marginal rate of substitution (MRS), 149 prices of, 50 substitutability and price elasticity of demand, 120 Substitute resources, 457 changes in prices of other resources, 259 Substitution effect, 47, 141, 259 Sugar Program, 404–405 Sunk costs, in decision making, 172 Sun Microsystems, 386, 387, 454 Superstars, in winner-take-all markets, 258 Supplemental Security Income (SSI), 421, 422, 433 Supply, 51–54 See also Market supply aggregate See Aggregate supply change in demand and, 66–69 change in quantity supplied, 54, 57–58 change in supply, 52–54, 57–58, 66–69, 188, 301 defi fined, 51 determinants of, 52 inelastic, 297–299 law of supply, 51, 59 of loanable funds, 300, 301 market supply, 52 price elasticity of, 122–124 resource See Supply of resources restricting agricultural, 401 short-run, 186–189 supply curve, 51–52 Supply curve, 51–52 for Federal funds, 671 labor, 273–277, 282 lack of, in pure monopoly, 208–209 Supply factors defi fined, 506 economic growth and, 505–506 Supply-of-products curve, 770 Supply of resources, 313–333 energy economics, 317–320 environmental quality and, 330–331 increase in, 15–16 natural resource economics, 321–329 population growth and, 313–314 resource consumption per person, 74–75, 314–317 Supply schedule, 51 Supply shocks, 470–472, 531, 599 defi fined, 470 IND-24 Index Supply-side economics, 720–723 defi fined, 720 incentives to save and invest, 720 incentives to work, 720 Laffer Curve and, 720–723 Surplus balance of payments, 768–769 budget, 610, 615 consumer, 126–127, 195–197 defi fined, 55 producer, 127–128, 195–197, 400–401 reduction of agricultural, 400–401 Survey of Manufacturers, 494 Sushi, market for, 68–69 Switzerland, as magnet country for immigration, 452 TAC (total allowable catch), 329 Taco Bell, 137, 380 Taft-Hartley Act of 1947, 292 Target, 247 Tariffs costs to society, 102 decline in, 95–96 defi fined, 95, 101, 754 economic impact of, 754–755 historic U.S tariff rates, 103 international economic linkages, 570–571 international trade growth and, 95–96 marginal analysis of, 101–102 net costs of, 755–756 protective, 101, 754 as rent-providing, 361 types of, 754 Taste-for-discrimination model, 423–425 competition and, 424–425 discrimination coeffi ficient, 423–424 prejudice and the market, 424 Tastes change in demand and, 49, 50 in determination of exchange rates, 771 Taxable income, 85 Taxation, 363–371 aggregate supply and, 593, 720–723 apportioning tax burden, 363–365 barter and, 44 changes in aggregate demand and, 586, 587 changes in supply and, 53, 54 clipping coins in, 531 corporate, 86, 87, 364, 368, 369, 370, 486, 551, 587, 593 in correcting for negative externalities, 342–343 defi fined, 79 dynamic tax scoring, 725 effi ficiency loss of tax, 366–367 elasticity of tax incidence, 365–367 equilibrium GDP and, 572–575 excise, 86–87, 121, 368–369 federal tax revenues, 85–87, 371 fiscal policy and increase in, 611 fi fiscal policy and reduction of, 609 fi health care and, 442 incidence of U.S taxes, 368–371 income distribution and, 368–371, 412 interest rates and, 303–304 Laffer Curve and, 720–723 negative externalities and, 79–80, 368 payroll, 86, 364–365, 369 personal, 74, 85–87, 364, 368, 369, 373, 586 progressive taxes, 85, 86, 364, 368, 371, 612–613 property taxes, 88, 365, 369–370 proportional, 364, 612–613 public debt and, 621 public goods and services and, 81 quasi-public goods and services and, 81 real GDP and, 722 regressive taxes, 364–365, 371, 612–613 sales taxes, 86–87, 364, 368–369 shifts in income and savings schedules, 548 shifts in investment demand curve and, 551–552 single-tax movement on land, 298–299 specific fi taxes, 79–80, 364–365 state taxes, 87–88, 90 subsidies for health care, 439–440 supply-side economics and, 720–723 taxes on production and imports, 486 Tax Freedom Day (U.S.), 84 tax structure in U.S., 371 underground economy and, 493 Tax credits, health care and, 442 Taxes on production and imports, 486 Tax Freedom Day (U.S.), 84 Tax incidence defi fined, 365 division of burden, 365–366 elasticity and, 365–367 in the U.S., 368–371 Taylor, John, 673, 738n Taylor rule, 672–673, 735, 738 Teamsters Union, 290, 640 Technology See also Innovation advances in, 16, 37, 213, 242, 258, 395, 441, 508–509 agricultural supply increases and, 395 changes in aggregate demand and, 587 changes in supply and, 53, 54 computerized inventory management, 474–475 economic growth and, 16, 504, 505, 508–509, 512–513 health care prices and, 441 industrial regulation in perpetuating monopoly, 383 in market systems, 32, 36, 37 productivity changes and, 258, 512–513 pure monopoly and, 213 role in wage determination, 272 shifts in investment demand curve and, 551–552 social regulation and, 383 Telecommuting, 513 Temporary Assistance for Needy Families (TANF), 350, 421, 422, 433 Temporary workers health care costs and, 434 unemployment and, 525 Tennessee Valley Authority (TVA), 382 Term auction facility, 669 Terms of trade comparative advantage and, 98, 747 defined, fi 98, 747 flexible exchange rates and, 775 fl Terrorism terrorist attacks of September 11, 2001, 14, 80–81, 600, 615, 617, 637–638, 678, 737 war on, 80–81 Threats credible, 246–247 empty, 246–247 Thrift institutions consolidation among, 639 defined, fi 632 in Federal Reserve System, 638 relative decline of, 639 in the U.S., 638, 639, 640 TIAA-CREF, 640 Ticket scalping, 56 Time duration of unemployment, 528 ease of resource substitutability, 262 economic growth and, 500 fiscal policy timing problems, 617 fi income inequality and, 411–412, 415–416 marginal value of utility and, 143–144 price elasticity of demand and, 120–121 price elasticity of supply and, 122–124 supply-side economics and, 721 Time deposits, 632–633 Time preference, 697 Time-value of money, 302–303 compound interest, 302 future value, 302, 303 present value, 302–303, 688–691, 705 Time Warner, 240, 380 Tobacco subsidies, 402–403 Token money, 631 Topel, Robert, 435 Topographical maps, indifference maps and, 151 Total allowable catch (TAC), 329 Total cost (TC) average total cost (ATC), 163 defined, fi 161–162 graphical portrayal of, 180 ratio of resource cost to, 262 Total fertility rate, 313–314 Total money demand, 661–664 Total opportunity cost (TC), in market systems, 34–35 Total output See also Gross domestic product (GDP); Output interest and, 304 profit fi and, 307 Total product (TP), defined, fi 157 Total revenue (TR) defined, fi 178 graphical portrayal of, 179, 180 in market systems, 34–35 total-revenue curve for price elasticity of demand, 119–120 total-revenue test for price elasticity, 116–119, 207 Total utility Index defi fined, 135 income equality in maximizing, 416–417 marginal utility and, 135–137 Toyota, 77, 214, 240, 241, 247, 293 Trade Adjustment Assistance Act of 2002, 105–106 Trade barriers, 754–759 argument for, 756–759 economic impact of, 754–755 net costs of, 755–756 satire of, 760 types of, 101, 754 See also Import quotas; Tariffs Trade bloc, defined, fi 104 Trade deficits fi causes of, 779 defi fined, 94, 744, 767 implications of, 779–781 of the U.S., 95, 778–781 Trade flows, 92 Trademarks, 31 Trade-offs, budget line, 9–10 Trade patterns, international trade of U.S., 94–95 Trade surplus, defined, fi 94, 744, 767 Trading possibilities line, 747–749 Tragedy of the commons, 343–344, 517 Training See Education and training Trane, 287 Transactions demand for money, 661, 662 Transfer payments See also Income distribution defi fined, 79 exclusion from GDP, 481 in government fi finance, 83–84 income transfer in pure monopoly, 211 noncash transfers, 412 public debt as, 621 public versus private, 481 Transition costs, 348 Transportation technology, international trade growth and, 95 Treble damages, 376 Trough, of business cycle, 521 Trump, Donald, Truth in Lending Act of 1968, 309 Truth in Savings Act of 1991, 309 Turkey, U.S dollars in, 642 Tying contracts, 377, 381–382 Tyson, 392 UCAR International, 381 Unanticipated inflation, fl 532 Unattainable combinations, Uncertainty See also Risk flexible exchange rates and, 774–775 fl shocks and, 470–474 Underground economy See also Black markets gross domestic product and, 493 Unemployment, 523–528 in China, 516 cyclical, 525, 578, 596–597 defi fined, 467 defi finition of full employment, 525 economic cost of, 525–528 education and, 526, 528 government role in promoting stability and, 82 immigration and, 457–458 income inequality and, 414 inflation fl and, 714–719 international comparisons, 528–529 as leading indicator, 623 measurement of, 523–524 minimum wage and, 280 noneconomic costs of, 528 in production possibilities model, 14–15 trade protection and, 758 trends in, 716 types of, 524–525 union wage increases and, 279 in the U.S., 467–468, 523, 539, 577, 600 Unemployment compensation, 421–422 Unemployment equilibrium, 730 Unemployment insurance, 421 Unemployment rate, 523–524 Unilever, 214, 240 Uninsurable risks, 307 Unionization rate, 290 Unions See Labor unions Union shop, 291 United Autoworkers, 290 United Kingdom, modern economic growth and, 503 United Nations, Department of Economic and Social Affairs, 464 U.S Bureau of Economic Analysis (BEA), 311, 480, 494, 497, 500, 560, 582, 603, 615, 725, 765–766 U.S Bureau of Engraving and Printing, 631, 645 U.S Bureau of Labor Statistics, 21, 260, 269, 289, 523, 529, 530 U.S Census Bureau, 65, 90, 111, 200, 411, 448, 494 U.S Customs Service, 494 U.S Department of Agriculture (USDA), 65, 395, 401, 408 U.S Department of Defense, 443 U.S Department of Homeland Security, 464 United States dollar See also Exchange rate(s) currency circulating abroad, 642 dollar economies, 642 dollar-yen market, 99–100, 111, 784 economic growth measures and, 468, 469–470 exchange rates and, 769–778 purchasing power of, 634–635 United States economy, 72–90 accounting statement, 485 agriculture in, 392, 394–406 balance of payments, 765–769 business cycles in, 521 businesses in, 75–78 capitalism in, 30 circular flow fl model and, 82–83, 488–490 comparative advantage and, 96–99 covert collusion in, 238 economic growth in, 499, 500–504, 505, 507–514, 519, 520, 598–600 economics of war and, 14 energy economics in, 315–320, 333 IND-25 Environmental Performance Index (EPI), 331 executive pay in, 77, 287, 415 exports of, 93–96, 111 export supply, 751 federal fi finances in, 84–87, 371 Federal minimum wage, 280–281 financial institutions in, 639, 640 fi fiscal policy in, 613–616 fi fisheries management in, 327–329 fi foreign exchange market, 99–100, 111 forest management in, 326–327 gasoline market in, 59–60, 68, 71, 349 general level of wages in, 271–272 Global Climate Change initiative, 347–348 global competition and, 96–99, 108 government and trade, 101–102 Great Depression and, 14, 17, 102, 483, 521, 525, 562, 574–575, 578, 618, 656, 707, 727, 729 gross domestic product (GDP) of, 468, 494 health care in, 364–365, 421, 422, 431–448 historic tariff rates, 103 households in, 73–75 immigration and, 449–464 impact of taxes and transfer payments in, 412 import demand, 751–752 imports of, 93, 94, 111, 394, 758, 779 income distribution in, 410–411, 415, 420–423, 430 income shares in, 309, 455–456 Industrial Revolution and, 313 inflation fl in, 520–521, 529–530, 539 infrastructure of, 483–484, 509 interest rates in, 686 international linkages and, 92 international trade and, 91–111 See also International trade labor resources, 21 labor unions in, 277–280, 290–294 local finances in, 88, 371 monetary policy in, 678–683 monopsony in, 277 mortgage debt crisis, 670, 682–683 multilateral trade agreements, 102–105 North American Free Trade Agreement (NAFTA), 105, 513 offshoring of jobs and, 106–107, 434–435 as open economy, 96 poverty measures in, 418–420 productivity acceleration and, 511–514 public debt and, 780–781 public sector, 78–82 recent fiscal policy, 614–615 recessions in, 521, 577, 597, 603 specialization and, 96, 98–99 state fi finances in, 87–88, 90, 371 supply and demand analysis for international trade, 750–752 tax incidence in, 368–370 tax structure in, 371 terrorist attacks of September 11, 2001, 14, 80–81, 600, 615, 617, 637–638, 678, 737 IND-26 Index United States economy.—Cont trade adjustment assistance, 105–106 trade defi ficits of, 778–781 trade-related issues, 105–106 unemployment in, 467–468, 523–524, 539, 577, 600 water use in, 315–317 wealth distribution in, 413–414, 427 U.S Environmental Protection Agency (EPA), 345, 347, 355, 385 U.S International Trade Commission (USITC), 763 U.S Justice Department, 221, 247, 376, 381, 386– 387, 390 U.S Mint, 631, 645 U.S Postal Service, 213, 240 U.S securities assets of Federal Reserve Banks, 664 liabilities of Federal Reserve Banks, 664–665 nature of, 619–620 open-market operations and, 638, 665–667 purchase by commercial banks, 652 U.S Steel case, 378 U.S Supreme Court, antitrust policy and, 378 U.S Treasury Department, 631, 632, 638, 664 United Steelworkers, 290 Unit elasticity of demand, 115, 118 Unit of account, money as, 630 Unplanned changes, 566–567, 574 Unrelated goods, 50 Uruguay Round, 103–104 User cost of extraction, 322 in present use versus future use, 322–324 Usury laws, 305 Utility defi fined, 4, 135 law of diminishing marginal utility, 135–137 marginal utility, 135–137 total utility, 135–137, 416–417 utility-maximizing rule, 138–141 Utility-maximizing rule, 138–141 algebraic generalization, 139–140 defi fined, 138 demand curve and, 140–141 numerical example, 138–139 Value added defi fined, 481 in production process, 481 Vanguard, 640 Variable costs (VC) average (AVC), 162–163 defi fined, 161 identifying, 175 Variables dependent, 23 independent, 23 Variety behavioral economists and, 142–143 benefi fits of, 229 in monopolistic competition, 228–229 Vault cash, 647 Végh, Carlos, 537n Velocity, 728 of money, 741 Venezuela, oil industry of, 599 Verizon, 240 Verson stamping machine, 171 Vertical axis, 22 Vertical integration, 75 Vertical intercept, 25 Vertical mergers, 380, 381 Visa card, 633, 640, 641 Voice mechanism, 294 Volume, in international trade of U.S., 92–93 Voluntary export restriction (VER), 754 Voting See Majority voting Vouchers, health care and, 442 Wachovia, 640 Wage(s) See also Wage determination defi fined, 271 effi ficiency, 285–286, 597, 733–734 general level of, 271–273 income approach to GDP and, 486 real, 271–273, 289 unemployment and union wage increases, 279 Wage contracts, 597 Wage determination, 270–294 average wage of selected occupations, 281 bilateral monopoly model of, 279–280 CEO pay, 77, 287, 415 defi finitions, 271 downward wage inflexibility fl and, 733–734 education and, 283 general level of wages, 271–273 global perspective on wages of production workers, 271–273 immigration and, 454–455, 459–460 labor unions and, 277–280, 290–294 minimum-wage controversy in, 280–281 monopsony model of, 275–277 pay for performance, 285–286 productivity and, 271–272 in purely competitive labor market, 273–275 wage differentials, 281–285 Wage differentials, 281–285 compensating differences, 283–284 defi fined, 281 education and, 415 marginal revenue productivity, 282 market imperfections, 284–285, 293–294 noncompeting groups, 282–283 Wage growth, health care costs and, 434 Wage rates defi fined, 271 impact of immigration on, 454–455, 460 labor unions and, 279, 284, 291 Wagner act of 1935, 292 Wait unemployment, 524 Walgreens, 249, 641 Wal-Mart, 75, 77, 146, 247, 249, 296, 308, 513, 641 Walt Disney Company, 240, 241, 380 War See also National defense economics of, 14 on terrorism, 80–81 Warranties, 351–352 Washington Mutual, 640 Water pollution of, 345 use of, 315–317 Watt, James, 501 Wealth changes in aggregate demand and, 586 as nonincome determinant of consumption and saving, 546 unequal distribution of, 413–414, 427 Wealth effect, 546–547, 548, 603 Wealth of Nations, The (Smith), 38 Weapons, black markets in, 642 Well-being noneconomic sources of, 495 real GDP as measure of, 478 Wells Fargo, 640 Western Union, 202 Weyerhaeuser, 513 Wham-O, 202 Wheat, price fl floors on, 61–62 Wheeler-Lea Act of 1938, 377 Williams, Raburn M., 537n Wilson, 92 Winfrey, Oprah, 9, 409 Winner-take-all markets, 258 Wizzit, 641 Women crowding model and, 426 economic growth and, 509 poverty among, 419 unemployment and, 526, 528 Woods, Tiger, 409 Workplace safety, 350–351, 355 Work rules, 292 WorldCom, 77, 381 World price, 750 World Trade Organization (WTO), 103–104, 404–405, 513, 516, 759, 763 Xerox, 204 X-ineffi ficiency, 212–213 Yahoo!, 454, 512 Yale University, Environmental Performance Index (EPI), 331 Yücel, Mine K., 599n Yum! 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Economics, Principles of Microeconomics, and Principles of Macroeconomics First Edition McConnell, Brue, and Flynn Economics, Microeconomics, and Macroeconomics Eighteenth Edition Samuelson and. ..EIGHTEENTH EDITION Economics Principles, Problems, and Policies The McGraw-Hill Economics Series McConnell, Brue, and Flynn Brief Editions: Microeconomics and Macroeconomics First Edition... purpose, style, and coverage from Economics, 18e Microeconomics, Brief Edition Go to www.mcconnellbriefmicro1e.com for sample chapters, the text preface, and more information Macroeconomics, Brief