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Penn Plaza, New York, NY 10121 Copyright © 2017 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2013, 2010, and 2008 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 McGraw-Hill Education, 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 DOW 21 20 19 18 17 16 ISBN 978-1-259-19315-6 MHID 1-259-19315-2 Chief Product Officer, SVP Products & Markets: G Scott Virkler Vice President, General Manager, Products & Markets: Marty Lange Managing Director: James Heine Senior Brand Manager: Katie Hoenicke Director, Product Development: Rose Koos Senior Product Developer: Christina Kouvelis Marketing Manager: Virgil Lloyd Director of Digital Content Development: Douglas Ruby Digital Product Analyst: Kevin Shanahan Director, Content Design & Delivery: Linda Avenarius Program Manager: Mark Christianson Content Project Managers: Harvey Yep (Core)/Bruce Gin (Assessment) Buyer: Laura M Fuller Design: Egzon Shaqiri Content Licensing Specialists: Melissa Homer (Image)/Beth Thole (Text) Cover Image: Jag_cz Compositor: Aptara®, Inc Printer: R R Donnelley All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Cataloging-in-Publication Data Names: Colander, David C., author Title: Economics / David C Colander, Middlebury College Description: Tenth edition | New York, NY : McGraw-Hill/Irwin, [2017] | Series: The McGraw-Hill series in economics Identifiers: LCCN 2016021255| ISBN 9781259193156 (alk paper) | ISBN 1259193152 (alk paper) Subjects: LCSH: Economics Classification: LCC HB171.5 C788 2017 | DDC 330—dc23 LC record available at https://lccn.loc.gov/2016021255 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites mheducation.com/highered About the Author David Colander is Distinguished College Professor at Middlebury College He has authored, coauthored, or edited over 40 books and over 150 articles on a wide range of economic topics He earned his B.A at Columbia College and his M.Phil and Ph.D at Columbia University He also studied at the University of Birmingham in England and at Wilhelmsburg Gymnasium in Germany Professor Colander has taught at Columbia University, Vassar College, the University of Miami, and Princeton University as the Kelley Professor of Distinguished Teaching He has also been a consultant to Time-Life Films, a consultant to Congress, a Brookings Policy Fellow, and Visiting Scholar at Nuffield College, Oxford He has been president of both the History of Economic Thought Society and the Eastern Economics Association He has also served on the editorial boards of the Journal of Economic Perspectives, The Journal of Economic Education, The Journal of Economic Methodology, The Journal of the History of Economic Thought, The Journal of Socio-Economics, and The Eastern Economic Journal He has been chair of the AEA Committee on Electronic Publishing, a member of the AEA Committee on Economic Education, and is currently the associate editor for content of the Journal of Economic Education He is married to a pediatrician, Patrice In their spare time, the Colanders designed and built an oak post-and-beam house on a ridge overlooking the Green Mountains to the east and the Adirondacks to the west The house is located on the site of a former drive-in movie theater (They replaced the speaker poles with fruit trees and used the I-beams from the screen as support for the second story of the carriage house and the garage.) They now live in both Florida and Vermont Preface “Imagine a textbook that students enjoy!” That comment, from an instructor who taught at Purdue, was e-mailed to me as I was struggling to write the preface to an earlier edition That comment still captures what I believe to be the most distinctive feature of this edition It speaks to students An Entire Learning Platform That comment continues to guide this edition But because students today learn differently than they did twenty years ago, it does so in new ways Students today grew up with the Internet and social media that provide them with access to a broad range of digital resources and instant feedback That changes the way they learn, and if we are to reach them, we have to present material to them in ways that fit their learning style They want to be able to bring their course with them, to access it anywhere, anytime—at a coffee shop in the afternoon, in their dorm room late at night, or at lunch hour at work They still want material that speaks to them, but it has to speak to them in their language at the time they want to listen Modern learning is blended learning in which online presentations, review and testing of material, and feedback are seamlessly blended with the narrative of the text The strengths of previous editions translate well in this new environment Students don’t want an automaton They want a person who speaks to them, even if it is online They don’t differentiate a “virtual” world from a “real” world Both are real and students seek the same thing in both—a presentation of material that engages them And that’s what I I tell stories I use colloquial language, and I offer material that they read about online, or hear about through other media—today’s economic issues The material speaks to them in ways that they can hear and enjoy This edition has built upon the last edition, and is structured so as to reach out to students in the digital language of online communication To teach modern students effectively, we’ve got to get their attention and hold it, and digital tools give us that opportunity That’s why I’ve worked hard in this revision to provide material that students can engage in a single, seamless, and fully digital product All of the content, including end-of-chapter questions, lines up directly with learning objectives These learning objectives serve as the organizational structure for the material The learning objectives, themselves, are broken vi down into further learning objectives associated with concepts that are presented in bite-sized portions of the text as part of the LearnSmart offer This allows students the opportunity to master concepts that support the larger picture As a result, within McGraw Hill’s Connect platform, students can learn the core building blocks online with instant feedback; instructors can assess student learning data and know what their students understand, and what they don’t With that information, they can devote class time to those issues with which students are having problems The end-of-chapter material is written for optimal online delivery: All of the standard questions and problems are auto-gradable and integrated with the online experience Such integration allows students to move seamlessly between homework problems and portions of the narrative to get the information they need, when they need it This is a significant advance in pedagogy Now, even professors in large lecture classes can assign questions and exercises at the end of chapters and provide feedback to students at the point of need To provide the greatest flexibility for the range of course approaches, in addition to the standard questions and exercises at the end of every chapter, I also provide a set of Issues of Ponder and Alternative Perspective Questions that have no “correct” answer, but instead are designed to get the students to think In a blended learning environment, these are the questions that can form the basis for rich classroom discussions that engage the students with broad issues as much as the online material engages them with the building blocks Classes become discussion and thinking time, not regurgitation and repetition time I am confident that the combination of the digital tools via LearnSmart and Connect, the modern material presented, and the colloquial style I have worked so hard to perfect will engage students in the tenth edition like never before Modern, Not Outdated 1950s Economics You can have the best online platform and presentation in the world, but if the content isn’t relevant or engaging, it serves little purpose My goal is to present students with the best economics I can That means that I want to teach modern economics, not neoclassical economics (or whatever ■ Preface ■ vii else the collection of models that developed in the 1950s is called) That doesn’t mean that I don’t teach the traditional models; it just means that I integrate modern interpretations and insights into those models That approach makes the tone and format somewhat different from the 1950s’ tone and format of many current competitors that make it seem as if economics hasn’t changed in over 60 years Why haven’t competitors changed? Because it is really, really hard to deviate from the standard template developed in the 1950s I fully recognize the difficulty I know and accept that if we are going to teach modern economics, it has to involve an evolutionary, not revolutionary, template But recognizing the importance of the existing template is not a call for laziness and complacency in what we teach; it is a call for creativity Economics has changed and that means the content of the texts has to change as well Over the past decade I have been working on ways to introduce modern economics into the principles course— trying different ideas on my students and colleagues and discovering what works and what doesn’t In earlier editions I started to integrate modern economics into the standard principles template, and I continue that integration in this edition after getting useful comments from many of my users about the best way to it One of the biggest problems that many people pointed out with presenting the subtleties of modern economics to students is that many of their students are, shall we say, less-than-perfect students I am not unaware of the nature of students—in fact I was one of those far-less-than-perfect students I am no utopian; I am a realist who recognizes that many, perhaps most, students could care less about how economists think They are taking the course because it is required, because their parents told them they had to, or because it was what fit in their schedule That is the reality, and they are the students I’m writing for So my target student is a non-economics major who doesn’t especially care about the content they are learning; he or she is much more likely to be concerned with what is going to be on the exam For these non-economics majors it is even more important that we teach them modern economics, not a set of models from an outdated template I want students to know TANSTAAFL, to know the strengths of markets, the weaknesses of markets, the importance of incentives, and why economic policy is so complicated and messy Big Think Economics: Teaching More than Modules Much of the recent focus in economic pedagogy involves a shift in focus away from seeing textbooks as a whole to seeing them as a compilation of modules This has been accompanied by a modularization of the teaching of economic principles: economic understanding is divided into learning objectives, sub learning objectives, and sub-sub learning objectives These learning objectives are presented to students as the building blocks of economic understanding: Know these and you know economics This atomization approach makes lots of sense as long as one remembers that to hold the building blocks together one needs both mortar and an architectural blueprint Unfortunately, mortar and blueprints don’t fit nicely into building block modules Mortar and blueprints require conceptualization that goes beyond the standard models— conceptualization that brings the big picture into focus, not just the individual building blocks Because there are alternative architectural blueprints, there is not a single big picture, but instead a variety of them The study of such issues is the grist for “big think” economics To present big think economics to students requires nuanced contextual discussion, as well as mathematical models involving analytic understanding Students have to be presented with questions without definitive answers, but ones upon which, when addressed creatively, economic models can shed light My book contains lots of such discussions In the book I continually remind students that the models they are learning are based on assumptions, and that to apply the models the students need to decide whether the assumptions fit The text presents students with examples of how economists have put the building blocks together in different ways so that they recognize the strength and limitations of the models The goal is to have the students come away not with a set rules, but a set of tools, which if used with judgment, can help the student arrive at reasonable conclusions Modern Critical Thinking Economics Modern economics can mean different things to different people, and my interpretation of modern economics centers around critical thinking Modern economics is based on the traditional models, but it subjects those models to critical thinking, and does not apply the models where they don’t fit empirically It focuses on the real world, rather than on abstract models To maintain that critical thinking approach, two principles stand out: (1) institutions and history are important in policy discussions and (2) good economics is open to dealing with all ideas The mantra of modern critical thinking economics is, “Tell me something I don’t already know, using whatever method works.” Let me discuss each of these principles briefly viii ■ Preface ■ Institutions and History Are Important to Understand Policy If one opens up Adam Smith’s Wealth of Nations, John Stuart Mill’s Principles of Political Economy, or Alfred Marshall’s Principles of Economics, one will see economic analysis placed in historical and institutional context The modern textbook template moved away from that, and in previous editions, I tried to return the principles of economics toward that broader template, presenting models in a historical and institutional context This edition continues that emphasis on institutions and history Modern work in game theory and strategic decision making is making it clear that the implications of economic reasoning depend on the institutional setting To understand economics requires an understanding of existing institutions and the historical development of those institutions In a principles course we don’t have time to present much about history and institutions, but that does not preclude us from letting students know that we know that these issues are important And that’s what I try to When I say that institutions and history are important, I am talking especially about economic policy As I stated above, this text and the accompanying package is not designed for future economics majors Most principles students aren’t going to go on in economics I write for students who will probably take only one or two economics courses in their lifetime These students are interested in policy, and what I try to present to them is modern economic reasoning relevant to policy questions Because I think policy is so important in explaining how to apply economic reasoning, I utilize a distinction made by J.N Keynes (John Maynard Keynes’ father) and Classical economists generally That distinction is between theorems—the deductive conclusions of models— and precepts—the considered judgments of economists about the policy implications of the models I make it clear to students that models not tell us what to about policy—they give us theorems Only when we combine the model’s results with our understanding of institutions, our understanding of the social context, and the normative goals we want to achieve, can we arrive at policy conclusions embodied in precepts Openness to Various Views While I present modern economics, I present it in such a way that is open to many different points of view I don’t present the material as “the truth” but simply as the conventional wisdom, the learning of which is a useful hurdle for all students to jump over To encourage students to question conventional wisdom, at the end of each chapter I include a set of questions—Questions from Alternative Perspectives—written by economists from a variety of different perspectives These include Post-Keynesian, feminist, Austrian, Radical, Institutionalist, and religious perspectives Each are described further in the “Distinguishing Features” section that follows the preface The Radical questions come from the Dollars and Sense Collective, a group with whom I’ve worked to coordinate their readers (www.dollarsandsense.org/bookstore.html) with this text I also often integrate Austrian ideas into my class; I find that The Free Market (www.mises.org) is a provocative resource I often pair an article in The Free Market with one in Dollars and Sense in my assignments to students for supplementary reading Having students read both Radical and Austrian views, and then integrate those views into more middle-of-the-road, views is, for me, a perfect way to teach the principles course (If I have a lot of radicals and libertarians in the class, I assign them articles that advocate more middle-of-the-road views.) Teaching both Models and Critical Thinking The goal in most principles courses is to teach students economic insights by presenting them a collection of models Models are central to modern economics Robert Solow nicely captured their importance when he said that, for better or worse, economics is a modeling science This means that an important aspect of teaching students modern economics involves introducing them to the modeling approach to understanding the world But teaching models, in my view, should be along the lines of Marshall, not Mas-Colell, Whinston, and Green Marshall emphasized that economics was an approach to problems, not a body of confirmed truths In my view, the modeling method, not the models, is the most important to an economics class In my presentation of models, I carefully try to guide students in the modeling method, rather than having them memorize truths from models I carefully emphasize the limitations of the models and the assumptions that underlie them, and am constantly urging students to think beyond the models This approach pushes the students a bit harder than the alternative, but it is, in my view, the best pedagogical approach; it is the critical thinking approach Changes to This Edition The principles of economics are unchanging, but the problems to which those principles are applied are in a www.freebookslides.com IND-40 Posted-price markets, 572 Potential income, 592 Potential income level effects of variations, 730 full-employment level, 730 government knowledge of, 730–731 and inflation, 731 policy recommendations, 730–731 Potential output, 528–529, 567 effect of trade deficit on, 551 versus equilibrium output, 568 exceeded in World War II, 581 and expansionary monetary policy, 669, 670 gap with consumption, 809 limited by globalization, 809–810 and long-run aggregate supply curve, 574–575 lower in recession of 2008, 581 measurement problems, 583 short-term growth, 595–596 in structural stagnation hypothesis, 622 and unemployment changing target rate of unemployment, 754 cyclical vs structural, 752–753 globalization factor, 755–756 Okun’s rule of thumb for, 751–752 and reservation wage, 752 short-run causes of structural unemployment, 755 Poverty absolute vs relative, 391 absolute vs relative measures, 392 costs of, 392–393 debates about definition, 391–392 economists’ views on ending, 848 incentive for crime, 389 number and percentages of persons in, 392 official definition, 391 Poverty initiatives, 16 Poverty threshold, 391 and food budget, 391–392 Precepts, 13, 479 Precommitment policy, 703 Precommitment rules, 456 Precommitment strategy, 464 Predatory pricing, dumping as, 222 Predictable irrationality, 461–462, 488 Predictably Irrational (Ariely), 464 Prescott, Edward, 158, 371 Present value, 637 determining, 638–639 annuity rule, 638–639 Rule of 72, 639 importance of, 639–641 in popular press, 639 Present value formula, 637–638 Present value table, 638 Presley, Elvis, 150 Price(s) basis of rational choice, 410 in cigarettes in World War II, 640 as collective judgment, 487 cream-skimming, 326 with deflation, 564 ■ Index ■ determination of quantity demanded, 73–78 determination of quantity supplied, 79–84 effect of excess demand, 89 effect of tariffs and quotas, 209 effects of government intervention excise taxes and tariffs, 106–107 price ceilings, 103–104 price floors, 105–106 quantity restrictions, 107–108 expectations of future, 570 of factors of production, 278 finding, for monopoly, 290–291 with hyperinflation, 745 implicit collusion, 313 income effect, 422 increase during bubbles, 689 information from inflation on, 773 irrational reaction to, 124 kinked demand curve, 314 and law of one price, 33 and long-run aggregate supply curve, 579–580 lowered in Great Depression, 338 lower from globalization, 632 and marginal revenue and marginal cost, 265 money, as relative prices, 642 in monopolistic competition, 305–306 of monopoly determined graphically, 287–289 determined numerically, 286–287 of normal monopolist, 292–293 oligopoly decisions on, 312 in oligopoly models, 315 in perfect competition, 263 and quantity demanded, 415–416 as rationing mechanism, 10–11 set at zero, 122 and shutdown point, 273 sticky in cartels, 314 substitution effect, 416–417 supply and demand analysis of, 87–88 weighting goods by, 543 Price ceilings, 104, 150, 295 equations for, 115 in military draft, 155 rent control, 104–105 world supply curve as, 620 Price changes effect on quantity demanded, 76 effect on quantity supplied, 82 Price controls compared to taxation, 150 effect on output and market price, 295 with inelastic supplies, 155 price ceilings, 150 price floors, 151 Price-discriminate, 293 Price discrimination by airlines, 293 definition, 133 elimination of welfare loss, 294 examples of, 134 by movie theaters, 293 www.freebookslides.com Price elasticity, information provided by, 118 Price elasticity of demand, 122 calculating, 124–125 and endpoint problem, 124–125 examples, 126 factors determining substitutes, 128–131 geometric tricks for estimating, 129 and price discriminating monopolists, 293 total revenue and, 131–133 Price elasticity of supply, 122 calculating, 124–125 examples, 126 and minimum wage, 124–126 Price-fixing by Archer Daniels Midland, 324 fines for, 324 Price floors, 106, 151 and elasticity of supply and demand, 154, 156 equations for, 115 minimum wage, 106–107 Price increase, supply and demand analysis, 138 Price indexes, 551, 771 consumer price index, 772–773 creating, 771–772 GDP deflator, 551 measurement problems, 774 producer price index, 773 Price leaders, 315 Price level with contractionary monetary policy, 643 dynamic adjustment feedback effects, 574 effect on quantity of aggregate demand, 573 effects of pressures for fall in, 574 and exchange rate changes, 804–805 and exchange rates in fiscal policy, 803 and exchange rates in monetary policy, 802 with expansionary monetary policy, 643 fixed, 568 and increase of aggregate expenditures, 569 interest rate effect, 569 international effect, 568 and law of demand, 79 money wealth effect, 569–570 pressure to fall, 585–586 in quantity theory of money, 774 rare declines in, 579–580 real GDP and, 551 and substitutes, 72 Priceline.com, 266, 332 Price mechanism, 53 to coordinate demand, 77–78 distortions of excise taxes and tariffs, 107–108 price ceilings, 104–105 price floors, 108 quantity restrictions, 109–110 Price-setting and elasticities, 133 and price controls, 296 by retailers, 133 Prices of other goods, 80–81 ■ Index ■ IND-41 Price supports, in European Union, 520 Price taker, 268 Price transparency, in European Union, 777 Price wars, in oligopoly, 317 Pricing mechanism, 13 Pricing policies public vs private goods, 171–172 Principle of diminishing marginal utility, 410 Principle of rational choice, 412 extending, 414–415 and law of demand, 415–416 and law of supply, 423 Principles of Economics (Marshall), 10, 121 Prisoner’s dilemma, 434 campaign finance reform proposal, 446 cheap talk, 441 dominant strategy, 441 duopoly example, 453–454 example, 434–436 Nash equilibrium, 436 noncooperative game, 436 payoff matrix, 435 strategic options, 435 Private equity firms, 336 Private goods, 64 excludability of cost of pricing, 171–172 Private property, for economic growth, 603 Private property rights, 50 Privatization, in Europe, 343 Procyclical fiscal policy, 736 in financial crisis of 2008, 736–737 in states, 735–737 Producer price index, 771 GDP deflator as, 771 Producers, effects of globalization, 638 Producer surplus, 142 distribution of, 510–511 effect of rent-seeking activities, 151–156 effect of taxation, 147 from monopoly, 292 from perfect competition, 292 and price-discriminating monopolist, 298 Product(s) changes in demand for, 378 identical in perfect competition, 264 intermediate, 546–547 Product differentiation from advertising, 308 benefits to consumers, 308 in monopolistic competition, 301 Production, 57, 224; see also Long-run cost curve adjusting for global dimensions of, 554 changes since 1933, 251 cost advantage of China, 192 and depreciation, 548 economically efficient, 243 economically efficient point of, 261 economies of scope in, 252–253 during Industrial Revolution, 538 and land prices, 244 learning by doing, 253, 608 www.freebookslides.com IND-42 Production—Cont location options, 223 long- vs short-run options for firms, 243 low levels of long-run planning decisions, 244 minimum efficient level, 247 many components of, 251 negative externalities from, 161 and paradox of thrift, 564 real-world, 333 requirements in cartels, 317 role of firms in, 225–227 specialized, 214–216 technical efficiency, 248 technological change, 253 technology changes in auto industry, 249 time and costs to change or move, 192 value added in stages of, 225, 548 wealth from past, 190 Production decisions importance of economies and diseconomies of scale, 248 long-run, 244 multiple dimensions of, 258–259 role of economies of scope, 251–252 Production figures, 554 Production function, 228–229 changing in the west, 829 graph, 229 Production possibilities curve, 24–25 and advances in technology, 605 and comparative advantage, 28–30 conclusions on, 37–38 creation of, 25 and decision trees, 29 examples of shifts in, 30 and gains from trade, 32 meaning of efficiency, 29 and productive efficiency, 28 Saudi Arabia, 183 for scarcity, 25–27 summary of, 29 trade and comparative advantage, 30–34 trade-offs, 34 United States, 184 Production possibilities table, 25 creation of production possibilities curve, 26 increasing opportunity cost of trade-offs, 26–27 production possibilities curve for individuals, 25–26 Production process; see also Costs of production average product, 229 law of diminishing marginal productivity, 230–231 long- vs short-run, 228 marginal product, 228 production function, 232 production tables, 232 Production tables, 228 graph, 229 real-world applications, 229 Productive efficiency, 28 and distribution, 31–32 from division of labor, 31 Productivity, 591 fluctuations in, 752 and inflation, 775 ■ Index ■ policies to increase, 634–637 relation to costs, 236 and shift in SAS curve, 573 Professional degrees, 370 Profit, 57, 225 accounting, 225, 255 in aggregate income, 554 determination of from graphs, 275 output where MC = MR, 275 per unit MC = MR, 276 from table of costs, 274 by total cost and revenue curves, 273 zero profit or loss where MC = MR, 273–274 economic, 225–227, 255 of lazy monopolists, 335, 336 in monopolistic competition, 302–303 of monopoly breaking even or making a loss, 292–293 making a profit, 295 motivation for efficiency other than, 337–338 of natural monopoly, 295 normal, 275 and output, 550 zero, 273–274, 275–277 Profit maximization, 225–226 lack of manager incentives for, 332 MC = MR, 269–270 problems with manager incentives, 336 need for monitoring, 336–338 in real-world firms, 273 short- vs long-run, 332 total, 270–271 Profit-maximizing condition, 269 Profit-maximizing level of output in monopolistic competition, 301 in natural monopoly, 298 in perfect competition marginal cost, 263 marginal cost curve as supply curve, 269 marginal revenue, 266 MC = MR, 269–270 total profit maximization, 270–271 Progressive tax, 399 and income inequality, 391 Property rights, 512–513 and economic growth, 602 and income distribution, 402–403 lacking in developing countries, 844 and nonwage income, 363 Property taxes, 145, 400 effect on rents, 147 Proportional tax, 399 Protectionism; see Trade restrictions Psychic income, 370 Public assistance, 403 general assistance, 403 Medicaid, 403 Supplemental Nutritional Assistance Program, 403 Temporary Assistance for Needy Families, 403 Public choice economists, 153 on farm lobby, 153 on government failure, 516 www.freebookslides.com Public choice model, 504 Public goods, 64, 169 effect of technology on, 169 excludability of cost of pricing, 171–172 free rider problem, 171 market value, 169–171 national defense, 169 Public School Match program, New York City, 486 Purchasing power parity, 560, 771–772, 827 actual in 2011, 773 criticisms of, 772–773 to estimate long-run equilibrium exchange rate, 771–772 rich vs poor nations, 827 Purposeful behavior, 460, 467 Push policy, 493 Pyramid class structure, 393 Q Quality, and Consumer price index, 774 Quantitative easing, 676 as asset price support system, 677 effect on yield curve, 677 Quantitative literacy, 48 Quantity-adjusting markets, 577 Quantity demanded, 77, 79 and demand curve, 79 income effect, 416–417 in law of demand, 78 and market demand curve, 82–83 substitution effect, 416–417 time dimension, 81–82 Quantity of labor demanded, 356 Quantity supplied, 85 effect of price changes, 86 effect of price elasticity, 123 in law of supply, 84–85 Quantity theory of money, 751 adjusted theory, 753 causation from money to prices, 751 declining influence of, 751–752 equation of exchange, 750 real output independent of money supply, 750–751 velocity of money, 750 Quintiles of income, 383 Quotas, 209 compared to tariffs, 209 equations for, 118 quantity restrictions, 108–109 small-country assumption, 210 QWERTY keyboard, 346, 610 R Rabin, Matt, 460 Race, median income by, 394 Radical economists, on income redistribution, 394–395 Rainy day funds, 713 Rational, 511 Rational choice behavioral economists on, 408 and budget constraint, 410–411 ■ Index ■ IND-43 extending principle of, 414–415 focal point equilibria, 419 follow-the-leader approach, 419 income effect, 416–417 indifference curve analysis, 427–431 and law of demand, 415–416 and law of supply, 417–418 and marginal utility, 410–412 opportunity cost, 417 principle of, 412 real-world applications cost of decision making, 418–420 given tastes, 420 utility maximization, 421–422 simultaneous decisions, 412 substitution effect, 416–417 using bounded rationality, 419 utility-maximizing rule, 412–413 Rational choice theory diminishing marginal utility, 410 marginal utility, 408–411 reasons for choices, 407 and self-interest, 407–408 based on price, 408 based on utility, 408 total utility, 408–410 Rational expectations, 746 Rationality assumption in game theory, 438 in behavioral economics, 445, 447 failure of individuals, 511 Rationing, nonprice, 105 Rationing mechanism, 10–11 Rawls, John, 395–396 Reagan, Ronald W., 369, 715 Real assets, 636–637 inflation and demand for, 558 Real deficit, 688 calculating, 689 Real exchange rate, 773 Real GDP, 555 calculating, 555 versus nominal GDP, 555–558 Real interest rate, 557, 603, 658–659 Real sector, 615, 629, 636 Real wage, and opportunity cost of work, 353 Real wealth, 558 Real-world competition costs of preventing, 341 economic insights and, 338 as process, 337 Real-world data, on graphs, 46–49 Real-world firms goals, 332 and lazy monopolists, 335–336 motivation for efficiency vs profit, 336–337 profit-maximization problem manager incentives, 332 need for monitoring, 333–334 short- vs long-run, 332 and X-inefficiency, 335 Real-world markets, 331, 337 Real-world production, 332 RECAP nudge, 492 www.freebookslides.com IND-44 Recession, 532 AS/AD model for, 568–569 differentiated from structural stagnation, 802–803 reason for trade restrictions, 216 recovery after recessions 1973–2007, 802–803 related to savings, 569 in U.S in 2008, 569, 586–587 Recessionary gap, 582–583 and fiscal policy, 584 Recovery, slow after 2008, 805 Redefining Progress, 561–562 Regime change, 831 Regional free trade associations, 220 Regression model, 470–471 Regressive tax, 399 Regulation cost/benefit analysis, 505, 507 of financial sector Depression-era, 671 Dodd-Frank Reform Act of 2010, 674 and efficient market hypothesis, 670 and expansionary monetary policy, 650, 652, 657–658 law of diminishing control, 673–674 moral hazard problems, 672 new financial instruments, 673 placing blame for crisis, 670 pressure to reduce regulations, 674 structural stagnation view, 655, 669 too-big-to-fail policy, 674 unregulated institutions, 673 general principles of, 674–675 hindering economic growth, 602 of natural monopolies, 340 views of economists on, 339–340 Regulatory trade restrictions, 211 Reinsch family farm, 247 Relative poverty, 386 Relevant market, in antitrust policy, 324 Rembrandt, 285 Rent control, 103 effect on New York City, 154 effects of, 104–105 and key money, 105 in New York City, 104 in Paris, 104 shortages created by, 154 Rents in aggregate income, 552 impact of property taxes, 149 Rent-seeking activities, 151 government reasons, 150–151 inelastic demand and incentive to restrict supply, 153–154 inelastic supply and incentive to restrict prices, 154 long- and short-run problem of price controls, 154–156 Republicans, 595–596 as classical economists, 715 and government spending, 707, 715 Reputation, of firms, 332 ■ Index ■ Reservation wage, 725, 819 Reserve currency euro, 778–779 United States dollar, 778 Reserve ratio, 624–625 change in, 650 Reserve requirement, 650 bank borrowing, 650 and bank liabilities, 650 change in reserve ratio, 650 elimination of, 654 and excess reserves, 650–651 Fed control of, 650 and Fed funds market, 652 and money supply, 650–651 Reserves and Fed funds market, 652–653 as IOUs of Fed, 651 total money, 648–650 Resource curse, 197–198 Resources alternative energy, 604–605 available for growth, 604–605 changing definition of, 604 effect of rent-seeking on, 151, 153 and growth in China, 604 increase in nontradable, 818–820 intergenerational transfer, 691 and oil prices, 604 overutilizing, 584 and tragedy of the commons, 166 Restructuring, 828 of lazy monopolists, 336 Revenue, implicit, 226 Reverse engineering, 339 Ricardian equivalence theorem, 701 and deficit spending, 702 and tax cuts, 715 Ricardo, David, 10, 192, 201, 701, 796n Rich, the, 60 tax cuts for, 611 Rights agreement, 515 Right to work laws, 368 Rivoli, Pietra, 247 Robber barons, 322 Robbins, Lionel, 17n Robertson, Dennis, 786 Robinson, Joan, 301, 335 Robinson-Patman Act, 337 Rockefeller, John D., 307, 322 Rodero-Cosano, Javier, 442n Rogers, Will, 162, 642 Rogoff, Ken, 685 Rollback strategy, 439–442 in trust game, 446 Romer, Paul, 171 Romney, Mitt, 60 Roosevelt, Franklin D., 684 Rosie the Riveter, 549 Roth, Al, 485 Rothbard, Murray, 591 Rule of 72, 597–598, 639 www.freebookslides.com Russia Marxism in, 55, 75–76 per capita growth, 601 Ryanair, 344 S Sachs, Jeffrey, 843 Saez, Emmanuel, 824 Safety net, 75, 511, 823–824 guaranteed-jobs program, 729–732 for help in structural stagnation, 823–824 Saffer, Henry, 139, 519 Sales, corporations’ percent of, 58 Sales taxes, 404 and economic policy, 149–150 and shift in SAS curve, 579 Salinas, Carlos de, 831 Samsung Electronics, 205 Samuelson, Paul, 703 Santa Fe Institute, 487 SAS; see Short-run aggregate supply curve Saudi Arabia, 212–213, 220 production possibilities curve, 185 rich but developing, 829–830 trade with United States, 185–187 Savings, 479, 490 in downward spiral, 569 financial sector as conduit for, 629 to forgo consumption, 602, 618 and interest rates, 630 for investment, 607 investment funded by, 839–840 paradox of thrift, 569 poverty and lack of, 602 Savings banks, 648, 673 Say, Jean Baptiste, 595 Say’s law, 595 Scales, 47 Scarcity, changing degree of, coercion to deal with, and economic forces, 11 elements of, and invisible hand, 11, 14–15 and market forces, 11 and rationing mechanism, 11 Schelling, Thomas, 441, 443, 460 Schuhmann, Peter, 48 Schultz, George, 700 Schumann, Robert, 156 Schumpeter, Joseph, 60, 594, 599, 608, 816 Schwarzenegger, Arnold, 98 Scientific models, 459, 476 Scottish Enlightenment, 516 Screening, 173 Screening question, 434 Secondary boycotts, 369 Secondary reserves, 651 Second-best criticism of perfect competition, 163 Second Life, 458 Secular growth trend, 529, 532 ■ Index ■ IND-45 Secular stagnation theory, 806 Securitized bonds, 615–616 Segregation game, 443 Self-confirming equilibrium, 474 Self-employment, 356 Self-interest in cost/benefit analysis, 508 opposed to competition, 337 Sellers many, in monopolistic competition, 300 price takers, 266 Semco, 365 Sen, Amartya, 397, 512 Separation of ownership and control, 58, 333 Sequential games, 437–438 mixed strategy, 439–450 Services, 57 job increases, 189 nontradable types, 190 Services account, 761 Sex, median income by, 392 Sexual activity decisions, 465 Sexual harassment, 368 Shadow prices, 484 Shampanies, Kristina, 128 Share distribution of income, 383 Sharp Corporation, 325 Shepherd, Joanne, 472 Sherman Antitrust Act, 322 and Microsoft case, 326 Shift factors for aggregate demand curve exchange rates, 571 expectations, 575–576 foreign income, 575 income distribution, 575 monetary and fiscal policies, 576 multiplier effects, 573, 576 in demand for labor costs of competing factors, 357 demand for firm’s goods, 358 focal point phenomenon, 359 international competitiveness, 359–360 monopoly, 358 new technology, 358–359 for long-run aggregate supply curve, 579–581 short-run aggregate supply curve, 577–579 excise and sales tax changes, 579 import price changes, 579 input price changes, 578–579 productivity changes, 579 real-world examples, 579 rule of thumb for estimating, 579 Shift factors of demand, 80–81 Shift factors of supply, 86–87 Shift in demand, 79–80, 92 and elasticity, 137 equations for, 117–118 Shift in supply, 85–86, 92 and elasticity, 137 equations for, 117–118 Shifts in supply and demand, 92–93, 101–103, 137 Shortages, created by rent control, 151 www.freebookslides.com IND-46 Short run adjustments to long run from, 277–278 focus of Keynesian economics, 523, 570 income elasticity in, 134 options for firms, 243 output fixed in, 595 problem of price controls in, 154–159 production decisions in, 227–229 Short-run aggregate supply curve, 577 and costs of production increases, 578 with economy above potential, 585 with expansionary fiscal policy, 585 and increases in aggregate demand, 577 and inflation, 747 policies to shift down, 817–818 increase productivity, 819–820 lower wages, 818–819 reduce unemployment compensation, 819 and price level, 581 quantity-adjusting markets, 577 shift factors, 577–579 excise and sales tax changes, 579 import price changes, 579 input price changes, 578–579 productivity changes, 579 real-world examples, 579 rule of thumb for estimating, 579 slope of, 577 Short-run average total cost, and envelope relationship, 249 Short-run average total cost curve, 249 Short-run cost curve, U shape, 248 Short-run decision, 228 Short-run equilibrium determining, 581 integrated with long run, 581–582 Short-run growth framework, 527–528 Short-run macroeconomics, 594 Short-run marginal cost curve, 249 Short-run market supply, 275–277 Short-run Phillips curve, 751 versus long-run curve, 751–754 Short-run profit, 332, 341 Short-run structural problems, policies to deal with, 806 Short-run supply-side macro policy, 611 Short-term interest rate effect of operation twist, 678 relation to long-term rate, 630 Shove policy, 495 Shutdown decision and long-run equilibrium, 277–278 real-world example, 279 relevant costs, 278 Shutdown point, 274 Signaling, 173 Silver, dollar backed by, 784 Simon, Herbert, 418, 460 Simultaneous decisions, 412 Simultaneous move games, 438 Singapore, 79–80 population control program, 845 Single-tax movement, 297 Sin taxes, 168, 511 ■ Index ■ SIRIUS Satellite Radio, 171 Skeath, Susan, 433 Skilled workers, negative effects of globalization, 610–611 Skype, 226, 814 Slavery, partial, 365 Slemrod, Joel, 824 Slesnick, Daniel, 387 Sloan, Alfred P., 265 Slope, 44 of aggregate demand curve, 571–574 of average fixed cost curve, 234 of demand curve, 78 versus elasticity, 123 of linear curves, 44 of nonlinear curves, 44–45 of supply curve, 85 Small-country assumption, and trade restrictions, 209, 210 Smith, Adam, 10, 17, 22, 24, 31, 34, 40, 73, 201, 258, 298, 329, 432, 488, 515–516, 594, 598–599, 815 Smith, Vernon, 438 Smoot-Hawley Tariff of 1930, 208 Social capital, 604 Social classes, 383 lower class, 393 middle class, 393–394 upper class, 393–394 Social entrepreneurship, 251 Social forces, 11, 266 effect on economic policies, 19 effect on equilibrium, 91–92 and labor market, 362–363 Social goals, 502, 561 Social incentives, 487 Socialism, 53 central economic planning, 75 and China, 55 development in 20th century, 54 out of favor as a term, 55 and Soviet Union collapse, 55 theoretical ideas of, 54 transition from feudalism, 75–76 transition to market economy from, 76 as welfare system, 54 in Western Europe, 54 Social norms, and production decisions, 252 Social policy agreement among economists, 504 choice of models for, 503 differing views of economists, 502 interpretation of empirical evidence, 503 need for worldview, 503–504 and policy makers’ values, 502–503 survival of the fittest approach, 509 Social Register, 393 Social responsibility for employment, 728 Social Security system, 400, 686 and budget deficits, 700 effects of inflation, 742 privatized in Sweden, 422 Social Security taxes, 61, 355, 399 and economic policy, 149 Social Security trust fund, 692 www.freebookslides.com Society, economic efficiency and goals of, 510 Socioeconomic distribution of income, 383 Socrates, 522 Solar energy subsidies, 377 Sole proprietorships, 58, 226 advantages and disadvantages, 59 percent of business firms, 58 Solomon, 201 Solow, Robert, 433 Solvent, 665 Somalia, 63, 837 Sound finance, 700–702 departure from, in 1930s, 700–701 supported by economists, 700 view of fiscal policy definition, 700–702 versus Ricardo, 701 South America, U.S trade with, 205 South Korea, 214 per capita growth 1980–2011, 597 unemployment 1980–2011, 597 South Sea bubble, 666 South Sea Company, 666 Spain budget deficit, 778 danger of default, 778 government debt, 695 Special drawing rights, 785 Special interests, lobbying by, 151 Specialization, 598 economic growth from, 598–599 and gains from trade, 32–34 and globalization, 34–35 increased by globalization, 815 leading to technological change, 343 Specialized production, 214–216 economies of scale, 215–216 infant industry argument, 216 learning by doing, 215 Spillover effects, 609 Stable institutional framework, 63 Stages of production, value added in, 226 Stagflation, 751 Stalin, Joseph, 75–76 Stamp, Josiah, 543 Standard model, 256 of cost analysis, 243–249 definition, 273 with real-world complications, 256 Standard Oil Trust case, 322 Starbucks, 224, 232, 342 State government fiscal policies five-year rolling average budgets, 713 procyclical, 711–713 rainy day funds, 713 income and expenditures, 61 number of employees, 61 State laws on competition, 323 right to work laws, 368 State socialism, 75–76 ■ Index ■ IND-47 State taxes income tax, 399 property taxes, 400 sales taxes, 399 Status quo bias, 422 Steel imports, effect of trade restrictions, 218 Steel tariff, 218 Stein, Herb, 715 Steinem, Gloria, 241, 373 Stern, Nicholas, 18 Sticky prices, 315 Stigler, George, 426 Stiglitz, Joseph, 835 Stock, 665 in South Sea Company, 666 valuing annuity rule, 639–640 present value formula, 639–641 rule of 72, 639 Stockholders, 575 Stock of capital, 603–604 Stock options, 333 Stone, Richard, 544 Store of wealth, 618 wealth accounts, 547 Stories Economists Tell (Colander), 474n Strategic bargaining, 214 Strategic currency stabilization, 766 Strategic decision making, 312 Strategic interaction in duopoly, 453 game theory as tool to study cooperative game, 437–438 sequential games, 438–439 simultaneous move games, 438–439 strategies of players, 438–441 Strategic pricing, 578 Strategic thinking, 432 Strategic trade policies, 214 Structural deficit, 687 Structural stagnation, 533–534, 795 and assumed underlying growth trend, 803–805 blended macro framework for, 527–528 cause of slow recovery, 805 distinguished from business cycles, 533–534 and financial crisis of 2008, 533–534 long-run causes, 803 policies for long-run problems shifting domestic SAS curve down, 818–820 shifting world supply curve up, 817–818 policy implications, 805–806 problems with standard political solutions, 820 short-run causes, 802 slow growth with, 803–805 versus standard recession, 802–803 targeted safety net for, 623–624 and unemployment, 533–534 www.freebookslides.com IND-48 Structural stagnation hypothesis, 801 on failure of expansionary policies, 812 focus on globalization, 807 and globalized AS/AD model, 807–812 hidden costs of government employment, 808 long-run causes, 803 on money supply increase in early 2000s, 669 need for positive supply shock, 805 on risk of new financial liabilities, 806 versus secular stagnation theory, 806–807 short-run causes, 802 Structural unemployment, 534, 724–725 costs of taking a job, 725 example, 725 geographical aspect, 725 and reservation wage, 725 Structure, form of models, 458 Structure of production, auto industry, 245 Structure of the firm, and demand for labor, 377–378 Stupid decisions, 421 Subcategories of unemployment, 722 Subsidies effect on demand, 81 equations for, 118 on exports, 795 for solar energy, 377 to U.S cotton growers, 840 Substitutes, 78, 135, 136 and elasticities, 128–131 demand, 130 effects on decision making, 130–131 factors affecting number of degree of luxury, 130 market definition, 130 proportion of one’s budget, 130 time period, 130 and prices of other goods, 80–81 Substitution effect, 416 and supply of labor, 354 Suicide rate, low in developing countries, 826 Summers, Lawrence, 513 Sumo wrestlers, 470 Sunk costs, fixed costs as, 230, 274 Sunstein, Cass, 488–489, 490–493 Sun Tzu, 432 Super Crunchers (Ayres), 471 Supplemental Nutritional Assistance Program, 400 Supplemental Security Income, 401 Supply, 84 characteristics, 84 derived from individuals, 224 of factors of production, 224–225 law of, 84–85 pressure to limit, 153–154 of produced goods, 224–225 in Say’s law, 595 shift factors, 87 labor supply, 87 technology, 87 shifts in, 86 ■ Index ■ Supply and demand, 77 for children, 93 and consumer surplus, 142 and fallacy of composition, 94 versus modeling, 458 other things constant assumption, 94 problem of other things changing, 508 and producer surplus, 142 short run, 274–275 Supply and demand analysis CEO compensation, 334 characteristics of, 92–93 effect of disasters or shocks edible oils market, 101–103 and elasticities price increases, 136 and shifts in demand/supply, 137 of exchange rates, 195–196 government intervention, 103–109 excise taxes and tariffs, 107–108 price ceilings, 103–105 price floors, 105–107 quantity restrictions, 108–109 of industry, 274–279 limitations of, 94 of military draft, 152 of prices, 89–90 of rent-seeking activities government reasons, 151–152 inelastic demand and incentive to restrict supply, 153–154 inelastic supply and incentive to restrict prices, 154–155 long- and short-run problem of price controls, 155–156 of tariffs and quotas, 209–210 of tax incidence, 143–149 third-party-payer markets, 110–111 of trade and exchange rates, 194–195 of wage determination, 360–364 Supply and demand interactions, 88–93 equilibrium, 89–90 graphical illustration, 90, 91 limitations of equilibrium, 90–91 political and social forces and equilibrium, 91–92 shifts in, 92–93 Supply chain, T-shirt production, 247 Supply curve, 85 change in elasticity along, 126–128 individual, 87–88 of labor, 353, 362 long-run, 278–279 marginal cost curve as, 269 market, 87–88 movement along, 86 in perfect competition, 163 summary on, 89 in supply table, 87 Supply decisions, by entrepreneurs, 250–251 www.freebookslides.com Supply/demand model, 474n versus behavioral model, 485 chocolate futures example, 477–478 and cost/benefit analysis, 508–509 distributional issues, 509–511 logic of, 509 and monetary policy, 643 rationality aspect, 511 for social policy, 503 used in context, 501 Supply of labor in China elasticity of, 355–356 immigration, 356 incentive effect, 352–353 and income effect, 354 income taxes, work, and leisure, 354–355 as individual choice, 352 international, 356 and nonmarket/illegal activities, 353–354 real wage and opportunity cost, 353 and substitution effect, 354 in United States, 244 Supply-side economics, 715 Supply-side economists, 715 Supply-side model, 596 Supply table, and supply curve, 87, 88 Surgery, licensing for, 175 Surplus value, 74 Survival of the fittest approach to social policy, 509 Survivor, 443 SUVs, 101 market for, 100–101 Sweden foreign aid by, 841 government debt, 695 per capita growth, 601 privatization of Social Security, 422 T Taft-Hartley Act, 368 Tanner, Michael, 519 TANSTAAFL (no-free-lunch theory), Target rate of unemployment, 538–539, 588 reasons for changes over time demographics, 725 globalization, 726 labor force changes, 725 unemployment benefits, 726 Tariffs, 64, 107, 208 compared to quotas, 209 effect on prices, 209 effect on trade patterns, 209 and GATT, 209 on imported steel, 108 national rate comparisons, 208 reason for trade restrictions, 217 retaliatory, 212 to shift world supply curve up, 817–818 small-country assumption, 209, 210 ■ Index ■ IND-49 Smoot-Hawley Act of 1930, 209 on steel imports, 218 and strategic trade policies, 214 supply and demand analysis, 107–108 U.S rates 1920–2012, 208 and World Trade Organization, 209 Tastes and conspicuous consumption, 420 given, 419 individual choice, 420 Taxation allocation of, 147 to change behavior, 512 Colbert on, 142 compared to price controls, 151 costs of, 145 deadweight loss, 145 deciding on objects of distributional issues, 146 government goals, 146 effect on demand, 81 effluent fees, 167 equations for, 116 flat tax, 146 flexibility in changing, 707–708 impact on consumer and producer surplus, 144–146 incentive effects, 397 for income redistribution federal income tax, 399 state and local taxes, 399–400 types of rates, 399 intergenerational transfer of resources, 691 limited base in developing countries, 833 luxury tax, 148 Ricardian equivalence theorem, 701 sin taxes, 168, 511, 512 by state and local government, 61 supply and demand analysis, 107–108 during Vietnam War, 708 welfare loss triangle, 145 Tax cuts, 611, 715 in Bush administration, 688 Taxi medallions, 108–109 Tax incentive program, 168 Tax incidence and relative elasticity, 146–148 sales taxes, 149–150 Social Security taxes, 149 Tax rates flat rate, 397 marginal rate, 354–355 progressive, 397 proportional, 397 regressive, 397 Taylor, John, 655 Taylor rule, 655 and Fed policy, 656–657 and interest rates, 656 versus money supply in early 2000s, 669 Team spirit, 247 Technical efficiency, 244 www.freebookslides.com IND-50 Technological change, 253 in auto industry, 245 biased, 29 and cartels, 314 and declining costs, 254 effect on supply, 87 effect on trade patterns, 205 and efficiency or inefficiency, 29 Moore’s law, 254 neutral, 29 new products from, 255 positive externalities from, 609 Technological development, 343 causes, 343 dynamic efficiency of, 343 for economic growth, 605–606 and market structures, 343–346 Moore’s law, 344 outcome of specialization, 343 Technological infrastructure, 191 Technological innovation, 607, 608 patent protection, 609 Technological lock-in, 346 examples of, 609–610 from network externalities, 610 Technology, 5, 605 ages of, 608 challenge of China and India, 36 in chicken production, 254 common knowledge aspect, 609 computational, 254 and demand for labor decline in manufacturing, 359 Luddite reasoning, 358 effect on demand for labor, 378 effect on income distribution, 385 fracking, 597 in new growth theory, 608–609 questions raised by, 598 related to learning by doing, 254 spillover effects, 609 Telephone industry, 340 Temporary Agricultural Program, 726 Temporary Assistance for Needy Families, 400 Terrorist attack of 2001, 606 Textbook publishing costs of production and length of, 250 indivisible setup costs, 245 Textile industry, 34 Thailand, per capita growth, 601 Thaler, Richard, 463, 488 Thatcher, Margaret, 160 Theorems, 12–13, 478, 487–488 Theory; see Economic theory Theory of Moral Sentiments (Smith), 515–516 Third-party-payer markets, 109 in college costs, 110–111 in health care, 109–110 Third-party sales, 218 Tic-tac-toe game, 438 Tiemstra, John, 565 Time, 801 ■ Index ■ Time period for substitutes, 128 Tipping-point models, 465 Tobin, James, 782 Tocqueville, Alexis de, 328 Too-big-to-fail problem, 674 Total cost, 225, 226, 231 and average costs, 231 decrease in, 135 equation, 238 Total cost curve, 233–234 Total money reserves, 626–628 Total output, 544, 600 Total profit maximization, 270–271 Total revenue, 225, 226 along demand curve, 132–133 and elasticity of demand, 131–134 increase in, 137 Total surplus, 144 Total utility, 408 related to marginal utility, 408–409 Towse, Ruth, 372 Toyota Motor Corporation, 210, 561 Tradable sector, 808 globalization and jobs, 726–727 Trade adjustment assistance program, 213 Trade balance; see Balance of trade Trade deficits, 188, 193, 197 continuance of, 811 costs of, 787 effect on potential output, 554 impact on employment, 809–810 from merchandise account, 761 opposing opinions on, 788 reduced by services account, 761 reduced by trade restrictions, 208 short-run problems from, 787 of U.S 1970–2012, 206 and value of dollar, 788 Trade-offs, in production possibilities curve, 24–27 Trade policy, 795 Trade restrictions, 194 costs to society of relaxing, 213 cost to consumers of saving jobs, 213 and demand for labor, 359 on dumping, 219 by European Union on food imports, 213 opposed by economists, 203 abuse of national security argument, 218 addictive nature of restrictions, 218 competition increased by trade, 217–218 output increased by trade, 217 reasons for, 211–218 haggling by companies over gains from trade, 213–214 haggling by countries over restrictions, 214 infant industry argument, 216 international politics, 216–217 macroeconomic costs of trade, 216 national security, 216 recession, 216 revenues from tariffs, 217 specialized production, 214–216 unequal distribution of gains from trade, 212–213 www.freebookslides.com retaliation, 217 to shift world supply curve up, 818 on steel imports, 217–218 varieties of embargoes, 210–211 nationalistic appeals, 211 quotas, 209–210 regulation, 211 tariffs, 208–210 voluntary restraint agreements, 210 Trade surplus, 193 benefits of, 787 of U.S after World War II, 207 Trade wars, 208–209 Trading blocs, 65 Trading companies, 73, 187 in United States, 189 Trading zones, 219–220 Traditional economics policy frames, 494–495 policy implications, 487–488 Traditional economists, 14, 459; see also Classical economists contrasted with modern economists, 476 critique of behavioral economics and government failure, 496–497 critique of behavioral models, 462 versus economic engineers, 497 opposition to government-created monopoly, 298 Traditional model advantages of behavioral models over, 463–464 and behavioral economics, 447 endowment effects, 446 fairness/trust game, 446 framing effects, 446–447 challenge to standard assumptions endowment effects, 446 on fairness, 446 framing effects, 446–447 on rationality, 445–446 compared to behavioral models, 460 versus government intervention, 466 importance of, 447–448 simplicity and insight from, 462–463 Traditional societies, 53 problems of, 72 Tragedy of the commons, 166 Transaction costs, lowered by Internet, 226 Transferable comparative advantage, 192 effect of law of one price, 192–193 Transfer payments, 545 excluded from GDP, 545 intergenerational transfer of resources, 691 Transportation costs, 814 and demand for labor, 359 Transshipments, 218 Travels of a T-Shirt in the Global Economy (Rivoli), 247 Treasury Department, 690 Triple bottom line, 251 Trough, 532 Trust game, 446 Tulipmania, 666 Tullock, Gordon, 514 Turner, Robert W., 181 ■ Index ■ IND-51 Tversky, Amos, 446 Two-thirds game, 440–441 Tyson, Laura, 258 U Ultimate targets of monetary policy, 653–654 Ultimatum game, 421 single-play, 440 Underground economy and illegal immigration, 562 not in GDP, 562 Unemployables, 538 Unemployment and business cycles, 534, 539 causes in Europe, 728–729 changing duration of, 722 among college graduates, 728 cyclical, 534, 724 in developing countries, 829 discouraged workers, 728 examples of, 720 in financial crisis of 2008, 722 frictional, 538 and government as employer of last resort design and characteristics, 730–731 likelihood of implementation, 733 paying for program, 732–733 proposal, 729 useful but unproductive, 731–732 as government problem, 538–539 and government spending, 64 held down by increase in aggregate demand, 810 Keynesian model, 536 for more than 27 weeks 1948–2020, 722 and potential income level, 706–707 and potential output changing target rate, 725–726 globalization factor, 726–727 Okun’s rule of thumb, 723–724 reservation wage, 725 structural vs cyclical, 724–725 as social problem, 537–538 statistics for 2011, 723 structural, 534, 724 in structural stagnation, 533 subcategories, 722 target rate of, 538–539 voluntary or involuntary individual responsibility, 727 policy choices, 728–729 social responsibility, 728 summary on, 729 Unemployment benefits, reason for change in target rate of unemployment, 726 Unemployment compensation, 401 Unemployment insurance, reducing, 819 Unfair Practices Act, Arkansas, 323 Unified budget, 690 Union of Soviet Socialist Republics, 75–76 collapse of, 76 Union shop, 368 www.freebookslides.com IND-52 United Kingdom, 771 budget deficits, 710 foreign aid by, 841 government debt, 695 per capita growth 1980–2011, 723 unemployment 1980–2011, 723 United Nations, 66–67 United Nations Millennium Declaration, 843 United States amount of government spending, 75 budget deficit, 705, 794 class structure, 383 cultural trendsetter, 191 as debtor nation, 207–208, 762 English as language of business, 191 foreign aid by, 841 gold made illegal to hold, 760, 784 government debt, 695 immigration policy, 191 labor supply, 244 land prices, 244 long-term loans to Europe, 785 low ranking in education, 811, 819 as meritocracy, 388 number and percentages of persons in poverty, 388–389 open immigration policy, 191 property rights, 363 redesign of currency, 621 stable institutions, 191 statistics on, 65 tariff on steel imports, 218 tension over income redistribution, 394–395 wealth distribution, 391 United States dollar(s) backed by silver, 784 causes of fluctuations, 772 downward pressure on, 788, 796–797 foreign demand for, 764 held by foreigners 1960–1970s, 785 loss of gold backing in 1930s, 784 supported by foreign governments, 797 trade deficit and value of, 788 and yuan, 616, 766, 818 United States economy balance of payments accounts 1990–2011, 793–794 balance of trade, 188 business cycles 1860–2010, 530 CEO compensation, 334 changing nature of outsourcing, 192–193 versus China in wages, 188 comparative advantage concerns about future, 192 equalizing trade balance, 193–194 gain and loss of advantage, 193 inherent vs transferable, 192 and law of one price, 192–193 competitiveness 1945–1970s, 795 control of distribution and market, 35 decline in wage premium, 36–37 disappearing comparative advantage, 34 distributional effects of globalization, 189–190 ■ Index ■ duration of business cycles, 532 employment and trade deficit, 810 employment recovery 1973–2007, 802 expansions and recessions 1982–2007, 530 fourth sector, 251 GDP, 546 growth prospects, 530 growth rate 1940–2010, 529 growth since 1945, 528–529 import-led stagnation, 810 income distribution across time, 383–384 income mobility, 388 institutional changes in, 814 international competitors, 65 and international trade balance of trade 1970–2012, 205 change in kinds of imports, 205 changing nature of, 204–205 effect of technological change, 205 exports and imports by region, 205 historical perspective, 206 main trading partners, 204 outsourcing of services, 205–206 outsourcing to China and India, 206 job losses in manufacturing, 370 labor market characteristics, 362 larger government role, 55 largest exporters, 220 and law of one price, 37 median income, 60 narrowing wage gap, 194 per capita growth 1980–2011, 723 policies to increase productivity, 819–820 postwar trade surpluses, 193 production possibilities curve, 185 reactions to globalization, 35–36 recent trade deficits, 193 restoring balance of trade, 796–797 role of tradition, 54 and Rule of 72, 598 sectors of businesses, 56–59 government, 61–66 households, 59–60 interconnections, 55–56 size of labor force, 60 sources of comparative advantage, 190–191 infrastructure, 191 intellectual property rights, 191 natural resources, 191 production location advantage, 191 skilled labor force, 191 wealth from past production, 191 stagnant wages, 190 strength of, 51 technology leadership challenged, 36 trade conflict with European Union, 212 trade with Saudi Arabia, 184–186 trading companies, 189 unemployment 1980–2011, 723 in value-added chain, 816 world supply curve as price ceiling, 808 www.freebookslides.com United States Patent Office, 291 United States Postal Service, 11 United States Steel, 218 antitrust case, 322 United States Supreme Court Standard Oil case, 322 United States Steel case, 322 United States Tax Code, 399 Unit elastic, 126–127 Unit elastic demand, 126–127 Unit of account, 617–618 University of North Carolina, 149 University of Phoenix, 32 Unlimited liability, 58 Unskilled labor effect of minimum wage, 106 negative effects of globalization, 782–783 Upper class, 393 Upturn, 532 Upward-sloping, 44 Used car market, 101, 180 U shape of average cost curve, 234–235 of long- and short-run cost curves, 249 Utility, 408 Utility maximization example, 413–414 status quo bias, 422 ultimatum game, 421 Utility-maximizing rule, 412–413 following, 413–414 and law of demand, 415–416 and law of supply, 417–418 V Value added, 227, 548 calculating, 548 Value-added chain, 816 China and India in, 816 and comparative advantage, 816 and gains from trade, 816 and low-cost countries, 816 United States economy in, 816 Value judgments of policy makers, 502–503 Value of life, 505–507 Value of marginal product, 375–376 Values of policy makers, 502–503 Variable costs, 230–231 average, 231–232 equation, 238 Variables, goodness of fit, 470 Vault cash, 648 Veblen, Thorstein, 40, 307, 328, 420, 425, 494 Velcro shoes, 469 Velocity of money, 748 constant, 748 not constant, 749 Venezuela, 55, 76 Vermont Pure, 342 Vesterlund, Lise, 372 ■ Index ■ IND-53 Vickrey, William, 445, 541, 735 Vickrey auction, 445 Vietnam War, 530, 708 Viner, Jacob, 250n, 259 Volcker, Paul, 782 Voltaire, 351 Voluntary reductions, to deal with externalities free rider problem, 168 operation of, 168 during times of crisis, 168 Voluntary trade agreements, 32, 215 W Wage gap, narrowing, 194 Wage rates and quantity of labor, 352 and quantity of labor demanded, 359 Wages in China, 601 China vs United States, 188 and derived demand curve for labor, 375 determination of comparable worth laws, 364 efficiency wages, 364 living wage laws, 364 in developing countries, 356 differential growth, 818 effects of globalization in U.S., 189 entry-level, 725 imperfect competition, 361–362 and inflation, 746–747 international adjustment force, 811–812, 818 and law of one price, 37 lower in nontradable sector, 726 lower to shift SAS curve down, 818–819 median pay, 60 multitiered contracts, 379 political and social forces, 362 pressure of social forces on, 568 reservation wage, 725, 819 and Social Security taxes, 149 stagnant in U.S., 190 trend toward inequality, 384 Wagner Act, 368 Walmart, 23, 241, 258, 279–280, 337, 391, 455, 726 state laws on competition, 323 Walton family, 391 Wants, Marxian view of, 495 Warhol, Andy, 285, 842 War on terrorism, 606 Watt, James, 74 Wealth, 394 billionaires, 391 distribution of, 391–392 Lorenz curve, 391 nominal, 558 from past production, 191 real, 558 www.freebookslides.com IND-54 Wealth accounts, 547 Wealth of Nations (Smith), 10, 22, 31, 34, 73, 201, 488, 515, 594 Wegmans Food Markets, 378 Welfare capitalism, development of, 74–75 Welfare gain, from natural monopoly, 297 Welfare loss, of monopoly eliminated by price discrimination, 293–294 Welfare loss triangle, 145, 292 military draft, 152 Welfare of society, 163, 295 Welfare versus work, 355 Wells, H G., 542 Western Europe, 54, 75 growth rate 1940–2010, 529 per capita income, 528 White Man’s Burden (Easterly), 843 Whitney, Eli, 74 Wicksteed, Phillip, 426 Wilcox, Claire, 223 Wincott, Harold, 759 Wind power, 605 Winner-take-all industries, 345–346 Women GDP bias against, 550 in labor force, 726 pay gap, 364 Work and income tax, 354–355 versus leisure, 354–355 Workers bargaining power, 334 country differences, 359–360 firm’s consideration of welfare of, 378–379 interests of the firm and, 377 Workers’ rights, 365 Workplace democracy, 365 Works Progress Administration, 702, 732 Workweek, 60 World Bank, 67, 180, 504, 513 establishment of, 784 World Court, 65 World economy, 65 World Health Organization, 827 World supply curve, 808 and equilibrium price, 809 excluding nontradable goods, 809 net exports at zero, 809 ■ Index ■ policies to shift up differential wage growth, 818 exchange rate adjustments, 817–818 tariffs and trade restrictions, 818 as price ceiling on U.S goods, 809 World Trade Organization, 67, 209 Doha Round, 840 on dumping, 219 protests against, 215 ruling on EU ban on beef imports, 212 support for free trade, 215 and voluntary trade agreements, 210 Worldview, 503–504 World War II, 528, 530, 532 and establishment of Bretton Woods, 784–785 fiscal policy during, 586 and postwar world, 784–785 Wulfers, Justin, 472 X Xerox Corporation, 314, 333 X-inefficiency, 335 in natural monopolies, 340 Y Yahoo!, 485 Yield curve, 656–657 effect of quantitative easing, 676–677 graph, 677 importance of, 677 and operation twist, 677–678 Yuan, 65 and dollar, 716 held below equilibrium price, 763, 766 and value of dollar, 616, 766, 818 Yuengert, Andrew M., 21, 518 Z Zero price, 128 Zero-profit condition, 276 Zero profit or loss, 275–277, 292 in long run, 278 in long run for monopolistic competition, 304 Zielinski, Anthony, 517 Zuckerberg, Mark, 599, 606 ... 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