Principles of economics 7th by frank

PRI N C I P L ES O F ECONOMICS SEVENTH EDITION Frank | Bernanke | Antonovics | Heffetz www.ebookslides.com PRINCIPLES OF ECONOMICS Seventh Edition www.ebookslides.com THE MCGRAW-HILL SERIES IN ECONOMICS Essentials of Economics Brue, McConnell, and Flynn Essentials of Economics Fourth Edition Mandel M: Economics, The Basics Third Edition Schiller and Gebhardt Essentials of Economics Tenth Edition Principles of Economics Asarta and Butters Connect Master: Economics Colander Economics, Microeconomics, and Macroeconomics Tenth Edition Frank, Bernanke, Antonovics, and Heffetz Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Seventh Edition Frank, Bernanke, Antonovics, and Heffetz A Streamlined Approach for: Principles of Economics, Principles of Microeconomics, and Principles of Macroeconomics Third Edition Karlan and Morduch Economics, Microeconomics, and Macroeconomics Second Edition McConnell, Brue, and Flynn Economics, Microeconomics, and Macroeconomics Twenty-First Edition Schiller and Gebhardt The Economy Today, The Micro Economy Today, and The Macro Economy Today Fifteenth Edition Slavin Economics, Microeconomics, and Macroeconomics Eleventh Edition Economics of Social Issues Guell Issues in Economics Today Eighth Edition Register and Grimes Economics of Social Issues Twenty-First Edition Econometrics and Data Analytics Frank Microeconomics and Behavior Ninth Edition Advanced Economics Romer Advanced Macroeconomics Fifth Edition Money and Banking Cecchetti and Schoenholtz Money, Banking, and Financial Markets Fifth Edition Urban Economics O’Sullivan Urban Economics Ninth Edition Labor Economics Hilmer and Hilmer Practical Econometrics First Edition Borjas Labor Economics Seventh Edition Prince Predictive Analytics for Business Strategy First Edition McConnell, Brue, and Macpherson Contemporary Labor Economics Eleventh Edition Managerial Economics Baye and Prince Managerial Economics and Business Strategy Ninth Edition Public Finance Rosen and Gayer Public Finance Tenth Edition Environmental Economics Brickley, Smith, and Zimmerman Managerial Economics and Organizational Architecture Sixth Edition Field and Field Environmental Economics: An Introduction Seventh Edition Thomas and Maurice Managerial Economics Twelfth Edition International Economics McConnell, Brue, and Flynn Brief Editions: Microeconomics and Macroeconomics Second Edition Intermediate Economics Samuelson and Nordhaus Economics, Microeconomics, and Macroeconomics Nineteenth Edition Dornbusch, Fischer, and Startz Macroeconomics Thirteenth Edition Bernheim and Whinston Microeconomics Second Edition Appleyard and Field International Economics Ninth Edition Pugel International Economics Sixteenth Edition www.ebookslides.com PRINCIPLES OF ECONOMICS Seventh Edition ROBERT H FRANK Cornell University BEN S BERNANKE Brookings Institution [affiliated] Former Chairman, Board of Governors of the Federal Reserve System KATE ANTONOVICS University of California, San Diego ORI HEFFETZ Cornell University and the Hebrew University of Jerusalem www.ebookslides.com PRINCIPLES OF ECONOMICS, SEVENTH EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2019 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2016, 2013, and 2009 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 LWI 21 20 19 18 ISBN 978-1-259-85206-0 (student edition) MHID 1-259-85206-7 (student edition) ISBN 978-1-260-11091-3 (loose leaf edition) MHID 1-260-11091-5 (loose leaf edition) Executive Portfolio Manager: Katie Hoenicke Senior Product Developer: Christina Kouvelis Marketing Manager: Bobby Pearson Director, Digital Content Development: Douglas Ruby Content Project Managers: Harvey Yep (Core) / Bruce Gin (Assessment) Buyer: Laura Fuller Design: Matt Diamond Content Licensing Specialists: Beth Thole (Image and Text) Cover Image: âpixalot/Getty Images Compositor: Aptarađ, Inc 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: Frank, Robert H., author | Bernanke, Ben, author | Antonovics, Kate  L., author | Heffetz, Ori, author Title: Principles of economics / ROBERT H FRANK, Cornell University, BEN S  BERNANKE, Brookings Institution [affiliated] Former Chairman, Board of  Governors of the Federal Reserve System, KATE ANTONOVICS, University of  California, San Diego ORI HEFFETZ, Cornell University and the Hebrew University of Jerusalem Description: Seventh edition | McGraw-Hill Education : Dubuque, [2018] |  Revised edition of Principles of economics, 2015 Identifiers: LCCN 2017058920 | ISBN 9781259852060 (alk paper) Subjects: LCSH: Economics Classification: LCC HB171.5 F734 2018 | DDC 330—dc23 LC record available at https://lccn.loc.gov/2017058920 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 www.ebookslides.com D E D I C AT I O N For Ellen R H F For Anna B S B For Fiona and Henry K A For Katrina, Eleanor, Daniel, and Amalia O H ABO U T T H E AUTHOR S ROBERT H FRANK BEN S BERNANKE Robert H Frank is the H J Louis Professor of Management and Professor of Economics at Cornell’s Johnson School of Management, where he has taught since 1972 His “Economic View” column appears regularly in The New York Times After receiving his B.S from Georgia Tech in 1966, he taught math and science for two years as a Peace Corps Volunteer in rural Nepal He received his M.A in statistics in 1971 and his Ph.D in economics in 1972 from The University of California at Berkeley He also holds honorary doctorate degrees from the University of St Gallen and Dalhousie University During leaves of absence from Cornell, he has served as chief economist for the Civil Aeronautics Board (1978–1980), a Fellow at the Center for Advanced Study in the Behavioral Sciences (1992–1993), Professor of American Civilization at l’École des Hautes Études en Sciences Sociales in Paris (2000–2001), and the Peter and Charlotte Schoenfeld Visiting Faculty Fellow at the NYU Stern School of Business in 2008–2009 His papers have appeared in the American Economic Review, Econometrica, the Journal of Political Economy, and other leading professional journals Professor Frank is the author of a best-selling intermediate economics textbook—Microeconomics and Behavior, Ninth Edition (Irwin/McGraw-Hill, 2015) His research has focused on rivalry and cooperation in economic and social behavior His books on these themes include Choosing the Right Pond (Oxford, 1995), Passions Within Reason (W W Norton, 1988), What Price the Moral High Ground? (Princeton, 2004), Falling Behind (University of California Press, 2007), The Economic Naturalist (Basic Books, 2007), The Economic Naturalist’s Field Guide (Basic Books, 2009), The Darwin Economy (Princeton, 2011), and Success and Luck (Princeton, 2016), which have been translated into 24 languages The Winner-Take-All Society (The Free Press, 1995), co-authored with Philip Cook, received a Critic’s Choice Award, was named a Notable Book of the Year by The New York Times, and was included in BusinessWeek’s list of the 10 best books of 1995 Luxury Fever (The Free Press, 1999) was named to the Knight-Ridder Best Books list for 1999 Professor Frank has been awarded an Andrew W Mellon Professorship (1987–1990), a Kenan Enterprise Award (1993), and a Merrill Scholars Program Outstanding Educator Citation (1991) He is a co-recipient of the 2004 Leontief Prize for Advancing the Frontiers of Economic Thought He was awarded the Johnson School’s Stephen Russell Distinguished Teaching Award in 2004, 2010, and 2012, and the School’s Apple Distinguished Teaching Award in 2005 His introductory microeconomics course has graduated more than 7,000 enthusiastic economic naturalists over the years Professor Bernanke received his B.A in economics from Harvard University in 1975 and his Ph.D in economics from MIT in 1979 He taught at the Stanford Graduate School of Business from 1979 to 1985 and moved to Princeton University in 1985, where he was named the Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs and where he served as Chairman of the Economics Department Professor Bernanke is currently a Distinguished Fellow in Residence with the ­Economic Studies Program at the Brookings Institution Professor Bernanke was sworn in on February 1, 2006, as Chairman and a member of the Board of Governors of the Federal Reserve System—his second term expired January 31, 2014 Professor Bernanke also served as Chairman of the Federal Open Market Committee, the Fed’s principal monetary policymaking body Professor Bernanke was also Chairman of the President’s Council of Economic Advisers from June 2005 to January 2006 Professor Bernanke’s intermediate textbook, with Andrew Abel and Dean Croushore, Macroeconomics, Ninth Edition (Addison-Wesley, 2017), is a best seller in its field He has authored numerous scholarly publications in macroeconomics, macroeconomic history, and finance He has done significant research on the causes of the Great Depression, the role of financial markets and institutions in the business cycle, and measurement of the effects of monetary policy on the economy Professor Bernanke has held a Guggenheim Fellowship and a Sloan Fellowship, and he is a Fellow of the Econometric Society and of the American Academy of Arts and Sciences He served as the Director of the Monetary Economics Program of the National Bureau of Economic Research (NBER) and as a member of the NBER’s Business Cycle Dating Committee From 2001–2004, he served as editor of the American Economic Review Professor Bernanke’s work with civic and professional groups includes having served two terms as a member of the Montgomery Township (N.J.) Board of Education Visit Professor Bernanke’s blog at www.brookings.edu/blogs/ben-bernanke KATE ANTONOVICS Professor Antonovics received her B.A from Brown University in 1993 and her Ph.D in economics from the University of Wisconsin in 2000 Shortly thereafter, she joined the faculty in the Economics Department at the University of California, San Diego (UCSD), where she has been ever since PR EFAC E Professor Antonovics is known for her excellence in teaching and her innovative use of technology in the classroom Her popular introductory-level microeconomics course regularly enrolls more than 900 students each fall She also teaches labor economics at both the undergraduate and graduate level She has received numerous teaching awards, including the UCSD Department of Economics award for Best Undergraduate Teaching, the UCSD Academic Senate Distinguished Teaching Award, and the UCSD Chancellor’s Associates Faculty Excellence Award in Undergraduate Teaching Professor Antonovics’s research has focused on racial discrimination, gender discrimination, affirmative action, intergenerational income mobility, learning, and wage dynamics Her papers have appeared in the American Economic Review, the Review of Economics and Statistics, the Journal of Labor Economics, and the Journal of Human Resources She is a member of both the American Economic Association and the Society of Labor Economists ORI HEFFETZ Professor Heffetz received his B.A in physics and philosophy from Tel Aviv University in 1999 and his Ph.D in economics from Princeton University in 2005 He is an Associate Professor of Economics at the Samuel Curtis Johnson Graduate School of Management at Cornell University, and at the Economics Department at the Hebrew University of Jerusalem Bringing the real world into the classroom, Professor ­Heffetz has created a unique macroeconomics course that introduces basic concepts and tools from economic theory and applies them to current news and global events His popular classes are taken by hundreds of students every year on ­Cornell’s Ithaca and New York city campuses and via live videoconferencing in dozens of cities across the United States, Canada, and Latin America Professor Heffetz’s research studies the social and cultural aspects of economic behavior, focusing on the mechanisms that drive consumers’ choices and on the links among economic choices, individual well-being, and policymaking He has published scholarly work on household consumption patterns, individual economic decision making, and survey methodology and measurement He was a visiting researcher at the Bank of Israel during 2011, is currently a Research Associate at the National Bureau of Economic Research (NBER), and serves on the editorial board of Social Choice and Welfare lthough many millions of dollars are spent each year on introductory economics instruction in American colleges and universities, the return on this investment has been disturbingly low Studies have shown, for example, that several months after having taken a principles of economics course, former students are no better able to answer simple economics questions than others who never even took the course Most students, it seems, leave our introductory courses without having learned even the most important basic economic principles The problem, in our view, is that these courses almost always try to teach students far too much In the process, really important ideas get little more coverage than minor ones, and everything ends up going by in a blur The human brain tends to ignore new information unless it comes up repeatedly That’s hardly surprising since only a tiny fraction of the terabytes of information that bombard us each day is likely to be relevant for anything we care about Only when something comes up a third or fourth time does the brain start laying down new circuits for dealing with it Yet when planning their lectures, many instructors ask themselves, “How much can I cover today?” And because modern electronic media enable them to click through upwards of 100 PowerPoint slides in an hour, they feel they better serve their students when they put more information before them But that’s not the way learning works Professors should instead be asking, “How much can my students absorb?” Our approach to this text was inspired by our conviction that students will learn far more if we attempt to cover much less Our basic premise is that a small number of basic principles most of the heavy lifting in economics, and that if we focus narrowly and repeatedly on those principles, students can actually master them in just a single semester The enthusiastic reactions of users of previous editions of our textbook affirm the validity of this premise Avoiding excessive reliance on formal mathematical derivations, we present concepts intuitively through examples drawn from familiar contexts We rely throughout on a well-articulated list of seven Core Principles, which we reinforce repeatedly by illustrating and applying each principle in numerous contexts We ask students periodically to apply these principles themselves to answer related questions, exercises, and problems Throughout this process, we encourage students to become “economic naturalists,” people who employ basic economic principles to understand and explain what they observe in the world around them An economic naturalist understands, for example, that infant safety seats are A vii viii PREFACE required in cars but not in airplanes because the marginal cost of space to accommodate these seats is typically zero in cars but often hundreds of dollars in airplanes Scores of such examples are sprinkled throughout the book Each one, we believe, poses a question that should make any curious person eager to learn the answer These examples stimulate interest while teaching students to see each feature of their economic landscape as the reflection of one or more of the Core Principles Students talk about these examples with their friends and families Learning economics is like learning a language In each case, there is no substitution for actually speaking By inducing students to speak economics, the Economic Naturalist examples serve this purpose For those who would like to learn more about the role of examples in learning economics, Bob Frank’s lecture on this topic is posted on YouTube’s “Authors@Google” series (https://www.youtube.com/watch?v=QaINVxelKEE, or search “Authors@Google Robert Frank”) KEY THEMES AND FEATURES Emphasis on Seven Core Principles As noted, a few Core Principles most of the work in economics By focusing almost exclusively on these principles, the text ensures that students leave the course with a deep mastery of them In contrast, traditional encyclopedic texts so overwhelm students with detail that they often leave the course with little useful working knowledge at all • The Scarcity Principle: Although we have boundless needs and wants, the resources available to us are limited So having more of one good thing usually means having less of another • The Cost-Benefit Principle: An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs • The Incentive Principle: A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises In short, incentives matter • The Principle of Comparative Advantage: Everyone does best when each concentrates on the activity for which his or her opportunity cost is lowest • The Principle of Increasing Opportunity Cost: In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs • The Efficiency Principle: Efficiency is an important social goal because when the economic pie grows larger, • The Equilibrium Principle: A market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action Economic Naturalism Our ultimate goal is to produce economic naturalists— people who see each human action as the result of an implicit or explicit cost-benefit calculation The economic naturalist sees mundane details of ordinary existence in a new light and becomes actively engaged in the attempt to understand them Some representative examples: In Micro: • Why movie theaters offer discount tickets to students? • Why we often see convenience stores located on adjacent street corners? • Why supermarket checkout lines all tend to be roughly the same length? In Macro: • Why has investment in computers increased so much in recent decades? • Why does news of inflation hurt the stock market? • Why almost all countries provide free public education? Economic Naturalist Video Series: We are very excited to offer for the first time an entire video series based on Economic Naturalist examples A series of videos covering some of our favorite micro- and macro-focused examples can be used as part of classroom presentations or assigned for homework within McGraw-Hill ­Connect® These fascinating, fun, and thought-provoking applications of economics in everyday life encourage students to think like an economist Active Learning Stressed The only way to learn to hit an overhead smash in tennis is through repeated practice The same is true for learning economics Accordingly, we consistently introduce new ideas in the context of simple examples and then follow them with applications showing how they work in familiar settings At frequent intervals, we pose concept checks that both test and reinforce the understanding of these ideas The end-of-chapter questions and problems are carefully crafted to help students internalize and extend basic concepts and are available within Connect as assignable content so that instructors can require students to engage with this material Experience with earlier editions confirms that this approach really does prepare students to apply basic economic principles to solve PREFACE Learning Glass Lecture Videos: A series of three- to fiveminute lecture videos featuring the authors and utilizing learning glass technology provide students with an overview of important concepts These videos, with accompanying questions, can be assigned within Connect or used as part of classroom discussion Modern Microeconomics • Economic surplus is more fully developed here than in any other text This concept underlies the argument for economic efficiency as an important social goal Rather than speak of trade-offs between efficiency and other goals, we stress that maximizing economic surplus facilitates the achievement of all goals • One of the biggest hurdles to the fruitful application of cost-benefit thinking is to recognize and measure the relevant costs and benefits Common decision pitfalls identified by 2002 Nobel Laureate Daniel Kahneman and others—such as the tendency to ignore implicit costs, the tendency not to ignore sunk costs, and the tendency to confuse average and marginal costs and benefits—are introduced in Chapter 1, Thinking Like an Economist, and discussed repeatedly in subsequent chapters • There is perhaps no more exciting toolkit for the economic naturalist than a few principles of elementary game theory In Chapter 9, Games and Strategic Behavior, we show how these principles enable students to answer a variety of strategic questions that arise in the marketplace and everyday life We believe that the insights of the Nobel Laureate Ronald Coase are indispensable for understanding a host of familiar laws, customs, and social norms In new Chapter 10, Introduction to Behavioral Economics, we discuss the psychology of decision making In Chapter 11, Externalities, Property Rights, and the Environment, we show how such devices function to minimize misallocations that result from externalities Modern Macroeconomics The Great Recession has renewed interest in cyclical fluctuations without challenging the importance of such longrun issues as growth, productivity, the evolution of real wages, and capital formation Our treatment of these issues is organized as follows: • A five-chapter treatment of long-run issues, followed by a modern treatment of short-term fluctuations and stabilization policy, emphasizes the important distinction between short- and long-run behavior of the economy • Designed to allow for flexible treatment of topics, ix (Chapters 24–27) can be used before long-run material (Chapters 19–23) with no loss of continuity • The analysis of aggregate demand and aggregate supply relates output to inflation, rather than to the price level, sidestepping the necessity of a separate derivation of the link between the output gap and inflation • This book places a heavy emphasis on globalization, starting with an analysis of its effects on real wage inequality and progressing to such issues as the costs and benefits of trade, the causes and effects of protectionism, the role of capital flows in domestic capital formation, the link between exchange rates and monetary policy, and the sources of speculative attacks on currencies ORGANIZATION OF THE SEVENTH EDITION In Microeconomics • More and clearer emphasis on and repetition of the Core Principles: If we asked a thousand economists to provide their own versions of the most important economic principles, we’d get a thousand different lists Yet to dwell on their differences would be to miss their essential similarities It is less important to have exactly the best short list of principles than it is to use some wellthought-out list of this sort • Outsourcing discussion supports comparative advantage material: In Chapter 2, students will see a full-spectrum view of production possibilities and the realities economies face considering outsourcing decisions • Strong connection drawn between core concepts: Chapter makes strong connections between market equilibrium and efficiency, the cost of preventing price adjustments, economic profit, and the invisible hand theory • Introduction to behavioral economics: New to this edition, Chapter 10 provides an introduction to the study of behavioral economics Theoretical and empirical developments in economics and psychology have challenged traditional core assumptions of decision making These challenges are explained and dissected in this chapter • Using economics to help make policy decisions: Chapters 11–13 use economic reasoning to help inform realworld policy decisions Insurance, environmental regulation, and income redistribution are all discussed • Early chapter on international trade: Chapter 15 builds upon the comparative advantage material introduced in Chapter as a basis for trade Because international trade involves important micro principles and policy issues, this chapter is presented earlier in the book and www.ebookslides.com INDEX and tax cuts, 672–673 in Taylor rule, 717, 718 and unemployment, 639–640 Outsourcing computerization, 49 defined, 48 dental work, 50 high-wage countries vs low-wage areas, 36 offshore call centers, 49–50 rules-based jobs vs face-to-face jobs, 49–50 transcription of medical records, 48–49 Overheating of economy, 718 Overnight letter delivery and price of Internet access, 70 Overvalued exchange rate, 784–786, 788 P PAE; see Planned aggregate expenditure (PAE) Page, Larry, 512 Panama, 630 “Panel Estimates of the Male-Female Earnings Functions” (Polachek and Kim), 358n Paperback books, 225 Parable of Buridan’s ass, 269 Parameter, 20 Pareto, Vilfredo, 189 Pareto efficiency, 189; see also ­Efficiency Parkland, 380 Part-time workers for economic reasons, 466 Participation rate, 463 Parties, shouting at, 248 Passions Within Reason (Frank), 278n, 280n Patent, 207, 208 Pay-per-view TV, 375, 382–383 Payoff matrix advertising game, 239 cartel agreement, 245 defined, 239 prisoner’s dilemma, 242 steroid consumption, 313 Payroll deduction savings plan, 272, 563 PBS NewsHour, 49–50 Peacocks, 283 Peak (of recession), 632 Peer influence, 115 “Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1988, The” (Heston and Summers), 45n Pentagon’s wasteful expenditures, 389 People’s Bank of China, 766 Pepsi-Cola, 254 Perception, 269 “Perceptions of Unfairness: Constraints on Wealthseeking” (Kahneman et al.), 281n Perfect hurdle, 222–224 Perfect price discrimination, 222 Perfectly competitive firm demand curve, 154–155 imperfectly competitive firm, contrasted, 206 Perfectly competitive market, 154 Perfectly competitive supply, 149–172 choosing output to maximize profit, 157–158 container recycling; see Recycling services demand curve of perfectly competitive firm, 154–155 firm’s shutdown condition, 158–159 graphical approach to profit maximization, 159–162 law of diminishing returns, 155, 156, 158, 163 maximum-profit condition, 161 producer surplus, 168–169 product expansion, 165 profit maximization, 153–154 profit-maximizing firms, 153–163 pure private goods, 375 short-run production, 155–156 Perfectly elastic demand, 96, 97 Perfectly elastic supply, 104 Perfectly inelastic demand, 96, 97 Perfectly inelastic supply, 103 Perfume ads, 315 Periods of highest consumption, 78 Perot, Ross, 48 Personal Responsibility Act, 364 Personal talent, 185; see also Talent Peso, Argentine, 767, 792–793 Peso, Mexican, 767 Petty, William, 441–442 Pharmaceutical companies, 207 I-23 Physical capital, 507–509 Pigou, A C., 304 Pilates instructors vs hair stylists, 181–183 Pizza elasticity of demand, 89 price controls, 67–68 Planned aggregate expenditure (PAE), 653–660 and output, 657–660 and real interest rate, 708–710 Planned investment, 654 Planned investment spending, 708, 709 Planned spending actual vs., 653–654 and government purchases, 668–671 and output gap, 664–668 and recessions, 664–665 Planting of trees, 306 Point elasticity, 112 Poland, 433 Policy reaction function, 717–719, 730, 732–733, 761 Political and legal environment; see also Laws and regulations antitrust laws, 229 Cold War—U.S./China relations, 342 democracy, 385 as determinant of average labor productivity, 513–514 economic policies that support, 517 oil market, 107 in poor countries, 518 specialization, 47 Political instability, and economic growth, 514 Pollution; see also Externalities and the environment acid rain, 320, 385 China, 459 and economic growth, 519 government regulations, 385 level of economic development, 418 optimal abatement not zero, 166–167 smart for one but dumb for all, 80–81 socially optimal level, 166–167, 304 taxation, 391 www.ebookslides.com I-24 INDEX Pollution permits, 318–319 Polygynous animal species, 283 Polygynous human societies, 283 Poor countries economic policies that support growth in, 517–518 richest vs poorest countries, 43, 43n, 461, 462 Poor decisions; see Decision pitfalls Population density, 47 Population growth, 46 Pork barrel spending, 386 Portfolio allocation decision, 689 Portugal, 777n Positional arms control agreements, 313 Positional arms races, 313 Positional externalities, 311–316 arbitration agreements, 314 campaign spending limits, 313 cosmetic and reconstructive surgery, 315–316 defined, 313 fashion norms, 314–315 football players and steroid use, 312–313 kindergarten starting dates, 314 nerd norms, 314 norms against vanity, 315–316 norms of taste, 315 payoffs dependent on relative performance, 312 positional arms control agreements, 313 positional arms races, 313 roster limits, 314 social norms, 314–316 Positive analysis, 433–434 Positive Economic Principle, 13 Positive externality, 294 Positive shock to potential output, 749–750 Posner, Richard, 285, 286 Potential GDP, 637; see also Potential output (Y*) Potential output (Y*), 637–638 in case example, 645 as cause of short-term economic fluctuations, 644 Poterba, James M., 656n Pound, British, 767, 768 Poverty absolute, 460 antipoverty efforts; see Income redistribution gross domestic product (GDP), 460 Nepal, 31 public employment for the poor, 368 richest vs poorest countries, 43, 43n Poverty line, 460 Poverty threshold, 365 Powell, Jerome, 593 Power; see Market power “Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior” (Madrian and Shea), 275n PPC; see Production possibilities curve (PPC) Praise, 267 Precautionary saving in China, 560 defined, 559 and household saving in United States, 564 Precious metals, currency fixed to, 783 Preemptive approach, to inflation, 754, 755 Preferences commitment problem, 257 consumer’s reservation price, 114 Cost-Benefit Principle, 72 indifference curves, 141–145 Present-aim standard of rationality, 277–278 Presentation of productivity information, 34 Presidential elections, 277, 313, 630–631 Price(s) allocative function, 177, 184 asset, 715–717 buyer’s reservation, 60 demand met at preset, 651–652 equilibrium, 62, 64, 76 of holding money, 688 house, 558, 666–667 and interest rates, 609–610 inverse relationship between interest rate and, 696–697 in labor market, 528 and money, 597–601 and money supply, 597–601 nominal, 126, 530 rationing function, 177, 184 real, 126 relative, 483, 530, 532, 745n reservation, 534–535 and short-term economic fluctuations, 645–646 stock, 558, 612–613 world, 408 Price ceiling, 67, 193–195 Price changes eliminating output gaps with, 644 menu costs for, 651–652 Price controls gasoline, 66 home heating oil, 192–194 pizza, 67–68 price ceiling, 193–195 price subsidies, 196–198 rent, 56–58, 65–66 waste, 193–194 Price discrimination airline industry, 225 automobile industry, 225 book publishing industry, 225 deep discounts for scratched/ damaged goods, 226 defined, 218 hurdle method, 222–224 imperfect, 222 movie industry, 225–226 output, and, 219–222 perfect, 222 perfectly discriminating monopolist, 222 public interest, 224–225 special sales, 225 Price elasticity of demand, 88–101 big-ticket items, 90 budget share, 90 calculating, 96 Cost-Benefit Principle, 90 defined, 88 determining factors, 90–91 elastic/inelastic, 89 estimated elasticity for selected products, 91 graphical interpretation, 93–97 long run vs short run, 90 luxury tax on yachts, 92–93 www.ebookslides.com INDEX midpoint formula, 112 perfectly elastic/inelastic, 96, 97 slope (steepness) of demand curve, 94 straight-line demand curve, 94–95 substitution possibilities, 90 tax on cigarettes and teenage smoking, 92 time, 90 total expenditure, 97–101 unit elastic, 89 Price elasticity of supply, 102–108 defined, 102 determining factors, 104–106 flexibility of inputs, 105 graph, 103 long-run vs short-run, 105–106 mobility of inputs, 105 perfectly elastic/inelastic, 103, 104 substitute inputs, 105 time, 105–106 unique and essential inputs, 108 Price index, 474 Price level, 483 Price level (P), 693 Price reduction, 124 Price setter, 154, 204 Price subsidies, 196–198; see also Subsidies Price taker, 154, 204 Price volatility, 106–108 Primary income, 618n Priming the pump, 15 Principal amount, 609 Principle of Comparative Advantage for banking system, 607 defined, 35 globalization, 539 international trade, 399 relative concept, 41 technology and average labor productivity, 510 and uses of money, 584 Principle of Increasing Opportunity Cost for capital investments, 573 defined, 44 and diminishing returns to capital, 509 externalities, 304 individual supply curve, 153 information gathering, 328 many-worker production ­possibilities curve, 402 market supply curve, 153 and physical capital, 508 skateboard market and price of fiberglass, 73 supply curve, 61 two-worker production possibilities curve, 401 urban parkland, 380 wages and demand for labor, 528–529 Principles of Economics (Frank) active learning, 14 core ideas, 14 underlying philosophy, 14 Prisoner’s dilemma, 242–248 cartel game, 243–245 character judgments, 257 cigarette advertising on TV, 246–247 classic situation, 242 defined, 242 multiplayer, 243 recap/summary, 248 repeated, 246 shouting at parties, 248 tit-for-tat strategy, 246 Prisoner’s Dilemma (Rapoport and Chammah), 280n Private contracting, 381 Private goods, 374, 375, 378 Private money, 585–586 Private ownership, 309–311 Private provision of public goods, 380–383 Private saving, 567 Private universities, Producer surplus calculating, 168–169 defined, 168, 169 hurdle method of price discrimination, 224 vertical interpretation of supply curve, 169 Product clustering, 253, 254 Product compatibility, 183 Product expansion Cost-Benefit Principle, 161 theory of supply, 165 Product promotions, 225 Product space, 254 I-25 Production fixed factor of, 155 industrial, 634 and marginal product, 529, 531, 533 mass, implementation of, 512 and potential output, 638 short-run, 155–156 variable factor of, 155 Production possibilities curve (PPC) attainable/unattainable point, 39 comparative advantage/disparities in opportunity costs, 41–42 defined, 37 downward slope, 39 economic growth, 45 efficient/inefficient point, 39 individual productivity, 40–41 international trade, 399–403 many-person economy, 43–44, 402–403 population growth, 46 shifting, 45–48 single-person economy (Susan), 37–38 slope, 39, 403 three-worker economy, 402 two-worker economy, 400–401 Production without specialization, 42 Production worker, 326 Productive Ability and Equilibrium Principle, 350–351 Productivity, 427 assembly-line, 506 average labor; see Average labor productivity breaking task down into simple steps, 46 capital, output and, 508–509 changes, 40–41 and demand for labor, 533, 534 and real earnings, 538 and real wages, 537 specialization, 46 Productivity growth, 149 Professional musicians and talent, 360 Profit accounting, 174–177 defined, 153 economic; see Economic profit normal, 175 www.ebookslides.com I-26 INDEX Profit maximization algebraic expression, 235 graph, 159–162 monopolist, 212–216 opportunity cost, 219–220 perfectly competitive supply, 153–154 seller’s goal, 222 Profit-maximizing firm, 154 Profit-maximizing output level, 157–158 Profitable firm, 159 Progressive tax, 378 Property rights, well-defined, 514 Property rights and tragedy of the commons, 306–311 collective investment decisions, 308 controlling multinational pollution, 311 fruit growing in public places, 310 harvesting timber on remote public land, 311 harvesting whales in international waters, 311 international property rights, 311 invisible hand, 307 private ownership, 309–311 shared milkshakes, 310 tragedy of the commons, defined, 308 unpriced resources, 306–309 Proportional income tax, 377 Proposition 13 (California), 389 Protectionism, 412–418; see also International trade Psychological incentives, 256–257 Psychosphysics of perception, 269 Public capital, in government spending, 566 Public employment for the poor, 368 Public goods, 374–383 by-products, 381 collective goods, 375 common goods, 375 Cost-Benefit Principle, 375 defined, 374 demand curve, 379 fireworks displays, 376 free-rider problem, 376 funding by donation, 381 individually consumed private goods, compared, 378 nonrival/nonexcludable, 374, 375 optimal quantity, 379–383 parkland, 380 paying for/financing, 376–378 private contracting, 381 private goods, contrasted, 374–376 private provision of, 380–383 pure, 374 Public housing, 364 Public investment, 517 Public saving, 567–570 Public service employment, 367 Publishing industry; see Book publishing industry Purchases government; see Government purchases joint, 376 open-market, 593–594 stock, 451 Purchasing power; see Consumer price index (CPI); Inflation Purchasing power parity (PPP) theory, 773–776 described, 773–775 and law of one price, 773 shortcomings of, 775–776 Pure commons goods, 375 Pure monopoly, 204 Pure private goods, 375 Pure public goods, 374 Q Quality adjustment bias, 481 Quality of life, 459 Quantitative easing (QE), 705 Quantitative easing programs, 755 Quantity, in labor market, 528 Quantity equation, 599 Quayle, Dan, 630 Quicken, 15 Quota, 414–416 R Race and ethnicity African Americans—employment data (July 2017), 465 black-white differential in wages, 359 Randers, Jørgen, 518n Rapoport, Anatol, 280 Rate of inflation, 475 Rational choice model departures; see Departures from rational choice with regret fungibility of wealth, 264 intertemporal choice, 271 lost-$10-ticket vs lost-$10-cash problem, 264–265 rate of savings, 286 rent-convenience tradeoff, 269–270 tit-for-tat strategy, 280 Rational ignorance, 387 Rational person, Rational spending rule, 123–128 Cost-Benefit Principle, 123 defined, 123 diminishing marginal utility, 136 indifference curves, 136; see also Indifference curves optimal combination of goods, 122 price reduction, 124 utility maximization, 119–122 Rationing function of price, 177, 184 Rawls, John, 362, 363 Rawls’ theory of justice, 362–363 Reagan, Ronald, 417n, 631 Real after-tax income, 634 Real earnings, and productivity, 538 Real estate agents, 330 Real exchange rate, 766, 769–771 Real GDP, 455–457 and average labor productivity, 503 impact of recession on, 635 and living standards, 499–500 U.S fluctuations in, 631–632 Real income (real output, Y), 124 demand for dollars and, 780 and demand for money, 693 supply of dollars and, 779 Real interest rate, 489–492 affected by government budget deficit, 576–577 affected by technology, 575–576 and aggregate demand, 782 and capital formation, 572–573 and consumption, 656 and controlling interest, 755 and demand for dollars, 779 eliminating expansionary gap with, 713–714 and exchange rate, 781, 782 Federal Reserve’s control over, 700–701 www.ebookslides.com INDEX and inflation, 729–730, 740–741, 762 and monetary policy in basic Keynesian model, 725–726 and net capital inflows, 619 and planned aggregate expenditure, 708–710 in policy reaction function, 719 in recessions, 711 and saving, 560–562 and short-run equilibrium output, 710 and stock market prices, 715 and supply of dollars, 779 Real output (Y), 693; see also Real income Real price, 126 Real quantity, 476 Real rate of return, 489 Real value of money, 730 Real wage(s), 478 and demand for labor, 530–532 in industrialized countries, 536–537 in labor market, 536–544 and productivity, 537 trends in, 526–527 in United States, 536, 537–539 Real-world examples; see Economic naturalism Reasons and Persons (Parfit), 277n Recession (1973-1975), 635 Recession (1981-1982) global impact of, 635 inflation rate in, 636 output gap in, 638 Recession (2001), 511, 657 Recession (2007-2009), 511; see also Great Recession beginning date for, 633–634 causes of, 666–667 global impact of, 635 inflation in, 636 output gap in, 638 production and recovery from, 638 Recession(s), 631–636 and banking crises, 608 defined, 632 double dip, 429 effects, 428 Federal Reserve actions in, 711–713 and planned spending, 664–665 as result of monetary policy, 753 tax cuts to reduce, 673–674 unemployment, 428, 429 U.S., in, 428 Recessionary gap defined, 638 as economic problem, 639 and fall in planned spending, 664–665 Federal Reserve’s actions in, 643 government purchases to avoid, 669–670 and inflation, 736, 740–741, 752 monetary policy for elimination of, 711–712 Reconstructive surgery, 315 Recording industry, 360 Recycling services aluminum beverage containers vs glass containers, 165 benefits, 165 how much time to spend recycling soft drink containers, 150–151 individual supply curve, 152 market supply curve, 152 socially optimal level of recycling glass containers, 166–167 supplier of container-recycling services, 151 Red Cross blood services, 153 Red tape barriers, 417 Redeposits, on consolidated balance sheet, 589 Refundable tax on food/beverage containers, 391 Regression to the mean, 267 Regressive tax, 377 Regulations; see Laws and regulations Reinhart, Carmen, 608, 608n Relative position, 282–285, 287–288 Relative price, 483, 530, 532 Relative price changes, 745n Remote-office game, 251, 254, 256 Renminibi (yuan), Chinese, 766, 767 Renoir, Pierre-Auguste, 58, 59 Rent controls, 56–58, 65–66 Rent-convenience tradeoff, 269–270 Rent-seeking, 387 “Rentocracy: At the Intersection of Supply and Demand, The” (Tierney), 56n Repeated prisoner’s dilemma, 246 Representative heuristic, 266 I-27 Republican National Convention (1992), 630 Required return, and inflation, 715 Research and development (R&D) economic policies that support, 517 subsidies, 306 value embodied in goods and services, 211 Reservation price, 534–535 Reserve banking fractional system, 589 100 percent, 588 Reserve-deposit ratio, 589–590 Reserve requirements, setting and changing, 702–703 Reserves, bank, 588 Residential investment, 450 Resource depletion, 459 Restaurant check-splitting and total restaurant bill, 386 commitment problem, 254 tipping, 254, 255, 257, 277 tipping at out-of-town restaurant, 255, 257 Retailers, 326 Retton, Mary Lou, 349, 350 Return, in portfolio allocation decision, 689 Revaluation, currency, 784 Richest vs poorest countries, 43, 43n, 461, 462 Right-of-way rules, 302 Rise, 22 Risk and net capital inflows, 620 in portfolio allocation decision, 689 and stock prices, 612–613 Risk-averse person, 331 Risk-neutral person, 331 Risk premium, in stock purchases, 612 Risk sharing, and diversification, 614–615 Risky jobs, 359 Rivergate Books, 329 Roaring Twenties, 424 Robber barons, 229 Robinson, Joan, 205n Rogoff, Kenneth, 608, 608n Romer, David, 729n www.ebookslides.com I-28 INDEX Romney, Mitt, 276 Roosevelt, Franklin D., 631, 791 Rules-based jobs, 50 Run, 22 Rupees, Indian, 773 Russia, 488 bread subsidies, 196 IMF lending to, 790 in International Monetary Fund, 790 Ruth, Babe, 477 S Sale(s) discounted prices, 225 of government bonds, 698n open-market, 594 Sales agents, 326–327 Salt, 90 SAT scores, 340 Satisficing, 264 Saudi Arabia, 790 Saving(s), 553–578 affected by government budget deficit, 576–577 affected by technology, 575–576 defined, 554 economic policies that promote, 516–517 impulse-control problem, 286 investment, international capital flows, and, 620–622 investment and capital formation, 571–574 investment and financial markets, 574–578 middle-income families, 287 national saving, 565–571 rate, 286 and real interest rate, 560–562, 708, 708n reasons for, 559–565 self-control and demonstration effects, 562–564 and wealth, 554–559 Saving curve, 575 Saving-investment diagram, 621 Saving rate defined, 554 and trade deficit, 622–624 Savings and loan crisis (1980s), 597 Scale economies; see Economies of scale Scarcity Principle and cost of economic growth, 515 defined, demand, 122 optimal amount of litter, 166 production possibilities curve, 37–38 specialization (Joe Jamail), 32 standard of living, 425 Schröder, Gerhard, 547 Schwartz, Anna, 791n Schwarzenegger, Arnold, 336 Seals, 283 Sears “Scratch ‘n’ Dent Sale”, 226 Sears Tower, 207 Secondary income, 618n Seles, Monica, 311 Self-control, 271–272, 562–564 Self-correcting economy, 741–742 Self-correction, by economy, 644 Self-interest, 174, 188, 257 Self-interest model, 277 Self-reinforcing differences, 46 Selfish Gene, The (Dawkins), 283n Selfishness, 257 Seller’s reservation price, 61 Seller’s surplus, 79 Sense of justice, 257 September 11 terrorist attacks excess reserves since, 703–704 Federal Reserve’s response to, 712–713 and oil price volatility, 106, 107 Sequential games, 252 Service industries, 149, 635 Services final goods and, 450 foreign currency for purchase of, 777, 778 nontraded, 775–776 Sex and Reason (Posner), 285, 286 Sexual indiscretions, 285 Share of population employed, 504–505 Shared living arrangements, 301 Shared milkshakes, 310 Shareholder profits, 229 Sherlock Holmes, Sherman Antitrust Act, 229 Shifts demand curve, 69–72, 76 in demand for labor, 530–534 in demand for U.S dollars, 780–781 in money demand curve, 694 production possibilities curve, 45–48 simultaneous shifts in both demand and supply, 77 supply curve, 72–76, 164–165 in supply of labor, 535–536 in supply of U.S dollars, 779–780 Shimer, Robert, 640n Shocks to potential output, 748–750 Shoe-leather costs, 486, 488 Short run cost-saving innovation and economic profit, 187 defined, 155 economic loss (corn market), 179 economic profit (corn market), 178 marginal cost curve, 163 production, 155–156 shutdown condition, 159 Short-run aggregate supply (SRAS) line, 739–741, 746, 751–752 Short-run determination, of exchange rates, 777–781 Short-run economic fluctuations, 437 Short-run equilibrium, 740, 763 Short-run equilibrium output, 660–663 and algebraic solution to Keynesian model, 682–683 and inflation, 737, 761–762 and real interest rate, 710 Short-term economic fluctuations, 629–647 case example, 645–646 causes of, 644–646 concepts related to, 634–636 and cyclical unemployment, 639–641 and Okun’s law, 642–644 output gaps of, 637–639 and presidential elections, 630–631 recessions and expansions, 631–636 Short-term equilibrium output, 667–668 Short-term unemployed, 466 Shortage, 63 www.ebookslides.com INDEX Shouting at parties, 248 Shutdown condition, 158–159 Silver Blaze (Doyle), Simon, Herbert, 264 Simple interest, 501 Simultaneous equations, 27–28, 86 Skateboard market and price of fiberglass, 73 Skill-based technological change defined, 542–543 and unemployment, 547 Skills, workers’ lack of, 545 Slice of economic pie; see Economic pie Slope budget constraint, 137, 139, 141, 146 changes, 24–25 consumption possibilities, 407 defined, 22 demand curve, 59, 60 demand curve for labor, 353 indifference curve, 146 individual supply curve, 153 marginal cost curve, 163 price elasticity of demand, 94 production possibilities curve, 39, 403 rise/run, 22 supply curve, 60–61, 153 supply curve of labor, 354 Slovakia, 777n Slovenia, 777n Sluggish economy, 718 Small independent bookstores, 329 Smart for one but dumb for all examples, 80–81 individual pursuit of self-interest, 188 Smith, Adam division and specialization of labor, 46 individual pursuit of self-interest, 174, 188 invisible hand, 174, 177; see also Invisible hand theory market price, 58 population density and specialization, 47 self-interest and broader interests of society, 188 Snow tires, 302 Social efficiency dumping toxins into river, 299 editing manuscripts, 220–221 Social justice and efficiency, 199 Social norms, 314–316 Social optimum equilibrium, 187–192 externalities, 295, 296 pollution, 166–167, 304 socially optimal quantity, 80 “Social Psychology, Unemployment and Macroeconomics” (Darity and Goldsmith), 465n “social safety net”, and saving, 563–564 Social Security, 564 Socially optimal quantity, 80 Sociological factors, related to ­entrepreneurship, 512 Software industry; see Computer software Solman, Paul, 49–50 South Africa, 630 South America, 774–775 South Korea earnings of highly skilled professionals, 49 in East Asian crisis (1997-1998), 789 South Korean won, 767 South Pacific, 584 Soviet Union, 57, 630 Soviet Union, former, 694, 695 Spain euro in, 777n in Great Depression, 791 monetary policy and economic conditions in, 794 political and legal economic ­environment in, 514 unemployment rate, 547 Spatial location, 252, 254 Special sales, 225 Specialization baseball—.400 hitters, 35–36 can there be too much?, 47 comparative advantage, 33–34 cost of failure to specialize, 41–42 King of Torts (Joe Jamail), 32 political and economic environment, 47 population density, 47 prodigious gains in productivity, 46 real-world gains, 46 Smith, Adam, 46 I-29 “Specious Reward: A Behavioral ­Theory of Impulsiveness and Impulse Control” (Ainslie), 271n Speculative attacks, 786–787, 789 on Argentine peso, 793 in East Asian crisis (1997–1998), 789–790 and European Monetary System, 793 Speed limits, 302 Spending, 649–677 and basic Keynesian model, 681–685 changes in, and inflation, 731–732 demand met at preset prices, 651–652 and fiscal policy, 668–676 planned aggregate expenditure, 653–660 planned spending and output gap, 664–668 and short-run equilibrium output, 660–663 Spending changes, 644, 646 Spielberg, Steven, 72 Splitting economic surplus, 301 Sport utility vehicles (SUVs), 127 Sports baseball; see Baseball football players and steroid use, 312–313 roster limits, 314 talented players, 108 tennis, 311–312 Sports Illustrated jinx, 267 Spreadsheet, 208 Sprint, 205 Squawk Box (television show), 687 “Stability and Competition” (Hotelling), 253n Stabilization policies, 651, 668, 688; see also Fiscal policy; Monetary policy Stagflation, 746 Stagnation, in U.S real wage, 537–539 Standard of living, 425; see also ­Living standards Standard & Poor’s (S&P) 500 index from 1995 to 2000, 715–716 from 2000-2002, 656 fluctuations in, 615–616 www.ebookslides.com I-30 INDEX Standardized commodities, purchasing power parity theory for, 775, 776 Standing in line, 114, 128 Start-up costs, 209 State-owned natural monopoly, 227 State universities, 1–2 Statistical discrepancy, 623n Statistical discrimination, 339–343 Status quo bias, 274 Steel industry, 545 Stern, Gerald, 329 Steroids and football players, 312–313 Stiroh, Kevin J., 511n Stock analysts, 188–189 Stock exchanges, 610 Stock market and bond market, 613–616 boom and bust cycles in, 606 and consumption spending, 656–657 currency appreciation related to, 782 effect of inflation on, 715 fluctuations of, in United States, 615–616 and wealth, 558 Stock market crash (1929), 424 Stock market crash (1987), 424 “Stock Market Wealth and Consumption” (Poterba), 656n Stock prices household saving, real home prices and, 558 and risk, 612–613 Stock purchase, 451 Stocks, 610–613 Stocks, in wealth, 555–556 Stone, Richard, 442 Store of value, 585 Straight-line demand curve, 94–95 Strategic behavior, 237, 241; see also Game theory Structural macroeconomic policies, 517 Structural policies, 433, 547 Structural unemployment, 545, 640 Student discounts, 219 “Subjective Probability: A Judgment of Representativeness” (Kahneman and Tversky), 266n Subsidies, 196–198 Affordable Care Act, 345 bread, 196 planting of trees, 306 positive externality, 305–306 scientific research, 306 Subsidized school lunches, 364 Substitutes cross-price elasticity of demand, 90 defined, 70 demand curve, 70 economic profit, 208 price elasticity of demand, 90 price elasticity of supply, 105 Substitution bias, 482 Substitution effect applications, 125 defined, 59, 123 fuel shortages, 126 Sulfur dioxide (SO2) emissions, 320 Summers, Robert, 45n Sung period, in China, 513 Sunk cost, 8, Sunstein, Cass, 287, 288n Superbowl ads, 336 Superconducting supercollider, 387 Supermarket checkout lines, 186 Supply; see also Supply and demand; Supply curve competition; see Perfectly competitive supply elasticity; see Price elasticity of supply and fiscal policy, 674–675 of foreign currency, 784 of labor, 534–536 “law” of, 162–163 of money, 696–697 periods of highest consumption, 78 of savings, 574 ultimate supply bottleneck, 108 of U.S dollars, 777–780 Supply and demand, 55–86 algebraic expression, 85–86 cash on the table, 79–80 change in demand, 68, 69 change in quantity demanded, 68, 69 change in quantity supplied, 69 change in supply, 69 complements/substitutes, 70 demand curve; see Demand curve efficiency and equilibrium, 78–81 equilibrium price and quantity, 76 excess demand, 63 excess supply, 63 in foreign exchange market, 777–779 geometric framework, 56–84 income effect, 59 international trade, 407–411 market equilibrium, 62–68 normal/inferior goods, 72 rent controls, 65–66 shifts in demand curve, 69–72, 76 shifts in supply curve, 72–75, 76 simultaneous shifts in both demand and supply, 77 smart for one but dumb for all, 80–81 substitution effect, 59 supply curve; see Supply curve Supply curve agricultural commodities and weather, 75 changes in prices of other products, 164–165 cost side of market, 163 defined, 60 expectations about future, 164 horizontal interpretation, 61, 169 individual/market, 152–153, 163 individual’s choice of whether to produce, 150 input prices, 74, 164 Low-Hanging-Fruit Principle, 61 marginal cost curve, 162, 163 money, 696 number of suppliers, 164 perfectly elastic/inelastic, 103, 104 shifts, 72–76, 164–165 technology, 75, 164 upward sloping, 60–61, 153 vertical interpretation, 61, 169 Supply elasticity; see Price elasticity of supply Supply-siders, 674–675 Supportive management styles, 267 Surplus balance-of-payments, 785 buyer’s, 79 consumer; see Consumer surplus defined, 63 economic; see Economic surplus producer; see Producer surplus seller’s, 79 total, 79 www.ebookslides.com INDEX Surplus-enhancing transaction excess demand, 190 excess supply, 191 market equilibrium price, 191 Survey of Current Business, 429 Sustained inflation, 748 SUVs; see Sport utility vehicles (SUVs) Sweden, 791 Sympathy, 280 Sympathy for one’s trading partner, 257 Systemic cognitive errors, 270 Szabo, Ecaterina, 349, 350 T Tables, constructing equations and graphs from, 25–26 Talent chef, 185 musicians, 360 sports, 108 Target savers, 562 Target zone system, 783n Tariff, 412–415 Tastes, 72, 114; see also Preferences Tattoos, 315 Tax treatment, of bonds, 609 Taxation best tax system, 390 bracket creep, 485 capital depreciation allowance, 485 carbon taxes, 319–320 corporate income tax, 229 deadweight loss, 391 earned income tax credit (EITC), 195, 366 head tax, 377 higher taxes and prosperous ­persons, 284 incentives, 390–391 inflation, 485 luxury tax on yachts, 92–93 negative externality, 304–305 negative income tax (NIT), 365 pollution, 316–318, 391 in poor countries, 518 primary purpose of tax system, 390 progressive tax, 378 proportional income tax, 377 refundable tax on food/beverage containers, 391 regressive tax, 377 shareholder profits, 229 tax on cigarettes and teenage smoking, 92 transfers, aggregate spending, and, 671–674 Taxicabs, 354 Taylor, John, 717, 717n Taylor rule, 717–718 Technological change and labor market trends, 526 and potential output, 638 skill-based, 542–543, 547 and wage inequality, 541–543 Technology(-ies) and demand for money, 690 as determinant of average labor productivity, 510–511 to eliminate menu costs, 652 improvements, 46 saving and investment affected by, 575–576 term-paper revisions, 75 Teenage smoking, 92 Telephone companies, 228 Temporal location, 252, 253 Temporary sales, 225 Tennis, 311–312 Tennis balls and court rental fees, 69, 70 Term-paper revisions, 75 Terms, of bonds, 609 Textbook; see Principles of Economics (Frank) Thailand, 789 Thaler, Richard, 9n, 264, 265, 269n, 274, 281n, 287, 288n Thatcher, Margaret, 547 Theory of competitive labor markets, 355 Theory of games; see Game theory Theory of Justice, A (Rawls), 362n Theory of Monopolistic Competition, The (Chamberlin), 205n Theory of the invisible hand, 177; see also Invisible hand theory Thinking Fast and Slow (Kahneman), 6n Thinking-like-an-economist mindset, 186 I-31 This Time Is Different (Reinhart and Rogoff), 608n Three-worker production possibilities curve, 402 Thrift, 286 Tierney, John, 56n Tight monetary policy, 781–783, 788 Time; see also Long run; Short run price elasticity of demand, 90 price elasticity of supply, 105–106 waiting, 114 “Time Discounting and Time ­Preference: A Critical Review” ­(Frederick et al.), 271n Tipping at restaurants, 254, 255, 257, 277 Tit-for-tat, 246, 280 Titanic (film), 114, 115 Titanic disaster, 114–115 Tjoa, Bill, 16 Tobacco industry, 205 “Total Charitable Donations Rise to New High of $390.05 Billion”, 277n Total cost, 155 Total cost curve, 209 Total expenditure defined, 98 price elasticity of demand, 97–101 Total revenue, 98; see also Total expenditure Total surplus, 79 “Toward a Positive Theory of Consumer Choice” (Thaler), 9n, 269n Toyota Prius, 127 TPP; see Trans-Pacific Partnership (TPP) Trade, and exchange rates, 793 Trade balance, 783 defined, 617 investment, national saving, and, 623 in United States, 617–618 Trade deficit, 431 defined, 617 and saving rate, 622–624 Trade imbalances, 431 Trade-off, 2, 13, 17 Trade restrictions, 412–417 Trade surplus, 431, 617 Traffic laws, 302 www.ebookslides.com I-32 INDEX Tragedy of the commons, 308; see also Property rights and tragedy of the commons Trans-Pacific Partnership (TPP), 398 Transcription of medical records, 48–49 Transfer payments, 451, 567, 671–674 Transition aid, 541 Transportation, advances in, 510 Transportation costs, 775–776 Treasury, sales of government bonds by, 698n Trial and error, Trough (of recession), 633 Truman, Harry, 630 Trustworthiness, 257, 258 TurboTax, 15 Tversky, Amos, 6n, 264, 264n, 265n, 266n, 268 $20 bill auction, 388–389 Two-tier labor market, 526–527 Two-worker production possibilities curve, 400–401 U Uganda, 584 Ukraine, 431 Ultimatum bargaining game, 280 Unattainable point, 39 Uncertainty, and inflation, 730 Undaunted Courage (Ambrose), 498n Underemployed persons, 466 Underground economy, 459 Undervalued exchange rate, 784 Underworld code (Omerta), 254 Unemployed, defined, 463 Unemployment, 428–430, 463–466, 544–548 BLS survey, 463 chronically unemployed, 466 cyclical, 545–546, 635, 639–641 data sources, 429, 430 discouraged workers, 466 duration of, 465–466 economic costs, 465 employed, unemployed, out of the labor force, 463 Europe, 430 frictional, 544–545, 640 Great Depression, 424, 429 as indicator of short-term ­economic fluctuations, 635 inflation, 431 international considerations, 430 involuntary part-time workers, 466 natural rate of, 639–641 participation rate, 463 psychological costs, 465 reaction of, to monetary policy, 751–752 recession, 428, 429 short-term unemployed, 466 social costs, 465 structural, 545, 640 trends in, 527 “true”, 466 types of, 544–546 underemployed persons, 466 U.S employment data (July 2017), 464 U.S unemployment rate (1965 - present), 464 Unemployment insurance, 546 Unemployment rate, 428, 429, 463 and inflation, 740–741 Unemployment spell, 465, 466 Unequal rent amounts, 301 Unions, 355–357 Unique and essential inputs, 108 Unit elastic, 89, 96 Unit of account, 584–585 United Kingdom Brexit, 541 in International Monetary Fund, 790 real GDP growth, 635 unemployment, 547 United States absolute poverty, 460 average labor productivity in, 505 banking panics in, 595 business as respectable activity in, 512 capital inflows in early economic development, 621 capital investment per worker, 45 charitable donations, 381 China, relations with, 342 Chinese productivity, compared, 427–428 Confederate States of America (inflation), 488, 600 consumption function in, 655–656 costs of economic growth in, 515 demand for money in, 690 design of computer hardware and software, 36 determinants of nominal exchange rate, 773 digital revolution, 426 dollar holdings in Argentina vs., 694–695 economic effects of September 11 terrorist attacks, 712–713 economic mobility, 362 economic policies that promote savings and investment in, 516–517 educational attainment, 427 employment trends, 527, 537–539 exchange rate and monetary policy in, 792 expenditure components of GDP, 2016, 450 exports and imports (1929–2016), 431 farm productivity in, 509 fast track authority, 418 Federal Reserve, 583; see also Federal Reserve System financial aid provided to Europe by, 507 founding fathers, 384, 385 gated communities, 381 globalization effects, 539–541 Great Recession, 629 health insurance, 275–276, 344–345 household saving and wealth in, 557–558 household saving in, 554, 563–564 income inequality, 460 inflation, 636 inflation in, 744–747, 749–750, 753 inflation-protected bonds, 492 inflation rate (1929-2016), 430 in International Monetary Fund, 790 Internet use, 426 key monetary statistics, 596 labor force participation rate in, 504 labor productivity growth in, 511 M1 and M2 in, 586 manufacturer of TV and other electronic equipment, as, 36 military spending as share of GDP in, 670–671 www.ebookslides.com INDEX minimum wage, 365 money stock held by businesses in, 691 NAFTA, 48 national crime index, 435–436 national saving in, 566 natural rate of unemployment in, 640–641 output gap, 638–639, 642–643 policy mistakes and Great Depression in, 790–791 population employed in, 504 potential output, 637, 638 poverty line, 460 presidential elections and economic fluctuations, 630–631 productivity growth, 427 public education in, 516 purchasing power parity theory in, 775 real GDP fluctuations, 631–632, 635 real GDP per person and average labor productivity in, 503 real GDP per person in, 499 real interest rate (1970-2016), 490 real wages, 526, 536–539 recessions, 428 recessions in, 632–633, 635 regulation of private monopolies, 227–228 savings and loan crisis, 597 shoe-leather costs, 486 size of labor force, 50 stock market fluctuations in, 615–616 stock market values and spending in, 656–657 strength of economy and currency in, 772 tax cuts and recessions, 673–674 trade balance in, 617–618 trade deficit, 431 trade deficit of, 622–624 unemployment, 544, 545, 635 unemployment rate, 547 unemployment rate (1929-2016), 429 uninsured persons, 344 union membership, 357 velocity of money, 598–599 wage inequality, 526 wages for production workers (1970-2016), 479 U.S Constitution, 384 U.S dollar Argentine vs U.S holdings in, 694–695 currencies fixed to, 766, 769, 783, 789 demand for, 778, 780–781 Depression-era value of, 791n equilibrium value of, 779 gold standard for, 791 monetary policy and strength of, 781, 782 nominal exchange rates for, 767–769 supply of, 777–780 value and supply of, 780 value of, and strength of U.S economy, 772 U.S Federal Housing Finance Agency, 657n University; see Colleges and universities Unpriced resources, 306–309 Unregulated housing market, 65 Unregulated private insurance markets, 344 Urban parkland, 380 Used car sales, 334–336 Utility average, 125 consumption, 117–121 defined, 116 marginal, 118, 125 Utility maximization, 116 Utility maximization model, 117 Utilometer, 116 V Vacation vs business travelers, 225 Vaccination, 81, 303–304 Value of marginal product of workers, 529 store of, 585 Value added, 447 Value of marginal product of labor (VMP), 351 Value of the marginal product, 573 Variable defined, 20 definite, 20 indefinite, 20 I-33 Variable cost, 155, 209 Variable factor of production, 155 Velocity (of money), 598–599 Venezuela, 488, 775 Verizon, 205 VERs; see Voluntary export restraints (VERs) Vertical intercept budget constraint, 138 changes, 23–24 defined, 22 Vertical interpretation demand curve, 60, 132 supply curve, 61, 169 VHS, 208 Vicksburg, battle of, 600 Video game producers, 210–211 Vietnam war, 744 Visual blight, 237 VMP; see Value of marginal product of labor (VMP) Volcker, Paul, 593, 727, 747, 753, 782, 783 Voluntary export restraints (VERs), 416–417 Volunteer services, 459 W Wage inequality (wage gap), 539–544 explaining, 355–361 and globalization, 539–541 and skill-based technological change, 542 and technological change, 541–543 in United States and western Europe, 526–527 Wages, and demand for labor, 528–530 Waiting lines, 114, 128 Waiting time, 114 Wants; see also Preferences best goods/services, 115 determinant of reservation price, 114 measuring, 116–119 needs, contrasted, 115 War, inflation caused by, 743–744 War on Poverty, 744 Warner Brothers, 237, 238 Washing machines, and exchange rate, 779–780 www.ebookslides.com I-34 INDEX Wealth capital gains and losses, 556–558 defined, 554 and household saving, 557–558 and savings, 554–559 stocks and flows, 555–556 Wealth effect, 656 Wealth of Nations, The, 46n, 47n, 174; see also Smith, Adam Wealth redistribution, 486–487 Weather, 75, 638 Weber-Fechner law, 269 Wedding ceremonies, 286 Weimar Republic, 600 Welfare payments; see Income redistribution Well-defined property rights, 514 West Germany, 506–507 Western Europe employment trends, 527 unemployment rate, 544, 546–547 wage inequality, 527 Whales, 311 Wheat, 154, 773–774 Wholesalers, 326 “Why Are Saving Rates So High in China?” (Yang, et al.), 559n “Why Is the U.S Unemployment Rate So Much Lower?” (Shimer), 640n Williams, Ted, 35 Windows operating system, 183, 208 Winner-take-all labor market, 359–360 Wireless phone service, 205 Won, South Korean, 767 Word processor, 208 Work, 350–353; see also Labor markets Worker mobility, 541 Worker productivity, 533, 534 Workers fragmentation of workplace tasks, 47n labor markets; see Labor markets unemployment; see Unemployment Workplace safety regulation, 282–283 Workweek, length of, 283 World price, 408 World Trade Center, 712, 713 World Trade Organization, 320 World War I German inflation after, 600 international economic system prior to, 766 World War II economic recovery following, 506–507 European economic cooperation since, 793 and Great Depression, 633 and International Monetary Fund, 790 real wage growth since, 526 Wozniak, Steve, 512 Y Yachts, luxury tax, 92–93 Yang, Dennis Tao, 559n Yap, island, 584 Yellen, Janet, 593, 687 Yen, Japanese, 767 Yosemite Concession Services Corporation, 207–208 Yuan, Chinese, 766, 767 Z Zero lower bound, monetary policy near, 705 Zero profit tendency, 180 Zhang, Junsen, 559n Zhou, Shaojie, 559n Zimbabwe, hyperinflation, 431, 488 Zimbabwean dollar, 695 Zimmerman, Dennis, 92n Zoning laws, 302, 309, 384 Zuckerberg, Mark, www.ebookslides.com C HA PTER 15 A PPEN D IX An Algebraic Approach to Trade Analysis T hus far, we have used a graphical approach to show how international trade and various restrictions on trade affect economic welfare In this appendix, we illustrate how the same issues can be approached in an algebraic framework E XA MP LE 5A A Tariff on Imported Computers What are the effects of a tariff on trade? Suppose the demand for computers by Costa Rican consumers is given by QD = 3,000 − 0.5PC, where QD is the annual quantity of computers demanded and PC is the price per computer in dollars The supply of computers by domestic Costa Rican producers is QS = 1,000 + 0.5PC, where QS is the annual quantity of computers supplied a. Assuming that the Costa Rican economy is closed to trade, find the equilibrium price and quantity in the Costa Rican computer market b. Assume the economy opens to trade If the world price of computers is $1,500, find annual Costa Rican consumption, production, and imports of computers c. At the request of domestic producers, the Costa Rican government imposes a tariff of $300 per imported computer Find Costa Rican consumption, production, and imports of computers after the imposition of the tariff How much revenue does the tariff raise for the government? a To find the closed-economy price and quantity, we set supply equal to demand: 1,000 + 0.5PC = 3,000 − 0.5PC Solving for PC gives the equilibrium price, equal to $2,000 per computer Substituting this equilibrium price into either the supply equation or the demand equation, we find the equilibrium quantity of computers in the Costa Rican market, equal to 2,000 computers per year This equilibrium price and quantity correspond to a point like point E in Figure 15A.1 b If the economy opens to trade, the domestic price of computers must equal the world price, which is $1,500 At this price, the domestic quantity demanded for computers is 3,000 – 0.5(1,500) = 2,250 computers per year; the domestic quantity supplied is 1,000 + 0.5(1,500) = 1,750 computers per year These 15A-1 www.ebookslides.com 15A-2 CHAPTER 15 APPENDIX  AN ALGEBRAIC APPROACH TO TRADE ANALYSIS FIGURE 15A.1 Price of computers The Market for Computers in Costa Rica Domestic supply E p World price Domestic demand qS q qD Quantity of computers quantities correspond to qD and qS, respectively, in Figure 15A.1 Imports equal the difference between domestic quantities demanded and supplied, or 2,250 – 1,750 = 500 computers per year c The imposition of a tariff of $300 per computer raises the price from $1,500 (the world price without the tariff) to $1,800 To find Costa Rican consumption and production at this price, we set the price equal to $1,800 in the demand and supply equations Thus the domestic quantity demanded is 3,000 – 0.5(1,800) = 2,100 computers per year; the domestic quantity supplied is 1,000 + 0.5(1,800) = 1,900 computers per year Imports, the difference between the quantity demanded by Costa Ricans and the quantity supplied by domestic firms, is 2,100 – 1,900 = 200 computers per year Thus the tariff has raised the price of computers by $300 and reduced imports by 300 computers per year The tariff revenue collected by the government is $300/ imported computer × 200 computers/year = $60,000 per year CONCEPT CHECK 15A.1 Repeat parts (b) and (c) of Example 15A.1 under the assumption that the world price of computers is $1,200 (the tariff is still $400) What happens if the world price is $1,800? E XA MP LE 15A Effects of an Import Quota What are the effects of an import quota on trade? Suppose the supply of and demand for computers in Costa Rica is as given in Example 15A.1, and the government imposes an import quota of 200 computers Find the equilibrium price in the domestic computer market, as well as the quantities produced by domestic firms and purchased by domestic consumers The quantity of computers supplied by domestic Costa Rican producers was stated in Example 15A.1 to be 1,000 + 0.5PC The quota allows 200 computers per year to be imported Thus the total quantity of computers supplied, including both domestic production and imports, is 1,000 + 0.5PC + 200, or 1,200 + 0.5PC Setting the quantity supplied equal to the quantity demanded, we get 1,200 + 0.5PC = 3,000 − 0.5PC www.ebookslides.com CHAPTER 15 APPENDIX  AN ALGEBRAIC APPROACH TO TRADE ANALYSIS 15A-3 Solving for PC, we find that the price of computers in the domestic Costa Rican market is $1,800 Domestic production of computers is 1,000 + 0.5(1,800) = 1,900 computers per year, while quantity demanded domestically is 3,000 – 0.5(1,800) = 2,100 computers per year The difference between domestic quantity demanded and domestic production, 200 computers per year, is made up by imports Note that the domestic price, domestic production, and domestic demand are the same in Examples 15A.1 and 15A.2 Thus the tariff and the quota have the same effects on the domestic market for computers The only difference between the two policies is that with a quota, the government does not get the tariff revenue it got in Example 15A.1 That revenue goes instead to the holders of import licenses, who can buy computers on the world market at $1,500 and sell them in the domestic market at $1,800 PROBLEMS The demand for automobiles in a certain country is given by D = 12,000 − 200P, where P is the price of a car Supply by domestic automobile producers is S = 7,000 + 50P (LO2, LO3, LO4) a Assuming that the economy is closed, find the equilibrium price and production of automobiles.  b The economy opens to trade The world price of automobiles is 18 Find the domestic quantities demanded and supplied and the quantity of imports or exports Who will favor the opening of the automobile market to trade, and who will oppose it? c The government imposes a tariff of unit per car Find the effects on domestic quantities demanded and supplied and on the quantity of imports or exports Also find the revenue raised by the tariff Who will favor the imposition of the tariff, and who will oppose it? d Can the government obtain the same results as you found in part c by imposing a quota on automobile imports? Explain Suppose the domestic demand and supply for automobiles is given by Problem The world price of automobiles is 16 Foreign car firms have a production cost of 15 per automobile, so they earn a profit of per car (LO3, LO4) a How many cars will be imported, assuming this country trades freely? b Now suppose foreign car producers are asked “voluntarily” to limit their exports to the home country to half of free trade levels What will be the equilibrium price of cars in the domestic market if foreign producers comply? Find domestic quantities of cars supplied and demanded c How will the “voluntary” export restriction affect the profits of foreign car producers? ANSWERS TO CONCEPT CHECKS 15A.1 If the world price of computers is $1,200, domestic demand for computers is 3,000 − 0.5(1,200) = 2,400 computers Domestic supply is 1,000 + 0.5(1,200) = 1,600 computers The difference between the quantity demanded and the quantity supplied, 800 computers, is imported A tariff of $400 raises the domestic price of computers to $1,600 Now domestic demand is 2,200 and domestic supply is 1,800 The difference, 400 computers, equals imports Revenue for the g­ overnment is ($400/computer) (400 imported computers) $160,000 If the world price of computers is $1,800 and there is no tariff, domestic demand is 2,100; domestic supply is 1,900; and imports are 200 A tariff of $400 raises the world price to $2,200, which is greater than the domestic price when there is no trade ($2,000) No computers are imported in this case and no tariff revenue is raised (LO3) ... Microeconomics, and Macroeconomics Tenth Edition Frank, Bernanke, Antonovics, and Heffetz Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Seventh Edition Frank, Bernanke,... Streamlined Approach for: Principles of Economics, Principles of Microeconomics, and Principles of Macroeconomics Third Edition Karlan and Morduch Economics, Microeconomics, and Macroeconomics Second... Economics, The Basics Third Edition Schiller and Gebhardt Essentials of Economics Tenth Edition Principles of Economics Asarta and Butters Connect Master: Economics Colander Economics, Microeconomics,