... the various mixes of output
that an economy can produce. It illustrates one of the TenPrinciplesofEconomics in
Chapter 1: People face tradeoffs. Here the farmer faces a tradeoff between produc-
ing ... ac-
tivities of millions of people with varying tastes and abilities. As a starting point
for this analysis, here we consider the reasons for economic interdependence. One
of the TenPrinciplesofEconomics ... easier to see in the case of babies and mini-
vans. Couples often buy a minivan in anticipation of the birth of a child. The
Violent
Crimes
(per 1,000
people)
Police Officers
(per 1,000 people)
0
Figure...
... sum of all the
individual demands for a particular good or service.
Catherine’s Demand
Price of
Ice-Cream
Cone
Price of
Ice-Cream
Cone
Nicholas’s Demand
0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream ...
competitive?
DEMAND
We begin our study of markets by examining the behavior of buyers. Here we con-
sider what determines the quantity demanded of any good, which is the amount
of the good that buyers are ... arrange
sales.
More often, markets are less organized. For example, consider the market for
ice cream in a particular town. Buyers of ice cream do not meet together at any one
time. The sellers of ice cream...
... percentage
change in the price of the second
good
price elasticity of supply
a measure of how much the quantity
supplied of a good responds to a
change in the price of that good,
computed as the ... attendance at the various museums around the country to see how the
admission price affects attendance. In studying either of these sets of data, the
statisticians would need to take account of ... affect attendance—
weather, population, size of collection, and so forth—to isolate the effect of
price. In the end, such data analysis would provide an estimate of the price elas-
ticity of demand,...
... demanded. Unemployment of this sort is sometimes called structural unem-
ployment, and it is often thought to explain longer spells of unemployment. As we
will see, this kind of unemployment results ... finding a job. Almost half of all spells of
unemployment end when the unemployed person leaves the labor force.
Because people move into and out of the labor force so often, statistics on un-
employment ... politicians
campaigning for office often speak about how their proposed policies will help
create jobs.
In the preceding two chapters we have seen some of the forces that determine
the level and growth of a country’s...
... diagram of the labor market, show the effect of
an increase in the minimum wage on the wage paid to
workers, the number of workers supplied, the number
of workers demanded, and the amount of
unemployment.
7. ... surplus of
workers, it might seem profitable to reduce the wage it is offering. But by reducing
the wage, the firm induces an adverse change in the mix of workers. In this case,
at a wage of $10, ... variety of
interesting problems for eco-
nomic theory. Some of these
problems were highlighted in
our description of the theory of
efficiency wages. These prob-
lems, however, go beyond the
study of...
... shows the quantity of money in the economy and an index of the price
level. The slope of the money line represents the rate at which the quantity of
money was growing, and the slope of the price line ... stabilizes, the price level stabilizes as well.
These episodes illustrate well one of the TenPrinciplesof Economics: Prices rise
when the government prints too much money.
CHAPTER 28 MONEY ... velocity of money, we divide the nominal value of output
(nominal GDP) by the quantity of money. If P is the price level (the GDP deflator),
Y the quantity of output (real GDP), and M the quantity of...
... outcomes:
efficiency
the property of a resource allocation
of maximizing the total surplus
received by all members of society
equity
the fairness of the distribution of
well-being among the members of
society
CHAPTER ... the producer surplus of all sellers.
Quantity of
Houses Painted
Quantity of
Houses Painted
Price of
House
Painting
500
800
$900
0
Supply
600
1234
(b) Price = $800
Price of
House
Painting
500
800
$900
0
600
1234
(a) ... the equilibrium of sup-
ply and demand maximizes the sum of consumer and producer surplus. In other
words, the equilibrium outcome is an efficient allocation of resources. The job of
the benevolent...
... tax revenue.
This chapter has shed some light on how high the price of civilized society can
be. One of the TenPrinciplesofEconomics discussed in Chapter 1 is that markets are
usually a good ... raw land. Yet the value of land often comes from
improvements, such as clearing trees, providing sewers,
and building roads. Unlike the supply of raw land, the supply
of improvements has an elasticity ... result
of a triangle depends on the square of its size. If we double the size of a tax, for
instance, the base and height of the triangle double, so the deadweight loss rises by
a factor of 4....
... the losses of the losers.
Now that we have completed our analysis of trade, we can better understand one
of the TenPrinciplesofEconomics in Chapter 1: Trade can make everyone better off.
If Isoland ... importer of a good, domestic
consumers of the good are better off, and domestic producers of the good are
worse off.
◆ Trade raises the economic well-being of a nation in the sense that the gains of
the ... WELFARE
◆ Trade raises the economic well-being of a nation in the sense that the gains of
the winners exceed the losses of the losers.
THE GAINS AND LOSSES OF AN IMPORTING COUNTRY
Now suppose that...
... good are better off, and
consumers of the good are worse off. When a country
allows trade and becomes an importer of a good,
consumers are better off, and producers are worse off. In
both cases, ... lower trade
barriers of their own accord not only
profit themselves, but also often induce
the laggards to match their example. The
most potent force for the worldwide
freeing of trade, then, is ... well, but they do not do everything well. In this chap-
ter we begin our study of another of the TenPrinciplesof Economics: Governments
can sometimes improve market outcomes. We examine why markets...
... invention of a better battery, can be
patented. The inventor thus obtains much of the benefit of his invention, although
certainly not all of it. By contrast, a mathematician cannot patent a theorem; ... number of cars that can be
supported without pollution outside of
the central city and auctions off the
rights to license new cars each month.
Different types of plates allow different
degrees of ... con-
gestion. Often, as in the case of local roads, tolls are not a practical solution because
the cost of collecting them is too high.
Sometimes congestion is a problem only at certain times of day....
... capability of American producers
relative to that of foreign firms. Is this argument
consistent with your classification of basic research
in part (a)? (Hint: Can excludability apply to some
potential ... international agreement extended some
aspects of [national] jurisdiction from 12 to 200
miles offshore.” Using the concept of property
rights, discuss how this agreement reduces the
scope of the problem.
d. ... started to
THE DESIGN OF
THE TAX SYSTEM
243
246 PART FOUR THE ECONOMICSOF THE PUBLIC SECTOR
THE FEDERAL GOVERNMENT
The U.S. federal government collects about two-thirds of the taxes in our economy.
It...
... could buy
coffee in Seattle for, say, $4 a pound and then sell it in Boston for $5 a pound, mak-
ing a profit of $1 per pound from the difference in price. The process of taking ad-
vantage of differences ... 672 PART ELEVEN THE MACROECONOMICS OF OPEN ECONOMIES
would drive up the U.S. price of coffee and drive down the Japanese price. Con-
versely, if a dollar could buy more coffee in Japan than in ... States, traders
could buy coffee in Japan and sell it in the United States. This import of coffee into
the United States from Japan would drive down the U.S. price of coffee and drive
up the Japanese...