economics today - gbv

EconomicsTodayFifteenth Edition

Roger LeRoy MillerInstitute for University Studies, Arlington, Texas

Addison-WesleyBoston San Francisco New York

London Toronto Sydney Tokyo Singapore Madrid

Mexico City Munich Paris Cape Town Hong Kong Montreal

Brief ContentsPreface

Part One Introduction1 The Nature of Economics2 Scarcity and the World of Trade-Offs3 Demand and Supply4 Extensions of Demand and Supply Analysis5 Public Spending and Public Choice6 Funding the Public Sector

Part Two Introduction to Macroeconomics and Economic Growth7 The Macroeconomy: Unemployment and Inflation8 Measuring the Economy's Performance9 Global Economic Growth and Development

Part Three Real GDP Determination and Fiscal Policy10 Real GDP and the Price Level in the Long Run11 Classical and Keynesian Macro Analyses12 Consumption, Real GDP, and the Multiplier13 Fiscal Policy14 Deficit Spending and the Public Debt

Part Four Money, Stabilization, and Growth15 Money, Banking, and Central Banking16 Money Creation, the Demand for Money, and Monetary Policy17 Domestic and International Dimensions of Monetary Policy18 Stabilization in an Integrated World Economy19 Policies and Prospects for Global Economic Growth

Part Five Dimensions of Microeconomics20 Demand and Supply Elasticity21 Consumer Choice22 Rents, Profits, and the Financial Environment of Business

Part Six Market Structure, Resource Allocation, and Regulation23 The Firm: Cost and Output Determination24 Perfect Competition25 Monopoly26 Monopolistic Competition27 Oligopoly and Strategic Behavior28 Regulation and Antitrust Policy in a Globalized Economy

Part Seven Labor Resources and the Environment29 The Labor Market: Demand, Supply, and Outsourcing30 Unions and Labor Market Monopoly Power31 Income, Poverty, and Health Care32 Environmental Economics

Part Eight Global Economics33 Comparative Advantage and the Open Economy34 Exchange Rates and the Balance of Payments

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Contents

Preface xx

EXAMPLEEarthly Rewards of Religiosity

"Neuroeconomics" Evaluates

Rational Choice

The Perceived Value of Gifts

Getting Directions

E-COMMERCE EXAMPLEThe New Online Dating Incentive:

Health Insurance

POLICY EXAMPLEHow Empirical Evidence Aids

in Thwarting Terrorism

4

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5

9

E-COMMERCE EXAMPLEA Comparative Advantage in

Grocery Shopping 42

INTERNATIONAL EXAMPLEThe Significant Opportunity Cost

of a Second of Time 31

Making Death Illegal—At Least,

Inside City Limits 35

POLICY EXAMPLESchooling Admirals in Entrepreneurship 29

The U.S. Military Confronts aTrade-Off 33

Part One Introduction

1 The Nature of Economics 1The Power of Economic Analysis 2Defining Economics 2Microeconomics versus Macroeconomics 3The Economic Person: Rational Self-interest 3Economics as a Science 7Positive versus Normative Economics 10

You Are There Herding Alpacas Toward a Tax Break 11

Issues and Applications Risking Life and Limb on MumbaiCommuter Trains 12

Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 14

Problems 15Economics on the Net 17Answers to Quick Quizzes 17

Appendix A Reading and Working with Graphs 18Direct and Inverse Relationships 18Constructing a Graph 19Graphing Numbers in a Table 20The Slope of a Line (A Linear Curve) 21


Problems 26

2 Scarcity and the World of Trade-Offs 27Scarcity 28

Wants and N e e d s 30Scarcity, Choice, and Opportuni ty Cost 30

T h e World of Trade-Offs 3 2T h e Choices Society Faces 34Economic Growth and the Production Possibilities Curve 38T h e Trade-Off Between the Present and the Future 39Specialization and Greater Productivity 40Comparative Advantage and Trade Among Nations 43

You Are There Specializing in Providing Baggage-Free Business Trips 44

Issues and Applications Specialization and Division of Labor

at the Speedway 45

VI

CONTENTS VII

EXAMPLECollege Students Face Higher

Relative Prices 53

Diamonds May Not Really Be Forever 60

Mining Production s Direct Responseto Higher Prices for Minerals 63

Integrating Poisons intoPharmaceuticals Production 68

Keeping Price Expectations Updatedwith Forecasts of Forecasts 69

In Nursing, Quantity DemandedExceeds Quantity Supplied 13

E-COMMERCE EXAMPLEAdjusting the Price of Broadband

Service for Quality 54

Video Bloggers Generate a Takeoffin Toy Helicopter Demand 59

Digital Imaging Boosts the Supplyof Dentistry Services 61

INTERNATIONAL POLICY EXAMPLEGovernment Subsidies Generate

More Train Traffic in Europe 68

POLICY EXAMPLEShould Shortages in the Ticket

Market Be Solved by Scalpers? 13

EXAMPLEThe Rising Price of Using Old Songs

as Video Background Music

A Hot Market for a Cooling Element

Summer Internships for Sale

Zero-Priced Seats at Graduation

Ceremonies Become Hot Items

E-COMMERCE EXAMPLECellphone Services Reduce the

Transaction Costs of Dating

Helping People Keep Up with theFlood of Online Videos

INTERNATIONAL EXAMPLEThe Global Black Market for

Marathon Entry Numbers

POLICY EXAMPLEKing Cotton Receives Royal Government

Subsidies

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Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice

ProblemsEconomics on the NetAnswers to Quick Quizzes

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3 Demand and SupplyDemandThe Demand ScheduleShifts in DemandThe Law of SupplyThe Supply ScheduleShifts in SupplyPutting Demand and Supply Together

You Are There Beetle Factories Respond to Higher Demandfor Weed-Eating Bugs

Issues and Applications Why Are People Eating More?Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice


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4 Extensions of Demand and Supply Analysis 82The Price System and Markets 83Changes in Demand and Supply 85The Rationing Function of Prices 88The Policy of Government-Imposed Price Controls 90The Policy of Controlling Rents 92Price Floors in Agriculture 94Price Floors in the Labor Market 97Quantity Restrictions 98

You Are There Finding a Spanish Instructor in the Midstof a Teacher Shortage 99

Issues and Applications Effects of the $0 Price Ceilingin the Market for Kidneys 100



VIII CONTENTS

EXAMPLEBillboards That Catch Drivers' Eyes,

Sometimes for Too Long 109

E-COMMERCE EXAMPLEIs the "Nu" Internet Domain a

Public Good? 115

The Minuscule Payoff fromPublic School Internet Subsidies 122

INTERNATIONAL POLICY EXAMPLEChina's Government Struggles with

How to Regard Tobacco 111

1MTEBNAT1OMAL EXAMPLEWhy a Synonym for "Big Oil"

Is "Big Government" 125

POLICY EXAMPLEIncentives Coax Senior Citizens

from Behind the Wheel 112

If the Government Doesn't Pay for It,Physicians Don't Do It 121

5 Public Spending and Public Choice 107What a Price System Can and Cannot Do 108Correcting for Externalities 108The Other Economic Functions of Government 113The Political Functions of Government 116Public Spending and Transfer Programs 118Collective Decision Making: The Theory of Public Choice 123

You Are There Aiming to Prevent Cost from ExceedingValue per Dollar in Higher Education 126

Issues and Applications An Ethanol Bonanza,or an Ethanol Boondoggle? 126



IMTERMATIGWAL POLICY EXAMPLEDefying One Agency, Illegal

Immigrants Pay Taxes to Another 139

How Iceland Slashed a Tax Rateand Boosted Tax Revenues 145

POLICY EXAMPLEStates Consider Shifting Tax Gears

to Satisfy Budget Constraints 135

The Same Tax Rate, but DifferentTax Bases for Different People 136

State-Sponsored Gambling—

Voluntary but Regressive Taxation 138

Connecticut's "Death Tax"May Induce Changes in Residency 143

6 Funding the Public SectorPaying for the Public SectorSystems of TaxationThe Most Important Federal TaxesTax Rates and Tax RevenuesTaxation from the Point of View of Producers

and ConsumersFinancing Social Security

You Are There For This Physician, the Tax Rate Is Too Highto Justify Working

Issues and Applications Progressive Income Taxationin the United States



134

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EXAMPLEWhy Older Men May Be More

Anxious Than in Years Past

Why Women Are ConfrontingHigher Inflation Than Men

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Part Two Introduction to Macroeconomicsand Economic Growth

7 The Macroeconomy:Unemployment and InflationUnemploymentThe Major Types of UnemploymentFull Employment and the Natural Rate of Unemployment

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CONTENTS IX

EXAMPLE (continued)A Flawless Leading Indicator

Suddenly Reveals a Flaw ' 116

INTERNATIONAL EXAMPLEHow Illegal Aliens Affect Measured

U.S. Cyclical Unemployment 165

POLICY EXAMPLEAre Seasonal Adjustments to the

CP1 Causing Seasonal Inflation? 110v

' EXAMPLEThe Upward Bias in Gross Domestic

Income Relative to GDP 196

Correcting GDP for Price IndexChanges, 1999-2009 200

INTERNATIONAL POLICY EXAMPLEGreece Pays a Price for Broadening

Its GDP Definition 190

INTERftfOTIONAL EXAMPLEHow Easter Complicates Measuring

Mexican GDP Growth 193

Purchasing Power Parity Comparisonsof World Incomes 203

v

'EXAMPLEExplaining the U.S. Lead in Labor

Productivity Growth " 220

INTERNATIONAL EXAMPLEGrowth Rates Around the World 216

An Upswing in Global

Economic Growth 219

Saving and Growth in China 222

A Story of Different Choices RegardingTrade—and Economic Growth 225

POLICY EXAMPLEAre Growth Rates in China

and India Overstated? 211

EXAMPLEDoes Sustained Low Inflation

Depress Real GDP? 252

INTERNATIONAL EXAMPLE s

Will a "Brain Drain" FlattenGermany's Trend Growth Path? 242

Inflation and Deflation 167Anticipated versus Unanticipated Inflation 172Changing Inflation and Unemployment: Business Fluctuations 174

You Are There Staying Employed in Denmark—at the Taxpayers' Expense 176

Issues and Applications Explaining the Downtrendin Labor Force Participation 177



8 Measuring the Economy's Performance i84The Simple Circular Flow 185National Income Accounting 187Two Main Methods of Measuring GDP 191Other Components of National Income Accounting 197Distinguishing Between Nominal and Real Values 200Comparing GDP Throughout the World 203

You Are There Housework's Exclusion from GDPIsNot Gender Neutral 204

Issues and Applications Is U.S. Fixed Investment Understated? 205Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 207


9 Global Economic Growth and Development 213How Do We Define Economic Growth? - 214Productivity Increases: The Heart of Economic Growth 220Saving: A Fundamental Determinant of Economic Growth 221New Growth Theory and the Determinants of Growth 223Immigration, Property Rights, and Growth 227Economic Development 229

You Are There An Invention Becomes a Market Innovation—by Accident 233

Issues and Applications Governments Get Serious About "Child Support" 233Summary: What You Should Know/Key Terms andKey Figures /Where to Go to Practice 235


Part Three Real GDP Determination and Fiscal Policy

10 Real GDP and the Price Levelin the Long Run 239Output Growth and the Long-Run Aggregate Supply Curve 240Total Expenditures and Aggregate Demand 243Shifts in the Aggregate Demand Curve 246Long-Run Equilibrium and the Price Level 248Causes of Inflation 250"

CONTENTS

INTERNATIONAL EXAMPLE (continued)For Greenland, a Warming

Climate Is Good Economic News ' 250

EXAMPLEAre the U.S. and European SRAS

Curves Horizontal? 210

INTERNATIONAL EXAMPLEIn a Global Economy, World Saving

Equals World Investment 265

POLICY EXAMPLEThe Aggregate Supply Impact of Cuts

in U.S. Marginal Tax Rates 214

EXAMPLEExplaining the Low U.S.

"Saving Rate" . 293

Consumption Effects of Changes in

Housing versus Financial Wealth 295

The Rise and Decline of IT Investment'sShare of Total Investment, 298

You Are There Another Day's Battle with Inflation in Zimbabwe 253

Issues and Applications Is U.S. Long-Run Real GDP Growth Declining? 254Summary: What You Should Know/Key Terms andKey Figures /Where to Go to Practice 256


11 Classical and Keynesian Macro Analyses KAThe Classical Model 262Keynesian Economics and the Keynesian

Short-Run Aggregate Supply Curve 268Output Determination Using Aggregate Demand and

Aggregate Supply: Fixed versus Changing PriceLevels in the Short Run 271

Shifts in the Aggregate Supply Curve 272Consequences of Changes in Aggregate Demand 275Explaining Short-Run Variations in Inflation 276

You Are There Putting More Weight on StabilityThan Growth in Denmark 279

Issues and Applications Higher Oil Prices and (Usually)U.S. Recessionary Gaps 280



12 Consumption, Real GDP, and the Multiplier 287Some Simplifying Assumptions in a Keynesian Model 288Determinants of Planned Consumption and Planned Saving 290Determinants of Investment 296Determining Equilibrium Real GDP 298Keynesian Equilibrium with Government and

the Foreign Sector Added 302The Multiplier 305How a Change in Real Autonomous Spending Affects

Real GDP When the Price Level Can Change 307The Relationship Between Aggregate Demand

and the C + I+G+X Curve 308

You Are There Listen to the German Chancellor:It's Time to Go Shopping! 310

Issues and Applications The Diminishing Effect of InterestRate Changes on U.S. Real Consumption Spending 311



Appendix B The Keynesian Model and the Multiplier 317

CONTENTS XI

INTERNATIONAL POLICY EXAMPLEStruggling to Boost Government

Spending in Peru 320

POLICY EXAMPLEDirect Expenditure Offsets in

Florida Insurance Coverage

A Laffer Curve in the Mid-2000s?

POLICY EXAMPLEWhat Was the U.S. Treasury

Thinking?

A Short-Run Deficit-BoostingStimulus Is Set to Give Way to

Deficit-Fighting Tax Increases

Should Entitlement "Trust Funds"Be Included in Deficits and theNet Public Debt?

INTERNATIONAL EXAMPLEWhy Musical Chairs in the U.S. '-•

Treasury Make the $100 Bill aWeaker Store of Value Abroad

325

321

INTERNATIONAL EXAMPLEWho Is Most Likely to Buy U.S.

Government Bonds "Indirectly"? 350

348

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358

E-COMMERCE EXAMPLEA Web Site That Specializes in

Identifying Double Coincidences

of Wants

Watch Out Banks! Here Come

Zopa and Circleone

Private Electronic Check ClearingMay Clear Out the Fed

361

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13 Fiscal Policy 318Discretionary Fiscal Policy 319Possible Offsets to Fiscal Policy 322Discretionary Fiscal Policy in Practice: Coping with Time Lags 328Automatic Stabilizers 329What Do We Really Know About Fiscal Policy? 330

You Are There A Derailed Effort to Move TowardAccounting for the Laffer Curve 331

Issues and Applications Does Government SpendingCrowd Out Private Health Care Expenditures? 332



Append ix C Fiscal Policy: A Keynesian Perspective 339Changes in Government Spending 339Changes in Taxes 340The Balanced-Budget Multiplier 340The Fixed Price Level Assumption 341Problems 341

14 Deficit Spending and the Public Debt 342Public Deficits and Debts: Flows versus Stocks 343Government Finance: Spending More Than Tax Collections 344Evaluating the Rising Public Debt 346Federal Budget Deficits in an Open Economy 351Growing U.S. Government Deficits:

Implications for U.S. Economic Performance 352

You Are There Facing a Future Medicare Meltdown? 358

Issues and Applications Are the Budget andTrade Deficits Twins or Distant Cousins? 359


Problems 363Economics on the Net 3 64Answers to Quick Quizzes 364

Part Four Money, Stabilization, and Growth

15 Money, Bank ing, and Central Banking 365The Functions of Money 367Properties of Money 369Defining Money 371Financial Intermediation and Banks 374Federal Deposit Insurance 378The Federal Reserve System: The U.S. Central Bank 382

You Are There Would You Like Your Change in Fives,Tens, Melvilles, or Rockwells? - 386

Issues and Applications The Crash of 2008 and theDecline of Investment Banking 387

XII CONTENTS

INTERNATIONAL EXAMPLE (continued)A Virtual Money Becomes Widely

Acceptable in China 310

EXAMPLEWhy the Decline in Clearing of Paper

Checks Is Bad News forAirplane Pilots 400

E-COMMERCE EXAMPLEWhat Goes on Inside Envelope-Free

Automated Teller Machines 403

POLICY EXAMPLEInterest on Reserves at Federal

Reserve Banks 396

INTERNATIONAL POLICY EXAMPLEPaying Attention to Money Supply

Growth Rates in Europe 428

POLICY EXAMPLEReading the Tea Leaves of Fed Policy

Statements

Supplementing the Taylor Rule,with the Taylor Principle

434

431

EXAMPLEThe U.S. Natural Rate of

Unemployment

Does the United States Face aStagflation Threat?

Measurement Issues ComplicateAssessing the Speed of U.S. PriceAdjustment

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1 6 Money Creation, the Demand forMoney, and Monetary Policy 394Banks and Money 395The Relationship Between Total Reserves and Total Deposits 397Money Expansion by the Banking System 400The Money Multiplier 406The Demand for Money 410How the Fed Influences Interest Rates 412

You Are There Scanning Checks Benefits a Bank's Small-Business Customer 415

Issues and Applications Together, Bankers Cry, "Please Deposit Your Cash!" 415Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 418


1 7 Domestic and InternationalDimensions of Monetary Policy 422Effects of an Increase in the Money Supply 423Open Economy Transmission of Monetary Policy 425Monetary Policy and Inflation 427Monetary Policy in Action: The Transmission Mechanism 429The Way Fed Policy Is Currently Implemented 432Selecting the Federal Funds Rate Target 435

You Are There It's Time for the FOMC to Make a Tough Call 437

Issues and Applications The Fed Tackles a Credit Crisis 438Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 440


Appendix D Monetary Policy: A Keynesian Perspective 445Increasing the Money Supply 445Decreasing the Money Supply 446Arguments Against Monetary Policy 446Problems 446

1 8 Stabilization in anIntegrated World Economy 448Active versus Passive Policymaking 449The Natural Rate of Unemployment 449Rational Expectations, the Policy Irrelevance

Proposition, and Real Business Cycles 457Modern Approaches to Justifying Active Policymaking 463Is There a New Keynesian Phillips Curve? 465

CONTENTS XIII

POLICY EXAMPLEWhen It Comes to Inflation, the Fed

Keeps Its Eyes Off the Headlines 456

INTERNATIONAL EXAMPLEIn Indonesia, Cutting Back on

Policing Might Enhance Growth 480

Small Lenders Meet with BigSuccesses—If Governments Do NotPut Them Out of Business 483

The IMF Rethinks Nations'Voting Shares 488

EXAMPLEThe Price Elasticity of Demand for

Oranges 503

What Do Real-World Price

Elasticities of Demand Look Like? 512

Sending Mail First Class orSecond Class? 513

Short-Run versus Long-Run Price 'Elasticities of Housing Supply 511

INTERNATIONAL EXAMPLE .,Why Hearing Aid Producers Settle for

a Low Rate of "Market Penetration" 508

The Income Elasticity of Demandfor Finnish City Bus Travel 515

POLICY EXAMPLEWho Pays Higher Beer Taxes? 505

EXAMPLENewspaper Vending Machines versus

Candy Vending Machines 530

Summing Up: Economic Factors FavoringActive versus Passive Policymaking

You Are There Inflation Targeting Catches On—Except at the Fed

Issues and Applications Are U.S. Inflation Expectations Rising?,Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice


19 Policies and Prospects forGlobal Economic GrowthLabor Resources and Economic GrowthCapital Goods and Economic GrowthPrivate International Financial Flows as a

Source of Global GrowthInternational Institutions and Policies for Global Growth

You Are There A Microlender Succeeds in India—In Part by Avoiding Overexposure to Water Buffalo

Issues and Applications Private International Investment:Source of Instability or Engine of Economic Growth?



Part Five Dimensions of Microeconomics

20 Demand and Supply ElasticityPrice ElasticityPrice Elasticity RangesElasticity and Total RevenuesDeterminants of the Price Elasticity of DemandCross Price Elasticity of DemandIncome Elasticity of DemandPrice Elasticity of Supply

You Are There Using Cross Price Elasticities toAssess Brand and Supermarket "Loyalty"

Issues and Applications Price Elasticity of Demandand the Upswing in Marijuana Use



21 Consumer ChoiceUtility TheoryGraphical AnalysisDiminishing Marginal UtilityOptimizing Consumption Choices

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XIV CONTENTS

EXAMPLE (continued)Which Is Worse—Too Many. Choices

or No Choice? 532

E-COMMERCE EXAMPLEMoviemakers Try to Avoid Projecting

Negative Marginal Utility 529

Help, I'm Shopping, and I Can't Stop! 538

WTEBNATIQWAL EXAiWPLEA Consumer Optimum with One

Inflation-Adjusted Dollar a Day 534

EXAMPLEDo Entertainment Superstars Make

Super Economic Rents? 561

How Chalking Up Sports LossesRaises Schools' Profits 561

Efficient Markets or Adaptive Markets? 514

E-COMMERCE EXAMPLEAt GM, a Wireless Mechanic Helps

Cut the Present Value of FutureWarranty Costs 511

INTERNATIONAL POLICY EXAMPLEAn Interest Rate Policy Reallocates \

Iranian Financial Capital 569

POLICY EXAMPLEWhy It Can Pay to Form a Partnership

Instead of a Corporation 564

EXAMPLEToyota Finds Itself Just Beyond Its

Minimum Efficient Scale 602

E-COMMERCE EXAMPLERiding an Escalator to the Outer

Edge of a Production Function 585

Wal-Mart Encounters Interferencein Inventory Radio-Tracking 594

How a Price Change Affects Consumer OptimumThe Demand Curve RevisitedBehavioral Economics and Consumer Choice Theory

You Are There Opting Out of Company Health Plans

Issues and Applications A Renewed Interest in Measuring UtilitySummary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice


Appendix E More Advanced Consumer Choice TheoryOn Being IndifferentProperties of Indifferences CurvesThe Marginal Rate of SubstitutionThe Indifference MapThe Budget ConstraintConsumer Optimum RevisitedEffects of Changes in IncomeThe Price-Consumption CurveDeriving the Demand Curve


Problems

22 Rents, Profits, and the FinancialEnvironment of BusinessEconomic RentFirms and ProfitsInterestCorporate Financing MethodsThe Markets for Stocks and Bonds

You Are There In a Cold Twist, a Millionaire

Bequeaths His Wealth to Himself

Issues and Applications How Musicians IncreasinglyRely on Stocks and Bonds



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Part Six Market Structure, Resource Allocation, and Regulation

23 The Firm: Cost and Output Determination 583Short Run versus Long Run 584The Relationship Between Output and Inputs 585Diminishing Marginal Product 586Short-Run Costs to the Firm 589The Relationship Between Diminishing Marginal

Product and Cost Curves 595Long-Run Cost Curves 598Why the Long-Run Average Cost Curve Is U-Shaped "" 599Minimum Efficient Scale 602

CONTENTS XV

INTERNATIONAL EXAMPLEA French Handbag Manufacturer

Opts for Multitasking 588

Global Cargo Shippers Pursue

Scale Economies 601

EXAMPLESell the Livestock and Open the

Farm to Pheasant Hunters! 626

E-COMMERCE EXAMPLEBlogging Becomes a Business 612

INTERNATIONAL EXAMPLEIncreasing Costs and Future Prices

in the Oil Industry 628

EXAMPLEKeeping Customers Flowing to Mr.

Goodwrench Instead of IndependentAuto Mechanics 641

For Hewlett-Packard, Ink PatentsGenerate the Color of Money 643

Why Students Pay DifferentPrices to Attend College 654

E-COMMERCE EXAMPLE N

Online Retailers Are Watching 653

INTERNATIONAL POLICY EXAMPLEA Monopoly in the Assignment

of Internet Addresses 640

German Chimney-Sweep CompetitionGoes Up in Smoke 642

You Are There More Flights of Smaller Jets Translate intoHigher Long-Run Average Costs at Airports 603

Issues and Applications Family Physicians Downsize toReduce Long-Run Average Costs 604



24 Perfect Competition 6ioCharacteristics of a Perfectly Competitive Market Structure 611The Demand Curve of the Perfect Competitor 612How Much Should the Perfect Competitor Produce? 613Using Marginal Analysis to Determine the Profit-Maximizing

Rate of Production 615Short-Run Profits 617The Short-Run Break-Even Price and the

Short-Run Shutdown Price 618The Supply Curve for a Perfectly Competitive Industry 621Price Determination Under Perfect Competition 623The Long-Run Industry Situation: Exit and Entry 625Long-Run Equilibrium 629Competitive Pricing: Marginal Cost Pricing 630

You Are There Conflicting Signals in the Crocodile Market 631

Issues and Applications The Data-Storage Industry Booms,and Price Declines 632



25 Monopoly 639Definition of a Monopolist 640Barriers to Entry 641The Demand Curve a Monopolist Faces • 644Elasticity and Monopoly 647Costs and Monopoly Profit Maximization 648Calculating Monopoly Profit 651On Making Higher Profits: Price Discrimination 653The Social Cost of Monopolies 655

You Are There Why Pouring Vegetable Oil into a Car Is Illegal in Illinois 657

Issues and Applications The Predictable Consequences of EuropeanState Religion Monopolies 658



Appendix F Consumer Surplus and the Losses Resulting from Monopoly 664Consumer Surplus 664Consumer Surplus in a Perfectly Competitive Market 665How Society Loses from Monopoly 666

XVI CONTENTS

EXAMPLEDifferentiation at the

Graveyard—High-Definition RIP 610

Firms Sell with Smell 611

E-COMMERCE EXAMPLEClicking a Phone Connection 616

EXAMPLEWar Games Catch on at Firms 694

The Prisoners' Dilemma 695

Trying to Coordinate a Potato Cartel 699

E-COMMERCE EXAMPLEMarket Concentration in the Personal

Computer Industry 692

Comcast Builds a Mini Internetfor Its Online Programming 103

E-COMMERCE EXAMPLEThe Justice Department Focuses on

Flash Memory Price Fixing 129

INTERNATIONAL POLICY EXAMPLEThe Long Arm of Europe's REACH

Slaps U.S. Firms 121

POLICY EXAMPLEHow Keeping Costs Low to Maintain

Low Electricity Rates CreatesSocial Spillovers 119

Trying to Satisfy One RegulationCan Violate Another Regulation 124

The Feedback Effect of Warning-Label Overkill 125

26 Monopolistic Competition 668Monopolistic Competition 669Price and Output for the Monopolistic Competitor 672Comparing Perfect Competition with Monopolistic Competition 674Brand Names and Advertising 675Information Products and Monopolistic Competition 678

You Are There Trademarked Differentiationat Polo Ralph Lauren Corporation 682

Issues and Applications What's in a Name?The Auto Name Game Heats Up 683



27 Oligopoly and Strategic Behavior 689Oligopoly 690Strategic Behavior and Game Theory 693The Cooperative Game: A Collusive Cartel 697Network Effects 700Product Compatibility in Multiproduct

Oligopolies Facing Network Effects 701Comparing Market Structures 706

You Are There A Real Estate Cartel Corrals a "Cheater" 707

Issues and Applications Oligopoly in theGlobal Commercial Aircraft Industry 707



28 Regulation and Antitrust Policyin a Globalized Economy 714Forms of Industry Regulation 715Regulating Natural Monopolies 718Regulating Nonmonopolistic Industries 721Incentives and Costs of Regulation 725Antitrust Policy 728Antitrust Enforcement 731

You Are There Regulation of U.S. Currency Moves into the Court System 733

Issues and Applications The Latest in SpiralingRegulation Costs: "Doc Fees" ' 734



CONTENTS XVII

EXAMPLE

The Derived Demand for Railcars

Why Divers Are Supplying Labor

to Nuclear Reactors

Employing a New Nurse's Aide

E-COMMERCE EXAMPLEWhy Hire an Orchestra When a

Computer Program Will Do?

INTERNATIONAL EXAMPLEReal-Time Tutoring from the

Far Side of the World

EXAMPLEHigher Incomes Imply More Assets

for the Older Set

E-COMMERCE EXAMPLEHigh-Priced Pills and Future

Health Care Costs

iftSTEBNATIONAl EXAMPLEEvidence of a More Unequal

Distribution of Income in China

A Symptom of National HealthPlans—Long Queues

EU Governments Get Serious AboutEmissions—Or Do They?

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EXAMPLELongshoremen's Unions Win Control

over Key Technologies 116

Advertising Against Wal-Mart 111

INTERNATIONAL EXAMPLENo Pay Raise, No Data! 113

POLICY EXAMPLECan Minimum Wage Laws Ever

Boost Employment? 182

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Part Seven Labor Resources and the Environment

29 The Labor Market:Demand, Supply, and Outsourcing 741Labor Demand for a Perfectly Competitive Firm 742The Market Demand for Labor 746Wage Determination in a Perfectly Competitive Labor Market 749Labor Outsourcing, Wages, and Employment 752Monopoly in the Product Market 756The Utilization of Other Factors of Production 759

You Are There: "Reverse Outsourcing" Provides New Jobs in Ohio 761

Issues and Applications The Narrowing Male-Female Wage Gap 762Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 764

Problems . 766Economics on the Net 767Answers to Quick Quizzes 767

30 Unions and Labor Market Monopoly Power 768Industrialization and Labor Unions 769Union Goals and Strategies 772Economic Effects of Labor Unions 777Monopsony: A Buyer's Monopoly 779

You Are There In China, Consumers Seek to Act Together as a Monopsonist 784

Issues and Applications Can the U.S. Auto Industry and theUnited Auto Workers Union Remain Viable Enterprises? 784



3 1 Income, Poverty, and Health Care 791Income 792Determinants of Income Differences 796Theories of Desired Income Distribution 799Poverty and Attempts to Eliminate It 800Health Care 804

You Are There The New Experimental Therapy: Prepaid Clinics 810

Issues and Applications The Volatility of U.S. Households'Incomes 811Summary: What You Should Know/Key Terms andKey Figures/Where to Go to Practice 813


32 Environmental Economics sisPrivate versus Social Costs 819Correcting for Externalities 821Pollution 823Common Property 825Reducing Humanity's Carbon Footprint:

Restrainino1 PollnHnn-P.Qncino- Art-nntipc 897

xviii CONTENTS

POLICY EXAMPLEPassive Smoking Effects of Smoking

Bans versus Cigarette Taxes 822

Determining Whether SpeciesAre Distinct Can Have aDollar Value 830

Wild Species, Common Property, and Trade-Offs 829

You Are There A U.S. Senator Finds the Largest U.S. Carbon Footprint 831

Issues and Applications The Economics of Pollutionin China—Present and Future 831


. Problems 835Economics on the Net 837Answers to Quick Quizzes 837

EXAMPLEHow "Transfer Points" Contribute

to U.S. Competitiveness

E-COMMERCE EXAMPLECanadian Consumers Cheat to

Watch U.S. TV Programming

INTERNATIONAL EXAMPLEHave Seafood, Will Travel

The Comparative Advantage of

Desert Dairies

China Discovers a New ComparativeAdvantage

POLICY EXAMPLEPaying More for U.S.-Grown

Charitable Food Donations

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851

INTERNATIONAL EXAMPLEGoing Loony over an Appreciating

Loonie 812

Measuring the Value of Zimbabwe'sDollar 881

Part Eight Global Economics

33 Comparative Advantageand the Open Economy 838The Worldwide Importance of International Trade 839Why We Trade: Comparative Advantage

and Mutual Gains from Exchange 840The Relationship Between Imports and Exports 847International Competitiveness 848Arguments Against Free Trade 849Ways to Restrict Foreign Trade 852International Trade Organizations 854

You Are There How Visa Rules Protect U.S. Pop Stars from aBritish Invasion 857

Issues and Applications Higher Shipping Costs: A Barrier to Tradeor a By-Product of Its Growth? 858



34 Exchange Rates and theBalance of Payments 863The Balance of Payments and International Capital Movements 864Determining Foreign Exchange Rates 871The Gold Standard and the International Monetary Fund 878Fixed versus Floating Exchange Rates 879

You Are There Literally Betting the House on an Exchange Rate 884

Issues and Applications The Current Account Deficit forOne Group of Nations Is the Current Account Surplus for Another 884



Answers to Odd-Numbered Problems

Photo Credits

Glossary

Index

A-l

C-l

G-l

1-1

economics today - gbv

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