Microeconomics Principles and Policy [13 ed.] 130528061X

Citation preview

Get complete eBook Order by email at [email protected]

Get complete eBook Order by email at [email protected]

Get Complete eBook Download Link below for instant download

https://browsegrades.net/documents/2 86751/ebook-payment-link-for-instantdownload-after-payment Follow the Instructions for complete eBook Download by email.

Get complete eBook Order by email at [email protected]

Tap into engagement MindTap empowers you to produce your best work—consistently. MindTap is designed to help you master the material. Interactive videos, animations, and activities create a learning path designed by your instructor to guide you through the course and focus on what’s important.

MindTap delivers real-world activities and assignments that will help you in your academic life as well as your career.

Flashcards ReadSpeaker Progress App MyNotes & Highlights

MindTap helps you stay organized and efficient by giving you the study tools to master the material.

Self Quizzing & Practice

MindTap empowers and motivates with information that shows where you stand at all times—both individually and compared to the highest performers in class.

“MindTap was very useful – it was easy to follow and everything was right there.” — Student, San Jose State University

“I’m definitely more engaged because of MindTap.” — Student, University of Central Florida

“MindTap puts practice questions in a format that works well for me.” — Student, Franciscan University of Steubenville

Tap into more info at: www.cengage.com/mindtap Source Code: 14M-AA0105

Engaged with you. www.cengage.com Get complete

eBook Order by email at [email protected]

Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected]

5 REASONS

to buy your textbooks and course materials at

1

SAVINGS:

2

CHOICE:

3 4 5

Prices up to 75% off, daily coupons, and free shipping on orders over $25

Multiple format options including textbook, eBook and eChapter rentals

CONVENIENCE:

Anytime, anywhere access of eBooks or eChapters via mobile devices

SERVICE:

Free eBook access while your text ships, and instant access to online homework products

STUDY TOOLS:

Study tools* for your text, plus writing, research, career and job search resources *

availability varies

Find your course materials and start saving at:

www.cengagebrain.com

Source Code: 14M-AA0107

Engaged with you. www.cengage.com Get complete

eBook Order by email at [email protected]

Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected]

MICROECONOMICS PRINCIPLES and POLICY Thirteenth Edition

William J. Baumol New York University and Princeton University

Alan S. Blinder Princeton University

Australia • Brazil • Mexico • Singapore • United Kingdom • United States

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected]

BRIEF CONTENTS

Preface xxvi About the Authors xxxi

Part 1

Getting Acquainted with Economics 1 Chapter Chapter Chapter Chapter

Part 2

1 What Is Economics? 3 2 The Economy: Myth and Reality 21 3 The Fundamental Economic Problem: Scarcity and Choice 39 4 Supply and Demand: An Initial Look 55

The Building Blocks of Demand and Supply 79 Chapter 5 Consumer Choice: Individual and Market Demand 81 Chapter 6 Demand and Elasticity 107 Chapter 7 Production, Inputs, and Cost: Building Blocks for Supply Analysis 125 Chapter 8 Output, Price, and Profit: The Importance of Marginal Analysis 151 Chapter 9 Securities, Business Finance, and the Economy: The Tail that Wags the Dog? 173

Part 3

Markets and the Price System 193 Chapter 10 Chapter 11 Chapter 12 Chapter 13

Part 4

The Firm and the Industry under Perfect Competition 195 Monopoly 213 Between Competition and Monopoly 229 Limiting Market Power: Regulation and Antitrust 255

The Virtues and Limitations of Markets 277 Chapter 14 Chapter 15 Chapter 16 Chapter 17

The Case for Free Markets: The Price System 279 The Shortcomings of Free Markets 301 Externalities, the Environment, and Natural Resources 325 Taxation and Resource Allocation 349

iv

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Brief Contents Part 5

The Distribution of Income 367 Chapter 18 Pricing the Factors of Production 369 Chapter 19 Labor and Entrepreneurship: The Human Inputs 391 Chapter 20 Poverty, Inequality, and Discrimination 419

Part 6

U.S. Economic Leadership 437 Chapter 21 Is U.S. Economic Leadership Threatened? 439 Chapter 22 International Trade and Comparative Advantage 461

APPENDIX: Answers to Odd-Numbered Test Yourself Questions 785 Glossary  805 Index  817

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

v

Get complete eBook Order by email at [email protected]

TABLE OF CONTENTS Preface xxvi About the Authors xxxi

Part 1

Getting Acquainted with Economics 1

Chapter 1 What Is Economics? 3 1-1 IDEAS FOR BEYOND THE FINAL EXAM 3 1-1a 1-1b 1-1c 1-1d 1-1e 1-1f 1-1g 1-1h 1-1i 1-1j 1-1k

Idea 1: How Much Does It Really Cost? 4 Idea 2: Attempts to Repeal the Laws of Supply and Demand—The Market Strikes Back 4 Idea 3: The Surprising Principle of Comparative Advantage 5 Idea 4: Trade Is a Win–Win Situation 5 Idea 5: The Importance of Thinking at the Margin 6 Idea 6: Externalities—A Shortcoming of the Market Cured by Market Methods 6 Idea 7: The Trade-Off between Efficiency and Equality 6 Idea 8: Government Policies Can Limit Economic Fluctuations—But Don’t Always Succeed 7 Idea 9: The Short-Run Trade-Off between Inflation and Unemployment 7 Idea 10: Productivity Growth Is (Almost) Everything in the Long Run 8 Epilogue 8

1-2 INSIDE THE ECONOMIST’S TOOL KIT 8 1-2a Economics as a Discipline 8 1-2b The Need for Abstraction 8 1-2c The Role of Economic Theory 11 1-2d What Is an Economic Model? 12 1-2e Reasons for Disagreements: Imperfect Information and Value Judgments 12 Summary 13 Key Terms 14 Discussion Questions 14

APPENDIX Using Graphs: A Review 14 Graphs Used in Economic Analysis 14 Two-Variable Diagrams 14 The Definition and Measurement of Slope 15 Rays through the Origin and 45° Lines 17 Squeezing Three Dimensions into Two: Contour Maps 18 Summary 19 Key Terms 19 Test Yourself 20

Chapter 2 The Economy: Myth and Reality 21 2-1 THE AMERICAN ECONOMY: A THUMBNAIL SKETCH 21 2-1a 2-1b 2-1c 2-1d

A Private-Enterprise Economy 23 A Relatively “Closed” Economy 23 A Growing Economy … 24 But with Bumps along the Growth Path 24

vi

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Table of Contents 2-2 THE INPUTS: LABOR AND CAPITAL 26 2-2a 2-2b 2-2c 2-2d

The American Workforce: Who Is in It? 27 The American Workforce: What Does It Do? 28 The American Workforce: What Does It Earn? 29 Capital and Its Earnings 30

2-3 THE OUTPUTS: WHAT DOES AMERICA PRODUCE? 30 2-4 THE CENTRAL ROLE OF BUSINESS FIRMS 31 2-5 WHAT’S MISSING FROM THE PICTURE? GOVERNMENT 32 2-5a 2-5b 2-5c 2-5d 2-5e

The Government as Referee 33 The Government as Business Regulator 33 Government Expenditures 34 Taxes in America 34 The Government as Redistributor 35

2-6 CONCLUSION: IT’S A MIXED ECONOMY 36 Summary 36 Key Terms 36 Discussion Questions 37

Chapter 3 The Fundamental Economic Problem: Scarcity and Choice 39 ISSUE: What to Do about the Budget Deficit? 39

3-1 SCARCITY, CHOICE, AND OPPORTUNITY COST 40 3-1a 3-1b

Opportunity Cost and Money Cost 41 Optimal Choice: Not Just Any Choice 42

3-2 SCARCITY AND CHOICE FOR A SINGLE FIRM 42 3-2a 3-2b

The Production Possibilities Frontier 43 The Principle of Increasing Costs 44

3-3 SCARCITY AND CHOICE FOR THE ENTIRE SOCIETY 45 3-3a

Scarcity and Choice Elsewhere in the Economy 45

ISSUE REVISITED: Coping with the Budget Deficit 46

3-4 THE CONCEPT OF EFFICIENCY 46 3-5 THE THREE COORDINATION TASKS OF ANY ECONOMY 47 3-6 TASK 1. HOW THE MARKET FOSTERS EFFICIENT RESOURCE ALLOCATION 48 3-6a 3-6b

The Wonders of the Division of Labor 48 The Amazing Principle of Comparative Advantage 48

3-7 TASK 2. MARKET EXCHANGE AND DECIDING HOW MUCH OF EACH GOOD TO PRODUCE 49 3-8 TASK 3. HOW TO DISTRIBUTE THE ECONOMY’S OUTPUTS AMONG CONSUMERS 50 Summary 52 Key Terms 52 Test Yourself 53 Discussion Questions 53

Chapter 4 Supply and Demand: An Initial Look 55 PUZZLE: What Happened to Oil Prices? 55

4-1 THE INVISIBLE HAND 56 4-2 DEMAND AND QUANTITY DEMANDED 56 4-2a 4-2b 4-2c

The Demand Schedule 57 The Demand Curve 58 Shifts of the Demand Curve 58

4-3 SUPPLY AND QUANTITY SUPPLIED 61 4-3a 4-3b

The Supply Schedule and the Supply Curve 61 Shifts of the Supply Curve 62

4-4 SUPPLY AND DEMAND EQUILIBRIUM 64 4-4a

The Law of Supply and Demand 66

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

vii

viii

Get complete eBook Order by email at [email protected] Table of Contents

4-5 EFFECTS OF DEMAND SHIFTS ON SUPPLY-DEMAND EQUILIBRIUM 66 4-6 SUPPLY SHIFTS AND SUPPLY-DEMAND EQUILIBRIUM 67 PUZZLE RESOLVED: Those Leaping Oil Prices 68 4-6a

Application: Who Really Pays That Tax? 69

4-7 BATTLING THE INVISIBLE HAND: THE MARKET FIGHTS BACK 70 4-7a

Restraining the Market Mechanism: Price Ceilings 71

POLICY DEBATE Economic Aspects of the War on Drugs 71 4-7b 4-7c 4-7d 4-7e

Case Study: Rent Controls in New York City 72 Restraining the Market Mechanism: Price Floors 73 Case Study: Farm Price Supports and the Case of Sugar Prices 74 A Can of Worms 74

4-8 A SIMPLE BUT POWERFUL LESSON 76 Summary 76 Key Terms 76 Test Yourself 77 Discussion Questions 78

Part 2

The Building Blocks of Demand and Supply 79

Chapter 5 Consumer Choice: Individual and Market Demand 81 PUZZLE: Why Shouldn’t Water Be Worth More Than Diamonds? 81

5-1 SCARCITY AND DEMAND 82 5-2 UTILITY: A TOOL TO ANALYZE PURCHASE DECISIONS 83 5-2a 5-2b 5-2c 5-2d 5-2e

The Purpose of Utility Analysis: Analyzing How People Behave, Not What They Think 83 Total versus Marginal Utility 84 The “Law” of Diminishing Marginal Utility 84 Using Marginal Utility: The Optimal Purchase Rule 86 From Diminishing Marginal Utility to Downward-Sloping Demand Curves 88

5-3 BEHAVIORAL ECONOMICS: ARE ECONOMIC DECISIONS REALLY MADE “RATIONALLY”? 90 5-4 CONSUMER CHOICE AS A TRADE-OFF: OPPORTUNITY COST 92 5-4a

Consumer’s Surplus: The Net Gain from a Purchase 92

PUZZLE RESOLVED: Resolving the Diamond–Water Puzzle 94 5-4b

Income and Quantity Demanded 94

5-5 FROM INDIVIDUAL DEMAND CURVES TO MARKET DEMAND CURVES 95 5-5a Market Demand Curves as a Horizontal Sum of the Demand Curves of Individual Buyers 95 5-5b The “Law” of Demand 96 5-5c Exceptions to the “Law” of Demand 97 Summary 97 Key Terms 98 Test Yourself 98 Discussion Questions 98

APPENDIX Analyzing Consumer Choice Graphically: Indifference Curve Analysis 99 Geometry of Available Choices: The Budget Line 99 Properties of the Budget Line 100 Changes in the Budget Line 100 What the Consumer Prefers: Properties of the Indifference Curve 101 The Slopes of Indifference Curves and Budget Lines 102 Tangency Conditions 103 Consequences of Income Changes: Inferior Goods 104 Consequences of Price Changes: Deriving the Demand Curve 104 Summary 105 Key Terms 106 Test Yourself 106

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Table of Contents Chapter 6 Demand and Elasticity 107 ISSUE: Will Taxing Cigarettes Make Teenagers Stop Smoking? 107

6-1 ELASTICITY: THE MEASURE OF RESPONSIVENESS 108 6-1a

Price Elasticity of Demand and the Shapes of Demand Curves 111

6-2 PRICE ELASTICITY OF DEMAND: ITS EFFECT ON TOTAL REVENUE AND TOTAL EXPENDITURE 113 ISSUE REVISITED: Will a Cigarette Tax Decrease Teenage Smoking Significantly? 114

6-3 WHAT DETERMINES DEMAND ELASTICITY? 115 6-4 ELASTICITY AS A GENERAL CONCEPT 115 6-4a 6-4b 6-4c

1. Income Elasticity 116 2. Price Elasticity of Supply 116 3. Cross Elasticity of Demand 116

6-5 THE TIME PERIOD OF THE DEMAND CURVE AND ECONOMIC DECISION MAKING 118 6-6 REAL-WORLD APPLICATION: POLAROID VERSUS KODAK 119 6-7 IN CONCLUSION 120 Summary 120 Key Terms 120 Test Yourself 121 Discussion Questions 121

APPENDIX How Can We Find a Legitimate Demand Curve from Historical Statistics? 121 An Illustration: Did the Advertising Program Work? 123 How Can We Find a Legitimate Demand Curve from the Statistics? 123

Chapter 7 Production, Inputs, and Cost: Building Blocks for Supply Analysis 125 PUZZLE: How Can We Tell if Large Firms Are More Efficient? 126

7-1 SHORT-RUN VERSUS LONG-RUN COSTS: WHAT MAKES AN INPUT VARIABLE? 127 7-1a 7-1b

The Economic Short Run versus the Economic Long Run 127 Fixed Costs and Variable Costs 128

7-2 PRODUCTION, INPUT CHOICE, AND COST WITH ONE VARIABLE INPUT 128 7-2a 7-2b 7-2c

Total, Average, and Marginal Physical Products 128 Marginal Physical Product and the “Law” of Diminishing Marginal Returns 129 The Optimal Quantity of an Input and Diminishing Returns 130

7-3 MULTIPLE INPUT DECISIONS: THE CHOICE OF OPTIMAL INPUT COMBINATIONS 132 7-3a 7-3b 7-3c

Substitutability: The Choice of Input Proportions 132 The Marginal Rule for Optimal Input Proportions 133 Changes in Input Prices and Optimal Input Proportions 134

7-4 COST AND ITS DEPENDENCE ON OUTPUT 135 7-4a 7-4b 7-4c

Input Quantities and Total, Average, and Marginal Cost Curves 135 The Law of Diminishing Marginal Productivity and the U-Shaped Average Cost Curve 138 The Average Cost Curve in the Short and Long Run 139

7-5 ECONOMIES OF SCALE 140 7-5a 7-5b

The “Law” of Diminishing Returns and Returns to Scale 141 Historical Costs versus Analytical Cost Curves 142

PUZZLE RESOLVED: Resolving the Economies of Scale Puzzle 142 7-5c

Cost Minimization in Theory and Practice 144

POLICY DEBATE Should Offshore Oil Drilling Be Subsidized by the U.S. Government? 144 Summary 145 Key Terms 145 Test Yourself 145 Discussion Question 146

APPENDIX Production Indifference Curves 146 Characteristics of the Production Indifference Curves, or Isoquants 147 The Choice of Input Combinations 147

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

ix

x

Get complete eBook Order by email at [email protected] Table of Contents Cost Minimization, Expansion Path, and Cost Curves 148 Summary 150 Key Terms 150 Test Yourself 150

Chapter 8 Output, Price, and Profit: The Importance of Marginal Analysis 151 PUZZLE: Can a Company Make a Profit by Selling Below Its Costs? 152

8-1 PRICE AND QUANTITY: ONE DECISION, NOT TWO 153 8-2 TOTAL PROFIT: KEEP YOUR EYE ON THE GOAL 154 8-3 ECONOMIC PROFIT AND OPTIMAL DECISION MAKING 154 8-3a 8-3b 8-3c 8-3d

Total, Average, and Marginal Revenue 155 Total, Average, and Marginal Cost 156 Maximization of Total Profit 157 Profit Maximization: A Graphical Interpretation 158

8-4 MARGINAL ANALYSIS AND MAXIMIZATION OF TOTAL PROFIT 159 8-4a 8-4b

Marginal Revenue and Marginal Cost: Guides to Optimization 161 Finding the Optimal Price from Optimal Output 162

POLICY DEBATE Profit and the New Market Economies 162 8-5 GENERALIZATION: THE LOGIC OF MARGINAL ANALYSIS AND MAXIMIZATION 164 8-5a

Application: Fixed Cost and the Profit-Maximizing Price 164

PUZZLE RESOLVED: Using Marginal Analysis to Unravel the Case of the “Unprofitable” Calculator 165

8-6 CONCLUSION: THE FUNDAMENTAL ROLE OF MARGINAL ANALYSIS 166 8-7 THE THEORY AND REALITY: A WORD OF CAUTION 167 Summary 168 Key Terms 168 Test Yourself 168 Discussion Question 169

APPENDIX The Relationships among Total, Average, and Marginal Data 169 Graphical Representation of Marginal and Average Curves 170 Test Yourself 171

Chapter 9 Securities, Business Finance, and the Economy: The Tail that Wags the Dog? 173 PUZZLE: The Stock Market’s Unpredictability 173

9-1 CORPORATIONS AND THEIR UNIQUE CHARACTERISTICS 174 9-1a 9-1b 9-1c

Financing Corporate Activity: Stocks and Bonds 175 Plowback, or Retained Earnings 177 What Determines Stock Prices? The Role of Expected Company Earnings 178

9-2 STOCK EXCHANGES AND THEIR FUNCTIONS 178 9-2a 9-2b

Regulation of the Stock Market 179 Stock Exchanges and Corporate Capital Needs 180

9-3 SPECULATION 181 9-4 BETTING ON SECURITIES: RISKS TO THE ENTIRE ECONOMY 182 9-4a 9-4b 9-4c 9-4d 9-4e

Investments and Their Risks 182 Derivatives and Other Complex Security Investments: An Invitation to Gamble? 183 Leverage: Raising the Stakes 184 Herd Behavior, the Securities Markets, and the Path to Recession 184 Irresponsible Lending: Another Booby Trap 185

PUZZLE RESOLVED: Unpredictable Stock Prices as “Random Walks” 186 Summary 188 Key Terms 188 Test Yourself 188 Discussion Questions 189

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Table of Contents APPENDIX Buying Stocks and Bonds 189 Selecting a Portfolio: Diversification 189 Key Terms 191 Test Yourself 191 Discussion Question 191

Part 3

Markets and the Price System 193

Chapter 10 The Firm and the Industry under Perfect Competition 195 PUZZLE: Pollution Reduction Incentives That Actually Increase Pollution 195

10-1 PERFECT COMPETITION DEFINED 196 10-2 THE PERFECTLY COMPETITIVE FIRM 197 10-2a 10-2b 10-2c 10-2d 10-2e 10-2f

The Firm’s Demand Curve under Perfect Competition 197 Short-Run Equilibrium for the Perfectly Competitive Firm 197 Short-Run Profit: Graphic Representation 199 The Case of Short-Term Losses 200 Shutdown and Break-Even Analysis 200 The Perfectly Competitive Firm’s Short-Run Supply Curve 202

10-3 THE PERFECTLY COMPETITIVE INDUSTRY 203 10-3a 10-3b 10-3c 10-3d 10-3e

The Perfectly Competitive Industry’s Short-Run Supply Curve 203 Industry Equilibrium in the Short Run 203 Industry and Firm Equilibrium in the Long Run 204 Zero Economic Profit: The Opportunity Cost of Capital 207 The Long-Run Industry Supply Curve 208

POLICY DEBATE Should Government Regulators Use Perfect Competition as a Guide? 209 10-4 PERFECT COMPETITION AND ECONOMIC EFFICIENCY 209 PUZZLE RESOLVED: Which More Effectively Cuts Pollution—The Carrot or the Stick? 210 Summary 211 Key Terms 212 Test Yourself 212 Discussion Questions 212

Chapter 11 Monopoly 213 PUZZLE: What Happened to AT&T’s “Natural Monopoly” in Telephone Service? 213

11-1 MONOPOLY DEFINED 214 11-1a 11-1b

Sources of Monopoly: Barriers to Entry and Cost Advantages 214 Natural Monopoly 215

11-2 THE MONOPOLIST’S SUPPLY DECISION 216 11-2a 11-2b 11-2c 11-2d

Determining the Profit-Maximizing Output 218 Comparing Monopoly and Perfect Competition 219 Monopoly Is Likely to Shift Demand 221 Monopoly Is Likely to Shift Cost Curves 221

11-3 CAN ANYTHING GOOD BE SAID ABOUT MONOPOLY? 221 11-3a 11-3b

Monopoly May Aid Innovation 222 Natural Monopoly: Where Single-Firm Production Is Cheapest 222

11-4 PRICE DISCRIMINATION UNDER MONOPOLY 222 11-4a

Is Price Discrimination Always Undesirable? 225

PUZZLE RESOLVED: Competition in Telephone Service 225 Summary 226 Key Terms 226 Test Yourself 227 Discussion Questions 227

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xi

xii

Get complete eBook Order by email at [email protected] Table of Contents

Chapter 12 Between Competition and Monopoly 229 PUZZLE: Three Puzzling Observations 230

12-1 MONOPOLISTIC COMPETITION 230 12-1a 12-1b 12-1c

Characteristics of Monopolistic Competition 231 Price and Output Determination under Monopolistic Competition 232 The Excess Capacity Theorem and Resource Allocation 233

1ST PUZZLE RESOLVED: Explaining the Abundance of Retailers 234

12-2 OLIGOPOLY 234 2ND PUZZLE RESOLVED: Why Oligopolists Advertise but Perfectly Competitive Firms Generally Do Not 235 12-2a 12-2b

Why Oligopolistic Behavior Is So Difficult to Analyze 235 A Shopping List 236

POLICY DEBATE Acting on Recognized Interdependence versus “Tacit Collusion” 239 12-2c

Sales Maximization: An Oligopoly Model with Interdependence Ignored 239

3RD PUZZLE RESOLVED: The Kinked Demand Curve Model 241 12-2d 12-2e 12-2f 12-2g 12-2h 12-2i

The Game Theory Approach 243 Games with Dominant Strategies 243 Games without Dominant Strategies 245 Other Strategies: The Nash Equilibrium 246 Zero-Sum Games 246 Repeated Games 247

12-3 MONOPOLISTIC COMPETITION, OLIGOPOLY, AND PUBLIC WELFARE 249 12-4 A GLANCE BACKWARD: COMPARING THE FOUR MARKET FORMS 250 Summary 251 Key Terms 252 Test Yourself 252 Discussion Questions 252

Chapter 13 Limiting Market Power: Regulation and Antitrust 255 13-1 THE PUBLIC INTEREST ISSUE: MONOPOLY POWER VERSUS MERE SIZE 255 13-2 ANTITRUST LAWS AND POLICIES 257 13-3 MEASURING MARKET POWER: CONCENTRATION 258 13-3a 13-3b

Concentration: Definition and Measurement—The Herfindahl-Hirschman Index 258 The Evidence of Concentration in Reality 260

13-4 A CRUCIAL PROBLEM FOR ANTITRUST: THE RESEMBLANCE OF MONOPOLIZATION AND VIGOROUS COMPETITION 261 13-5 ANTICOMPETITIVE PRACTICES AND ANTITRUST 262 13-5a 13-5b

Predatory Pricing 262 The Microsoft Case: Bottlenecks, Bundling, and Network Externalities 262

13-6 USE OF ANTITRUST LAWS TO PREVENT COMPETITION 263 13-7 WHAT IS REGULATION? 264 PUZZLE: Why Do Regulators Often Raise Prices? 265

13-8 SOME OBJECTIVES OF REGULATION 265 13-8a 13-8b

Control of Market Power Resulting from Economies of Scale and Scope 265 Universal Service and Rate Averaging 266

13-9 TWO KEY ISSUES THAT FACE REGULATORS 267 13-9a 13-9b 13-9c

Setting Prices to Protect Consumers’ Interests and Allow Regulated Firms to Cover Their Costs 267 Marginal versus Average Cost Pricing 267 Preventing Monopoly Profit but Keeping Incentives for Efficiency and Innovation 269

13-10 THE PROS AND CONS OF “BIGNESS” 270 13-10a 13-10b

Economies of Large Size 270 Required Scale for Innovation 270

13-11 DEREGULATION 271 13-11a

The Effects of Deregulation 271

PUZZLE RESOLVED: Why Regulators Often Push Prices Upward 273

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Table of Contents

xiii

13-12 CONCLUDING OBSERVATIONS 274 Summary 274 Key Terms 275 Discussion Questions 275

Part 4

The Virtues and Limitations of Markets 277

Chapter 14 The Case for Free Markets: The Price System 279 PUZZLE: Crossing the San Francisco–Oakland Bay Bridge: Is the Price Right? 280

14-1 EFFICIENT RESOURCE ALLOCATION AND PRICING 280 14-1a 14-1b

Pricing to Promote Efficiency: An Example 281 Can Price Increases Ever Serve the Public Interest? 282

14-2 SCARCITY AND THE NEED TO COORDINATE ECONOMIC DECISIONS 284 14-2a 14-2b 14-2c

Three Coordination Tasks in the Economy 284 Input-Output Analysis: The Near Impossibility of Perfect Central Planning 287 Which Buyers and Which Sellers Get Priority? 290

14-3 HOW PERFECT COMPETITION ACHIEVES EFFICIENCY: A GRAPHIC ANALYSIS 291 14-4 HOW PERFECT COMPETITION ACHIEVES OPTIMAL OUTPUT: MARGINAL ANALYSIS 294 14-4a 14-4b 14-4c

The Invisible Hand at Work 295 Other Roles of Prices: Income Distribution and Fairness 296 Yet Another Free-Market Achievement: Growth versus Efficiency 297

POLICY DEBATE User Charges for Public Facilities 298 PUZZLE RESOLVED: San Francisco Bridge Pricing Revisited 298

14-5 TOWARD ASSESSMENT OF THE PRICE MECHANISM 299 Summary 299 Key Terms 300 Test Yourself 300 Discussion Questions 300

Chapter 15 The Shortcomings of Free Markets 301 PUZZLE: Why Are Health-Care Costs in Canada Rising? 302

15-1 WHAT DOES THE MARKET DO POORLY? 302 15-2 EFFICIENT RESOURCE ALLOCATION: A REVIEW 303 15-3 EXTERNALITIES: GETTING THE PRICES WRONG 304 15-3a 15-3b 15-3c

Externalities and Inefficiency 304 Externalities Are Everywhere 306 Government Policy and Externalities 307

15-4 PROVISION OF PUBLIC GOODS 308 15-5 ALLOCATION OF RESOURCES BETWEEN PRESENT AND FUTURE 310 15-5a 15-5b

The Role of the Interest Rate 310 How Does It Work in Practice? 311

15-6 SOME OTHER SOURCES OF MARKET FAILURE 312 15-6a 15-6b 15-6c 15-6d

Imperfect Information: “Caveat Emptor” 312 Rent Seeking 312 Moral Hazard 312 Principals, Agents, and Recent Stock Option Scandals 313

15-7 MARKET FAILURE AND GOVERNMENT FAILURE 315 15-8 THE COST DISEASE OF SOME VITAL SERVICES: INVITATION TO GOVERNMENT FAILURE 316 15-8a 15-8b 15-8c 15-8d 15-8e 15-8f

Deteriorating Personal Services 317 Personal Services Are Getting More Expensive 317 Why Are These “In-Person” Services Costing So Much More? 318 Uneven Labor Productivity Growth in the Economy 319 A Future of More Goods but Fewer Services: Is It Inevitable? 319 Government May Make the Problem Worse 321

Get complete eBook Order by email at [email protected] PUZZLE RESOLVED: Explaining the Rising Costs of Canadian Health-Care 321

Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xiv

Get complete eBook Order by email at [email protected] Table of Contents

15-9 THE MARKET SYSTEM ON BALANCE 322 15-10 EPILOGUE: THE UNFORGIVING MARKET, ITS GIFT OF ABUNDANCE, AND ITS DANGEROUS FRIENDS 322 Summary 323 Key Terms 324 Test Yourself 324 Discussion Questions 324

Chapter 16 Externalities, the Environment, and Natural Resources 325 PUZZLE: Those Resilient Natural Resource Supplies 325

16-1 THE ECONOMICS OF ENVIRONMENTAL PROTECTION 326 16-2 REVIEW—EXTERNALITIES: A CRITICAL SHORTCOMING OF THE MARKET MECHANISM 326 16-2a 16-2b 16-2c

The Facts: Is the World Really Getting Steadily More Polluted? 327 The Role of Individuals and Governments in Environmental Damage 330 Pollution and the Law of Conservation of Matter and Energy 331

16-3 BASIC APPROACHES TO ENVIRONMENTAL POLICY 333 16-3a 16-3b

Emissions Taxes versus Direct Controls 334 Another Financial Device to Protect the Environment: Emissions Permits 336

16-4 TWO CHEERS FOR THE MARKET 337 16-5 THE ECONOMICS OF NATURAL RESOURCES 338 16-6 ECONOMIC ANALYSIS: THE FREE MARKET AND PRICING OF DEPLETABLE NATURAL RESOURCES 339 16-6a 16-6b

Scarcity and Rising Prices 339 Supply-Demand Analysis and Consumption 339

16-7 ACTUAL RESOURCE PRICES IN THE TWENTIETH CENTURY 341 16-7a 16-7b 16-7c

Interferences with Price Patterns 342 Is Price Interference Justified? 345 On the Virtues of Rising Prices 345

PUZZLE RESOLVED: Growing Reserves of Exhaustible Natural Resources 345 Summary 346 Key Terms 346 Test Yourself 346 Discussion Questions 347

Chapter 17 Taxation and Resource Allocation 349 PUZZLE: Why Can’t We Simplify the Income Tax? 350

17-1 THE LEVEL AND TYPES OF TAXATION 350 17-1a 17-1b

Progressive, Proportional, and Regressive Taxes 351 Direct versus Indirect Taxes 351

17-2 THE FEDERAL TAX SYSTEM 352 17-2a 17-2b 17-2c 17-2d 17-2e

The Federal Personal Income Tax 352 The Payroll Tax 353 The Corporate Income Tax 353 Excise Taxes 353 The Payroll Tax and the Social Security System 354

17-3 THE STATE AND LOCAL TAX SYSTEM 355 17-3a 17-3b 17-3c

Sales and Excise Taxes 355 Property Taxes 355 Fiscal Federalism 355

17-4 THE CONCEPT OF EQUITY IN TAXATION 356 17-4a 17-4b 17-4c

Horizontal Equity 356 Vertical Equity 356 The Benefits Principle 357

17-5 THE CONCEPT OF EFFICIENCY IN TAXATION 357 17-5a

Tax Loopholes and Excess Burden 358

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Table of Contents 17-6 SHIFTING THE TAX BURDEN: TAX INCIDENCE 359 17-6a 17-6b

The Incidence of Excise Taxes 360 The Incidence of the Payroll Tax 361

17-7 WHEN TAXATION CAN IMPROVE EFFICIENCY 362 17-8 EQUITY, EFFICIENCY, AND THE OPTIMAL TAX 363 PUZZLE REVISITED: Why We Can’t Simplify the Tax Code 363 Summary 364 Key Terms 365 Test Yourself 365 Discussion Questions 366

Part 5

The Distribution of Income 367

Chapter 18 Pricing the Factors of Production 369 PUZZLE: Why Does a Higher Return to Savings Reduce the Amounts Some People Save? 369

18-1 THE PRINCIPLE OF MARGINAL PRODUCTIVITY 370 18-2 INPUTS AND THEIR DERIVED DEMAND CURVES 371 18-3 INVESTMENT, CAPITAL, AND INTEREST 372 18-3a 18-3b

The Demand for Funds 374 The Downward-Sloping Demand Curve for Funds 375

PUZZLE RESOLVED: The Supply of Funds 376 18-3c

The Issue of Usury Laws: Are Interest Rates Too High? 376

18-4 THE DETERMINATION OF RENT 377 18-4a 18-4b 18-4c 18-4d 18-4e

Land Rents: Further Analysis 378 Generalization: Economic Rent Seeking 380 Rent as a Component of an Input’s Compensation 381 An Application of Rent Theory: Salaries of Professional Athletes 382 Rent Controls: The Misplaced Analogy 382

18-5 PAYMENTS TO BUSINESS OWNERS: ARE PROFITS TOO HIGH OR TOO LOW? 383 18-5a 18-5b

What Accounts for Profits? 384 Taxing Profits 386

18-6 CRITICISMS OF MARGINAL PRODUCTIVITY THEORY 386 Summary 387 Key Terms 388 Test Yourself 388 Discussion Questions 388

APPENDIX Discounting and Present Value 389 Summary 390 Key Term 390 Test Yourself 390

Chapter 19 Labor and Entrepreneurship: The Human Inputs 391 19-1 THE MARKETS FOR LABOR 391 PUZZLE: Entrepreneurs Earn Less Than Most People Think—Why So Little? 392

19-2 WAGE DETERMINATION IN COMPETITIVE MARKETS 393 19-2a 19-2b 19-2c 19-2d

The Demand for Labor and the Determination of Wages 394 Influences on MRPL: Shifts in the Demand for Labor 394 Technical Change, Productivity Growth, and the Demand for Labor 395 The Service Economy and the Demand for Labor 395

19-3 THE SUPPLY OF LABOR 396 19-3a 19-3b 19-3c

Rising Labor-Force Participation 397 An Important Labor Supply Conundrum 397 The Labor Supply Conundrum Resolved 399

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xv

Get complete eBook Order by email at [email protected] Table of Contents

xvi

19-4 WHY DO WAGES DIFFER? 400 19-4a 19-4b 19-4c 19-4d

Labor Demand in General 400 Labor Supply in General 401 Investment in Human Capital 401 Teenagers: A Disadvantaged Group in the Labor Market 401

19-5 UNIONS AND COLLECTIVE BARGAINING 402 19-5a 19-5b 19-5c

Unions as Labor Monopolies 403 Monopsony and Bilateral Monopoly 405 Collective Bargaining and Strikes 405

19-6 THE ENTREPRENEUR: THE OTHER HUMAN INPUT 406 19-7 THE MARKET ECONOMY’S INCREDIBLE GROWTH RECORD 407 19-8 SOURCES OF FREE-MARKET INNOVATION: THE ROLE OF THE ENTREPRENEUR 407 19-8a

Breakthrough Invention and the Entrepreneurial Firm 408

19-9 ENTREPRENEURSHIP AND GROWTH 409 19-9a 19-9b 19-9c 19-9d

The Entrepreneur’s Prices and Profits 409 Fixed Costs and Public Good Attributes in Invention and Entrepreneurship 410 Discriminatory Pricing of an Innovative Product over Its Life Cycle 411 Negative Financial Rewards for Entrepreneurial Activity? 412

PUZZLE RESOLVED: Why Are Entrepreneurial Earnings Surprisingly Low? 413

19-10 INSTITUTIONS AND THE SUPPLY OF INNOVATIVE ENTREPRENEURSHIP 414 Summary 415 Key Terms 416 Test Yourself 417 Discussion Questions 417

Chapter 20 Poverty, Inequality, and Discrimination 419 ISSUE: Were the Bush Tax Cuts Unfair? 419

20-1 THE FACTS: POVERTY 420 20-1a 20-1b

20-2 20-3 20-4 20-5 20-6

Counting the Poor: The Poverty Line 420 Absolute versus Relative Poverty 421

THE FACTS: INEQUALITY 422 SOME REASONS FOR UNEQUAL INCOMES 424 THE FACTS: DISCRIMINATION 426 THE TRADE-OFF BETWEEN EQUALITY AND EFFICIENCY 426 POLICIES TO COMBAT POVERTY 428 20-6a 20-6b 20-6c

Education as a Way Out 428 The Welfare Debate and the Trade-Off 429 The Negative Income Tax 430

20-7 OTHER POLICIES TO COMBAT INEQUALITY 431 20-7a 20-7b

The Personal Income Tax 431 Death Duties and Other Taxes 431

20-8 POLICIES TO COMBAT DISCRIMINATION 431 POLICY DEBATE Should Affirmative Action Be Abolished? 432 20-9 A LOOK BACK 433 Summary 433 Key Terms 434 Test Yourself 434 Discussion Questions 434

APPENDIX The Economic Theory of Discrimination 434 Discrimination by Employers 434 Discrimination by Fellow Workers 435 Statistical Discrimination 435 The Roles of the Market and the Government 436 Summary 436 Key Term 436

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Table of Contents Part 6

U.S. Economic Leadership 437

Chapter 21 Is U.S. Economic Leadership Threatened? 439 ISSUE: Is America Past Its Prime? Two Economists Debate the Prospects for Future U.S. Growth 439

21-1 21-2 21-3 21-4 21-5 21-6 21-7 21-8 21-9

PRODUCTIVITY GROWTH 440 ENTREPRENEURSHIP 441 INNOVATION 442 THE BUDGET DEFICIT AND PUBLIC DEBT 443 THE TRADE DEFICIT 444 HEALTH CARE 445 EDUCATION 446 POVERTY AND INEQUALITY 447 CONCLUSIONS: MIXED PROSPECTS FOR FUTURE U.S. GROWTH 449

Summary 450 Key Terms 450 Test Yourself 450 Discussion Questions 450

Part 7

The Macroeconomy: Aggregate Supply and Demand 451

Chapter 22 An Introduction to Macroeconomics 453 ISSUE: How Did the Housing Bust Lead to the Great Recession? 453

22-1 DRAWING A LINE BETWEEN MACROECONOMICS AND MICROECONOMICS 454 22-1a 22-1b 22-1c

Aggregation and Macroeconomics 454 The Foundations of Aggregation 454 The Line of Demarcation Revisited 455

22-2 SUPPLY AND DEMAND IN MACROECONOMICS 455 22-2a 22-2b 22-2c 22-2d 22-2e

A Quick Review 455 Moving to Macroeconomic Aggregates 456 Inflation 456 Recession and Unemployment 456 Economic Growth 457

22-3 GROSS DOMESTIC PRODUCT 457 22-3a 22-3b 22-3c

Money as the Measuring Rod: Real versus Nominal GDP 458 What Gets Counted in GDP? 458 Limitations of the GDP: What GDP Is Not 459

22-4 THE ECONOMY ON A ROLLER COASTER 461 22-4a 22-4b 22-4c 22-4d 22-4e 22-4f 22-4g 22-4h 22-4i

Growth, but with Fluctuations 461 Inflation and Deflation 462 The Great Depression 463 From World War II to 1973 465 The Great Stagflation, 1973–1980 465 Reaganomics and Its Aftermath 466 Clintonomics: Deficit Reduction and the “New Economy” 466 Tax Cuts and the Bush Economy 467 Obamanomics and the Great Recession 467

ISSUE REVISITED: How Did the Housing Bust Lead to the Great Recession? 468

22-5 THE PROBLEM OF MACROECONOMIC STABILIZATION: A SNEAK PREVIEW 468 22-5a Combating Unemployment 468 22-5b Combating Inflation 469 22-5c Does It Really Work? 469 Summary 470 Key Terms 471 Test Yourself 471 Discussion Questions 471

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xvii

xviii

Get complete eBook Order by email at [email protected] Table of Contents

Chapter 23 The Goals of Macroeconomic Policy 473 23-1 THE GOAL OF ECONOMIC GROWTH 474 ISSUE: Is Faster Growth Always Better? 475

23-2 THE CAPACITY TO PRODUCE: POTENTIAL GDP AND THE PRODUCTION FUNCTION 476 23-3 THE GROWTH RATE OF POTENTIAL GDP 477 ISSUE REVISITED: Is Faster Growth Always Better? 478

23-4 THE GOAL OF LOW UNEMPLOYMENT 479 23-5 THE HUMAN COSTS OF HIGH UNEMPLOYMENT 480 23-6 COUNTING THE UNEMPLOYED: THE OFFICIAL STATISTICS 482 23-7 TYPES OF UNEMPLOYMENT 482 POLICY DEBATE Does the Minimum Wage Cause Unemployment? 483 23-8 HOW MUCH EMPLOYMENT IS “FULL EMPLOYMENT”? 483 23-9 UNEMPLOYMENT INSURANCE: THE INVALUABLE CUSHION 484 23-10 THE GOAL OF LOW INFLATION 485 23-10a 23-10b

Inflation and Real Wages 485 The Importance of Relative Prices 487

23-11 INFLATION AS A REDISTRIBUTOR OF INCOME AND WEALTH 487 23-12 REAL VERSUS NOMINAL INTEREST RATES 488 23-13 INFLATION DISTORTS MEASUREMENTS 489 23-13a 23-13b

Confusing Real and Nominal Interest Rates 489 The Malfunctioning Tax System 489

23-14 OTHER COSTS OF INFLATION 490 23-15 THE COSTS OF LOW VERSUS HIGH INFLATION 491 23-16 LOW INFLATION DOES NOT NECESSARILY LEAD TO HIGH INFLATION 492 Summary 493 Key Terms 493 Test Yourself 494 Discussion Questions 494

APPENDIX How Statisticians Measure Inflation 494 Index Numbers for Inflation 494 The Consumer Price Index 495 Using a Price Index to “Deflate” Monetary Figures 496 Using a Price Index to Measure Inflation 496 The GDP Deflator 496 Summary 497 Key Term 497 Test Yourself 497

Chapter 24 Economic Growth: Theory and Policy 499 PUZZLE: Why Does College Education Keep Getting More Expensive? 500

24-1 THE THREE PILLARS OF PRODUCTIVITY GROWTH 500 24-1a 24-1b 24-1c

24-2 24-3 24-4 24-5 24-6

Capital 500 Technology 501 Labor Quality: Education and Training 501

LEVELS, GROWTH RATES, AND THE CONVERGENCE HYPOTHESIS 502 GROWTH POLICY: ENCOURAGING CAPITAL FORMATION 504 GROWTH POLICY: IMPROVING EDUCATION AND TRAINING 507 GROWTH POLICY: SPURRING TECHNOLOGICAL CHANGE 508 THE PRODUCTIVITY SLOWDOWN AND SPEED-UP IN THE UNITED STATES 509 24-6a 24-6b

The Productivity Slowdown, 1973–1995 510 The Productivity Speed-Up 1995–2010 511

PUZZLE RESOLVED: Why the Relative Price of College Tuition Keeps Rising 512

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Table of Contents 24-7 GROWTH IN THE DEVELOPING COUNTRIES 513 24-7a 24-7b

The Three Pillars Revisited 513 Some Special Problems of Developing Countries 514

24-8 FROM THE LONG RUN TO THE SHORT RUN 515 Summary 515 Key Terms 516 Test Yourself 516 Discussion Questions 517

Chapter 25 Aggregate Demand and the Powerful Consumer 519 ISSUE: Demand Management and the Ornery Consumer 519

25-1 AGGREGATE DEMAND, DOMESTIC PRODUCT, AND NATIONAL INCOME 520 25-2 THE CIRCULAR FLOW OF SPENDING, PRODUCTION, AND INCOME 521 25-3 CONSUMER SPENDING AND INCOME: THE IMPORTANT RELATIONSHIP 523 25-4 THE CONSUMPTION FUNCTION AND THE MARGINAL PROPENSITY TO CONSUME 526 25-5 FACTORS THAT SHIFT THE CONSUMPTION FUNCTION 527 POLICY DEBATE Using the Tax Code to Spur Saving 529 ISSUE REVISITED: Why Temporary Tax Cuts Have Only Modest Effects on Spending 529

25-6 THE EXTREME VARIABILITY OF INVESTMENT 530 25-7 THE DETERMINANTS OF NET EXPORTS 531 25-7a 25-7b

National Incomes 531 Relative Prices and Exchange Rates 532

25-8 HOW PREDICTABLE IS AGGREGATE DEMAND? 532 Summary 533 Key Terms 533 Test Yourself 533 Discussion Questions 534

APPENDIX National Income Accounting 534 Defining GDP: Exceptions to the Rules 534 GDP as the Sum of Final Goods and Services 535 GDP as the Sum of All Factor Payments 536 GDP as the Sum of Values Added 537 Summary 539 Key Term 539 Test Yourself 539 Discussion Questions 540

Chapter 26 Demand-Side Equilibrium: Unemployment or Inflation? 541 ISSUE: Why Does the Market Permit High Unemployment? 541

26-1 26-2 26-3 26-4 26-5 26-6

THE MEANING OF EQUILIBRIUM GDP 542 THE MECHANICS OF INCOME DETERMINATION 543 THE AGGREGATE DEMAND CURVE 546 DEMAND-SIDE EQUILIBRIUM AND FULL EMPLOYMENT 548 THE COORDINATION OF SAVING AND INVESTMENT 550 CHANGES ON THE DEMAND SIDE: MULTIPLIER ANALYSIS 551 26-6a 26-6b 26-6c

The Magic of the Multiplier 551 Demystifying the Multiplier: How It Works 553 Algebraic Statement of the Multiplier 554

26-7 THE MULTIPLIER IS A GENERAL CONCEPT 555 26-8 THE MULTIPLIER AND THE AGGREGATE DEMAND CURVE 557 Summary 558 Key Terms 558 Test Yourself 559 Discussion Questions 560

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xix

Get complete eBook Order by email at [email protected] Table of Contents

xx

APPENDIX A The Simple Algebra of Income Determination and the Multiplier 560 Test Yourself 561 Discussion Questions 561

APPENDIX B The Multiplier with Variable Imports 562 Summary 564 Test Yourself 564

Chapter 27 Bringing in the Supply Side: Unemployment and Inflation? 565 PUZZLE: What Causes Stagflation? 565

27-1 THE AGGREGATE SUPPLY CURVE 566 27-1a 27-1b

27-2 27-3 27-4 27-5

Why the Aggregate Supply Curve Slopes Upward 566 Shifts of the Aggregate Supply Curve 567

EQUILIBRIUM OF AGGREGATE DEMAND AND SUPPLY 569 INFLATION AND THE MULTIPLIER 570 RECESSIONARY AND INFLATIONARY GAPS REVISITED 571 ADJUSTING TO A RECESSIONARY GAP: DEFLATION OR UNEMPLOYMENT? 573 27-5a 27-5b 27-5c

Why Nominal Wages and Prices Won’t Fall (Easily) 573 Does the Economy Have a Self-Correcting Mechanism? 575 An Example from Recent History: Deflation Worries in the United States 575

27-6 ADJUSTING TO AN INFLATIONARY GAP: INFLATION 575 27-6a 27-6b

Demand Inflation and Stagflation 576 A U.S. Example 577

27-7 STAGFLATION FROM A SUPPLY SHOCK 578 27-8 APPLYING THE MODEL TO A GROWING ECONOMY 578 27-8a 27-8b

Demand-Side Fluctuations 580 Supply-Side Fluctuations 581

PUZZLE RESOLVED: Explaining Stagflation 582

27-9 A ROLE FOR STABILIZATION POLICY 582 Summary 583 Key Terms 583 Test Yourself 583 Discussion Questions 584

Part 8

Fiscal and Monetary Policy 585

Chapter 28 Managing Aggregate Demand: Fiscal Policy 587 ISSUE: The Great Debate over Fiscal Stimulus 587

28-1 INCOME TAXES AND THE CONSUMPTION SCHEDULE 588 28-2 THE MULTIPLIER REVISITED 589 28-2a 28-2b 28-2c 28-2d

The Tax Multiplier 589 Income Taxes and the Multiplier 589 Automatic Stabilizers 590 Government Transfer Payments 591

ISSUE REVISITED: The Stimulus Debate in 2009–2010 591

28-3 PLANNING EXPANSIONARY FISCAL POLICY 592 28-4 PLANNING CONTRACTIONARY FISCAL POLICY 593 28-5 THE CHOICE BETWEEN SPENDING POLICY AND TAX POLICY 593 ISSUE REDUX: Democrats versus Republicans on Stimulus 594

28-6 SOME HARSH REALITIES 594 28-7 THE IDEA BEHIND SUPPLY-SIDE TAX CUTS 595 28-7a

Some Flies in the Ointment 596

ISSUE: The Partisan Debate Once More 597 28-7b

Toward an Assessment of Supply-Side Economics 598

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Table of Contents Summary 599 Key Terms 599 Test Yourself 599 Discussion Questions 600

APPENDIX A Graphical Treatment of Taxes and Fiscal Policy 600 Multipliers for Tax Policy 602 Summary 603 Key Terms 603 Test Yourself 603 Discussion Questions 603

APPENDIX B Algebraic Treatment of Taxes and Fiscal Policy 604 Test Yourself 605

Chapter 29 Money and the Banking System 607 ISSUE: Why Are Banks So Heavily Regulated? 607

29-1 THE NATURE OF MONEY 608 29-1a 29-1b 29-1c

Barter versus Monetary Exchange 609 The Conceptual Definition of Money 610 What Serves as Money? 610

29-2 HOW THE QUANTITY OF MONEY IS MEASURED 612 29-2a 29-2b 29-2c

M1 613 M2 613 Other Definitions of the Money Supply 613

29-3 THE BANKING SYSTEM 614 29-3a 29-3b 29-3c 29-3d 29-3e 29-3f

How Banking Began 614 Principles of Bank Management: Profits versus Safety 615 Bank Regulation 617 Deposit Insurance 617 Bank Supervision 617 Reserve Requirements 617

29-4 SYSTEMIC RISK AND THE “TOO BIG TO FAIL” DOCTRINE 618 29-5 THE ORIGINS OF THE MONEY SUPPLY 619 29-5a

How Bankers Keep Books 619

29-6 BANKS AND MONEY CREATION 620 29-6a 29-6b 29-6c

The Limits to Money Creation by a Single Bank 620 Multiple Money Creation by a Series of Banks 621 The Process in Reverse: Multiple Contractions of the Money Supply 624

29-7 WHY THE MONEY-CREATION FORMULA IS OVERSIMPLIFIED 625 29-8 THE NEED FOR MONETARY POLICY 626 Summary 628 Key Terms 628 Test Yourself 629 Discussion Questions 629

Chapter 30 Monetary Policy: Conventional and Unconventional 631 ISSUE: Why Resort to “Unconventional” Monetary Policies? 631

30-1 MONEY AND INCOME: THE IMPORTANT DIFFERENCE 632 30-2 AMERICA’S CENTRAL BANK: THE FEDERAL RESERVE SYSTEM 632 30-2a 30-2b

Origins and Structure 633 Central Bank Independence 633

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xxi

Get complete eBook Order by email at [email protected] Table of Contents

xxii

30-3 IMPLEMENTING MONETARY POLICY IN NORMAL TIMES: OPEN-MARKET OPERATIONS 635 30-3a 30-3b 30-3c 30-3d

The Market for Bank Reserves 635 The Mechanics of an Open-Market Operation 636 Open-Market Operations, Bond Prices, and Interest Rates 638 Which Interest Rate? 638

30-4 OTHER INSTRUMENTS OF MONETARY POLICY 640 30-4a 30-4b 30-4c

Lending to Banks 640 Changing Reserve Requirements 642 Quantitative Easing 642

30-5 HOW MONETARY POLICY WORKS IN NORMAL TIMES 643 30-5a 30-5b

Investment and Interest Rates 644 Monetary Policy and Total Expenditure 644

30-6 MONEY AND THE PRICE LEVEL 645 30-7 APPLICATION: WHY THE AGGREGATE DEMAND CURVE SLOPES DOWNWARD 646 30-8 UNCONVENTIONAL MONETARY POLICIES 647 30-9 FROM FINANCIAL DISTRESS TO RECESSION 647 30-10 FROM MODELS TO POLICY DEBATES 648 Summary 648 Key Terms 649 Test Yourself 649 Discussion Questions 650

Chapter 31 The Financial Crisis and the Great Recession 651 ISSUE: Did the Fiscal Stimulus Work? 651

31-1 31-2 31-3 31-4 31-5 31-6

ROOTS OF THE CRISIS 652 LEVERAGE, PROFITS, AND RISK 653 THE HOUSE PRICE BUBBLE AND THE SUBPRIME MORTGAGE CRISIS 654 FROM THE HOUSING BUBBLE TO THE FINANCIAL CRISIS 656 FROM THE FINANCIAL CRISIS TO THE GREAT RECESSION 659 HITTING BOTTOM AND RECOVERING 663

ISSUE REVISITED: Did the Fiscal Stimulus Work? 663

31-7 LESSONS FROM THE FINANCIAL CRISIS 664 Summary 664 Key Terms 665 Test Yourself 665 Discussion Questions 665

Chapter 32 The Debate over Monetary and Fiscal Policy 667 ISSUE: Should We Forsake Stabilization Policy? 667

32-1 VELOCITY AND THE QUANTITY THEORY OF MONEY 668 32-1a 32-1b

Some Determinants of Velocity 670 Monetarism: The Quantity Theory Modernized 670

POLICY DEBATE Does Money Growth Always Cause Inflation? 671 32-2 DEBATE: SHOULD THE FED USE UNCONVENTIONAL MONETARY POLICIES? 671 32-3 DEBATE: SHOULD POLICY MAKERS FIGHT ASSET PRICE BUBBLES? 674 32-4 DEBATE: SHOULD WE RELY ON FISCAL OR MONETARY POLICY? 675 32-5 DEBATE: THE SHAPE OF THE AGGREGATE SUPPLY CURVE 677 32-6 DEBATE: SHOULD THE GOVERNMENT INTERVENE AT ALL? 679 32-6a

Lags and the Rules-versus-Discretion Debate 680

32-7 DIMENSIONS OF THE RULES-VERSUS-DISCRETION DEBATE 680 32-7a 32-7b 32-7c

How Fast Does the Economy’s Self-Correcting Mechanism Work? 681 How Long Are the Lags in Stabilization Policy? 681 How Accurate Are Economic Forecasts? 681

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Table of Contents 32-7d 32-7e 32-7f

The Size of Government 681 Uncertainties Caused by Government Policy 682 A Political Business Cycle? 682

ISSUE REVISITED: What Should Be Done? 684 Summary 684 Key Terms 685 Test Yourself 685 Discussion Questions 686

Chapter 33 Budget Deficits in the Short and Long Run 687 ISSUE: Is the Federal Government Budget Deficit Too Large? 687

33-1 SHOULD THE BUDGET ALWAYS BE BALANCED? THE SHORT RUN 688 33-2 THE IMPORTANCE OF THE POLICY MIX 689 33-2a 33-2b

The Multiplier Formula Revisited 690 The Government Budget and Investment 690

33-3 DEFICITS AND DEBT: TERMINOLOGY AND FACTS 692 33-3a

Some Facts about the National Debt 692

33-4 INTERPRETING THE BUDGET DEFICIT OR SURPLUS 694 33-4a 33-4b 33-4c

The Structural Deficit or Surplus 694 On-Budget versus Off-Budget Surpluses 696 Conclusion: What Happened to the Deficit? 696

33-5 WHY IS THE NATIONAL DEBT CONSIDERED A BURDEN? 697 33-6 BUDGET DEFICITS AND INFLATION 698 33-6a

The Monetization Issue 699

33-7 DEBT, INTEREST RATES, AND CROWDING OUT 700 33-7a

The Bottom Line 701

33-8 THE MAIN BURDEN OF THE NATIONAL DEBT: SLOWER GROWTH 702 ISSUE REVISITED: Is the Budget Deficit Still Too Large? 703

33-9 THE ECONOMICS AND POLITICS OF THE U.S. BUDGET DEFICIT 704 Summary 705 Key Terms 706 Test Yourself 706 Discussion Questions 706

Chapter 34 The Trade-Off between Inflation and Unemployment 707 ISSUE: Is the Trade-Off between Inflation and Unemployment a Relic of the Past? 707

34-1 DEMAND-SIDE INFLATION VERSUS SUPPLY-SIDE INFLATION: A REVIEW 708 34-2 ORIGINS OF THE PHILLIPS CURVE 709 34-3 SUPPLY-SIDE INFLATION AND THE COLLAPSE OF THE PHILLIPS CURVE 711 34-3a

Explaining the Fabulous 1990s 711

ISSUE REVISITED: Why Inflation and Unemployment Both Declined 712

34-4 WHAT THE PHILLIPS CURVE IS NOT 712 34-5 FIGHTING UNEMPLOYMENT WITH FISCAL AND MONETARY POLICY 714 34-6 WHAT SHOULD BE DONE? 715 34-6a 34-6b 34-6c

The Costs of Inflation and Unemployment 715 The Slope of the Short-Run Phillips Curve 715 The Efficiency of the Economy’s Self-Correcting Mechanism 715

34-7 INFLATIONARY EXPECTATIONS AND THE PHILLIPS CURVE 716 34-8 THE THEORY OF RATIONAL EXPECTATIONS 718 34-8a 34-8b 34-8c

What Are Rational Expectations? 718 Rational Expectations and the Trade-Off 719 An Evaluation 720

34-9 WHY ECONOMISTS (AND POLITICIANS) DISAGREE 720 34-10 THE DILEMMA OF DEMAND MANAGEMENT 721

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xxiii

xxiv

Get complete eBook Order by email at [email protected] Table of Contents

34-11 ATTEMPTS TO REDUCE THE NATURAL RATE OF UNEMPLOYMENT 721 Summary 723 Key Terms 724 Test Yourself 724 Discussion Questions 724

Part 9

The United States in the World Economy 727

Chapter 35 International Trade and Comparative Advantage 729 ISSUE: How Can Americans Compete with “Cheap Foreign Labor”? 729

35-1 WHY TRADE? 730 35-1a

Mutual Gains from Trade 731

35-2 INTERNATIONAL VERSUS INTRANATIONAL TRADE 732 35-2a 35-2b 35-2c

Political Factors in International Trade 732 The Many Currencies Involved in International Trade 732 Impediments to Mobility of Labor and Capital 732

35-3 THE LAW OF COMPARATIVE ADVANTAGE 733 35-4 THE ARITHMETIC OF COMPARATIVE ADVANTAGE 733 35-4a 35-4b

The Graphics of Comparative Advantage 734 Must Specialization Be Complete? 737

ISSUE REVISITED: Comparative Advantage Exposes the “Cheap Foreign Labor” Fallacy 737

35-5 TARIFFS, QUOTAS, AND OTHER INTERFERENCES WITH TRADE 738 35-5a

Tariffs versus Quotas 739

35-6 WHY INHIBIT TRADE? 740 35-6a 35-6b 35-6c 35-6d 35-6e

Gaining a Price Advantage for Domestic Firms 740 Protecting Particular Industries 740 National Defense and Other Noneconomic Considerations 741 The Infant-Industry Argument 742 Strategic Trade Policy 742

35-7 CAN CHEAP IMPORTS HURT A COUNTRY? 743 ISSUE RESOLVED: Last Look at the “Cheap Foreign Labor” Argument 744 Summary 745 Key Terms 746 Test Yourself 746 Discussion Questions 746

APPENDIX Supply, Demand, and Pricing in World Trade 747 How Tariffs and Quotas Work 748 Summary 749 Test Yourself 749

Chapter 36 The International Monetary System: Order or Disorder? 751 PUZZLE: Has the Value of the Dollar Really Sagged? 751

36-1 WHAT ARE EXCHANGE RATES? 752 36-2 EXCHANGE RATE DETERMINATION IN A FREE MARKET 753 36-2a 36-2b 36-2c 36-2d

Interest Rates and Exchange Rates: The Short Run 755 Economic Activity and Exchange Rates: The Medium Run 756 The Purchasing-Power Parity Theory: The Long Run 757 Market Determination of Exchange Rates: Summary 759

36-3 WHEN GOVERNMENTS FIX EXCHANGE RATES: THE BALANCE OF PAYMENTS 759 36-4 A BIT OF HISTORY: THE GOLD STANDARD AND THE BRETTON WOODS SYSTEM 761 36-4a 36-4b

The Classical Gold Standard 761 The Bretton Woods System 761

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Table of Contents 36-5 ADJUSTMENT MECHANISMS UNDER FIXED EXCHANGE RATES 762 36-6 WHY TRY TO FIX EXCHANGE RATES? 763 36-7 THE CURRENT “NONSYSTEM” 764 36-7a 36-7b 36-7c

The Role of the IMF 764 The Volatile Dollar 765 The Birth and Adolescence of the Euro 766

PUZZLE RESOLVED: Why the Dollar Rose, Then Fell, Then Rose? 767 Summary 767 Key Terms 768 Test Yourself 768 Discussion Questions 769

Chapter 37 Exchange Rates and the Macroeconomy 771 ISSUE: Is a Rising Currency Value a Blessing? 771

37-1 INTERNATIONAL TRADE, EXCHANGE RATES, AND AGGREGATE DEMAND 772 37-1a 37-1b

Relative Prices, Exports, and Imports 772 The Effects of Changes in Exchange Rates 773

37-2 AGGREGATE SUPPLY IN AN OPEN ECONOMY 774 37-3 THE MACROECONOMIC EFFECTS OF EXCHANGE RATES 774 37-3a

Interest Rates and International Capital Flows 775

37-4 FISCAL AND MONETARY POLICIES IN AN OPEN ECONOMY 776 37-4a

Fiscal Policy Revisited 776

37-4b

Monetary Policy Revisited 778

37-5 INTERNATIONAL ASPECTS OF DEFICIT REDUCTION 778 37-5a

The Loose Link between the Budget Deficit and the Trade Deficit 779

37-6 SHOULD WE WORRY ABOUT THE TRADE DEFICIT? 780 37-7 ON CURING THE TRADE DEFICIT 780 37-7a

Change the Mix of Fiscal and Monetary Policy 780

37-7b

More Rapid Economic Growth Abroad 781

37-7c

Raise Domestic Saving or Reduce Domestic Investment 781

37-7d

Protectionism 782

37-8 CONCLUSION: NO NATION IS AN ISLAND 782 ISSUE REVISITED: Is a Rising Currency Value a Blessing? 783 Summary 783 Key Terms 784 Test Yourself 784 Discussion Questions 784

APPENDIX: Answers to Odd-Numbered Test Yourself Questions 785 Glossary  805 Index  817

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xxv

Get complete eBook Order by email at [email protected]

Part 1

GETTING ACQUAINTED WITH ECONOMICS

W

1

What Is Economics?

2

The Economy: Myth and Reality

3

The Fundamental Economic Problem: Scarcity and Choice

4

Supply and Demand: An Initial Look

C H A P T E R S

elcome to economics! Some of your fellow students may have warned you that “econ is boring.” Don’t believe them—or at least, don’t believe them too much. It is true that studying economics is hardly pure fun. But a first course in economics can be an eye-opening experience. There is a vast and important world out there—the economic world—and this book is designed to help you understand it. Have you ever wondered whether jobs will be plentiful or scarce when you graduate, or why a college education becomes more and more expensive? Should the government be suspicious of big firms? Why can’t pollution be eliminated? How did the U.S. economy manage to grow so rapidly in the 1990s while Japan’s economy stagnated? If any of these questions have piqued your curiosity, read on. You may find economics is more interesting than you had thought! It is only in later chapters that we will begin to give you the tools you need to begin carrying out your own economic analyses. However, the four chapters of Part 1 listed next will introduce you to both the subject matter of economics and some of the methods that economists use to study their subject.

1

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected]

1

WHAT IS ECONOMICS? Why does public discussion of economic policy so often show the abysmal ignorance of the participants? Why do I so often want to cry at what public figures, the press, and television commentators say about economic affairs? ROBERT M. SOLOW, WINNER OF THE 1987 NOBEL PRIZE IN ECONOMICS

E

conomics is a broad-ranging discipline, both in the questions it asks and the methods it uses to seek answers. Many of the world’s most pressing problems are economic in nature. The first part of this chapter is intended to give you some idea of the sorts of issues that economic analysis helps to clarify and the kinds of solutions that economic principles suggest. The second part briefly introduces the tools that economists use—tools you are likely to find useful in your career, personal life, and role as an informed citizen, long after this course is over.

C O N T E N T S 1-1 Ideas for Beyond the Final Exam 1-1a Idea 1: How Much Does It Really Cost? 1-1b Idea 2: Attempts to Repeal the Laws of Supply and Demand—The Market Strikes Back 1-1c Idea 3: The Surprising Principle of Comparative Advantage 1-1d Idea 4: Trade Is a Win–Win Situation 1-1e Idea 5: The Importance of Thinking at the Margin 1-1f Idea 6: Externalities—A Shortcoming of the Market Cured by Market Methods 1-1g Idea 7: The Trade-Off between Efficiency and Equality

1-1h Idea 8: Government Policies Can Limit Economic Fluctuations—But Don’t Always Succeed 1-1i Idea 9: The Short-Run Trade-Off between Inflation and Unemployment 1-1j Idea 10: Productivity Growth Is (Almost) Everything in the Long Run 1-1k Epilogue

1-2 Inside the Economist’s Tool Kit 1-2a Economics as a Discipline 1-2b The Need for Abstraction 1-2c The Role of Economic Theory

1-2d What Is an Economic Model? 1-2e Reasons for Disagreements: Imperfect Information and Value Judgments

Appendix Using Graphs: A Review Graphs Used in Economic Analysis Two-Variable Diagrams The Definition and Measurement of Slope Rays through the Origin and 45° Lines Squeezing Three Dimensions into Two: Contour Maps

1-1 IDEAS FOR BEYOND THE FINAL EXAM Elephants may never forget, but people do. We realize that most students inevitably forget much of what they learn in a course—perhaps with a sense of relief—soon after the final exam. Nevertheless, we hope that you will remember some of the most significant economic ideas and, even more important, the ways of thinking about economic issues that will help you evaluate the economic issues that arise in our economy. To help you identify some of the most crucial concepts, we have selected 10 from the many in this book. Some offer key insights into the workings of the economy, and several bear on important policy issues that appear in newspapers; others point out common misunderstandings that occur among even the most thoughtful lay observers. Most of them indicate that it takes more than just good common sense to analyze economic issues effectively. As the opening quote of this chapter suggests, many learned judges, politicians, and university administrators who failed to understand basic economic principles could have made wiser decisions.

3

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

4

Get eBook Order by email at [email protected] Part 1 complete Getting Acquainted with Economics

Ideas for Beyond the Final Exam

Try this one on for size. Imagine you own a widget manufacturing company that rents a warehouse. Your landlord raises your rent by $10,000 per year. Should you raise the price of your widgets to try to recoup some of your higher costs or should you do the opposite—lower your price to try to sell more and spread the so-called overhead costs over more products? In fact, as we shall see in Chapter 8, both answers are probably wrong! Each of the 10 “Ideas for Beyond the Final Exam,” many of which are counterintuitive, will be sketched briefly here. More important, each will be discussed in depth when it occurs in the course of the book, where it will be called to your attention by a special icon in the margin. Don’t expect to master these ideas fully now, but do notice how some of the ideas arise again and again as we deal with different topics. By the end of the course, you will have a better grasp of when common sense works and when it fails, and you will be able to recognize common fallacies that are all too often offered by public figures, the press, and television commentators.

1-1a Idea 1: How Much Does It Really Cost?

The opportunity cost of a decision is the value of the next best alternative that must be given up because of that decision (e.g., working instead of going to school).

Because no one has infinite riches, people are constantly forced to make choices. If you purchase a new computer, you may have to give up that trip you had planned. If a business decides to retool its factories, it may have to postpone its plans for new executive offices. If a government expands its defense program, it may be forced to reduce its outlays on school buildings. Economists say that the true costs of such decisions are not the number of dollars spent on the computer, the new equipment, or the military, but rather the value of what must be given up in order to acquire the item—the vacation trip, the new executive offices, and the new schools. These are called opportunity costs because they represent the opportunities the individual, firm, or government must forgo to make the desired expenditure. Economists maintain that rational decision making must be based on opportunity costs, not just dollar costs (see Chapters 3, 8, 14, and 15). The cost of a college education provides a vivid example. How much do you think it costs to go to college? Most people are likely to answer by adding together their expenditures on tuition, room and board, books, and the like, and then deducting any scholarship funds they may receive. Suppose that amount comes to $15,000. Economists keep score differently. They first want to know how much you would be earning if you were not attending college. Suppose that salary is $20,000 per year. This may seem irrelevant, but because you give up these earnings by attending college, they must be added to your tuition bill. You have that much less income because of your education. On the other side of the ledger, economists would not count all of the university’s bill for room and board as part of the costs of your education. They would want to know how much more it costs you to live at school rather than at home. Economists would count only these extra costs as an educational expense because you would have incurred these costs whether or not you attend college. On balance, college is probably costing you much more than you think. And, as we will see later, taking opportunity cost into account in any personal planning will help you to make more rational decisions.

1-1b Idea 2: Attempts to Repeal the Laws of Supply and Demand—The Market Strikes Back When a commodity is in short supply, its price naturally tends to rise. Sometimes disgruntled consumers badger politicians into “solving” this problem by making the high prices illegal—by imposing a ceiling on the price. Similarly, when supplies are plentiful—say, when fine weather produces extraordinarily abundant crops—prices tend to fall. Falling prices naturally dismay producers, who often succeed in getting legislators to impose price floors.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Chapter What Is Economics? Such attempts to repeal the laws of supply and demand usually backfire and sometimes produce results virtually the opposite of those intended. Where rent controls are adopted to protect tenants, housing grows scarce because the law makes it unprofitable to build and maintain apartments. When price floors are placed under agricultural products, surpluses pile up because people buy less. As we will see in Chapter 4 and elsewhere in this book, such consequences of interference with the price mechanism are not accidental. They follow inevitably from the way in which free markets work.

1-1c Idea 3: The Surprising Principle of Comparative Advantage China today produces many products that Americans buy in huge quantities, including toys, textiles, and electronic equipment. American manufacturers often complain about Chinese competition and demand protection from the flood of imports that, in their view, threatens American standards of living. Is this view justified? Economists think that it is often false. They maintain that both sides normally gain from international trade. But what if the Chinese were able to produce everything more cheaply than we can? Wouldn’t Americans be thrown out of work and our nation be impoverished? A remarkable result, called the law of comparative advantage, shows that, even in this extreme case, the two nations could still benefit by trading and that each could gain as a result! We will explain this principle first in Chapter 3 and then more fully in Chapter 35. For now, a simple parable will make the reason clear. Suppose Sally grows up on a farm and is a whiz at plowing, but she is also a successful country singer who earns $4,000 per performance. Should Sally turn down singing engagements to leave time to work in the fields? Of course not. Instead, she should hire Alfie, a much less efficient farmer, to do the plowing for her. Sally may be better at plowing, but she earns so much more by singing that it makes sense for her to specialize in that and leave the farming to Alfie. Although Alfie is a less skilled farmer than Sally, he is an even worse singer. So Alfie earns his living in the job at which he at least has a comparative advantage (his farming is not as inferior as his singing), and both Alfie and Sally gain. The same is true of two countries. Even if one of them is more efficient at everything, both countries can gain by producing the things they do best comparatively.

1-1d Idea 4: Trade Is a Win–Win Situation One of the most fundamental ideas of economics is that both parties must expect to gain something in a voluntary exchange. Otherwise, why would they both agree to trade? This principle seems self-evident, yet it is amazing how often it is ignored in practice. For example, it was widely believed for centuries that in international trade one country’s gain from an exchange must be the other country’s loss (Chapter 35). Analogously, some people feel instinctively that if Ms. A profits handsomely from a deal with Mr. B, then Mr. B must have been exploited. Laws sometimes prohibit mutually beneficial exchanges between buyers and sellers—as when a loan transaction is banned because the interest rate is “too high” (Chapter 18), or when a willing worker is condemned to remain unemployed because the wage she is offered is “too low” (Chapter 19), or when the resale of tickets to sporting events (“ticket scalping”) is outlawed even though the buyer is happy to get the ticket that he could not obtain at a lower price (Chapter 4). In every one of these cases, well-intentioned but misguided reasoning blocks the possible mutual gains that arise from voluntary exchange and thereby interferes with one of the most basic functions of an economic system (see Chapter 3).

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

5

6

Get eBook Order by email at [email protected] Part 1 complete Getting Acquainted with Economics 1-1e Idea 5: The Importance of Thinking at the Margin We will devote much of this book to explaining and extolling a type of decision-making process called marginal analysis (see especially Chapters 5, 7, 8, and 14), which we can best illustrate through an example. Suppose an airline is told by its accountants that the full average cost of transporting one passenger from Los Angeles to New York is $300. Can the airline profit by offering a reduced fare of $200 to students who fly on a standby basis? The surprising answer is probably yes. The reason is that most of the costs of the flight must be paid whether the plane carries 20 passengers or 120 passengers. Costs such as maintenance, landing rights, and ground crews are irrelevant to the decision of whether to carry additional standby passengers at reduced rates. The only costs that are relevant are the extra costs of writing and processing additional tickets, the food and beverages consumed by these passengers, the additional fuel required, and so on. These so-called marginal costs are probably quite small in this example. A passenger who pays the airline any amount more than it costs the airline to give her a seat that would otherwise be unused (its marginal cost of flying her) adds something to the company’s profit. So it probably is more profitable to let students ride at low fares than to leave the seats empty. In many real cases, a failure to understand marginal analysis leads decision makers to reject advantageous possibilities, like the reduced fare in our example. These people are misled by using average rather than marginal cost figures in their calculations—an error that can be very costly.

1-1f Idea 6: Externalities—A Shortcoming of the Market Cured by Market Methods Markets are adept at producing the goods that consumers want and in just the quantities they desire. They do so by rewarding those who respond to what consumers want and who produce these commodities economically. This all works out well as long as each exchange involves only the buyer and the seller—and no one else. However, some transactions affect third parties who were not involved in the decision. Examples abound: Electric utilities that generate power for midwestern states also produce pollution that kills freshwater fish in upstate New York. A farmer sprays crops with toxic pesticides, but the poison seeps into the groundwater and affects the health of neighboring communities. Such social costs are called externalities because they affect parties external to the economic transactions that cause them. Externalities escape the control of the market mechanism because no financial incentive motivates polluters to minimize the damage they do—as we will learn in Chapters 15 and 16. So business firms make their products as cheaply as possible, disregarding any environmental harm they may cause. Yet Chapters 15 and 16 will point out a way for the government to use the market mechanism to control undesirable externalities. If the electric utility and the farmer are charged for the clean air and water they use, just as they are charged for any coal and fertilizer they consume, then they will have a financial incentive to reduce the amount of pollution they generate. Thus, in this case, economists believe that market methods are often the best way to cure one of the market’s most important shortcomings.

1-1g Idea 7: The Trade-Off between Efficiency and Equality Wages and income have grown more unequal in the United States since the late 1970s. Highly skilled workers have pulled away from low-skilled workers. The rich have grown richer while the poor have become (relatively) poorer, yet U.S. unemployment has been much lower than that in Europe for many years. In many European countries, inequality has not grown more extreme.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Chapter What Is Economics? Many economists see these phenomena as two sides of the same coin. Europe and the United States have made different choices regarding how best to balance the conflicting claims of greater economic efficiency (more output and jobs) versus greater equality. Roughly speaking, the American solution is to let markets work to promote efficiency— something they are very good at doing—with only minimal government interferences to reduce economic inequalities. (Some of these interferences are studied in Chapter 20.) However, much of continental Europe takes a different view. They find it scandalous that many Americans work for less than $7.50 per hour, with virtually no fringe benefits and no job security. European laws mandate not only relatively high minimum wages but also substantial fringe benefits and employment protections; of course, European taxes must be much higher to pay for these programs. As economists see it, each system’s virtue is also its vice. There is an agonizing trade-off between the size of a nation’s output and the degree of equality with which that output is distributed. European-style policies designed to divide the proverbial economic pie more equally inadvertently can cause the size of the pie to shrink. American-style arrangements that promote maximal efficiency and output may permit or even breed huge inequalities and poverty. Which system is better? There is no clear answer, but we will examine the issue in detail in Chapter 20.

1-1h Idea 8: Government Policies Can Limit Economic Fluctuations— But Don’t Always Succeed One of the most persistent and troubling problems of market economies has been their tendency to go through cycles of boom and bust. The booms, as we shall see, often bring inflation, and the busts always raise unemployment. Years ago, economists, businesspeople, and politicians viewed these fluctuations as inevitable: There was nothing the government could or should do about them. That view is now considered obsolete. As we will learn in Part 7, and especially Part 8, modern governments have an arsenal of weapons that they can and do deploy to try to mitigate fluctuations in their national economies—to limit both inflation and unemployment. Some of these weapons constitute what is called fiscal policy: control over taxes and government spending. Others come from monetary policy: control over money and interest rates. Both were used on a grand scale to fight the Great Recession of 2007–2009. But trying to tame the business cycle is not the same as succeeding. Economic fluctuations remain with us, and one reason is that the government’s fiscal and monetary policies sometimes fail—for both political and economic reasons. As we will see in Part 8, policy makers do not always make the right decisions. And even when they do, the economy does not always react as policymakers hope. Furthermore, for reasons we will explain later, the “right” decision is not always clear. To this day, many of the fiscal and monetary policies of 2008 and 2009 remain highly controversial.

1-1i Idea 9: The Short-Run Trade-Off between Inflation and Unemployment The U.S. economy was lucky in the second half of the 1990s. A set of fortuitous events—falling energy prices, tumbling computer prices, a rising dollar, and so on— pushed inflation down even as unemployment fell to its lowest level in almost 30 years. During the 1970s and early 1980s, the United States was not so fortunate. Skyrocketing prices for food and energy sent both inflation and unemployment up to extraordinary heights. In both episodes, then, inflation and unemployment moved in the same direction. But economists maintain that neither of these two episodes was “normal.” When we are experiencing neither unusually good luck (as in the 1990s) nor exceptionally bad luck (as in the 1970s), there is a trade-off between inflation and unemployment—meaning that low

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

7

8

Get eBook Order by email at [email protected] Part 1 complete Getting Acquainted with Economics unemployment normally makes inflation rise and high unemployment normally makes inflation fall. For example, the high unemployment of 2008–2010 pushed the inflation rate down so low that people began worrying about negative inflation rates, or deflation. We will study the mechanisms underlying this trade-off in Parts 7 and 8, especially in Chapter 34. It poses one of the fundamental dilemmas of national economic policy.

1-1j Idea 10: Productivity Growth Is (Almost) Everything in the Long Run Today in Geneva, Switzerland, workers in a watch factory turn out more than 100 times as many mechanical watches per year as their ancestors did three centuries earlier. The productivity of labor (output per hour of work) in cotton production has probably gone up more than 1,000-fold in 200 years. It is estimated that rising labor productivity has increased the standard of living of a typical American worker approximately sevenfold in the past century (see Chapter 24). Other economic issues such as unemployment, monopoly, and inequality are important to us all and receive much attention in economics. But in the long run, nothing has as great an effect on our material well-being and the amounts society can afford to spend on hospitals, schools, and social amenities as the rate of growth of productivity—the amount that an average worker can produce in an hour. Chapter 24 points out that what appears to be a small increase in productivity growth can have a huge effect on a country’s standard of living over a long period of time because productivity compounds like the interest on savings in a bank. Similarly, a slowdown in productivity growth that persists for a substantial number of years can have a devastating effect on living standards.

1-1k Epilogue These ideas are some of the more fundamental concepts you will find in this book—ideas that we hope you will retain beyond the final exam. There is no need to master them right now, for you will hear much more about each as you progress through the book. By the end of the course, you may be amazed to see how natural, or even obvious, they will seem.

1-2 INSIDE THE ECONOMIST’S TOOL KIT We turn now from the kinds of issues economists deal with to some of the tools they use to grapple with them.

1-2a Economics as a Discipline Although economics is clearly the most rigorous of the social sciences, it nevertheless looks decidedly more “social” than “scientific” when compared with, say, physics. An economist must be a jack of several trades, borrowing modes of analysis from numerous fields. Mathematical reasoning is often used in economics, but so is historical study. And neither looks quite the same as when practiced by a mathematician or a historian. Statistics play a major role in modern economic inquiry, although economists had to modify standard statistical procedures to fit their kinds of data.

1-2b The Need for Abstraction Some students find economics unduly abstract and “unrealistic.” The stylized world envisioned by economic theory seems only a distant cousin to the world they know. There is an old joke about three people—a chemist, a physicist, and an economist—stranded on a desert island with an ample supply of canned food but no tools to open the cans. The chemist thinks that lighting a fire under the cans would burst the cans. The physicist advocates building a catapult with which to smash the cans against some boulders. The economist’s suggestion? “Let’s assume we have a can opener.”

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Chapter What Is Economics?

From The Wall Street Journal —Permission, Cartoon Features Syndicate.

Economic theory does make some unrealistic assumptions— you will encounter some of them in this book—but some abstraction from reality is necessary because of the incredible complexity of the economic world, not because economists like to sound absurd. Compare the chemist’s simple task of explaining the interactions of compounds in a chemical reaction with the economist’s complex task of explaining the interactions of people in an economy. Are molecules motivated by greed or altruism, by envy or ambition? Do they ever imitate other molecules? Do forecasts about them influence their behavior? People, of course, do all these things and many, many more. It is therefore vastly more difficult to predict human behavior than to predict chemical reactions. If economists tried to keep track of every feature  of  human behavior, they would never get anywhere. Thus: Abstraction from unimportant details is necessary to understand the functioning of anything as complex as the economy.

“Yes, John, we’d all like to make economics less dismal …” NOTE: The nineteenth-century British writer Thomas Carlyle described economics as the “dismal science,” a label that stuck.

An analogy will make it clear why economists abstract from details. Suppose you have just arrived for the first time in Los Angeles. You are now at the Los Angeles Civic Center—the point marked A in Maps 1 and 2, which are alternative maps of part of Los Angeles. You want to drive to the Los Angeles County Museum of Art, point B on each map. Which map would be more useful? Map 1 has complete details of the Los Angeles road system, but this makes it hard to read and hard to use as a way to find the art museum. For this purpose, Map 1 is far too detailed, although for other purposes (e.g., locating a small street in Hollywood) it may be far better than Map 2. In contrast, Map 2 omits many minor roads—you might say they are assumed away—so that the freeways and major arteries stand out more clearly. As a result of this simplification, several routes from the Civic Center to the Los Angeles County Museum of Art

Abstraction means ignoring many details so as to focus on the most important elements of a problem.

Ma p 1 Detailed Road Map of Los Angeles 530

570

680

630

MONICA

BLVD

A YR M WILLOW BROOK AVE LOCKWOOD AVE

SU

26

A

0

0

DOWN

3200

TOWN

0

1500

10 0

20

40

0

1200

0

60

11 00

00

15

50

0

MONICA SANTA 260 0

70

1800

2000

10

13

2500

90

80

0

60

0

0

1000 1100

60

AVE

1 80

AVE BLVD AVE AVE DR AVE A HIGH VE LAND LON HIGH GW LAN OO D D D R AVE

AVE

10 10 0 0

ST

AVE

21 00

410 0

3500

4500

5000 5300

NDEL AVE E

5300

5500

OV E

CU R

SO N

ORGENESEE AVE AN GE GR OV E AV E

OGDEN DR

OGDEN

GR

E

NG

6000

3600 3800

AVE

LAUREL AVE EDINBURGH AVE HAYWORTH AVE FAIRFAX AVE ORANGE GROVE OGDEN DR AVE GENESEE SPAULDING AVE AVE STANLEY AVE CURSON AVE SIERRA BONITA ST GARDNER ST VISTA AVE MARTE AVE FULLER AVE

OR A

FAIRFAX

ALA

0

H

DR AVE

20

4T

0

VICCTORI A

LVD CRESCENT HEIGHTS B SAN DIE GO WAY

0

GRO VE OGD EN AVE GEN ES DR SPAU EE LD STAN ING A AVE LEY VE CUR AVE SON BONI AVE TA M AVE CARMASSELIN AVE ONA HUSSAVE ER

CE RU

60

AVE SIER RA

SP

0

AY

W

900

DR

ON

D

M

0

1 30

160 0

CURS

R PA

IU AD

30

AVE

AVE BLVD

AN

00

ST

S U N PL VUE SUN BLVD ET NS NSINGTON SU KE EDGEW ARE E

15

10 0

Los Angeles Civic Center

ST

0

EN SD

H

4T

50

0

ILL NH W

700

30

C RO

600

10 0 10 0

La Fayette Park

D

900

0

0

2N

700

Park

00

2

10 0

50

Elysian

AR

2200

200

200

M

GE ITA M T S

TE

15

AT ARK ST P K

AR

EVADO

E FF

600

300

00

ITIA

B

300

A RE

AVE AVE

20

JUAN

Los Angeles County Museum of Art

AVE BLVD DR AVE

A

L

AVE AVE

S

ES

700

ET

E AC RR B

Silver Lake Rec. Con VE

NS

00

SANTA

29

1100

Hollywood SIERRA VISTA BARTON Forever park BROTON AVE Lemon Grove AVE cemetry

00

710

2

AVE

5500

ELEANOR

ON URRA Y TON LM H A M IL DE D R DR BLV ISSA OW D DR R SO SL IN C AN

ELEANOR AVE

ST

Sanda Monica Blvd

1000

700

AVE AVE

A

HAU SER BURN COCH SIDE RIDGELE BLV RAN Y D D U NSM CLOV AVE ST VISTA UIR ERD DR ALE MEA FU DOW AVE AVE LL ER HA B RO RED US AV ER E OND OK AV O SYC PL POINSETTIA E COC AMO AVE MAN H R R ORAN SFIE E AN ALTA VISTA BLVD AVE LD DET LA GE AV BR ROIT AVE AVE FORMOSA CLOVERDALE AVE A AVE EA AV E ST DR VE ST DETROIT ST DETROIT E AVE SYCA LON AV AVE LABREA MOR AVE LA BREA GWO E E AVE OD AVE SYCAMORE SYCAMORE AVE CITR AVE US DR ORANGE DR ORANGE HIGH AVE MANSFIELD MANSFIELD AVE AVE LA LON GWO ND A HILLC AVE CITRUS VE OD PL CITRUS AVE WES REST VI HIGHLAND AVE TREM HIGHLAND T AVE RD NEYAR L O N GWOO B BUC D KEN AINE D MC CADDEN PL KIN LVD ISTO AVE MC CADDEN PL VIRG GHAM AVE N HUD LAS PALMAS AVE INIA SON WIL LAS PALMAS AVE MULL AVE LA RIM LIN N CHEROKEE AVE EN F PA GTO JUNE JUNE MUIR AVE BUC AYETT VIC AVE U ST ST NADE FIEL ER TOR N AU DRW KIN D BLV EST HUDS IA CRE SEWARD ST HUDSUN AVE D VIR GHAM D ON BLV RD AVE NSH QUEE G D HUDSON AVE AW WELL INA R RD NA BR RIM DR 13TH NNE ING D ON PAU WILCOX AVE SON T 12TH BLV ON R BLVD LUC LE MUIRF AVE D COLE IEL C E P AV D 11TH D WIN LYM NRNE LAIR E BLVD CAHUENGA RD S E O VI 12 FR DS CTOR U 10TH TH 10T EM WAY OR TH B LILLIAN IA AV R OSSM O R E ROSSMORE ON H LV AVE E AVE T AVE VINE ST 9TH BLV D VIC PL ARDEN BLVD D BLVD ARDEN NO AVE BLV AVE 8TH CRE TORIA RTO D NSH BLVD P N EI CENTRO AVE LUCERNE N LAY AVE AV 7TH LUCERNE BLVD AW BR E M ON AVE BLVD LARCHMONT SON AVE WIN OUTH 6TH PLYM BEA NO BLV BLVD D ST GOWER RTO OU CHWO D LOR SOR AVE 5TH N DR TH OD AVE RA BLVD WIN IN AVE D 5 4TH E BLVD SO TH AVE R BLVD 4TH AVE 3RD BLVD AVE 3R IRVING PL AVE 2ND 2ND AVE WE IRVING D AVE STC NORTON HE NORTON ARLI AVE AVE NORTON NGTO STER WESTMINSTER PL N VAN NESS VAN NESS AVE S AVE AVE CIMARRON ST ST AVE VAN NES RIDGEWOOD PL RIDGEWOOD WILTON PL WILTON PL WILTON PL GRAMARCY GRAMARCY PL PL GRAMERCY PL GRAMERCY DR GRAMARCY PL PL ST ANDREWS ST ANDREWS ANDREWS PL PL PL MANHATTAN PL MANHATTAN MANHATTAN MANHATTAN WESTERN AVE WESTERN AVE PL AVE OXFORD OXFORD AVE OXFORD AVE OXFORD AVE BLVD OXFORD SERRANO AVE SERRANO AVE WESTMORELAND BLVD SERRANO HARVARD AVE BLVD HOBART BLVD BLVD HOBART BL AVE LA SALLE VD BLVD HARVARD HARVARD HARVARD BLVD AVE AV KINGSELY DR KINGSELY DRIVE DR KINGSLEY E ARDMORE AVE AVE AVE CONGRESS AVE ADMORE ARDMORE ARDMORE AVE ROOSEVELT NORMANDIEPL AVE IROLO AVE ST NORMANDIE NORMANDIE AVE NORMANDIE AVE AVE AVE MARIPOSA MARIPOSA MARIPOSA AVE AVE AVE AVE ALEXANDRIA NORMANDIE FEDORA ALEXANDRIA AVE EDGEMONT ST AVE RAYMOND KENMORE ST KENMORE AVE KENMORE PL AVE EDGEMONT ST BUDLONG KENMORE AVE DEWAY AVE ST ST AVE CATALINA JULIET ST CATALINA WELTON AVE ST BERENDO CATALINA ST CATALINA ST AVE NEW HAMPSHIRE BERENDO ST NEW HAMPASHIRE AVE AVE VERMONT AVE VERMONT AVE AVE NITA BIMINI PL SHATTO MENLO AVE JUA VE PL AVE WES AVE AVE MADISON A MADISON T MORELAND AVE O RCHARD AVE PL ORCHARD AVE ELLENDALE WESTMORELAND WILSHIRE AVE ELDEN NEW ENGLAND ST VIRGIL AVE PL AVE CHARD ORCHARD AVE MAGNOLIA AVE MAGNOLIA AVEMAGNOLIA CT COMMON WEALTH LA ARAPAHOE ST ST FA ARAPAHOE CO YE HOOVER ST UR M S IM TTE ST HOOVER TLA OC R H AN AN AV OGE CA COR RE CID VE DILLO OBIN E N A LUC YPE BOR ZAN ON RO CR LAFA BO MAL ND ND LA GRAN EN RIO N ITA ILE N AD S V N E VE NN R Y K E O T D A O M EN D E AL AL P O ST TIO ET ME R N ST N A LTMA S BU IE VA ST VIEW ARK ELETS RL BR N AV T RA N C TE BLV O PO TO RA ST KO N AVE TU E M E AV VIE T ST DO RT BE D DA CO INGT AE LA AV E CO PART NTRE PAR LA RM W AV ST ED K ON ST NS SC E RO ND E G MIC ROSA D AN ST AR WA K NA AV UN TAN ST MA ECL R HE FF DO PL E ION CE BLV Y LTM IFFE LTO TO N CH RE DR WE ST AN DR BE ST D ES P ORW NA S R A B T O T VE CA M DR PL ON LA ER AR AV OD PA BE RO AV YD K E VA AN R AC ND BU NIE B KE EN E OC KMA FLO BAN GRO GR ELE RL AL LENC ST PL GO CID UN ON NA AV AN WE SAL VE ING RAE B T LD EN E ION D R LO LA OA ANY IA ST T TAL VE EN PA ST FA ST ST VIEW AV ON GA BLV RK ST K GR E BEN YETT TE V AT LIT TON E PA D RO IEW TA AV TLE AVE LA R S R N E S R R K E E BO T AM ST ON E OS MO WE DC GR WA K PI ND DIL S L S ELA NT Y CO PAR A SH AV EEN ST OC TERL KE RO T B T MO LVAR T WIT E AL SD AN CIDEN Y ME NAD LVD AD UN VA LD ME A L E G B T O R L R CO EN AIN R LA ELU TAL WINO U LEB S Fig INE LU CIA ST S WE V UN NION EN uero BE A IE RO M ST WIT MBIA S ION O CO BO STLA W A SEM ST C C NTO VE LO ME R HIL S HPEMR N ST a St K N A V O G N O O B E N E MA AV R A NT UN VE UR IE LL L CA OP OK WA NAD DR E VERW UM LIN BR AVE TES E S E L GA RLAN ST BR IO ST TER O OO SIL GT AE R N OA D BY T N S F D CO LO ON AV LAN low TE LN O P HA LUM W MA DWA CO AV E D er BIA ST RT LO L Y R 1S IN E BIX St AL F ST TS S WA ONAD EL DRMA LES BELMONT AVE LUC ORD HO O TER N TR N NE AN AS PE GR AV HIL EX AVE L S D W P DAWSON OA S O A T RO E T O LIB AN ST WLCOME ST DO WIT ST HIG L S ER D HORE LIV T H LAKES N M T Y AV ER NO STM E S E S AVE H RT AIN F PA H LEM GLENDALE W OPE LOW KE N LA NE DO TTON BLVD 1S S MA MAIN ST ER GR N S LAG AL KE LO ONY BO TOLU W UG TS T VA I NGT UNA G E NT SH AN ST YL CA LA SP E EC AN EC ST TR LAV ST S S D ST ORELOBD RADO RIN ON O BE ETA CROS FAIRHO P ELL O N AV GS AU AR HIL LIVE AD W S PL LA B E D K A T SA RY N KE L NE S MC 1S N SH PL KS ST T W T DIA N M OR DU HIG ST LO G AN FIR EA GO BRUECHO PARK PO FF ST M RO VE H N RA ASH MIN CE E SA VES OYNE ST MO BU ND SU RTIA SARG AD N ST N T TAL EN NK CL HIL A DIO NE QU HER T AV EV ER VE CA L W E GO DO INTE LAND ELYS EL OR S H S U R AV T IA NE AN GL O PR IL ST E S T AV N YELE PARK N AS L W D IN ST AN OW T BR E S DR A P S H G N S T EV TO RIN T VE IG OA T ST E RO H VA CET D MA RETT L W BA ST N H AVO ENTIN ON N E RV ST UC CE ILL AY AY AL NEW N NT D R KNO IEW AM E C HE ST E ST EN Y ST L ED SP R T NIA AVE L ST ST T OC NE ST A S RIN LST AD S OW K N T G W NEW IU NO ST GL TAN N A ER HIG M RT KO AY F V ST ACA H OR E H H T D D ST O MA EMY S C MER LER ES D CLE ST WN CR IN ST EN A A C VEL ST TR HAN ST VE VE GL AN AVEOCK AN AL ER T D K AYD FOR AV S ST NH ST ST ME OHL ES D A E CE ILL RC ER AV VE NT ST ST RA H S E NH L A AN T IL N T L S VE BR ST OA T 100 DW ACADEMY GATE AY

BLVD

Sanda Monica Blvd L O S A N G E L E S COUNTRY

EN LD GO

AVE Park

MONICA

N NDE RA

790

CH NALD VIS AM S TA PL ON DU ST GO AIN AV CL ANE RD ON IFF O PA DR AV O ST FA ON RKT T RT RG S LA AVO TER ER B L.A. M ROMAINE ST ROMAINE OS N AARON A RAND ST T AV P L EW AL BARTON AVE AR Poinsettia Recreation centre City BURNS AVE E EN ST DR W ON ON Y BE EL R E D N D ING ST PA A D E D R O G WILLOUGHBY AVE NORMAL AVE ECL UA RK College LEMON GROVE Recreation KE T W ST I NE LEY ELYSI Somuel Goldern GREGORY K DR CITYLIMITS RS ST MONROE Centre Paramount MONROE ST AR PE ST ST E AVE LEMON GROVE E P studios MA FFIE Pictures AV MARATHON ST INSTITUTE RE AV Y WARING AVE DE CAMERFORD AVE SC BERR E ST MARATHON ST IA L OT YS L.A. Police ET ST TA MELROSE AVE LANEWAY ACCESS T MELROSE AVE MELROSE AVE RE MO CR AV T U S A N E Academy L ER DE TA Raleigh RALEIGH ST N CA V FAN JEW NA LT TO DE E OIR ST CLINTON ELL 101 CLINTON ST ITA EL Studios CLINTON ST MA CLINTON S A MOR SU LSIN GR ACAD SW CLINTON M RA AF T ST ST RD Y NS OR OR EMY TH TH SC TON AC ON ST ET E MAPLEWOOD OTT R AD ROSEWOOD AVE ST MAPLEWOOD AVE MIDDLEBURY LON EM ST S D E ROSEWOOD AVE Y AVE ROSEWOOD ROSEWOOD AVE PA ON BL T AVE AK ST Dodger L L V AS S ALEXANDRIA ELMWOODAVE D D AVE OAKWOOD T T VER PL OAKWOOD AVE ORELAN Stadium SH IL MA BOYLSTON DR OAKWOOD S CB ChavezRovino COSMOPOLITAN EMPL SC Wilshire T ST A TH OT BEVERLY BLVD BEVERLY SA BLVD HT OOLYW T BE N BEVERLY BLVD EM LLE AV KE TAYEN OO MO PLE NT S Z ST E VE Country A COUNCIL ST COUNCIL ST ST PO D COUNCIL T ON ST NTAN R L CLIN A LST ON D AVLISON L CBS TeleS COUNCIL HY AV E LIL ILAC 1ST ST Y Echo TO F AN T E AC Clup 1ST ST vision City N 1ST ST SC RW BO Farmers ST Park GL COUN S ST OU Pan Pacific WestWilshire Y AS A TW CE V SE CIL PARK ELYSIAN AY Market LLA ARE L B WILTON DR P W L A L 2ND Park EV 2ND ST L ILA ST 2ND ST EWKE ER ST Everett CT LY DGCAR LLAM ER 3RD Park RA CA ROL FIG ST BU CE BL CO BER Shatto L LU RN COLGATE AVE 3RD ST 3RD ST VD UE UR ME SID RO BENAR T T 2N AL Rec. E RN D A AN D AV Park La Brea AR MARION DE E D AVE ON CORT LE Cen 4TH ST COLL ST ST 4TH ST Apartments 4TH EZ GENEVA ST ST E 110 ST BOYL E AV IN T N L CO E W H I U DE EW GEZ RAV AL C U D OR PT AVE Shriners Hospitals RO NCIL BEA AN ST 5TH ST T 5TH ST CK CR CH AN EZ T SE LINDENHURST AVE VAL 6TH WO 4T GE PO LEY OD LIN DE BE ST CO 5T H ST VE A Honcock U H 6TH ST 6TH ST MIR RL ST CO RT ST ST Y AM LTO Park AR ST BL N S ST AVE VD WILSHIRE BLVD WILSHIRE OCEAN VIEW T WILSHIRE WILSHIRE BLVD WARNERDR L.A. County MIG BLVD MA A ST 4T ST INGRAHAM ST SUNSET RY M HS 8TH DIA NONE DEL VALLY Museum of Art L 8TH ST T DR LO PL MO TTE MIR 5THAND ST 7TH ST 7TH 7TH ST ND AM BARROWS 8TH ST ST 3R AR EMERALD 6TH DR LEEWARD 9TH ST 9TH D ST AVE AMAR AVE MIR LEAWARD MAC ARTHUR 8TH ST ST S OLYMPIC 4TH T BLVD ST 7TH PARK FRANCIS AVE Civic S M S T HA AR 9T A 9TH ST T W ST 9TH H Y ST 9TH ST Center B 8TH ING ILSH TO 5TH LAN ST ED WH ST MARINO D RA IR GE EDGEWOOD ITW 9TH ST SAN ST WO SAN MARINO ST ORTH 7TH HAM E OD COU ST ST CA NTR MB Y R N 10TH ST ST OLYMPIC BLVD CLU SAN 12TH 3R ST IA B D D R VIC D OCKWEIL ST ER ST ENT 11TH ST PAC W LIN E 11TH ST KAR DO WO 11 CO TURNER D CK 12 BLV TH HARRINGTON OD LL ST WE T D EG S ST H AVE ILE T 12TH E R 11 ST ST 12TH ST JAD 12TH S PL 12TH T T VIC PICO CO 10 SATU Terrace 12THH 16TH CTORIA DR PICK Pershing BLVD N T ICCTOR BLVD V PICO H R LO N IA FOR N ST 12 M D ST PL ECTIC TH 10TH Sq W ST 14TH ST ParkAV E ST CH ITA PL 14TH CO W E S TL AK E ST ST UT ST PIC LLE 17TH ARLES ST 15TH ST NORMANDIE E 15TH ST 15TH ST O PL 10 GE BLVD AC VEN A L V A R A D O TE R R TH BL PL SATU ST ICE ST Rec. Con. CAMBRIDGE ST VENICE VD BLVD RN PICK BLV ST VENICE ST FOR ST EL OL 17TH ST L.A. 14 D C D ST T Y T M E Convention H 18TH MP 16TH S T O 17T 17TH ROSEDALE Center DR IN AN IC ST 18T H ST A PL ST PICK 18TH 17TH ST PL M M H FOR CEMETERY ST H NE D ST ST O B G T 110 18TH PICO O R G O LV COL IO W RD D NO ST 20TH 17 MASCOT ST ST WASHINGTON BLVD WA 18TH PIC WASHINGTON BLVD ST D N TEC TH CE ST ST SH O 21TH A AN SA N ING ST TobermanS 20TH CORDOVAST ST ED S ST 4TH ST R T MA TO 20 21 E 21ST 20TH ST AM N Rec. Cen BL ST TH CH ST VD AL ST 22 AV O ND EZ RD N ST P L BAN 23RD AV ST ST 22ND GOR 23RD E V S 22ND PL EN ST GRAMERCY 7TH ST 23RD S T 23RD 21 ST PIC ICE 23RD 23RD ST ST T PARK O ST 24TH 24TH S PL 24TH ST 10 BL 25TH ST 25TH 25TH S T ST FRWY VD T 11 TH L.A. 26TH T ADAMS BLVD ADAMS BLVD 12 H ST ST Trade ADAMS BLVD TH 26TH ST P S 27TH Technical T IC 14 ST TH 14 O B 27TH ST ST College TH 27TH ST LV ADAMS BLVD D AVE

9

0

00

NOTE: Point A marks the Los Angeles Civic Center, and point B marks the Los Angeles County Museum of Art.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get eBook Order by email at [email protected] Part 1 complete Getting Acquainted with Economics Ma p 2

A

EN AD

FA I R O A

N M A IN

ALH

RD

N IO SS

D

SA

3.1 SA NT A

e l es R ive r Vernon Maywood

AT L

1 .9

1 .0

O NA

710

W HI

AN

T T IE

R

A

VD BL

Comm V

PO M

.8

2.8

East Los Angeles

FRW Y

0 2.

SANTA FE VD AV

TO

BLV

MI

1 .6

1.3

Boyle Hts.

ARROY O

ST

BL

GL

CK

RO

EA

Y

FR W

LE

ING

WY

3.2

ST

E x p os i t i on Pk.

T UN

CALIF. ST. UNIV. L.A. V A LLEY

60

10

FR

PROP.

6.0

N CA AV

EN

DA

LE

BRAND 2.8

DA EN

BL VD 3 .6

ALAMEDAST

AV

GL

OA

0.7

BR

CO

SA PE N DR O

110 PI

DW

AY

T 7T CIVIC ST H CEN

CY ST

South Pasadena

4

WESTERN

ER T BL VD

LE IM

AV

0

GA C I E NE

BL SPORTS ARENA

EL PUEBLO DE LOS ANGE LE S ST. HIST. PK .

A

1S

H

ng

H

IL

LS

UNIV. OF SO. CALIF. Leimert L.A. MEM. Park COLISEUM M . L. K I N G J R .

MUSIC CENTER

S

PA

Y

1 .2

N

2

Los A

BLVD

11.0

DODGER F R STAD. W

RA D ST O

AV

HIGHLAND

FRWY

W

BLVD

L A A DEA AV

BLVD

LOS ANGELES BL

LA CIENEGA

WILSHIRE

BL VD

D

Elysian Pk.

2.

Eagle Rock

1 .8

4.

IN DW BAL

BEVERLY

OO

4.4 URA 710 V EN T Y FRW

OCCIDENTAL COLL. A RO UE SOUTHWEST FIG 110 MUSEUM 7.2

N O S A ND A RN FE RD

Culver City

YW

BL

VD

ET

M O NICA

H a n c oc k P a rk

NS

Century City

B

SU

BLV D

L.A . CO. M US. OF A RT

LL

8

BLVD

FA R MER S MARKET

2.

.0

SUNSET BL SANTA MONIC A 2 BL

O

14

Silverlake WY Res

101

H

IC

ER

BL

C

T EN

DR

GL

3.9

0

NY ON

6.

CA

HOLLYWOOD BOWL

ROSE BOWL

134

FOREST Hollywood 3.6 D LAWN MEM. BLV 2 Res Z I L PK. E F F R LO S

Hollywood

Hills

5

AL VA

R

AINS

COLORADO ST VERDUGO RD

LA U

FR UNIVERSAL STUDIOS (TOURS) W Griffith Y Park

EL

DR

5.3

STATE

tudio City

Park LS

134

4.2

HIL

N

D

FR W Y

ST

BLVD

L

G

O

DE

WOOD AY

OO

URA

GLENDA

Major Los Angeles Arteries and Freeways LAU

10

emerge. For example, we can take the Hollywood Freeway west to Alvarado Boulevard, go south to Wilshire Boulevard, and then head west again. Although we might find a shorter route by poring over the details in Map 1, most strangers to the city would be better off with Map 2. Similarly, economists try to abstract from a lot of confusing details while retaining the essentials. Map 3, however, illustrates that simplification can go too far. It shows little more than the major interstate routes that pass through the greater Los Angeles area and therefore will not help a visitor find the art museum. Of course, this map was never intended to be used as a detailed tourist guide, which brings us to an important point: There is no such thing as one “right” degree of abstraction and simplification for all analytic purposes. The proper degree of abstraction depends on the objective of the analysis. A model that is a gross oversimplification for one purpose may be needlessly complicated for another.

Economists are constantly seeking analogies to Map 2 rather than Map 3, walking the thin line between useful generalizations about complex issues and gross distortions of the pertinent facts. For example, suppose you want to learn why some people are fabulously rich whereas others are abjectly poor. People differ in many ways, too many to enumerate, much less to study. The economist must ignore most of these details to focus on the important ones. The color of a person’s hair or eyes is probably not important for the problem but, unfortunately, the color of his or her skin probably is because racial discrimination can depress a person’s income. Height and weight may not matter, but education probably does. Proceeding in this way, we can pare Map 1 down to the manageable dimensions of Map 2. But there is a danger of going too far, stripping away some of the crucial factors, so that we wind up with Map 3.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Chapter What Is Economics?

11

Ma p 3 Greater Los Angeles Freeways

Chatsworth

BURBANK

GLENDALE

BEVERLY HILLS

CULVER 10 CITY

101

INGLEWOOD 110 EL SEGUNDO 710 MANHATTAN BEACH SOUTH GATE HERMOSA BEACH 110 LYNWOOD

1

2

Closed 39

PASADENA

LOS ANGELES

REDONDO BEACH

249

Tujunga 405

2

SANTA MONICA

or

Sunland

27

Monica ay

Pearblossam

A N G E L E S

Canoga Park Calabasas Woodland 13 Malibu Topanga Hills

23 AGOURA

Topanga Beach

L O S

SAN FERNANDO

118

lif

HIDDEN HILLS 27

Ca

USAND AKS ILLAGE

ARCADIA MONTEREY PARK MONTEBELLO

AZUSA

GLENDORA SAN DIMAS LA VER CLAR

WEST COVINA WHITTIER 60 10

91

COMPTON DOWNEY 605 LAHABRA POMONA HEIGHTS TORRANCE MONTCLAIR NORWALK LA HABRA BREA 57

Sa

LONG

12

n

BUENA FULLERTON PARK YORBA GARDEN OLINDA BEACH SEAL GROVE ANAHEIM Santa 10 Sunset BEACH Beach ORANGE 91 SANTA

Pe

39

dr o

HUNTINGTON BEACH

ANA 55

231

0

CHINO 3

7

Mira

71 5 4

CORONA

TUSTIN

1-2c The Role of Economic Theory Some students find economics “too theoretical.” To see why we can’t avoid it, let’s consider what we mean by a theory. To an economist or natural scientist, the word theory means something different from what it means in common speech. In science, a theory is not an untested assertion of alleged fact. The statement that aspirin provides protection against heart attacks is not a theory; it is a hypothesis, that is, a reasoned guess, which will prove to be true or false once the right sorts of experiments have been completed. But a theory is different. It is a deliberate simplification (abstraction) of reality that attempts to explain how some relationships work. It is an explanation of the mechanism behind observed phenomena. Thus, gravity forms the basis of theories that describe and explain the paths of the planets. Similarly, Keynesian theory (discussed in Parts 7 and 8) seeks to describe and explain how government policies affect unemployment and prices in the national economy. People who have never studied economics often draw a false distinction between theory and practical policy. Politicians and businesspeople, in particular, often reject abstract economic theory as something that is best ignored by “practical” people. The irony of these statements is that

A theory is a deliberate simplification of relationships used to explain how those relationships work.

It is precisely the concern for policy that makes economic theory so necessary and important.

To analyze policy options, economists are forced to deal with possibilities that have not actually occurred. For example, to learn how to shorten periods of high unemployment, they must investigate whether a proposed new policy that has never been tried can help. Or to determine

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

12

Get eBook Order by email at [email protected] Part 1 complete Getting Acquainted with Economics

Two variables are said to be correlated if they tend to go up or down together. Correlation need not imply causation.

which environmental programs will be most effective, they must understand how and why a market economy produces pollution and what might happen if the government taxed industrial waste discharges and automobile emissions. Such questions require some theorizing, not just examination of the facts, because we need to consider possibilities that have never occurred. The facts, moreover, can sometimes be highly misleading. Data often indicate that two variables move up and down together. But this statistical correlation does not prove that either variable causes the other. For example, when it rains, people drive slower and there are also more traffic accidents, but no one thinks slower driving causes more accidents. Rather, we understand that both phenomena are caused by a common underlying factor—more rain. How do we know this? Not just by looking at the correlation between data on accidents and driving speeds. Data alone tell us little about cause and effect. We must use some simple theory as part of our analysis. In this case, the theory might explain that drivers are more apt to have accidents on wet roads. Similarly, we must use theoretical analysis, and not just data alone, to understand how, if at all, different government policies will lead to lower unemployment or how a tax on emissions will reduce pollution. Statistical correlation need not imply causation. Some theory is usually needed to interpret data.

1-2d What Is an Economic Model? An economic model is a representation of a theory or a part of a theory, often used to gain insight into cause and effect. The notion of a “model” is familiar enough to children, and economists—like other researchers—use the term the same way children do. A child’s model airplane looks and operates much like the real thing, but it is smaller and simpler, so it is easier to manipulate and understand. Engineers for Boeing also build models of planes. Although their models are far larger and much more elaborate than a child’s toy, they use them for the same purposes: to observe the workings of these aircraft “up close” and to experiment to see how the models behave under different circumstances. (“What happens if I do this?”) From these experiments, they make educated guesses as to how the real-life version will perform. Economists use models for similar purposes. The late A. W. Phillips, famous engineer-turned-economist who discovered the “Phillips curve” (discussed in Chapter 34), was talented enough to construct a working model of the determination of national income in a simple economy by using colored water flowing through pipes. For years this contraption has graced the basement of the London School of Economics. Although we will explain the models with words and diagrams, Phillips’s engineering background enabled him to depict the theory with tubes, valves, and pumps. Because many of the models used in this book are depicted in diagrams, for those of you who need review, we explain the construction and use of various types of graphs in the appendix to this chapter. Don’t be put off by seemingly abstract models. Think of them as useful road maps and remember how hard it would be to find your way around Los Angeles without one. Science & Society Picture Library/Getty Images

An economic model is a simplified, small-scale version of an aspect of the economy. Economic models are often expressed in equations, by graphs, or in words.

A. W. Phillips built this model in the early 1950s to illustrate Keynesian theory.

1-2e Reasons for Disagreements: Imperfect Information and Value Judgments “If all the earth’s economists were laid end to end, they could not reach an agreement,” the saying goes. Politicians and reporters are fond of pointing out that economists can be found on both sides of many public policy issues. If economics is a science, why do economists so often disagree? After all, astronomers do not debate whether the earth revolves around the sun or vice versa.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Chapter What Is Economics?

13

This question reflects a misunderstanding of the nature of science. Disputes are normal at the frontier of any science. For example, astronomers once argued vociferously over whether the earth revolves around the sun. Nowadays, they argue about gamma-ray bursts, dark matter, and other esoterica. These arguments go mostly unnoticed by the public because few of us understand what they are talking about. But economics is a social science, so its disputes are aired in public and all sorts of people feel competent to join economic debates. Furthermore, economists actually agree on much more than is commonly supposed. Virtually all economists, regardless of their politics, agree that taxing polluters is one of the best ways to protect the environment (see Chapters 15 and 16), that rent controls can ruin a city (Chapter 4), and that free trade among nations is usually preferable to the erection of barriers through tariffs and quotas (see Chapter 35). The list could go on and on. It is probably true that the issues about which economists agree far exceed the subjects on which they disagree. Finally, many disputes among economists are not scientific disputes at all. Sometimes the pertinent facts are simply unknown. For example, you will learn in Chapter 16 that the appropriate financial penalty to levy on a polluter depends on quantitative estimates of the harm done by the pollutant; however, good estimates of this damage may not be available. Similarly, although there is wide scientific agreement that the earth is slowly warming, there are disagreements over the costs of global warming. Such disputes make it difficult to agree on a concrete policy proposal. Another important source of disagreements is that economists, like other people, come in all political stripes: conservative, middle-of-the-road, liberal, radical. Each may have different values, and so each may hold a different view of the “right” solution to a public policy problem—even if they agree on the underlying analysis. Here are two examples: 1. We suggested early in this chapter that policies that lower inflation are likely to raise unemployment. Many economists believe they can measure the amount of unemployment that must be endured to reduce inflation by a given amount. However, they disagree about whether it is worth having, say, 3 million more people out of work for a year to cut the inflation rate by 1 percent. 2. In designing an income tax, society must decide how much of the burden to put on upper-income taxpayers. Some people believe the rich should pay a disproportionate share of the taxes. Others disagree, believing it is fairer to levy the same income-tax rate on everyone. Economists cannot answer questions like these any more than nuclear physicists could have determined whether dropping the atomic bomb on Hiroshima was a good idea. The decisions rest on moral judgments that can be made only by the citizenry through its elected officials. Although economic science can contribute theoretical and factual knowledge on a particular issue, the final decision on policy questions often rests either on information that is not currently available or on social values and ethical opinions about which people differ, or on both.

Summary 1. To help you get the most out of your first course in economics, we have devised a list of 10 important ideas that you will want to retain beyond the final exam. Briefly, they are the following: a. Opportunity cost is the correct measure of cost. b. Attempts to fight market forces often backfire. c. Nations can gain from trade by exploiting their comparative advantages. d. Both parties can gain in a voluntary exchange.

e. Good decisions typically require marginal analysis, which weighs added costs against added benefits. f. Externalities may cause the market mechanism to malfunction, but this defect can often be repaired by market methods. g. Governments have tools that can mitigate cycles of boom and bust, but these tools are imperfect. h. There is a trade-off between efficiency and equality. Many policies that promote one damage the other.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

14

Get eBook Order by email at [email protected] Part 1 complete Getting Acquainted with Economics i. In the short run, policy makers face a trade-off between inflation and unemployment. Policies that reduce one normally increase the other.

4. Correlation need not imply causation. 5. Economists use simplified models to understand the real world and predict its behavior, much as a child uses a model railroad to learn how trains work.

j. In the long run, productivity is almost the only thing that matters for a society’s material well-being.

6. Although these economic models, if skillfully constructed, can illuminate important economic problems, they rarely can answer the questions that confront policy makers. Value judgments involving such matters as ethics are needed for this purpose, and the economist is no better equipped than anyone else to make them.

2. Common sense is not always a reliable guide in explaining economic issues or in making economic decisions. 3. Because of the great complexity of human behavior, economists are forced to abstract from many details, to make generalizations that they know are not quite true, and to organize what knowledge they have in terms of some theoretical structure called a “model.”

Key Terms abstraction

9

economic model

12

correlation

12

opportunity cost

4

theory

11

Discussion Questions 1. Think about a way you would construct a model of how your college is governed. Which officers and administrators would you include and exclude from your model if the objective were one of the following: a. To explain how decisions on financial aid are made b. To explain the quality of the faculty Relate this to the map example in the chapter.

2. Relate the process of abstraction to the way you take notes in a lecture. Why do you not try to transcribe every word uttered by the lecturer? Why don’t you write down just the title of the lecture and stop there? How do you decide, roughly speaking, on the correct amount of detail? 3. Explain why a government policy maker cannot afford to ignore economic theory.

Appendix Using Graphs: A Review1 As noted in the chapter, economists often explain and analyze models with the help of graphs. Indeed, this book is full of them. But that is not the only reason for studying how graphs work. Most college students will deal with graphs in the future, perhaps frequently. You will see them in newspapers. If you become a doctor, you will use graphs to keep track of your patients’ progress. If you join a business firm, you will use them to check profit or performance at a glance. This appendix introduces some of the techniques of graphic analysis—tools you will use throughout the book and, more important, very likely throughout your working career.

Graphs Used in Economic Analysis Economic graphs are invaluable because they can display a large quantity of data quickly and because they facilitate data interpretation and analysis. They enable 1 Students who have some acquaintance with geometry and feel quite comfortable with graphs can safely skip this appendix.

the eye to take in important statistical relationships at a glance that would be far less apparent from written descriptions or long lists of numbers.

Two-Variable Diagrams Much of the economic analysis found in this and other books requires that we keep track of two variables simultaneously. A variable is something measured by a number; it is used to analyze what happens to other things when the size of that number changes (varies).

For example, in studying how markets operate, we will want to keep one eye on the price of a commodity and the other on the quantity of that commodity that is bought and sold. For this reason, economists frequently find it useful to display real or imaginary figures in a two-variable diagram, which simultaneously represents the behavior of two economic variables. The numerical value

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Chapter What Is Economics? of one variable is measured along the horizontal line at the bottom of the graph (called the horizontal axis), starting from the origin (the point labeled “0”), and the numerical value of the other variable is measured up the vertical line on the left side of the graph (called the vertical axis), also starting from the origin.

Ta ble 1 Quantities of Natural Gas Demanded at Various Prices

The “0” point in the lower-left corner of a graph where the axes meet is called the origin. Both variables are equal to zero at the origin.

Figures 1(a) and 1(b) are typical graphs of economic analysis. They depict an imaginary demand curve, represented by the blue dots in Figure 1(a) and the heavy blue line in Figure 1(b). The graphs show the price of natural gas on their vertical axes and the quantity of gas people want to buy at each price on the horizontal axes. The dots in Figure 1(a) are connected by the continuous blue curve labeled DD in Figure 1(b). Economic diagrams are generally read just as one would read latitudes and longitudes on a map. On the demand curve in Figure 1, the point marked a represents a hypothetical combination of price and quantity of natural gas demanded by customers in St. Louis. By drawing a horizontal line leftward from that point to the vertical axis, we learn that at this point the average price for gas in St. Louis is $3 per thousand cubic feet. By dropping a line straight down to the horizontal axis, we find that consumers want 80 billion cubic feet per year at this price, just as the statistics in Table 1 show. The other points on the graph give similar information. For example, point b indicates that if natural gas in St. Louis were to cost only $2 per thousand cubic feet, quantity demanded would be higher—it would reach 120 billion cubic feet per year. Notice that information about price and quantity is all we can learn from the diagram. The demand curve will not tell us what kinds of people live in

15

Price (per thousand cubic feet)

$2

$3

$4

$5

$6

Quantity demanded (billions of cubic feet per year)

120

80

56

38

20

St. Louis, the size of their homes, or the condition of their furnaces. It tells us about the quantity demanded at each possible price—no more, no less. A diagram abstracts from many details, some of which may be quite interesting, so as to focus on the two variables of primary interest—in this case, the price of natural gas and the amount of gas that is demanded at each price. All of the diagrams used in this book share this basic feature. They cannot tell the reader the “whole story,” any more than a map’s latitude and longitude figures for a particular city can make someone an authority on that city.

The Definition and Measurement of Slope One of the most important features of economic diagrams is the rate at which the line or curve being sketched runs uphill or downhill as we move to the right. The demand curve in Figure 1 clearly slopes downhill (the price falls) as we follow it to the right (i.e., as consumers demand more gas). In such instances, we say that the curve has a negative slope, or is negatively sloped, because one variable falls as the other one rises. The slope of a straight line is the ratio of the vertical change to the corresponding horizontal change as we move to the right along the line between two points on that line, or, as it is often said, the ratio of the “rise” over the “run.”

Fig u re 1 A Hypothetical Demand Curve for Natural Gas in St. Louis

6

5

5

4 a

P

3

Price

Price

D 6

b

2

4 P

3

a b

2

D

1

1 0

20

40

60

Q 80 100 120 140

0

Quantity (a)

20

40

60

Q 80 100 120 140

Quantity (b)

Get complete eBook Order by email at [email protected] NOTE: Price is in dollars per thousand cubic feet; quantity is in billions of cubic feet per year.

Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get eBook Order by email at [email protected] Part 1 complete Getting Acquainted with Economics

16

we choose to measure it. That is why we can pick any horizontal distance, AB, and the corresponding slope triangle, ABC, to measure slope. But this is not true for curved lines.

The four panels of Figure 2 show all possible types of slope for a straight-line relationship between two unnamed variables called Y (measured along the vertical axis) and X (measured along the horizontal axis). Figure 2(a) shows a negative slope, much like our demand curve in the previous graph. Figure 2(b) shows a positive slope, because variable Y rises (we go uphill) as variable X rises (as we move to the right). Figure 2(c) shows a zero slope, where the value of Y is the same irrespective of the value of X. Figure 2(d) shows an infinite slope, meaning that the value of X is the same irrespective of the value of Y. Slope is a numerical concept, not just a qualitative one. The two panels of Figure 3 show two positively sloped straight lines with different slopes. The line in Figure 3(b) is clearly steeper. But by how much? The labels should help you compute the answer. In Figure 3(a) a horizontal movement, AB, of 10 units (13 – 3) corresponds to a vertical movement, BC, of 1 unit (9 – 8). So the slope is BC/AB – 1/10. In Figure 3(b), the same horizontal movement of 10 units corresponds to a vertical movement of 3 units (11 – 8). So the slope is 3/10, which is larger—the rise divided by the run is greater in Figure 3(b). By definition, the slope of any particular straight line remains the same, no matter where on that line

Curved lines also have slopes, but the numerical value of the slope differs at every point along the curve as we move from left to right.

The four panels of Figure 4 provide some examples of slopes of curved lines. The curve in Figure 4(a) has a negative slope everywhere, and the curve in Figure 4(b) has a positive slope everywhere. But these are not the only possibilities. In Figure 4(c) we encounter a curve that has a positive slope at first but a negative slope later on. Figure 4(d) shows the opposite case: a negative slope followed by a positive slope. We can measure the slope of a smooth curved line numerically at any particular point by drawing a straight line that touches, but does not cut, the curve at the point in question. Such a line is called a tangent to the curve. The slope of a curved line at a particular point is defined as the slope of the straight line that is tangent to the curve at that point.

Fig u re 2 Different Types of Slope of a Straight-Line Graph

Y

Y

Negative slope

(a)

Y

Positive slope X

0

Y

0

Zero slope X

X

0

(b)

Infinite slope

(c)

X

0

(d)

Fig u re 3 Y

How to Measure Slope

Y 3 Slope = — 10 C

11 9 8

0

C

1 Slope = — 10 B

A

3

13 (a)

X

8

0

B

A

3

13

X

(b)

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Chapter What Is Economics?

17

Fig u re 4 Behavior of Slopes in Curved Graphs Y

Y

Y

Negative slope

Y Negative slope

Positive slope

Positive slope Negative slope

Positive slope X

0

X

0

(a)

0

(b)

X (c)

0

X (d)

Exercise Show that the slope of the curve at point G

Fig u re 5 How to Measure Slope at a Point on a Curved Graph

Y r

8

D

7 6 5

R

t

F

C

E

4

G

T

3

r

M

is about 1.

What would happen if we tried to apply this graphical technique to the high point in Figure 4(c) or to the low point in Figure 4(d)? Take a ruler and try it. The tangents that you construct should be horizontal, meaning that they should have a slope exactly equal to zero. It is always true that where the slope of a smooth curve changes from positive to negative, or vice versa, there will be at least one point whose slope is zero. Curves shaped like smooth hills, as in Figure 4(c), have a zero slope at their highest point. Curves shaped like valleys, as in Figure 4(d), have a zero slope at their lowest point.

2 1 0

A t

B 1

2

3

Rays through the Origin and 45° Lines 4

5

6

7

8

9

10

X

Figure 5 shows tangents to the blue curve at two points. Line tt is tangent at point T, and line rr is tangent at point R. We can measure the slope of the curve at these two points by applying the definition. The calculation for point T, then, is the following: Slope at point T

(1 − 5) (3 − 1)

=

−4 2

= −2

A similar calculation yields the slope of the curve at point R, which, as we can see from Figure 5, must be smaller numerically. That is, the tangent line rr is less steep than line tt: Slope at point R = Slope of line rr =

(5 − 7 ) (8 − 6)

=

−2 2

The Y-intercept of a line or a curve is the point at which it touches the vertical axis (the Y-axis). The X-intercept is defined similarly.

For example, the Y-intercept of the line in Figure 3(a) is a bit less than 8. Lines whose Y-intercept is zero have so many special uses in economics and other disciplines that they have been given a special name: a ray through the origin, or a ray.

= Slope of line tt Distance BC = Distance BA =

The point at which a straight line cuts the vertical (Y) axis is called the Y-intercept.

= −1

Figure 6 shows three rays through the origin, and the slope of each is indicated in the diagram. The ray in the center (whose slope is 1) is particularly useful in many economic applications because it marks points where X and Y are equal (as long as X and Y are measured in the same units). For example, at point A we have X = 3 and Y = 3 ; at point B, X = 4 and Y = 4 . A similar relation holds at any other point on that ray. How do we know that this is always true for a ray whose slope is 1? If we start from the origin (where

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get eBook Order by email at [email protected] Part 1 complete Getting Acquainted with Economics

18

both X and Y are zero) and the slope of the ray is 1, we know from the definition of slope that

Fig u re 6 Rays through the Origin

Slope = Y

Slope = +1

4

3

B

A

1 Slope = + – 2

K

1

If a point representing some data is above the 45 ° line, we know that the value of Y exceeds the value of X. Similarly, whenever we find a point below the 45 ° line, we know that X is larger than Y.

E

0

1

2

D 3

4

5

X

Squeezing Three Dimensions into Two: Contour Maps

Fig u re 7

© iStockphoto.com/Judy Watt

A Geographic Contour Map

2

=1

Rays through the origin with a slope of 1 are called 45° lines because they form an angle of 45° with the horizontal axis. A 45° line marks off points where the variables measured on each axis have equal values.2

C

2

Horizontal change

This implies that the vertical change and the horizontal change are always equal, so the two variables must always remain equal. Any point along that ray (e.g., point A) is exactly equal in distance from the horizontal and vertical axes (length DA = length CA)—the number on the X-axis (the abscissa) will be the same as the number on the Y-axis (the ordinate).

Slope = +2

5

Vertical change

Sometimes problems involve more than two variables, so two dimensions just are not enough to depict them on a graph. This is unfortunate, because the surface of a sheet of paper is only two-dimensional. When we study a business firm’s decision-making process, for example, we may want to keep track simultaneously of three variables: how much labor it employs, how much raw material it imports from foreign countries, and how much output it creates. Luckily, economists can use a well-known device for collapsing three dimensions into two—a contour map. Figure 7 is a contour map of the area just southeast of Eugene, Oregon, including the Eugene Compressor Station. On some of the irregularly shaped “rings” on this map, we find numbers (like 800) indicating the height (in meters) above sea level at that particular spot on the hill. Thus, unlike other maps, which give only latitudes and longitudes, this contour map (also called a topographical map) exhibits three pieces of information about each point: latitude, longitude, and altitude. Figure 8 looks more like the contour maps encountered in economics. It shows how a third variable, called Z (think of it as a firm’s output, for example), varies as we change either variable X (think of it as a firm’s employment of labor) or variable Y (think of it as the use of imported raw material). Just like the map of the area near Eugene, Oregon, any point on

The definition assumes that both variables are measured in the same units.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Chapter What Is Economics?

A production indifference map is a graph whose axes show the quantities of two inputs that are used to produce some output. A curve in the graph corresponds to some given quantity of that output, and the different points on that curve show the different quantities of the two inputs that are just enough to produce the given output.

Fig u re 8 An Economic Contour Map Y 80 70 Yards of Cloth per Day

the diagram conveys three pieces of data. At point A, we can read off the values of X and Y in the conventional way (X is 30 and Y is 40), and we can also note the value of Z by finding out on which contour line point A falls. (It is on the Z = 20 contour.) So point A is able to tell us that 30 hours of labor and 40 yards of cloth produce 20 units of output per day. The contour line that indicates 20 units of output shows the various combinations of labor and cloth a manufacturer can use to produce 20 units of output. Economists call such maps production indifference maps.

19

60 50 A

40

Z = 40 B

30

Z = 30

20

Z = 20

10

Although most of the analyses presented in this book rely on the simpler two-variable diagrams, contour maps will find their applications, especially in the appendixes to Chapters 5 and 7.

Z = 10 0

10

20

30

40

50

60

70

80

X

Labor Hours per Day

Summary 1. Because graphs are used so often to portray economic models, it is important for students to acquire some understanding of their construction and use. Fortunately, the graphics used in economics are usually not very complex. 2. Most economic models are depicted in two-variable diagrams. We read data from these diagrams just as we read the latitude and longitude on a map: each point represents the values of two variables at the same time. 3. In some instances, three variables must be shown at once. In these cases, economists use contour maps, which, as the name suggests, show “latitude,” “longitude,” and “altitude” all at the same time.

4. Often, the most important property of a line or curve drawn on a diagram will be its slope, which is defined as the ratio of the “rise” over the “run,” or the vertical change divided by the horizontal change when one moves along the curve. Curves that go uphill as we move to the right have positive slopes; curves that go downhill have negative slopes. 5. By definition, a straight line has the same slope wherever we choose to measure it. The slope of a curved line changes, but the slope at any point on the curve can be calculated by measuring the slope of a straight line tangent to the curve at that point.

Key Terms 45° line

18

origin (of a graph)

ray through the origin, or ray 15

production indifference map 19

slope of a straight (or curved) line 15–16

17

tangent to a curve variable

16

14

Y-intercept

17

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

20

Get eBook Order by email at [email protected] Part 1 complete Getting Acquainted with Economics

Test Yourself 1. Portray the following hypothetical data on a twovariable diagram:

Academic Year

Total Enrollment

Enrollment in Economics Courses

2008–2009

3,000

300

2009–2010

3,100

325

2010–2011

3,200

350

2011–2012

3,300

375

2012–2013

3,400

400

Measure the slope of the resulting line, and explain what this number means. 2. From Figure 5, calculate the slope of the curve at point M. 3. Colin believes that the number of job offers he will get depends on the number of courses in which his

grade is B+ or better. He concludes from observation that the following figures are typical: Number of grades of B+ or better

0

1

2

3

4

Number of job offers

1

3

4

5

6

Put these numbers into a graph like Figure 1(a). Measure and interpret the slopes between adjacent dots. 4. In Figure 6, determine the values of X and Y at point K and at point E. What do you conclude about the slopes of the lines on which K and E are located? 5. In Figure 8, interpret the economic meaning of points A and B. What do the two points have in common? What is the difference in their economic interpretation?

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected]

2

THE ECONOMY: MYTH AND R EALITY E pluribus unum (Out of many, one) MOTTO ON U.S. CURRENCY

T

his chapter introduces you to the U.S. economy and its role in the world. It may seem that no such introduction is necessary, for perhaps you have lived your entire life in the United States. Every time you work at a summer or part-time job, pay your college bills, or buy a slice of pizza, you not only participate in the American economy—but you also observe something about it. But the casual impressions we acquire in our everyday lives, though sometimes correct, are often misleading. Experience shows that most Americans—not just students—either are unaware of or harbor grave misconceptions about some of the most basic economic facts. One popular myth holds that most of the goods that Americans buy are made in China. Another is that business profits account for a third of the price we pay for a typical good or service. Also, “everyone knows” that the number of federal government jobs has grown rapidly during the past few decades. In fact, none of these things is remotely close to being true. So, before we begin to develop theories of how the economy works, it is useful to get an accurate picture of what our economy is really like.

C O N T E N T S 2-1 The American Economy: A Thumbnail Sketch

2-2c The American Workforce: What Does It Earn? 2-2d Capital and Its Earnings

2-1a 2-1b 2-1c 2-1d

2-3 The Outputs: What Does America Produce?

A Private-Enterprise Economy A Relatively “Closed” Economy A Growing Economy … But with Bumps along the Growth Path

2-2 The Inputs: Labor and Capital 2-2a The American Workforce: Who Is in It? 2-2b The American Workforce: What Does It Do?

2-4 The Central Role of Business Firms

2-5b 2-5c 2-5d 2-5e

The Government as Business Regulator Government Expenditures Taxes in America The Government as Redistributor

2-6 Conclusion: It’s a Mixed Economy

2-5 What’s Missing from the Picture? Government 2-5a The Government as Referee

2-1 THE AMERICAN ECONOMY: A THUMBNAIL SKETCH The U.S. economy is the biggest national economy on earth, for two very different reasons. First, there are a lot of us. The population of the United States is just under 320 million—making it the third most populous nation on earth after China and India. That vast total includes children, retirees, full-time students, institutionalized people, and the unemployed, none of whom produce much output. But as of 2013, the working population of the United States numbered almost 144 million. As long as they are reasonably productive, that many people are bound to produce vast amounts of goods and services. And they do. But population is not the main reason why the U.S. economy is by far the world’s biggest. After all, despite having nearly four times the population, India’s economy 21

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

22

Get eBook Order by email at [email protected] Part 1 complete Getting Acquainted with Economics

Lee Lorenz The New Yorker Collection/The Cartoon Bank

is less  than one-quarter of the size of that of the United States. The second reason why the U.S. economy is so large is that we are a very rich country. American workers are among the most productive in the world. In 2013, for instance, our economy produced nearly $53,000 worth of goods and services for every living American—about $116,000 for every working American. If each of the 50 states was a separate country, California would be the eighth-largest national economy on earth! Why are some countries (like the United States) so rich and others (like India) so poor? That is one of the central questions facing economists. It is useful to think of an economic system as a machine that takes inputs, such as labor and other things we call factors of production, and transforms them “And may we continue to be worthy of consuming a disproportionate share into outputs, or the things people want to consume. of this planet’s resources.” The American economic machine performs this task with extraordinary efficiency, whereas the Indian machine runs quite inefficiently (though it is improving rapidly). Learning why Inputs or factors of this is so is one of the chief reasons to study economics. production are the labor, Thus, what makes the American economy stronger than all others—at least for now machinery, buildings, and natural resources used to (we discuss this in greater depth in Chapter 21)—is our unique combination of prosperity make outputs. and population. There are other rich countries in the world, like Switzerland, and there are other countries with huge populations, like India. But no nation combines a huge Outputs are the goods and services that consumers population with high per capita income the way the United States does. China, with an economy two-thirds the size of ours, is the only nation that comes close—although per and others want to acquire.

U.S. Share of World GDP—It’s Nice to Be Rich

SOURCES: Central Intelligence Agency, The World Factbook, https://www.cia.gov/library/publications/the-world-factbook/ rankorder/2004rank.html; https://www.cia.gov/library/publications/the-world-factbook/ fields/2119.html#xx; and https://www.cia.gov/library/publications/the-world-factbook/ fields/2001.html#xx.

2013 Gross Domestic Product (GDP) per Capita in 7 Industrial Countries 55,000

52,800

50,000 43,100

45,000

39,500

40,000 GDP per Capita ($)

The approximately 7 billion people of the world produced approximately $87.2 trillion worth of goods and services in 2013. The United States, with only about 4.5 percent of that population, turned out almost 20 percent of total output. As the accompanying graph shows, among the seven largest developed countries of the world, the United States is still the leader in goods and services, with almost $53,000 worth of GDP produced per person (or per capita). These seven major industrial economies (the United States, Japan, Germany, France, Italy, the United Kingdom, and Canada—which account for just over 10 percent of global population) generated almost 40 percent of world output in 2013. But their share has been falling as giant developing nations like China and India grow rapidly.

37,300

37,100

35,000

35,700 29,600

30,000 25,000 20,000 15,000 10,000 5,000 0

United States

Canada Germany

United Kingdom

Japan

France

Italy

NOTE: Foreign GDPs are converted to U.S. dollars using exchange rates.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Chapter 2 The Economy: Myth and Reality

23

capita income in China, where the labor force alone is almost triple the size of the entire U.S. population, remains low. Although the United States is a rich and populous country, the 50 states certainly were not created equal. Population density varies enormously—from a high of about 1,200 people per square mile in crowded New Jersey to a low of just one person per square mile in the wide-open spaces of Alaska. Income variations are much less pronounced, but still, in 2012, the average income for a family of four in Mississippi was only about half that in Maryland.

2-1a A Private-Enterprise Economy Part of the secret of America’s economic success is that free markets and private enterprise have flourished here. These days, private enterprise and capitalism are the rule, not the exception, around the globe. But the United States has taken the idea of free markets— where individuals and businesses voluntarily buy and sell things—further than almost any other country. It remains the “land of opportunity.” Every country has a mixture of public and private ownership of property. Even in the darkest days of communism, Russians owned their own personal possessions. In our country, the post office and the electricity-producing Tennessee Valley Authority are enterprises of the federal government, and many cities and states own and operate mass transit facilities and sports stadiums. But the United States stands out among the world’s nations as being one of the most “privatized.” Few industrial assets are publicly owned in the United States. Even many city bus companies and almost all utilities (such as electricity, gas, and telephones) are run as private companies in the United States. In Europe, they are often government enterprises, though there is substantial movement toward transfer of government firms to private ownership. The United States also has one of the most “marketized” economies on earth. The standard measure of the total output of an economy is called gross domestic product (GDP), a term that appears frequently in the news. The share of GDP that passes through markets in the United States is enormous. Although government purchases of goods and services amount to about 20 percent of GDP, much of that is purchased from private businesses. Direct government production of goods is extremely rare in our society.

2-1b A Relatively “Closed” Economy All nations trade with one another, and the United States is no exception. As of 2013, our annual exports were nearly $2.3 trillion and our annual imports were more than $2.7 trillion. That’s a lot of money, and so is the gap between them. But America’s international trade often gets more attention than it deserves. The fact is that we still produce most of what we consume and consume most of what we produce, although the shares of imports and exports have been growing, as Figure 1 shows. In 1959, the average of exports and imports was only about 4 percent of GDP, a tiny fraction of the total. It has since gone up as high as 15.4 percent in 2011, before falling to just under 15 percent in 2013. Although this is no longer negligible, it still means that almost 86 percent of what Americans buy every year is made in the United States. Among the most severe misconceptions about the U.S. economy is the myth that this country no longer manufactures anything, but imports everything from, say, China. In fact, as of 2013, only about 16 percent of U.S. GDP was imported, with imports from China making up less than one-fifth of all imports. Economists use the terms open and closed to indicate how important international trade is to a nation. A common measure of “openness” is the average of exports and imports, expressed as a share of GDP. Thus, the Netherlands is considered an extremely open economy because it imports and exports more than two-thirds of its GDP. (See Table 1.) By this criterion, the United States stands out as the most closed economy among the advanced, industrial nations. We export and import a smaller share of GDP than all of the other countries listed in the table, including China and Russia.

Gross domestic product (GDP) is a measure of the size of the economy—the total amount it produces in a year. Real GDP adjusts this measure for changes in the purchasing power of money; that is, it corrects for inflation.

An economy is called relatively open if its exports and imports constitute a large share of its GDP. An economy is considered relatively closed if its exports and imports constitute a small share of GDP.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

24

Get eBook Order by email at [email protected] Part 1 complete Getting Acquainted with Economics Fig u re 1

Average of Exports and Imports, as a share of GDP (%)

16 14 12 10 8 6 4 2 0 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009

Ta ble 1

2013

SOURCE: Economic Report of the President, “Table B-2: Gross Domestic Product, 1999–2013” (Washington, D.C.: U.S. Government Printing Office, 2014), www.gpo.gov/fdsys/browse/collection.action?collectionCode=ERP.

Share of U.S. Gross Domestic Product (GDP) Exported and Imported, 1959–2013

2-1c A Growing Economy …

The next salient fact about the U.S. economy is its growth; it gets bigger almost every year (see Figure 2). Gross domestic prodOpenness uct in 2013 was more than $15.7 trillion; as noted earlier, that’s almost $53,000 per American. Measured in dollars of constant Netherlands 77.7% purchasing power,1 the U.S. GDP was more than five times as Germany 42.2 large in 2013 as it was in 1960. Of course, there were many more United Kingdom 33.4 people in America in 2013 than there were then. But even corCanada 30.6 recting for population growth, America’s real GDP per capita was four times higher in 2013 than in 1960. That’s still not a bad Mexico 20.1 performance: Living standards quadrupled in 50 years. Russia 16.7 Looking back further, the purchasing power of the average Japan 15.5 American increased nearly ninefold over the entire twentieth China 15.5 century! That’s a remarkable number. To get an idea of what it means, just think how much poorer your family would United States 14.9 become if it started out with an average U.S. income and then, NOTE: Openness calculated as the average of imports and exports as a percentage of GDP. suddenly, eight dollars out of nine were taken away. Most Americans at the end of the nineteenth century could not afford vacations; the men had one good suit of clothing, which they listed in their wills; and they wrote with ink that was kept in inkwells (and that froze every winter). SOURCE: For United States, Economic Report of the President, “Table B-2: Gross Domestic Product, 1999–2013” (Washington, D.C.: U.S. Government Printing Office, 2014); for all other countries, Central Intelligence Agency, The World Factbook, “Table B-2: Gross Domestic Product, 1999–2013,” https://www.cia.gov/library/ publications/the-world-factbook .

Openness of Various National Economies, 2013

2-1d But with Bumps along the Growth Path

A recession is a period of time during which the total output of the economy falls.

Although the cumulative growth performance depicted in Figure 2 is impressive, America’s economic growth has been quite irregular. We have experienced alternating periods of good and bad times, which are called economic fluctuations or sometimes just business cycles. In some years—five since 1960, to be exact—GDP actually declined. Such periods of declining economic activity are called recessions. The bumps along the American economy’s historic growth path are barely visible in Figure 2, but they stand out more clearly in Figure 3, which displays the same data in a different way. Here we plot not the level of real GDP each year but, rather, its growth rate—the percentage change from one year to the next. Now the booms and busts that delight and distress people—and swing elections—stand out clearly. From 1983 to 1984, for example, 1

This concept is called real GDP.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Chapter 2 The Economy: Myth and Reality Fig u re 2

Billions of Dollars per Year

18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 1960 1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

SOURCE: Bureau of Economic Analysis, National Economic Accounts, “Current Dollar and Real Domestic Product,” www.bea.gov/national.

Real Gross Domestic Product (GDP) since 1960

NOTE: Real (inflation-adjusted) GDP figures are in billions of chained 2009 dollars.

real GDP grew by more than 7 percent, which helped ensure Ronald Reagan’s landslide reelection. But from 2008 to 2009, real GDP actually dropped sharply, causing all sorts of social distress. One important consequence of these ups and downs in economic growth is that unemployment varies considerably from one year to the next (see Figure 4). During the Great Depression of the 1930s, unemployment ran as high as 25 percent of the workforce, but it fell to barely over 1 percent during World War II. Just within the past few years, the national unemployment rate has been as high as 10.1 percent (in October 2009) and as low as 3.8 percent (in April 2000). In human terms, that 6.3 percentage point difference represents approximately 10 million jobless workers. Understanding why joblessness varies so dramatically, and what we can do about it, is another major reason for studying economics.

Fig u re 3

8 7

1960s record expansion

Annual Change in Real GDP (%)

6 5

Boom of 1980s

Boom of 1990s

4 3 2 1

2001 recession

0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2013 1973–74 –1 1990–91 recession recession 2008–09 –2 1981–82 recession recession –3

SOURCE: Economic Report of the President, “Table B-4: Growth Rates in Real Gross Domestic Product by Area and Country, 1995–2014” (Washington, D.C.: U.S. Government Printing Office, 2014), www.gpo.gov/ fdsys/browse/collection.action?collectionCode=ERP.

The Growth Rate of Real Gross Domestic Product (GDP) in the United States since 1960

NOTE: Growth rates are for 1959–1960, 1960–1961, and so on.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

25

26

Get eBook Order by email at [email protected] Part 1 complete Getting Acquainted with Economics Fig u re 4

Percentage of Civilian Workers Who Are Unemployed

30

Great Depression

25 20 1980–83 recessions

15 10

World War II

1960s boom

5 0 1929

1939

1949

1959

1973–75 recession

1969

1979

1980s boom

1989

2008–10 recession 1990s boom

1999

2013

SOURCES: Economic Report of the President (Washington, D.C.: U.S. Government Printing Office, 2014), www.gpo.gov/fdsys/browse/collection.action?collectionCode=ERP; and Economic Report of the President, “Table B-12: Civilian Unemployment Rate, 1970–2014” (Washington, D.C.: U.S. Government Printing Office, 2014).

The Unemployment Rate in the United States since 1929

2-2 THE INPUTS: LABOR AND CAPITAL Let’s now return to the analogy of an economy as a machine turning inputs into outputs. The most important input is human labor: the men and women who run the machines, work behind the desks, and serve you in stores.

Unemployment Rates in Europe

U.S.

LEON NEAL/Getty Images

For roughly the first quarter-century after World War II, unemployment rates in the industrialized countries of Europe were significantly lower than those in the United States. Then, in the mid-1970s, rates of joblessness in Europe leaped, with double digits becoming common. And they were higher than U.S. unemployment rates in almost every year since—until recently, when the U.S. unemployment rate jumped by 60 percent, from 5.8 percent in 2008 to 9.3 percent in 2009. By 2012, unemployment rates in the United States had fallen back to roughly 8 percent—just about average, when compared with European and other industrialized economies. Put on a comparable basis by the U.S. Bureau of Labor Statistics, unemployment rates in the various countries in 2012 were:

8.1%

Italy

10.8

France

10.0

United Kingdom

8.0

Sweden

7.9

Canada

6.3

Germany

5.5

Australia

5.2

Japan

3.9

SOURCE: U.S. Bureau of Labor Statistics, “International Unemployment Rates and Employment Indexes, Seasonally Adjusted, 2009–2013,” accessed online at www.bls.gov/ fls/intl_unemployment_rates_monthly.pdf.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Chapter 2 The Economy: Myth and Reality 2-2a The American Workforce: Who Is in It? We have already mentioned that as of 2013, about 144 million Americans held jobs. Just over 48 percent of these workers were men; nearly 52 percent were women. This ratio represents a drastic change from two generations ago, when most women worked only at home (see Figure 5). Indeed, the massive entrance of women into the paid labor force was one of the major social transformations of American life during the second half of the twentieth century. In 1960, women accounted for just over 30 percent of the American labor force; as of 2013, women made up more than half of the labor force. As Figure 6 shows, the share of women in the labor forces of other industrial countries has also been growing. The expanding role of women in the labor market has raised many controversial questions—whether they are discriminated against (the evidence suggests that they are), whether the government should compel employers to provide maternity leave, and so on. In contrast to women, the percentage of teenagers in the workforce has dropped significantly since its peak in the mid-1970s (see Figure 7). Young men and women ages

Fig u re 5

SOURCE: Bureau of Labor Statistics, “Women in the Labor Force: A Databook (2010 edition),” www.bls.gov/cps/cpsaat03.htm.

The Composition of Employment by Sex, 1950 and 2013

Women 29% Men 48%

Women 52%

Men 71%

1950

2013

NOTE: As of 2013, about 144 million Americans held jobs. Data is for civilian noninstitutional population 16 years old and older.

Fig u re 6

Sweden United States United Kingdom Germany Netherlands Japan Spain

2012 1960

Italy 0

5

10

15

20

25

30

35

40

45

50

SOURCES: “A Survey of Women and Work,” The Economist, July 18, 1998, p. 4; and Organization for Economic Cooperation and Development, ALFS Summary Tables: Annual Labor Force Statistics, “Civilian Employment: http://stats.oecd.org.

Working Women as a Percentage of the Labor Force, 1960 versus 2012

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

27

28

Get eBook Order by email at [email protected] Part 1 complete Getting Acquainted with Economics Fig u re 7

Percentage of Total Civilian Employment

10 9 8 7 6 5 4 3 2 1

19 5 19 0 5 19 2 5 19 4 5 19 6 5 19 8 6 19 0 6 19 2 6 19 4 6 19 6 6 19 8 7 19 0 7 19 2 7 19 4 7 19 6 7 19 8 8 19 0 8 19 2 8 19 4 8 19 6 8 19 8 9 19 0 9 19 2 9 19 4 9 19 6 9 20 8 0 20 0 0 20 2 0 20 4 0 20 6 0 20 8 1 20 0 12

0

Year

SOURCE: Economic Report of the President (Washington, D.C.: U.S. Government Printing Office, various years), www.bls.gov/cps/cpsaato5htm.

Teenage Employment as a Percentage of Total Employment, 1950–2012

NOTE: Data is for civilian noninstitutional population 16 to 19 years old.

16 to 19 accounted for 8.6 percent of employment in 1974 but only 3 percent in 2013. As the baby boom gave way to the baby bust, people under 20 became scarce resources! Still, just over 4 million teenagers hold jobs in the U.S. economy today—a number that has declined steadily in the past decade. Most teenagers fill low-wage jobs at fast-food restaurants, amusement parks, and the like. Relatively few can be found in the nation’s factories.

2-2b The American Workforce: What Does It Do?

SOURCE: Economic Report of the President (Washington, D.C.: U.S. Government Printing Office, 2014).

What do these 144 million working Americans do? The only real answer is: almost anything you can imagine. In May 2013, America had 84,210 architects, 312,340 computer programmers, 580,570 carpenters, almost 2.4 million truck drivers, 592,670 lawyers, roughly 755,210 secretaries, Fig u re 8 157,800 kindergarten teachers, 30,890 pediatricians, Civilian Non-Farm Payroll Employment by Sector, 2013 67,810 tax preparers, 17,340 physicists, 302,870 fire fighters, and 17,230 economists.2 Figure 8 shows the breakdown by sector. It holds some surprises for most people. The majority of American workers—like workers in all developed countries—produce services, not goods. In 2013, just over 70 percent of all non-farm workers in the United Service producing Other goods States were employed by private service industries, producing (minus government) 4.9% whereas only about 14 percent produced goods. 70.2% These legions of service workers included about 21.1 million in educational and health services, Manufacturing 8.8% nearly 18.6 million in business and professional serGovernment vices, and more than 15 million in retail trade. (The 16.0% biggest single private employer in the country was Walmart.) By contrast, manufacturing companies in the United States employed only 12 million people, and almost a third of those worked in offices rather NOTE: Numbers may not add to 100 percent due to rounding. 2 U.S. Bureau of Labor Statistics, Occupational Employment Statistics, May 2013, www.bls.gov/oes/current/ oes_stru.htm.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Get complete eBook Order by email at [email protected] Chapter 2 The Economy: Myth and Reality than in the factory. The  Homer Simpson image of the typical American worker as a blue-collar worker is really quite misleading. As of 2013, federal, state, and local governments employed about 22 million people but, contrary to another popular misconception, few of these civil servants work for the federal government. Federal civilian employment was about 2.8 million—about 10 percent lower than it was in the 1980s. (The armed forces employed about another 1.2 million men and women in uniform.) State and local governments provided almost 19.1 million jobs—or about seven times the number of federal government jobs. In addition to the jobs categorized in Figure 8, approximately 2 million people were working on farms in the United States, and almost 9 million were self-employed. As Figure 9 shows, all industrialized countries have become “service economies” in recent decades. To a considerable degree, this shift to services reflects the arrival of the “Information Age.” Activities related to computers, to research, to the transmission of information by teaching and publication, and other information-related activities are providing many of the new jobs. This means that, in the rich economies, workers who moved out of manufacturing jobs into the service sectors have not gone predominantly into low-skill jobs such as dishwashing or housecleaning. Many found employment in service jobs in which education and experience provide a great advantage. At the same time, technological change has made it possible to produce more and more manufactured products using fewer and fewer workers. Such labor-saving innovation in manufacturing has allowed a considerable share of the labor force to move out of goods-producing jobs and into services.

Fig u re 9

Service Sector Jobs as a Percentage of the Total Labor Force

90

1967 2012

80 70

68.1

70.1

70.2

74.8

77.9

78.4

79.7

58.9

58.7

60 50 40 38.3

42.8

45.1

81.2

48.8

50.8

Sweden

United Kingdom

36.2

30 20 10 0

Italy

Germany

Japan

Spain

Canada

United States

SOURCE: Organization for Economic Cooperation and Development, Labor Force Statistics, various years, http://stats.oecd.org.

The Growing Share of Service Sector Jobs, 1967 versus 2012

2-2c The American Workforce: What Does It Earn? Altogether, these workers’ wages accounted for more than 60 percent of the income that the production process generated in 2011. That figures up to an average hourly wage of just over $20 in 2013—plus fringe benefits like health insurance and pensions, which can contribute an additional 30 to 40 percent for some workers. Because the average workweek was about 33 hours long in 2013, a typical weekly paycheck in the United States was almost $680 before taxes (but excluding the value of benefits). That is hardly a princely sum, and most college graduates can expect to earn substantially more.3 But that pay is typical of average wage rates in a rich country like the United States. 3

As of 2010, high school graduates typically earned just 60 percent of what workers with undergraduate college degrees were earning. Data from Bureau of Labor Statistics, “Labor Force Statistics from the Current Population Survey.” Earnings by education, www.bls.gov/emp/ep_chart_001.htm.

Get complete eBook Order by email at [email protected] Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

29

Get Complete eBook Download Link below for instant download

https://browsegrades.net/documents/2 86751/ebook-payment-link-for-instantdownload-after-payment Follow the Instructions for complete eBook Download by email.