An Applications Approach. Eighth Edition

Transcription

1 Contemporary Economics An Applications Approach Eighth Edition Robert Carbaugh Ö Routledge Taylor & Francis Group NEW YORK AND LONDON

2 ontent List of Figures xix List oftables xxi Preface xxiv Acknowledgments xxviii Introduction 1 CHARTER 1 Scarcity and Choice 2 What is Economics? 3 Microeconomics 4 Macroeconomics 4 The Economic Way of Thinking 4 Every Choice Has a Cost 5 People Make Better Choiees by Thinking at the Margin 5 Rational Self-Interest 5 Economic Models 6 Positi ve versus Norma tive Econ omics 6 Scarcity 6 Scarcity and Opportunity Cost 7 The Opportunity Cost ofattending College 8 Opportunity Costs and Choiees 9 The Production Possibilities Curve and Opportunity Cost 11 Economic Inefficiency 7 7 The Law oflnereasing Opportunity Cost 13 Economic Growth 13 Economic Decline 15 Innovation, Economic Growth, and the American Economy 16 Economic Growth: Trade-Offs between Current and Future Consumption 18 Production Possibilities Applications 18 Opportunity Cost of National Security 19 Economic Sanctions against Iran 20 Russian Aggression against Ukraine Brings Sanctions 22 Chapter Summary 23 Key Terms and Concepts 23

3 viii Contents Study Questions and Problems 24 Exploring Further 1.1: A Primer on Tables and Graphs 25 Movements along the Study Time-Grade Line 26 Siope ofthe Study Time-Grade Line 27 Shifts in the Study Time-Grade Line 27 PART The Microeconomy 29 C H A P T E R 2 Market Transactions: Demand and Supply Analysis 30 Markets 31 Demand 32 The Demand Curve and the Law of Demand 32 What Explains the Law of Demand? 33 Changes in Demand: Demand Shifters 34 Demand Theory Applications 36 GM Offers Deep Discounts to Boister Volt Saies 36 Yankees Siash Prices of Top Tickets to Fili Seats at New Park 37 Supply 38 The Supply Curve and the Law of Supply 38 Changes in Supply: Supply Shifters 40 Hydraulic Fracturing Squeezes More Oil and Natural Gas from the Ground 41 Demand, Supply, and Equilibrium 42 Shifts in Demand and Supply 45 Contemporary Applications of Demand and Supply 47 Bike Competition Puts the Brakes on Schwinn 47 What Drives Gasoline Prices? 48 Rising Health Care Costs Harm Households 50 Reducing America 's Dependence on Oil 51 Chapter Summary 53 Key Terms and Concepts 54 Study Questions and Problems 55 CHAPTER 3 Demand and Supply Applications 57 Price Elasticity of Demand 58 Determinants of Price Elasticity of Demand 60 Availability of Substitutes 60 Proportion of Income 61 Time 61 Price Elasticity of Demand and Total Revenue 62 Cigarette Tax Raised to Increase Government Revenue 64

4 Contents ix Colleges Hike Tuition Used to Offset Cutbacks in State Aid to Higher Education 65 Pittsburgh Pirates Underestimate Fan Reaction: Ticket Price Hike Was Wrong 66 U.S. Postal Service Boosts Rates to Increase Revenue 66 Price Ceilings and Price Floors 68 Rent Controls Make Housing MoreAffordable 69 Should Federal Interest-Rate Ceilings Be Imposed on MasterCard and Visa? 70 U.S. Farmers Reap Subsidies from the Government 77 Chapter Summary 72 Key Terms and Concepts 73 Study Questions and Problems 73 CHAPTER 4 Production and the Costs of Production 76 The Short Run and the Long Run 77 The Production Function 78 Short-Run Production 79 Improvements in Technology and Work Rules Shift Product Curves Upward 80 Short-Run Production Costs 82 Total Fixed, Total Variable, and Total Costs 82 Average Costs 84 Marginal Cost 86 Long-Run Production Costs 87 Economies of Scale 87 Diseconomies of Scale 90 Shifts in Cost Curves 90 Apple's Global Production Network 91 Dell Downsizes to Slash Costs 92 Costs and Profit 93 Explicit Costs and Implicit Costs 93 Accounting Profit and Economic Profit 94 Chapter Summary 95 Key Terms and Concepts 96 Study Questions and Problems 96 CHAPTER 5 Competition and Monopoly: Virtues andvices 99 Perfect Competition 100 The Perfectly Competitive Firm as a Price Taker 101 Perfect Competition: Profit Maximization in the Short Run 103

5 Marginal Revenue Equals Marginal Cost Rule 103 Profit Maximization 104 Perfect Competition: Long-Run Adjustments and Economic Efficiency 105 Will itunes Store Start Singing the Blues? 107 Monopoly 108 Barriers to Entry 109 Legal Barriers 109 Control over Essential Inputs 111 Economies of Scale 111 Cable Television: Why Rates Are So High 112 De Beers: The "Gift of Love" 113 Profit Maximization for a Monopoly 114 Price and Marginal Revenue 114 Maximizing Profits 116 Continuing Monopoly Profits 118 The Case Against Monopoly 118 Universal Service and the Postal Monopoly 120 Reducing Monopoly Power: Generic Drugs Compete Against Brand-Name Drugs 122 Is Google a Monopoly? Should It Be Bröken Up? 123 Chapter Summary 125 Key Terms and Concepts 126 Study Questions and Problems 126 Exploring Further 5.1: Loss Minimization and the Shut-Down Rule 129 CHAPTER 6 Imperfect Competition 131 Concentration Ratios 132 Monopolistic Competition 134 Profit Maximization in the Short Run 136 The Long Run: Normal Profit and Excess Capacity 137 Despite Competition from Starbucks, Many Independent Coffeehouses Survive 137 Advertising 139 Price Discrimination 141 Oligopoly 143 Oligopolistic Rivalry 143 Rivalry in the Soft Drink Industry 144 Rivalry in the Photographic Equipment Industry 144 Game Theory and Oligopoly Behavior 145 Competitive Oligopoly and Low Prices 145 Cooperative Behavior and Cheating 146 Airbus and Boeing Compete for Supremacy in the Jetliner Industry 147 Collusion and Cartels 149 Mergers and Oligopoly 151

6 Contents xi Chapter Summary 152 Key Terms and Concepts 153 Study Questions and Problems 153 CHAPTER 7 Labor Markets 155 Labor Market Equilibrium 156 Do Minimum Wage Laws Help Workers? 158 Are Workers Better Off with Labor Unions? 161 Increasing Union Wages 162 What Gives a Union Strength? 165 Indiana and Michigan Adopt Right-to-Work Laws 166 Caterpillar Bulldozes Canadian Locomotive Workers 166 Did Restrictive Work Rules Cream Twinkies and Ding Dongs? 167 Outsourcing: Threat or Opportunity for U.S. Workers? 168 What Prevents U.S. Jobs from Being Outsourced Abroad? 168 Effects of Outsourcing 169 Will Jobs Move Back to the United States? 170 Immigration Laws and American Workers 172 Chapter Summary 175 Key Terms and Concepts 175 Study Questions and Problems 176 Exploring Further 7.1: A Firm's Hiring Decision 177 CHAPTER 8 Government and Markets 180 Market Failure 181 Monopoly Power 182 Antitrust Policy 182 Is Microsoft a Monopoly? 183 Economic Regulation and Deregulation 185 Public Utility Regulation 185 Peak-Load Pricing: Buying Power by the Hour 187 Spillover Effects 188 Spillover Costs 189 Cap and Trade: Trading Emission Certificates 190 Spillover Benefits 191 Should the United States Shift More Energy Subsidies to Renewable Power? 192 Should Government Subsidize Professional Sports? 194 Social Regulation 195 Do Corporate Fuel Economy Standards Promote Fuel Conservation? 196 Public Goods 197 Inadequate Information 198 Economic Inequality 199

7 Chapter Summary 200 Key Terms and Concepts 201 Study Questions and Problems 201 The Macroeconomy 203 CHAPTER 9 The Mixed Economy of the United States 204 Households as Income Receivers: Income Inequality 205 Sources of Income Inequality 206 Trends in Income Inequality 208 Households as Spenders 210 The Business Sector 211 Government in the Mixed Economy 212 Social Insurance: Social Security, Medicare, and Unemployment Compensation 213 Should Social Security Be Privatized? 216 Government Finance 216 Taxation Principles: Benefits Received versus Ability to Pay 219 Progressive, Regressive, and Proportional Taxes 220 The U.S. Tax Structure 222 Federal Personal Income Tax 222 Federal Corporate Income Tax 223 Social Security Tax 223 Sales, Excise, and Property Taxes 223 Overall U.S. Tax System 224 ls the U.S. Tax System Fair? 224 Should the U.S. Tax System Be Reformed? 226 Fiat-Rate Income Tax 227 Value-Added Tax 228 National Sales Tax 229 Corporate Income Tax 229 Chapter Summary 231 Key Terms and Concepts 231 Study Questions and Problems 232 CHAPTER 10 Gross Domestic Product and Economic Growth 234 Measuring an Economy's Output 235 Gross Domestic Product 236 GDP ls the Market Value 236

8 Contents xiii OfAII Final Goods and Services 236 Produced 236 Within a Country 237 In a Given Year 237 The Components of GDP 237 /4 Formula for GDP 240 What GDP Does Not Measure 240 Real GDP versus Nominal GDP 241 Long-Run Economic Growth 243 The Rate of Economic Growth 243 What Determines Economic Growth 245 Natural Resources 245 Physical Capital 246 Human Capital 246 Productivity 247 The Significance oftechnological Innovation 248 The Role of Government 250 Theories of Economic Growth 251 ls Growth Desirable? 252 Chapter Summary 253 Key Terms and Concepts 255 Study Questions and Problems 255 CHAPTER 11 The Business Cycle, Unemployment, and Inflation 257 The Business Cycle 258 Phases of the Business Cycle 258 Theories of the Business Cycle 261 The Great Recession: Bursting ofhousing Bubble Triggers Recession 263 Unemployment 265 Measuring Unemployment 266 Three Kinds of Unemployment 267 Mitigating the Costs of Unemployment 268 What ls Füll Employment? 269 Inflexible Labor Markets Cost Jobs 269 Productivity, Real Wages, and Jobs 272 Inflation 273 Measuring Inflation: The ConsumerPrice Index 273 Who Benefits from and Who is Hurt By Inflation? 276 Inflation and the Purchasing Power of Income 276 Redistribution ofwealth from Lenders to Borrowers 278 Inflation and Real Interest Rates 279 Inflation and Taxpayers 279 Effects of Severe Inflation 280 Causes of Inflation 281

9 Chapter Summary 281 Key Terms and Concepts 282 Study Questions and Problems 283 CHAPTER 12 Macroeconomic Instability: Aggregate Demand and Aggregate Supply 285 The Stability of the Macroeconomy 286 The Classical View 287 The Great Depression 287 The Keynesian View 288 Aggregate Demand and Aggregate Supply 290 Aggregate Demand 290 Movemerts aiong the Aggregate Demand Curve 291 Shifts in the Aggregate Demand Curve 291 The Multiplier Effect 292 Aggregate Supply 293 Movements along the Aggregate Supply Curve 294 Shifts in the Aggregate Supply Curve 295 The Origins of Recession 296 Decreases in Aggregate Demand 296 Deereases in Aggregate Supply 296 The Origins of Inflation Revisited 298 Demand-Pull Inflation 299 Cost-Push Inflation 300 Productivity Growth Dampens Inflation 301 Chapter Summary 303 Key Terms and Concepts 304 Study Questions and Problems 304 Exploring Further 12.1: The Nature and Operation of the Multiplier Effect 306 Calculating the Value ofthe Multiplier 306 Graphical Illustration ofthe Multiplier Effect 307 CHAPTER 13 Fiscal Policy and the Federal Budget 309 Fiscal Policy 310 Fiscal Policy and Aggregate Demand: Short-Run Effects 311 Combating Recession 311 Combating Inflation 315 Automatic Stabilizers 315 Effects of Fiscal Policy in the Long Run 316 Fiscal Policy in Action 319 Problems of Fiscal Policy 320 Timing Lags 320 Crowding-Out Effect 321

10 Contents xv Offsetting State and Local Fiscal Policies 322 When ls Fiscal Policy Useful? 322 The Federal Deficit and Federal Debt 323 Sales and Ownership of Federal Debt 324 U.S. Fiscal Policy: Does the Federal Debt Cheat Future Generations? 325 Should the Federal Budget Be Balanced At All Times? 326 Annually Balanced Budget 326 Cyclically Balanced Budget 327 Functional Finance 327 Chapter Summary 328 Key Terms and Concepts 329 Study Questions and Problems 329 Exploring Further 13.1: Fiscal Policy and the Multiplier 331 CHAPTER 14 Money and the Banking System 332 The Meaning of Money 333 Medium of Exchange 334 Unit of Account 334 Store ofvalue 334 Are Credit Cards Money? 335 Shopping for a Credit Card: Why Are Rates So High? 335 The U.S. Money Supply 337 Coins 338 Paper Money 338 Checking Accounts 340 Special Types ofchecks 342 Check Processing and Collection 342 Holds on Checking Accounts 344 What Backs the Money Supply? 345 Measuring the Money Supply: The M1 Money Supply 346 How Your Money Grows Over Time: Compound Interest 348 The Business of Banking 349 A Bank's Balance Sheet 350 The Reserve Requirement 351 The Process of Money Creation 351 The Federal Deposit Insurance Corporation 353 Chapter Summary 355 Key Terms and Concepts 356 Study Questions and Problems 357 CHAPTER 15 The Federal Reserve and Monetary Policy 359 The Federal Reserve System 360

11 Structure ofthe Federal Reserve System 360 The Independence ofthe Fed 362 The Functions ofthe Federal Reserve System 363 Monetary Policy 364 Open Market Operations 364 The Discount Rate 366 The Reserve Requirement 367 Term Auction Facility 368 Shifting Aggregate Demand 369 Expansionary Policy 369 Restrictive Policy 370 The Federal Reserve and Economic Stabilization 371 The Great Recession of Attack on America 372 Monetary Policy: Advantages and Disadvantages 375 Advantagesof Monetary Policy 375 Disadvantages of Monetary Policy 375 Discretion or Rules: Fixed Money Rule or Inflation Targeting 376 Should Congress Reduce the Independence ofthe Federal Reserve? 377 Chapter Summary 378 Key Terms and Concepts 379 Study Questions and Problems 379 The International Economy 384 CHAPTER 16 International Trade and the Global Economy 384 The United States as an Open Economy 385 The Advantages of Specialization and Trade 386 Comparative Advantage and International Trade 388 Production and Consumption without Specialization and Trade 388 Production and Consumption with Specialization and Trade 388 Comparative Advantage 390 Why is Free Trade Controversial? 392 Limiting Foreign Competition: Tariffs 393 The Regressive Nature ofu.s. Tariffs 395 Arguments for Trade Restrictions 395 Job Protection 396 Protection against Cheap Foreign Labor 396 Fairness in Trade: A Level Playing Field 397 Infant Industry 397

12 Contents xvii National Security Argument 397 Pursuing Trade Liberalization 399 World Trade Organization 399 North American Free Trade Agreement 401 The Trans-Pacific Partnership 401 Chapter Summary 402 Key Terms and Concepts 403 Study Questions and Problems 404 CHAPTER 17 International Finance 406 The Balance of Payments 407 The Current Account 407 The Capital and Financial Account 408 What Does a Current Account Deficit (Surplus) Mean? 408 The U.S. Balance of Payments 409 Are U.S. Current Account Deficits Bad? 410 Foreign Exchange Market 411 Exchange Rate Determination 413 Long-Run Determinants of Exchange Rates 414 Short-Run Determinants of Exchange Rates 414 Exchange Rate Systems 415 Floating Exchange Rates 415 Fixed Exchange Rates 417 Monetary Integration in Europe: The Euro 417 Chapter Summary 419 Key Terms and Concepts 420 Study Questions and Problems 420 CHAPTER 18 Economic Systems and Developing Countries 424 Economic Systems and the Fundamental Economic Questions 425 Market Economy 426 Command Economy 427 Mixed Economy 427 Transition Economies 429 Eastern European Countries 429 China 430 india 431 The Economics of Developing Countries 431 Obstacles to Economic Development 432 The Ladder of Economic Development and Trade Conflicts 433 Fair Trade and Coffee Growers 435

13 Strategies for Economic Growth 435 Assisting the Developing Countries 436 World Bank 436 International Monetary Fund 437 Generalized System of Preferences 438 Chapter Summary 438 Key Terms and Concepts 439 Study Questions and Problems 439 Glossary 441 Index 453