Economics PRINCIPLES, APPLICATIONS, AND TOOLS SEVENTH EDITION The Pearson Series in Economics Abel/Bernanke/Croushore Macroeconomics* Fort Sports Economics Krugman/Obstfeld/Melitz International Economics: Theory & Policy* Bade/Parkin Foundations of Economics* Froyen Macroeconomics Laidler The Demand for Money Berck/Helfand The Economics of the Environment Fusfeld The Age of the Economist Leeds/von Allmen The Economics of Sports Bierman/Fernandez Game Theory with Economic Applications Gerber International Economics* Leeds/von Allmen/Schiming Economics* Gordon Macroeconomics* Lipsey/Ragan/Storer Economics* Greene Econometric Analysis Lynn Economic Development: Theory and Practice for a Divided World Blanchard Macroeconomics* Blau/Ferber/Winkler The Economics of Women, Men and Work Boardman/Greenberg/Vining/Weimer Cost-Benefit Analysis Boyer Principles of Transportation Economics Branson Macroeconomic Theory and Policy Brock/Adams The Structure of American Industry Bruce Public Finance 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Lewis and Clark College Steven M Sheffrin Tulane University Stephen J Perez California State University, Sacramento Prentice Hall Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editorial Director: Sally Yagan Editor in Chief: Donna Battista Acquisitions Editor: Noel Seibert Editorial Project Manager: Carolyn Terbush Managing Editor: Nancy H Fenton Senior Production Project Manager: Meredith Gertz Supplements Production Project Manager: Alison Eusden Director of Marketing: Kate Valentine Executive Marketing Manager: Lori DeShazo Marketing Assistant: Kim Lovato Art Director/Cover Designer: Anthony Gemmellaro Text Designer: Liz Harasymczuk Design Illustration (Interior): GEX Publishing Services Manager, Rights and Permissions, Text: Michael Joyce Image Manager/Image Asset Services: Rachel Youdelman Photo Researcher: 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the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps Copyright © 2012, 2010, 2008, 2006, 2003 by Pearson Education, Inc All rights reserved Manufactured in the United States of America This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Rights and Contracts Department, 501 Boylston Street, Suite 900, Boston, MA 02116, fax your request to 617-671-3447, or e-mail at http://www.pearsoned.com/legal/permissions.htm Library of Congress Cataloging-in-Publication Data O Sullivan, Arthur Economics : principles, applications, and tools / Arthur O Sullivan, Steven M Sheffrin, Stephen J Perez 7th ed p cm Includes index ISBN 978-0-13-255523-4 (casebound) Economics I Sheffrin, Steven M II Perez, Stephen J III Title HB171.5.O84 2012 330 dc22 2010048065 10 CRK 15 14 13 12 11 ISBN 10: 0-13-255523-9 ISBN 13: 978-0-13-255523-4 TO OUR CHILDREN CONOR, MAURA, MEERA, KIRAN, DAVIS, AND TATE About the Authors ARTHUR O SULLIVAN is a professor of economics at Lewis and Clark College in Portland, Oregon After receiving his B.S in economics at the University of Oregon, he spent two years in the Peace Corps, working with city planners in the Philippines He received his Ph.D in economics from Princeton University in 1981 and has taught at the University of California, Davis, and Oregon State University, winning teaching awards at both schools He is the author of the best-selling textbook Urban Economics, currently in its seventh edition Professor O Sullivan s research explores economic issues concerning urban land use, environmental protection, and public policy His articles have appeared in many economics journals, including the Journal of Urban Economics, Journal of Environmental Economics and Management, National Tax Journal, Journal of Public Economics, and Journal of Law and Economics Professor O Sullivan lives with his family in Portland, Oregon For recreation, he enjoys hiking, kiteboarding, and squash STEVEN M SHEFFRIN is professor of economics and executive director of the Murphy Institute at Tulane University Prior to joining Tulane in 2010, he was a faculty member at the University of California, Davis, and served as department chairman of economics and dean of social sciences He has been a visiting professor at Princeton University, Oxford University, London School of Economics, and Nanyang Technological University, and he has served as a financial economist with the Office of Tax Analysis of the United States Department of the Treasury He received his B.A from Wesleyan University and his Ph.D in economics from the Massachusetts Institute of Technology Professor Sheffrin is the author of 10 other books and monographs and over 100 articles in the fields of macroeconomics, public finance, and international economics His most recent books include Rational Expectations (second edition) and Property Taxes and Tax Revolts: The Legacy of Proposition 13 (with Arthur O Sullivan and Terri Sexton) Professor Sheffrin has taught macroeconomics and public finance at all levels, from general introduction to principles classes (enrollments of 400) to graduate classes for doctoral students He is the recipient of the Thomas Mayer Distinguished Teaching Award in economics He lives with his wife Anjali (also an economist) in New Orleans, Louisiana, and has two daughters who have studied economics In addition to a passion for current affairs and travel, he plays a tough game of tennis STEPHEN J PEREZ is a professor of economics and NCAA faculty athletics representative at California State University, Sacramento After receiving his B.A in economics at the University of California, San Diego, he was awarded his Ph.D in economics from the University of California, Davis, in 1994 He taught economics at Virginia Commonwealth University and Washington State University before coming to California State University, Sacramento, in 2001 He teaches macroeconomics at all levels as well as econometrics, sports economics, labor economics, and mathematics for economists Professor Perez s research explores most macroeconomic topics In particular, he is interested in evaluating the ability of econometric techniques to discover the truth, issues of causality in macroeconomics, and sports economics His articles have appeared in many economics journals, including the Journal of Monetary Economics; Econometrics Journal; Economics Letters; Journal of Economic Methodology; Public Finance and Management; Journal of Economics and Business; Oxford Bulletin of Economics and Statistics; Journal of Money, Credit, and Banking; Applied Economics; and Journal of Macroeconomics ix 730 Photo Credits CHAPTER 01: Pages and 13, Peter Belanger; Page 9, Fleyeing/ Dreamstime; Page 10, Photos.com; Page 24, iStockphoto CHAPTER 02: Pages 28 and 43, Szefei wong/Alamy; Page 32, Shutterstock; Page 36, Sculpies/Dreamstime; Page 38, Image Source/Alamy; Page 39, Navarone/Dreamstime CHAPTER 03: Pages 49 and 60, Stan Honda/Getty; Page 54, Lew Robertson/Corbis; Page 57, Flying Lab Software, LLC; Page 58, Time & Life Pictures/Getty Images CHAPTER 04: Pages 65 and 91, Alex Segre/Alamy; Page 87, Corbis (top), Shutterstock (bottom); Page 88, Robert Dutton/ Dreamstime; Page 89, Reinhard Eisele/Corbis; Page 90, William West/Getty Images CHAPTER 05: Pages 97 and 115, Fancy/Alamy; Page 107, Kathy deWitt/Alamy; Page 112, Corbis RF/Alamy; Page 114, Corbis CHAPTER 06: Pages 120 and 136, Yellow Dog Productions/ Getty Images; Page 123, Poppy Berry/Corbis/Zefa Collection; Page 125, The Image Works; Page 129, Luba V Nel/ Shutterstock; Page 132, PhotoAlto/Alamy CHAPTER 07: Pages 139 and 155, Blend Images/SuperStock; Page 145, Danse Macabre (1493), Michael Wolgemuth and W Pleydenwurff, Woodcut, illustration from Liber Chronicarum by Hartmann Schedel/Bibliotheque des Arts Decoratifs, Paris/ Archives Charmet/The Bridgeman Art Library; Page 149, Knud Neilson/Shutterstock; Page 151, Science and Society/SuperStock CHAPTER 08: Pages 158 and 177, Greatstock Photographic Library/Alamy; Page 162, Design Pics/SuperStock; Page 164, Jozef Sedmak/Shutterstock; Page 169, Jonathan Larsen/ Shutterstock; Page 170, Rick Wilking/Reuters/Corbis; Page 173, The Art Archive/SuperStock; Page 174, Library of Congress Prints and Photographs Division [LC-USZ62-103992]; Page 176, Greg Smith/Corbis CHAPTER 09: Pages 185 and 202, Jim West/The Image Works; Page 188, Elisheva Monasevich/Fotolia; Page 198, Paul Fleet/ Alamy; Page 199, JustASC/Shutterstock CHAPTER 10: Pages 205 and 220, Getty Images; Page 212, Don Hammond/Design Pics/Corbis; Page 214, EMG Education Management Group; Page 219, Jose Luis Magana/AP Images CHAPTER 11: Pages 223 and 245, PCL/Alamy; Page 229, David Duprey/AP Images; Page 233, Purestock/Getty Images; Page 238, Tim Tidal/Picture Post/Getty Images; Page 242, Damian Dovarganes/AP Images CHAPTER 12: Pages 253 and 268, Stock Connection/SuperStock; Page 255, Ric Feld/AP Images; Page 258, AP Images; Page 265, Andy Dean/Alamy; Page 267, AP Images CHAPTER 13: Pages 272 and 286, fStop/SuperStock; Page 276, Pearson Asset; Page 284, Sandy Felsenthal/Corbis; Page 285, AP Images CHAPTER 14: Pages 291 and 307, Molly Riley/Reuters/ Newscom; Page 296, Feng Yu/Alamy; Page 300, Christopher Walker/Shutterstock; Page 305, Ho/Reuters/Newscom CHAPTER 15: Pages 311 and 325, Oliver Eltinger/Photolibrary New York; Page 317, Steve Hamblin/Alamy; Page 318, iStockphoto; Page 323, Comstock/Corbis CHAPTER 16: Pages 329 and 344, Corbis Premium RF/Alamy; Page 336, Stockbyte/Thinkstock; Page 339, Pawel Libera/Corbis; Page 343, Siphiwe Sibeko/Reuters/Corbis CHAPTER 17: Pages 347 and 361, Underwood Archives/Alamy; Page 353, Photos.com; Page 356, Corbis Premium RF/Alamy; Page 360, Stephen Barnes/Air Travel/Alamy CHAPTER 18: Pages 364 and 381, Ellen Isaacs/Alamy; Page 371, Dior Azcuy/AP Images; Page 374, Getty Images; Page 376, Corbis Premium RF/Alamy; Page 379, John Maiser, Jr./The Image Works CHAPTER 19: Pages 385 and 405, Bernhard Classen/Alamy; Page 396, Yoshikazu Tsuno/Agence France Press/Getty Images; Page 402, David H Seymour/Fotolia; Page 403, Raul Ferrari/ AP Images CHAPTER 20: Pages 409 and 431, G Wright/The Image Works; Page 415, Getty Images; Page 419, Joseph Sohm/Corbis; Page 423, US Department of Agriculture; Page 430, Noel Henderson/Photolibrary New York CHAPTER 21: Pages 437 and 456, Keith Morris/Alamy; Page 450, Myrleen Pearson/The Image Works (top), Charles Gupton/Getty Images (bottom); Page 455, Robert Fried (top), Wayne Hutchinson/Alamy (bottom) CHAPTER 22: Pages 462 and 473, Getty Images; Page 468, Spectrum Colour Library/HIP/The Image Works; Pages 471 and 489, Shutterstock; Page 472, Mar Photographics/Alamy (top), Richard T Nowitz/Corbis (bottom); Page 483, Micheal Coglianty/Image Bank/Getty Images; Page 484, Mar Photographics/Alamy CHAPTER 23: Pages 493 and 509, Gavin Hellier/Alamy; Page 506, Oleksiy Maksymenko Photography/Alamy; Page 507, Juniors Bildarchiv/Alamy (top), vectorlib-com/Shutterstock (bottom); Page 508, Lebecht Music and Arts Photo Library/ Alamy; Page 509, Sandia National Laboratories (top) CHAPTER 24: Pages 514 and 533, Andreja Donko/Fotolia; Page 523, Jim Parkin/Alamy; Page 525, Viviane Moos/Corbis; Page 528, Getty Images; Page 529, Ashley Cooper/Corbis; Page 531, Peter Evans/Alamy CHAPTER 25: Pages 538 and 553, Larry Mulvehill/The Image Works; Page 547, John Reddy/Alamy; Page 548, Jeffrey Coolidge/Getty Images; Page 552, Joseph Barrak/Agence France Presse/Getty Images (top), Aim Patrice/Corbis/Sygma (bottom) CHAPTER 26: Pages 558 and 570, Patricia Hofmeester/Fotolia; Page 561, Ed Andrieski/AP Images; Page 565, Judith Collins/ Alamy; Page 567, NASA; Page 568, Solus-Veer/Corbis CHAPTER 27: Pages 574 and 594, Lifestyle pictures/Alamy; Page 583, Alamy; Page 587, Lisa F Young/Shutterstock; Page 591, Photos.com; Page 594, Kim Karpeles/Alamy (top) PHO TO C R E DI T S 731 CHAPTER 28: Pages 601 and 614, Kim Karpeles/Alamy; Page 605, Samuel Wheeler/Alamy (top), NASA (bottom); Page 611, Ariel Skelley/Corbis (top), Scott Morgan/Taxi/Getty Images (bottom) CHAPTER 31: Pages 660, 673, and 676, Imagebroker/Alamy; Page 663, Frog-traveller/Shutterstock; Page 667, Anne Kitzman/ Shutterstock; Page 670, Photos.com; Page 675, Lisa F Young/ Shutterstock CHAPTER 29: Pages 617 ad 636, David Zaitz/Alamy; Page 624, Bob Daemmrich/PhotoEdit Inc (top), Ron Redfern/Dorling Kindersley (bottom); Page 625, Duane Burleson/AP Images; Page 631, Russel Kord/Alamy (top), Kim Karpeles/Alamy (bottom); Page 632, Tim Burrett/Shutterstock CHAPTER 32: Pages 681 and 700, Alexander Raths/Shutterstock; Page 687, Mangostock/Shutterstock; Page 690, Michael Newman/ PhotoEdit Inc.; Page 693, Michael Newman/PhotoEdit Inc CHAPTER 30: Pages 643 and 656, Getty Images; Page 647, Photodisc/Getty Images; Page 648, Reuters/Corbis; Page 650, Getty Images; Page 651, Frank Tozier/Alamy; Page 655, Lowe Llaguno/Shutterstock CHAPTER 33: Pages 705 and 718, David Zaitz/Alamy; Page 709, Timothy Epp; Page 710, Maciej Oleksy; Page 715, Anne Rippy/ Image Bank/Getty Images; Page 717, Photos.com 732 Index Key terms and the page on which they are defined appear in boldface 45° line, 225 A Above-market wages, 717 Absolute advantage, 52 Accelerator theory, 254 Accounting, 685 growth, 168 171 Accounting cost, 495 Accounting profit, 495 Accounting rules, 55 Acemoglu, Daron, 173 Adjustment process economics of, 318 324 speed of, 315 317 Adverse-selection problem, 620, 624 625, 628 Adverse technological shocks, 150 Advertisers dilemma, 592 594 Advertising generic, 594 oligopoly and, 592 594 Afghanistan War, 349 Africa economic growth in, 158, 163 poverty in, 6, 158 African Americans labor market discrimination and, 699 wage discrimination and, 691 Age, poverty and, 697 Aggregate demand, 188 195 components of, 189 fiscal policy and, 206 207 long-run aggregate supply and, 196 money supply and, 302 multiplier and, 192 195 short-run aggregate supply and, 197 198 Aggregate demand curve (AD), 188 189, 314 deriving, 244 downward slope of, 189 190 income-expenditure model and, 243 245 shifts in, 190 192, 245 Aggregate supply, 195 200 Aggregate supply curve (AS), 195 long-run, 195 196 short-run, 196 199 supply shocks and, 199 200 Aghion, Phillipe, 175 Aging populations, entitlement programs and, 212 Airbus, 374 Airline deregulation, 612 Airline Deregulation Act, 612 Airline ticket discounts, 549 Air pollution, 673 674 Akerlof, George, 618 Aluminum Company of America (Alcoa), 590 Amazon.com, 472, 550 American Federation of Labor-Congress of Industrial Organizations (AFL-CIO), 706 American International Group (AIG), 268, 285 American Telephone and Telegraph (AT&T), 607, 613 American Tobacco Company, 607 Anticipated inflation, 134 135 Antidrug policies, 419 Antitrust policy, 60, 606 612 Apartment market, 528 Apple Computer, 462 Apple iPod, 360 361 Appreciation of a currency, 304, 386 387 Archer Daniels Midland (ADM), 584 Argentina financial crisis in, 403 hyperinflation in, 342 Artificial barriers to entry, 563, 603, 691 Asian financial crisis, 404 Asian Pacific Economic Cooperation (APEC), 375 Assets, 277 Assumptions, use of, for simplification, 7, 10 Asteroid collision, 643 644, 647 648 Asymmetric information, 618 622 insurance and, 626 629 lemons problem and, 618 625 Auction prices, 186 Authoritarian institutions, 173 Automatic stabilizers, 215, 238 241, 354, 356 Automobile collisions external costs from, 676 young drivers and, 675 Automobile emissions standards, marginal principle and, 36 Automobile insurance, 676 Automobiles, external costs from, 673 675 Autonomous consumption, 227 229 Autonomous consumption spending, 192 Average-cost curves, 505 506 Average-cost pricing, 605 Average costs, 498 499, 505 506 of information goods, 508 509 marginal costs and, 500 501 variety and, 566 Average fixed cost (AFC), 498 Average variable cost (AVC), 498 B Balanced budget, debate over, 348 354 Balanced-budget amendment, 354 Balanced-budget multiplier, 236, 251 Balance of payments, 393, 395 397 Balance of payments deficit, 400 Balance of payments surplus, 400 Balance sheet, 277 278 Bank failures, 266 Bank of England, 282, 339 Bank runs, 266 Banks See also Central banks; Federal Reserve balance sheet for, 277 278 creation of money by, 277 281 excess reserves held by, 280 reserve ratio of, 278, 279 reserve requirements for, 295 296 Barbie doll, 49 Bar graphs, 15 Barrier to entry, 539, 562 artificial, 563, 603 Barro, Robert, 233, 354 Barter, 273 Baseball pitchers, 625 Base year, 130 Basket of goods, 130, 131 Bastiat, Frédéric, 374 Bear Stearns, 267, 285 Becker, Gary, 173 Beech-Nut, 611 Beef, hormone-treated, 378 Beer prices, highway death and, 416 Bernake, Ben S., 291, 317, 356 Big Mac, exchange rates and price of, 392 Bils, Mark, 188 Black Death, living standards and, 145 Blanchflower, David, 114 Blinder, Alan, 305 Board of Governors of the Federal Reserve, 283 Boeing, 374 Bolivia, hyperinflation in, 342 Bond prices economy and, 300 301 interest, 298 301 open market operations and, 300 Bonds corporate, 259 260, 262 interest rates on long-term, 306 307 Boom economy, 200 201 returning to full employment after, 315 Borjas, George, 690 Bosworth, Barry, 169 Brand elasticity, 418 419 Branding, 472 Brands, name vs store, 561 Break-even price, 520, 523 Breathmobile, 673 674 Bretton Woods system, 399, 401 Broda, Christian, 379 Brown, E Cary, 216 217 Bubonic plague, 145 Buchanan, James, 654 Buchholz, Todd, 53 Budget deficit, 214 216, 219 1996 2009, 220 as burden on future generations, 350 351 debates over, 350 354 as good for economy, 353 354 hyperinflation and, 342 343 inflation and, 350 recent history of, 348 350 size of government and, 352 353 Budget line, 464 466, 477 478, 484 Budget set, 464 465, 477 478 Budget surplus, 215, 348 349 Bumper crops, 419 Bureau of Labor Statistics (BLS), 120, 123 Bus fares, deficits and, 419 Bush, George H W., 98, 334 Bush, George W., 218 219, 237, 349 Bush administration, fiscal policy during, 218 219 Business cycles, 111 113, 186 political, 317 318 real business cycle theory, 148 151 Business decisions, using macroeconomics to make, 12 Business licenses, 446 448 Buyers knowledgeable, 626 628 uninformed, 618 619 Byrraju Foundation, 493 I N DE X C Cable TV service, 613 Cagan, Phillip, 341, 343 Campus bookstores, 590 591 Candy cane production, 54 Cap-and-trade system, 660 Capital diminishing returns to, 180 human, 2, 159, 172 173 increase in supply of, 165 physical, stock of, 141, 142 143 Capital account, 394 395 Capital consumption allowance, 103 Capital deepening, 159, 164 167 economic growth and, 169 influences on, 166 167 model of, 180 183 Capital gains, 359 360 Carbon tax, 667 Car insurance, 631, 632 Cars, resale value of, 624 Car stereos, 562 Cartel, 576 577 Cartel pricing, 576 580, 583 Carter, Jimmy, 98, 334 Carton-board pricing, 584 Celebrity endorsements, 569 Celler-Kefauver Act, 610, 612 Central banks, 281, 282, 284 See also Federal Reserve credibility of, and inflation, 337 339 independence of, 338 339 inflation targeting by, 357 Centrally planned economy, 55 Ceteris paribus, 8, 10, 67, 68, 69, 70, 75, 79, 484 Chain-weighted index, 111, 130 131 Chairman of the Federal Reserve, 283 Change in demand, 76 vs change in quantity demanded, 75 76 market effects of, 87 Change in quantity demanded, 68 vs change in demand, 75 76 Change in quantity supplied, 70 vs change in supply, 79 81 Change in supply, 81 vs change in quantity supplied, 79 81 effects of, across markets, 87 88 prices and, 89 90 Changes marginal, 8, 10 using microeconomics to predict, 12 Cheaters dilemma, 587 Cheating, 445 Checkable deposits, 275 Check collection and clearing system, 281 282, 284 Checking accounts, 275, 276, 279 Childcare, GDP and, 113 Child labor, 162 China economic growth in, 173, 242 exchange rate of, 392 fiscal policy in, 237 global recession and, 223 government investment in, 152 sources of growth in, 169 trade sanctions on, 364 trade with, 379 Chump problem, 646 Cigarette prices, teenagers and, 416 417 Cigarette taxes, 453 Circular flow of production and income, 99 100, 108 Civic externalities, 649 Clark, Andrew E., 129 Clark, Gregory, 145, 174 Classical economics, 324 325 Classical models, 140 Clayton Act, 610, 612 Climate change See Global warming Clinton, Bill, 98, 209, 218, 236, 453 Clinton administration, fiscal policy during, 218 Clock towers, 647 Closed economy, 153 crowding out in, 152 153 Clothing, 566 Coase bargaining, 663 664 Cobblers, 558 Coca-Cola, 546 Cole, Harold L., 151 Collective bargaining, 706 College degree benefits of, 173 higher wages and, 681, 693 694 opportunity cost of, 29 30 College facilities rental, marginal principle and, 35 36 Collins, Susan, 169 Command-and-control policy, 668 669 Committees, effectiveness of, 305 Commodity money, 274 Comparative advantage, 51 vs absolute advantage, 52 exchange and, 50 53 international trade and, 53 54 terms of trade and, 367 Competition among second- and third-largest firms, 611 brand, 561 imperfect, 59 in market economy, 60 monopolistic, 516, 559, 562 565 perfect, 514 533 pricing and, 608 spatial, 563 565 unfair, 374 Complements, 68, 77, 78 Computer software, pirated, 172 Concentration ratios, 575 Concorde, 374 Congressional Budget Office, 210 211, 349 Constant-cost industry, 531 long-run supply for, 531 533 Constant returns to scale, 502 Constrained discretion, 356 Consumer choice, 462 468, 471, 480 branding and, 472 free goods and, 472 Consumer confidence, autonomous consumption and, 228 229 Consumer constraints, 464 465, 477 478 Consumer groups, 549 Consumer markets, measuring price stickiness in, 188 Consumer preferences indifference curves, 478 480 shifts in, 77, 79 Consumer Price Index (CPI), 130 vs chain index for GDP, 130 131 components of, 131 cost-of-living adjustments and, 132 Consumer products, information about, 59 60 Consumer satisfaction scores, 623 Consumer search economics of, 632 636 marginal principle and, 632 634 opportunity cost and, 635 636 prices and, 635 636 reservation prices and searching strategy, 634 635 Consumer services, asymmetric information and, 623 Consumer spending falling home prices and, 229 income and, 227, 240 Consumer surplus, 439 demand curve and, 439 440 Consumer wealth, autonomous consumption and, 228 Consumption autonomous, 227 consumer, 240 inequality, trade, and, 379 Consumption expenditures, 102, 103, 152 Consumption function, 192, 227 229 changes in, 227 229 equilibrium output and, 229 234 tax rate and, 239 Consumption possibilities curve, 367 368 Consumption taxes, 358 361 Contestable markets, 591 Continuity, 53 Contractionary policies, 207, 316 Contracts, 55 Convergence, 163 Coordination problems, 504 Copper supply, 529 Corporate bonds, 259 260, 262 Corporate mergers See Mergers Corporate taxes, 213 Costa Rica, GNI per capital, 162 Cost curves, long-run, 505 506 Cost of living, 130 Cost-of-living adjustments (COLAs), 132 Costs accounting, 495 average, 498 502, 505 506, 566 economic, 494, 495 entry, 525 explicit, 494 fixed, 497, 499, 522 implicit, 494 input, 504 labor, 682 long-run, 501 506 marginal, 33, 499 501, 503 menu, 134 opportunity See Opportunity cost shoe-leather, 134 short-run, 495 502 sunk, 522 total, 496 498, 502 variable, 496, 520 522 Cost savings, from outsourcing, 54 Council of Economic Advisors, 219 Counterfeiters, 272 Coupons, 549 Craft union, 706 Creative destruction, 172 Credit cards, 276 277 Crime externalities, 649 Crop insurance, 631 733 734 IN D E X Crop yields, fertilizer and, 39 Cross-price elasticity of demand, 422 423 Crowding in, 154 Crowding out, 152 in closed economy, 152 153 increasing health-care expenditures and, 323 in long run, 322 324 in open economy, 153 154 Cruise ship berths, supply and demand of, 88 89 Culture, economic growth and, 174 Currency appreciation, 304, 386 387 demand and supply of, 387 390 depreciation, 303 304, 386 387 devaluation, 400 Federal Reserve and supply of, 281 revaluation, 400 Currency markets, 385 386 Current account, 393, 394 395 Current account deficit, 396 397 Curves See also Demand curve; Production possibilities curve; Supply curve consumption possibilities, 367 368 expectations Phillips, 332 334 indifference, 478 480, 484 Laffer, 213 214 moving along vs shifting, 20 21 nonlinear, 22 23 slope of, 19 supply, 69 73 total-product, 496 Custom duties, 213 Custom prices, 186 Cyclical unemployment, 126, 140, 146 D Deadweight loss, 444 445, 447, 453 454 Deadweight loss from monopoly, 544 546 Deadweight loss from taxation, 456 DeBeers, 584 Debit cards, 277 Decision making by committees, 305 in market economy, 55 56 simultaneous, 585 587 using microeconomics for, 12 Deflation, 42, 133 134 Dell, Melissa, 162 DeLong, Brad, 164 Demand, 66 See also Aggregate demand aggregate, 188 195 change in, 75 76 changes in, and aggregate demand curve, 191 192 currency, 387 390 derived, 682 elastic, 412, 417 418, 452 excess, 74 75 increases in, 76 78 inelastic, 412, 417 418, 452 for labor, 682 685 labor, wages and, 143 145 law of, 66 68, 67, 410 for leisure, 686 market effects of changes in, 75 79 for money, 292 294 perfectly elastic, 412 perfectly inelastic, 412 for pollution permits, 672 673 price elasticity of, 410 416 prices and, 468 471 short-run determination of output by, 187 188 simultaneous changes in supply and, 84 86 unit elastic, 412, 418 Demand and supply model, 86 90 Demand changes long-run response to, 529 531 price effects of, 427 429 short-run response to, 529, 530 Demand curve, 66 69 See also Aggregate demand curve (AD) consumer surplus and, 439 440 decreases in, 78 79 firm-specific, 515 516 individual, 67, 468 471, 484 488 labor, 143, 147 law of demand and, 66 68 long-run demand curve for labor, 685 marginal-revenue curve and, 540 market, 68 69 movement along, 68 negatively sloped, 484 486 points on, 470 price elasticity and, 412, 413, 420 422 shifts in, 76 79 short-run demand curve for labor, 684 Demand deposits, 275 Demand increase long-run response to, 529 531 short-run response to, 529, 530 Demand policies, 316 Demand schedule, 66 67 Demographics, 335 Denison, Edward, 168 Deposit accounts, 275 Deposit creation formula, 290 Deposit insurance, 266, 630 Depreciation, 103 as function of stock of capital, 181 saving, capital deepening and, 180 183 Depreciation of a currency, 303 304, 386 387 Depression, 113, 224 Deregulation of airlines, 612 of electricity, 613 614 of telecommunication services, 612 613 of trucking, 709 Derived demand, 682 Devaluation, 400 Developing countries economic growth in, 163 164 knowledge accumulation in, 173 lack of incentives for growth in, 176 price structures in, 161 property rights in, 175, 176 Diamonds, price fixing of, 584 Differentiation advertising and, 568 569 by location, 563 565 product, 562 563 Diminishing marginal returns, 142 Diminishing returns, 39, 40, 496 Diminishing returns principle, 39 40, 142, 166, 180, 496, 683 Disability insurance, unemployment and, 125 Discount rate, 296 297 Discounts, 549 550 Discouraged workers, 123 124 Discovered price, 632 Discretionary spending, 211 Diseconomies of scale, 504 Disposable income, 694, 695 Division of labor, exchange and, 52 53 Doha trade negotiations, 375 Dollars See U.S dollar Dolphins, tuna fishing and, 377 378 Domestic industries helping, with protectionist policies, 373 374 protection of, 54, 448 450 Dominant strategy, 579 Dominican Republic-Central America Free Trade Agreement (DR-CAFTA), 375 Double coincidence of wants, 273 Driving speed, marginal principle and, 37 Dumping, 376 377 Dunkin Donuts, 565 Duopolists dilemma, 579 580 overcoming, 580 584 Duopoly, 576 E Earnings, retained, 261 Earnings gap, 690 694 Earthquakes, price of paper and, 65 Easterly, William, 176 eBay, 623 Economic profit, 520 Econometric models, 210 Economic analysis of government intervention in efficient markets, 443 444 problem solving and, Economic boom, returning to full employment after, 315 Economic cost, 494, 495 Economic fluctuations, 186 lags and, 208 210 technology and, 148 151 using macroeconomics to understand, 11 12 Economic growth, 101, 159 160 in Africa, 158 capital deepening and, 164 167 culture, evolution, and, 174 in developing countries, 163 164 global warming and, 162 inequality and, 164 international comparisons of, 161 162 measuring, 160 161 new growth theory and, 174 175 vs per capita income, 163 property rights and, 175, 176 rates, 159 164 role of government in, 175 176 role of political factors in, 173 sources of, 169 technological progress and, 168 171, 180 183 using macroeconomics to understand, 11 Economic models, classical models, 140 to determine causes of recessions, 198 econometric, 210 Economic policy debates over, 347 361 speed of adjustment and, 315 317 using, to fight recession, 316 317 Economic principles, 30 See also Diminishing returns principle; Marginal principle; Opportunity cost; Real-nominal principle; Voluntary exchange principle Economic profit, 494 Economic questions, I N DE X Economic recovery interest rates and, 300 after recession, 314 315 Economics, 1, classical, 324 325 public-choice, 651 655 supply-side, 213 214, 218 Economic stability, 240 241 Economic uncertainty, 60, 210, 255 Economic way of thinking elements of, example, 11 Economic well-being, 97 Economies of scale, 502 503, 504 Economy boom, 200 201, 315 centrally planned, 55 in short run, 200 201, 224 Edison, Thomas, Education, 172 176 external benefits from, 648 649 Efficiency, 1, 438 invisible hand and, 443 licensing and, 447 448 market equilibrium and, 441 444 Efficiency wages, 715 717 Elastic demand, 412, 417 418, 452 Elasticities computing, 411 412 market vs brand, 418 419 predicting changes in equilibrium price using, 427 431 Elasticity of demand See also Price elasticity of demand along linear demand curve, 420 421 cross-price, 422 423 estimates of, 423 for gasoline, 415 416 income, 422 price, 410 416 price discrimination and, 551 for vanity plates, 419 Elections, 318 Electric generators, price fixing and, 583 Electricity, deregulation of, 613 614 Electronic products, cost components of, 506 E-mail, spam, 10 Emigration, 139 Employment free trade and, 368 369 part-time, 124 trade-off between wages and, 708, 709 Employment taxes, 644 labor demand and supply and, 147 148 Energy prices, investment spending and, 255 Entitlement and mandatory spending, 211 Entitlement programs, 211, 212 Entrepreneurs, role of, 56 57 Entrepreneurship, 2, Entry barriers, 539 Entry costs, 525 Entry deterrence, 588 592 contestable markets and, 591 examples of, 590 591 limit pricing and, 589 590 passive approach to, 588, 591 592 Environment, GDP and, 115 Environmental protection, trade laws and, 377 378 Equations, using, to compute missing values, 25 Equilibrium with all high-cost consumers, 626 628 with all low-quality goods, 619 620 labor market, 143 144, 145 147, 688 690 long-run, 201, 563, 564 market, 438 in money market, 297 298 Nash, 580 of price-fixing game, 579 580 short-run, 201 with some high-quality goods, 620 622 Equilibrium output, 224 225 adjusting to, 225 227 consumption function and, 229 234 determining, 226 formulas for, 249 252 in open economy, 241 242 saving and investment and, 231 232 Equilibrium price decrease in demand and, 78 79 decrease in supply and, 83 84 increase in demand and, 77 78 increase in supply and, 82 83 for pollution permits, 672 predicting changes in, using elasticity s, 427 431 simultaneous changes in demand and supply and, 84 86, 88 89 total surplus and, 441 443 Equilibrium quantity, simultaneous changes in demand and supply and, 84 86 Equilibrium wage, 691 Equimarginal rule, 465 467 Escalators, marginal principle and, 36 Estate taxes, 213 Euro, 386, 387 390, 402 European Climate Exchange, 660, 673 Europeans, work hours of, 149 European Union (EU), 375 Evolution, economic growth and, 174 Excess burden of a tax, 456 Excess demand, 74 75 Excess reserves, 278, 280 Excess supply, 75 Exchange comparative advantage and, 50 53 division of labor and, 52 53 rules of, government enforcement of, 59 60 Exchange rate, 303 304, 386 appreciation, 397 current systems of, 401 402 depreciation, 397 398 determination of, 386 390 fixed, 397 401 flexible, 399 401 net exports and, 391 real, 390 393 Excise taxes, 213 Expansion, 111, 501 503 Expansionary policies, 207, 219, 316 Expectations of inflation, 330 Expectations Phillips curve, 332 333, 334 Expected real interest rate, 259 Expenditures, planned, 225 Experience rating, 628 Explicit cost, 494 Exports, 53, 104 in income-expenditure model, 241 243 net, 102, 104, 152 External benefits, 644, 645 across international borders, 648 from education, 648 649 marginal principle and, 649 650 private goods with, 648 651 public goods and, 645 648 735 External cost of production, 664 External costs from automobiles, 673 675 Coase bargaining and, 663 664 from collisions, 676 from congestion, 675 676 of pollution, 661 664 regulation of, 668 670 of young drivers, 675 Externalities negative, 58 59 network, 539 F Fackler, Jack, 198 Factors of production, Family type, poverty and, 697 Fannie Mae, 265, 267, 268 Featherbedding, 708 Federal budget, 210 216 See also Budget deficit debate over balancing, 348 354 recent history of, 348 350 Federal deficit, 214 216 Federal Deposit Insurance Corporation (FDIC), 630 Federal funds market, 296 297 Federal funds rate, 297, 306 307, 317 Federal government, 644 See also Government revenue sources for, 644 645 spending by, 644 Federal Open Market Committee (FOMC), 283 Federal Reserve functions of, 281 282 housing boom and, 356 independence of, 283 284 inflation and, 337 338 inflation targeting by, 355 358 interest rates and, 298, 300, 301 market expectations and, 306 307 monetary policy and, 282, 283, 291 307 money supply and, 294 297 open market operations of, 295, 300 response by, in financial crisis, 284 285, 296 structure of, 282 283 tools of, 295 297 Federal Reserve Banks, 282 283 Federal Reserve float, 284 Federal Reserve System, 281 Federal revenues, 212 213 Federal spending, 210 212, 220 Federal Trade Commission (FTC), 606, 607 Federal Trade Commission Act, 610 Feldstein, Martin, 148 Female-headed households, 697 Fertilizer, crop yields and, 39 Fiat money, 274 275 Final goods and services, 100 Finance, investment and, 253 Financial account, 394 396 Financial crises of 2008 2009, 267, 285, 329, 402 economic view of, management of, 402 405 response of Federal Reserve to, 284 285, 296 Financial intermediaries, 263 268, 264 Financial panics, 281 Firm-specific demand curve, 515 516 Fiscal imbalances, long-term, of U.S., 353 Fiscal multipliers, 207 208, 234 238 736 IN D E X Fiscal policy, 206 aggregate demand and, 206 207 automatic stabilizers, 215, 238 241 contractionary policies, 207 expansionary, 219 expansionary policies, 207 federal deficit and, 214 215 Keynesian, 234, 236 237 lags and, 208 210 role of, 206 210 stabilization policies, 208 210 in U.S history, 216 220 Fiscal stimulus, 205, 219, 237 Fiscal-year basis, 210 Fischer, Stanley, 163 Fitoussi, Jean-Paul, 97 Fixed costs, 497, 499, 522 Fixed exchange rates, 397 401 Fixed exchange rate system, 399 Fixed production facility, 495 502 Flat tax, 360 361 Flexible exchange rate system, 399 401 Flexible prices, 186 187 Ford, Henry, 717 Forecasting, economic uncertainties, 210 Foreign competition, workers and, 373 Foreign demand, affect on output of, 242 Foreign exchange market intervention, 398 399 Foreign producers, dumping by, 376 377 France GNI per capital, 161 government consumption in, 152 Franchises, 565 Freddie Mac, 265, 267, 268 Free goods, 472, 484 Free rider, 645 Free-rider problem, 645 646 Free trade, 172, 364, 365 dumping and, 376 377 employment and, 368 369 reasons for protests against, 380 Frictional unemployment, 126 127, 140 Friedman, Milton, 316, 332, 343 Full employment, 127, 140, 186 dividing output among competing demands for GDP at, 151 155 labor market equilibrium and, 145 147 opportunity cost of increased government spending at, 153 returning to, after recession, 314 315 returning to, from a boom, 315 wage and price changes and, 313 319 Full-employment model, 140, 147 151 Full-employment output, 146*147 Furniture manufacture, 685 G Galor, Oded, 174 Game theory, 575 Game tree, 578 579, 590, 593 Garden-seed market, 58 Gasoline elasticity of demand for, 415 416 tax on, 470 471, 488, 674 675, 676 GATT See General Agreement on Tariffs and Trade (GATT) GDP See Gross domestic product GDP deflator, 110 111 Gender pay gap, 691 692 General Agreement on Tariffs and Trade (GATT), 375 Generic advertising, 594 Generic drugs, 548, 591 Genetically modified crops, 378 Germany central bank of, 338 government investment in, 152 U.S dollar and, 400 401 Gift taxes, 213 Global economy, 53 54 Global recession, 97, 223 Global warming cap-and-trade system for, 660 carbon tax and, 667 economic growth and, 162 Global weather observation, 648 GNP See Gross national product Gokhale, Jagadeesh, 353 Gold prices, inflation and, 329 Gold standard, 274 Good additives, 584 Goods basket of, 130 bundling, 467 468, 482 483 complement, 77 complementary, 78 free, 472, 484 inferior, 77, 78 intermediate, 100 nondurable, 379 normal, 76, 78 private, 645 public, 59, 645 648 substitute, 77, 78, 412 414, 468 Gordon, Robert J., 170 171 Got Milk? campaign, 594 Government alternative models of, 654 capital deepening and, 167 enforcement of rules of exchange by, 59 60 levels of, 644 revenue sources for, 644 645 role of, in market economy, 59 60, 175 176 size of, 352 353 Government bonds, 214 Government debt, 211 212, 329, 348 See also Budget deficit as burden on future generations, 350 351 international comparisons of, 352 as percentage of GDP, 349 350, 352 Government intervention in efficient markets, 443 444 through import restrictions, 448 450 through price controls, 444 446 through quantity controls, 446 450 Government investment, 152, 167 Government purchases, 102, 103 104, 152, 153 Government regulations on business practices, 609 610 on natural monopoly, 603 605 on pollution, 668 670 Government spending in 2009 stimulus package, 205 aggregate demand and, 206 capital deepening and, 167 changes in, and aggregate demand curve, 191 crowding in and, 154 federal budget and, 210 212 GDP and, 233, 234 income-expenditure model and, 234 241 multiplier, 234 235, 251 U.S consumption and, during WWII, 153 U.S investment and, during WWII, 154 on welfare programs, 698 Government subsidies, 650 Graphs of negative relationships, 21 22 of nonlinear relationships, 22 23 of single variable, 15 17 of two variables, 17 19 using, 15 23 Great Depression, 113, 134, 186, 196 bank failures during, 266 city-issued money during, 276 fiscal policy during, 216 217 inside lag during, 209 labor market policies and, 151 unemployment during, 140, 185 Greece, hyperinflation in, 341 Greenspan, Alan, 291, 306 Grim-trigger strategy, 582 Gross domestic product (GDP), 100 affect of imports and exports on, 243 chain-weighted index for, 130 131 components of, 102 104 contributions to growth of real, 169 debt as percent of, 349 350, 352 dividing output among competing demands for, 151 155 fluctuations in, 111 113 GDP equation, 105 vs GNP, 106 government spending and, 233, 234 growth in, 159 growth rates of U.S., 1871 2009, 239 happiness and, 114 historical U.S price index for, 133 interest rates and, 301 303 investment spending as share of U.S., 255 as measure of welfare, 113 115 measuring macroeconomic activity using, 100 105 measuring real vs nominal, 109 110 money demand and, 292 293 nominal, 101, 108 111 real, 101, 102, 108 111 real, per capita, 160 real exchange rates and net exports as percentage of, 391 research and development as percentage of, 171 shortcomings in, 113 115 Gross investment, 103 Gross national income, international comparisons of, 161 162 Gross national product (GNP), 106 real, 161 Group insurance, 628 Growth accounting, 168 171 Growth rate, 160 international comparisons of, 161 162 vs per capita income, 163 Growth version of the quantity equation, 340 341 Guarantees, 623 H Hall, Robert E., 323, 360 Happiness GDP and, 114 unemployment, social norms, and, 129 Hardback books, 551 552 Hart-Scott-Rodino Act, 610, 612 I N DE X Hayek, Friedrich, 55 Health-care expenditures, crowding out and, 323 Health insurance, 626, 628 629 Heat-sensing vending machines, 552 Heller, Walter, 217 Herfinfahl-Hirschman Index (HHI), 575 576 Heston, Alan, 161 Highway deaths, beer prices and, 416 H.J Heinz Company, 611 Home prices, 229 Homes, underwater, 265 Honeybees, price of ice cream and, 87 88 Hong Kong economic growth in, 175 government consumption in, 152 Hoover, Herbert, 151, 217 Horizontal mergers, 607 Hormone-treated beef, 378 Houses prices, Hurricane Katrina and, 87 Housework, GDP and, 113 Housing boom, 356 Housing cycle, 531 Housing market, 253 Housing prices fall in, 253, 266 267, 291 in Japan, 161 Human capital, 2, 159, 172 173 Human capital theory, 173 174 Hungary, hyperinflation in, 341, 343 Hurricane Andrew, price of ice and, 532 533 Hurricane Katrina, housing prices and, 87 Hyperinflation, 135, 341 343 I Ice cream prices, honeybee population and, 87 88 Ice prices, Hurricane Andrew and, 532 533 Illiquid, 293 Immigration, 139, 690 Imperfect competition, 59 Imperfect information, 59, 715 717 Implicit cost, 494 Import bans, 369 370 Import licenses, 370 371 Import quotas, 370 Import restrictions, 448 450 Imports, 53, 104, 241 243 Incentives, 9, 176 Income, 98 99 circular flow of, 99 100 consumer spending and, 227, 240 cross-price elasticities and, 423 decrease in, 77, 78 differences in, 690 694 disposable, 694, 695 increase in, 76, 78 market, 694, 695 national, 105 108 per capita, 161 162, 163 permanent, 218 personal, 106 personal disposable, 106 Income distribution, 694 697 changes in top end of, 1920 2002, 696 697 facts about, 694 695 recent changes in, 695 696 Income effect, 469 470, 485 489, 686 687 Income effect for leisure demand, 686 Income elasticity of demand, 422 Income-expenditure model, 224 227 aggregate demand curve and, 243 245 automatic stabilizers in, 238 241 consumption function in, 227 234 equilibrium output in, 229 234 exports and imports in, 241 243 government spending and taxation in, 234 241 multiplier in, 232 234 Income inequality, outsourcing and trade and, 379 380 Income tax, 212 213, 239, 644 Increasing-cost industry, 526 examples of, 528, 529 long-run supply curve for, 526 528 India central bank of, 282 economic growth in, 163, 242 per capita output in, 167 price structures in, 161 sources of growth in, 169 Indifference curve map, 480 Indifference curves, 478 480, 479, 484 Individual demand curve, 67, 468 471, 484 488 Individual supply curve, 69 70, 71 Indivisible inputs, 503, 507 Induced innovation, 172 Industrial diamonds, price fixing of, 584 Industrial Revolution, 173, 174, 605 Industrial union, 706 Industry size, production costs and, 526 527 Inefficiencies, Inelastic demand, 412, 417 418, 452 Inelastic supply, 424 Inequality economic growth and, 164 international trade and, 379 Infant industries, 373 Inferior good, 77, 78 Inflation, 98, 132 134, 261, 401 anticipated, 134 135 budget deficits and, 350 costs of, 134 135 credibility of central bank and, 337 339 effect on real minimum wage, 41 expectations of, 330 gold prices and, 329 hyperinflation, 341 343 public expectations about, 333 334 repayment of student loans and, 42 in steady state, 330 331 unanticipated, 134, 135 unemployment and, 332 336 U.S., and unemployment in 1980s, 334 335 velocity of money and, 339 341 Inflation expectations central banks and, 337 339 interest rates and, 330 331 money demand and, 331 Inflation rate, 132, 133, 134 Inflation targeting, by Fed, 355 358 Information about consumer products, 59 60 asymmetric, 618 622 buyers invest in, 622 623 imperfect, 59, 715 717 role of, in markets, 618 Information goods, cost structure for, 508 509 Information technology, growth accounting and, 170 171 Innovation, 53 incentives for, 547 548 induced, 172 monopolies and, 172 production costs and, 509 737 Input costs, 504 Input prices, 187, 197, 526 Input-substitution effect, 685, 707 Inside lags, 208 210, 305 306 Insourcing, 54 Institutional changes, 335 Institutions, economic growth and, 175 Insurance, 55, 60 adverse selection and, 626 629, 631 asymmetric information and, 626 629 automobile, 676 car, 631, 632 crop, 631 deposit, 266, 630 disability, 125 group, 628 health, 626, 628 629 moral hazard and, 629 632 risk and, 264 265, 617 unemployment, 128 Insurance companies, 630 Intellectual property rights, 172 Interest, net, 211 212 Interest rate effect, 190 Interest rates approaching zero, 319 bond prices and, 298 301 on corporate and government investment, 2002 2008, 259 determination of, 297 301 economic recovery and, 300 GDP and, 301 303 inflation and, 330 331 investment and, 260 261, 301 303 on long-term bonds, 306 307 monetary policy and, 302 money demand and, 292 293 nominal, 258 260, 261, 319, 331 present value and, 256 257 real, 258 260, 261 Intermediate goods, 100 International comparisons of government debt, 352 of growth rate, 161 162 International Financial Statistics, 152 International Monetary Fund, 152, 161, 404 International trade, 365 See also Free trade; Trade comparative advantage and, 53 54 income distribution and, 696 income-expenditure model and, 241 243 inequality and, 379 monetary policy and, 303 304 International trade effect, 190 Internet file sharing, 467 468 Interstate Bakeries, 608 609 Inventions, patents on, 55 Inventory cycle, 241 Inventory management, 241 Investment, 152, 240 241, 254 256 finance and, 253 financial intermediaries and, 263 268 government, 152 gross, 103 interest rates and, 260 261, 301 303 multiplier and, 232 234 neoclassical theory, 261 net, 103, 166 present value and, 260 private, 103 Q-theory of, 262 saving and, 165 166, 231 232 stock market and, 261 263 738 IN D E X Investment decisions, 260 263 Investment spending accelerator theory of, 254 energy prices and, 255 money market and, 301 multiple-accelerator model, 256 procyclical, 254 real interest rates and, 261 as share of U.S GDP, 255 Investors, 254, 263 Invisible hand, 56, 443 iPod, 360 361 iPod Shuffle, Iraq invasion of Kuwait by, 306 war in, 349 Italy, GNI per capital, 161 iTunes, 462, 467 468, 482 483 J Japan economic growth in, 162 financial crisis in, 266 GNI per capital, 161, 162 government spending in, 237 238 housing prices in, 161 recession in, 236 237 work hours in, 149 Job loss, from outsourcing, 54 Johnson, Lyndon, 217 Jones, Benjamin, 162 Jones, Charles I., 323 Jorgenson, Dale, 171, 261 K Kashyap, Anil, 188 Kennedy, John F., 217 Kennedy administration, fiscal policy during, 217 Keynes, John Maynard, 186, 192, 196, 224, 237 classical economics and, 324 325 on economic stabilization, 317 influence of, 238 on investment spending, 254 Keynesian cross, 224 Keynesian fiscal policy, 234, 236 237 Kinked demand curve model, 584 585 Kiwifruit market, 624 625 Klenow, Peter, 188 Knights of Labor, 706 Knowledgeable sellers, 618 619 Knowledgeable buyers, 626 628 Knowledge accumulation, 172 173 Korean VCRs, price discrimination and, 377 Kuwait, Iraqi invasion of, 306 Kuznets, Simon, 164 L Labor, 2, 141 child, 162 division of, and exchange, 52 53 marginal benefit of, 682 684 marginal cost of, 711 marginal product of, 495, 683 relationship between output and, 141 142 skilled, 380 taxes and demand and supply for, 147 148 unskilled, 380 wages and demand and supply for, 143 145 Labor costs, 682 Labor demand, 682 685 by individual firm in short run, 682 684 labor market equilibrium and, 688 690 in long run, 685 marginal principle and, 682 market, in short run, 684 market effect of increase in, 689 short-run vs long-run, 685 Labor demand curve, 143, 147 long-run, 685 short-run, 684 Labor force, 121, 122, 123 Labor force participation rate, 121 Labor Management Relations Act, 707 Labor Management Reporting and Disclosure Act, 707 Labor market, equilibrium, 688 690 immigration of low-skilled workers and, 690 imperfect information and, 715 717 income and substitution effects in, 686 687 mixed, 715 716 output effect in, 707, 708 perfect competition in, 706 racial discrimination and, 699 Labor market equilibrium, 143 144 full employment and, 145 147 Labor market policies, Great Depression and, 151 Labor productivity, 170, 336 Labor specialization, 499, 503 504 Labor supply, 685 688 labor market equilibrium and, 688 690 marginal labor cost and, 711 Labor supply curve, 144, 147 148, 685 688 positively sloped, 715 Labor unions, 706 effects of, on worker productivity and turnover, 708 710 history of U.S., 706 707 wages and, 707, 710 Laffer, Arthur, 213 Laffer curve, 213 214 Lags, 208 210, 305 306 Law firms, janitors wages in, 717 Law of demand, 67, 410 Law of diminishing marginal utility, 464 Law of one price, 393 Law of supply, 70, 528 Laws labor, 706 707 against price fixing, 583 584 Learning by doing, 373 Learning effect, 693 Lebergott, Stanley, 148 Lehman Brothers, 267, 285 Leisure, GDP and, 113 Leisure demand, 686 Lemons laws, 623 Lemons problem, 618 622 applications of, 624 625 evidence for, 622 responding to, 622 625 Lender of last resort, 281, 282 Leverage, 265 266 Liabilities, 277 Liberty ships, 373 Licensing, 446 448 Life expectancy, entitlement programs and, 212 Limit price, 590 Limit pricing, 589 590 Lincoln, Abraham, 53 Linear demand curve, price elasticity along, 420 421 Liquid, 263 Liquidity demand for money, 293 Liquidity traps, 317, 319 Living standards, 1, 130 Black Death and, 145 differences in, 159 growth in GDP and, 159 trade and, 379 Loan repayment, effect of inflation and deflation on, 42 Local government, 644 revenue sources for, 644 645 spending by, 644 Local telephone service, 613 Locomotive effect, 242 LoJack, 650 Long-distance phone service, 613 Long run crowding out in, 322 324 labor demand in, 685 neutrality of money in, 320 322 production costs in, 501 506 Long-run aggregate supply curve, 195 196, 314 Long-run average cost (LAC), 502, 505 506 Long-run average-cost curves, 505 506 Long-run demand curve for labor, 685 Long-run equilibrium, 201 in monopolistic competition, 563, 564 with spatial competition, 564 Long run in macroeconomics, 312 Long-run marginal cost (LMC), 503 Long-run market supply curve, 526 528 Long-run neutrality of money, 320 322 Long-run supply, for constant cost industry, 531 533 Long-run supply curve, 531 532 Long-run supply elasticity, 425 426 Long-run total cost (LTC), 502 Lottery winners, present value and, 258 Low-price guarantees, 580 582 Low-skilled workers immigration of, 690 wage differentials and, 705, 717 Lucas, Robert E., 174, 333 Luxembourg, 161 Luxury boat tax, 453 M M1, 275, 279 M2, 275 276, 340 Macroeconomic activity measuring using gross domestic product, 100 105 measuring using national income, 105 108 Macroeconomic policy, debates over, 347 361 Macroeconomics, 11, 98 linking the short and long run in, 200 201, 312 313 short run in, 187 188 use of, 11 12 Malthus, Thomas, 145, 324 Mandatory spending, 211 Manning, Alan, 715 Manufacturers rebates, 549 Manufacturing firms concentration ratios in, 575 inventory management by, 241 Marginal approach, to determining output, 518 520 I N DE X Marginal benefit, 33, 634 of labor, 682 684 Marginal change, 8, 10 Marginal cost, 33 average cost and, 500 501 short-run, 499 500 Marginal labor cost, 711 Marginally attached workers, 123 124 Marginal principle, 33 37, 71, 144, 559, 602, 712 automobile emissions standards and, 36 consumer search and, 632 634 driving speed and, 37 external benefits and, 649 650 labor demand and, 682 movie sequels and, 34 35 output decisions and, 602 603 pollution and, 661 price discrimination and, 550 of renting facility, 35 36 using, 542 544 Marginal product of labor, 495, 683 Marginal propensity to consume (MPC), 192, 227, 233, 240 Marginal propensity to import, 241 Marginal propensity to save (MPS), 192, 231 Marginal rate of substitution (MRS), 479 480, 481 482 Marginal revenue, 518 520 formula for, 541 542 total revenue and, 540 541 Marginal-revenue curve, 540 Marginal-revenue product of labor (MRP), 683 684, 716 Marginal utility, 463 464 Marine hose, price fixing of, 583 Marketable pollution permits, 670 673 Market changes, predicting and explaining, 86 Market demand, for labor in short run, 684 Market demand curve, 68 69 Market economy, 55 Market economy risk in, 60 role of government in, 59 60, 175 176 Market effects of changes in demand, 75 79 of changes in supply, 79 86, 87 88 of gasoline tax, 674 675 of import restrictions, 448 450 of increase in labor demand, 689 of licensing, 447 448 of minimum wage, 689 690 of pollution regulation, 669 of pollution tax, 665 667 of simultaneous changes in demand and supply, 84 86 of taxes, 451 456 Market efficiency external costs and, 661 licensing and, 447 448 Market elasticity, 418 419 Market entry, 558, 559 effects of, 559 562, 567 examples of, 562 franchises and, 565 trade-offs with, 565 568 Market equilibrium, 73 75, 74, 438 efficiency and, 441 444 perfect competition and, 524 526 price controls and, 445 Market expectations, 306 307 Market failure, 58 Market income, 694, 695 Market power, 539, 549, 575 Markets, 2, 50, 55 58 See also Labor market applications of demand and supply model to, 86 90 of changes in demand, 87 development of, 57 58 emergence of, in POW camps, 57 58 government intervention in efficient, 443 444 perfectly competitive, 66, 72 role of entrepreneurs in, 56 57 role of information in, 618 scale of, 172 thin, 620 622 using microeconomics to understand, 12 virtues of, 55 56 voluntary exchange and, 37 38 Market structures, 515 516 Market supply curve, 71 73 long-run, 526 528 short-run, 524 slope of, 73, 529 Market supply curve for labor, 687 688 Mattel, 49 Maximum prices, 444 446 McMillin, Douglas, 198 Means-tested programs, 698 Median location, 653 654 Median-voter rule, 651 653, 655 Medicaid, 211, 212 Medicare, 211, 212, 213, 353 Medium of exchange, 273 274 Menu costs, 134 Merck, 591 Mercury, in tuna, 670 Mergers, 607 blocking, 607 608 horizontal, 607 prices and, 611 restrictions on, 608 609 vertical, 607 Merrill Lynch, 267 Methane, 663 Mexico financial crisis in, 402 404 GNI per capital, 162 Microeconomics, 12 13 Microsoft, 607, 610 Microsoft Windows, 590, 610 Military spending, opportunity cost of, 30 31 Milk prices, in short run and long run, 430 Mill, John Stuart, 324 Minimum efficient scale, 504 Minimum prices, 446 Minimum supply price, 71 Minimum wage, 187 inflation s effect on real, 41 market effects of, 689 690 monopsony and, 713 714 Mining industry, 529, 685 Mixed market, 618 Moav, Omer, 174 Mobile phones cost components of, 506 entry costs and, 525 taxes on, 455 Modigliani, Franco, 325 Monetarists, 343 Monetary policy, 281, 283 challenges, 304 307 contractionary, 316 expansionary, 316 Fed and, 291 307 housing boom and, 356 interest rates and, 302 international trade and, 303 304 lags in, 305 306 in long run, 321 in short run, 321 Monetary systems, types of, 274 275 Monetizing the deficit, 350 Money, 273 changes in growth rate of, and steady state, 331 332 city-issued, during Great Depression, 276 commodity, 274 creation of, by banks, 277 281 demand for, 292 294 fiat, 274 275 long-run neutrality of, 320 322 M1, 275, 279 M2, 275 276 measuring, in U.S economy, 275 277 as medium of exchange, 273 274 nominal value of, 42 properties of, 273 274 real-nominal principle and, 40 43 real value of, 42 as store of value, 274 velocity of, 339 341 Money-back guarantees, 623 Money demand GDP and, 293 294 inflation and, 331 interest rates and, 292 293, 297 301 other components of, 294 price level and, 293 transaction, 292 Money illusion, 330 Money market, 292 294 equilibrium in, 297 298 investment spending and, 301 Money multiplier, 279 281 Money supply aggregate demand and, 302 changes in, 190 Federal Reserve and supply of, 294 297 interest rates and, 297 301 Monopolies, 516, 539 antitrust policies and, 60, 606 612 breaking up, 606 607 deadweight loss of, 544 546 entry deterrence by, 588 592 helping domestic firms establish, in world markets, 373 374 innovation and, 172 vs monopsony, 713 natural, 539, 602 606 output decisions by, 539 544, 602 603 patents and, 547 549 vs perfect competition, 516, 545 profit maximization by, 542 544 public policy and, 547 rent seeking by, 546 social cost of, 544 547 value of, 547 Monopolistic competition, 516, 559, 562 565 advertising and, 568 569 differentiation by location and, 563 565 features of, 562 563 long-run equilibrium and, 563 739 740 IN D E X vs perfect competition, 566 568 trade-offs with, 565 568 Monopsony, 710 hiring decision for, 712 marginal labor cost and, 711 minimum wage and, 713 714 vs monopoly, 713 vs perfect competition, 713 in real world, 714 715 Monopsony power, 710 715 Moral hazard, 629 insurance and, 629 632 Mortgages, subprime, 267, 285, 291, 356 Movie advertising, 568 Movie popcorn, 538, 551 Movie sequels, marginal principle and, 34 35 Mozambique, Multilateral real exchange rate, 391 Multiple-accelerator model, 256 Multiplier effect, 243 Multiplier(s), 192 195, 207 208 balanced-budget, 236, 251 fiscal, 207 208, 234 238 formulas for, 249 252 government spending, 234 235, 251 in income-expenditure mode, 232 234 money, 279 281 tax, 235, 236, 251 using, 236 238 using long-term macro data to measure, 233 Music distribution, 584 Music piracy, 172, 467 468, 471, 482 483 Music videos, average cost of, 508 509 N Name brands, vs store brands, 561 Nash equilibrium, 580 National Atmospheric and Space Administration (NASA), 567 National Bureau of Economics Research (NBER), 112 113 National debt See Budget deficit; Government debt National income, 105 measuring, 105 106, 107 value added and, 107 National Industrial Recovery Act, 151 National Labor Relations Act, 706 707 National Labor Relations Board (NLRB), 706 707 Natural disasters, 148 Natural monopoly, 539, 602 606 examples of, 605 606 output decisions by, 602 603 price controls for, 603 604 regulation of, 603 605 Natural rate of unemployment, 127 128, 146, 335 336 Natural resources, Negative externalities, 58 59 Negative relationship, 19 graphing, 21 22 Neoclassical theory of investment, 261 Net exports, 102, 104, 152, 391 Net interest, 211 212 Net international investment position, 396 Net investment, 103, 166 Net national product (NNP), 106 Network externalities, 539 New Deal, 151 New growth theory, 174 175 New York Federal Reserve, 283 New Zealand, central bank of, 338, 357 Nicaragua, hyperinflation in, 342 NNP See Net national product (NNP) Nominal GDP, 101, 108 111 Nominal interest rate, 258 261, 319, 331 Nominal value, 42 Nominal wages, 330 Nondurable goods, 379 Nonlinear relationships, graphing, 22 23 Normal good, 76, 78 Normative analysis, North American Free Trade Agreement (NAFTA), 364, 375 Norway, 161 O Obama, Barack, 205 Obama administration, fiscal stimulus of, 205, 219, 237, 349 Obstfeld, Maurice, 163 Occupations, wages differences across, 690 691 Office Depot, 601, 608 Offshoring, 53 54 Ohanian, Lee E., 151 Oil prices, 148, 199 Okun, Arthur, 186 Oligopoly, 516, 575 576 advertising and, 592 594 pricing by, 576 580, 584 585 Olken, Benjamin, 162 Online games, market exchange and, 38 39 Open economy, 153 crowding out in, 153 equilibrium output in, 241 242 Open market operations, 295, 300 Open market purchases, 295 Open market sales, 295 Opportunity cost, 29, 50, 494 495 of college degree, 29 30 consumer search and, 635 636 crowding out and, 152 153 of holding money, 292 293 in market development, 57 of military spending, 30 31 production possibilities curve and, 31 33 productivity and, 50 of running a business, 32 Opportunity cost principle, 152, 216, 237, 256, 292, 351, 365, 494 Organ transplantation, 450 Oswald, Andrew, 114 Output determining long-run, 196 dividing among competing demands for GDP, at full employment, 151 155 equilibrium, 224 227 full-employment, 146 148 interest rates and, 301 303 marginal approach to determining, 518 520 potential, 146 148 reducing with indivisible inputs, 503 relationship between labor and, 141 142 short-run determination of, 187 188 short-run output decisions, 517 520 taxes and, 147 148 Output decisions, for monopoly, 539 544, 602 603 Output effect, 685, 707, 708 Output prices, labor demand and, 684 Outside lags, 208 210, 305 306 Outsourcing, 53 54, 379 380 Owitt, Peter, 175 Owner s equity, 277 Ozone pollution, 673 674 P Pager, Devah, 699 Pakistan economic growth in, 163 price structures in, 161 wireless phone service in, 525 Paperback books, 551 552 Paper prices, 65 Participatory institutions, 173 Part-time employment, 124 Patents, 55, 172, 539 expiration of, 548 as incentive for innovation, 547 548 monopolies and, 547 549 trade-offs from, 548 549 Patinkin, Don, 325 Paying efficiency wages, 716 717 Payoff matrix, 585, 586, 587 Peak, 111 Per capita incomes, 161 162, 163 Percentage changes computing, 23 25, 411 412 in equilibrium price, 429, 431 in price, 424 in quantity demanded, 416 in quantity supplied, 424, 427 Perfect competition, 514 533 effects of changes in demand in, 529 531 in labor market, 706 market equilibrium and, 524 526 monopolistic competition vs., 566 568 vs monopoly, 516, 545 monopsony vs., 713 short-run output decisions, 517 520 short-run supply curves and, 523 524 Perfectly competitive markets, 66, 72, 515 Perfectly elastic demand, 412 Perfectly elastic supply, 426 427 Perfectly inelastic demand, 412 Perfectly inelastic supply, 426 Permanent income, 218 Permits, 668 marketable pollution permits, 670 673 Personal disposable income, 106 Personal income, 106 Peru, lack of property rights in, 176 Pfizer, 591 Pharmaceutical industry, patents and, 548, 591 Phelps, Edmund, 332 Philippines, emigration from, 139 Phillips, A.W., 332 Physical attractiveness, wages and, 693 Physical capital, Pie graphs, 15 Piketty, Thomas, 164 Pinkovskiy, Maxis, 158 Piracy, 172, 467 468, 471, 482 483 Planned expenditures, 225 Point of diminishing return, 166 Political business cycles, 317 318 Political institutions, affect on economic growth of, 173 Political parties, 318 Pollution, 58 59 automobile, 673 674 GDP and, 115 I N DE X marketable permits for, 670 673 optimal level of, 661 664 regulation of, 668 670 taxing, 664 667 water, 662 Pollution tax, 664 667 Poor impact of tariffs on, 371 redistribution programs for, 698 Poor countries See Developing countries Population, decreases in, 79 Population growth, capital deepening and, 166 167 Population increases, 77 Positive analysis, Positive relationship, 19 Potential output, 146 147 taxes and, 147 148 Poverty, in Africa, 6, 158 public policy and, 697 700 Poverty rates, 697 698 Predatory pricing, 377, 609 610 Prescott, Edward, 149 Present value, 256 257 interest rates and, 256 257 lottery winners and, 258 Presidential elections, 318 Presidential popularity, economic conditions and, 98 Price ceiling, 75, 441 442 Price-change formula, 428 Price changes income and substitution effects of, 469 470, 485 489 response of producers to, 528 Price controls, for natural monopoly, 603 604 Price discrimination, 377, 549 553 conditions for, 549 discounts, 549 550 elasticity of demand and, 551 examples of, 551 553 marginal principle and, 550 senior discounts and, 550 551 Price effects of changes in demand, 427 429 of changes in supply, 429 431 Price elasticity of demand, 410 416 along linear demand curve, 420 422 availability of substitutes and, 412 414 demand curve and, 412 determinants of, 414 416 output effect and, 708 predicting changes in equilibrium price using, 427 429 predicting changes in quantity using, 416 417 predicting revenue effects of price changes using, 418 419 price discrimination and, 551 tax shifting and, 452 453 total revenue and, 417 419 Price elasticity of supply, 424 427 determinants of, 425 short-run vs long-run, 425 426 Price fixing, 577 578 equilibrium of, 579 580 examples of, 583 584 game tree and, 578 579 laws on, 583 584 simultaneous, 586 Price flexibility, full employment and, 140 Price floor, 75, 442 443 Price leadership, 584 Price level determining long-run, 196 money demand and, 292 293 Price makers, 515 Price ratio, 478 Prices adjustment over time in, 312 313 allocation of resources and, 450 auction, 186 break-even, 520, 523 change in supply and, 89 90 changes in demand and, 87 of complementary goods, 77 consumer search and, 635 636 controls on, 444 446 custom, 186 demand and, 468 471 demand schedule and, 66 67 effect of market entry on, 559 561 equilibrium, 77 79, 82 85 excess demand and, 74 75 excess supply and, 75 expectations of higher, 77 expectations of lower, 79 flexible, 186 187 full employment and, 313 319 import restrictions and, 448 450 inflation and, 132 134 input, 187, 197, 526 low-price guarantees and, 580 582 in market economy, 56 maximum, 444 446 mergers and, 611 minimum, 446 minimum supply price, 71 for pollution permits, 672 673 predatory, 377 problems in measuring changes in, 131 132 reactions to changes in, 90 reservation, 634 635 retail, 188 scarcity and, 56 shut-down, 521, 522 sticky, 186 187, 188 of substitutes, 77 supply schedule and, 69 tax cuts and, 455 trade and, 379 wages and, 312 313 Price taker, 515 Pricing average-cost, 604 cartel, 576 580, 583 competition and, 608 limit, 589 590 low-price guarantees and, 580 582 oligopoly, 584 585 predatory, 609 610 repeated pricing games, 582 583 voluntary, 552 553 Pricing strategies, 538 Prisoner of war (POW) camps, emergence of markets in, 57 58 Prisoners dilemma, 586 587 Private cost of production, 664 Private goods, 645, 648 651 Private investment expenditures, 102, 103 741 Problem solving, economic analysis and, Procyclical, 254 Producer surplus, 440 441 Product differentiation, 562 563 advertising for, 568 569 Production, 98 99 circular flow of, 99 100 diseconomies of scale in, 504 economies of scale in, 504 factors of, 2, 140 141 long-run costs, 501 506 marginal product and, 495 496 scale economies in, 507 508 scaling down, 503 504 short-run costs, 495 502 short-run output decisions, 517 520 Production costs applications of, 506 509 external, 661 indivisible inputs and, 507 industry size and, 526 527 long-run, 501 506 price elasticity of supply and, 425 short-run, 495 501 technological innovation and, 509 Production facilities, sharing, and diminishing returns, 40 Production function, 140 143, 141, 146 Production possibilities curve, 31, 365 367 economic growth and, 159 160 opportunity cost and, 31 33 scarcity and, 31 shifting the, 33 Productivity efficiency wages and, 716 increased, from specialization, 52 53 labor, 170 opportunity cost and, 50 Profit maximization, by monopoly, 542 544 Profits economic, 520 effect of market entry on, 560 561 Property crime, 419 Property rights, 175, 176 Property taxes, 644 Prosperity, Protectionist policies, 369 372 import bans, 369 370 import restrictions, 448 450 quotas, 370 371 rationales for, 372 374 responses to, 372 tariffs, 372 voluntary export restraints, 370 371 Protests, against free trade, 380 Public choice, 651 655 Public-choice economics, 651 655 median location and, 653 654 median-voter rule and, 651 653 Public goods, 59, 645 648 asteroid diversion as, 647 648 free-rider problem and, 645 646 global weather observation as, 648 Public policies monopoly and, 547 poverty and, 697 700 using microeconomics to evaluate, 13 Public schools, median voter and support for, 655 Public utility commissions (PUCs), 603 Pubs, labor-supply curve and, 715 Purchasing power parity, 393 742 IN D E X Q Q-theory of investment, 262 Quantities, controlling, 446 450 Quantity demanded, 66, 75 76 Quantity equation, 340 Quantity supplied, 69 Quotas import, 370 vs tariffs, 372 R Rabushka, Alvin, 360 Race, poverty and, 697 Racial discrimination labor market and, 699 wages and, 691 Radiohead, 552 553 Rational expectations, 333 334, 338 Reagan, Ronald, 98, 218, 334 Reagan administration, fiscal policy during, 218 Real business cycle theory, 148 151, 149 Real exchange rates, 390 393 Real GDP, 101, 102, 108 111 contributions to growth of, 169 fluctuations in growth of, 186 Real GDP per capita, 160 Real GNP, 161 Real interest rate, 258 261 Real minimum wage, 41 Real-nominal principle, 40 43, 101, 129 130, 189, 258, 292, 313, 319, 331, 390 Real value, 42 Real wages, 43, 143, 330 Rebates, 549 Recessions, 111 of 1990, 111 2007 2009, 205, 223 budget deficits and, 353 354 causes of, 198 comparing severity of, 112 economic recovery from, 300 economic view of current, reasons for, 185, 186 returning to full employment after, 314 315 since WWII, 111 112 using economic policy to fight, 316 317 Redistribution programs, 698 Redlick, Charles, 233 Rent control, 444 446 Rent seeking, 546 Repair guarantees, 623 Repetition, 52 Replication, 501 503 Required reserves, 278 Resale, 549 Research and development as percentage of GDP, 171 technological progress and, 171 172 Reservation price, 634 635 Reserve Bank of India, 282 Reserve ratio, 278, 279 Reserve requirements, 295 296 Reserves, 278, 282 Resources, scarcity of, Restaurant meals, 566 Retail prices, 188 Retained earnings, 261 Revaluation, 400 Revenue See also Total revenue marginal, 518 520 Ricardian equivalence, 351 352 Ricardo, David, 324 Rice prices, drought and, 90 Right-to-work laws, 707 Risk financial intermediaries and, 263 265 insurance and, 55, 60, 617 in market economy, 60 Robinson-Patman Act, 609, 610, 612 Rogoff, Kenneth, 163 Romalis, John, 379 Romer, Christina, 219 Romer, Paul, 174 Roosevelt, Franklin, 151, 216 217, 274 Rule of 70, 160 161 Rules of thumb approach, to predicting inflation, 333 Russia, hyperinflation in, 341 342 S Saez, Emmanuel, 164 Sales taxes, 358 361, 644 Sali-i-Martin, Xavier, 158 Samuelson, Paul, 332 Satellite radio, 605 606 Savers, 263 Saving, 165 166 consumption taxes and, 358 359 depreciation, capital deepening and, 180 183 as function of stock of capital, 181 increase in, 182 183 investment and, 231 232 Savings accounts, 276 Savings and loan crisis, 266, 630 Savings function, 231 Say, Jean-Baptiste, 324 Say s law, 324 325 Scale economies, 502 503, 507 508 Scale of the market, 172 Scarcity, prices and, 56 production possibilities curve and, 31 trade-offs and, Schmalensee, Richard, 590 Schumpeter, Joseph, 172 Search See Consumer search Search costs, 445 Seasonal unemployment, 126 Securitization, 265, 267 Seignorage, 342 343 Self-interest, 37, 56, 654 Self-sufficiency, 38, 50, 51 Sellers knowledgeable, 618 619 uninformed, 626 628 Sen, Amartya, 97 Senior discounts, 550 551 September 11, 2001, 218, 237, 284 Sherman Antitrust Act, 583, 610 Shirking, 717 Shoe-leather costs, 134 Shoe-repair firms, 558 Shoes, 566 Shortage, 74 75 Short run, labor demand in, 683 684 Short-run aggregate supply curve, 196 199, 314 Short-run average costs, 498 499, 506 Short-run average total cost (ATC), 499 Short-run costs, 495 502 Short-run demand curve for labor, 684 Short-run equilibrium, 201 Short run in macroeconomics, 187 188, 224, 312 Short-run marginal cost (MC), 499 500 Short-run market supply curve, 524 Short-run output decisions, 517 520 Short-run supply curves, 523 526 Short-run supply elasticity, 425 426 Short-run total costs, 496 498, 497 Shut-down decision, 520 522 Shut-down price, 521, 522 Signaling, 569 Signaling effect, 693 Simon, Herbert, 333 Simultaneous decision making, 585 587 Sirius Satellite radio, 605 606 Six-month treasuries, 259 Skilled labor, 380 Slope of aggregate demand curve, 189 190 of supply curve, 424, 425 Slope of a curve, 19, 71, 73 Smetters, Kent, 353 Smith, Adam, 9, 37, 52, 53, 56, 172 Smog, 673 674 Smoot-Hawley tariffs, 374 375 Social cost of production, 664 Social costs, of monopoly, 544 547 Social insurance taxes, 213 Social safety net, 60 Social Security, 211, 212, 213, 353 cost-of-living adjustments, 132 real-nominal principle and, 42 43 Soft drinks, tax on, 468 Solar power, 509 Solow, Robert, 168, 180, 332 Sovereign investment fund, 397 Spam, 10 Spangler Candy Company, 54 Spatial competition, 563 565 Special interest, 654 Specialization benefits of, 365 369 gains from trade and, 50 52 increased productivity and, 52 53 voluntary exchange and, 38 Speculative demand for money, 293 Spence, Michael, 618 Stabilization policies, 208 210, 316, 356 357 Stagflation, 199 200 Standard of living See Living standards Standard Oil Trust, 606 Staples, 601, 608 State government, 644 revenue sources for, 644 645 spending by, 644 Steady state growth rate of money and, 331 332 inflation in, 330 331 Sticky prices, 186 187, 188 Stiglitz, Joseph, 97, 404, 618 Stock market, investment and, 261 263 Stock of capital, 141, 142 143, 180 182, 254 Store brands, vs name brands, 561 Store of value, 274 Structural unemployment, 127, 140 Student discounts, 550 Student loans, inflation and cost of repaying, 42 Subprime mortgages, 267, 285, 291, 356 Sub-Saharan Africa, 1, 6, 176 I N DE X Subsidized firms, 374 Substitutes, 68, 77, 78 price elasticity and, 412 414 taxes and, 468 Substitution effect, 469 470, 485 489, 686 687 of gasoline tax, 470 471 of price increase, 471 Substitution effect for leisure demand, 686 Sugar industry, 528 Sugar prices, 54 Summers, Robert, 161 Sunk costs, 522 Supply aggregate, 195 200 of capital, 165 currency, 387 390 decrease in, and equilibrium price, 83 84 excess, 75 increase in, and equilibrium price, 82 83 inelastic, 424 of labor, 685 688 labor, wages and, 143 145 law of, 70, 528 long-run, 531 533 market effects of changes in, 79 86, 87 88 of money, 190 perfectly elastic, 426 427 perfectly inelastic, 426 of pollution permits, 672 673 price effects of changes in, 429 431 price elasticity of, 424 427 simultaneous changes in demand and, 84 86 Supply curve, 69 73 aggregate, 314 decreases in supply and shifts in, 83 downward shift in, 81 of firm, 523 524 increase in supply and shifts in, 81 82 individual, 69 70, 71 labor, 144, 147 148, 685 688 long-run, 531 532 long-run market, 526 528 market, 71 73 movement along, 70 producer surplus and, 440 441 rightward shift, 81 short-run, 523 526 short-run market, 524 slope of, 71, 73 Supply restrictions, housing cycle and, 531 Supply schedule, 69 Supply shocks, 199 200 Supply-side economics, 213 214, 218 Surplus, 75 consumer, 439 440 producer, 440 441 total, 441 Switzerland, central bank of, 338 T Taft-Harley Act, 707 Tangency condition, 481 Tariffs, 364, 372 history of, 374 375 impact of, on poor, 371 Tax burden, 453 454 Tax cuts during Bush administration, 218 219, 349 during Kennedy administration, 217 prices and, 455 Taxes 1996 2009, 220 aggregate demand and, 206 behavioral affects of, 455 burden of, 437 changes in, and aggregate demand curve, 191 cigarette, 453 congestion, 675 676 consumption, 358 361 corporate, 213 employment, 644 estate, 213 excise, 213 flat, 360 361 on gasoline, 470 471, 488, 674 675, 676 gift, 213 government investment and, 167 income, 212 213, 239, 644 income-expenditure model and, 234 241 luxury boat, 453 market effects of, 451 456 on mobile phones, 455 pollution, 664 667 potential output and, 147 148 property, 644 revenues from, 212 213 as revenue source, 644 645 sales, 358 361, 644 social insurance, 213 on soft drinks, 468 value-added, 360, 361, 455 withholding, 213 work hours and, 149 Taxi drivers, wage increases and, 687 Taxi medallions, 446 448 Tax multiplier, 235, 236, 251 Tax rates, 214, 239 240, 354 Tax rebates, 219 Tax revenues economy and, 214 tax rates and, 214 Tax shifting, 451 453 Tax system, 135 Taylor, John, 356 Teachers, unionization and, 710 Technological progress, 159 causes of, 171 175 economic growth and, 168 171, 180 183 income distribution and, 696 measuring, 168 169 new growth theory and, 174 175 production costs and, 509 Technology, economic fluctuations and, 148 151 Teenagers, cigarette prices and, 416 417 Telecommunications, deregulation of, 612 613 Telecommunications Act, 612 Temin, Peter, 198 Temporary Aid to Needy Families (TANF), 698 Terms of trade, 367 The General Theory of Employment, Interest, and Money (Keynes), 237, 238 Thin market, 620 622 Ticket prices, 574 Tie-in sale, 609 Time-series graph, 16 17 Tires, 562 Tit-for-tat strategy, 582 Tobacco land, 453 Tobin, James, 262 Total cost computing, 517 518 short-run, 496 498 743 Total market value, 100 Total-product curve, 496 Total revenue, 417 computing, 517 518 marginal revenue and, 540 541 price elasticity and, 417 419, 420 422 shut-down decision and, 520 522 Total surplus, 441 equilibrium price and, 441 443 Total utility, 463 464 Trade See also Free trade; International trade benefits of, 365 369 capital deepening and, 167 comparative advantage and terms of, 367 gains from, and specialization, 50 52 income inequality and, 379 380 inequality and, 379 international, comparative advantage and, 53 54 policy debates, 376 380 protectionist policies and, 369 374 Trade agreements, history of, 374 375 Trade balance, 105 Trade deficit, 104, 167, 396 397 Trade laws, environmental protection and, 377 378 Trade sanctions, 364 Trade surplus, 104 capital deepening and, 167 Traffic congestion, 675 676 economic view of, economic way of thinking about, 11 Transaction demand for money, 292 293 Transfer payments, 104, 694 Traveler s checks, 275 Treasury Department, 398 Treasury securities, 296 Trees, external benefits from, 651 Troubled Asset Relief Program (TARP), 267 268 Trough, 111 Truckers, unionized, 709 Trucking, 562 Truman, Harry S., 3, 347 Trusts, 606 Tuna, mercury in, 670 Tuna fishing, dolphins and, 377 378 Turnover, 717 Two-variable graphs, 17 19 U Unanticipated inflation, 134, 135 Underground economy, GDP and, 113 115 Underpricing, 582 583 Underwater homes, 265 Unemployed, 121 Unemployed individuals, 124 126 Unemployment, 98, 121 126 in 2007, 311 in 2009, 205, 219, 311 alternative measures of, 122 124 categories of, 126 128 costs of, 128 129 cyclical, 126, 140, 146 disability insurance and, 125 duration of, 128 129 frictional, 126 127, 140 during Great Depression, 140, 185 inflation and, 332 336 measurement of, 121 122 natural rate of, 127 128, 146, 335 336 prolonged, 311 744 IN D E X seasonal, 126 social norms, happiness, and, 129 statistics on, 125 structural, 127, 140 Unemployment insurance, 60, 128 Unemployment rate, 121 in 2010, 120, 122, 125 in developed countries, 122 exclusions from, 120 Unfair competition, 374 Uninformed buyers, 618 619 Uninformed sellers, 626 628 Uninsured, 628 629 Unions See Labor unions United Kingdom central bank of, 282, 284, 338 GNI per capital, 161 housing restrictions in, 531 inflation targeting in, 357 United States annual productivity growth, 1959 2007, 170 consumption and government spending during WWII in, 153 consumption of GDP in, 152 exchange rates in, 400 401 fiscal policy in, 216 220 GNI per capital, 161 growth rates of GDP, 1871 2009, 239 inflation and unemployment in 1980s, 334 335 investment and government spending during WWII in, 154 investment spending as share of GDP, 255 labor unions in, 706 707 long-term fiscal imbalances of, 353 net effect of immigration in, 690 net international investment position, 396 prosperity in, real GNP, 161 research and development funding in, 172 trade deficit of, 396 397 work hours in, 149 world trade and, 242 United States v Microsoft Corporation, 610 Unit elastic demand, 412, 418 Unit of account, 274 Unskilled labor, 380 U.S.-China currency tensions, 392 U.S dollar demand and supply of, 387 390 depreciation, 303 304 government intervention with price of, 398 399 U.S economy oil price fluctuations and, 199 world economy and, 242 Used car sales, 617, 618 622, 624 U.S Treasury bonds, 211, 259 Util, 463 Utility, 463, 479 marginal, 463 464 maximization, 480 484 total, 463 464 Utility companies, 603 604 Utility-maximizing rule, 481 482, 483 V Value added, 107 Value-added tax (VAT), 360, 361, 455 ValueStar, 623 Vanilla bean prices, 89 90 Vanity plates, 419 Variable costs, 497, 520 522 Variables, graphs of single, 15 17 graphs of two, 17 19 isolation of, 8, 10 negative relationships between, 21 22 nonlinear relationships between, 22 23 Variety, average cost and, 566 Velocity of money, 339 341 Vending machines, heat-sending, 552 Vertical intercept, 18 Vertical mergers, 607 Vietnam War era, fiscal policy during, 217 218 Virtual currency, 57 Volcker, Paul, 291, 334 Voluntary exchange principle, 37 39, 52, 274, 438, 445 marketable permits and, 670 671 markets and, 37 38 online games and, 38 39 specialization and, 38 Voluntary export restraint (VER), 370 Voluntary pricing, 552 553 Voter expectations, 318 Voting, 651 653 W Wachovia Bank, 267 Wage flexibility, full employment and, 140 Wage-price spiral, 313, 316 Wages above-market, 717 across occupation, 690 691 adjustment over time in, 312 313 attractiveness and, 693 college degree and, 681, 693 694 demand and supply for labor and, 143 145 differences in, 690 694 efficiency, 715 717 equilibrium, 691 full employment and, 313 319 gender gap in, 691 692 inequalities, and outsourcing, 379 380 labor unions and, 707, 710 in less-developed countries, 685 minimum, 187, 713 714 nominal, 330 prices and, 312 313 racial discrimination and, 691 real, 143, 330 real-nominal principle and, 43 sticky, 187 supply of labor and, 687 taxes and, 147 148 trade-off between jobs and, 708, 709 Wal-Mart, 107, 379 War on terror, 349 Warranties, 623 Wars, 148 Water pollution, 662 Water privatization, 605 Wealth, autonomous consumption and, 228 Wealth effect, 190, 229 Wealth of Nations (Smith), 52 Weather, pollution permits and, 673 Weather observation, as public good, 648 Weber, Max, 175 Welfare, GDP as measure of, 113 115 Welfare programs, 698 700 Welfare reform, 698 Willingness to accept, 440 Willingness to pay, 439, 538 Wind power, scale economies in, 507 508 Withholding taxes, 213 Wolfram miners, 528 Women, in labor force, 122, 123 Wonder Bread, 608 609 Wood pulp prices, 65 Workers discouraged, 123 124 effect of unions on productivity and turnover over, 708 710 foreign competition and, 373 marginally attached, 123 124 skilled, 380 unskilled, 380 U.S vs European, 149 Work hours, European, 149 Work incentives, welfare and, 699 700 Workplace externalities, 648 649 World Bank, 161, 175, 176 World of Warcraft (WoW), 57 World savings, 396 World Trade Organization (WTO), 375 X Xidex Corporation, 611 XM Satellite radio, 605 606 Z Zambia, economic growth in, 163 Zimbabwe, hyperinflation in, 343 ... 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