title author publisher isbn10 | asin print isbn13 ebook isbn13 language subject publication date lcc ddc subject cover next page > cover next page > : : : : : : : : : : : www.ebook3000.com < previous page page_i next page > Page i Economics Third Edition BUSINESS REVIEW BOOKS Walter J Wessels Professor of Economics Department of Economics and Business North Carolina State University < previous page page_i next page > < previous page page_ii next page > Page ii Copyright © 2000 by Barron's Educational Series, Inc Prior editions © Copyright 1993, 1987 by Barron's Educational Series, Inc All rights reserved No part of this book may be reproduced in any form by photostat, microfilm, xerography, or any other means, or incorporated into any information retrieval system, electronic or mechanical, without the written permission of the copyright owner All inquiries should be addressed to: Barron's Educational Series, Inc 250 Wireless Boulevard Hauppauge, New York 11788 http://www.barronseduc.com Library of Congress Catalog Card No 99-16326 International Standard Book No 0-7641-1274-0 Library of Congress Cataloging-in-Publication Data Wessels, Walter J Economics / Walter J Wessels.3rd ed p cm (Barron's business review series) Includes index ISBN 0-7641-1274-0 Economics I Title II Series HB171.5.W43 2000 330dc21 99-16326 CIP PRINTED IN THE UNITED STATES OF AMERICA 987654321 < previous page page_ii www.ebook3000.com next page > < previous page page_iii next page > Page iii CONTENTS Preface xiii Essentials of Economics What Is Economics All About? What Is Economics About? The Basis for Economics Scarcity Opportunity Cost Marginal Analysis KNOW THE CONCEPTS PRACTICAL APPLICATION ANSWERS How to Use Graphs in Economics Reading Graphs How Two Variables Are Related Plotting Graphs Measuring the Slope 1 2 10 12 13 15 18 18 19 20 21 22 KNOW THE CONCEPTS 23 PRACTICAL APPLICATION 25 ANSWERS Supply and Demand: Part One 30 30 How to Study Supply and Demand 31 Price 32 Demand and the Law of Demand 33 The Demand Curve 35 Supply and the Law of Supply 36 The Supply Curve 37 Market Equilibrium 40 Price Floors 41 Price Ceilings 41 Effects of Price Ceilings and Floors 43 On the Nature of the Price System 43 KNOW THE CONCEPTS 44 PRACTICAL APPLICATION 45 ANSWERS Supply and Demand: Part Two 48 www.ebook3000.com The Difference between Economic Shifts and Movements 49 Factors Shifting Demand 52 Factors Shifting Supply How to Avoid Mistakes in Analyzing Supply and Demand < previous page 48 page_iii 55 next page > < previous page page_iv next page > Page iv 56 KNOW THE CONCEPTS 57 PRACTICAL APPLICATION 60 ANSWERS Macroeconomics: Aggregate Supply and Demand Measuring National Output 63 63 Introduction 64 Basic Premises 65 The Circular Flow of Income 65 Measuring GDP 69 GDP and National Welfare 70 National Income Accounting Formulas 71 Applying the National Income Premises 73 KNOW THE CONCEPTS 74 PRACTICAL APPLICATION 76 ANSWERS Inflation and Unemployment 78 78 Measuring Inflation 80 The Three Main Price Indexes www.ebook3000.com Problems with Price Indexes The Meaning of Inflation How Inflation Affects Real Income The Economic Costs of Inflation Measuring Unemployment The Effect of Recession The Types of Costs of Unemployment KNOW THE CONCEPTS PRACTICAL APPLICATION ANSWERS Introduction to Macroeconomics: Output, Growth, and Capital What Is Macroeconomics? Recessions Why Recessions Occur Full-Employment Output The Level of Current Output Factors Affecting Growth Creation of Capital Capital Markets 80 81 81 83 85 86 86 88 89 91 94 94 95 96 97 98 100 101 102 106 Will Savings Be Invested? 107 KNOW THE CONCEPTS < previous page page_iv www.ebook3000.com next page > < previous page page_v next page > Page v PRACTICAL APPLICATION ANSWERS Aggregate Demand and Supply: The Key to Macroeconomics Aggregate Demand and Supply Aggregate Demand Aggregate Supply (Short Run) The Effects of Shifts in Aggregate Demand and Supply Aggregate Supply (Long Run) How to Apply Aggregate Demand and Supply KNOW THE CONCEPTS PRACTICAL APPLICATION ANSWERS Aggregate Demand in the Private Sector: The Keynesian Model The Basic Keynesian Model Consumption Function Investment Function Equilibrium in Aggregate Demand Applying the Keynesian Model 108 109 112 113 114 116 118 121 122 123 124 126 129 130 130 133 134 137 and total cost, 328329 Marginal factor cost (MFC), 439440, 446448 Marginal land, 480 Marginal physical product (MPP), 325326 Marginal propensity to consume (MPC), 129, 131 Marginal propensity to save (MPS), 131 Marginal revenue, 366368 Marginal revenue product (MRP), 439440 price searcher in output market, 442443 price taker in output market, 441442 Marginal tax rate, 169, 173, 511, 513 Marginal utility, 310 Market clearing price, 38 Market demand curve, 310 Market equilibrium price, 3740 Market failure, 493 solutions to, 494496 Market for loanable funds, 94, 102105, 274276 Median voter model, 502 Microeconomics, 293 Minimum efficient scale, 334 Minimum wage, 473 Misperception theory, 116117 Monetarist model: compared with Keynesian model, 213214 of short-run effects of money, 205206 Monetary base, 189 Monetary economists, 96 Monetary policy, in open economy, 285286 < previous page page_589 www.ebook3000.com next page > < previous page page_590 next page > Page 590 Monetary shock, 250 Money, 183 creation of, 186189 Fed control of supply, 189191 functions of, 184 long-run effects of, 210 on interest rates, 210 long-run neutrality of, 197, 200202 measurement of, 184 nominal, 197 precautionary demand for, 198 quantity theory of, 197200 real, 197 short-run effects of, 205209 speculative demand for, 198 transaction demand for, 198 velocity of, 197, 200 Monopolistic competition, 381, 383385 Monopoly, 365 antitrust policy, 429 barriers to entry, 365366 bilateral, 471 cost advantages, 366 facts about, 371372 fallacies about, 370371 marginal revenue, 366368 output decision, 369370 price ceilings on, 426428 and price discrimination, 372374 regulation of, 426429 and social harm, 432 social loss from, 424425 and taxes, 374376 Monopsony, 439, 447448, 471472 Moral suasion, 191 Multiyear-contracts model, 256 Mutual interdependence, 385 N Nash equilibrium, 400, 403405, 408 National income (NI), 70 National output measurement, 6373 Natural rate of unemployment, 121 Natural resources, 98 Necessity, 302 Negative externalities, 493 Negative relationship, 19, 21 Neo-Keynesian macroeconomics, 242, 255257 Net benefits, 10 Net exports, 67, 267 Net foreign investment (NFI), 102, 104, 267 Net investment, 63 Net national product (NNP), 70 Nominal GDP, 6364 Nominal interest rate, 78, 82, 102 Nominal shock, 242, 245 Noncompeting groups, 466 Noncooperative games, 401403 Nonprice competition, 392 Nonprice rationing, 42 Normal good, 4849, 302 www.ebook3000.com Normal profits, 352 Normal yield curve, 484 Normative statement, 12 O Okun's Law, 87 Oligopoly, 381, 385387 dominant-firm, 388389 and game theory, 392393 price-leadership, 390 Open-market macroeconomics, 266286 Open-market operation, 190 Opportunistic behavior, 429 Opportunity cost, 1, 34 Output, 98100 change in cost with, 325 effect, 444 effects of increase and decrease in, 122123 finding most profitable level of, 343346 line, 49 total cost of producing, 328329 Overemployment, 155156 Overvalued currency, 283 P Path dependency, 400, 408409 Payments-in-kind, 512 Perfect competition, 342, 346347, 432 Perfectly contestable markets, 381383 Perfectly elastic demand curve, 294 Perfectly elastic supply curve, 304 Perfectly inelastic demand curve, 294 Perfectly inelastic supply curve, 304 Perfect price discrimination, 372 Permanent income, 141 Permanent-income hypothesis, 141 Personal income (PI), 70 Phillips Curve, 222 effect of expansion on, 228229 effect of inflation on, 230232 effect of recession on, 227228 Physical capital, 98 Planned investment, 129 Pollution, socially optimal level of, 499500 < previous page page_590 www.ebook3000.com next page > < previous page page_591 next page > Page 591 Pork-barrel legislation, 502 Positive externalities, 493494 Positive relationship, 19, 21 Positive statement, 12 Potential real GDP, 150151 Present value, 211212, 485486 Price: breakeven, 342, 350 ceiling, 41, 426428 discrimination, 365, 372374 floor, 4041 indexes, 78, 80 leader, 390 line, 49 lower, income and substitution effects of, 555557 relative, 31 shutdown, 342, 349 war, 390 Price elasticity: of demand, 293295 of supply, 293 Price searching firms, 365 in input (factor) market: monopsony, 447448 in output market, 442443 Price taking firms, 346, 365 in input (factor) market, 446447 in output market, 441442 unions in, 468469 Prisoner's dilemma game, 401403, 407408 Private benefit, 494 Private choice, 501 Private cost, 493 Problem of the commons, 494 Producer Price Index (PPI), 80 Producer surplus, 423 Product differentiation, 383 Production possibility curve, 1, 46, 535 Productivity measurement, 440441 Profits: accounting, 335, 352 economic, 325, 335, 352, 486487 maximization of, graphical approach, 578580 measurement of, 440441 normal, 352 Progressive tax system, 511, 514 Property rights, assigning, 494 Proportional tax system, 514 Public choice, 501502 Public good, 493, 497498 Purchasing-power parity, 266, 272273 Q Quantity demanded, 30, 32 Quantity supplied, 30, 35 Quotas, 537 R Random errors, 244 Random walk, 252253 Rate of return, 479 Rate of yield, 479 Rational expectations, 9697, 106, 230232, 242 www.ebook3000.com applications, 250253 criticisms of, 251252 and efficient-market theory, 252253 example of, 250 macroeconomics, 242248 model, 248249 Rational voter ignorance, 503 Real business cycle theory, 242, 253254 Real exchange rate, 266, 272 Real GDP, 63 Real interest rate, 78, 82, 102 Realized investment, 129 Real shock, 242, 245 Real wages, 82 Recession, 86, 123, 153154 causes of, 9697 effect on Phillips Curve, 227 growth, 123 shocks as cause of, 258 types of, 95 Recessionary gap, 153154 Recognition lag, 213 Regressive tax system, 514 Relative price, 31, 530 Rent seeking, 503 Required reserve ratio, 186187 Residual demand curve, 389 Return, 479 Ricardian Tax Equivalence Theorem, 176 Ricardo, David, 176 Robinson-Patman Act, 429 Rules of supply: long-run, 350351 short-run, 348350 S Savings, 7172, 101102, 129130 investment of, 106107 Scarcity, 13 Segregated markets, 373 Self-correcting mechanism, 150, 154 < previous page page_591 www.ebook3000.com next page > < previous page page_592 next page > Page 592 Seller (supplier), 30, 49 Sequential games, 405406 Sherman Antitrust Act, 429 Shift in demand, 48 effects on, 5052 factors in, 4950 Shocks, 242, 245, 250, 258 Shortage, 38 Short-run, 113 supply curve, 349350 constructing, 351354 Shutdown price, 342, 349 Slope, 18, 2122 Smith, Adam, 101 Social benefit, 494 Social cost, 493 Social demand curve, 497 Special interests, 502504 Spending multiplier, 129, 137140, 171 effects of employment on, 157158 and fiscal policy, 210211 Spillover effect, 469 Stagflation, 120, 226 Sticky-price theory, 116, 255 Sticky-wage theory, 116, 255 Stock, 94, 101 Stock margin requirement, 191 Stock market, efficient-market theory, 252253 Straight-line demand curve, 296298 Strategic complementarities, 256 Structural unemployment, 87 Substitutes, 4849, 52, 301, 303 Substitution effect, 310, 444, 462 Sunk cost, 342, 345 Superior good, 302 Supply: affects of costs on, 356357 of the dollar, 270271 law of, 30, 35 long-run rules, 350351 price, 35 elasticity of, 293, 303305 shift in, 5255 short-run rules, 348350 Supply curve, 3637 aggregate, 112 relationship with Phillips Curve, 224226 aggregate long-run, 112, 121122, 151152 aggregate short-run, 112 shift in, causes, 222223 backward-bending, of labor, 463 long-run, 350351 constructing, 354355 perfectly elastic, 304 perfectly inelastic, 304 short-run, 349350 constructing, 351354 Supply-side economics, 173174, 233 Surplus, 38, 40 Systematic errors, 244 www.ebook3000.com T Tangency, 384 Tangent line, 21 Tariffs, 536537 arguments for, 538539 Taxation, 513519 distortions in tax code, 518519 and efficiency, 515517 equity in, 515 Tax-based income policy (TIP), 233 Taxes: consumption, 520 direct, 513 flat, 520 indirect, 513 lump-sum, 374375 unit, 375376 value-added, 520 Tax incidence, 520521 Tax multiplier, 169, 172 Tax shifting, 520521 Technological progress, 94, 98, 366 Terms of trade, 532 Threat point, 401 Tiebout Hypothesis, 504 Total fixed costs (TFC), 328329 Total revenue, and elasticity, 298300 Total spending curve, 135136 factors shifting, 142 Total surplus, 423 Total utility, 310 Total variable costs (TVC), 328329 Trade-off, 34 Transaction costs, 429, 495 Transfer payments, 67, 511513 U Unanimity, 503 Unbiased forecast, 242, 244 Underemployed, 87 Unemployed, 85 Unemployment: cyclical, 87 frictional, 8687 labor force categories, 85 natural rate of, 121, 158160, 222, 227 < previous page page_592 www.ebook3000.com next page > < previous page page_593 Page 593 rate of, 78, 86 structural, 87 too little, 155156 and trade, 538 Unexpected shocks, 258 Unions See Labor unions Unitary elastic, 294 Unit tax, 375376 Usury ceiling, 483 Usury law, 483 Utility maximization, 553554 V Value added, 68 Value-added tax (VAT), 520 Variable costs, 357 Variable relationships, 1920 Velocity, 197, 200 Vertical axis, 18 Vertical equity, 515 Vertical integration, 429430 and antitrust, 430431 Volume discounts, 373 Voting paradox, 501502 W Wage and price controls, 232233 Wage differentials: efficiency wages, 466 human capital, 465 noncompeting groups, 466 special skills, 466 workers alike, jobs alike, 459464 workers alike, jobs different, 464465 Wage-threat effect, 469 Wealth, 140 The Wealth of Nations (Smith), 101 Web sites, 548 Y Yield, 211, 479, 482 < previous page page_593 www.ebook3000.com ... previous page page_i next page > Page i Economics Third Edition BUSINESS REVIEW BOOKS Walter J Wessels Professor of Economics Department of Economics and Business North Carolina State University... next page > Page iii CONTENTS Preface xiii Essentials of Economics What Is Economics All About? What Is Economics About? The Basis for Economics Scarcity Opportunity Cost Marginal Analysis KNOW... Stock Market Real Business Cycle Theory Neo-Keynesian Macroeconomics Where Does Business Cycle Theory Stand Today? KNOW THE CONCEPTS PRACTICAL APPLICATION ANSWERS 16 Open-Market Macroeconomics Introduction