Essentials of Economics, Tenth Edition
By Bradley R. Schiller
Content:
About the Authors iii
Preface iv
Section I BASICS
Chapter 1
THE CHALLENGE OF ECONOMICS 2
How Did We Get So Rich? 3
The Central Problem of Scarcity 6
Three Basic Economic Questions 6
WHAT to Produce 7
HOW to Produce 12
FOR WHOM to Produce 13
The Mechanisms of Choice 13
The Political Process 14
The Market Mechanism 14
Central Planning 14
Mixed Economies 15
What Economics Is All About 15
Market Failure 15
Government Failure 15
Macro versus Micro 16
Theory versus Reality 16
Politics versus Economics 17
Modest Expectations 18
Policy Perspectives: Is “Free” Health Care Really Free? 18
Summary 19
Appendix: Using Graphs 21
Slopes 22
Shifts 23
Linear versus Nonlinear Curves 24
Causation 24
News Wires
Never Enough Money! 4
Will Your Kids Be Better Off? 5
North Korea’s Rockets Deepen Food Crisis 11
Chapter 2
THE U.S. ECONOMY 26
What America Produces 27
How Much Output 27
The Mix of Output 31
Changing Industry Structure 33
How America Produces 35
Factors of Production 35
The Private Sector: Business Types 37
The Government’s Role 38
Striking a Balance 40
For Whom America Produces 40
The Distribution of Income 40
Income Mobility 41
Government Redistribution: Taxes and Transfers 41
Policy Perspectives: Can We End Global Poverty? 43
Summary 43
News Wires U.S. Manufacturing: Output vs. Jobs since 1975 35
The Education Gap between Rich and Poor Nations 37
Income Share of the Rich 42
Chapter 3
SUPPLY AND DEMAND 46
Market Participants 47
Goals 47
Constraints 47
Specialization and Exchange 47
The Two Markets 49
Dollars and Exchange 49
Supply and Demand 50
Demand 50
Individual Demand 50
Determinants of Demand 53
Ceteris Paribus 53
Shifts in Demand 54
Movements versus Shifts 55
Market Demand 55
The Market Demand Curve 56
The Use of Demand Curves 56
Supply 58
Determinants of Supply 58
The Market Supply Curve 59
Shifts in Supply 59
Equilibrium 60
Market Clearing 60
Market Shortage 62
Market Surplus 63
Changes in Equilibrium 64
Disequilibrium Pricing 65
Price Ceilings 65
Price Floors 66
Laissez Faire 67
Policy Perspectives: Did Gas Rationing Help or Hurt New
Jersey Motorists? 68
Summary 69
News Wires
Higher Alcohol Prices and Student Drinking 53
Electric Cars Hurt Most among Renewables on Oil’s Slump 55
Hurricane Sandy to Raise Prices on Used Cars 60
Scalpers Want Small Fortune for Tickets to See the Pope
in NYC 62
Apple iPhone 6 Plus Sells Out: Shipping Delays Expected 63
Gov. Christie Signs Order to Ration Gas in 12 NJ
Counties 69
Section II MICROECONOMICS
Chapter 4
CONSUMER DEMAND 72
Patterns of Consumption 73
Determinants of Demand 74
The Sociopsychiatric Explanation 74
The Economic Explanation 76
The Demand Curve 76
Utility Theory 76
Price and Quantity 78
Price Elasticity 79
Elastic versus Inelastic Demand 81
Price Elasticity and Total Revenue 82
Determinants of Price Elasticity 84
Other Changes in Consumer Behavior 85
Changes in Income 87
Policy Perspectives: Does Advertising Change Our
Behavior? 87
Summary 88
News Wires
Men versus Women: How They Spend 75
Price Cut on MacBook Air Jumpstarts Sales 80
Smokers Gasping at Obama’s Tax Hike 82
Starbucks Customers Shrug off Price Hike 84
San Francisco: The Butts Stop Here 85
Truck Sales Rise and Hybrid Sales Fall as Gas Prices Drop 86
Chapter 5
SUPPLY DECISIONS 92
Capacity Constraints: The Production Function 93
Efficiency 95
Capacity 95
Marginal Physical Product 95
Law of Diminishing Returns 96
Short Run versus Long Run 97
Costs of Production 98
Total Cost 98
Which Costs Matter? 99
Average Cost 100
Marginal Cost 100
Supply Horizons 102
The Short-Run Production Decision 103
The Long-Run Investment Decision 103
Economic versus Accounting Costs 104
Economic Cost 105
Economic Profit 105
Policy Perspectives: Can We Outrun Diminishing Returns? 106
Summary 107
News Wires
“We Pretend to Work, They Pretend to Pay Us” 97
Tesla to Boost Output in 2015; Tesla Plans “Gigafactory” 104
Chapter 6
COMPETITION 110
Market Structure 111
Perfect Competition 113
No Market Power 113
Price Takers 114
Market Demand versus Firm Demand 114
The Firm’s Production Decision 116
Output and Revenues 116
Revenues versus Profits 116
Profit Maximization 117
Price 117
Marginal Cost 117
Profit-Maximizing Rate of Output 117
Total Profit 120
Supply Behavior 121
A Firm’s Supply 121
Market Supply 122
Industry Entry and Exit 123
Entry 124
Tendency toward Zero Economic Profits 125
Exit 126
Equilibrium 126
Low Barriers to Entry 127
Market Characteristics 127
Policy Perspectives: Does Competition Help Us or Hurt
Us? 128
Summary 130
News Wires
Catfish Farmers Feel Forced Out of Business 114
Flat Panels, Thin Margins 124
U.S. Catfish Growers Struggle against High Feed Prices,
Foreign Competition 126
The T-Shirt Business: Too Much Competition 128
Chapter 7
MONOPOLY 132
Monopoly Structure 133
Monopoly = Industry 133
Price versus Marginal Revenue 134
Monopoly Behavior 136
Profit Maximization 136
The Production Decision 136
The Monopoly Price 137
Monopoly Profits 138
Barriers to Entry 138
Threat of Entry 139
Patent Protection: Polaroid versus Kodak 139
Other Entry Barriers 140
Comparative Outcomes 141
Competition versus Monopoly 141
Near Monopolies 142
WHAT Gets Produced 144
FOR WHOM 145
HOW 145
Any Redeeming Qualities? 145
Research and Development 146
Entrepreneurial Incentives 146
Economies of Scale 146
Natural Monopolies 147
Contestable Markets 147
Structure versus Behavior 147
Policy Perspectives: Why Is Flying Monopoly Air Routes So
Expensive? 148
Summary 150
News Wires
SCO Suit May Blunt the Potential of Linux 140
Judge Rules Microsoft Violated Antitrust Laws 141
OPEC Keeps Output Target on Hold, Predicts Low
Prices 143
German Brewers Fined over Price-Fixing 144
Two Drug Firms Agree to Settle Pricing Suit 145
Following the Fares 149
Chapter 8
THE LABOR MARKET 152
Labor Supply 153
Income versus Leisure 154
Market Supply 155
Labor Demand 155
Derived Demand 155
Marginal Physical Product 157
Marginal Revenue Product 158
The Law of Diminishing Returns 158
The Hiring Decision 161
The Firm’s Demand for Labor 161
Market Equilibrium 162
Equilibrium Wage 163
Equilibrium Employment 163
Changing Market Outcomes 163
Changes in Productivity 163
Changes in Price 164
Legal Minimum Wages 164
Labor Unions 166
Policy Perspectives: Should CEO Pay Be Capped? 167
Summary 169
News Wires
Thousands of Hopeful Job Seekers Attend Career Fair at
Rutgers 154
Hewlett-Packard’s Job Cuts to Hit 34,000 156
Most Lucrative College Degrees 157
Alabama’s Nick Saban Gets Raise, Contract Extension 162
Obama Proposes to Increase Federal Minimum Wage 165
Swiss Voters Reject Strict CEO Pay Limits in Referendum 168
Chapter 9
GOVERNMENT INTERVENTION 172
Market Failure 173
The Nature of Market Failure 174
Sources of Market Failure 174
Public Goods 174
Joint Consumption 175
The Free-Rider Dilemma 175
Externalities 177
Consumption Decisions 177
Production Decisions 179
Social versus Private Costs 181
Policy Options 182
Market Power 185
Restricted Supply 185
Antitrust Policy 186
Inequity 186
Macro Instability 188
Policy Perspectives: Will the Government Get It Right? 188
Summary 190
News Wires
Israel’s “Iron Dome” Works! 176
Secondhand Smoke Kills 600,000 People a Year: Study 178
Obama Vetoes Keystone Pipeline 183
Breathing Easier 184
Bloomberg: Forced Recycling a Waste 185
Section III MACROECONOMICS
Chapter 10
THE BUSINESS CYCLE 192
Assessing Macro Performance 194
GDP Growth 195
Business Cycles 195
Real GDP 195
Erratic Growth 196
Unemployment 198
The Labor Force 198
The Unemployment Rate 200
The Full Employment Goal 201
Inflation 203
Relative versus Average Prices 203
Redistributions 205
Uncertainty 209
Measuring Inflation 210
The Price Stability Goal 210
Policy Perspectives: Is Another Recession Coming? 211
Summary 212
News Wires
Market in Panic as Stocks Are Dumped in 12,894,600
Share Day: Bankers Halt It 193
Economy: Sharpest Decline in 26 Years 195
Depression Slams World Economies 198
How Unemployment Affects the Family 201
UPS to Hire up to 95,000 Seasonal Employees for Holiday
Season 202
Inflation and the Weimar Republic 204
College Tuition in the U.S. Again Rises Faster than Inflation 205
Chapter 11
AGGREGATE SUPPLY AND DEMAND 214
A Macro View 215
Macro Outcomes 215
Macro Determinants 216
Stable or Unstable? 216
Classical Theory 216
The Keynesian Revolution 217
The Aggregate Supply–Demand Model 218
Aggregate Demand 218
Aggregate Supply 220
Macro Equilibrium 221
Macro Failure 222
Undesirable Outcomes 222
Unstable Outcomes 223
Shift Factors 225
Competing Theories of Short-Run Instability 227
Demand-Side Theories 227
Supply-Side Theories 228
Eclectic Explanations 228
Policy Options 229
Fiscal Policy 229
Monetary Policy 229
Supply-Side Policy 229
Policy Perspectives: Which Policy Lever to Use? 230
Summary 231
News Wires
Job Losses Surge as U.S. Downturn Accelerates 223
Consumer Confidence Plummets 225
Sandy Pummels New York Area 226
Chapter 12
FISCAL POLICY 234
Components of Aggregate Demand 235
Consumption 236
Investment 236
Government Spending 237
Net Exports 238
Equilibrium 238
The Nature of Fiscal Policy 239
Fiscal Stimulus 239
More Government Spending 241
Tax Cuts 244
Inflation Worries 247
Fiscal Restraint 247
Budget Cuts 248
Tax Hikes 248
Fiscal Guidelines 248
Policy Perspectives: Must the Budget Be Balanced? 249
Summary 252
News Wires
Recession Looming 237
U.S. Congress Gives Final Approval to $787 Billion
Stimulus 240
The 2008 Economic Stimulus: First Take on Consumer
Response 245
Wal-Mart Woes: Consumer Spending Curbed by Payroll
Tax 249
Chapter 13
MONEY AND BANKS 254
The Uses of Money 255
Many Types of Money 256
The Money Supply 256
Cash versus Money 256
Transactions Accounts 257
Basic Money Supply 257
Near Money 258
Aggregate Demand 259
Creation of Money 259
Deposit Creation 259
A Monopoly Bank 260
Reserve Requirements 262
Excess Reserves 263
A Multibank World 263
The Money Multiplier 263
Limits to Deposit Creation 264
Excess Reserves as Lending Power 265
The Macro Role of Banks 265
Financing Aggregate Demand 265
Constraints on Money Creation 266
Policy Perspectives: Are Bitcoins the New Money? 267
Summary 267
News Wires
Bras: The Currency of Russia in the 1990s 256
How Would You Like to Pay for That? 259
Chapter 14
MONETARY POLICY 270
The Federal Reserve System 271
Federal Reserve Banks 272
The Board of Governors 272
The Fed Chair 273
Monetary Tools 273
Reserve Requirements 273
The Discount Rate 275
Open Market Operations 277
Powerful Levers 279
Shifting Aggregate Demand 279
Expansionary Policy 280
Restrictive Policy 280
Interest Rate Targets 281
Price versus Output Effects 281
Aggregate Demand 281
Aggregate Supply 281
Policy Perspectives: How Much Discretion Should the Fed
Have? 283
Summary 284
News Wires
China Cuts Reserve Requirements 275
Fed Cuts Key Interest Rate Half-Point to
1 Percent 277
Chapter 15
ECONOMIC GROWTH 286
The Nature of Growth 287
Short-Run Changes in Capacity Use 287
Long-Run Changes in Capacity 287
Nominal versus Real GDP 289
Growth Indexes 289
The GDP Growth Rate 289
GDP per Capita: A Measure of Living Standards 290
GDP per Worker: A Measure of Productivity 292
Sources of Productivity Growth 294
Labor Quality 294
Capital Investment 294
Management 294
Research and Development 294
Policy Levers 295
Education and Training 295
Immigration Policy 295
Investment Incentives 296
Savings Incentives 297
Government Finances 297
Deregulation 298
Economic Freedom 299
Policy Perspectives: Is More Growth Desirable? 300
Summary 301
News Wires
What Economic Growth Has Done for U.S. Families 291
House Poised to Pass STEM Immigration Bill 296
Americans Save Little 297
Improvement in Economic Freedom and Economic
Growth 300
Chapter 16
THEORY AND REALITY 304
Policy Tools 305
Fiscal Policy 305
Monetary Policy 307
Supply-Side Policy 309
Idealized Uses 311
Case 1: Recession 311
Case 2: Inflation 311
Case 3: Stagflation 311
Fine-Tuning 312
The Economic Record 313
Why Things Don’t Always Work 314
Goal Conflicts 314
Measurement Problems 315
Design Problems 317
Implementation Problems 318
Policy Perspectives: Hands Off or Hands On? 320
Summary 321
News Wires
Budget Deficit Sets Record in February 308
Macro Performance, 2004–2014 314
NBER Makes It Official: Recession Started One Year Ago 316
Tough Calls in Economic Forecasting 317
Section IV INTERNATIONAL
Chapter 17
INTERNATIONAL TRADE 324
U.S. Trade Patterns 325
Imports 325
Exports 325
Trade Balances 327
Motivation to Trade 328
Production and Consumption without Trade 328
Trade Increases Specialization and World
Output 330
Comparative Advantage 331
Opportunity Costs 331
Absolute Costs Don’t Count 332
Terms of Trade 332
Limits to the Terms of Trade 332
The Market Mechanism 332
Protectionist Pressures 333
Microeconomic Losers 333
The Net Gain 334
Barriers to Trade 335
Tariffs 335
Quotas 336
Nontariff Barriers 338
Exchange Rates 339
Global Pricing 340
Appreciation/Depreciation 340
Foreign Exchange Markets 341
Policy Perspectives: Who Enforces World Trade Rules? 342
Summary 344
News Wires
Exports in Relation to GDP 326
Insight: Brazil Protects Its… Wines? 334
A Litany of Losers 335
U.S. Solar Tariffs on Chinese Cells May Boost Prices 336
Obama Cuts Sour Deal on Sugar 339
What the Strong U.S. Dollar Means for Americans Traveling
to Europe This Year 340
Glossary 347
Index 351