Economics, Fifth Edition
By N. Gregory Mankiw and Mark P. Taylor
Contents:
About the authors ix
Preface x
Acknowledgements xiii
PART 1
Introduction to Economics 1
1 What is economics? 1
The economy and economic systems 1
How people make decisions 3
How people interact 6
How the economy as a whole works 9
2 Thinking like an economist 15
Introduction 15
Economic methodology 15
Schools of thought 25
The economist as policy advisor 26
Why economists disagree 27
PART 2
The Theory of Competitive
Markets 33
3 The market forces of supply and demand 33
The assumptions of the competitive market model 33
Demand 35
Shifts versus movements along the demand curve 37
Supply 40
Supply and demand together 44
Prices as signals 47
Analyzing changes in equilibrium 48
Elasticity 53
The price elasticity of demand 53
Other demand elasticities 61
Price elasticity of supply 62
Applications of supply and demand elasticity 67
4 Background to demand: Consumer choices 74
The standard economic model 74
The budget constraint: What the consumer can afford 76
Preferences: What the consumer wants 80
Optimization: What the consumer chooses 86
Conclusion: Do people really behave this way? 98
Behavioural approaches to consumer behaviour 98
5 Background to supply: Firms in competitive markets 105
The costs of production 105
Production and costs 106
The various measures of cost 109
Costs in the short run and in the long run 115
Summary 116
Returns to scale 117
What is a competitive market? 123
Profit maximization and the competitive firm’s supply curve 125
The supply curve in a competitive market 132
Conclusion: Behind the supply curve 137
6 Consumers, producers and the efficiency of markets 141
Consumer surplus 141
Producer surplus 146
Market efficiency 150
PART 3
Interventions in Markets 159
7 Supply, demand and government policies 159
Controls on prices 159
Taxes 163
Subsidies 170
The tax system 171
The deadweight loss of taxation 172
Administrative burden 178
The design of the tax system 179
Taxes and equity 181
8 Public goods, common resources and
merit goods 189
The different kinds of goods 189
Public goods 190
Common resources 194
Merit goods 197
Conclusion 199
9 Market failure and externalities 204
Market failure 204
Externalities 204
Externalities and market inefficiency 206
Private solutions to externalities 210
Public policies towards externalities 213
Public/private policies towards externalities 216
Government failure 220
Conclusion 225
PART 4
Firm Behaviour and Market Structures 231
10 Firms’ production decisions 231
Isoquants and isocosts 231
The least-cost input combination 236
Conclusion 238
11 Market structures I: monopoly 242
Imperfect competition 242
Why monopolies arise 243
How monopolies make production
and pricing decisions 247
The welfare cost of monopoly 252
Public policy towards monopolies 258
Conclusion: the prevalence of monopoly 261
12 Market structures II: monopolistic
competition 267
Competition with differentiated products 268
Advertising and branding 272
Conclusion 276
13 Market structures III: oligopoly 280
Characteristics of oligopoly 280
Game theory and the economics of
cooperation 284
Entry barriers in oligopoly 296
Public policy towards oligopolies 297
Conclusion 299
14 Market structures IV: Contestable
markets 304
The nature of contestable markets 304
The limitations of contestability 308
Summary 310
PART 5
Factor Markets 315
15 The economics of factor markets 315
The marginal product theory of
distribution 315
The demand for labour 315
The supply of labour 319
Equilibrium in the labour market 323
Other theories of the labour market 325
Marxist labour theory 325
Feminist economics and the labour market 326
Monopsony 327
Wage differentials 329
The economics of discrimination 334
The other factors of production: Land and
capital 337
Economic rent 340
Conclusion 341
PART 6
Inequality 347
16 Income inequality and poverty 347
The measurement of inequality 348
The political philosophy of redistributing
income 355
Policies to reduce poverty 359
Conclusion 362
PART 7
Trade 367
17 Interdependence and the gains from
trade 367
The production possibilities frontier 367
International trade 372
The principle of comparative advantage 376
The determinants of trade 379
The winners and losers from trade 380
Restrictions on trade 384
Criticisms of comparative advantage theory 391
Other theories of international trade 392
Conclusion 396
PART 8
Heterodox Economics 401
18 Information and behavioural
economics 401
Principal and agent 401
Asymmetric information 402
Behavioural economics 408
Conclusion 412
19 Heterodox theories in economics 416
Introduction 416
Institutional economics 419
Feminist economics 422
Complexity economics 425
Conclusion 428
PART 9
The Data of Macroeconomics 433
20 Measuring a nation’s well-being and the
price level 433
Marxist economics 433
The Austrian school 434
Keynesianism 435
Monetarism 435
The nature of macroeconomics 436
The economy’s income and expenditure 436
The measurement of gross domestic
product 438
The components of GDP 441
Real versus nominal GDP 444
The limitations of GDP as a measure of
well-being 448
International differences in GDP and the quality
of life 450
Measuring the cost of living 451
The Consumer Prices Index 451
Correcting economic variables for the effects
of inflation 456
Conclusion 458
PART 10
The Real Economy
in the Long Run 463
21 Production and growth 463
Economic growth around the world 463
Growth theory 465
Productivity 465
The determinants of economic growth 467
Causes of growth 471
Endogenous growth theory 475
Economic growth and public policy 476
Conclusion: The importance of long-run
growth 481
22 Unemployment and the labour market 485
Identifying unemployment 485
The causes of unemployment 488
The natural rate of unemployment 494
Marx and the reserve army of the
unemployed 501
The cost of unemployment 501
Conclusion 503
PART 11
Long-Run Macroeconomics 509
23 Saving, investment and the financial
system 509
Financial institutions in the economy 509
Present value: Measuring the time value of
money 515
Managing risk 517
Asset valuation 522
Saving and investment in the national
income accounts 523
The market for loanable funds 526
24 The monetary system 535
The meaning of money 535
The role of central banks 541
The European Central Bank and the
Eurosystem 542
The Bank of England 543
Banks and the money supply 543
The central bank’s tools of monetary control 547
Money growth and inflation 550
What is inflation? 550
The costs of inflation 559
Deflation 563
Conclusion 564
25 Open-economy macroeconomics 569
The international flows of goods and
capital 569
The prices for international transactions:
Real and nominal exchange rates 574
A first theory of exchange rate determination:
Purchasing power parity 577
A macroeconomic theory of the open
economy 580
Supply and demand for loanable funds
and for foreign currency exchange 581
Equilibrium in the open economy 584
How policies and events affect an open
economy 586
Conclusion 591
PART 12
Short-Run Economic
Fluctuations 595
26 Business cycles 595
Trend growth rates 596
Causes of changes in the business cycle 602
Business cycle models 604
Macroeconomic models of the economy 608
Conclusion 610
27 Keynesian economics and IS–LM
analysis 614
The Keynesian cross 614
The multiplier effect 618
The IS and LM curves 623
General equilibrium using the IS–LM model 626
From IS–LM to aggregate demand 628
Conclusion 634
28 Aggregate demand and aggregate
supply 637
Three key facts about economic
fluctuations 637
Explaining short-run economic
fluctuations 638
The aggregate demand curve 640
The aggregate supply curve 642
Two causes of economic fluctuations 648
New Keynesian economics 652
29 The influence of monetary and fiscal
policy on aggregate demand 657
How monetary policy influences aggregate
demand 657
How fiscal policy influences aggregate
demand 664
Using policy to stabilize the economy 667
Conclusion 669
30 The short-run trade-off between inflation
and unemployment 674
The relationship between inflation and
unemployment 674
The Phillips curve 675
Shifts in the Phillips curve: The role of
expectations 678
The long-run vertical Phillips curve as an
argument for central bank independence 684
Shifts in the Phillips curve: The role of supply
shocks 685
The cost of reducing inflation 687
Inflation targeting 692
Reflecting on the Phillips curve 696
Conclusion 698
31 Supply-side policies 703
Shifts in the aggregate supply curve 703
Types of supply-side policies 707
Conclusion 715
PART 13
International
Macroeconomics 719
32 The causes and aftermath of the financial
crisis 719
The causes of the crisis 719
The efficient markets hypothesis 726
The financial crisis and sovereign
debt 734
The sovereign debt crisis 739
Austerity policies: Too far too quickly? 743
The productivity puzzle 747
33 Common currency areas 755
The euro 755
The benefits and costs of a common
currency 757
The theory of optimum currency areas 760
Is Europe an optimum currency area? 763
Fiscal policy and common currency
areas 766
The fiscal compact 769
Conclusion 770
34 The future of the European Union 774
The euro 774
Italy 777
Brexit 777
Conclusion 785
Glossary 788
Index 798
Credits 810
List of formulae 812