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CONTENTS<br/>List of Key Graphs vi<br/>Preface vii<br/>Contributors xiv<br/>PART ONE<br/>An Introduction to Economics and #the Economy<br/>To the Student 2<br/> 1 The Nature and Method of #Economics 3<br/>The Economic Perspective 3<br/>Scarcity and Choice / Rational Behavior / Marginalism: Benefits and Costs<br/>Consider This: Free for All? 4<br/>Why Study Economics? 5<br/>Economics for Citizenship / Professional and #Personal Applications<br/>Economic Methodology 6<br/>Theoretical Economics / Policy Economics<br/>Macroeconomics and Microeconomics 9<br/>Macroeconomics / Microeconomics / Positive and #Normative Economics<br/>Pitfalls to Sound Reasoning 10<br/>Biases / Loaded Terminology / Definitions / Fallacy of Composition / Causation <br/>Fallacies<br/>A Look Ahead 12<br/>Last Word: Fast-Food Lines: An Economic #Perspective 12<br/>Appendix Chapter 1: Graphs and Their Meaning 15<br/>Construction of a Graph / Direct and Inverse Relationships / Dependent and <br/>Independent <br/>Variables / Other Things Equal / Slope of a Line / Vertical Intercept / Equation <br/>of a Linear <br/>Relationship / Slope of a Nonlinear Curve<br/> 2 The Economizing Problem 22<br/>The Foundation of Economics 22<br/>Unlimited Wants / Scarce Resources<br/>Economics: Employment and Efficiency 24<br/>Full Employment: Using Available Resources / Full Production: Using Resources <br/>Efficiently / Production Possibilities Table / <br/>Production Possibilities Curve / Law of Increasing Opportunity Cost / Allocative <br/>Efficiency Revisited<br/>Unemployment, Growth, and the Future 28<br/>Unemployment and Productive Inefficiency / A Growing Economy / A Qualification: <br/>International Trade / Examples and <br/>Applications<br/>Consider This: A Matter of Degrees: #Is College Worth the Cost? 32<br/>Economic Systems 33<br/>The Market System / The Command System<br/>The Circular Flow Model 34<br/>Last Word: September 11, 2001, and the War on #Terrorism 35<br/> 3 Individual Markets: Demand #and Supply 39<br/>Markets 39<br/>Demand 40<br/>Law of Demand / The Demand Curve / Market Demand / Change in Demand / Changes in <br/>Quantity Demanded<br/>Supply 45<br/>Law of Supply / The Supply Curve / Determinants of Supply / Changes in Supply / <br/>Changes in Quantity Supplied<br/>Supply and Demand: Market Equilibrium 48<br/>Surpluses / Shortages / Equilibrium Price and Quantity / Rationing Function of <br/>Prices / Changes in Supply, Demand, and <br/>Equilibrium / A Reminder: ?Other Things Equal?<br/>Consider This: The Cutting Edge 50<br/>Application: Government-Set Prices 52<br/>Price Ceilings and Shortages / Price Floors and Surpluses<br/>Last Word: Ticket Scalping: A Bum Rap? 55<br/>3Web Applications and Extensions of Supply and Demand Analysis 59<br/>(Web Chapter, www.mcconnell16.com)<br/>Changes in Supply and Demand 3W-1<br/>Lettuce / American Flags / Pink Salmon / Gasoline / Sushi<br/>Preset Prices 3W-4<br/>Olympic Figure Skating Finals / Olympic Curling Preliminaries<br/>Consider This: Taking Back a ?Gift? 3W-5<br/>Nonpriced Goods: The American Bison 3W-6<br/>Consumer and Producer Surplus 3W-7<br/>Consumer Surplus / Producer Surplus / Efficiency #Revisited / Efficiency Losses<br/>Last Word: Efficiency Gains from Generic Drugs 3W-11<br/> 4 The Market System 60<br/>Characteristics of the Market System 60<br/>Private Property / Freedom of Enterprise and Choice / Self-Interest / <br/>Competition / Markets and Prices / Reliance on <br/>Technology and Capital Goods / Specialization / Use of Money / Active, but <br/>Limited, Government<br/>The Market System at Work 64<br/>What Will Be Produced? / How Will the Goods and Services Be Produced? / Who Will <br/>Get the Goods and Services? / How Will <br/>the System Accommodate Change?<br/>Consider This: McHits and McMisses 66<br/>Competition and the ?Invisible Hand? 69<br/>Last Word: Shuffling the Deck 70<br/> 5 The U.S. Economy: Private and #Public Sectors 73<br/>Households as Income Receivers 73<br/>The Functional Distribution of Income / The Personal Distribution of Income<br/>Households as Spenders 74<br/>Personal Taxes / Personal Saving / Personal #Consumption Expenditures<br/>The Business Population 75<br/>Legal Forms of Businesses 76<br/>Advantages and Disadvantages / The #Principal-Agent Problem<br/>The Public Sector: Government?s Role 79<br/>Providing the Legal Structure / Maintaining Competition / Redistributing Income <br/>/ Reallocating Resources / Promoting Stability <br/>/ Government?s Role: A Qualification<br/>Consider This: Street Entertainers 82<br/>The Circular Flow Revisited 83<br/>Government Finance 84<br/>Government Purchases and Transfers<br/>Federal Finance 85<br/>Federal Expenditures / Federal Tax Revenues<br/>State and Local Finance 87<br/>State Finances / Local Finances<br/>Last Word: The Financing of Corporations 88<br/> 6 The United States in the Global Economy 91<br/>International Linkages 91<br/>The United States and World Trade 92<br/>Volume and Pattern / Rapid Trade Growth / #Participants in International Trade<br/>Specialization and Comparative Advantage 96<br/>Basic Principle / Comparative Costs / Terms of Trade / #Gains from <br/>Specialization and Trade<br/>The Foreign Exchange Market 99<br/>Dollar-Yen Market / Changing Rates: Depreciation and Appreciation<br/>Consider This: A Ticket to Ride 100<br/>Government and Trade 101<br/>Trade Impediments and Subsidies / Why Government #Trade Interventions? / Costs <br/>to Society<br/>Multilateral Trade Agreements and #Free-Trade Zones 103<br/>Reciprocal Trade Agreements Act / General Agreement on Tariffs and Trade / World <br/>Trade Organization / The European Union <br/>/ North American Free Trade Agreement<br/>Global Competition 106<br/>Last Word: Petition of the Candlemakers, 1845 106<br/>PART TWO<br/>Macroeconomic Measurement and #Basic Concepts<br/> 7 Measuring Domestic Output and National Income 112<br/>Assessing the Economy?s Performance 112<br/>Gross Domestic Product 112<br/>A Monetary Measure / Avoiding Multiple Counting / GDP Excludes Nonproduction <br/>Transactions / Two Ways of Looking at <br/>GDP: Spending and Income<br/>The Expenditures Approach 115<br/>Personal Consumption Expenditures (C) / Gross Private Domestic Investment (Ig) / <br/>Government Purchases #(G) / Net Exports <br/>(Xn) / Putting It All #Together: GDP 5 C 1 Ig 1 G 1 Xn<br/>Consider This: Stock Answers about Flows 117<br/>The Income Approach 118<br/>Compensation of Employees / Rents / Interest / #Proprietors? Income / Corporate <br/>Profits / From #National Income to GDP<br/>Other National Accounts 120<br/>Net Domestic Product / National Income / Personal Income / Disposable Income / <br/>The Circular Flow Revisited<br/>Nominal GDP versus Real GDP 123<br/>Adjustment Process in a One-Product Economy / An Alternative Method / Real-World <br/>Considerations and Data<br/>Shortcomings of GDP 125<br/>Nonmarket Activities / Leisure / Improved Product #Quality / The Underground <br/>Economy / GDP and the Environment / <br/>Composition and Distribution of #Output / Noneconomic Sources of Well-Being<br/>Last Word: Feeding the GDP Accounts 127<br/> 8 Introduction to Economic Growth and Instability 131<br/>Economic Growth 131<br/>Growth as a Goal / Arithmetic of Growth / Main Sources of Growth / Growth in the <br/>United States <br/>/ Relative Growth Rates<br/>The Business Cycle 133<br/>Phases of the Business Cycle / Causation: A First Glance / Cyclical Impact: <br/>Durables and Nondurables<br/>Unemployment 135<br/>Measurement of Unemployment / Types of Unemployment / Definition of Full <br/>Employment / Economic Cost of Unemployment / <br/>Noneconomic Costs / International Comparisons<br/>Inflation 141<br/>Meaning of Inflation / Measurement of Inflation / Facts of Inflation / Types of <br/>Inflation / Complexities<br/>Consider This: Clipping Coins 143<br/>Redistribution Effects of Inflation 144<br/>Who Is Hurt by Inflation? / Who Is Unaffected or #Helped by Inflation? / <br/>Anticipated Inflation / Addenda<br/>Effects of Inflation on Output 147<br/>Cost-Push Inflation and Real Output / Demand-Pull Inflation and Real Output / <br/>Hyperinflation and Breakdown<br/>Last Word: The Stock Market and the Economy 149<br/> 9 Basic Macroeconomic Relationships 152<br/>The Income-Consumption and Income-Saving Relationships 152<br/>The Consumption Schedule / The Saving Schedule / Average and Marginal <br/>Propensities / Nonincome Determinants of <br/>Consumption and Saving / Terminology, Shifts, and Stability<br/>Consider This: What Wealth Effect? 159<br/>The Real Interest-Rate?Investment #Relationship 159<br/>Expected Rate of Return / The Real Interest Rate / Investment Demand Curve / <br/>Shifts of the Investment #Demand Curve / <br/>Instability of Investment<br/>The Multiplier Effect 164<br/>Rationale / The Multiplier and the Marginal Propensities / How Large Is the <br/>Actual Multiplier Effect?<br/>Last Word: Squaring the Economic Circle 167<br/>PART THREE<br/>Macroeconomic Models and #Fiscal Policy<br/> 10 The Aggregate Expenditures#Model 172<br/>Simplifications 172<br/>Consumption and Investment Schedules 172<br/>Equilibrium GDP: C 1 Ig 5 GDP 173<br/>Tabular Analysis / Graphical Analysis<br/>Other Features of Equilibrium GDP 176<br/>Saving Equals Planned Investment / No Unplanned Changes in Inventories<br/>Changes in Equilibrium GDP and the #Multiplier 177<br/>Adding International Trade 179<br/>Net Exports and Aggregate Expenditures / The Net Export Schedule / Net Exports <br/>and Equilibrium GDP / International <br/>Economic Linkages<br/>Adding the Public Sector 182<br/>Government Purchases and Equilibrium GDP / Taxation and Equilibrium GDP<br/>Equilibrium versus Full-Employment GDP 185<br/>Recessionary Gap / Application: The U.S. Recession of #2001 / Inflationary Gap / <br/>Application: U.S. Inflation #in the Late 1980s<br/>Limitations of the Model 187<br/>Last Word: Say?s Law, the Great Depression, #and Keynes 188<br/> 11 Aggregate Demand and #Aggregate Supply 193<br/>Aggregate Demand 193<br/>Aggregate Demand Curve / Determinants of #Aggregate Demand<br/>Aggregate Supply 197<br/>Aggregate Supply in the Long Run / Aggregate Supply in the Short Run / <br/>Determinants of Aggregate Supply<br/>Equilibrium and Changes in Equilibrium 201<br/>Increases in AD: Demand-Pull Inflation / Decreases in AD: Recession and Cyclical <br/>Unemployment / Decreases in AS: Cost-<br/>Push Inflation / Increases in AS: Full Employment with Price-Level Stability<br/>Consider This: Ratchet Effect 205<br/>Last Word: Why Is Unemployment in Europe #So High? 207<br/>Appendix Chapter 11: The Relationship of the Aggregate Demand Curve to the <br/>Aggregate #Expenditures Model 211<br/>Deriving the Aggregate Demand Curve from the Aggregate Expenditures Model / <br/>Aggregate <br/>Demand Shifts and the Aggregate Expenditures Model<br/> 12 Fiscal Policy 214<br/>Legislative Mandates 214<br/>Fiscal Policy and the AD-AS Model 215<br/>Expansionary Fiscal Policy / Contractionary Fiscal #Policy / Financing of <br/>Deficits and Disposing of #Surpluses / Policy <br/>Options: G or T<br/>Built-In Stability 218<br/>Automatic or Built-In Stabilizers<br/>Evaluating Fiscal Policy 220<br/>Full-Employment Budget / Recent U.S. Fiscal Policy<br/>Problems, Criticisms, and Complications 223<br/>Problems of Timing / Political Considerations / Future Policy Reversals / <br/>Offsetting State and Local Finance / Crowding-Out <br/>Effect / Fiscal Policy in the Open Economy<br/>Last Word: The Leading Indicators 227<br/>Current Thinking on Fiscal Policy 228<br/>PART FOUR<br/>Money, Banking, and Monetary Policy<br/> 13 Money and Banking 232<br/>The Functions of Money 232<br/>The Supply of Money 233<br/>Money Definition M1 / Money Definition M2 / #Money Definition M3<br/>Consider This: Are Credit Cards Money? 236<br/>What ?Backs? the Money Supply? 236<br/>Money as Debt / Value of Money / Money and Prices / Stabilization of Money?s <br/>Value<br/>The Demand for Money 238<br/>Transactions Demand, Dt / Asset Demand, Da / #Total Money Demand, Dm<br/>The Money Market 240<br/>Adjustment to a Decline in the Money Supply / Adjustment to an Increase in the <br/>Money Supply<br/>The Federal Reserve and the Banking #System 242<br/>Historical Background / Board of Governors / FOMC / #The 12 Federal Reserve <br/>Banks / Commercial Banks and Thrifts / Fed <br/>Functions and the Money Supply / Federal Reserve Independence<br/>Recent Developments in Money and #Banking 245<br/>The Relative Decline of Banks and Thrifts / Consolidation among Banks and <br/>Thrifts / Convergence of Services Provided by <br/>Financial Institutions / Globalization of Financial Markets / Electronic <br/>Transactions<br/>Last Word: The Global Greenback 248<br/> 14 How Banks and Thrifts Create #Money 252<br/>The Balance Sheet of a Commercial Bank 252<br/>Prologue: The Goldsmiths 252<br/>A Single Commercial Bank 253<br/>Formation of a Commercial Bank / Money-Creating Transactions of a Commercial <br/>Bank / Profits, Liquidity, #and the Federal <br/>Funds Market<br/>The Banking System: Multiple-Deposit #Expansion 260<br/>The Banking System?s Lending Potential / The Monetary Multiplier / Some <br/>Modifications / Need for #Monetary Control<br/>Last Word: The Bank Panics of 1930 to 1933 265<br/> 15 Monetary Policy 268<br/>Consolidated Balance Sheet of the Federal Reserve Banks 268<br/>Assets / Liabilities<br/>Tools of Monetary Policy 270<br/>Open-Market Operations / The Reserve Ratio / The Discount Rate / Easy Money and <br/>Tight Money / Relative Importance<br/>Monetary Policy, Real GDP, and the #Price Level 276<br/>Cause-Effect Chain / Effects of an Easy Money Policy / #Effects of a Tight Money <br/>Policy<br/>Monetary Policy in Action 279<br/>The Focus on the Federal Funds Rate / Recent Monetary Policy / Problems and <br/>Complications / <br/>?Artful Management? or ?Inflation Targeting?? / Monetary Policy and the <br/>International <br/>Economy<br/>Consider This: Pushing on a String 282<br/>The ?Big Picture? 286<br/>Last Word: For the Fed, Life Is a Metaphor 287<br/>PART FIVE<br/>Long-Run Perspectives and Macroeconomic Debates<br/> 16 Extending the Analysis of #Aggregate Supply 292<br/>From Short Run to Long Run 292<br/>Short-Run Aggregate Supply / Long-Run Aggregate Supply / Equilibrium in the <br/>Extended AD-AS Model<br/>Applying the Extended AD-AS Model 295<br/>Demand-Pull Inflation in the Extended AD-AS Model / Cost-Push Inflation in the <br/>Extended AD-AS Model / Recession and the <br/>Extended AD-AS Model<br/>The Inflation-Unemployment Relationship 297<br/>The Phillips Curve / Aggregate Supply Shocks and the #Phillips Curve<br/>The Long-Run Phillips Curve 300<br/>Short-Run Phillips Curve / Long-Run Vertical Phillips #Curve / Disinflation<br/>Taxation and Aggregate Supply 302<br/>Taxes and Incentives to Work / Incentives to Save and #Invest / The Laffer Curve <br/>/ Criticisms of the Laffer Curve / Rebuttal and <br/>Evaluation<br/>Consider This: Sherwood Forest 304<br/>Last Word: Has the Impact of Oil Prices #Diminished? 305<br/> 17 Economic Growth 308<br/>Ingredients of Growth 308<br/>Supply Factors / Demand Factor / Efficiency Factor<br/>Production Possibilities Analysis 309<br/>Growth and Production Possibilities / Labor and #Productivity / Growth in the <br/>AD-AS Model<br/>U.S. Economic Growth Rates 312<br/>Consider This: Economic Growth Rates Matter! 313<br/>Accounting for Growth 312<br/>Labor Inputs versus Productivity / Technological Advance / Quantity of Capital / <br/>Education and Training / Economies of Scale <br/>and Resource Allocation / Other Factors<br/>The Productivity Acceleration: #A New Economy? 316<br/>Reasons for the Productivity Acceleration / Macroeconomic Implications / <br/>Skepticism about Permanence / What Can #We <br/>Conclude?<br/>Is Growth Desirable and Sustainable? 320<br/>The Antigrowth View / In Defense of Economic Growth<br/>Last Word: Women and Economic Growth 322<br/> 18 Deficits, Surpluses, and #the Public Debt 325<br/>Deficits, Surpluses, and Debt: Definitions 325<br/>Budget Philosophies 325<br/>Annually Balanced Budget / Cyclically Balanced #Budget / Functional Finance<br/>The Public Debt: Facts and Figures 326<br/>Causes / Quantitative Aspects / Social Security Considerations<br/>False Concerns 329<br/>Bankruptcy / Burdening Future Generations<br/>Substantive Issues 330<br/>Income Distribution / Incentives / Foreign-Owned Public Debt/ Crowding Out and <br/>the Stock of Capital<br/>Deficits and Surpluses: 1992?2012 332<br/>From Deficits to Surpluses / What to Do with the Surpluses? / Back to Deficits <br/>in 2002 / The Tax Cuts of 2003<br/>Last Word: The Long-Run Fiscal Imbalance: #Social Security 334<br/> 19 Disputes over Macro Theory and #Policy 338<br/>Some History: Classical Economics #and Keynes 338<br/>The Classical View / The Keynesian View<br/>What Causes Macro Instability? 340<br/>Mainstream View / Monetarist View / Real-Business-Cycle <br/>View / Coordination Failures<br/>Does the Economy ?Self-Correct?? 344<br/>New Classical View of Self-Correction / Mainstream #View of Self-Correction<br/>Rules or Discretion? 347<br/>In Support of Policy Rules / In Defense of Discretionary Stabilization Policy / <br/>Increased Macro Stability<br/>Consider This: On the Road Again 348<br/>Summary of Alternative Views 350<br/>Last Word: The Taylor Rule: Could a Robot Replace Alan Greenspan? 351<br/>PART SIX<br/>Microeconomics of Product Markets<br/> 20 Elasticity of Demand and Supply 356<br/>Price Elasticity of Demand 356<br/>The Price Elasticity Coefficient and Formula / Interpretations of Ed / <br/>Refinement: Midpoint Formula / Graphical Analysis / The <br/>Total-Revenue Test / Price Elasticity and the Total-Revenue Curve / Determinants <br/>of Price Elasticity of Demand / Applications <br/>of Price Elasticity of Demand<br/>Consider This: A Bit of a Stretch 358<br/>Price Elasticity of Supply 364<br/>Price Elasticity of Supply: The Market Period / Price #Elasticity of Supply: The <br/>Short Run / Price Elasticity #of Supply: The <br/>Long Run / Applications of Price #Elasticity of Supply<br/>Cross Elasticity and Income Elasticity of #Demand 367<br/>Cross Elasticity of Demand / Income Elasticity of Demand<br/>Last Word: Elasticity and Pricing Power: Why Different Consumers Pay Different <br/>Prices 369<br/> 21 Consumer Behavior and Utility Maximization 372<br/>A Closer Look at the Law of Demand 372<br/>Income and Substitution Effects / Law of Diminishing Marginal Utility<br/>Consider This: Vending Machines and #Marginal Utility 375<br/>Theory of Consumer Behavior 376<br/>Consumer Choice and Budget Constraint / Utility-Maximizing Rule / Numerical <br/>Example / Algebraic Restatement<br/>Utility Maximization and the Demand #Curve 378<br/>Deriving the Demand Schedule and Curve / Income and Substitution Effects <br/>Revisited<br/>Applications and Extensions 379<br/>DVDs and DVD Players / The Diamond-Water Paradox / #The Value of Time / Medical <br/>Care Purchases / Cash and Noncash <br/>Gifts<br/>Last Word: Criminal Behavior 382<br/>Appendix to Chapter 21: Indifference Curve #Analysis 386<br/>The Budget Line: What Is Attainable / Indifference Curves: What Is Preferred / <br/>The Indifference Map / Equilibrium at Tangency <br/>/ The Measurement of Utility / The Derivation <br/>of the Demand Curve<br/> 22 The Costs of Production 392<br/>Economic Costs 392<br/>Explicit and Implicit Costs / Normal Profit as a Cost / Economic Profit (or Pure <br/>Profit) / Short Run and Long Run<br/>Short-Run Production Relationships 394<br/>Law of Diminishing Returns<br/>Consider This: Diminishing Returns from Study 395<br/>Short-Run Production Costs 398<br/>Fixed, Variable, and Total Costs / Per-Unit, or Average, Costs / Marginal Cost / <br/>Shifts of the Cost Curves<br/>Long-Run Production Costs 403<br/>Firm Size and Costs / The Long-Run Cost Curve / Economies and Diseconomies of <br/>Scale / Minimum Efficient Scale and Industry <br/>Structure<br/>Applications and Illustrations 408<br/>Rising Cost of Insurance and Security / Successful #Start-Up Firms / The Verson <br/>Stamping Machine / The Daily Newspaper / <br/>Aircraft and Concrete Plants<br/>Last Word: Irrelevancy of Sunk Costs 409<br/> 23 Pure Competition 413<br/>Four Market Models 413<br/>Pure Competition: Characteristics and Occurrence 414<br/>Relevance of Pure Competition<br/>Demand as Seen by a Purely Competitive #Seller 415<br/>Perfectly Elastic Demand / Average, Total, and Marginal Revenue / Graphical <br/>Portrayal<br/>Profit Maximization in the Short Run 416<br/>Total-Revenue?Total-Cost Approach: Profit-Maximization Case / Marginal-<br/>Revenue?Marginal-Cost Approach<br/>Consider This: The Still There Motel 423<br/>Marginal Cost and Short-Run Supply 423<br/>Generalized Depiction / Diminishing Returns, Production Costs, and Product <br/>Supply / Changes in Supply / Firm and Industry: <br/>Equilibrium Price<br/>Profit Maximization in the Long Run 427<br/>Assumptions / Goal of Our Analysis / Long-Run Equilibrium / Long-Run Supply for <br/>a Constant-Cost Industry / Long-Run <br/>Supply for an Increasing-Cost Industry / Long-Run Supply for a Decreasing-Cost <br/>Industry<br/>Pure Competition and Efficiency 431<br/>Productive Efficiency: P 5 Minimum ATC / Allocative #Efficiency: P 5 MC<br/>Last Word: Pure Competition and Consumer Surplus 434<br/> 24 Pure Monopoly 438<br/>An Introduction to Pure Monopoly 438<br/>Examples of Monopoly / Dual Objectives of the #Study of Monopoly<br/>Barriers to Entry 439<br/>Economies of Scale / Legal Barriers to Entry: #Patents and Licenses / Ownership <br/>or Control of Essential Resources / Pricing <br/>and Other Strategic #Barriers to Entry<br/>Monopoly Demand 441<br/>Marginal Revenue Is Less Than Price / The Monopolist #Is a Price Maker / The <br/>Monopolist Sets <br/>Prices in the #Elastic Region of Demand<br/>Output and Price Determination 444<br/>Cost Data / MR 5 MC Rule / No Monopoly Supply #Curve / Misconceptions Concerning <br/>Monopoly Pricing / Possibility of <br/>Losses by Monopolist<br/>Economic Effects of Monopoly 447<br/>Price, Output, and Efficiency / Income Transfer / Cost Complications / <br/>Assessment and Policy Options<br/>Price Discrimination 451<br/>Conditions / Examples of Price Discrimination / Price Discrimination Outcomes<br/>Consider This: Price Discrimination at the Ballpark 452<br/>Regulated Monopoly 453<br/>Socially Optimal Price: P 5 MC / Fair-Return Price: P 5 ATC / Dilemma of <br/>Regulation<br/>Last Word: De Beers? Diamonds:<br/>Are Monopolies Forever? 456<br/> 25 Monopolistic Competition and #Oligopoly 460<br/>Monopolistic Competition 460<br/>Relatively Large Number of Sellers / Differentiated Products / Easy Entry and <br/>Exit / Advertising / Monopolistically Competitive <br/>Industries<br/>Price and Output in Monopolistic #Competition 462<br/>The Firm?s Demand Curve / The Short Run: Profit or Loss / The Long Run: Only a <br/>Normal Profit<br/>Monopolistic Competition and Efficiency 464<br/>Neither Productive nor Allocative Efficiency / #Excess Capacity<br/>Product Variety 466<br/>Benefits of Product Variety / Further Complexity<br/>Oligopoly 467<br/>A Few Large Producers / Homogeneous or Differentiated Products / Control over <br/>Price, but Mutual Interdependence / Entry <br/>Barriers / Mergers / Measures of Industry Concentration<br/>Oligopoly Behavior: A Game-Theory #Overview 469<br/>Mutual Interdependence Revisited / Collusive Tendencies / Incentive to Cheat<br/>Consider This: Creative Strategic Behavior 470<br/>Three Oligopoly Models 471<br/>Kinked-Demand Theory: Noncollusive Oligopoly / #Cartels and Other Collusion / <br/>Price Leadership Model<br/>Oligopoly and Advertising 477<br/>Positive Effects of Advertising / Potential Negative #Effects of Advertising<br/>Oligopoly and Efficiency 479<br/>Productive and Allocative Efficiency / Qualifications<br/>Last Word: Oligopoly in the Beer Industry 480<br/> 26 Technology, R&D, and Efficiency 484<br/>Invention, Innovation, and Diffusion 484<br/>Invention / Innovation / Diffusion / R&D Expenditures / Modern View of <br/>Technological Advance<br/>Role of Entrepreneurs and Other #Innovators 486<br/>Forming Start-Ups / Innovating within Existing Firms / Anticipating the Future / <br/>Exploiting University and Government <br/>Scientific Research<br/>A Firm?s Optimal Amount of R&D 488<br/>Interest-Rate Cost of Funds / Expected Rate of Return / Optimal R&D Expenditures<br/>Increased Profit via Innovation 490<br/>Increased Revenue via Product Innovation / Reduced #Cost via Process Innovation<br/>Imitation and R&D Incentives 493<br/>Benefits of Being First<br/>Consider This: Trade Secrets 494<br/>Role of Market Structure 495<br/>Market Structure and Technological Advance / #Inverted-U Theory / Market <br/>Structure and #Technological Advance: The <br/>Evidence<br/>Technological Advance and Efficiency 497<br/>Productive Efficiency / Allocative Efficiency / Creative Destruction<br/>Last Word: On the Path to the Personal #Computer and Internet 498<br/>PART SEVEN<br/>Microeconomics of Resource Markets<br/> 27 The Demand for Resources 504<br/>Significance of Resource Pricing 504<br/>Marginal Productivity Theory of #Resource Demand 505<br/>Resource Demand as a Derived Demand / Marginal Revenue Product / Rule for <br/>Employing Resources: #MRP 5 MRC / MRP as <br/>Resource Demand Schedule / Resource Demand under Imperfect Product Market <br/>Competition / Market Demand for a Resource<br/>Determinants of Resource Demand 509<br/>Changes in Product Demand / Changes in Productivity / Changes in the Prices of <br/>Other Resources / Occupational Employment <br/>Trends<br/>Consider This: She?s The One 509<br/>Elasticity of Resource Demand 513<br/>Optimal Combination of Resources 514<br/>The Least-Cost Rule / The Profit-Maximizing Rule / #Numerical Illustration<br/>Marginal Productivity Theory of Income Distribution 516<br/>Last Word: Input Substitution: The Case of ATMs 517<br/> 28 Wage Determination 521<br/>Labor, Wages, and Earnings 521<br/>General Level of Wages 522<br/>Role of Productivity / Real Wages and Productivity / #Secular Growth of Real <br/>Wages<br/>A Purely Competitive Labor Market 524<br/>Market Demand for Labor / Market Supply of Labor / #Labor Market Equilibrium<br/>Monopsony Model 526<br/>Upward-Sloping Labor Supply to Firm / MRC Higher #than the Wage Rate / <br/>Equilibrium Wage and Employment / Examples of <br/>Monopsony Power<br/>Three Union Models 528<br/>Demand-Enhancement Model / Exclusive or Craft Union Model / Inclusive or <br/>Industrial Union <br/>Model / Wage #Increases and Unemployment<br/>Bilateral Monopoly Model 531<br/>Indeterminate Outcome of Bilateral Monopoly / #Desirability of Bilateral <br/>Monopoly<br/>The Minimum-Wage Controversy 532<br/>Case against the Minimum Wage / Case for the #Minimum Wage / Evidence and <br/>Conclusions<br/>Wage Differentials 533<br/>Marginal Revenue Productivity / Noncompeting Groups / Compensating Differences / <br/>Market Imperfections<br/>Consider This: My Entire Life 536<br/>Pay for Performance 537<br/>The Principal-Agent Problem Revisited / Addenda: Negative Side Effects of Pay <br/>for Performance<br/>Last Word: Are Chief Executive Officers (CEOs) #Overpaid? 539<br/> 29 Rent, Interest, and Profit 542<br/>Economic Rent 542<br/>Perfectly Inelastic Supply / Changes in Demand / #Land Rent: A Surplus Payment / <br/>Application: A Single #Tax on Land / <br/>Productivity Differences and Rent #Differences / Alternative Uses of Land<br/>Interest 545<br/>Loanable Funds Theory of Interest / Extending the Model / Range of Interest <br/>Rates / Pure Rate of Interest / Role of the Interest <br/>Rate / Application: Usury Laws<br/>Consider This: That Is Interest 547<br/>Economic Profit 551<br/>Role of the Entrepreneur / Sources of Economic #Profit / Functions of Profit<br/>Last Word: Determining the Price of Credit 553<br/>Income Shares 554<br/>PART EIGHT<br/>Microeconomics of Government<br/> 30 Government and Market #Failure 558<br/>Public Goods 558<br/>Demand for Public Goods / Supply of Public Goods / Optimal Quantity of a Public <br/>Good / Cost-Benefit Analysis<br/>Externalities 562<br/>Spillover Costs / Spillover Benefits / Individual Bargaining: Coase Theorem / <br/>Liability Rules and Lawsuits / Government <br/>Intervention / A Market-Based Approach to Spillover Costs / Society?s Optimal <br/>Amount of Externality Reduction / Recycling / <br/>Global Warming<br/>Information Failures 572<br/>Inadequate Information Involving Sellers / Inadequate Information Involving <br/>Buyers / Qualification<br/>Consider This: ?Lemons? 572<br/>Last Word: Lojack: A Case of Positive #Externalities 576<br/> 31 Public Choice Theory and the Economics of Taxation 580<br/>Revealing Preferences through Majority #Voting 580<br/>Inefficient Voting Outcomes / Paradox of Voting / #Median-Voter Model<br/>Government Failure 584<br/>Special Interests and Rent Seeking / Clear Benefits, Hidden Costs / Limited and <br/>Bundled Choice / Bureaucracy and Inefficiency / <br/>Imperfect Institutions<br/>Apportioning the Tax Burden 586<br/>Benefits Received versus Ability to Pay / Progressive, Proportional, and <br/>Regressive Taxes<br/>Tax Incidence and Efficiency Loss 589<br/>Elasticity and Tax Incidence / Efficiency Loss of a Tax / Probable Incidence of <br/>U.S. Taxes / The U.S. Tax Structure<br/>Last Word: ?Government Failure? in the News 594<br/>PART NINE<br/>Microeconomic Issues and Policies<br/> 32 Antitrust Policy and #Regulation 598<br/>The Antitrust Laws 598<br/>Historical Background / Sherman Act of 1890 / Clayton Act of 1914 / Federal <br/>Trade Commission <br/>Act of 1914 / #Celler-Kefauver Act of 1950<br/>Antitrust Policy: Issues and Impacts 600<br/>Issues of Interpretation / Issues of Enforcement / #Effectiveness of Antitrust <br/>Laws<br/>Consider This: Of Catfish and Sneakers (and Other Things in Common) 604<br/>Industrial Regulation 604<br/>Natural Monopoly / Problems with Industrial #Regulation / Legal Cartel Theory<br/>Deregulation 606<br/>Social Regulation 607<br/>Distinguishing Features / The Optimal Level of Social Regulation / Two Reminders<br/>Last Word: The United States v. Microsoft 610<br/> 33 Agriculture: Economics and #Policy 614<br/>Economics of Agriculture 614<br/>Short-Run Problem: Price and Income Instability / #Long-Run Problem: A Declining <br/>Industry<br/>Economics of Farm Policy 620<br/>Rationale for Farm Subsidies / Background: The Parity #Concept / Economics of <br/>Price Supports / #Reduction of Surpluses<br/>Criticisms and Politics 624<br/>Criticisms of the Price Support System / #The Politics of Farm Policy<br/>Recent Reform 626<br/>Freedom to Farm Act of 1996 / The Farm Act of 2002<br/>Last Word: The Sugar Program: A Sweet Deal 628<br/> 34 Income Inequality and #Poverty 631<br/>Facts about Income Inequality 631<br/>Distribution of Personal Income by Income Category / Distribution of Personal <br/>Income by Quintiles (Fifths) / The Lorenz Curve <br/>and Gini Ratio / Income Mobility: The Time Dimension / Effect of Government <br/>Redistribution<br/>Causes of Income Inequality 634<br/>Ability / Education and Training / Discrimination / Preferences and Risks / <br/>Unequal Distribution of Wealth / Market Power / <br/>Luck, Connections, and Misfortune<br/>Trends in Income Inequality 636<br/>Causes of Growing Inequality<br/>Equality versus Efficiency 638<br/>The Case for Equality: Maximizing Total Utility / The Case for Inequality: <br/>Incentives and Efficiency / The Equality-Efficiency <br/>Tradeoff<br/>Consider This: Slicing the Pizza 640<br/>The Economics of Poverty 640<br/>Definition of Poverty / Incidence of Poverty / #Poverty Trends / The ?Invisible? <br/>Poor<br/>The Income-Maintenance System 642<br/>Social Insurance Programs / Public Assistance Programs<br/>Welfare: Goals and Conflicts 644<br/>Common Features / Conflicts among Goals<br/>Welfare Reform 645<br/>Temporary Assistance to Needy Families / #Assessment of TANF<br/>Last Word: U.S. Family Wealth and Its #Distribution 646<br/> 35 Labor Market Institutions and Issues: Unionism, Discrimination, <br/>#Immigration 650<br/>Unionism in America 650<br/>Business Unionism / Union Membership / The Decline of Unionism<br/>Collective Bargaining 652<br/>The Work Agreement / The Bargaining Process<br/>Economic Effects of Unions 654<br/>The Union Wage Advantage / Efficiency and Productivity<br/>Labor Market Discrimination 657<br/>Types of Discrimination / Costs of Discrimination<br/>Economic Analysis of Discrimination 659<br/>Taste-for-Discrimination Model / Statistical Discrimination / Occupational <br/>Segregation: The Crowding Model<br/>Antidiscrimination Policies and Issues 663<br/>The Affirmative Action Controversy / Recent Developments<br/>Immigration 665<br/>Number of Immigrants / Economics of Immigration / Complications and <br/>Modifications / Immigration: Two Views<br/>Last Word: Orchestrating Impartiality 668<br/> 36 The Economics of Health Care 672<br/>The Health Care Industry 672<br/>Twin Problems: Costs and Access 672<br/>High and Rising Health Care Costs 673<br/>Health Care Spending / Quality of Care: Are We Healthier? / Economic <br/>Implications of Rising Costs / The Basic Problem<br/>Limited Access 676<br/>Why the Rapid Rise in Costs? 676<br/>Peculiarities of the Health Care Market / The Increasing Demand for Health Care <br/>/ Role of Health Insurance / #Supply Factors <br/>in Rising Health Care Prices / #Relative Importance<br/>Consider This: What?s Cold and Clammy and #Out of Date? 682<br/>Reform of the Health Care System 682<br/>Universal Access / Cost Containment: Altering Incentives / Recent Laws and <br/>Proposals<br/>Last Word: A Market for Human Organs? 686<br/>PART TEN<br/>International Economics and #the World Economy<br/> 37 International Trade 690<br/>Some Key Facts 690<br/>The Economic Basis for Trade 691<br/>Comparative Advantage: Graphical #Analysis 692<br/>Two Isolated Nations / Specializing Based on Comparative Advantage / Terms of <br/>Trade / Gains from Trade / Trade with <br/>Increasing Costs / The Case for Free Trade<br/>Supply and Demand Analysis of Exports and Imports 697<br/>Supply and Demand in the United States / Supply and Demand in Canada / <br/>Equilibrium World Price, #Exports, and Imports<br/>Trade Barriers 700<br/>Economic Impact of Tariffs / Economic Impact of <br/>Quotas / Net Costs of Tariffs and Quotas / Impact #on Income Distribution<br/>The Case for Protection: A Critical Review 703<br/>Military Self-Sufficiency Argument / Increased Domestic Employment Argument / <br/>Diversification-for-Stability Argument / Infant <br/>Industry Argument / Protection-against-Dumping Argument / Cheap Foreign Labor <br/>Argument / A Summing Up<br/>Consider This: Shooting Yourself in the Foot 704<br/>Last Word: The WTO Protests 706<br/>The World Trade Organization 707<br/> 38 Exchange Rates, the Balance of Payments, and Trade Deficits 711<br/>Financing International Trade 711<br/>U.S. Export Transaction / U.S. Import Transaction<br/>The Balance of Payments 712<br/>Current Account / Capital Account / Official Reserves <br/>Account / Payments, Deficits, and Surpluses<br/>Flexible Exchange Rates 715<br/>Depreciation and Appreciation / Determinants of Exchange Rates / Flexible Rates <br/>and the Balance of Payments / Disadvantages <br/>of Flexible Exchange Rates<br/>Consider This: The Big Mac Index 717<br/>Fixed Exchange Rates 720<br/>Use of Reserves / Trade Policies / Exchange Controls and Rationing / Domestic <br/>Macroeconomic Adjustments<br/>International Exchange-Rate Systems 722<br/>The Gold Standard: Fixed Exchange Rates / The Bretton Woods System / The Current <br/>System: The Managed Float<br/>Recent U.S. Trade Deficits 726<br/>Causes of the Trade Deficits / Implications of #U.S. Trade Deficits<br/>Last Word: Speculation in Currency Markets 728<br/>39Web The Economics of Developing Countries 732<br/>(Web Chapter, www.mcconnell16.com)<br/>The Rich and the Poor 39W-1<br/>Classifications / Comparisons / Growth, Decline, and #Income Gaps / The Human <br/>Realities of Poverty<br/>Obstacles to Economic Development 39W-3<br/>Natural Resources / Human Resources / Capital #Accumulation / Technological <br/>Advance / Sociocultural and Institutional <br/>Factors<br/>The Vicious Circle 39W-10<br/>Role of Government 39W-11<br/>A Positive Role / Public Sector Problems<br/>Role of Advanced Nations 39W-12<br/>Expanding Trade / Foreign Aid: Public Loans #and Grants / Flows of Private <br/>Capital<br/>Where from Here? 39W-15<br/>DVC Policies for Promoting Growth / IAC Policies for #Fostering DVC Growth<br/>Last Word: Famine in Africa 39W-16<br/>40Web Transition Economies: Russia and China 733<br/>(Web Chapter, www.mcconnell16.com)<br/>Ideology and Institutions 40W-1<br/>State Ownership and Central Planning 40W-2<br/>Planning Goals and Techniques<br/>Problems with Central Planning 40W-3<br/>The Coordination Problem / The Incentive Problem<br/>Collapse of the Soviet Economy 40W-5<br/>Declining Growth / Poor Product Quality / Lack of Consumer Goods / Large <br/>Military Burden / Agricultural Drag<br/>The Russian Transition to a Market #System 40W-6<br/>Privatization / Price Reform / Promotion of Competition / Making the Ruble Fully <br/>Convertible / Price-Level Stabilization / Other <br/>Major Problems / Recent Revival<br/>Market Reforms in China 40W-10<br/>Agricultural and Rural Reform / Reform of Urban Industries / Special Economic <br/>Zones / Development of Supporting Institutions <br/>/ Transformation of the SOEs<br/>Outcomes and Prospects 40W-11<br/>Positive Outcomes of Reform / Problems<br/>Conclusion 40W-13<br/>Last Word: Police Smash Down Smirnov?s #Doors 40W-14<br/>Glossary G<br/>Index I-1 |