Microeconomics: Principles, Problems, and Policies, Twenty-First Edition
By Campbell R. McConnell, Stanley L. Brue and Sean M. Flynn
Contents:
List of Key Graphs ix
Preface x
Reviewers xix
Tables xxxiii
PART ONE
Introduction to Economics and
the Economy 1
Chapter 1
Limits, Alternatives, and Choices 2
The Economic Perspective 3
Scarcity and Choice / Purposeful Behavior / Marginal
Analysis: Comparing Benefits and Costs
Consider This: Free for All? 3
Consider This: Fast-Food Lines 4
Theories, Principles, and Models 4
Microeconomics and Macroeconomics 5
Microeconomics / Macroeconomics / Positive and
Normative Economics
Individual’s Economizing Problem 6
Limited Income / Unlimited Wants / A Budget Line
Consider This: Did Zuckerberg, Seacrest, and Swift Make
Bad Choices? 8
Society’s Economizing Problem 9
Scarce Resources / Resource Categories
Production Possibilities Model 9
Production Possibilities Table / Production Possibilities
Curve / Law of Increasing Opportunity Costs / Optimal
Allocation
Consider This: The Economics of War 12
Unemployment, Growth, and the Future 13
A Growing Economy / Present Choices and Future
Possibilities / A Qualification: International Trade
Last Word: Pitfalls to Sound Economic Reasoning 16
Chapter 1 Appendix: Graphs and Their Meaning 21
Chapter 2
The Market System and the Circular Flow 27
Economic Systems 27
Laissez-Faire Capitalism / The Command System /
The Market System
Characteristics of the Market System 29
Private Property / Freedom of Enterprise and Choice /
Self-Interest / Competition / Markets and Prices /
Technology and Capital Goods / Specialization / Use of
Money / Active, but Limited, Government
Five Fundamental Questions 32
What Will Be Produced? / How Will the Goods and
Services Be Produced? / Who Will Get the
Output? / How Will the System Accommodate
Change? / How Will the System Promote Progress?
Consider This: McHits and McMisses 33
The “Invisible Hand” 36
The Demise of the Command Systems / The Incentive Problem
Consider This: The Two Koreas 37
The Circular Flow Model 37
Households / Businesses / Product Market / Resource Market
How the Market System Deals with Risk 39
The Profit System / Shielding Employees and Suppliers
from Business Risk / Benefits of Restricting Business Risk
to Owners Consider This: Insurance 40
Last Word: Shuffling the Deck 41
PART TWO
Price, Quantity, and Efficiency 46
Chapter 3
Demand, Supply, and Market Equilibrium 47
Markets 48
Demand 48
Law of Demand / The Demand Curve / Market Demand /
Changes in Demand / Changes in Quantity Demanded
Supply 53
Law of Supply / The Supply Curve / Market
Supply / Determinants of Supply / Changes in
Supply / Changes in Quantity Supplied
Market Equilibrium 56
Equilibrium Price and Quantity / Rationing Function of
Prices / Efficient Allocation
Consider This: Uber and Dynamic Pricing 58
Changes in Supply, Demand, and Equilibrium 58
Changes in Demand / Changes in Supply / Complex Cases
Consider This: Salsa and Coffee Beans 60
Application: Government-Set Prices 60
Price Ceilings on Gasoline / Rent Controls / Price Floors
on Wheat
Last Word: Student Loans and Tuition Costs 62
Chapter 3 Appendix: Additional Examples of
Supply and Demand 69
Chapter 4
Market Failures: Public Goods and
Externalities 76
Market Failures in Competitive Markets 77
Demand-Side Market Failures / Supply-Side Market
Failures
Efficiently Functioning Markets 77
Consumer Surplus / Producer Surplus / Efficiency
Revisited / Efficiency Losses (or Deadweight Losses)
Public Goods 82
Private Goods Characteristics / Public Goods
Characteristics / Optimal Quantity of a Public
Good / Demand for Public Goods / Comparing MB and
MC / Cost-Benefit Analysis / Quasi-Public Goods / The
Reallocation Process
Consider This: Street Entertainers 84
Consider This: Responding to Digital Free Riding 85
Externalities 88
Negative Externalities / Positive Externalities /
Government Intervention /
Consider This: The Fable of the Bees 90
Society’s Optimal Amount of Externality Reduction 91
MC, MB, and Equilibrium Quantity / Shifts in Locations of
the Curves / Government’s Role in the Economy
Last Word: Carbon Dioxide Emissions, Cap and Trade, and
Carbon Taxes 93
Chapter 4 Appendix: Information Failures 98
Chapter 5
Government’s Role and Government Failure 102
Government’s Economic Role 102
Government’s Right to Coerce / The Problem of Directing
and Managing Government
Consider This: Does Big Government Equal Bad
Government? 103
Government Failure 104
Representative Democracy and the Principal-Agent
Problem / Clear Benefits, Hidden Costs / Unfunded
Liabilities / Chronic Budget Deficits / Misdirection of
Stabilization Policy / Limited and Bundled Choice /
Bureaucracy and Inefficiency / Inefficient Regulation and
Intervention / Corruption / Imperfect Institutions
Consider This: Mohair and the Collective Action Problem 105
Consider This: Government, Scofflaw 108
Last Word: “Government Failure” in the News 112
Chapter 5 Appendix: Public Choice Theory and
Voting Paradoxes 115
Consider This: Voter Failure 118
PART THREE
Consumer Behavior 121
Chapter 6
Elasticity 122
Price Elasticity of Demand 122
The Price-Elasticity Coefficient and
Formula / Interpretations of Ed
The Total-Revenue Test 124
Elastic Demand / Inelastic Demand / Unit
Elasticity / Price Elasticity along a Linear Demand
Curve / Price Elasticity and the Total-Revenue Curve
Consider This: A Bit of a Stretch 126
Determinants of Price Elasticity of Demand 128
Applications of Price Elasticity of Demand
Price Elasticity of Supply 130
Price Elasticity of Supply: The Immediate Market Period /
Price Elasticity of Supply: The Short Run / Price Elasticity
of Supply: The Long Run / Applications of Price Elasticity
of Supply
Consider This: Elasticity and College Costs 131
Cross Elasticity and Income Elasticity of Demand 133
Cross Elasticity of Demand / Income Elasticity of Demand
Last Word: Elasticity and Pricing Power: Why Different
Consumers Pay Different Prices 134
Chapter 7
Utility Maximization 139
Law of Diminishing Marginal Utility 139
Terminology / Total Utility and Marginal Utility / Marginal
Utility and Demand
Theory of Consumer Behavior 142
Consumer Choice and the Budget Constraint /
Utility-Maximizing Rule / Numerical Example /
Algebraic Generalization
Consider This: There’s No Accounting for Taste 144
Utility Maximization and the Demand Curve 144
Deriving the Demand Schedule and Curve
Income and Substitution Effects 145
Applications and Extensions 146
iPads / The Diamond-Water Paradox / Opportunity Cost
and the Value of Time / Medical Care Purchases / Cash
and Noncash Gifts
Last Word: Criminal Behavior 147
Chapter 7 Appendix: Indifference Curve Analysis 152
Consider This: Indifference Maps and
Topographical Maps 156
Chapter 8
Behavioral Economics 159
Systematic Errors and the Origin of Behavioral Economics 160
Comparing Behavioral Economics with Neoclassical
Economics
Consider This: Wannamaker’s Lament 162
Our Efficient, Error-Prone Brains 162
Heuristics Are Energy Savers / Brain Modularity
Prospect Theory 166
Losses and Shrinking Packages / Framing Effects and
Advertising / Anchoring and Credit Card Bills / Mental
Accounting and Overpriced Warranties / The Endowment
Effect and Market Transactions / Status Quo Bias
Consider This: Rising Consumption and the Hedonic
Treadmill 166
Myopia and Time Inconsistency 169
Myopia / Time Inconsistency
Consider This: A Bright Idea 170
Fairness and Self-Interest 171
Field Evidence for Fairness / Experimental Evidence for
Fairness
Last Word: The Behavioral Insights Team 174
PART FOUR
Microeconomics of Product Markets 179
Chapter 9
Businesses and the Costs of Production 180
Economic Costs 180
Explicit and Implicit Costs / Accounting Profit and Normal
Profit / Economic Profit / Short Run and Long Run
Short-Run Production Relationships 183
Law of Diminishing Returns
Consider This: Diminishing Returns from Study 184
Short-Run Production Costs 187
Fixed, Variable, and Total Costs / Per-Unit, or Average,
Costs / Marginal Cost / Shifts of the Cost Curves
Consider This: Ignoring Sunk Costs 189
Long-Run Production Costs 192
Firm Size and Costs / The Long-Run Cost
Curve / Economies and Diseconomies of
Scale / Minimum Efficient Scale and Industry Structure
Last Word: 3-D Printers 196
Applications and Illustrations 197
Rising Gasoline Prices / Successful Start-Up Firms /
The Verson Stamping Machine / The Daily
Newspaper / Aircraft and Concrete Plants
Chapter 10
Pure Competition in the Short Run 202
Four Market Models 202
Pure Competition: Characteristics and
Occurrence 203
Demand as Seen by a Purely Competitive Seller 204
Perfectly Elastic Demand / Average, Total, and Marginal
Revenue
Profit Maximization in the Short Run:
Total-Revenue–Total-Cost Approach 205
Profit Maximization in the Short Run: Marginal-
Revenue–Marginal-Cost Approach 206
Profit-Maximizing Case / Loss-Minimizing Case /
Shutdown Case
Marginal Cost and Short-Run Supply 211
Generalized Depiction / Diminishing Returns, Production
Costs, and Product Supply / Changes in Supply / Firm
and Industry: Equilibrium Price
Consider This: The “Still There” Motel 213
Last Word: Fixed Costs: Digging Yourself Out of a
Hole 214
Chapter 11
Pure Competition in the Long Run 220
The Long Run in Pure Competition 220
Profit Maximization in the Long Run
The Long-Run Adjustment Process in Pure Competition 221
Long-Run Equilibrium
Long-Run Supply Curves 223
Long-Run Supply for a Constant-Cost Industry / Long-Run
Supply for an Increasing-Cost Industry / Long-Run Supply
for a Decreasing-Cost Industry
Pure Competition and Efficiency 225
Productive Efficiency: P = Minimum ATC / Allocative
Efficiency: P = MC / Maximum Consumer and Producer
Surplus / Dynamic Adjustments / “Invisible Hand” Revisited
Last Word: A Patent Failure? 228
Technological Advance and Competition 228
Creative Destruction
Consider This: Running a Company Is Hard
Business 230
Chapter 12
Pure Monopoly 234
An Introduction to Pure Monopoly 234
Examples of Monopoly / Dual Objectives of the
Study of Monopoly
Barriers to Entry 235
Economies of Scale / Legal Barriers to Entry: Patents and
Licenses / Ownership or Control of Essential
Resources / Pricing and Other Strategic Barriers
to Entry
Monopoly Demand 237
Marginal Revenue Is Less Than Price / The Monopolist Is
a Price Maker / The Monopolist Sets Prices in the Elastic
Region of Demand
Output and Price Determination 240
Cost Data / MR = MC Rule / No Monopoly Supply
Curve / Misconceptions Concerning Monopoly
Pricing / Possibility of Losses by Monopolist
Economic Effects of Monopoly 243
Price, Output, and Efficiency / Income Transfer /
Cost Complications / Assessment and Policy
Options
Price Discrimination 247
Conditions / Examples of Price Discrimination /
Graphical Analysis
Consider This: Some Price Differences at the
Ballpark 248
Regulated Monopoly 249
Socially Optimal Price: P = MC / Fair-Return Price:
P = ATC / Dilemma of Regulation
Last Word: Personalized Pricing 251
Chapter 13
Monopolistic Competition 256
Monopolistic Competition 256
Relatively Large Number of Sellers / Differentiated
Products / Easy Entry and
Exit / Advertising / Monopolistically Competitive
Industries
Price and Output in Monopolistic Competition 259
The Firm’s Demand Curve / The Short Run: Profit or
Loss / The Long Run: Only a Normal Profit
Monopolistic Competition and Efficiency 261
Neither Productive nor Allocative Efficiency / Excess
Capacity
Product Variety 262
Benefits of Product Variety / Further Complexity
Last Word: Higher Wages, More McRestaurants 263
Consider This: The Spice of Life 264
Chapter 14
Oligopoly and Strategic Behavior 267
Oligopoly 268
A Few Large Producers / Homogeneous or Differentiated
Products / Control over Price, but Mutual Interdependence /
Entry Barriers / Mergers / Oligopolistic Industries
Consider This: Creative Strategic Behavior 269
Oligopoly Behavior: A Game Theory Overview 270
Mutual Interdependence Revisited / Collusion /
Incentive to Cheat
Consider This: The Prisoner’s Dilemma 271
Three Oligopoly Models 272
Kinked-Demand Theory: Noncollusive Oligopoly / Cartels
and Other Collusion / Price Leadership Model
Oligopoly and Advertising 278
Positive Effects of Advertising / Potential Negative Effects
of Advertising
Oligopoly and Efficiency 279
Productive and Allocative Efficiency / Qualifications
Additional Game Theory Applications 280
A One-Time Game: Strategies and Equilibrium / Credible
and Empty Threats / Repeated Games and Reciprocity
Strategies / First-Mover Advantages and Preemption of
Entry / Extensive Form Representation of Sequential
Games / A Leader-Follower (Stackelberg Duopoly) Game
Last Word: Internet Oligopolies 286
Chapter 15
Technology, R&D, and Efficiency 292
Invention, Innovation, and Diffusion 293
Invention / Innovation / Diffusion / R&D
Expenditures / Modern View of Technological Advance
Role of Entrepreneurs and Other Innovators 295
Forming Start-Ups / Innovating within Existing
Firms / Anticipating the Future / Exploiting University
and Government Scientific Research
A Firm’s Optimal Amount of R&D 296
Interest-Rate Cost of Funds / Expected Rate of
Return / Optimal R&D Expenditures
Increased Profit via Innovation 299
Increased Revenue via Product Innovation / Reduced Cost
via Process Innovation
Imitation and R&D Incentives 301
Benefits of Being First / Profitable Buyouts
Consider This: Trade Secrets 302
Role of Market Structure 303
Market Structure and Technological Advance / Inverted-U
Theory of R&D / Market Structure and Technological
Advance: The Evidence
Technological Advance and Efficiency 305
Productive Efficiency / Allocative Efficiency / Creative Destruction
Last Word: The Relative Decline of Federal
R&D Spending 306
PART FIVE
Microeconomics of Resource
Markets and Government 311
Chapter 16
The Demand for Resources 312
Significance of Resource Pricing 313
Marginal Productivity Theory of Resource Demand 313
Resource Demand as a Derived Demand / Marginal
Revenue Product / Rule for Employing Resources: MRP =
MRC / MRP as Resource Demand Schedule / Resource
Demand under Imperfect Product Market
Competition / Market Demand for a Resource
Determinants of Resource Demand 316
Changes in Product Demand / Changes in
Productivity / Changes in the Prices of Other
Resources / Occupational Employment Trends
Consider This: Superstars 317
Elasticity of Resource Demand 320
Optimal Combination of Resources 321
The Least-Cost Rule / The Profit-Maximizing
Rule / Numerical Illustration
Marginal Productivity Theory of Income
Distribution 325
Last Word: Labor and Capital: Substitutes or
Complements? 324
Chapter 17
Wage Determination 329
Labor, Wages, and Earnings 330
General Level of Wages / Role of Productivity / Real
Wages and Productivity / Long-Run Trend of Real Wages
A Purely Competitive Labor Market 332
Market Demand for Labor / Market Supply of
Labor / Labor Market Equilibrium
Consider This: Fringe Benefits vs. Take-Home Pay 334
Monopsony Model 334
Upsloping Labor Supply to Firm / MRC Higher Than the
Wage Rate / Equilibrium Wage and Employment /
Examples of Monopsony Power
Three Union Models 336
Demand-Enhancement Model / Exclusive or Craft Union
Model / Inclusive or Industrial Union Model /
Wage Increases and Job Loss
Bilateral Monopoly Model 339
Indeterminate Outcome of Bilateral Monopoly /
Desirability of Bilateral Monopoly
The Minimum-Wage Controversy 339
Case against the Minimum Wage / Case for the Minimum
Wage / Evidence and Conclusions
Wage Differentials 340
Marginal Revenue Productivity / Noncompeting Groups /
Compensating Differences / Market Imperfections
Consider This: My Entire Life 343
Pay for Performance 344
The Principal-Agent Problem / Addenda: Negative Side
Effects of Pay for Performance
Last Word: Occupational Licensing 346
Chapter 17 Appendix: Labor Unions and
Their Impacts 351
Chapter 18
Rent, Interest, and Profit 357
Economic Rent 358
Perfectly Inelastic Supply / Equilibrium Rent and Changes
in Demand / Productivity Differences and Rent
Differences / Land Rent: A Surplus Payment / Land
Ownership: Fairness versus Allocative
Efficiency / Application: A Single Tax on Land
Interest 361
Money Is Not a Resource / Interest Rates and Interest
Income / Range of Interest Rates / Pure Rate of Interest
Loanable Funds Theory of Interest Rates 362
Supply of Loanable Funds / Demand for Loanable
Funds / Extending the Model
Time-Value of Money 364
Compound Interest / Future Value and Present Value
Consider This: That Is Interest 365
Role of Interest Rates 365
Interest and Total Output / Interest and the Allocation of
Capital / Interest and R&D Spending / Nominal and Real
Interest Rates / Application: Usury Laws
Economic Profit 367
Entrepreneurship and Profit / Insurable and Uninsurable
Risks / Sources of Uninsurable Risks / Profit as
Compensation for Bearing Uninsurable Risks / Sources of
Economic Profit / Profit Rations
Entrepreneurship / Entrepreneurs, Profits, and Corporate
Stockholders
Consider This: Profits and Efficiency 369
Last Word: Determining the Price of Credit 370
Income Shares 372
Chapter 19
Natural Resource and Energy Economics 376
Resource Supplies: Doom or Boom? 376
Population Growth / Resource Consumption per Person
Consider This: Can Governments Raise Birthrates? 378
Energy Economics 381
Energy Efficiency Is Increasing / Efficient Electricity Use
Running Out of Energy? 383
Consider This: Storage Wars 384
Natural Resource Economics 385
Renewables vs. Nonrenewables / Optimal Resource
Management / Using Present Values to Evaluate Future
Possibilities / Nonrenewable Resources / Incomplete
Property Rights Lead to Excessive Present
Use / Application: Conflict Diamonds
Renewable Resources 389
Elephant Preservation / Forest Management / Optimal
Fisheries Management / Policies to Limit Catch Sizes
Consider This: The Tragedy of the Commons 393
Last Word: Is Economic Growth Bad for the
Environment? 394
Chapter 20
Public Finance: Expenditures and Taxes 399
Government and the Circular Flow 400
Government Finance 401
Government Purchases and Transfers / Government Revenues
Federal Finance 402
Federal Expenditures / Federal Tax Revenues
State and Local Finance 404
State Finances / Local Finances
Consider This: State Lotteries: A Good Bet? 405
Local, State, and Federal Employment 406
Apportioning the Tax Burden 406
Benefits Received versus Ability to Pay / Progressive,
Proportional, and Regressive Taxes
Consider This: The VAT: A Very Alluring Tax? 409
Tax Incidence and Efficiency Loss 409
Elasticity and Tax Incidence / Efficiency Loss of a Tax
Probable Incidence of U.S. Taxes 412
Personal Income Tax / Payroll Taxes / Corporate Income
Tax / Sales and Excise Taxes / Property Taxes / The U.S.
Tax Structure
Last Word: Taxation and Spending: Redistribution versus
Recycling 414
PART SIX
Microeconomic Issues and Policies 420
Chapter 21
Antitrust Policy and Regulation 421
The Antitrust Laws 421
Historical Background / Sherman Act of 1890 / Clayton
Act of 1914 / Federal Trade Commission Act of
1914 / Celler-Kefauver Act of 1950
Antitrust Policy: Issues and Impacts 423
Issues of Interpretation / Issues of
Enforcement / Effectiveness of Antitrust Laws
Consider This: Of Airfare and eBooks (and Other Things in Common) 427
Industrial Regulation 428
Natural Monopoly / Problems with Industrial
Regulation / Legal Cartel Theory / Deregulation
Social Regulation 430
Distinguishing Features / The Optimal Level of Social
Regulation / Two Reminders
Last Word: Antitrust Online 433
Chapter 22
Agriculture: Economics and Policy 437
Economics of Agriculture 437
The Short Run: Price and Income Instability
The Long Run: A Declining Industry 441
Technology and Supply Increases / Lagging
Demand / Graphical Portrayal / Consequences /
Farm-Household Income
Consider This: Risky Business 442
Economics of Farm Policy 444
Rationale for Farm Subsidies / Background: The Parity
Concept / Economics of Price Supports / Reduction of Surpluses
Consider This: Putting Corn in Your Gas Tank 447
Criticisms and Politics 447
Criticisms of the Parity Concept / Criticisms of the Price-
Support System / The Politics of Farm Policy
Recent Farm Policies 449
Freedom to Farm Act of 1996 / The Food, Conservation,
and Energy Act of 2008 / The Agricultural Act of 2014
Last Word: The Sugar Program: A
Sweet Deal 450
Chapter 23
Income Inequality, Poverty, and
Discrimination 455
Facts about Income Inequality 456
Distribution by Income Category / Distribution by Quintiles
(Fifths) / The Lorenz Curve and Gini Ratio / Income
Mobility: The Time Dimension / Effect of Government
Redistribution
Causes of Income Inequality 458
Ability / Education and
Training / Discrimination / Preferences and
Risks / Unequal Distribution of Wealth / Market
Power / Luck, Connections, and Misfortune
Income Inequality over Time 460
Rising Income Inequality since 1975 / Causes of Growing Inequality
Consider This: Laughing at The Lego Movie 462
Equality versus Efficiency 462
The Case for Equality: Maximizing Total Utility / The Case
for Inequality: Incentives and Efficiency / The Equality-Efficiency Trade-off
Consider This: Slicing the Pizza 464
The Economics of Poverty 464
Definition of Poverty / Incidence of Poverty / Poverty
Trends / Measurement Issues
The U.S. Income-Maintenance System 466
Social Insurance Programs / Public Assistance Programs
Consider This: Welfare Cliffs 468
Economic Analysis of Discrimination 469
Taste-for-Discrimination Model / Statistical
Discrimination / Occupational Segregation: The Crowding
Model / Cost to Society as Well as to Individuals
Last Word: U.S. Family Wealth and Its Distribution 473
Chapter 24
Health Care 479
The Health Care Industry 479
The U.S. Emphasis on Private Health Insurance / Twin
Problems: Costs and Access / High and Rising Health
Care Costs / Quality of Care: Are We Healthier?
Economic Implications of Rising Costs? 482
Reduced Access to Care / Labor Market
Effects / Personal Bankruptcies / Impact on Government
Budgets / Too Much Spending?
Limited Access 484
Why the Rapid Rise in Costs? 484
Peculiarities of the Health Care Market / The Increasing
Demand for Health Care / Role of Health
Insurance / Supply Factors in Rising Health Care
Prices / Relative Importance
Consider This: Why Do Hospitals Sometimes Charge $25
for an Aspirin? 486
Consider This: Electronic Medical Records 490
Cost Containment: Altering Incentives 491
Deductibles and Copayments / Health Savings
Accounts / Managed Care / Medicare and DRG / Limits
on Malpractice Awards
The Patient Protection and Affordable Care Act 493
Major Provisions / Objections and Alternatives
Consider This: PPACA Implementation Problems 494
Last Word: Singapore’s Efficient and Effective Health
Care System 495
Chapter 25
Immigration 500
Number of Immigrants 500
Legal Immigrants / Illegal Immigrants
The Decision to Migrate 502
Earnings Opportunities / Moving Costs / Factors
Affecting Costs and Benefits
Economic Effects of Immigration 504
Personal Gains / Impacts on Wage Rates, Efficiency, and
Output / Income Shares / Complications and
Modifications / Fiscal Impacts / Research Findings
Consider This: Stars and Stripes 506
The Illegal Immigration Debate 509
Employment Effects / Wage Effects / Price
Effects / Fiscal Impacts on Local and State
Governments / Other Concerns
Last Word: The Startling Slowdown in Illegal Immigration 511
Optimal Immigration 512
PART SEVEN
International Economics 517
Chapter 26
International Trade 518
Some Key Trade Facts 519
The Economic Basis for Trade 520
Comparative Advantage / Two Isolated
Nations / Specializing Based on Comparative
Advantage / Terms of Trade / Gains from Trade / Trade
with Increasing Costs / The Case for Free Trade
Consider This: A CPA and a House Painter 521
Consider This: Misunderstanding the Gains from Trade 526
Supply and Demand Analysis of Exports and Imports 527
Supply and Demand in the United States / Supply and
Demand in Canada / Equilibrium World Price, Exports, and Imports
Trade Barriers and Export Subsidies 531
Economic Impact of Tariffs / Economic Impact of
Quotas / Net Costs of Tariffs and Quotas
Consider This: Buy American? 531
The Case for Protection: A Critical Review 533
Military Self-Sufficiency Argument / Diversification-for-
Stability Argument / Infant Industry Argument / Protectionagainst-
Dumping Argument / Increased Domestic
Employment Argument / Cheap Foreign Labor Argument
Multilateral Trade Agreements and Free-Trade Zones 536
General Agreement on Tariffs and Trade / World Trade
Organization / The European Union / North American
Free Trade Agreement / Recognizing Those Hurt by Free
Trade / Trade Adjustment Assistance / Offshoring of Jobs
Last Word: Petition of the Candlemakers, 1845 539
Chapter 27
The Balance of Payments, Exchange
Rates, and Trade Deficits 544
International Financial Transactions 544
The Balance of Payments 545
Current Account / Capital and Financial
Account / Why the Balance?
Flexible Exchange Rates 548
Depreciation and Appreciation / Determinants of Exchange
Rates / Disadvantages of Flexible Exchange Rates
Fixed Exchange Rates 553
Foreign Exchange Market / Official Reserves / The Sizes of
Currency Purchases and Sales / Small and Alternating
Changes in FX Reserves and the Domestic Money Supply /
Large and Continuous Changes in FX Reserves and the
Domestic Money Supply / Confusing Payments Terminology
Consider This: China’s Inflationary Peg 556
The Current Exchange Rate System: The Managed Float 558
Recent U.S. Trade Deficits 560
Causes of the Trade Deficits / Implications of U.S. Trade Deficits
Last Word: Are Common Currencies Common Sense? 562
Chapter 27 Appendix Previous International
Exchange-Rate Systems 567
Chapter 28
The Economics of Developing Countries 571
The Rich and the Poor 571
Classifications / Comparisons / Growth, Decline, and
Income Gaps / The Human Realities of Poverty
Obstacles to Economic Development 574
Natural Resources / Human Resources / Capital
Accumulation / Technological Advance / Sociocultural
and Institutional Factors
The Vicious Circle 580
The Role of Government 581
A Positive Role / Public-Sector Problems
The Role of Advanced Nations 583
Expanding Trade / Admitting Temporary
Workers / Discouraging Arms Sales / Foreign Aid: Public
Loans and Grants / Flows of Private Capital
Last Word: Microfinance and Cash Transfers
Glossary G1
Index IND0
Reviewers xix
Tables xxxiii
PART ONE
Introduction to Economics and
the Economy 1
Chapter 1
Limits, Alternatives, and Choices 2
The Economic Perspective 3
Scarcity and Choice / Purposeful Behavior / Marginal
Analysis: Comparing Benefits and Costs
Consider This: Free for All? 3
Consider This: Fast-Food Lines 4
Theories, Principles, and Models 4
Microeconomics and Macroeconomics 5
Microeconomics / Macroeconomics / Positive and
Normative Economics
Individual’s Economizing Problem 6
Limited Income / Unlimited Wants / A Budget Line
Consider This: Did Zuckerberg, Seacrest, and Swift Make
Bad Choices? 8
Society’s Economizing Problem 9
Scarce Resources / Resource Categories
Production Possibilities Model 9
Production Possibilities Table / Production Possibilities
Curve / Law of Increasing Opportunity Costs / Optimal
Allocation
Consider This: The Economics of War 12
Unemployment, Growth, and the Future 13
A Growing Economy / Present Choices and Future
Possibilities / A Qualification: International Trade
Last Word: Pitfalls to Sound Economic Reasoning 16
Chapter 1 Appendix: Graphs and Their Meaning 21
Chapter 2
The Market System and the Circular Flow 27
Economic Systems 27
Laissez-Faire Capitalism / The Command System /
The Market System
Characteristics of the Market System 29
Private Property / Freedom of Enterprise and Choice /
Self-Interest / Competition / Markets and Prices /
Technology and Capital Goods / Specialization / Use of
Money / Active, but Limited, Government
Five Fundamental Questions 32
What Will Be Produced? / How Will the Goods and
Services Be Produced? / Who Will Get the
Output? / How Will the System Accommodate
Change? / How Will the System Promote Progress?
Consider This: McHits and McMisses 33
The “Invisible Hand” 36
The Demise of the Command Systems / The Incentive Problem
Consider This: The Two Koreas 37
The Circular Flow Model 37
Households / Businesses / Product Market / Resource Market
How the Market System Deals with Risk 39
The Profit System / Shielding Employees and Suppliers
from Business Risk / Benefits of Restricting Business Risk
to Owners Consider This: Insurance 40
Last Word: Shuffling the Deck 41
PART TWO
Price, Quantity, and Efficiency 46
Chapter 3
Demand, Supply, and Market Equilibrium 47
Markets 48
Demand 48
Law of Demand / The Demand Curve / Market Demand /
Changes in Demand / Changes in Quantity Demanded
Supply 53
Law of Supply / The Supply Curve / Market
Supply / Determinants of Supply / Changes in
Supply / Changes in Quantity Supplied
Market Equilibrium 56
Equilibrium Price and Quantity / Rationing Function of
Prices / Efficient Allocation
Consider This: Uber and Dynamic Pricing 58
Changes in Supply, Demand, and Equilibrium 58
Changes in Demand / Changes in Supply / Complex Cases
Consider This: Salsa and Coffee Beans 60
Application: Government-Set Prices 60
Price Ceilings on Gasoline / Rent Controls / Price Floors
on Wheat
Last Word: Student Loans and Tuition Costs 62
Chapter 3 Appendix: Additional Examples of
Supply and Demand 69
Chapter 4
Market Failures: Public Goods and
Externalities 76
Market Failures in Competitive Markets 77
Demand-Side Market Failures / Supply-Side Market
Failures
Efficiently Functioning Markets 77
Consumer Surplus / Producer Surplus / Efficiency
Revisited / Efficiency Losses (or Deadweight Losses)
Public Goods 82
Private Goods Characteristics / Public Goods
Characteristics / Optimal Quantity of a Public
Good / Demand for Public Goods / Comparing MB and
MC / Cost-Benefit Analysis / Quasi-Public Goods / The
Reallocation Process
Consider This: Street Entertainers 84
Consider This: Responding to Digital Free Riding 85
Externalities 88
Negative Externalities / Positive Externalities /
Government Intervention /
Consider This: The Fable of the Bees 90
Society’s Optimal Amount of Externality Reduction 91
MC, MB, and Equilibrium Quantity / Shifts in Locations of
the Curves / Government’s Role in the Economy
Last Word: Carbon Dioxide Emissions, Cap and Trade, and
Carbon Taxes 93
Chapter 4 Appendix: Information Failures 98
Chapter 5
Government’s Role and Government Failure 102
Government’s Economic Role 102
Government’s Right to Coerce / The Problem of Directing
and Managing Government
Consider This: Does Big Government Equal Bad
Government? 103
Government Failure 104
Representative Democracy and the Principal-Agent
Problem / Clear Benefits, Hidden Costs / Unfunded
Liabilities / Chronic Budget Deficits / Misdirection of
Stabilization Policy / Limited and Bundled Choice /
Bureaucracy and Inefficiency / Inefficient Regulation and
Intervention / Corruption / Imperfect Institutions
Consider This: Mohair and the Collective Action Problem 105
Consider This: Government, Scofflaw 108
Last Word: “Government Failure” in the News 112
Chapter 5 Appendix: Public Choice Theory and
Voting Paradoxes 115
Consider This: Voter Failure 118
PART THREE
Consumer Behavior 121
Chapter 6
Elasticity 122
Price Elasticity of Demand 122
The Price-Elasticity Coefficient and
Formula / Interpretations of Ed
The Total-Revenue Test 124
Elastic Demand / Inelastic Demand / Unit
Elasticity / Price Elasticity along a Linear Demand
Curve / Price Elasticity and the Total-Revenue Curve
Consider This: A Bit of a Stretch 126
Determinants of Price Elasticity of Demand 128
Applications of Price Elasticity of Demand
Price Elasticity of Supply 130
Price Elasticity of Supply: The Immediate Market Period /
Price Elasticity of Supply: The Short Run / Price Elasticity
of Supply: The Long Run / Applications of Price Elasticity
of Supply
Consider This: Elasticity and College Costs 131
Cross Elasticity and Income Elasticity of Demand 133
Cross Elasticity of Demand / Income Elasticity of Demand
Last Word: Elasticity and Pricing Power: Why Different
Consumers Pay Different Prices 134
Chapter 7
Utility Maximization 139
Law of Diminishing Marginal Utility 139
Terminology / Total Utility and Marginal Utility / Marginal
Utility and Demand
Theory of Consumer Behavior 142
Consumer Choice and the Budget Constraint /
Utility-Maximizing Rule / Numerical Example /
Algebraic Generalization
Consider This: There’s No Accounting for Taste 144
Utility Maximization and the Demand Curve 144
Deriving the Demand Schedule and Curve
Income and Substitution Effects 145
Applications and Extensions 146
iPads / The Diamond-Water Paradox / Opportunity Cost
and the Value of Time / Medical Care Purchases / Cash
and Noncash Gifts
Last Word: Criminal Behavior 147
Chapter 7 Appendix: Indifference Curve Analysis 152
Consider This: Indifference Maps and
Topographical Maps 156
Chapter 8
Behavioral Economics 159
Systematic Errors and the Origin of Behavioral Economics 160
Comparing Behavioral Economics with Neoclassical
Economics
Consider This: Wannamaker’s Lament 162
Our Efficient, Error-Prone Brains 162
Heuristics Are Energy Savers / Brain Modularity
Prospect Theory 166
Losses and Shrinking Packages / Framing Effects and
Advertising / Anchoring and Credit Card Bills / Mental
Accounting and Overpriced Warranties / The Endowment
Effect and Market Transactions / Status Quo Bias
Consider This: Rising Consumption and the Hedonic
Treadmill 166
Myopia and Time Inconsistency 169
Myopia / Time Inconsistency
Consider This: A Bright Idea 170
Fairness and Self-Interest 171
Field Evidence for Fairness / Experimental Evidence for
Fairness
Last Word: The Behavioral Insights Team 174
PART FOUR
Microeconomics of Product Markets 179
Chapter 9
Businesses and the Costs of Production 180
Economic Costs 180
Explicit and Implicit Costs / Accounting Profit and Normal
Profit / Economic Profit / Short Run and Long Run
Short-Run Production Relationships 183
Law of Diminishing Returns
Consider This: Diminishing Returns from Study 184
Short-Run Production Costs 187
Fixed, Variable, and Total Costs / Per-Unit, or Average,
Costs / Marginal Cost / Shifts of the Cost Curves
Consider This: Ignoring Sunk Costs 189
Long-Run Production Costs 192
Firm Size and Costs / The Long-Run Cost
Curve / Economies and Diseconomies of
Scale / Minimum Efficient Scale and Industry Structure
Last Word: 3-D Printers 196
Applications and Illustrations 197
Rising Gasoline Prices / Successful Start-Up Firms /
The Verson Stamping Machine / The Daily
Newspaper / Aircraft and Concrete Plants
Chapter 10
Pure Competition in the Short Run 202
Four Market Models 202
Pure Competition: Characteristics and
Occurrence 203
Demand as Seen by a Purely Competitive Seller 204
Perfectly Elastic Demand / Average, Total, and Marginal
Revenue
Profit Maximization in the Short Run:
Total-Revenue–Total-Cost Approach 205
Profit Maximization in the Short Run: Marginal-
Revenue–Marginal-Cost Approach 206
Profit-Maximizing Case / Loss-Minimizing Case /
Shutdown Case
Marginal Cost and Short-Run Supply 211
Generalized Depiction / Diminishing Returns, Production
Costs, and Product Supply / Changes in Supply / Firm
and Industry: Equilibrium Price
Consider This: The “Still There” Motel 213
Last Word: Fixed Costs: Digging Yourself Out of a
Hole 214
Chapter 11
Pure Competition in the Long Run 220
The Long Run in Pure Competition 220
Profit Maximization in the Long Run
The Long-Run Adjustment Process in Pure Competition 221
Long-Run Equilibrium
Long-Run Supply Curves 223
Long-Run Supply for a Constant-Cost Industry / Long-Run
Supply for an Increasing-Cost Industry / Long-Run Supply
for a Decreasing-Cost Industry
Pure Competition and Efficiency 225
Productive Efficiency: P = Minimum ATC / Allocative
Efficiency: P = MC / Maximum Consumer and Producer
Surplus / Dynamic Adjustments / “Invisible Hand” Revisited
Last Word: A Patent Failure? 228
Technological Advance and Competition 228
Creative Destruction
Consider This: Running a Company Is Hard
Business 230
Chapter 12
Pure Monopoly 234
An Introduction to Pure Monopoly 234
Examples of Monopoly / Dual Objectives of the
Study of Monopoly
Barriers to Entry 235
Economies of Scale / Legal Barriers to Entry: Patents and
Licenses / Ownership or Control of Essential
Resources / Pricing and Other Strategic Barriers
to Entry
Monopoly Demand 237
Marginal Revenue Is Less Than Price / The Monopolist Is
a Price Maker / The Monopolist Sets Prices in the Elastic
Region of Demand
Output and Price Determination 240
Cost Data / MR = MC Rule / No Monopoly Supply
Curve / Misconceptions Concerning Monopoly
Pricing / Possibility of Losses by Monopolist
Economic Effects of Monopoly 243
Price, Output, and Efficiency / Income Transfer /
Cost Complications / Assessment and Policy
Options
Price Discrimination 247
Conditions / Examples of Price Discrimination /
Graphical Analysis
Consider This: Some Price Differences at the
Ballpark 248
Regulated Monopoly 249
Socially Optimal Price: P = MC / Fair-Return Price:
P = ATC / Dilemma of Regulation
Last Word: Personalized Pricing 251
Chapter 13
Monopolistic Competition 256
Monopolistic Competition 256
Relatively Large Number of Sellers / Differentiated
Products / Easy Entry and
Exit / Advertising / Monopolistically Competitive
Industries
Price and Output in Monopolistic Competition 259
The Firm’s Demand Curve / The Short Run: Profit or
Loss / The Long Run: Only a Normal Profit
Monopolistic Competition and Efficiency 261
Neither Productive nor Allocative Efficiency / Excess
Capacity
Product Variety 262
Benefits of Product Variety / Further Complexity
Last Word: Higher Wages, More McRestaurants 263
Consider This: The Spice of Life 264
Chapter 14
Oligopoly and Strategic Behavior 267
Oligopoly 268
A Few Large Producers / Homogeneous or Differentiated
Products / Control over Price, but Mutual Interdependence /
Entry Barriers / Mergers / Oligopolistic Industries
Consider This: Creative Strategic Behavior 269
Oligopoly Behavior: A Game Theory Overview 270
Mutual Interdependence Revisited / Collusion /
Incentive to Cheat
Consider This: The Prisoner’s Dilemma 271
Three Oligopoly Models 272
Kinked-Demand Theory: Noncollusive Oligopoly / Cartels
and Other Collusion / Price Leadership Model
Oligopoly and Advertising 278
Positive Effects of Advertising / Potential Negative Effects
of Advertising
Oligopoly and Efficiency 279
Productive and Allocative Efficiency / Qualifications
Additional Game Theory Applications 280
A One-Time Game: Strategies and Equilibrium / Credible
and Empty Threats / Repeated Games and Reciprocity
Strategies / First-Mover Advantages and Preemption of
Entry / Extensive Form Representation of Sequential
Games / A Leader-Follower (Stackelberg Duopoly) Game
Last Word: Internet Oligopolies 286
Chapter 15
Technology, R&D, and Efficiency 292
Invention, Innovation, and Diffusion 293
Invention / Innovation / Diffusion / R&D
Expenditures / Modern View of Technological Advance
Role of Entrepreneurs and Other Innovators 295
Forming Start-Ups / Innovating within Existing
Firms / Anticipating the Future / Exploiting University
and Government Scientific Research
A Firm’s Optimal Amount of R&D 296
Interest-Rate Cost of Funds / Expected Rate of
Return / Optimal R&D Expenditures
Increased Profit via Innovation 299
Increased Revenue via Product Innovation / Reduced Cost
via Process Innovation
Imitation and R&D Incentives 301
Benefits of Being First / Profitable Buyouts
Consider This: Trade Secrets 302
Role of Market Structure 303
Market Structure and Technological Advance / Inverted-U
Theory of R&D / Market Structure and Technological
Advance: The Evidence
Technological Advance and Efficiency 305
Productive Efficiency / Allocative Efficiency / Creative Destruction
Last Word: The Relative Decline of Federal
R&D Spending 306
PART FIVE
Microeconomics of Resource
Markets and Government 311
Chapter 16
The Demand for Resources 312
Significance of Resource Pricing 313
Marginal Productivity Theory of Resource Demand 313
Resource Demand as a Derived Demand / Marginal
Revenue Product / Rule for Employing Resources: MRP =
MRC / MRP as Resource Demand Schedule / Resource
Demand under Imperfect Product Market
Competition / Market Demand for a Resource
Determinants of Resource Demand 316
Changes in Product Demand / Changes in
Productivity / Changes in the Prices of Other
Resources / Occupational Employment Trends
Consider This: Superstars 317
Elasticity of Resource Demand 320
Optimal Combination of Resources 321
The Least-Cost Rule / The Profit-Maximizing
Rule / Numerical Illustration
Marginal Productivity Theory of Income
Distribution 325
Last Word: Labor and Capital: Substitutes or
Complements? 324
Chapter 17
Wage Determination 329
Labor, Wages, and Earnings 330
General Level of Wages / Role of Productivity / Real
Wages and Productivity / Long-Run Trend of Real Wages
A Purely Competitive Labor Market 332
Market Demand for Labor / Market Supply of
Labor / Labor Market Equilibrium
Consider This: Fringe Benefits vs. Take-Home Pay 334
Monopsony Model 334
Upsloping Labor Supply to Firm / MRC Higher Than the
Wage Rate / Equilibrium Wage and Employment /
Examples of Monopsony Power
Three Union Models 336
Demand-Enhancement Model / Exclusive or Craft Union
Model / Inclusive or Industrial Union Model /
Wage Increases and Job Loss
Bilateral Monopoly Model 339
Indeterminate Outcome of Bilateral Monopoly /
Desirability of Bilateral Monopoly
The Minimum-Wage Controversy 339
Case against the Minimum Wage / Case for the Minimum
Wage / Evidence and Conclusions
Wage Differentials 340
Marginal Revenue Productivity / Noncompeting Groups /
Compensating Differences / Market Imperfections
Consider This: My Entire Life 343
Pay for Performance 344
The Principal-Agent Problem / Addenda: Negative Side
Effects of Pay for Performance
Last Word: Occupational Licensing 346
Chapter 17 Appendix: Labor Unions and
Their Impacts 351
Chapter 18
Rent, Interest, and Profit 357
Economic Rent 358
Perfectly Inelastic Supply / Equilibrium Rent and Changes
in Demand / Productivity Differences and Rent
Differences / Land Rent: A Surplus Payment / Land
Ownership: Fairness versus Allocative
Efficiency / Application: A Single Tax on Land
Interest 361
Money Is Not a Resource / Interest Rates and Interest
Income / Range of Interest Rates / Pure Rate of Interest
Loanable Funds Theory of Interest Rates 362
Supply of Loanable Funds / Demand for Loanable
Funds / Extending the Model
Time-Value of Money 364
Compound Interest / Future Value and Present Value
Consider This: That Is Interest 365
Role of Interest Rates 365
Interest and Total Output / Interest and the Allocation of
Capital / Interest and R&D Spending / Nominal and Real
Interest Rates / Application: Usury Laws
Economic Profit 367
Entrepreneurship and Profit / Insurable and Uninsurable
Risks / Sources of Uninsurable Risks / Profit as
Compensation for Bearing Uninsurable Risks / Sources of
Economic Profit / Profit Rations
Entrepreneurship / Entrepreneurs, Profits, and Corporate
Stockholders
Consider This: Profits and Efficiency 369
Last Word: Determining the Price of Credit 370
Income Shares 372
Chapter 19
Natural Resource and Energy Economics 376
Resource Supplies: Doom or Boom? 376
Population Growth / Resource Consumption per Person
Consider This: Can Governments Raise Birthrates? 378
Energy Economics 381
Energy Efficiency Is Increasing / Efficient Electricity Use
Running Out of Energy? 383
Consider This: Storage Wars 384
Natural Resource Economics 385
Renewables vs. Nonrenewables / Optimal Resource
Management / Using Present Values to Evaluate Future
Possibilities / Nonrenewable Resources / Incomplete
Property Rights Lead to Excessive Present
Use / Application: Conflict Diamonds
Renewable Resources 389
Elephant Preservation / Forest Management / Optimal
Fisheries Management / Policies to Limit Catch Sizes
Consider This: The Tragedy of the Commons 393
Last Word: Is Economic Growth Bad for the
Environment? 394
Chapter 20
Public Finance: Expenditures and Taxes 399
Government and the Circular Flow 400
Government Finance 401
Government Purchases and Transfers / Government Revenues
Federal Finance 402
Federal Expenditures / Federal Tax Revenues
State and Local Finance 404
State Finances / Local Finances
Consider This: State Lotteries: A Good Bet? 405
Local, State, and Federal Employment 406
Apportioning the Tax Burden 406
Benefits Received versus Ability to Pay / Progressive,
Proportional, and Regressive Taxes
Consider This: The VAT: A Very Alluring Tax? 409
Tax Incidence and Efficiency Loss 409
Elasticity and Tax Incidence / Efficiency Loss of a Tax
Probable Incidence of U.S. Taxes 412
Personal Income Tax / Payroll Taxes / Corporate Income
Tax / Sales and Excise Taxes / Property Taxes / The U.S.
Tax Structure
Last Word: Taxation and Spending: Redistribution versus
Recycling 414
PART SIX
Microeconomic Issues and Policies 420
Chapter 21
Antitrust Policy and Regulation 421
The Antitrust Laws 421
Historical Background / Sherman Act of 1890 / Clayton
Act of 1914 / Federal Trade Commission Act of
1914 / Celler-Kefauver Act of 1950
Antitrust Policy: Issues and Impacts 423
Issues of Interpretation / Issues of
Enforcement / Effectiveness of Antitrust Laws
Consider This: Of Airfare and eBooks (and Other Things in Common) 427
Industrial Regulation 428
Natural Monopoly / Problems with Industrial
Regulation / Legal Cartel Theory / Deregulation
Social Regulation 430
Distinguishing Features / The Optimal Level of Social
Regulation / Two Reminders
Last Word: Antitrust Online 433
Chapter 22
Agriculture: Economics and Policy 437
Economics of Agriculture 437
The Short Run: Price and Income Instability
The Long Run: A Declining Industry 441
Technology and Supply Increases / Lagging
Demand / Graphical Portrayal / Consequences /
Farm-Household Income
Consider This: Risky Business 442
Economics of Farm Policy 444
Rationale for Farm Subsidies / Background: The Parity
Concept / Economics of Price Supports / Reduction of Surpluses
Consider This: Putting Corn in Your Gas Tank 447
Criticisms and Politics 447
Criticisms of the Parity Concept / Criticisms of the Price-
Support System / The Politics of Farm Policy
Recent Farm Policies 449
Freedom to Farm Act of 1996 / The Food, Conservation,
and Energy Act of 2008 / The Agricultural Act of 2014
Last Word: The Sugar Program: A
Sweet Deal 450
Chapter 23
Income Inequality, Poverty, and
Discrimination 455
Facts about Income Inequality 456
Distribution by Income Category / Distribution by Quintiles
(Fifths) / The Lorenz Curve and Gini Ratio / Income
Mobility: The Time Dimension / Effect of Government
Redistribution
Causes of Income Inequality 458
Ability / Education and
Training / Discrimination / Preferences and
Risks / Unequal Distribution of Wealth / Market
Power / Luck, Connections, and Misfortune
Income Inequality over Time 460
Rising Income Inequality since 1975 / Causes of Growing Inequality
Consider This: Laughing at The Lego Movie 462
Equality versus Efficiency 462
The Case for Equality: Maximizing Total Utility / The Case
for Inequality: Incentives and Efficiency / The Equality-Efficiency Trade-off
Consider This: Slicing the Pizza 464
The Economics of Poverty 464
Definition of Poverty / Incidence of Poverty / Poverty
Trends / Measurement Issues
The U.S. Income-Maintenance System 466
Social Insurance Programs / Public Assistance Programs
Consider This: Welfare Cliffs 468
Economic Analysis of Discrimination 469
Taste-for-Discrimination Model / Statistical
Discrimination / Occupational Segregation: The Crowding
Model / Cost to Society as Well as to Individuals
Last Word: U.S. Family Wealth and Its Distribution 473
Chapter 24
Health Care 479
The Health Care Industry 479
The U.S. Emphasis on Private Health Insurance / Twin
Problems: Costs and Access / High and Rising Health
Care Costs / Quality of Care: Are We Healthier?
Economic Implications of Rising Costs? 482
Reduced Access to Care / Labor Market
Effects / Personal Bankruptcies / Impact on Government
Budgets / Too Much Spending?
Limited Access 484
Why the Rapid Rise in Costs? 484
Peculiarities of the Health Care Market / The Increasing
Demand for Health Care / Role of Health
Insurance / Supply Factors in Rising Health Care
Prices / Relative Importance
Consider This: Why Do Hospitals Sometimes Charge $25
for an Aspirin? 486
Consider This: Electronic Medical Records 490
Cost Containment: Altering Incentives 491
Deductibles and Copayments / Health Savings
Accounts / Managed Care / Medicare and DRG / Limits
on Malpractice Awards
The Patient Protection and Affordable Care Act 493
Major Provisions / Objections and Alternatives
Consider This: PPACA Implementation Problems 494
Last Word: Singapore’s Efficient and Effective Health
Care System 495
Chapter 25
Immigration 500
Number of Immigrants 500
Legal Immigrants / Illegal Immigrants
The Decision to Migrate 502
Earnings Opportunities / Moving Costs / Factors
Affecting Costs and Benefits
Economic Effects of Immigration 504
Personal Gains / Impacts on Wage Rates, Efficiency, and
Output / Income Shares / Complications and
Modifications / Fiscal Impacts / Research Findings
Consider This: Stars and Stripes 506
The Illegal Immigration Debate 509
Employment Effects / Wage Effects / Price
Effects / Fiscal Impacts on Local and State
Governments / Other Concerns
Last Word: The Startling Slowdown in Illegal Immigration 511
Optimal Immigration 512
PART SEVEN
International Economics 517
Chapter 26
International Trade 518
Some Key Trade Facts 519
The Economic Basis for Trade 520
Comparative Advantage / Two Isolated
Nations / Specializing Based on Comparative
Advantage / Terms of Trade / Gains from Trade / Trade
with Increasing Costs / The Case for Free Trade
Consider This: A CPA and a House Painter 521
Consider This: Misunderstanding the Gains from Trade 526
Supply and Demand Analysis of Exports and Imports 527
Supply and Demand in the United States / Supply and
Demand in Canada / Equilibrium World Price, Exports, and Imports
Trade Barriers and Export Subsidies 531
Economic Impact of Tariffs / Economic Impact of
Quotas / Net Costs of Tariffs and Quotas
Consider This: Buy American? 531
The Case for Protection: A Critical Review 533
Military Self-Sufficiency Argument / Diversification-for-
Stability Argument / Infant Industry Argument / Protectionagainst-
Dumping Argument / Increased Domestic
Employment Argument / Cheap Foreign Labor Argument
Multilateral Trade Agreements and Free-Trade Zones 536
General Agreement on Tariffs and Trade / World Trade
Organization / The European Union / North American
Free Trade Agreement / Recognizing Those Hurt by Free
Trade / Trade Adjustment Assistance / Offshoring of Jobs
Last Word: Petition of the Candlemakers, 1845 539
Chapter 27
The Balance of Payments, Exchange
Rates, and Trade Deficits 544
International Financial Transactions 544
The Balance of Payments 545
Current Account / Capital and Financial
Account / Why the Balance?
Flexible Exchange Rates 548
Depreciation and Appreciation / Determinants of Exchange
Rates / Disadvantages of Flexible Exchange Rates
Fixed Exchange Rates 553
Foreign Exchange Market / Official Reserves / The Sizes of
Currency Purchases and Sales / Small and Alternating
Changes in FX Reserves and the Domestic Money Supply /
Large and Continuous Changes in FX Reserves and the
Domestic Money Supply / Confusing Payments Terminology
Consider This: China’s Inflationary Peg 556
The Current Exchange Rate System: The Managed Float 558
Recent U.S. Trade Deficits 560
Causes of the Trade Deficits / Implications of U.S. Trade Deficits
Last Word: Are Common Currencies Common Sense? 562
Chapter 27 Appendix Previous International
Exchange-Rate Systems 567
Chapter 28
The Economics of Developing Countries 571
The Rich and the Poor 571
Classifications / Comparisons / Growth, Decline, and
Income Gaps / The Human Realities of Poverty
Obstacles to Economic Development 574
Natural Resources / Human Resources / Capital
Accumulation / Technological Advance / Sociocultural
and Institutional Factors
The Vicious Circle 580
The Role of Government 581
A Positive Role / Public-Sector Problems
The Role of Advanced Nations 583
Expanding Trade / Admitting Temporary
Workers / Discouraging Arms Sales / Foreign Aid: Public
Loans and Grants / Flows of Private Capital
Last Word: Microfinance and Cash Transfers
Glossary G1
Index IND0