Essentials of Economics, Twelfth Edition
By Bradley R. Schiller and Karen Gebhardt
Contents:
About the Authors iii
Preface vi
Section I BASICS
Chapter 1
THE CHALLENGE OF ECONOMICS 2
How Did We Get So Rich? 3
The Central Problem of Scarcity 6
Three Basic Economic Questions 7
WHAT to Produce 7
HOW to Produce 12
FOR WHOM to Produce 12
The Mechanisms of Choice 14
The Political Process 14
The Market Mechanism 14
Central Planning 15
Mixed Economies 15
What Economics Is All About 15
Market Failure 15
Government Failure 16
Macro versus Micro 16
Theory versus Reality 16
Politics versus Economics 17
Modest Expectations 18
Policy Perspectives 18
Summary 19
Appendix–Using Graphs 21
Slopes 22
Shifts 22
Linear versus Nonlinear Curves 24
Causation 25
News Wires
Never Enough Money! 4
Will Your Kids Be Better Off? 5
North Korea Unveils “Most Powerful Weapon” 11
Biden Wants $1.9 Trillion 13
Chapter 2
THE U.S. ECONOMY 26
What America Produces 27
How Much Output 27
The Mix of Output 31
Changing Industry Structure 33
How America Produces 35
Factors of Production 35
The Private Sector: Business Types 37
The Government’s Role 38
Striking a Balance 40
FOR WHOM America Produces 40
The Distribution of Income 40
Income Mobility 41
Government Redistribution: Taxes and Transfers 41
Policy Perspectives 43
Summary 43
News Wires
Why Are the Finns So Happy? 31
U.S. Manufacturing: Output vs. Jobs Since 1975 35
The Education Gap between Rich and Poor Nations 37
Income Share of the Rich 42
Chapter 3
SUPPLY AND DEMAND 46
Market Participants 47
Goals 47
Constraints 47
Specialization and Exchange 47
Market Interactions 48
The Two Markets 49
Dollars and Exchange 49
Supply and Demand 50
Demand 50
Individual Demand 50
The Demand Schedule and Demand Curve 51
Determinants of Demand 53
Ceteris Paribus 54
Shifts in Demand 54
Movements versus Shifts 55
Market Demand 56
The Market Demand Curve 56
The Use of Demand Curves 57
Supply 58
Determinants of Supply 58
The Market Supply Curve 59
Shifts in Supply 60
Equilibrium 61
Market Clearing 62
Market Shortage 62
Market Surplus 63
Changes in Equilibrium 64
Disequilibrium Pricing 66
Price Floors 68
Laissez Faire 69
Policy Perspectives 70
Summary 70
News Wires
Campus Drinking and Alcohol Prices 53
Low Gas Prices Threaten EV Sales 55
Rents Rising in Hurricane’s Wake 60
Scalpers Profiting Greatly from Pope’s Visit 63
Apple iPhone 12 Pro Sells Out 63
San Francisco’s Homeless Population Fueled by Rent Controls 67
Section II Microeconomics
Chapter 4
CONSUMER DEMAND 74
Patterns of Consumption 75
Determinants of Demand 76
The Sociopsychiatric Explanation 76
The Economic Explanation 77
The Demand Curve 78
Utility Theory 78
Price and Quantity 80
Price Elasticity 81
Elastic versus Inelastic Demand 82
Price Elasticity and Total Revenue 84
Determinants of Price Elasticity 85
Other Changes in Consumer Behavior 87
Changes in Income 87
Policy Perspectives 87
Summary 89
News Wires
Men versus Women: How They Spend 77
Apple Slashes the Price of iPhone 11 82
Oregon Hikes Cigarette Tax by $2 83
A Starbucks Java Jolt Just Got More Expensive 86
Chapter 5
SUPPLY DECISIONS 92
Capacity Constraints: The Production Function 93
Efficiency 95
Capacity 95
Marginal Physical Product 95
Law of Diminishing Returns 96
Short Run versus Long Run 97
Costs of Production 98
Total Cost 98
Which Costs Matter? 99
Average Cost 100
Marginal Cost 101
Supply Horizons 103
The Short-Run Production Decision 103
The Long-Run Investment Decision 104
Economic versus Accounting Costs 104
Economic Cost 105
Economic Profit 106
Policy Perspectives 106
Summary 107
News Wires
“We Pretend to Work; They Pretend to Pay Us” 97
Tesla Production May Approach 1 Million; Tesla Building Texas
Gigafactory 104
Chapter 6
COMPETITION 110
Market Structure 111
Perfect Competition 113
No Market Power 113
Price Takers 114
Market Demand versus Firm Demand 114
The Firm’s Production Decision 116
Output and Revenues 116
Revenues versus Profits 116
Profit Maximization 117
Price 117
Marginal Cost 117
Profit-Maximizing Rate of Output 117
Total Profit 120
Supply Behavior 121
A Firm’s Supply 122
Market Supply 122
Industry Entry and Exit 123
Entry 124
Tendency toward Zero Economic Profits 125
Exit 125
Equilibrium 126
Low Barriers to Entry 126
Market Characteristics 127
Policy Perspectives 128
Summary 129
News Wires
Catfish Farmers on the Hook 114
Catfish Farmers Quitting 124
The T-Shirt Business: Too Much Competition 127
Chapter 7
MONOPOLY 132
Monopoly Structure 133
Monopoly = Industry 133
Price versus Marginal Revenue 134
Monopoly Behavior 136
Profit Maximization 136
The Production Decision 136
The Monopoly Price 137
Monopoly Profits 137
Barriers to Entry 138
Threat of Entry 139
Patent Protection: Polaroid versus Kodak 139
Other Entry Barriers 140
Comparative Outcomes 142
Competition versus Monopoly 142
Near Monopolies 142
WHAT Gets Produced 143
FOR WHOM 144
HOW 144
Any Redeeming Qualities? 144
Research and Development 144
Entrepreneurial Incentives 145
Economies of Scale 145
Natural Monopolies 146
Contestable Markets 146
Structure versus Behavior 146
Policy Perspectives 147
Summary 147
News Wires
Big Legal Bills for Little Golf Balls 140
Judge Rules Microsoft Abused Monopoly Power 141
Tuna Firms Guilty of Price-Fixing 143
Stifling Would-Be Competition 145
Chapter 8
THE LABOR MARKET 150
Labor Supply 151
Income versus Leisure 152
Market Supply 153
Labor Demand 153
Derived Demand 153
Marginal Physical Product 156
Marginal Revenue Product 156
The Law of Diminishing Returns 156
The Hiring Decision 159
The Firm’s Demand for Labor 159
Market Equilibrium 160
Equilibrium Wage 161
Equilibrium Employment 161
Changing Market Outcomes 161
Changes in Productivity 161
Changes in Price 162
Legal Minimum Wages 162
Labor Unions 164
Policy Perspectives 165
Summary 166
News Wires
Amazon’s Career Day Attracts over 300,000 Job Seekers 152
American Airlines Warns of More Layoffs 154
Most Lucrative College Degrees 155
Alabama’s Nick Saban Gets $200,000 Bonus for Title Win 160
Biden Proposes $15 Minimum Wage 163
Chapter 9
GOVERNMENT INTERVENTION 168
Market Failure 169
The Nature of Market Failure 170
Sources of Market Failure 170
Public Goods 170
Joint Consumption 171
The Free-Rider Dilemma 171
Externalities 173
Consumption Decisions 173
Production Decisions 176
Social versus Private Costs 177
Policy Options 178
Market Power 181
Restricted Supply 181
Antitrust Policy 182
Inequity 182
Macro Instability 184
Policy Perspectives 184
Summary 186
News Wires
Israel’s “Iron Dome” Works! 172
Secondhand Smoke Kills More Than 600,000 People a Year:
Study 174
Biden Halts Keystone Pipeline 179
Breathing Easier 180
Bloomberg: Forced Recycling a Waste 181
Section III Macroeconomics
Chapter 10
THE BUSINESS CYCLE 188
Assessing Macro Performance 190
GDP Growth 191
Business Cycles 191
Real GDP 191
Erratic Growth 192
Unemployment 194
The Labor Force 195
The Unemployment Rate 195
The Full Employment Goal 196
Inflation 199
Relative versus Average Prices 199
Redistributions 200
Uncertainty 205
Measuring Inflation 205
The Price Stability Goal 206
Policy Perspectives 207
Summary 207
News Wires
Market in Panic as Stocks Are Dumped in 12,894,600-Share
Day; Bankers Halt It 189
Lockdowns Hit One-Third of Economy 191
Depression Slams World Economies 193
How Unemployment Affects the Family 197
Shippers, Retailers Hiring Thousands for the Holiday Season 198
Hyperinflation Brings Weimar Republic to a Standstill 200
College Costs Keep Rising 201
Chapter 11
AGGREGATE SUPPLY AND DEMAND 210
A Macro View 211
Macro Outcomes 211
Macro Determinants 212
Stable or Unstable? 212
Classical Theory 212
The Keynesian Revolution 213
The Aggregate Supply–Demand Model 214
Aggregate Demand 214
Aggregate Supply 216
Macro Equilibrium 217
Macro Failure 218
Undesirable Outcomes 218
Unstable Outcomes 220
Shift Factors 221
Competing Theories of Short-Run Instability 223
Demand-Side Theories 223
Supply-Side Theories 224
Eclectic Explanations 224
Policy Options 224
Fiscal Policy 225
Monetary Policy 225
Supply-Side Policy 225
Policy Perspectives 226
Summary 228
News Wires
Job Losses Surge 219
Consumer Confidence Plunges 222
Harvey Slams into Houston Area 222
Chapter 12
FISCAL POLICY 230
Components of Aggregate Demand 231
Consumption 231
Investment 233
Government Spending 234
Net Exports 234
Equilibrium 234
The Nature of Fiscal Policy 235
Fiscal Stimulus 236
More Government Spending 236
Income Transfers 241
Tax Cuts 241
Inflation Worries 243
Fiscal Restraint 244
Budget Cuts 244
Tax Hikes 244
Fiscal Guidelines 245
Policy Perspectives 246
Summary 248
News Wires
Recession Looming 232
Amazon Prime Day Surpasses $10 Billion in Sales 233
Congress Passes Biden Relief Package 237
Trump Tax Cuts Boost Spending 242
Retailers Bracing for Spending Slowdown 245
Chapter 13
MONEY AND BANKS 250
The Uses of Money 251
Many Types of Money 252
The Money Supply 252
Cash versus Money 252
Transactions Accounts 253
Basic Money Supply 253
Near Money 255
Aggregate Demand 255
Creation of Money 255
Deposit Creation 255
A Monopoly Bank 256
Reserve Requirements 257
Excess Reserves 258
A Multibank World 259
The Money Multiplier 259
Limits to Deposit Creation 260
Excess Reserves as Lending Power 260
The Macro Role of Banks 261
Financing Aggregate Demand 261
Constraints on Money Creation 262
Policy Perspectives 262
Summary 263
News Wires
Fish for Flour: Venezuela’s Barter Economy 252
How Would You Like to Pay for That? 254
Chapter 14
MONETARY POLICY 266
The Federal Reserve System 267
Federal Reserve Banks 268
The Board of Governors 268
The Fed Chair 269
Monetary Tools 269
Reserve Requirements 269
The Discount Rate 271
Open Market Operations 273
Powerful Levers 275
Shifting Aggregate Demand 275
Expansionary Policy 276
Restrictive Policy 276
Interest Rate Targets 276
Price versus Output Effects 277
Aggregate Demand 277
Aggregate Supply 277
Policy Perspectives 279
Summary 280
News Wires
China Cuts Reserve Requirements 271
Fed Cuts Key Interest Again 273
Chapter 15
ECONOMIC GROWTH 282
The Nature of Growth 283
Short-Run Changes in Capacity Use 283
Long-Run Changes in Capacity 283
Nominal versus Real GDP 285
Growth Indexes 285
The GDP Growth Rate 285
GDP per Capita: A Measure of Living Standards 286
GDP per Worker: A Measure of Productivity 288
Sources of Productivity Growth 290
Labor Quality 290
Capital Investment 290
Management 290
Research and Development 290
Policy Levers 291
Education and Training 292
Immigration Policy 292
Investment Incentives 292
Savings Incentives 293
Government Finances 294
Deregulation 294
Economic Freedom 295
Policy Perspectives 296
Summary 297
News Wires
What Economic Growth Has Done for U.S. Families 287
Americans Save Little 293
Improvement in Economic Freedom and Economic Growth 296
Section IV International
Chapter 16
INTERNATIONAL TRADE 300
U.S. Trade Patterns 301
Imports 301
Exports 301
Trade Balances 303
Motivation to Trade 304
Production and Consumption without Trade 304
Trade Increases Specialization and World Output 306
Comparative Advantage 307
Opportunity Costs 307
Absolute Costs Don’t Count 308
Terms of Trade 308
Limits to the Terms of Trade 308
The Market Mechanism 308
Protectionist Pressures 309
Microeconomic Losers 309
The Net Gain 310
Barriers to Trade 310
Tariffs 311
Quotas 311
Nontariff Barriers 313
Exchange Rates 314
Global Pricing 314
Appreciation/Depreciation 315
Foreign Exchange Markets 316
Policy Perspectives 317
Summary 318
News Wires
Exports in Relation to GDP 302
Angry French Winemakers Destroy Spanish Wine Stocks 310
Winners and Losers from Trump Steel Tariff 311
Mexico Accepts Trump’s Offer on Sugar Quotas 314
Paris Just Got Cheaper for American Tourists 315
Section V Capstone
Chapter 17
THEORY VERSUS REALITY 322
Policy Tools 323
Fiscal Policy 323
Monetary Policy 326
Supply-Side Policy 327
Idealized Uses 329
Case 1: Recession 329
Case 2: Inflation 329
Case 3: Stagflation 330
Fine-Tuning 331
The Economic Record 331
Why Things Don’t Always Work 333
Goal Conflicts 333
Measurement Problems 334
Design Problems 335
Implementation Problems 336
Policy Perspectives 338
Summary 339
News Wires
Macro Performance, 2000–2017 333
One Year Later, NBER Acknowledges Start of Recession 334
Glossary 341
Index 345