Essentials of Economics, 5th Edition
By Stanley L. Brue, Campbell R. McConnell, Sean M. Flynn and Randy R. Grant
Contents:
Preface xvi
Reviewers xix
PART ONE
Introduction
1 Limits, Alternatives, and Choices 3
The Economic Perspective 4
Scarcity and Choice
Applying the Analysis Is Facebook Free?
Illustrating the Idea Did Zuckerberg, Seacrest,
and Grande Make Bad Choices? 5
Marginal Analysis: Comparing Benefits and Costs 5
Applying the Analysis Fast-Food Lines 6
Theories, Principles, and Models 7
Microeconomics and Macroeconomics 8
Microeconomics / Macroeconomics
Individuals’ Economic Problem 9
Limited Income / Unlimited Wants / A Budget Line
Society’s Economic Problem 12
Scarce Resources / Resource Categories
Production Possibilities Model 13
Production Possibilities Table / Production
Possibilities Curve / Law of Increasing
Opportunity Costs / Optimal Allocation
Unemployment, Growth, and the Future 17
A Growing Economy
Applying the Analysis The Economics of Pandemics 19
Applying the Analysis Information Technology and Biotechnology 20
Present Choices and Future Possibilities
Summary
Terms and Concepts
Questions
Problems
Chapter One Appendix:
Graphs and Their Meaning 25
Construction of a Graph / Direct and Inverse
Relationships / Dependent and Independent
Variables / Other Things Equal / Slope of a Line /
Slope of a Nonlinear Curve
Appendix Summary
Appendix Terms and Concepts
Appendix Questions
Appendix Problems
2 The Market System and the Circular Flow 32
Economic Systems 33
The Command System / The Market System
Applying the Analysis Korea by Night 34
Characteristics of the Market System 35
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
Four Fundamental Questions 40
What Will Be Produced?
Applying the Analysis Consumer Sovereignty in a Pandemic 41
How Will the Goods and Services Be
Produced? / Who Will Get the Output? / How Will
the System Promote Progress?
Applying the Analysis Bitcoin and Cheap Electrons 42
Who Will Get the Output? / How Will the System Promote Progress?
Applying the Analysis The “Invisible Hand” 43
Applying the Analysis The Demise of the
Command Systems 44
The Circular Flow Model 45
Households / Businesses / Product Market / Resource Market
Applying the Analysis Some Facts About U.S. Businesses 47
Applying the Analysis Some Facts About U.S. Households 49
Summary
Terms and Concepts
Questions
Problems
PART TWO
Price, Quantity, and Efficiency
3 Demand, Supply, and Market Equilibrium 54
Demand 55
Law of Demand / The Demand Curve / Market
Demand / Changes in Demand / Changes in
Quantity Demanded
Supply 60
Law of Supply / Market Supply / Determinants of
Supply / Changes in Supply / Changes in
Quantity Supplied
Market Equilibrium 63
Equilibrium Price and Quantity / Rationing
Function of Prices
Applying the Analysis Emergent Equilibria 65
Changes in Demand, Supply, and
Equilibrium 66
Changes in Demand / Changes in Supply /
Complex Cases
Government-Set Prices 68
Applying the Analysis Price Ceilings on Gasoline 68
Applying the Analysis Rent Controls 70
Applying the Analysis Price Floors on
Wheat 70
Summary
Terms and Concepts
Questions
Problems
Chapter Three Appendix: Additional Examples
of Supply and Demand 76
Changes in Supply and Demand / Preset Prices
Applying the Analysis Uber and Dynamic Pricing 79
Appendix Summary
Appendix Questions
Appendix Problems
4 Elasticity of Demand and Supply 83
Price Elasticity of Demand 84
The Price-Elasticity Coefficient and Formula /
Interpretations of Ed
Illustrating the Idea A Bit of a Stretch 87
The Total-Revenue Test / Price Elasticity Along a
Linear Demand Curve / Determinants of Price
Elasticity of Demand
Applying the Analysis The Southwest Effect 91
Applying the Analysis Price Elasticity of
Demand and College Tuition 93
Applying the Analysis Decriminalization of
Illegal Drugs 94
Applying the Analysis Excise Taxes and Tax
Revenue 94
Applying the Analysis Large Crop Yields and
Farm Income 95
Price Elasticity of Supply 95
Price Elasticity of Supply: The Immediate Market
Period / Price Elasticity of Supply: The Short
Run / Price Elasticity of Supply: The Long Run
Applying the Analysis Antiques and Reproductions 98
Applying the Analysis Volatile Gold Prices 98
Income Elasticity of Demand 99
Normal Goods / Inferior Goods
Applying the Analysis Which Consumer
Products Suffer the Greatest Demand
Decreases during Recessions? 99
Cross-Elasticity of Demand 100
Substitute Goods / Complementary Goods /
Independent Goods
Applying the Analysis Using Cross-Elasticity to
Make Business and Regulatory Decisions 101
Summary
Terms and Concepts
Questions
Problems
5 Market Failures: Public Goods and
Externalities 105
Market Failures in Competitive Markets 106
Demand-Side Market Failures / Supply-Side
Market Failures
Efficiently Functioning Markets 107
Private and Public Goods 107
Private Goods Characteristics / Profitable
Provision / Public Goods Characteristics
Illustrating the Idea Art for Art’s Sake 110
Comparing Marginal Benefit and Marginal Cost
Applying the Analysis Cost-Benefit Analysis 112
Externalities 113
Negative Externalities / Positive Externalities
Illustrating the Idea Beekeepers and the Coase Theorem 115
Government Intervention
Applying the Analysis Congestion Pricing 118
Society’s Optimal Amount of Externality Reduction
Financing the Public Sector: Taxation 121
Apportioning the Tax Burden / Benefits
Received versus Ability to Pay / Progressive,
Proportional, and Regressive Taxes / Tax
Progressivity in the United States
Government’s Role in the Economy 125
Summary
Terms and Concepts
Questions
Problems
PART THREE
Product Markets
6 Businesses and Their Costs 131
Economic Costs 132
Explicit and Implicit Costs / Accounting Profit
and Normal Profit / Economic Profit / Short Run
and Long Run
Short-Run Production Relationships 136
Law of Diminishing Returns / Relevancy for Firms
Illustrating the Idea Diminishing Returns from Study 137
Tabular and Graphical Representations
Illustrating the Idea Exam Scores 140
Short-Run Production Costs 140
Fixed, Variable, and Total Costs
Applying the Analysis Sunk Costs 142
Per-Unit, or Average, Costs / Marginal Cost
Applying the Analysis Rising Gasoline Prices 145
Long-Run Production Costs 146
Firm Size and Costs / The Long-Run Cost
Curve / Economies and Diseconomies of Scale
Applying the Analysis The Verson Stamping Machine 150
Minimum Efficient Scale and Industry Structure
Applying the Analysis Aircraft Assembly Plants
versus Concrete Plants 152
Summary
Terms and Concepts
Questions
Problems
7 Pure Competition 157
Four Market Models 158
Pure Competition: Characteristics and Occurrence 159
Demand as Seen by a Purely Competitive Seller 160
Perfectly Elastic Demand / Average, Total, and
Marginal Revenue
Profit Maximization in the Short Run 162
Profit Maximization / Loss-Minimizing Case /
Shutdown Case
Applying the Analysis The Still There Motel 167
Marginal Cost and Short-Run Supply 168
Generalized Depiction / Firm and Industry:
Equilibrium Price
Profit Maximization in the Long Run 172
Assumptions / Goal of Our Analysis / Long-Run
Equilibrium
Applying the Analysis Running a Company Is
Hard Business 175
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 178
Productive Efficiency: P = Minimum ATC /
Allocative Efficiency: P = MC
Summary
Terms and Concepts
Questions
Problems
8 Pure Monopoly 184
An Introduction to Pure Monopoly 185
Barriers to Entry 185
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 187
Marginal Revenue Is Less than Price / The
Monopolist Is a Price Maker
Output and Price Determination 190
Cost Data / MR = MC Rule / Misconceptions
Concerning Monopoly Pricing
Applying the Analysis Salt Monopolies 192
Economic Effects of Monopoly 193
Price, Output, and Efficiency / Income Transfer /
Cost Complications
Applying the Analysis Monopoly Power in the
Internet Age 196
Price Discrimination 197
Conditions / Examples / Graphical Analysis
Applying the Analysis Price Discrimination at
the Ballpark 200
Monopoly and Antitrust Policy 200
Not Widespread / Antitrust Policy
Applying the Analysis United States v.
Microsoft 202
Summary
Terms and Concepts
Questions
Problems
9 Monopolistic Competition and Oligopoly 207
Monopolistic Competition 208
Differentiated Products / Easy Entry and Exit /
Advertising / Monopolistically Competitive Industries
Price and Output in Monopolistic Competition 210
The Firm’s Demand Curve / The Short Run:
Profit or Loss / The Long Run: Only a Normal Profit
Monopolistic Competition and Efficiency 212
Neither Productive nor Allocative Efficiency /
Excess Capacity / Product Variety and Improvement
Applying the Analysis The Spice of Life 214
Oligopoly 215
A Few Large Producers / Homogeneous or
Differentiated Products / Control over Price, but
Mutual Interdependence
Illustrating the Idea Creative Strategic
Behavior 216
Entry Barriers / Mergers
Oligopoly Behavior: A Game-Theory Overview 217
Illustrating the Idea The Prisoner’s Dilemma 217
Mutual Interdependence Revisited / Collusion / Incentive to Cheat
Kinked-Demand Model 220
Kinked-Demand Curve / Price Inflexibility / Price Leadership
Applying the Analysis Breakdowns in Price
Leadership: Price Wars 222
Collusion 223
Joint-Profit Maximization
Applying the Analysis Cartels and
Collusion 224
Obstacles to Collusion
Oligopoly and Advertising 226
Positive Effects of Advertising / Potential
Negative Effects of Advertising
Oligopoly and Efficiency 228
Inefficiency
Applying the Analysis Internet Oligopolies 229
Summary
Terms and Concepts
Questions
Problems
PART FOUR
GDP, Growth, and Instability
10 GDP and Economic Growth 234
Gross Domestic Product 235
A Monetary Measure / Avoiding Multiple
Counting / Excluding Secondhand Sales and
Financial Transactions
Measuring GDP 238
Personal Consumption Expenditures (C) / Gross
Private Domestic Investment (Ig) / Government
Purchases (G) / Net Exports (Xn) / Adding It Up:
GDP = C + Ig + G + Xn
Nominal GDP versus Real GDP 241
Applying the Analysis The Underground
Economy 242
Economic Growth 244
Growth as a Goal / Arithmetic of Growth
Illustrating the Idea Growth Rates Matter! 245
Growth in the United States
Determinants of Growth 246
Supply Factors / Demand Factor / Efficiency
Factor
Production Possibilities Analysis 247
Growth and Production Possibilities / Labor and
Productivity
Accounting for Growth 249
Labor Inputs versus Labor Productivity /
Technological Advance / Quantity of Capital /
Education and Training / Economies of Scale
and Resource Allocation / Institutional Structures
that Promote Growth / Other Factors
Recent Fluctuations in Average Productivity
Growth 254
Reasons for the Rise in the Average Rate of
Productivity Growth Between 1995 and 2010 /
Implications for Economic Growth / The Recent
Productivity Slowdown
Is Growth Desirable and Sustainable? 259
The Antigrowth View / In Defense of Economic
Growth
Summary
Terms and Concepts
Questions
Problems
11 Business Cycles, Unemployment, and
Inflation 264
Business Cycles 265
Causes of Business Cycles / Cyclical Impact:
Durables and Nondurables
Applying the Analysis Stock Prices and
Macroeconomic Instability 268
Unemployment 269
Measurement of Unemployment / Types of
Unemployment / Definition of Full Employment /
Economic Cost of Unemployment
Applying the Analysis Downwardly Sticky
Wages and Unemployment 272
Inflation 273
Measurement of Inflation / Facts of Inflation /
Types of Inflation
Illustrating the Idea Clipping Coins 276
Redistribution Effects of Inflation 277
Who Is Hurt by Inflation? / Who Is Unaffected or
Helped by Inflation? / Anticipated Inflation
Does Inflation Affect Output? 279
Cost-Push Inflation and Real Output /
Demand-Pull Inflation and Real Output
Applying the Analysis The Specter of Deflation 280
Applying the Analysis Hyperinflation 281
Summary
Terms and Concepts
Questions
Problems
12 Aggregate Demand and Aggregate Supply 284
Aggregate Demand 285
Changes in Aggregate Demand 285
Consumer Spending
Applying the Analysis What Wealth Effect? 288
Investment Spending / Government Spending /
Net Export Spending
Aggregate Supply 292
Aggregate Supply in the Immediate Short Run /
Aggregate Supply in the Short Run / Aggregate
Supply in the Long Run / Focusing on the Short Run
Changes in Aggregate Supply 296
Input Prices / Productivity / Legal-Institutional
Environment
Equilibrium Price Level and Real GDP 299
Changes in Equilibrium
Applying the Analysis Demand-Pull
Inflation 300
Applying the Analysis Cost-Push Inflation 302
Downward Price-Level Inflexibility
Illustrating the Idea The Ratchet Effect 304
Applying the Analysis Recession and Cyclical
Unemployment 305
The Multiplier Effect / Self Correction?
Summary
Terms and Concepts
Questions
Problems
13 Fiscal Policy, Deficits, and Debt 311
Fiscal Policy and the AD–AS Model 312
Expansionary Fiscal Policy / Contractionary
Fiscal Policy
Built-In Stability 315
Automatic or Built-In Stabilizers / Economic
Importance
Evaluating Fiscal Policy 316
Applying the Analysis Recent U.S. Fiscal
Policy 318
Problems, Criticisms, and Complications 320
Problems of Timing / Political Considerations /
Future Policy Reversals / Offsetting State and
Local Finance / Crowding-Out Effect
The U.S. Public Debt 322
Ownership / Debt and GDP / International
Comparisons / Interest Charges
False Concerns? 325
Bankruptcy / Burdening Future Generations
Substantive Issues 327
Income Distribution / Incentives /
Foreign-Owned Public Debt / Crowding-Out
Effect Revisited
The Long-Run Fiscal Imbalance: Social
Security 328
The Social Security Shortfall / Policy Options
Summary
Terms and Concepts
Questions
Problems
PART FIVE
Money, Banking, and Monetary
Policy
14 Money, Banking, and Financial
Institutions 334
The Functions of Money 335
The Components of the Money Supply 336
Money Definition: M1 / Money Definition: M2
What “Backs” the Money Supply? 339
The Value of Money
Illustrating the Idea Are Credit Cards
Money? 340
Money and Prices
The Federal Reserve and the Banking
System 341
The Board of Governors / The 12 Federal
Reserve Banks / FOMC / Commercial Banks and
Thrifts / Fed Functions and Responsibilities /
Federal Reserve Independence
The Financial Crisis of 2007 and 2008 346
Overview / Prelude / Causes / Crisis / Immediate
Response
Post-Crisis Policy Changes 348
The Fractional Reserve System 349
Illustrating the Idea The Goldsmiths 349
A Single Commercial Bank 350
Transaction 1: Creating a Bank /
Transaction 2: Acquiring Property and
Equipment / Transaction 3: Accepting Deposits /
Transaction 4: Depositing Reserves in a Federal
Reserve Bank / Transaction 5: Clearing a Check
Drawn Against the Bank / Transaction 6:
Granting a Loan (Creating Money)
The Banking System: Multiple-Deposit
Expansion 357
The Banking System’s Lending Potential / The
Monetary Multiplier / Reversibility: The Multiple
Destruction of Money
Applying the Analysis The Bank Panics of 1930
to 1933 360
Summary
Terms and Concepts
Questions
Problems
PART SIX
International Economics
15 Interest Rates and Monetary Policy 365
Interest Rates 366
The Demand for Money / The Equilibrium Interest Rate
Illustrating the Idea That Is Interest 369
Tools of Monetary Policy 370
Open-Market Operations / The Reserve Ratio /
The Discount Rate / Interest on Reserves /
Relative Importance / Easy Money and Tight Money
Monetary Policy, Real GDP, and the Price Level 375
The Cause-Effect Chain / Effects of an Easy
Money Policy / Effects of a Tight Money Policy
Monetary Policy in Action 379
Fed Targets
Applying the Analysis Recent U.S. Monetary
Policy 381
Problems and Complications
Applying the Analysis Less than Zero 383
Summary
Terms and Concepts
Questions
Problems
16 International Trade and Exchange Rates 388
Trade Facts 389
The Economic Basis for Trade 390
Comparative Advantage and Specialization
Illustrating the Idea A CPA and a House
Painter 392
Comparative Advantage: Production
Possibilities Analysis / Trade with Increasing Costs
The Foreign Exchange Market 396
Exchange Rates / Depreciation and
Appreciation / Determinants of Exchange Rates
Government and Trade 401
Trade Protections and Subsidies / Economic
Impact of Tariffs / Net Costs of Tariffs
Illustrating the Idea Buy American? 403
Three Arguments for Protection 403
Increased-Domestic-Employment Argument /
Cheap-Foreign-Labor Argument /
Protection-against-Dumping Argument
Trade Adjustment Assistance 405
Applying the Analysis Is Offshoring of Jobs Bad? 406
Multilateral Trade Agreements and Free-Trade Zones 407
General Agreement on Tariffs and Trade / World
Trade Organization / European Union / North
American Free Trade Agreement / Recent U.S.
Trade Deficits / Causes of the Trade Deficits /
Implications of U.S. Trade Deficits
Summary
Terms and Concepts
Questions
Problems
PART SEVEN
Resource Markets
17 Wage Determination 416
A Focus on Labor 417
Labor Demand 417
Marginal Revenue Product / Rule for Employing
Labor: MRP = MRC / MRP as Labor Demand
Schedule
Market Demand for Labor 420
Changes in Labor Demand 420
Changes in Product Demand / Changes in
Productivity / Changes in the Prices of Other
Resources
Applying the Analysis Occupational
Employment Trends 423
Elasticity of Labor Demand 424
Ease of Resource Substitutability / Elasticity of
Product Demand / Ratio of Labor Cost to Total Cost
Market Supply of Labor 425
Wage and Employment Determination 426
Monopsony 427
Upward-Sloping Labor Supply to Firm / MRC
Higher than the Wage Rate / Equilibrium Wage
and Employment
Applying the Analysis Monopsony Power 430
Union Models 430
Demand-Enhancement Model / The Exclusive or
Craft Union Model / The Inclusive or Industrial
Union Model / Wage Increases and Job Loss
Wage Differentials 434
Marginal Revenue Productivity / Noncompeting Groups
Illustrating the Idea My Entire Life 437
Compensating Differences
Applying the Analysis The Minimum Wage 438
Summary
Terms and Concepts
Questions
Problems
18 Income Inequality and Poverty 444
Facts about Income Inequality 445
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 448
Ability / Education and Training / Discrimination /
Preferences and Risks / Unequal Distribution of
Wealth / Market Power / Luck, Connections, and Misfortune
Income Inequality over Time 451
Rising Income Inequality Since 1980 / Causes of
Growing Inequality
Equality versus Efficiency 453
The Case for Equality: Maximizing Total Utility /
The Case for Inequality: Incentives and
Efficiency / The Equality-Efficiency Trade-Off
Illustrating the Idea Slicing the Pizza 455
The Economics of Poverty 456
Definition of Poverty / Incidence of Poverty /
Measurement Issues
The U.S. Income-Maintenance System 458
Social Insurance Programs / Public Assistance Programs
Applying the Analysis Universal Basic
Income 462
Summary
Terms and Concepts
Questions
Problems
Appendix Tables 466
Glossary 472
Index 484