Essentials of Economics, 5th Edition PDF by Stanley L Brue, Campbell R McConnell, Sean M Flynn and Randy R Grant


Essentials of Economics, 5th Edition

By Stanley L. Brue, Campbell R. McConnell, Sean M. Flynn and Randy R. Grant

Essentials of Economics, 5th Edition


Preface xvi

Reviewers xix



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


Terms and Concepts



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


Terms and Concepts




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


Terms and Concepts



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


Terms and Concepts



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


Terms and Concepts




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


Terms and Concepts



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


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


Terms and Concepts



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


Terms and Concepts



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


Applying the Analysis Internet Oligopolies 229


Terms and Concepts




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


Production Possibilities Analysis 247

Growth and Production Possibilities / Labor and


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



Terms and Concepts



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


Terms and Concepts



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


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?


Terms and Concepts



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


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


Terms and Concepts




Money, Banking, and Monetary


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


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


Terms and Concepts




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


Terms and Concepts



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


Terms and Concepts




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


Market Demand for Labor 420

Changes in Labor Demand 420

Changes in Product Demand / Changes in

Productivity / Changes in the Prices of Other


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


Terms and Concepts



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


Terms and Concepts



Appendix Tables 466

Glossary 472

Index 484

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