'<_: ' - ;-,. *.' 'it" 1 / tcs EDITION. o OldLVlil. Union County College. Cranford, New Jersey. The New School University New York City

Transcription

1 '<_: ' - ;-,. *.' 'it" 1 / s EDITION tcs o OldLVlil Union County College Cranford, New Jersey The New School University New York City McGraw-Hill Irwin

2 Contents in 1 A Brief Economic History of the United States 1 2 Resource Utilization 25 3 The Mixed Economy 49 4 Supply and Demand 71 5 Demand, Supply, and Equilibrium 95 6 The Price Elasticities of Demand and Supply Theory of Consumer Behavior Cost Profit, Loss, and Perfect Competition Monopoly Oligopoly Corporate Mergers and Antitrust Demand in the Factor Market Labor Unions Labor Markets and Wage Rates Rent, Interest, and Profit Income Distribution and Poverty International Trade International Finance 479 Glossary 505 Photo Credits 515 Index Monopolistic Competition 265 XIX

3 AsUUrlUcU V^OIIlCIllb Preface vi \j A Brief Economic History of the United States 1 Introduction 1 The American Economy in the 19th Century 2 Agricultural Development 2 The National Railroad Network 4 The Age of the Industrial Capitalist 5 The American Economy in the 20th Century 6 The Roaring Twenties 7 The 1930s: The Great Depression 7 The 1940s: World War II and Peacetime Prosperity 10 The 1950s: The Eisenhower Years 13 The Soaring Sixties: The Years of Kennedy and Johnson 14 The Sagging Seventies: The Stagflation Decade 15 The 1980s: The Age of Reagan 15 The State of American Agriculture 16 The "New Economy" of the Nineties 17 The Ominous 00s 18 Current Issue: America's Place in History 19 2 J Resource Utilization 25 Economics Denned 25 The Central Fact of Economics: Scarcity 26 Scarcity and the Need to Economize 26 The Economic Problem 26 The Four Economic Resources 26 Opportunity Cost 28 Full Employment and Full Production 28 The Production Possibilities Curve 32 Productive Efficiency 37 Economic Growth 37 Current Issue: Will You Be Underemployed When You Graduate? 39 V The Mixed Economy 49 The Three Questions of Economics 49 What Shall We Produce? 49 How Shall These Goods and Services Be Produced? 50 For Whom Shall the Goods and Services Be Produced? 50 To Sum Up 51 The Invisible Hand, the Price Mechanism, and Perfect Competition 51 The Invisible Hand 51 The Price Mechanism 52 Competition 52 Trust 53 Equity and Efficiency 53 The Circular Flow Model 54 The Economic Role of Government 55 Market Failure 56 Externalities 56 Curbing Environmental Pollution 58 Lack of Public Goods and Services 58 Government Failure 59 Capital 61 The "Isms": Capitalism, Communism, Fascism, and Socialism 63 The Decline and Fall of the Communist System 66 Transformation in China 66 Current Issue: The Bridge to Nowhere 68 4 Supply and Demand 71 Demand 71 Supply 72 Equilibrium 74 Surpluses and Shortages 74 Shifts in Demand and Supply 75 Price Ceilings and Price Floors 79 Applications of Supply and Demand 84 Interest Rate Determination 84 College Parking 85 The Rationing Function of the Price System 85 Last Word 86 Current Issue: High Gas Prices: Something Only an Economist Could Love 86 5 Demand, Supply, and Equilibrium 95 Demand Denned 95 Individual Demand and Market Demand 96 Changes in Demand 97 Increases in Demand 98 Decreases in Demand 98

4 XX11 Changes in Quantity Demanded and Changes in Demand 99 Practice Problems 100 What Causes Changes in Demand? 100 Supply Defined 104 Individual Supply and Market Supply 105 Changes in Supply 106 Practice Problems 106 What Causes Changes in Supply? 107 Graphing the Demand and Supply Curves 109 Graphing the Demand Curve 109 Graphing the Supply Curve 110 The Equilibrium Point 111 Shifts in Demand and Supply 114 Current Issue: Why Can't I Sell My House? The Price Elasticities of Demand and Supply 125 The Elasticity of Demand 125 The Price Elasticity of Demand 126 Measuring Elasticity 126 The Meaning of Elasticity 127 Determinants of the Degree of Elasticity of Demand 133 Advertising 135 Elasticity and Total Revenue 137 Elastic Demand and Total Revenue 137 Inelastic Demand and Total Revenue 138 Income Elasticity of Demand 138 Cross Elasticity of Demand 140 Price Elasticity of Supply 141 Elasticity over Time 142 Tax Incidence 144 Current Issue: The Price Elasticity of Demand for Oil Theory of Consumer Behavior 155 Utility 156 What Is Utility? 156 Marginal Utility 156 Total Utility 157 Maximizing Utility 157 The Water-Diamond Paradox 159 Some Limitations of Utility Applications 160 Consumer Surplus 160 Do Price Gougers Rip Us Off? 164 Current Issue: All-You-Can-Eat Buffets 164 Cost 171 Costs 171 Fixed Costs 172 Variable Costs 172 Total Cost 172 Marginal Cost 172 The Short Run and the Long Run 175 The Short Run 175 The Long Run 175 Average Cost 175 Average Fixed Cost 176 Average Variable Cost 176 Average Total Cost 177 Graphing the AFC, AVC, ATC, and MC Curves 178 Why Are the AVC and ATC Curves U-Shaped? 181 The Production Function and the Law of Diminishing Returns 183 Economies of Scale 185 Diseconomies of Scale 186 A Summing Up 187 The Decision to Operate or Shut Down 188 The Decision to Go Out of Business or Stay in Business 190 Choosing Plant Size 193 The Long-Run Average Total Cost Curve 194 Current Issue: Wedding Hall or City Hall? Profit, Loss, and Perfect Competition 203 Part I: Profit and Loss 203 Total Revenue and Marginal Revenue 204 Graphing Demand and Marginal Revenue 204 Economic and Accounting Profit 205 Profit Maximization and Loss Minimization 206 A Summing Up 210 Efficiency 213 Review of Efficiency and Profit Maximization 214 Part II: Perfect Competition 215 Definition of Perfect Competition 215 The Perfect Competitor's Demand Curve 218 The Short Run 219 The Long Run 222 Third Method of Calculating Profit and Loss 226 The Perfect Competitor: A Price Taker, Not a Price Maker 228 Efficiency, Price, and Profit 228 Current Issue: The Internet Effect: A More Perfect Knowledge and Lower Prices 228

5 xxui 10 Monopoly 239 Monopoly Defined 239 The Graph of the Monopolist 240 Calculating the Monopolist's Profit 242 Review of the Monopolist's Economic Analysis 243 The Monopolist Losing Money 245 Alternative Method of Calculating Monopolist's Profit or Loss 246 The Monopolist in the Short Run and in the Long Run 247 Are All Monopolies Big Companies? 247 Barriers to Entry 248 Limits to Monopoly Power 251 Economies of Scale and Natural Monopoly 252 What Is Natural Monopoly? 252 Two Policy Alternatives 254 Is Bigness Good or Bad? 255 When Is Bigness Bad? 255 When Is Bigness Good? 255 The Economic Case against Bigness 257 Conclusion 257 Last Word 257 Current Issue: Would You Allow Walmart to Open a Supercenter in Your Community? Monopolistic Competition 265 Monopolistic Competition Defined 265 The Monopolistic Competitor in the Short Run 266 The Monopolistic Competitor in the Long Run 268 Product Differentiation 269 Advertising and Monopolistic Competition 270 The Typical Monopolistic Competitor 271 Price Discrimination 272 Is the Monopolistic Competitor Inefficient? 276 Current Issue: Selling Status Oligopoly 283 Oligopoly Defined 283 Two Measures of the Degree of Oligopolization 284 Concentration Ratios 285 The Herfindahl-Hirschman Index (HHI) 285 The Competitive Spectrum 286 Cartels 287 Open Collusion 288 Covert Collusion 289 Price Leadership 290 Cutthroat Competition 291 Game Theory 294 Conclusion 295 Current Issue: Cutthroat Competition in the College Textbook Market 296 Appendix: The Four Types of Competition: A Review 305 Perfect Competition 305 Monopoly 306 Monopolistic Competition 306 Oligopoly 306 Perfect Competition versus Imperfect Competition 306 Summary Tables 307 \13 Corporate Mergers and Antitrust 311 A Historical Perspective on Corporate Concentration 311 Antitrust 312 The Political Background 312 The Sherman Antitrust Act 312 The Clayton Antitrust Act 314 The Federal Trade Commission Act (1914) 314 Modern Antitrust 315 Partial Breakdown of the Rule of Reason 315 The 60 Percent Rule 316 Two Landmark Cases 316 European Antitrust 317 Types of Mergers 318 Horizontal Mergers 318 Vertical Mergers 318 Conglomerate Mergers 319 Deregulation 319 Corporate Misconduct 320 How Effective Is Antitrust? 322 The Trend toward Bigness 322 Current Issue: Pharmaceutical Fraud Demand in the Factor Market 329 Derived Demand 329 Productivity 330 Prices of Substitute Resources 330 Marginal Revenue Product (MRP) 331 The MRP of the Imperfect Competitor 335 Changes in Resource Demand 336 Changes in Resource Demand versus Changes in Quantity of Resource Demanded 336 The Four Reasons for Changes in Resource Demand 337 Optimum Resource Mix for the Firm 339 Current Issue: Washing Machines and Women's Liberation 340

6 XXIV 15 Labor Unions 347 A Short History of the American Labor Movement 347 The Early Years 347 Key Labor Legislation 348 Craft Unions versus Industrial Unions 349 Union Organizing since the 1950s 350 The Formation of Change to Win 353 Jobs: Exportable and Nonexportable 353 The Economic Power of Labor Unions 354 The Economic Power of Large Employers 355 Collective Bargaining 356 Strikes, Lockouts, and Givebacks 356 The Collective Bargaining Agreement 358 The Strike 359 Averting Strikes: Mediation and Arbitration 360 Will You Ever Be a Member of a Labor Union? 360 Current Issue: The Card Check Law 360 Labor Markets and Wage Rates 367 The Supply of Labor 368 Noncompeting Groups 368 The Theory of the Dual Labor Market 368 The Backward-Bending Individual Labor Supply Curve 369 The Market Supply of Labor 371 The Demand for Labor 372 The Marginal Revenue Product Schedule 372 Nonhomogeneous Jobs and Compensating Pay Differentials 373 Determination of the Wage Rate: Supply and Demand 374 High Wage Rates and Economic Rent 376 Real Wages versus Money Wages 377 The Minimum Wage and the Living Wage 382 The Minimum Wage Rate: 1938 to the Present 382 Should There Be a Minimum Wage Rate? 383 Th J e Living Wage 385 The Effects of Employment Discrimination on Wages 386 Employment Discrimination against Women 386 Employment Discrimination against African Americans 388 Conclusion 388 Current Issue: The Education Gap Rent, Interest, and Profit 395 Rent 395 What Is Land? 395 How Is Rent Determined? 397 Economic Rent 398 Are Prices High because Rents Are High, or Are Rents High because Prices Are High? 399 Interest 400 What Is Capital? 400 How Is the Interest Rate Determined? 400 Interest Rates and Consumer Loans 401 The Present Value of Future Income 403 Profits 406 How Are Profits Determined? 406 How Large Are Profits? 406 Profits and Losses during the Great Recession 407 Theories of Profit 407 Conclusion 411 Current Issue: Subprime, Fringe, and Payday Lending Income Distribution and Poverty 417 Income Distribution in the United States 418 The Poor, the Middle Class, and the Rich 418 Distribution of Wealth in the United States 422 Distribution of Income: Equity and Efficiency 423 What Determines Income Distribution? 424 Poverty in America 425 Poverty Defined 425 Who Are the Poor? 427 Child Poverty 428 The Main Government Transfer Programs 430 Theories of the Causes of Poverty 433 The Conservative View versus the Liberal View 435 Solutions 437 Current Issue: Will You Ever Be Poor? 441 International Trade 449 Part I: A Brief History of U.S. Trade 450 U.S. Trade before U.S. Trade since The Effect of the Great Recession on Our Balance of Trade 452 U.S. Government Trade Policy 452 Part II: The Theory of International Trade 453 Specialization and Trade 453 Absolute Advantage 454 Comparative Advantage 454 Absolute Advantage versus Comparative Advantage 456 The Arguments for Protection 458 Tariffs or Quotas 462 Conclusion 463 Part III: The Practice of International Trade 465 What Are the Causes of Our Trade Imbalance? 465 Part IV: Our Trade Deficit with Japan and China 467 Japanese Trading Practices 467 Our Trade Deficit with China 468 Trading with China and Japan: More Differences than Similarities 469

7 Final Word 471 Free Trade in Word and Deed 471 Reducing Our Trade Deficit 472 Current Issue 1: Buy American? 472 Current Issue 2: Globalization 473 International Finance 479 The Mechanics of International Finance 479 Financing International Trade 479 The Balance of Payments 480 Exchange Rate Systems 483 The Gold Standard 483 The Gold Exchange Standard, The Freely Floating Exchange Rate System, 1973 to the Present 485 How Well Do Freely Floating (Flexible) Exchange Rates Work? 489 The Euro 489 The Yen and the Yuan 489 The Falling Dollar and the U.S. Trade Deficit 490 Running Up a Tab in the Global Economy 492 From Largest Creditor to Largest Debtor 492 Living beyond Our Means 495 A Codependent Relationship 496 Why We Need to Worry about the Current Account Deficit 497 Editorial: American Exceptionality 497 Glossary 505 Photo Credits 515 Index 516