The Ordinary Business of Life
Principles That Underlie Individual Choice:
The Core of Economics
Principle #1: Choices Are Necessary Because Resources Are Scarce
Principle #2: The True Cost of Something Is Its Opportunity Cost
Principle #3: “How Much” Is a Decision at the Margin
Principle #4: People Usually Respond to Incentives, Exploiting Opportunities to Make Themselves Better Off
Interaction: How Economies Work
Principle #5: There Are Gains from Trade
Principle #6: Markets Move Toward Equilibrium
Principle #7: Resources Should Be Used Efficiently to Achieve Society’s Goals
Principle #8: Markets Usually Lead to Efficiency
Principle #9: When Markets Don’t Achieve Efficiency, Government Intervention Can Improve Society’s Welfare
Economy-Wide Interactions
Principle #10: One Person’s Spending Is Another Person’s Income
Principle #11: Overall Spending Sometimes Gets Out of Line with the Economy’s Productive Capacity
Principle #12: Government Policies Can Change Spending
Models in Economics: Some Important Examples
Trade-offs: The Production Possibility Frontier
Comparative Advantage and Gains from Trade
Comparative Advantage and International Trade, in Reality
Transactions: The Circular-Flow Diagram
Using Models
Positive versus Normative Economics
When and Why Economists Disagree
Supply and Demand: A Model of a Competitive Market
The Demand Curve
The Demand Schedule and the Demand Curve
Shifts of the Demand Curve
Understanding Shifts of the Demand Curve
The Supply Curve
The Supply Schedule and the Supply Curve
Shifts of the Supply Curve
Understanding Shifts of the Supply Curve
Supply, Demand, and Equilibrium
Finding the Equilibrium Price and Quantity
Why Do All Sales and Purchases in a Market Take Place at the Same Price?
Why Does the Market Price Fall If It Is Above the Equilibrium Price?
Why Does the Market Price Rise If It Is Below the Equilibrium Price?
Using Equilibrium to Describe Markets
Changes in Supply and Demand
What Happens When the Demand Curve Shifts
What Happens When the Supply Curve Shifts
Simultaneous Shifts of Supply and Demand Curves
Competitive Markets—and Others
Consumer Surplus and the Demand Curve
Willingness to Pay and the Demand Curve
Willingness to Pay and Consumer Surplus
Producer Surplus and the Supply Curve
Cost and Producer Surplus
Why Governments Control Prices
Price Ceilings
How a Price Ceiling Causes Inefficiency
So Why Are There Price Ceilings?
Price Floors
How a Price Floor Causes Inefficiency
So Why Are There Price Floors?
Controlling Quantities
The Anatomy of Quantity Controls
The Costs of Quantity Controls
Defining and Measuring Elasticity
Calculating the Price Elasticity of Demand
An Alternative Way to Calculate Elasticities: The Midpoint Method
Interpreting the Price Elasticity of Demand
Price Elasticity Along the Demand Curve
What Factors Determine the Price Elasticity of Demand?
Other Demand Elasticities
The Cross-Price Elasticity of Demand
The Income Elasticity of Demand
The Price Elasticity of Supply
Measuring the Price Elasticity of Supply
What Factors Determine the Price Elasticity of Supply?
The Benefits and Costs of Taxation
The Revenue from an Excise Tax
Elasticities and the Deadweight Loss of a Tax
The Production Function
From the Production Function to Cost Curves
Two Key Concepts: Marginal Cost and Average Cost
Minimum Average Total Cost
Does the Marginal Cost Curve Always Slope Upward?
Short-Run versus Long-Run Costs
Summing Up Costs: The Short and Long of It
Perfect Competition
Defining Perfect Competition
Two Necessary Conditions for Perfect Competition
Production and Profits
Using Marginal Analysis to Choose the Profit-Maximizing Quantity of Output
When Is Production Profitable?
The Short-Run Production Decision
Summing Up: The Perfectly Competitive Firm’s Profitability and Production Conditions
The Industry Supply Curve
The Short-Run Industry Supply Curve
The Long-Run Industry Supply Curve
The Cost of Production and Efficiency in Long-Run Equilibrium
Types of Market Structure
The Meaning of Monopoly
Monopoly: Our First Departure from Perfect Competition
How a Monopolist Maximizes Profit
The Monopolist’s Demand Curve and Marginal Revenue
The Monopolist’s Profit-Maximizing Output and Price
Monopoly versus Perfect Competition
Monopoly: The General Picture
Monopoly and Public Policy
Welfare Effects of Monopoly
Dealing with Natural Monopoly
Price Discrimination
The Logic of Price Discrimination
Perfect Price Discrimination
Games Oligopolists Play
Repeated Interaction and Tacit Collusion
The Meaning of Monopolistic Competition
Free Entry and Exit in the Long Run
Externalities
Pollution: An External Cost
The Socially Optimal Quantity of Pollution
Why a Market Economy Produces Too Much Pollution
Private Solutions to Externalities
Policies Toward Pollution
Tradable Emissions Permits
Comparing Environmental Policies with an Example
Positive Externalities
Preserved Farmland: An External Benefit
Positive Externalities in Today’s Economy
Public Goods
Why Markets Can Supply Only Private Goods Efficiently
How Much of a Public Good Should Be Provided?
Poverty, Inequality, and Public Policy
The Logic of the Welfare State
The U.S. Welfare State
Social Security and Unemployment Insurance
The Effects of the Welfare State on Poverty and Inequality
The Economics of Health Care
The Need for Health Insurance
Government Health Insurance
Health Care in Other Countries
The Debate over the Welfare State
Problems with the Welfare State
The Politics of the Welfare State
The Nature of Macroeconomics
Macroeconomics: The Whole Is Greater Than the Sum of Its Parts
Macroeconomics: Theory and Policy
The Business Cycle
Charting the Business Cycle
Taming the Business Cycle
Inflation and Deflation
The Causes of Inflation and Deflation
The Pain of Inflation and Deflation
Measuring the Macroeconomy
Real GDP: A Measure of Aggregate Output
What Real GDP Doesn’t Measure
Price Indexes and the Aggregate Price Level
Market Baskets and Price Indexes
The Unemployment Rate
Defining and Measuring Unemployment
The Significance of the Unemployment Rate
The Natural Rate of Unemployment
Job Creation and Job Destruction
The Natural Rate of Unemployment
Changes in the Natural Rate of Unemployment
Inflation and Deflation
The Level of Prices Doesn’t Matter . . .
. . . But the Rate of Change of Prices Does
Winners and Losers from Inflation
Inflation Is Easy; Disinflation Is Hard
Comparing Economies Across Time and Space
The Sources of Long-Run Growth
The Crucial Importance of Productivity
Explaining Growth in Productivity
Accounting for Growth:
The Aggregate Production Function
What About Natural Resources?
Why Growth Rates Differ
Explaining Differences in Growth Rates
The Role of Government in Promoting Economic Growth
Success, Disappointment, and Failure
Latin America’s Disappointment
Africa’s Troubles and Promise
Is World Growth Sustainable?
Natural Resources and Growth, Revisited
Economic Growth and the Environment
Aggregate Demand
Why Is the Aggregate Demand Curve Downward Sloping?
Shifts of the Aggregate Demand Curve
Government Policies and Aggregate Demand
Aggregate Supply
The Short-Run Aggregate Supply Curve
Shifts of the Short-Run Aggregate Supply Curve
The Long-Run Aggregate Supply Curve
From the Short Run to the Long Run
The AD–AS Model
Short-Run Macroeconomic Equilibrium
Shifts of Aggregate Demand: Short-Run Effects
Long-Run Macroeconomic Equilibrium
Macroeconomic Policy
Policy in the Face of Demand Shocks
Responding to Supply Shocks
Fiscal Policy: The Basics
Taxes, Purchases of Goods and Services, Government Transfers, and Borrowing
The Government Budget and Total Spending
Expansionary and Contractionary Fiscal Policy
Can Expansionary Fiscal Policy Actually Work?
A Cautionary Note: Lags in Fiscal Policy
Fiscal Policy and the Multiplier
Multiplier Effects of an Increase in Government Purchases of Goods and Services
Multiplier Effects of Changes in Government Transfers and Taxes
How Taxes Affect the Multiplier
The Budget Balance
The Budget Balance as a Measure of Fiscal Policy
The Business Cycle and the Cyclically Adjusted Budget Balance
Should the Budget Be Balanced?
Long-Run Implications of Fiscal Policy
Deficits, Surpluses, and Debt
Problems Posed by Rising Government Debt
Deficits and Debt in Practice
The Meaning of Money
Measuring the Money Supply
The Monetary Role of Banks
Determining the Money Supply
Reserves, Bank Deposits, and the Money Multiplier
The Money Multiplier in Reality
The Federal Reserve System
What the Fed Does: Reserve Requirements and the Discount Rate
The European Central Bank
The Evolution of the American Banking System
The Crisis in American Banking in the Early Twentieth Century
Responding to Banking Crises: The Creation of the Federal Reserve
The Savings and Loan Crisis of the 1980s
Back to the Future: The Financial Crisis of 2008
The Demand for Money
The Opportunity Cost of Holding Money
Shifts of the Money Demand Curve
Money and Interest Rates
The Equilibrium Interest Rate
Monetary Policy and the Interest Rate
Monetary Policy and Aggregate Demand
Expansionary and Contractionary Monetary Policy
Monetary Policy in Practice
The Taylor Rule Method of Setting Monetary Policy
The Zero Lower Bound Problem
Money, Output, and Prices in the Long Run
Short-Run and Long-Run Effects of an Increase in the Money Supply
Changes in the Money Supply and the Interest Rate in the Long Run
Comparative Advantage and International Trade
Production Possibilities and Comparative Advantage, Revisited
The Gains from International Trade
Comparative Advantage versus Absolute Advantage
Sources of Comparative Advantage
Supply, Demand, and International Trade
International Trade and Wages
The Effects of Trade Protection
The Effects of an Import Quota
Capital Flows and the Balance of Payments
Balance of Payments Accounts
Underlying Determinants of International Capital Flows
The Role of the Exchange Rate
Understanding Exchange Rates
The Equilibrium Exchange Rate
Inflation and Real Exchange Rates
Vision and Story of Essentials of Economics
Engaging Students
in the Study of Economics
Technology That Builds Success
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Engaging Students with Effective Tools for Learning
Engaging Students with Technology
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Graphs, Variables, and Economic Models
A Key Concept: The Slope of a Curve
The Slope of a Linear Curve
Horizontal and Vertical Curves and Their Slopes
The Slope of a Nonlinear Curve
Calculating the Slope Along a Nonlinear Curve
Maximum and Minimum Points
Calculating the Area Below or Above a Curve
Graphs That Depict Numerical Information
Types of Numerical Graphs
Problems in Interpreting Numerical Graphs