Preface ix
Chapter 1 Introduction to Economics 1What Is Economics? 1
Economics and Scarcity 2
Scarcity and Choice 3
Efficiency and Equity 5
Application 1.1: To Work or Not to Work 6Factors of Production 7
Factors and Income 8
Scarce Resources 8
Application 1.2: Does Money Buy Happiness? 9Economic Theory and Policy 9
Economic Theory 10
Application 1.3: Ok, What Are They? 12Economic Policy 13
Up for Debate: Should St. Louis County, Missouri, Impose Mandatory Trash Pickup and Recycling? 14Tools of the Economist 15
Words, Graphs, and Mathematical Equations 15
Scarcity, Model Building, and Graphs 16
Modeling Scarcity 16
Interpreting the Model 17
Test Your Understanding: Production Possibilities 19Macroeconomics and Microeconomics 19
Critical Thinking Case 1: Difficult Choices in the Extreme 24
Chapter 1 Appendix 25
Graphing 25
Constructing a Graph 25
Direct and Inverse Relationships 26
Chapter 2 Economic Decision Making and Economic Systems 29Scarcity, the Basic Economic Decisions, and Economic Systems 29
Economic Systems and the Basic Economic Decisions 30
Traditional Economies 31
Market Economies 32
The Operation of a Market Economy 32
Economic Decisions in a Market Economy 33
Application 2.1: Saying No! 34Evaluating Market Economies 36
Government Intervention in a Market Economy: A Mixed Economy 37
Planned Economies 37
Economic Decisions in a Planned Economy 38
Evaluating Planned Economies 38
Mixed Economies 39
Test Your Understanding: Economic Decision Making and the Circular Flow 40Changing Economic Systems 41
The U.S. Economic System 41
The British Foundations of the U.S. Economy 41
Application 2.2: The People's Republic of China 42 Application 2.3: The Factory Girl's Last Day 43Historical Highlights in the Development of the U.S. Economy 44
Up for Debate: Are U.S. and Western European Economic Institutions Appropriate for Other Nations? 46Critical Thinking Case 2: Judging Economies 51
Chapter 3 Demand, Supply, and Price Determination 53Demand and Supply 54
Demand: The Buyer's Side 54
Supply: The Seller's Side 55
Market Demand, Market Supply, and Price Setting 58
Market Demand and Market Supply 58
Markets and Price Setting 58
Application 3.1: The Laws of Demand and Supply 59Equilibrium Price and Equilibrium Quantity 60
Changes in Quantity Demanded and Quantity Supplied 62
Changes in Demand and Supply 62
Changes in Demand 63
Changes in Supply 65
Changes in Quantity Demanded or Supplied and Changes in Demand or Supply: A Crucial Distinction 67
Application 3.2: Fads: Some In, Some Out 67Changes in Equilibrium Price and Equilibrium Quantity 69
Effect of Increases and Decreases in Demand 69
Effect of Increases and Decreases in Supply 70
Effect of Changes in Both Demand and Supply 71
Test Your Understanding: Changes in Demand and Supply 72Limiting Price Movements 73
Price Ceilings 73
Price Floors 73
Price Elasticity of Demand and Supply 75
Application 3.3: Is Rent Control a Good Thing or a Bad Thing? 76Price Elasticity of Demand 76
Up for Debate: Is It a Mistake to Raise the Minimum Wage? 77 Application 3.4: Peanut Butter: A Yummy Staple 79Price Elasticity of Supply 79
Critical Thinking Case 3: How Do Supply and Demand Work in Health Care? 84
Chapter 4 Goals and Problems of the Macroeconomy: Employment, Prices, and Production 85Unemployment and Full Employment 86
Consequences of Unemployment 86
Types of Unemployment 86
Application 4.1: What's at Stake When a Job is Lost? 87Employment and Unemployment Measures and Statistics 88
Interpreting Unemployment Statistics 92
The Goal of Full Employment 93
Inflation and Stable Prices 94
Consequences of Inflation 94
Causes of Inflationary Pressure 96
Application 4.2: The $4 Summer of 2008 98Measures of Inflation 99
Deflation and Disinflation 103
Production 103
Full Production and Economic Growth 103
Up for Debate: Will Policies to Protect the Environment Slow Economic Growth? 105Measures of Production 106
Does GDP Tell the Whole Story? 108
Test Your Understanding: Calculating Price Indexes and GDP 109 Application 4.3: A Tale of Two Families 110Productivity 110
A Possible Policy Problem 111
Critical Thinking Case 4: Statistics and Decision Making 117
Chapter 5 Foundations of the Macroeconomy 119Changes in Macroeconomic Activity 119
Business Cycles 121
Causes of Economic Fluctuations 122
Total Spending and Macroeconomic Activity 123
Application 5.1: What's Causing the Economy to Change? 124The Household Sector 124
The Business Sector 127
Up for Debate: Is Saving a Healthy Habit? 128 Application 5.2: Interest Rates and Investment Spending 130The Government Sector 132
The Foreign Sector 135
Summary of Aggregate Spending, Leakages, and Injections 136
The Multiplier Effect 138
Application 5.3: Ripples through the Economy 141Inflation, Expectations, and Macroeconomic Policies 141
A Word about Inflation 141
A Word about Expectations 142
Macroeconomic Predictors and Policies 142
Test Your Understanding: Changes in Economic Activity 143 Application 5.4: Unconventional Indicators of Economic Health 144Critical Thinking Case 5: Getting Smarter 149
Chapter 6 The Role of Government in the Macroeconomy 151Government Expenditures and Revenues 152
Government Expenditures 152
Government Revenues 154
Taxes: Types and Reform 156
Progressive, Proportional, and Regressive Taxes 156
Tax Reform and Issues 156
Up for Debate: Should the Federal Income Tax Be Changed to a Flat Tax? 157 Application 6.1: A Chronology of Federal Income Tax Policies 158Fiscal Policy 159
The Mechanics of Fiscal Policy 159
Discretionary and Automatic Fiscal Policy 160
Government Budgets 161
Types of Budgets 162
The Budget and Fiscal Policy: Tying Them Together 164
Application 6.2: How Much Do We Love Granny? 165 Test Your Understanding: Government's Impact on the Macroeconomy 166The Realities of Fiscal Policy and the Federal Budget 166
The National Debt 167
Financing and Assessing the National Debt 167
Application 6.3: U.S. Treasury Securities 168Crowding Out 171
Critical Thinking Case 6: Nimby (Not in My Backyard) 175
Chapter 7 Money, Financial Institutions, and the Federal Reserve 177Money 178
The Definition and Functions of Money 178
Application 7.1: Fixed Assets, Or: Why a Loan in Yap is Hard to Roll Over 180The U.S. Money Supply 180
Monetary Standards 183
Financial Depository Institutions 184
Commercial Banks 185
Other Financial Depository Institutions 186
Application 7.2: What Do I Do? 187The Federal Reserve System 187
Organization of the Federal Reserve System 188
Functions of the Federal Reserve Banks 189
Test Your Understanding: Changes in a Bank's Reserve Account 192Recent Trends in Financial Institutions 192
Legislative Changes 192
Structural Changes 193
The Financial Crisis of 2007-2009 195
Application 7.3: Ben Bernanke's Reflections on the Financial Crisis 196 Up for Debate: Should Congress Enact More Stringent Regulations over the Banking System? 197Critical Thinking Case 7: Cigarette Money 202
Chapter 8 Money Creation, Monetary Theory, and Monetary Policy 203The Money Supply and the Level of Economic Activity 204
The Equation of Exchange 204
Money Creation 205
The Process of Money Creation 206
The Multiple Expansion of Money 207
Application 8.1: Questions and Answers about Reserves and Loans 208Excess Reserves, Interest Rates, and the Level of Spending 210
Determining Interest Rates on Loans 212
Application 8.2: An Interest Rate Primer 215The Federal Reserve and Monetary Policy 215
Monetary Policy Tools 216
Test Your Understanding: Financial Depository Institution Calculations 220 Application 8.3: Who Really Is the Most Powerful Person in the United States? 221Assessing Monetary Policy 221
Government Deficits and Monetary Policy 221
Advantages and Disadvantages of Monetary Policy 223
Up for Debate: Should the Federal Reserve Be Placed Under the Direct Control of Congress? 225Critical Thinking Case 8: The Fed and the Great Depression of the 1930s 230
Chapter 9 Macroeconomic Viewpoints and Models 233Macroeconomic Model Building 234
A Warning 234
Application 9.1: Paying Close Attention to Models: It's Worth the Effort 235Classical Economics 236
Application 9.2: The Academic Scribblers 238Keynesian Economics 239
Equilibrium in the Macroeconomy 239
Keynesian Policy Prescriptions 242
New Classical Economics 243
The New Classical Model 244
Test Your Understanding: Classical, Keynesian, and New Classical Models 247Additional Macroeconomic Models 248
New Keynesian Economics 248
Monetarism 248
Supply-Side Economics 248
Up for Debate: Should Government's Role in Influencing Economic Activity Be Reduced? 249A Final Word on Macroeconomic Viewpoints 249
Application 9.3: The World According to . . . 250Critical Thinking Case 9: Does Anyone Care What Economists Think? 255
Chapter 10 Households and Businesses: An Overview 257Overview of Households 258
Household Income and Expenditures 258
Goals and Decision Making by Individuals 260
Maximizing Economic Well-Being 260
Application 10.1: Family Gossip 262 Application 10.2: You Decide 263Overview of Business 264
Legal Forms of Business 265
Test Your Understanding: The Price of Stock Shares 267Numbers and Sizes of Businesses 267
Business Ownership of Business 268
Goals and Decisions of Business Firms 269
Application 10.3: Two Profiles: Starbucks and Kraft Foods 270 Up for Debate: Should Profitable Businesses Be Expected to Actively Participate in Improving Their Communities? 271Critical Thinking Case 10: Time to Maximize 275
Chapter 11 Benefits, Costs, and Maximization 277Balancing Benefits and Costs: the Individual 278
Defining Benefits and Costs 278
Measuring Benefits and Costs 279
Maximizing Satisfaction 282
Application 11.1: Do It Yourself 285Graphing Costs, Benefits, and Net Benefit 285
Balancing Benefits and Costs: The Business 287
Defining Benefits and Costs 287
Measuring Revenues and Costs 288
Application 11.2: You Need an Economist 289Maximizing Profit 290
Graphing Costs, Revenues, and Profit 292
Social Benefits and Costs 292
Test Your Understanding: Maximizing Profit 294 Application 11.3: The Real Cost of Smoking 295Maximizing Society's Net Benefit 295
Public Choice 297
Up for Debate: Should Drivers Be Banned from Using Cell Phones While Operating a Vehicle? 298Maximizing Behavior and the Voting Process 298
Critical Thinking Case 11: A Spoonful of Sugar 304
Chapter 12 Production and the Costs of Production 307Production Basics 308
Sectors and Industries 308
Methods of Production 309
Economic Time, Production, and the Costs of Production 311
Application 12.1: Do You Know a Modern-Day Luddite? 312 Up for Debate: Should the Same Cost Measures Used by Businesses Apply to Government and Nonprofits? 313Short-Run Costs 314
Total Costs 314
Unit Costs 315
The Pattern of Short-Run Costs 316
The Law of Diminishing Returns 319
Test Your Understanding: Calculating Costs and Averages 320 Application 12.2: Are Wellness Programs Cost Effective? 322Long-Run Costs 322
Economies of Scale, Diseconomies of Scale, and Constant Returns to Scale 323
Application 12.3: Too Big to Help 325Critical Thinking Case 12: The Human Factor 330
Chapter 13 Competition and Market Structures 331Defining a Market 332
The Market Structures 333
Pure Competition 334
Characteristics of Pure Competition 334
Behavior of a Firm in Pure Competition 334
Application 13.1: The Farmers' Almanac: It's a Necessity 338Is There Pure Competition? 340
Monopolistic Competition 342
Characteristics of Monopolistic Competition 342
Behavior of a Firm in Monopolistic Competition 342
Up for Debate: Does Nonprice Competition Waste Resources? 346Oligopoly 347
Characteristics of Oligopoly 347
Behavior of a Firm in an Oligopolistic Market 347
Test Your Understanding: Purely Competitive and Monopolistically Competitive Markets 348Monopoly 350
Characteristics of Monopoly 350
Behavior of a Monopolist 351
Application 13.2: Take Me Out to the Ball Game 353 Application 13.3: Patents Work-For a While 354Market Structures, The Consumer, and Efficiency 354
Critical Thinking Case 13: The $800 Haircut 360
Chapter 14 Government and the Markets 361Antitrust Enforcement 362
The Antitrust Laws 363
Application 14.1: Cases Involving the Sherman Act 366 Application 14.2: Cases Involving the Clayton Act and Its Amendments 369Government Regulation 370
Application 14.3: Antitrust Enforcement Up Close and Personal 371The Structure of Regulation 371
Industry Regulation 375
Social Regulation 377
Test Your Understanding: Government and Business 379The Performance of Regulation 379
Up for Debate: Is Government Intervention Reaching Too Far? 380Critical Thinking Case 14: Eminent Domain: In the Public Interest or Not? 383
Chapter 15 Labor Markets, Unions, and the Distribution of Income 385Labor Markets: Demand 386
The Demand for Labor 387
Labor Markets: Supply 390
Test Your Understanding: A Small Business Determines Its Demand for Employees 392Changes and Modifications in Labor Markets 392
Changes in Labor Demand and Supply 392
Application 15.1: Go Green 395Modifications of the Labor Demand and Supply Model 396
Labor Unions 399
Types of Unions and Union Membership 399
Collective Bargaining 399
Collective Bargaining and the Law 400
The Distribution of Income 401
Differences in Income 402
Application 15.2: Making the Most of Intellectual Capital 404Poverty 404
Application 15.3: Young and Homeless 407 Up for Debate: Should There Be a Work Requirement for Those Seeking Public Assistance? 407Critical Thinking Case 15: Income Distribution: Are the Shares of the Pie Fair? 412
Chapter 16 International Trade 413
An Overview of U.S. International Trade 414
The Size and Composition of U.S. Trade 414
Application 16.1: A Sad Story 417Comparative Advantage and International Trade 418
Scarcity and Specialization 418
The Principle of Comparative Advantage 418
Free Trade and Protectionism 420
Test Your Understanding: Comparative Advantage 421Trade-Restricting Policies 421
Free Trade Arguments 423
Protectionist Arguments 423
The Real World of International Trade: Policies and Agreements 424
Application 16.2: Gloria Flunks the Professor 425 Up for Debate: Should Trade Be Restricted if It Results in Environmental Damage? 427Critical Thinking Case 16: A Petition (by Frederic Bastiat, 1801-1850) 431
Chapter 17 International Finance 433Exchanging Currencies 434
Exchange Rates 434
The Determination of Exchange Rates 434
Understanding Foreign Exchange
Markets 437
Application 17.1: Foreign Exchange Markets 438 Application 17.2: Does a Lower-Valued Dollar Help the Economy? 439 Test Your Understanding: Changes in Exchange Rates 441International Financial Transactions and Balances 442
The Current Account 442
Application 17.3: A Prized Export 444The Financial Account 445
Challenges to the International Financial System 445
External Debt Issues 445
Monetary Integration in Europe 446
Up for Debate: Euro-Dreams 447Critical Thinking Case 17: Helping Poor Countries 451
Glossary 453
Answers to "Test Your Understanding" 461
Index 469
Patrick J. Welch and Gerry F. Welch are the authors of Economics: Theory and Practice, Binder Ready Version, 11th Edition, published by Wiley.
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