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Economic global edition by acemoglu aonson new Economic global edition by acemoglu aonson new Economic global edition by acemoglu aonson new Economic global edition by acemoglu aonson new Economic global edition by acemoglu aonson new Economic global edition by acemoglu aonson new Economic global edition by acemoglu aonson new Economic global edition by acemoglu aonson new
Economics For these Global Editions, the editorial team at Pearson has collaborated with educators across the world to address a wide range of subjects and requirements, equipping students with the best possible learning tools This Global Edition preserves the cutting-edge approach and pedagogy of the original, but also features alterations, customization, and adaptation from the North American version Global edition Global edition Global edition Acemoglu • Laibson • List Economics Daron Acemoglu • David Laibson • John A List This is a special edition of an established title widely used by colleges and universities throughout the world Pearson published this exclusive edition for the benefit of students outside the United States and Canada If you purchased this book within the United States or Canada, you should be aware that it has been imported without the approval of the Publisher or Author Pearson Global Edition Acemoglu_1292079207_mech.indd 04/03/15 8:55 PM MyEconLab Provides the 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more A02_ACEM9202_01_GE_FM.indd 17/03/15 7:41 pm GLOBAL EDITION ECONOMICS Daron Acemoglu Massachusetts Institute of Technology David Laibson Harvard University John A List University of Chicago Boston Columbus Indianapolis New York San Francisco Hoboken Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Preface A02_ACEM9202_01_GE_FM.indd 17/03/15 7:41 pm Vice President, Business Publishing: Donna Battista Executive Acquisitions Editor: Adrienne D’Ambrosio Executive Development Editor: Mary Clare McEwing Editorial Assistant: Courtney Turcotte Senior Acquisitions Editor, Global Editions: Steven Jackson Project Editor, Global Editions: Suchismita Ukil Vice President, Product Marketing: Maggie Moylan Director of Marketing, Digital Services and Products: Jeanette Koskinas Senior Product Marketing Manager: Alison Haskins Executive Field Marketing Manager: Lori DeShazo Senior Strategic Marketing Manager: Erin Gardner Product Testing and Learning Validation: Kathleen McLellan Team Lead, Program Management: Ashley Santora Program Manager: Nancy Freihofer Media Production Manager, Global Editions: M Vikram Kumar Senior Production Controller, Global Editions: Trudy Kimber Team Lead, Project Management: Jeff Holcomb Project Manager: Sarah Dumouchelle Supplements Project Manager: Andra Skaalrud Operations Specialist: Carol Melville Creative Director: Blair Brown Art Director: Jon Boylan Vice President, Director of Digital Strategy and Assessment: Paul Gentile Manager of Learning Applications: Paul DeLuca Digital Editor: Denise Clinton Director, Digital Studio: Sacha Laustsen Digital Studio Manager: Diane Lombardo Digital Studio Project Manager: Melissa Honig Digital Content Team Lead: Noel Lotz Digital Content Project Lead: Courtney Kamauf Full-Service Project Management and Composition: S4Carlisle Publishing Services Interior Designer: Jonathan Boylan Acknowledgments of third-party content appear on the appropriate page within the text and on pp 765–767, which constitutes an extension of this copyright page Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsonglobaleditions.com © Pearson Education Limited 2016 The rights of Daron Acemoglu, David Laibson, and John A List to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled Economics, 1st edition, ISBN 978-0-321-39158-2, by Daron Acemoglu, David Laibson, and John A List, published by Pearson Education, Inc © 2015 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners ISBN 10: 1-292-07920-7 ISBN 13: 978-1-292-07920-2 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 Typeset in by S4Carlisle Publishing Services Printed and bound by CTPS in China A02_ACEM9202_01_GE_FM.indd 17/03/15 7:41 pm Dedication With love for Asu, Nina, and Jennifer, who inspire us every day A02_ACEM9202_01_GE_FM.indd 17/03/15 7:41 pm About the Authors Daron Acemoglu is Elizabeth and James Killian Professor of Economics in the Department of Economics at the Massachusetts Institute of Technology He has received a B.A in economics at the University of York, 1989; M.Sc in mathematical economics and econometrics at the London School of Economics, 1990; and Ph.D in economics at the London School of Economics in 1992 He is an elected fellow of the National Academy of Sciences, the American Academy of Arts and Sciences, the Econometric Society, the European Economic Association, and the Society of Labor Economists He has received numerous awards and fellowships, including the inaugural T W Shultz Prize from the University of Chicago in 2004, the inaugural Sherwin Rosen Award for outstanding contribution to labor economics in 2004, Distinguished Science Award from the Turkish Sciences Association in 2006, and the John von Neumann Award, Rajk College, Budapest in 2007 He was also the recipient of the John Bates Clark Medal in 2005, awarded every two years to the best economist in the United States under the age of 40 by the American Economic Association, and the Erwin Plein Nemmers prize awarded every two years for work of lasting significance in economics He holds Honorary Doctorates from the University of Utrecht and Bosporus University His research interests include political economy, economic development and growth, human capital theory, growth theory, innovation, search theory, network economics, and learning His books include Economic Origins of Dictatorship and Democracy (jointly with James A Robinson), which was awarded the Woodrow Wilson and the William Riker prizes, Introduction to Modern Economic Growth, and Why Nations Fail: The Origins of Power, Prosperity, and Poverty (jointly with James A Robinson), which has become a New York Times bestseller David Laibson is the Robert I Goldman Professor of Economics at Harvard University He is also a member of the National Bureau of Economic Research, where he is Research Associate in the Asset Pricing, Economic Fluctuations, and Aging Working Groups His research focuses on the topic of behavioral economics, and he leads Harvard University’s Foundations of Human Behavior Initiative He serves on several editorial boards, as well as the boards of the Health and Retirement Study (National Institutes of Health) and the Pension Research Council (Wharton) He serves on Harvard’s Pension Investment Committee and on the Academic Research Council of the Consumer Financial Protection Bureau He is a recipient of a Marshall Scholarship and a Fellow of the Econometric Society and the American Academy of Arts and Sciences He is also a recipient of the TIAA-CREF Paul A Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security Laibson holds degrees from Harvard University (A.B in Economics, Summa), the London School of Economics (M.Sc in Econometrics and Mathematical Economics), and the Massachusetts Institute of Technology (Ph.D in Economics) He received his Ph.D in 1994 and has taught at Harvard since then In recognition of his teaching, he has been awarded Harvard’s Phi Beta Kappa Prize and a Harvard College Professorship A02_ACEM9202_01_GE_FM.indd 17/03/15 7:41 pm John A List is the Homer J Livingston Professor in Economics at the University of Chicago, and Chairman of the Department of Economics List received the Kenneth Galbraith Award, Agricultural and Applied Economics Association, 2010 He is a Member of the American Academy of Arts and Sciences, 2011; Editor, Journal of Economic Perspectives; Associate Editor, American Economic Review; and Associate Editor, Journal of Economic Literature His research focuses on questions in microeconomics, with a particular emphasis on the use of experimental methods to address both positive and normative issues Much of his time has been spent developing experimental methods in the field to explore economic aspects of environmental regulations, incentives, preferences, values, and institutions Recently, he has focused on issues related to the economics of charity, exploring why people give, plus optimal incentive schemes for first-time as well as warm-list donors A02_ACEM9202_01_GE_FM.indd About the Authors 17/03/15 7:41 pm A02_ACEM9202_01_GE_FM.indd 17/03/15 7:41 pm Nash equilibrium, 344 Dutch auction bids, 428 finding, 343–345 oligopolies, 364–365 oligopoly with differentiated products, 366 tragedy of the commons, 346–347 zero-sum games, 347–348 National Bureau of Economic Research (NBER), 595 National Flood Insurance Program, 411 national income accounting identity, 473 national income accounts, 467 See also gross domestic product (GDP) circular flows, 469–470 Evidence-Based Economics, U.S GDP, 474–475 expenditures, 472–473 income, 476–477 items not measured by, 477–482 overview of, 467–468 production, 470–472 real vs nominal GDP, 482–488 National Income and Product Accounts (NIPA), 467 national security, free trade and, 226 natural experiment, 67 natural market power, 315 natural monopoly, 317 natural rate of unemployment, 589–590 natural resources common pool resource goods, 256–258 free trade, opposition to, 226–227 land, 305–306, 502 production possibilities curve and, 219 trade between countries, 225–226 tragedy of the commons, 257, 346–347 negative correlation, 65 negative externalities, 479–480 negatively related, 102 negotiation, bilateral, 202–203 net exports, 711–715 net exports curve, 737–738 net importer, 220 net present value, 392–393 network externalities, 316 Nicaragua, 497, 524, 627 Niger, 497 Nigeria, 535, 536, 565–566 Nike, 607, 613, 702 Nikolai I, 562 Niskanen, William, 272 Nogales, Mexico and Texas, 572 nominal exchange rate, 725–726 nominal GDP, 482–483, 624–626 nominal interest rate, 600–601, 602, 603 nominal wages, 665–666 non-excludable good, 250–251 non-rival good, 250–253 Nordhaus, William D., 528, 540 normal good, 106, 107, 143–144 normative economics, 43–44 See also cost-benefit analysis North, Douglass, 553–554 North American Free Trade Agreement (NAFTA), 229–230, 507 Northern Rock, 598, 613, 619 North Korea, 196–197, 554–557, 562, 708 Norway, 481, 511 O Obama, Barack, 283, 310, 691–692, 693 Obamacare, 310, 407–408, 416–417, 420 Ockenfels, Axel, 426 offshoring, costs and benefits of, 707–708 oil imports, 221 Okun, Arthur, 275, 656–657 Okun’s Law, 656–657 Old Navy, 710 oligopoly, 361 collusion, 367–370 differentiated products model, 365–366 Evidence-Based Economics, competitive markets, 378–380 homogeneous products model, 363–365 invisible hand and, 375–377 Letting the Data Speak, 367, 369 oligopolist’s problem, 363 overview of, 360–363, 377–378 omitted variable, 65, 66 one dollar a day per person poverty line, 498–500 OPEC (Organization of the Petroleum Exporting Countries), 369 open economy, 708–709 open market operations, 636–638 open outcry auction, 425–428, 432 opportunity cost of time labor supply curve, 582–584 unemployment and, 578–579 opportunity costs, 46–47 absolute and comparative advantage, 703–707 budget constraint and, 127–128 charitable giving and taxes, 445 comparative advantage and, 212–216 economic institutions and, 557–561 economic vs accounting profits, 172–173 Facebook, cost of, 48–50 housing prices, 93 labor supply shifters, 297–299 leisure-labor trade-off, 294–299 optimization in levels, 85 present value and discounting, 391–393 production possibilities and, 211–212, 217–218 savings, 603–604 terms of trade and, 215–216 optimization, 44–48 buying decisions, 128–131 housing costs and location, 91–93 indifference curves, 149–151 leisure-labor trade-off, 294–299 Principle of Optimization at the Margin, 90 profits, 161–162 shut down, 164–165 skill development, 83 social surplus, 185–186 supply curve shifts, 112–113 types of, 81–83 willingness to accept, 110 optimization in differences, 82–83, 88–91 optimization in levels, 82–87 optimum, 85 optometry, advertising for, 372 Oreopoulos, Philip, 67 Ostrom, Elinor, 257 outsourcing, costs and benefits of, 707–708 Owen, Robert, 562 P Page, Larry, 316 Pakistan, 481, 497, 557, 710 Pareto efficiency, 186, 328–329 patents, 563 patents, 314 expiration of, 325–326 monopolies, benefits of, 332–333 monopolies and, 312–313 monopolist’s problem, 318–320 paternalism, 283–284 Patient Protection and Affordable Care Act (ACA), 310, 407–408, 416–417, 420 Pay-As-You-Throw programs, 248 pay-for-performance programs, 414 payoff matrix, 339–340 payroll tax, 266–267 Pearl Harbor, attack on, 695–696 pecuniary externalities, 243 peer effects, economics of, 456–460, 457 Penn World Table, 519, 535 Pepsi, 366 per capita GDP, North and South Korea, 196–197 per capita income See income per capita Index 781 Z04_ACEM9202_01_GE_IDX.indd 781 19/03/15 5:39 PM perfectly competitive market, 100, 153, 377–380 perfectly elastic demand, 139 perfectly inelastic demand, 139 perfect price discrimination, 327 persistence, rate of growth, 651 Peru, 557, 564, 565–566 per-unit profit, 161–162 peso, 725, 726, 731–732 physical capital, 305–306, 500 aggregate production function, 500–503 depreciation of, 478 economic fluctuations and, 659 economic growth and, 525–531 GDP and, 472–473 income and, 476–477 prosperity, causes of, 551–556 Solow growth model, 541–549 sustained growth and, 526–527 technology, role of, 504–509 physical capital stock, 501 physical fitness, peer effects, 459 pie chart graphs, 73–74 Pigou, Arthur, 247 Pigou, Arthur Cecil, 657 Pigouvian subsidies, 247–250 Pigouvian tax, 247–250, 258–259 Piketty, Thomas, 534 planned economies economic institutions of, 556–563 North Korea, 554–556 Poland, 497, 511, 627 political creative destruction, 561–562 political institutions, 557 poll tax, 275 pollution externalities, overview, 237–240 externalities, value calculations, 248 free trade, opposition to, 226–227 tragedy of the commons, 346–347 population, labor supply and, 297–299 population growth, 540, 583 pork barrel spending, 694 Portugal, 497, 742 positive correlation, 65 positive economics, 43 positive externalities, 479–480 positively related, 110 potential workers, 575–576 pound, British, 733–737, 741 poverty China, poverty line, 512 definition of, 531 economic growth and, 535–537 economic institutions and, 556–557 Evidence-Based Economics, geography and, 563–568 foreign aid and, 568–570 geography and, 550–551, 552–553 prosperity, causes of, 551–556 standard of living, 492, 498–500 PPC (production possibilities curve), 209–212, 217–218 Pratt, Michael, 410–411 preference reversal, 394–395 preferences, buyers, 105–106, 125–126 preferences, sources of, 457 present bias, 394 present value, 391–393 price See also auctions; bargaining; exchange rates advertising and, 372 aggregated demand curves, 103–104 airline price wars, 367 ask price, 201 asset price fluctuations and banks, 616 bid price, 201 bilateral negotiation, 202–203 budget constraint and, 129–131 buyer behavior, overview, 101–107, 125–131 collusion, 367–370 Consumer Price Index (CPI), 486–487, 489, 629 consumer surplus, 133–135 cost structures, firm differences, 180–181 cross-price elasticity of demand, 142–143 deadweight loss, 194–195 demand curve, 102, 105–107 double oral auction, 201–202 economic fluctuations and, 655, 659 Evidence-Based Economics, competitive markets, 378–380 Evidence-Based Economics, fairness, 450 Evidence-Based Economics, gasoline prices, 107–108 firm market exit, 170–172 GDP deflator, 484–486 global differences in, 494 housing, location and, 92–93 inflation rate and, 487, 626–629 invisible hand, effect on, 193–199 invisible hand, firms, 186–190 invisible hand, industries, 190–192 labor demand curve and, 580–584, 653 long run, profits and, 171–172 market demand curve, 104–105 market equilibrium, 113–117 market price, 100 markets, overview, 99–101 market supply curve, 110–111 money supply, GDP and prices, 624–626 monopolies, quantity and price decisions, 322–325 monopolistic competition, 370–375 monopolist’s problem, 318–321 oligopoly with differentiated products, 366 oligopoly with homogeneous products, 363–365 patent expiration, effects of, 325–326 price ceilings, 118, 278–279 producer surplus, 165–166 profit and, 160–162 real vs nominal GDP, 482–488 regulation of, 331 reservation value, 183–184 revenue curves, 158–159 savings vs consumption decisions, 526 short-run and long-run supply, 168–169 social surplus, 184–186 substitution effect, 149–151 supply and, 109–113 supply curve, 112–113, 162–165 tariffs, effects of, 227–228 trade between countries, 222 willingness to pay, 102–103 world price, 222–225 price ceilings, 278–279 price control, 193–195 price controls, 628 price discrimination, 327–329 price effect, monopolist’s problem, 320 price elasticity of demand, 138–143 price elasticity of supply, 163–165 price floors, 279–280 Priceline, 336 price-makers, 313–314 See also monopoly price taker, 100 principal, 388–393 principal-agent relationship, 412 Principle of Optimization at the Margin, 90 prisoner’s dilemma, game theory, 338–343, 447–448 private equity funds, 608 private investment, 472–473 private property rights, 556, 557–563 private provision of public goods, 254–256 probability, 396–400, 397 producers See also sellers comparative advantage, 212–216 Evidence-Based Economics, ethanol, 173–176 782 Index Z04_ACEM9202_01_GE_IDX.indd 782 19/03/15 5:39 PM firm market entry and exit, 169–172 invisible hand, firms, 186–190 short-run and long-run supply, 167–169 social surplus, 184–186 specialization, 213 subsidies, effects of, 152 producer surplus overview, 165–166 tariffs, effects of, 227–228 taxation, deadweight loss and, 272–277 trade between countries, 223–225 production See also capital; labor; land cost of production, 156–158 demand for labor, 292–294 fixed and variable factors, 154–156 land and, 305–306 physical capital and, 305–306 profits, maximizing, 160–162 production possibilities curve (PPC), 209–212, 210, 217–218 productivity, 497 aggregate production function, 500–503, 514–515 circular flows, 469–470 Consumer Price Index (CPI), 486–487 economic growth and, 525–531 efficiency wages, 588 externalities, 479–480 gross national product (GNP) and, 480–481 home production, 478–479 income per capita and, 497–498 labor demand curve and, 653 leisure, 481 national income accounts, overview, 467–468, 470–472 real vs nominal GDP, 482–488 Solow growth model, 541–549 technology, role of, 504–509 underground economy, 479 productivity, technology and, 304 profit demand for labor and, 579–584 dividends as, 607–608 efficiency wages, 588 profit, 160 advertising and, 372 demand for labor and, 292–294 economic vs accounting, 172–173 elasticities and, 144 firm market entry and exit, 169–172 invisible hand, firms, 186–190 invisible hand, industries, 190–192 long run, zero profits, 171–172 maximizing, 162 monopolies, quantity and price decisions, 322–325 monopolistic competition, 370–375 monopolist’s problem, 318–321 oligopolies, 361, 364–365, 366 overview of, 160–162 price discrimination, degrees of, 327–329 short-run and long-run supply, 167–169 subsidies, effects of, 173–176 progressive tax system, 269 Prohibition, 282 property rights, 244–245 property rights, private, 556, 557–563 property taxes, 267 proportional tax system, 269 prosperity See also economic growth causes of, 551–556 Evidence-Based Economics, geography and, 563–568 foreign aid and, 568–570 institutions, inclusive and extractive, 556–563 standard of living, 498–500, 718–720 protectionism, 226–228, 227 proximate causes of prosperity, 551–556 Prudential, 598 psychology, economic fluctuations and, 658 public goods, 250–251 free-rider problem, 251, 252 funding for, 268–269 government provision of, 251–254 market failures and, 236 private provision of, 254–256 public policy See government public-use data, 62 Puerto Rico, 481 purchasing power parity (PPP), 494, 521–525 pure altruism, 446 pure strategy, 347–348 Puzo, Mario, 462 Q Qatar, 495, 497, 627 Qian, Nancy, 438 quantitative easing, 683 quantity demanded, 101–102 aggregate demand curve, 103–104 buyer decisions and, 131–133 cross-price elasticity of demand, 142–143 deadweight loss, 194–195 demand curve, 102 government intervention and, 118 market demand curve, 104–105 market equilibrium, 113–117 price controls and, 193–194 price elasticity of demand, 138–143 price fixing and, 119 quantity effect, monopolist’s problem, 320 quantity sold, revenue curves, 158–159 quantity supplied, 109 deadweight loss, 194–195 government intervention and, 118 market equilibrium, 113–117 market supply curve, 110–111 monopolies, quantity and price decisions, 322–325 price controls and, 193–194 price elasticity of supply, 163–165 price fixing and, 119 producer surplus, 165–166 quantity theory of money, 625–626, 627, 629–630, 684–685 questions, economic, 67–69 R race, labor discrimination, 307 railway technology, 562 Ramey, Valerie, 695 random, 396 randomization, 66–67, 76–78 Rasul, Imran, 457 rational expectations, 641 Reagan, Ronald, 275, 283 real business cycle theory, 655, 657 real exchange rate, 735–741, 736 real GDP, 482–483, 624–626, 656–657 See also gross domestic product (GDP) real GDP growth, 483 real interest rate, 600–601 credit demand curve, 601–602, 603 credit supply curve, 603–607 realized real interest rate, 640–642 real wages, 629, 665–666 Reber, Sarah, 415 recession, 466 of 1981, 685 countercyclical fiscal policy, 688–696 countercyclical policies, overview, 677–679 economic fluctuations, overview of, 646–649 equilibrium and, 661–666 Japan’s lost decades, 686–687 labor demand and fluctuations, 653–659 multipliers, 659–666 unemployment and, 577–578, 589 recession (2007–2009) bank failures, 612, 614–615, 616 capital utilization, 655 Index 783 Z04_ACEM9202_01_GE_IDX.indd 783 19/03/15 5:39 PM recession (2007–2009) (cont.) causes of, 646, 667–671 central bank policy mistakes, 686 fixed exchange rates, cost of, 742 government stimulus programs, 688–696 overview of, 466, 616, 648–649 unemployment and, 577–578 red advertising campaign, 64–65, 66 redistribution of wealth equity-efficiency trade-off, 282–283 taxes and, 269–271, 275 value of, 200 zero-sum games, 347–348 regressive tax system, 269, 271, 275 regulations, 277 externalities, government responses, 246–250 free trade, opposition to, 226–227 of monopolistic competition, 376–377 of oligopolies, 376–377 Reiley, David, 426, 432 Reinikka, Ritva, 569 Reiss, Peter, 378–379 rent, 476 rental price, 305–306 rent control, 278–279 Reporters Without Borders, 562 reputation, game theory and, 352–354 research and development (R&D), 332–333, 357, 505–506, 533 research design, 66–67 reservation value, 183–184, 200 reserve deposits, 619, 632–635, 682 residual demand curve, 364 resource allocation See also production possibilities curve (PPC) across industries, 190–192 command economies, 195–198 common pool resource goods, 256–258 economic questions, 67–68 equity and efficiency, 199–200 within firms, 186–190 key resources, 316 overview of, 41–42 scarcity and price, 92–93 tragedy of the commons, 257, 346–347 resources, natural common pool resource goods, 256–258 free trade, opposition to, 226–227 land, 305–306, 502 production possibilities curve and, 219 trade between countries, 225–226 retained earnings, 605 retirement savings, 604 Revell, Ashley, 403 revenge, economics of, 452–456 revenue, 158 demand for labor and, 579–584 firm market entry and exit, 169–172 monopolies, quantity and price decisions, 322–325 monopolistic competition, 370–375 profits and, 160–162 supply curve and, 162–165 revenue curves, 158–159, 318–320 revenue equivalence theorem, 431 reversal of fortune, 565–568 reverse causality, 65–66 rewards See incentives Ricardo, David, 722 Richardson, David, 456 risk, 396 Dutch auctions, 427–428 modeling time and risk, 387 moral hazard, markets with, 411–416 optimization and, 45–48 probability and, 396–400 risk preferences, 400–401 time preferences, 393–396 time value of money, 388–393 risk averse, 401 risk management, banks and, 611–612 risk neutral, 401 risk seeking, 401 Rockefeller, John D., 330, 491 Rome, 531 roommate effect, 458 Roosevelt, Franklin D., 269, 283 Roosevelt, Theodore, 330 Rosling, Hans, 540 Roth, Alvin, 426 roulette wheels, 396–397 Rouse, Cecelia, 306 Rumsfeld, Donald, 197 Russia, 356 GDP and life satisfaction, 481 income per capita, 495 income per worker, 497 poverty, 535 railway investment, 562 Rwanda, 521, 522, 565–566 S Sacerdote, Bruce, 458 Sachs, Jeffrey, 261, 553, 571 Sadoff, S., 72n1 Saez, Emmanuel, 534 salaries See wages salary.com, 596 sales taxes, 267 Samsung, 357 Saudi Arabia, 481, 562 savings credit and, 602–603 economic fluctuations and, 658 economic growth and, 519–526 financial intermediaries, 607–610 vs investments, 476–477 Solow growth model, 542–549 tax cuts and, 692–693 savings and loan crisis (1980s-1990s), 614–615, 616 savings rate, 526, 527 scarce resources, 42 scarcity, 42, 92–93 scatter plot, 75 Schering-Plough legal market power, 314–315 monopolist’s problem, 318–321 optimal quantity and price decisions, 322–325 patent expiration, effects of, 325–326 patents, monopolies and, 312–313 Schmitz, James Jr., 506 Schumpeter, Joseph, 561 scientific method, 59–64 causation and correlation, 64–67 questions, properties of, 67–68 sealed bid auction, 425, 432 sealed bid first-price auction, 428–429 sealed bid second-price auction, 429–431 Sears, 574 second-degree price discrimination, 327–329 securities, 608 seignorage, 628–629 Seles, Monica, 349 self-fulfilling prophecy, 659 sellers See also auctions; bargaining; information, economics of behavior of, overview, 109–113 competitive markets and, 100–101 cost of doing business, 156–158 cost structures, differences in, 180–181 Evidence-Based Economics, 173–176, 200–203 firm entry and exit, 169–172 making the goods, 154–156 market equilibrium, 113–117 overview of, 152–153 Pareto efficiency, 186 price and the invisible hand, 193–199 producer surplus, 165–166 profits, overview of, 160–162 reservation value, 183–184 784 Index Z04_ACEM9202_01_GE_IDX.indd 784 19/03/15 5:39 PM revenue curves, 158–159 seller’s problem, 153–154 short-run and long-run supply, 167–169 social surplus, 184–186 supply curve and, 162–165 zero profit, long run, 171–172 Senegal, 494 sentiment, economic fluctuations, 655–659 sentiments, 658 Sequoia Capital, 608 services government purchases, 473 international trade, 710 real vs nominal GDP, 482–488 technological change and, 527–528 Seuss, Dr., 262 sex ratios, bargaining power and, 439 shadow banking system, 608 Sheldon, George, 410 Sherman Antitrust Act (1890), 330, 331, 335, 376–377 Shiller, Robert, 616 short run, 154 short-run supply curve, 167–169 short-term borrowing, 610 shut down, 164–165 Sierra Leone, 539 signaling, 408–409 simultaneous move games, 339–343, 340 Singapore, 481, 521, 522, 524, 708–709 Sirius Satellite Radio, 335 skills, wage inequality and, 300–301 skills-biased technological changes, 304 Slim, Carlos, 507 slope, 77, 211 Slovenia, 497 Smith, Adam, 183, 189, 193, 554 Smith, Vernon, 193, 201 smoking, incentives to stop, 135–137 Smoot-Hawley Tariff Act, 228 sniping, 426 Sober, Elliott, 456 social economics charity, economics of, 443–446 Choice & Consequence, confirmation bias, 460 Choice & Consequence, revenge, 456 Evidence-Based Economics, fairness, 450–452 fairness, economics of, 447–452 Letting the Data Speak, charitable giving, 445, 446 Letting the Data Speak, Dictator Game, 450 Letting the Data Speak, economics majors, 457 Letting the Data Speak, peer effects, 459 overview, 442–443 peer effects, economics of, 456–460 trust and revenge, economics of, 452–456 social enforcement mechanisms, 245–246 social insurance tax, 266–267 socially optimal price, 331 social preferences, Choice & Consequences, 355 Social Security, 268, 269, 283, 490 social surplus, 184–186 deadweight loss, 194–195 price discrimination, degrees of, 327–329 tariffs, effects of, 227–228 Solow growth model, 541–549 solvent, 612 Sony, 357 Soros, George, 724, 733–735, 744 South Africa, 495, 498 South Korea economic growth, 521, 522, 523, 524, 525 economic institutions, 556–557 GDP over time, 196–197 income per capita, 495 income per worker, 497, 508 inflation, 627 prosperity of, 554–556 standard of living, 499, 500 South Sudan, 539 Southwest Airlines, 367 Spain economic growth, 521, 522, 524, 525 GDP and life satisfaction, 481 income per capita, 495 income per worker, 497, 508 recession (2007–2009), 742 standard of living, 499, 500 unemployment, 590, 596 specialization, 154–155, 213 specialization, gains from, 703, 706–707 specialization of labor, 168 Spence, Michael, 409 Sputnik, 695–696 stamp auctions, 429–431 standard of living, 498–500, 718–720 See also economic growth; poverty Standard Oil, 491 Staples, 471 Starbucks, 511, 596 state taxes, 267 statistical discrimination, 303–304 steady-state equilibrium, 542–549 Steve’s Wholesale Cheese, 169–171 Stigler, George, 418 stimulus, government, 688–696 stockholders’ equity, 609–612, 610 stocks, 608 store of value, 621–622 strategies, 339 structural unemployment, 585–590 student achievement, incentives and, 72–83 subsidies, 152, 173–176 subsistence level, 532 substitute goods, 141–142, 143 substitutes, 107 substitution effect, 150 indifference curves, 149–151 leisure-labor trade-off, 296 Summers, Lawrence, 310 Summers, Robert, 519, 535 sunk costs, 165 supply equilibrium, federal funds market, 635–638 excess supply, 114 foreign exchange market, 727–733 government intervention and, 117–118 of labor, 294–299, 582–584 price fixing and, 119 producer surplus, 165–166 social surplus, 185–186 supply curve, 110 See also labor supply curve corrective taxes and subsidies, 247–250 cost structures, effects of, 180–181 equilibrium, 113–117 externalities, negative, 238–240 externalities, positive, 240–243 invisible hand, industries, 190–192 long run, profits and, 171–172 marginal revenue curve and, 159 market supply curve, 110–111 monopolies and, 324–325 overview of, 162–165 shifts in, 112–113 short-run and long-run, 167–169 taxation, deadweight loss and, 272–277 supply curve shifts, 112, 116–117 surplus, producer, 165–166 surplus, social, 184–186 Survivor, 358 sustained growth, 524 Svensson, Jakob, 569 Sweden, 494 Switzerland, 479, 494, 533 Syria, 562 systemically important financial institutions (SIFIs), 615 Syverson, Chad, 367, 421 Index 785 Z04_ACEM9202_01_GE_IDX.indd 785 19/03/15 5:39 PM T Taco Bell, 375 Taft, William Howard, 487 Taft-Hartley Act (1947), 56 Taiwan, 481, 745 Tajikistan, 495 tariffs, 227–228, 232, 536, 709–711 See also trade taste-based discrimination, 303–304 Tata Steel, 712 taxes average tax rate, 97 charitable giving and, 445 corrective taxes and subsidies, 247–250 countercyclical fiscal policy, 688–690, 692–693 deadweight loss and, 272–277 Evidence-Based Economics, externalities, 258–259 federal income tax brackets, 270 government, optimal size of, 285–286 government revenue and expenditures, 266–272 marginal tax rate, 97 payroll tax, 266–267 property tax, 267 proportional tax system, 269 public policy decisions, 43–44 redistribution of funds, 269–271 savings vs consumption decisions, 526 tariffs, 227–228, 709–711 tax credits, 606 tax incidence, 272–277 Tax Reform Act of 1986, 445 tax revenues (receipts), 266 Taylor, John, 687, 700 Taylor rule, 687–688 teacher incentives, 414 technological change, 527–528 technology, 501 aggregate production function, 514–515 comparative advantage and, 226 creative destruction, 561–562 economic fluctuations and, 662 economic growth and, 527–531 foreign aid and, 569–570 history of economic growth, 531–533 Industrial Revolution, 533, 562–563 labor demand curve and, 581–584, 653 labor-saving technology, 297 life expectancy and, 537 Luddites, 586 Moore’s Law, 505 poverty reduction and, 536 production and, 219 prosperity, causes of, 551–556 real business cycle theory, 657 role in GDP, 504–509 skill-based technological change, 304 Solow growth model, 541–549 transfer of, international trade, 715–716 terms of trade, 215–216 test group, 66, 73 Thailand, 524, 744, 745 Thatcher, Margaret, 275 theft, employee, 412 The Informant, 370 theory causation and correlation, 64–67 empiricism and, 52–53 theory of efficient markets, 616 third-degree price discrimination, 327–329 time elasticity of demand and, 142 Facebook, cost of, 48–50 modeling time and risk, 387 monetary value of, 47 opportunity costs, 85, 86–87 as resource, 41–42 time preferences, 393–396 time value of money, 388–393 time series graph, 74–75 Togo, 481, 495 total cost, 156 cost of doing business, 156–158 profits and, 160–162 total efficiency units of labor, 501 total profit, 161–162 total revenue, monopolist’s problem, 320–321 trade absolute and comparative advantage, 703–707 barriers, tariffs, 709–711 comparative advantage, 212–216 costs and benefits of, 707–708 between countries, 220–226 current and financial accounts, 711–715 efficiencies from, 707–708 Evidence-Based Economics, free trade and jobs, 229–230 fair trade products, 223 gains from specialization, 703 job loss and, 229–230 Nike and Vietnamese workers, 718–720 open and closed economies, 708–709 opposition to, 208, 226–228 poverty reduction and, 536 production possibilities curve, 209–212 between states, 216–220 tariffs, 227–228 technology transfer and economic growth, 715–716 terms of trade, 215–216 trade balance, 711–715 trade deficit, 711–715 trade-offs, 46 Choice and Consequence, preference reversals, 395 Evidence-Based Economics, immediate gratification, 395–396 leisure-labor trade-off, 296 overview, 386–387 probability and risk, 396–400 risk preferences, 400–401 time preferences, 393–396 time value of money, 388–393 trade surplus, 711–715 traffic, externalities of, 258–259 tragedy of the commons, 257, 346–347 transaction costs, 245 transfer payments, 269, 473, 712–715 transportation costs, trade patterns and, 217, 218 treatment (test) group, 66, 73 Troubled Asset Relief Program (TARP), 697 trust, economics of, 452–456 trust games, 352–354, 453–454 tulip bubble, 427 Turkey, 511, 710 Turkmenistan, 539, 557, 562 Tversky, Amos, 401 Twitter, 316, 317 U Uganda, 495, 569 Ultimatum Game, 434–436, 448–452 U.N Charter on Human Rights, 223 underemployed, 577 underground economy, 282, 479, 733 unemployed, 466, 576 unemployment countercyclical fiscal policy, 693–696 cyclical unemployment, 590 Evidence-Based Economics, 591–592 frictional unemployment, 584–585, 590 Great Depression, 651–653 labor demand and fluctuations, 653–659 labor market equilibrium, 579–584 measurement of, 575–579 natural rate of, 589–590 Okun’s Law, 656–657 reasons for, 584 structural unemployment, 585–590 786 Index Z04_ACEM9202_01_GE_IDX.indd 786 19/03/15 5:39 PM unemployment benefits, 417–418 unemployment rate, 466, 576–579 Unilever, 335 unions, labor, 587–588 unitary model, 437–438 United Airlines, 602, 658 United Arab Emirates, 481, 495 United Kingdom bank runs, 613 economic growth, 521, 522, 524, 525 exchange rates, 736–737 GDP and life satisfaction, 481 GDP per capita, 511 income per worker, 508 inflation, 627 innovation from, 536 international trade, 708–709 life expectancy, 537 railway investment, 562 standard of living, 499, 500 United Kingdom General Household Survey, 68 United Nations, 500, 553, 569 United States child labor, 719 Department of Energy, 245 Department of Treasury, 427, 440–441 economic development, 565–566 economic growth, 517–518, 519, 521, 523, 524, 525, 529–531, 539 Environmental Protection Agency (EPA), 245, 248 export and import data, 220–222 Federal Reserve Bank, 631–632 financial intermediaries, assets of, 608 foreign exchange market, 727–733 game theory, 356 GDP, 474–475, 481 GNP (gross national product), 480–481 income inequality, 534 income (GDP) per capita, 493, 495, 508–509, 517–518, 519, 520 income per worker, 497 inflation rates, 618, 627 innovation from, 536 interest rates, 744–745 international trade, 708–709, 711, 713, 722 labor supply, 583 life expectancy, 537 minimum wage, 586 NAFTA (North American Free Trade Agreement), 229–230 potential workers, 576 railway investment, 562 R&D spending, 506, 533 real exchange rate, 735–738 real GDP growth, 483–484 reserve requirements, 633 savings rate, 526 standard of living, 499, 500 tariffs, 709–711 tire production, 722 underground economy, 479 unemployment rate, 577–578, 590, 594, 674 union membership, 587 unit-elastic supply, 163–165 unit of account, 622 urbanization, prosperity and, 564–566 U.S Commerce Department See Bureau of Economic Analysis U.S Department of Labor, 486, 530, 575–579, 595 used car market, 406–407 U.S Treasury Department, 683, 697 usury laws, 618 US West, 367 utility, 149, 393 indifference curves, 149–151 time discounting, 393–394 utils, 393–394 Uzbekistan, 557, 562 V vaccines, as externalities, 242 value, current, 487–488 value added, 471–472 value-added tax (VAT), 267 value of marginal product of labor (VMPL), 292–294 value of marginal product of physical capital (VMPK), 305–306 value of the marginal product of labor, 579–580 Vanderbilt, Cornelius, 330 Vanguard, 608 van Zanden, J L., 517, 558 variable cost, 156 cost of doing business, 156–158 shut down, 164–165 variable factor of production, 154 variables, 65 causation and correlation, 64–67, 75–78 comparative statics, 86–87 dependent variables, 74 graphing data, 73–75 independent variables, 74 pie chart graphs, 73–74 supply curve shifts, 110–113 VAT (value-added tax), 267 vault cash, 632–634 Venezuela black market, 733, 744 gasoline prices, 107–108 GDP and life satisfaction, 481 life expectancy, 537 poverty, 535, 536 Venice, 531 venture capital funds, 608 Vickrey, William, 431 Vietnam, 495, 535, 536, 710, 719 Volcker, Paul, 685 volunteering, global data on, 444 von Metternich, Klemens, 562 W wage rigidity, 585–590 wages bargaining power, 434 compensating wage differentials, 301, 302 cost of doing business, 156–158 countercyclical policies, overview, 677–679 demand for labor, 292–294 discrimination in job market, 307 downward wage rigidity, 588–589, 655, 659, 661–666 economic fluctuations and, 659–666 education level and, 62, 63–64, 68 efficiency wages, 413, 588 Evidence-Based Economics, unemployment, 591–592 free trade and job loss, 229–230 inflation and, 626–627 international trade and, 718–720 labor demand and fluctuations, 653–659 labor demand curve and, 580–584 labor market equilibrium and, 296–299 market-clearing wage, 583–584 market wage, 580 minimum wage, 280, 585–587 nominal vs real wages, 665–666 pay-for-performance programs, 414 real wage, 629 unemployment benefits, 417–418 wage inequality, 299–304 wage rigidity, 585–590 Wall Street Journal, 573 Walmart, 64–65, 66, 199, 471, 472, 710, 725, 726, 735–738 Walton, Sam, 199 warranties, 399–400, 408 Washington Mutual, 614–615 Index 787 Z04_ACEM9202_01_GE_IDX.indd 787 19/03/15 5:39 PM wealth demand curve and, 106 distribution of, 200 redistribution, equity-efficiency trade-off, 282–283 Wealth of Nations, The (1776), 183, 189 web browsers, 317, 330–331 Weber, Max, 553 welfare programs, 269 welfare state, 283 West, James, 459 Williams, Venus, 349 willingness to accept, 110 willingness to pay, 102–103 Wilson, Beth, 91 Wilson, David Sloan, 456 Wilson, Woodrow, 330 Windows, Microsoft, 335 wine advertising decisions, 372 Wisconsin Cheeseman, The cost of doing business, 156–158 labor, demand for, 292–294 labor, supply of, 296–299 physical capital and land, 305–306 producer surplus, 165–166 production data, 154–156 profits, 160–162, 172–173 revenue curves, 158–159 short-run and long-run supply, 167–169 supply curve, 162–165 workers See labor World Bank foreign aid, 569 GDP per capita, 517, 519 GNP per capita, 512 on poverty, 498–500, 507, 531, 535 World Health Organization (WHO), 537, 553 world price, 222–225 World Series of Poker, 339 Worlds Fair, 332–333 X Xiaoping, Deng, 716, 719 XM Satellite Radio, 335 Y Yellen, Janet, 421, 632 Yemen, 535, 536, 627 yuan, 725–733, 736–738, 739 Z Zaire, 627 Zambia, 495 zero correlation, 65 zero lower bound, 686–687 zero-sum games, 347–348 Zimbabwe, 466, 497, 572, 645 Zoellick, Robert B., 711 788 Index Z04_ACEM9202_01_GE_IDX.indd 788 19/03/15 5:39 PM Z04_ACEM9202_01_GE_IDX.indd 789 19/03/15 5:39 PM Z04_ACEM9202_01_GE_IDX.indd 790 19/03/15 5:39 PM Z04_ACEM9202_01_GE_IDX.indd 791 19/03/15 5:39 PM Z04_ACEM9202_01_GE_IDX.indd 792 19/03/15 5:39 PM Choices Providing Options and Value in Economics Complete Digital Experience MyEconLab + eText = Allow your students to save by purchasing a stand-alone MyEconLab directly from Pearson at www.myeconlab.com Pearson’s industry-leading learning solution features a full Pearson eText and course management functionality Most importantly, MyEconLab helps you hold students accountable for class preparation and supports more active learning styles Visit www.myeconlab.com to find out more Digital Students can purchase a three-hole-punched, full-color version of the text via myeconlab.com at a significant discount delivered right to their door Instant eText Access Homework and Tutorial Only MyEconLab = The CourseSmart eBookstore 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Pearson Series in Economics Abel/Bernanke/Croushore Macroeconomics* Fort Sports Economics Acemoglu/ Laibson/List Economics* Froyen Macroeconomics Bade/Parkin Foundations of Economics* Fusfeld... Definition of Economics 42 Positive Economics and Normative Economics 43 Microeconomics and Macroeconomics 44 1.2 Three Principles of Economics 44 1.3 The First Principle of Economics: Optimization 45... I Introduction to Economics 40 Chapter 1: The Principles and Practice of Economics 2.3 Economic Questions and Answers 40 1.1 The Scope of Economics 41 Economic Agents and Economic Resources