Economics (barrons business review)

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Page i

Economics
Third Edition
BUSINESS REVIEW BOOKS
Walter J. Wessels
Professor of Economics
Department of Economics and Business
North Carolina State University

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Page ii

Copyright © 2000 by Barron's Educational Series, Inc.
Prior editions © Copyright 1993, 1987 by Barron's
Educational Series, Inc.
All rights reserved.
No part of this book may be reproduced in any form by photostat, microfilm, xerography, or any other means, or
incorporated into any information retrieval system, electronic or mechanical, without the written permission of the
copyright owner.
All inquiries should be addressed to:
Barron's Educational Series, Inc.
250 Wireless Boulevard
Hauppauge, New York 11788

Library of Congress Catalog Card No. 99-16326
International Standard Book No. 0-7641-1274-0
Library of Congress Cataloging-in-Publication Data
Wessels, Walter J.
Economics / Walter J. Wessels.3rd ed.
p. cm. (Barron's business review series)
Includes index.
ISBN 0-7641-1274-0
1. Economics.
I. Title
II. Series.
HB171.5.W43 2000
330dc21
99-16326

CIP
PRINTED IN THE UNITED STATES OF AMERICA
987654321

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CONTENTS

Preface

xiii

Essentials of Economics
1
What Is Economics All About?

What Is Economics About?

The Basis for Economics

Scarcity

Opportunity Cost

Marginal Analysis

KNOW THE CONCEPTS

PRACTICAL APPLICATION

ANSWERS
2
How to Use Graphs in Economics

Reading Graphs

How Two Variables Are Related

Plotting Graphs

Measuring the Slope

1

1

2

2

3

10

12

13

15

18

18

19

20

21


22

KNOW THE CONCEPTS

23

PRACTICAL APPLICATION

25

ANSWERS
3
Supply and Demand: Part One

30

30

How to Study Supply and Demand

31

Price

32

Demand and the Law of Demand

33

The Demand Curve

35

Supply and the Law of Supply

36

The Supply Curve

37

Market Equilibrium

40

Price Floors

41

Price Ceilings

41

Effects of Price Ceilings and Floors

43

On the Nature of the Price System

43

KNOW THE CONCEPTS

44

PRACTICAL APPLICATION

45

ANSWERS
4
Supply and Demand: Part Two

48

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The Difference between Economic Shifts and Movements

49

Factors Shifting Demand

52

Factors Shifting Supply

How to Avoid Mistakes in Analyzing Supply and Demand

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56

KNOW THE CONCEPTS

57

PRACTICAL APPLICATION

60

ANSWERS
Macroeconomics: Aggregate Supply and Demand
5
Measuring National Output

63

63

Introduction

64

Basic Premises

65

The Circular Flow of Income

65

Measuring GDP

69

GDP and National Welfare

70

National Income Accounting Formulas

71

Applying the National Income Premises

73

KNOW THE CONCEPTS

74

PRACTICAL APPLICATION

76

ANSWERS
6
Inflation and Unemployment

78

78

Measuring Inflation

80

The Three Main Price Indexes

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Problems with Price Indexes

The Meaning of Inflation

How Inflation Affects Real Income

The Economic Costs of Inflation

Measuring Unemployment

The Effect of Recession

The Types of Costs of Unemployment

KNOW THE CONCEPTS

PRACTICAL APPLICATION

ANSWERS
7
Introduction to Macroeconomics: Output, Growth, and Capital

What Is Macroeconomics?

Recessions

Why Recessions Occur

Full-Employment Output

The Level of Current Output

Factors Affecting Growth

Creation of Capital

Capital Markets

80

81

81

83

85

86

86

88

89

91

94

94

95

96

97

98

100

101

102


106

Will Savings Be Invested?

107

KNOW THE CONCEPTS

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PRACTICAL APPLICATION

ANSWERS
8
Aggregate Demand and Supply: The Key to Macroeconomics

Aggregate Demand and Supply

Aggregate Demand

Aggregate Supply (Short Run)

The Effects of Shifts in Aggregate Demand and Supply

Aggregate Supply (Long Run)

How to Apply Aggregate Demand and Supply

KNOW THE CONCEPTS

PRACTICAL APPLICATION

ANSWERS
9

Aggregate Demand in the Private Sector: The Keynesian Model

The Basic Keynesian Model

Consumption Function

Investment Function

Equilibrium in Aggregate Demand

Applying the Keynesian Model

108

109

112

113

114

116

118

121

122

123

124

126

129

130

130

133

134

137


137

Shifts in Investment

140

Determinants of Consumption

141

Determinants of Investment

142

Factors Shifting the Total Spending Curve

142

Plotting Aggregate Demand

143

KNOW THE CONCEPTS

144

PRACTICAL APPLICATION

146

ANSWERS
10
Aggregate Supply and Getting to Full Employment

150

Constructing the Aggregate Supply Curve to Get to Full Employment

151

Long-Run Equilibrium

153

From Recession to Full Employment

From Too Little Unemployment to Full Employment

The Effects of Employment on the Spending Multiplier

155

157

158

The Natural Rate of Unemployment

161

KNOW THE CONCEPTS

162

PRACTICAL APPLICATION

165

ANSWERS

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Macroeconomics: Fiscal and Monetary Policy
11
Fiscal Policy: Government Spending and Taxation

What Fiscal Policy Is

The Effect of Spending

The Effect of Taxation

The Overall Effects of Spending and Taxation

Limits of an Active Fiscal Policy

The Effect on Aggregate Supply and Demand

Deficits: Do They Matter?

KNOW THE CONCEPTS

PRACTICAL APPLICATION

ANSWERS
12
The Supply of Money

What Is Money?

How Money Is Measured

Balance Sheets and Banks: Federal and Commercial

How Money Is Created

How the Fed Controls the Money Supply

169

170

170

172

175

175

176

176

179

179

181

183

183

184

185

186

189


192

KNOW THE CONCEPTS

192

PRACTICAL APPLICATION

194

ANSWERS
13
Money and Aggregate Demand

197

197

Money Demand

198

The Quantity Theory of Money

200

The Long-Run Neutrality of Money

203

How to Predict Inflation

204

The German Hyperinflation

The Short-Run Effects of Money: The Monetarist Model

Keynesian Model of the Short-Run Effects of Money

The Long-Run Effects of Money Supply on Interest Rates

The Spending Multiplier and Fiscal Policy

205

206

210

210

211

Bonds: Interest Rates and Prices

The Differences between Keynesian and Monetarist Views

213

214

KNOW THE CONCEPTS

215

PRACTICAL APPLICATION

218

ANSWERS
14
Inflation and Unemployment

222

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What Causes the Short-Run Aggregate Supply Curve (AS) to Shift?

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The Relationship between the AS Curve and the Phillips Curve

How Shifts Affect the AS Curve and the Phillips Curve

224

226

227

Visualizing the Business Cycle

230

Inflation and the Phillips Curve

232

The Business Cycle

Can Economic Recovery Be Made Faster?

Can Inflation (at Full Employment) Be Reduced?

Does the Phillips Curve Tell the Real Story?

232

234

235

236

KNOW THE CONCEPTS

237

PRACTICAL APPLICATION

239

ANSWERS
15
Rational Expectations and Other Models of the Business Cycle

242

243

Rational-Expectations Macroeconomics

244

Assumptions

246

Results

248

Rational-Expectations Model

An Example of a Rational-Expectations Model

250

251

Criticisms of Rational Expectations

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Rational Expectations, Random Walk, and the Stock Market

Real Business Cycle Theory

Neo-Keynesian Macroeconomics

Where Does Business Cycle Theory Stand Today?

KNOW THE CONCEPTS

PRACTICAL APPLICATION

ANSWERS
16
Open-Market Macroeconomics

Introduction

The Key to Understanding World Trade

The Exchange Rate

The Demand and Supply of the Dollar

The Market for Assets

Factors Affecting the Exchange Rate

Other Equations

Fixed Exchange Rates

Runs on Currencies and Capital Flight

Fiscal and Monetary Policy in an Open Economy

KNOW THE CONCEPTS

252

253

255

258

259

260

262

266

266

267

268

270

273

278

281

283

284

285

286


287

PRACTICAL APPLICATION

289

ANSWERS

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Microeconomics: Consumer and Cost
17
Elasticity

293

The Price Elasticity of Demand

Measuring the Price Elasticity of Demand

Elasticity and Total Revenue

Factors Affecting Elasticity

Pertaining to Demand

Pertaining to Supply

KNOW THE CONCEPTS

PRACTICAL APPLICATION

ANSWERS
18
The Theory of Demand

Market and Individual Demand

The Law of Diminishing Marginal Utility

The Law of Equal Marginal Utility per Dollar

Deriving the Law of Demand from the Law of Equal Marginal Utility per Dollar

Income Effects and Substitution Effects

Consumer Surplus

293

296

298

301

301

303

305

306

307

310

310

311

312

314

315

317


Applications for Business: Principle of Equal Marginal Benefit per Unit

319

320

KNOW THE CONCEPTS

321

PRACTICAL APPLICATION

322

ANSWERS
19
Cost and Output

325

325

Short- and Long-Run Costs

326

Short-Run Costs

332

Long-Run Costs

335

Profits and Costs

336

KNOW THE CONCEPTS

337

PRACTICAL APPLICATION

339

ANSWERS
Microeconomics: Competition and Monopoly
20

Competitive Supply

342

342

Rules of Basic Decision Making

342

Concerning Costs

343

Concerning Output

How Competitive Firms Make Decisions Concerning Costs and Output

346

348

Rules of Supply

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The Construction of the Industry's Short-Run Supply Curve

351

356

Effects of Costs on Supply

357

Competition Bids Price down to Cost

358

KNOW THE CONCEPTS

359

PRACTICAL APPLICATION

361

ANSWERS
21
Monopolies

365

365

Why Do Monopolies Exist?

366

Basic Elements

366

Marginal Revenue

369

The Output Decision

370

Fallacies and Facts

372

Price Discrimination

374

Taxes and Monopolies

376

KNOW THE CONCEPTS

377

PRACTICAL APPLICATION

378

ANSWERS
22
Between Monopoly and Competition

381

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Perfectly Contestable Markets

Monopolistic Competition

Oligopoly

Special Models of Oligopolies

Game Theory and Oligopoly

Forces That Promote Competition

KNOW THE CONCEPTS

PRACTICAL APPLICATION

ANSWERS
23
Game Theory

Cooperation

Noncooperation

Nash Equilibrium

Sequential Games

Coordination Games

Games and Pay

Keynesian Games

The Core

Evolutionary Games

382

383

385

388

392

393

394

395

397

400

400

401

403

405

406

407

408

409

411


412

KNOW THE CONCEPTS

413

PRACTICAL APPLICATION

416

ANSWERS

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24
Efficiency and Regulation

The Competitive Process

The Efficiency of Competitive Markets

The Social Loss from Monopoly

Regulating Monopoly

Vertical Integration

Vertical Integration and Antitrust

Is Monopoly Bad?

When Won't a Competitive Economy Be Efficient?

KNOW THE CONCEPTS

PRACTICAL APPLICATION

ANSWERS

421

421

422

424

426

429

430

432

433

433

434

436

Microeconomics: What People Earn
25
Factor Demand and Productivity

How to Measure Productivity and Profits

Determining Marginal Benefit by Marginal Revenue Product

Determining Marginal Cost by Marginal Factor Cost

The Four Cases Combined

439

440

441

446

448


450

Efficiency

452

Income Allocation

452

KNOW THE CONCEPTS

453

PRACTICAL APPLICATION

455

ANSWERS
26
Wages, Labor Markets, and Unions

459

459

Workers and Jobs

459

Model 1: Workers Alike, Jobs Alike

Model 2: Workers Alike, Jobs Different

Other Models of Differences in Wages

464

465

467

Discrimination

468

Unions

468

Unions in Price-Taking Firms

470

Unions and Efficiency

Unions and Monopsonistic Employers

471

473

The Minimum Wage

473

KNOW THE CONCEPTS

474

PRACTICAL APPLICATION

476

ANSWERS

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