Ebook Economics (9th edition): Part 1 - Roger A. Arnold

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E c onomi c s
R O G E R

A.

A R N O L D

CALIFORNIA STATE UNIVERSITY
SAN MARCOS

9E







Kor














Ki








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Economics, 9E
Roger A. Arnold
Vice President of Editorial, Business: Jack W.
Calhoun
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Rosenberg

© 2010, 2008 South-Western, a part of Cengage Learning
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ISBN-13: 978-0-324-59542-0
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SOUTH-WESTERN

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Brief Contents
Preface

xxv

Appendix C Budget Constraint and Indifference Curve Analysis 420
Chapter 19 Production and Costs

An Introduction to Economics
Part 1
Chapter 1

Part 7

Product Markets and Policies

Economics: The Science of Scarcity

Chapter 20 Perfect Competition

What Economics Is About

Chapter 21 Monopoly

Appendix A Working with Diagrams

1
19

Appendix B Should You Major in Economics? 27
Chapter 2

Economic Activities: Producing and Trading 33

Chapter 3

Supply and Demand: Theory

Chapter 4

Supply and Demand: Applications

428

458

485

Chapter 22 Monopolistic Competition, Oligopoly, and Game
Theory 508
Chapter 23 Government and Product Markets: Antitrust and
Regulation 534

53

91

Macroeconomics

Part 8

Factor Markets and Related Issues

Chapter 24 Factor Markets: With Emphasis on the Labor
Market 557
Chapter 25 Wages, Unions, and Labor

582

Part 2

Macroeconomic Fundamentals

Chapter 26 The Distribution of Income and Poverty

Chapter 5

Macroeconomic Measurements, Part I: Prices and
Unemployment 113

Chapter 27 Interest, Rent, and Profit

Chapter 6

Macroeconomic Measurements, Part II: GDP and Real

GDP 133

Part 3

Macroeconomic Stability, Instability,
and Fiscal Policy

Chapter 7

Aggregate Demand and Aggregate Supply 156

Chapter 8

The Self-Regulating Economy

Chapter 9

Economic Instability: A Critique of the Self-Regulating
Economy 203

Part 9

Chapter 28 Market Failure: Externalities, Public Goods, and
Asymmetric Information 642
Chapter 29 Public Choice: Economic Theory Applied to
Politics 668

The Global Economy
Part 10

International Economics and Globalization

Chapter 30 International Trade
Chapter 31 International Finance

Part 4

Money, the Economy, and Monetary Policy

Chapter 11 Money and Banking

250

623

Market Failure and Public Choice

184

Chapter 10 Fiscal Policy and the Federal Budget 229

601

689
708

Chapter 32 Globalization and International Impacts on the
Economy 737

Chapter 12 The Federal Reserve System 270

Chapter 13 Money and the Economy
Chapter 14 Monetary Policy

Part 5

Practical Economics

284

311

Expectations and Growth

Part 11

Financial Matters

Chapter 33 Stocks, Bonds, Futures, and Options

765

Chapter 15 Expectations Theory and the Economy 333
Chapter 16 Economic Growth

354

Microeconomics
Part 6

Microeconomic Fundamentals

Chapter 17 Elasticity

375

Chapter 18 Consumer Choice: Maximizing Utility and Behavioral
Economics 402

Web Chapter
Part 12

Web Chapter

Chapter 34 Agriculture: Problems, Policies, and Unintended
Effects 786
Self-Test Appendix
Glossary
Index

786

806

816

v


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Contents
Preface

xxv

A n Intr oduct ion t o E c onom ic s
Part  Economics: The Science of Scarcity



CHAPTER

WHAT ECONOMICS IS ABOUT
A Definition of Economics

E C O N O M I C S 24/7
LOST
3

Why Didn’t Jessica Alba
Go to College?
7

Economics in a Cosmetic
Surgeon’s Office?

12

1

1

Goods and Bads 1 Resources 2 Scarcity and a Definition of Economics 2
Key Concepts in Economics

5

Opportunity Cost 5 Opportunity Cost and Behavior 6 Benefits and Costs 7
Decisions Made at the Margin 8 Efficiency 8 Unintended Effects 10
Exchange 11
Economic Categories

13

Positive and Normative Economics 13 Microeconomics and Macroeconomics 14
A Reader Asks

16

Chapter Summary

16

OFFICE HOURS

Key Terms and Concepts

17

“I Don’t Believe That
Every Time a Person Does
Something, He Compares
the Marginal Benefits
and Costs”

Questions and Problems

17

15

APPENDIX A: WORKING WITH DIAGRAMS
Two-Variable Diagrams
Slope of a Line

19

20

Slope of a Line Is Constant
Slope of a Curve

Bar Graphs
Line Graphs

22

22

The 45-Degree Line
Pie Charts

19

22

23
23
24

Appendix Summary

26

Questions and Problems

26

APPENDIX B: SHOULD YOU MAJOR IN ECONOMICS?

27

Five Myths About Economics and an Economics Major

28

Myth 1: Economics Is All Mathematics and Statistics 28 Myth 2: Economics Is Only About
Inflation, Interest Rates, Unemployment, and Other Such Things 28 Myth 3: People Become
vii


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viii

CONTENTS

Economists Only if They Want to “Make Money” 29 Myth 4: Economics Wasn’t Very
Interesting in High School, So It’s Not Going to Be Very Interesting in College 30 Myth 5:
Economics Is a Lot Like Business, But Business Is More Marketable 30
What Awaits You as an Economics Major?
What Do Economists Do?

31

Places to Find More Information



CHAPTER

Concluding Remarks

32

32

ECONOMIC ACTIVITIES: PRODUCING AND TRADING
The Production Possibilities Frontier

E C O N O M I C S 24/7
The PPF and Your Grades
40

Trading Prisoners
41

Jerry Seinfeld, the
Doorman, and
Adam Smith
47

OFFICE HOURS
“What Purpose Does the
PPF Serve?”
49



CHAPTER

30

Exchange or Trade

39

Periods Relevant to Trade 39 Trade and the Terms of Trade 41 Costs of Trades 42
Trades and Third-Party Effects 44
Production, Trade, and Specialization

A Reader Asks

50

Chapter Summary

50

Key Terms and Concepts

51

Questions and Problems

51

A Note About Theories

58

iPods and the Law of
Demand
62

Advertising and the
Demand Curve

63

The Dowry and Marriage
Market Disequilibrium
75

Overbooking and the
Airlines
80

OFFICE HOURS
“I Thought Prices Equaled
Costs Plus 10 Percent”
86

44

Producing and Trading 44 Profit and a Lower Cost of Living 47 A Benevolent and AllKnowing Dictator Versus the Invisible Hand 48

SUPPLY AND DEMAND: THEORY

Ticket Prices at
Disney World

33

The Straight-Line PPF: Constant Opportunity Costs 33 The Bowed-Outward (ConcaveDownward) PPF: Increasing Opportunity Costs 34 Law of Increasing Opportunity Costs 36
Economic Concepts Within a PPF Framework 37

Working with Numbers and Graphs

E C O N O M I C S 24/7

33

What Is Demand?

52

53

53

54

The Law of Demand 54 What Does Ceteris Paribus Mean? 55 Four Ways to Represent
the Law of Demand 56 Two Prices: Absolute and Relative 56 Why Does Quantity
Demanded Go Down as Price Goes Up? 57 Individual Demand Curve and Market Demand
Curve 58 A Change in Quantity Demanded Versus a Change in Demand 59 What Factors
Cause the Demand Curve to Shift? 62 Movement Factors and Shift Factors 65
Supply 66

The Law of Supply 66 Why Most Supply Curves Are Upward Sloping 67 Changes
in Supply Mean Shifts in Supply Curves 68 What Factors Cause the Supply Curve to
Shift? 69 A Change in Supply Versus a Change in Quantity Supplied 70
The Market: Putting Supply and Demand Together 71

Supply and Demand at Work at an Auction 71 The Language of Supply and Demand: A
Few Important Terms 72 Moving to Equilibrium: What Happens to Price when There Is
a Surplus or a Shortage? 72 Speed of Moving to Equilibrium 74 Moving to Equilibrium:

Maximum and Minimum Prices 75 Equilibrium in Terms of Consumers’ and Producers’
Surplus 76 What Can Change Equilibrium Price and Quantity? 78
Demand and Supply as Equations
Price Controls

81

82

Price Ceiling: Definition and Effects 82 Price Floor: Definition and Effects 85
A Reader Asks

87

Chapter Summary

87

Key Terms and Concepts

88


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CONTENTS
Questions and Problems

CHAPTER



ix

88

Working with Numbers and Graphs

90

SUPPLY AND DEMAND: APPLICATIONS

91

Application 1: Why Is Medical Care So Expensive? 91
OFFICE HOURS
“Doesn’t High Demand
Mean High Quantity
Demanded?”
109

Application 2: Where Will House Prices Change the Most?

94

Application 3: Why Do Colleges Use GPAs, ACTs, and SATs for Purposes of
Admission? 95
Application 4: Supply and Demand on a Freeway 96
Application 5: Price Ceilings in the Kidney Market
Application 6: The Minimum Wage Law

97

99

Application 7: Price Floors and Winners and Losers
Application 8: Are Renters Better Off?

102

Application 9: Do You Pay for Good Weather?
Application 10: College Superathletes

101

104

105

Application 11: 10 a.m. Classes in College

107

Application 12: What will Happen to the Price of Marijuana if the Purchase and Sale
of Marijuana Are Legalized? 108
A Reader Asks

110

Chapter Summary

110

Key Terms and Concepts

111

Questions and Problems

111

Working with Numbers and Graphs

112

Macroe cono m ic s
Part  Macroeconomic Fundamentals



CHAPTER

MACROECONOMIC MEASUREMENTS, PART I: PRICES AND
UNEMPLOYMENT 113
How to Approach the Study of Macroeconomics 113

E C O N O M I C S 24/7
Economics at the Movies
121

Woodstock, 1969

123

What Was a Penny Worth?
125

OFFICE HOURS
“Is There More Than One
Reason the Unemployment
Rate Will Fall?”
129

Macroeconomic Problems 113 Macroeconomic Theories 114 Macroeconomic
Policies 115 Different Views of How the Economy Works 115
Three Macroeconomic Organizational Categories 115
Macroeconomic Measures

117

Measuring Prices Using the CPI 117 Inflation and the CPI 119 The Substitution Bias in
Fixed-Weighted Measures 121 GDP Implicit Price Deflator 122 Converting Dollars from
One Year to Another 122
Measuring Unemployment

124

Who Are the Unemployed? 124 The Unemployment and Employment
Rates 125 Reasons for Unemployment 126 Discouraged Workers 126 Types of
Unemployment 127 Cyclical Unemployment 128
A Reader Asks

130

Chapter Summary

130

Key Terms and Concepts

131


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E c onomi c s
R O G E R

A.

A R N O L D

CALIFORNIA STATE UNIVERSITY
SAN MARCOS

9E







Kor














Ki








To download more slides, ebooks, solution manual, and test bank, visit
x

CONTENTS
Questions and Problems

CHAPTER



131

Working with Numbers and Graphs

131

MACROECONOMIC MEASUREMENTS, PART II: GDP
AND REAL GDP 133
Gross Domestic Product

E C O N O M I C S 24/7
Gross Family Product
135

Happiness and the
Economist
137

How Are California and
Italy Alike?
139

1820
143

GDP: Proceed with
Caution
145

OFFICE HOURS
“Why Do We Use the
Expenditure Approach to
Measure Production?”
152

133

Three Ways to Compute GDP 133 What GDP Omits 136 GDP Is Not Adjusted for Bads
Generated in the Production of Goods 137 Per Capita GDP 137 Is Either GDP or Per
Capita GDP a Measure of Happiness or Well-Being? 137
The Expenditure Approach to Computing GDP for a Real-World Economy

138

Expenditures in a Real-World Economy 138 Computing GDP Using the Expenditure
Approach 140
The Income Approach to Computing GDP for a Real-World Economy 142

Computing National Income 143 From National Income to GDP: Making Some
Adjustments 144
Other National Income Accounting Measurements

146

Net Domestic Product 147 Personal Income 147 Disposable Income 147
Real GDP 148

Why We Need Real GDP 148 Computing Real GDP 148 The General Equation for
Real GDP 149 What Does It Mean if Real GDP Is Higher in One Year Than in Another
Year? 149 Real GDP, Economic Growth, and Business Cycles 149
A Reader Asks

153

Chapter Summary

153

Key Terms and Concepts

154

Questions and Problems

154

Working with Numbers and Graphs

155

Part  Macroeconomic Stability, Instability, and
Fiscal Policy
CHAPTER



AGGREGATE DEMAND AND AGGREGATE SUPPLY
The Two Sides to an Economy

E C O N O M I C S 24/7
Gisele and the Dollar
166

The Subprime Mortgage
Market
171

The Vietnam War and
AD-SRAS
175

Reality Can Be Messy, and
Correct Predictions Can Be

Difficult to Make
177

OFFICE HOURS
“What Purpose Does the
AD-AS Framework Serve?”
179

Aggregate Demand

156

156

156

Why Does the Aggregate Demand Curve Slope Downward? 157 A Change in the Quantity
Demanded of Real GDP Versus a Change in Aggregate Demand 160 Changes in Aggregate
Demand: Shifts in the AD Curve 161 How Spending Components Affect Aggregate
Demand 161 Factors That Can Change C, I, G, and NX (EX – IM) and Therefore Can
Change AD 162 Can a Change in the Money Supply Change Aggregate Demand? 167
Short-Run Aggregate Supply

167

Short-Run Aggregate Supply Curve: What It Is and Why It Is Upward Sloping 167 What
Puts the “Short Run” in SRAS? 169 Changes in Short-Run Aggregate Supply: Shifts in the
SRAS Curve 169 Something More to Come: People’s Expectations 170
Putting AD and SRAS Together: Short-Run Equilibrium

172

How Short-Run Equilibrium in the Economy Is Achieved 172 Thinking in Terms of ShortRun Equilibrium Changes in the Economy 173 An Important Exhibit 175
Long-Run Aggregate Supply

176

Going from the Short Run to the Long Run 176 Short-Run Equilibrium, Long-Run
Equilibrium, and Disequilibrium 177 Something More to Come: Shifts in the LRAS
Curve 178


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CONTENTS
A Reader Asks

180

Chapter Summary

180

Key Terms and Concepts

181

Questions and Problems

181

Working with Numbers and Graphs

CHAPTER



Natural Disasters and the
Economy
194

The Story Behind the
Curves on the Blackboard
198

OFFICE HOURS
“Do Economists Really
Know What the Natural
Unemployment Rate
Equals?”
199



184

Three States of the Economy

187

Real GDP and Natural Real GDP: Three Possibilities 187 The Labor Market and the Three

States of the Economy 189
The Self-Regulating Economy

192

What Happens if the Economy Is in a Recessionary Gap? 193 What Happens if the Economy
Is in an Inflationary Gap? 194 The Self-Regulating Economy: A Recap 195 Policy
Implication of Believing the Economy Is Self-Regulating 196 Changes in a Self-Regulating
Economy: Short Run and Long Run 196
A Reader Asks

200

Chapter Summary

200

Key Terms and Concepts

201

Questions and Problems

201

Negative Savings and
House Wealth
212

The Multiplier on Spring

Break
214

Why Economists Might
Disagree
224

OFFICE HOURS
“Does a Lot Depend
on Whether Wages Are
Flexible or Inflexible?”
225

202

ECONOMIC INSTABILITY: A CRITIQUE OF THE
SELF-REGULATING ECONOMY 203
Questioning the Classical Position

E C O N O M I C S 24/7

184

Classical Economists and Say’s Law 184 Classical Economists and Interest Rate
Flexibility 185 Classical Economists on Prices and Wages 187

Working with Numbers and Graphs

CHAPTER

182

THE SELF-REGULATING ECONOMY
The Classical View

E C O N O M I C S 24/7

xi

203

Keynes’s Criticism of Say’s Law in a Money Economy 204 Keynes on Wage Rates 205
New Keynesians and Wage Rates 206 Keynes on Prices 206 Is It a Question of the Time It
Takes for Wages and Prices to Adjust? 207
The Simple Keynesian Model

208

Assumptions 208 The Consumption Function 208 Consumption and Saving 211
The Multiplier 212 The Multiplier and Reality 213
The Simple Keynesian Model in the AD-AS Framework

215

Shifts in the Aggregate Demand Curve 215 The Keynesian Aggregate Supply
Curve 215 The Economy in a Recessionary Gap 216 Government’s Role in the
Economy 217 The Theme of the Simple Keynesian Model 218
The Simple Keynesian Model in the TE-TP Framework

218

Deriving a Total Expenditures (TE ) Curve 218 What Will Shift the TE
Curve? 220 Comparing Total Expenditures (TE) and Total Production (TP) 220 Moving
from Disequilibrium to Equilibrium 221 The Graphical Representation of the Three States
of the Economy in the TE-TP Framework 221 The Economy in a Recessionary Gap and the
Role of Government 223 The Theme of the Simple Keynesian Model 223