Economics : principles, problems, and policies / Campbell R. McConnell, Stanley L. Brue.

Includes index.

CONTENTS
List of Key Graphs vi
Preface vii
Contributors xiv
PART ONE
An Introduction to Economics and #the Economy
To the Student 2
1 The Nature and Method of #Economics 3
The Economic Perspective 3
Scarcity and Choice / Rational Behavior / Marginalism: Benefits and Costs
Consider This: Free for All? 4
Why Study Economics? 5
Economics for Citizenship / Professional and #Personal Applications
Economic Methodology 6
Theoretical Economics / Policy Economics
Macroeconomics and Microeconomics 9
Macroeconomics / Microeconomics / Positive and #Normative Economics
Pitfalls to Sound Reasoning 10
Biases / Loaded Terminology / Definitions / Fallacy of Composition / Causation
Fallacies
A Look Ahead 12
Last Word: Fast-Food Lines: An Economic #Perspective 12
Appendix Chapter 1: Graphs and Their Meaning 15
Construction of a Graph / Direct and Inverse Relationships / Dependent and
Independent
Variables / Other Things Equal / Slope of a Line / Vertical Intercept / Equation
of a Linear
Relationship / Slope of a Nonlinear Curve
2 The Economizing Problem 22
The Foundation of Economics 22
Unlimited Wants / Scarce Resources
Economics: Employment and Efficiency 24
Full Employment: Using Available Resources / Full Production: Using Resources
Efficiently / Production Possibilities Table /
Production Possibilities Curve / Law of Increasing Opportunity Cost / Allocative
Efficiency Revisited
Unemployment, Growth, and the Future 28
Unemployment and Productive Inefficiency / A Growing Economy / A Qualification:
International Trade / Examples and
Applications
Consider This: A Matter of Degrees: #Is College Worth the Cost? 32
Economic Systems 33
The Market System / The Command System
The Circular Flow Model 34
Last Word: September 11, 2001, and the War on #Terrorism 35
3 Individual Markets: Demand #and Supply 39
Markets 39
Demand 40
Law of Demand / The Demand Curve / Market Demand / Change in Demand / Changes in
Quantity Demanded
Supply 45
Law of Supply / The Supply Curve / Determinants of Supply / Changes in Supply /
Changes in Quantity Supplied
Supply and Demand: Market Equilibrium 48
Surpluses / Shortages / Equilibrium Price and Quantity / Rationing Function of
Prices / Changes in Supply, Demand, and
Equilibrium / A Reminder: ?Other Things Equal?
Consider This: The Cutting Edge 50
Application: Government-Set Prices 52
Price Ceilings and Shortages / Price Floors and Surpluses
Last Word: Ticket Scalping: A Bum Rap? 55
3Web Applications and Extensions of Supply and Demand Analysis 59
(Web Chapter, www.mcconnell16.com)
Changes in Supply and Demand 3W-1
Lettuce / American Flags / Pink Salmon / Gasoline / Sushi
Preset Prices 3W-4
Olympic Figure Skating Finals / Olympic Curling Preliminaries
Consider This: Taking Back a ?Gift? 3W-5
Nonpriced Goods: The American Bison 3W-6
Consumer and Producer Surplus 3W-7
Consumer Surplus / Producer Surplus / Efficiency #Revisited / Efficiency Losses
Last Word: Efficiency Gains from Generic Drugs 3W-11
4 The Market System 60
Characteristics of the Market System 60
Private Property / Freedom of Enterprise and Choice / Self-Interest /
Competition / Markets and Prices / Reliance on
Technology and Capital Goods / Specialization / Use of Money / Active, but
Limited, Government
The Market System at Work 64
What Will Be Produced? / How Will the Goods and Services Be Produced? / Who Will
Get the Goods and Services? / How Will
the System Accommodate Change?
Consider This: McHits and McMisses 66
Competition and the ?Invisible Hand? 69
Last Word: Shuffling the Deck 70
5 The U.S. Economy: Private and #Public Sectors 73
Households as Income Receivers 73
The Functional Distribution of Income / The Personal Distribution of Income
Households as Spenders 74
Personal Taxes / Personal Saving / Personal #Consumption Expenditures
The Business Population 75
Legal Forms of Businesses 76
Advantages and Disadvantages / The #Principal-Agent Problem
The Public Sector: Government?s Role 79
Providing the Legal Structure / Maintaining Competition / Redistributing Income
/ Reallocating Resources / Promoting Stability
/ Government?s Role: A Qualification
Consider This: Street Entertainers 82
The Circular Flow Revisited 83
Government Finance 84
Government Purchases and Transfers
Federal Finance 85
Federal Expenditures / Federal Tax Revenues
State and Local Finance 87
State Finances / Local Finances
Last Word: The Financing of Corporations 88
6 The United States in the Global Economy 91
International Linkages 91
The United States and World Trade 92
Volume and Pattern / Rapid Trade Growth / #Participants in International Trade
Specialization and Comparative Advantage 96
Basic Principle / Comparative Costs / Terms of Trade / #Gains from
Specialization and Trade
The Foreign Exchange Market 99
Dollar-Yen Market / Changing Rates: Depreciation and Appreciation
Consider This: A Ticket to Ride 100
Government and Trade 101
Trade Impediments and Subsidies / Why Government #Trade Interventions? / Costs
to Society
Multilateral Trade Agreements and #Free-Trade Zones 103
Reciprocal Trade Agreements Act / General Agreement on Tariffs and Trade / World
Trade Organization / The European Union
/ North American Free Trade Agreement
Global Competition 106
Last Word: Petition of the Candlemakers, 1845 106
PART TWO
Macroeconomic Measurement and #Basic Concepts
7 Measuring Domestic Output and National Income 112
Assessing the Economy?s Performance 112
Gross Domestic Product 112
A Monetary Measure / Avoiding Multiple Counting / GDP Excludes Nonproduction
Transactions / Two Ways of Looking at
GDP: Spending and Income
The Expenditures Approach 115
Personal Consumption Expenditures (C) / Gross Private Domestic Investment (Ig) /
Government Purchases #(G) / Net Exports
(Xn) / Putting It All #Together: GDP 5 C 1 Ig 1 G 1 Xn
Consider This: Stock Answers about Flows 117
The Income Approach 118
Compensation of Employees / Rents / Interest / #Proprietors? Income / Corporate
Profits / From #National Income to GDP
Other National Accounts 120
Net Domestic Product / National Income / Personal Income / Disposable Income /
The Circular Flow Revisited
Nominal GDP versus Real GDP 123
Adjustment Process in a One-Product Economy / An Alternative Method / Real-World
Considerations and Data
Shortcomings of GDP 125
Nonmarket Activities / Leisure / Improved Product #Quality / The Underground
Economy / GDP and the Environment /
Composition and Distribution of #Output / Noneconomic Sources of Well-Being
Last Word: Feeding the GDP Accounts 127
8 Introduction to Economic Growth and Instability 131
Economic Growth 131
Growth as a Goal / Arithmetic of Growth / Main Sources of Growth / Growth in the
United States
/ Relative Growth Rates
The Business Cycle 133
Phases of the Business Cycle / Causation: A First Glance / Cyclical Impact:
Durables and Nondurables
Unemployment 135
Measurement of Unemployment / Types of Unemployment / Definition of Full
Employment / Economic Cost of Unemployment /
Noneconomic Costs / International Comparisons
Inflation 141
Meaning of Inflation / Measurement of Inflation / Facts of Inflation / Types of
Inflation / Complexities
Consider This: Clipping Coins 143
Redistribution Effects of Inflation 144
Who Is Hurt by Inflation? / Who Is Unaffected or #Helped by Inflation? /
Anticipated Inflation / Addenda
Effects of Inflation on Output 147
Cost-Push Inflation and Real Output / Demand-Pull Inflation and Real Output /
Hyperinflation and Breakdown
Last Word: The Stock Market and the Economy 149
9 Basic Macroeconomic Relationships 152
The Income-Consumption and Income-Saving Relationships 152
The Consumption Schedule / The Saving Schedule / Average and Marginal
Propensities / Nonincome Determinants of
Consumption and Saving / Terminology, Shifts, and Stability
Consider This: What Wealth Effect? 159
The Real Interest-Rate?Investment #Relationship 159
Expected Rate of Return / The Real Interest Rate / Investment Demand Curve /
Shifts of the Investment #Demand Curve /
Instability of Investment
The Multiplier Effect 164
Rationale / The Multiplier and the Marginal Propensities / How Large Is the
Actual Multiplier Effect?
Last Word: Squaring the Economic Circle 167
PART THREE
Macroeconomic Models and #Fiscal Policy
10 The Aggregate Expenditures#Model 172
Simplifications 172
Consumption and Investment Schedules 172
Equilibrium GDP: C 1 Ig 5 GDP 173
Tabular Analysis / Graphical Analysis
Other Features of Equilibrium GDP 176
Saving Equals Planned Investment / No Unplanned Changes in Inventories
Changes in Equilibrium GDP and the #Multiplier 177
Adding International Trade 179
Net Exports and Aggregate Expenditures / The Net Export Schedule / Net Exports
and Equilibrium GDP / International
Economic Linkages
Adding the Public Sector 182
Government Purchases and Equilibrium GDP / Taxation and Equilibrium GDP
Equilibrium versus Full-Employment GDP 185
Recessionary Gap / Application: The U.S. Recession of #2001 / Inflationary Gap /
Application: U.S. Inflation #in the Late 1980s
Limitations of the Model 187
Last Word: Say?s Law, the Great Depression, #and Keynes 188
11 Aggregate Demand and #Aggregate Supply 193
Aggregate Demand 193
Aggregate Demand Curve / Determinants of #Aggregate Demand
Aggregate Supply 197
Aggregate Supply in the Long Run / Aggregate Supply in the Short Run /
Determinants of Aggregate Supply
Equilibrium and Changes in Equilibrium 201
Increases in AD: Demand-Pull Inflation / Decreases in AD: Recession and Cyclical
Unemployment / Decreases in AS: Cost-
Push Inflation / Increases in AS: Full Employment with Price-Level Stability
Consider This: Ratchet Effect 205
Last Word: Why Is Unemployment in Europe #So High? 207
Appendix Chapter 11: The Relationship of the Aggregate Demand Curve to the
Aggregate #Expenditures Model 211
Deriving the Aggregate Demand Curve from the Aggregate Expenditures Model /
Aggregate
Demand Shifts and the Aggregate Expenditures Model
12 Fiscal Policy 214
Legislative Mandates 214
Fiscal Policy and the AD-AS Model 215
Expansionary Fiscal Policy / Contractionary Fiscal #Policy / Financing of
Deficits and Disposing of #Surpluses / Policy
Options: G or T
Built-In Stability 218
Automatic or Built-In Stabilizers
Evaluating Fiscal Policy 220
Full-Employment Budget / Recent U.S. Fiscal Policy
Problems, Criticisms, and Complications 223
Problems of Timing / Political Considerations / Future Policy Reversals /
Offsetting State and Local Finance / Crowding-Out
Effect / Fiscal Policy in the Open Economy
Last Word: The Leading Indicators 227
Current Thinking on Fiscal Policy 228
PART FOUR
Money, Banking, and Monetary Policy
13 Money and Banking 232
The Functions of Money 232
The Supply of Money 233
Money Definition M1 / Money Definition M2 / #Money Definition M3
Consider This: Are Credit Cards Money? 236
What ?Backs? the Money Supply? 236
Money as Debt / Value of Money / Money and Prices / Stabilization of Money?s
Value
The Demand for Money 238
Transactions Demand, Dt / Asset Demand, Da / #Total Money Demand, Dm
The Money Market 240
Adjustment to a Decline in the Money Supply / Adjustment to an Increase in the
Money Supply
The Federal Reserve and the Banking #System 242
Historical Background / Board of Governors / FOMC / #The 12 Federal Reserve
Banks / Commercial Banks and Thrifts / Fed
Functions and the Money Supply / Federal Reserve Independence
Recent Developments in Money and #Banking 245
The Relative Decline of Banks and Thrifts / Consolidation among Banks and
Thrifts / Convergence of Services Provided by
Financial Institutions / Globalization of Financial Markets / Electronic
Transactions
Last Word: The Global Greenback 248
14 How Banks and Thrifts Create #Money 252
The Balance Sheet of a Commercial Bank 252
Prologue: The Goldsmiths 252
A Single Commercial Bank 253
Formation of a Commercial Bank / Money-Creating Transactions of a Commercial
Bank / Profits, Liquidity, #and the Federal
Funds Market
The Banking System: Multiple-Deposit #Expansion 260
The Banking System?s Lending Potential / The Monetary Multiplier / Some
Modifications / Need for #Monetary Control
Last Word: The Bank Panics of 1930 to 1933 265
15 Monetary Policy 268
Consolidated Balance Sheet of the Federal Reserve Banks 268
Assets / Liabilities
Tools of Monetary Policy 270
Open-Market Operations / The Reserve Ratio / The Discount Rate / Easy Money and
Tight Money / Relative Importance
Monetary Policy, Real GDP, and the #Price Level 276
Cause-Effect Chain / Effects of an Easy Money Policy / #Effects of a Tight Money
Policy
Monetary Policy in Action 279
The Focus on the Federal Funds Rate / Recent Monetary Policy / Problems and
Complications /
?Artful Management? or ?Inflation Targeting?? / Monetary Policy and the
International
Economy
Consider This: Pushing on a String 282
The ?Big Picture? 286
Last Word: For the Fed, Life Is a Metaphor 287
PART FIVE
Long-Run Perspectives and Macroeconomic Debates
16 Extending the Analysis of #Aggregate Supply 292
From Short Run to Long Run 292
Short-Run Aggregate Supply / Long-Run Aggregate Supply / Equilibrium in the
Extended AD-AS Model
Applying the Extended AD-AS Model 295
Demand-Pull Inflation in the Extended AD-AS Model / Cost-Push Inflation in the
Extended AD-AS Model / Recession and the
Extended AD-AS Model
The Inflation-Unemployment Relationship 297
The Phillips Curve / Aggregate Supply Shocks and the #Phillips Curve
The Long-Run Phillips Curve 300
Short-Run Phillips Curve / Long-Run Vertical Phillips #Curve / Disinflation
Taxation and Aggregate Supply 302
Taxes and Incentives to Work / Incentives to Save and #Invest / The Laffer Curve
/ Criticisms of the Laffer Curve / Rebuttal and
Evaluation
Consider This: Sherwood Forest 304
Last Word: Has the Impact of Oil Prices #Diminished? 305
17 Economic Growth 308
Ingredients of Growth 308
Supply Factors / Demand Factor / Efficiency Factor
Production Possibilities Analysis 309
Growth and Production Possibilities / Labor and #Productivity / Growth in the
AD-AS Model
U.S. Economic Growth Rates 312
Consider This: Economic Growth Rates Matter! 313
Accounting for Growth 312
Labor Inputs versus Productivity / Technological Advance / Quantity of Capital /
Education and Training / Economies of Scale
and Resource Allocation / Other Factors
The Productivity Acceleration: #A New Economy? 316
Reasons for the Productivity Acceleration / Macroeconomic Implications /
Skepticism about Permanence / What Can #We
Conclude?
Is Growth Desirable and Sustainable? 320
The Antigrowth View / In Defense of Economic Growth
Last Word: Women and Economic Growth 322
18 Deficits, Surpluses, and #the Public Debt 325
Deficits, Surpluses, and Debt: Definitions 325
Budget Philosophies 325
Annually Balanced Budget / Cyclically Balanced #Budget / Functional Finance
The Public Debt: Facts and Figures 326
Causes / Quantitative Aspects / Social Security Considerations
False Concerns 329
Bankruptcy / Burdening Future Generations
Substantive Issues 330
Income Distribution / Incentives / Foreign-Owned Public Debt/ Crowding Out and
the Stock of Capital
Deficits and Surpluses: 1992?2012 332
From Deficits to Surpluses / What to Do with the Surpluses? / Back to Deficits
in 2002 / The Tax Cuts of 2003
Last Word: The Long-Run Fiscal Imbalance: #Social Security 334
19 Disputes over Macro Theory and #Policy 338
Some History: Classical Economics #and Keynes 338
The Classical View / The Keynesian View
What Causes Macro Instability? 340
Mainstream View / Monetarist View / Real-Business-Cycle
View / Coordination Failures
Does the Economy ?Self-Correct?? 344
New Classical View of Self-Correction / Mainstream #View of Self-Correction
Rules or Discretion? 347
In Support of Policy Rules / In Defense of Discretionary Stabilization Policy /
Increased Macro Stability
Consider This: On the Road Again 348
Summary of Alternative Views 350
Last Word: The Taylor Rule: Could a Robot Replace Alan Greenspan? 351
PART SIX
Microeconomics of Product Markets
20 Elasticity of Demand and Supply 356
Price Elasticity of Demand 356
The Price Elasticity Coefficient and Formula / Interpretations of Ed /
Refinement: Midpoint Formula / Graphical Analysis / The
Total-Revenue Test / Price Elasticity and the Total-Revenue Curve / Determinants
of Price Elasticity of Demand / Applications
of Price Elasticity of Demand
Consider This: A Bit of a Stretch 358
Price Elasticity of Supply 364
Price Elasticity of Supply: The Market Period / Price #Elasticity of Supply: The
Short Run / Price Elasticity #of Supply: The
Long Run / Applications of Price #Elasticity of Supply
Cross Elasticity and Income Elasticity of #Demand 367
Cross Elasticity of Demand / Income Elasticity of Demand
Last Word: Elasticity and Pricing Power: Why Different Consumers Pay Different
Prices 369
21 Consumer Behavior and Utility Maximization 372
A Closer Look at the Law of Demand 372
Income and Substitution Effects / Law of Diminishing Marginal Utility
Consider This: Vending Machines and #Marginal Utility 375
Theory of Consumer Behavior 376
Consumer Choice and Budget Constraint / Utility-Maximizing Rule / Numerical
Example / Algebraic Restatement
Utility Maximization and the Demand #Curve 378
Deriving the Demand Schedule and Curve / Income and Substitution Effects
Revisited
Applications and Extensions 379
DVDs and DVD Players / The Diamond-Water Paradox / #The Value of Time / Medical
Care Purchases / Cash and Noncash
Gifts
Last Word: Criminal Behavior 382
Appendix to Chapter 21: Indifference Curve #Analysis 386
The Budget Line: What Is Attainable / Indifference Curves: What Is Preferred /
The Indifference Map / Equilibrium at Tangency
/ The Measurement of Utility / The Derivation
of the Demand Curve
22 The Costs of Production 392
Economic Costs 392
Explicit and Implicit Costs / Normal Profit as a Cost / Economic Profit (or Pure
Profit) / Short Run and Long Run
Short-Run Production Relationships 394
Law of Diminishing Returns
Consider This: Diminishing Returns from Study 395
Short-Run Production Costs 398
Fixed, Variable, and Total Costs / Per-Unit, or Average, Costs / Marginal Cost /
Shifts of the Cost Curves
Long-Run Production Costs 403
Firm Size and Costs / The Long-Run Cost Curve / Economies and Diseconomies of
Scale / Minimum Efficient Scale and Industry
Structure
Applications and Illustrations 408
Rising Cost of Insurance and Security / Successful #Start-Up Firms / The Verson
Stamping Machine / The Daily Newspaper /
Aircraft and Concrete Plants
Last Word: Irrelevancy of Sunk Costs 409
23 Pure Competition 413
Four Market Models 413
Pure Competition: Characteristics and Occurrence 414
Relevance of Pure Competition
Demand as Seen by a Purely Competitive #Seller 415
Perfectly Elastic Demand / Average, Total, and Marginal Revenue / Graphical
Portrayal
Profit Maximization in the Short Run 416
Total-Revenue?Total-Cost Approach: Profit-Maximization Case / Marginal-
Revenue?Marginal-Cost Approach
Consider This: The Still There Motel 423
Marginal Cost and Short-Run Supply 423
Generalized Depiction / Diminishing Returns, Production Costs, and Product
Supply / Changes in Supply / Firm and Industry:
Equilibrium Price
Profit Maximization in the Long Run 427
Assumptions / Goal of Our Analysis / Long-Run Equilibrium / Long-Run Supply for
a Constant-Cost Industry / Long-Run
Supply for an Increasing-Cost Industry / Long-Run Supply for a Decreasing-Cost
Industry
Pure Competition and Efficiency 431
Productive Efficiency: P 5 Minimum ATC / Allocative #Efficiency: P 5 MC
Last Word: Pure Competition and Consumer Surplus 434
24 Pure Monopoly 438
An Introduction to Pure Monopoly 438
Examples of Monopoly / Dual Objectives of the #Study of Monopoly
Barriers to Entry 439
Economies of Scale / Legal Barriers to Entry: #Patents and Licenses / Ownership
or Control of Essential Resources / Pricing
and Other Strategic #Barriers to Entry
Monopoly Demand 441
Marginal Revenue Is Less Than Price / The Monopolist #Is a Price Maker / The
Monopolist Sets
Prices in the #Elastic Region of Demand
Output and Price Determination 444
Cost Data / MR 5 MC Rule / No Monopoly Supply #Curve / Misconceptions Concerning
Monopoly Pricing / Possibility of
Losses by Monopolist
Economic Effects of Monopoly 447
Price, Output, and Efficiency / Income Transfer / Cost Complications /
Assessment and Policy Options
Price Discrimination 451
Conditions / Examples of Price Discrimination / Price Discrimination Outcomes
Consider This: Price Discrimination at the Ballpark 452
Regulated Monopoly 453
Socially Optimal Price: P 5 MC / Fair-Return Price: P 5 ATC / Dilemma of
Regulation
Last Word: De Beers? Diamonds:
Are Monopolies Forever? 456
25 Monopolistic Competition and #Oligopoly 460
Monopolistic Competition 460
Relatively Large Number of Sellers / Differentiated Products / Easy Entry and
Exit / Advertising / Monopolistically Competitive
Industries
Price and Output in Monopolistic #Competition 462
The Firm?s Demand Curve / The Short Run: Profit or Loss / The Long Run: Only a
Normal Profit
Monopolistic Competition and Efficiency 464
Neither Productive nor Allocative Efficiency / #Excess Capacity
Product Variety 466
Benefits of Product Variety / Further Complexity
Oligopoly 467
A Few Large Producers / Homogeneous or Differentiated Products / Control over
Price, but Mutual Interdependence / Entry
Barriers / Mergers / Measures of Industry Concentration
Oligopoly Behavior: A Game-Theory #Overview 469
Mutual Interdependence Revisited / Collusive Tendencies / Incentive to Cheat
Consider This: Creative Strategic Behavior 470
Three Oligopoly Models 471
Kinked-Demand Theory: Noncollusive Oligopoly / #Cartels and Other Collusion /
Price Leadership Model
Oligopoly and Advertising 477
Positive Effects of Advertising / Potential Negative #Effects of Advertising
Oligopoly and Efficiency 479
Productive and Allocative Efficiency / Qualifications
Last Word: Oligopoly in the Beer Industry 480
26 Technology, R&D, and Efficiency 484
Invention, Innovation, and Diffusion 484
Invention / Innovation / Diffusion / R&D Expenditures / Modern View of
Technological Advance
Role of Entrepreneurs and Other #Innovators 486
Forming Start-Ups / Innovating within Existing Firms / Anticipating the Future /
Exploiting University and Government
Scientific Research
A Firm?s Optimal Amount of R&D 488
Interest-Rate Cost of Funds / Expected Rate of Return / Optimal R&D Expenditures
Increased Profit via Innovation 490
Increased Revenue via Product Innovation / Reduced #Cost via Process Innovation
Imitation and R&D Incentives 493
Benefits of Being First
Consider This: Trade Secrets 494
Role of Market Structure 495
Market Structure and Technological Advance / #Inverted-U Theory / Market
Structure and #Technological Advance: The
Evidence
Technological Advance and Efficiency 497
Productive Efficiency / Allocative Efficiency / Creative Destruction
Last Word: On the Path to the Personal #Computer and Internet 498
PART SEVEN
Microeconomics of Resource Markets
27 The Demand for Resources 504
Significance of Resource Pricing 504
Marginal Productivity Theory of #Resource Demand 505
Resource Demand as a Derived Demand / Marginal Revenue Product / Rule for
Employing Resources: #MRP 5 MRC / MRP as
Resource Demand Schedule / Resource Demand under Imperfect Product Market
Competition / Market Demand for a Resource
Determinants of Resource Demand 509
Changes in Product Demand / Changes in Productivity / Changes in the Prices of
Other Resources / Occupational Employment
Trends
Consider This: She?s The One 509
Elasticity of Resource Demand 513
Optimal Combination of Resources 514
The Least-Cost Rule / The Profit-Maximizing Rule / #Numerical Illustration
Marginal Productivity Theory of Income Distribution 516
Last Word: Input Substitution: The Case of ATMs 517
28 Wage Determination 521
Labor, Wages, and Earnings 521
General Level of Wages 522
Role of Productivity / Real Wages and Productivity / #Secular Growth of Real
Wages
A Purely Competitive Labor Market 524
Market Demand for Labor / Market Supply of Labor / #Labor Market Equilibrium
Monopsony Model 526
Upward-Sloping Labor Supply to Firm / MRC Higher #than the Wage Rate /
Equilibrium Wage and Employment / Examples of
Monopsony Power
Three Union Models 528
Demand-Enhancement Model / Exclusive or Craft Union Model / Inclusive or
Industrial Union
Model / Wage #Increases and Unemployment
Bilateral Monopoly Model 531
Indeterminate Outcome of Bilateral Monopoly / #Desirability of Bilateral
Monopoly
The Minimum-Wage Controversy 532
Case against the Minimum Wage / Case for the #Minimum Wage / Evidence and
Conclusions
Wage Differentials 533
Marginal Revenue Productivity / Noncompeting Groups / Compensating Differences /
Market Imperfections
Consider This: My Entire Life 536
Pay for Performance 537
The Principal-Agent Problem Revisited / Addenda: Negative Side Effects of Pay
for Performance
Last Word: Are Chief Executive Officers (CEOs) #Overpaid? 539
29 Rent, Interest, and Profit 542
Economic Rent 542
Perfectly Inelastic Supply / Changes in Demand / #Land Rent: A Surplus Payment /
Application: A Single #Tax on Land /
Productivity Differences and Rent #Differences / Alternative Uses of Land
Interest 545
Loanable Funds Theory of Interest / Extending the Model / Range of Interest
Rates / Pure Rate of Interest / Role of the Interest
Rate / Application: Usury Laws
Consider This: That Is Interest 547
Economic Profit 551
Role of the Entrepreneur / Sources of Economic #Profit / Functions of Profit
Last Word: Determining the Price of Credit 553
Income Shares 554
PART EIGHT
Microeconomics of Government
30 Government and Market #Failure 558
Public Goods 558
Demand for Public Goods / Supply of Public Goods / Optimal Quantity of a Public
Good / Cost-Benefit Analysis
Externalities 562
Spillover Costs / Spillover Benefits / Individual Bargaining: Coase Theorem /
Liability Rules and Lawsuits / Government
Intervention / A Market-Based Approach to Spillover Costs / Society?s Optimal
Amount of Externality Reduction / Recycling /
Global Warming
Information Failures 572
Inadequate Information Involving Sellers / Inadequate Information Involving
Buyers / Qualification
Consider This: ?Lemons? 572
Last Word: Lojack: A Case of Positive #Externalities 576
31 Public Choice Theory and the Economics of Taxation 580
Revealing Preferences through Majority #Voting 580
Inefficient Voting Outcomes / Paradox of Voting / #Median-Voter Model
Government Failure 584
Special Interests and Rent Seeking / Clear Benefits, Hidden Costs / Limited and
Bundled Choice / Bureaucracy and Inefficiency /
Imperfect Institutions
Apportioning the Tax Burden 586
Benefits Received versus Ability to Pay / Progressive, Proportional, and
Regressive Taxes
Tax Incidence and Efficiency Loss 589
Elasticity and Tax Incidence / Efficiency Loss of a Tax / Probable Incidence of
U.S. Taxes / The U.S. Tax Structure
Last Word: ?Government Failure? in the News 594
PART NINE
Microeconomic Issues and Policies
32 Antitrust Policy and #Regulation 598
The Antitrust Laws 598
Historical Background / Sherman Act of 1890 / Clayton Act of 1914 / Federal
Trade Commission
Act of 1914 / #Celler-Kefauver Act of 1950
Antitrust Policy: Issues and Impacts 600
Issues of Interpretation / Issues of Enforcement / #Effectiveness of Antitrust
Laws
Consider This: Of Catfish and Sneakers (and Other Things in Common) 604
Industrial Regulation 604
Natural Monopoly / Problems with Industrial #Regulation / Legal Cartel Theory
Deregulation 606
Social Regulation 607
Distinguishing Features / The Optimal Level of Social Regulation / Two Reminders
Last Word: The United States v. Microsoft 610
33 Agriculture: Economics and #Policy 614
Economics of Agriculture 614
Short-Run Problem: Price and Income Instability / #Long-Run Problem: A Declining
Industry
Economics of Farm Policy 620
Rationale for Farm Subsidies / Background: The Parity #Concept / Economics of
Price Supports / #Reduction of Surpluses
Criticisms and Politics 624
Criticisms of the Price Support System / #The Politics of Farm Policy
Recent Reform 626
Freedom to Farm Act of 1996 / The Farm Act of 2002
Last Word: The Sugar Program: A Sweet Deal 628
34 Income Inequality and #Poverty 631
Facts about Income Inequality 631
Distribution of Personal Income by Income Category / Distribution of Personal
Income by Quintiles (Fifths) / The Lorenz Curve
and Gini Ratio / Income Mobility: The Time Dimension / Effect of Government
Redistribution
Causes of Income Inequality 634
Ability / Education and Training / Discrimination / Preferences and Risks /
Unequal Distribution of Wealth / Market Power /
Luck, Connections, and Misfortune
Trends in Income Inequality 636
Causes of Growing Inequality
Equality versus Efficiency 638
The Case for Equality: Maximizing Total Utility / The Case for Inequality:
Incentives and Efficiency / The Equality-Efficiency
Tradeoff
Consider This: Slicing the Pizza 640
The Economics of Poverty 640
Definition of Poverty / Incidence of Poverty / #Poverty Trends / The ?Invisible?
Poor
The Income-Maintenance System 642
Social Insurance Programs / Public Assistance Programs
Welfare: Goals and Conflicts 644
Common Features / Conflicts among Goals
Welfare Reform 645
Temporary Assistance to Needy Families / #Assessment of TANF
Last Word: U.S. Family Wealth and Its #Distribution 646
35 Labor Market Institutions and Issues: Unionism, Discrimination,
#Immigration 650
Unionism in America 650
Business Unionism / Union Membership / The Decline of Unionism
Collective Bargaining 652
The Work Agreement / The Bargaining Process
Economic Effects of Unions 654
The Union Wage Advantage / Efficiency and Productivity
Labor Market Discrimination 657
Types of Discrimination / Costs of Discrimination
Economic Analysis of Discrimination 659
Taste-for-Discrimination Model / Statistical Discrimination / Occupational
Segregation: The Crowding Model
Antidiscrimination Policies and Issues 663
The Affirmative Action Controversy / Recent Developments
Immigration 665
Number of Immigrants / Economics of Immigration / Complications and
Modifications / Immigration: Two Views
Last Word: Orchestrating Impartiality 668
36 The Economics of Health Care 672
The Health Care Industry 672
Twin Problems: Costs and Access 672
High and Rising Health Care Costs 673
Health Care Spending / Quality of Care: Are We Healthier? / Economic
Implications of Rising Costs / The Basic Problem
Limited Access 676
Why the Rapid Rise in Costs? 676
Peculiarities of the Health Care Market / The Increasing Demand for Health Care
/ Role of Health Insurance / #Supply Factors
in Rising Health Care Prices / #Relative Importance
Consider This: What?s Cold and Clammy and #Out of Date? 682
Reform of the Health Care System 682
Universal Access / Cost Containment: Altering Incentives / Recent Laws and
Proposals
Last Word: A Market for Human Organs? 686
PART TEN
International Economics and #the World Economy
37 International Trade 690
Some Key Facts 690
The Economic Basis for Trade 691
Comparative Advantage: Graphical #Analysis 692
Two Isolated Nations / Specializing Based on Comparative Advantage / Terms of
Trade / Gains from Trade / Trade with
Increasing Costs / The Case for Free Trade
Supply and Demand Analysis of Exports and Imports 697
Supply and Demand in the United States / Supply and Demand in Canada /
Equilibrium World Price, #Exports, and Imports
Trade Barriers 700
Economic Impact of Tariffs / Economic Impact of
Quotas / Net Costs of Tariffs and Quotas / Impact #on Income Distribution
The Case for Protection: A Critical Review 703
Military Self-Sufficiency Argument / Increased Domestic Employment Argument /
Diversification-for-Stability Argument / Infant
Industry Argument / Protection-against-Dumping Argument / Cheap Foreign Labor
Argument / A Summing Up
Consider This: Shooting Yourself in the Foot 704
Last Word: The WTO Protests 706
The World Trade Organization 707
38 Exchange Rates, the Balance of Payments, and Trade Deficits 711
Financing International Trade 711
U.S. Export Transaction / U.S. Import Transaction
The Balance of Payments 712
Current Account / Capital Account / Official Reserves
Account / Payments, Deficits, and Surpluses
Flexible Exchange Rates 715
Depreciation and Appreciation / Determinants of Exchange Rates / Flexible Rates
and the Balance of Payments / Disadvantages
of Flexible Exchange Rates
Consider This: The Big Mac Index 717
Fixed Exchange Rates 720
Use of Reserves / Trade Policies / Exchange Controls and Rationing / Domestic
Macroeconomic Adjustments
International Exchange-Rate Systems 722
The Gold Standard: Fixed Exchange Rates / The Bretton Woods System / The Current
System: The Managed Float
Recent U.S. Trade Deficits 726
Causes of the Trade Deficits / Implications of #U.S. Trade Deficits
Last Word: Speculation in Currency Markets 728
39Web The Economics of Developing Countries 732
(Web Chapter, www.mcconnell16.com)
The Rich and the Poor 39W-1
Classifications / Comparisons / Growth, Decline, and #Income Gaps / The Human
Realities of Poverty
Obstacles to Economic Development 39W-3
Natural Resources / Human Resources / Capital #Accumulation / Technological
Advance / Sociocultural and Institutional
Factors
The Vicious Circle 39W-10
Role of Government 39W-11
A Positive Role / Public Sector Problems
Role of Advanced Nations 39W-12
Expanding Trade / Foreign Aid: Public Loans #and Grants / Flows of Private
Capital
Where from Here? 39W-15
DVC Policies for Promoting Growth / IAC Policies for #Fostering DVC Growth
Last Word: Famine in Africa 39W-16
40Web Transition Economies: Russia and China 733
(Web Chapter, www.mcconnell16.com)
Ideology and Institutions 40W-1
State Ownership and Central Planning 40W-2
Planning Goals and Techniques
Problems with Central Planning 40W-3
The Coordination Problem / The Incentive Problem
Collapse of the Soviet Economy 40W-5
Declining Growth / Poor Product Quality / Lack of Consumer Goods / Large
Military Burden / Agricultural Drag
The Russian Transition to a Market #System 40W-6
Privatization / Price Reform / Promotion of Competition / Making the Ruble Fully
Convertible / Price-Level Stabilization / Other
Major Problems / Recent Revival
Market Reforms in China 40W-10
Agricultural and Rural Reform / Reform of Urban Industries / Special Economic
Zones / Development of Supporting Institutions
/ Transformation of the SOEs
Outcomes and Prospects 40W-11
Positive Outcomes of Reform / Problems
Conclusion 40W-13
Last Word: Police Smash Down Smirnov?s #Doors 40W-14
Glossary G
Index I-1

McConnell and Brue’s Economics: Principles, Problems, and Policies is the leading Principles of Economics textbook because it is innovative and teaches students in a clear, unbiased way. The 17th Edition builds upon the tradition of leadership with three main goals: help the beginning student master the principles essential for understanding the economizing problem, specific economic issues, and the policy alternatives; help the student understand and apply the economic perspective and reason accurately and objectively about economic matters; and promote a lasting student interest in economics and the economy.