Economics, 3rd Edition

see also public policy

government purchases, 443, 709

government spending reduction, 754

graphs, 30–40

single variable, 31–3

two variables, 33–40

types of, 31–3

Greece, 793–4

greenhouse gas emissions, 235–6

gross domestic product, 438–52

components of, 441–5, 528–9

at constant prices, 445–6

at current prices, 445–6

deflator, 447–8, 463

at market prices, 445–6

measurement, 439–41, 448

nominal, 446–7

per capita, 9–10, 445

real, 445–7

revisions, 444

and well-being, 449–52

gross investment, 479

gross national product, 442

growth see economic growth

Gulf Cooperation Council states, 310–11

gun crime, 260–1

happiness, 449–51

harmonized indices of consumer prices, 

463

health, 487–8, 510

healthcare, 233–4

hedonics, 469–70

herd mentality, 272

heuristics, 127–8

HICPs (harmonized indices of consumer 

prices), 463

horizontal equity, 214, 215

household spending, 645

house prices, 783–5

human capital, 368–70, 480

human life, valuation of, 226–8

hysteresis, 502

ice cream, 583, 598

Iceland, 696

idiosyncratic risk, 544–6

imperfect competition, 290–1

implicit costs, 134–5

import quotas, 425–7

imports, 418

incentives, 5–6, 12–14

income

consumer choice, 116–17

demand curve, 47–8

inequality, 386–93, 402

redistribution of, 395–401

income effects, 118–19

income elasticity of demand, 81, 92–3

income expansion path, 122–4

inconsistency, 274

indexation, 465–6

India, 350–1

indicators, 643

indifference curves, 108–10

indirect taxes, 192

inductive reasoning, 18

industrial policies, 756

inequality, 386–93, 402

inferior goods, 48

inflation, 11, 583–98

China, 699

correction for, 465–7

cost of, 594–9

cost of reduction, 734–7

fear of, 726

and money supply, 600–2

targeting, 739–40, 741–2

theory of, 584–93

unemployment, 721–42

inflationary gap, 658

inflation rate, 458

inflation tax, 592

informational efficiency, 550

infrastructure investment, 755

in-kind transfers, 400

insurance, 233–4, 268, 542–3

interaction, 6–8

interest income, 596

interest rates, 467, 706, 709–10

internalizing an externality, 242–3

international trade, 410–14, 429

intertemporal choice, 232

interventionist supply-side policies, 749, 

755–6

introduction of new goods, 459

investment, 443, 483–4, 527–30, 608–9

in education and training, 755–6

incentives, 533

in infrastructure, 755

investment funds, 523

Ireland, 525

IS (investment and saving) curve, 665–6

IS-LM model, 665, 667–9, 671–2

IS-MP model, 672–3

isocost lines, 282–4

isoquants, 279–82

job search, 504–6

Keynes, John Maynard, 553, 647, 655

Keynesian cross, 655–9

Keynesian economics, new, 697–8

Keynesian intervention, 673–5, 676–7

kinked demand curves, 334–5

Krugman, Paul, 674–5

Kydland, Finn E. 649–50

labour, 2

labour demand, 356–60, 365

labour force, 499

labour force participation rate, 499–500

labour force surveys, 499–500

labour markets, 268, 355–82, 753–4

labour mobility, 766, 769

labour productivity, 286

labour supply, 360–4, 365

labour unions, 371–2

Laffer curve, 752–3

lagging indicators, 643

land, 2

land market, 377–8

law of demand, 43

law of supply, 50

law of supply and demand, 58

LCD (liquid crystal display panels), 332

leading indicators, 643

least-cost input combination, 284–6

Lehman Bros, 789

Li, David, 547–8

liberalism, 396–7

libertarianism, 397–8

libertarian paternalism, 398

LIBOR (London Interbank Offered 

Rate), 275, 577–8

life cycles, 390–2

linear demand curves, 80–1

linear equations, 31

line graphs, 33

liquid crystal display panels, 332

liquidity, 560

liquidity preference, theory of, 703–5

LM (liquidity and money) curve, 666–7

loanable funds, market for, 530–5, 

623–4, 626–8

logrolling, 257–8

London Interbank Offered Rate, 577–8

long run, 136

long-term unemployment, 502

Lorenz curve, 386–8

lotteries, 363

lump-sum tax, 212

macroeconomics, 9, 437–53, 605–19, 

622–35

Malthus, Thomas Robert, 491

marginal abatement cost, 235, 249

marginal changes, 5

marginal cost curves, 155–7

marginal costs, 140–1, 142–3, 165–6

marginal product, 136–8

marginal product of labour, 356–9

marginal propensity to consume, 660–1

marginal propensity to save, 660–1

marginal rate of substitution, 111–12

marginal rate of technical substitution, 

281

marginal revenue, 151–2

marginal revenue product, 358

marginal tax rate, 212

marginal utility, 110–11

market demand, 44–6

market economy, 6–8

market efficiency, 179–83

market entry, 158–9

market equilibrium, 59–62, 62–7, 181–2

market exit, 157, 158–9

market failure, 8

market for foreign currency exchange, 

624–8

market for loanable funds, 530–5, 

623–4, 626–8

market inefficiency, 240–4

market irrationality, 552–3

market-orientated supply-side policies, 

749–55

market power, 8, 290–1

market price, 56–7

markets, 41–3

market segments, 330

market share, 290–1

market supply, 50–1

maximin criterion, 396–7

mediums of exchange, 559

mental accounting, 271–2

menu costs, 595–6

merit goods, 232–4

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INDEX  817

microeconomics, 9

minimum efficient scale, 142

minimum wage, 26, 370–1, 398–9, 

506–7

Minsky’s financial instability hypothesis, 

552

misallocation of resources, 596

Mises, Ludwig von, 564

misperceptions theory, 690

model of aggregate demand and 

aggregate supply, 681–2

models, 21–3

monetary control, 571–3

monetary equilibrium, 584–7

monetary injection, 586–7

monetary neutrality, 588–9

monetary policy, 565, 618–19, 669, 

702–9

money

meaning of, 559–62

quantity theory of, 587

value of, 584

velocity of, 589–90

money demand, 584–6, 704–5

money markets, 572, 705

money multiplier, 570–1

money stock, 561

money supply, 564, 565, 575, 584–6, 

600–2, 703–4, 707–8

monopolies, 43, 290–311

causes of, 291–4

versus competition, 294–5

competition law, 310–11

deadweight loss, 301–2

government-created, 292–3

natural, 293–4

pharmaceuticals, 299–300

prevalence of, 309–10

profit, 298

profit maximization, 297–8

public ownership, 309

public policy, 307–9

regulation, 308–9

revenue, 295–7

social cost, 302–3

supply curves, 297–8

welfare cost, 300–3

monopolistically competitive markets, 

43

monopolistic competition, 314–26

monopoly resources, 292

monopsony, 366–7

moral hazard, 265–6, 275

MP (monetary policy) function, 672–3

multiplier effect, 659–64

naïve empiricism, 127

Nash equilibrium, 333, 340–2

national defence, 224

national income, 442

national savings, 528–9

natural experiments, 21

natural monopolies, 222, 293–4

natural-rate hypothesis, 729

natural rate of output, 687–8

natural rate of unemployment, 

501–2, 726

natural resources, 480, 482

negative correlation, 33

negative externalities, 239, 241–3

negative income tax, 399–400

negative interest rates, 710

net capital outflow, 606–9, 625–6

net exports, 444–5, 607–8

net investment, 479

net national product, 442

neuroscience, 129–31

New Keynesian economics, 697–8

nominal exchange rates, 610

nominal gross domestic product, 446–7

nominal interest rates, 467

nominal values, 40

nominal variables, 587–8

non-price competition, 335

nonstationary data, 641

non-tariff barriers, 427

normal goods, 47–8

normal profit, 155

normative statements, 23–4

nutrition, 487–8

oil, 339–40

oil prices, 55, 98–9

Okun’s law, 680

oligopolies, 43, 329–51

characteristics of, 329–35

models of, 344–7

prisoners’ dilemma, 338–9

product differentiation, 330

public policy, 347–50

omitted variables, 38–9

open economy macroeconomics, 

605–19, 622–35

open-market operations, 565, 571, 580

opportunity costs, 4, 135, 407, 415

optimum currency areas, 765–8, 768–72

output, 680

natural rate of, 687–8

output gap, 658

outright open-market operations, 571

overconfidence, 126

Pakistan, 175

Pareto improvement, 180–1

participation rate, 499–500

patents, 292–3

payoff matrix, 336

peaks, 640

pensions, 233–4

perfect complements, 112–13

perfect price discrimination, 305

perfect substitutes, 112

permanent income, 392

personal income, 442

persuasion heuristics, 128

pharmaceuticals, 299–300

Phillips curve, 11, 721–34

photocopying, 350–1

physical capital, 479–80

pie charts, 32

Pigovian taxes, 248–9

PIIGS (Portugal, Ireland, Italy, Greece 

and Spain) countries, 771, 773, 

795, 802

planned spending, 656

political stability, 488–9

politician incentives, 256

pollution, 231, 235–6

tradable permits, 249–51, 252–4

population, 48

population growth, 491–3

positional arms races, 248, 253

positional externalities, 247–8

positive correlation, 33

positive externalities, 239, 243–4

positive statements, 23–4

poverty, 225

poverty line, 393

poverty rate, 393

poverty reduction, 398, 400–1

PPS (purchasing power standard), 615

predatory pricing, 323, 349

Prescott, Edward C. 649–50

present value, 539–41

price ceilings, 187–90

price-consumption curves, 120

price controls, 187–92

price discrimination, 303–6, 762–3

price elasticity of demand

applications of, 95–7

arc method of calculation, 74–5

computing, 73–6

linear demand curves, 80–1

mathematics of, 90–1

midpoint method of calculation, 74–5

point method of calculation, 75–6

rules, 73

total expenditure, 78–81, 94–5

price elasticity of supply

applications of, 95–7

arc method of calculation, 85

computing, 85

determinants of, 83–4

mathematics of, 93–4

midpoint method of calculation, 85

point method of calculation, 85–6

total revenue, 88–9, 94–5

price floors, 187, 190–2, 200

price indices, 456–63, 469–70

price levels, 681

prices

consumer choice, 117–18

consumer surplus, 173

finding, 49

producer surplus, 178–9

resource allocation, 67

as signals, 58–9

principals, 264–5

prisoners’ dilemma, 337–44

private goods, 222

private savings, 529

private sector, 221

private solutions to externalities, 244–8

privatization, 258–9, 754–5

procyclical variables, 642–3

producer prices index, 458

producer surplus, 176–9

product differentiation, 315–19, 330

production costs, 134–8

production decisions, 287–8

production function, 136–8

production isoquants, 279–82

production possibilities frontier, 405–10

productivity, 10–11, 286, 477–81

profit maximization, 153–4, 297–8

profit measurement, 159–60

progressive tax, 215

property rights, 251–2, 488–9

proportional tax, 215

prospect theory, 272

public choice theory, 255

public goods, 222, 223–30

public interest, 255–6

---

818  INDEX

public policy see also government 

policy

asymmetric information, 270–1

economic growth, 482–93

externalities, 248–51

job search, 505

monopolies, 307–9

oligopolies, 347–50

public savings, 529

public sector, 221

purchasing power, 594–5

purchasing power parity, 612–17, 626

purchasing power standard, 615

Qatar, 310–11

QE (quantitative easing), 574–5, 600–2, 

618–19

quality of life, 451–2

quantitative easing, 574–5, 600–2, 

618–19

quantity demanded, 43, 49

quantity discounts, 306

quantity equation, 590

quantity supplied, 50

quantity theory of money, 587

quants, 547–8

quotas, 25–6, 425–7

random walks, 550

RAS (reticular activation system), 127

rational behaviour, assumption of, 246–7

rational expectations, 735

rational ignorance effect, 256

rationalism, 19–20

rationality, 126–9

reaction function, 346

real business cycles, 648–50

real exchange rates, 611–12

real gross domestic product, 445–7

real interest rates, 467

real money balances, 665

real values, 40

real variables, 587–8

real wage flexibility, 766, 768–9

real wages, 588

recessions, 452–3, 637

redistribution of income, 395–401

redistribution of wealth, arbitrary, 598

refinancing rate, 571–3

regional policies, 756

regressive tax, 215

regulation, 251, 308–9

relative poverty, 393

relative price variability, 596

rent control, 189–90

rent seeking, 258

repo rate, 572

representativeness heuristics, 128

repurchase agreements, 572

resale price maintenance, 348–9

research, 224–5

research and development, 490, 756

reserve ratio, 569

reserve requirements, 573

reserves, 568

residual demand, 345

resource allocation, 67

resources, misallocation of, 596

restraint of trade, 348

retail prices index, 461–2

reticular activation system (RAS), 127

returns to scale, 147

revenue, competitive firms, 151–2

reverse causality, 39–40

Ricardo, David, 416

rising marginal costs, 142

risk aversion, 541–2

risk management, 541–8

rival goods, 222

road congestion, 231, 255

Romer model, 672–3

RPI (retail prices index), 461–2

rule of 70, 476

Russia, 634–5

sacrifice ratio, 734–5

Saha, David, 674

satisficers, 271

savings, 483–4, 527–33, 608–9

scarcity, 2

scatterplots, 33–5

scientific method, 19

screening, 270

seafood, 82

securitization of assets, 576–8

self-interest, 244

SEM (standard economic model), 

102–3, 126, 271–4

SGP (Stability and Growth Pact), 775

shares, 521

ships, 287–8

shoeleather costs, 595

shortages, 57–8

short run, 136

short-termism, 258

shutdowns, 157

signalling, 268–70

simulation heuristics, 128

single currency, 762–8

Single European Market, 761–2

slope, 37–8

demand curves, 121–2

supply curves, 164

Smith, Adam, 7, 416

social contracts, 244–5

socially efficient outcomes, 242–3

social norms of moral behaviour, 244

social optimum, 242–3

social security, 399

social welfare function, 183

South Sea Bubble, 786

sovereign debt crisis, 793–7, 802

special-interest effect, 257

special purpose vehicles, 576–8

specific taxes, 192–4

spending, 656–7

SPV (special purpose vehicles), 576–8

Stability and Growth Pact, 775

stabilization of economies, 713–16

Stackelberg Model of oligopoly, 347

stagflation, 695–6

standard economic model, 102–3, 

126, 271–4

standard of living, 10–11

stationary data, 641

sticky price theory, 690

sticky wage theory, 689–90

stochastic trends, 642

stock markets, 521–2, 553

stocks, 521

stores of value, 560

strikes, 372

structural deficit, 776, 797–8

structural unemployment, 503

sub-prime market, 526, 785–7

subsidies, 198–9

substitutes, 47

substitution bias, 459

substitution effects, 118–19

sunk costs, 158

superstars, 370

supply, 50–6, 83–9

supply and demand, 41, 56–67

supply curves

competitive firms, 153–60

competitive markets, 160–4

factors affecting, 53–4

market supply, 50–1

monopolies, 297–8

price, 50

producer surplus, 177

quantity supplied, 50

shifts in, 51–4, 56

slope, 164

variety of, 86

supply schedules, 50

supply shocks, 732–4

supply-side policies, 646–7, 745–57

economic slowdown, 757

interventionist, 749, 755–6

market-orientated, 749–55

types of, 749–56

surpluses, 57–8

symmetric demand shocks, 767, 770–2

synergies, 307

tacit collusion, 344

tariffs, 25–6, 424–5

tastes, 48

taxation

ability-to-pay principle, 214–15

administrative burden, 210–11