Economics

837 Pages·2014·20.861 MB·English

by  Mark P. Taylor, N. Gregory Mankiw

“Mankiw & Taylor’s Economics is a superb book for all students
approaching this subject for the first time. The book is both intuitive,
with plenty of examples enabling students to link economic theory and
facts, and rigorous, with analytical supplements and extensive exercises
allowing students to go into depth if they wish to. This book will make
students love this subject and it is simply excellent.”
Dr Gaia Garino, Principal Teaching Fellow in Economics, University of Leicester, UK
“A very well written and modern text, covering a wide and exhaustive range of
topics to be taught in introduction to economics classes. The accessible language and
approach is ideal for all students including those to whom English is a second language,
and a key pedagogical strength of the book is the many examples which show students
how to apply key economics topics within their everyday lives.” E
Prof. Erich Ruppert, Faculty of Economics, Business and Law, University of Aschaffenburg, Germany
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Now firmly established as one of the leading economics principles texts in the UK and Europe, this exciting, new third edition o
by N. Gregory Mankiw (Harvard University) and Mark P. Taylor (Warwick University), has undergone some significant
restructuring and reorganization to more directly match economics students’ course structures and learning and assessment
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needs. There are new sections covering microeconomic and macroeconomic topics and concepts in more depth, whilst at
the same time retaining the book’s reputation for clarity, authority and real world relevance.
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New to the third edition:
> In direct response to user feedback, the chapter structure has been reorganized to better map to typical UK
and European course structures
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> Brand new Case Studies, In the News features, and examples throughout
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> Supplementary maths content provided separately
> Enhanced lecturer and student digital support resources including articles from The Economist with associated
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discussion questions linked to every chapter and new assessment practice questions which can be used for
tutorial discussion and assignments
> New coverage on information and behavioural economics, business cycles, supply-side policies the role of
empirical evidence, and economic rent
> Fully updated to reflect the economic arguments which have surfaced following the financial crisis
> Fresh, modern text design with accessible layout and approach
About the Authors
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N. Gregory Mankiw, Professor of Economics, Harvard University, USA T
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Mark P. Taylor, Professor of Economics and Dean of Warwick Business School, University of Warwick, UK yn N. Gregory Mankiw Mark P. Taylor
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Economics is essential reading for all students taking introductory economics modules on undergraduate courses and within o
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an economics component of postgraduate and MBA courses. rw Economics
For your lifelong learning solutions, visit www.cengage.co.uk
Purchase your next print book, e-book or e-chapter at www.cengagebrain.com
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Economics, 3rd Edition © 2014, Cengage Learning EMEA
N. Gregory Mankiw and Mark P. Taylor
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BRIEF CONTENTS
About the authors ix PART 8 Inequality 385
Preface x
18 Income inequality and poverty 385
Supplements xi
Acknowledgements xiii
PART 9 Trade 405
PART 1 Introduction to economics 1 19 Interdependence and the gains from trade 405
1 Ten principles of economics 1
2 Thinking like an economist 17 PART 10 The data of macroeconomics 437
20 Measuring a nation’s income 437
PART 2 Supply and demand: How 21 Measuring the cost of living 456
markets work 41
3 The market forces of supply and demand 41 PART 11 The real economy in the
4 Elasticity and its applications 72 long run 473
5 Background to demand: The theory of consumer 22 Production and growth 473
choice 102 23 Unemployment 497
6 Background to supply: Firms in competitive
markets 134
PART 12 Interest rates, money and prices
in the long run 519
PART 3 Markets, efficiency and welfare 169
24 Saving, investment and the financial system 519
7 Consumers, producers and the efficiency 25 The basic tools of finance 539
of markets 169 26 The monetary system 558
8 Supply, demand and government policies 187 27 Money growth and inflation 583
PART 4 The economics of the PART 13 The macroeconomics
public sector 203 of open economies 605
9 The tax system and the costs of taxation 203 28 Open-economy macroeconomics: Basic
concepts 605
PART 5 Inefficient market allocations 221 29 A macroeconomic theory of the open
economy 622
10 Public goods, common resources
and merit goods 221
11 Externalities and market failure 239 PART 14 Short-run economic fluctuations 637
12 Information and behavioural economics 264 30 Business cycles 637
31 Keynesian economics and IS-LM analysis 655
PART 6 Firm behaviour and 32 Aggregate demand and aggregate supply 679
market structures 279 33 The influence of monetary and fiscal policy on
aggregate demand 702
13 Firms’ production decisions 279
34 The short-run trade-off between inflation
14 Market structures I: Monopoly 290
and unemployment 721
15 Market structures II: Monopolistic
35 Supply-side policies 745
competition 314
16 Market structures III: Oligopoly 329
PART 15 International macroeconomics 759
PART 7 Factor markets 355 36 Common currency areas and european
monetary union 759
17 The economics of labour markets 355
37 The financial crisis and sovereign debt 782
iii
CONTENTS
About the authors ix 4 Elasticity and its applications 72
Preface x
The price elasticity of demand 72
Supplements xi
Other demand elasticities 81
Acknowledgements xiii
Price elasticity of supply 83
Applications of supply and demand elasticity 95
PART 1 5 Background to demand: The theory
INTRODUCTION TO ECONOMICS 1 of consumer choice 102
The standard economic model 102
The budget constraint: What the consumer
1 Ten principles of economics 1 can afford 104
What is economics? 1 Preferences: What the consumer wants 108
How people make decisions 2 Optimization: What the consumer chooses 113
How people interact 6 Summary: Do people really think this way? 126
How the economy as a whole works 8 Behavioural approaches to consumer
Conclusion 12 behaviour 126
2 Thinking like an economist 17 6 Background to supply: Firms
in competitive markets 134
Introduction 17
The economist as scientist 17 The costs of production 134
The economist as policy advisor 23 Production and costs 135
Why economists disagree 24 The various measures of cost 138
Let’s get going 28 Costs in the short run and in the long run 145
Appendix Summary 146
Graphing and the tools of economics: A brief Returns to scale 147
review 30 What is a competitive market? 150
Profit maximization and the competitive firm’s
supply curve 153
The supply curve in a competitive market 160
PART 2 Conclusion: Behind the supply curve 164
SUPPLY AND DEMAND:
HOW MARKETS WORK 41
PART 3
3 The market forces of supply MARKETS, EFFICIENCY
and demand 41 AND WELFARE 169
Markets and competition 41
Demand 43
7 Consumers, producers and the efficiency
Supply 50
of markets 169
Supply and demand together 56
Conclusion: How prices allocate resources 67 Consumer surplus 170
Producer surplus 176
Market efficiency 179
Conclusion: Market efficiency and market
failure 183
iv
CONTENTS v
8 Supply, demand and government 12 Information and behavioural
policies 187 economics 264
Controls on prices 187 Principal and agent 264
Taxes 192 Asymmetric information 265
Subsidies 198 Deviations from the standard economic
Conclusion 199 model 271
Conclusion 274
PART 4
PART 6
THE ECONOMICS OF THE
FIRM BEHAVIOUR AND MARKET
PUBLIC SECTOR 203
STRUCTURES 279
9 The tax system and the costs
of taxation 203 13 Firms’ production decisions 279
Taxes and efficiency 203 Isoquants and isocosts 279
The deadweight loss of taxation 204 The least-cost input combination 284
Administrative burden 210 Conclusion 286
The design of the tax system 211
Taxes and equity 214 14 Market structures I: Monopoly 290
Conclusion 216
Imperfect competition 290
Why monopolies arise 291
How monopolies make production and pricing
decisions 294
PART 5
The welfare cost of monopoly 300
INEFFICIENT MARKET
Price discrimination 303
ALLOCATIONS 221 Public policy towards monopolies 307
Conclusion: The prevalence of monopoly 309
10 Public goods, common resources
15 Market structures II: Monopolistic
and merit goods 221
competition 314
The different kinds of goods 222
Competition with differentiated products 315
Public goods 223
Advertising and branding 319
Common resources 230
Contestable markets 323
Merit goods 232
Conclusion 324
Conclusion 234
16 Market structures III: Oligopoly 329
11 Externalities and market failure 239
Characteristics of oligopoly 329
Externalities 239
Game theory and the economics of
Externalities and market inefficiency 240
cooperation 335
Private solutions to externalities 244
Models of oligopoly 344
Public policies towards externalities 248
Public policy toward oligopolies 347
Public/private policies towards
Conclusion 350
externalities 251
Government failure 254
Conclusion 260
vi CONTENTS
PART 7 PART 10
FACTOR MARKETS 355 THE DATA OF
MACROECONOMICS 437
17 The economics of labour markets 355
The demand for labour 356 20 Measuring a nation’s income 437
The supply of labour 360
The economy’s income and expenditure 438
Equilibrium in the labour market 364
The measurement of gross domestic
Wage differentials 367
product 439
The economics of discrimination 373
The components of GDP 441
The other factors of production: Land
Real versus nominal GDP 445
and capital 376
GDP and economic well-being 449
Economic rent 379
Conclusion 452
Conclusion 380
21 Measuring the cost of living 456
The consumer prices index 456
PART 8
Correcting economic variables for the effects
INEQUALITY 385 of inflation 465
Conclusion 468
18 Income inequality and poverty 385
The measurement of inequality 386
PART 11
The political philosophy of redistributing
income 395 THE REAL ECONOMY IN THE
Conclusion 401
LONG RUN 473
22 Production and growth 473
PART 9
Economic growth around the world 474
TRADE 405
Growth theory 476
Productivity: Its role and determinants 477
19 Interdependence and the gains from Economic growth and public policy 482
Conclusion: The importance of long-run
trade 405
growth 493
The production possibilities frontier 405
International trade 410
The principle of comparative advantage 414 23 Unemployment 497
The determinants of trade 418 Identifying unemployment 497
The winners and losers from trade 420 Job search 504
Restrictions on trade 423 Minimum wage laws 506
Conclusion 431 Unions and collective bargaining 508
The theory of efficiency wages 510
The cost of unemployment 511
Conclusion 514
CONTENTS vii
PART 12 29 A macroeconomic theory of the open
INTEREST RATES, MONEY AND economy 622
Supply and demand for loanable funds and for
PRICES IN THE LONG RUN 519
foreign currency exchange 622
Equilibrium in the open economy 625
24 Saving, investment and the financial How policies and events affect an open
system 519 economy 628
Conclusion 634
Financial institutions in the economy 520
Saving and investment in the national income
accounts 527
The market for loanable funds 530 PART 14
Conclusion 535
SHORT-RUN ECONOMIC
FLUCTUATIONS 637
25 The basic tools of finance 539
Present value: Measuring the time value
of money 539 30 Business cycles 637
Managing risk 541
Trend growth rates 638
Asset valuation 548
Causes of changes in the business cycle 645
Conclusion 554
Business cycle models 646
Conclusion 650
26 The monetary system 558
The meaning of money 559 31 Keynesian economics and IS-LM
The role of central banks 565 analysis 655
The European Central Bank and the
The Keynesian cross 655
Eurosystem 566
The multiplier effect 659
The Bank of England 567
The IS and LM curves 665
Banks and the money supply 568
General equilibrium using the IS-LM model 667
Conclusion 579
From IS-LM to aggregate demand 669
Conclusion 675
27 Money growth and inflation 583
The classical theory of inflation 584 32 Aggregate demand and aggregate
The costs of inflation 594 supply 679
Conclusion 599
Three key facts about economic fluctuations 679
Explaining short-run economic fluctuations 680
The aggregate demand curve 682
The aggregate supply curve 686
PART 13
Two causes of economic fluctuations 691
THE MACROECONOMICS OF OPEN
New Keynesian economics 697
ECONOMIES 605 Conclusion 698
33 The influence of monetary and fiscal
28 Open-economy macroeconomics: Basic
concepts 605 policy on aggregate demand 702
How monetary policy influences aggregate
The international flows of goods and capital 606
demand 702
The prices for international transactions: Real
How fiscal policy influences aggregate
and nominal exchange rates 609
demand 709
A first theory of exchange rate determination:
Using policy to stabilize the economy 713
Purchasing power parity 612
Conclusion 716
Conclusion 618
viii CONTENTS
34 The short-run trade-off between inflation 37 The financial crisis and sovereign
and unemployment 721 debt 782
The Phillips curve 721 Bubbles and speculation 782
Shifts in the Phillips curve: The role of The sovereign debt crisis 793
expectations 724 Austerity policies – too far too quickly? 797
The long-run vertical Phillips curve as an
argument for Central Bank independence 730
Glossary 805
Shifts in the Phillips curve: the role of supply
Index 814
shocks 732
Credits 820
The cost of reducing inflation 734
Inflation targeting 739
Conclusion 740
35 Supply-side policies 745
Shifts in the aggregate supply curve 745
Types of supply-side policies 749
Conclusion 756
PART 15
INTERNATIONAL
MACROECONOMICS 759
36 Common currency areas and European
monetary union 759
The euro 760
The single European market and the euro 760
The benefits and costs of a common
currency 762
The theory of optimum currency areas 765
Is Europe an optimum currency area? 768
Fiscal policy and common currency areas 772
Conclusion 777
ABOUT THE AUTHORS
AUTHORS
N. GREGORY MANKIW is Professor of Economics at Harvard University. As a student, he studied eco-
nomics at Princeton University and the Massachusetts Institute of Technology (MIT). As a teacher he has taught
macroeconomics, microeconomics, statistics and principles of economics. Professor Mankiw is a prolific writer
and a regular participant in academic and policy debates. In addition to his teaching, research and writing,
Professor Mankiw has been a research associate of the National Bureau of Economic Research, an advisor to
the Federal Reserve Bank of Boston and the Congressional Budget Office. From 2003 to 2005, he served as
chairman of the US President’s Council of Economic Advisors and was an advisor to Presidential candidate Mitt
Romney during the 2012 US presidential election. Professor Mankiw lives in Wellesley, Massachusetts, with his
wife Deborah, their three children and their border terrier Tobin.
MARK P. TAYLOR is Dean of Warwick Business School at the University of Warwick and Professor of
International Finance. He obtained his first degree in philosophy, politics and economics from Oxford University
and his Master’s degree in economics from London University, from where he also holds a doctorate in econom-
ics and international finance. Professor Taylor has taught economics and finance at various universities (including
Oxford, Warwick and New York) and at various levels (including principles courses, advanced undergraduate and
advanced postgraduate courses). He has also worked as a senior economist at the International Monetary Fund
and at the Bank of England and, before becoming Dean of Warwick Business School, was a managing director at
BlackRock, the world’s largest financial asset manager, where he worked on international asset allocation based
on macroeconomic analysis. His research has been extensively published in scholarly journals and he is today
one of the most highly cited economists in the world. Professor Taylor lives with his family in a 15th-century farm-
house near Stratford upon Avon, Warwickshire, where he collects clocks and keeps bees.
CONTRIBUTING AUTHOR
ANDREW ASHWIN  has over 20 years experience as a teacher of economics. He has an MBA and is currently
researching for a PhD investigating assessment and the notion of threshold concepts in economics. Andrew is an
experienced author, writing a number of texts for students at different levels and journal publications related to his
PhD research, and learning materials for the website Biz/ed, which was based at the University of Bristol. Andrew
was Chair of Examiners for a major awarding body for business and economics in England and is a consultant for
the UK regulator, Ofqual. Andrew has a keen interest in assessment and learning in economics and has received
accreditation as a Chartered Assessor with the Chartered Institute of Educational Assessors. He is also Editor of
the Economics, Business and Enterprise Association (EBEA) journal. Andrew lives in Rutland with his wife Sue
and their twin sons Alex and Johnny.
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