Economics

853 Pages·2005·22.889 MB·English

by  John Sloman

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About the author:
John Slomanis Principal Lecturer in the School of Economics at the University of
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John Sloman
University of the West of England and
the Economics Network
ECONOMICS
Sixth edition
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First edition published 1991
Second edition published 1994
Updated second edition published 1995
Third edition published 1997
Updated third edition published 1998
Fourth edition published 2000
Fifth edition published 2003
Sixth edition published 2006
© John Sloman 1991
© John Sloman, Alison Bird and Mark Sutcliffe 1994, 1997
© John Sloman, Alison Sloman and Mark Sutcliffe 2000, 2003
© John Sloman 2006
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ISBN-13: 978-0-273-70512-3
ISBN-10: 0-273-70512-1
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
A catalog record for this book is available from the Library of Congress
10 9 8 7 6 5 4 3 2 1
10 09 08 07 06
Typeset in 8/12 pt Stone Serif by 35
Printed and bound by Graficas Estella, Bilboa, Spain
EC6_A01.qxd 10/28/05 16:55 Page v
Brief Contents
Preface xiii
Part A: Introduction 1
1 Introducing Economics 3
Part B: Foundations of Microeconomics 31
2 Supply and Demand 33
3 Government Intervention in the Market 69
Part C: Microeconomics 89
4 Background to Demand 91
5 Background to Supply 119
6 Profit Maximising under Perfect Competition and Monopoly 156
7 Profit Maximising under Imperfect Competition 177
8 Alternative Theories of the Firm 204
9 The Theory of Distribution of Income 227
10 Inequality, Poverty and Policies to Redistribute Incomes 263
11 Markets, Efficiency and the Public Interest 291
12 Applied Microeconomics 327

Part D: Foundations of Macroeconomics 365
13 The National Economy 367
14 Macroeconomic Issues and Analysis: an Overview 395
Part E: Macroeconomics 429
15 The Roots of Modern Macroeconomics 431
16 Short-run Macroeconomic Equilibrium 451
17 Money and Interest Rates 478
18 The Relationship between the Money and Goods Markets 504
19 Fiscal and Monetary Policy 528
20 Aggregate Supply, Unemployment and Inflation 573
21 Long-term Economic Growth 598
22 Supply-side Policies 609
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vi BRIEF CONTENTS
Part F: The World Economy 633
23 International Trade 635
24 The Balance of Payments and Exchange Rates 668
25 Global and Regional Interdependence 702
26 Economic Problems of Developing Countries 720
Appendix 1: Some Techniques of Economic Analysis A:1
Appendix 2: Websites A:14
Threshold Concepts and Key Ideas T:1
Glossary G:1
Index I:1
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A HD vii
Contents
Preface xiii Boxes
3.1 Rent control 71
Guided Tour xx
3.2 Black markets 72
3.3 Ashes to ashes? A moral dilemma of
Part A: Introduction 1 tobacco taxes 75
3.4 Elasticities of demand for various foodstuffs 79
1 Introducing Economics 3 3.5 The fallacy of composition 80
1.1 What do economists study? 4
1.2 Different economic systems 16
1.3 The nature of economic reasoning 27 Part C: Microeconomics 89
Boxes 4 Background to Demand 91
1.1 What's the latest economic news? 5 4.1 Marginal utility theory 92
1.2 Looking at macroeconomic data 7 4.2 Demand under conditions of risk and
1.3 The opportunity costs of studying uncertainty 100
economics 11 *4.3 Indifference analysis 105
1.4 Scarcity and abundance 13
Boxes
1.5 Rise and fall of planning in the former
*4.1 Using calculus to derive a marginal
Soviet Union 18
utility function 94
1.6 Adam Smith and the invisible hand 24
4.2 The marginal utility revolution 97
1.7 Ceteris paribus? An economics joke! 28
4.3 Choices within the household 98
4.4 Taking account of time 100
Part B: Foundations of Microeconomics 31 4.5 Adverse selection and moral hazard:
problems for unwary insurance companies 104
2 Supply and Demand 33 *4.6 Love and caring: an economic approach
2.1 Demand 34 to family behaviour 112

2.2 Supply 39 *4.7 Consumer theory: a further approach 115
2.3 Price and output determination 43
2.4 Elasticity 48
5 Background to Supply 119
2.5 The time dimension 61
5.1 The short-run theory of production 120
Boxes 5.2 Costs in the short run 126
*2.1 The demand for lamb 37 5.3 The long-run theory of production 131
2.2 UK house prices 46 5.4 Costs in the long run 140
2.3 Advertising and its effect on demand curves 53 5.5 Revenue 144
2.4 Any more fares? Pricing on the buses 54 5.6 Profit maximisation 149
*2.5 Using calculus to calculate price elasticity
Boxes
of demand 56
5.1 Malthus and the dismal science of
2.6 Dealing in futures markets 65
economics 122
5.2 Diminishing returns in the bread shop 124
3 Government Intervention in the Market 69 5.3 The relationship between averages and
3.1 The control of prices 70 marginals 125
3.2 Indirect taxes 73 *5.4 The relationship between total, average
3.3 Government rejection of market allocation 76 and marginal physical product 125
3.4 Agriculture and agricultural policy 78 5.5 The fallacy of using historic costs 127
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viii CONTENTS
5.6 Cost curves in practice 130 9.3 Capital and profit 249
*5.7 The Cobb-Douglas production function 136 9.4 Land and rent 259
5.8 Minimum efficient scale: some evidence 144
Boxes
*5.9 Using calculus to find maximum profit
9.1 Labour as a factor of production 229
output 152
*9.2 Using indifference curves to derive the
individual’s supply curve of labour 231
6 Profit Maximising under Perfect 9.3 ‘Telecommuters’ 232
Competition and Monopoly 156 9.4 Life at the mill 238
6.1 Alternative market structures 157 9.5 The rise and decline of the labour
6.2 Perfect competition 158 movement in the UK 240
6.3 Monopoly 166 9.6 How useful is marginal productivity theory? 242
6.4 The theory of contestable markets 172 9.7 Equal pay for equal work? 244
9.8 Flexible labour markets and the flexible firm 246
Boxes
9.9 Stocks and flows 251
6.1 Concentration ratios 159
9.10 The economics of non-renewable resources 260
6.2 Is perfect best? 160
6.3 E-commerce and perfect competition 165
10 Inequality, Poverty and Policies to
6.4 Windows cleaning! 170
Redistribute Incomes 263
6.5 X inefficiency 172
10.1 Inequality and poverty 264
6.6 Airline deregulation in the USA and Europe 174
10.2 Taxes, benefits and the redistribution of
income 274
7 Profit Maximising under Imperfect
Boxes
Competition 177
10.1 Poverty in the past 271
7.1 Monopolistic competition 178
10.2 How to reverse the UK’s increased
7.2 Oligopoly 181
inequality 272
7.3 Price discrimination 197
10.3 Minimum wage legislation 274
Boxes 10.4 The Laffer curve 283
7.1 Selling ice cream when I was a student 179 *10.5 Tax cuts and incentives: an application
7.2 Oligopoly in the brewing industry 183 of indifference curve analysis 284
7.3 OPEC 186 10.6 UK tax credits 288
7.4 The prisoners’ dilemma 193
7.5 What’s the train fare to London? 197 11 Markets, Efficiency and the Public
7.6 Peak-load pricing 198 Interest 291
7.7 Price discrimination in the cinema 200 11.1 Efficiency under perfect competition 292
11.2 The case for government intervention 300
11.3 Forms of government intervention 308
8 Alternative Theories of the Firm 204
*11.4 Cost–benefit analysis 315
8.1 Problems with traditional theory 205
11.5 Government failure and the case for the
8.2 Alternative maximising theories 209
market 323
8.3 Multiple aims 219
8.4 Pricing in practice 222 Boxes
11.1 The police as a public service 303
Boxes
11.2 Health care and the market 308
8.1 The organisational structure of firms 206
11.3 Deadweight loss from taxes on goods
8.2 What do you maximise? 208
and services 311
8.3 When is a theory not a theory? 210
*11.4 What price a human life? 317
8.4 Enron 215
*11.5 Meeting the Kyoto Protocol 320
8.5 Merger activity: a worldwide perspective 216
11.6 Mises, Hayek and the Mont Pelerin Society 324
8.6 Stakeholder power? 220
8.7 How do UK companies set prices? 223
12 Applied Microeconomics 327
12.1 Economics of the environment 328
9 The Theory of Distribution of Income 227 12.2 Traffic congestion and urban transport
9.1 Wage determination under perfect policies 339
competition 228 12.3 Competition policy 348
9.2 Wage determination in imperfect markets 236 12.4 Privatisation and regulation 355
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CONTENTS ix
Boxes 15.4 The monetarist–Keynesian debate 443
12.1 Green taxes 334 15.5 The current position: an emerging
12.2 Selling the environment 336 consensus? 447
12.3 Restricting car access to Athens 344
Boxes
12.4 Road pricing in Singapore 346
15.1 Balance the budget at all costs 437
12.5 Taking your vitamins – at a price 351
15.2 The crowding-out effect 438
12.6 Monopoly power in the sale of extended
15.3 Will wage cuts cure unemployment? 440
warranties 354
12.7 Selling power to the people 360
16 Short-run Macroeconomic
Equilibrium 451
Part D: Foundations of Macroeconomics 365 16.1 Background to the theory 452
16.2 The determination of national income 462
13 The National Economy 367
16.3 The simple Keynesian analysis of
13.1 The scope of macroeconomics 368
unemployment and inflation 468
13.2 The circular flow of income 370
16.4 The Keynesian analysis of the business
13.3 Measuring national income and output 373
cycle 471
13.4 Short-term economic growth and the
business cycle 377 Boxes
13.5 Long-term economic growth 384 *16.1 Using calculus to derive the mpc 456
Appendix: Calculating GDP 388 16.2 Consumption and saving in practice 457
16.3 Business expectations and investment
Boxes
in the EU 460
13.1 Which country is better off? 375
16.4 Deriving the multiplier formula 466
13.2 How big is the underground economy? 376
16.5 The paradox of thrift 467
13.3 The costs of economic growth 378
16.6 Has there been an accelerator effect over
13.4 Output gaps 382
the past 30 years? 474
13.5 Theories of growth 386
13.6 When higher GDP can lead to lower
welfare: the use of ISEW 390 17 Money and Interest Rates 478
17.1 The meaning and functions of money 479
17.2 The financial system 480
14 Macroeconomic Issues and Analysis 395
17.3 The supply of money 490
14.1 Unemployment 396
17.4 The demand for money 497
14.2 Aggregate demand and supply and the
17.5 Equilibrium 501
level of prices 405
14.3 Inflation 407 Boxes
14.4 The balance of payments and exchange 17.1 Money supply, national income and
rates 416 national wealth: don’t confuse them 479

14.5 Postscript to Part D: The relationship 17.2 Secondary marketing 485
between the four macroeconomic objectives 424 17.3 Changes in the banking industry 488
17.4 UK and eurozone monetary aggregates 491
Boxes
*17.5 Calculating the money multiplier 494
14.1 The costs of unemployment 400
17.6 Are the days of cash numbered? 498
14.2 Hyperinflation in Germany: 1923 410
14.3 Cost-push illusion 412
14.4 Is inflation dead? 413 18 The Relationship between the
14.5 The Phillips Curve 414 Money and Goods Markets 504
14.6 Dealing in foreign exchange 422 18.1 The effects of monetary changes on
14.7 The political business cycle (Part I) 425 national income 505
18.2 The monetary effects of changes in
the goods market 512
Part E: Macroeconomics 429 *18.3 ISLManalysis: the integration of the
goods and money market models 515
15 The Roots of Modern Macroeconomics
18.4 Taking inflation into account 523
(optional) 431
15.1 Setting the scene: three key issues 432 Boxes
15.2 Classical macroeconomics 434 18.1 Choosing the exchange rate or the
15.3 The Keynesian revolution 439 money supply 509