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Economics PDF

853 Pages·2006·22.889 MB·English
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0273705121_COVER 14/11/2005 12:52 Page 1 easy to learn from, flexible to teach from… John Sloman’s Economicshas proven to be an extremely popular text, with consistently positive feedback from students. Comprehensive and completely up-to-date, this sixth edition is the ideal introduction to economics for those looking to be interested and motivated by the subject. It’s carefully designed to enhance your learning sixth edition and help you to raise your marks too! John Sloman Classic features: • Careful use of a wealth of examples and cases to summaries. These encourage you to reflect on make the subject relevant to the real world and what you’ve learnt and highlight the links between E bring it to life. different areas of the subject. • Every sentence carefully considered to ensure • Suitable for a range of courses: advanced material C clarity and ease of understanding. is covered for more rigorous courses, but is easily • Learning features integrated throughout the text, identifiable and can be omitted without hindering such as questions, definitions, web references and understanding of basic concepts. O New to this edition: N • Thoroughly revised and updated: every sentence, examples with questions and answers on the table, chart and factual reference has been Companion Website, but can easily be omitted on reviewed, and revised where necessary. less rigorous courses. O • Many new examples and boxes have been added. • Policy sections have been updated to reflect • NEWThreshold Concepts feature explaining the recent changes, for example on competition policy, core concepts you need to grasp in order to think monetary policy and environmental policy. M ECONOMICS like an economist. • Extended coverage of various aspects of • NEWLooking at the Maths panels express models globalisation, such as the rapid economic growth and theories mathematically in addition to the in China, and attempts to reduce developing I words and diagrams used in the main body of the country debt. C text. They are backed up by fully worked sixth edition The best resource package for introductory Companion Website for both lecturers and S economics just got better! Resources are carefully students. See inside for further details. integrated with the text to provide a complete and • A printed Workbook containing a set of over 1500 blended learning experience. questions of various types, carefully matched to • Now with MyEconLab: enables you to assess your the content of the main text, allows you to test own learning, and provides a personalised Study your understanding and apply your knowledge. Plan which identifies areas you need to Available for purchase on its own, or value packed J concentrate on to improve your grades. Specific with the main text at a discount. o tools are provided for you to direct your study in • WinEcon CD contains award-winning interactive h the most efficient way. Access to MyEconLab is tutorials, especially customised for use with n provided with every new purchase of the main text. Sloman’s Economics. Available for purchase at a S • A wealth of resources is provided on the discount with the main text. l o m Audience: a Suitable for use on principles of economics courses as part of single or joint honours economics degree n programmes, or on introductory economics courses as a part of a business, social science or other degree programme. About the author: John Slomanis Principal Lecturer in the School of Economics at the University of the West of England. He is also Director of the Economics Network: the economics subject centre of the Higher Education Academy. Economics Network is based at the University of Bristol. Additional student supportat Additional student supportat www.pearsoned.co.uk/sloman an imprint of www.pearsoned.co.uk/sloman www.pearson-books.com EC6_A01.qxd 10/28/05 16:55 Page i ECONOMICS Visit the Economics, sixth editionCompanion Website at www.pearsoned.co.uk/slomanto find valuable studentlearning material including: • Learning objectives and chapter overview for each chapter • Multiple choice questions to test your learning • Extra case studies with questions per chapter • Maths cases with exercises, related to the Looking at the Maths boxes in the book • Answers to all in-chapter questions • Topical Economic Issues, with analysis and links to key concepts, updated regularly • Economics News Articles with questions, updated monthly • Extensive annotated Hotlinks to relevant sites on the Internet, regularly updated • An online glossary to explain key terms EC6_A01.qxd 10/28/05 16:55 Page ii We work with leading authors to develop the strongest educational materials in economics, bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk EC6_A01.qxd 10/28/05 16:55 Page iii John Sloman University of the West of England and the Economics Network ECONOMICS Sixth edition EC6_A01.qxd 10/28/05 16:55 Page iv Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk 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 The right of John Sloman to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. 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 EC6_A01.qxd 10/28/05 16:55 Page vi 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 EC6_A01.qxd 10/28/05 16:55 Page vii 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 EC6_A01.qxd 10/28/05 16:55 Page viii 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 EC6_A01.qxd 10/28/05 16:55 Page ix 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

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