Economics

930 Pages·2011·17.385 MB·English

by  N. Gregory Mankiw

SECOND EDITION
“This is a truly outstanding principles of economics textbook that beautifully marries theory, empirical analysis and policy. The authors
do their utmost to relate textbook theory to real-world economics. Up-to-date applications to European economies and elsewhere are
plentiful, especially in light of the recent crisis.” Professor Michael Funke, Department of Economics, Hamburg University, Germany
“Mankiw and Taylor’s Economics combines theory and cases with a European fl avour like no other textbook on the market. I am
positive that students will appreciate the clarity of the concepts. As a lecturer I greatly value the friendly exercises offered to the
students and the accompanying teaching material – an excellent textbook!”
Professor Philippe Gugler, Faculty of Economics and Social Sciences, University of Fribourg, Switzerland
“Mankiw and Taylor is an excellent introductory text for university-level economics. Its highly readable and accessible style
provides students with a fi rm grounding in the underlying principles of the subject, while at the same time supplementing the E
subject matter with excellent illustrations, case studies and supporting material.”
Professor Andrew Henley, School of Business and Economics, Swansea University, UK
c
“This text provides a very accessible route into economics for fi rst-year students. The authors have an engaging writing style and
there is comprehensive coverage of economic theory which is always backed up by insightful examples.” o
Dr Colin Jennings, Strathclyde Business School, University of Strathclyde, UK
“I use this academically rigorous and student-friendly textbook in my teaching since its unique application to Europe, the n
Middle East and Africa renders concepts extremely relevant to my students.” Professor Monal Abdel-Baki, Department of Economics,
The American University of Cairo, Egypt
o
Now fi rmly established as one of the
leading economics principles texts in New to the second edition:
m
Europe, the Middle East and Africa, this
> Two new chapters, one offering highly topical and in-depth analysis
highly anticipated second edition of
of the causes and effects of the global fi nancial crisis and one providing
Economics by N. Gregory Mankiw (Harvard
coverage of Keynesian economics and IS-LM analysis
University) and Mark P. Taylor (Warwick
> Coverage of the latest thinking in economics including recent insights
University) further enhances the book’s i
from behavioural economics that help students understand different
reputation for clarity, authority and real-
explanations for economic phenomena c
world relevance.
> New case studies and ‘In the News’ articles that provide relevant and
topical insights into the real-world economics of Europe, the Middle
The features and content which made s
East and Africa
the fi rst edition so successful have been
> Updates to all chapters, new examples and the latest data to help
retained, including:
bring economics to life
> An accessible writing style that makes the
science of economics as clear as possible Economics is essential reading for all students taking introductory
> The classic ten principles approach to economics modules on undergraduate courses. It is also ideal for use with SECOND
economics – introduced in Chapter One the economics component of MBA courses. EDITION
and then referred to throughout the book
About the Authors:
There is a wealth of resources available on the companion website at TM N. Gregory Mankiw
www.cengage.co.uk/mankiw_taylor2 to complement your learning from N. Gregory Mankiw, Professor of a
Economics, Harvard University, USA ya
the book with a wide range of exercises and activities and much more. ln Mark P. Taylor
Mark P. Taylor, Professor of Economics o
k
Economics is also accompanied by Aplia, an online, interactive, auto-graded
and Dean of Warwick Business School, r
i
learning tool. For more information about Aplia please visit:
University of Warwick, UK w
Economics
www.aplia.com/cengageemea/

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ECONOMICS
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For our other contributions to
the next generation:
Catherine, Nicholas and Peter;
and Benjamin, Oliver and Harriet
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ECONOMICS
N. Gregory Mankiw and Mark P. Taylor
Australia•Brazil•Japan•Korea•Mexico•Singapore•Spain•UnitedKingdom•UnitedStates
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BRIEF CONTENTS
About the Authors xiii 22 Frontiers of Microeconomics 466
Preface xiv
Walk Through Tour xx PART8 The Data of Macroeconomics 485
Supplements xxii
23 Measuring a Nation’s Income 486
Acknowledgements xxiv
24 Measuring the Cost of Living 506
PART 1 Introduction
1 PART9 The Real Economy in the Long
1 Ten Principles of Economics 2 Run 523
2 Thinking Like an Economist 21
25 Production and Growth 524
3 Interdependence and the Gains from Trade 52
26 Saving, Investment and the Financial System 550
27 The Basic Tools of Finance 572
PART 2 Supply and Demand I: How Markets
28 Unemployment 592
Work
67
PART10 Money and Prices in the Long
4 The Market Forces of Supply and Demand 68
5 Elasticity and Its Application 94 Run 615
6 Supply, Demand and Government Policies 117
29 The Monetary System 616
30 Money Growth and Inflation 641
PART 3 Supply and Demand II: Markets and
Welfare
137 PART11 The Macroeconomics of Open
7 Consumers, Producers and the Efficiency of Economies 665
Markets 138
31 Open-economy Macroeconomics: Basic
8 Application: The Costs of Taxation 158
Concepts 666
9 Application: International Trade 174
32 A Macroeconomic Theory of the Open
Economy 686
PART 4 The Economics of the Public
Sector PART12 Short-run Economic Fluctuations
197 705
10 Externalities 198 33 Keynes and IS-LM Analysis 706
11 Public Goods and Common Resources 221 34 Aggregate Demand and Aggregate Supply 726
12 The Design of the Tax System 237 35 The Influence of Monetary and Fiscal Policy on
Aggregate Demand 757
PART 5 Firm Behaviour and the Organization 36 The Short-run Trade-off Between Inflation and
of Industry Unemployment 782
263
13 The Costs of Production 264 PART13 Topics in International Finance and
14 Firms in Competitive Markets 287 Macroeconomics
815
15 Monopoly 308
16 Monopolistic Competition 338 37 The Financial Crisis 816
17 Oligopoly 355 38 Common Currency Areas and European Monetary
Union 840
PART 6 The Economics of Labour Markets
381 PART14 Final Thoughts
867
18 The Markets for the Factors of Production 382
39 Five Debates over Macroeconomic Policy 868
19 Earnings and Discrimination 403
20 Income Inequality and Poverty 418
Glossary 883
PART 7 Topics for Further Study 437 Index 891
21 The Theory of Consumer Choice 438
v
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CONTENTS
About the Authors xiii 3 Interdependence and the Gains
Preface xiv from Trade
52
Walk Through Tour xx
Supplements xxii A Parable for the Modern Economy 53
Acknowledgements xxiv The Principle of Comparative Advantage 57
Applications of Comparative Advantage 61
Conclusion 64
Summary 64
Key Concepts 64
Questions for Review 65
Problems and Applications 65
PART 1
PART 2
INTRODUCTION
1
1 Ten Principles of Economics
2
SUPPLY AND DEMAND I: HOW
How People Make Decisions 3
How People Interact 8 MARKETS WORK
67
How the Economy as a Whole Works 12
Conclusion 17
4 The Market Forces of Supply and
Summary 18
Key Concepts 18 Demand
68
Questions for Review 18
Problems and Applications 19 Markets and Competition 68
Demand 70
Supply 76
Supply and Demand Together 80
2 Thinking Like an Economist 21 Conclusion: How Prices Allocate Resources 89
Summary 90
The Economist as Scientist 22
Key Concepts 91
The Economist as Policy Advisor 31
Questions for Review 91
Why Economists Disagree 35
Problems and Applications 92
Let’s Get Going 39
Summary 40
5 Elasticity and Its Application
Key Concepts 40 94
Questions for Review 41 The Elasticity of Demand 95
Problems and Applications 41 The Elasticity of Supply 104
Appendix Graphing: A Brief Review 42
vi
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Contents vii
Three Applications of Supply, Demand and Summary 171
Elasticity 108 Key Concepts 171
Conclusion 114 Questions for Review 172
Summary 114 Problems and Applications 172
Key Concepts 115
Questions for Review 115 9 Application: International Trade
174
Problems and Applications 115
The Determinants of Trade 175
6 Supply, Demand and Government The Winners and Losers from Trade 177
The Arguments for Restricting Trade 189
Policies
117 Conclusion 193
Summary 194
Controls on Prices 118
Key Concepts 194
Taxes 127
Questions for Review 194
Conclusion 133
Problems and Applications 195
Summary 133
Key Concepts 134
Questions for Review 134
Problems and Applications 134
PART 4
PART 3
THE ECONOMICS OF THE PUBLIC
SECTOR
197
SUPPLY AND DEMAND II: MARKETS
10 Externalities
198
AND WELFARE
137
Externalities and Market Inefficiency 200
Private Solutions to Externalities 205
7 Consumers, Producers and the
Public Policies Towards Externalities 210
Efficiency of Markets 138 Public/Private Policies Towards Externalities 215
Conclusion 217
Consumer Surplus 139
Summary 218
Producer Surplus 143
Key Concepts 218
Market Efficiency 147
Questions for Review 218
Conclusion: Market Efficiency and Market
Problems and Applications 219
Failure 155
Summary 155
11 Public Goods and Common
Key Concepts 156
Questions for Review 156 Resources
221
Problems and Applications 156
The Different Kinds of Goods 222
8 Application: The Costs of Taxation Public Goods 223
158
Common Resources 229
The Deadweight Loss of Taxation 159 Conclusion: The Importance of Property Rights 234
The Determinants of the Deadweight Loss 164 Summary 235
Deadweight Loss and Tax Revenue as Taxes Key Concepts 235
Vary 167 Questions for Review 235
Conclusion 170 Problems and Applications 235
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viii Contents
12 The Design of the Tax System How Monopolies Make Production and Pricing
237
Decisions 313
A Financial Overview of the UK Government 238 The Welfare Cost of Monopoly 320
Tax Systems in Other Countries 247 Price Discrimination 323
Taxes and Efficiency 250 Public Policy Towards Monopolies 328
Taxes and Equity 254 Conclusion: The Prevalence of Monopoly 333
Conclusion: The Trade-off Between Equity and
Summary 334
Efficiency 260 Key Concepts 334
Summary 260 Questions for Review 334
Key Concepts 261 Problems and Applications 335
Questions for Review 261
Problems and Applications 261
16 Monopolistic Competition
338
Competition with Differentiated Products 339
Advertising 344
Conclusion 350
Summary 352
PART 5 Key Concepts 353
Questions for Review 353
Problems and Applications 353
17 Oligopoly
355
FIRM BEHAVIOUR AND THE Between Monopoly and Perfect Competition 356
Markets with Only a Few Sellers 357
ORGANIZATION OF INDUSTRY
263 GameTheoryandtheEconomicsofCooperation 364
Public Policy Toward Oligopolies 373
Conclusion 376
13 The Costs of Production
264
Summary 377
What Are Costs? 265 Key Concepts 377
Production and Costs 267 Questions for Review 377
The Various Measures of Cost 271 Problems and Applications 378
Costs in the Short Run and in the Long Run 278
Conclusion 282
Summary 283
Key Concepts 284
Questions for Review 284
Problems and Applications 284 PART 6
14 Firms in Competitive Markets
287
What is a Competitive Market? 288
Profit Maximization and the Competitive Firm’s
Supply Curve 290
THE ECONOMICS OF LABOUR
The Supply Curve in a Competitive Market 299
Conclusion: Behind the Supply Curve 305 MARKETS
381
Summary 305
Key Concepts 306
Questions for Review 306 18 The Markets for the Factors of
Problems and Applications 306 Production
382
15 Monopoly The Demand for Labour 383
308
The Supply of Labour 389
Why Monopolies Arise 310 Equilibrium in the Labour Market 390
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