Economics, 13th Canadian Edition

1008 Pages·67.841 MB·English

by  Christopher T.S. Ragan, Richard G. Lipsey

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THIRTEENTH CANADIAN EDITION
E C O N O M I C S
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R AG AN
CHRISTOPHER T.S.
LIPSEMcGILLYUNIVERSITY
RICHARD G.
SIMON FRASER UNIVERSITY, EMERITUS
THIRTEENTH CANADIAN EDITION
ECONOMICS
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Library and Archives Canada Cataloguing in Publication
Ragan, Christopher
Economics/Christopher T.S. Ragan, Richard G. Lipsey. 13th Canadian ed.
Includes index.
Authors names in reverse order on Canadian 10th ed.
ISBN 978-0-321-61417-9
1. Economics Textbooks. 2. Economics Canada Textbooks. I. Lipsey, Richard G., 1928 II. Lipsey, Richard
G., 1928 . Economics. III. Title.
HB171.5.R35 2011 330 C2009-904724-1
Copyright 2011, 2008, 2005, 2001, 1997 Pearson Canada Inc., Toronto, Ontario.
Previous editions were published by HarperCollins Publishers (formerly Harper & Row Publishers) in 1994, 1991, 1988,
1982, 1979, 1969, and 1966. Portions of the work were first published in the United Kingdom as An Introduction to
Positive Economics, 1963 by Richard G. Lipsey.
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Brief Contents
PART 1 What Is Economics? 1 PART 8 The Economy in the Short Run 518
Chapter 1 Economic Issues and Concepts 1 Chapter 21 The Simplest Short-Run Macro
Chapter 2 Economic Theories, Data, and Model 518
Graphs 24 Chapter 22 Adding Government and Trade
to the Simple Macro Model 546
PART 2 An Introduction to Chapter 23 Output and Prices in the Short Run 569
Demand and Supply 48
PART 9 The Economy in the Long Run 591
Chapter 3 Demand, Supply, and Price 48
Chapter 4 Elasticity 75 Chapter 24 From the Short Run to the Long Run:
Chapter 5 Markets in Action 98 The Adjustment of Factor Prices 591
Chapter 25 The Difference Between Short-Run
and Long-Run Macroeconomics 622
PART 3 Consumers and Producers 120
Chapter 26 Long-Run Economic Growth 637
Chapter 6 Consumer Behaviour 120
Chapter 7 Producers in the Short Run 149 PART 10 Money, Banking, and
Chapter 8 Producers in the Long Run 174
Monetary Policy 671
PART 4 Market Structure and Efficiency 197 Chapter 27 Money and Banking 671
Chapter 28 Money, Interest Rates, and
Chapter 9 Competitive Markets 197
Economic Activity 700
Chapter 10 Monopoly, Cartels, and Price
Chapter 29 Monetary Policy in Canada 728
Discrimination 225
Chapter 11 Imperfect Competition and
PART 11 Macroeconomic Problems
Strategic Behaviour 251
and Policies 762
Chapter 12 Economic Efficiency and Public
Policy 279 Chapter 30 Inflation and Disinflation 762
Chapter 31 Unemployment Fluctuations and
PART 5 Factor Markets 305 the NAIRU 790
Chapter 32 Government Debt and Deficits 818
Chapter 13 How Factor Markets Work 305
Chapter 14 Labour Markets 333
PART 12 Canada in the Global Economy 842
Chapter 15 Interest Rates and the Capital
Market 357 Chapter 33 The Gains from International
Trade 842
PART 6 Government in the Chapter 34 Trade Policy 867
Market Economy 383 Chapter 35 Exchange Rates and the
Balance of Payments 892
Chapter 16 Market Failures and Government
Intervention 383
MYECONLAB CHAPTER 931
Chapter 17 The Economics of Environmental
Protection 417 Chapter 36W Challenges Facing the Developing
Chapter 18 Taxation and Public Expenditure 446 Countries 931
PART 7 An Introduction to Mathematical Notes M-1
Macroeconomics 474 Photo Credits P-1
Chapter 19 What Macroeconomics Timeline of Great Economists T-1
Is All About 474 Index I-1
Chapter 20 The Measurement of National
Income 497
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Contents
To the Instructor xix 2.5 Graphing Economic Theories 37
To the Student xxvii Functions 38
Features of This Edition xxviii Graphing Functional Relations 39
Supplements xxx A Final Word 43
Acknowledgments xxxii Summary 44
Key Concepts 45
Study Exercises 45
Discussion Questions 47
PART 1 What Is Economics? 1
PART 2 An Introduction to
Chapter 1 Economic Issues and Concepts 1
Demand and Supply 48
1.1 The Complexity of the Modern
Economy 2
Chapter 3 Demand, Supply, and Price 48
The Self-Organizing Economy 2
Efficient Organization 3 3.1 Demand 49
Main Characteristics of Market Economies 3 Quantity Demanded 49
1.2 Scarcity, Choice, and Opportunity Cost 4 Quantity Demanded and Price 51
Resources 4 Demand Schedules and Demand
Scarcity and Choice 4 Curves 52
Four Key Economic Problems 8 3.2 Supply 57
1.3 Who Makes the Choices and How? 10 Quantity Supplied 57
The Flow of Income and Expenditure 10 Quantity Supplied and Price 58
The Complexity of Production 11 Supply Schedules and Supply
Markets and Money 12 Curves 58
Globalization 13 3.3 The Determination of Price 62
1.4 Is There an Alternative to the Market The Concept of a Market 62
Economy? 15 Graphical Analysis of a Market 62
Types of Economic Systems 15 Changes in Market Prices 64
The Great Debate 16 Relative Prices and Inflation 68
Government in the Modern Mixed Summary 70
Economy 19 Key Concepts 71
Summary 20 Study Exercises 71
Key Concepts 21 Discussion Questions 74
Study Exercises 21
Discussion Questions 23 Chapter 4 Elasticity 75
4.1 Price Elasticity of Demand 76
Chapter 2 Economic Theories, Data, The Measurement of Price Elasticity 77
What Determines Elasticity of
and Graphs 24
Demand? 81
2.1 Positive and Normative Advice 25 Elasticity and Total Expenditure 82
Disagreements Among Economists 26 4.2 Price Elasticity of Supply 84
2.2 Economic Theories 27 Determinants of Supply Elasticity 85
Theories 27 4.3 An Important Example Where Elasticity
Models 28 Matters 87
2.3 Testing Theories 29 4.4 Other Demand Elasticities 91
Rejection Versus Confirmation 30 Income Elasticity of Demand 91
Statistical Analysis 31 Cross Elasticity of Demand 93
Correlation Versus Causation 31 Summary 94
2.4 Economic Data 32 Key Concepts 95
Index Numbers 32 Study Exercises 95
Graphing Economic Data 35 Discussion Questions 97
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CONTENTS vii
Chapter 5 Markets in Action 98 6A.2 The Budget Line 141
Properties of the Budget Line 142
5.1 The Interaction Among Markets 99
The Slope of the Budget Line 142
5.2 Government-Controlled Prices 100
6A.3 The Consumers Utility-Maximizing
Disequilibrium Prices 101
Choices 143
Price Floors 101
The Consumers Reaction to a
Price Ceilings 102
5.3 Rent Controls: A Case Study of Change in Income 144
Price Ceilings 105 The Consumers Reaction to a
The Predicted Effects of Rent Controls 106 Change in Price 144
Who Gains and Who Loses? 107 6A.4 Deriving the Demand Curve 144
Policy Alternatives 108 Income and Substitution Effects 146
5.4 An Introduction to Market Efficiency 109 Study Exercises 147
Demand as Value and Supply
as Cost 109
Chapter 7 Producers in the Short Run 149
Economic Surplus and Market
Efficiency 111 7.1 What Are Firms? 150
Market Efficiency and Price Organization of Firms 150
Controls 112 Financing of Firms 151
One Final Application: Output Goals of Firms 152
Quotas 114 7.2 Production, Costs, and Profits 154
A Cautionary Word 115 Production 154
Summary 116 Costs and Profits 154
Key Concepts 117 Profit-Maximizing Output 157
Study Exercises 117 Time Horizons for Decision Making 157
Discussion Questions 119 7.3 Production in the Short Run 158
Total, Average, and Marginal Products 159
PART 3 Consumers and Producers 120 Diminishing Marginal Product 160
The Average Marginal Relationship 161
7.4 Costs in the Short Run 163
Chapter 6 Consumer Behaviour 120
Defining Short-Run Costs 163
6.1 Marginal Utility and Consumer Choice 121 Short-Run Cost Curves 164
Diminishing Marginal Utility 121 Capacity 167
Utility Schedules and Graphs 122 Shifts in Short-Run Cost Curves 168
Maximizing Utility 123 Summary 169
The Consumers Demand Curve 125 Key Concepts 170
6.2 Income and Substitution Effects Study Exercises 170
of Price Changes 126 Discussion Questions 173
The Substitution Effect 127
The Income Effect 127
Chapter 8 Producers in the Long Run 174
The Slope of the Demand Curve 128
An Interesting Application to 8.1 The Long Run: No Fixed Factors 175
Taxation 130 Profit Maximization and Cost
6.3 Consumer Surplus 131 Minimization 175
The Concept 131 Long-Run Cost Curves 178
The Paradox of Value 133 Shifts in LRAC Curves 181
Summary 135 8.2 The Very Long Run: Changes in
Key Concepts 136 Technology 182
Study Exercises 136 Technological Change 183
Discussion Questions 138 Firms Choices in the Very Long Run 186
Summary 188
Appendix to Chapter 6 Key Concepts 188
Indifference Curves 139 Study Exercises 189
6A.1 Indifference Curves 139 Discussion Questions 191
Diminishing Marginal Rate of
Substitution 140 Appendix to Chapter 8
The Indifference Map 141 Isoquant Analysis 192
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viii CONTENTS
8A.1 Isoquants 192 Study Exercises 247
An Isoquant Map 193 Discussion Questions 250
8A.2 Cost Minimization 194
The Principle of Substitution 195 Chapter 11 Imperfect Competition
and Strategic Behaviour 251
PART 4 Market Structure and Efficiency 197
11.1 The Structure of the Canadian
Economy 252
Chapter 9 Competitive Markets 197
Industries with Many Small Firms 252
9.1 Market Structure and Firm Behaviour 198 Industries with a Few Large Firms 252
Competitive Market Structure 198 Industrial Concentration 253
Competitive Behaviour 198 11.2 What Is Imperfect Competition? 254
The Significance of Market Structure 199 Firms Choose Their Products 255
9.2 The Theory of Perfect Competition 199 Firms Choose Their Prices 255
The Assumptions of Perfect Non-price Competition 256
Competition 199 Two Market Structures 257
The Demand Curve for a Perfectly 11.3 Monopolistic Competition 257
Competitive Firm 200 The Assumptions of Monopolistic
Total, Average, and Marginal Revenue 202 Competition 257
9.3 Short-Run Decisions 203 Predictions of the Theory 258
Should the Firm Produce at All? 203 Empirical Relevance of
How Much Should the Firm Produce? 205 Monopolistic Competition 260
Short-Run Supply Curves 206 11.4 Oligopoly and Game Theory 261
Short-Run Equilibrium in a The Basic Dilemma of Oligopoly 261
Competitive Market 208 Some Simple Game Theory 262
9.4 Long-Run Decisions 212 11.5 Oligopoly in Practice 265
Entry and Exit 212 Types of Cooperative Behaviour 265
Long-Run Equilibrium 215 Types of Competitive Behaviour 266
Changes in Technology 217 The Importance of Entry Barriers 267
Declining Industries 219 Oligopoly and the Economy 272
Summary 220 Summary 273
Key Concepts 221 Key Concepts 275
Study Exercises 221 Study Exercises 275
Discussion Questions 224 Discussion Questions 278
Chapter 10 Monopoly, Cartels, and Chapter 12 Economic Efficiency
Price Discrimination 225 and Public Policy 279
10.1 A Single-Price Monopolist 226 12.1 Productive and Allocative Efficiency 280
Revenue Concepts for a Monopolist 226 Productive Efficiency 281
Short-Run Profit Maximization 228 Allocative Efficiency 282
Entry Barriers and Long-Run Which Market Structures Are Efficient? 285
Equilibrium 231 Allocative Efficiency and Total Surplus 287
The Very Long Run and Creative Allocative Efficiency and Market
Destruction 232 Failure 289
10.2 Cartels as Monopolies 235 12.2 Economic Regulation to Promote
The Effects of Cartelization 236 Efficiency 291
Problems That Cartels Face 236 Regulation of Natural Monopolies 292
10.3 Price Discrimination 239 Regulation of Oligopolies 295
When Is Price Discrimination Financial Crisis and Recession 297
Possible? 240 12.3 Canadian Competition Policy 298
Different Forms of Price The Evolution of Canadian Policy 299
Discrimination 240 Current Reforms 299
The Consequences of Price Summary 300
Discrimination 245 Key Concepts 301
Summary 246 Study Exercises 301
Key Concepts 247 Discussion Questions 304
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CONTENTS ix
The Present Value of a Single Future
PART 5 Factor Markets 305
Payment 360
The Present Value of a Stream of
Chapter 13 How Factor Markets Work 305
Future Payments 362
13.1 Income Distribution 306 Conclusions 364
A Glimpse of the Theory Ahead 307 15.3 Investment Demand 364
13.2 The Demand for Factors 308 The Firms Demand for Capital 364
The Firms Marginal Decision on The Economys Demand for
Factor Use 308 Investment 368
The Firms Demand Curve for a Factor 310 15.4 The Supply of Saving 368
Elasticity of Factor Demand 311 Saving and Current Income 369
The Market Demand Curve for Saving and Expected Future Income 369
a Factor 313 Saving and the Interest Rate 370
Shifts of the Market Factor Demand The Economys Supply of Saving 370
Curve 313 15.5 Investment, Saving, and the
13.3 The Supply of Factors 314 Interest Rate 371
The Supply of Factors to the Economy 315 Changes in the Capital-Market
The Supply of Factors to a Particular Equilibrium 373
Industry 316 Summary 378
The Supply of Factors to a Particular Key Concepts 379
Firm 319 Study Exercises 379
13.4 The Operation of Factor Markets 319 Discussion Questions 381
Differentials in Factor Prices 320
Policies to Promote Pay Equity 323 PART 6 Government in the
Economic Rent 324 Market Economy 383
A Final Word 328
Summary 328 Chapter 16 Market Failures and
Key Concepts 329
Government Intervention 383
Study Exercises 330
Discussion Questions 332 16.1 Basic Functions of Government 384
16.2 The Case for Free Markets 386
Automatic Coordination 386
Chapter 14 Labour Markets 333
Innovation and Growth 387
14.1 Wage Differentials 334 Decentralization of Power 388
Wage Differentials in Competitive 16.3 Market Failures 389
Markets 334 Market Power 389
Wage Differentials in Non-competitive Externalities 390
Markets 339 Non-rivalrous and Non-excludable
Legislated Minimum Wages 342 Goods 392
14.2 Labour Unions 345 Asymmetric Information 396
Collective Bargaining 345 Summary 398
Unanswered Questions 348 16.4 Broader Social Goals 399
14.3 The Good Jobs Bad Jobs Income Distribution 400
Debate 349 Preferences for Public Provision 400
Six Observations 350 Protecting Individuals from Others 402
A Mixed Blessing? 352 Paternalism 402
Summary 352 Social Responsibility 402
Key Concepts 353 Economic Growth 403
Study Exercises 353 A General Principle 403
Discussion Questions 356 16.5 Government Intervention 404
The Tools of Government Intervention 404
Chapter 15 Interest Rates and the The Costs of Government Intervention 405
Government Failure 407
Capital Market 357
How Much Should Government
15.1 A Brief Overview of the Capital Intervene? 411
Market 358 Summary 412
15.2 Present Value 360 Key Concepts 414
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x CONTENTS
Study Exercises 414
PART 7 An Introduction to
Discussion Questions 416
Macroeconomics 474
Chapter 17 The Economics of Chapter 19 What Macroeconomics
Environmental Protection 417 Is All About 474
17.1 The Economic Rationale for 19.1 Key Macroeconomic Variables 476
Regulating Pollution 418 Output and Income 476
Pollution as an Externality 418 Employment, Unemployment, and
The Optimal Amount of Pollution the Labour Force 480
Abatement 419 Productivity 483
17.2 Pollution-Control Policies 421 Inflation and the Price Level 484
Direct Controls 421 Interest Rates 487
Emissions Taxes 423 The International Economy 490
Problems with Emissions Taxes 424 19.2 Growth Versus Fluctuations 491
Tradable Pollution Permits: Cap and Long-Term Economic
Trade 424 Growth 492
Uncertainty and the Choice Between Short-Term Fluctuations 493
Emissions Taxes and Cap and What Lies Ahead? 493
Trade 427 Summary 494
17.3 The Economic Challenge of Key Concepts 494
Global Climate Change 429 Study Exercises 494
The Basics About Greenhouse-Gas Discussion Questions 496
Emissions 430
The Case for Global Collective Action 431
Chapter 20 The Measurement of
Energy Use, GDP, and Greenhouse-Gas
National Income 497
Emissions 433
Significant Policy Challenges 436
20.1 National Output and Value Added 498
Summary 439
20.2 National Income Accounting: The Basics 500
Summary 442
GDP from the Expenditure Side 501
Key Concepts 442
GDP from the Income Side 504
Study Exercises 443
20.3 National Income Accounting:
Discussion Questions 445
Some Further Issues 507
GDP and GNP 507
Real and Nominal GDP 509
Chapter 18 Taxation and Public
Omissions from GDP 510
Expenditure 446
GDP and Living Standards 513
18.1 Taxation in Canada 447 Summary 514
Progressive Taxes 447 Key Concepts 515
The Canadian Tax System 448 Study Exercises 515
18.2 Evaluating the Tax System 452 Discussion Questions 517
Taxation and Equity 452
Taxation and Efficiency 454 PART 8 The Economy in the Short Run 518
18.3 Public Expenditure in
Canada 457
Chapter 21 The Simplest Short-Run
Canadian Fiscal Federalism 458
Macro Model 518
Canadian Social Programs 460
18.4 Evaluating the Role of 21.1 Desired Aggregate Expenditure 519
Government 467 Desired Consumption Expenditure 520
Public Versus Private Sector 468 Desired Investment Expenditure 527
Scope of Government Activity 468 The Aggregate Expenditure Function 530
Evolution of Policy 469 21.2 Equilibrium National Income 532
Summary 469 21.3 Changes in Equilibrium National
Key Concepts 470 Income 535
Study Exercises 471 Shifts of the AEFunction 535
Discussion Questions 473 The Multiplier 537