John Sloman • Alison Wride

889 Pages·2011·14.49 MB·English

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Economics has never been so exciting to learn,
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The seventh edition of Economics contains the most up-to-the-minute coverage and uses the latest data to E
track and analyse the impact of the global financial crisis on our economy. dO
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Just like the economy, Economics has also been Go to www.pearsoned.co.uk/sloman, your gateway ECONOMICS
through a thorough overhaul. While retaining its to all the online resources for this new edition,
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classic features and clear and engaging writing including:
style, it has many new features, including: • A new regularly updated Economics in the News
• New co-author Alison Wride from the University of site with accompanying podcasts.
Exeter. • A new student revision centre with a wealth O
• New Part D on Microeconomic Policy with of resources such as self-testing interactive
separate chapters on government policies questions and answers, revision cards, audio
Seventh Edition
towards the environment, big business and animations and hints and tips to help you do well
inequality. in your exams.
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• Expanded section on Game Theory covering • A new edition of MyEconLab. Redeem your access
multiple move and single shot games. code included with this textbook to gain access to
• The most exhaustive revision to date of the an unrivalled online study and testing resource,
Macroeconomics section. The impact of the providing you with personalised practice exactly
fi nancial crisis, banking collapse and subsequent where you need it most.
recession on fi scal and monetary policy is See Getting Started with MyEconLab on page xxii for I
explored in detail, as is the role of securitisation more details.
and issues of liquidity and risk. C
“The book has been written and revised in successive editions with a dedicated focus on the needs of S
students.”
Roy Bailey, University of Essex
“A key strength of the book is the student-friendly writing style. The author defi nitely takes a student point of
view with respect to discussion and explanation.”
Pam Siler, University of Abertay, Dundee
“There are a number of key strengths in the Sloman book. First, the clarity of the written style is outstanding.
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Second, the learning features are exceptional. Third, the way in which the subject is tackled using logical o
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ideas, graphical representation as well as the algebra gives students confi dence in their own ability to learn i h
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diffi cult topics. Fourth, the delivery of material across multi-media platforms is innovative and shows much o n
creativity.” n S
Ian Jackson, Staffordshire University l
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John Sloman is Director of the Economics Network, the Economics subject centre of the Higher Education d a
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Academy. Economics Network is based at the University of Bristol. John is also Visiting Professor at the

University of the West of England, Bristol. •

Alison Wride is Deputy Director of the University of Exeter Business School and an Associate Professor in
Economics.
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Front cover images: © Getty Images aublle onlINiCnOSeDI DEleEarninsge r
ONCE OPENED THIS PACK
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ECONOMICS
Visit the Sloman website at www.pearsoned.co.uk/slomanto find valuable studentlearning
material including:
• a new, searchable economic news blog,with news items, analysis and accompanying
podcastsadded several times per month and referenced to the relevant chapter in this book;
• a new student revision centrewith an online revision guide to help you prepare for your
economics exam, self-assessment questions to test your knowledge, an online glossary,
revision flashcards and hints and tips for doing well in exams;
• hotlinks to over 200 sites;
• links to the book’s MyEconLabsite.
With your purchase of a new copy of this textbook, you received a Student Access Kit to
MyEconLabfor Economics, Seventh Edition. Follow the instructions on the card to register
successfully and start making the most of the online resources.
MyEconLabprovides a variety of tools to enable students to assess and progress their own
learning, including questions and tests for each chapter of the book. A personalised Study Plan
identifies areas to concentrate on to improve grades. Specific tools are provided to each student
to direct their studies in the most efficient way. MyEconLab also includes:
• a highly interactive online workbook;
• guided solutions that break problems into component steps and guide you through them
with hints;
• extra case studies with questions: several per chapter;
• maths cases with exercises, related to the Looking at the Maths boxes in the book;
• answers to all in-chapter questions;
• a comprehensive glossary with flashcards to check students’ knowledge;
• animations of key models with audio explanations.
See Getting Started with MyEconLabon page xxii for more details.
To activate your registration go to www.pearsoned.co.uk/sloman, click on the Economics,

Seventh Edition cover, select MyEconLab registration, log-in and follow the instructions
on-screen to register as a new user.
ECON_A01.qxd 3/04/2009 15:22 Page ii
We work with leading authors to develop the
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ECONOMICS
Seventh Edition
John Sloman
The Economics Network, University of Bristol
Alison Wride
University of Exeter
A01_SLOM5627_07_SE_FM.QXD 10/30/09 11:44 AM Page iv
Pearson Education Limited
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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
Seventh edition published 2009
© John Sloman 1991
© John Sloman, Alison Bird and Mark Sutcliffe 1994, 1997
© John Sloman, Alison Sloman and Mark Sutcliffe 2000, 2003
© John Sloman 2006
© John Sloman, Alison Wride 2009
The rights of John Sloman and Alison Wride to be identified as
authors of this work have been asserted by them 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,
Saffron House, 6–10 Kirby Street, London EC1N 8TS.
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 978-0-273-71562-7
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloguing-in-Publication Data
Sloman, John, 1947–
Economics / John Sloman, Alison Wride. – 7th ed.
p. cm.
ISBN 978-0-273-71562-7 (pbk.)
1. Economics. I. Wride, Alison. II. Title.
HB171.5.S635 2009
330—dc22
2009003561
10 9 8 7 6 5 4 3 2
13 12 11 10 09
Typeset in 8/12pt Stone Serif by 35
Printed and bound by Rotolito Lombarda, Italy
The publisher’s policy is to use paper manufactured from sustainable
forests.
ECON_A01.qxd 3/04/2009 15:22 Page v
About the Authors
John Sloman is Director of for Business (Pearson Education, 4th edition 2007) and
the Economics Network (www. with Peter Smith from the University of Southampton of
economicsnetwork.ac.uk) of the the Economics Workbookdesigned to accompany Economics
UK Higher Education Academy. 7th edition. Translations or editions of the various books
The Economics Network is based are available for a number of different countries with the
at the University of Bristol and help of co-authors around the world.
provides a range of services John is very interested in promoting new methods of
designed to promote and share teaching economics, including group exercises, experiments,
good practice in learning and role playing, computer-aided learning and the use of audi-
teaching economics. The Net- ence response systems and podcasting in teaching. He has
work is one of 24 subject centres covering the range of dis- organised and spoken at conferences for both lecturers and
ciplines taught in UK Higher Education. The HE Academy students of economics throughout the UK and in many
is backed by grants from the four UK higher education other countries.
funding councils. As part of his work with the Economics Network he
John is also visiting professor at the University of the has contributed to its two sites for students and prospec-
West of England, Bristol where, from 1992 to 1999, he was tive students of economics: Study Economics (www.
Head of School of Economics. He taught at UWE until 2007. studyeconomics.org) and Why Study Economics? (www.
John has taught a range of courses, including economic whystudyeconomics.ac.uk)
principles on social science and business studies degrees, From March to June 1997, John was a visiting lecturer at
development economics, comparative economic systems, the University of Western Australia. In July and August
intermediate macroeconomics and managerial economics. 2000, he was again a visiting lecturer at the University of
He has also taught economics on various professional Western Australia and also at Murdoch University in Perth.
courses. In 2007, John received a Lifetime Achievement Award as
He is also the author of Essentials of Economics(Pearson ‘outstanding teacher and ambassador of economics’
Education, 4th edition 2007) and Economics and the Business prsented jointly by the Higher Education Academy, the
Environment(2nd edition 2008). He is also co-author, with Government Economic Service and the Scottish Economic

Kevin Hinde from the University of Durham, of Economics Society.
Alison Wrideis Deputy Director In 2006 Alison received the Student Nominated Award
of the University of Exeter for Teaching Excellence from the Economics Network of
Business School and an Associate the UK Higher Education Academy. This was followed
Professor in Economics. Prior to by the University of Exeter Vice Chancellor’s Award for
her appointment as Deputy Head, Excellence in 2007, in recognition of both her role in lead-
she was Head of Undergraduate ing on the transformation of the student experience in the
Studies within the School. Business School and her own teaching. Her work in this
Her areas of interest include area has lead to requests for talks at a number of confer-
the student experience and the ences and other events.
relationship between skills, em- Alison has taught economics at a variety of levels: A
ployability and education. She is acknowledged as having level, undergraduate and MBA. Her teaching ethos is based
expertise in understanding the factors that influence stud- on enthusing students and bringing economics to life and
ent satisfaction, particularly relevant given the School’s setting the theory in context. She still believes that ‘the
position as number one business school in the UK for 2006, best decision I ever made – in terms of my career – was
2007 and 2008. choosing to take A level economics. I fell in love with the
ECON_A01.qxd 3/04/2009 15:22 Page vi
vi ABOUT THE AUTHORS
subject within an hour and that was entirely due to the Scottish Government. This work focuses on furnishing
excellence and enthusiasm of my teacher.’ those at the cutting edge of developing policy with the
Alison’s external interests include work with the tools and economic understanding to ensure that both
Treasury and Government Economic Service on economics the formulation of aims and the choice of methods
training for non-economists working in Government; result in coherent strategies that enhance efficiency
she is currently involved in a similar initiative with the and equity.
ECON_A01.qxd 3/04/2009 15:22 Page vii
Brief Contents
Custom Publishing xv
Guided Tour xvi
Getting Started with MyEconLab xxii
Preface xxv
Student Resources Flowchart xxx
Lecturer Resources Flowchart xxxi
Acknowledgements xxxii
Publisher’s Acknowledgements xxxiii
PartA INTRODUCTION
1 Introducing Economics 3
Part B FOUNDATIONS OF MICROECONOMICS
2 Supply and Demand 31
3 Markets in Action 56
Part C MICROECONOMIC THEORY
4 Background to Demand 95
5 Background to Supply 123
6 Profit Maximising under Perfect Competition and Monopoly 163
7 Profit Maximising under Imperfect Competition 185
8 Alternative Theories of the Firm 213
9 The Theory of Distribution of Income 236
Part D MICROECONOMIC POLICY
10 Inequality, Poverty and Policies to Redistribute Income 275
11 Markets, Efficiency and the Public Interest 304
12 Environmental Policy 341
13 Government Policy towards Business 367
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viii BRIEF CONTENTS
Part E FOUNDATIONS OF MACROECONOMICS
14 The National Economy 385
15 Macroeconomic Issues and Analysis: An Overview 415
Part F MACROECONOMICS
16 The Roots of Modern Macroeconomics 453
17 Short-run Macroeconomic Equilibrium 474
18 Money and Interest Rates 502
19 The Relationship between the Money and Goods Markets 535
20 Fiscal and Monetary Policy 561
21 Aggregate Supply, Unemployment and Inflation 611
22 Long-term Economic Growth 638
23 Supply-side Policies 650
Part G THE WORLD ECONOMY
24 International Trade 669
25 The Balance of Payments and Exchange Rates 705
26 Global and Regional Interdependence 742
27 Economic Problems of Developing Countries 761
Postscript: The Castaways or Vote for Caliban 792
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
ECON_A01.qxd 3/04/2009 15:22 Page ix
Contents
Custom Publishing xv 3.4 Government rejection of market allocation 80
Guided Tour xvi 3.5 Agriculture and agricultural policy 82
Getting Started with MyEconLab xxii
Boxes
Preface xxv
3.1 Advertising and its effect on demand curves 62
Student Resources Flowchart xxx
3.2 Pricing on the buses 63
Lecturer Resources Flowchart xxxi
*3.3 Using calculus to calculate the price elasticity
Acknowledgements xxxii
of demand 65
Publisher’s Acknowledgements xxxiii
3.4 Short selling 74
3.5 Dealing in futures markets 76
3.6 A moral dilemma of tobacco taxes 79
Part A INTRODUCTION
3.7 The fallacy of composition 84
1 Introducing Economics 3
1.1 What do economists study? 4 Part C MICROECONOMIC THEORY
1.2 Different economic systems 16
1.3 The nature of economic reasoning 25 4 Background to Demand 95
Boxes 4.1 Marginal utility theory 96
1.1 What’s the latest economics news? 5 4.2 Demand under conditions of risk and
1.2 Looking at macroeconomic data 7 uncertainty 105
1.3 The opportunity costs of studying 11 *4.3 Indifference analysis 109
1.4 Scarcity and abundance 13
Boxes
1.5 The rise and fall of planning in the former
*4.1 Using calculus to derive a marginal utility
Soviet Union 18
function 98
1.6 Adam Smith and the ‘invisible hand’ of the market 22
4.2 The marginal utility revolution 102
1.7 Ceteris paribus 26
4.3 Is economics the study of selfish behaviour? 103

4.4 Taking account of time 104
4.5 Problems with insurance markets 108
Part B FOUNDATIONS OF MICROECONOMICS
*4.6 Love and caring 116
*4.7 Consumer theory: characteristics theory 120
2 Supply and Demand 31
2.1 Demand 32 5 Background to Supply 123
2.2 Supply 39 5.1 The short-run theory of production 124
2.3 Price and output determination 42 5.2 Costs in the short run 130
2.4 The control of prices 51 5.3 The long-run theory of production 136
Boxes 5.4 Costs in the long run 146
*2.1 The demand for lamb 36 5.5 Revenue 150
2.2 UK house prices 46 5.6 Profit maximisation 155
2.3 Stock market prices 48
Boxes
2.4 Underground markets 53 5.1 Malthus and the dismal science of economics 126
5.2 Diminishing returns in the bread shop 128
3 Markets in Action 56 5.3 The relationship between averages and marginals 129
3.1 Elasticity 57 *5.4 The relationship between TPP, MPPand APP 130
3.2 The time dimension 71 5.5 The fallacy of using historic costs 131
3.3 Indirect taxes 77 5.6 Cost curves in practice 135