Essentials of Economics

The market-leading concise text in introductory economics Want to see economics in action? Visit the Sloman Economics News Site for a blog that's updated several times a week with current affairs and topical stories all linked to your textbook so you can explore the background to the issues more deeply. This new edition of the market-leading Essentials of Economics has been updated with the most recent data and coverage of economic issues as the world tries to recover from global financial turmoil and looks at explanations of how consumers and firms really behave. Its classic features and clear and engaging writing style is complemented by strong theoretical coverage and a wealth of pedagogical features to support learning. John Sloman was Director of the Economics Network from its foundation in 1999 until 2012, and is now Visiting Fellow at the University of Bristol where the Network is based. John is also Visiting Professor at the University of the West of England, Bristol. Dean Garratt is Principal Teaching Fellow in the Department of Economics at the University of Warwick.About the authors Student and lecturer resources Preface Acknowledgements Publisher's acknowledgements Part A Introduction 1 Economic issues 1.1 Engaging with economics An island economy Economic puzzles and issues 1.2 The economic problem The problem of scarcity Demand and supply 1.3 Dividing up the subject Macroeconomics Microeconomics 1.4 Modelling economic relationships The production possibility curve The circular flow of goods and incomes Techniques of analysis 1.5 Economic systems The command economy The free-market economy The mixed market economy Chapter 1 Boxes 1.1 Macroeconomic issues: An historical perspective 1.2 The opportunity costs of studying economics: What are you sacrificing? 1.3 Command economies: Rise and fall of planning 1.4 Affording the mixed economy: The sovereign debt crisis of the early 2010s PART B MICROECONOMICS 2 Markets, demand and supply 2.1 Demand The relationship between demand and price The demand curve Other determinants of demand Movements along and shifts in the demand curve Utility and the demand curve 2.2 Supply Supply and price The supply curve Other determinants of supply Movements along and shifts in the supply curve 2.3 The determination of price Equilibrium price and output Movement to a new equilibrium 2.4 The free-market economy Advantages of a free-market economy Problems with a free-market economy 2.5 Behavioural economics What is behavioural economics? Explaining 'irrational' consumer choices Relevance to economic policy Chapter 2 Boxes 2.1 Satisfaction and the rational consumer: Consumer surplus and 'benefit drivers' 2.2 UK house prices: From raising the roof to falling through the floor 2.3 Stock market prices: Demand and supply in action 2.4 Commodity prices: Riding the commodities Big Dipper? 2.5 Nudging people: How to change behaviour 3 Markets in action 3.1 Price elasticity of demand Measuring the price elasticity of demand Interpreting the figure for elasticity Determinants of price elasticity of demand 3.2 Price elasticity of demand and consumer expenditure 3.3 Price elasticity of supply (PeS) The determinants of price elasticity of supply 3.4 Other elasticities Income elasticity of demand 3.5 Markets and adjustment over time Short-run and long-run adjustment Price expectations and speculation 3.6 Uncertainty and risk Responding to risk and uncertainty 3.7 Markets where prices are controlled Setting a minimum (high) price Setting a maximum (low) price Chapter 3 Boxes 3.1 The measurement of elasticity 3.2 Advertising and its effect on demand curves: How to increase sales and price 3.3 Short selling: Gambling on a fall in share prices 3.4 Problems with insurance markets: Adverse selection and moral hazard 3.5 Agriculture and minimum prices: A problem of surpluses 3.6 The effect of imposing taxes on goods: Who ends up paying? 4 The supply decision 4.1 Production and costs: short run Short-run and long-run changes in production Production in the short run: the law of diminishing returns Measuring costs of production Costs and output 4.2 Production and costs: long run The scale of production Long-run average cost The relationship between long-run and short-run average cost curves Long-run cost curves in practice Postscript: decision-making in different time periods 4.3 Revenue Total, average and marginal revenue Average and marginal revenue curves when price is not affected by the firm's output Average and marginal revenue curves when price varies with output 4.4 Profit maximisation Some qualifications 4.5 Problems with traditional theory Explaining actual producer behaviour Chapter 4 Boxes 4.1 Diminishing returns in the bread shop: Is the baker using his loaf? 4.2 Malthus and the dismal science of economics: Population growth + diminishing returns = starvation 4.3 The relationship between averages and marginals 4.4 Costs and the economic vulnerability of firms: The behaviour of costs and firms' financial well-being 4.5 Minimum efficient scale: The extent of economies of scale in practice 4.6 The logic of logistics: Driving up profits 5 Market structures 5.1 The degree of competition 5.2 Perfect competition Assumptions The short-run equilibrium of the firm The short-run supply curve The long-run equilibrium of the firm 5.3 Monopoly What is a monopoly? Barriers to entry Equilibrium price and output Monopoly versus perfect competition: which best serves the public interest? Potential competition or potential monopoly? The theory of contestable markets 5.4 Monopolistic competition Assumptions Equilibrium of the firm Non-price competition Monopolistic competition and the public interest 5.5 Oligopoly The two key features of oligopoly Competition and collusion Collusive oligopoly Non-collusive oligopoly: the breakdown of collusion Non-collusive oligopoly: assumptions about rivals' behaviour Oligopoly and the consumer 5.6 Game theory Single-move games Multi-move games 5.7 Price discrimination Advantages to the firm Price discrimination and the consumer Chapter 5 boxes 5.1 E-commerce: A return of power to the people? 5.2 Breaking sky's monopoly on live premier league football: The sky is the limit for the English Premier League 5.3 OPEC - the rise and fall and rise again of a cartel: The history of the world's most famous cartel 5.4 The power of oligopoly: Energising competition in the UK energy sector 5.5 The prisoners' dilemma 5.6 Profit-maximising prices and output for a third-degree price discriminating firm: Identifying different prices in different markets 6 Wages and the distribution of income 6.1 Wage determination in a perfect market Perfect labour markets The supply of labour The demand for labour: the marginal productivity theory Wages and profits under perfect competition 6.2 Wage determination in imperfect markets Firms with power The role of trade unions Bilateral monopoly The efficiency wage hypothesis 6.3 inequality Types of inequality Measuring the size distribution of income The functional distribution of income The distribution of wealth Causes of inequality 6.4 The redistribution of income Benefits The tax/benefit system and the problem of disincentives: the 'poverty trap' Chapter 6 Boxes 6.1 Labour market trends: Patterns in employment 6.2 Wages under bilateral monopoly: All to play for? 6.3 Equal pay for equal work? Wage inequalities between men and women 6.4 Minimum wage legislation: A way of helping the poor? 6.5 Inequality and economic growth: Macroeconomic implications of income inequality 6.6 UK tax credits: An escape from the poverty trap? 7 Market failures and government policy 7.1 Social efficiency 7.2 Market failures: externalities and public goods Externalities Public goods 7.3 Market failures: monopoly power Deadweight loss under monopoly Conclusions 7.4 Other market failures Ignorance and uncertainty Protecting people's interests The principal-agent problem Immobility of factors and time lags in response Macroeconomic goals How far can economists go in advising governments? 7.5 Government intervention: taxes and subsidies The use of taxes and subsidies Advantages of taxes and subsidies Disadvantages of taxes and subsidies 7.6 Government intervention: laws and regulation Laws prohibiting or regulating undesirable structures or behaviour Regulatory bodies 7.7 Other forms of government intervention Changes in property rights Provision of information The direct provision of goods and services Nationalisation and privatisation 7.8 More or less intervention? Drawbacks of government intervention Advantages of the free market Should there be more or less intervention in the market? 7.9 The environment: a case study in market failure The environmental problem Market failures Policy alternatives How much can we rely on governments? Chapter 7 Boxes 7.1 The tragedy of the commons: The depletion of common resources 7.2 Should health-care provision be left to the market? A case of multiple market failures 7.3 Green taxes: Their growing popularity in the industrialised world 7.4 Trading our way out of climate change: The EU carbon trading system 7.5 The problem of urban traffic congestion: Does Singapore have the answer? Part C Macroeconomics 8 Aggregate demand and the national economy 8.1 Introduction to macroeconomics Key macroeconomic issues Government macroeconomic policy 8.2 The circular flow of income model The inner flow, withdrawals and injections The relationship between withdrawals and injections The circular flow of income and the key macroeconomic objectives Disequilibrium and a chain reaction 8.3 The components of aggregate demand Household consumption Investment Government expenditure Imports and exports 8.4 Simple Keynesian model of national income determination Showing equilibrium with a Keynesian diagram The withdrawals and injections approach The income and expenditure approach 8.5 The multiplier The withdrawals and injections approach The income and expenditure approach The multiplier: a numerical illustration Appendix measuring national income and output The product method The income method The expenditure method From GDP to national income Households' disposable income Taking account of inflation Chapter 8 Boxes 8.1 The household sector balance sheets: Net worth 8.2 Sentiment and spending: Does sentiment help to forecast spending? 8.3 The distinction between real and nominal values: Working out what is real 8.4 Trying to make sense of economic data: The apparently puzzling case of Japanese GDP 9 Aggregate supply and growth 9.1 The AD/AS model The aggregate demand curve The aggregate supply curve Equilibrium 9.2 Introducing economic growth The distinction between actual and potential growth 9.3 Short-term economic growth and the business cycle The business cycle in practice 9.4 Explanations of the business cycle Fluctuations in aggregate demand Fluctuations in aggregate supply Finance and trade 9.5 Long-term economic growth Growth over the decades Comparing the growth performance of different countries 9.6 Explanations of long-term growth The causes of economic growth Capital accumulation Technological progress Endogenous growth theory Chapter 9 Boxes 9.1 Output gaps: An alternative measure of excess or deficient demand 9.2 The accelerator: an example: Demonstrating the instability of investment 9.3 Getting intensive with physical capital: How quickly does it grow? 9.4 Labour productivity: How effective is UK labour? 9.5 UK human capital: Estimating the capabilities of the labour force 10 Banking, money and interest rates 10.1 The meaning and functions of money The functions of money What should count as money? 10.2 The financial system The key role of banks in the monetary system Liquidity, profitability and capital adequacy Strengthening international regulation of capital adequacy and liquidity The central bank The role of the money markets 10.3 The supply of money The creation of credit The creation of credit: the real world What causes money supply to rise? The relationship between money supply and the rate of interest 10.4 The demand for money What determines the size of the demand for money? 10.5 Equilibrium Equilibrium in the money market The link between the money and goods markets Chapter 10 Boxes 10.1 Financial intermediation: What is it that banks do? 10.2 The growth of banks' balance sheets: The rise of wholesale funding 10.3 The rise of securitisation : Spreading the risk or promoting a crisis? 10.4 Credit, money and minsky's financial instability hypothesis: Are credit cycles inevitable? 11 Inflation and unemployment 11.1 Inflation Introduction to the causes of inflation 11.2 Aggregate demand, inflation and output The short-run aggregate supply curve The long-run aggregate supply curve 11.3 Money supply, aggregate demand and inflation The equation of exchange Money and aggregate demand 11.4 Unemployment The meaning of 'unemployment' Official measures of unemployment Unemployment and the labour market Types of disequilibrium unemployment Equilibrium unemployment (or natural unemployment) 11.5 The relationship between inflation and unemployment: the short run Unemployment and inflation at the same time The Phillips curve 11.6 The relationship between inflation and unemployment: introducing expectations The expectations-augmented Phillips curve The accelerationist theory The long-run Phillips curve and the equilibrium rate of unemployment Rational expectations Keynesian views 11.6 Inflation rate targeting and unemployment Long-term changes in unemployment Inflation targeting Chapter 11 Boxes 11.1 Inflation or deflation: Where's the danger? 11.2 Cost push illusion: When rising costs are not cost-push inflation? 11.3 The costs of unemployment: Is it just the unemployed who suffer? 11.4 The duration of unemployment: Taking a dip in the unemployment pool 11.5 Mind the gap: Do output gaps explain inflation? 12 Macroeconomic policy 12.1 Fiscal policy Deficits and surpluses The use of fiscal policy The effectiveness of fiscal policy Problems of magnitude The problem of timing Fiscal rules 12.2 Monetary policy The policy setting Control of the money supply over the medium and long term Short-term monetary measures Techniques to control the money supply Techniques to control interest rates Using monetary policy 12.3 Demand-side policy Attitudes towards demand management The case for rules and policy frameworks The case for discretion Conclusions 12.4 Supply-side policy Market-orientated supply-side policies Interventionist supply-side policies Chapter 12 Boxes 12.1 The financial crisis and the UK fiscal policy yo-yo: From fiscal expansion to fiscal consolidation 12.2 Evolving fiscal frameworks, part I: The European Union: Constraining the fiscal discretion of national governments 12.3 Evolving fiscal frameworks, part II: the UK: From golden rules to fiscal mandates 12.4 The daily operation of monetary policy: What goes on at Threadneedle Street? 12.5 Monetary policy in the eurozone: The role of the ECB 12.6 Quantitative easing: Rethinking monetary policy in hard times 12.7 Moves towards market-based policies in the uk: Creating the right incentives? PART D INTERNATIONAL ECONOMICS 13 Globalisation and international trade 13.1 Global interdependence Interdependence through trade Financial interdependence International Business Cycles Global policy response 13.2 The advantages of trade Trading patterns Specialisation as the basis for trade The gains from trade based on comparative advantage Other reasons for gains from trade The terms of trade 13.3 Arguments for restricting trade Arguments in favour of restricting trade Problems with protection 13.4 The world trading system and the wto 13.5 Trading blocs Types of preferential trading arrangement The direct effects of a customs union: trade creation and trade diversion Longer-term effects of a customs union Preferential trading in practice 13.6 The European Union From customs union to common market The benefits and costs of the single market Completing the internal market The effect of the new member states 13.7 Trade and developing countries The relationship between trade and development Trade strategies Approach 1: Exporting primaries - exploiting comparative advantage Approach 2: Import-substituting industrialisation (ISI) Approach 3: Exporting manufactures - a possible way forward? Chapter 13 Boxes 13.1 Doctor, the world has caught a cold! Global answers to global problems? 13.2 Trading places: Patterns and trends in world trade 13.3 Do we exploit foreign workers by buying cheap foreign imports? 13.4 The Doha development agenda: A new direction for the WTO? 13.5 Features of the single market 13.6 The Chinese 'economic miracle': Riding the dragon 14 Balance of payments and exchange rates 14.1 The balance of payments account The current account The capital account The financial account 14.2 Exchange rates Determination of the rate of exchange in a free market 14.3 Exchange rates and the balance of payments Exchange rates and the balance of payments: no government or central bank intervention Exchange rates and the balance of payments: with government or central bank intervention 14.4 Fixed versus floating exchange rates Advantages of fixed exchange rates Disadvantages of fixed exchange rates Advantages of a free-floating exchange rate Disadvantages of a free-floating exchange rate Exchange rates in practice 14.5 The origins of the euro The ERM The Maastricht Treaty and the road to the single currency 14.6 Economic and monetary union (EMU) in Europe Birth of the euro How desirable is EMU? Future of the euro The fiscal framework 14.7 Debt and developing countries The oil shocks of the 1970s Dealing with the debt Chapter 14 Boxes 14.1 Nominal and real exchange rates: Searching for a real advantage 14.2 Dealing in foreign currencies: A daily juggling act 14.3 The importance of international financial movements: How a current account deficit can coincide with an appreciating exchange rate 14.4 The euro/dollar see-saw: Ups and downs in the currency market 14.5 Optimal currency areas: When it pays to pay in the same currency Web appendix Key ideas and glossary Index