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    Fundamentals of Economics
    FOURTH EDITION

    William Boyes
    Arizona State University

    Michael Melvin
    Arizona State University

    Houghton Mifflin Company Boston New York

    To our families
    W.B.

    M.M.

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    Copyright © 2009 by Houghton Mifflin Company. All rights reserved.
    No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or by any information storage
    or retrieval system without the prior written permission by federal copyright law. Address
    inquiries to College Permissions, Houghton Mifflin Company, 222 Berkeley Street, Boston,
    MA 02116-3764.
    Printed in the U.S.A.
    Library of Congress Catalog Number: 2007936150
    ISBN-10: 0-618-99267-7
    ISBN-13: 978-0-618-99267-6
    1 2 3 4 5 6 7 8 9–CRK–11 10 09 08 07

    Brief Contents

    PA R T O N E
    1

    The Price System
    Economics and the World Around You

    2
    4

    Appendix to Chapter 1: Working with Graphs

    18

    2

    Markets and the Market Process

    26

    3

    Applications of Demand and Supply

    52

    PA R T T WO

    Consumers, Firms, and Social Issues

    80

    4

    The Firm and the Consumer

    82

    5

    Costs and Profit Maximization

    98

    6

    Competition

    114

    7

    Business, Society, and the Government

    132

    8

    Social Issues

    156

    PA R T T H R E E
    9

    The National and Global Economies

    184

    An Overview of the National and International Economies

    186

    10

    Macroeconomic Measures

    204

    11

    Unemployment, Inflation, and Business Cycles

    228

    12

    Macroeconomic Equilibrium: Aggregate Demand and Supply

    252

    13

    Fiscal Policy

    280

    14

    Money and Banking

    300

    PA R T F O U R

    Macroeconomic Policy

    322

    15

    Monetary Policy

    324

    16

    Macroeconomic Policy, Business Cycles, and Growth

    354

    17

    Issues in International Trade and Finance

    378

    18

    Globalization

    400

    iii

    This page intentionally left blank

    Contents
    Preface

    xi

    PART ONE

    CHAPTER 1

    The Price System

    2

    Economics and the World Around You

    4

    Preview

    4

    1. The Definition of Economics
    1.a Scarcity and Opportunity Costs

    7
    7

    Summary / Exercises / Internet Exercise

    14

    Global Business Insight: “Free” Air?

    7

    Study Guide

    15

    1.b Resources and Income

    8

    2. Specialization and Exchange
    2.a Benefits of Trade

    11
    11

    A P P E N D I X TO C H A P T E R 1

    Working with Graphs

    1. Reading and Constructing Graphs
    1.a Constructing a Graph from a Table
    1.b Interpreting Points on a Graph
    1.c Shifts of Curves

    18
    18
    19
    20

    2. Application: The PPC
    2.a Interpreting Graphs: Points Inside
    the Production Possibilities Curve

    21

    CHAPTER 2

    2.b Specialization and Comparative Advantage
    2.c Gains from Trade

    2.b Interpreting Graphs: Points Outside the
    Production Possibilities Curve
    2.c Shifts of the Production Possibilities Curve
    2.d Gains from Trade
    Summary / Exercises

    12
    12

    18
    22
    22
    24
    25

    22

    Markets and the Market Process

    Preview

    26

    1. Allocation Mechanisms
    1.a Efficiency
    1.b Alternatives to Market Allocation

    28
    29
    31

    2. How Markets Function

    31

    3. Demand
    3.a The Law of Demand
    3.b The Demand Schedule
    3.c The Demand Curve
    3.d From Individual Demand Curves to a
    Market Curve
    3.e Changes in Demand and Changes in
    Quantity Demanded

    33
    33
    34
    34

    4. Supply
    4.a The Law of Supply
    4.b The Supply Schedule and Supply Curve

    38
    38
    38

    35
    35

    26
    4.c From Individual Supply Curves to the
    Market Supply
    4.d Changes in Supply and Changes in
    Quantity Supplied

    5. Equilibrium: Putting Demand and
    Supply Together
    5.a Determination of Equilibrium
    5.b Changes in the Equilibrium Price:
    Demand Shifts
    5.c Changes in the Equilibrium Price:
    Supply Shifts

    38
    39
    41
    41
    42
    44

    Summary / Exercises / Internet Exercise

    45

    Study Guide

    48

    v

    Fundamentals of Economics
    FOURTH EDITION

    William Boyes
    Arizona State University

    Michael Melvin
    Arizona State University

    Houghton Mifflin Company Boston New York

    CHAPTER 3

    Applications of Demand and Supply

    Preview

    52

    1. The Market for Low-Carb Foods

    53

    2. The Labor Market

    56

    Global Economic Insight: Jobs Moving Offshore

    56

    2.a Illegal Immigration
    2.b Immigration Policy
    3. Examples of Market Restrictions
    3.a The Market for Medical Care
    3.b The Market for Human Organs

    PART TWO

    CHAPTER 4

    60
    62
    64
    64
    66

    1. Revenue
    1.a Total, Average, and Marginal Revenue

    82
    82

    2. How Does a Firm Learn About Its Demand?
    2.a Example: Demand for Auto Safety
    2.b Example: Demand for Oranges
    2.c Example: Location

    84
    85
    85
    85

    3. Knowing the Customer
    3.a The Price Elasticity of Demand

    85
    86

    98

    1. Costs
    1.a Total, Average, and Marginal Costs
    1.b Why Are the Cost Curves U-Shaped?

    98
    98
    100

    2. Maximizing Profit
    2.a Economic Profit

    102
    103

    77

    80
    82

    3.b Price Elasticity and Revenue
    3.c Determinants of Price Elasticity

    88
    89

    Global Business Insight: Price Adjusting
    Vending Machines

    89

    4. What’s to Come?

    91

    Summary / Exercises / Internet Exercise

    91

    Study Guide

    93

    98
    3. The Profit-Maximizing Rule: MR  MC
    3.a Graphical Derivation of the MR  MC Rule
    3.b What Have We Learned?

    104
    104
    107

    Summary / Exercises / Internet Exercise

    108

    Study Guide

    110

    114

    Preview

    114

    1. Competition and Entry
    1.a Commodities and Differentiation

    114
    114

    1.b Monopoly
    1.c Competition and the Shape of Demand
    Curves

    vi

    74

    Competition

    Economic Insight: The American Girls
    Phenomenon

    69
    70
    71
    72

    Study Guide

    Costs and Profit Maximization

    Preview

    68

    Summary / Exercises / Internet Exercise

    The Firm and the Consumer
    82

    CHAPTER 6

    3.c Price Ceilings: The Market for Rental Housing
    3.d Price Floors: The Market for Agricultural
    Products
    3.e Tariffs
    3.f Quotas
    3.g Bans: The Ban on Trans Fats

    Consumers, Firms, and Social Issues

    Preview

    CHAPTER 5

    52

    115
    116
    117

    2. Creating Barriers to Entry
    2.a Brand Names
    2.b Firm Size and Economies of Scale

    119
    119
    121

    3. The Benefits of Competition
    3.a Consumer Surplus
    3.b Creating Destruction

    122
    123
    124

    Summary / Exercises / Internet Exercise

    126

    Study Guide

    128

    Contents

    CHAPTER 7

    Business, Society, and the Government

    Preview

    132

    1. Alternatives to the Market
    1.a Disagreement with the Market Outcome
    1.b Cartels, Collusion, and Monopolization

    132
    133
    133

    Global Business Insight: Dumping

    134

    Economic Insight: eBay and Online Markets

    136

    1.c Antitrust
    1.d Economic Regulation
    2. Market Failures
    2.a Externalities

    CHAPTER 8

    136
    138

    142
    142
    143
    143

    Summary / Exercises / Internet Exercise

    149

    Study Guide

    151

    139
    139

    Social Issues

    156

    Preview

    156

    1. Global Warming
    1.a The Market for Natural Resources
    1.b Environmental Problems
    1.c Solving Global Warming

    156
    156
    158
    161

    2. Illicit Drugs
    2.a The Suppliers
    2.b The War on Drugs
    2.c Alternative Drug Policies

    163
    163
    165
    167

    3. Discrimination
    3.a The Market

    167
    168

    PART THREE

    CHAPTER 9

    2.b Common Ownership
    2.c Some Goods Don’t Fit the Market:
    Public Goods
    2.d What We Don’t Know Can Hurt Us:
    Asymmetric Information
    2.e Market Problems and the Government

    132

    3.b Statistical Discrimination

    169

    Economic Insight: Discrimination and Poor
    Word-Processing Skills

    169

    4. Minimum Wage

    170

    5. Income Inequality and Poverty
    5.a Poverty
    5.b Income Distribution over Time

    171
    173
    174

    Economic Insight: The Official Poverty Rate

    176

    Summary / Exercises / Internet Exercise

    176

    Study Guide

    179

    The National and Global Economies

    An Overview of the National and International Economies

    184
    186

    Preview

    186

    3.b International Sector Spending

    191

    1. Households
    1.a Number of Households and Household
    Income
    1.b Household Spending

    186

    4. Overview of the U.S. Government
    4.a Government Policy
    4.b Government Spending

    191
    191
    193

    2. Business Firms
    2.a Forms of Business Organizations
    2.b Business Statistics
    2.c Firms Around the World
    2.d Business Spending

    188
    188
    188
    189
    189

    5. Linking the Sectors
    5.a The Private Sector
    5.b The Public Sector

    196
    196
    199

    Summary / Exercises / Internet Exercise

    199

    Study Guide

    201

    3. The International Sector
    3.a Types of Countries

    190
    190

    CHAPTER 10

    187
    187

    Macroeconomic Measures

    Preview

    204

    1. Measures of Output and Income
    1.a Gross Domestic Product

    204
    204

    Economic Insight: The Value of Homemaker
    Services

    205

    1.b Other Measures of Output and Income

    Contents

    209

    204
    2. Nominal and Real Measures
    2.a Nominal and Real GDP
    2.b Price Indexes

    212
    212
    213

    3. Flows of Income and Expenditures

    215

    4. The Foreign Exchange Market
    4.a Exchange Rates

    216
    216

    vii

    4.b Exchange Rate Changes and
    International Trade

    217

    5. The Balance of Payments
    5.a Balance of Payments Accounts

    218
    218

    CHAPTER 11

    5.b The Current Account and the
    Financial Account

    220

    Summary / Exercises / Internet Exercise

    221

    Study Guide

    224

    Unemployment, Inflation, and Business Cycles

    228

    Preview

    228

    1. Business Cycles
    1.a Definitions
    1.b Historical Record
    1.c Indicators

    229
    229
    230
    231

    2. Unemployment
    2.a Definition and Measurement
    2.b Interpreting the Unemployment Rate

    232
    232
    233

    Economic Insight: The Underground Economy

    234

    Summary / Exercises / Internet Exercise

    247

    234
    235

    Study Guide

    249

    2.c Types of Unemployment
    2.d Costs of Unemployment

    CHAPTER 12

    2.e The Record of Unemployment

    237

    3. Inflation

    239

    Global Business Insight: High Unemployment
    in Europe

    240

    3.a
    3.b
    3.c
    3.d

    Absolute Versus Relative Price Changes
    Effects of Inflation
    Types of Inflation
    The Inflationary Record

    241
    241
    244
    245

    Macroeconomic Equilibrium: Aggregate Demand and Supply

    252

    Preview

    252

    1. Aggregate Demand, Aggregate Supply,
    and Business Cycles
    1.a Aggregate Demand and Business Cycles
    1.b Aggregate Supply and Business Cycles
    1.c A Look Ahead

    3.b Changes in Aggregate Demand: Nonprice
    Determinants

    252
    253
    254
    254

    2. Factors That Influence Aggregate Demand
    2.a Consumption
    2.b Investment
    2.c Government Spending
    2.d Net Exports
    2.e Aggregate Expenditures

    255
    255
    256
    256
    256
    256

    4. Aggregate Supply
    4.a Changes in Aggregate Quantity Supplied:
    Price-Level Effects
    4.b Short-Run Versus Long-Run Aggregate
    Supply
    4.c Changes in Aggregate Supply: Nonprice
    Determinants

    3. The Aggregate Demand Curve
    3.a Changes in Aggregate Quantity
    Demanded: Price-Level Effects

    257

    CHAPTER 13

    257

    264
    264
    266
    270

    5. Aggregate Demand and Supply Equilibrium
    5.a Short-Run Equilibrium
    5.b Long-Run Equilibrium

    271
    271
    272

    Summary / Exercises / Internet Exercise

    272

    Study Guide

    275

    280

    Preview

    280

    1. Fiscal Policy and Aggregate Demand
    1.a Shifting the Aggregate Demand Curve
    1.b Multiplier Effects
    1.c Government Spending Financed by
    Tax Increases
    1.d Government Spending Financed by
    Borrowing
    1.e Crowding Out

    281
    281
    281

    viii

    264

    Global Business Insight: OPEC and Aggregate
    Supply

    Fiscal Policy

    2. Fiscal Policy in the United States
    2.a The Budget Process
    2.b The Historical Record

    260

    282
    284
    284
    285
    285
    286

    Economic Insight: The Taxpayer’s Federal
    Government Credit Card Statement

    287

    2.c Deficits and the National Debt
    2.d Automatic Stabilizers

    289
    291

    3. Fiscal Policy in Different Countries
    3.a Government Spending
    3.b Taxation

    293
    293
    293

    Global Business Insight: Value-Added Tax

    294

    Summary / Exercises / Internet Exercise

    295

    Study Guide

    297

    Contents

    CHAPTER 14

    Money and Banking

    300

    Preview

    300

    1. What Is Money?
    1.a Functions of Money
    1.b The U.S. Money Supply
    1.c Global Money

    300
    301
    302
    304

    2. Banking
    2.a Financial Intermediaries
    2.b U.S. Banking

    306
    306
    306

    Global Business Insight: Islamic Banking