9-20 Econ

16.1 Explain derived demand and how firms decide the profit-maximizing quantity of labor to employ.

16.1 Explain derived demand and how firms decide the profit-maximizing quantity of labor to employ. For example, the chef at a restaurant is paid and her skills are in demand because she produces what customers want—great-tasting meals. The higher the demand for restaurant food, the higher the demand for chefs, so the demand for chefs is derived from the demand for restaurant meals. •An input's attractiveness, then, varies with what the input can add to the firm's revenues relative to what the input adds to costs. •In a competitive labor market, the demand for labor is determined by its marginal revenue product (MRP), which is the additional revenue that a firm obtains from one more unit of input. Why? Suppose a worker adds $500 per week to a firm's sales by his productivity; he produces 100 units that add $5 each to firm revenue. •To determine whether the worker adds to the firm's profits, we would need to calculate the marginal resource cost associated with the worker. The marginal resource cost (MRC) is the amount that an extra input adds to the firm's total costs. In this case, the marginal resource cost is the wage the employer has to pay to entice an extra worker. •Assume that the marginal resource cost of the worker, the market wage, is $350 per worker per week. In our example, the firm would find its profits growing by adding one more worker because the marginal benefit (MRP) associated with the worker, $500, would exceed the marginal cost (MRC) of the worker, $350. •Remember that the law of diminishing marginal product states that as increasing quantities of some variable input (say, labor) are added to fixed quantities of another input (say, land or capital), output will rise, but at some point it will increase by diminishing amounts. •The value of the marginal revenue product of labor shows how the marginal revenue product depends on the number of workers employed. •The curve slopes downward due to diminishing marginal product of labor (as the quantity of a variable input is increased, with other inputs fixed, at some point the additional variable inputs will have less effect). •The decline in marginal productivity results in a decline in the marginal revenue product (the change in total revenue associated win an additional unit of input). •Output expands as more workers are hired to cultivate the land, but the growth in output steadily slows, meaning that the added output associated with one more worker declines as more workers are added. •For example, when a third worker is hired, total wheat output increases from 5,500 bushels to 7,000 bushels, an increase of 1,500 bushels in terms of marginal product. •However, when a fourth worker is added, total wheat output only increases from 7,000 bushels to 8,000 bushels, or a marginal increase of 1,000 bushels. •Note that the reason for the decline in marginal product is not that the workers being added are steadily inferior in terms of ability or quality relative to the first workers. Indeed, for simplicity, we assume that each worker has exactly the same skills and productive capacity. But as more workers are added, each additional worker has fewer of the fixed resources with which to work, and marginal product falls. Firms try to maximize the difference between total revenue and total costs, so each additional labor input must provide results in additional revenue. •The marginal revenue product of labor declines because of the diminishing marginal product of labor when additional workers are added. •This decline in MRP is illustrated in Exhibit 3, which shows various output and revenue levels for a wheat farmer using different quantities of labor. •We see that the marginal product, or the added physical volume of output, declines as the number of workers grows because of diminishing marginal product. •Thus, the fifth worker adds only 60 bushels of wheat per week compared with 100 bushels for the first worker. •A competitive firm can hire any number of potential workers at the market-determined wage; it is a price (wage) taker. •At employment levels less than q*, additional workers add profits. •At employment levels beyond q*, additional workers are unprofitable. •At q*, profits are maximized. •The individual's labor supply curve might be backward bending. •At a lower wage rate, as wages increase, the worker might supply more hours of work (the substitution effect dominates the income effect), an upward-sloping labor supply curve. •However, above a certain wage rate, a worker might prefer to enjoy more leisure and less work to meet personal preferences (the income effect dominates the substitution effect), a backward-bending labor supply curve. •That is, if the substitution effect is stronger than the income effect, the individual's labor supply curve is upward sloping. If the income effect is stronger than the substitution effect, the individual's labor supply curve is backward bending. •Substitution effect: At a higher wage rate, the cost of forgoing labor time to gain greater leisure time increases, producing a tendency to substitute labor for leisure. In other words, a higher wage rate makes leisure more expensive—its opportunity cost rises. •Income effect: At a higher wage rate, the quantity of labor supplied tends to decrease because many individuals consider leisure a normal good. So when income increases, people demand more leisure. That is, at some wage rate, some workers feel that they can afford more leisure.

18.5 Explain how we measure the inflation rate and why inflation is a problem.

18.5 Explain how we measure the inflation rate and why inflation is a problem. •An overall stable price level increases economic security. •In general, the only thing that can cause a sustained increase in the rate of inflation is a high rate of growth in money. •In periods of high and variable inflation, households and firms have a difficult time distinguishing between changes in the relative price of individual goods and services (the price of a specific good compared to the prices of other goods) and changes in the general price level of all goods and services. •We adjust for the changing purchasing power of the dollar by constructing a price index. •The most well-known index is the consumer price index (CPI). •The GDP deflator corrects for changing prices in broader terms. •The two measures tend to move in the same direction, but the CPI tends to be much more volatile—it bounces around more than the GDP deflator. •Divergences between the two measures are rare. •One important difference between them that can yield different results is that the GDP deflator measures the price of all goods and services that are produced domestically, while the CPI measures the goods and services bought by consumers. •Both of these measures of prices would yield different inflation rates, which could be substantial over a long period of time. •However, the important point is that both of these measures tend to move together. The Bureau of Labor Statistics divides the typical consumer's spending among various categories of goods and services. •Substitution bias occurs because the CPI measures the price changes of a fixed basket of goods and services. It does not capture the savings that households enjoy when they change their spending in response to relative price changes. •Quality bias arises because some of any increase in the price of an item may be due to an improvement in quality, rather than being a price increase for the same quality. Quality improvements are difficult to measure. •New outlet bias is similar to substitution bias, but refers to where households shop rather than to what they purchase. Over the past 15 years, for example, the growth of discount stores like Costco and Sam's Club has helped consumers lower their expenditures. A similar problem arises with online shopping, which now accounts for a significant fraction of sales. •New product bias occurs because new products, such as iPhones or iPads, are not introduced into the index until they are commonplace items. •Inflation hurts those on fixed incomes. Suppose you retire on a fixed pension of $2,000 per month. Over time, that $2,000 will buy less and less if prices generally rise. Your real income—your income adjusted to reflect changes in purchasing power—falls. •Inflation can hurt creditors. For example, suppose a bank loaned someone money for a house, at a 4 percent fixed rate for 20 years, in the early 1960s (a period of low inflation). However, the 1970s was a period of high inflation rates (roughly 10 percent per year). Under this scenario, because the lender did not correctly anticipate the higher rate of inflation, the lender is the victim of unanticipated inflation. That is, the borrower is paying back with dollars that have much less purchasing power than those dollars they borrowed in the early 1960s. •Some people gain because of unanticipated inflation. Debtors pay back dollars worth less in purchasing power than those borrowed. Corporations that can quickly raise the prices on their goods may have revenue gains greater than their increases in costs, providing additional profits. •Some economists believe that significant costs are incurred when individuals and firms devote resources to protecting themselves against expected future inflation. •The uncertainty that unanticipated inflation creates can also discourage investment and economic growth. •Moreover, inflation can raise one nation's price level relative to price levels in other countries. In turn, this shift can make financing the purchase of foreign goods difficult, or it can decrease the value of the national currency relative to that of other countries. Predictably low rates of inflation, while still a problem, are considerably better than high and variable inflation rates. A slow, predictable rate of inflation makes predicting future price increases relatively easy. Consequently, setting interest rates will be an easier task and the redistribution effects of inflation will be minimized. •If people can correctly anticipate inflation, they will behave in a manner that will largely protect them against loss. •However, if the inflation is not correctly anticipated (it is not an easy task to predict inflation), inflation will still redistribute income. •Understanding the difference between nominal and real interest rates is critical. •In most economic decisions, it is the real rate of interest that matters because it is this rate that shows how much borrowers pay and lenders receive in terms of purchasing power—goods and services money can buy. •Investors and lenders will do best when the real interest rates are high. •Usually, lenders are able to anticipate inflation with reasonable accuracy. If the inflation rate is anticipated accurately, new lenders will not lose nor will borrowers gain from a change in the inflation rate. •However, nominal interest rates and real interest rates do not always run together. For example, in periods of high unexpected inflation, the nominal interest rates can be high when the real interest rates are low or even negative.

9.2: Describe and explain public choice theory.

•A successful campaign would have to address the concerns of the median voters (those in the middle of the distribution in Exhibit 1), resulting in moderate policies. •For example, if one candidate ran a fairly conservative campaign, attracting voters at and to the right of V1, an opponent could win by a landslide by taking a fairly conservative position just to the left of this candidate. Alternatively, if the candidate takes a liberal position, say V2, then the opponent can win by campaigning just to the right of that position. In this case, it is easy to see that the candidate who takes the median position, VM, is least likely to be defeated. •Regardless of the distribution, however, the successful candidate will still seek out the median voters. •The median voter model predicts a strong tendency for both candidates to choose a position in the middle of distribution, and therefore the election will be close. •If the model predicts correctly, then the median voter will determine the outcome of the election because those voters whose preferences are in the tails—the two extremes—will prefer the middle position rather than the other extreme position. •Many people vote for reasons other than to affect the outcome of the election. They vote because they believe in the democratic process and because of civic pride. In other words, they perceive that the benefits they derive from being involved in the political process outweigh the costs. •Furthermore, rational ignorance does not imply that people should not vote; it is merely one explanation for why some people do not vote. The point that public choice economists are making is that some people will vote only if they think that their vote will make a difference; otherwise, they will not vote •If a special interest group is successful in getting everyone else to pay for a project that benefits them, the cost will be spread over so large a number of taxpayers that the amount any one person will have to pay is negligible. Hence, the motivation for an individual citizen to spend the necessary time and effort to resist an interest group is minimal, even if she had a guarantee that this resistance would be effective. •Public choice economists believe that if the government becomes a vehicle for promoting special interests, it fails in its primary responsibility of expanding opportunities for all. Instead, the government will have created the illusion that people can benefit at the expense of each other. •The difference between public choice economists and those who see every social ill as justification for expanding the government is not a difference in moral vision. Instead, it is a difference in their interpretation of how the government works. Public choice economists lean toward less government not because they want less from the government, but because they, like many others, want less waste from government. •An example of log rolling occurs when Representative A may tell Representative B that he will vote for her water bill if she votes for his new highway bill. Of course, if Representative B does not go along with Representative A's legislation, she runs the risk of not getting support for her legislation at a later date. •The trading of votes could lead to an outcome where the majority of Congress now supports the economic interests of a few at the economic expense of many. This is especially true if the cost to the many is so low that people are rationally ignorant to the effects of rent-seeking behavior. Rent seeking occurs when individuals and firms use resources, like money and lobbyists, to influence the government to grant them special privileges.

10.2Explain how consumers use marginal utility to choose their goods and services.

10.2 Explain how consumers use marginal utility to choose their goods and services. •To achieve maximum satisfaction—consumer equilibrium—consumers have to allocate income in such a way that the ratio of the marginal utility to the price of the goods is equal for all goods purchased. •In a state of consumer equilibrium, each good provides the consumer with the same level of marginal utility per dollar spent.

110.3 Describe the behavioral economics approach to economic decision making.

10.3 Describe the behavioral economics approach to economic decision making. •People might satisfice in some circumstances rather than trying to accurately calculate the best decision. •If the likely improvement for a range of decisions is judged to be less than the increased cost of calculating necessity, people may adopt rules of thumb—relying on decisions that are felt to have worked well enough in the past.

11.1 Describe and explain the concept of economic profits and sunk costs

11.1 Describe and explain the concept of economic profits and sunk costs Implicit costs are opportunity costs. The goal of every firm is to maximize profits; that is, the difference between what they give up for their inputs and what they receive for their goods. Economic profits are less than accounting profits because economic profits include implicit as well as explicit costs. As shown in Exhibit 1, economic costs include both implicit and explicit costs, whereas accounting costs are only explicit costs—that is, those that require monetary payment. A zero economic profit means that the total revenues compensate sufficiently for the time and money the owners have put into the business. Firms should ignore sunk costs when making decisions about future actions and instead focus on what will make the most economic sense going forward.

11.2 Describe and explain the concept of diminishing marginal product

11.2 Describe and explain the concept of diminishing marginal product Some inputs can be varied on short notice. Number of staff is a common example. Other inputs take longer to change, such as the size and number of factories. Inputs that cannot be changed in the short run are called fixed inputs. A firm can vary all inputs in the long run, even factors such as the number and location of facilities. Depending on the firm and industry, the long run could range from weeks to years.

11.3 Describe and explain the difference between the short run and the long run.

11.3 Describe and explain the difference between the short run and the long run. By dividing total cost by the units of output, the average total cost (ATC) can be determined. The same process can be used to find average fixed cost (AFC) and average variable cost (AVC). The two equations for MC are equivalent because fixed costs do not change; therefore, it is the change in VC that makes the difference, whether considered on its own or as part of change in TC. Exhibit 2 shows how fixed and variable costs affect average, marginal, and total costs. FC stays the same regardless of input. VC and TC rise with output. AFC decreases with output. AVC and ATC decrease but then rise again as the point of diminishing marginal product is reached.The total fixed cost (TFC) curve is, by definition, a horizontal line. The total cost (TC) curve is the vertical summation of the total variable cost (TVC) and total fixed cost (TFC) curves. Notice that TVC = 0 when q = 0 and that TFC = $40 even when no output is being produced.The marginal cost (MC) curve always intersects the average total cost (ATC) and average variable cost (AVC) curves at those curves' minimum points. Average fixed cost (AFC) curves always decline and approach—but never reach—zero. The ATC curve is the vertical summation of the AFC and AVC curves; it reaches its minimum (lowest unit cost) point at a higher output than the minimum point of the AVC curve.

11.4 Describe and explain the short-run costs of the firm and how they vary with the output levels that are produced.

11.4 Describe and explain the short-run costs of the firm and how they vary with the output levels that are produced. In Area a (left side), MP is rising and MC is falling. In Area b (right side), MP is falling and MC is rising. At low levels of output, ATC is high because AFC is high (the fixed plant is underutilized). At high levels of output (close to capacity), the fixed plant is overutilized, leading to high MC and, consequently, high ATC . Thus, the ATC is U-shaped because the decline in AFC causes ATC to drop at first, but this is eventually overwhelmed by rising MC. Marginal costs are equal to the AVC at the lowest point of the AVC curve. On the left side of Exhibit 3, the MC is less than AVC, and AVC is falling. On the right side, the MC is higher than the AVC, and AVC is rising. The marginal cost curve crosses the average variable cost curve at AVC's minimum point. As shown in Exhibit 4, MC and ATC have the same relationship as MC and AVC. When MC is less than ATC, ATC is falling, and when it is higher than ATC, ATC is rising. Marginal costs are equal to the AVC at the lowest point of the AVC curve. On the left side of Exhibit 3, the MC is less than AVC, and AVC is falling. On the right side, the MC is higher than the AVC, and AVC is rising. The marginal cost curve crosses the average variable cost curve at AVC's minimum point. As shown in Exhibit 4, MC and ATC have the same relationship as MC and AVC. When MC is less than ATC, ATC is falling, and when it is higher than ATC, ATC is rising.

11.5 Describe and explain how the firm uses the long-run average cost curve in its planning.

11.5 Describe and explain how the firm uses the long-run average cost curve in its planning. In the short run, a firm's fixed inputs (such as plant size) determine its cost curve. In the long run, a firm can adjust all ofits inputs in order to achieve its desired short-run average total cost curve.Notice that the long run average total cost curve is much flatter than the short run average total cost curve. This is because firms can be more flexible in the long run--they can choose which short run cost curve they want to operate along, by choosing their plant scale. But not in the short run, during which they are stuck with their existing short run cost curve. That is, in the short run, the firm operates a given scale of plant, and will use the short run costs that result in its price and output decisions. Economies of scale occur when a firm's LRATC declines as output expands. Firm expansion can allow for increased specialization that boosts productivity alongside expanded output. Expansion can also enable a firm to overcome high fixed costs. Larger firms may also benefit from lower costs for some inputs than smaller firms. Diseconomies of scale occur when a firm's LRATC decreases when its output expands. Larger organizations tend to be complex, and may become difficult to manage effectively, driving up their LRATCs.

12.1 Define a perfectly competitive market. Perfectly competitive firms must take the price given by the market because their influence on price is insignificant.

12.1 Define a perfectly competitive market. Perfectly competitive firms must take the price given by the market because their influence on price is insignificant. For example, in the wheat market it is not possible to determine any significant and consistent qualitative differences in the wheat produced by different farmers. •It is fairly easy for entrepreneurs to become suppliers of the product or, if they are already producers, to stop supplying the product. •"Fairly easy" does not mean that any person on the street can instantly enter the business but rather that the financial, legal, educational, and other barriers to entering the business are modest, enabling large numbers of people to overcome the barriers and enter the business, if they so desire, in any given period.

12.2 Describe and explain why a perfectly competitive firm faces a horizontal firm demand curve.

12.2 Describe and explain why a perfectly competitive firm faces a horizontal firm demand curve. •For example, wheat farmers know that they cannot dispose of their wheat at any figure higher than the current market price or they will lose buyers. •Further, the farmers certainly would not knowingly charge a lower price, because they could sell all they want at the market price.

12.3 Describe and explain how price and output are determined in a perfectly competitive market.

12.3 Describe and explain how price and output are determined in a perfectly competitive market. •If the farmer sells 10 bushels at $5 a bushel, total revenue is $50 and average revenue is $5 per bushel ($50 ÷ 10 bushels). •If the price of wheat per bushel is $5, the marginal revenue is $5. Because total revenue is equal to price multiplied by quantity (TR = P × q), as we add one additional unit of output, total revenue will always increase by the amount of the product price, $5. Remember, it is not the goal of the firm to just make an economic profit—the goal is to maximize economic profit. •Let's take another look at profit maximization, using the table in Exhibit 3. Comparing columns 2 and 3—the calculations of total revenue and total cost, respectively—we see that the farmer maximizes his profits at output levels of three or four bushels, where he will make profits of $4. •In column 4—profit—you can see that there is no higher level of profit at any of the other output levels. •Producing five bushels would reduce profits by $1 because marginal revenue, $5, is less than the marginal cost, $6. Consequently, the farmer would not produce this level of output.

12.4 Describe and explain short-run economic profits and losses.

12.4 Describe and explain short-run economic profits and losses. 1. Find where marginal revenue equals marginal cost and proceed straight down to the horizontal quantity axis to find q*, the profit-maximizing output level. 2. At q*, go straight up to the demand curve and then to the left to find the market price, P*. Once you have identified P* and q*, you can find total revenue at the profit-maximizing output level because TR = P × q. 3. The last step is to find the total cost. Again, go straight up from q* to the average total cost (ATC) curve and then left to the vertical axis to compute the average total cost per unit. If we multiply average total cost by the output level, we can find the total cost (TC = ATC × q). In (a), the firm is earning short-run economic profits of $120. In (a), the firm is earning short-run economic profits of $120. In (b), the firm is suffering losses of $80. In (c), the firm is making zero economic profits, with the price just equal to the average total cost in the short run.The firm may continue to operate even though it is experiencing an economic loss. Why? Because fixed costs continue whether the firm produces or not; it is better to earn enough to cover a portion of fixed costs than to earn nothing at all. •We must be careful to distinguish between a firm's decision to temporarily shut down and a permanent exit from the market. We reserve the language "shut down" to describe a firm that has made a short run decision not to produce any output in the specific time period because of current market conditions. Exit, on the other hand, is a long run decision to leave the market permanently. •This applies to seasonal businesses, such as a summer miniature golf course. Because the short run is too brief for new firms to enter the market, the market supply curve is the summation of existing firms. •In long-run equilibrium, perfectly competitive firms make zero economic profits. Remember, a zero economic profit means that the firm actually earns a normal return on the use of its resources. •Zero economic profit is an equilibrium or stable situation because any positive economic (above-normal) profit signals resources into the industry, beating down prices and therefore revenues to the firm. •Any economic losses signal resources to leave the industry, causing supply reductions that lead to increased prices and higher firm revenues for the remaining firms.

12.5 Explain why firms may enter and exit the market. •In the long run in perfect competition, a stable

12.5 Explain why firms may enter and exit the market. •In the long run in perfect competition, a stable situation or equilibrium is achieved when economic profits are zero. •In this case, at the profit-maximizing point where MC = MR, short-run and long-run average total costs are equal. •Industry-wide supply shifts would change prices and average revenue, wiping out any losses or profits that develop in the short run and leading to the situation depicted here.

12.6 Describe and explain how the shape of the long-run supply curve depends on the extent to which input costs change with the entry or exit of firms in the industry.

12.6 Describe and explain how the shape of the long-run supply curve depends on the extent to which input costs change with the entry or exit of firms in the industry. With constant-cost industries, the only long-run effect of the increase in demand is an increase in industry output, as more firms enter that are just like existing firms. The long-run supply curve is horizontal when the market has free entry and exit; there are a large number of firms with identical costs and input prices are constant. This is a more common scenario than the constant-cost industry.

13-1: Define monopoly.

13-1: Define monopoly. •In monopoly, the firm and "the industry" are one and the same. Consequently, the firm sets the price of the good because the firm faces the industry demand curve and can pick the most profitable point on that demand curve. •Monopolists are price makers (rather than price takers) that try to pick the price that will maximize their profits. •Monopoly is a matter of degree. •Many firms have some monopoly power, but it is usually limited. •The ownership of key resources is rarely the source of monopoly power. •Many goods are traded internationally, and resources are owned by many different people around the world. •It is uncommon that a firm would control the worldwide supply of a resource that did not have a close substitute.

13-2: Describe and explain why marginal revenue is less than the price in the monopoly model.

13-2: Describe and explain why marginal revenue is less than the price in the monopoly model. •The demand curve for a perfectly competitive firm is perfectly elastic; competitive firms can sell all they want at the market price. The firm is a price taker. •The demand curve for a monopolist is downward sloping; if the monopolist raises its price, it will lose some but not all of its customers. The monopolist is a price maker. •Because a monopoly has no close competitors, it can change the product price by adjusting its output. •In Exhibit 2, we see the price of the good, the quantity of the good, the total revenue, which is the quantity sold times the price (TR = P ´ Q), and the average revenue, that is, the amount of revenue the firm receives per unit sold (AR = TR ¸Q). •The average revenue is simply the price per unit sold, which is exactly equal to the market demand curve, and the marginal revenue (MR)—the amount of revenue the firm receives from selling an additional unit—is equal to DTR ¸DQ. •To sell more output, the monopolist must accept a lower price on all units sold—the price effect; the monopolist receives additional revenue from the new unit sold—the output effect, but less revenue on all the units it was previously selling. •Thus, the marginal revenue curve for the monopolist always lies below the demand curve. •Area b in (a) represents the marginal revenue from an extra unit of output (q + 1) for the firm in perfect competition. The competitive firm's marginal revenue (area b) is equal to the market price, P1 (P1 ´ 1). Area b is the gain in total revenue from the output effect and area c is the loss in total revenue from the price effect. Notice there is no price effect for the perfectly competitive firm. •The marginal revenue for the monopolist is the change in total revenue (b - c) for one more unit of output (Q + 1); this is less than the price, P2.

15.3 Define and explain price leadership, mergers, and entry deterrence.

15.3 Define and explain price leadership, mergers, and entry deterrence. •Price leadership is most likely to develop when one firm, the so-called dominant firm, produces a large portion of the total output. •The dominant firm sets the price that maximizes its profits and the smaller firms, which would have little influence over price anyway, act as if they are perfect competitors—selling all they want at that price. •When entry to an industry is easy, excess profits attract newcomers. New firms may break down existing price agreements by undercutting prices in an attempt to establish themselves in the industry. In response, older firms may reduce prices to avoid excessive sales losses. •Because new firms would likely have higher costs than existing firms, the lower price may not be high enough to cover their costs. However, once the threat of entry subsides, the market price may return to the profit-maximizing price, P*. •The Justice Department and the Federal Trade Commission (FTC) both prefer to use a measure called the Herfindahl-Hirshman Index (HHI) rather than concentration ratios. •According to the Justice Department, an HHI below 1,500 is very competitive, an HHI between 1,500 and 2,500 is somewhat competitive, and an HHI over 2,500 indicates an oligopoly.

13-4: Describe and explain the inefficiencies of monopoly.

13-4: Describe and explain the inefficiencies of monopoly. •Society as a whole does not lose additional amounts due to the monopoly profits. The profits are transferred from consumers to producers, with the monopolists (stockholders and workers) gaining at the expense of consumers who pay a higher price for a monopolist's product than they would if the product had been produced by a perfectly competitive firm. •In short, the monopolist causes a decrease in consumer surplus, an increase in producer surplus, and a deadweight loss (a reduction in economic efficiency). •If the monopolist has to pay a lobbyist to protect its government-created monopoly, the monopolist may have to use some of its monopoly profits to convince lawmakers to keep its monopoly in business. If this is the case, the social loss will include the deadweight loss from producing too little output and the monopolist profits lost from protecting the monopoly. •There are relatively few true monopolies, so the size of any deadweight loss is probably very small. Most economists believe that it is less than 1 percent of the total production of the United States. That is, if every industry were perfectly competitive (P = MC), the gain in total output would be less than 1 percent. •Even the monopolist wants more profits, and any innovation that lowers costs or expands revenues creates profits for the monopolist. •In addition, because patents expire, a monopolist may be expected to innovate in order to obtain additional patents and preserve its monopoly power. Therefore, the incentive to innovate might well exist in monopolistic market structures.

13-5: Describe how monopoly regulation influences output, price, economic profit, and efficiency.

13-5: Describe how monopoly regulation influences output, price, economic profit, and efficiency. Antitrust laws have costs as well as benefits. Companies may merge to lower costs and gain efficiency. That is, the new merged firm may be more efficient than the firms were individually, so the government may not oppose the merger .•The marginal cost (MC) curve is less than the average total cost (ATC) curve for the natural monopolist as the average cost falls. •If the monopolist is unregulated, it could produce a relatively small level of output, QM, at a relatively high price, PM, and make an economic profit. •If regulators require the natural monopolist to use marginal cost pricing, the monopoly will lose money because PMC is less than ATC. •Average cost pricing (at point B) would permit firms to make a normal rate of return, where PAC = ATC. •The monopolist's unregulated output at point A is not optimal from society's standpoint, and the optimal output at point C is not feasible without subsidy.

14.1 Define a monopolistically competitive market. Monopolistic competition has features in common with both monopoly and perfect competition

14.1 Define a monopolistically competitive market. Monopolistic competition has features in common with both monopoly and perfect competition. As with monopoly, individual sellers in monopolistic competition believe that they have some market power. But monopolistic competition is probably closer to competition than monopoly. •Because of the long-run price and output behavior, and zero long-run economic profits, monopolistic competition is similar to perfect competition. •The monopolistically competitive firm produces a product that is different (that is, differentiated rather than identical or homogeneous) from others, which leads to some degree of monopoly power. •Unlike firms with a true monopoly, however, competition occurs among the many firms selling similar (but not identical) brands. •For example, a restaurant may change prices or improve service without a retaliatory move on the part of other competing restaurants because there are so many rivals they tend to get lost in the crowd. •That is, restaurants, drug stores, auto repair shops, and dry cleaners tend to act independently in metropolitan areas.

14.2 Describe and explain how price and output are determined in a monopolistically competitive market.

14.2 Describe and explain how price and output are determined in a monopolistically competitive market. Determining whether a firm is generating economic profits, economic losses, or zero economic profits at the profit-maximizing level of output, q*, can be done with the same three-step method used for perfect competition and monopolies. •In (a) the firm is making short-run economic profits because the firm's total revenue (P * 3q * 5 $800) at output q* is greater than the firm's total cost (ATC 3q * 5 $700). Because the firm's total revenue is greater than total cost, the firm has a total profit of $100: TR2TC 5 $800 2 $700. •In (b) the firm is incurring a short-run economic loss because at q*, price is below average total cost. At q*, total cost (ATC 3q *5 $800) is greater than total revenue (P * 3q * 5 $700), so the firm incurs a total loss (TR2TC 5 $700 2 $800 52$100). The firm's demand curve becomes relatively more elastic due to each firm's products having more substitutes (more choices for consumers). At the profit-maximizing output level, the firm earns zero economic profits. •The process of entry and exit will continue until all firms in the industry are making zero economic profits. •When the market reaches this long-run equilibrium, no firms have an incentive to enter or exit. **But what if competitors are bought out early, or patent laws maintain the unique status, are we just not seeing firms enter or exit because of this? •Long-run equilibrium occurs at q*, where DLR = ATC and MRLR = MC.

14.3 Describe and explain the difference between monopolistic competition and perfect competition.

14.3 Describe and explain the difference between monopolistic competition and perfect competition. Each of the many firms in monopolistic competition produces a volume of output less than what would allow the lowest cost. As a result, each fails to reach productive efficiency. The gains from product diversity can be large and may easily outweigh the inefficiency costs. Remember, firms differentiate their products to meet consumers' demand.

15.1 Define oligopoly.

15.1 Define oligopoly. •Oligopoly is likely to occur whenever the number of firms in an industry is so small that any change in output or price or quality of a product by one firm appreciably impacts the sales of competing firms. •In comparison with other market structures, oligopoly is quite different. In perfect competition, the firm sells all it wants at the market price. A monopolist does not have to worry about its competitors because a pure monopolist is the industry. Oligopoly is different, with firm managers acting more like baseball coaches or chess players, predicting and reacting to the moves made by others. Economies of large-scale production make operation on a small scale more costly, ceteris paribus.

9-1: Explain what kind of taxes Americans pay and where the money goes.

9-1: Explain what kind of taxes Americans pay and where the money goes. •Government's role in the economy increased markedly during World War II. •From 1950 to 1975, government expenditures grew slowly from about 25 percent of GDP to 33 percent GDP. •Government expenditures increased sharply with the recession that began in 2008. •By 2009, government expenditures as a percent of GDP reached a peacetime record.•The largest category and the fastest growing category of federal spending is transfer payments (such as Social Security, Medicare, Medicaid, and the Affordable Care Act). •The second largest federal expenditure category is national defense: 18 percent of federal expenditures. •Mandatory spending is government spending that is committed for the long run, such as Social Security and Medicare. •Discretionary spending includes programs that can be altered on an annual basis when the government proposes a new budget. •The final category is net interest. •Roughly 80 percent of tax revenues come in the form of income taxes on individuals and social insurance taxes (payroll taxes), which are levied on work-related income, that is, payrolls. •Social insurance taxes are used to pay for Social Security and compulsory insurance plans such as Medicare. •Payroll taxes are split between employees and employers. •The Social Security share of federal taxes has steadily risen as the proportion of the population over age 65 has grown and as Social Security benefits have been increased. •The U.S. federal government relies more heavily on income-based taxes than nearly any other government in the world. Most other governments rely more heavily on sales taxes, excise taxes, and customs duties. •Other taxes, on such items as gasoline, liquor, and tobacco products, provide for a small proportion of government revenues (both federal and state). •Customs duties, estate and gift taxes, and some minor miscellaneous taxes and user charges also generate revenues. ••Taxes greatly change the "take home" income of Americans. •Progressive taxes, of which the federal income tax is one example, are designed so that those with higher incomes pay a greater proportion of their income in taxes. •A progressive tax is one tool that the government can use to redistribute income. Certain types of income are excluded from income for taxation purposes, such as interest on municipal bonds and income in kind—food stamps or Medicare, •A payroll (FICA) tax puts "a wedge" between the wage firms pay and the wage workers receive. •The wedge does not depend on whether the tax was imposed on the buyers or sellers. But the effects depend on elasticity of supply and demand. •If, as most labor economists believe, the supply of labor is less elastic than the demand for labor, the worker (not the firm) bears most of the burden of the payroll tax. Employers pass it on in the form of lower wages. •Example: Say the government taxed individuals 12 percent of the first $50,000 of income and 50 percent of all income above $50,000. If an individual made $70,000 per year, she would pay 12 percent of $50,000 (0.12 × $50,000 = $6,000) plus 50 percent of $20,000 (0.50 × $20,000 = $10,000). So the average tax rate is $16,000/$70,000, or roughly 22.86 percent. But the marginal tax rate is 50 percent. That is, any additional work will be taxed at 50 percent. •The marginal tax rate is a better indicator than the average rate in predicting how people will save, work, and invest.•With a flat tax, a household could simply report its income, multiply it by the tax rate, and send in the money. Because no deductions are involved, the form could be a simple page! But most flat tax proposals call for exempting income to a certain level—say, the poverty line. •The advantages of the flat tax are that all of the traditional exemptions, like entertainment deductions, mortgage interest deductions, business travel expenses, and charitable contribution deductions, would be out the door, along with the possibilities of abuses and misrepresentations that go with tax deductions. Taxpayers could fill out tax returns in the way they did in the old days, in a space about the size of a postcard. Advocates argue that the government could collect the same amount of tax revenues, but the tax would be much more efficient, as many productive resources would be released from looking for tax loopholes to doing something productive from society's standpoint. •Of course, some versions of the flat tax will hurt certain groups. Not surprisingly, realtors and home owners, who like the mortgage interest deductions, and tax accountants, who make billions every year preparing tax returns, will not be supportive of a flat tax with no deductions. •Decisions made by buyers and sellers are different from what they would be without the tax. Taxes can be inefficient because they may lead to less work, less saving, less investment, and lower output. •Economists spend a lot of time on issues of efficiency, but policy makers (and economists) are also concerned about other goals, such as fairness. •Income redistribution through taxation may also lead to greater productivity for low-income workers through improvements in health and education. •Even though what is fair to one person may not be fair to another, most people would agree that we should have a fair tax system based on either ability to pay or benefits received. •While economists cannot determine the best balance between efficiency and equity, they can at least provide input on the trade-offs between efficiency and equity when they evaluate and design tax policies.•In Exhibit 6, we see three different tax systems. Under each tax system the rich pay more than the poor. •Under the progressive system, the high-income taxpayers pay the largest fraction of their income and the largest amount. •In a proportional tax system, each taxpayer would pay the same fraction of their income. Wealthier taxpayers still pay more. •Under a regressive tax system, the high-income taxpayers would pay a smaller fraction of their income than in either of the other systems, but they still pay a larger absolute amount. •All three of these systems deal with vertical equity, but no one system will be considered fair to everyone. •In Exhibit 7, we see data for different income groups' share in the federal tax burden. We break the groups into quintiles from lowest to highest and also look at the richest 1 percent of income earners. •Column 2 shows the share of total income earned, that is, the percentage of total income earned by each income group. •Column 3 shows the percentage of all federal taxes (including Social Security and Medicare) paid by each income group. The last column shows the average federal tax rate for each group. •In column 3, we can see that those taxpayers who have income in the highest 20 percent pay 66.7 percent of the federal taxes—which is greater than the 52.1 percent of the income they earn. The richest 1 percent earn over 15 percent of the income and pay over 25 percent of the federal taxes. In addition, many individuals in the lowest 20% of income, especially those with children, qualify for tax credits, so they actually pay a negative tax. •One example of the benefits-received principle is the gasoline tax: the more miles one drives on the highway, the more gasoline used and the more taxes collected. The tax revenues are then used to maintain the highways. •Because we collectively consume national defense, it is not possible to find out who benefits and by exactly how much.

15.4 Use game theory to explain strategic decisions. Each firm will react to the price, quantity, and quality of rival firms.

15.4 Use game theory to explain strategic decisions. Each firm will react to the price, quantity, and quality of rival firms. •Enforcement costs are usually too high to keep all firms from cheating on collusive agreements, and antitrust laws forbid firms in the U.S. from colluding. •Consequently, most games are non-cooperative games, in which each firm sets its own price without consulting other firms. Firms in oligopoly often behave like the prisoners in the prisoners' dilemma, carefully anticipating the moves of their rivals in an uncertain environment. The sentence depends on the prisoner's decision to confess or remain silent and on the decision made by the other prisoner. When the prisoners follow their dominant strategy and confess, both will be worse off than if each had remained silent—hence, the "prisoners' dilemma." •If both firms defect by lowering their prices from the level of joint profit maximization, both will be worse off than if they had colluded, but at least each will have minimized its potential loss if it cannot trust its competitor. •This situation is the oligopolists' dilemma. •In one-shot prisoners' dilemma games, self-interest prevents cooperative behavior and leads to an inferior joint outcome for the participants. •However, cooperation is not impossible because most oligopolistic interactions are not one-shot games. Instead, they are repeated games. •You do what your opponent did in the previous round. This type of response tends to elicit cooperation rather than competition. •In the tit-for-tat game, both firms will be better off if they stick to the plan rather than cheating—that is, failing to cooperate. whether it is a positive or negative network externality may depend on the consumer's tastes and preferences.

16.2 Describe and explain how the equilibrium wage and level of employment are determined in labor markets.

16.2 Describe and explain how the equilibrium wage and level of employment are determined in labor markets. •At any wage higher than W*, the quantity of labor supplied exceeds the quantity of labor demanded, resulting in a surplus of labor. In this situation, unemployed workers are willing to undercut the established wage in order to get jobs, pushing the wage down and returning the market to equilibrium. •At a wage below the equilibrium level—at W2, for example—quantity demanded exceeds quantity supplied, resulting in a labor shortage. In this situation, employers are forced to offer higher wages in order to hire as many workers as they would like. •Note that only at the equilibrium wage are both suppliers and demanders able to exchange the quantity of labor they desire. •At wages above the equilibrium wage—at W1, for example—quantity supplied exceeds quantity demanded, and potential workers are willing to supply their labor services for an amount lower than the prevailing wage. •At a wage lower than W*—at W2 , for example—potential demanders overcome the resulting shortage of labor by offering workers a wage greater than the prevailing wage. •In both cases, wages are pushed toward the equilibrium value. •The labor demand curve can shift right if demand increases or left if demand decreases. •Workers can increase productivity if they have more capital or land with which to work, if technological improvements occur, or if they acquire additional skills or experience (human capital). However, if labor productivity falls, then marginal product will fall, and the demand curve for labor will shift to the left. •The greater the demand for the firm's product, the greater the firm's demand for labor or any other variable input used in producing that good (the derived demand discussed earlier). And a decrease in the demand for a firm's product will decrease the demand for that resource. •The change in the price of one factor of production can change the demand for another. If the price of labor rises, it can cause an increase in the demand for capital—perhaps substituting robots for workers. If there is an increase in the price of tractors (capital), this increases the cost of producing wheat and reduces the demand for wheat farmers (labor). •If new workers enter the labor force, the labor supply curve will shift to the right. Of course, if workers leave the country—and thus the labor force—or the relevant population declines, the supply curve will shift to the left. •If people become willing to work more hours at a given wage (due to changes in worker tastes or preferences), the labor supply curve will shift to the right. If they become willing to work fewer hours at a given wage, the labor supply curve will shift to the left. •Increases in income from other sources than employment can cause the labor supply curve to shift to the left. For example, if you just won $20 million in your state's Super Lotto, you might decide to take yourself out of the labor force. Likewise, a decrease in nonwage income might push a person back into the labor force. •Amenities associated with a job or location—such as good fringe benefits, safe and friendly working conditions, a child-care center, and so on—will make for a more desirable work environment. If job conditions deteriorate, the labor supply will decrease, shifting the labor supply curve to the left. •Today, an example of monopsony power would include the only auto repair shop in a small town—if workers do not want to move. •In some professional sports, players are drafted and are assigned to teams until they are eligible to be free agents (after 6 years in baseball). Because other teams cannot compete for these players, the outcome is lower salaries, as teams exercise their monopsony power. •However, for the most part, in most occupations, many potential employers in many different locations compete for workers.

16.3 Explain how labor unions impact labor markets.

16.3 Explain how labor unions impact labor markets. •Several possible reasons explain the recent decline in labor union membership. First, a shift of U.S. workers shows them moving out of manufacturing into the service sector, where unions typically have a smaller presence. •Second, in recent years the federal government deregulated heavily unionized industries such as trucking, railroad, and the airline industry. This deregulation led to increased competition at home and abroad and, consequently, firms hired fewer expensive union workers. •Third, global competition means many firms must close down plants and lay off workers. This "downsizing" makes it more difficult for unions to gain concessions from firms. •Fourth, the federal government passed new laws regarding safer workplaces. •Featherbedding is the practice of hiring workers who may not be needed (and by extension increasing union membership). Taft-Hartley also prohibited this practice. •In small shops or on farms, workers usually have a close relationship with an owner/employer; but in larger enterprises, however, the workers may only know a supervisor and have no direct contact with either the owner or upper management. •Workers realize that acting together, as a union of workers, they have more power in the collective bargaining process than they would acting individually. •Through restrictive membership practices and other means, a union can reduce the labor supply in its industry, thereby increasing the wage rate they can earn (from W1 to W2) but reducing employment (from Q1 to Q2). •Workers unable to get jobs in the union sector join the nonunion sector, and the supply of labor in the nonunion sector increases (from Q1 to Q2), lowering wages in those industries (from W1 to W3).

17-1: Discuss the income distribution in the United States.

17-1: Discuss the income distribution in the United States. Exhibit 1 shows a breakdown of annual family income by groups of five (or quintiles): the bottom fifth, the second fifth, the third fifth, the fourth fifth, and the top fifth, as well as the top 5 percent. •Exhibit 2 illustrates the changing distribution of measured income in the United States since 1935. •The proportion of income received by the richest Americans (top 5 percent) declined sharply after 1935 but has been edging back up since the 1980s. •The proportion received by the poorest Americans (the lowest 20 percent) has remained virtually unchanged since 1935. •Most of the observed changes occurred between 1935 and 1950, probably reflecting the impact of the Great Depression and new government programs in the 1930s, as well as World War II. •From 1950 to 1980, there was little change in the overall distribution of income. •Two significant changes have occurred since the 1980s: The lowest one-fifth of families have seen their share of measured income fall from 5.3 percent to 3.7 percent of all income, and the top one-fifth of families have seen their share of measured income rise from 41.1 percent to 49.2 percent of all income. •The Lorenz curve is a graphical presentation of the distribution of income. •The horizontal axis measures the cumulative percentage of households, and the vertical axis measures the cumulative percentage of income. •The 45-degree line represents the line of perfect income equality. •The further the Lorenz curve is from the line of perfect income equality, the more unequal is the distribution of income. •The Gini coefficient is found by dividing area A by area A + B. •A Gini coefficient, as it approaches 1, indicates greater inequality. The Gini coefficient is equal to the area below the line of perfect equality (0.5 by definition) minus the area below the Lorenz curve, divided by the area below the line of perfect equality. In other words, it is double the area between the Lorenz curve and the line of perfect equality. •College graduates' average earnings are much greater than those of high school graduates. Their unemployment rates are much lower, too. •In addition, the differences in wages between high school graduates and college graduates has widened considerably over the last 35 years. •Employers are demanding more educated workers with higher marginal products and suppliers of labor (workers) are willing to invest in education because of the reward (higher wages) of investing in higher education. •Exhibit 6, constructed with data from the Human Development Report, shows that income inequality is greater in the United States and the United Kingdom than in Norway and Germany. •Norway's ratio of 3.8 means that the richest 20 percent of the population makes 3.8 times as much income as the bottom 20 percent. •In South Africa, the richest 20 percent of the population make 27.9 times as much income as the bottom 20 percent. •The table shows that some of the greatest disparities in income are found in developing countries such as South Africa and Brazil. •Exhibit 6, constructed with data from the Human Development Report, shows that income inequality is greater in the United States and the United Kingdom than in Norway and Germany. •Norway's ratio of 3.8 means that the richest 20 percent of the population makes 3.8 times as much income as the bottom 20 percent. •In South Africa, the richest 20 percent of the population make 27.9 times as much income as the bottom 20 percent. •The table shows that some of the greatest disparities in income are found in developing countries such as South Africa and Brazil.

17-3: Discuss the different types of discrimination and whether or not differences in earnings reflect discrimination or differences in productivity.

17-3: Discuss the different types of discrimination and whether or not differences in earnings reflect discrimination or differences in productivity. •Females' less-than-proportionate presence in the labor force might be viewed as a matter of choice; some women may prefer to be engaged in full-time household production rather than work outside the home. •On the other hand, others argue that this attitude reflects ingrained sexism; no inherent reason says that the adult male member of the household should not stay at home with the kids as much as the female member. •In any case, the proportion of women to men in the labor force has dramatically increased over time—women were only 38 percent of the labor force in 1970, and now women are more than 47 percent. •The American Association of University Women (AAUW) concluded in another study that for full-time workers with college degrees, women are paid 76 cents for every dollar men are paid.•The nondiscriminating firm can hire the unfavored, but equally competent workers and have a cost advantage over firms that discriminate. •This cost advantage may allow the nondiscriminating firm to undercut its discriminating competitors' prices and either force them out of business or make them change their hiring practices.

17-4: Define poverty and discuss remedies to address poverty.

17-4: Define poverty and discuss remedies to address poverty. •The amount of poverty fell steadily in the 1960s, was steady in the 1970s, and rose during the recession in the early 1980s. •The poverty rate then fell slightly during the rest of the 1980s and rose again during the recessions of 1990-1991 and the recessions of 2001 and 2008-2009. •The poverty rate in 2016 was 12.7 percent, down from 15 percent in 2012. •The poverty rate in 2011-12 was the highest since 1993. •Transfer payments are payments made to individuals for which goods or services are exchanged. They come in the form of in-kind transfers—direct transfers of goods or services such as food stamps, housing subsidies, and Medicaid—and cash transfers of direct cash payments such as welfare, Social Security, and unemployment compensation. All three of these social insurance programs are event based—job loss, old age, or disability. •A person or a family must prove they have a low enough income to qualify for welfare programs. Medicaid, a program designed to give health care to the poor, and the food stamp program are examples. Other welfare programs include Supplemental Security Income (SSI) and Temporary Assistance for Needy Families (TANF). •The Earned Income Tax Credit (EITC) is a program that allows the working poor to receive income refunds that can be greater than the taxes they paid during the last year.

18.1 List and describe the three major economic goals

18.1 List and describe the three major economic goals •Achieving a high rate of economic growth means increasing output per person over time. •Real gross domestic product (RGDP) measures output or production. •Real indicates that the output is adjusted for the general increase in prices over time, whereas gross domestic product (GDP) is defined as the total value of all final goods and services produced in a given period, such as a year or a quarter.

18.2 Define the unemployment rate and the labor force participation rate and understand how they are computed.

18.2 Define the unemployment rate and the labor force participation rate and understand how they are computed. •The labor force is the number of people over the age of 16 who are available for employment and willing to work. •The civilian labor force figure excludes people in the armed services and those in prisons or mental hospitals. •Other people regarded as outside the labor force include homemakers, retirees, and full-time students. •These groups are excluded from the labor force because they are not considered currently available for employment. •By far, the worst employment downturn in U.S. history occurred during the Great Depression, which began in late 1929 and continued until 1941. Unemployment rose from only 3.2 percent of the labor force in 1929 to more than 20 percent in the early 1930s, and double-digit unemployment persisted through 1941. •Unemployment since 1960 ranged from a low of 3.5 percent in 1969 to a high of 10.8 percent in 1982. •The financial crisis of 2008 led to unemployment rates of 9.4 percent by mid-2009. •Unemployment in the worst years is two or more times what it is in good years. According to the Bureau of Labor Statistics, the four main categories of unemployed workers are job losers (those who have been temporarily laid off or fired), job leavers (those who have quit their jobs), reentrants (those who worked before and are reentering the labor force), and new entrants (those entering the labor force for the first time—primarily teenagers). •In the short run, a reduction in unemployment may come at the expense of a higher rate of inflation, especially if the economy is close to full capacity, where resources are almost fully employed. •Moreover, trying to match employees with jobs can quickly lead to significant inefficiencies because of mismatches between a worker's skill level and the level of skill required for a job. •Underemployment occurs when the skills of the employee are higher than those necessary for the job. •Another source of inefficiencies is placing employees in jobs beyond their abilities. •The number of women working shifted dramatically, reflecting the changing role of women in the workforce. •Some factors contributing to this were changing social attitudes, federal legislation outlawing discrimination, and the decline in average household size.

18.3 Identify and discuss the different types of unemployment.

18.3 Identify and discuss the different types of unemployment. •While the unemployed are looking, they are frictionally unemployed. •Keep in mind longer job searches are not all bad: Job seekers who spend more time might find better jobs where they are happier and more productive and firms may find workers with the skills that better match their needs. •Short-run unemployment is unavoidable. It is caused by changes in people's lives, such as moving from one place to another, or temporary changes in the economy, such as a firm downsizing. It generally only lasts several weeks. •A certain amount of frictional unemployment may be good for the economy because workers who are temporarily unemployed may find jobs that are better suited to their skill level. Even though the amount of frictional unemployment varies somewhat over time, it is unusual for it to be much less than 2 percent of the labor force. •Actually, frictional unemployment tends to be somewhat greater in periods of low unemployment, when job opportunities are plentiful. •This high level of job opportunity stimulates mobility, which, in turn, creates some frictional unemployment. •The quantity of unemployed workers conceivably could equal the number of job vacancies, with the unemployment persisting because the unemployed lack the appropriate skills. •Most economists believe that structural unemployment comes from automation (labor-saving capital) and permanent changes in demand. •Structural unemployment is more long term and serious than frictional unemployment because these workers do not have marketable skills. During a recession many firms find their sales falling and cut back on production. As production falls, firms start laying off workers. •Most economists believe that the median, or "typical," annual unemployment rate is somewhere between 4.5 and 5 percent. •In short, the natural rate of unemployment is the unemployment rate when the economy is experiencing neither a recession nor a boom. •The natural rate of unemployment is also called the full-employment rate of unemployment. •The natural rate of unemployment can change over time as technological, demographic, institutional, and other conditions vary. •When all the resources of an economy—labor, land, and capital—are fully employed, the economy is said to be producing its potential output. •Literally, full employment of labor means that the economy is providing employment for all who are willing and able to work with no cyclical unemployment. •It also means that capital and land are fully employed. •It does not mean the economy will always be producing at its potential output of resources.

18.4 Describe the different reasons for unemployment.

18.4 Describe the different reasons for unemployment. •The labor market is in equilibrium where the quantity demanded of labor is equal to the quantity supplied of labor, at WE and QE. •If the wage persists above the equilibrium wage, a surplus of labor or unemployment exists. •That is, at W1, the quantity of labor supplied is greater than the quantity of labor demanded; we can think of this surplus of labor as unemployment. Because minimum wage-earners, a majority of whom are 25 years or younger, are a small portion of the labor force, most economists believe the effect of minimum wage on unemployment is small in the United States. •If the bargaining raises the union wage above the equilibrium level, the quantity of union labor demanded will decrease, and the quantity of union labor supplied will increase—that is, union workers will be unemployed. •The union workers who still have their jobs will be better off, but some who are equally skilled will be unemployed and will either seek nonunion work or wait to be recalled in the union sector. •Many economists believe that is why wages are approximately 15 percent higher in union jobs, even when nonunion workers have comparable skills. •Even though wages in the union sector are typically higher than the market wage, the presence of unions does not necessarily lead to greater unemployment because workers can find jobs in the nonunion sector. •Less than 10 percent of private sector jobs are unionized. •It is costly for firms to pay an efficiency wage, and firms must monitor their workers' efforts. •If enough firms resort to paying the efficiency wage rate, it leads to a surplus of workers who want jobs and cannot find them. •This, like a binding minimum wage, leads to unemployment. •Without unemployment insurance, a job seeker would be more likely to take the first job offered, even if the job did not match the job seeker's preferences or skill levels. •A longer job search might mean a better match, but it comes at the expense of lost production and greater amounts of tax dollars. •Most economists believe that eliminating unemployment insurance could reduce unemployment, but they disagree on whether economic well-being is reduced or enhanced by a change in the policy. •When a skill-biased technical change occurs, it increases the productivity of skilled workers. •Consequently, the increase in demand for skilled workers shifts the curve from D1 to D2 in (a). •The increase in demand leads to higher real wages from W1 to W2 and a greater quantity of skilled labor, Q1 to Q2. •In (b) we see a reduction in demand for low-skilled workers from D1 to D2 because these workers cannot use the new technology that increases productivity. •The result is lower wages, W1 to W2, and lower employment, Q1 to Q2.

18.6 Explain and discuss economic fluctuations. In a growing economy, business downturns are temporary reversals from a long-term trend of economic growth.

18.6 Explain and discuss economic fluctuations. In a growing economy, business downturns are temporary reversals from a long-term trend of economic growth. The expansion phase usually is longer than the contraction phase; and in a growing economy, output (real GDP) will rise from one business cycle peak to the next. •The length of any given business cycle is not uniform. •Because it does not have the regularity that the term cycle implies, economists often use the term economic fluctuationrather than business cycle. •In addition, economic fluctuations are almost impossible to predict.

19.1 Define gross domestic product (GDP) and explain why GDP equals both aggregate expenditures and aggregate income.

19.1 Define gross domestic product (GDP) and explain why GDP equals both aggregate expenditures and aggregate income. National income accounting was such an important accomplishment that one of the first Nobel prizes in economics was given to the late Simon Kuznets, a pioneer of national income accounting in the United States.•Underlying the calculations are the various equilibrium prices and quantities for the multitude of goods and services produced. •Recall that in microeconomics, we measured production in tons of wheat or quantity of cars purchased. However, when we measure GDP, we can't add tons of wheat with gallons of gasoline. That would be very messy. Instead, we measure the value of the production of the goods and services in dollars. For example, suppose U.S. Steel Corporation produces some steel that it sells to General Motors Corporation for use in making an automobile. If we counted the value of steel used in making the car as well as the full value of the finished auto in the GDP, we would be engaging in double counting—adding the value of the steel in twice, first in its raw form and second in its final form, the automobile. •Households buy goods and services from firms through the product market. •Firms use their revenue from sales to pay for the inputs (the factors) of production: land, labor, capital, and entrepreneurial activity. These factors are paid wages, rent, interest, and the residual amount, which is profit. •In the circular flow model of income and expenditures, we can measure GDP either by calculating the total value of expenditures or the total value of aggregate income because, for the economy as a whole, expenditures must equal income. •GDP equals the total amount spent by households in the market—to buy goods and services, to pay taxes, and to save. •To produce goods and services, the firm uses the factors of production (labor, land, capital, and entrepreneurial activity), and it pays these factors wages, rent, interest, and profit. •These payments are total income, which is also equal to GDP. The government and firms borrow the funds that flow into the financial system from households.

19.2 Describe the expenditure approach and the value-added approach to measuring GDP.

19.2 Describe the expenditure approach and the value-added approach to measuring GDP. •Food and clothing are examples of nondurable goods, as are such quickly consumable items as drugs, toys, magazines, soap, razor blades, and so on. •Automobiles, appliances, stereos, and furniture are included in the durable goods category. •In every year since 1929, when GDP accounts began to be calculated annually, consumption has been more than half of total expenditures on goods and services (even during World War II). •It is common for people to say that they have invested in stocks, meaning that they have traded money for pieces of paper, called stock certificates, that say they own shares in certain companies. Such transactions are not investments as defined by economists (i.e., increases in capital goods), even though they might provide the enterprises selling the stocks the resources to buy new capital goods, which would be counted as investment purchases by economists. •Government purchases includes the payment of salaries to government employees. •Also, the government makes payments to the private firms with which it contracts to provide various goods and services, such as highway construction companies and weapons manufacturers. •Transfer payments (such as Social Security, farm subsidies, and welfare) are not included in government purchases because this spending does not go to purchase newly produced goods or services but is merely a transfer of income among the country's citizens. •Every business needs inventory and, other things being equal, the greater the inventory, the greater the amount of goods and services that can be sold to a consumer in the future. Thus, inventories are considered a form of investment. •Each firm involved in the production of a good adds value to the good. •For example, suppose a coffee grower sells $.50 of green coffee beans to a coffee roaster. Assuming that there are no other inputs the coffee grower used besides his efforts, then the grower's value added is $.50. •The roaster then takes the green coffee beans and transforms their color, taste, and smell and then packs it and sells it to the shipper and wholesaler. The roaster's value added is $.75, the difference between the price it paid for the coffee beans ($.50) and the price it sells its roasted and packed coffee beans ($1.25). •The shippers' and wholesalers' value added is $.75. It is the difference between the price it pays for roasted and packed coffee ($1.25) and the price it sells the coffee to Buck's Coffee House ($2). •Lastly, Bucks Coffee House's value added is the difference between the price it pays for the shipped coffee ($2) and the price it can sell a pound of coffee at the store ($3).

19.3 Explain how the Bureau of Economic Analysis (BEA) computes gross national product (GNP), net national product (NNP), national income (NI), personal income (PI), and disposable personal income.

19.3 Explain how the Bureau of Economic Analysis (BEA) computes gross national product (GNP), net national product (NNP), national income (NI), personal income (PI), and disposable personal income. •The difference between net income of foreigners and GDP is called gross national product (GNP). •For example, we would add to GDP the profits sent back to the United States from Walmart stores in Canada and Mexico. However, the profits Toyota earns in the United States are sent back to Japan and are subtracted from U.S. GDP, so GNP becomes the income earned worldwide by U.S. firms and residents. •Indirect business taxes include sales tax, excise taxes, and gasoline taxes. •For example, with sales tax, an ink cartridge for your printer might cost $30.00 plus a tax of $2.70, for a total of $32.70. The retail distributor, the ink cartridge producer, and others will share $30 in proceeds, even though the actual equilibrium price is $32.70. •In other words, the output (ink cartridge) is valued at $32.70, even though recipients only get $30.00 in income. • These are all payments to the factors of production. For example, sales taxes and depreciation are non-income items that are included in the value of the goods and services produced but are not income directly received by households.

19.4 Explain how the BEA measures real GDP.

19.4 Explain how the BEA measures real GDP. For example, a dollar in 1979 would certainly not buy as much as a dollar in 1970 because inflation caused the overall price level for goods and services increased. The "yardstick" used to determine GDP, the U.S. dollar, changed in value over this period. Once the price index has been calculated, the actual procedure for adjusting nominal, or current dollar, GDP to get real GDP is not complicated. For convenience, an index number of 100 is assigned to some base year. The base year is arbitrarily chosen—it can be any year. •To determine the real GPD, an index number of 100 needs to be assigned to some base year. •For example, in the above chart, to determine the real GDP for 2013, an index number of 100 is assigned to 2009. •In comparison, the GDP price index (or deflator) for 2013 is 106.487. •The increase in the figure means that prices were roughly 6.5 percent higher in 2013 than they were in 2009. •To correct the 2013 nominal GDP, we take the nominal GDP figure for 2013—$16,797.5 billion and divide it by the GDP price index (deflator) 106.590, which results in a quotient of 157.59 billion. We then multiply this number by 100, giving us $15,759 billion, which would be the 2013 real GDP in terms of the 2009 base year. •Economic growth is usually considered to have occurred anytime the real GDP per capita has risen. •If we do not take population growth into account, we can be misled by changes in real GDP values. •For example, in some less-developed countries in some periods, real GDP has risen perhaps 2 percent a year, but the population has grown just as fast. •In these cases, the real output of goods and services per person has remained virtually unchanged, but this would not be apparent in an examination of real GDP trends alone.

19.5 Discuss some of the deficiencies of GDP as a measure of economic welfare.

19.5 Discuss some of the deficiencies of GDP as a measure of economic welfare. •The single most important nonmarket transaction omitted from the GDP is the services of housewives (or househusbands). These services are not sold in any market, so they are not entered into the GDP; but they are nonetheless performed. •In less-developed countries, where a significant amount of food and clothing output is produced in the home, the failure to include nonmarket economic activity in GDP is a serious deficiency. •For example, illegal gambling and prostitution are not included in the GDP, leading to underreporting of an unknown magnitude. Likewise, cash payments made to employees "under the table" slip through the GDP net. •It also appears that a significant portion of this unreported income comes from legal sources, such as self-employment. To put leisure in the proper perspective, ask yourself whether you would rather live in Country A, which has a per capita GDP of $25,000 a year and a 30-hour work week, or Country B, with a $25,000 per capita GDP and a 50-hour work week. Most people would choose Country A. For example, the quality of a computer bought today differs significantly from one that was bought 10 years ago, but it will not lead to an increase in measured GDP. GDP is a measure of economic production, not a measure of economic well-being. However, greater levels of GDP can lead to improvements in economic well-being because society will now be able to afford better ed If higher real GDP per capita leads to higher living standards, then we should see a connection in data. ucation and health care and a cleaner, safer environment.

20.1 Define economic growth and explain how

20.1 Define economic growth and explain how increasing productivity can lead to sustained economic growth. Economists focus on per capita GDP to isolate the effect of increased population on economic growth. China and India have both experienced high rates of economic growth over the past 25 years, meaning that much of the world is now poorer than these two heavily populated countries. Because of differences in growth rates, some countries will become richer than others over time. The aggregate value of all goods and services produced in the economy must equal the payments made to the factors of production—wages and salaries paid to workers, rental payments to capital, profits to owners, and so on.

20.2 Explain why there are vastly different growth rates all over the world.

20.2 Explain why there are vastly different growth rates all over the world. More productive workers usually have more physical capital and education, and have benefitted from technology. Today's workers generally produce more output than workers in the past, and those in some countries, like the United States, generally produce more output than do workers in most other countries. Even in primitive economies, workers usually have some rudimentary tools to further their productive activity—for example, a worker digging a ditch with a shovel will be more efficient than a worker digging with only his or her hands. Because resources are scarce, in order to invest in new capital, society must sacrifice some current consumption. Holding the other determinants of output constant (human capital, natural resources, and technology), when the quantity of capital per worker rises, so does the amount of output per worker, but at a diminishing rate—the curve of the per-worker production function eventually becomes flatter as more capital per worker is added. If the economy has a very low level of capital, an extra unit of capital leads to a relatively large increase in output—a movement from point A to point B. If the economy already has a great deal of capital, an extra unit of capital leads to a relatively smaller increase in output—a movement from point C to point D Human capital may be a more important determinant of labor productivity than physical capital. Resources are not the whole story; for example, Japan and Hong Kong have had tremendous economic success despite having relatively few natural resources, while Brazil, which has abundant natural resources, has an income per capita that is relatively low compared to many developed countries. Technological change can lead to better machinery and equipment, increases in capital, and better organization and production methods, thus enabling workers to produce more even with the same amount of physical and human capital. Technological change can shift the per-worker production curve upward, producing more output per worker with the same amount of capital per worker.

20.3 Discuss the public policy options that can help an economy achieve greater economic growth.

20.3 Discuss the public policy options that can help an economy achieve greater economic growth. If individuals choose to consume all their income, they will have nothing left for saving, which businesses could use for investment purposes to build new plants or replace worn-out or obsolete equipment. It is in the best interest of the world to invest in developing countries, as greater global inequality can lead to political and economic unrest. One of the primary objectives of the World Bank and the International Monetary Fund (IMF) is to create greater economic balance by helping channel funds from more developed countries to developing countries, so that they can invest in more infrastructure, like sewers, roads, and schools. Some features of democracy, such as majority voting and special interest groups, may actually be growth retarding, but any society can implement policies that promote growth. A related special interest problem concerns favored districts with political clout that end up as the recipients of improved infrastructure, which may not be an efficient solution. Poor infrastructure is a major deterrent to growth. The concept of R&D is broad and can include new products, management improvements, production innovations, or simply learning by doing. Property rights give owners the legal right to keep or sell their properties, and without them, life would be a huge "free-for-all" where people could take whatever they wanted. At any given time, an individual has a choice between current work and investment activities such as education that can increase future earning power. Improvements in literacy stimulate economic growth by reducing barriers to the flow of information; when information costs are high, out of ignorance, many resources flow to or remain in uses that are unproductive. Moreover, education imparts skills that are directly useful in raising labor productivity. Countries that fail to enforce the rule of law, experience wars and revolutions, have poor education and health systems, and have low rates of saving and investment are not likely to grow very rapidly. In Western Europe and the United States, population growth rates are currently roughly 1 percent per year, while in some of the poorer African countries, they can approach 3 percent per year or more.

20.4 Discuss the benefits and costs of population growth.

20.4 Discuss the benefits and costs of population growth. The law of diminishing returns states that if you add variable amounts of one input (in this case, labor) to fixed quantities of another input (in this case, land), output will rise but by diminishing amounts (because as the land-labor ratio falls, less land is available per worker). If population were to expand faster than output, per capita output would fall; population growth would inhibit growth with a larger population. Although the law of diminishing returns is a valid concept, Malthus's other assumptions were unrealistic, and he implicitly neglected the potential for technological advances and ignored the real possibility that improved technology, often embodied in capital, could overcome the impact of the law of diminishing returns. Countries of all population sizes can have high (or low) standards of living. Some developing nations of the world are having substantial population increases, with a virtually fixed supply of land, slow capital growth, and few technological advances. The greater the population growth rate, the lower the capital stock per worker, which could lead to lower labor productivity, a reduction in one's standard of living, and slower economic growth. As women achieve better access to education and jobs, their opportunity costs of raising children rise and fertility rates fall. Some developing nations of the world are having substantial population increases, with a virtually fixed supply of land, slow capital growth, and few technological advances. The greater the population growth rate, the lower the capital stock per worker, which could lead to lower labor productivity, a reduction in one's standard of living, and slower economic growth. As women achieve better access to education and jobs, their opportunity costs of raising children rise and fertility rates fall.

Wealth Tax:

An annual tax on the net wealth a person holds — so, their assets minus their debts. Not just the income they bring in each year.

15.2

•Equilibrium price and quantity for a collusive oligopoly are determined according to the intersection of the marginal revenue curve (derived from the market demand curve) and the horizontal sum of the short-run marginal cost curves for the oligopolists. •As shown in Exhibit 1, the resulting equilibrium quantity is Q* and the equilibrium price is P*. •Collusion facilitates joint profit maximization for the oligopoly. If the oligopoly is maintained in the long run, it charges a higher price, produces less output, and fails to maximize social welfare, relative to perfect competition, because P* > MC at Q*.15.2 Describe and explain collusion and cartels. •The oligopolist's profit-maximizing decision is much more difficult than those in perfect competition or monopoly. •The oligopolist who fails to accurately predict Its rivals' behavior will lose profits. •From society's point of view, collusion creates a situation, like monopoly, where goods are overpriced and underproduced, with consumers losing out as the result of a misallocation of resources. •Cartels may lead to what economists call joint profit maximization: The firms in the cartel act together to achieve the same outcome as a monopolist, producing at a point where marginal revenue is equal to marginal cost for the industry. •With outright agreements—necessarily secret because of antitrust laws (in the United States, at least)—firms that make up the market will attempt to estimate demand and cost schedules and then set optimum price and output levels accordingly.

13-3: Explain how a monopolist determines its price and output.

•The monopolist maximizes profits at that quantity where MR = MC, that is, at QM. At QM the monopolist finds P* by extending a vertical line up to the demand curve and over to the vertical axis to find the price. •Rather than charging a price equal to marginal cost or marginal revenue at their intersection, however, the monopolist charges the price that customers are willing to pay for that quantity as indicated on the demand curve at PM. At Q1, MR > MC, and the firm should expand output. •At Q2, MC > MR, so the firm should cut back production. •Find where marginal revenue equals marginal cost and proceed straight down to the horizontal (quantity) axis to find QM, the profit-maximizing output level for the monopolist. •At QM, go straight up to the demand curve and then to the left to find the market price, PM. Once you have identified PM and QM, you can find total revenue at the profit-maximizing output level because TR = P ´ Q. •The last step is to find total cost. Again, go straight up from QM to the average total cost (ATC) curve and then left to the vertical axis to compute the average total cost at QM. If we multiply average total cost by the output level, we can find the total cost (TC = ATC ´ Q).