Principles of economics

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0.2 About openstax’s resources

0.3 Customization

0.6 About Principles of Economics

0.7 Coverage and scope

0.8 Pedagogical foundation

0.9 Questions for each level of learning

0.10 Updated art

0.11 About our team

0.12 Senior contributing author

0.13 Contributing authors

0.14 Expert reviewers

0.15 Ancillaries

1 The use of mathematics in principles of economics

2 Indifference curves

3 Present discounted value

4 The expenditure-output model

Welcome to economics!

1 What is economics, and why is it important?

1.1 The problem of scarcity

1.2 The division of and specialization of labor

1.3 Why the division of labor increases production

1.4 Trade and markets

1.5 Why study economics?

1.6 Key concepts and summary

2 Microeconomics and macroeconomics

2.1 Microeconomics

2.2 Macroeconomics

2.3 Key concepts and summary

3 How economists use theories and models to understand economic issues

3.1 Key concepts and summary

4 How economies can be organized: an overview of economic systems

4.1 Regulations: the rules of the game

4.2 The rise of globalization

4.3 Key concepts and summary

Choice in a world of scarcity

Introduction to choice in a world of scarcity

1 How individuals make choices based on their budget constraint

2 The production possibilities frontier and social choices

2.1 The shape of the ppf and the law of diminishing returns

2.2 Productive efficiency and allocative efficiency

2.3 Why society must choose

2.4 The ppf and comparative advantage

2.5 Key concepts and summary

3 Confronting objections to the economic approach

3.1 First objection: people, firms, and society do not act like this

3.2 Second objection: people, firms, and society should not act this way

3.3 Key concepts and summary

Demand and supply

Introduction to demand and supply

1 Demand, supply, and equilibrium in markets for goods and services

1.1 Demand for goods and services

1.2 Supply of goods and services

1.3 Equilibrium—where demand and supply intersect

1.4 Key concepts and summary

2 Shifts in demand and supply for goods and services

2.1 What factors affect demand?

2.2 The Ceteris Paribus Assumption

2.3 How does income affect demand?

2.4 Other factors that shift demand curves

2.5 Summing up factors that change demand

2.6 How production costs affect supply

2.7 Other factors that affect supply

2.8 Summing up factors that change supply

2.9 Key concepts and summary

2.11 References

3 Changes in equilibrium price and quantity: the four-step process

3.1 Good weather for salmon fishing

3.2 Newspapers and the internet

3.3 The interconnections and speed of adjustment in real markets

3.4 A combined example

3.5 Key concepts and summary

4 Price ceilings and price floors

4.1 Price ceilings

4.2 Price floors

4.3 Key concepts and summary

5 Demand, supply, and efficiency

5.1 Consumer surplus, producer surplus, social surplus

5.2 Inefficiency of price floors and price ceilings

Labor and financial markets

Introduction to labor and financial markets

1 Demand and supply at work in labor markets

1.1 Equilibrium in the labor market

1.2 Shifts in labor demand

1.3 Shifts in labor supply

1.4 Technology and wage inequality: the four-step process

1.5 Price floors in the labor market: living wages and minimum wages

1.6 The minimum wage as an example of a price floor

1.7 Concepts and summary

2 Demand and supply in financial markets

3 The market system as an efficient mechanism for information

3.1 Key concepts and summary

Introduction to elasticity

1 Price elasticity of demand and price elasticity of supply

1.1 Calculating price elasticity of demand

1.2 Calculating the price elasticity of supply

1.3 Key concepts and summary

2 Polar cases of elasticity and constant elasticity

3 Elasticity and pricing

3.1 Does raising price bring in more revenue?

3.2 Can costs be passed on to consumers?

3.3 Elasticity and tax incidence

3.4 Long-run vs. short-run impact

3.5 Key concepts and summary

4 Elasticity in areas other than price

Consumer choices

Introduction to consumer choices

1 Consumption choices

2 How changes in income and prices affect consumption choices

2.1 How changes in income affect consumer choices

2.2 How price changes affect consumer choices

2.3 The foundations of demand curves

2.4 Applications in government and business

2.5 Key concepts and summary

3 Labor-leisure choices

4 Intertemporal choices in financial capital markets

4.1 Using marginal utility to make intertemporal choices

4.2 Applications of the model of intertemporal choice

4.3 The unifying power of the utility-maximizing budget set framework

4.4 Behavioral economics: an alternative viewpoint

4.5 Key concepts and summary

Cost and industry structure

Introduction to cost and industry structure

1 Explicit and implicit costs, and accounting and economic profit

1.1 Key concepts and summary

2 The structure of costs in the short run

2.1 Fixed and variable costs

2.2 Average total cost, average variable cost, marginal cost

2.3 Lessons from alternative measures of costs

2.4 A variety of cost patterns

2.5 Key concepts and summary

3 The structure of costs in the long run

3.1 Choice of production technology

3.2 Economies of scale

3.3 Shapes of long-run average cost curves

3.4 The size and number of firms in an industry

3.5 Shifting patterns of long-run average cost

3.6 Key concepts and summary

Perfect competition

Introduction to perfect competition

1 Perfect competition and why it matters

1.1 Key concepts and summary

2 How perfectly competitive firms make output decisions

3 Entry and exit decisions in the long run

4 Efficiency in perfectly competitive markets

4.1 Key concepts and summary

Introduction to a monopoly

1 How monopolies form: barriers to entry

1.1 Natural monopoly

1.2 Control of a physical resource

1.3 Legal monopoly

1.4 Promoting innovation

1.5 Intimidating potential competition

1.6 Summing up barriers to entry

1.7 Key concepts and summary

2 How a profit-maximizing monopoly chooses output and price

Monopolistic competition and oligopoly

Introduction to monopolistic competition and oligopoly

1 Monopolistic competition

1.1 Differentiated products

1.2 Perceived demand for a monopolistic competitor

1.3 How a monopolistic competitor chooses price and quantity

1.4 Monopolistic competitors and entry

1.5 Monopolistic competition and efficiency

1.6 The benefits of variety and product differentiation

1.7 Key concepts and summary

Monopoly and antitrust policy

Introduction to monopoly and antitrust policy

1 Corporate mergers

1.1 Regulations for approving mergers

1.2 The four-firm concentration ratio

1.3 The herfindahl-hirshman index

1.4 New directions for antitrust

1.5 Key concepts and summary

2 Regulating anticompetitive behavior

3 Regulating natural monopolies

3.1 The choices in regulating a natural monopoly

3.2 Cost-plus versus price cap regulation

3.3 Key concepts and summary

4 The great deregulation experiment

Environmental protection and negative externalities

Introduction to environmental protection and negative externalities

1 The economics of pollution

1.1 Externalities

1.2 Pollution as a negative externality

1.3 Key concepts and summary

2 Command-and-control regulation

3 Market-oriented environmental tools

3.1 Pollution charges

3.2 Marketable permits

3.3 Better-defined property rights

3.4 Applying market-oriented environmental tools

3.5 Key concepts and summary

4 The benefits and costs of u.s. environmental laws

4.1 Benefits and costs of clean air and clean water

4.2 Ecotourism: making environmentalism pay

4.3 Marginal benefits and marginal costs

4.4 Key concepts and summary

5 International environmental issues

6 The tradeoff between economic output and environmental protection

Positive externalities and public goods

Introduction to positive externalities and public goods

1 Why the private sector under invests in innovation

1.1 The positive externalities of new technology

1.2 Why invest in human capital?

1.3 Other examples of positive externalities

1.4 Key concepts and summary

2 How governments can encourage innovation

2.1 Intellectual property rights

2.2 Policy #1: government spending on research and development

2.3 Policy #2: tax breaks for research and development

2.4 Policy #3 cooperative research

2.5 Key concepts and summary

3.1 The definition of a public good

3.2 The free rider problem of public goods

3.3 The role of government in paying for public goods

3.4 Common resources and the “tragedy of the commons”

3.5 Positive externalities in public health programs

3.6 Key concepts and summary

Poverty and economic inequality

Introduction to poverty and economic inequality

1 Drawing the poverty line

1.1 Key concepts and summary

2 The poverty trap

3 The safety net

3.1 Temporary assistance for needy families

3.2 The earned income tax credit (eitc)

3.3 Supplemental nutrition assistance program (snap)

3.5 Key concepts and summary

4 Income inequality: measurement and causes

5 Government policies to reduce income inequality

5.1 Redistribution

5.2 The ladder of opportunity

5.3 Inheritance taxes

5.4 The tradeoff between incentives and income equality

5.5 Key concepts and summary

Issues in labor markets: unions, discrimination, immigration

Introduction to issues in labor markets: unions, discrimination,

2 Employment discrimination

2.1 Earnings gaps by race and gender

2.2 Investigating the female/male earnings gap

2.3 Investigating the black/white earnings gap

2.4 Competitive markets and discrimination

2.5 Public policies to reduce discrimination

2.6 An increasingly diverse workforce

2.7 Key concepts and summary

3.1 Historical patterns of immigration

3.2 Economic effects of immigration

3.3 Proposals for immigration reform

3.4 Key concepts and summary

Information, risk, and insurance

Introduction to information, risk, and insurance

1 The problem of imperfect information and asymmetric information

1.1 “lemons” and other examples of imperfect information

1.2 How imperfect information can affect equilibrium price and quantity

1.3 When price mixes with imperfect information about quality

1.4 Mechanisms to reduce the risk of imperfect information

1.5 Key concepts and summary

2 Insurance and imperfect information

2.1 How insurance works

2.3 Risk groups and actuarial fairness

2.4 The moral hazard problem

2.5 The adverse selection problem

2.6 U.s. health care in an international context

2.7 Government regulation of insurance

2.8 The patient protection and affordable care act

2.9 Key concepts and summary

2.11 References

Financial markets

Introduction to financial markets

1 How businesses raise financial capital

2 How households supply financial capital

2.1 Expected rate of return, risk, and actual rate of return

2.2 Bank accounts

2.5 Mutual funds

2.6 Housing and other tangible assets

2.7 The tradeoffs between return and risk

2.8 Key concepts and summary

2.10 References

3 How to accumulate personal wealth

Introduction to public economy

1 Voter participation and costs of elections

2 Special interest politics

3 Flaws in the democratic system of government

The macroeconomic perspective

Introduction to the macroeconomic perspective

0.3 Policy tools

1 Measuring the size of the economy: gross domestic product

1.1 Gdp measured by components of demand

1.2 Gdp measured by what is produced

1.3 The problem of double counting

1.4 Other ways to measure the economy

1.5 Key concepts and summary

2 Adjusting nominal values to real values

3 Tracking real gdp over time

4 Comparing gdp among countries

5 How well gdp measures the well-being of society

5.1 Limitations of gdp as a measure of the standard of living

5.2 Does a rise in gdp overstate or understate the rise in the standard of

5.3 Gdp is rough, but useful

5.4 Key concepts and summary

Economic growth

Introduction to economic growth

1 The relatively recent arrival of economic growth

2 Labor productivity and economic growth

2.1 Sources of economic growth: the aggregate production function

2.2 Components of the aggregate production function

2.3 Measuring productivity

2.4 The “new economy” controversy

2.5 The power of sustained economic growth

2.6 Key concepts and summary

3 Components of economic growth

3.1 Capital deepening

3.2 Growth accounting studies

3.3 A healthy climate for economic growth

3.4 Key concepts and summary

4 Economic convergence

Introduction to unemployment

1 How the unemployment rate is defined and computed

1.1 Who’s in or out of the labor force?

1.2 Calculating the unemployment rate

1.3 Hidden unemployment

1.4 Labor force participation rate

1.5 The establishment payroll survey

1.6 How is the u.s. unemployment data collected?

1.7 Criticisms of measuring unemployment

1.8 Key concepts and summary

2 Patterns of unemployment

3 What causes changes in unemployment over the short run

4 What causes changes in unemployment over the long run

4.1 The long run: the natural rate of unemployment

4.2 Frictional unemployment

4.3 Structural unemployment

4.4 Natural unemployment and potential real gdp

4.5 Productivity shifts and the natural rate of unemployment

4.6 Public policy and the natural rate of unemployment

4.7 The natural rate of unemployment in recent years

4.8 The natural rate of unemployment in europe

4.9 A preview of policies to fight unemployment

4.10 Key concepts and summary

4.12 References

Introduction to inflation

1 Tracking inflation

2 How changes in the cost of living are measured

3 How the u.s. and other countries experience inflation

3.1 Historical inflation in the u.s. economy

3.2 Inflation around the world

3.3 Key concepts and summary

4 The confusion over inflation

5 Indexing and its limitations

The international trade and capital flows

Introduction to the international trade and capital flows

1 Measuring trade balances

2 Trade balances in historical and international context

2.1 Key concepts and summary

3 Trade balances and flows of financial capital

4 The national saving and investment identity

5 The pros and cons of trade deficits and surpluses

6 The difference between level of trade and the trade balance

6.1 Final thoughts about trade balances

6.2 Key concepts and summary

The aggregate demand/aggregate supply model

Introduction to the aggregate demand/aggregate supply model

1 Macroeconomic perspectives on demand and supply

2 Building a model of aggregate demand and aggregate supply

3 Shifts in aggregate supply

4 Shifts in aggregate demand

5 How the ad/as model incorporates growth, unemployment, and inflation

5.1 Growth and recession in the ad/as diagram

5.2 Unemployment in the ad/as diagram

5.3 Inflationary pressures in the ad/as diagram

5.4 Importance of the aggregate demand/aggregate supply model

5.5 Key concepts and summary

6 Keynes’ law and say’s law in the ad/as model

The keynesian perspective

Introduction to the keynesian perspective

1 Aggregate demand in keynesian analysis

1.1 What determines consumption expenditure?

1.2 What determines investment expenditure?

1.3 What determines government spending?

1.4 What determines net exports?

1.5 Key concepts and summary

2 The building blocks of keynesian analysis

2.1 Wage and price stickiness

2.2 The two keynesian assumptions in the ad/as model

2.3 The expenditure multiplier

2.4 Key concepts and summary

3 The phillips curve

3.1 The discovery of the phillips curve

3.2 The instability of the phillips curve

3.3 Keynesian policy for fighting unemployment and inflation

3.4 Key concepts and summary

4 The keynesian perspective on market forces

The neoclassical perspective

Introduction to the neoclassical perspective

1 The building blocks of neoclassical analysis

2 The policy implications of the neoclassical perspective

3 Balancing keynesian and neoclassical models

3.1 Key concepts and summary

Money and banking

Introduction to money and banking

1 Defining money by its functions

2 Measuring money: currency, m1, and m2

3 The role of banks

3.1 Banks as financial intermediaries

3.2 A bank’s balance sheet

3.3 How banks go bankrupt

3.4 Key concepts and summary

4 How banks create money

4.1 Money creation by a single bank

4.2 The money multiplier and a multi-bank system

4.3 Cautions about the money multiplier

4.4 Money and banks—benefits and dangers

4.5 Key concepts and summary

Monetary policy and bank regulation

Introduction to monetary policy and bank regulation

1 The federal reserve banking system and central banks

2 Bank regulation

2.1 Bank supervision

2.3 Deposit insurance

2.4 Lender of last resort

2.5 Key concepts and summary

3 How a central bank executes monetary policy

3.1 Open market operations

3.2 Changing reserve requirements

3.3 Changing the discount rate

3.4 Key concepts and summary

4 Monetary policy and economic outcomes

5 Pitfalls for monetary policy

Exchange rates and international capital flows

Introduction to exchange rates and international capital flows

1 How the foreign exchange market works

1.1 The extraordinary size of the foreign exchange markets

1.2 Demanders and suppliers of currency in foreign exchange markets

1.3 Participants in the exchange rate market

1.4 Strengthening and weakening currency

1.5 Key concepts and summary

2 Demand and supply shifts in foreign exchange markets

3 Macroeconomic effects of exchange rates

4 Exchange rate policies

Government budgets and fiscal policy

Introduction to government budgets and fiscal policy

1 Government spending

1.1 Total u.s. government spending

1.2 State and local government spending

1.3 Key concepts and summary

3 Federal deficits and the national debt

4 Using fiscal policy to fight recession, unemployment, and inflation

5 Automatic stabilizers

6 Practical problems with discretionary fiscal policy

6.1 Fiscal policy and interest rates

6.2 Long and variable time lags

6.3 Temporary and permanent fiscal policy

6.4 Structural economic change takes time

6.5 The limitations of fiscal policy

6.6 Political realties and discretionary fiscal policy

6.7 Discretionary fiscal policy: summing up

6.8 Key concepts and summary

7 The question of a balanced budget

7.1 Key concepts and summary

The impacts of government borrowing

Introduction to the impacts of government borrowing

1 How government borrowing affects investment and the trade balance

2 Fiscal policy, investment, and economic growth

3 How government borrowing affects private saving

3.1 Key concepts and summary

4 Fiscal policy and the trade balance

Macroeconomic policy around the world

Introduction to macroeconomic policy around the world

1 The diversity of countries and economies across the world

2 Improving countries’ standards of living

3 Causes of unemployment around the world

4 Causes of inflation in various countries and regions

4.1 Concepts and summary

5 Balance of trade concerns

5.1 Concerns over international trade in goods and services

5.2 Concerns over international flows of capital

5.3 Market-oriented economic reforms

5.4 Key concepts and summary

International trade

Introduction to international trade

1 Absolute and comparative advantage

1.1 A numerical example of absolute and comparative advantage

1.2 Gains from trade

1.3 Key concepts and summary

2 What happens when a country has an absolute advantage in all goods

2.1 Production possibilities and comparative advantage

2.2 Mutually beneficial trade with comparative advantage

2.3 How opportunity cost sets the boundaries of trade

2.4 Comparative advantage goes camping

2.5 Key concepts and summary

3 Intra-industry trade between similar economies

3.1 The prevalence of intra-industry trade between similar economies

3.2 Gains from specialization and learning

3.3 Economies of scale, competition, variety

3.4 Dynamic comparative advantage

3.5 Key concepts and summary

4 The benefits of reducing barriers to international trade

4.1 From interpersonal to international trade

4.2 Key concepts and summary

Globalization and protectionism

Introduction to globalization and protectionism

1 Protectionism: an indirect subsidy from consumers to producers

1.1 Demand and supply analysis of protectionism

1.2 Who benefits and who pays?

1.3 Key concepts and summary

2 International trade and its effects on jobs, wages, and working conditions

3 Arguments in support of restricting imports

4 How trade policy is enacted: globally, regionally, and nationally

4.1 The world trade organization

4.2 Regional trading agreements

4.3 Trade policy at the national level

4.4 Long-term trends in barriers to trade

4.5 Key concepts and summary

5 The tradeoffs of trade policy

5.1 Key concepts and summary

Source: OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11

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