Content

Preface xxvii
PART 1
BASIC ECONOMIC CONCEPTS 1
1 Economic Problem and Economic Goals 3
Economic Progress 3
Economic Problems 4
Economic Policy 6
The Controversial Role of Government 6
Economic Goals 7
Box 1-1: Karl Marx 8
1. A Low Rate of Unemployment 8
2. Stability of the Average Price Level 10
3. Efficiency 11
4. An Equitable Distribution of Income 12
5. Growth 13
Interrelationships among the Goals 14
A Preview 15
Key Points 15
Key Terms 16
Problems 16
Appendix 1-A: Diagrams and Algebra Used in Economics 17
1. A Simple Comparison of Two Facts 17
Things to Watch 17
2. Relationships Between Variables 19
Straight-Line Relationships 20
Relationships with Diminishing Slopes 21
Diagrams with Two Relationships 22
3. Time Series: How Something Changes Through Time 24
Should We Measure from Zero! 24
How Should Growth Be Illustrated! 25
Real or Monetary Measures! 27
Relative Measures 28
2 Scarcity and Choice: The Economic Problem 29
Unlimited Wants... 29
... Scarce Resources 30
Box 2-1: A Tale of Two Dreams 31
Scarcity and Choice: The Production Possibilities Curve 33
The Shape of the Production Possibilities Curve:
Increasing Opportunity Costs 33
The Production Possibilities Curve is a "Frontier" 35
Growth: The Outward Shift of the Production Possibilities Curve
36
Growth: The Choice Between Consumer Goods and Capital Goods
37
Capital Imports and Growth 37
Economic Development: The Problem of Takeoff 38
 An Introduction to Economic Theory: The Need to Simplify 39
Theory Necessarily Involves Simplification 40
The Distinction Between Positive and Normative Economics
40
Key Points 41
Key Terms 42
Problems 42
3 Specializations, Exchange, and Money 43
Exchange: The Barter Economy 43
Exchange with Money 44
The Circular Flow of Expenditures and Income 45

The Monetary System 45

Box 3-1: Early Money on the Island of Uap 46
Monetary Problems in the POW Camp 47
Comparative Advantage: A Reason to Specialize 48
Box 3-2: Illustration of Comparative Advantage 49
Economies of Scale: Another Reason to Specialize 49
Living in a Global Economy: Economies of Scale and the
Canada/United States Free Trade Agreement 50
Key Points 51
Key Terms 52
Problems 52
4 Demand and Supply: The Market Mechanism 53
The Market and the Government 53
The Market Mechanism 55
Perfect and Imperfect Competition 55
The Perfectly Competitive Market: Demand and Supply 56
Demand 56
Supply 57
The Equilibrium of Demand and Supply 58
Shifts in the Demand Curve 59
Demand Shifters 60
1. Income 60
2. Prices of Related Goods 60
3. Tastes 60
What is produced: The Response to a Change in Tastes 61
Shifts in Supply 61
Supply Shifters 61
1. The Cost of Inputs 61
2. Technology 62
3. Weather 62
4. The Prices of Related Goods 62
The Response to a Shift in the Supply Curve 62
Shifts in a Curve and Movements Along a Curve 63
Box 4-1: Curve Shifting and Equilibrium: Another View 63
The Interconnected Questions of What, How, and For Whom 65
How! And For Whom! 66
 The Market Mechanism: A Preliminary Evaluation 66
Strengths of the Market 66
Box 4-2: The Controversy over Heroin 67
The Alternative of Price Controls: Some Problems 68
The Market Mechanism: Limitations and Problems 69
Box 4-3: Supply and Demand in Action: The Market for Big-City
Office Space 70
Key Points 71
Key Terms 72
Problems 72
5 The Economic Role of the Government 75
The Growth of Government Expenditures 76
Government Expenditures in Perspective 76
Government Purchases versus Transfers 77
The Budgets of the Canadian Governments 79
Federal Government Expenditures 79
Provincial and Local Government Expenditures 80
Government Receipts 80
Intergovernmental Transfers 82
Government Regulation 82
Box 5-1: Federal Transfers to the Provinces 83
Problems with Government Regulation 85
Public Enterprise 86
Accountability 86
Privatization 87
The Economic Role of the Government: What Should the
Government Do? 87
1. The Government Provides What the Private Market Can't 87
2. Externalities 88
3. Merit Goods 88
4. Helping the Poor 89
5. The Government and Economic Stability 89
Taxation 89
1. Neutrality 89
2. ... and Nonneutrality: Meeting Social Objectives by Tax
Incentives 89
3. Simplicity 90
4. Equity 90
The Benefit Principle 90
Ability to Pay 90
The Burden of Taxes: Who Ultimately Pays? 91
Tax Loopholes 92
1. Capital Gains 92
2. Imputed Income from Owner-Occupied Housing 92
3. Preferences to Some Corporations 93
Tax Reform in the 1980s 93
1. The Tax Base Should Be Broadened 93
2. There Should Be a Reduction in Income Tax Rates 93
 3. Deductions Should Be Replaced by Tax Credits 93
The 1988 Tax Reforms 94
Box 5-2: The Legacy of Reaganomics 95
Why Can't We Get Rid of All the Loopholes? 96
Key Points 97
Key Terms 98
Problems 98

PART 2
FOUNDATIONS OF MICROECONOMIC ANALYSIS:
THE COMPETITIVE MODEL 99

6 Applications of Demand and Supply: The Concept of Elasticity 101

The Price Elasticity of Demand 101
Examples 102
Dropping the Minus Sign 102
Elastic and Inelastic Demand 102
The Beginning-point Problem 102
Two Solutions 103.
The Elasticity of Demand: What Happens to Total Revenue?
103
Elasticity and Slope 105
What Determines Elasticity of Demand? 105
1. Substitutability 105
2. Necessities versus Luxuries 106
3. Percentage of Income 107
4. Time 107
The Price Elasticity of Supply 107
What Determines Elasticity of Supply? 108
1. Time 108
2. Substitutes or Complements in Production! 108
3. The Feasibility and Cost of Storage 109
Significance of Elasticity 109
Incidence of a Tax: Who Pays? 110
Elasticity and Tax Revenue 111
Rent Control 112
Living in a Global Economy: How Can Indebted Countries
Increase Their Export Earnings? 114
Other Elasticity Measures 114
Income Elasticity of Demand 114
Cross Elasticity of Demand 115
Key Points 115
Key Terms 116
Problems 116
Appendix 6-A: Applying Elasticity: What Are the Special
Problems of Agriculture? 118
Year-to-Year Price Instability 118
Long-run Downward Trend in Price 119
 Will the Future Bring Food Scarcity? 120

7 Demand and Utility 123

Market Demand as the Sum of Individual Demands 123
Diminishing Marginal Utility 123
Marginal Benefit and the Consumer's Equilibrium 125
Consumer's Surplus 127
Changes in Consumer Surplus 128
The Paradox of Value 128
The Consumer's Equilibrium: Another Look 130
The Marginal Rate of Substitution: The Slope of the Indifference
Curve 131
Marginal Utility and the Marginal Rate of Substitution 131
Diminishing Marginal Rate of Substitution and Diminishing
Marginal Utility 131
Willingness to Pay and the Marginal Rate of Substitution 132
Box 7-1: Why Indifference Curves Cannot Cross 133
The Budget Limitation 134
The Consumer's Equilibrium 134
The Consumer's Equilibrium When Income Changes 135
Box 7-2: How the Consumer Chooses Among Many Goods 136
An Application: Cash Assistance vs. Aid in Kind 137
Deriving a Demand Curve from an Indifference Map 139
The Results of a Price Change: Substitution and Income Effects
139
Extensions of Demand Theory 140
Transactions Cost 140
How Do Search Costs Influence Market Price? 141
Time Costs in Consumption 141
Key Points 142
Key Terms 142
Problems 143

8 Business Organization and Finance 145

Business Organizations 145
Sole Proprietorships and Partnerships: Their Advantages and
Disadvantages 145
The Corporation 146
Corporation Taxes 147
Double Taxation and the Dividend Tax Credit 147
How a Corporation Finances Expansion 148
Common Stock 148
Bonds 148
Convertible Bonds 149
Preferred Stock 149
Financial Markets 149
Buyers of Securities: Who Are Canada's Capitalists? 150
Box 8-1: Who Controls the Corporation? 151
 The Objectives of Buyers of Securities 152
The Objectives Of Issuers of Securities 152
The Bond Market 153
The Stock Market 153
Business Accounting: The Balance Sheet and the Income
Statement 155
The Balance Sheet 155
The Left-Hand, Asset Side 156
The Right-Hand Side, Showing Liabilities and Net
Worth 156
The Income Statement 157
Depreciation 157
Accounting Cost vs. Opportunity Cost 158
Key Points 159
Key Terms 160
Problems 160
9 The Costs of Production 163
The Short Run and the Long 163
Costs in the Short Run 164
1. Fixed Costs or Overhead Costs 164
2. Variable Costs 164
Marginal Cost 164
Average Total Cost 165
The Relationship Between Average and Marginal Costs 166
The Short-run Production Function 166
Total, Average, and Marginal Product 166
Box 9-1: Why a Firm's Costs Are Like a Baseball Player's Average
167
The Law of Diminishing Returns 168
Marginal Product and Marginal Cost 168
The U-Shaped Average Cost Curve 168
Costs in the Long Run 168
Finding the Least-cost Combination of Inputs 171
The Envelope Curve and the Best Combination of Inputs 173
Box 9-2: If You Have Had Trouble Drawing Curves in Economics,
You Are Not Alone 175
Economies of Scale 176
The Range of Constant Returns and Minimum Efficient Scale
177
Economies of Scale and Diminishing Returns 178
Living in a Global Economy: The Quest for Lower Costs 178
Key Points 179
Key Terms 180
Problems 180
Appendix 9-A: The Effect of a Change in the Price of Inputs 182
10 Supply in a Perfectly Competitive Market 183
Perfect Competition as a Limiting Case 183
Perfect Competition: Demand as Seen by an Individual Producer 184
Marginal Revenue 184
Profit Maximization: Marginal Revenue = Marginal Cost 185
Another View of Profit Maximization: Total Revenue and Total Cost 186
Short-run Supply of a Perfectly Competitive Firm 187
The Shutdown Point 187
The Short-run Market Supply Curve 188
Supply in the Long Run 188
Box 10-1: Ignoring the Shutdown Principle: The Case of Sysco
The Importance of Entry and Exit 192
Case 1: Perfectly Elastic Long-run Supply 193
Efficient Scale in the Long Run 194
A Fall in Demand 195
Case 2: A Rising Long-run Supply Curve 195
The Reallocation of Resources: The Role of Profits lg7
The Gains to Producers from a Higher Price 197
Reprise:The Burden of a Tax 198
Key Points 198
Key Terms 199
Problems 199
Appendix 10-A: Using the Supply Curve to Measure Producer Gains:
Some Complications 2Ol
Case 7 201
Case 2 201
Case 3 201
11 Perfect Competition and Economic Efficiency 203
TWo Important Assumptions 203
How a Perlectly Competitive Market l,lrorks 204
Demonsuating Why Perfect Competition is Efficient 206
Box 11-1: Conditions That Result in an Etficient Solution 206
Q6mFetition and Etficiency: The TWo-good Case 208
Prcducet's Response 209
Market Eqilibilum 2O9
Box 11.2: Pareto and the Elirnination of Deadweight Loss 210
Etficiency in the Shot Run and in the Long Run 2ll
Living in a Global Economy: Fretir Entry into the London
Financial Market 212
Other Tlpes of Efficimcy 213
Technological, or fsshnisal, Efftciency 213
Dynamic Efftciency 214
Reprise How the Competitive ltlarket Deterrnines Who Will Produce and
Who WiIl Consume 214
Preview: Problems With the Competitive Market 215
Resen'ations About the Perfectly Competitive Outcome 215
1. It Depends on the Distribution of Income 215
2. The Moral Hazard and Adverse Selection Problems 216
3. BuyeSs or Sellers May Be Misled By Price Signds 217
Speculation and Price Instability 218
Speculation as a Stabilizing Influence 218
Speculation as a Destabltzng,Influence 219
The Hunt Brothers: Down at Heel, with Less than a
Billion Dollars Left 22O
Government Agricultual Price Supports 220
Key Points 221
Key Terms 222
Problems 222
Appendix 11-A: Forms of Farn Assistance 223
Support Prices and Deffciency Payments 223
(a) Price Supports 223
(b) Deficiency Payments 223
How do Pokcies (a) and (b) Comparc! 223
Problem 225