Economics Private and Public Choice

Economics: Private and Public Choice is an aid for students and general readers to develop a sound economic reasoning. The book discusses several ways to economic thinking including six guideposts as follows: (i) scarce goods have costs; (ii) Decision-makers economize in their choices; (iii) Incentives are important; (iv) Decision-makers are dependent on information scarcity; (v) Economic actions can have secondary effects; and (vi) Economic thinking is scientific. The book explains the Keynesian view of money, employment, and inflation, as well as the monetarist view on the proper macropolicy, business cycle, and inflation. The book also discusses consumer decision making, the elasticity of demand, and how income influences demand. The text analyzes costs and producer decisions, the firm under pure competition, and how a competitive model functions. The book explains monopoly, and also considers the high barriers that prevent entry such as legal barriers, economies of scale, and control over important resources. The author also presents comparative economic systems such as capitalism and socialism. This book can prove useful for students and professors in economics, as well as general readers whose works are related to public service and planning in the area of economic development.

Suggested Outlines for One-Semester Courses

Preface

Acknowledgments

I The Economic Way of Thinking - An Introduction

1 The Economic Approach

What Is Economics About?

Man's Losing Struggle with Scarcity

The Economic Way of Thinking

Normative and Positive Economics

Looking for Action?—Try Economics

Myths of Economics: "Economics rejects the humanitarian side of man."

Perspectives in Economics: Do Material Goods Bring Happiness?

2 Some Tools of the Economist

Opportunity Cost Is the Highest Valued Opportunity Lost

The Production Possibilities Curve

Trade Tips and Comparative Advantage

Dependence, Specialization, and Exchange

Three Economizing Decisions Facing All Nations: What, How, and for Whom

Two Methods of Making Decisions—The Market and Government Planning

Myths of Economics: "In exchange, if someone gains, someone else must lose. Trading is a zero-sum game."

3 Market Decisions and the Market Process

Scarcity Necessitates Rationing

Consumer Choice and the Law of Demand

Producer's Choice and the Law of Supply

Price and Market Equilibrium

Shifts in Demand and Advice on How to Pass Your First Economics Exam

Shifts in Supply

Time and the Adjustment Process

Supply and Demand in Action

Repealing the Laws of Supply and Demand

Rationing and Motivating, the Two Great Attributes of the Market

Myths of Economics: "Rent controls are an effective method of assuring adequate housing at a price the poor can afford."

4 A Bird's-Eye View of the Public Sector

Ideal Economic Efficiency

Why Might the Invisible Hand Fail?

Government—A Potential Vehicle for Gain

Redistribution—Dividing the Economic Pie

The Market and the Public Sector—Two Methods of Economic Organization

Conflicts between Good Economics and Good Politics

Outstanding Economist: James Buchanan

5 Taxes and Government Spending

What Do Federal, State, and Local Governments Buy?

Sources of Tax Revenues

The Concept of Incidence

Who Pays the Tax Bill?

The Taxes Others Paid

Myths of Economics: "The growth of the federal government has been the major source of government expansion."

Controversies in Economics: Is There an Energy Crisis or a Policy Crisis?

II Macroeconomics

6 Taking the Nation's Economic Pulse

The Concept of the GNP

Two Ways of Measuring GNP

Gross National Product or Gross National Cost?

Five Problems with GNP as a Measuring Rod

What the GNP Does Not Measure

The Great Contribution of GNP

Other Related Income Measures

Outstanding Economist: Simon Kuznets

7 Unemployment, Inflation, and Business Cycles

Swings in the Economic Pendulum

A Hypothetical Business Cycle

Three Different Views of the Business Cycle

The Normal Rate of Unemployment

Cyclical Unemployment

Actual and Potential GNP

Questions and Answers about Inflation

Myths of Economics: "Unemployed resources would not exist if the economy were operating efficiently."

8 Aggregate Equilibrium and a Simple Keynesian Model

Keynes and the Views of Classical Economists

Tools of Modern Keynesian Analysis

Equilibrium and the Keynesian Model

Adding Government Demand

Leakages and Injections—Another Way of Looking at Equilibrium

Pulling It Together

Outstanding Economist: John Maynard Keynes

9 The Multiplier, Accelerator, and a Keynesian View of the Business Cycle

The Multiplier Principle

Business Pessimism - A Self-Fulfilling Prophecy

Investment Instability and the Accelerator

A Keynesian View of the Business Cycle

Investment and the Cycle

10 Fiscal Policy

Public Policy to Deal with a Recession

Fiscal Policy to Deal with Inflation

The Central Idea of Fiscal Policy

The Full-Employment Budget Concept

Has Real World Fiscal Policy Been Stabilizing?

Automatic Stabilizers

Spending versus Taxing Alternatives

Outstanding Economist: Walter Heller

Perspectives in Economics: Fact and Fiction about the National Debt

11 Money and the Banking System

What Is Money?

The Business of Banking

Fractional Reserve Goldsmithing

Fractional Reserve Banking

The Federal Reserve System

How the Fed Controls Our Money Supply

The Fed and the Treasury

Dynamics of Monetary Policy

Outstanding Economist: Arthur Burns

12 Money, Employment, Inflation, and a More Complete Keynesian Model

The Demand and Supply of Money

Interest Rates and Investment

Expansionary and Restrictive Monetary Policy

How Monetary Policy Works - The Keynesian View

Combining Monetary and Fiscal Policy

Did Macropolicy Cause the Inflation of the 1970s?

Will Monetary Policy Always Stimulate Demand?

Full Employment and Inflation in the Real World

Outstanding Economist: Paul Samuelson

Controversies in Economics: Will There Ever Be Another Great Depression?

13 The Business Cycle and Inflation—The Monetarist View

The Equation of Exchange

The Classical View—Money Does Not Matter

The Early Keynesians—Money Still Does Not Matter Much

The Modern Monetarist—Money Matters Most

The Impact of Money—The Monetarist View

Money and Business Cycles

Money, Recessions, and Inflation—The Record

Money and Inflation in Other Countries

Outstanding Economist: Milton Friedman

Myths of Economics: "Inflation is caused by greedy businessmen and union leaders."

Perspectives in Economics: Inflation: Its Cause and Cure—A Monetarist's View

14 Proper Macropolicy—The Monetarist View

Two Things That Monetary Policy Cannot Do—The Monetarist View

Limited Effectiveness of Monetary Policy—The Monetarist View

Three Things Monetary Policy Can Do—The Monetarist View

Why Macroplanners May Do the Wrong Thing

Constant Rate of Monetary Growth—The Monetarist View of Proper Policy

The Monetarist View of Fiscal Policy

Myths of Economics: "The high interest rates of the 1970s resulted because the Fed was reducing the rate of monetary expansion."

Perspectives in Economics: Why Fiscal Policy Is Impotent - An Interview with a Monetarist

15 Dealing with Unemployment and Inflation

Can Wage-Price Controls Make Macro-"Solutions" More Effective?

Public Employment

Dealing with Youth Unemployment

Could We Better Target Government Spending?

Do Unemployment Compensation and Welfare Benefits Increase the Unemployment Rate?

Indexing—Learning to Live with Inflation

Pulling It All Together

Controversies in Economics: Keynesians, Monetarists, and Middle-of-the-Roaders on Macroeconomics

III Microeconomics

16 Demand and Consumer Choice

Consumer Decision-Making—Deciding What to Buy

Individual Demand

Consumer Choice and Market Demand

What Will Cause the Demand Curve to Shift?

Time Cost and Consumer Choice

Elasticity of Demand

How Does Income Influence Demand?

Why Do Consumers Buy That?

Outstanding Economist: John Kenneth Galbraith

Controversies in Economics: Advertising—The Views of Its Critics and Defenders

17 Costs and Producer Decisions

The Business Firm

Calculating Economic Costs and Profits

Total Costs, Average Costs, and Marginal Costs

Rate of Output and the Firm's Cost in the Short Run

Costs in the Long Run

What Factors Will Cause the Firm's Cost Curves to Shift?

Costs and the Economic Way of Thinking

Myths of Economics: "A good business decision-maker will never sell a product for less than its production cost."

18 The Firm under Pure Competition

Two Meanings of Competition

The Assumptions of the Purely Competitive Model

Why Is Pure Competition Important?

The Workings of the Competitive Model

The Firm and Competitive Markets

The Role of Profits in the Competitive Model

Supply Elasticity and the Role of Time

Market Adjustments to Changing Production Costs

Efficiency and the Competitive Model

19 Monopolistic Competition, Product Differentiation, and Low Barriers to Entry

Product Differentiation

The Hypothetical Model of Monopolistic Competition

Price and Output under Monopolistic Competition

Real World Monopolistic Competitors

Price Discrimination

Competition and the Economic Way of Thinking

Contrasting Pure and Monopolistic Competition

Outstanding Economist: Joan Robinson

Controversies in Economics: Is Monopolistic Competition Inefficient?

Perspectives in Economics: Is Planned Obsolescence Good Business?

20 Monopoly and High Barriers to Entry

Competition is Great, But

What Is a Monopoly?

The Hypothetical Model of Monopoly

Why Monopoly Is Bad

When Can a Monopolized Industry Be Competitive?

Economies of Scale and Natural Monopoly

Regulating the Monopolist

The Government Operated Firm

There Are No Ideal Solutions

Perspectives in Economics: How the Regulators Promote Inefficiency and Protect You from Low Prices—The Case of Transportation

21 Oligopoly and the World of Big Business

Characteristics of Oligopoly

Price and Output Determination

It Pays to Collude . . . and to Cheat

The Kinked Demand Curve

Monopoly Power and Profit—The Early Bird Gets the Worm

Real World Oligopolists

Outstanding Economist: George Stigler

Perspectives in Economics: Profits and Other Four-Letter Words

22 Business Structure, Competition, and Public Policy

The Two Faces of Business Power

How Much of Our Economy Is Competitive?

Does Big Business Dominate the U.S. Economy?

Antitrust Legislation—The Policy Objectives

Major Antitrust Legislation

Alternative Views on Antitrust Policy

Perspectives in Economics: A Program to Promote Competitive Markets

Perspectives in Economics: A Galbraithian View of a Modern Industrial Economy

IV Factor Markets and Income Distribution

23 The Supply and Demand of Productive Resources

Human and Nonhuman Resources

The Demand for Resources

The Firm's Hiring Decision

The Supply of Resources in the Short Run

The Supply of Resources in the Long Run

Supply, Demand, and Resource Prices

Outstanding Economist: Gary Becker

24 Earnings and the Job Market

Why Do Earnings Differ?

Productivity and the General Level of Wages

How Is the Economic Pie Divided between Physical and Human Capital?

Can Higher Wages Be Legislated?

Myths of Economics: "Automation is the major cause of unemployment."

25 Union Power—A Shield or a Threat?

What Is a Collective Bargaining Contract?

The Strike—A "Big Stick" of the Union

The Strike and Serious BargainingHow Does the "Big Stick" Affect the Public?

Getting More for Union Members

What Gives the Union Muscle?

How Much More Do Union Members Get?

Unions and Inflation

The Power of Big Labor

Myths of Economics: "Unions have increased the share of income going to labor."

Perspectives in Economics: What Can We Expect from the Rapid Growth of Public Sector Unionism?

26 Inequality, Income Mobility, and Poverty

Income Inequality in the United States

Income Inequality in Other Countries

Inequality and Income Inequality

Intergenerational Income Mobility

Poverty in the United States

Three Approaches to Poverty

Controversies in Economics: The Cases for and against the Negative Income Tax

27 Employment Discrimination and the Earnings of Blacks and Women

What Is Employment Discrimination?

How Does Discrimination Influence Earnings?

Does It Pay to Discriminate?

The Cost of Discrimination—The Case of Baseball

Employment Discrimination and the Earnings of Blacks

Are Things Improving?

Everything You Always Wanted to Know about Female Earnings—But Were Afraid to Ask

The Future Status of Minorities and Women

Outstanding Economist: Juanita Kreps

V Public Choice

28 Problem Areas for the Market

Market Failure: External Cost

Market Failure: External Benefits and Opportunities Missed

Market Failure: Public Goods

Market Failure: Poor Information

Outstanding Economist: Allen Kneese

Perspectives in Economics: An Emissions Charge Strategy to Control Pollution

29 Public Choice and Gaining from Government

Voters and the Demand for Political Action

Supply, Profits, and the Political Entrepreneur

Money, Political Advertising, and the Successful Politician

The Opportunity Cost of Government

Market Failure and Gaining from Government

Can Income Redistribution Promote Social Gain?

Actual Income Redistribution—Winners and Losers

Perspectives in Economics: Externalities, No-Fault Insurance, and Government Action to Improve on the Market

30 The Economics of Government Failure

Government Failure: Voter Ignorance and Inefficient Public Policy

Government Failure: The Special Interest Effect

Government Failure: The Shortsightedness Effect

Government Failure: Little Entrepreneurial Incentive for Internal Efficiency

Government Failure: Imprecise Reflection of Consumer Preferences

Is an Economic Analysis of the Public Sector Too Cynical?

Public Sector and the Market—Revisited

Outstanding Economist: Kenneth Arrow

Perspectives in Economics: Dealing with Special Interests

VI International Economics

31 Gaining from International Trade

The Size of the International Sector

Why Do Nations Trade?

Supply, Demand, and International Trade

Tariffs and Quotas

Why Industries Are on the Dole

International Trade and the Great Oil Cartel

Myths of Economics: "Free trade with low-wage countries such as China and India would cause the wages of U.S. workers to fall."

32 International Finance and Balance of Payments

Foreign Exchange Markets

Balance of Payments and Exchange Markets

Deficits, Surpluses, and Balance of Payments

Trading with Flexible Exchange Rates

Trading with Fixed Exchange Rates

Fixed versus Flexible Exchange Rates

33 Comparative Economic Systems

Comparing Capitalism and Socialism

Common Constraints and the Universality of Economic Tools

The Soviet Economy

Yugoslavia—Socialism or the Market?

Socialism or Capitalism?

Outstanding Economist: Wassily Leontief

Appendix A A Graphic Look at Economics

Appendix B Analyzing the Equilibrium Level of Income with Equations

Appendix C Analyzing Aggregate Equilibrium with the IS-LM Model

Suggestions for Additional Reading

Hints for Answering Discussion Questions

Index

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