Economics 9th Edition, Sloman.pdf - Ninth Edition Economics has never been so exciting to learn Want to see economics in action Search online for the

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Unformatted text preview: Ninth Edition Economics has never been so exciting to learn! Want to see economics in action? Search online for the Sloman Economics News Site - a blog that’s updated several times a week with current affairs and topical stories, all linked into your textbook so you can explore the background to the issues more deeply. The ninth edition of Economics contains the most up-to-date coverage of economic theory and the global economy, and uses the latest data to track and analyse economic events. Economics provides the foundation for the study of economics, while covering the recent turmoil in the economy. It reflects the debates that have taken place since the recession about the nature of economics and what should be studied. New to this edition: • Recent developments in money and banking, and their impact on the economy • An increased emphasis on the role of borrowing, debt, balance sheets and risk at the government, corporate and household levels • The development of macroeconomic models, including the interaction between the IS/MP model and the ADI/ASI model • Increased emphasis on behavioural economics. ECONOMICS ECONOMICS John Sloman • Alison Wride • Dean Garratt ECONOMICS Ninth Edition Ninth Edition John Sloman was previously Director of the Economics Network, and is now Visiting Fellow at the Network. John is also Visiting Professor at the University of the West of England, Bristol. Dean Garratt is Principal Teaching Fellow in the Department of Economics at the University of Warwick. Use the power of MyEconLab to accelerate your learning. You need both an access card and a course ID to access MyEconLab. • John Sloman • Alison Wride • Dean Garratt Alison Wride is Provost and Professor of Economics at GSM London. · Is your lecturer using MyEconLab? Ask your lecturer for your course ID. · Has an access card been included with the book? Check the inside back cover of the book. · If you have a course ID but no access card, go to to buy access to this interactive study programme. CVR_SLOM4772_09.indd 1 17/11/2014 15:54 ECONOMICS A01_SLOM4772_09_SE_FM1.indd i 11/18/14 11:38 AM A01_SLOM4772_09_SE_FM1.indd ii 11/18/14 11:38 AM ECONOMICS Ninth edition John Sloman The Economics Network, University of Bristol Visiting Professor, University of the West of England Alison Wride Provost and Professor of Economics, GSM London (formerly Greenwich School of Management) Dean Garratt Principal Teaching Fellow, University of Warwick A01_SLOM4772_09_SE_FM1.indd iii 11/18/14 11:38 AM Pearson Education Limited Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: First edition published 1991 (print) Second edition published 1994 (print) Updated second edition published 1995 (print) Third edition published 1997 (print) Updated third edition published 1998 (print) Fourth edition published 2000 (print) Fifth edition published 2003 (print) Sixth edition published 2006 (print) Seventh edition published 2009 (print) Eighth edition published 2012 (print and electronic) Ninth edition 2015 (print and electronic) © John Sloman 1991 (print) © John Sloman, Alison Bird and Mark Sutcliffe 1994, 1997 (print) © John Sloman, Alison Sloman and Mark Sutcliffe 2000, 2003 (print) © John Sloman 2006 (print) © John Sloman, Alison Wride 2009 (print) © John Sloman, Alison Wride and Dean Garratt 2012 (print) © John Sloman, Alison Wride and Dean Garratt 2015 (print and electronic) The rights of John Sloman, Alison Wride and Dean Garratt to be identified as authors of this Work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. The print publication is protected by copyright. Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law. Any unauthorised distribution or use of this text may be a direct infringement of the authors’ and the publisher’s rights and those responsible may be liable in law accordingly. All trademarks used therein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. Pearson Education is not responsible for the content of third-party internet sites ISBN: 978-1-292-06477-2 (print) 978-1-292-06484-0 (PDF) 978-1-292-06478-9 (eText) British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing-in-Publication Data Sloman, John, 1947Economics / John Sloman, Alison Wride, Dean Garratt. -- Ninth edition. pages cm ISBN 978-1-292-06477-2 1. Economics. I. Wride, Alison. II. Garratt, Dean, 1970- III. Title. HB171.5.S635 2015 330--dc23 2014042517 10 9 8 7 6 5 4 3 2 1 14 13 12 11 10 Front cover images: John Sloman Typeset in 8/12pt Stone Serif ITC Pro by 35 Printed and bound in Slovakia by Neografia NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION A01_SLOM4772_09_SE_FM1.indd iv 11/18/14 11:38 AM About the authors John Sloman is Visiting Fellow at the University of Bristol and Associate of the Economics Network ( . ac.uk) a UK-wide organisation, where, until his retirement in 2012, he was Director. The Economics Network is based at the University of Bristol and provides Garratt, of Economics for Business (Pearson Education, 6th edition 2013) and with Elizabeth Jones of the University of Warwick of Essential Economics for Business (Pearson Education, 4th edition 2014). Translations or editions of the various books are available for a number of different countries with the help of co-authors around the world. John is very interested in promoting new methods of teaching economics, including group exercises, experiments, role playing, computer-aided learning and use of a range of services designed to promote and share good practice in learning and teaching economics. The Network is supported by grants from the Royal Economic Society, the Scottish Economic Society and university economic departments and units from across the UK. John is also Visiting Professor at the University of the West of England, Bristol, where, from 1992 to 1999, he was Head of School of Economics. He taught at UWE until 2007. John has taught a range of courses, including economic principles on social science and business studies degrees, development economics, comparative economic systems, intermediate macroeconomics and managerial economics. He has also taught economics on various professional courses. John is the co-author with Dean Garratt of Essentials of Economics (Pearson Education, 6th edition 2013) and, with Kevin Hinde from the University of Durham and Dean audience response systems and podcasting in teaching. He has organised and spoken at conferences for both lecturers and students of economics throughout the UK and in many other countries. As part of his work with the Economics Network he has contributed to its two sites for students and prospective students of economics: Study Economics ( economics.org) and Why Study Economics? (www. whystudyeconomics.ac.uk). From March to June 1997, John was a visiting lecturer at the University of Western Australia. In July and August 2000, he was again a visiting lecturer at the University of Western Australia and also at Murdoch University in Perth. In 2007, John received a Lifetime Achievement Award as ‘outstanding teacher and ambassador of economics’ presented jointly by the Higher Education Academy, the Government Economic Service and the Scottish Economic Society. Alison Wride is Provost of GSM London and a Professor of Economics. Prior to her appointment at GSM London she was Head of the College of Business, Economics and Law at Swansea University, and before that she spent her early career at the University of Exeter. Her areas of interest include the student experience and the relationship between skills, employability and education. She is acknowledged as having expertise in understanding the factors that influence student satisfaction and has always endeavoured to bring a sense of engagement to her teaching. In 2006 Alison received the Student Nominated Award for Teaching Excellence from the Economics Network of the UK Higher Education Academy. This was followed by the University of Exeter Vice Chancellor’s Award for Excellence in 2007, in recognition of both her role in leading the transformation of the student experience in the Business School and her own teaching. In 2009 Alison was awarded a National Teaching Fellowship. Alison believes that ‘good’ teaching depends on great communication. She sees that her job, as a teacher and author, is to take relatively complex ideas and to explain them in a way that is accessible and that inspires the reader, leaving them wanting to know more. She has taught economics to A level students, undergraduates and to those who are already out in the world of work. Her teaching ethos is based on enthusing students, bringing economics A01_SLOM4772_09_SE_FM1.indd v 11/18/14 11:38 AM vi ABOUT THE AUTHORS to life and setting the theory in context. She still believes that ‘the best decision I ever made − in terms of my career − was choosing to take A-level economics. I fell in love with the subject within an hour and that was entirely due to the excellence and enthusiasm of my teacher.’ Alison’s external interests include work with the Treasury and Government Economic Service on economics training for non-economists working in government; she is currently involved in a similar initiative with the Department for Business, Innovation and Skills. This work focuses on furnishing those at the cutting edge of developing policy with the tools and economic understanding to ensure that both the formulation of aims and the choice of methods result in coherent strategies that enhance efficiency and equity. Dean Garratt is a Principal Teaching Fellow in the Department of Economics at the University of Warwick. Prior to joining Warwick in 2014, Dean was a principal lecturer and course leader of the undergraduate economics portfolio at Nottingham Business School. Dean teaches economics at a variety of levels, both to stu- think like an economist is achieved when students are encouraged to see the relevance and application of economic ideas and principles. In 2006 Dean received an Outstanding Teaching Award from the Economics Network of the Higher Education Academy. The award is given to an academic who demonstrates excellence in course structure, delivery, student response, student performance and peer recognition. Subsequently, Dean became an Associate of the Economics Network helping to promote quality teaching dents on economics courses and to those taking economics on other degree courses. Earlier in his career Dean worked as an economic assistant at both HM Treasury and at the Council of Mortgage Lenders. While at these institutions Dean was researching and briefing on a variety of issues relating to the household sector and to the housing and mortgage markets. His time as an economic assistant has significantly influenced Dean’s approach towards the teaching of economics. This has seen Dean frequently adopt a problem or issues-based approach in his teaching of economics. Dean believes that a deeper understanding of what it means to practices through presentations and workshops. Dean has been involved in projects to develop problem-based learning and teaching resources for economists, including resources for use on level 1 quantitative methods and data analysis modules. Dean is an academic assessor for the Government Economic Service (GES). In this role he helps to assess potential recruits to the GES with particular focus on the ability of candidates to articulate their understanding of economics and its applications. Outside of work, Dean is an avid watcher of most sports. He is a season ticket holder at both Leicester City Football Club and Leicestershire County Cricket Club. A01_SLOM4772_09_SE_FM1.indd vi 11/18/14 11:38 AM Brief Contents Custom Publishing Preface Student Resources Flowchart Lecturer Resources Flowchart Acknowledgements Publisher’s Acknowledgements Part A INTRODUCTION 1 Part B Why Economics is Good for You Economics and Economies 2 6 FOUNDATIONS OF MICROECONOMICS 2 3 Part C Supply and Demand Markets in Action 34 60 MICROECONOMIC THEORY 4 5 6 7 8 9 Part D 10 11 12 13 A01_SLOM4772_09_SE_FM1.indd vii xv xvi xx xxi xxii xxiii Background to Demand Background to Supply Profit Maximising under Perfect Competition and Monopoly Profit Maximising under Imperfect Competition Alternative Theories of the Firm The Theory of Distribution of Income 100 132 170 193 221 246 MICROECONOMIC POLICY Inequality, Poverty and Policies to Redistribute Income Markets, Efficiency and the Public Interest Environmental Policy Government Policy towards Business 284 314 353 381 11/18/14 11:38 AM viii BRIEF CONTENTS Part E 14 15 16 Part F 17 18 19 20 21 22 23 Part G 24 25 26 27 A01_SLOM4772_09_SE_FM1.indd viii FOUNDATIONS OF MACROECONOMICS The National Economy Macroeconomic Issues and Analysis: An Overview Macroeconomic Issues, Debates and Controversies 400 430 463 MACROECONOMIC MODELS, THEORIES AND POLICY Short-run Macroeconomic Equilibrium Banking, Money and Interest Rates The Relationship between the Money and Goods Markets Aggregate Supply, Unemployment and Inflation Fiscal and Monetary Policy Long-term Economic Growth Supply-side Policies 494 523 560 593 625 669 684 THE WORLD ECONOMY International Trade The Balance of Payments and Exchange Rates Global and Regional Interdependence Economics of Developing Countries 706 741 778 799 Postscript: The Castaways or Vote for Caliban 832 Appendix 1: Some Techniques of Economic Analysis Appendix 2: Websites Threshold Concepts and Key Ideas Glossary Index A:1 A:15 T:1 G:1 I:1 11/18/14 11:38 AM Contents Custom Publishing xv Preface xvi Student Resources Flowchart xx Lecturer Resources Flowchart xxi Acknowledgements xxii Publisher’s Acknowledgements xxiii Part A INTRODUCTION Why Economics is Good for You 2 What is economics? Puzzles and stories Applying the principles 3 4 5 1 Economics and Economies 6 1.1 1.2 1.3 What do economists study? Different economic systems The nature of economic reasoning 7 18 27 Boxes 1.1 1.2 1.3 1.4 1.5 1.6 1.7 What’s the latest economics news? Looking at macroeconomic data The opportunity costs of studying Scarcity and abundance Command economies Adam Smith (1723–90) Ceteris paribus 8 10 14 16 22 24 28 Part B FOUNDATIONS OF MICROECONOMICS 2 Supply and Demand 2.1 2.2 2.3 2.4 Demand Supply Price and output determination The control of prices Boxes *2.1 The demand for lamb 2.2 UK house prices A01_SLOM4772_09_SE_FM1.indd ix 34 35 42 45 55 2.3 2.4 Stock market prices Underground (or shadow) markets 3 Markets in Action 3.1 3.2 3.3 3.4 3.5 Elasticity The time dimension Indirect taxes Government rejection of market allocation Agriculture and agricultural policy Boxes 3.1 Advertising and its effect on demand curves 3.2 Any more fares? *3.3 Using calculus to calculate the price elasticity of demand 3.4 Short selling 3.5 Dealing in futures markets 3.6 Ashes to ashes? 3.7 The fallacy of composition 3.8 Feed the world Part C 4.4 Marginal utility theory Indifference analysis Demand under conditions of risk and uncertainty Behavioural economics Boxes *4.1 Using calculus to derive a marginal utility function 4.2 The marginal utility revolution: Jevons, Menger, Walras 4.3 Taking account of time *4.4 Love and caring *4.5 Consumer theory a further approach 4.6 Problems with insurance markets 4.7 Nudging people 4.8 Is economics the study of selfish behaviour? 5 Background to Supply 40 50 5.1 5.2 60 61 74 80 84 86 66 67 69 78 79 82 88 94 MICROECONOMIC THEORY 4 Background to Demand 4.1 *4.2 4.3 52 57 The short-run theory of production Costs in the short run 100 101 109 120 125 103 107 108 114 119 124 127 129 132 133 139 11/18/14 11:38 AM x CONTENTS 5.3 5.4 5.5 5.6 Boxes 5.1 5.2 5.3 *5.4 5.5 5.6 *5.7 5.8 *5.9 5.10 The long-run theory of production Costs in the long run Revenue Profit maximisation 144 154 158 162 Malthus and the dismal science of economics Diminishing returns in the bread shop The relationship between averages and marginals The relationship between TPP, MPP and APP The fallacy of using historic costs Cost curves in practice The Cobb–Douglas production function Minimum efficient scale Using calculus to find the maximum profit output The logic of logistics 134 137 138 138 140 143 149 156 165 167 6 Profit Maximising under Perfect Competition and Monopoly 6.1 6.2 6.3 6.4 Boxes 6.1 6.2 6.3 6.4 6.5 6.6 6.7 170 Alternative market structures Perfect competition Monopoly The theory of contestable markets 171 172 181 188 Concentration ratios Is perfect best? E-commerce and market structure Breaking Sky’s monopoly on live football coverage X inefficiency Cut-throat competition Airline deregulation in the USA and Europe 173 174 178 7 Profit Maximising under Imperfect Competition 185 186 187 190 Boxes 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 What do you maximise? The US sub-prime hosing crisis When is a theory not a theory? Enron Merger activity Stakeholder power? How do companies set prices? How firms increase profits by understanding ‘irrational’ consumers 9 The Theory of Distribution of Income 9.1 9.2 9.3 9.4 Wage determination under perfect competition Wage determination in imperfect markets Capital and profit Land and rent Boxes 9.1 Labour as a factor of production *9.2 Using indifference curve analysis to derive the individual’s supply curve of labour 9.3 Immigration and the UK labour market 9.4 Life at the mill 9.5 The rise and decline of the labour movement in the UK 9.6 How useful is marginal productivity theory? 9.7 Equal pay for equal work? 9.8 Flexible labour markets and the flexible firm 9.9 Behaviour at work 9.10 Stocks and flows 9.11 The economics of non-renewable resources Part D Monopolistic competition Oligopoly Game theory Price discrimination 194 197 209 214 Boxes 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 Selling ice cream as a student Increasing concentration OPEC Buying power The prisoners’ dilemma What’s the train fare to London? Peak-load pricing Just the ticket? 195 199 202 208 211 215 215 218 Problems with traditional theory Behavioural theories Alternative maximising theories Multiple aims Pricing in practice A01_SLOM4772_09_SE_FM1.indd x 246 247 256 268 278 248 250 251 257 260 261 262 264 266 271 280 MICROECONOMIC POLICY 10 Inequality, Poverty and Policies to Redistribute Income 10.1 Inequality and poverty 10.2 Taxes, benefits and the redistribution of income Boxes 10.1 10.2 10.3 *10.4 10.5 10.6 10.7 Poverty in the past Minimum wage legislation The Laffer curve Tax cuts and incentives UK tax credits Reducing inequality What the future holds 11 Markets, Efficiency and the Public Interest 8.1 8.2 8.3 8.4 8.5 244 193 7.1 7.2 7.3 7.4 8 Alternative Theories of the Firm 223 226 228 234 236 238 242 221 222 224 228 238 240 11.1 11.2 11.3 *11.4 11.5 Efficiency under perfect competition The case for government intervention Forms of government intervention Cost–benefit analysis Government failure and the case for the market 284 285 296 293 295 303 304 309 310 311 314 315 323 333 340...
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