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

2.1 What is an indifference curve?

2.2 Utility-maximizing with indifference curves

2.3 Changes in income

2.4 Responses to price changes: substitution and income effects

2.5 Indifference curves with labor-leisure and intertemporal choices

2.6 Sketching substitution and income effects

2.7 Key concepts and summary

2.8 Review questions

3 Present discounted value

3.1 Applying present discounted value to a stock

3.2 Applying present discounted value to a bond

3.3 Other applications

4 The expenditure-output model

4.1 The axes of the expenditure-output diagram

4.2 Building the aggregate expenditure schedule

4.3 Equilibrium in the keynesian cross model

4.4 The multiplier effect

4.5 Key concepts and summary

4.6 Self-check questions

4.7 Review questions

4.8 Critical thinking questions

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

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

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

2.1 Who demands and who supplies in financial markets?

2.2 Equilibrium in financial markets

2.3 Shifts in demand and supply in financial markets

2.4 The united states as a global borrower

2.5 Price ceilings in financial markets: usury laws

2.6 Key concepts and summary

3 The market system as an efficient mechanism for information

Introduction to elasticity

1 Price elasticity of demand and price elasticity of supply

2 Polar cases of elasticity and constant elasticity

2.1 Key concepts and summary

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

4.1 Income elasticity of demand

4.2 Cross-price elasticity of demand

4.3 Elasticity in labor and financial capital markets

4.4 Expanding the concept of elasticity

4.5 Key concepts and summary

Consumer choices

Introduction to consumer choices

1 Consumption choices

1.1 Total utility and diminishing marginal utility

1.2 Choosing with marginal utility

1.3 A rule for maximizing utility

1.4 Measuring utility with numbers

1.5 Key concepts and summary

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

Perfect competition

Introduction to perfect competition

1 Perfect competition and why it matters

2 How perfectly competitive firms make output decisions

2.1 Determining the highest profit by comparing total revenue and total

2.2 Comparing marginal revenue and marginal costs

2.3 Profits and losses with the average cost curve

2.4 The shutdown point

2.5 Short-run outcomes for perfectly competitive firms

2.6 Marginal cost and the firm’s supply curve

2.7 Key concepts and summary

3 Entry and exit decisions in the long run

3.1 How entry and exit lead to zero profits in the long run

3.2 The long-run adjustment and industry types

3.3 Key concepts and summary

4 Efficiency in perfectly competitive markets

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

2.1 Why do oligopolies exist?

2.2 Collusion or competition?

2.3 The prisoner’s dilemma

2.4 The oligopoly version of the prisoner’s dilemma

2.5 How to enforce cooperation

2.6 Tradeoffs of imperfect competition

2.7 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

2.1 Restrictive practices

2.2 Key concepts and summary

3 Regulating natural monopolies

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

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

5 International environmental issues

6 The tradeoff between economic output and environmental protection

6.1 Key concepts and summary

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

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

2.1 Key concepts and summary

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

Issues in labor markets: unions, discrimination, immigration

Introduction to issues in labor markets: unions, discrimination,

1.1 Facts about union membership and pay

1.2 Higher wages for union workers

1.3 The decline in u.s. union membership

1.4 Key concepts and summary

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

1.1 Early stage financial capital

1.2 Profits as a source of financial capital

1.3 Borrowing: banks and bonds

1.4 Corporate stock and public firms

1.5 How firms choose between sources of financial capital

1.6 Key concepts and summary

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

2.1 Identifiable winners, anonymous losers

2.2 Pork barrels and logrolling

2.3 Key concepts and summary

3 Flaws in the democratic system of government

The macroeconomic perspective

Introduction to the macroeconomic perspective

1 Measuring the size of the economy: gross domestic product

2 Adjusting nominal values to real values

3 Tracking real gdp over time

4 Comparing gdp among countries

4.1 Converting currencies with exchange rates

4.2 Gdp per capita

4.3 Key concepts and summary

5 How well gdp measures the well-being of society

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

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

1.1 The price of a basket of goods

1.2 Index numbers

1.3 Key concepts and summary

2 How changes in the cost of living are measured

2.1 The cpi and core inflation index

2.2 Practical solutions for the substitution and the quality/new goods

2.3 Additional price indices: ppi, gdp deflator, and more

2.4 Key concepts and summary

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

5.1 Indexing in private markets

5.2 Indexing in government programs

5.3 Might indexing reduce concern over inflation?

5.4 A preview of policy discussions of inflation

5.5 Key concepts and summary

The international trade and capital flows

Introduction to the international trade and capital flows

1 Measuring trade balances

1.1 Components of the u.s. current account balance

1.2 Key concepts and summary

2 Trade balances in historical and international context

3 Trade balances and flows of financial capital

4 The national saving and investment identity

4.1 Understanding the determinants of the trade and current account balance

4.2 Domestic saving and investment determine the trade balance

4.3 Exploring trade balances one factor at a time

4.4 Short-term movements in the business cycle and the trade balance

4.5 Key concepts and summary

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

3.1 How productivity growth shifts the as curve

3.2 How changes in input prices shift the as curve

3.3 Other supply shocks

3.4 Key concepts and summary

4 Shifts in aggregate demand

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

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

2 The building blocks of keynesian analysis

3 The phillips curve

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

Money and banking

Introduction to money and banking

1 Defining money by its functions

1.1 Barter and the double coincidence of wants

1.2 Functions for money

1.3 Commodity versus fiat money

1.4 Key concepts and summary

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

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

4.1 The effect of monetary policy on interest rates

4.2 The effect of monetary policy on aggregate demand

4.3 Federal reserve actions over last four decades

4.4 Quantitative easing

4.5 Key concepts and summary

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

2 Demand and supply shifts in foreign exchange markets

3 Macroeconomic effects of exchange rates

4 Exchange rate policies

4.1 Floating exchange rates

4.2 Using soft pegs and hard pegs

4.3 Tradeoffs of soft pegs and hard pegs

4.4 A merged currency

4.5 Key concepts and summary

Government budgets and fiscal policy

Introduction to government budgets and fiscal policy

1 Government spending

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

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

2.1 Crowding out physical capital investment

2.2 The interest rate connection

2.3 Public investment in physical capital

2.4 Public investment in human capital

2.5 How fiscal policy can improve technology

2.6 Summary of fiscal policy, investment, and economic growth

2.7 Key concepts and summary

3 How government borrowing affects private saving

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

2.1 Growth policies for the high-income countries

2.2 Growth policies for the middle-income economies

2.3 Growth policies for economically-challenged countries

2.4 Key concepts and summary

3 Causes of unemployment around the world

3.1 Unemployment from a recession

3.2 The natural rate of unemployment

3.3 Undeveloped labor markets

3.4 Key concepts and summary

4 Causes of inflation in various countries and regions

5 Balance of trade concerns

International trade

Introduction to international trade

1 Absolute and comparative advantage

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

Globalization and protectionism

Introduction to globalization and protectionism

1 Protectionism: an indirect subsidy from consumers to producers

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

2.1 Fewer jobs?

2.2 Trade and wages

2.3 Labor standards and working conditions

2.4 Key concepts and summary

3 Arguments in support of restricting imports

3.1 The infant industry argument

3.2 The anti-dumping argument

3.3 The environmental protection argument

3.4 The unsafe consumer products argument

3.5 The national interest argument

3.6 Key concepts and summary

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

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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