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Contents

Themes and capstone units

  1. Preface
  2. A note to instructors
  3. Producing The Economy
  4. List of resources
    1. Einsteins
    2. Great economists
    3. How economists learn from facts
    4. When economists disagree
    5. Exercises
    6. Videos
    7. Figures
  5. 1—The capitalist revolution
    1. Introduction
    2. 1.1 Income inequality
      Global economyInequality
    3. 1.2 Measuring income and living standards
    4. 1.3 History’s hockey stick: Growth in income
      History, instability, and growthGlobal economyInequalityInnovation
    5. 1.4 The permanent technological revolution
      History, instability, and growthInnovation
    6. 1.5 The economy and the environment
      Environment
    7. 1.6 Capitalism defined: Private property, markets, and firms
      History, instability, and growth
    8. 1.7 Capitalism as an economic system
      History, instability, and growth
    9. 1.8 The gains from specialization
      History, instability, and growthGlobal economy
    10. 1.9 Capitalism, causation and history’s hockey stick
      History, instability, and growthGlobal economyInnovation
    11. 1.10 Varieties of capitalism: Institutions, government, and the economy
      History, instability, and growthGlobal economyPolitics and policy
    12. 1.11 Economics and the economy
    13. 1.12 Conclusion
    14. 1.13 References
  6. 2—Technology, population, and growth
    1. Introduction
    2. 2.1 Economists, historians, and the Industrial Revolution
      History, instability, and growthGlobal economyInnovation
    3. 2.2 Economic models: How to see more by looking at less
    4. 2.3 Basic concepts: Prices, costs, and innovation rents
      Innovation
    5. 2.4 Modelling a dynamic economy: Technology and costs
      Innovation
    6. 2.5 Modelling a dynamic economy: Innovation and profit
      Innovation
    7. 2.6 The British Industrial Revolution and incentives for new technologies
      History, instability, and growthInequalityInnovation
    8. 2.7 Malthusian economics: Diminishing average product of labour
    9. 2.8 Malthusian economics: Population grows when living standards rise
      History, instability, and growthInnovation
    10. 2.9 The Malthusian trap and long-term economic stagnation
      History, instability, and growthInnovation
    11. 2.10 Escaping from Malthusian stagnation
      History, instability, and growthInequalityInnovation
    12. 2.11 Conclusion
    13. 2.12 References
  7. 3—Scarcity, work, and choice
    1. Introduction
    2. 3.1 Labour and production
    3. 3.2 Preferences
    4. 3.3 Opportunity costs
    5. 3.4 The feasible set
    6. 3.5 Decision making and scarcity
    7. 3.6 Hours of work and economic growth
      Global economyInnovation
    8. 3.7 Income and substitution effects on hours of work and free time
    9. 3.8 Is this a good model?
    10. 3.9 Explaining our working hours: Changes over time
      History, instability, and growthInnovation
    11. 3.10 Explaining our working hours: Differences between countries
      Global economyPolitics and policy
    12. 3.11 Conclusion
    13. 3.12 References
  8. 4—Social interactions
    1. Introduction
    2. 4.1 Social interactions: Game theory
    3. 4.2 Equilibrium in the invisible hand game
    4. 4.3 The prisoners’ dilemma
      Environment
    5. 4.4 Social preferences: Altruism
      Inequality
    6. 4.5 Altruistic preferences in the prisoners’ dilemma
      Inequality
    7. 4.6 Public goods, free riding, and repeated interaction
      Inequality
    8. 4.7 Public good contributions and peer punishment
    9. 4.8 Behavioural experiments in the lab and in the field
      Politics and policy
    10. 4.9 Cooperation, negotiation, conflicts of interest, and social norms
      InequalityEnvironment
    11. 4.10 Dividing a pie (or leaving it on the table)
      Inequality
    12. 4.11 Fair farmers, self-interested students?
      Global economy
    13. 4.12 Competition in the ultimatum game
    14. 4.13 Social interactions: Conflicts in the choice among Nash equilibria
      Global economyInequalityEnvironmentInnovation
    15. 4.14 Conclusion
    16. 4.15 References
  9. 5—Property and power: Mutual gains and conflict
    1. Introduction
    2. 5.1 Institutions and power
      History, instability, and growthInequality
    3. 5.2 Evaluating institutions and outcomes: The Pareto criterion
      History, instability, and growth
    4. 5.3 Evaluating institutions and outcomes: Fairness
      History, instability, and growthInequality
    5. 5.4 A model of choice and conflict
      History, instability, and growthInequality
    6. 5.5 Technically feasible allocations
    7. 5.6 Allocations imposed by force
      History, instability, and growth
    8. 5.7 Economically feasible allocations and the surplus
      Inequality
    9. 5.8 The Pareto efficiency curve and the distribution of the surplus
      InequalityPolitics and policy
    10. 5.9 Politics: Sharing the surplus
      Politics and policy
    11. 5.10 Bargaining to a Pareto-efficient sharing of the surplus
    12. 5.11 Angela and Bruno: The moral of the story
      History, instability, and growthInequalityPolitics and policy
    13. 5.12 Measuring economic inequality
      InequalityPolitics and policy
    14. 5.13 A policy to redistribute the surplus and raise efficiency
      InequalityPolitics and policy
    15. 5.14 Conclusion
    16. 5.15 References
  10. 6—The firm: Owners, managers, and employees
    1. Introduction
    2. 6.1 Firms, markets, and the division of labour
    3. 6.2 Other people’s money: The separation of ownership and control
    4. 6.3 Other people’s labour
    5. 6.4 Employment rents
      Inequality
    6. 6.5 Determinants of the employment rent
      Politics and policy
    7. 6.6 Work and wages: The labour discipline model
      Politics and policy
    8. 6.7 Wages, effort, and profits in the labour discipline model
      Inequality
    9. 6.8 Putting the model to work: Owners, employees, and the economy
      Politics and policy
    10. 6.9 Another kind of business organization
      InequalityPolitics and policy
    11. 6.10 Principals and agents: Interactions under incomplete contracts
    12. 6.11 Conclusion
    13. 6.12 References
  11. 7—The firm and its customers
    1. Introduction
    2. 7.1 Breakfast cereal: Choosing a price
    3. 7.2 Economies of scale and the cost advantages of large-scale production
      Innovation
    4. 7.3 Production: The cost function for Beautiful Cars
    5. 7.4 Demand and isoprofit curves: Beautiful Cars
    6. 7.5 Setting price and quantity to maximize profit
    7. 7.6 Look at profit maximization as marginal revenue and marginal cost
    8. 7.7 Gains from trade
    9. 7.8 The elasticity of demand
    10. 7.9 Using demand elasticities in government policy
      Politics and policy
    11. 7.10 Price-setting, competition, and market power
      Politics and policy
    12. 7.11 Product selection, innovation, and advertising
      Innovation
    13. 7.12 Prices, costs, and market failure
    14. 7.13 Conclusion
    15. 7.14 References
  12. 8—Supply and demand: Price-taking and competitive markets
    1. Introduction
    2. 8.1 Buying and selling: Demand and supply
    3. 8.2 The market and the equilibrium price
    4. 8.3 Price-taking firms
    5. 8.4 Market supply and equilibrium
    6. 8.5 Competitive equilibrium: Gains from trade, allocation, and distribution
    7. 8.6 Changes in supply and demand
      Global economy
    8. 8.7 The effects of taxes
      Politics and policy
    9. 8.8 The model of perfect competition
    10. 8.9 Looking for competitive equilibria
    11. 8.10 Price-setting and price-taking firms
      Politics and policy
    12. 8.11 Conclusion
    13. 8.12 References
  13. 9—The labour market: Wages, profits, and unemployment
    1. Introduction
    2. 9.1 The wage-setting curve, the price-setting curve, and the labour market
    3. 9.2 Measuring the economy: Employment and unemployment
      Global economy
    4. 9.3 The wage-setting curve: Employment and real wages
    5. 9.4. The firm’s hiring decision
    6. 9.5. The price-setting curve: Wages and profits in the whole economy
    7. 9.6 Wages, profits, and unemployment in the whole economy
    8. 9.7 How changes in demand for goods and services affect unemployment
      Politics and policy
    9. 9.8. Labour market equilibrium and the distribution of income
      InequalityPolitics and policy
    10. 9.9. Labour supply, labour demand, and bargaining power
      Global economyPolitics and policy
    11. 9.10. Labour unions: Bargained wages and the union voice effect
      History, instability, and growthGlobal economyPolitics and policy
    12. 9.11 Labour market policies to address unemployment and inequality
      InequalityPolitics and policy
    13. 9.12. Looking backward: Baristas and bread markets
    14. 9.13 Conclusion
    15. 9.14 References
  14. 10—Banks, money, and the credit market
    1. Introduction
    2. 10.1 Money and wealth
    3. 10.2 Borrowing: Bringing consumption forward in time
    4. 10.3 Impatience and the diminishing marginal returns to consumption
    5. 10.4 Borrowing allows smoothing by bringing consumption to the present
    6. 10.5 Lending and storing: Smoothing and moving consumption to the future
    7. 10.6 Investing: Another way to move consumption to the future
      Inequality
    8. 10.7 Assets, liabilities, and net worth
    9. 10.8 Banks, money, and the central bank
      History, instability, and growthPolitics and policy
    10. 10.9 The central bank, the money market, and interest rates
      History, instability, and growthPolitics and policy
    11. 10.10 The business of banking and bank balance sheets
    12. 10.11 The central bank’s policy rate can affect spending
      Politics and policy
    13. 10.12 Credit market constraints: A principal–agent problem
      Inequality
    14. 10.13 Inequality: Lenders, borrowers, and those excluded from credit markets
      Inequality
    15. 10.14 Conclusion
    16. 10.15 References
  15. 11—Rent-seeking, price-setting, and market dynamics
    1. Introduction
    2. 11.1 How people changing prices to gain rents can lead to a market equilibrium
    3. 11.2 How market organization can influence prices
    4. 11.3 Short-run and long-run equilibria
    5. 11.4 Prices, rent-seeking, and market dynamics at work: Oil prices
      History, instability, and growthGlobal economyPolitics and policy
    6. 11.5 The value of an asset: Basics
    7. 11.6 Changing supply and demand for financial assets
    8. 11.7 Asset market bubbles
    9. 11.8 Modelling bubbles and crashes
      History, instability, and growth
    10. 11.9 Non-clearing markets: Rationing, queuing, and secondary markets
      Politics and policy
    11. 11.10 Markets with controlled prices
      Politics and policy
    12. 11.11 The role of economic rents
      InequalityInnovationPolitics and policy
    13. 11.12 Conclusion
    14. 11.13 References
  16. 12—Markets, efficiency, and public policy
    1. Introduction
    2. 12.1 Market failure: External effects of pollution
      Environment
    3. 12.2 External effects and bargaining
      Environment
    4. 12.3 External effects: Policies and income distribution
      InequalityEnvironmentPolitics and policy
    5. 12.4 Property rights, contracts, and market failures
      History, instability, and growthEnvironmentPolitics and policy
    6. 12.5 Public goods
      EnvironmentInnovationPolitics and policy
    7. 12.6 Missing markets: Insurance and lemons
      Politics and policy
    8. 12.7 Incomplete contracts and external effects in credit markets
      InequalityPolitics and policy
    9. 12.8 The limits of markets
      History, instability, and growthInequalityPolitics and policy
    10. 12.9 Market failure and government policy
      Politics and policy
    11. 12.10 Conclusion
    12. 12.11 References
  17. 13—Economic fluctuations and unemployment
    1. Introduction
    2. 13.1 Growth and fluctuations
      History, instability, and growthPolitics and policy
    3. 13.2 Output growth and changes in unemployment
      Global economy
    4. 13.3 Measuring the aggregate economy
    5. 13.4 Measuring the aggregate economy: The components of GDP
      Politics and policy
    6. 13.5 How households cope with fluctuations
      History, instability, and growthPolitics and policy
    7. 13.6 Why is consumption smooth?
    8. 13.7 Why is investment volatile?
      History, instability, and growthGlobal economyInnovation
    9. 13.8 Measuring the economy: Inflation
      History, instability, and growthGlobal economy
    10. 13.9 Conclusion
    11. 13.10 References
  18. 14—Unemployment and fiscal policy
    1. Introduction
    2. 14.1 The transmission of shocks: The multiplier process
    3. 14.2 The multiplier model
    4. 14.3 Household target wealth, collateral, and consumption spending
      History, instability, and growthPolitics and policy
    5. 14.4 Investment spending
      InnovationPolitics and policy
    6. 14.5 The multiplier model: Including the government and net exports
      Politics and policy
    7. 14.6 Fiscal policy: How governments can dampen and amplify fluctuations
      History, instability, and growthPolitics and policy
    8. 14.7 The multiplier and economic policymaking
      Politics and policy
    9. 14.8 The government’s finances
      History, instability, and growthGlobal economyPolitics and policy
    10. 14.9 Fiscal policy and the rest of the world
      Global economyPolitics and policy
    11. 14.10 Aggregate demand and unemployment
      Politics and policy
    12. 14.11 Conclusion
    13. 14.12 References
  19. 15—Inflation, unemployment, and monetary policy
    1. Introduction
    2. 15.1 What’s wrong with inflation?
      Inequality
    3. 15.2 Inflation results from conflicting and inconsistent claims on output
    4. 15.3 Inflation, the business cycle, and the Phillips curve
    5. 15.4 Inflation and unemployment: Constraints and preferences
      Politics and policy
    6. 15.5 What happened to the Phillips curve?
      History, instability, and growthPolitics and policy
    7. 15.6 Expected inflation and the Phillips curve
    8. 15.7 Supply shocks and inflation
      History, instability, and growthGlobal economyPolitics and policy
    9. 15.8 Monetary policy
      Global economyPolitics and policy
    10. 15.9 The exchange rate channel of monetary policy
      Global economyPolitics and policy
    11. 15.10 Demand shocks and demand-side policies
      Innovation
    12. 15.11 Macroeconomic policy before the global financial crisis: Inflation-targeting policy
      History, instability, and growthGlobal economyPolitics and policy
    13. 15.12 Another reason for rising inflation at low unemployment
    14. 15.13 Conclusion
    15. 15.14 References
  20. 16—Technological progress, employment, and living standards in the long run
    1. Introduction
    2. 16.1 Technological progress and living standards
      History, instability, and growthInnovation
    3. 16.2 The job creation and destruction process
      Global economyInequalityInnovation
    4. 16.3 Job flows, worker flows, and the Beveridge curve
      Politics and policy
    5. 16.4 Investment, firm entry, and the price-setting curve in the long run
      Innovation
    6. 16.5 New technology, wages, and unemployment in the long run
      History, instability, and growthInnovationPolitics and policy
    7. 16.6 Technological change and income inequality
      InequalityInnovation
    8. 16.7 How long does it take for labour markets to adjust to shocks?
      History, instability, and growthGlobal economyInnovation
    9. 16.8 Institutions and policies: Why do some countries do better than others?
      History, instability, and growthGlobal economyInequalityInnovationPolitics and policy
    10. 16.9 Technological change, labour markets, and trade unions
      History, instability, and growthGlobal economyInequalityInnovationPolitics and policy
    11. 16.10 Changes in institutions and policies
      History, instability, and growthPolitics and policy
    12. 16.11 Slower productivity growth in services, and the changing nature of work
      History, instability, and growthGlobal economyInnovation
    13. 16.12 Wages and unemployment in the long run
      InnovationPolitics and policy
    14. 16.13 Conclusion
    15. 16.14 References
  21. 17—Capstone: The Great Depression, golden age, and global financial crisis
    1. Introduction
    2. 17.1 Three economic epochs
    3. 17.2 The Great Depression, positive feedbacks, and aggregate demand
    4. 17.3 Policymakers in the Great Depression
    5. 17.4 The golden age of high growth and low unemployment
    6. 17.5 Workers and employers in the golden age
    7. 17.6 The end of the golden age
    8. 17.7 After stagflation: The fruits of a new policy regime
    9. 17.8 Before the financial crisis: Households, banks, and the credit boom
    10. 17.9 Modelling housing bubbles
    11. 17.10 The financial crisis and the great recession
    12. 17.11 The role of banks in the crisis
    13. 17.12 The economy as teacher
    14. 17.13 Conclusion
    15. 17.14 References
  22. 18—Capstone: The nation and the world economy
    1. Introduction
    2. 18.1 Globalization and deglobalization in the long run
    3. 18.2 Globalization and investment
    4. 18.3 Globalization and migration
    5. 18.4 Specialization and the gains from trade among nations
    6. 18.5 Specialization, factor endowments, and trade between countries
    7. 18.6 Winners and losers from trade and specialization
    8. 18.7 Winners and losers in the very long run and along the way
    9. 18.8 Migration: Globalization of labour
    10. 18.9 Globalization and anti-globalization
    11. 18.10 Trade and growth
    12. 18.11 Conclusion
    13. 18.12 References
  23. 19—Capstone: Economic inequality
    1. Introduction
    2. 19.1 Inequality across the world and over time
    3. 19.2. Accidents of birth: Another lens to study inequality
    4. 19.3 What (if anything) is wrong with inequality?
    5. 19.4 How much inequality is too much (or too little)?
    6. 19.5 Endowments, technology, and institutions
    7. 19.6 Inequality, endowments, and principal–agent relationships
    8. 19.7 Putting the model to work: Explaining changes in inequality
    9. 19.8 Predistribution
    10. 19.9 Explaining recent trends in inequality in market income
    11. 19.10 Redistribution: Taxes and transfers
    12. 19.11 Equality and economic performance
    13. 19.12 Conclusion
    14. 19.13 References
  24. 20—Capstone: Economics of the environment
    1. Introduction
    2. 20.1 Recap: External effects, incomplete contracts, and missing markets
    3. 20.2 Climate change
    4. 20.3 The abatement of environmental damages: Cost-benefit analysis
    5. 20.4 Conflicts of interest: Bargaining over wages, pollution, and jobs
    6. 20.5 Cap and trade environmental policies
    7. 20.6 The measurement challenges of environmental policy
    8. 20.7 Dynamic environmental policies: Future technologies and lifestyles
    9. 20.8 Environmental dynamics
    10. 20.9 Why is addressing climate change so difficult?
    11. 20.10 Policy choices matter
    12. 20.11 Conclusion
    13. 20.12 References
  25. 21—Capstone: Innovation, information, and the networked economy
    1. Introduction
    2. 21.1 The innovation process: Invention and diffusion
    3. 21.2 Innovation systems
    4. 21.3 External effects: Complements, substitutes, and coordination
    5. 21.4 Economies of scale and winner-take-all competition
    6. 21.5 Matching (two-sided) markets
    7. 21.6 Intellectual property rights
    8. 21.7 Optimal patents: Balancing the objectives of invention and diffusion
    9. 21.8 Public funding of basic research, education, and information infrastructure
    10. 21.9 Conclusion
    11. 21.10 References
  26. 22—Capstone: Economics, politics, and public policy
    1. Introduction
    2. 22.1 The government as an economic actor
    3. 22.2 Government acting as a monopolist
    4. 22.3 Political competition affects how the government will act
    5. 22.4 Why an erstwhile dictator might submit to political competition
    6. 22.5 Democracy as a political institution
    7. 22.6 Political preferences and electoral competition: The median voter model
    8. 22.7 A more realistic model of electoral competition
    9. 22.8 The advance of democracy
    10. 22.9 Varieties of democracy
    11. 22.10 Democracy makes a difference
    12. 22.11 A puzzle: The persistence of unfairness and market failures in democracies
    13. 22.12 Economic infeasibility
    14. 22.13 Administrative infeasibility
    15. 22.14 Special interests
    16. 22.15 Policy matters and economics works
    17. 22.16 Conclusion
    18. 22.17 References
  27. Looking forward to economics after Core Economics website
  28. Glossary
  29. Bibliography
  30. Leibnizes
    1. 2.2.1 Introducing the Leibnizes
    2. 2.7.1 The production function
    3. 3.1.1 Average and marginal productivity
    4. 3.1.2 Diminishing marginal productivity
    5. 3.1.3 Concave and convex functions
    6. 3.2.1 Indifference curves and the marginal rate of substitution
    7. 3.4.1 Marginal rate of transformation
    8. 3.5.1 Optimal allocation of free time: MRT meets MRS
    9. 3.6.1 Modelling technological change
    10. 3.7.1 Mathematics of income and substitution effects
    11. 4.4.1 Altruistic preferences: Finding the optimal distribution
    12. 5.4.1 Quasi-linear preferences
    13. 5.4.2 Angela’s choice of working hours
    14. 5.7.1 Angela’s choice of working hours when she pays rent
    15. 5.8.1 The Pareto efficiency curve
    16. 6.6.1 The worker’s best response function
    17. 6.7.1 Profit, wages, and effort
    18. 7.3.1 Average and marginal cost functions
    19. 7.4.1 Isoprofit curves and their slopes
    20. 7.5.1 The profit-maximizing price
    21. 7.6.1 Marginal revenue and marginal cost
    22. 7.8.1 The elasticity of demand
    23. 8.4.1 The firm and market supply curves
    24. 8.4.2 Market equilibrium
    25. 8.5.1 Gains from trade
    26. 8.6.1 Shifts in demand and supply
    27. 11.8.1 Price bubbles
    28. 12.1.1 External effects of pollution
    29. 12.3.1 Pigouvian taxes
    30. 22.2.1 Expected duration of the dictator or governing elite
    31. 22.2.2 How the monopolist sets the rent-maximizing level of taxes
    32. 22.3.1 The income and substitution effect of an increase in political competition
  31. Copyright acknowledgements