ECONOMICS Daron Acemoglu David Laibsort John A. List

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GLOBAL EDITIONECONOMICSDaron AcemogluMassachusetts Institute of TechnologyDavid LaibsortHarvard UniversityJohn A. ListUniversity of ChicagoPEARSONBoston Columbus Indianapolis New York San Francisco HobokenAmsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal TorontoDelhi Mexico City Säo Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

ContentsPART IINTRODUCTION TOECONOMICS40Chapter 1: The Principlesand Practica of Economics401.1 The Scope of EconomicsEconomic Agents and Economic ResourcesDefinition of EconomicsPositive Economics and Normative EconomicsMicroeconomics and Macroeconomics41414243441.2 Three Principles of Economics1.3 The First Principle of Economics:OptimizationTrade-offs and Budget ConstraintsOpportunity CostCost-Benefit AnalysisEvidence-Based Economics: Is Facebook free?1.4 The Second Principle of Economics:EquilibriumThe Free-Rider Problem4451521.5 The Third Principle of Economics: Empiricism1.6 Is Economics Good for You?SummaryKey TermsQuestionsProblems525354545555Chapter 2: Economic Methodsand Economic Questions4546464748582.1 The Scientific MethodModels and DataAn Economic ModelEvidence-Based Economics: How muchmore do workers with a College education earn?MeansArgument by Anecdote5959612.2 Causation and CorrelationThe Red Ad Campaign BluesCausation versus CorrelationExperimental Economics and Natural ExperimentsEvidence-Based Economics: How much dowages increase when an individual is compelledby law to get an extra year of schooling?64646566626363672.3 Economic Questions and AnswersSummaryKey TermsQuestionsProblems6870707071Appendix: Constructing and InterpretingGraphsA Study About IncentivesExperimental DesignDescribing VariablesCause and EffectAppendix Key TermsAppendix Problems72727273757879Chapter 3: Optimization: Döingthe Best You Can803.1 Two Kinds of Optimization:A Matter of FocusChoice & Consequence: Do People ReallyOptimize?3.2 Optimization in LevelsComparative Statics3.3 Optimization in Differences:Marginal AnalysisMarginal CostEvidence-Based Economics: How doeslocation affect the rental cost of housing?SummaryKey TermsQuestionsProblemsChapter 4: Demand, Suppigand Equilibrium4.1 MarketsCompetitive Markets4.2 How Do Buyers Behave?Demand CurvesWillingness to PayFrom Individual Demand Curvesto Aggregated Demand CurvesBuilding the Market Demand CurveShifting the Demand 0511

Evidence-Based Economics: How muchmore gasoline would people buy if its pricewere lower?1074.3 How Do Seilers Behave?Supply CurvesWillingness to AcceptFrom the Individual Supply Curve to the MarketSupply CurveShilling the Supply Curve1091091104.4 Supply and Demand in EquilibriumCurve Shifting in Competitive Equilibrium1131151101104.5 What Would Happen If the GovernmentTried to Dictate the Price of Gasoline?Choice & Consequence: The UnintendedConsequences of Fixing Market PricesSummaryKey TermsQuestionsProblemsPART II117119120121121122FOUNDATIONSOF MICROECOIMOMICS124Consumersand Incentives1245.1 The Buyer's ProblemWhatYouLikePrices of Goods and ServicesChoice & Consequence: Absolutes vs.PercentagesHow Much Money You Have to Spend1251251265.2 Putting It All TogetherPrice ChangesIncome Changes1281301315.3 From the Buyer's Problem to theDemand Curve1315.4 Consumer SurplusAn Empty Feeling: Loss in Consumer SurplusWhen Price IncreasesEvidence-Based Economics: Would a smokerquit the habit for 100 per month?5.5 Demand ElasticitiesThe Price Elasticity of DemandMoving Up and Down the Demand CurveElasticity MeasuresDeterminants of the Price Elasticity of DemandThe Cross-Price Elasticity of DemandThe Income Elasticity of DemandLetting the Data Speak: Should McDonald'sBe Interested in Elasticities?12Contents126127SummaryKey TermsQuestionsProblemsAppendix: Representing Preferenceswith Indifference Curves: Another Useof the Budget ConstraintAppendix QuestionsAppendix Key TermsChapter 6: Seilers and Incentives6.1 Seilers in a Perfectly CompetitiveMarket6.2 The Seiler s ProblemMaking the Goods: How Inputs Are Turnedinto OutputsThe Cost of Döing Business: IntroducingCost CurvesChoice & Consequence: Average Cost VersusMarginal CostThe Rewards of Döing Business: IntroducingRevenue CurvesPutting It All Together: Using the ThreeComponents to Do the Best You CanChoice & Consequence: MaximizingTotal Profit, Not Per-Unit Profit1521531531541561581581601621621631646.4 Producer Surplus1656.5 From the Short Run to the Long RunLong-Run Supply CurveChoice & Consequence: Visiting a CarManufacturing Plant167168135138138139140141143143144Appendix: When Firms Have DifferentCost Structures1341491511516.3 From the Seller's Problem to theSupply CurvePrice Elasticity of SupplyShutdown6.6 From the Firm to the Market: Long-RunCompetitive EquilibriumFirm EntryFirm ExitZero Profits in the Long RunEconomic Profit versusAccounting ProfitEvidence-Based Economics: Howwould an ethanol subsidy affect ethanolproducers?SummaryKey 71172173176177177178180

Chapter 7: Perfect Competitionand the Invisible Hand1827.1 Perfect Competition and Efficiency183Social Surplus184Pareto Efficiency1867.2 Extending the Reach of the InvisibleHand: From the Individual to the Firm1867.3 Extending the Reach of the InvisibleHand: Allocation of Resources AcrossIndustries1907.4 Prices Guide the Invisible Hand193Deadweight Loss194The Command Economy195Choice & Consequence: FEMA and WalmartAfter Katrina196The Central Planner197Choice & Consequence: Commandand Control at Kmart1997.5 Equity and Efficiency199Evidence-Based Economics: Can markets composedof only self-interested peoplemaximize the overall well-being of society?200Summary204Key Terms204Questions204Problems205Chapter 8: Trade8.1 The Production Possibilities CurveCalculating Opportunity Cost8.2 The Basis for Trade: ComparativeAdvantageSpecializationAbsolute AdvantageChoice & Consequence: An Experiment onComparative AdvantageThe Price of the Trade8.3 Trade Between StatesChoice & Consequence: Should LeBron JamesPaint His Own House?Economy-Wide PPCComparative Advantage and SpecializationAmong States2082092112122132132142152162172172198.4 Trade Between Countries220Determinants of Trade Between Countries222Letting the Data Speak: Fair Trade Products223Exporting Nations: Winners and Losers223Importing Nations: Winners and Losers224Where Do World Prices Come From?225Determinants of a Country's Comparative Advantage 2258.5 Arguments Against Free TradeNational Security ConcernsFear of GlobalizationEnvironmental and Resource ConcernsInfant Industry ArgumentsThe Effects of TariffsEvidence-Based Economics: Will freetrade cause you to lose yourjob?SummaryKey TermsQuestionsProblemsChapter 9: Externalftiesand Public Goods2262262262262272272292312312322322369.1 ExternalitiesA "Bröken" Invisible Hand: Negative ExternalitiesA "Bröken" Invisible Hand: PositiveExternalitiesChoice & Consequence: PositiveExternalities in Spots You Never ImaginedPecuniary Externalities2372389.2 Private Solutions to ExternalitiesPrivate Solution: BargainingThe Coase TheoremPrivate Solution: Döing the Right Thing2432442442452402422439.3 Government Solutions to Externalities246Government Regulation: Command-and-ControlPolicies246Government Regulation: Market-Based Approaches 247Corrective Taxes and Subsidies247Letting the Data Speak: How To ValueExternalities248Letting the Data Speak: Pay As You Throw:Consumers Create Negative Externalities Tool2499.4 Public Goods250Government Provision of Public Goods251Choice & Consequence: The Free-Rider'sDilemma252Private Provision of Public Goods2549.5 Common Pool Resource GoodsChoice & Consequence: Tragedyof the CommonsChoice & Consequence: The Race to FishEvidence-Based Economics: How canthe Queen of England lower her commute timeto Wembley Stadium?SummaryKey 260261

ChaThe Governmentin the Economy: Taxationand Regulation10.1 Taxation and Government Spendingin the United StatesWhere Does the Money Come From?Why Does the Government Tax and Spend?Letting the Data Speak: Understanding FederalIncome Tax BracketsTaxation: Tax Incidence and DeadweightLossesChoice & Consequence: The DeadweightLoss Depends on the Tax10.2 RegulationDirect Regulation10.3 Government FailuresThe Direct Costs of BureaucraciesCorruptionUnderground Economy10.4 Equity Versus Efficiency10.5 Consumer Sovereignty and PaternalismThe DebateEvidence-Based Economics: What is theoptimal size of government?Letting the Data Speak: The Efficiency ofGovernment Versus Privately Run ExpeditionsSummaryKey TermsQuestionsProblems: Markets forFactors of Production11.1 The Competitive Labor MarketThe Demand for Labor11.2 The Supply of Labor: Your Labor-LeisureTrade-offChoice & Consequence: Producing Web Sitesand Computer ProgramsLabor Market Equilibrium: Supply MeetsDemandLetting the Data Speak: "Get Your HotDogsHere!"Labor Demand ShiftersLabor Supply ShiftersLetting the Data Speak: Do Wages ReallyGo Down if Labor Supply Increases?11.3 Wage InequalityDifferences in Human CapitalDifferences in Compensating Wage 4296296296297297299299300301Discrimination in the Job Market301Choice & Consequence: Paying for WorkerTraining301Choice & Consequence: Compensating WageDifferentials302Changes in Wage Inequality Over Time30411.4 The Market for Other Factorsof Production: Physical Capital and Land305Evidence-Based Economics: Is there discriminationin the labor market?306Summary308Key Terms308Questions308Problems309PART III MARKET STRUCTURE312Monopoly31212.1 Introducing a New Market Structure31312.2 Sources of Market PowerLegal Market PowerNatural Market PowerChoice & Consequence: Cleaning Up WhileCleaningUp 315Control of Key ResourcesEconomies of Scale12.3 The Monopolist's ProblemRevenue CurvesPrice, Marginal Revenue, and Total Revenue12.4 Choosing the Optimal Quantityand PriceProducing the Optimal QuantitySetting the Optimal PriceHow a Monopolist Calculates ProfitsDoes a Monopoly Have a Supply Curve?12.5 The "Bröken" Invisible Hand: The Costof Monopoly12.6 Restoring EfficiencyThree Degrees of Price DiscriminationLetting the Data Speak: Third-Degree PriceDiscrimination in Action 32912.7 Government Policy TowardMonopolyThe Microsoft CasePrice RegulationEvidence-Based Economics: Can amonopoly ever be good for society?SummaryKey TermsQuestionsProblems3143143153 334334334335

Chapter 13: Game Theoryand Strategie Play33813.1 Simultaneous Move GamesBest Response« and the Prisoners' DilemmaDominant Strategies and Dominant StrategyEquilibriumGames without Dominant Strategies33934013.2 Nash EquilibriumFinding a Nash EquilibriumChoice & Consequence: Work or Surf?13.3 Applications of Nash EquilibriaTragedy of the Commons RevisitedZero-Sum Games13.4 How Do People Actually PlaySuch Games?Game Theory in Penalty Kicks13.5 Extensive-Form GamesBackward InductionFirst-Mover Advantage, Commitment,and VengeanceEvidence-Based Economics: Is there valuein putting yourself into someone eise's shoes?Choice & Consequence: There Is Moreto Life than MoneySummaryKey TermsQuestionsProblems343344345346346347Chapter 14: Oligopoly andMonopolistic Competition14.1 Two More Market Structures14.2 OligopolyThe Oligopolist's ProblemOligopoly Model with Homogeneous ProductsDöing the Best You Can: How Should You Priceto Maximize Profits?Oligopoly Model with Differentiated ProductsLetting the Data Speak: Airline Price WarsCollusion: One Way to Keep Prices HighLetting the Data Speak: To Cheat or Notto Cheat: That Is the QuestionChoice & Consequence: Collusion in Practice14.3 Monopolistic CompetitionThe Monopolistic Competitor's ProblemDöing the Best You Can: How a MonopolisticCompetitor Maximizes ProfitsLetting the Data Speak: Why Do Some FirmsAdvertise and Some Don't? 372How a Monopolistic Competitor Calculates Profits341341Long-Run Equilibrium in a MonopolisticallyCompetitive Industry37537614.5 Summing Up: Four Market StructuresEvidence-Based Economics: How many firmsare necessary to make a market competitive?SummaryKey 381382PART IV EXTENDING THE MICROECONOMICTOOLBOX34834834935037314.4 The "Bröken" Invisible HandRegulating Market Power386Chapter 15: Trade-offs InvolvingTime and Risk38615.1 Modeling Time and Risk15.2 The Time Value of MoneyFuture Value and the Compounding of InterestBorrowing Versus LendingPresent Value and Discounting15.3 Time PreferencesTime DiscountingPreference ReversaisChoice & Consequence: Failing to AnticipatePreference ReversaisEvidence-Based Economics: Do peopleexhibit a preference for immediate gratification?38738838839039139339339415.4 Probability and RiskRoulette Wheels and ProbabilitiesIndependence and the Gambler's FallacyExpected ValueChoice & Consequence: Is GamblingWorthwhile? 399Extended Warranties39639639739815.5 Risk PreferencesSummaryKey TermsQuestionsProblems400401402402402Chapter 16: The Economicsof Information39539539940416.1 Asymmetrie InformationHidden Characteristics: Adverse Selectionin the Used Car MarketHidden Characteristics: Adverse Selectionin the Health Insurance MarketContents40540640715

Market Solutions to Adverse Selection:SignalingChoice & Consequence: Are You Sendinga Signal Right Now?Evidence-Based Economics: Why do newcars lose considerable value the minute they aredriven off the lot?Choice & Consequence: A Tale of a Tail16.2 Hidden Actions: Marketswith Moral HazardLetting the Data Speak: Moral Hazardon Your BikeMarket Solutions to Moral Hazard inthe Labor Market: Efficiency WagesMarket Solutions to Moral Hazard in the InsuranceMarket: "Putting Your Skin in the Game"Letting the Data Speak: Designing Incentivesfor TeachersEvidence-Based Economics: Why is privatehealth insurance so expensive?16.3 Government Policy in a Worldof Asymmetrie InformationGovernment Intervention and Moral HazardThe Equity-Efficiency Trade-offCrime and Punishment as a Principal-AgentProblemLetting the Data Speak: Moral HazardAmong Job SeekersSummaryKey TermsQuestionsProblemsAuctionsand Bargaining17.1 AuctionsTypes of AuctionsOpen-Outcry English AuctionsLetting the Data Speak: To Snipe or Notto Snipe?Open-Outcry Dutch AuctionsSealed Bid: First-Price AuctionSealedBid: Second-Price AuctionThe Revenue Equivalence TheoremEvidence-Based Economics: How shouldyou bid in an eBay auction?17.2 BargainingWhat Determines Bargaining Outcomes?Bargaining in Action: The Ultimatum GameBargaining and the Coase TheoremEvidence-Based Economics: Who determineshow the household spends its 432433433434436437Letting the Data Speak: Sex Ratios ChangeBargaining Power TooSummaryKey TermsQuestionsProblems*r 11Social Economics18.1 The Economics of Charity and FairnessThe Economics of CharityLetting the Data Speak: Do People DonateLess When It's Costlier to Give?Letting the Data Speak: Why Do People Giveto Charity?The Economics of FairnessLetting the Data Speak: Dictators in the LabEvidence-Based Economics: Do peoplecare about fairness?18.2 The Economics of Trust and RevengeThe Economics of TrustThe Economics of RevengeChoice & Consequence: Does Revenge Havean Evolutionary Logic?18.3 How Others Influenae Our DecisionsWhere Do Our Preferences Come From?The Economics of Peer EffectsLetting the Data Speak: Is Economics Badfor You?Following the Crowd: HerdingLetting the Data Speak: Your Peers AffectYour WaistlineChoice & Consequence: Are You an InternetExplorer?SummaryKey TermsQuestionsProblemsPART 56456456456457458459460460460461461IlMTRODUCTION TOMACROECOIMOMICS464Chapter 19: The Wealth ofNations: Defining and MeasuringMacroeconomic Aggregates46419.1 Macroeconomic Questions46519.2 National Income Accounts: Production Expenditure IncomeProductionExpenditureIncome467467468468

Circular FlowsNational Income Accounts: ProductionNational Income Accounts: ExpenditureEvidence-Based Economics: In the UnitedStates, what is the total market value of annualeconomic production?National Income Accounting: IncomeLetting the Data Speak: Saving vs. Investment46947047247447647619.3 What Isn't Measured by GDP?477Physical Capital Depreciation478Home Production478The Underground Economy479Negative Externalities479Gross Domestic Product vs. Gross National Product 480Leisure481Does GDP Buy Happiness?48119.4 Real vs. NominalThe GDP DeflatorThe Consumer Price IndexInflationAdjusting Nominal VariablesSummaryKey hapter 20: Aggregate Incomes49220.1 Inequality Around the WorldMeasuring Differences in Income per CapitaLetting the Data Speak: The Big Mac IndexInequality in Income per CapitaIncome per WorkerProductivityIncomes and the Standard of LivingChoice & Consequence: Dangers of JustFocusing on Income per Capita49349349549549649749820.2 Productivity and the AggregateProduction FunctionProductivity DifferencesThe Aggregate Production FunctionLaborPhysical Capital and LandRepresenting the Aggregate Production Function49850050050150150250220.3 The Role and Determinantsof Technology504Technology504Dimensions of Technology504Letting the Data Speak: Moore's Law505Letting the Data Speak: Efficiency of Productionand Productivity at the Company Level506EntrepreneurshipLetting the Data Speak: Monopoly and GDPEvidence-Based Economics: Why is the averageAmerican so much richer than the average Indian?SummaryKey TermsQuestionsProblemsAppendix: The Mathematicsof Aggregate Production Functions507507508510510511511514PART VI LONG-RUN GROWTH ANDDEVELOPMENT516Chapter 21: Economic Growth21.1 The Power of Economic GrowthA First Look at U.S. GrowthExponential GrowthChoice & Consequence: The Power of GrowthPatterns of GrowthLetting the Data Speak: Levels versus Growth51651751851852052152321.2 How Does a Nation's Economy Grow?525Optimization: The Choice Between Saving andConsumption526What Brings Sustained Growth?526Choice & Consequence: Is Increasing the Saving RateAlways a Good Idea?527Knowledge, Technological Change, and Growth527Evidence-Based Economics: Why are you somuch more prosperous than your great-greatgrandparents were?52921.3 The History of Growth and TechnologyGrowth Before Modern TimesMalthusian Limits to GrowthThe Industrial RevolutionGrowth and Technology Since the IndustrialRevolution53153153253321.4 Growth, Inequality, and PovertyGrowth and InequalityLetting the Data Speak: Income Inequalityin the United StatesChoice & Consequence: Inequality versusPovertyGrowth and PovertyHow Can We Reduce Poverty?Letting the Data Speak: Life Expectancyand InnovationSummaryKey 653753853853853917

Appendix: The Solow Growth ModelAppendix Key TermsAppendix Problems541549510Chapter 22: Why Isn't the WholeWorld Developed?22.1 Proximate Versus Fundamental Causesof ProsperityGeographyCultureInstitutionsA Natura] Experiment of History22.2 Institutions and Economic DevelopmentInclusive and Extractive Economic InstitutionsHow Economic Institutions Affect EconomicOutcomesLetting the Data Speak: Divergenceand Convergence in Eastern EuropeThe Logic of Extractive Economic InstitutionsInclusive Economic Institutions and the IndustrialRevolutionLetting the Data Speak: Blocking the RailwaysEvidence-Based Economics: Are tropica! andsemitropical areas condemned to poverty by theirgeographica?22.3 Is Foreign Aid the Solutionto World Poverty?Choice & Consequence: Foreign Aidand CorruptionSummaryKey TermsQuestionsProblemsPART VIIChapter 23: Employmentand Unemployment23.1 Measuring Employmentand UnemploymentClassifying Potential WorkersCalculating the Unemployment RateTrends in the Unemployment RateWho Is Unemployed?23.2 Equilibrium in the Labor MarketThe Demand for LaborShifts in the Labor Demand CurveThe Supply of

ECONOMICS 40 Chapter 1: The Principles and Practica of Economics 40 1.1 The Scope of Economics 41 Economic Agents and Economic Resources 41 Definition of Economics 42 Positive Economics and Normative Economics 43 Microeconomics and Macroeconomics 44 1.2 Three Principles of Economics