Worker Quality

A fourth and final type of efficiency-wage theory emphasizes the link between wages and worker quality. When a firm hires new workers, it cannot perfectly gauge the quality of the applicants. By paying a high wage, the firm attracts a better pool of workers to apply for its jobs. To see how this might work, consider a simple example. Waterwell Company owns one well and needs one worker to pump water from the well. Two workers, Bill and Ted, are interested in the job. Bill, a proficient worker,...

Why Some Frictional Unemployment Is Inevitable

Frictional unemployment is often the result of changes in the demand for labor among different firms. When consumers decide that they prefer Compaq over Dell computers, Compaq increases employment, and Dell lays off workers. The former Dell workers must now search for new jobs, and Compaq must decide which new workers to hire for the various jobs that have opened up. The result of this transition is a period of unemployment. Similarly, because different regions of the country produce different...

Unemployment Insurance

One government program that increases the amount of frictional unemployment, without intending to do so, is unemployment insurance. This program is designed to offer workers partial protection against job loss. The unemployed who quit their jobs, were fired for cause, or just entered the labor force are not eligible. Benefits are paid only to the unemployed who were laid off because their previous employers no longer needed their skills. Although the terms of the program vary over time and...

The Functions Of Money

Money has three functions in the economy It is a medium of exchange, a unit of account, and a store of value. These three functions together distinguish money from other assets, such as stocks, bonds, real estate, art, and even baseball cards. Let's examine each of these functions of money in turn. A medium of exchange is an item that buyers give to sellers when they purchase goods and services. When you buy a shirt at a clothing store, the store gives you the shirt, and you give the store your...

Research And Development

The primary reason that living standards are higher today than they were a century ago is that technological knowledge has advanced. The telephone, the transistor, the computer, and the internal combustion engine are among the thousands of innovations that have improved the ability to produce goods and services. Although most technological advance comes from private research by firms and individual inventors, there is also a public interest in promoting these efforts. To a large extent,...

Some Important Identities

Recall that gross domestic product (GDP) is both total income in an economy and the total expenditure on the economy's output of goods and services. GDP But wait. There is a big difference. Profits grow over time. If that dividend should increase with profits, say at a rate of 5 percent annually, then, by the 30th year, your annual dividend payment will be over 800, or one-third more than the bond is yielding. The price of the stock almost certainly will have risen as well. By this simple...

Public Policy And Job Search

Even if some frictional unemployment is inevitable, the precise amount is not. The faster information spreads about job openings and worker availability, the more rapidly the economy can match workers and firms. The Internet, for instance, may help facilitate job search and reduce frictional unemployment. In addition, public policy may play a role. If policy can reduce the time it takes unemployed workers to find new jobs, it can reduce the economy's natural rate of unemployment. Government...

Property Rights And Political Stability

Another way in which policymakers can foster economic growth is by protecting property rights and promoting political stability. As we first noted when we discussed economic interdependence in Chapter 3, production in market economies arises from the interactions of millions of individuals and firms. When you buy a car, for instance, you are buying the output of a car dealer, a car manufacturer, a steel company, an iron ore mining company, and so on. This division of production among many firms...

Job Search

One reason why economies always experience some unemployment is job search. Job search is the process of matching workers with appropriate jobs. If all workers and all jobs were the same, so that all workers were equally well suited for all jobs, job search would not be a problem. Laid-off workers would quickly find new jobs that were well suited for them. But, in fact, workers differ in their tastes and skills, jobs differ in their attributes, and information about job candidates and job the...

Info

The tax.) The difference in the two panels is the relative elasticity of supply and demand. Panel (a) of Figure 6-9 shows a tax in a market with very elastic supply and relatively inelastic demand. That is, sellers are very responsive to the price of the good, whereas buyers are not very responsive. When a tax is imposed on a market with these elasticities, the price received by sellers does not fall much, so sellers bear only a small burden. By contrast, the price paid by buyers rises...

Dollar Figures From Different Times

We first return to the issue of Babe Ruth's salary. Was his salary of 80,000 in 1931 high or low compared to the salaries of today's players To answer this question, we need to know the level of prices in 1931 and the level of prices today. Part of the increase in baseball salaries just compensates players for the higher level of prices today. To compare Ruth's salary to those of today's players, we need to inflate Ruth's salary to turn 1931 dollars into today's dollars. A price index...

And The Freesilver Debate

As a child, you probably saw the movie The Wizard of Oz, based on a children's book written in 1900. The movie and book tell the story of a young girl, Dorothy, who finds herself lost in a strange land far from home. You probably did not know, however, that the story is actually an allegory about U.S. monetary policy in the late nineteenth century. From 1880 to 1896, the price level in the U.S. economy fell by 23 percent. Because this event was unanticipated, it led to a major redistribution of...

Government Budget Deficits And Surpluses

Long Ran Aggregate Supply

Throughout the 1980s and 1990s, one of the most pressing policy issues was the size of the government budget deficit. Recall that a budget deficit is an excess of government spending over tax revenue. Governments finance budget deficits by borrowing in the bond market, and the accumulation of past government borrowing is called the government debt. In the 1980s and 1990s, the U.S. federal government ran large budget deficits, resulting in a rapidly growing government debt. As a result, much...

Measuring The Cost Of Living

Learn how the consumer price index (CPI) is constructed Consider why the CPI is an imperfect measure of the cost of living Compare the CPI and the GDP deflator as measures of the overall price level In 1931, as the U.S. economy was suffering through the Great Depression, famed baseball player Babe Ruth earned 80,000. At the time, this salary was extraordinary, even among the stars of baseball. According to one story, a reporter asked Ruth whether he thought it was right that he made more than...

Unemployment And Its Natural Rate

Learn about the data used to measure the amount of unemployment Consider how unemployment arises from the process of job search Losing a job can be the most distressing economic event in a person's life. Most people rely on their labor earnings to maintain their standard of living, and many people get from their work not only income but also a sense of personal accomplishment. A job loss means a lower living standard in the present, anxiety about the future, and reduced self-esteem. It is not...

The Effects Of An Import Quota

Import Quota

The Isolandian economists next consider the effects of an import quota a limit on the quantity of imports. In particular, imagine that the Isolandian government distributes a limited number of import licenses. Each license gives the license holder the right to import 1 ton of steel into Isoland from abroad. The Isolandian economists want to compare welfare under a policy of free trade and welfare with the addition of this import quota. Figure 9-7 shows how an import quota affects the Isolandian...

The Economics Of Unions

Profit Maximization

Like any cartel, a union is a group of sellers acting together in the hope of exerting their joint market power. Most workers in the U.S. economy discuss their wages, benefits, and working conditions with their employers as individuals. By contrast, workers in a union do so as a group. The process by which unions and firms agree on the terms of employment is called collective bargaining. When a union bargains with a firm, it asks for higher wages, better benefits,...

The Shortrun Tradeoff Between Inflation And Unemployment

Two closely watched indicators of economic performance are inflation and unemployment. When the Bureau of Labor Statistics releases data on these variables each month, policymakers are eager to hear the news. Some commentators have added together the inflation rate and the unemployment rate to produce a misery index, which purports to measure the health of the economy. How are these two measures of economic performance related to each other Earlier in the book we discussed the long-run...

Shifts In The Demand Curve

Income Demand Curve

Suppose that the American Medical Association suddenly announces a new discovery People who regularly eat ice cream live longer, healthier lives. How does this announcement affect the market for ice cream The discovery changes people's tastes and raises the demand for ice cream. At any given price, buyers now want to purchase a larger quantity of ice cream, and the demand curve for ice cream shifts to the right. Whenever any determinant of demand changes, other than the good's price, the demand...

Do You Think That Firms In Small Towns Or In Cities Have More Market Power In Hiring

Why do you think that younger women experienced a bigger increase in labor-force participation than older women Between 1997 and 1998, total U.S. employment increased by 2.1 million workers, but the number of unemployed workers declined by only 0.5 million. How are these numbers consistent with each other Why might one expect a reduction in the number of people counted as unemployed to be smaller than the increase in the number of people employed Are the following workers more likely to...

Illustrate The Effect Of This Tax On Equilbrium Price And Quantity In The Sock Market

What happens to consumer and producer surplus when 3. the sale of a good is taxed How does the change in consumer and producer surplus compare to the tax 4 revenue Explain. 2. Draw a supply-and-demand diagram with a tax on the 5 sale of the good. Show the deadweight loss. Show the How do the elasticities of supply and demand affect the deadweight loss of a tax Why do they have this effect Why do experts disagree about whether labor taxes have small or large deadweight losses What happens to...

2 Suppose The Government Borrows 20 Billion More Next Year Than This Year. A Use A Supply-and-demand Diagram To Analyze

What is the role of the financial system Name and describe two markets that are part of the financial system in our economy. Name and describe two financial intermediaries. 2. Why is it important for people who own stocks and bonds to diversify their holdings What type of financial institution makes diversification easier 3. What is national saving What is private saving What is public saving How are these three variables related 4. What is investment How is it related to national saving 5....

Elasticity And Tax Incidence

Tax Revenue Supply Demand Curve

When a good is taxed, buyers and sellers of the good share the burden of the tax. But how exactly is the tax burden divided Only rarely will it be shared equally. To see how the burden is divided, consider the impact of taxation in the two markets in Figure 6-9. In both cases, the figure shows the initial demand curve, the initial supply curve, and a tax that drives a wedge between the amount paid by buyers and the amount received by sellers. Not drawn in either panel of the figure is the new...

Case Study The Laffer Curve And Supplyside Economics

One day in 1974, economist Arthur Laffer sat in a Washington restaurant with some prominent journalists and politicians. He took out a napkin and drew a figure on it to show how tax rates affect tax revenue. It looked much like panel b of our Figure 8-7. Laffer then suggested that the United States was on the downward-sloping side of this curve. Tax rates were so high, he argued, that reducing them would actually raise tax revenue. Most economists were skeptical of Laffer's suggestion. The idea...

Deadweight Loss

Example Deadweight Loss

Reduction in quantity due to the tax Reduction in quantity due to the tax deadweight loss It is a loss to buyers and sellers in a market not offset by an increase in government revenue. From this example, we can see the ultimate source of deadweight losses Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade. The area of the triangle between the supply and demand curves area C E in Figure 8-3 measures these losses. This loss can be...

Imagine That Winemakers In The State Of Washington Petitioned The State Government To Tax Wines Imported From

The United States represents a small part of the world orange market. a. Draw a diagram depicting the equilibrium in the U.S. orange market without international trade. Identify the equilibrium price, equilibrium quantity, consumer surplus, and producer surplus. b. Suppose that the world orange price is below the U.S. price before trade, and that the U.S. orange market is now opened to trade. Identify the new equilibrium price, quantity consumed, quantity produced domestically, and quantity...

Evaluating Price Controls

One of the Ten Principles of Economics discussed in Chapter 1 is that markets are usually a good way to organize economic activity. This principle explains why economists usually oppose price ceilings and price floors. To economists, prices are not the outcome of some haphazard process. Prices, they contend, are the result of the millions of business and consumer decisions that lie behind the supply and demand curves. Prices have the crucial job of balancing supply and demand and, thereby,...

Economists In Washington

Enforce Anti Trust Laws

President Harry Truman once said that he wanted to find a one-armed economist. When he asked his economists for advice, they always answered, On the one hand, . . . . On the other hand, . . . . Truman was right in realizing that economists' advice is not always straightforward. This tendency is rooted in one of the Ten Principles of Economics in Chapter 1 People face tradeoffs. Economists are aware that tradeoffs are involved in most policy decisions. A policy might increase efficiency at the...

Case Study Rent Control In The Short Run And Long

Rent Control Economics

One common example of a price ceiling is rent control. In some cities, the local government places a ceiling on rents that landlords may charge their tenants. The goal of this policy is to help the poor by making housing more affordable. Economists often criticize rent control, arguing that it is a highly inefficient way to help the poor raise their standard of living. One economist called rent control the best way to destroy a city, other than bombing. The adverse effects of rent control are...

In The N

Price System Allocate Resources

Mother Nature Shifts the Supply Curve According to our analysis, a natural disaster that reduces supply reduces the quantity sold and raises the price. Here's a recent example. 4-Day Cold Spell Slams California Crops Devastated By Todd S. Purdum A brutal four-day freeze has destroyed more than a third of California's annual citrus crop, inflicting upwards of a halfbillion dollars in damage and raising the prospect of tripled orange prices in supermarkets by next week. Throughout the Golden...

Two Ways To Reduce The Quantity Of Smoking Demanded

Supply For Cigarettes Graph

Public policymakers often want to reduce the amount that people smoke. There are two ways that policy can attempt to achieve this goal. One way to reduce smoking is to shift the demand curve for cigarettes and other tobacco products. Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on television are all policies aimed at reducing the quantity of cigarettes demanded at any given price. If successful, these policies shift...

How Taxes On Buyers Affect Market Outcomes

Tax Levied Buyers

We first consider a tax levied on buyers of a good. Suppose, for instance, that our local government passes a law requiring buyers of ice-cream cones to send 0.50 to the government for each ice-cream cone they buy. How does this law affect the buyers and sellers of ice cream To answer this question, we can follow the three steps in Chapter 4 for analyzing supply and demand 1 We decide whether the law affects the supply curve or demand curve. 2 We decide which way the curve shifts. 3 We examine...

Should Tiger Woods Mow His Own Lawn

Tiger Woods spends a lot of time walking around on grass. One of the most talented golfers of all time, he can hit a drive and sink a putt in a way that most casual golfers only dream of doing. Most likely, he is talented at other activities too. For example, let's imagine that Woods can mow his lawn faster than anyone else. But just because he can mow his lawn fast, does this mean he should To answer this question, we can use the concepts of opportunity cost and comparative advantage. Let's...

Perception Versus Reality

Because of differences in scientific judgments and differences in values, some disagreement among economists is inevitable. Yet one should not overstate the amount of disagreement. In many cases, economists do offer a united view. Table 2-2 contains ten propositions about economic policy. In a survey of economists in business, government, and academia, these propositions were endorsed by an overwhelming majority of respondents. Most of these propositions would fail to command a similar...

Elasticity And Total Revenue Along A Linear Demand Curve

Although some demand curves have an elasticity that is the same along the entire curve, that is not always the case. An example of a demand curve along which elasticity changes is a straight line, as shown in Figure 5-5. A linear demand curve has a constant slope. Recall that slope is defined as rise over run, which here is the ratio of the change in price rise to the change in quantity run . This particular demand curve's slope is constant because each 1 increase in price causes the same...

Beer And Pizza Are Complements Because They

Market, p. 66 competitive market, p. 66 quantity demanded, p. 67 law of demand, p. 68 normal good, p. 68 inferior good, p. 68 substitutes, p. 68 complements, p. 68 demand schedule, p. 69 demand curve, p. 70 ceteris paribus, p. 70 quantity supplied, p. 75 law of supply, p. 75 supply schedule, p. 76 supply curve, p. 76 equilibrium, p. 80 equilibrium price, p. 80 equilibrium quantity, p. 80 surplus, p. 81 shortage, p. 81 1. What is a competitive market Briefly describe the types of markets other...

When The Weather Turns Warm In New England Every Summer The Prices Of Hotel Rooms In Caribbean Resorts Plummet.

Explain each of the following statements using supply- a. When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country. b. When the weather turns warm in New England every summer, the prices of hotel rooms in Caribbean resorts plummet. c. When a war breaks out in the Middle East, the price of gasoline rises, while the price of a used Cadillac falls. 2. An increase in the demand for notebooks raises the quantity of notebooks demanded, but not the...

Principle 2 The Cost Of Something Is What You Give Up To Get It

Because people face tradeoffs, making decisions requires comparing the costs and benefits of alternative courses of action. In many cases, however, the cost of some action is not as obvious as it might first appear. Consider, for example, the decision whether to go to college. The benefit is intellectual enrichment and a lifetime of better job opportunities. But what is the cost To answer this question, you might be tempted to add up the money you spend on tuition, books, room, and board. Yet...

Three Steps To Analyzing Changes In Equilibrium

Ice Cream Market Demand And Supply

So far we have seen how supply and demand together determine a market's equilibrium, which in turn determines the price of the good and the amount of the good that buyers purchase and sellers produce. Of course, the equilibrium price and quantity depend on the position of the supply and demand curves. When some event shifts one of these curves, the equilibrium in the market changes. The analysis of such a change is called comparative statics because it involves comparing two static situations...

Principle 6 Markets Are Usually A Good Way To Organize Economic Activity

For 5 a week you can watch baseball without being nagged to cut the grass For 5 a week you can watch baseball without being nagged to cut the grass The collapse of communism in the Soviet Union and Eastern Europe may be the most important change in the world during the past half century. Communist countries worked on the premise that central planners in the government were in the best position to guide economic activity. These planners decided what goods and services were produced, how much was...

Principle 4 People Respond To Incentives

Cost Benefit Analysis Seat Belts

Because people make decisions by comparing costs and benefits, their behavior may change when the costs or benefits change. That is, people respond to incentives. When the price of an apple rises, for instance, people decide to eat more pears and fewer apples, because the cost of buying an apple is higher. At the same time, apple orchards decide to hire more workers and harvest more apples, because the benefit of selling an apple is also higher. As we will see, the effect of price on the...