Principles of Economics in Context

Neva Goodwin is Co-Director of the Global Development and Environment Institute (GDAE) at Tufts University, where she is the director of the electronic Social Science Library: Frontier Thinking in Sustainable Development and Human Well-Being. Her current interests focus on ecological restoration, especially with regard to soils. Jonathan M. Harris is Senior Research Associate at the Global Development and Environment Institute at Tufts University. His current research focuses on the implications of large-scale environmental problems, especially global climate change, for macroeconomic theory and policy. Julie A. Nelson is Professor of Economics at the University of Massachusetts Boston and Senior Research Fellow at the Global Development and Environment Institute at Tufts University. Many of her books and articles critique economic methodology from a feminist perspective. She has published in journals ranging from Econometrica and the Journal of Political Economy to Hypatia: Journal of Feminist Philosophy and Ecological Economics. Pratistha Joshi Rajkarnikar is a Postdoctoral Scholar at the Global Development and Environment Institute at Tufts University. Her research covers topics on women’s empowerment, economic development, and the impacts of globalization on developing economies. She has taught economics in visiting positions at Trinity College and University of Massachusetts Boston. Brian Roach is Director of the Theory and Education Program at the Tufts University Global Development and Environment Institute, and a lecturer at Tufts and Brandeis universities. He specializes in environmental economics, and is co-author (with Jonathan Harris) of Environmental and Natural Resource Economics: A Contemporary Approach. Mariano Torras teaches economics at Adelphi University in Garden City, New York. A heterodox economist who specializes in ecological and development economics, his recent research has been in the areas of institutional economics and economic methodology; particular attention has been on approaches to addressing climate change.

PART ONE: The Context for Economic Analysis Chapter 0: Economics and Well-Being Time Trend Graphs: U.S. Gross Domestic Product per Capita U.S. Unemployment Rate U.S. Inflation Rate Taxes as a Percentage of GDP Stock Market Performance Median Home Prices Median Worker Earnings vs. Corporate Profits Gender-Based Earnings Inequality Global International Trade Global Carbon Dioxide Emissions Bar Graphs for United States: Income Inequality Unequal Income Growth Educational Attainment Industrial Concentration Ratios International Comparison Graphs: GDP per Capita Growth Rate of GDP per Capita Net National Savings Government Debt Labor Productivity Average Annual Hours Worked Unemployment Rate Inflation Rate Taxes Received by Central Government Trade Balance Income Inequality (Gini coefficient) CEO Pay vs. Worker Pay Ratio Absolute Poverty Foreign Aid (by Donors) Foreign Aid (by Recipients) Internet Users Educational Performance Life Expectancy Subjective Well-Being Carbon Dioxide Emissions per Capita Local Air Quality Chapter 1: Economic Activity in Context 1. Our Starting Point 2. The Goals of an Economy 2.1 Intermediate and Final Goals 2.2 Traditional Economic Goals 2.3 Components of Well-Being 2.4 Economics and Well-being 3. The Issues That Define Economics 3.1 The Four Essential Economic Activities 3.2 The Three Basic Economic Questions 4. Economic Tradeoffs 4.1 Society’s Production-Possibilities Frontier 4.2 Tradeoffs Over Time Chapter 2: Useful Tools and Concepts Our Tools for Understanding Empirical Investigation Theoretical Investigation Historical Investigation Different Economic Theories: Examples of Two Basic Models The Basic Neoclassical Model The Contextual Model The Three Spheres of Economic Activity The Core Sphere The Public Purpose Sphere The Business Sphere The Size of the Three Spheres The Informal Sphere and Less Industrialized Countries Chapter 3: Markets and Society Three Definitions of Markets Markets as Places to Buy and Sell Markets Defined by Product Categories "The Market" as an Economic System The Institutional Requirements of Markets Institutions Related to Property and Decision Making Social Institutions of Trust Infrastructure for the Smooth Flow of Goods and Information Money as a Medium of Exchange Types of Markets Markets Defined by What is Sold Markets Defined by How Prices are Determined Advantages And Limitations of Markets Overview of Advantages and Disadvantages of Markets Assessing Market Outcomes PART TWO: Basic Economic Analysis Chapter 4: Supply and Demand 1. Introduction to the Microeconomic Market Model 2. The Theory of Supply 2.1 The Supply Schedule and Supply Curve 2.2 Changes in Supply 2.3 Nonprice Determinants of Supply 3. The Theory of Demand 3.1 The Demand Schedule and Demand Curve 3.2 Changes in Demand 3.3 Nonprice Determinants of Demand 4. The Theory of Market Adjustment 4.1 Surplus, Shortage, and Equilibrium 4.2 Market Forces and Other Considerations 4.3 Shifts in Supply and Demand 5. Topics in Market Analysis 5.1 Real-World Prices 5.2 Markets and Equity 5.3 Shortage, Scarcity, and Inadequacy 5.4 Precision Versus Accuracy Chapter 5: Elasticity The Price Elasticity of Demand 1.1 Price-Inelastic Demand 1.2 Price-Elastic Demand 1.3 Measuring Price Elasticity 1.4 Two Extreme Cases 1.5 Demand Curves and Elasticity 1.6 Elasticity and Revenues 1.7 Price Elasticity of Demand in the Real World 2. The Price Elasticity of Supply 3. Income Elasticity of Demand 4. Income and Substitution Effects of A Price Change 5. Short-Run versus Long-Run Elasticity Chapter 6: Welfare Analysis 1. Welfare Economics 2. Consumer Surplus 2.1 Quantifying Consumer Benefits 2.2 Consumer Surplus and Demand Curves 2.3 Consumer Surplus in an Entire Market 3. Producer Surplus 3.1 Quantifying Producer Benefits 3.2 Producer Surplus and Supply Curves 3.3 Producer Surplus in an Entire Market 4. Social Efficiency 4.1 Market Equilibrium and Social Efficiency 4.2 Price Ceilings 4.3 Price Floors Policy Inferences from Welfare Analysis 5.1 Laissez-Faire Economics 5.2 Market Failure Chapter 7: International Trade And Trade Policy 1. Trade, Specialization, and Productivity
2. Gains from Trade 2.1 The Theory of Comparative Advantage 2.2 Factor-Price Equalization 2.3 Other Benefits of Free Trade 3. Drawbacks of Free Trade Vulnerability and Lock-In Power Differentials Trade and the Environment 3.4 Inequality and Other Social Impacts of Trade Globalization and Policy 4.1 Globalization Data and Trends 4.2 National Trade Policies 4.3 International Trade Agreements 5. Conclusion: Free Trade and Fair Trade Appendix: A Formal Theory of Gains from Trade PART THREE: Economics and Society Chapter 8: Economic Behavior and Rationality Historical Perspectives on Economic Behavior Classical Economic Views of Human Nature The Neoclassical Model Modern Perspectives on Economic Behavior Behavioral Economics
The Role of Time in Economic Decisions The Role of Emotions in Economic Decisions The Role of Influential Factors Selfishness and Altruism Insights from Neuroeconomics Economic Behavior in Contextual Economics Alternatives to Maximizing Behavior The Model of Economic Behavior in Contextual Economics Policy Inferences from our Model of Economic Behavior Predictable Irrationality and Nudges Government Policy Examples Concluding thoughts Chapter 9: Consumption and the Consumer Society Economic Theory and Consumption Consumer Sovereignty The Budget Line Consumer Utility Limitations of the Standard Consumer Model Consumption in Historical and International Context A Brief History of Consumer Society Limits to Modern Consumerism
Consumption in a Social Context Social Comparisons Advertising Private Versus Public Consumption Consumption in an Environmental Context The Link Between Consumption and the Environment Green Consumerism Consumption and Well-Being Does Money Buy Happiness? Affluenza and Voluntary Simplicity Consumption and Public Policy Appendix: A Formal Theory of Consumer Behavior A1. The Assumptions A2. The Budget Line and Its Slope A3. Indifference Curves A4. Utility Maximization A5. Response to Variations in Price Chapter 10: Markets for Labor 1. Economic Theory of Labor Markets 1.1 The Firm’s Decision to Hire Labor 1.2 The Individual’s Decision to Supply Labor 1.3 The Individual Supply Curve for Labor 1.4 The Market Supply Curve for Labor 1.5 Market Demand Curves 1.6 Market Adjustment 2. Explaining Variations in Wages 2.1 Wage Variations in the Neoclassical Labor Model 2.2 Social Norms, Bargaining Power, and Labor Unions 2.3 Efficiency Wages and Dual Labor Markets
2.4 Discrimination 3. Contemporary Labor Issues and Policies 3.1 Labor Market Flexibility 3.2 Labor Markets and Immigration
3.3 Cooperatives 3.4 Work-Life Balance 3.5 Labor Markets, Inequality, and Power Appendix: A Formal Model of a Firm’s Hiring Decision Part Four: Essential Topics for Contemporary Economics Chapter 11: Economic and Social Inequality Defining and Measuring Inequality 1.1 Inequality of What? 1.2 Measuring Inequality 2. Inequality Trends and Further Considerations 2.1 Income Inequality Over Time in the United States 2.2 Wealth Inequality 2.3 Further Perspectives on Inequality 2.4 Economic Mobility 3. International Data on Inequality 3.1 Cross-Country Comparisons 3.2 Global Inequality 4. Causes and Consequences of Inequality 4.1 Causes of Inequality 4.2 Consequences of Inequality 5. Responding to Inequality 5.1 Tax and Transfer Policies 5.2 Wage Policies 5.3 Public Spending and Regulatory Policies 5.4 Addressing Inequality in Developing and Transitional Countries 5.5 Concluding Thoughts Chapter 12: Taxes and Tax Policy Economic Theory and Taxes 1.1 Taxes in the Supply-and-Demand Model 1.2 Tax Revenues 1.3 Welfare Analysis of Taxation The Structure of Taxation in the United States
2.1 Tax Progressivity 2.2 Federal Income Taxes 2.3 Federal Social Insurance Taxes 2.4 Federal Corporate Taxes 2.5 Other Federal Taxes 2.6 State and Local Taxes 3. Tax Analysis and Policy Issues 3.1 Tax Data for the United States 3.2 International Data on Taxes 3.3 Current Tax Policy Issues Chapter 13: The Economics of the Environment The Theory of Externalities 1.1 Negative Externalities in the Supply-and-Demand Model 1.2 Internalizing Negative Externalities 1.3 Positive Externalities Policy Implications of Externalities 2. Valuing the Environment 2.1 Total Economic Value 2.2 Nonmarket Valuation Methodologies 2.3 Cost-Benefit Analysis 3. Environmental Policies in Practice 3.1 Policy Options 3.2 Design and Performance of Environmental Policies Appendix: Formal Analysis of Negative Externalities Chapter 14: Common Property Resources and Public Goods 1. Goods other than Private Goods 2. Artificially Scarce Goods 3. Common Property Resources 3.1 Modeling a Common Property Resource 3.2 Policies for Common Property Resource Management 4. Public Goods 5. Climate Change
5.1 Climate Change Data and Projections 5.2 Economic Analysis of Climate Change 5.3 Climate Change Policy 5.4 Economics of Renewable Energy Part Five: Resources, Production, and Market Organization Chapter 15: Capital Stocks and Resource Management
Capital Stocks 1.1 Stocks Versus Flows 1.2 The Five Types of Natural Capital Natural Capital 2.1 Renewable and Nonrenewable Natural Capital 2.2 Natural Capital and Sustainability Manufactured Capital 3.1 Fixed Manufactured Capital 3.2 Inventories
3.3 Manufactured Capital in the Core and Public Purpose Spheres Human Capital 4.1 Physical Human Capital 4.2 Intangible Human Capital 5. Social Capital 6. Financial Capital 6.1 Equity Finance 6.2 Debt Finance 7. Sustaining Capital Stocks Chapter 16: Production Costs An Overview of Production 1.1 The Goals of Production 1.2 An Economic Perspective on Production Types of Production Costs Fixed Versus Variable Costs 2.2 Accounting Versus Economic Costs 2.3 Private Versus External Costs The Production Function 3.1 Thinking About Inputs and Outputs 3.2 Graphing Production Functions 3.3 Production in the Short Run
4. Production Costs 4.1 Production Costs in the Short Run 4.2 Production Costs in the Long Run 4.3 Production Process Choice
Chapter 17: Perfectly Competitive Markets Understanding Market Power and Competition 1.1 The Business Perspective on Competition and Market Power 1.2 The Consumer Perspective on Competition and Market Power 1.3 The Citizen Perspective on Competition and Market Power 1.4 The Economists’ Perspective on Competition and Market Power 2. Perfect Competition 2.1 The Conditions of Perfect Competition 2.2 Examples of Perfect Competition? 3. Profit Maximization under Perfect Competition 3.1 Revenues 3.2 Profit Maximization Example 3.3 Profits Under Perfect Competition 4. Losses and Exit 4.1 Losses in the Short Run
4.2 Losses in the Long Run 5. Production, Efficiency, and Equity 5.1 Path Dependence 5.2 Network Externalities 5.3 Markets, Efficiency, and Equity Appendix: A Formal Model of Perfect Competition Chapter 18: Markets with Market Power 1. The Traditional Models 2. Pure Monopoly: One Seller 2.1 The Conditions of Monopoly 2.2 Examples of Monopoly 2.3 Profit Maximization for a Monopolist 2.4 Monopoly and Inefficiency Can Monopoly Be Efficient? 3. Monopolistic Competition 3.1 The Conditions of Monopolistic Competition 3.2 Examples of Monopolistic Competition 3.3 Profit Maximization with Monopolistic Competition 3.4 Monopolistic Competition and Long-Run Efficiency Oligopoly 4.1 Market Structure of an Oligopolistic Industry
4.2 Oligopoly and the Behavior of Firms 4.3 Examples of Oligopoly 5. Market Power, Well-Being and Politics 5.1 Market Concentration and Politics 5.2 Final Thoughts Appendix: Formal Analysis of Monopoly and Monopolistic Competition A1. The Assumptions A2. Monopoly A3. Monopolistic Competition PART SIX: Macroeconomic Basics Chapter 19: Introduction to Macroeconomics 1. What is Macroeconomics About? 2. Macroeconomic Goals 2.1 Living Standards 2.2 Stability and Security
2.3 Sustainability 3. Macroeconomics and the Dynamics of Real-World Markets 3.1 When Price Adjustments are Slow 3.2 When Prices Swing Too Much: Market Instability 4. Macroeconomics in Context 4.1 The Classical Period 4.2 The Great Depression and Keynes 4.3 The Crisis of the 1970s and Retreat from Keynesian Economics 4.4 Macroeconomics for the Twenty-First Century Chapter 20: Macroeconomic Measurement: The Current Approach 1. An Overview of National Accounting and Conventions 1.1 Conventions about National Accounting Sectors 1.2 Conventions about Capital Stocks 1.3 Conventions about Investment 2. Defining Gross Domestic Product 3. Measuring Gross Domestic Product 3.1 The Product Approach 3.2 The Spending Approach 3.3 The Income Approach 4. Growth, Price Changes, and Real GDP 4.1 Nominal vs. Real GDP 4.2 Calculating Real GDP 4.3 Price Indexes and Inflation Rates 4.4 Calculating GDP Growth Rates 5. Savings, Investment, and Trade 5.1 The Relationship of Savings, Investment, and Trade 5.2 Net Domestic Product and Saving Appendix: Chained Dollar Real GDP Chapter 21: Macroeconomic Measurement: Environmental and Social Dimensions 1. Why GDP Is Not a Measure of Well-Being 2. A Broader View of National Income Accounts 2.1 Satellite Accounts 2.2 Measuring Well-Being 2.3 The Genuine Progress Indicator (GPI) 2.4 The Better Life Index (BLI) 2.5 The Human Development Index (HDI) 2.6 Other National Accounting Alternatives 3. Measuring Household Production 3.1 Measuring Household Labor 3.2 Time Use Surveys 3.3 Methods of Valuing Household Production 4. Accounting for the Environment 4.1 Methods of Valuing the Environment 4.2 Monetary Valuation of Environmental Factors 5. Conclusion: Measuring Economic Well-Being Chapter 22: The Structure of the United States Economy The Three Major Productive Sectors in an Economy 1.1 A Quick Review of Categories 1.2 The Relative Size of the Output Sectors in the United States 1.3 Historical Trends and Global Comparisons The Primary Sector in the United States The Food System The Energy SystemThe Secondary (Industrial) Sector in the United States Manufacturing Construction Rising Productivity in the Secondary Sector The Tertiary (Service) Sector 4.1 The Growth of the Tertiary Sector 4.2 Analyzing the Tertiary Sector by Sub-Categories 4.3 Retail Services 4.4 Finance and Financialization 4.5 Human Services: Health 4.6 Human Services: Education 5. Concluding Thoughts Chapter 23: Employment, Unemployment, and Wages Employment and Unemployment 1.1 Measuring Employment and Unemployment 1.2 The Unemployment Rate 1.3 Discouraged Workers and Underemployment 1.4 Labor Force Participation A Closer Look at Unemployment 2.1 Types of Unemployment 2.2 Patterns of Unemployment 3. Theories of Employment, Unemployment, and Wages 3.1 The Classical Theory 3.2 Alternative Theories of Labor Markets 3.3 Policy Responses 4. Special Issues of the 21st Century 4.1 Jobs and Technological Change 4.2 Some Future Possibilities PART SEVEN: Macroeconomic Theory and Policy Chapter 24: Aggregate Demand and Economic Fluctuations The Business Cycle 1.1 What Happens During the Business Cycle 1.2 A Stylized Business Cycle 1.3 The Downturn Side of the Story Macroeconomic Modeling 2.1 Simplifying Assumptions 2.2 Output, Income, and Aggregate Expenditure 2.3 The Problem of Leakages 2.4 The Classical Solution to Leakages The Keynesian Model 3.1 Consumption
3.2 Investment 3.3 The Aggregate Expenditure Schedule 3.4 The Possibility of Unintended Investment 3.5 Movement to Equilibrium in the Keynesian Model 3.6 The Problem of Persistent Unemployment 3.7 The Multiplier 4. Concluding Thoughts
Appendix: An Algebraic Approach to the Multiplier Chapter 25: Fiscal Policy The Role of Government Spending and Taxes 1.1 A Change in Government Spending 1.2 Taxes and Transfer Payments 1.3 The Circular Flow with Government Spending and Taxes 1.4 Expansionary and Contractionary Fiscal Policy The Federal Budget 2.1 Deficits and Surpluses 2.2 Automatic Stabilizers 2.3 Discretionary Policy Policy Issues 3.1 Crowding Out and Crowding In 3.2 Different Multiplier Effects 3.3 Applying Fiscal Policy Appendix: More Algebraic Approaches to the Multiplier A1. An Algebraic Approach to the Multiplier, with a Lump-Sum Tax
A2. An Algebraic Approach to the Multiplier, with a Proportional Tax Chapter 26: Money, Banking, and Finance 1. Why Money?
1.1 Money and Aggregate Expenditure 1.2 "Running the Printing Press" 1.3 Deflation and Financial Crises 2. What Is Money? 2.1 The Roles of Money 2.2. Types of Money 2.3 Measures of Money 3. The Banking System 3.1 Commercial Banks 3.2 Bank Types 3.3 How Banks Create Money The Financial System 4.1 Functions of Finance 4.2 Non-Bank Financial Institutions 4.3 Financialization and Financial Bubbles Chapter 27: The Federal Reserve and Monetary Policy 1. The Federal Reserve System 2. Monetary Policy
2.1 How the Fed Creates Money and Credit 2.2. Other Monetary Policy Tools 3. The Theory of Money, Interest Rates, and Aggregate Expenditure 3.1 The Federal Funds Rate and Other Interest Rates 3.2 Interest Rates and Investment 3.3 Monetary Policy and Aggregate Expenditure 4. Monetary Policies in Practice 4.1 The Fed and Monetary Policy: A Brief History 4.2 The Liquidity Trap and Credit Rationing Theories of Money, Prices, and Inflation 5.1 The Quantity Equation 5.2 Competing Theories
Complications and Policy Controversies 6.1 The Fed’s Dilemma 6.2 Rules versus Activism Appendices A1. Bond Prices and Interest Rates A2. Short Vs. Long Run and Real Vs. Nominal Interest Rates A3. Money Supply and Money Demand Chapter 28: Aggregate Supply, Aggregate Demand, and Inflation: Putting It All Together Aggregate Demand and Inflation 1.1 The Aggregate Demand (AD) Curve 1.2 Shifts of the AD Curve: Spending and Taxation 1.3 Shifts of the AD Curve: Monetary Policy 2. Capacity and the Aggregate Supply Curve 2.1 The Aggregate Supply (AS) Curve 2.2 Shifts of the AS Curve: Inflationary Expectations 2.3 Shifts of the AS Curve: Supply Shocks 3. Putting the AD/AS Model to Work 3.1 An Economy in Recession 3.2 An Overheated Economy 3.3 Stagflation 3.4 A Hard Line Against Inflation 3.5 Technology and Globalization 4. Competing Theories 4.1 Classical Macroeconomics 4.2 Keynesian Macroeconomics Appendix: More Schools of Macroeconomics A1. New Classical Economics A2. The Classical-Keynesian Synthesis and New Keynesian Macroeconomics A3. Post-Keynesian Macroeconomics Chapter 29: The Global Economy and Policy Macroeconomics in a Global Context 1.1 Global Connections 1.2 Major Policy Tools 1.3 Patterns of Trade and Finance The Trade Balance: Completing the Picture 2.1 The Circular Flow Revisited 2.2 Effects on the Multiplier
2.3 Balance between Savings, Investment, and Net Borrowing 3. International Finance 3.1 Purchasing Power Parity 3.2 Currency Exchange Rates 3.3 The Balance of Payments 4. Macroeconomics in an Open Economy 4.1 Fiscal Policy 4.2 Monetary Policy 4.3 Managed Versus Flexible Foreign Exchange 4.4 A Special Case: The Eurozone and the Euro Crisis 5. International Financial Institutions Appendix: An Algebraic Approach to the Multiplier, in a Model with Trade PART EIGHT: Macroeconomic Issues and Applications Chapter 30: Financial Instability and Economic Inequality 1. The 2007-2008 Financial Crisis 1.1 Entering the Crisis 1.2 The Collapse of the Housing Bubble and Impacts of the Crisis 1.3 Policy Responses for Recovery 2. A Broader Understanding of the Crisis 2.1 Deregulation and Financialization 2.2 Theories of Financial Instability 3. The Creation of an Unequal Society 3.1 Causes of Rising Wage Inequality 3.2 Financialization and Inequality 3.3 Macroeconomic Policies and Inequality 4. Policies to Promote Financial Stability and Greater Equality Chapter 31: Deficits and Debt 1. Deficits and the National Debt 2. The U.S. National Debt: A Historical Perspective 2.1 Two Centuries of Deficits and Debt 2.2 "Supply-Side" Economics 2.3 1989 to the Present 3. The Debt and its Links to Finance 3.1 Taxonomy of Debt Types Federal Government Borrowing: Potential Problems Political Economy of the Debt 4.1 Who Owns the Debt? 4.2 The Twin Deficits 4.3 Balanced Budget Debate 4.4 Imposed Austerity: The Case of the European Union 5. Deficit Projections and Potential Policy Responses 5.1 Deficit Projections 5.2 Policy Choices 5.3 Debt and Deficits in Context Chapter 32: How Economies Grow and Develop Economic Growth and Development 1.1 Experiences of Economic Growth Around the World 1.2 Standard Economic Growth Theory 1.3 Defining Poverty 2. Economic Development in the World Today 2.1 Early Experiences and Theories of Development 2.2 A Second Wave of Development Theory 3. Twenty-First Century Reconsiderations of the Sources of Economic Growth 4. Growth, Inequality, and Development 4.1 Economic Growth and "Convergence" 4.2 Inequality and the Kuznets Hypothesis 4.3 Inequality and Economic Well-Being 5. Recent Perspectives and Sustainable Development Goals 6. Different Kinds of Economies Chapter 33: Growth and Sustainability in the 21st Century 1.Macroeconomics and Sustainability 2. Major Environmental Issues 2.1 Global Population 2.2 Nonrenewable Resource Availability 2.3 Renewable Resources 2.4 Pollution and Wastes 3. Climate Change 3.1 Climate Change Science, Data, and Impacts 3.2 The Economics of Climate Change 3.3 Climate Change Policy 4. Economic Growth And The Environment 4.1 The Environmental Kuznets Curve Hypothesis 4.2 Does Protecting the Environment Harm Employment and Economic Growth? 4.3 Economic Perspectives on the Transition to a Sustainable Economy 5. Policies for Sustainable Development 5.1 Rethinking Employment and Production 5.2 Rethinking Economic Incentives5.3 Green Keynesianism 6. Concluding Thoughts