The Economy

The CORE team The Economy

Brazilian favela: © Tuca Vieira

The Economy

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Preface
A note to instructors
Producing The Economy
Table of contents
List of resources
1. Glossary
2. Einsteins
3. Great economists
4. How economists learn from facts
5. When economists disagree
6. Exercises
7. Videos
8. Figures
1—The capitalist revolution
1. Introduction
2. 1.1 Income inequality
3. 1.2 Measuring income and living standards
4. 1.3 History’s hockey stick: Growth in income
5. 1.4 The permanent technological revolution
6. 1.5 The economy and the environment
7. 1.6 Capitalism defined: Private property, markets, and firms
8. 1.7 Capitalism as an economic system
9. 1.8 The gains from specialization
10. 1.9 Capitalism, causation and history’s hockey stick
11. 1.10 Varieties of capitalism: Institutions, government, and the economy
12. 1.11 Economics and the economy
13. 1.12 Conclusion
14. 1.13 References
2—Technology, population, and growth
1. Introduction
2. 2.1 Economists, historians, and the Industrial Revolution
3. 2.2 Economic models: How to see more by looking at less
4. 2.3 Basic concepts: Prices, costs, and innovation rents
5. 2.4 Modelling a dynamic economy: Technology and costs
6. 2.5 Modelling a dynamic economy: Innovation and profit
7. 2.6 The British Industrial Revolution and incentives for new technologies
8. 2.7 Malthusian economics: Diminishing average product of labour
9. 2.8 Malthusian economics: Population grows when living standards rise
10. 2.9 The Malthusian trap and long-term economic stagnation
11. 2.10 Escaping from Malthusian stagnation
12. 2.11 Conclusion
13. 2.12 References
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
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
11. 3.10 Explaining our working hours: Differences between countries
12. 3.11 Conclusion
13. 3.12 References
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
5. 4.4 Social preferences: Altruism
6. 4.5 Altruistic preferences in the prisoners’ dilemma
7. 4.6 Public goods, free riding, and repeated interaction
8. 4.7 Public good contributions and peer punishment
9. 4.8 Behavioural experiments in the lab and in the field
10. 4.9 Cooperation, negotiation, conflicts of interest, and social norms
11. 4.10 Dividing a pie (or leaving it on the table)
12. 4.11 Fair farmers, self-interested students?
13. 4.12 Competition in the ultimatum game
14. 4.13 Social interactions: Conflicts in the choice among Nash equilibria
15. 4.14 Conclusion
16. 4.15 References
5—Property and power: Mutual gains and conflict
1. Introduction
2. 5.1 Institutions and power
3. 5.2 Evaluating institutions and outcomes: The Pareto criterion
4. 5.3 Evaluating institutions and outcomes: Fairness
5. 5.4 A model of choice and conflict
6. 5.5 Technically feasible allocations
7. 5.6 Allocations imposed by force
8. 5.7 Economically feasible allocations and the surplus
9. 5.8 The Pareto efficiency curve and the distribution of the surplus
10. 5.9 Politics: Sharing the surplus
11. 5.10 Bargaining to a Pareto-efficient sharing of the surplus
12. 5.11 Angela and Bruno: The moral of the story
13. 5.12 Measuring economic inequality
14. 5.13 A policy to redistribute the surplus and raise efficiency
15. 5.14 Conclusion
16. 5.15 References
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
6. 6.5 Determinants of the employment rent
7. 6.6 Work and wages: The labour discipline model
8. 6.7 Wages, effort, and profits in the labour discipline model
9. 6.8 Putting the model to work: Owners, employees, and the economy
10. 6.9 Another kind of business organization
11. 6.10 Principals and agents: Interactions under incomplete contracts
12. 6.11 Conclusion
13. 6.12 References
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
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
11. 7.10 Price-setting, competition, and market power
12. 7.11 Product selection, innovation, and advertising
13. 7.12 Prices, costs, and market failure
14. 7.13 Conclusion
15. 7.14 References
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
8. 8.7 The effects of taxes
9. 8.8 The model of perfect competition
10. 8.9 Looking for competitive equilibria
11. 8.10 Price-setting and price-taking firms
12. 8.11 Conclusion
13. 8.12 References
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
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
9. 9.8. Labour market equilibrium and the distribution of income
10. 9.9. Labour supply, labour demand, and bargaining power
11. 9.10. Labour unions: Bargained wages and the union voice effect
12. 9.11 Labour market policies to address unemployment and inequality
13. 9.12. Looking backward: Baristas and bread markets
14. 9.13 Conclusion
15. 9.14 References
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
8. 10.7 Assets, liabilities, and net worth
9. 10.8 Banks, money, and the central bank
10. 10.9 The central bank, the money market, and interest rates
11. 10.10 The business of banking and bank balance sheets
12. 10.11 The central bank’s policy rate can affect spending
13. 10.12 Credit market constraints: A principal–agent problem
14. 10.13 Inequality: Lenders, borrowers, and those excluded from credit markets
15. 10.14 Conclusion
16. 10.15 References
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
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
10. 11.9 Non-clearing markets: Rationing, queuing, and secondary markets
11. 11.10 Markets with controlled prices
12. 11.11 The role of economic rents
13. 11.12 Conclusion
14. 11.13 References
12—Markets, efficiency, and public policy
1. Introduction
2. 12.1 Market failure: External effects of pollution
3. 12.2 External effects and bargaining
4. 12.3 External effects: Policies and income distribution
5. 12.4 Property rights, contracts, and market failures
6. 12.5 Public goods
7. 12.6 Missing markets: Insurance and lemons
8. 12.7 Incomplete contracts and external effects in credit markets
9. 12.8 The limits of markets
10. 12.9 Market failure and government policy
11. 12.10 Conclusion
12. 12.11 References
13—Economic fluctuations and unemployment
1. Introduction
2. 13.1 Growth and fluctuations
3. 13.2 Output growth and changes in unemployment
4. 13.3 Measuring the aggregate economy
5. 13.4 Measuring the aggregate economy: The components of GDP
6. 13.5 How households cope with fluctuations
7. 13.6 Why is consumption smooth?
8. 13.7 Why is investment volatile?
9. 13.8 Measuring the economy: Inflation
10. 13.9 Conclusion
11. 13.10 References
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
5. 14.4 Investment spending
6. 14.5 The multiplier model: Including the government and net exports
7. 14.6 Fiscal policy: How governments can dampen and amplify fluctuations
8. 14.7 The multiplier and economic policymaking
9. 14.8 The government’s finances
10. 14.9 Fiscal policy and the rest of the world
11. 14.10 Aggregate demand and unemployment
12. 14.11 Conclusion
13. 14.12 References
15—Inflation, unemployment, and monetary policy
1. Introduction
2. 15.1 What’s wrong with inflation?
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
6. 15.5 What happened to the Phillips curve?
7. 15.6 Expected inflation and the Phillips curve
8. 15.7 Supply shocks and inflation
9. 15.8 Monetary policy
10. 15.9 The exchange rate channel of monetary policy
11. 15.10 Demand shocks and demand-side policies
12. 15.11 Macroeconomic policy before the global financial crisis: Inflation-targeting policy
13. 15.12 Another reason for rising inflation at low unemployment
14. 15.13 Conclusion
15. 15.14 References
16—Technological progress, employment, and living standards in the long run
1. Introduction
2. 16.1 Technological progress and living standards
3. 16.2 The job creation and destruction process
4. 16.3 Job flows, worker flows, and the Beveridge curve
5. 16.4 Investment, firm entry, and the price-setting curve in the long run
6. 16.5 New technology, wages, and unemployment in the long run
7. 16.6 Technological change and income inequality
8. 16.7 How long does it take for labour markets to adjust to shocks?
9. 16.8 Institutions and policies: Why do some countries do better than others?
10. 16.9 Technological change, labour markets, and trade unions
11. 16.10 Changes in institutions and policies
12. 16.11 Slower productivity growth in services, and the changing nature of work
13. 16.12 Wages and unemployment in the long run
14. 16.13 Conclusion
15. 16.14 References
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
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
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
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
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
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
Looking forward to economics after CORE
Bibliography
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
Copyright acknowledgements
Index

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