[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

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Learning GoalsIn this chapter, you will learn1234About the critical waysinformation affects marketsWhat the adverse selectionproblem is, and how it affectsmarketsWhat the incentive problemis, and how it affects marketsHow search and advertisingare explained by imperfectinformation
Chapter 15IMPERFECTINFORMATION INTHE PRODUCTMARKET∂It was never any secret to economists that the real world did not match themodel of perfect competition. Theories of imperfect competition and monopolysuch as those covered in Chapters 11 and 12 have been put forth from AdamSmith’s time to the present.Another limitation of the model of perfect competition has recently attractedattention: its assumption of perfect information—that market participants are fullyinformed about the goods being bought and sold. By incorporating imperfect informationinto their models, economists have come a long way in closing the gap betweenthe real world and the world depicted in the perfect competition, perfect informationmodel of Part Two.This chapter provides an overview of the major information problems of theproduct market, the ways in which market economies deal with them, and how thebasic model of Part Two has to be modified as a result. In Chapter 16, we will seehow information problems affect labor markets. We start our analysis of informationproblems by examining a market you may be familiar with—the used-car market.The Market for Lemons andAdverse SelectionHave you ever wondered why a three-month-old used car sells for so much less—often20 percent less—than a new car? Surely cars do not deteriorate that fast. The pleasureof owning a new car may be worth something, but in three months, even the caryou buy new will be “used.” Several thousand dollars is a steep price to pay for thisshort-lived pleasure.333
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∂ECONOMICSFOURTH EDITION
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∂ECONOMICSFOURTH EDITIONBW. W. NO
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ABOUT THE AUTHORSJoseph E. Stiglitz
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CONTENTS IN BRIEFPART 1 INTRODUCTIO
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CONTENTSPREFACEXXXVPART 1 INTRODUCT
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Sources of Shifts in Demand Curves
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Short-Run and Long-Run Cost Curves
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Conditions for the Pareto Efficienc
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THINKING LIKE AN ECONOMIST: Trade-O
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Search and Information Intermediari
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CHAPTER 19 INTERNATIONAL TRADE AND
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Government Deficits and Trade Defic
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Evaluating Government Deficits and
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PART 7MACROECONOMICFLUCTUATIONS 635
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An Expansionary Shift in the ADI Cu
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CHAPTER 35 POLICY IN THE OPEN ECONO
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CASE IN POINT: Fed Policy Statement
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PREFACEThe study of economics has a
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of the economist’s approach to im
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ture also allows an instructor who
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With SmartWork’s intuitive interf
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AcknowledgmentsThe book’s first t
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Alternative Course OutlineIn the Fo
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Plus any of the optional chapters c
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∂Part 1INTRODUCTION∂1
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Chapter 1MODERNECONOMICS∂The past
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the illegal online sharing of music
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2. In making choices, individuals r
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gal activity, and on the other side
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Internet ConnectionAUCTION SITESAn
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and products. It is hard to imagine
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The primary reliance on private dec
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Microeconomics andMacroeconomics:Th
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does not prove that the coin is not
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Review and PracticeSUMMARY1. Econom
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Chapter 2THINKING LIKE ANECONOMIST
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COMPETITIVE MARKETSTo complete the
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new insights into markets and situa
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INCENTIVES VERSUS EQUALITYWhile inc
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line up to buy at that price. (The
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she has more of both goods than at
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Diminishing returns is an important
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Thinking Like an EconomistTRADE-OFF
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computers and textiles. The develop
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To understand sunk costs, let’s g
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Review and PracticeSUMMARY1. The ba
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Appendix: Reading GraphsWhether the
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Now look at point A, where the econ
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∂Part 2PERFECT MARKETS∂51
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Chapter 3DEMAND, SUPPLY,AND PRICE
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you might buy a few, and if the pri
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SHIFTS IN DEMAND CURVES1.25When the
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Case in PointGASOLINE PRICES AND TH
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In practice, both effects are often
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higher performance at that price. A
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Wrap-UpSUPPLY CURVEThe supply curve
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A change in the natural environment
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USING DEMAND AND SUPPLY CURVESThe c
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Internet ConnectionTHE DEMAND AND S
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the demand and supply curves. What
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Chapter 4USING DEMANDAND SUPPLY∂W
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ABPRICE ($)Demand fororange juice2.
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Table 4.1PRICE ELASTICITY OF DEMAND
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International PerspectiveCOMPARING
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the supply curve becomes close to v
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be reflected more in changes in qua
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to illustrate the market’s failur
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New York City leads, in the short r
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Case in PointRENT CONTROL IN NEW YO
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ment is concerned with low wages pa
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2. Imagine that the short-run price
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fall represents a larger percentage
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Chapter 5THE CONSUMPTIONDECISION∂
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As we learned in Chapter 2, a budge
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450ALL OTHER GOODS ($)300GG'FF'20 3
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The consumption of some goods actua
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Internet ConnectionWHAT WE CONSUMET
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tive or negative. Generally, though
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Normally, demand curves are downwar
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is 30, and that of the last pizza i
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CONSUMER SURPLUSIn Chapter 1, we le
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nomic model of consumer choice can
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The Status Quo Bias Loss aversion a
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of $60,000 per year. Imagine that t
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Moving along the curve in one direc
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number of CDs, having an additional
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candy increases. Now he can buy few
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Chapter 6THE FIRM’S COSTS∂Imagi
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The relationship between the quanti
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COST (THOUSANDS OF DOLLARS)AB175C15
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ABCOST (DOLLARS PER UNIT)Marginalco
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average costs are declining at outp
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Table 6.4DEBORAH’S COSTS IF SHE W
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COST (DOLLARS PER UNIT)ALong-run to
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There is one last case to consider.
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produce the same output in several
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Hydroelectric power being generated
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Review and PracticeSUMMARY1. A firm
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Chapter 7THE COMPETITIVEFIRM∂Whet
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Internet ConnectionFIRMS’ PROFIT-
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Figure 7.3 develops the graphical a
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ABCOST OR PRICE (DOLLARS PER UNIT)p
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COST OR PRICE (DOLLARS PER UNIT)c m
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e-InsightTHE 2001 RECESSION: CUTBAC
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invested in this enterprise would p
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In some cases, supplies of inputs a
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Wrap-UpACCOUNTANTS’ VERSUS ECONOM
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ant, who helps him to draw up the f
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CHAPTER 8LABOR MARKETS∂The previo
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“standard” workweek—the 40-ho
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Wrap-UpWAGE CHANGES AND LABOR SUPPL
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656055Female labor forceparticipati
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Thus, in Figure 8.5, at the price p
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market is in equilibrium, the deman
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constraint has a kink at 37 hours o
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AOriginal budgetconstraintBOriginal
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Chapter 9CAPITAL MARKETS∂At any g
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Joan chooses among the points on th
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past twenty years computer prices h
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The slope of the budget constraint
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gests that the personal saving rate
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would have earned $1,000 in interes
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Despite offering important insights
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e-InsightFINANCING THE NEW ECONOMYW
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Review and PracticeSUMMARY1. The in
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Appendix A: IndifferenceCurves and
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increase in the interest rate, we n
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Chapter 10THE EFFICIENCY OFCOMPETIT
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CONSUMER AND PRODUCERSURPLUSTo unde
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unable to find an apartment when re
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PRICE OF CIGARETTESPrice paid bycon
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Exchange Efficiency Exchange effici
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COMPETITIVE MARKETS ANDPARETO EFFIC
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more extensive government intervent
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households determine their saving,
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AUnskilled laborsupply (SU )BSkille
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today, but it will also depend on p
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Review and PracticeSUMMARY1. Genera
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∂Part 3IMPERFECT MARKETS∂237
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Chapter 11INTRODUCTION TOIMPERFECTM
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price. The basic competitive model
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is called monopoly. Your local elec
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How much the price must change as s
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Imperfect InformationThe model of p
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MARKETS FOR INFORMATIONInformation
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ness scandals in recent years have
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Thinking Like an EconomistINCENTIVE
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practical matter, this can be done
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Review and PracticeSUMMARY1. By and
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Chapter 12MONOPOLY,MONOPOLISTICCOMP
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In Chapter 7, we used a graph that
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of $9,000, it sells 2 units; and at
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United StatesJapanPRICE (p )p 1PRIC
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A natural monopoly occurs whenever
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Table 12.2DEGREE OF COMPETITION IN
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Equilibrium with MonopolisticCompet
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A firm that is part of an oligopoli
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and still be better off. However, t
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backward through time, this logic w
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Page 333 and 334: Thinking Like an EconomistTRADE-OFF
Page 335 and 336: Review and PracticeSUMMARY1. Both m
Page 337 and 338: 9. Explain why frequent-flier progr
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Page 341 and 342: MANAGERIAL SLACKChapter 6 argued th
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Page 361 and 362: Chapter 14STRATEGICBEHAVIOR∂Durin
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Page 365 and 366: Consider the case of politicians A
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Page 387 and 388: The Incentive ProblemProviding ince
Page 389 and 390: REPUTATION SOLUTIONSReputation play
Page 391 and 392: Case in PointBUYING HEALTH INSURANC
Page 393 and 394: Thinking Like an EconomistINCENTIVE
Page 395 and 396: Internet ConnectionJOB SEARCHThe In
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Page 405 and 406: Chapter 16IMPERFECTIONS INTHE LABOR
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Page 425 and 426: Chapter 17THE PUBLIC SECTOR∂Throu
Page 427 and 428: Why Does the GovernmentIntervene in
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Wrap-UpCRITERIA FOR EVALUATING A TA
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The income tax is only one of sever
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1997, the program commonly known as
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SOCIAL INSURANCEThe United States h
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Government FailuresDecisions about
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BUDGETING AND SPENDING PROCEDURESTh
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campaign contributions affect the b
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that point, additional sources of r
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Health care is different from most
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Review and PracticeSUMMARY1. Govern
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Chapter 18ENVIRONMENTALECONOMICS∂
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Consider what happens if, in the pr
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matters? Some economists, led by th
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in such developments. The end of lo
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the socially optimal level of produ
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by 2 units and plant B by 4 units.
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operation causes. Thus, the price h
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Review and PracticeSUMMARY1. Govern
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Chapter 19INTERNATIONALTRADE AND TR
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relative to the size of the populat
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Internet ConnectionDAVID RICARDOThe
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e-InsightTHE UNITED STATES’ COMPA
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has a comparative advantage in fine
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But trade among individuals and tra
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restrict the importation of goods.
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OTHER NONTARIFF BARRIERSVERs and qu
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they can raise prices. In such a ca
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BEGGAR-THY-NEIGHBOR POLICIESConcern
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Thinking Like an EconomistDISTRIBUT
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parent: everyone can see that it is
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Environmental and human rights issu
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Internet ConnectionTHE WORLD TRADE
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9. How is it possible that while th
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Chapter 20TECHNOLOGICALCHANGE∂For
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e-InsightTHE NEW ECONOMY AND INNOVA
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uncertain about whether it will be
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Soon after Henry Ford’s Model T h
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Because expenditures on R & D are f
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SCHUMPETERIAN COMPETITIONAlthough c
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even the existence of certain mater
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increasing awareness of the importa
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Review and PracticeSUMMARY1. Ideas
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∂Part 5INTRODUCTIONTO MACROECONOM
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Chapter 21MACROECONOMICSAND THEECON
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302520PERCENT1510501900 1910 1920 1
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Today, a slight rise in the unemplo
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GOVERNMENT DEFICITS AND TRADE DEFIC
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significant periods of deflation si
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Review and PracticeSUMMARY1. The th
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Chapter 22MEASURINGOUTPUT ANDUNEMPL
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Table 22.1CALCULATING GDPPrices and
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MEASURING GDP: THE VALUE OF OUTPUTT
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Wrap-UpGDP equals consumption plus
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spending represents income for thos
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International PerspectiveWHAT GETS
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Measuring Nonmarket Goods Nonmarket
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ment represents economic hardship.
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1412FranceUNEMPLOYMENT RATE (%)1086
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Wrap-UpFORMS OF UNEMPLOYMENTSeasona
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Flows and StocksGDP is a measure of
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produces two products, lectures and
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Chapter 23THE COST OFLIVING ANDINFL
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a variety of transactions, inflatio
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JANUARY 1918 = 10010 1310 1210 1110
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To see how a price index like the C
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The second major problem is “qual
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purchase foreign goods, so their pr
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Review and PracticeSUMMARY1. The in
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∂Part 6FULL-EMPLOYMENTMACROECONOM
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Chapter 24THE FULL-EMPLOYMENTMODEL
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In macroeconomics, we stress aggreg
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duction and hire more workers. Seco
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REAL WAGE (w/P )ALabor supply curve
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capital markets to ensure that the
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to firms and in return receive paym
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est rate (perhaps rising slightly w
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REAL INTEREST RATE (r )ASavingcurve
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USING THE GENERAL EQUILIBRIUM MODEL
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Review and PracticeSUMMARY1. Macroe
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Chapter 25GOVERNMENTFINANCE AT FULL
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Adding the GovernmentIntroducing go
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From this perspective, the first eq
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revenues match expenditures. In 199
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International PerspectiveDEFICITS I
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investment increases the capital st
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400AThe Federal Deficit300200BILLIO
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collected fell; Congress passed a l
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Review and PracticeSUMMARY1. When t
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Chapter 26THE OPENECONOMY AT FULLEM
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domestic economy is borrowing more
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The discussion so far has also assu
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to be a simple matter: the buyer pa
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2520DomesticinvestmentPERCENTAGE OF
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50,000Exports40,00030,000MILLIONS O
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curve for dollars represents the do
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Trade deficits mean the country is
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Review and PracticeSUMMARY1. In an
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Chapter 27GROWTH ANDPRODUCTIVITY∂
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3.53.03.122.66PERCENT2.52.01.52.202
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The growth rate of output is the su
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production function: the relationsh
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telecommunications industry, other
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its marginal cost is therefore zero
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residual (i.e., TFP). The decrease
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because the United States has been
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2. Explain why a rapid influx of wo
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Chapter 28MONEY, THE PRICELEVEL, AN
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2015RATE OF INFLATION IN CPI (%)105
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Since we are interested in the dema
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807060INFLATION RATE (%)50403020100
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important of these are banks, but t
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pay their workers. How could the lo
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Money as a Store of Value People wi
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Table 28.2GLOSSARY OF FINANCIAL TER
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Table 28.3AMERICABANK BALANCE SHEET
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e-InsightELECTRONIC CASHA TV ad sho
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Table 28.5SUPERBANK BALANCE SHEETAs
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The Federal Reserve was created by
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the banking system as a whole remai
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If (for good reasons or bad) many d
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Review and PracticeSUMMARY1. In the
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∂Part 7MACROECONOMICFLUCTUATIONS
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Chapter 29INTRODUCTION TOMACROECONO
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A11,0001960-1961recession1969-1970r
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broken only by two brief recessions
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Thinking Like an EconomistEMPLOYMEN
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L 1 - L 0 , is the level of cyclica
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Thinking Like an EconomistINFORMATI
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market. Once this has happened, the
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assuming that the firm’s output i
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labor markets. Conversely, wages wi
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Fundamentals of Fluctuations 4INFLA
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Review and PracticeSUMMARY1. Econom
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Chapter 30AGGREGATEEXPENDITURES AND
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THE NATIONAL INCOME-OUTPUT IDENTITY
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the final increase in equilibrium o
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ical questions. First, why does the
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8,0007,000REAL CONSUMPTION(BILLIONS
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lion. If any of the components of E
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2018INVESTMENT (AS % OF GDP)1614121
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without waiting; otherwise, they ma
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The effect of exports and imports o
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became less expensive, imports rose
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Calculating Equilibrium OutputAt th
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Wrap-UpAGGREGATE EXPENDITURES AND O
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Review and PracticeSUMMARY1. Income
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Chapter 31AGGREGATEDEMAND ANDINFLAT
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When we discuss interest rates and
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Because equilibrium GDP is determin
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Fiscal Policy A change in governmen
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Wrap-UpFACTORS THAT SHIFT THE AGGRE
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But the story does not end there. A
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offsetting amount. But the contract
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Thinking Like an EconomistTOUGH TRA
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bank could cut interest rates at ea
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Case in PointTHE 1990SNow that we h
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to sustained increases in productiv
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Review and PracticeSUMMARY1. Aggreg
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Chapter 32THE FEDERALRESERVE ANDINT
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987INTEREST RATES (%)65432TargetFed
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The position of the demand curve fo
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equilibrium funds rate rises. If th
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tity of money increases. When the m
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Chapter 33THE ROLE OFMACROECONOMICP
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THE NEW TRADE-OFF:OUTPUT STABILITY-
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AggregatedemandinflationcurvesPoten
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ADI 1E 1Aggregatedemand-inflationcu
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765Actual deficitPOTENTIAL GDP (%)4
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Conducting Monetary Policy The FOMC
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The Committee perceives the upside
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stimulate aggregate expenditures, e
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Case in PointTHE INTEREST RATE CUT
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economy and lead to a resurgence of
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The Inflation Target The position o
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This discussion returns us to the t
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Wrap-UpDIFFERENCES BETWEEN MONETARY
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3. Assume that the economy is curre
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∂Part 8THE GLOBAL ECONOMY∂755
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Chapter 34THEINTERNATIONALFINANCIAL
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The foreign exchange market in Yere
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that wants to use the euros to buy
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States than moving it to Europe or
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Expectations about changes in the e
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expressed in terms of the value of
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One of the attractions of the Europ
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As speculators withdrew capital, th
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Under a currency board, the exchang
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Review and PracticeSUMMARY1. In a f
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Chapter 35POLICY IN THEOPEN ECONOMY
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While this discussion has focused o
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rises and its appreciation reduces
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Internet ConnectionFOREIGN EXCHANGE
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exports are a large fraction of tot
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Central Bank had increased the inte
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3. Suppose a fall in net exports du
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Chapter 36DEVELOPMENTAND TRANSITION
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$5,500$5,000$4,50019912002$4,000$3,
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LIFE IN A LESS-DEVELOPED COUNTRYJus
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Some of this inequality is simply d
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changes served to level the playing
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policies, together with macroeconom
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Trade Giving less-developed economi
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eroded significantly in 2001 as a r
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calculations of this kind allowed i
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with ethnic strife or conflicts wit
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the value of existing savings. Mafi
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6. What are some of the roles that
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∂Part 9FURTHER TOPICS INMACROECON
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Chapter 37INFLATION ANDUNEMPLOYMENT
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curve. A. W. Phillips was a New Zea
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1614INFLATION RATE (%)1210861960-19
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on the rate of inflation. The posit
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An important implication of this co
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Internet ConnectionWINNERS OF THE N
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the oil embargo imposed by the Orga
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expected inflation rate equal to π
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unemployment rate is 5 percent (i.e
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Chapter 38CONTROVERSIES INMACROECON
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ing a large tax cut through Congres
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rather than raising taxes to financ
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ity.” The Humphrey-Hawkins Act se
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THE INTERVENTIONIST PERSPECTIVEThe
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ceed in keeping the unemployment ra
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they argue that if the Fed is held
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These actions were taken in light o
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International PerspectiveCENTRAL BA
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rate−1 percent expected inflation
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but doing so leads to bigger swings
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between fluctuations in unemploymen
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Chapter 39A STUDENT’S GUIDETO INV
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Internet ConnectionCALCULATING INTE
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regarding the prospects of the econ
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Table 39.1ALTERNATIVE INVESTMENTS A
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A crowd protests rate hikes by the
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12,000ADow Jones Industrial Average
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Investing in housing, particularly
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Thinking Like an EconomistTHE DISTR
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subsides. Thus, if a person knows t
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can expect to earn only a normal le
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Strategies for Intelligent Investin
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Review and PracticeSUMMARY1. Invest
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Page 941 and 942:
capital goods: the machines and bui
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Federal Open Market Committee(FOMC)
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M1, M2, M3: measures of the money s
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price system: the economic system i
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substitution effect: the reduced co
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Page 953 and 954:
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banks:assets of, 621-22, 625balance
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currency (continued)inflation and,
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exchange rates (continued)appreciat
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horizontal restrictions, oligopolie
Page 963 and 964:
investment, investments, 672-76, 69
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monetary policy (continued)trade-of
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price takers, 27, 131, 218price war
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Social Security (continued)as pay-a
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unions (continued)strikes by, 355su
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[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

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