Contents in Brief
Page
v
Preface
PART 1
INTRODUCTION TO ECONOMICS
Chapter 1
Nature and Scope of Economics
Chapter 2
Scarcity, Trade-offs and Opportunity Cost
Chapter 3
Working with Graphs and Numbers
1
3
21
39
PART 2
THE FUNCTIONING OF MARKETS AND BUYERS’ BEHAVIOUR
Chapter 4
Demand, Supply and the Market
Chapter 5
Elasticity of Demand
Chapter 6
Theory of Consumer Choice
Appendix:
Indifference Curve Analysis
57
59
89
111
127
PART 3
THE FIRM AND SUPPLIERS’ BEHAVIOUR
Chapter 7
Theory of the Firm and Profits
Appendix:
Entrepreneurs and Entrepreneurship
Chapter 8
Production and Costs
Appendix:
Isoquants and Isocosts
131
133
147
151
171
PART 4
BUSINESS DECISIONS IN DIFFERENT MARKET STRUCTURES
Chapter 9
Profit Maximization: The Basic Rules
Chapter 10
Profit Maximization in Perfect Competition and Monopoly
Chapter 11
Profit Maximization in Monopolistic Competition and Oligopoly
Chapter 12
Special Pricing Practices and Competitive Business Strategy
179
181
193
215
233
PART 5
WELFARE ECONOMICS AND LABOUR ECONOMICS
Chapter 13
The Role of Government, Public Goods and Externalities
Chapter 14
The Labour Market
251
253
269
PART 6
THE REAL SIDE OF THE ECONOMY: MEASURING
NATIONAL INCOME AND ECONOMIC GROWTH
Chapter 15
Measuring National Output/Income
Appendix:
Saving and Investment in the National Income Accounts
Chapter 16
Aggregate Demand and Aggregate Supply
Appendix
The Keynesian Income-Expenditure Model
Chapter 17
Unemployment
Appendix
Unemployment in the European Union
Chapter 18
Growth and Development
Appendix
The Millennium Development Goals
293
295
319
321
340
347
368
371
396
PART 7
THE MONETARY SIDE OF THE ECONOMY
Chapter 19
Inflation: Measurement, Causes & Effects
Chapter 20
Money and the Money Market
Chapter 21
Banking and the Money Creation Process
Chapter 22
The Central Bank and its Functions
399
401
423
439
459
PART 8
STABILIZATION POLICY
Chapter 23
Monetary Policy
Chapter 24
Fiscal Policy
473
475
495
PART 9
THE INTERNATIONAL ECONOMY
Chapter 25
International Trade
Chapter 26
Balance of Payments and Exchange Rates
Appendix
The Simple Algebra of the Balance of Payments
Appendixes
Present Value Statistical Tables
Answers to Odd-Numbered True-False Questions
Answers to Odd-Numbered Multiple Choice Questions
Subject Index
521
523
549
573
575
576
579
581
583
Contents in Detail
Preface
About the Authors
Page
v
xi
PART 1
INTRODUCTION
1
Chapter 1
Nature and Scope of Economics
3
Learning outcomes
Preview
Lessons from the recent economic recession
Current economic issues
Economics defined
Fundamental/basic economic problem
Economic Resources
Scope of economics
Microeconomics
Macroeconomics
Economics as a science
Theories, hypotheses and models
Assumptions
Theory and policy
Positive and normative economic analysis
3
3
4
4
6
7
7
8
8
9
9
10
12
12
13
Study Questions
15
Scarcity, Trade-offs and Opportunity Cost
21
Learning outcomes
Preview
Scarcity and basic economic problem
Scarcity & opportunity cost
Production possibilities curve (or frontier)—PPC or PPF
Tasks performed by an economic system
Deciding What, How and for Whom to produce
Coordination of economic choices: The market and price system
The role of markets—the “invisible hand” of Adam Smith
The role of prices (rationing & signalling/allocative functions)
Economic systems
21
21
21
22
23
26
26
29
29
31
32
Study Questions
33
Working with Graphs and Numbers
39
Learning outcomes
Preview
Plotting pairs of numbers
Using graphs to display data
Pie charts, bar charts, and time series graphs
Expressing economic relationships
From a table to a graph
The slope of a line
Shift of a curve vs. movement along a curve
Non-linear relationships
Percentage changes
Ratios
Stocks and flows
Real and nominal values
39
39
39
40
40
41
41
43
43
44
46
46
46
47
Chapter 2
Chapter 3
PART 2
Chapter 4
Chapter 5
Chapter 6
Average and marginal values
Time value of money: Present value and future value
Future value and compounding
Present value and Discounting
48
50
50
51
Study Questions
52
THE FUNCTIONING OF MARKETS
& BUYERS’ BEHAVIOUR
57
Demand, Supply and the Market
59
Learning outcomes
Preview
The market
Market structures-an overview
59
59
59
60
The Law of Demand
61
The individual demand schedule
The substitution and income effects
The market demand
Drawing the demand curve
Non-price determinants of demand
Shift of the market demand curve
Changes in demand vs. changes in quantity demanded
62
63
63
64
65
67
68
The Law of Supply
69
The market supply schedule and the market supply curve
Non-price determinants of supply
Shifts in the supply curve
69
70
71
Market Equilibrium
72
The simple math of equilibrium
Disequilibrium situations
Changes/shifts in demand causing disequilibrium
Changes/shifts in supply causing disequilibrium
Simultaneous shifts in demand and supply and new equilibrium
Market interventions by governments
73
73
74
76
77
78
Study Questions
80
Elasticity of Demand
89
Learning outcomes
Preview
89
89
Price Elasticity of Demand
89
Calculating price elasticity
Arc price elasticity
Point price elasticity
Real world price elasticities
Determinants of price elasticity
Price elasticity and total revenue
90
93
94
94
94
96
Income Elasticity
Cross-Price Elasticity
99
100
Price elasticity of supply
101
Study Questions
103
The Theory of Consumer Choice
111
Learning outcomes
Preview
111
111
The Consumption Preferences
112
Utility analysis
Marginal utility
Law of diminishing marginal utility
112
113
114
The Consumption Possibilities
115
The budget line (income constraint)
Budget equation
Adjustments (changes) in income and prices
Utility maximization
Substitution and income effects
Derivation of the consumer’s demand curve
Derivation of the market demand curve
115
116
117
118
119
120
121
Study Questions
122
Appendix:
Indifference Curve Analysis
Indifference curves
Consumer equilibrium
Study Questions
127
127
128
128
PART 3
THE FIRM AND SUPPLIERS’ BEHAVIOUR
131
Chapter 7
Theory of the Firm and Profits
133
Learning outcomes
Preview
Business organizations
Basic accounting concepts
The firm and its functions
Objectives of the firm
Maximization theories
Profit and revenue maximization
Non-maximization theories
Economic profits vs. accounting profits
Case Study 7.1: Cynthia’s Day Care Centre
Theories of Profit
The role of profits in the economy
133
133
133
134
135
136
136
136
137
138
139
140
141
Study Questions
142
Appendix:
Entrepreneurs and Entrepreneurship
Learning outcomes
Introduction
Defining entrepreneur and entrepreneurship
Personality characteristics of entrepreneurs
147
147
147
147
149
Chapter 8
Production and Costs
151
Learning outcomes
Preview
151
151
Production Analysis
157
The production function
The short run (SR) and the long run (LR)
The SR production function: One variable input
The law of diminishing marginal returns
Optimal use of the variable input
152
152
153
155
156
Cost Analysis
156
Relevant costs
Short run cost functions and curves
Putting production and costs curves together
156
157
159
Long term costs (Returns to scale)
Reasons for economies and diseconomies of scale
Minimum efficient scale
Economies of Scope
The Learning Curve
Real-world cost minimization strategies of firms
159
160
161
161
162
162
Study Questions
164
Appendix:
Isoquants and Isocosts
Isoquants
Marginal rate of technical substitution
Isocost line
Isocost equation
Optimal combination of inputs
Study Questions
171
171
171
172
173
175
176
PART 4
BUSINESS DECISIONS IN DIFFERENT MARKET
STRUCTURES
179
Profit Maximization: The Basic Rules
181
Learning outcomes
Preview
Profit Maximization
Revenue and cost variables
Profit maximisation using total revenue and total cost
Profit maximisation using marginal revenue and marginal cost
Shutdown points
Revenue Maximization
Break-even Analysis
Algebraic form of break-even analysis
Scenario Analysis
Break-even analysis with a targeted level of profits
181
181
181
181
182
183
185
185
186
186
188
189
Study Questions
189
Perfect Competition and Monopoly
193
Learning outcomes
Preview
Overview of Characteristics of Market Structures
193
193
193
PERFECT COMPETITION
195
Output Determination under Perfect Competition
Determination of market equilibrium price
The horizontal demand curve of the firm in perfect competition
Profit maximization in the short run
Shut down for loss making firm
Deriving the firm’s short run supply curve
Long Run Equilibrium in perfect competition
195
196
196
199
201
201
201
MONOPOLY
203
Barriers to entry
Demand conditions under monopoly
Profit maximization under monopoly
Loss-making Monopoly
Comparison of Perfect Competition with Monopoly
203
203
205
205
206
Study Questions
207
Chapter 9
Chapter 10
Chapter 11
Chapter 12
PART 5
Chapter 13
Monopolistic Competition and Oligopoly
215
Learning outcomes
Preview
215
215
MONOPOLISTIC COMPETITION
216
Product differentiation
Profit maximization in monopolistic competition
Market efficiency and excess capacity
Case Study 11.1: Excess Capacity in Cypriot Manufacturing Industries
216
216
218
219
OLIGOPOLY
219
Barriers to entry
Interdependent actions and strategies
The kinked-demand curve model
Short run profit maximisation in Oligopoly
Non-price competition
Market concentration
Case Study 11.2: Indicators of concentration in the banking sector in Cyprus
Cartels: Collusive oligopoly
Joint-profit maximization by a cartel
219
220
220
221
222
223
223
224
226
Study Questions
226
Special Pricing Practices and Competitive Business Strategy
233
Learning outcomes
Preview
233
233
Special pricing practices of firms with market power
234
(1) Price Discrimination
Degrees of price discrimination
Prerequisite conditions for third-degree price discrimination
Examples of price discrimination
(2) Mark-up pricing (Cost-plus pricing)
(3) Life-Cycle pricing strategies
(4) Price leadership model
(5) Other pricing practices
a) Tying and Bundling
b) Peak Load pricing
c) Two-Part Tariff
Strategic entry barriers
Globalisation
Contestable markets
234
234
235
235
236
237
238
239
239
239
239
239
240
240
Game Theory
241
Payoff matrix and dominant strategy
Nash equilibrium
Competition, cooperation and prisoners’ dilemmas
Repeated games and tit-for-tat
Credible threats and commitment
241
242
242
244
244
Study Questions
245
WELFARE ECONOMICS AND LABOUR
ECONOMICS
251
The Role of Government, Public Goods and Externalities
253
Learning outcomes
Preview
Economic functions of the government
Public goods vs. private goods
The free rider problem
253
253
254
255
255
Chapter 14
PART 6
Chapter 15
Appendix:
Common resources
Governments intervention: minimum wage laws and price ceilings
Market failures and externalities
Positive and negative externalities
Pollution abatement measures
Pollution taxes
256
257
259
259
260
262
Study Questions
263
The Labour Market
269
Learning outcomes
Preview
“Derived” demand for factors of production (inputs)
How does the labour market function?
The demand for labour
Determinants of the demand for labour
Marginal product of labour (MPL)
The law of diminishing marginal returns (productivity)
The hiring rule
The supply of labour
The “backward-bending” supply curve for an individual
From individual supply to market supply
Non-wage determinants
Equilibrium in the labour market
Disequilibrium in the labour market: Surpluses and shortages
Changes in market demand and supply of labour
The simple math of equilibrium in the labour market
Market effects of the minimum wage
Human capital, pay differentials and discrimination
Discrimination in the labour market
269
269
270
270
270
271
273
274
274
276
276
277
278
278
279
280
281
282
283
284
Study Questions
287
REAL SIDE OF THE ECONOMY: MEASURING
NATIONAL INCOME AND ECONOMIC GROWTH
293
Measuring National Output/Income
295
Learning outcomes
Preview
GDP and GNP: Definitions, calculations, examples
Final vs. intermediate goods
From GDP to GNP
The circular flow of income model
Extensions of the basic model
Adding investment and saving (injections and leakages)
Adding the government and the foreign sector
Three ways to measure GDP
(1) The Output approach (value added approach)
(2) The Expenditure approach
(3) The Income approach
Nominal and real GDP
Limitations of GDP as indicator of welfare (wellbeing)
The Human Development Index (HDI)
295
295
296
296
297
298
300
300
301
302
303
304
306
307
309
310
Study Questions
312
Saving and Investment in the National Income Accounts
319
Chapter 16
Aggregate Demand and Aggregate Supply
321
Learning outcomes
Preview
321
321
Aggregate Demand (AD)
322
The consumption function
The marginal propensity to consume (MPC)
Non-income determinants of consumption
Non-price determinants of AD
The slope of the AD curve
Shifting the AD curve
Introducing the expenditure multiplier
322
322
322
324
324
325
325
The Aggregate Supply (AS)
327
(a) Short run aggregate supply
(b) AS with unused capacity
Are “sticky prices” a reasonable assumption?
(c) Potential and actual output
(d) The Classical View: LR aggregate supply
(e) The Keynesian View of SR aggregate supply
Equilibrium output
Adjustments toward full employment equilibrium
327
328
328
329
329
330
331
332
Study Questions
334
Appendix:
Keynesian Income-Expenditure Model
Planned aggregate expenditure (AE) and its components
Determination of equilibrium income/output
Study Questions
340
340
342
344
Chapter 17
Unemployment: Measurement, Causes and Effects
347
Learning outcomes
Preview
The employment-output connection
Okun’s Law
Employment and unemployment: Definitions and statistics
Methods of measuring unemployment
(1) The labour force survey (LFS)
(2) The claimant count
Unemployment by age group
Duration of unemployment
Static and dynamic view of the labour market
Reasons for unemployment flows
Types of unemployment
Frictional unemployment
Structural unemployment
Cyclical unemployment
Seasonal unemployment
Natural rate of unemployment
Job search
Minimum wage laws
Efficiency wages
Non-economic dimensions of unemployment
Government policy measures for unemployment
347
347
348
348
349
352
353
353
353
354
354
355
356
356
356
357
357
358
359
359
360
360
361
Study Questions
362
Unemployment in the European Union
Recent developments in unemployment in the EU
368
368
Appendix
Long-term unemployment trends in the EU
Youth unemployment trends
Male and female unemployment
Long term unemployment
369
369
370
370
Growth and Development
371
Learning outcomes
Preview
Economic growth defined
Measuring rates of growth
The production possibilities curve and economic growth
Economic growth in Europe and around the world
Economic fluctuations: Business cycles
Phases of the business cycle
Rostow’s stages of economic development
Growth models
The production function
Productivity: Its role and determinants
Economic growth and government policy
(1) Education
(2) Health
(3) Investments in capital
(4) Foreign direct investment (FDI)
(5) Research and development
(6) Regulatory & Institutions environment
Case Study 18.1: Index of Economic Freedom for Cyprus and Greece for 2012
General empirical findings for growth models
371
371
372
372
373
374
376
376
377
379
379
380
382
382
382
382
385
385
385
387
388
Study Questions
389
Appendix
The Millennium Development Goals
396
PART 7
THE MONETARY SIDE OF THE ECONOMY
399
Chapter 19
Inflation: Measurement, Causes and Effects
401
Learning outcomes
Preview
Definition of inflation
Inflation in Cyprus: A historical look
Calculating the inflation rate
Causes of inflation
Demand-pull inflation
Cost-push inflation
The costs/effects of inflation
Anticipated & unanticipated inflation
Specific costs of inflation
Hyperinflation and its effects
Money supply growth and inflation
Real vs. nominal values
Relationship between inflation and interest rates
The Fisher equation
The Phillips curve: Trade-off between inflation and unemployment
Long run Phillips curve
Case Study 22.1: The Inflation-Unemployment Trade-off in Cyprus
401
401
401
402
403
405
405
406
407
407
408
409
410
410
411
411
412
413
413
Study Questions
415
Chapter 18
Chapter 20
Money and the Money Market
423
Learning outcomes
Preview
423
423
Money and its Functions
424
Definition of money
The barter system
Forms of money
Functions of money
Medium of exchange
Unit of account
Store of value
Advantages of money
Money vs. credit cards
Different measures of the money supply
Determinants (motives) for the demand for money
1. Transactions motive
2. Precautionary motive
3. Asset (speculative) motive
The total demand for money
The Supply of money
Equilibrium in the money market
Bond prices and market interest rates
424
424
425
426
426
426
426
426
427
428
429
429
429
430
430
430
432
432
433
Study Questions
434
Banking and the Money Creation Process
439
Learning outcomes
Preview
439
439
The Modern Banking System
439
An overview of the financial system
Changes in the financial services industry
Financial institutions
Functions of modern banking system
Credit and the role of the banking system
The accounting view of bank operations—assets and liabilities
Liabilities (sources of funds)
Assets (uses of funds)
Deposit insurance scheme in Cyprus
Asymmetric information problems in the banking industry
439
440
441
442
443
443
444
445
446
446
The Money Creation Process
447
Fractional reserve banking system
The money multiplier
Reserve requirements, prudent banking and run on banks
447
450
451
Study Questions
452
The Central Bank and its Functions
459
Learning outcomes
Preview
459
459
Functions of the Central Banking
Instruments/tools of monetary policy
460
461
(1) Required reserve ratio
(2) Discount rate
(3) Open market operations
Independence of the central banks
The European Central Bank (ECB)
461
461
462
463
463
(M1 and M2)
Demand and Supply of Money & Interest Rates
Chapter 21
Chapter 22
Tasks of the Eurosystem
Independence of the ECB
National central banks (NCBs)
Policy objectives of the ECB & the Eurosystem
Monetary policy instruments of the ECB
Governing bodies of the ECB
The Bank of England (BoE)
Core purposes and strategic priorities
Targets and instruments
The base rate
The Monetary Policy Committee (MPC)
464
464
464
464
465
465
466
467
467
467
467
Study Questions
468
PART 8
STABILISATION POLICY
473
Chapter 23
Monetary Policy
475
Learning outcomes
Preview
Monetary policy instruments/tools
Monetary policy and impact on the money market
The monetary transmission mechanism
Expansionary monetary policy
The expenditure multiplier
Restrictive (Contractionary) monetary policy
Limitations of monetary policy in stabilizing the economy
The rules vs. discretion debate (actives vs. passive monetary policy)
Monetary growth rule
Inflation targeting
The Taylor rule
The quantity theory of money
Responses of central banks to financial crises
Constraints in using national monetary policy within the Eurozone
Concluding evaluation of monetary policy
475
475
476
476
477
478
479
480
481
482
482
482
482
483
485
486
487
Study Questions
488
Fiscal Policy
495
Learning outcomes
Preview
Definition of fiscal policy
The government budget
Expenditures
Revenues
The government balance: surpluses and deficits
Case Study 13.1: The Government budget for Cyprus for the years 2007-2010
The tax system
Schools of thought about fiscal policy
How fiscal policy affects economic activity: A first look
Types of fiscal policy
Automatic stabilisers
Expansionary & Contractionary fiscal policy
The expenditure and tax multiplier
Balanced budget
Contractionary fiscal policy
Limitations of fiscal policy in stabilizing the economy
Time lags
Limited discretion
495
495
496
496
497
497
498
499
500
502
502
503
503
504
505
507
507
508
509
509
Chapter 24
Availability of reliable and timely information about the economy
Fiscal policy and the financial markets
Crowding out
Constraints in using national fiscal policy
510
510
510
511
Supply-Side Policies
511
Supply-side effects of government expenditures
Supply-side economics and taxation
The Laffer curve
511
512
512
Study Questions
513
PART 9
THE INTERNATIONAL ECONOMY
521
Chapter 25
International Trade
523
Learning outcomes
Preview
Why do nations trade?
Reasons for international trade
Patterns of trade
Basic facts of international trade
What is traded?
Who trades with whom?
Economic and trading blocs
A focus on European Union’s trading patterns
The pioneering theories of trade
Adam Smith’s absolute (cost) advantage
David Ricardo’s comparative (cost) advantage
Graphical representation of comparative advantage
Extensions of the Ricardian model
The Hecksher-Ohlin model
Opposition to free trade
Arguments for trade protection
The infant industry argument
The retaliation argument
Trade barriers/restrictions
Tariffs
Non-tariff barriers
 Quotas, voluntary export restraints & administrative restrictions
Globalization
Multinational companies (MNCs)
Arguments in favour and against MNCs
Offshoring and outsourcing
The World Trade Organisation (WTO)
523
523
523
524
524
524
524
525
525
527
528
528
528
531
532
532
534
535
536
536
537
537
538
538
539
540
541
542
544
Study Questions
545
Balance of Payments & Exchange Rates
549
Learning outcomes
Preview
549
549
The Balance of Payments
550
Double-entry accounting of the Balance of Payments
The balance of payments of Cyprus
The trade account of Cyprus
The current account of Cyprus
Determinants of the current account
Interest rates and the capital account
550
551
552
553
553
554
Chapter 26
Appendix
Foreign Exchange Markets and Exchange Rates
555
Exchange rates
The foreign exchange market
The law of demand for foreign exchange
Determinants of demand for foreign exchange
Changes in the demand for Euros
Supply of foreign exchange
Changes in the supply of Euros
Market equilibrium and disequilibrium
Changes in demand and supply of foreign exchange
Changes in demand (no changes in supply)
Changes in supply (no changes in demand)
Appreciation and depreciation
The real exchange rate
Purchasing power parity
Exchange rates and Balance of Payments policy
(1) By changing domestic interest rates
(2) By controlling inflation (through the money supply)
Exchange rate regimes (systems)
Flexible exchange rate systems
Fixed (pegged) exchange rate systems
Intervention by central banks in the FX market
Advantages and disadvantages of flexible & fixed exchange rate systems
Hybrid exchange rate systems
555
556
557
557
558
558
559
560
560
560
561
561
562
563
563
563
564
564
564
564
565
566
566
Study Questions
567
The Simple Algebra of the Balance of Payments
Some important identities
Relationship between internal balance and external balance
573
573
573
Appendixes
Present Value Statistical Tables
Answers to Odd-numbered True-False Questions
Answers to Odd-numbered Multiple Choice Questions
Subject Index
575
576
579
581
583