EssEntials of Economics A01_SLOM2240_07_SE_FM.indd 1 19/01/16 3:55 PM At Pearson, we have a simple mission: to help people make more of their lives through learning We combine innovative learning technology with trusted content and educational expertise to provide engaging and effective learning experiences that serve people wherever and whenever they are learning. From classroom to boardroom, our curriculum materials, digital learning tools and testing programmes help to educate millions of people worldwide – more than any other private enterprise. Every day our work helps learning flourish, and wherever learning flourishes, so do people. To learn more please visit us at www.pearson.com/uk A01_SLOM2240_07_SE_FM.indd 2 19/01/16 3:55 PM EssEntials of Economics Seventh edition John Sloman The Economics Network, University of Bristol Visiting Professor, University of the West of England Dean Garratt Nottingham Business School A01_SLOM2240_07_SE_FM.indd 3 19/01/16 3:55 PM Pearson Education Limited Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk First edition published 1998 (print) Second edition published 2001 (print) Third edition published 2004 (print) Fourth edition published 2007 (print) Fifth edition published 2010 (print) Sixth edition published 2013 (print and electronic) Seventh edition published 2016 (print and electronic) © Pearson Education Limited 1998, 2010 (print) © Pearson Education Limited 2013, 2016 (print and electronic) The rights of John Sloman, and Dean Garratt to be identified as authors of this Work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. 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All trademarks used therein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. Contains public sector information licensed under the Open Government Licence (OGL) v3.0. http://www. nationalarchives.gov.uk/doc/open-government-licence/version/3/. Pearson Education is not responsible for the content of third-party internet sites ISBN: 978-1-292-08224-0 (print) 978-1-292-08231-8 (PDF) 978-1-292-08225-7 (eText) 978-1-292-08232-5 (ePub) British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing-in-Publication Data A catalogue record for this book is available from the Library of Congress 10 9 8 7 6 5 4 3 2 1 19 18 17 16 15 Front cover images © John Sloman Typeset in Stone Serif ITC Pro 8/12 by Lumina Datamatics Printed and bound by L.E.G.O. S.p.A., Italy NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION A01_SLOM2240_07_SE_FM.indd 4 19/01/16 3:55 PM about the authors John Sloman is Visiting Fellow at with Dean Garratt, Jon Guest and Elizabeth Jones of Econom- the University of Bristol and Asso- ics for Business (Pearson Education, 7th edition 2016) and ciate of the Economics Network with Elizabeth Jones of Essential Economics for Business (4th (www.economicsnetwork.ac.uk) edition 2014). Translations or editions of the various books a UK-wide organisation, where, are available for a number of different countries with the until his retirement in 2012, he help of co-authors around the world. was Director. The Economics John is very interested in promoting new methods of Network is based at the Universi- teaching economics, including group exercises, experi- ty of Bristol and provides a range ments, role playing, computer-aided learning and use of of services designed to promote audience response systems and podcasting in teaching. He and share good practice in learn- has organised and spoken at conferences for both lecturers ing and teaching economics. The and students of economics throughout the UK and in many Network is supported by grants from the Royal Economic other countries. Society, the Scottish Economic Society and university eco- As part of his work with the Economics Network he has nomic departments and units from across the UK. contributed to its two sites for students and p rospective John is also visiting professor at the University of the students of economics: Studying Economics (www. West of England, Bristol, where, from 1992 to 1999, he was studyingeconomics.ac.uk) and Why Study Economics? Head of School of Economics. He taught at UWE until 2007. (www.whystudyeconomics.ac.uk) John has taught a range of courses, including economic From March to June 1997, John was a visiting lecturer principles on social science and business studies degrees, at the University of Western Australia. In July and August development economics, comparative economic systems, 2000, he was again a visiting lecturer at the University of intermediate macroeconomics and managerial econom- Western Australia and also at Murdoch University in Perth. ics. He has also taught economics on various professional In 2007, John received a Lifetime Achievement Award as courses. ‘outstanding teacher and ambassador of economics’ presented He is also the co-author with Alison Wride and Dean jointly by the Higher Education Academy, the Government Garratt of Economics (Pearson Education, 9th edition 2015), Economic Service and the Scottish Economic Society. Dean Garratt is a Principal and briefing on a variety of issues relating to the household Lecturer in Economics at Not- sector and to the housing and mortgage markets. tingham Business School (NBS), Dean is a Senior Fellow of the Higher Education Acad- Assistant Head of Economics and emy and an Associate of the Economics Network helping the course leader for the School’s to promote high-quality teaching practice. Dean has been MSc Economics programme. In involved in several projects promoting a problem-based 2014/15 Dean worked as a Princi- approach in the teaching of economics. pal Teaching Fellow in Econom- In 2006 Dean was awarded the Outstanding Teaching ics at the University of Warwick Prize by the Economics Network. The award recognises having previously been at NBS exemplary teaching practice that deepens and inspires inter- from 2001, including a period as est in economics. In 2013, Dean won the student-nominated course leader for the undergradu- Nottingham Business School teacher of the year award. ate economics courses. Dean is an academic assessor for the Government Eco- Dean teaches economics at a variety of levels to students nomic Service (GES). In this role he helps to assess potential both on economics courses and non-economics courses. He recruits to the GES with particular focus on the ability of is passionate about encouraging students to communicate candidates to articulate their understanding of economics economics more intuitively, to deepen their interest in eco- and its applications. nomics and to apply economics to a range of issues. Outside of work, Dean is an avid watcher of most sports. Earlier in his career Dean worked as an economic assis- Having been born in Leicester, he is a season ticket holder at tant at both HM Treasury and at the Council of Mortgage both Leicester City Football Club and Leicestershire County Lenders. While at these institutions Dean was researching Cricket Club. A01_SLOM2240_07_SE_FM.indd 5 19/01/16 3:55 PM This page intentionally left blank A01_SLOM2240_07_SE_FM.indd 6 19/01/16 3:55 PM Brief contents About the authors v Student and lecturer resources xvi Preface xix Acknowledgements xxii Publisher’s acknowledgements xxiii Part A INTroDUcTIoN 1 Economic issues 2 Part B MIcroEcoNoMIcS 2 Markets, demand and supply 28 3 Markets in action 51 4 The supply decision 75 5 Market structures 100 6 Wages and the distribution of income 137 7 Market failures and government policy 166 Part c MAcroEcoNoMIcS 8 Aggregate demand and the national economy 200 9 Aggregate supply and growth 231 10 Banking, money and interest rates 260 11 Inflation and unemployment 292 12 Macroeconomic policy 327 Part D INTErNATIoNAl EcoNoMIcS 13 Globalisation and international trade 362 14 Balance of payments and exchange rates 397 Web appendix W:1 Key ideas and glossary K:1 Index I:1 A01_SLOM2240_07_SE_FM.indd 7 19/01/16 3:55 PM This page intentionally left blank A01_SLOM2240_07_SE_FM.indd 8 19/01/16 3:55 PM Detailed contents About the authors v Movements along and shifts in the demand curve 30 Student and lecturer resources xvi Utility and the demand curve 31 2.2 Supply 34 Preface xix Supply and price 34 Acknowledgements xxii The supply curve 34 Publisher’s acknowledgements xxiii other determinants of supply 35 Movements along and shifts in the supply curve 36 2.3 The determination of price 37 Part A INTroDUcTIoN Equilibrium price and output 37 Movement to a new equilibrium 37 1 Economic issues 2 2.4 The free-market economy 46 Advantages of a free-market economy 46 1.1 Engaging with economics 3 Problems with a free-market economy 46 An island economy 3 2.5 Behavioural economics 47 Economic puzzles and issues 3 What is behavioural economics? 47 1.2 The economic problem 4 Explaining ‘irrational’ consumer choices 47 The problem of scarcity 5 relevance to economic policy 48 Demand and supply 5 1.3 Dividing up the subject 6 chapter 2 Boxes Macroeconomics 6 2.1 Satisfaction and the rational consumer: Microeconomics 7 Consumer surplus and ‘benefit drivers’ 33 1.4 Modelling economic relationships 11 2.2 UK house prices: From raising the roof to The production possibility curve 12 falling through the floor 39 The circular flow of goods and incomes 14 2.3 Stock market prices: Demand and supply in action 42 Techniques of analysis 14 2.4 Commodity prices: Riding the commodities 1.5 Economic systems 15 Big Dipper? 44 The command economy 16 2.5 Nudging people: How to change behaviour 48 The free-market economy 17 The mixed market economy 21 3 Markets in action 51 chapter 1 Boxes 3.1 Price elasticity of demand 52 1.1 Macroeconomic issues: An historical perspective 8 Measuring the price elasticity of demand 52 1.2 The opportunity costs of studying economics: Interpreting the figure for elasticity 53 What are you sacrificing? 10 Determinants of price elasticity of demand 53 1.3 Command economies: Rise and fall of planning 18 3.2 Price elasticity of demand and 1.4 Affording the mixed economy: The sovereign debt consumer expenditure 54 crisis of the early 2010s 22 3.3 Price elasticity of supply (Pe) 58 S The determinants of price elasticity of supply 59 3.4 other elasticities 59 Part B MIcroEcoNoMIcS Income elasticity of demand 59 cross-price elasticity of demand 60 2 Markets, demand and supply 28 3.5 Markets and adjustment over time 61 2.1 Demand 29 Short-run and long-run adjustment 61 The relationship between demand and price 29 Price expectations and speculation 61 The demand curve 29 3.6 Uncertainty and risk 65 other determinants of demand 30 responding to risk and uncertainty 65 A01_SLOM2240_07_SE_FM.indd 9 19/01/16 3:55 PM