Page 10 - Economics

CONFIRMING PAGES

PREFACE ix

CONSIDER THIS . . . (Chapter 3), salsa and cof- Contemporary Discussions
Unprinci- fee beans (Chapter 3), un-
pled Agents and Examples
In the 1990s principled agents (Chapter
many corpora- The seventeenth edition refers to and discusses many cur-
tions addressed 4), a CPA and a house
the principal- rent topics. Examples include the economics of the war in
agent problem painter (Chapter 5), high
by providing a Iraq, China’s rapid growth rate, large Federal budget defi-
substantial part European unemployment
of executive pay
either as shares of the firmís stock or as stock options. Stock rates (Chapter 7), the Fed cits, the Doha Round, recent Fed monetary policy, the
options are contracts that allow executives or other key em-
ployees to buy shares of their employersí stock at fixed, lower as a sponge (Chapter 14), debate over inflation targeting, the productivity accelera-
prices when the stock prices rise. The intent was to align the
interest of the executives and other key employees more tion, the recent profit paths of Wal-Mart and General
closely with those of the broader corporate owners. By returns on ethical investing
pursuing high profits and share prices, the executives Motors, rapidly expanding and disappearing U.S. jobs, ris-
would enhance their own wealth as well as that of all the (Chapter 14Web), women
stockholders. ing oil prices, recent antitrust actions, farm subsidy pro-
This ìsolutionî to the principal-agent pr oblem had an un- and economic growth
expected negative side effect. It prompted a few unscrupu- grams, welfare caseloads, prescription drug coverage under
lous executives to inflate their firmsí share prices by hiding (Chapter 16), waste-to-oil
costs, overstating revenues, engaging in deceptive transac-
tions, and, in general, exaggerating profits. These executives conversion methods (Chap- Medicare, health savings accounts (HSAs), immigration
then sold large quantities of their inflated stock, making quick
personal fortunes. In some cases, ìindependentî outside au- impacts, large U.S. trade deficits, offshoring of American
diting firms turned out to be not so independent, because ter 27Web), art for art’s
they held valuable consulting contracts with the firms being jobs, and many more.
audited. sake (Chapter 28), and the
When the stock-market bubble of the late 1990s burst,
many instances of business manipulations and fraudulent ac- hedging of risk in agricul-
counting were exposed. Several executives of large U.S. firms
were indicted and a few large firms collapsed, among them ture (Chapter 31).
Enron (energy trading), WorldCom (communications), and Distinguishing Features
Arthur Andersen (accounting and business consulting). General Our “Last Word”
stockholders of those firms were left holding severely
depressed or even worthless stock. pieces are lengthier appli-
In 2002 Congress strengthened the laws and penalties
against executive misconduct. Also, corporations have improved Comprehensive Explanations at an Appro-
their accounting and auditing procedures. But seemingly endless cations and case studies lo-
revelations of executive wrongdoings make clear that the
principal-agent problem is not an easy problem to solve. cated toward the end of priate Level Economics is comprehensive, analytical,
each chapter. In this edi- and challenging yet fully accessible to a wide range of stu-
tion, we included photos to pique student interest. New dents. The thoroughness and accessibility enable instruc-
and relocated Last Words include those on pitfalls to tors to select topics for special classroom emphasis with
sound economic reasoning (Chapter 1), a market for hu- confidence that students can read and comprehend other
man organs (Chapter 3), the long-run problem of financ- independently assigned material in the book. Where
ing Social Security (Chapter 4), the diminishing impact needed, an extra sentence of explanation is provided. Brev-
of oil prices on the overall economy (Chapter 10), the ity at the expense of clarity is false economy.
relative performance of index funds versus actively man-
aged funds (Chapter 14Web), a supply-side anecdote on Fundamentals of the Market System Many
who gets tax cuts (Chapter 15), economic growth in China economies throughout the world are making difficult tran-
(Chapter 16), efficiency gains from entry (Chapter 21), sitions from planning to markets. Our detailed description
the effects of economic growth of the environment of the institutions and operation of the market system in
(Chapter 27Web), and mandatory health insurance Chapter 2 is even more relevant than before. We pay par-
(Chapter 33).
ticular attention to property rights, entrepreneurship,
freedom of enterprise and choice, competition, and the
role of profits because these concepts are often misunder-
stood by beginning students.
Last Word
A Legal Market for Human Organs?
Early and Full Integration of International
A Legal Market Might Eliminate the Present Shortage D 1 and supply curve S 1 in the accompanying figure. The down-
of Human Organs for Transplant. But There Are Many ward slope of the demand curve tells us that if there were a Economics We give the principles and institutions of
market for human organs, the quantity of organs demanded
Serious Objections to ìTurning Human Body Parts
would be greater at lower prices than at higher prices. Vertical
into Commoditiesî f or Purchase and Sale.
supply curve S 1 represents the fixed quantity of human organs the global economy early treatment. Chapter 5 examines
It has become increasingly commonplace in medicine to trans- now donated via consent before death. Because the price of
plant kidneys, lungs, livers, eye corneas, pancreases, and hearts these donated organs is in effect zero, quantity demanded Q 3 the growth of world trade and its major participants, spe-
from deceased individuals to those whose exceeds quantity supplied Q 1 . The
organs have failed or are failing. But sur- P shortage of Q 3 Q 1 is rationed through
geons and many of their patients face a S 1 S 2 a waiting list of those in medical need of cialization and comparative advantage, the foreign ex-
growing problem: There are shortages of transplants. Many people die while still
donated organs available for transplant. on the waiting list. change market, tariffs and subsidies, and various trade
Not everyone who needs a transplant
can get one. In 2005 there were 89,000 Use of a Market A market for human
Americans on the waiting list for trans- organs would increase the incentive to agreements. This strong introduction to international
plants. Indeed, an inadequate supply of donate organs. Such a market might work
P 1
donated organs causes an estimated 4000 like this: An individual might specify in a economics permits “globalization” of later discussions in
deaths in the United States each year. legal document that he or she is willing to
sell one or more usable human organs
Why Shortages? Seldom do we hear of upon death or near-death. The person both the macro and the micro chapters. Then, we delve
shortages of desired goods in market could specify where the money from the
economies. What is different about D 1 sale would go, for example, to family, a
organs for transplant? One difference is P 0 church, an educational institution, or a into the more difficult, graphical analysis of international
Q 1 Q 2 Q 3 Q
that no legal market exists for human or- charity. Firms would then emerge to pur-
trade and finance in Chapters 35 and 36.
gans. To understand this situation, observe the demand curve chase organs and resell them where needed for profit. Under such
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