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ECON_A01.QXD 14/12/04 11:03 am Page i

Economics
A Student’s Guide
ECON_A01.QXD 14/12/04 11:03 am Page ii

We work with leading authors to develop the

strongest educational materials in business and
economics, bringing cutting-edge thinking and best
learning practice to a global market.
Under a range of well-known imprints, including
Financial Times Prentice Hall, we craft high quality
print and electronic publications which help readers
to understand and apply their content, whether
studying or at work.
To find out more about the complete range of our
publishing, please visit us on the World Wide Web at:
www.pearsoned.co.uk
ECON_A01.QXD 14/12/04 11:03 am Page iii

Fifth
Edition

Economics
A Student’s Guide

JOHN BEARDSHAW
DAVID BREWSTER
PAUL CORMACK
ANDREW ROSS
ECON_A01.QXD 05/06/2006 2:59 PM Page iv

Dedicated to John Beardshaw 1943–1995

Pearson Education Limited

Edinburgh Gate
Harlow
Essex CM20 2JE
England

and Associated Companies throughout the world

Visit us on the World Wide Web at:

www.pearsoned.co.uk

First published in Great Britain under the Pitman Publishing imprint in 1984
Second edition published 1989
Third edition published under the Longman imprint in 1992
Fourth edition published 1998
Fifth edition published 2001

© John Beardshaw 1984, 1989 and 1992

© Denise Beardshaw and Pearson Education Limited 1998, 2001

The rights of John Beardshaw, David Brewster, Paul Cormack and Andrew Ross
to be identified as the authors of this work have been asserted by them in
accordance with the Copyright, Designs and Patents Act 1988.

All rights reserved. No part of this publication may be reproduced, stored

in a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise without either the prior
written permission of the publishers or a licence permitting restricted copying
in the United Kingdom issued by the Copyright Licensing Agency Ltd,
90 Tottenham Court Road, London W1T 4LP.

ISBN-10: 0-273-65140-4
ISBN-13: 978-0-273-65140-6

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

Library of Congress Cataloging-in-Publication Data

Economics : a student’s guide / John Beardshaw ... [et al.].-- 5th ed.
p. cm.
Includes bibliographical references and index.
ISBN 0-273-65140-4 (alk. paper)
1. Economics. I. Beardshaw, John.
HB171.5 .E3346 2001
330--dc21 2001023882

10 9 8 7 6
07 06 05

Typeset in 10/12pt Sabon by 30.

Printed in Malaysia, KHL
ECON_A01.QXD 14/12/04 11:03 am Page v

Contents

Preface xv
Syllabus map xvi
About the authors xviii
Acknowledgements xix

SECTION 1 The market system

1 Introduction: what is economics all about? 3
2 Mathematical techniques in economics 16
3 The economic problem: resources, scarcity and choice 29
4 The allocation of resources in competitive markets 47
5 Elasticities of demand and supply 64
6 Markets in movement 80
7 The business organisation, costs and profits 98
8 Market structures 112

SECTION II Market failure and government intervention

9 The mixed economy: market failure vs government failure 125
10 Government intervention in the market 137

SECTION III Markets in operation

11 The market in practice: agriculture, housing and labour 155
12 The leisure industry 173
13 The economics of the environment 182
14 Transport and the economy 196

SECTION IV The national economy

15 What is the macroeconomy? 211
16 Measuring the macroeconomy 216
17 Analysing the macroeconomy 228
18 Managing the macroeconomy: problems and policies 238

SECTION V Business economics

19 The size and growth of firms 259
20 Costs in the short run and the long run 270
ECON_A01.QXD 14/12/04 11:03 am Page vi

vi Contents

21 Competitive supply 279

22 Price and output under imperfect competition 286
23 Aspects of monopoly 304
24 Public ownership, privatisation, regulation and deregulation 318

SECTION VI Labour markets and the distribution of income

25 The pricing of productive factors 339
26 Labour and wages 354
27 An introduction to welfare economics 371
28 Inequality and public policy 392

SECTION VII Macroeconomic analysis

29 Keynesian macroeconomics 413
30 Changes in aggregate demand: consumption, savings
and investment 423
31 The Keynesian aggregate model 439
32 The multiplier 448
33 Aggregate demand and supply analysis 455

SECTION VIII Managing the economy: issues and policies

34 Growth and stability 469
35 Money and prices 480
36 Fiscal and monetary policies 510
37 Monetary analysis and income analysis 527
38 The control of inflation 550
39 Unemployment and government policy 566
40 Advanced policy issues 585
41 The gains of international trade 606
42 The balance of payments and exchange rates 622
43 Conflicts between objectives 641

SECTION IX The EU and wider perspectives

44 International institutions 649
45 The European Union 662
46 The developing economies 692
47 Schools of thought and future issues 705

Index 717
ECON_A01.QXD 14/12/04 11:03 am Page vii

Full contents

Preface xv Summary 45
Syllabus map xvi Questions 45
About the authors xviii Data response A 45
Acknowledgements xix Data response B 46
Publishers’ acknowledgements xx
4 The allocation of resources in competitive
SECTION 1 markets 47
The market system The price system 47
Demand 48
1 Introduction: what is economics all Supply 51
about? 3 Equilibrium prices 53
The subject matter of economics 3 Demand in detail 56
Positive and normative statements 5 The price system assessed 60
Scientific method 6 Summary 61
Different answers to the same questions 8 Questions 62
Conclusions 11 Data response A 62
Summary 12 Data response B 63
Questions 12
Data response A 13 5 Elasticities of demand and supply 64
Data response B 13 Introduction 64
Elasticity of demand 64
2 Mathematical techniques in economics 16
Price elasticity of demand and the firm’s decision
How to use this chapter 16
making 66
The use and abuse of statistics 16
The calculation of price elasticity of demand 67
Indices 19
Factors determining price elasticity of demand 69
Statistics 24
Arc elasticity 71
Summary 26
Point elasticity 72
Questions 26
Income elasticity of demand 73
Data response A 26
Cross elasticity of demand 74
Data response B 27
Price elasticity of supply 75
Data response C 27
Summary 78
3 The economic problem: resources, scarcity Questions 78
and choice 29 Data response A 79
Wants and needs 29 Data response B 79
The factors of production 30
The division of labour 32 6 Markets in movement 80
Economies of scale 33 Some important ideas reviewed 80
New technology 36 Changes in market price 81
Increasing costs and diminishing returns 37 The effect of time on prices 84
The law of increasing costs 38 Government interference with equilibrium prices 84
International trade 42 Taxes and subsidies 89
ECON_A01.QXD 14/12/04 11:03 am Page viii

viii Full contents

Problems with demand and supply analysis 92 Case study 10.1 The growth of public expenditure 137
Summary 95 Reasons for growth in public expenditure 138
Questions 95 Strategies for the control of public expenditure 139
Data response A 96 Case study 10.2 Reform of the NHS: technical
Data response B 96 efficiency and transactions costs 140
How to pay for the service? 141
7 The business organisation, costs and Case study 10.3 Markets in education: allocative
profits 98 efficiency 144
Types of business organisation 98 Case study 10.4 Monopoly and privatised industries 146
Legal forms of firms 100 Case study 10.5 Regional problems 147
Costs of production 103 Summary 151
Profits 108
Conclusion 110 SECTION III
Summary 110
Markets in operation
Questions 111
Data response A 111 11 The market in practice: agriculture,
Data response B 111 housing and labour 155
Introduction 155
8 Market structures 112 Case study 11.1 Agricultural prices 155
Supply 112 Features of the agriculture industry 157
Profit maximisation 112 Recent developments in policy 158
Types of competition 113 A comparison of three policies 159
Alternative objectives 119 Case study 11.2 The housing market 161
Summary 120 The public sector 163
Questions 120 The voluntary sector 165
Data response A 120 The owner occupied sector 165
Data response B 120 Case study 11.3 Minimum wage legislation 170
Summary 172

SECTION 1I 12 The leisure industry 173

Market failure and government intervention The meaning of leisure 173
Travel and tourism 176
9 The mixed economy: market failure vs
Some economic aspects of the English Premier
government failure 125 League 177
What is a mixed economy? 125 Conclusion 179
The origins of the mixed economy 127 Summary 179
Criteria for government intervention in the Questions 180
market 130 Data response A 180
The allocative role: provision of goods and
services 130 13 The economics of the environment 182
The distributive role: transfer payments 132 An introduction to the environment 182
Criteria for the allocation of resources 133 Policies to deal with the environment 182
Conclusion 135 Pollution characteristics 185
Summary 135 Case study 13. 1 Global warming 187
Questions 136 Policies 189
Data response A 136 Case study 13.2 Ozone depletion 192
Case study 13.3 Rubbish and recycling 193
10 Government intervention in the Policy 194
market 137 Summary 195
Introduction 137 Questions 195
ECON_A01.QXD 14/12/04 11:03 am Page ix

Full contents ix

14 Transport and the economy 196 1997 onwards 251

Introduction 196 International interdependence and ‘globalisation’ 252
Case study 14.1 Road congestion 196 Conclusion 254
Case study 14.2 Privatising a loss-making monopoly Summary 254
200 Questions 254
Privatisation 202 Data response A 255
Accountability 203
Alternative methods of privatisation 203
SECTION V
Case study 14.3 Air transport 204
Case study 14.4 The Channel crossing: intermodal Business economics
competition 207 19 The size and growth of firms 259
Summary 208 The size of firms 259
The growth of firms 260
SECTION IV Multinational firms 264
The national economy The continuation of the small business 264
Conclusion 265
15 What is the macroeconomy? 211 Summary 265
Pre-Keynesian attitudes 211 Questions 265
Macroeconomics 212 Data response A 266
Conclusion 214 Data response B 266
Summary 214
Questions 214 20 Costs in the short run and the long
Data response A 215 run 270
Average costs in the short run 270
16 Measuring the macroeconomy 216 Average costs in the long run 272
The four macroeconomic policy targets 216 The mathematics of marginal cost 275
The circular flow of national income 217 Changes in costs 276
The components of national income 218 Conclusion 276
National income accounts 219 Summary 277
Growth 222 Questions 278
Conclusion 225 Data response A 278
Summary 226 Data response B 278
Questions 226
Data response A 226 21 Competitive supply 279
The best profit output 279
17 Analysing the macroeconomy 228 The supply curve 281
The aggregate demand and supply curve The optimality of perfect competition 282
approach 228 Summary 284
The derivation of the aggregate supply curve 231 Questions 284
Conclusion 234 Data response A 284
Summary 235 Data response B 285
Questions 235
Data response A 236 22 Price and output under imperfect
competition 286
18 Managing the macroeconomy: problems Perfect and imperfect competition 286
and policies 238 Profit-maximising techniques 287
The major objectives of government policy 238 The equilibrium of the monopolist 292
1945 to the early 1970s 239 The equilibrium of the monopolistically competitive
1974–1982 241 firm 293
1982–1996 249 Oligopolistic competition 295
ECON_A01.QXD 14/12/04 11:03 am Page x

x Full contents

Managerial and behavioural theories revisited 298 Production in the long run 347
Contestable markets 299 Conclusion 350
Limit pricing 300 Summary 350
Conclusion 300 Questions 351
Summary 300 Data response A 351
Questions 301 Data response B 352
Data response A 301
Data response B 301 26 Labour and wages 354
The determination of the wage rate and level of
23 Aspects of monopoly 304 employment 354
Governments and monopoly 304 The supply of labour 355
Pricing problems 308 Trade unions and wages 358
Discriminating monopoly 308 National minimum wage 362
Monopoly assessed 311 Monopsony in labour markets 362
Conclusion 313 Differentials and disequilibriums 363
Summary 313 Summary 366
Questions 314 Questions 366
Data response A 314 Data response A 367
Data response B 314 Data response B 368

24 Public ownership, privatisation, regulation 27 An introduction to welfare economics 371

and deregulation 318 Introduction 371
How to use this chapter 318 Partial and general equilibrium 371
Introduction 318 The Pareto criterion 373
Case study 24.1 The development of the nationalised Allocative efficiency 374
industries 319 Welfare and utility 375
Reasons for nationalisation 319 Efficiency and the free market 375
Case study 24.2 Problems of nationalised industry Pareto efficiency and perfect competition 376
control 321 The welfare significance of equilibrium in a perfect
Case study 24.3 The privatisation process 325 market 378
Methods of privatisation 325 Causes of market failure 381
Case study 24.4 Privatisation and the introduction of Imperfect competition 381
competition 326 Externalities 382
Vertical disintegration 326 Public goods 386
Local monopolies competing in the capital Public goods, efficiency and valuation 387
markets 329 Conclusion 389
Competition and new technology 329 Summary 389
Case study 24.5 The regulation of privatised Questions 390
industries 331 Data response A 391
Case study 24.6 Is privatisation a success? 333
Summary 335 28 Inequality and public policy 392
Structure of the chapter 392
SECTION VI The distribution of income and wealth 392
Understanding the tax-benefit system 395
Labour markets and the distribution
Understanding the benefit system 399
of income
Case study 28.1 What makes a good tax? 399
25 The pricing of productive factors 339 Case study 28.2 The shift to expenditure taxation 400
Introduction 339 Case study 28.3 Direct taxes: a disincentive to work?
Marginal distribution theory 339 403
Resources and costs 345 Tax reform 406
ECON_A01.QXD 14/12/04 11:03 am Page xi

Full contents xi

Case study 28.4 Local taxation and autonomy 408 Questions 453
Summary 409 Data response A 454
Data response B 454
SECTION VII
33 Aggregate demand and supply
Macroeconomic analysis analysis 455
29 Keynesian macroeconomics 413 The aggregate demand and supply curve
The Keynesian revolution 413 approach 455
Macroeconomics 414 A neo-classical view 459
The fundamental ideas of Keynes 416 Conclusion 461
Summary 461
Keynesian recession and depression 417
Questions 462
The revival of the neo-classical school 421
Data response A 462
Conclusion 421
Data response B 463
Summary 421
Questions 421
Data response A 422 SECTION VIII
Data response B 422 Managing the economy: issues and policies

30 Changes in aggregate demand: 34 Growth and stability 469

consumption, savings and investment 423 Economic growth 469
Factors influencing growth 471
Income and consumption 423
People and growth 474
Determinants of consumption 427
The problems of the UK economy 477
Savings 428
Summary 478
Determinants of investment 430
Questions 479
Conclusion 433
Data response A 479
Summary 435
Data response B 479
Questions 435
Appendix: the accelerator 435 35 Money and prices 480
Data response A 437 Introduction 480
Data response B 438 The development of money 480
Credit creation 481
31 The Keynesian aggregate model 439 The functions and attributes of money 483
Goods and money 439 Measuring the money supply 486
Withdrawals and injections 440 The quantity equation of money 489
The ‘hydraulic' Keynesian model – an overview 441 The concept of the general price level 491
The equilibrium of national income 443 Alternative measures of inflation 495
A model of the economy 443 International comparisons 496
Conclusion 445 Financial institutions 497
Summary 445 Commercial banks 498
Questions 446 Money markets 502
Data response A 446 The capital market 505
Central banking 505
32 The multiplier 448 Summary 506
The multiplier defined 449 Questions 508
The operation of the multiplier 449 Data response A 508
The multiplier formula 450
Equilibrium and the multiplier 451 36 Fiscal and monetary policies 510
Conclusion 453 Introduction 510
Summary 453 Fiscal policy 510
ECON_A01.QXD 14/12/04 11:03 am Page xii

xii Full contents

The development of monetary policy 514 40 Advanced policy issues 585

The stages of monetary policy 515 About this chapter 585
The weapons of monetary policy 516 The philosophy behind neo-classical economics 585
Problems of monetary policy 519 Demand and marginal utility 586
The independence of the Bank of England 521 Case studies 589
Summary 522 Case study 40. 1 Acid rain 589
Questions 522 Case study 40.2 Problems of decision making in the
Data response A 523 public sector 592
Data response B 523 Cost-benefit analysis 592
Case study 40.3 Pricing in practice on the railways
37 Monetary analysis and income analysis 527 593
Monetarists and Keynesians 527 Conclusions 597
Money and national income 529 Summary 597
Liquidity preference 532 Appendix: indifference curve analysis 597
Monetarist theory of the demand for money 535 Applications of indifference curve analysis 600
The determination of aggregate real income 539 Revealed preference theory 603
Recession or the natural rate of unemployment? 542 Appendix summary 604
Conclusion 546 Appendix questions 604
Summary 546 Data response A 604
Questions 547 Data response B 605
Data response A 548
Data response B 548
41 The gains of international trade 606
The theory of comparative advantage 606
38 The control of inflation 550
Comparative advantage: a model 607
The costs of inflation 550
Comparative advantage and exchange rates 611
The Phillips curve 551
Extending the theory 612
The causes of inflation 555
Limitations of comparative advantage 614
The control of inflation 559
Protectionism considered 616
Conclusion 563
Conclusion 618
Summary 563
Questions 563 Summary 619
Data response A 564 Questions 619
Data response B 564 Data response A 620

39 Unemployment and government 42 The balance of payments and

policy 566 exchange rates 622
Employment and unemployment 566 The pattern of the UK’s overseas trade 622
The costs of unemployment 569 The balance of payments 625
Vacancies and unemployment 569 The problems of a surplus 627
Types of unemployment 570 Deficit problems 628
Regional unemployment 572 Exchange rates 630
The control of unemployment: the supply side The exchange rate debate 632
view 577 Fixed exchange rates 633
The control of unemployment: neo-Keynesian The equilibrium exchange rate 634
views 580 The Asian crisis 635
Conclusion 581 Recent UK developments 636
Summary 581 Summary 638
Questions 582 Questions 638
Data response A 582 Data response A 638
Data response B 582 Data response B 639
ECON_A01.QXD 14/12/04 11:03 am Page xiii

Full contents xiii

43 Conflicts between objectives 641 Data response A 687

The lessons of history 641 References 691
Conclusion 644 Websites 691
Summary 644
Questions 645 46 The developing economies 692
Development economics 692
Population and development 694
SECTION IX Technological issues 696
The EU and wider perspectives The problem of agriculture 697
44 International institutions 649 Trade issues 697
Introduction 649 The state and development 699
The International Monetary Fund 649 The debt problem of developing countries 699
The break-up of the Bretton Woods System 651 What is necessary for development? 701
Eurocurrencies 654 Conclusion 702
The General Agreement on Tariffs and Trade (GATT) Summary 703
and its successor, the World Trade Organisation Questions 703
(WTO) 655 Data response A 703
Other international institutions 657
Summary 659 47 Schools of thought and future issues 705
Questions 659 Introduction 705
Data response A 660 Political economy 706
Websites 661 The Austrian school 707
Post-Keynesian economics 708
45 The European Union 662 Marxist economics 709
Introduction 662 Where are we now? 712
The economics of integration 663 Future issues 713
Economic and Monetary Union 668 Summary 715
Regional problems and policy in the EU 678 Questions 715
Employment and social policy in the EU 681 Data response A 716
EU enlargement 683 Data reponse B 716
Summary 686
Questions 687 Index 717
ECON_A01.QXD 14/12/04 11:03 am Page xiv

A Companion Web Site accompanies

ECONOMICS: A Student’s Guide

Visit the Companion Web Site at http://www.booksites.net/beardshaw

to find valuable teaching and learning material.

● Up-to-date web-links
● Questions for further discussion
● Updates for the textbook
● Glossary
● A syllabus manager that will build and host your very own course website
ECON_A01.QXD 14/12/04 11:03 am Page xv

Preface

A fifth edition is an achievement for any textbook with a more in-depth treatment of the micro-foun-
but particularly so in a field where there is such a dations for more advanced readers. The important
wide range of excellent books to choose from. We topic of national income accounting has also been
believe this success is due to marrying long-estab- simplified to reflect the reduced emphasis in impor-
lished strengths with advances in learning methods, tance in many syllabuses. A new applied chapter
together with an up-to-date and comprehensive traces the course of UK macroeconomic policy-
presentation of economic theory and practice. You making since the Second World War, highlighting
may ask – is this the best economics book to buy? the necessary theoretical underpinnings along the
Well, although this book has won number one slot way. There is also much that is new on interna-
in a review of such texts, John Beardshaw himself tional aspects and a whole new chapter on Europe
stressed that economics tells us that league tables by a specialist in the field.
are not necessarily a useful approach to individual On the microeconomic side: there is a new sec-
choice. Put simply, John saw that product differen- tion on the housing market and a new chapter on
tiation in the market for economics texts had the leisure industry to meet the needs of A-level
benefited the student and hence students should syllabuses. New sections on regulation and dereg-
make use of this diversity and use the texts which ulation of industry plus a comprehensive review
best suit their own needs and preferences. We hope of changes to competition policy have been intro-
that we have again provided a textbook for those duced. Changes in the introduction of important
looking for a combination of the best of new and microeconomic concepts have been made to
‘traditional’ approaches and a thorough but not reflect new syllabuses but the need for logical
too technical approach to economics. development of theory has been retained.
While seeking to preserve the strengths of Given recent changes in some syllabuses, no
Economics: A Student’s Guide that have served textbook can provide a ‘one size fits all’ solution
so well, there is much that is new in this edition. and hence there will be parts of the book that
Most noticeable is the extensive restructuring you can return to another day as they may not be
that will allow the AS-level student to master the directly relevant to your course. Where examina-
basics of economics in the first part of the book tion boards have provided materials to help
while retaining the higher level of analysis needed students prepare for the board’s assessments, stu-
at A-level and for first-year university or profes- dents would be foolish not to use these. Equally it
sional courses later in the text. would be too narrow an approach not to have
On the macroeconomic side: to reflect changes in access to a main textbook such as Economics: A
syllabuses this book no longer requires the reader to Student’s Guide or another of the excellent text-
understand the ‘Keynesian-cross’ 45-degree dia- books that now exist (it would also herald a very
gram, but it is still there in self-contained chapters unhealthy reduction in competition in the text-
for those syllabuses and readers that require it. The book market!). The mapping below shows you
chapter on the fundamental insights of Keynes, how to use this book if you are following the
introduced to praise in the last edition, is retained. main UK syllabuses at AS/A-level but your tutor
This is because the insights of Keynes are still as rel- will give guidance for other syllabuses such as
evant as ever to syllabuses and economics, even if professional or undergraduate courses. If you are
the mechanics of representing his ideas have moved fortunate enough to be able to read the book in
on. Accordingly, aggregate demand and supply is its entirety then you will have gained a very sub-
used more extensively, but not uncritically, together stantial introduction to the subject.
ECON_A01.QXD 14/12/04 11:03 am Page xvi

xvi Preface

Syllabus map for AS/A-level students

Course Where to find this in the book

AQA
Module 1 Markets and market failure Sections I and II (Chapters 1–10)
Module 2 The national economy Section IV (Chapters 15–18)
Module 3 Markets at work Section III (Chapters 11–14)
Module 4 Working as an economist Section IX (Chapters 44–45)
Module 5 Business economics and the Section V (Chapters 19–24) and Section VI (Chapters 25–28)
distribution of income
Module 6 Government policy, the national Section VII (Chapters 29–30 and 33), Section VIII
and international economy (Chapters 34–36, 38–39, 41-43) and Section IX (Chapter 46).
(Chapter 40 of Section VIII and Chapter 47 of Section IX can
also be read for a more advanced analysis of certain issues)

Edexcel
Unit 1 Markets – how they work Section I (Chapters 1–8) and Section III (Chapter 11)
Unit 2 Markets – why they fail Section II (Chapters 9–10) and Section III (Chapters 13–14)
Unit 3 Managing the economy Section IV (Chapters 15–18)
Unit 4 Industrial economics Section V (Chapters 19–24)
Unit 5A Labour markets Section VI (Chapters 25–28)
Unit 5B Economic development Section VIII (Chapter 34), Section IX (Chapter 46) and
Section III (Chapter 12)
Unit 6 The UK in the global economy Section VII (Chapters 29–30 and 33), Section VIII (Chapters
34–36, 38–39, 41–43) and Section IX (Chapters 44–45).
(Chapter 40 of Section VIII and Chapter 47 of Section IX can
also be read for a more advanced analysis of certain issues)

OCR
Module 2881 The market system Section I (Chapters 1–8), Section III (Chapter 11) and Section V
(Chapters 19–24)
Module 2882 Market failure and government Section II (Chapters 9–10) and Section III (Chapter 13)
intervention
Module 2883 The national and international economy Section IV (Chapters 15 and 17–18) and Section VIII
(Chapters 38–39 and 41–42)
Module 2884 Economics of work and leisure Section III (Chapter 12) and Section VI (Chapters 25–26 and 28)
Module 2885 Transport economics Section III (Chapter 14) and Section VI (Chapter 27)
Module 2886 Economics of development Section VIII (Chapter 34) and Section IX (Chapter 46)
Module 2887 The UK economy Section IV (Chapter 16), Section VII (Chapter 29–30 and 33) and
Section VIII (Chapters 35–36 and 43) (Chapter 40 of Section VIII
and Chapter 47 of Section IX can also be read for a more
advanced analysis of certain issues)
Module 2888 Economics in a European context Section IX (Chapters 44–45)
ECON_A01.QXD 14/12/04 11:03 am Page xvii

Preface xvii

The new syllabuses have allowed the introduc- accords with many teachers and students. There
tion of an even greater number of applied is room for different approaches and this can
chapters dealing with recent economic events and only benefit students overall. Such an attitude
also more case studies. This has enhanced the reflects another difference of approach; within
‘real-life’ feel of the book, but we have also been the necessary confines of the syllabus, this book
careful to trace through the logical development continues to be deliberately more pluralistic than
of the theory that underlies such applied analysis. most comparable texts. This is not in anyway an
Without proper attention to this it would be attack on mainstream economics, but simply
impossible for you to achieve the deep learning recognition that other approaches are worthy of
necessary for an understanding of the subject at least a mention and indeed provide a contextu-
matter. thus this edition further embraces and alisation for mainstream economics. Also, from a
develops an ‘active learning’ approach but avoids learning methodology angle, because considering
the mistake of confusing active learning with problems from new perspectives is an important
simply providing a set of resources for activities. technique for deep learning.
In short, modern learning methods are employed We realise that teachers have a difficult job in
to make learning more enjoyable and effective recommending the most appropriate learning
but have not replaced the painstaking work resources for their students and their own
required to present the student with a clear expo- teaching style. For our part we have again
sition of complex subject matter. attempted to present an informed, readable,
This book is packed with student activities, uncluttered and well-structured text that more
questions and data response exercises, but it is than covers the syllabuses it will be used for. To the
also unashamedly a textbook that seeks to pro- extent that it retains its well-established traditional
vide the student with a structured and graduated strengths, it is more ‘scholarly’ than some recent
ladder to understanding. Admittedly, written text approaches. To the extent that it has utilised find-
is a limited medium for interactivity, but we have ings from recent research in teaching and learning,
sought to steer the reader away from those mis- it is more worldly, digestible and interactive than
conceptions and confusions which so frequently more technical and didactic approaches. But we
block understanding by pointing out common have also been mindful that the book should con-
student misunderstandings at the point at which tinue to do justice to the discipline of economics
these are most likely to occur. This draws on the itself. Economics profoundly affects all our lives
extensive classroom experience of the authors in and its principles can be applied in everyday life as
teaching economics, but we would be delighted well as business. For these and many other reasons
to continue to receive further suggestions for you should find it an interesting subject. This book
where this powerful technique for avoiding the does require effort by the reader for no-one claims
common misunderstandings taking hold that that economics is an easy subject. We hope this
might block learning could be deployed. new edition continues to make studying economics
Although exercises, questions, activities and interesting and successful for many more students.
guidance break-up the text, we have deliberately
avoided the ‘magazine’ format favoured by some David Brewster
modern authors. This is not a criticism of their Paul Cormack
approach but merely a preference that we know Andrew Ross
ECON_A01.QXD 14/12/04 11:03 am Page xviii

About the authors

John Beardshaw Paul Cormack

John Beardshaw graduated from the London Paul Cormack is a Senior Lecturer in the School
School of Economics and taught at colleges in of Environment and Development at Sheffield
and around London before becoming Senior Hallam University. He is a graduate of Hull
Tutor in Banking Studies and Lecturer in charge University and holds an MA from Leicester
of Economics at Southgate College. John main- University and an MBA from Thames Valley
tained his regular teaching throughout a career University. He taught A-level economics in
which included authorship, examining and London schools for three years before moving
awards moderation, consultancy for a major mer- into higher education, where he has taught since
chant bank and a highly successful series of 1978. He has a special interest in transport and
intensive revision courses for A-level students. environmental economics, but his current
He began writing on economics with the inten- research is into costs in higher education.
tion of producing a book for students which was
both comprehensive and comprehensible. Since
Andy Ross
his first and very successful publication in the late
1970s, he went on to write other well received Andy Ross began working life as a telephone
textbooks, workbooks and articles on economics. engineer. After A-levels as a mature student, he
This work brought him international recognition studied full-time at the LSE and then as a post-
as a leading author in his field. graduate at Birkbeck College London. He gained
a distinction for the teaching certificate at
Garnett College and taught A-level economics for
David Brewster
five years before lecturing in higher education.
David Brewster teaches economics at the Since then he has held the post of Head of
Westminster Business School, part of the Department of Economics, Head of the School of
University of Westminster. He studied at Reading European and International Studies, and Director
University and at Brunel University. He taught of the College of Undergraduate Studies at
economics at Thames Valley University for over Thames Valley University. Currently Head of
twenty years and then briefly at the University of Branch at the Office for National Statistics, Andy
North London before moving to Westminster. He has recently become an Economic Advisor in the
has also been a Visiting Professor at California Government Economic Service.
State University, Fullerton. He has written a
number of articles in the fields of business eco-
nomics and industrial economics, and is the
author of Business Economics: decision-making
and the firm (Thomson Learning Business Press).
ECON_A01.QXD 14/12/04 11:03 am Page xix

Acknowledgements

Thanks goes to Brian Ardy of South Bank are noted as appropriate, but if any have been
University for updating the chapters on Europe inadvertently overlooked, the publishers will be
and international institutions, adding much inter- pleased to make the necessary arrangement at the
esting new material. Acknowledgement must also first opportunity.
go to Malcolm Cummings, Chris Faux, Andreas Appreciation also for the support, guidance
Kyriacou and David Palfreman for their contribu- and patience of the team at Pearson Education,
tions to previous editions. A particular thank you especially Paula Harris, Laura Prime and Liz
is given to Denise Beardshaw for her advice and Tarrant.
comments on previous editions. As usual, the authors accept responsibility for
Permission has been sought from the many any mistakes or shortcomings.
newspapers and statistical sources used and these
ECON_A01.QXD 14/12/04 11:03 am Page xx

Publishers’ acknowledgements

We are grateful to the following for permission to of KPMG, London; ‘Money, a telling law’ by Dorothy
reprint copyright material: Rowe in The Observer, 31 August 1997, and
‘Inwardly troubled’ by Simon Caulkin in The
Ashgate Publishing Limited for Table 45.3 from Observer, 16 April 2000; the Office for National
The Economics of European Integration, 3rd edition, Statistics for permission to reprint the many tables and
by W. Molle (1997); Atlantic Syndication Partners for figures which are shown credited to them in the text;
‘The French put tax on hard work’ by Peter Shard in the Office for the Official Publications of the European
Daily Mail, 28 August 1997; BEQB for Figure 38.11; Communities for Figures 1.2 and 45.5 and Tables 12.1,
Figure 29.3 (a) and (b) used with permission of the 20.3, 45.3, 45.8, 45.11 and 45.12; the OECD for
Confederation of British Industry; The Economist Tables 30.3 and 34.1; Palgrave Publishers Ltd for
Newspaper Limited, London, for extracts from the extracts from ‘The General Theory Of Employment,
articles ‘Bashing the Unions’ in The Economist, 14 Interest And Money’ in The Collected Writings of John
September 1996, ‘A Good Start’ in The Economist, 10 Maynard Keynes by John Maynard Keynes (CUP,
May 1997, ‘Labour stats aren’t working’ in 1936); Syndication International for the article
The Economist, 7 February 1998, ‘The Air War’ ‘Feelgood factor boost for firms’ by Kevin Relly in the
in The Economist, 11 September 1999, ‘Snarl-up’ in Daily Mirror, 30 June 1997; The World Bank for an
The Economist, 15 April 2000, ‘Loosening the Belt’ extract from World Development Report 1990, IBRD;
in The Economist, 15 July 2000, and ‘Motoring down- the Financial Times for permission to reprint ‘Cuba’s
hill – Tourism in Scotland’ in The Economist, 5 August revolution in a class of its own’, © Financial Times, 20
2000; Tables 1.2 and 45.4 from Eurostat; Table 11.1 March 2000; ‘Avoiding the trap of transition’ plus
adapted from General report on the activities of the figure, © Financial Times, 11 October 2000; Figure 7.6
EU, 1998, and Tables 20.2 and 45.9 from Pratten from ‘UK corporate profitability’, © Financial Times,
(1989) The Cost of Non-Europe, Vol. 2, Office for the 28 September 2000; ‘Big oil, big bucks’, © Financial
Official Publications of the European Communities, Times, 18 August 1998; ‘Service staff shortages prompt
Luxembourg; Table 40.4 adapted from EMEP data; inflation warning’ plus figure, © Financial Times, 6
Figure 45.5 and Tables 45.11 and 45.12 from June 2000; from ‘UK glories in seventh heaven’ plus
European Commission (1999a and b), Tables 45.5 and figure, © Financial Times, 22 September 2000; ‘In
45.6 from the European Commission website: defence of domination’, © Financial Times, 8
http//www.europarl.eu reproduced by permission of November 1999; ‘A once-toothless watchdog gets set
the European Commission; Guardian Newspapers Ltd to bite back’, © Financial Times, 1 March 2000;
for extracts from ‘Analysis’ by Larry Elliott in The ‘Central bankers upbeat despite euro slide’, ©
Guardian, 11 September 1977, ‘Rouble devalued by Financial Times, 12 September 2000; and ‘A hole of its
Soviet Union’ in The Guardian, 26 October 1989, own making’, © Financial Times, 7 August 1997; and
‘Putting trade in its place’ in The Guardian, 27 May the United Nations for Table 1.1.
1996, ‘Dedicated followers of fashion’ in The
Guardian, 18 August 1997, ‘Whisper it . . . takeovers While every effort has been made to trace the owners
don’t pay’ by Lisa Buckingham and Dan Atkinson in of copyright material, in a few cases this has proved
The Guardian, 30 November 1999; the International impossible and we take this opportunity to offer our
Monetary Fund for Figures 19.1 and Tables 44.1, 44.2, apologies to any copyright holders whose rights we
45.1 and 45.2; Figure 19.1 reproduced by permission may have unwittingly infringed.
ECON_C01.QXD 14/12/04 10:44 am Page 1

SECTION I
The market system

‘It is not from the benevolence of the butcher, the brewer or

the baker that we expect our dinner, but from their regard to
their own self-interest.’
Adam Smith
ECON_C01.QXD 14/12/04 10:44 am Page 2
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