Principles of Economics 7th Edition PDF

 Principles of Economics: a Guided Tour Introduction 1 Ten Principles of Economics...

 Principles of Economics: a Guided Tour Introduction 1 Ten Principles of Economics The study of economics is guided by a few big ideas. 2 Thinking Like an Economist Economists view the world as both scientists and policymakers. 3 Interdependence and the Gains from Trade The theory of comparative advantage explains how people benefit from economic interdependence. How Markets Work 4 The Market Forces of Supply and Demand How does the economy coordinate interdependent economic 5 Elasticity and Its Application actors? Through the market forces of supply and demand. 6 Supply, Demand, and Government Policies The tools of supply and demand are put to work to examine the effects of various government policies. Markets and Welfare 7 Consumers, Producers, and the Efficiency of Markets Why is the equilibrium of supply and demand desirable for society as a whole? The concepts of consumer and producer 8 Application: The Costs of Taxation surplus explain the efficiency of markets, the costs of taxation, and the benefits of international trade. 9 Application: International Trade The Economics of the Public Sector 10 Externalities Market outcomes are not always efficient, and governments 11 Public Goods and Common Resources can sometimes remedy market failure. 12 The Design of the Tax System To fund programs, governments raise revenue through their tax systems, which are designed with an eye toward balancing efficiency and equity. Firm Behavior and the Organization of Industry 13 The Costs of Production The theory of the firm sheds light on the decisions that lie behind supply in competitive markets. 14 Firms in Competitive Markets 15 Monopoly Firms with market power can cause market outcomes to 16 Monopolistic Competition be inefficient. 17 Oligopoly Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. The Economics of Labor Markets 18 The Markets for the Factors of Production These chapters examine the special features of labor markets, 19 Earnings and Discrimination in which most people earn most of their income. 20 Income Inequality and Poverty Topics for Further Study 21 The Theory of Consumer Choice Additional topics in microeconomics include household decision making, asymmetric information, political economy, and 22 Frontiers of Microeconomics behavioral economics. The Data of Macroeconomics 23 Measuring a Nation’s Income The overall quantity of production and the overall price level 24 Measuring the Cost of Living are used to monitor developments in the economy as a whole. The Real Economy in the Long Run 25 Production and Growth 26 Saving, Investment, and the Financial System These chapters describe the forces that in the long run determine key real variables, including growth in GDP, saving, investment, 27 The Basic Tools of Finance real interest rates, and unemployment. 28 Unemployment Money and Prices in the Long Run 29 The Monetary System The monetary system is crucial in determining the long-run behavior of the price level, the inflation rate, and other 30 Money Growth and Inflation nominal variables. The Macroeconomics of Open Economies 31 Open-Economy Macroeconomics: A nation’s economic interactions with other nations are described Basic Concepts by its trade balance, net foreign investment, and exchange rate. 32 A Macroeconomic Theory of the A long-run model of the open economy explains the determinants Open Economy of the trade balance, the real exchange rate, and other real variables. Short-Run Economic Fluctuations 33 Aggregate Demand and Aggregate Supply The model of aggregate demand and aggregate supply explains 34 The Influence of Monetary and Fiscal Policy short-run economic fluctuations, the short-run effects of on Aggregate Demand monetary and fiscal policy, and the short-run linkage between 35 The Short-Run Trade-off real and nominal variables. between Inflation and Unemployment Final Thoughts A capstone chapter presents both sides of six major debates 36 Six Debates over Macroeconomic Policy over economic policy. Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Seventh Edition Economics Principles of Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Seventh Edition Economics Principles of N. Gregory Mankiw Australia Brazil Japan Korea Mexico Singapore Spain United Kingdom United States Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. Important Notice: Media content referenced within the product description or the product text may not be available in the eBook version. Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Principles of Economics, 7e © 2015, 2012 Cengage Learning N. Gregory Mankiw WCN: 02-200-203 Senior Vice President, Global ALL RIGHTS RESERVED. No part of this work covered by the copyright Product Manager, Higher Education: herein may be reproduced, transmitted, stored, or used in any form Jack W. 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Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  To Catherine, Nicholas, and Peter, my other contributions to the next generation Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  About the N. Gregory Mankiw is the Robert M. Beren ­Professor of Economics at Harvard University. As a student, Author he studied economics at Princeton ­University and MIT. As a teacher, he has taught macroeconomics, microeconomics, statistics, and principles of eco- nomics. He even spent one summer long ago as a sailing instructor on Long Beach Island. Professor Mankiw is a prolific writer and a regular participant in academic and policy de- bates. His work has been published in scholarly journals, such as the American Economic Review, Journal of ­Political Economy, and Quarterly Journal of Economics, and in more popular forums, such as the New York Times and The Wall Street Journal. He is also ­author of the best-selling intermediate- level textbook ­Macroeconomics (Worth Publishers). In addition to his teaching, research, and writing, ­Professor Mankiw has been a research associate Jordi Cabre of the National Bureau of Economic Research, an adviser to the Congressional Budget Office and the Federal Reserve Banks of Boston and New York, and a member of the ETS test development committee for the Advanced ­Placement exam in economics. From 2003 to 2005, he served as chairman of the President’s Council of Economic Advisers. Professor Mankiw lives in Wellesley, Massachusetts, with his wife Deborah, three children, Catherine, Nicholas, and Peter, and their border terrier, Tobin. vii Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Brief Contents Part I Introduction 1 Part VII Topics for Further Study 433 1 Ten Principles of Economics 3 21 The Theory of Consumer Choice 435 2 Thinking Like an Economist 19 22 Frontiers of Microeconomics 461 3 Interdependence and the Gains from Trade 47 Part VIII The Data of Macroeconomics 481 Part II How Markets Work 63 23 Measuring a Nation’s Income 483 4 The Market Forces of Supply and Demand 65 24 Measuring the Cost of Living 505 5 Elasticity and Its Application 89 6 Supply, Demand, and Government Policies 111 Part IX The Real Economy in the Long Run 521 25 Production and Growth 523 Part III Markets and Welfare 133 26 Saving, Investment, and the Financial System 547 7 Consumers, Producers, and the Efficiency of Markets 135 27 The Basic Tools of Finance 569 8 Application: The Costs of Taxation 155 28 Unemployment 585 9 Application: International Trade 171 Part X Money and Prices in the Long Run 607 Part IV The Economics of the Public Sector 193 29 The Monetary System 609 10 Externalities 195 30 Money Growth and Inflation 633 11 Public Goods and Common Resources 215 12 The Design of the Tax System 233 Part XI The Macroeconomics of Open Economies 657 31 Open-Economy Macroeconomics: Basic Concepts 659 Part V Firm Behavior and the Organization 32 A Macroeconomic Theory of the Open Economy 683 of Industry 257 13 The Costs of Production 259 14 Firms in Competitive Markets 279 Part XII Short-Run Economic Fluctuations 705 15 Monopoly 299 33 Aggregate Demand and Aggregate Supply 707 16 Monopolistic Competition 329 34 The Influence of Monetary and Fiscal Policy on Aggregate 17 Oligopoly 347 Demand 745 35 The Short-Run Trade-off between Inflation and Unemployment 769 Part VI The Economics of Labor Markets 371 18 The Markets for the Factors of Production 373 19 Earnings and Discrimination 395 Part XIII Final Thoughts 793 20 Income Inequality and Poverty 413 36 Six Debates over Macroeconomic Policy 795 ix Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Preface to the Student E “ conomics is a study of mankind in the ordinary business of life.” So wrote Alfred Marshall, the great 19th-century economist, in his text- book, Principles of Economics. Although we have learned much about the economy since Marshall’s time, this definition of economics is as true today as it was in 1890, when the first edition of his text was published. Why should you, as a student at the beginning of the 21st century, embark on the study of economics? There are three reasons. The first reason to study economics is that it will help you understand the world in which you live. There are many questions about the economy that might spark your curiosity. Why are apartments so hard to find in New York City? Why do airlines charge less for a round-trip ticket if the traveler stays over a Saturday night? Why is Leonardo DiCaprio paid so much to star in movies? Why are liv- ing standards so meager in many African countries? Why do some countries have high rates of inflation while others have stable prices? Why are jobs easy to find in some years and hard to find in others? These are just a few of the questions that a course in economics will help you answer. The second reason to study economics is that it will make you a more astute participant in the economy. As you go about your life, you make many economic decisions. While you are a student, you decide how many years to stay in school. Once you take a job, you decide how much of your income to spend, how much to save, and how to invest your savings. Someday you may find yourself running a small business or a large corporation, and you will decide what prices to charge for your products. The insights developed in the coming chapters will give you a new perspective on how best to make these decisions. Studying economics will not by itself make you rich, but it will give you some tools that may help in that endeavor. The third reason to study economics is that it will give you a better understand- ing of both the potential and the limits of economic policy. Economic questions are always on the minds of policymakers in mayors’ offices, governors’ mansions, and the White House. What are the burdens associated with alternative forms of taxation? What are the effects of free trade with other countries? What is the best way to protect the environment? How does a government budget deficit affect the economy? As a voter, you help choose the policies that guide the allocation of society’s resources. An understanding of economics will help you carry out that responsibility. And who knows: Perhaps someday you will end up as one of those policymakers yourself. Thus, the principles of economics can be applied in many of life’s situations. Whether the future finds you reading the newspaper, running a business, or sit- ting in the Oval Office, you will be glad that you studied economics. N. Gregory Mankiw December 2013 xi Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  5 REASONS to buy your textbooks and course materials at SAVINGS: 1 Prices up to 65% off, daily coupons, and free shipping on orders over $25 CHOICE: 2 Multiple format options including textbook, eBook and eChapter rentals CONVENIENCE: 3 Anytime, anywhere access of eBooks or eChapters via mobile devices SERVICE: 4 Free eBook access while your text ships, and instant access to online homework products STUDY TOOLS: 5 Free study tools* for your text, plus writing, research, career and job search resources *availability varies Find your course materials and start saving at: www.cengagebrain.com Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Acknowledgments I n writing this book, I benefited from the input of many talented people. ­Indeed, the list of people who have contributed to this project is so long, and their contributions so valuable, that it seems an injustice that only a single name appears on the cover. Let me begin with my colleagues in the economics profession. The seven edi- tions of this text and its supplemental materials have benefited enormously from their input. In reviews and surveys, they have offered suggestions, identified challenges, and shared ideas from their own classroom experience. I am indebted to them for the perspectives they have brought to the text. Unfortunately, the list has become too long to thank those who contributed to previous editions, even though students reading the current edition are still benefiting from their insights. Most important in this process have been Ron Cronovich (Carthage College) and David Hakes (University of Northern Iowa). Ron and David, both dedicated teachers, have served as reliable sounding boards for ideas and hardworking partners with me in putting together the superb package of supplements. The following reviewers of the sixth edition provided suggestions for refining the content, organization, and approach in the seventh. Mark Abajian, San Diego Mesa College Vivette Ancona, Hunter College–CUNY Rahi Abouk, University of Wisconsin Diane Anstine, North Central College Milwaukee Carolyn Arcand, University of Nathanael Adams, Cardinal Stritch Massachusetts Boston University Ali Ataiifar, Delaware County Seemi Ahmad, Dutchess Community Community College College Shannon Aucoin, University of May Akabogu-Collins, Mira Costa Louisiana Lafayette College–Oceanside Lisa Augustyniak, Lake Michigan Ercument Aksoy, Los Angeles Valley College College Wesley Austin, University of Louisiana William Aldridge, University of Lafayette Alabama–Tuscaloosa Sang Hoo Bae, Clark University Donald L. Alexander, Western Karen Baehler, Hutchinson Community Michigan University College Basil Al-Hashimi, Mesa Community Mohsen Bahmani-Oskooee, University College of Wisconsin Milwaukee Rashid Al-Hmoud, Texas Tech Stephen Baker, Capital University University Tannista Banerjee, Auburn University Hassan Aly, Ohio State University Bob Barnes, DePaul University Michelle Amaral, University of the Hamid Bastin, Shippensburg Pacific University Shahina Amin, University of Northern Leon Battista, Albertus Magnus College Iowa Gerald Baumgardner, Susquehanna Catalina Amuedo, San Diego State University University xiii Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. xiv Acknowledgments Christoph Bauner, University of William Carner, Westminster College Massachusetts–Amherst Onur Celik, Quinnipiac University Elizabeth Bayley, University of Kalyan Chakraborty, Emporia State Delaware University Mike Belleman, St Clair County Suparna Chakraborty, Baruch Community College College–CUNY Cynthia Benelli, University of California Dustin Chambers, Salisbury University Santa Barbara Silvana Chambers, Salisbury University Charles Bennett, Gannon University Krishnamurti Chandrasekar, New York Bettina Berch, Borough of Manhattan Institute of Technology Community College Yong Chao, University of Louisville Stacey Bertke, Owensboro Community & David Chaplin, Northwest Nazarene Technical College University Tibor Besedes, Georgia Institute of Xudong Chen, Baldwin-Wallace College Technology Yi-An Chen, University of Washington, Abhijeet Bhattacharya, Illinois Valley Seattle Community College Ron Cheung, Oberlin College Ronald Bishop, Lake Michigan College Dmitriy Chulkov, Indiana University Janet Blackburn, San Jacinto South Kokomo College Lawrence Cima, John Carroll University Natalia Boliari, Manhattan College Cindy Clement, University of Maryland Antonio Bos, Tusculum College Matthew Clements, Saint Edward’s Jennifer Bossard, Doane College University James Boudreau, University of Texas– Tina Collins, San Joaquin Valley College Pan American Scott Comparato, Southern Illinois Mike Bowyer, Montgomery Community University College Stephen Cotten, University of Houston William Brennan, Minnesota State Clear Lake University–Mankato Jim Cox, Georgia Perimeter College Scott Broadbent, Western Kentucky Michael Craig, University of University Tennessee–Knoxville Greg Brock, Georgia Southern Matt Critcher, University of Arkansas University Community College at Batesville Stacey Brook, University of Iowa George Crowley, Troy University, Troy Keith Brouhle, Grinnell College David Cullipher, Arkansas State Byron Brown, Michigan State University-Mountain Home University Dusan Curcic, University of Virginia Christopher Brunt, Lake Superior State Maria DaCosta, University of University Wisconsin–EauClaire Laura Bucila, Texas Christian Bruce Dalgaard, St. Olaf College University Anusua Datta, Philadelphia University Donna Bueckman, University of Amanda Dawsey, University of Tennessee–Knoxville Montana Joe Bunting, St. Andrews University William DeFrance, University of Rob Burrus, University of North Michigan-Flint Carolina–Wilmington Paramita Dhar, Central Connecticut James Butkiewicz, University of State University Delaware Ahrash Dianat, George Mason Anna Cai, University of University Alabama–Tuscaloosa Stephanie Dieringer, University of Michael Carew, Baruch College South Florida St. Petersburg Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Acknowledgments xv Parks Dodd, Georgia Institute of Alex Gialanella, Manhattanville College Technology Bill Gibson, University of Vermont Veronika Dolar, Long Island University Kenneth Gillingham, Yale University Kirk Doran, University of Notre Dame Gregory Gilpin, Montana State Caf Dowlah, Queensborough University Community College–CUNY Jayendra Gokhale, Oregon State Tanya Downing, Cuesta College University Michael J. Driscoll, Adelphi University Joel Goldhar, IIT/Stuart School of Ding Du, Northern Arizona University Business Kevin Dunagan, oakton community Michael Goode, Central Piedmont college Community College Nazif Durmaz, University of Michael J Gootzeit, University of Houston–Victoria Memphis Tomas Dvorak, Union College Jackson Grant, US Air Force Academy Eva Dziadula, Lake Forest College Jeremy Groves, Northern Illinois Dirk Early, Southwestern University University Ann Eike, University of Kentucky Ilhami Gunduz, Brooklyn Harold Elder, University of College–CUNY Alabama–Tuscaloosa Michele Hampton, Cuyahoga Lynne Elkes, Loyola University Community College Eastern Maryland James Hartley, Mount Holyoke College Diantha Ellis, Abraham Baldwin College Mike Haupert, University of Wisconsin Noha Emara, Columbia University LaCrosse Michael Enz, Framingham State David Hedrick, Central Washington University University Lee Erickson, Taylor University Sara Helms, Samford University Pat Euzent, University of Central Jessica Hennessey, Furman University Florida–Orlando Thomas Henry, Mississippi State Timothy Ewest, Wartburg College University Amir Farmanesh, University of Bob Holland, Purdue University Maryland Glenn Hsu, University of Central Donna Fisher, Georgia Southern Oklahoma University Jim Hubert, Seattle Central Community Nikki Follis, Chadron State College College Joseph Franklin, Newberry College Christopher Hyer, University of New Ted Fu, Shenandoah University Mexico Winnie Fung, Wheaton College Kent Hymel, California State Marc Fusaro, Arkansas Tech University–Northridge University Miren Ivankovic, Anderson University Todd Gabe, University of Maine Eric Jacobson, University of Delaware Mary Gade, Oklahoma State University Ricot Jean, Valencia College Jonathan Gafford, Columbia State Michal Jerzmanowski, Clemson Community College University Iris Geisler, Austin Community College Bonnie Johnson, California Lutheran Jacob Gelber, University of Alabama at University Birmingham Bruce Johnson, Centre College Robert Gentenaar, Pima Downtown Paul Johnson, University of Alaska Community College Anchorage Soma Ghosh, Albright College Philipp Jonas, KV Community College Edgar Ghossoub, University of Texas at Adam Jones, University of North San Antonio Carolina–Wilmington Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. xvi Acknowledgments Jason Jones, Furman University Heather Micelli, Mira Costa College Roger Jordan, Baker College Laura Middlesworth, University of James Jozefowicz, Indiana University of Wisconsin–Eau Claire Pennsylvania Phillip Mixon, Troy University–Troy Simran Kahai, John Carroll University Evan Moore, Auburn David Kalist, Shippensburg University University–Montgomery David Karemera, St. Cloud State Francis Mummery, California State University University–Fullerton Wahhab Khandker, University of John Mundy, St. Johns River State Wisconsin–LaCrosse University Jongsung Kim, Bryant University James Murray, University of Kihwan Kim, Rutgers Wisconsin–LaCrosse Todd Knoop, Cornell College Christopher Mushrush, Illinois State Fred Kolb, University of University Wisconsin–EauClaire John Nader, Davenport University Oleg Korenok, Virginia Commonwealth Max Grunbaum Nagiel, Daytona State University College Mikhail Kouliavtsev, Stephen F. Austin Scott Niederjohn, Lakeland College State University George Norman, Tufts University Ben Kyer, Francis Marion University Yanira Ogrodnik, Post University Daniel Lawson, Oakland Community David O’Hara, Metropolitan State College University Elena Lazzari, Marygrove College Wafa Orman, University of Alabama in Chun Lee, Loyola Marymount Huntsville University Brian O’Roark, Robert Morris Daniel Lee, Shippensburg University University Jihoon Lee, Northeastern University Glenda Orosco, Oklahoma State Jim Lee, Texas A&M–Corpus Christi University Institute of Sang Lee, Southeastern Louisiana Technology University Orgul Ozturk, University of South Qing Li, College of the Mainland Carolina Carlos Liard-Muriente, Central Maria Papapavlou, San Jacinto Central Connecticut State University College Larry Lichtenstein, Canisius College Nitin Paranjpe, Wayne State Jenny Liu, Portland State University University Jialu Liu, Allegheny College Irene Parietti, Felician College Michael Machiorlatti, Oklahoma City Jooyoun Park, Kent State University Community College Michael Patton, St. Louis Community Bruce Madariaga, Montgomery College College–Wildwood and Northwestern University Wesley Pech, Wofford College C. Lucy Malakar, Lorain County Germain Pichop, Oklahoma City Community College Community College Gabriel Manrique, Winona State Florenz Plassmann, Binghamton University University Katherine McClain, University of Lana Podolak, Community College of Georgia Beaver County Michael McIlhon, Century College Gyan Pradhan, Eastern Kentucky Jennifer McNiece, Howard Payne University University Silvia Prina, Case Western Reserve Charles Meyrick, Housatonic University Community College Thomas Prusa, Rutgers University Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Acknowledgments xvii Robert Rebelein, Vassar College Sylwia Starnawska, D’Youville College Matt Rendleman, Southern Illinois Keva Steadman, Augustana College University Rebecca Stein, University of Kristen Roche, Mount Mary College Pennsylvania Antonio Rodriguez, Texas A&M Michael Stroup, Stephen F. Austin State International University University Debasis Rooj, Kishwaukee College Edward Stuart, Northeastern Illinois Larry Ross, University of Alaska University Jeff Rubin, Rutgers University–New Yu-hsuan Su, University of Washington Brunswick Abdul Sukar, Cameron University Jason C. Rudbeck, University of Georgia John Susenburger, Utica College Jeff Ruggiero, University of Dayton James Swofford, University of South Robert Rycroft, University of Mary Alabama Washington Vera Tabakova, East Carolina University Allen Sanderson, University of Chicago Eric Taylor, Central Piedmont Nese Sara, University of Cincinnati Community College Naveen Sarna, Northern Virginia Erdal Tekin, Georgia State University Community College–Alexandria Noreen Templin, Butler Community Eric Sartell, Whitworth University College Martin Schonger, Princeton Thomas Tenerelli, Central Washington University University Michael Schultz, Menlo College Charles Thompson, Brunswick Gerald Scott, Florida Atlantic Community College University Flint Thompson, Chippewa Valley Reshmi Sengupta, Northern Illinois Technical College University Deborah Thorsen, Palm Beach State David Shankle, Blue Mountain College College–Central Robert Shoffner, Central Piedmont James Tierney, University of California Community College Irvine Johnny Shull, Wake Tech Community Julie Trivitt, Arkansas Tech University College Ross vanWassenhove, University of Suann Shumaker, Las Positas College Houston Nicholas Shunda, University of Ben Vaughan, Trinity University Redlands Rubina Vohra, St. Peter’s College Milan Sigetich, Southern Oregon Will Walsh, Samford University University Chih-Wei Wang, Pacific Lutheran Jonathan Silberman, Oakland University University Chad Wassell, Central Washington Joe Silverman, Mira Costa University College–Oceanside Christine Wathen, Middlesex Catherine Skura, Sandhills Community Community College College Oxana Wieland, University of Gary Smith, Canisius College Minnesota, Crookston Richard Smith, University of South Christopher Wimer, Bowling Green Florida–St. Petersburg State University–Firelands College Joe Sobieralski, Southwestern Illinois Ken Woodward, Saddleback College College–Belleville Eric Zemljic, Kent State University Soren Soumbatiants, Franklin Zhen Zhu, University of Central University Oklahoma Dean Stansel, Florida Gulf Coast Kent Zirlott, University of University Alabama–Tuscaloosa Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. xviii Acknowledgments The team of editors who worked on this book improved it tremendously. Jane Tufts, developmental editor, provided truly spectacular editing—as she always does. Mike Worls, economics product director, did a splendid job of oversee- ing the many people involved in such a large project. Jennifer Thomas, prod- uct ­development manager; Clara Goosman, content developer; and Elizabeth ­Beiting-Lipps, associate content developer, were crucial in assembling an exten- sive and thoughtful group of reviewers to give me feedback on the previous edi- tion while putting together an excellent team to revise the supplements. ­Colleen Farmer, ­senior content project manager, and Katy Gabel, project manager, had the patience and dedication necessary to turn my manuscript into this book. ­Michelle Kunkler, senior art director, gave this book its clean, friendly look. Greg ­LaFever, the illustrator, helped make the book more visually appealing and the economics in it less abstract. Pamela Rockwell, copyeditor, refined my prose, and ­PreMediaGlobal prepared a careful and thorough index. John Carey, senior mar- ket development manager, and Robin LeFevre, senior brand manager, worked long hours getting the word out to potential users of this book. The rest of the Cengage team was also consistently professional, enthusiastic, and dedicated. I am grateful also to Lisa Mogilanski and Alex Sareyan, two star Harvard un- dergraduates, who helped me refine the manuscript and check the page proofs for this edition. As always, I must thank my “in-house” editor, Deborah Mankiw. As the first reader of most things I write, she continued to offer just the right mix of criticism and encouragement. Finally, I would like to mention my three children, Catherine, Nicholas, and Peter. Their contribution to this book was putting up with a father spending too many hours in his study. The four of us have much in common—not least of which is our love of ice cream (which becomes apparent in Chapter 4). I am grate- ful to Nicholas in particular for helping me check the page proofs for this edition. In case you didn’t notice, Nick, it was just my way of tricking you into learning a bit of economics. N. Gregory Mankiw December 2013 Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Contents Preface: To the Student xi 1-3b Principle 9: Prices Rise When the Government Prints Too Acknowledgments xiii Much Money 13 In The News: Why You Should Study Economics 14 1-3c Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment 15 1-4 Conclusion 16 Summary 16 Key Concepts 17 Questions for Review 17 Quick Check Multiple Choice 17 Problems and Applications 18 Chapter 2 Thinking Like an Economist 19 2-1 The Economist as Scientist 20 2-1a The Scientific Method: Observation, Theory, and More Observation 20 2-1b The Role of Assumptions 21 2-1c Economic Models 22 2-1d Our First Model: The Circular-Flow Diagram 22 2-1e Our Second Model: The Production Possibilities Part I Introduction Frontier 24 1 2-1f Microeconomics and Macroeconomics 27 2-2 The Economist as Policy Adviser 27 Chapter 1 2-2a Positive versus Normative Analysis 28 2-2b Economists in Washington 28 Ten Principles of Economics 3 2-2c Why Economists’ Advice Is Not Always Followed 29 1-1 How People Make Decisions 4 2-3 Why Economists Disagree 30 1-1a Principle 1: People Face Trade-offs 4 2-3a Differences in Scientific Judgments 30 1-1b Principle 2: The Cost of Something Is What You Give Up to 2-3b Differences in Values 31 Get It 5 2-3c Perception versus Reality 31 1-1c Principle 3: Rational People Think at the Margin 6 In The News: Actual Economists and Virtual Realities 33 1-1d Principle 4: People Respond to Incentives 7 2-4 Let’s Get Going 34 Case Study: The Incentive Effects of Gasoline Prices 8 Summary 34 1-2 How People Interact 9 Key Concepts 34 1-2a Principle 5: Trade Can Make Everyone Better Off 9 Questions for Review 35 1-2b Principle 6: Markets Are Usually a Good Way to Organize Quick Check Multiple Choice 35 Economic Activity 10 Problems and Applications 35 1-2c Principle 7: Governments Can Sometimes ­Improve Market Appendix Graphing: A Brief Review 37 Outcomes 11 Graphs of a Single Variable 37 FYI: Adam Smith and the Invisible Hand 11 Graphs of Two Variables: The Coordinate System 38 1-3 How the Economy as a Whole Works 13 Curves in the Coordinate System 39 1-3a Principle 8: A Country’s Standard of Living Depends on Its Slope 41 Ability to Produce Goods and Services 13 Cause and Effect 43 xix Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. xx Contents Chapter 3 4-2 Demand 67 4-2a The Demand Curve: The Relationship between Price and Interdependence and the Gains from Quantity Demanded 67 4-2b Market Demand versus Individual Demand 68 Trade 47 4-2c Shifts in the Demand Curve 69 3-1 A Parable for the Modern Economy 48 Case Study: Two Ways to Reduce the Quantity of Smoking 3-1a Production Possibilities 48 Demanded 71 3-1b Specialization and Trade 50 4-3 Supply 73 3-2 Comparative Advantage: The Driving Force of 4-3a The Supply Curve: The Relationship between Price and Specialization 52 Quantity Supplied 73 3-2a Absolute Advantage 52 4-3b Market Supply versus Individual Supply 74 3-2b Opportunity Cost and Comparative Advantage 52 4-3c Shifts in the Supply Curve 75 3-2c Comparative Advantage and Trade 53 4-4 Supply and Demand Together 77 3-2d The Price of the Trade 54 4-4a Equilibrium 77 FYI: The Legacy of Adam Smith and David Ricardo 55 4-4b Three Steps to Analyzing Changes in Equilibrium 79 3-3 Applications of Comparative Advantage 55 4-5 Conclusion: How Prices Allocate Resources 83 3-3a Should Tom Brady Mow His Own Lawn? 55 In The News: Price Increases after Disasters 84 In The News: Economics within a Marriage 56 3-3b Should the United States Trade with Other Countries? 57 Summary 84 Key Concepts 86 3-4 Conclusion 58 Questions for Review 86 Summary 59 Quick Check Multiple Choice 86 Key Concepts 59 Problems and Applications 87 Questions for Review 59 Quick Check Multiple Choice 59 Problems and Applications 60 Chapter 5 Elasticity and Its Application 89 5-1 The Elasticity of Demand 90 5-1a The Price Elasticity of Demand and Its Determinants 90 5-1b Computing the Price Elasticity of Demand 91 5-1c The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities 91 5-1d The Variety of Demand Curves 92 5-1e Total Revenue and the Price Elasticity of Demand 94 FYI: A Few Elasticities from the Real World 94 5-1f Elasticity and Total Revenue along a Linear Demand Curve 96 5-1g Other Demand Elasticities 97 5-2 The Elasticity of Supply 98 5-2a The Price Elasticity of Supply and Its Determinants 98 5-2b Computing the Price Elasticity of Supply 99 5-2c The Variety of Supply Curves 99 5-3 Three Applications of Supply, Demand, and Elasticity 101 5-3a Can Good News for Farming Be Bad News for Part II How Markets Work 63 Farmers? 102 5-3b Why Did OPEC Fail to Keep the Price of Oil High? 104 5-3c Does Drug Interdiction Increase or Decrease Drug- Chapter 4 Related Crime? 105 5-4 Conclusion 107 The Market Forces of Supply and Summary 107 Demand 65 Key Concepts 108 4-1 Markets and Competition 66 Questions for Review 108 4-1a What Is a Market? 66 Quick Check Multiple Choice 108 4-1b What Is Competition? 66 Problems and Applications 109 Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Contents xxi Chapter 6 7-1c How a Lower Price Raises Consumer Surplus 138 7-1d What Does Consumer Surplus Measure? 139 Supply, Demand, and Government 7-2 Producer Surplus 141 Policies 111 7-2a Cost and the Willingness to Sell 141 7-2b Using the Supply Curve to Measure Producer 6-1 Controls on Prices 112 Surplus 142 6-1a How Price Ceilings Affect Market Outcomes 112 7-2c How a Higher Price Raises Producer Surplus 143 Case Study: Lines at the Gas Pump 114 Case Study: Rent Control in the Short Run and the 7-3 Market Efficiency 144 Long Run 115 7-3a The Benevolent Social Planner 145 6-1b How Price Floors Affect Market Outcomes 116 7-3b Evaluating the Market Equilibrium 146 Case Study: The Minimum Wage 117 In The News: The Invisible Hand Can Park Your Car 148 6-1c Evaluating Price Controls 119 Case Study: Should There Be a Market in Organs? 148 In The News: Venezuela versus the Market 120 7-4 Conclusion: Market Efficiency and Market Failure 150 6-2 Taxes 121 Summary 151 6-2a How Taxes on Sellers Affect Market Outcomes 122 Key Concepts 151 6-2b How Taxes on Buyers Affect Market Outcomes 123 Questions for Review 151 Case Study: Can Congress Distribute the Burden of