Economics Principles, Problems, and Policies (18th Edition) PDF

 EIGHTEENTH EDITION Economics Principles, Problems, and Policies  McConnell, Brue, and Flynn The McGraw-Hill Brief Editions: Microeconomics and Macroeconomics Economics Series...

 EIGHTEENTH EDITION Economics Principles, Problems, and Policies  McConnell, Brue, and Flynn The McGraw-Hill Brief Editions: Microeconomics and Macroeconomics Economics Series First Edition Miller ESSENTIALS OF ECONOMICS Principles of Microeconomics First Edition Brue, McConnell, and Flynn Essentials of Economics Samuelson and Nordhaus Second Edition Economics, Microeconomics, and Macro- economics Mandel Eighteenth Edition Economics: The Basics First Edition Schiller The Economy Today, The Micro Economy Schiller Today, and The Macro Economy Today Essentials of Economics Eleventh Edition Seventh Edition Slavin PRINCIPLES OF ECONOMICS Economics, Microeconomics, and Macro- economics Colander Ninth Edition Economics, Microeconomics, and Macroeconomics ECONOMICS OF SOCIAL ISSUES Seventh Edition Guell Frank and Bernanke Issues in Economics Today Principles of Economics, Principles Fourth Edition of Microeconomics, Principles of Macroeconomics Sharp, Register, and Grimes Fourth Edition Economics of Social Issues Eighteenth Edition Frank and Bernanke Brief Editions: Principles of Economics, ECONOMETRICS Principles of Microeconomics, and Principles of Macroeconomics Gujarati and Porter First Edition Basic Econometrics Fifth Edition McConnell, Brue, and Flynn Economics, Microeconomics, and Gujarati and Porter Macroeconomics Essentials of Econometrics Eighteenth Edition Fourth Edition MANAGERIAL ECONOMICS LABOR ECONOMICS Baye Borjas Managerial Economics and Business Strategy Labor Economics Sixth Edition Fifth Edition Brickley, Smith, and Zimmerman McConnell, Brue, and Macpherson Managerial Economics and Organizational Contemporary Labor Economics Architecture Eighth Edition Fifth Edition Thomas and Maurice PUBLIC FINANCE Managerial Economics Rosen and Gayer Ninth Edition Public Finance Eighth Edition INTERMEDIATE ECONOMICS Seidman Bernheim and Whinston Public Finance Microeconomics First Edition First Edition Dornbusch, Fischer, and Startz ENVIRONMENTAL ECONOMICS Macroeconomics Tenth Edition Field and Field Environmental Economics: An Introduction Frank Fifth Edition Microeconomics and Behavior Seventh Edition INTERNATIONAL ECONOMICS ADVANCED ECONOMICS Appleyard, Field, and Cobb Romer International Economics Advanced Macroeconomics Sixth Edition Third Edition King and King International Economics, Globalization, MONEY AND BANKING and Policy: A Reader Cecchetti Fifth Edition Money, Banking, and Financial Markets Pugel Second Edition International Economics Fourteenth Edition URBAN ECONOMICS O’Sullivan Urban Economics Seventh Edition  Instructors teaching a concise and digitally integrated principles course welcome the Brief Editions The Brief Editions of Microeconomics and Macroeconomicss simplify the core concepts and remodel the examples presented in Economics, 18e. Not just cut-and-paste books, the Brief Editions are concise, highly integrated principles textbooks distinct in purpose, style, and coverage from Economics, 18e. Microeconomics, Brief Edition Go to www.mcconnellbriefmicro1e.com for sample chapters, the text preface, and more information. Macroeconomics, Brief Edition Go to www.mcconnellbriefmacro1e.com for sample chapters, the text preface, and more information. For instructors teaching a one-semester Micro-Macro survey course, we present Essentials of Economics, 2e Go to www.brue2e.com for sample chapters, the text preface, and more information.  EIGHTEENTH EDITION Economics Principles, Problems, and Policies Campbell R. McConnell University of Nebraska Stanley L. Brue Pacifi fic Lutheran University Sean M. Flynn Vassar College Boston Burr Ridge, IL Dubuque, IA New York San Francisco St. Louis Bangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto To Mem and to Terri and Craig, and to past instructors ECONOMICS: PRINCIPLES, PROBLEMS, AND POLICIES Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2009, 2008, 2005, 2002, 1999, 1996, 1993, 1990, 1987, 1984, 1981, 1978, 1975, 1972, 1969, 1966, 1963, 1960 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 WCK/WCK 0 9 8 ISBN 978-0-07-337569-4 MHID 0-07-337569-1 Publisher: Douglas Reiner Developmental editor: Elizabeth Clevenger Developmental editor: Anne Hilbert Editorial coordinator: Noelle Fox Senior marketing manager: Jennifer Lambert Senior marketing manager: Melissa Larmon Senior project manager: Harvey Yep Lead production supervisor: Michael R. McCormick Interior designer: Cara Hawthorne Senior photo research coordinator: Lori Kramer Photo researcher: Keri Johnson Senior media project manager: Kerry Bowler Cover design: Cara Hawthorne Cover image: © David Churchill/Arcaid/Corbis Typeface: 10/12 Janson Text 55 Roman Compositor: Aptara, Inc. Printer: Quebecor World Versailles Inc. Library of Congress Cataloging-in-Publication Data McConnell, Campbell R. Economics: principles, problems, and policies / Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn. — 18th ed. p. cm. — (The McGraw-Hill series in economics) Includes index. ISBN-13: 978-0-07-337569-4 (alk. paper) ISBN-10: 0-07-337569-1 (alk. paper) 1. Economics. I. Brue, Stanley L., 1945- II. Flynn, Sean Masaki. III. Title. HB171.5.M47 2009 330—dc22 2008037520 www.mhhe.com About the Authors Campbell R. McConnell earned his Ph.D. from the University of Iowa after re- ceiving degrees from Cornell College and the University of Illinois. He taught at the University of Nebraska– Lincoln from 1953 until his retirement in 1990. He is also coauthor of Contemporary Labor Economics, eighth edi- tion, and Essentials of Economics, second edition (both The McGraw-Hill Companies), and has edited read- ers for the principles and labor economics courses. He is a recipient of both the University of Nebraska Distinguished Teaching Award and the James A. Lake Academic Freedom Award and is past president of the Midwest Economics Association. Professor McConnell was awarded an honorary Doctor of Laws degree from Cornell College in 1973 and received its Distinguished Achievement Award in 1994. His primary areas of interest are labor economics and economic education. He has an extensive collection of jazz recordings and enjoys reading jazz history. Stanley L. Brue did his undergraduate work at Augustana College (South Dakota) and received its Distinguished Achievement Award in 1991. He received his Ph.D. from the University of Nebraska–Lincoln. He is a professor at Pacific Lutheran University, where he has been honored as a recipient of the Burlington Northern Faculty Achievement Award. Professor Brue has also received the national Leavey Award for excellence in economic education. He has served as national president and chair of the Board of Trustees of Omicron Delta Epsilon International vii  Economics Honorary. He is coauthor of Economic Scenes, fifth edition (Prentice-Hall), Contemporary Labor Economics, eighth edition, Essentials of Econom- ics, second edition (both The McGraw-Hill Compa- nies), and The Evolution of Economic Thought, seventh edition (South-Western). For relaxation, he enjoys international travel, attending sporting events, and skiing with family and friends. Sean M. Flynn did his undergraduate work at the University of Southern California before com- pleting his Ph.D. at U.C. Berkeley, where he served as the Head Graduate Student Instructor for the Department of Economics after receiving the Out- standing Graduate Student Instructor Award. He teaches at Vassar College in Poughkeepsie, New York, and is also the author of Economics for Dummiess (Wiley) and Essentials of Economics, second edition (The McGraw-Hill Companies). His research interests include finance and behavioral economics. An accomplished mar- tial artist, he has represented the United States in international aikido tournaments and is the author of Understanding Shodokan Aikido (Shodokan Press). Other hobbies include running, travel, and ethnic food. viii  1.2 The Production Possibilities Curve 12 List of Key Graphs 2.2 The Circular Flow Diagram 40 3.6 Equilibrium Price and Quantity 55 7.1 Total and Marginal Utility 136 8.2 The Law of Diminishing Returns 160 8.5 The Relationship of the Marginal-Cost Curve to the Average-Total-Cost and Average-Variable-Cost Curves 164 8.8 The Long-Run Average-Total-Cost Curve: Unlimited Number of Plant Sizes 167 9.3 Short-Run Profit Maximization for a Purely Competitive Firm 184 9.6 The P = MC Rule and the Competitive Firm’s Short-Run Supply Curve 187 9.12 Long-Run Equilibrium: A Competitive Firm and Market 194 10.4 Profit Maximization by a Pure Monopolist 208 11.1 A Monopolistically Competitive Firm: Short Run and Long Run 226 11.2 The Kinked-Demand Curve 235 13.3 Labor Supply and Labor Demand in (a) a Purely Competitive Labor Market and (b) a Single Competitive Firm 274 27.2 (a) Consumption and (b) Saving Schedules 544 27.5 The Investment Demand Curve 550 28.2 Equilibrium GDP 565 28.7 Recessionary and Infl flationary Expenditure Gaps 576 29.7 The Equilibrium Price Level and Equilibrium Real GDP 595 33.1 The Demand for Money, the Supply of Money, and the Equilibrium Interest Rate 662 33.5 Monetary Policy and Equilibrium GDP 674 33.6 The AD-AS Theory of the Price Level, Real Output, and Stabilization Policy 680 37.2 Trading Possibility Lines and the Gains from Trade 748 38.1 The Market for Foreign Currency (Pounds) 770 ix  Preface are greatly pleased to have Sean working on the text since he shares our commitment to present economics in a way that is understandable to all. Fundamental Objectives We have three main goals for Economics: Help the beginning student master the principles essential for understanding the economizing problem, specific economic issues, and the policy alternatives. Help the student understand and apply the economic perspective and reason accurately and objectively about economic matters. Promote a lasting student interest in economics and the economy. What’s New and Improved? One of the benefits of writing a successful text is the oppor- tunity to revise—to delete the outdated and install the new, to rewrite misleading or ambiguous statements, to intro- duce more relevant illustrations, to improve the organiza- tional structure, and to enhance the learning aids. This is the most significant revision of Economicss since the fourteenth edition. It has greatly benefited from the addition of our new coauthor. The more significant changes Welcome to the eighteenth edition of Economics, the best- include the following. selling economics textbook in the world. An estimated 14 million students have used Economicss or its companion edi- tions, Macroeconomics and Microeconomics. Economicss has Micro First Organization been adapted into Australian and Canadian editions and Perhaps most noticeably, we changed the book’s organiza- translated into Italian, Russian, Chinese, French, Spanish, tion to micro first in keeping with how contemporary econ- Portuguese, and other languages. We are pleased that omists view the direction of linkage between the two parts Economicss continues to meet the market test: nearly one out of the subject. All the new principles texts introduced dur- of four U.S. students in principles courses used the seven- ing the past two decades have been organized as micro-first teenth edition. texts and colleges have increasingly changed their course numbering (sequencing) to micro first. As it relates to the actual principles course, however, A Note about the Cover this change in ordering is mainly symbolic. Micro and and New Coauthor macro courses are still taught separately and independently, with no prerequisite on either. Also, students increasingly In the tradition of the previous two covers, the cover for use the split micro and macro versions of our main text, this edition includes a photograph of steps. The new edi- even in schools that adopt our book for all sections of both tion’s cover is a metaphor for the step-by-step approach that micro and macro principles. We therefore think that most we use to present basic economic principles. It also repre- instructors will find it relatively easy to make the transition sents the simplicity, beauty, and power of basic economic to the new ordering. models. We have chosen a highly modern photo to reflect the addition of our new coauthor, Sean M. Flynn, who has helped modernize the content of the book from cover to Fully Updated, Totally cover. Sean did his undergraduate work at USC, received Contemporary Macroeconomics his Ph.D. from U.C. Berkeley (in 2002), teaches principles We recast the entire macro analysis in terms of the modern, at Vassar, and is the author of Economics for Dummies. We dominant paradigm of macroeconomics, using economic x  PREFACE xi growth as the central backdrop and viewing business fluc- the requisites for, and impediments to, economic growth in tuations as significant and costly variations in the rate of developing nations. growth. In this paradigm, business cycles result from Although the framework in which the macro is built demand shocks (or, less often, supply shocks) in conjunction is extensively revised, the revisions were made to preserve with inflexible short-run product prices and wages. The the main elements of the chapters in the previous edition. degree of price and wage stickiness decreases with time. We simply have wrapped the macroeconomics analysis into In our models, the immediate short run is a period in which a modern package of growth, expectations, shocks, price the price level and wages are not only sticky, but stuck; the stickiness, time horizons, and international linkages. short run is a period in which product prices are flexible Our macro content is also fully modern in terms of and wages are not; and the long run is a period in which its coverage of contemporary problems and policies. For both prices and wages are fully flexible. Each of these three example, we cover the mortgage debt crisis, the recent eco- periods—and thus each of the models based on them—is nomic slowdown, the Fed’s reductions of the Federal funds relevant to understanding the actual macro economy and rate, the Fed’s term auction facility, the stimulus tax pack- its occasional difficulties. age of 2008, and more. New Chapter 23 introduces the macro framework in a lively, intuitive way, using an example of a hypothetical Four New Chapters single-firm economy. It also makes a clear, critical distinc- Four chapters—two micro and two macro—are new to tion between the broader concept of financial investment the print version of Economics. Our common purpose for and the narrower subset of investment called economic all four chapters is to incorporate contemporary analytical investment in a way that allows us to use both ideas. A chap- themes and address current economic issues. ter on the measurement of nominal and real GDP follows. With real GDP clearly defined and measured, we pres- Chapter 15: Natural Resource and Energy Economics. This ent a chapter on economic growth. This early placement new micro chapter—brought from our Web site for the of the growth chapter allows students to understand the seventeenth edition—is now in Part 3 (Microeconomics of importance of economic growth and the factors that drive Resource Markets). This chapter addresses the question of it. This growth chapter is followed by a chapter that intro- whether the world is becoming overpopulated and rapidly duces business fluctuations along the economy’s growth running out of resources. It covers topics such as declin- path and the problems of unemployment and inflation that ing fertility rates, the optimal rate of resource extraction, may result. resource substitution, resource sustainability, oil prices, and Following this set of core beginning chapters, we imme- alternative energy sources. An understanding of the basic diately begin to build models of the economy for the imme- economic principles of natural resource economics will be diate short run and the short run. Students are therefore critical to future voters and leaders. This micro treatment quickly introduced to models in which recessions and infla- of natural resource and energy topics is particularly timely tion can occur. This approach allows us to use the short-run since many students are regularly exposed to alarmist views AD-AS model to address fiscal policy and monetary policy on these subjects. relatively earlier in the macro. Students are made fully aware from the start of the macro that the rate of economic growth Chapter 22: Immigration. This new micro chapter covers is fundamentally important for standards of living. Yet, the the economics of immigration—both legal and illegal—in quick introduction of sticky price models enables students to an analytical and balanced way. Students are highly inter- understand demand shocks, recession, stimulatory fiscal pol- ested in this subject, yet often lack the economic knowl- icy, Fed monetary policy actions, and other topics that domi- edge and tools to grasp the issues and debates. This chapter nate the news about the macro economy. provides that basic economic understanding. The chapter Because Chapter 5 provides an early introduction to also serves as a timely application of the economic princi- international trade and international finance, we are able to ples developed in the prior chapters on resource markets. integrate the global economy from the start of the macro analysis. Then, after eventually developing the long-run Chapter 23: An Introduction to Macroeconomics. As pre- AD-AS model, we directly link this long-run analysis back viously noted, this new chapter introduces the revised to our earlier discussions of growth. We finish the macro macroeconomic content in an interesting, concise way. It with two chapters that provide further analysis of interna- motivates the study of macroeconomics and establishes the tional trade, balance of payments, exchange rates, and trade analytical framework to the subject that we use throughout imbalances. The macro ends with a bonus Web chapter on the macro portion of the book. xii PREFACE Chapter 34: Financial Economics. This new macro chap- the supplementary materials. The concise new appen- ter examines ideas such as compound interest, present dixes are: value, arbitrage, risk, diversification, and the risk-return relationship. Students need a better grounding in such Chapter 3: Additional Examples of Supply and Demand. ideas to truly understand the modern economy. In view of At the end of Chapter 3 we provide several additional exam- the problems in the financial markets over the recent past, ples of supply and demand, including concrete examples of we think that integrating financial economics more directly simultaneous shifts in supply and demand curves. Products in the macro principles course makes good sense. For covered include lettuce, corn and ethanol, pink salmon, gas- many students, this course will be their only (classroom!) oline, and sushi. We also use the Olympic Games to illus- opportunity to learn that promises of high, unguaranteed trate examples of preset prices, shortages, and surpluses. returns reflect high, uninsured risk. Even if instructors cannot find time to assign and cover the entire chapter, Chapter 11: Additional Game Theory Applications. We they may want to discuss the beginning portion, which placed several applications of game theory in a new appen- addresses the time value of money and provides easy-to- dix at the end of the micro chapter on monopolistic com- understand real-world examples of present value. petition and oligopoly. Instructors who like to stress game theory in dealing with oligopoly now have strong backup To make room for our four new chapters, we had to support from the textbook for their efforts. The appendix make certain accommodations. Specifically, we moved our discusses concepts such as dominant strategies, Nash equi- micro chapter “Technology, R & D, and Efficiency” to the librium, repeated games, and first-mover advantages. book’s Web site, where it joins the chapter “The Economics of Developing Countries.” Both chapters are available free Chapter 13: Labor Unions and Their Impacts. This com- to students for full-color viewing and can be printed for off- pact appendix covers union membership, the decline of computer study. Furthermore, these chapters are fully sup- mcc75691_ch01.indd Page 9 9/5/08 7:29:16 AM user unions, collective bargaining, and the economic effects ported by all the supplementary materials such as the Study of unions. Guide and Test Banks. Instructors who wish to cover the R&D chapter, rather than, for example, the new resource chapter, can easily make the substitution. New (or Relocated) “Consider We also deleted the chapter “Labor Market Issues and This” and “Last Word” Boxes Institutions: Unions, Discrimination, and Immigration.” Our “Consider This” boxes are used to provide anal- The core of the union content is now is an appendix to the ogies, examples, or stories that help drive home central wage determination chapter; the discrimination material is economic ideas in a student-oriented, real-world manner. consolidated and placed in the chapter “Income Inequality, For instance, the idea of trade secrets is described with the Poverty, and Discrimination,” and the immigration con- legend of “cat gut” and violin strings, while McDonald’s tent now is part of the full new chapter on this subject. “McHits” and “McMisses” Also, we deleted the mainly macro chapter on the bal- CONSIDER THIS... demonstrate the idea of ance of payments, exchanges rates, and trade deficits from Did Gates, Winfrey, and Rodriguez Make consumer sovereignty. the micro split version of Economics. It continues to be in Bad Choices? Opportunity costs come into These brief vignettes, each Economicss and the macro split. play in decisions well beyond simple buying decisions. Con- accompanied by a photo, Our explicit discussion of Keynesian versus Classical sider the different choices people make with respect to illustrate key points in a macroeconomics in the chapter on macro theories and college. College graduates usually earn about 50 percent lively, colorful, and easy- more during their lifetimes issues has been deleted since we integrated the graphical than persons with just high to-remember way. school diplomas. For most capable students, “Go to college, analysis into earlier chapters. Finally, we have deleted the stay in college, and earn a degree” is very sound advice. New or relocated “Con- Yet Microsoft cofounder Bill Gates and talk show host Oprah lengthy historical discussions of the gold standard and the Winfrey* both dropped out of college, and baseball star Alex Rodriguez (“A-Rod”) never even bothered to start classes.What sider This” boxes include Bretton Woods System from the chapter on exchange rates were they thinking? Unlike most students, Gates faced enor- mous opportunity costs for staying in college. He had a vision such disparate topics as and placed it as supplemental material for the chapter at for his company, and his starting work young helped ensure Mi- crosoft’s success. Similarly, Winfrey landed a spot in local televi- an economic comparison of our Web site. Other, lesser deletions or abridgements have sion news when she was a teenager, eventually producing and starring in the Oprah Winfrey Show w when she was 32 years old. the two Koreas (Chapter 2), Getting a degree in her twenties might have interrupted the occurred throughout the book. string of successes that made her famous talk show possible. “buying American” (Chapter And Rodriguez knew that professional athletes have short careers. Therefore, going to college directly after high school would have taken away four years of his peak earning potential. 5), the prisoner’s dilemma Three New Appendixes So Gates, Winfrey, and Rodriguez understood opportunity costs and made their choices accordingly. The size of opportu- nity costs greatly matters in making individual decisions. (Chapter 11), govern- Three additional chapter appendixes are available for *Winfrey eventually went back to school and earned a degree from ment policies and birth optional assignment in this edition. All are supported by Tennessee State University when she was in her thirties. rates (Chapter 15), turning  PREFACE xiii mcc75691_ch01.indd Page 16 9/5/08 7:37:50 AM user 2007 and early 2008; the stimulus package of 2008; Federal LAST Word budget deficits; the mortgage debt crisis; recent Fed mon- Pitfalls to Sound Economic Reasoning etary policy; the Fed’s new term auction facility; the Taylor Because They Affect Us So Personally, We Often media is sometimes emotionally biased, or loaded. The writer rule; U.S. trade deficits; and many more. Have Difficulty Thinking Accurately and Objectively or spokesperson may have a cause to promote or an ax to grind About Economic Issues. and may slant comments accordingly. High profits may be labeled “obscene,” low wages may be called “exploitive,” or Here are some common pitfalls to avoid in successfully applying self-interested behavior may be “greed.” Government workers may be referred to as “mindless bureaucrats” and those favor- the economic perspective. Biases Most people bring a bundle of biases and preconceptions to the field of economics. For example, some might think that ing stronger government regulations may be called “socialists.” To objectively analyze economic issues, you must be prepared to reject or discount such terminology. Distinguishing Features corporate profits are excessive Fallacy of Composition An- Comprehensive Explanations at an or that lending money is always superior to borrowing money. other pitfall in economic think- Others might believe that gov- ing is the assumption that what is ernment is necessarily less effi- cient than businesses or that more government regulation is true for one individual or part of a whole is necessarily true for a group of individuals or the Appropriate Level Economicss is comprehensive, always better than less. Biases cloud thinking and interfere whole. This is a logical fallacy called the fallacy of composition; the analytical, and challenging yet fully accessible to a wide assumption is not correct. A with objective analysis. All of us must be willing to shed biases statement that is valid for an in- dividual or part is not necessarily range of students. The thoroughness and accessibility en- and preconceptions that are not supported by facts. valid for the larger group or whole. You may see the action able instructors to select topics for special classroom em- better if you leap to your feet to Loaded Terminology The economi economic rminology minology used l phasis with confidence that students can read and comprehend other independently assigned material in the book. Where needed, an extra sentence of explanation is provided. Brevity at the expense of clarity is false economy. entrails into oil (Chapter 15), putting corn in our gas tanks (Chapter 19), consumption inequality (Chapter 20), the can- Fundamentals of the Market System Many cer fight that is going nuclear (Chapter 21), the contribu- economies throughout the world are still making difficult tions of past immigrants to the U.S. economy (Chapter 22), transitions from planning to markets while a handful of other patent reform in India (Chapter 25), and the relative countries such as Venezuela seem to be trying to reestablish returns on standard versus ethical investing (Chapter 34). government-controlled, centrally planned economies. Our Our “Last Word” pieces are lengthier applications and detailed description of the institutions and operation of the case studies located toward the end of chapters. New or market system in Chapter 2 is therefore even more relevant relocated Last Words include those on fair trade products than before. We pay particular attention to property rights, (Chapter 5); insights from behavioral economics (Chapter 7); entrepreneurship, freedom of enterprise and choice, com- the link between economic growth and environmental petition, and the role of profits because these concepts are protection (Chapter 15); past and current, and proposed often misunderstood by beginning students worldwide. U.S. immigration laws (Chapter 22); the role of inventory management in moderating recessions (Chapter 23); the Early and Full Integration of International Fed’s response to the mortgage debt crisis (Chapter 33); the Economics We give the principles and institutions of relative performance of index funds versus actively managed the global economy early treatment. Chapter 5 examines funds (Chapter 34); and Bastiat’s “Petition of the the growth of world trade and its major participants, spe- Candlemakers” (Chapter 37). cialization and comparative advantage, the foreign ex- change market, tariffs and subsidies, and various trade Contemporary Discussions and agreements. This strong introduction to international Examples economics permits “globalization” of later discussions in The eighteenth edition refers to and discusses many current both the micro and the macro chapters. Then, we delve topics. Examples include the cost of the war in Iraq; surpluses into the more difficult, graphical analysis of international and shortages of tickets at the Olympics; the myriad impacts trade and finance in Chapters 37 and 38. of ethanol subsides; offshoring of American jobs; trade adjust- ment assistance; the additions of countries to the European Early and Extensive Treatment of Gov- Union and to the euro zone; normal trade relations status; ernment Government is an integral component of aspects of behavioral economics; game theory; the most rap- modern capitalism. This book introduces the economic idly expanding and disappearing U.S. jobs; oil and gaso- functions of government early and accords them system- line prices; climate change; The Food, Conservation, and atic treatment in Chapter 4. Chapter 16 examines public Energy Act of 2008; consumption versus income inequality; goods and externalities in further detail, and Chapter 17 prescription drug coverage under Medicare; Health Savings looks at salient facets of public choice theory and taxation. Accounts (HSAs); comprehensive immigration reform; Both the micro and the macro sections of the text include China’s rapid growth rate; the business downturn of late issue- and policy-oriented chapters. xiv PREFACE Stress on the Theory of the Firm We have cal tools. In the micro, we favor inclusiveness; instructors given much attention to microeconomics in general and can effectively choose two or three chapters from Part 5. to the theory of the firm in particular, for two reasons. First, the concepts of microeconomics are difficult for Integrated Text and Web Site Economicss and most beginning students; abbreviated expositions usu- its Web site are highly integrated through in-text Web ally compound these difficulties by raising more ques- buttons, Web-based end-of-chapter questions, bonus Web tions than they answer. Second, we wanted to couple chapters, multiple-choice self-tests at the Web site, math analysis of the various market structures with a discussion notes, and other features. Our Web site is part and parcel of the impact of each market arrangement on price, out- of our student learning package, customized to the book. put levels, resource allocation, and the rate of techno- The in-text Web buttons (or indicators) merit special logical advance. mention. Three differing colors of rectangular indicators appear throughout the book, informing readers that com- Step-by-Step, Two-Path Macro As in the plementary content on a subject can be found at our Web previous edition, our macro continues to be distinguished site, www.mcconnell18e.com. The indicator types are: by a systematic step-by-step approach in developing ideas Worked Problemss Written by Norris Peterson of Pacifi fic and building models. Explicit assumptions about price and Lutheran University (WA), these pieces consist of side-by-side wage stickiness are posited and then systematically peeled computational questions away, yielding new models and extensions, all in the broader WORKED PROBLEMS and computational proce- context of growth, expectations, shocks, and degrees of dures used to derive the price and wage stickiness over time. W 1.1 1 answers. In essence, they In crafting this step-by-step macro approach, we took Budget Lines extend the textbook’s care to preserve the “two-path macro” that many instruc- explanation involving tors appreciated. Instructors who so choose can bypass the computations—for example, of real GDP, real GDP per immediate short-run model (Chapter 28) and can pro- capita, the unemployment rate, the inflation fl rate, per-unit ceed without loss of continuity directly to the short-run production costs, economic profit,fi and more. From a stu- AD-AS model (Chapter 29), fiscal policy, money and bank- dent’s perspective, they provide “cookbook” help for prob- ing, monetary policy, and the long-run analysis. lem solving. Emphasis on Technological Change and Interactive Graphss These pieces (developed under the super- Economic Growth This edition continues to em- vision of Norris Peterson) depict 30 major graphs and in- phasize economic growth. Chapter 1 uses the production struct students to shift the possibilities curve to show the basic ingredients of growth. INTERACTIVE GRAPHS curves, observe the out- Chapter 25 explains how growth is measured and presents G 1.1 comes, and derive rele- the facts of growth. It also discusses the causes of growth, Production Possibilities Curve vant generalizations. This looks at productivity growth, and addresses some contro- hands-on graph work will versies surrounding economic growth. Chapter 25’s Last greatly reinforce the graphs and their meaning. Word examines the rapid economic growth in China. Origin of the Ideass These pieces, written by Randy Grant of Chapter 39Web focuses on developing countries and the Linfifield College (OR), are brief histories of 70 major ideas growth obstacles they confront. Chapter 11Web provides identifi fied in the book. They identify the particular econo- an explicit and cohesive discussion of the microeconomics mists who developed ideas of technological advance, including topics such as inven- ORIGIN OF THE IDEA such as opportunity costs, tion, innovation, and diffusion; start-up firms; R&D deci- equilibrium price, the sion making; market structure and R&D effort; and creative O 1.1 multiplier, comparative destruction. Origin of the term “Economics” advantage, and elasticity. Focus on Economic Policy and Issues For many students, the micro chapters on antitrust, agriculture, Organizational Alternatives income inequality, health care, and immigration, along with Although instructors generally agree on the content of the macro chapters on fiscal policy and monetary policy, are principles of economics courses, they sometimes differ on where the action is centered. We guide that action along how to arrange the material. Economicss includes 10 parts, logical lines through the application of appropriate analyti- and thus provides considerable organizational flexibility.  PREFACE xv We chose to move from microeconomics to macroeco- tions enable students to nomics because this is consistent with how contemporary see key concepts and economists view the direction of linkage between the two hear the explanation si- components. The introductory material of Part 1, however, multaneously. The Sol- can be followed immediately by the macroanalysis of Parts man Videos, a set of 6 and 7. Similarly, the two-path macro enables covering the more than 250 minutes full aggregate expenditures model or advancing directly of video created by Paul from the basic macro relationships chapter to the AD-AS Solman of The News model. Hour with Jim Lehrer, Some instructors will prefer to intersperse the micro- cover core economic concepts such as elasticity, deregula- economics of Parts 3 and 4 with the problems chapters of tion, and perfect competition. These study aids plus pre- Part 5. Chapter 19 on agriculture may follow Chapter 9 and post-tests and chapter quizzes can be purchased and on pure competition; Chapter 18 on antitrust and regula- downloaded to an iPod, MP3 player, or desktop computer. tion may follow Chapters 10, 11, and 11Web on imperfect Premium Content enables the student to study and self-test competition models and technological advance. Chapter on his or her computer or on the go. 22 on immigration may follow Chapter 13 on wages; and Chapter 20 on income inequality may follow Chapters 13 McGraw-Hill Connect Economics Con- and 14 on distributive shares of national income. nect Economics is a complete, online supplement system Instructors who teach the typical two-semester course that duplicates and expands upon the textbook’s end-of and feel comfortable with the book’s organization will chapter material and test banks. Nearly all the questions find that, by putting Parts 1 to 5 in the first semester and from the text, including the nu- Parts 6 to 10 in the second, the material is divided logically ™ merous graphing exercises, are between the two semesters. presented in an autogradable economics format and tied to the text’s Pedagogical Aids learning objectives. Instructors may edit existing questions and author entirely new Economicss is highly student-oriented. The “To the Student” problems. Connect Economics can be used for student statement at the beginning of Part 1 details the book’s practice, homework, quizzes, and formal examinations. many pedagogical aids. The eighteenth edition is also Detailed grade reports enable instructors to see how accompanied by a variety of high-quality supplements each student performs on a particular problem, a full as- that help students master the subject and help instructors signment, and in the context of the overall class. The implement customized courses. Connect Economics grade reports can be easily inte- grated with WebCT and Blackboard. Connect Econom- Supplements for Students and ics is also available with an integrated online version of Instructors the textbook. With a single access code, students can read the eBook, work through practice problems, do Study Guide One of the world’s leading experts on homework, and take exams. economic education, William Walstad of the University of Nebraska–Lincoln, prepared the eighteenth edition of the CourseSmart eTextbook For roughly half the Study Guide. Many students find the Study Guide indis- cost of a print book, you can reduce your impact on the pensable. Each chapter contains an introductory state- environment by buying ment, a checklist of behavioral objectives, an outline, a list McConnell, Brue, and Fly- of important terms, fill-in questions, problems and proj- nn’s Economics, 18e eText. ects, objective questions, and discussion questions. CourseSmart eTextbooks, The Guide comprises a superb “portable tutor” for the available in a standard on- principles student. Separate Study Guidess are available for line reader, retain the exact the macro and micro paperback editions of the text. content and look of the print text, plus offer the advan- tage of digital navigation to which students are accus- Premium Content The Premium Content, available tomed. Students can search the text, highlight, take at the Online Learning Center, offers a range of dynamic notes, and use e-mail tools to share notes with their class- study aids to the student. Narrated PowerPoint presenta- mates. CourseSmart also includes tech support in case xvi PREFACE help is ever needed. To buy Economics, 18e as an eText, Presentationss for the eighteenth edition. Each chapter, in- or to learn more about this digital solution, visit cluding the Web chapters, is accompanied by a concise yet www.Course Smart.com and search by title, author, or thorough tour of the key concepts. Instructors can use the ISBN. slides in the classroom while students can use the slides to study. Students can view a second, distinct set of slides— Instructor’s Manual Shawn D. Knabb of Western the Narrated PowerPoint Presentations—on the site or Washington University revised and updated the Instructor’s download the material to their video iPod. The content is Manual. correlated to the Learning Objectives. This exceptional The revised Instructor’s Manuall includes: study aid, updated by Darlene DeVera of Deanza College, Chapter summaries. is a part of the Premium Content package. Listings of “what’s new” in each chapter. Teaching tips and suggestions. Digital Image Library Every graph and table in the text is available on the instructor’s side of the Web site Learning objectives. and on the Instructor’s Resource CD-ROM. Chapter outlines. Data and visual aid sources with suggestions for Online Learning Center (www.mccon- classroom use. nell18e.com) The Web site accompanying this book Extra questions and problems. is a central resource for students and instructors alike. The End-of-chapter correlation guides mapping content optional Web Chapters: “Technology, R&D, and Efficiency,” to the learning objectives and important AACSB and “The Economics of Developing Countries,” and Chapter 38 Bloom’s Taxonomy standards. Web supplement: “Previous International Exchange-Rate The Instructor’s Manuall is available on the instructor’s side Systems” are posted as full-color PDF files. As previously of the Online Learning Center. mentioned, the three in-text Web buttons alert the students to points in the book where they can springboard to the Three Test Banks Test Bank I contains about 6650 Web site to get more information. Students can test their multiple-choice and true-false questions, most of which were knowledge of a chapter’s concepts with the self-graded mul- written by the text authors. Randy Grant revised Test Bank I tiple choice quiz and review PowerPoint presentations. for the eighteenth edition. Test Bank II contains around 6300 The password-protected Instructor Center houses the multiple-choice and true-false questions, updated by Michael Instructor’s Manual, all three Test Banks, and links to EZ Youngblood of Rock Valley College. All Test Bank I and II Test Online, PowerPoint Presentations, and Digital Image questions are organized by learning objective, topic, AACSB Library. Assurance of Learning, and Bloom’s Taxonomy guidelines. Test Bank III, written by William Walstad, contains more Instructor’s Resource CD-ROM This CD than 600 pages of short-answer questions and problems cre- contains all three test banks, PowerPoint presentations, ated in the style of the book’s end-of-chapter questions. Test and the Digital Image Library featuring all of the tables Bank III can be used to construct student assignments or de- and figures from the text. sign essay and problem exams. Suggested answers to the es- say and problem questions are included. In all, more than Classroom Performance Systems by eIn- 14,000 questions give instructors maximum testing flexibility struction This is a revolutionary system that brings while ensuring the fullest possible text correlation. ultimate interactivity to Test Banks I and II are available through EZ Test the classroom. CPS is a Online as well as in MS Word. EZ Test allows professors wireless response system to created customized tests that contain both questions that gives you immediate that they select from the test banks as well as questions feedback from every stu- that they craft themselves. Test Bank III is available in MS dent in the class. CPS Word on the password-protected instructor’s side of the units include easy-to-use Online Learning Center, and on the Instructor Resource software for creating and CD, both of which we will describe shortly. delivering questions and assessments to your class. With CPS you can ask subjective and objective questions. Then PowerPoint Presentations Nora Underwood of every student responds with an individual, wireless re- the University of Central Florida updated the PowerPoint sponse pad, providing instant results. CPS is the perfect  PREFACE xvii tool for engaging students while gathering important as- Acknowledgments sessment data. Instructors can access eInstruction questions in two We give special thanks to Norris Peterson of Pacific formats—CPS and PowerPoint. Motivate student prepa- Lutheran University and Randy Grant of Linfield College, ration, interactivity, and active learning with these lecture who created the “button” content on our Web site. We formatted questions. again thank James Reese of the University of South Carolina at Spartanburg, who wrote the original Internet Assurance of Learning Ready Assurance of exercises. Although many of those questions were replaced learning is an important element of many accreditation or modified in the typical course of revision, several remain standards. Economics, 18e is designed specifically to sup- virtually unchanged. We also thank Nora Underwood at the port your assurance of learning initiatives. Each chapter University of Central Florida for updating the PowerPoint in the book begins with a list of numbered learning ob- slides for the eighteenth edition and Darlene DeVera of jectives which appear throughout the chapter, as well as Deanza College for the Narrated PowerPoint presentations. in the end-of-chapter problems and exercises. Every test Shawn Knabb of Western Washington University deserves bank question is also linked to one of these objectives, in a great thanks for updating the Instructor’s Manuall as well as addition to level of difficulty, topic area, Bloom’s for accuracy checking the many parts making up 18e and Taxonomy level, and AACSB skill area. EZ Test, Mc- the ancillies. Thanks to Mohammad Bajwa of Northampton Graw-Hill’s easy-to-use test bank software, can search Community College, who accuracy checked both Test the test bank by these and other categories, providing an Banks I and II, and to Benjamin Pappas, who updated the engine for targeted Assurance of Learning analysis and art in both Test banks. Finally, we thank William Walstad assessment. and Tom Barbiero (the coauthor of our Canadian edition) for their helpful ideas and insights. AACSB Statement The McGraw-Hill Compa- We are greatly indebted to an all-star group of pro- nies is a proud corporate member of AACSB International. fessionals at McGraw-Hill—in particular Douglas Reiner, Understanding the importance and value of AACSB ac- Elizabeth Clevenger, Harvey Yep, Melissa Larmon, and Brent creditation, Economics, 18e has sought to recognize the Gordon—for their publishing and marketing expertise. curricula guidelines detailed in the AACSB standards for We thank Keri Johnson for her selection of the business accreditation by connecting end-of-chapter ques- Consider This and Last Word photos and Cara Hawthorne tions in Economics, 18e and the accompanying test banks to for the design. the general knowledge and skill guidelines found in the The eighteenth edition has benefited from a number AACSB standards. of perceptive formal reviews. The contributors, listed at The statements contained in Economics, 18e are pro- the end of the Preface, were a rich source of suggestions vided only as a guide for the users of this text. The AACSB for this revision. To each of you, and others we may have leaves content coverage and assessment within the pur- inadvertently overlooked, thank you for your considerable view of individual schools, the mission of the school, help in improving Economics. and the faculty. While Economics, 18e and the teaching package make no claim of any specific AACSB qualifica- tion or evaluation, we have, within Economics, 18e labeled Stanley L. Brue selected questions according to the six general knowledge Sean M. Flynn and skills areas. Campbell R. McConnell  Reviewers Sindy Abadie, Southwest Tennessee Community College Mark Abajian, University of San Diego Teshome Abebe, Eastern Illinois University Bryan Aguiarr, North West Arkansas Community College Mohammed Akacem, Metropolitan State College of Denver Christopher Azevedo, University of Central Missouri Maneshni Bahman, Paradise Valley Community College Cynthia Bansak, San Diego State University Gyanendra Baral, Oklahoma City Community College Carl R. Bauer, Oakton Community College Doris Bennett, Jacksonville State University Trisha Bezman-Worley, Francis Marion University Okmyung Bin, East Carolina University John Bishop, East Carolina University Bruce Brown, California State Polytechnic University, Pomona Michael Bull , Deanza College J.M. Callan, RWC/University of Cincinnati Rebecca J. Campbell, Mississippi State University Tony Caporale , University of Dayton Barbara Connolly, Westchester Community College Thomas A Creahan, Morehead State University Shah Dabirian, California State University–Long Beach Janet Daniel, Baton Rouge Community College Diana Denison, Red Rocks Community College David Doorn, University of Minnesota–Duluth Contributors Amrik Singh Dua, Mt. San Antonio College Thomas Dunn, Angelina College Swarna D. Dutt, University of West Georgia Angela Dzata, Alabama State University Dennis S. Edwards, Coastal Carolina University Ann Eike, University of Kentucky Harold W. Elder, University of Alabama Paul Emberton, Texas State University–San Marcos Monica Escaleras, Florida Atlantic University–Boca Raton Antonina Espiritu, University of Evansville William Feipel, Illinois Central College Harold “Steven” Floyd, Manatee Community College Jack Foleyy, Blinn College–Bryan Richard Fowles, University of Utah Charles Fraley, Cincinnati State Technical and Community College Mark Frascatore, Clarkson University Timothy S. Fuerst, Bowling Green State University Yoshikazu Fukasawa, Midwestern State University Connel Fullenkamp, Duke University Alejandro Gallegos , Winona State University Ralph Gamble, Fort Hays State University Lisa Giddings, University of Wisconsin, La Crosse Adam C. Gifford, Lake-Sumter Community College Susan Glanz, St. John’s University Fusun Gonul, Slippery Rock University of Pennsylvania Richard Gosselin, Houston Community College  CONTRIBUTORS xix Homer Guevara, Northwest Vista College John Shea, University of Maryland–College Park Gus Herring, Brookhaven College Curtis Simon, Clemson University John Heywood, University of Wisconsin–Milwaukee Virginia Shingleton, Valparaiso University Charles Hiatt, Central Florida Community College–Ocala Tom Sweeney, Des Moines Area Community College George E. Hoffer, Virginia Commonwealth University Regina Tawah, Bowie State University Adora D. Holstein, Robert Morris University Manjuri Talukdarr, Northern Illinois University Jack W. Hou, California State University, Long Beach Henry Terrell, University of Maryland–College Park Jim H. Hubert, Seattle Central Community College Mary Thompson, Belmont University George Jakubson, Cornell University–Ithaca Wendine Thompson-Dawson, Monmouth College Vincent Jackson, Florida Community College, Jacksonville Ross D. Weiner, The City College of New York Wayne Joerding, Washington State University William Wood, James Madison University Barbara John, University of Dayton J. Christopher M. Wreh, North Central Texas College Simran Kahai, John Carroll University Jay Zagorsky, Boston University Yvan J. Kelly, Flagler College Inske Zandvliet, Brookhaven College Kamau Kinuthia, American River College Michael Zerbe, Stark State College of Technology Mary Beth Klingerr, College of Southern Maryland Shawn Knabb, Western e Washington University Heather Kohls, Marquette University User Survey Respondents Maria Cornachione Kula, Roger Williams University Deergha Adhikari, University of Louisiana at Lafayette Theodore A. Labayy, Bishop State Community College Douglas K. Adie, Ohio University Carsten Lange, California State Polytechnic University, Pomona Charles Anderson, Kean University Ron Lascheverr, University of Illinois–Urbana Champaign Ali Ataiifarr, Delaware County Community College Fritz Laux, Northeastern State University Wendy Baileyy, Troy University Marc Law w, University of Vermont Mohammad Bajwa, Northampton Community College Shu Lin, Florida Atlantic University–Boca Raton Robert Bergerr, Flagler College KT Magnusson, Salt Lake Community College Gale Blalock, University of Evansville Murir Mahmud, Dixie State College Martin Bookbinderr, Passaic County College Paula Manns, Atlantic Cape Community College Jonathan Brickerr, Asheville Buncombe Technical Community College Evelina Mengova, California State University, Fullerton Lindsay Calkins, John Carroll University Babu Nahata, University of Louisville Gary E. Clayton, Northern Kentucky University Gerald Nyambane, Davenport University Jane Cline, Forsyth Technical Community College Victor Oguledo, Florida A&M Ana Carolina Corrales, Miami Dade College North Glenda Orosco, Oklahoma State University, Okmulgee Morassa Danai, California State University, Fullerton Joan Osborne, Palo Alto College James Davis, Santa Rosa Junior College Michel-Ange Pantal, University of Missouri, Columbia Tanya Downing, Cuesta College Charles J. Parker, Wayne State College James Fallon, Gwynedd Mercy College Nathan Perryy, University of Utah–Salt Lake City Jeff Foran, Miami-Dade College–Wolfson Mary Anne Pettit, Southern Illinois University David Fosterr, Grayson County College Diana Petersdorff, University of Wisconsin, Stout Arthur Friedberg, Mohawk Valley Community College Chirinjev Peterson, Greenville Technical College Mark Friedman, Middlesex Community College John Pharrr, Cedar Valley College Anthony A. Gabb, St. John’s University James Ragan, Kansas State University Leticia Garcia, Elgin Community College Brian Rosario, University of California, Davis Anthony J. Greco, University of Louisiana, Lafayette Marina Rosserr, James Madison University Paul L. Hettlerr, California University of Pennsylvania Nicole Cornell Sadowski, York College of Pennsylvania John G. Kamiru, Norfolk State University Allen R. Sanderson, University of Chicago Reza Karim, Des, Moines Area Community College David P. Schutte, Mountain View College Frances F. Lea, Germanna Community College Gerald Scott, Florida Atlantic University–Boca Raton Sarah Leahyy, Brookdale Community College Timothy Shaughnessyy, Louisiana State University–Shreveport Judy Lee, Leeward Community College xx CONTRIBUTORS Phillip K. Letting, Harrisburg Area Community College Henry Ryderr, Gloucester County College Melissa Lind, University of Texas Arlington David Schafferr, University of Wisconsin, Eau Claire Glenn Lowell, Utah Valley State College Orem Terri A. Sexton, California State University, Sacramento Zagros Madjd-Sadjadi, Winston-Salem State University David Shorow w, Richland College Susan McElroyy, University of Texas at Dallas Carl Simkonis, Northern Kentucky University Meghan Millea, Mississippi State University Macki Sissoko, Norfolk State University IIir Miteza, University of Michigan, Dearborn Noel Smith, Palm Beach Community College–South Darrell Neron, Peirce College Richard Snyderr, Florida State University Robert Newman, University of Texas at San Antonio Mike Toma, Armstrong Atlantic State University Ifeakandu Okoye, Florida A&M University Michael Twomeyy, University of Michigan, Dearborn Mary Ellen McGowan Overbayy, Seton Hall University Lawrence Waldman, Central New Mexico Community College Steve Peng, Ohio University–Zanesville Thomas Wierr, Northeastern State University Marilyn Pugh, University of Maryland University College Mahmut Yasarr, University of Texas at Arlington Manuel C. Rios, Laredo Community College Edward Zajicek, Winston-Salem State University  Brief Contents PART ONE PART SIX Introduction to Economics and the GDP, Growth, and Instability 465 Economy 1 23 An Introduction to Macroeconomics 466 1 Limits, Alternatives, and Choices 3 24 Measuring Domestic Output and National Income 479 2 The Market System and the Circular Flow 29 25 Economic Growth 498 3 Demand, Supply, and Market Equilibrium 45 26 Business Cycles, Unemployment, and Inflation 520 14 The U.S. Economy: Private and Public Sectors 72 5 The United States in the Global Economy 91 PART SEVEN PART TWO Macroeconomic Models and Fiscal Policy 540 Microeconomics of Product Markets 112 27 Basic Macroeconomic Relationships 541 6 Elasticity, Consumer Surplus, and Producer Surplus 113 28 The Aggregate Expenditures Model 561 7 Consumer Behavior 134 29 Aggregate Demand and Aggregate Supply 583 8 The Costs of Production 154 30 Fiscal Policy, Deficits, and Debt 607 9 Pure Competition 176 10 Pure Monopoly 201 PART EIGHT 11 Monopolistic Competition and Oligopoly 222 11w Technology, R&D, and Efficiency (WEB CHAPTER, Money, Banking, and Monetary Policy 628 www.mcconnell18e.com) 251 31 Money and Banking 629 32 Money Creation 645 PART THREE 33 Interest Rates and Monetary Policy 660 Microeconomics of Resource Markets 252 34 Financial Economics 687 12 The Demand for Resources 253 13 Wage Determination 270 PART NINE 14 Rent, Interest, and Profit 296 15 Natural Resource and Energy Economics 312 Extensions and Issues 706 35 Extending the Analysis of Aggregate Supply 707 PART FOUR 36 Current Issues in Macro Theory and Policy 726 Microeconomics of Government 334 16 Public Goods, Externalities, and Information PART TEN Asymmetries 335 17 Public Choice Theory and the Economics of International Economics 742 Taxation 356 37 International Trade 743 38 The Balance of Payments, Exchange Rates, and Trade Deficits 764 PART FIVE 38w Previous International Exchange-Rate Systems Microeconomic Issues and Policies 374 (WEB SUPPLEMENT, www.mcconnell18e.com) 785 18 Antitrust Policy and Regulation 375 39w The Economics of Developing Countries 19 Agriculture: Economics and Policy 391 (WEB CHAPTER, www.mcconnell18e.com) 786 20 Income Inequality, Poverty, and Discrimination 409 21 Health Care 431 Glossary G-1 22 Immigration 449 Index IND-1 xxi  List of Key Graphs ix Preface x Contributors xviii PART ONE Introduction to Economics and the Economy 1 To the Student 2 Chapter 1 Limits, Alternatives, and Choices 3 The Economic Perspective 4 Scarcity and Choice / Purposeful Behavior / Marginal Analysis: Benefits and Costs Consider This: Free for All? 4 Consider This: Fast-Food Lines 5 Theories, Principles, and Models 5 Microeconomics and Macroeconomics 6 Microeconomics / Macroeconomics / Positive and Normative Economics Individuals’ Economizing Problem 7 Limited Income / Unlimited Wants / A Budget Line Consider This: Did Gates,Winfrey, and Rodriguez Make Bad Choices? 9 Contents Society’s Economizing Problem Scarce Resources / Resource Categories 10 Production Possibilities Model 11 Production Possibilities Table / Production Possibilities Curve / Law of Increasing Opportunity Costs / Optimal Allocation Consider This: The Economics of War 14 Unemployment, Growth, and the Future 14 A Growing Economy / Present Choices and Future Possibilities / A Qualification: International Trade Last Word: Pitfalls to Sound Economic Reasoning 16 Chapter 1 Appendix: Graphs and Their Meaning 22 Chapter 2 The Market System and the Circular Flow 29 Economic Systems 30 The Command System / The Market System Characteristics of the Market System 30 Private Property / Freedom of Enterprise and Choice / Self-Interest / Competition / Markets and Prices / Technology and Capital Goods / Specialization / Use of Money / Active, but Limited Government Five Fundamental Questions 34 What Will Be Produced? / How Will the Goods and Services Be Produced? / Who Will Get the Output? / How Will the System Accommodate Change? / How Will the System Promote Progress? Consider This: McHits and McMisses 35  CONTENTS xxiii The “Invisible Hand” 38 Federal Finance 84 The Demise of the Command Systems 38 Federal Expenditures / Federal Tax Revenues The Coordination Problem / The Incentive Problem Last Word: Financing Social Security 86 Consider This: The Two Koreas 39 State and Local Finance 87 The Circular Flow Model 39 State Finances / Local Finances Resource Market / Product Market Last Word: Shuffling the Deck 41 Chapter 5 Chapter 3 The United States in the Global Economy 91 Demand, Supply, and Market Equilibrium 45 International Linkages 92 Markets 46 The United States and World Trade 92 Volume and Pattern / Rapid Trade Growth / Participants in Demand 46 International Trade Law of Demand / The Demand Curve / Market Demand / Change in Demand / Changes in Specialization and Comparative Advantage 96 Quantity Demanded Comparative Advantage: Production Possibilities Analysis Consider This: A CPA and House Painter 97 Supply 51 Law of Supply / The Supply Curve / Market The Foreign Exchange Market 99 Supply / Determinants of Supply / Changes in Dollar-Yen Market / Changing Rates: Depreciation and Supply / Changes in Quantity Supplied Appreciation Market Equilibrium 54 Government and Trade 101 Equilibrium Price and Quantity / Rationing Function of Trade Impediments and Subsidies / Why Government Trade Prices / Efficient Allocation / Changes in Supply, Demand, Interventions? / Costs to Society and Equilibrium Consider This: Buy American? 102 Consider This: Ticket Scalping: A Bum Rap! 56 Multilateral Trade Agreements and Free-Trade Zones 102 Consider This: Salsa and Coffee Beans 59 Reciprocal Trade Agreements Act / General Agreement on Application: Government-Set Prices 59 Tariffs and Trade / World Trade Organization / The European Price Ceilings on Gasoline / Rent Controls / Price Floors Union / North American Free Trade Agreement on Wheat Trade-Related Issues 105 Last Word: A Legal Market for Human Organs? 60 Trade Adjustment Assistance / Offshoring of Jobs Chapter 3 Appendix: Additional Examples of Last Word: Fair-Trade Products 106 Supply and Demand 66 Global Competition 108 Chapter 4 The U.S. Economy: Private and Public Sectors 72 PART TWO Households as Income Receivers 73 Microeconomics of Product Markets 112 The Functional Distribution of Income / The Personal Distribution of Income Households as Spenders 74 Chapter 6 Personal Taxes / Personal Saving / Personal Consumption Expenditures Elasticity, Consumer Surplus, and The Business Population 75 Producer Surplus 113 Legal Forms of Businesses 75 Price Elasticity of Demand 114 Advantages of Corporations / The Principal-Agent The Price-Elasticity Coefficient and Problem Formula / Interpretations of Ed / The Total- Consider This: Unprincipled Agents 77 Revenue Test / Price Elasticity and the Total- The Public Sector: Government’s Role 78 Revenue Curve / Determinants of Price Elasticity of Providing the Legal Structure / Maintaining Demand / Applications of Price Elasticity of Demand Competition / Redistributing Income / Reallocating Consider This: A Bit of a Stretch 116 Resources / Promoting Stability / Government’s Role: A Price Elasticity of Supply 122 Qualification Price Elasticity of Supply: The Market Period / Price Elasticity Consider This: Street Entertainers 81 of Supply: The Short Run / Price Elasticity of Supply: The Long The Circular Flow Revisited 82 Run / Applications of Price Elasticity of Supply Government Finance 83 Cross Elasticity and Income Elasticity of Demand 124 Government Purchases and Transfers Cross Elasticity of Demand / Income Elasticity of Demand xxiv CONTENTS Consumer and Producer Surplus 126 Profit fi Maximization in the Short Run: Consumer Surplus / Producer Surplus / Efficiency Total-Revenu