Principles of Microeconomics PDF Textbook by N. Gregory Mankiw

Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203  Principles of Microeconomics:...

Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203  Principles of Microeconomics: 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. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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. 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 16 Monopolistic Competition to be inefficient. 17 Oligopoly 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. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 MICRO ECONOMICS NINTH EDITION N. GREGORY MANKIW HARVARD UNIVERSITY Australia Brazil Mexico Singapore United Kingdom United States Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 Microeconomics, Ninth Edition © 2021, 2018 Cengage Learning, Inc. N. Gregory Mankiw Unless otherwise noted, all content is © Cengage. ALL RIGHTS RESERVED. No part of this work covered by the copyright Senior Vice President, Higher Education & Skills herein may be reproduced or distributed in any form or by any means, Product: Erin Joyner except as permitted by U.S. copyright law, without the prior written permission of the copyright owner. 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Printed in the United States of America Print Number: 01   Print Year: 2019 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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.  To Catherine, Nicholas, and Peter, my other contributions to the next generation Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 Author N. Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard University. As a student, he stud- ied economics at Princeton University and MIT. As a teacher, he has taught macroeconomics, m ­ icroeconomics, statistics, and principles of economics. 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 debates. His work has been published in scholarly journals, such as the JORDI CABRÉ American Economic Review, Journal of Political Economy, and Quarterly Journal of Economics, and in more popu- lar 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 of the National Bureau of Economic Research, an adviser to the Congressional Budget Office and the Federal Reserve Banks of Boston and New York, a trustee of the Urban Institute, and a member of the ETS test develop- ment committee for the Advanced Placement exam in economics. From 2003 to 2005, he served as chairman of the President’s Council of Economic Advisers. iv Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 Instructor D uring my 20-year career as a student, the course that excited me most was the two-semester sequence on the principles of economics that I took ­during my freshman year in college. It is no exaggeration to say that it changed my life. I had grown up in a family that often discussed politics over the dinner table. The pros and cons of various solutions to society’s problems generated fervent debate. But in school, I had been drawn to the sciences. Whereas politics seemed vague, rambling, and subjective, science was analytic, systematic, and objective. While political debate continued without end, science made progress. My freshman course on the principles of economics opened my eyes to a new way of thinking. Economics combines the virtues of politics and science. It is, truly, a social science. Its subject matter is society—how people choose to lead their lives and how they interact with one another—but it approaches the subject with the dispassion of a science. By bringing the methods of science to the questions of politics, economics tries to make progress on the challenges that all societies face. I was drawn to write this book in the hope that I could convey some of the excitement about economics that I felt as a student in my first economics course. Economics is a subject in which a little knowledge goes a long way. (The same cannot be said, for instance, of the study of physics or the Chinese language.) Economists have a unique way of viewing the world, much of which can be taught in one or two semesters. My goal in this book is to transmit this way of thinking to the widest possible audience and to convince readers that it illuminates much about the world around them. I believe that everyone should study the fundamental ideas that economics has to offer. One purpose of general education is to inform people about the world and thereby make them better citizens. The study of economics, as much as any disci- pline, serves this goal. Writing an economics textbook is, therefore, a great honor and a great responsibility. It is one way that economists can help promote better government and a more prosperous future. As the great economist Paul Samuelson put it, “I don’t care who writes a nation’s laws, or crafts its advanced treaties, if I can write its economics textbooks.” What’s New in the Ninth Edition? Economics is fundamentally about understanding the world in which we live. Most chapters of this book include Case Studies illustrating how the principles of economics can be applied. In addition, In the News boxes offer excerpts from newspapers, magazines, and online news sources showing how economic ideas shed light on current issues facing society. After students finish their first course in economics, they should think about news stories from a new perspective and v Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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. vi Preface: To the Instructor with greater insight. To keep the study of economics fresh and relevant for each new cohort of students, I update each edition of this text to keep pace with the ever-changing world. The new applications in this ninth edition are too numerous to list in their entirety, but here is a sample of the topics covered (and the chapters in which they appear): Technology companies are increasingly using economists to better run their businesses. (Chapter 2) The hit Broadway show Hamilton has brought renewed attention to the issue of ticket reselling. (Chapter 7) President Trump has taken a new and controversial approach to international trade. (Chapter 9) A carbon tax and dividend plan has become a focal policy in the debate about global climate change. (Chapter 10) Social media share many features, along with many of the problems, ­associated with common resources. (Chapter 11) The Supreme Court hears a case about international price discrimination. (Chapter 15) Amazon looks like it might be the next target for antitrust regulators. (Chapter 17) The winners and losers from immigration have become a major issue in the political debate. (Chapter 18) Research on tax data shows by how much the super-rich have gotten even richer. (Chapter 20) Some economists suggest that, despite little change in the official poverty rate, we are winning the war on poverty. (Chapter 20) In addition to updating the book, I have refined its coverage and pedagogy with input from many users of the previous edition. There are numerous changes, large and small, aimed at making the book clearer and more student-friendly. All the changes that I made, and the many others that I considered, were evalu- ated in light of the benefits of brevity. Like most things that we study in economics, a student’s time is a scarce resource. I always keep in mind a dictum from the great novelist Robertson Davies: “One of the most important things about writing is to boil it down and not bore the hell out of everybody.” How Is This Book Organized? The organization of this book was designed to make economics as student-friendly as possible. What follows is a whirlwind tour of this text. The tour will, I hope, give instructors some sense of how the pieces fit together. Introductory Material Chapter 1, “Ten Principles of Economics,” introduces students to the economist’s view of the world. It previews some of the big ideas that recur throughout econom- ics, such as opportunity cost, marginal decision making, the role of incentives, the gains from trade, and the efficiency of market allocations. Throughout the book, I refer regularly to the Ten Principles of Economics introduced in Chapter 1 to remind students that these ideas are the foundation for all economics. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 Instructor vii Chapter 2, “Thinking Like an Economist,” examines how economists approach their field of study. It discusses the role of assumptions in developing a theory and introduces the concept of an economic model. It also explores the role of economists in making policy. This chapter’s appendix offers a brief refresher course on how graphs are used, as well as how they can be abused. Chapter 3, “Interdependence and the Gains from Trade,” presents the theory of comparative advantage. This theory explains why individuals trade with their neighbors, as well as why nations trade with other nations. Much of economics is about how market forces coordinate many individual production and consump- tion decisions. As a starting point for this analysis, students see in this chapter why specialization, interdependence, and trade can benefit everyone. The Fundamental Tools of Supply and Demand The next three chapters introduce the basic tools of supply and demand. Chapter 4, “The Market Forces of Supply and Demand,” develops the supply curve, the demand curve, and the notion of market equilibrium. Chapter 5, “Elasticity and Its Application,” introduces the concept of elasticity and uses it to analyze events in three different markets. Chapter 6, “Supply, Demand, and Government Policies,” uses these tools to examine price controls, such as rent-control and minimum-wage laws, and tax incidence. Chapter 7, “Consumers, Producers, and the Efficiency of Markets,” extends the analysis of supply and demand using the concepts of consumer surplus and pro- ducer surplus. It begins by developing the link between consumers’ willingness to pay and the demand curve and the link between producers’ costs of ­production and the supply curve. It then shows that the market equilibrium maximizes the sum of the producer and consumer surplus. Thus, students learn early about the efficiency of market allocations. The next two chapters apply the concepts of producer and consumer surplus to questions of policy. Chapter 8, “Application: The Costs of Taxation,” shows why taxation results in deadweight losses and what determines the size of those losses. Chapter 9, “Application: International Trade,” considers who wins and who loses from international trade and presents the debate over protectionist trade policies. More Microeconomics Having examined why market allocations are often desirable, the book then considers how the government can sometimes improve on them. Chapter 10, “Externalities,” explains how external effects such as pollution can render market outcomes inefficient and discusses the possible public and private solutions to those inefficiencies. Chapter 11, “Public Goods and Common Resources,” considers the problems that arise when goods, such as national defense, have no market price. Chapter 12, “The Design of the Tax System,” describes how the government raises the revenue necessary to pay for public goods. It presents some institutional back- ground about the U.S. tax system and then discusses how the goals of efficiency and equity come into play when designing a tax system. The next five chapters examine firm behavior and industrial organization. Chapter 13, “The Costs of Production,” discusses what to include in a firm’s costs, and it introduces cost curves. Chapter 14, “Firms in Competitive Markets,” ana- lyzes the behavior of price-taking firms and derives the market supply curve. Chapter 15, “Monopoly,” discusses the behavior of a firm that is the sole seller in its market. It examines the inefficiency of monopoly pricing, the possible policy Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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. viii Preface: To the Instructor responses, and the attempts by monopolies to price discriminate. Chapter 16, “Monopolistic Competition,” looks at behavior in a market in which many sellers offer similar but differentiated products. It also discusses the debate over the effects of advertising. Chapter 17, “Oligopoly,” covers markets in which there are only a few sellers, using the prisoners’ dilemma as the model for examining strategic interaction. The next three chapters present issues related to labor markets. Chapter 18, “The Markets for the Factors of Production,” emphasizes the link between factor prices and marginal productivity. Chapter 19, “Earnings and Discrimination,” discusses the determinants of equilibrium wages, including compensating differentials, human capital, and discrimination. Chapter 20, “Income Inequality and Poverty,” examines the degree of inequality in U.S. society, alternative views about the gov- ernment’s role in changing the distribution of income, and various policies aimed at helping society’s poorest members. The next two chapters present optional material. Chapter 21, “The Theory of Consumer Choice,” analyzes individual decision making using budget constraints and indifference curves. Chapter 22, “Frontiers of Microeconomics,” introduces the topics of asymmetric information, political economy, and behavioral econom- ics. Some instructors may skip all or some of this material, but these chapters are useful in motivating and preparing students for future courses in microeconomics. Instructors who cover these topics may assign these chapters earlier than they are presented in the book, and I have written them to facilitate this flexibility. Learning Tools The purpose of this book is to help students learn the fundamental lessons of eco- nomics and to show how they can apply these lessons to their lives and the world in which they live. Toward that end, I have used various learning tools that recur throughout the book. Case Studies Economic theory is useful and interesting only if it can be applied to understanding actual events and policies. This book, therefore, contains numerous case studies that apply the theory that has just been developed. In the News Boxes One benefit that students gain from studying economics is a new perspective and greater understanding about news from around the world. To highlight this ben- efit, I have included excerpts from many newspaper and magazine articles, some of which are opinion columns written by prominent economists. These articles, together with my brief introductions, show how basic economic theory can be applied. Most of these boxes are new to this edition. And for the first time in this edition, each news article ends with “Questions to Discuss,” which can be used to start a dialogue in the classroom. FYI Boxes These boxes provide additional material “for your information.” Some of them offer a glimpse into the history of economic thought. Others clarify technical issues. Still others discuss supplementary topics that instructors might choose either to discuss or skip in their lectures. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 Instructor ix Ask the Experts Boxes This feature summarizes results from the IGM Economics Experts Panel, an ongoing survey of several dozen prominent economists. Every few weeks, these experts are offered a statement and then asked whether they agree with it, ­disagree with it, or are uncertain about it. The survey results appear in the chapters near the coverage of the relevant topic. They give students a sense of when economists are united, when they are divided, and when they just don’t know what to think. Definitions of Key Concepts When key concepts are introduced in the chapter, they are presented in bold type- face. In addition, their definitions are placed in the margins. This treatment should aid students in learning and reviewing the material. Quick Quizzes After each major section in a chapter, students are offered a brief multiple-choice Quick Quiz to check their comprehension of what they have just learned. If stu- dents cannot readily answer these quizzes, they should stop and review material before continuing. The answers to all Quick Quizzes are available at the end of each chapter. Chapter in a Nutshell Each chapter concludes with a brief summary that reminds students of the most important lessons that they have learned. Later in their study, it offers an efficient way to review for exams. List of Key Concepts A list of key concepts at the end of each chapter offers students a way to test their understanding of the new terms that have been introduced. Page references are included so that students can review the terms they do not understand. Questions for Review Located at the end of each chapter, questions for review cover the chapter’s pri- mary lessons. Students can use these questions to check their comprehension and prepare for exams. Problems and Applications Each chapter also contains a variety of problems and applications asking students to apply the material that they have learned. Some instructors may use these ques- tions for homework assignments. Others may use them as a starting point for class- room discussions. Alternative Versions of the Book The book you are now holding is one of five versions of this text that are available for introducing students to economics. Cengage and I offer this menu of books because instructors differ in how much time they have and what topics they choose to cover. Here is a brief description of each: Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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. x Preface: To the Instructor Principles of Economics. This complete version of the book contains all 36 chapters. It is designed for two-semester introductory courses that cover both microeconomics and macroeconomics. Principles of Microeconomics. This version contains 22 chapters and is designed for one-semester courses in introductory microeconomics. Principles of Macroeconomics. This version contains 23 chapters and is designed for one-semester courses in introductory macroeconomics. It con- tains a full development of the theory of supply and demand. Brief Principles of Macroeconomics. This shortened macro version of 18 chapters contains only one chapter on the basics of supply and demand. It is designed for instructors who want to jump to the core topics of macroeconomics more quickly. Essentials of Economics. This version of the book contains 24 chapters. It is designed for one-semester survey courses that cover the basics of both micro- economics and macroeconomics. The accompanying table shows precisely which chapters are included in each book. Instructors who want more information about these alternative versions should contact their local Cengage representative. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 Instructor xi TABLE 1 The Five Versions of This Book Brief Principles of Principles of Principles of Essentials of Principles of Economics Microeconomics Macroeconomics Macroeconomics Economics 1 Ten Principles of Economics X X X X 2  Thinking Like an Economist X X X X 3  Interdependence and the Gains from Trade X X X X 4  The Market Forces of Supply and Demand X X X X 5  Elasticity and Its Application X X X 6  Supply, Demand, and Government Policies X X X 7  Consumers, Producers, and the Efficiency of X X X Markets 8  Application: The Costs of Taxation X X X 9  Application: International Trade X X X 10 Externalities X X 11 Public Goods and Common Resources X X 12 The Design of the Tax System X 13 The Costs of Production X X 14 Firms in Competitive Markets X X 15 Monopoly X X 16 Monopolistic Competition X 17 Oligopoly X 18 The Markets for the Factors of Production X 19 Earnings and Discrimination X 20 Income Inequality and Poverty X 21 The Theory of Consumer Choice X 22 Frontiers of Microeconomics X 23 Measuring a Nation’s Income X X X 24 Measuring the Cost of Living X X X 25 Production and Growth X X X 26 Saving, Investment, and the Financial System X X X 27 The Basic Tools of Finance X X X 28 Unemployment X X X 29 The Monetary System X X X 30 Money Growth and Inflation X X X 31 Open-Economy Macroeconomics: Basic Concepts X X 32 A Macroeconomic Theory of the Open Economy X X 33 Aggregate Demand and Aggregate Supply X X X 34 The Influence of Monetary and Fiscal Policy on X X X Aggregate Demand 35 The Short-Run Trade-Off between Inflation and X X Unemployment 36 Six Debates over Macroeconomic Policy X X Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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. xii Preface: To the Instructor Supplements Cengage offers various supplements for instructors and students who use this book. These resources make teaching the principles of economics easy for the instructor and learning them easy for the student. David R. Hakes of the University of Northern Iowa, a dedicated teacher and economist, supervised the ­development of the supplements for this edition. A complete list of available supplements follows this Preface. Modules I have written four modules, or mini-chapters, with optional material that instruc- tors can include in their courses. For instructors using the digital version of the book, these modules can be added with a few mouse clicks. As of now, there are modules on The Economics of Healthcare, The European Union, The Keynesian Cross, and How Economists Use Data. I expect to add more modules to the library available to instructors in the years to come. Translations and Adaptations I am delighted that versions of this book are (or will soon be) available in many of the world’s languages. Currently scheduled translations include Azeri, Chinese (in both standard and simplified characters), Croatian, Czech, Dutch, French, Georgian, German, Greek, Indonesian, Italian, Japanese, Korean, Macedonian, Montenegrin, Portuguese, Romanian, Russian, Serbian, and Spanish. In addition, adaptations of the book for Australian, Canadian, European, and New Zealand students are also available. Instructors who would like more information about these books should contact Cengage. Acknowledgments In 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 many editions 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 has been David Hakes (University of Northern Iowa). David has served as a reliable sounding board for ideas and a hardworking partner with me in putting together the superb package of supplements. I am also grateful to Stephanie Thomas (Cornell University), who helped in the planning process for this new edition. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 Instructor xiii The following reviewers of the eighth edition provided suggestions for refining the content, organization, and approach in the ninth. Anil Aba, University of Utah Miren Ivankovic, Anderson Scott Niederjohn, Lakeland Mark Abajian, San Diego Mesa University University College Justin Jarvis, Truman State Carla Nietfeld, Francis Marion Dorian Abreu, Hunter College University University Goncalo Alves Pina, Santa Clara Aaron Johnson, Albany State John Nyhoff, Oakton Community University University College Bob Barnes, Loyola University Bonnie Johnson, Wayne State Andrew Paizis, New York Chicago University University James Bathgate, Western Nevada Rutherford Johnson, University of Jason Patalinghug, College Minnesota Crookston Southern Connecticut State Nicole Bissessar, Southern New Venoo Kakar, San Francisco State University Hampshire University University Jodi Pelkowski, Wichita State Joseph Brignone, Brigham Young Jennifer Klein, University of University University Colorado Boulder Sougata Poddar, Chapman William Byrd, Troy University Audrey Kline, University of University Samantha Cakir, Macalester College Louisville Lana Podolak, Community College John Carter, Modesto Junior College Fred Kolb, University of of Beaver County Avik Chakrabarti, University of Wisconsin–Eau Claire Gyan Pradhan, Eastern Kentucky Wisconsin–Milwaukee Janet Koscianski, Shippensburg University Yong Chao, University of Louisville University Elena Prado, San Diego State David Chaplin, Northwest Mikhail Kouliavtsev, University Nazarene University Stephen F. Austin State John Reardon, Hamline Mitch Charkiewicz, Central University University Connecticut State University Nakul Kumar, Bloomsburg Ty Robbins, Manchester LaPorchia Collins, Tulane University University University Jim Leggette, Belhaven University Jason Rudbeck, University of Andrew Crawley, University of David Lewis, Oregon State Georgia Maine University Anthony Scardino, Felician Maria DaCosta, University of Hank Lewis, Houston Community University Wisconsin–Eau Claire College Helen Schneider, University of Dennis Debrecht, Carroll Yan Li, University of Texas at Austin University Wisconsin–Eau Claire Alex Shiu, McLennan Community Amrita Dhar, University of Mary Zhen Li, Albion College College Washington Dan Marburger, Arizona State Harmeet Singh, Texas A&M Lynne Elkes, Loyola University University University–Kingsville Maryland Jim McGibany, Marquette Catherine Skura, Sandhills Elena Ermolenko, Oakton University Community College Community College Steven McMullen, Hope College Gordon Smith, Anderson Sarah Estelle, Hope College Meghan Mihal, St. Thomas University John Flanders, Central Methodist Aquinas College Nathan Smith, University of University Martin Milkman, Murray State Hartford Gary Gray, Umpqua Community University Mario Solis-Garcia, Macalester College Soonhong Min, University at College Jessica Hennessey, Furman Albany Arjun Sondhi, Wayne State University Phillip Mixon, Troy University University Alexander Hill, Arizona State Chau Nguyen, Mesa Community Derek Stimel, University of University College California, Davis Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 Preface: To the Instructor Paul Stock, University of Mary Phillip Tussing, Houston Jim Wollscheid, University of Hardin Baylor Community College Arkansas–Fort Smith Yang Su, University of William Walsh, University of Doyoun Won, University Washington Alabama of Utah Anna Terzyan, Loyola Marymount Beth Wheaton, Southern Methodist Kelvin Wong, Arizona State University University University Elsy Thomas, Bowling Green State Oxana Wieland, University of Fan Yang, University of University Minnesota Crookston Washington Kathryn Thwaites, Sandhills Christopher Wimer, Heidelberg Ying Yang, University of Rhode Community College University Island The team of editors who worked on this book improved it tremendously. Jane Tufts, developmental editor, provided truly spectacular editing—as she always does. Jason Fremder, economics Product Director, and Christopher Rader, Product Manager, did a splendid job of overseeing the many people involved in such a large project. Sarah Keeling, Senior Learning Designer, was crucial in assembling an extensive and thoughtful group of reviewers to give me feedback on the previous edition and shape up the new edition. Anita Verma, Senior Content Manager, was crucial in putting together an excellent team to revise the supplements and with Beth Asselin and Phil Scott, project managers at SPi Global, had the patience and ­dedication necessary to turn my manuscript into this book. Bethany Bourgeois, Senior Designer, gave this book its clean, friendly look. Irwin Zucker, copyeditor, refined my prose, and Val Colligo, indexer, prepared a careful and thorough index. John Carey, Executive Marketing Manager, worked long hours getting the word out to potential users of this book. The rest of the Cengage team has, as always, been consistently professional, enthusiastic, and dedicated. We have a top team of veterans who have worked across multiple editions ­producing the supplements that accompany this book. Working with those at Cengage, the following have been relentless in making sure that the suite of ­ancillary materials is unmatched in both quantity and quality. No other text comes close. PowerPoint: Andreea Chiritescu (Eastern Illinois University) Test Bank: Shannon Aucoin, Eugenia Belova, Ethan Crist, Kasie Jean, and Brian Rodriguez (in-house Subject Matter Experts) Instructor manual: David Hakes (University of Northern Iowa) I am grateful also to Rohan Shah and Rohit Goyal, two star undergraduates at Harvard and Yale, respectively, 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 should 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). N. Gregory Mankiw May 2019 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 V F  irm Behavior and the Organization of 1 Ten Principles of Economics 1 Industry 243 2 Thinking Like an Economist 17 13 The Costs of Production 243 3 Interdependence and the Gains from Trade 45 14 Firms in Competitive Markets 263 15 Monopoly 287 16 Monopolistic Competition 317 PART II How Markets Work 61 17 Oligopoly 335 4 The Market Forces of Supply and Demand 61 5 Elasticity and Its Application 87 6 Supply, Demand, and Government Policies 109 PART VI The Economics of Labor Markets 357 18 The Markets for the Factors of Production 357 PART III Markets and Welfare 131 19 Earnings and Discrimination 379 7 Consumers, Producers, and the Efficiency of 20 Income Inequality and Poverty 397 Markets 131 8 Application: The Costs of Taxation 151 9 Application: International Trade 167 PART VII Topics for Further Study 419 21 The Theory of Consumer Choice 419 22 Frontiers of Microeconomics 447 PART IV The Economics of the Public Sector 187 10 Externalities 187 11 Public Goods and Common Resources 209 12 The Design of the Tax System 225 xv Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 Instructor v 2-1d Our First Model: The Circular-Flow Diagram 20 2-1e Our Second Model: The Production Possibilities Preface: To the Student xxiii Frontier 21 2-1f Microeconomics and Macroeconomics 24 2-2 The Economist as Policy Adviser 25 PART I Introduction 1 2-2a Positive versus Normative Analysis 25 IN THE NEWS: Why Tech Companies Hire Economists 26 CHAPTER 1 2-2b Economists in Washington 27 2-2c Why Economists’ Advice Is Not Always Followed 28 Ten Principles of Economics 1 2-3 Why Economists Disagree 29 1-1 How People Make Decisions 2 2-3a Differences in Scientific Judgments 29 1-1a Principle 1: People Face Trade-Offs 2 2-3b Differences in Values 30 1-1b Principle 2: The Cost of Something Is What You Give 2-3c Perception versus Reality 30 Up to Get It 3 ASK THE EXPERTS: Ticket Resale 32 1-1c Principle 3: Rational People Think at the Margin 4 2-4 Let’s Get Going 32 1-1d Principle 4: People Respond to Incentives 5 Chapter in a Nutshell 33 1-2 How People Interact 6 Key Concepts 33 1-2a Principle 5: Trade Can Make Everyone Better Off 7 Questions for Review 33 1-2b Principle 6: Markets Are Usually a Good Way to Problems and Applications 34 Organize Economic Activity 7 Quick Quiz Answers 34 FYI: Adam Smith and the Invisible Hand 8 APPENDIX Graphing: A Brief Review 35 CASE STUDY: Adam Smith Would Have Loved Uber 9 Graphs of a Single Variable 35 1-2c Principle 7: Governments Can Sometimes Improve Graphs of Two Variables: The Coordinate System 36 Market Outcomes 9 Curves in the Coordinate System 37 1-3 How the Economy as a Whole Works 11 Slope 39 1-3a Principle 8: A Country’s Standard of Living Depends Cause and Effect 41 on Its Ability to Produce Goods and Services 11 1-3b Principle 9: Prices Rise When the Government Prints Too Much Money 11 CHAPTER 3 1-3c Principle 10: Society Faces a Short-Run Trade-Off between Inflation and Unemployment 12 Interdependence and the Gains 1-4 Conclusion 13 from Trade 45 Chapter in a Nutshell 14 3-1 A Parable for the Modern Economy 46 Key Concepts 14 3-1a Production Possibilities 46 Questions for Review 14 3-1b Specialization and Trade 48 Problems and Applications 14 3-2 Comparative Advantage: The Driving Force of Quick Quiz Answers 15 Specialization 50 3-2a Absolute Advantage 50 CHAPTER 2 3-2b Opportunity Cost and Comparative Advantage 50 3-2c Comparative Advantage and Trade 52 Thinking Like an Economist 17 3-2d The Price of the Trade 52 FYI: The Legacy of Adam Smith and David Ricardo 53 2-1 The Economist as Scientist 18 2-1a The Scientific Method: Observation, Theory, and 3-3 Applications of Comparative Advantage 54 More Observation 18 3-3a Should LeBron James Mow His Own Lawn? 54 2-1b The Role of Assumptions 19 3-3b Should the United States Trade with Other 2-1c Economic Models 19 Countries? 54 xvi Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2021 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 xvii 3-4 Conclusion 55 FYI: A Few Elasticities from the Real World 91 ASK THE EXPERTS: Trade between China and the 5-1e Total Revenue and the Price Elasticity of Demand 93 United States 55 5-1f Elasticity and Total Revenue along a Linear IN THE NEWS: Economics within a Marriage 56 Demand Curve 94 Chapter in a Nutshell 56 5-1g Other Demand Elasticities 96 Key Concepts 57 5-2 The Elasticity of Supply 97 Questions for Review 57 5-2a The Price Elasticity of Supply and Problems and Applications 58 Its Determinants 97 Quick Quiz Answers 59 5-2b Computing the Price Elasticity of Supply 98 5-2c The Variety of Supply Curves 98 5-3 Three Applications of Supply, Demand, and Elasticity 100 PART II How Markets Work 61 5-3a Can Good News for Farming Be Bad News for Farmers? 101 CHAPTER 4 5-3b Why Did OPEC Fail to Keep the Price of Oil High? 103 The Market Forces of Supply 5-3c Does Drug Interdiction Increase or Decrease Drug-Related Crime? 104 and Demand 61 5-4 Conclusion 106 4-1 Markets and Competition 62 Chapter in a Nutshell 106 4-1a What Is a Market? 62 Key Concepts 107 4-1b What Is Competition? 62 Questions for Review 107 4-2 Demand 63 Problems and Applications 107 4-2a The Demand Curve: The Relationship between Quick Quiz Answers 108 Price and Quantity Demanded 63 4-2b Market Demand versus Individual Demand 64 4-2c Shifts in the Demand Curve 65 CHAPTER 6 CASE STUDY: Two Ways to Reduce Smoking 68 4-3 Supply 69 Supply, Demand, and Government 4-3a The Supply Curve: The Relationship between Policies 109 Price and Quantity Supplied 69 6-1 Controls on Prices 110 4-3b Market Supply versus Individual Supply 70 6-1a How Price Ceilings Affect Market Outcomes 110 4-3c Shifts in the Supply Curve 71 CASE STUDY: Lines at the Gas Pump 112 4-4 Supply and Demand Together 73 CASE STUDY: Rent Control in the Short Run and 4-4a Equilibrium 73 the Long Run 113 4-4b Three Steps to Analyzing Changes in Equilibrium 75 ASK THE EXPERTS: Rent Control 114 IN THE NEWS: Price Increases after Disasters 80 6-1b How Price Floors Affect Market Outcomes 114