Principles of Economics, 8th Edition PDF

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Co Copy Cop Co op opy py yri righ g t 20 018 8 Ceng enga e ng ga ag agge e Learn ea e ear aarn rrn nin ing. ing ing. ng ng. All g. Alllll R A Rig Ri iig ghts Re Re Rese Res es ese s rv se served rrved ved v d. M Ma ay no not b be e cop cop opied ed d, sc d, sc sca ca annned nn n ned ne e , or dup upllica up ica ic catte ted, ted ed ed, ed d,, in in w whol hol oeo ol orr in nppar part pa art arrt. WC a CNN 02-20 2 0-20 203 20 3  PRINCIPLES OF ECONOMICS Eighth Edition N. GREGORY MANKIW HARVAR D U N IVER SITY Australia Brazil Mexico Singapore United Kingdom United States Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated d, in whole or in part. WC CN 02-200-203  Principles of Economics, 8e © 2018, 2015 Cengage Learning N. Gregory Mankiw ALL RIGHTS RESERVED. 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Executive Marketing Manager: John Carey Library of Congress Control Number: 2016947882 Senior Content Project Manager: Colleen A. Farmer ISBN 13: 978-1-305-58512-6 Senior Digital Production Project Manager: ISBN 10: 1-305-58512-7 Derek Drifmeyer Manufacturing Planner: Kevin Kluck Cengage Learning Marketing Coordinator: Casey Binder 20 Channel Center Street Boston, MA 02210 Senior Learning Design Author: Eugenia Belova USA Learning Design Author: Brian A. Rodriguez Production Service: Lumina Datamatics Inc., Cengage Learning is a leading provider of customized learning solutions with Intellectual Property employees residing in nearly 40 different countries and sales in more than Analyst: Jennifer Bowes 125 countries around the world. Find your local representative at Project Manager: Sarah Shainwald www.cengage.com. Senior Art Director: Michelle Kunkler Internal and Cover Designer: Harasymczuk Cengage Learning products are represented in Canada by Nelson Education, Ltd. Design Cover Image: Library of Congress Prints and To learn more about Cengage Learning Solutions, visit www.cengage.com Photographs Division Washington, DC 20540 USA [LC-USZC4-4637]; © AIMSTOCK/Getty Images; © Buena Vista Purchase any of our products at your local college store or at our preferred Images/Getty Images online store www.cengagebrain.com Chapter Opener Photo: © samsonovs/Getty Images Custom Internal Illustrations: Bruce Morser Printed in the United States of America Print Number: 01 Print Year: 2016 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203  To Catherine, Nicholas, and Peter, my other contributions to the next generation Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203  About the Author N. Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard University. As a student, he studied economics at Princeton University and MIT. As a teacher, he has taught macroeconomics, microeco- nomics, 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 American Economic Review, Journal of Political Econ- omy, and Quarterly Journal of Economics, and in more popular forums, such as the New York Times and The Wall Street Journal. He is also author of the best-selling Jordi Cabré intermediate-level textbook Macroeconomics (Worth Publishers). In addition to his teaching, research, and writing, Professor Mankiw has been a research asso- ciate of the National Bureau of Economic Research, an adviser to the Congressional Budget Office and the Federal Reserve Banks of Boston and New York, and a member of the ETS test development committee for the Advanced Placement exam in economics. From 2003 to 2005, he served as chairman of the President’s Council of Economic Advisers. Professor Mankiw lives in Wellesley, Massachusetts, with his wife, Deborah, three children, Catherine, Nicholas, and Peter, and their border terrier, Tobin. iv Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203  Brief Brief Contents Contents PART I Introduction 1 PART VII Topics for Further Study 423 1 Ten Principles of Economics 3 21 The Theory of Consumer Choice 425 2 Thinking Like an Economist 19 22 Frontiers of Microeconomics 451 3 Interdependence and the Gains from Trade 47 PART VIII The Data of Macroeconomics 471 PART II How Markets Work 63 23 Measuring a Nation’s Income 473 4 The Market Forces of Supply and Demand 65 24 Measuring the Cost of Living 495 5 Elasticity and Its Application 89 6 Supply, Demand, and Government Policies 111 PART IX The Real Economy in the Long Run 513 25 Production and Growth 515 PART III Markets and Welfare 131 26 Saving, Investment, and the Financial System 541 7 Consumers, Producers, and the Efficiency 27 The Basic Tools of Finance 563 of Markets 133 28 Unemployment 577 8 Application: The Costs of Taxation 153 9 Application: International Trade 167 PART X Money and Prices in the Long Run 601 29 The Monetary System 603 PART IV The Economics of the Public Sector 187 30 Money Growth and Inflation 627 10 Externalities 189 11 Public Goods and Common Resources 211 12 The Design of the Tax System 227 PART XI The Macroeconomics of Open Economies 651 31 Open-Economy Macroeconomics: Basic Concepts 653 PART V Firm Behavior and the Organization 32 A Macroeconomic Theory of the of Industry 245 Open Economy 677 13 The Costs of Production 247 14 Firms in Competitive Markets 267 15 Monopoly 289 PART XII Short-Run Economic Fluctuations 699 16 Monopolistic Competition 319 33 Aggregate Demand and Aggregate Supply 701 17 Oligopoly 337 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand 737 35 The Short-Run Trade-off between Inflation PART VI The Economics of Labor Markets 359 and Unemployment 763 18 The Markets for the Factors of Production 361 19 Earnings and Discrimination 383 20 Income Inequality and Poverty 401 PART XIII Final Thoughts 787 36 Six Debates over Macroeconomic Policy 789 v Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Preface: To the Student “ conomics is a study of mankind in the ordinary business of life.” So wrote E Alfred Marshall, the great 19th-century economist, in his textbook, Principles of Economics. We have learned much about the economy since Marshall’s time, but this definition of economics is as true today as it was in 1890, when the first edition of his text was published. Why should you, as a student in the 21st century, embark on the study of economics? There are three reasons. The first reason to study economics is that it will help you understand the world in which you live. There are many questions about the economy that might spark your curiosity. Why are apartments so hard to find in New York City? Why do airlines charge less for a round-trip ticket if the traveler stays over a Saturday night? Why is Robert Downey, Jr., paid so much to star in movies? Why are living standards so meager in many African countries? Why do some countries have high rates of inflation while others have stable prices? Why are jobs easy to find in some years and hard to find in others? These are just a few of the questions that a course in economics will help you answer. The second reason to study economics is that it will make you a more astute participant in the economy. As you go about your life, you make many economic decisions. While you are a student, you decide how many years to stay in school. Once you take a job, you decide how much of your income to spend, how much to save, and how to invest your savings. Someday you may find yourself running a small business or a large corporation, and you will decide what prices to charge for your products. The insights developed in the coming chapters will give you a new perspective on how best to make these decisions. Studying economics will not by itself make you rich, but it will give you some tools that may help in that endeavor. The third reason to study economics is that it will give you a better understand- ing of both the potential and the limits of economic policy. Economic questions are always on the minds of policymakers in mayors’ offices, governors’ mansions, and the White House. What are the burdens associated with alternative forms of taxation? What are the effects of free trade with other countries? What is the best way to protect the environment? How does a government budget deficit affect the economy? As a voter, you help choose the policies that guide the allocation of society’s resources. An understanding of economics will help you carry out that responsibility. And who knows: Perhaps someday you will end up as one of those policymakers yourself. Thus, the principles of economics can be applied in many of life’s situations. Whether the future finds you following the news, running a business, or sitting in the Oval Office, you will be glad that you studied economics. N. Gregory Mankiw December 2016 vi Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203  Video A pplication V ideo application features the book’s author introducing chapter content. Author Greg Mankiw introduces the important themes in every chapter by delivering a highly relevant deposition on the real-world context to the economic principles that will be appearing in the upcoming chapter. These videos are intended to motivate students to better understand how economics relates to their day-to-day lives and in the world around them. C onceptClip Videos C onceptClip videos help students master economics terms. These high-energy videos, embedded throughout the interactive book, address the known student challenge of understanding economics terminology when initially introduced to the subject matter. Developed by Professor Mike Brandl of The Ohio State University, these concept-based animations provide students with memorable context to the key terminology required for your introductory economics course. “I have always wanted supplemental material such as this to help me understand certain concepts in economics.” Co C Copy Cop op o py p pyri yri riig righ igh gh ht 20 018 18 Cenga g ge e Lea earn arn ning. Al All R All Rig iig ghts htts s Rese Res rved. rved ed. Ma ay not no not b be e cop cop pied, ied ied ed sc sca canned c nne ned, o orr du du dup uplica iica ca ated, ted d,, in in wh whol who hol ole ole or in in pa part. WCN 02-20 par part 2-20 -20 20 200 00-20 0-20 203 G raph Builder G raph Builder allows students to move step-by-step through complex graphical figures. Designed specifically for introductory economics students, Graph Builder interactive exercises help students first understand complex graphs by deconstructing a graph into finite steps that build upon one another, then practice graphing by drawing out a similar scenario from scratch. This drawing method supports the kinesthetic learning approach valued by instructors, like you— all within the context of the interactive book! “I have not used anything like this before.” “The Graph Builder is amazing! This would help me a lot and the concept is great. I think all students should have access to this feature because it would better their knowledge of how to make graphs.” Cop C Copy opyri opyrigh riigh righht 2018 20 2 18 C Cenga engage eng en enga e Learn earn ea earrning ing. ng. ng g. Al All Allll Rig Rig Ri ght hts hts Re ts Re Rese eserv rved ved ed d. M Ma ay no not ot b be e cop cop pied, i d, sc ied s anned sca nn nne n , orr dup du du upplic lica lica ic cated, ted, in te n whol holle eoor in n part part arrrt. WC WCN CN 02- 02 2-2 2- 2-20 -2000 0-2 0-2 0-20 -20 203 20 203 Adaptive Test Prep Prepares Your Students for High-Stakes Testing A re your students constantly asking you for more practice questions as exam time comes closer? Do your students complain because the test bank-type questions in the exam do not have the same look and feel as their homework assignments? Adaptive Test Prep is a powerful tool that uses 4,000 new test bank-like questions to give students almost unlimited practice for each chapter and section. They can take as many tests as they like that are immediately graded for them. Students see how they did and the program gives them immediate remediation in the form of very robust feedback, a link right back into the textt where the question topic resides, and for about 2,000 questions, they get a brief Quick Coach video o with an instructor walking them through the exactt question they missed! Students can generate reports that show them which chapters and sections they need the most help on so they can tailor future practice tests just on the areas they are struggling with. Cop C Co Copy opyrigh opy op o py p yrri rig righ iigh gh g ht 2018 20 20118 8 Cen enga eng ennga ga age e Le ear earn ea aarn rnin rn iing. ing ng. ng ng.. A g All Al llll Rig Riig Rights ght hts hts Rese ts Re Res Re ese esse served rrv ved ve vedd. Ma May n noot be ot be co co cop opp pied ied, ied iie ed, s ed sca sc c ca annn nne nned n , orr dup du du upplic lica lica ic cated, ted, in te n whol holle eoor in n part part arrrt. WC WCN CN 02- 02 2-2 2- 2-20 -2000 0-2 0-2 0-20 -20 203 20 203 Acknowledgments I n writing this book, I benefited from the input of many talented people. Indeed, the list of people who have contributed to this project is so long, and their contributions so valuable, that it seems an injustice that only a single name appears on the cover. Let me begin with my colleagues in the economics profession. The many edi- tions of this text and its supplemental materials have benefited enormously from their input. In reviews and surveys, they have offered suggestions, identified challenges, and shared ideas from their own classroom experience. I am indebted to them for the perspectives they have brought to the text. Unfortunately, the list has become too long to thank those who contributed to previous editions, even though students reading the current edition are still benefiting from their insights. Most important in this process has been David Hakes (University of Northern Iowa). David, a dedicated teacher, has served as a reliable sounding board for ideas and is a hardworking partner with me in putting together the superb pack- age of supplements. In addition, a special thanks to Ron Cronovich, an insightful instructor and trusted advisor, for his many years of consultation. A special thanks to the team of teaching economists who worked on the test bank and ancillaries for this edition, many of whom have been working on the Mankiw ancillaries from the beginning. To Ken McCormick for vetting the entire test bank (with 17,000 questions) for correctness, and to Ken Brown, Sarah Cos- grove, Harold Elder, Michael Enz, Lisa Jepsen, Bryce Kanago, Daniel Marburger, Amanda Nguyen, Alicia Rosburg, Forrest Spence, and Kelvin Wong for authoring new questions and updating existing ones. The following reviewers of the seventh edition provided suggestions for refining the content, organization, and approach in the eighth. Mark Abajian, San Diego Mesa William Aldridge, University of Ali Ataiifar, Delaware County College Alabama–Tuscaloosa Community College Rahi Abouk, University of Wisconsin Donald L. Alexander, Western Shannon Aucoin, University of Milwaukee Michigan University Louisiana Lafayette Mathew Abraham, Indiana University Hassan Aly, Ohio State University Lisa Augustyniak, Lake Michigan – Purdue University Indianapolis Michelle Amaral, University of the College Nathanael Adams, Cardinal Stritch Pacific Wesley Austin, University of Louisiana University Shahina Amin, University of Northern Lafayette Seemi Ahmad, Dutchess Community Iowa Dennis Avola, Framingham State College Catalina Amuedo-Dorantes, University May Akabogu-Collins, Mira Costa San Diego State University Regena M. Aye, Allen Community College–Oceanside Vivette Ancona, Hunter College Ercument Aksoy, Los Angeles Valley College–CUNY Sang Hoo Bae, Clark University College Aba Anil, University of Utah Karen Baehler, Hutchinson Basil Al-Hashimi, Mesa Community Diane Anstine, North Central College Community College College Carolyn Arcand, University of Sahar Bahmani, University of Rashid Al-Hmoud, Texas Tech Massachusetts Boston Wisconsin-Parkside University Becca Arnold, San Diego Community Mohsen Bahmani-Oskooee, College University of Wisconsin Milwaukee x  ACKNOWLEDGMENTS xi Richard Baker, Copiah-Lincoln Stacey Brook, University of Iowa Dmitriy Chulkov, Indiana University Community College Keith Brouhle, Grinnell College Kokomo Stephen Baker, Capital University Byron Brown, Michigan State University Lawrence Cima, John Carroll University Tannista Banerjee, Auburn University Crystal Brown, Anderson University Cindy Clement, University of Bob Barnes, DePaul University Kris Bruckerhoff, University of Maryland Hamid Bastin, Shippensburg University Minnesota-Crookston Matthew Clements, St. Edward’s James Bathgate, Western Nevada College Christopher Brunt, Lake Superior State University Leon Battista, Albertus Magnus College University Sondra Collins, University of Southern Gerald Baumgardner, Susquehanna Laura Bucila, Texas Christian University Mississippi University Donna Bueckman, University of Tina Collins, San Joaquin Valley College Christoph Bauner, University of Tennessee–Knoxville Scott Comparato, Southern Illinois Massachusetts–Amherst Don Bumpass, Sam Houston State University Elizabeth Bayley, University of Delaware University Kathleen Conway, Carnegie Mellon Ergin Bayrak, University of Southern Joe Bunting, St. Andrews University University California Benjamin Burden, Temple College Stephen Cotten, University of Houston Nihal Bayraktar, Pennsylvania State Mariya Burdina, University of Central Clear Lake University Oklahoma Jim Cox, Georgia Perimeter College Mike Belleman, St. Clair County Rob Burrus, University of North Michael Craig, University of Community College Carolina–Wilmington Tennessee–Knoxville Audrey Benavidez, Del Mar College James Butkiewicz, University of Delaware Matt Critcher, University of Arkansas Cynthia Benelli, University of California William Byrd, Troy University Community College at Batesville Santa Barbara Anna Cai, University of George Crowley, Troy University, Troy Charles Bennett, Gannon University Alabama–Tuscaloosa David Cullipher, Arkansas State Bettina Berch, Borough of Manhattan Samantha Cakir, Macalester College University-Mountain Home Community College Michael Carew, Baruch College Dusan Curcic, University of Virginia Stacey Bertke, Owensboro Community & William Carner, Westminster College Norman Cure, Macomb Community Technical College Craig Carpenter, Albion College College Tibor Besedes, Georgia Institute of John Carter, California State Maria DaCosta, University of Technology University-Stanislaus Wisconsin–EauClaire Abhijeet Bhattacharya, Illinois Valley Ginette Carvalho, Fordham University Bruce Dalgaard, St. Olaf College Community College Onur Celik, Quinnipiac University Anusua Datta, Philadelphia University Ronald Bishop, Lake Michigan College Avik Chakrabarti, University of Earl Davis, Nicholls State University Thomas Bishop, California State Channel Wisconsin–Milwaukee Amanda Dawsey, University of Islands Kalyan Chakraborty, Emporia State Montana Nicole Bissessar, Kent State University Prabal De, City College of New York University-Ashtabula Suparna Chakraborty, Baruch Rooj Debasis, Kishwaukee College Janet Blackburn, San Jacinto South College–CUNY Dennis Debrecht, Carroll University College Dustin Chambers, Salisbury University William DeFrance, University of Jeanne Boeh, Augsburg College Silvana Chambers, Salisbury University Michigan-Flint Natalia Boliari, Manhattan College Krishnamurti Chandrasekar, New York Theresa J. 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All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xii ACKNOWLEDGMENTS Caf Dowlah, Queensborough Community Edgar Ghossoub, University of Texas at Eric Jacobson, University of Delaware College–CUNY San Antonio Bolormaa Jamiyansuren, Augsburg Tanya Downing, Cuesta College Alex Gialanella, Manhattanville College College Michael J. 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WCN 02-200-203  ACKNOWLEDGMENTS xiii Yuexing Lan, Auburn Montgomery Charles Meyrick, Housatonic Germain Pichop, Oklahoma City Daniel Lawson, Oakland Community Community College Community College College Heather Micelli, Mira Costa College Lodovico Pizzati, University of Southern Elena Lazzari, Marygrove College Laura Middlesworth, University of California Quan Le, Seattle University Wisconsin–Eau Claire Florenz Plassmann, Binghamton Chun Lee, Loyola Marymount Meghan Mihal, St. Thomas Aquinas University University College Lana Podolak, Community College of Daniel Lee, Shippensburg University Eric Miller, Oakton Community College Beaver County Jihoon Lee, Northeastern University Phillip Mixon, Troy University–Troy Gyan Pradhan, Eastern Kentucky Jim Lee, Texas A&M–Corpus Christi Evan Moore, Auburn University Junghoon Lee, Emory University University–Montgomery Curtis Price, University of Southern Ryan Lee, Indiana University Francis Mummery, California State Indiana Sang Lee, Southeastern Louisiana University–Fullerton Silvia Prina, Case Western Reserve University John Mundy, St. Johns River State University James Leggette, Belhaven University University Thomas Prusa, Rutgers University Bozena Leven, The College of New Jersey Charles Murray, The College of Saint Conrad Puozaa, University of Qing Li, College of the Mainland Rose Mississippi Zhen Li, Albion College James Murray, University of John Stuart Rabon, Missouri State Carlos Liard-Muriente, Central Wisconsin–LaCrosse University Connecticut State University Christopher Mushrush, Illinois State Mark Reavis, Arkansas Tech University Larry Lichtenstein, Canisius College University Robert Rebelein, Vassar College Jenny Liu, Portland State University John Nader, Davenport University Agne Reizgeviciute, California State Jialu Liu, Allegheny College Max Grunbaum Nagiel, Daytona State University-Chico Sam Liu, West Valley College College Matt Rendleman, Southern Illinois Xuepeng Liu, Kennesaw State University Mihai Nica, University of Central University Jie Ma, Indiana University Oklahoma Judith Ricks, Onondaga Community Michael Machiorlatti, Oklahoma City Scott Niederjohn, Lakeland College College Community College Mark Nixon, Fordham University Chaurey Ritam, Binghamton University Bruce Madariaga, Montgomery College George Norman, Tufts University Jared Roberts, North Carolina State and Northwestern University David O’Hara, Metropolitan State University Brinda Mahalingam, University of University Josh Robinson, University of Alabama-Huntsville Brian O’Roark, Robert Morris University Alabama-Birmingham C. 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All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xiv ACKNOWLEDGMENTS Michael Schultz, Menlo College Dean Stansel, Florida Gulf Coast Mark Tuttle, Sam Houston State Jessica Schuring, Central College University University Danielle Schwarzmann, Towson Sylwia Starnawska, D’Youville College Jennifer VanGilder, Ursinus College University Keva Steadman, Augustana College Ross vanWassenhove, University of Gerald Scott, Florida Atlantic University Rebecca Stein, University of Houston Elan Segarra, San Francisco State Pennsylvania Ben Vaughan, Trinity University University Dale Steinreich, Drury University Roumen Vesselinov, Queens College, Bhaswati Sengupta, Iona College Paul Stock, University of Mary City University of New York Reshmi Sengupta, Northern Illinois Hardin-Baylor Rubina Vohra, St. Peter’s College University Michael Stroup, Stephen F. 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All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203  ACKNOWLEDGMENTS xv The team of editors who worked on this book improved it tremendously. Jane Tufts, developmental editor, provided truly spectacular editing—as she always does. Michael Parthenakis, senior product manager, did a splendid job of over- seeing the many people involved in such a large project. Anita Verma, senior con- tent developer, was crucial in assembling an extensive and thoughtful group of reviewers to give me feedback on the previous edition, while putting together an excellent team to revise the supplements. Colleen Farmer, senior content project manager, had the patience and dedication necessary to turn my manuscript into this book. Kasie Jean, digital content designer and a trained economist, designed and implemented all of the valuable student resources in MindTap. Michelle Kunkler, senior art director, gave this book its clean, friendly look. Bruce Morser, the illustrator, helped make the book more visually appealing and the economics in it less abstract. Pamela Rockwell, copyeditor, refined my prose, and Lumina Datamatic’s indexer, prepared a careful and thorough index. John Carey, exec- utive 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. I am grateful also to Denis Fedin and Nina Vendhan, two star Harvard undergraduates, who helped me refine the manuscript and check the page proofs for this edition. As always, I must thank my “in-house” editor Deborah Mankiw. As the first reader of most things I write, she continued to offer just the right mix of criticism and encouragement. Finally, I would like to mention my three children Catherine, Nicholas, and Peter. Their contribution to this book was putting up with a father spending too many hours in his study. The four of us have much in common—not least of which is our love of ice cream (which becomes apparent in Chapter 4). N. Gregory Mankiw December 2016 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Contents Preface: To the Student vi 1-3c Principle 10: Society Faces a Short-Run Trade-off Acknowledgments x between Inflation and Unemployment 14 1-4 Conclusion 15 Summary 16 Key Concepts 16 Questions for Review 16 Problems and Applications 17 CHAPTER 2 Thinking Like an Economist 19 2-1 The Economist as Scientist 20 2-1a The Scientific Method: Observation, Theory, and More Observation 20 2-1b The Role of Assumptions 21 2-1c Economic Models 22 2-1d Our First Model: The Circular-Flow Diagram 22 2-1e Our Second Model: The Production Possibilities Frontier 24 2-1f Microeconomics and Macroeconomics 26 PART I Introduction 1 2-2 The Economist as Policy Adviser 27 2-2a Positive versus Normative Analysis 27 2-2b Economists in Washington 28 CHAPTER 1 2-2c Why Economists’ Advice Is Not Always Followed 29 Ten Principles of Economics 3 2-3 Why Economists Disagree 30 2-3a Differences in Scientific Judgments 30 1-1 How People Make Decisions 4 2-3b Differences in Values 30 1-1a Principle 1: People Face Trade-offs 4 2-3c Perception versus Reality 31 1-1b Principle 2: The Cost of Something ASK THE EXPERTS: Ticket Resale 32 Is What You Give Up to Get It 5 1-1c Principle 3: Rational People Think at the Margin 6 2-4 Let’s Get Going 32 1-1d Principle 4: People Respond to Incentives 7 IN THE NEWS: Why You Should Study Economics 33 Summary 34 1-2 How People Interact 8 Key Concepts 34 1-2a Principle 5: Trade Can Make Everyone Better Off 8 Questions for Review 35 1-2b Principle 6: Markets Are Usually a Good Way to Problems and Applications 35 Organize Economic Activity 9 Appendix Graphing: A Brief Review 37 FYI: Adam Smith and the Invisible Hand 10 CASE STUDY: Adam Smith Would Have Loved Uber 11 1-2c Principle 7: Governments Can Sometimes CHAPTER 3 Improve Market Outcomes 11 1-3 How the Economy as a Whole Works 13 Interdependence and the Gains 1-3a Principle 8: A Country’s Standard of Living Depends from Trade 47 on Its Ability to Produce Goods and Services 13 3-1 A Parable for the Modern Economy 48 1-3b Principle 9: Prices Rise When the Government 3-1a Production Possibilities 49 Prints Too Much Money 13 3-1b Specialization and Trade 50 xvi Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203  CONTENTS xvii 3-2 Comparative Advantage: The Driving Force 4-3 Supply 73 of Specialization 52 4-3a The Supply Curve: The Relationship between Price 3-2a Absolute Advantage 52 and Quantity Supplied 73 3-2b Opportunity Cost and Comparative Advantage 52 4-3b Market Supply versus Individual Supply 74 3-2c Comparative Advantage and Trade 53 4-3c Shifts in the Supply Curve 75 3-2d The Price of the Trade 54 4-4 Supply and Demand Together 76 FYI: The Legacy of Adam Smith and David Ricardo 55 4-4a Equilibrium 76 3-3 Applications of Comparative Advantage 55 4-4b Three Steps to Analyzing Changes in Equilibrium 78 3-3a Should Serena Williams Mow Her Own Lawn? 55 4-5 Conclusion: How Prices Allocate Resources 83 IN THE NEWS: Economics within a Marriage 56 ASK THE EXPERTS: Price Gouging 83 3-3b Should the United States Trade with Other Countries? 56 IN THE NEWS: Price Increases after Disasters 84 ASK THE EXPERTS: Trade between China and Summary 86 the United States 58 Key Concepts 86 3-4 Conclusion 58 Questions for Review 87 Summary 59 Problems and Applications 87 Key Concepts 59 Questions for Review 60 Problems and Applications 60 CHAPTER 5 Elasticity and Its Application 89 5-1 The Elasticity of Demand 90 5-1a The Price Elasticity of Demand and Its Determinants 90 5-1b Computing the Price Elasticity of Demand 91 5-1c The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities 92 5-1d The Variety of Demand Curves 93 FYI: A Few Elasticities from the Real World 93 5-1e Total Revenue and the Price Elasticity of Demand 95 5-1f Elasticity and Total Revenue along a Linear Demand Curve 96 5-1g Other Demand Elasticities 98 5-2 The Elasticity of Supply 99 5-2a The Price Elasticity of Supply and Its Determinants 99 5-2b Computing the Price Elasticity of Supply 99 5-2c The Variety of Supply Curves 100 5-3 Three Applications of Supply, Demand, and Elasticity 102 PART II How Markets 5-3a Can Good News for Farming Be Bad News for Farmers? 102 Work 63 5-3b Why Did OPEC Fail to Keep the Price of Oil High? 104 5-3c Does Drug Interdiction Increase or Decrease CHAPTER 4 Drug-Related Crime? 105 5-4 Conclusion 107 The Market Forces of Supply and Summary 108 Demand 65 Key Concepts 108 Questions for Review 109 4-1 Markets and Competition 66 Problems and Applications 109 4-1a What Is a Market? 66 4-1b What Is Competition? 66 4-2 Demand 67 CHAPTER 6 4-2a The Demand Curve: The Relationship between Price and Quantity Demanded 67 Supply, Demand, and Government 4-2b Market Demand versus Individual Demand 68 Policies 111 4-2c Shifts in the Demand Curve 69 6-1 Controls on Prices 112 CASE STUDY: Two Ways to Reduce the Quantity of Smoking 6-1a How Price Ceilings Affect Market Outcomes 112 Demanded 71 CASE STUDY: Lines at the Gas Pump 114 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xviii CONTENTS CASE STUDY: Rent Control in the Short Run and the Long 7-3 Market Efficiency 142 Run 115 7-3a The Benevolent Social Planner 143 6-1b How Price Floors Affect Market Outcomes 116 7-3b Evaluating the Market Equilibrium 144 ASK THE EXPERTS: Rent Control 116 IN THE NEWS: The Invisible Hand Can Park Your Car 146 CASE STUDY: The Minimum Wage 118 CASE STUDY: Should There Be a Market for Organs? 147 ASK THE EXPERTS: The Minimum Wage 119 ASK THE EXPERTS: Supplying Kidneys 148 6-1c Evaluating Price Controls 120 7-4 Conclusion: Market Efficiency and Market Failure 148 6-2 Taxes 120 Summary 150 6-2a How Taxes on Sellers Affect Market Outcomes 121 Key Concepts 150 6-2b How Taxes on Buyers Affect Market Outcomes 122 Questions for Review 150 CASE STUDY: Can Congress Distribute the Burden Problems and Applications 150 of a Payroll Tax? 124 6-2c Elasticity and Tax Incidence 124 CASE STUDY: Who Pays the Luxury Tax? 126 C