,Table of Contents
Preface: To the Student ix Principle 10: Society Faces a Short-Run Trade-off between
Inflation and Unemployment 14
Conclusion 15
FYI How to Read This Book 16
Summary 17
Key Concepts 17
Questions for Review 18
Problems and Applications 18
CHAPTER 2
THINKING LIKE AN ECONOMIST 21
The Economist as Scientist 22
The Scientific Method: Observation, Theory, and
More Observation 22
PART I The Role of Assumptions 23
INTRODUCTION 1 Economic Models 23
Our First Model: The Circular-Flow Diagram 24
CHAPTER 1 Our Second Model: The Production Possibilities
TEN PRINCIPLES OF ECONOMICS 3 Frontier 25
Microeconomics and Macroeconomics 28
How People Make Decisions 4
FYI Who Studies Economics? 29
Principle 1: People Face Trade-offs 4
Principle 2: The Cost of Something Is What You Give The Economist as Policy Adviser 30
Up to Get It 5 Positive versus Normative Analysis 30
Principle 3: Rational People Think at the Margin 6 Economists in Washington 31
Principle 4: People Respond to Incentives 7 IN THE NEWS Football Economics 32
How People Interact 8 Why Economists’ Advice Is Not Always Followed 32
Principle 5: Trade Can Make Everyone Better Off 8 Why Economists Disagree 34
Principle 6: Markets Are Usually a Good Way to Differences in Scientific Judgments 34
Organize Economic Activity 8 Differences in Values 34
IN THE NEWS Incentive Pay 9 Perception versus Reality 35
Principle 7: Governments Can Sometimes Improve
Market Outcomes 10 Let’s Get Going 36
FYI Adam Smith and the Invisible Hand 11 IN THE NEWS Environmental Economics 37
How the Economy as a Whole Works 12 Summary 38
Principle 8: A Country’s Standard of Living Depends Key Concepts 38
on Its Ability to Produce Goods and Services 12 Questions for Review 38
Principle 9: Prices Rise When the Government Prints Too Problems and Applications 38
Much Money 13 APPENDIX Graphing: A Brief Review 40
IN THE NEWS Why You Should Study Economics 14 Graphs of a Single Variable 40
xvi
, TABLE OF CONTENTS xvii
Graphs of Two Variables: The Coordinate System 41 Demand 67
Curves in the Coordinate System 42 The Demand Curve: The Relationship between Price
Slope 44 and Quantity Demanded 67
Cause and Effect 46 Market Demand versus Individual Demand 68
Shifts in the Demand Curve 69
CHAPTER 3 CASE STUDY Two Ways to Reduce the Quantity of
INTERDEPENDENCE AND THE GAINS FROM Smoking Demanded 71
TRADE 49
Supply 73
A Parable for the Modern Economy 50 The Supply Curve: The Relationship between Price
Production Possibilities 50 and Quantity Supplied 73
Specialization and Trade 52 Market Supply versus Individual Supply 73
Comparative Advantage: The Driving Force of Shifts in the Supply Curve 74
Specialization 54 Supply and Demand Together 77
Absolute Advantage 54 Equilibrium 77
Opportunity Cost and Comparative Advantage 54 Three Steps to Analyzing Changes in Equilibrium 79
Comparative Advantage and Trade 55
The Price of the Trade 56 Conclusion: How Prices Allocate Resources 83
IN THE NEWS The Helium Market 83
Applications of Comparative Advantage 57
IN THE NEWS Price Increases after Natural
FYI The Legacy of Adam Smith and David Ricardo 57
Disasters 84
Should Tiger Woods Mow His Own Lawn? 58
Should the United States Trade with Other Countries? 58 Summary 85
IN THE NEWS The Changing Face of International Key Concepts 86
Trade 59 Questions for Review 86
Problems and Applications 87
Conclusion 60
Summary 60 CHAPTER 5
Key Concepts 60 ELASTICITY AND ITS APPLICATION 89
Questions for Review 61
Problems and Applications 61 The Elasticity of Demand 90
The Price Elasticity of Demand and Its Determinants 90
Computing the Price Elasticity of Demand 91
The Midpoint Method: A Better Way to Calculate
Percentage Changes and Elasticities 91
The Variety of Demand Curves 92
Total Revenue and the Price Elasticity of Demand 94
Elasticity and Total Revenue along a Linear Demand
Curve 95
Other Demand Elasticities 97
IN THE NEWS Energy Demand 98
The Elasticity of Supply 99
The Price Elasticity of Supply and Its Determinants 99
Computing the Price Elasticity of Supply 100
PART II The Variety of Supply Curves 100
HOW MARKETS WORK 63 Three Applications of Supply, Demand, and
CHAPTER 4 Elasticity 102
Can Good News for Farming Be Bad News for
THE MARKET FORCES OF SUPPLY
Farmers? 103
AND DEMAND 65 Why Did OPEC Fail to Keep the Price of Oil High? 105
Markets and Competition 66 Does Drug Interdiction Increase or Decrease
What Is a Market? 66 Drug-Related Crime? 106
What Is Competition? 66 Conclusion 108
Summary 108
, xviii TABLE OF CONTENTS
Key Concepts 109 Willingness to Pay 138
Questions for Review 109 Using the Demand Curve to Measure Consumer
Problems and Applications 110 Surplus 139
How a Lower Price Raises Consumer Surplus 140
CHAPTER 6 What Does Consumer Surplus Measure? 141
SUPPLY, DEMAND, AND GOVERNMENT
POLICIES 113 Producer Surplus 143
Cost and the Willingness to Sell 143
Controls on Prices 114 Using the Supply Curve to Measure Producer
How Price Ceilings Affect Market Outcomes 114 Surplus 144
CASE STUDY Lines at the Gas Pump 116 How a Higher Price Raises Producer Surplus 145
CASE STUDY Rent Control in the Short Run and the
Long Run 117 Market Efficiency 147
How Price Floors Affect Market Outcomes 118 The Benevolent Social Planner 147
Evaluating the Market Equilibrium 148
CASE STUDY The Minimum Wage 119
Evaluating Price Controls 121 CASE STUDY Should There Be a Market in
IN THE NEWS President Chavez versus the Organs? 150
Market 122 IN THE NEWS Ticket Scalping 151
Taxes 123 Conclusion: Market Efficiency and Market Failure 152
How Taxes on Sellers Affect Market Outcomes 124 IN THE NEWS The Miracle of the Market 153
How Taxes on Buyers Affect Market Outcomes 125
Summary 154
CASE STUDY Can Congress Distribute the Burden Key Concepts 155
of a Payroll Tax? 127 Questions for Review 155
Elasticity and Tax Incidence 128 Problems and Applications 155
CASE STUDY Who Pays the Luxury Tax? 130
CHAPTER 8
Conclusion 130 APPLICATION: THE COSTS OF TAXATION 159
Summary 131
Key Concepts 131 The Deadweight Loss of Taxation 160
Questions for Review 131 How a Tax Affects Market Participants 161
Problems and Applications 132 Deadweight Losses and the Gains from Trade 163
The Determinants of the Deadweight Loss 164
CASE STUDY The Deadweight Loss Debate 166
Deadweight Loss and Tax Revenue as Taxes Vary 167
FYI Henry George and the Land Tax 169
CASE STUDY The Laffer Curve and Supply-Side
Economics 169
IN THE NEWS On the Way to France 170
Conclusion 172
Summary 172
Key Concepts 173
Questions for Review 173
PART III Problems and Applications 173
MARKETS AND WELFARE 135
CHAPTER 9
APPLICATION: INTERNATIONAL TRADE 177
CHAPTER 7
CONSUMERS, PRODUCERS, AND THE EFFICIENCY The Determinants of Trade 178
The Equilibrium without Trade 178
OF MARKETS 137
The World Price and Comparative Advantage 179
Consumer Surplus 138
The Winners and Losers from Trade 180
Preface: To the Student ix Principle 10: Society Faces a Short-Run Trade-off between
Inflation and Unemployment 14
Conclusion 15
FYI How to Read This Book 16
Summary 17
Key Concepts 17
Questions for Review 18
Problems and Applications 18
CHAPTER 2
THINKING LIKE AN ECONOMIST 21
The Economist as Scientist 22
The Scientific Method: Observation, Theory, and
More Observation 22
PART I The Role of Assumptions 23
INTRODUCTION 1 Economic Models 23
Our First Model: The Circular-Flow Diagram 24
CHAPTER 1 Our Second Model: The Production Possibilities
TEN PRINCIPLES OF ECONOMICS 3 Frontier 25
Microeconomics and Macroeconomics 28
How People Make Decisions 4
FYI Who Studies Economics? 29
Principle 1: People Face Trade-offs 4
Principle 2: The Cost of Something Is What You Give The Economist as Policy Adviser 30
Up to Get It 5 Positive versus Normative Analysis 30
Principle 3: Rational People Think at the Margin 6 Economists in Washington 31
Principle 4: People Respond to Incentives 7 IN THE NEWS Football Economics 32
How People Interact 8 Why Economists’ Advice Is Not Always Followed 32
Principle 5: Trade Can Make Everyone Better Off 8 Why Economists Disagree 34
Principle 6: Markets Are Usually a Good Way to Differences in Scientific Judgments 34
Organize Economic Activity 8 Differences in Values 34
IN THE NEWS Incentive Pay 9 Perception versus Reality 35
Principle 7: Governments Can Sometimes Improve
Market Outcomes 10 Let’s Get Going 36
FYI Adam Smith and the Invisible Hand 11 IN THE NEWS Environmental Economics 37
How the Economy as a Whole Works 12 Summary 38
Principle 8: A Country’s Standard of Living Depends Key Concepts 38
on Its Ability to Produce Goods and Services 12 Questions for Review 38
Principle 9: Prices Rise When the Government Prints Too Problems and Applications 38
Much Money 13 APPENDIX Graphing: A Brief Review 40
IN THE NEWS Why You Should Study Economics 14 Graphs of a Single Variable 40
xvi
, TABLE OF CONTENTS xvii
Graphs of Two Variables: The Coordinate System 41 Demand 67
Curves in the Coordinate System 42 The Demand Curve: The Relationship between Price
Slope 44 and Quantity Demanded 67
Cause and Effect 46 Market Demand versus Individual Demand 68
Shifts in the Demand Curve 69
CHAPTER 3 CASE STUDY Two Ways to Reduce the Quantity of
INTERDEPENDENCE AND THE GAINS FROM Smoking Demanded 71
TRADE 49
Supply 73
A Parable for the Modern Economy 50 The Supply Curve: The Relationship between Price
Production Possibilities 50 and Quantity Supplied 73
Specialization and Trade 52 Market Supply versus Individual Supply 73
Comparative Advantage: The Driving Force of Shifts in the Supply Curve 74
Specialization 54 Supply and Demand Together 77
Absolute Advantage 54 Equilibrium 77
Opportunity Cost and Comparative Advantage 54 Three Steps to Analyzing Changes in Equilibrium 79
Comparative Advantage and Trade 55
The Price of the Trade 56 Conclusion: How Prices Allocate Resources 83
IN THE NEWS The Helium Market 83
Applications of Comparative Advantage 57
IN THE NEWS Price Increases after Natural
FYI The Legacy of Adam Smith and David Ricardo 57
Disasters 84
Should Tiger Woods Mow His Own Lawn? 58
Should the United States Trade with Other Countries? 58 Summary 85
IN THE NEWS The Changing Face of International Key Concepts 86
Trade 59 Questions for Review 86
Problems and Applications 87
Conclusion 60
Summary 60 CHAPTER 5
Key Concepts 60 ELASTICITY AND ITS APPLICATION 89
Questions for Review 61
Problems and Applications 61 The Elasticity of Demand 90
The Price Elasticity of Demand and Its Determinants 90
Computing the Price Elasticity of Demand 91
The Midpoint Method: A Better Way to Calculate
Percentage Changes and Elasticities 91
The Variety of Demand Curves 92
Total Revenue and the Price Elasticity of Demand 94
Elasticity and Total Revenue along a Linear Demand
Curve 95
Other Demand Elasticities 97
IN THE NEWS Energy Demand 98
The Elasticity of Supply 99
The Price Elasticity of Supply and Its Determinants 99
Computing the Price Elasticity of Supply 100
PART II The Variety of Supply Curves 100
HOW MARKETS WORK 63 Three Applications of Supply, Demand, and
CHAPTER 4 Elasticity 102
Can Good News for Farming Be Bad News for
THE MARKET FORCES OF SUPPLY
Farmers? 103
AND DEMAND 65 Why Did OPEC Fail to Keep the Price of Oil High? 105
Markets and Competition 66 Does Drug Interdiction Increase or Decrease
What Is a Market? 66 Drug-Related Crime? 106
What Is Competition? 66 Conclusion 108
Summary 108
, xviii TABLE OF CONTENTS
Key Concepts 109 Willingness to Pay 138
Questions for Review 109 Using the Demand Curve to Measure Consumer
Problems and Applications 110 Surplus 139
How a Lower Price Raises Consumer Surplus 140
CHAPTER 6 What Does Consumer Surplus Measure? 141
SUPPLY, DEMAND, AND GOVERNMENT
POLICIES 113 Producer Surplus 143
Cost and the Willingness to Sell 143
Controls on Prices 114 Using the Supply Curve to Measure Producer
How Price Ceilings Affect Market Outcomes 114 Surplus 144
CASE STUDY Lines at the Gas Pump 116 How a Higher Price Raises Producer Surplus 145
CASE STUDY Rent Control in the Short Run and the
Long Run 117 Market Efficiency 147
How Price Floors Affect Market Outcomes 118 The Benevolent Social Planner 147
Evaluating the Market Equilibrium 148
CASE STUDY The Minimum Wage 119
Evaluating Price Controls 121 CASE STUDY Should There Be a Market in
IN THE NEWS President Chavez versus the Organs? 150
Market 122 IN THE NEWS Ticket Scalping 151
Taxes 123 Conclusion: Market Efficiency and Market Failure 152
How Taxes on Sellers Affect Market Outcomes 124 IN THE NEWS The Miracle of the Market 153
How Taxes on Buyers Affect Market Outcomes 125
Summary 154
CASE STUDY Can Congress Distribute the Burden Key Concepts 155
of a Payroll Tax? 127 Questions for Review 155
Elasticity and Tax Incidence 128 Problems and Applications 155
CASE STUDY Who Pays the Luxury Tax? 130
CHAPTER 8
Conclusion 130 APPLICATION: THE COSTS OF TAXATION 159
Summary 131
Key Concepts 131 The Deadweight Loss of Taxation 160
Questions for Review 131 How a Tax Affects Market Participants 161
Problems and Applications 132 Deadweight Losses and the Gains from Trade 163
The Determinants of the Deadweight Loss 164
CASE STUDY The Deadweight Loss Debate 166
Deadweight Loss and Tax Revenue as Taxes Vary 167
FYI Henry George and the Land Tax 169
CASE STUDY The Laffer Curve and Supply-Side
Economics 169
IN THE NEWS On the Way to France 170
Conclusion 172
Summary 172
Key Concepts 173
Questions for Review 173
PART III Problems and Applications 173
MARKETS AND WELFARE 135
CHAPTER 9
APPLICATION: INTERNATIONAL TRADE 177
CHAPTER 7
CONSUMERS, PRODUCERS, AND THE EFFICIENCY The Determinants of Trade 178
The Equilibrium without Trade 178
OF MARKETS 137
The World Price and Comparative Advantage 179
Consumer Surplus 138
The Winners and Losers from Trade 180
