Cover Page......Page 1
GLOBAL COMPARISONS......Page 3
FOR INQUIRING MINDS......Page 4
Dedication Page......Page 5
Copyright Page......Page 6
Title Page......Page 8
About the Authors......Page 9
Brief Contents......Page 11
Contents......Page 13
Preface......Page 21
Any Given Sunday......Page 37
The Invisible Hand......Page 38
Good Times, Bad Times......Page 39
An Engine for Discovery......Page 40
Common Ground......Page 41
Resources Are Scarce......Page 42
The Real Cost of Something Is What You Must Give Up to Get It......Page 43
”How Much?” Is a Decision at the Margin......Page 44
People Usually Exploit Opportunities to Make Themselves Better Off......Page 45
ECONOMICS IN ACTION: A Woman’s Work......Page 46
Interaction: How Economies Work......Page 47
Markets Move Toward Equilibrium......Page 48
For Inquiring Minds: Choosing Sides......Page 49
Resources Should Be Used as Efficiently as Possible to Achieve Society’s Goals......Page 50
When Markets Don’t Achieve Efficiency, Government Intervention Can Improve Society’s Welfare......Page 51
ECONOMICS IN ACTION: Restoring Equilibrium on the Freeways......Page 52
Overall Spending Sometimes Gets Out of Line with the Economy’s Productive Capacity......Page 53
ECONOMICS IN ACTION: Adventures in Babysitting......Page 54
A Look Ahead......Page 55
Tunnel Vision......Page 59
For Inquiring Minds: Models for Money......Page 60
Trade-offs: The Production Possibility Frontier......Page 61
Comparative Advantage and Gains from Trade......Page 66
Pitfalls: Misunderstanding Comparative Advantage......Page 69
GLOBAL COMPARISON: Pajama Republics......Page 70
Transactions: The Circular-Flow Diagram......Page 71
ECONOMICS IN ACTION: Rich Nation, Poor Nation......Page 72
Positive versus Normative Economics......Page 73
When and Why Economists Disagree......Page 74
For Inquiring Minds: When Economists Agree......Page 75
ECONOMICS IN ACTION: Economists in Government......Page 76
A Look Ahead......Page 77
Two-Variable Graphs......Page 81
Curves on a Graph......Page 83
The Slope of a Linear Curve......Page 84
Horizontal and Vertical Curves and Their Slopes......Page 85
The Slope of a Nonlinear Curve......Page 86
Calculating the Slope Along a Nonlinear Curve......Page 87
Maximum and Minimum Points......Page 88
Calculating the Area Below or Above a Curve......Page 89
Types of Numerical Graphs......Page 90
Problems in Interpreting Numerical Graphs......Page 93
Wake Up and Don’t Smell the Coffee......Page 97
The Demand Curve......Page 98
The Demand Schedule and the Demand Curve......Page 99
GLOBAL COMPARISON: Pay More, Pump Less......Page 100
Understanding Shifts of the Demand Curve......Page 102
ECONOMICS IN ACTION: Beating the Traffic......Page 106
The Supply Schedule and the Supply Curve......Page 107
Shifts of the Supply Curve......Page 108
Understanding Shifts of the Supply Curve......Page 110
ECONOMICS IN ACTION: Only Creatures Small and Pampered......Page 113
Supply, Demand, and Equilibrium......Page 114
Finding the Equilibrium Price and Quality......Page 115
Why Does the Market Price Fall if It Is Above the Equilibrium Price?......Page 116
Why Does the Market Price Rise if It Is Below the Equilibrium Price?......Page 117
ECONOMICS IN ACTION: The Price of Admission......Page 118
What Happens When the Demand Curve Shifts......Page 119
What Happens When the Supply Curve Shifts......Page 120
Simultaneous Shifts of Supply and Demand Curves......Page 121
For Inquiring Minds: Tribulations on the Runway......Page 122
ECONOMICS IN ACTION: The Great Tortilla Crisis......Page 123
A Look Ahead......Page 124
Making Gains by the Book......Page 129
Willingness to Pay and the Demand Curve......Page 130
Willingness to Pay and Consumer Surplus......Page 131
How Changing Prices Affect Consumer Surplus......Page 133
For Inquiring Minds: A Matter of Life and Death......Page 135
Cost and Producer Surplus......Page 136
How Changing Prices Affect Producer Surplus......Page 139
ECONOMICS IN ACTION: When the Corn Is High......Page 140
The Gains from Trade......Page 141
The Efficiency of Markets......Page 142
Equity and Efficiency......Page 145
A Market Economy......Page 146
Why Markets Typically Work So Well......Page 147
ECONOMICS IN ACTION: A Great Leap—Backward......Page 148
A Look Ahead......Page 149
Big City, Not-So-Bright Ideas......Page 153
Price Ceilings......Page 154
Modeling a Price Ceiling......Page 155
How a Price Ceiling Causes Inefficiency......Page 156
For Inquiring Minds: Winners, Losers, and Rent Control......Page 158
For Inquiring Minds: Rent Control, Mumbai Style......Page 160
So Why Are There Price Ceilings?......Page 161
ECONOMICS IN ACTION: Hard Shopping in Caracas......Page 162
Price Floors......Page 163
Pitfalls: Ceilings, Floors, and Quantities......Page 165
GLOBAL COMPARISON: Check Out Our Low, Low Wages!......Page 167
ECONOMICS IN ACTION: “Black Labor” in Southern Europe......Page 168
Controlling Quantities......Page 169
The Anatomy of Quantity Controls......Page 170
The Costs of Quantity Controls......Page 172
ECONOMICS IN ACTION: The Clams of New Jersey......Page 173
A Look Ahead......Page 174
More Precious Than a Flu Shot......Page 179
Calculating the Price Elasticity of Demand......Page 180
An Alternative Way to Calculate Elasticities: The Midpoint Method......Page 182
ECONOMICS IN ACTION: Estimating Elasticities......Page 183
How Elastic Is Elastic?......Page 184
Price Elasticity Along the Demand Curve......Page 188
What Factors Determine the Price Elasticity ofDemand?......Page 189
ECONOMICS IN ACTION: Responding to Your Tuition Bill......Page 190
The Cross-Price Elasticity of Demand......Page 191
The Income Elasticity of Demand......Page 192
GLOBAL COMPARISON: Food’s Bite in World Budgets......Page 193
The Price Elasticity of Supply......Page 194
Measuring the Price Elasticity of Supply......Page 195
What Factors Determine the Price Elasticity of Supply?......Page 196
An Elasticity Menagerie......Page 197
A Look Ahead......Page 198
A Tax Riot......Page 203
The Effect of an Excise Tax on Quantities and Prices......Page 204
Price Elasticities and Tax Incidence......Page 207
ECONOMICS IN ACTION: Who Pays the FICA?......Page 209
The Benefits and Costs of Taxation......Page 210
The Revenue from an Excise Tax......Page 212
Tax Rates and Revenue......Page 211
For Inquiring Minds: The Laffer Curve......Page 213
The Costs of Taxation......Page 214
Elasticities and the Deadweight Loss of a Tax......Page 216
ECONOMICS IN ACTION: Taxing the Marlboro Man......Page 218
Two Principles of Tax Fairness......Page 219
For Inquiring Minds: Killing the Lawyers......Page 220
ECONOMICS IN ACTION: Federal Tax Philosophy......Page 221
Tax Bases and Tax Structure......Page 222
Equity, Efficiency, and Progressive Taxation......Page 223
Taxes in the United States......Page 224
For Inquiring Minds: Taxing Income versus Taxing Consumption......Page 225
ECONOMICS IN ACTION: The Top Marginal Income Tax Rate......Page 226
A Look Ahead......Page 227
A Seafood Fight......Page 231
Production Possibilities and Comparative Advantage, Revisited......Page 232
The Gains from International Trade......Page 235
Comparative Advantage versus Absolute Advantage......Page 236
Sources of Comparative Advantage......Page 238
ECONOMICS IN ACTION: Skill and Comparative Advantage......Page 240
Supply, Demand, and International Trade......Page 241
The Effects of Imports......Page 242
The Effects of Exports......Page 244
International Trade and Wages......Page 245
The Effects of Trade Protection......Page 247
The Effects of a Tariff......Page 248
ECONOMICS IN ACTION: Trade Protection in the United States......Page 250
Arguments for Trade Protection......Page 251
International Trade Agreements and the World Trade Organization......Page 252
For Inquiring Minds: Chinese Pants Explosion......Page 253
New Challenges to Globalization......Page 254
ECONOMICS IN ACTION: The Doha Deadlock......Page 255
A Look Ahead......Page 256
A Tale of Two Invasions......Page 261
Explicit versus Implicit Costs......Page 262
Accounting Profit versus Economic Profit......Page 263
ECONOMICS IN ACTION: Farming in the Shadow of Suburbia......Page 265
Marginal Cost......Page 266
Marginal Benefit......Page 268
Marginal Analysis......Page 269
A Principle with Many Uses......Page 272
ECONOMICS IN ACTION: The Cost of a Life......Page 273
ECONOMICS IN ACTION: A Billion Here, a Billion There . . .......Page 274
Borrowing, Lending, and Interest......Page 275
Defining Present Value......Page 276
Using Present Value......Page 278
ECONOMICS IN ACTION: How Big Is That Jackpot, Anyway?......Page 279
A Look Ahead......Page 280
A Clam Too Far......Page 285
Utility and Consumption......Page 286
The Principle of Diminishing Marginal Utility......Page 287
ECONOMICS IN ACTION: Oysters versus Chicken......Page 288
Budget Constraints and Budget Lines......Page 289
Optimal Consumption Choice......Page 291
For Inquiring Minds: Food for Thought on Budget Constraints......Page 292
ECONOMICS IN ACTION: The Consumption Possibilities of American Workers, 1895–2000......Page 293
Spending the Marginal Dollar......Page 294
Marginal Utility per Dollar......Page 295
Optimal Consumption......Page 296
ECONOMICS IN ACTION: Buying Your Way Out of Temptation......Page 298
Marginal Utility, the Substitution Effect, and the Law of Demand......Page 299
The Income Effect......Page 300
ECONOMICS IN ACTION: Mortgage Rates and Consumer Demand......Page 301
A Look Ahead......Page 302
A Tale of Two Cities......Page 307
Indifference Curves......Page 308
Properties of Indifference Curves......Page 311
The Marginal Rate of Substitution......Page 313
The Tangency Condition......Page 316
The Slope of the Budget Line......Page 317
Prices and the Marginal Rate of Substitution......Page 319
Preferences and Choices......Page 320
ECONOMICS IN ACTION: Rats and Rational Choice......Page 321
Using Indifference Curves: Substitutes and Complements......Page 322
Perfect Substitutes......Page 323
Perfect Complements......Page 324
Less Extreme Cases......Page 325
Prices, Income, and Demand......Page 326
Pitfalls: “Other Things Equal,” Revisited......Page 327
Income and Consumption......Page 328
Income and Substitution Effects......Page 331
ECONOMICS IN ACTION: How Much Housing?......Page 333
A Look Ahead......Page 334
The Farmer’s Margin......Page 339
Inputs and Output......Page 340
GLOBAL COMPARISON: Wheat Yields Around the World......Page 342
Pitfalls: What’s a Unit?......Page 343
For Inquiring Minds: Was Malthus Right?......Page 344
From the Production Function to Cost Curves......Page 345
ECONOMICS IN ACTION: The Mythical Man-Month......Page 346
Marginal Cost......Page 348
Average Cost......Page 350
Minimum Average Total Cost......Page 352
Does the Marginal Cost Curve Always Slope Upward?......Page 353
ECONOMICS IN ACTION: Don’t Put Out the Welcome Mat......Page 354
Short-Run versus Long-Run Costs......Page 355
Returns to Scale......Page 358
Summing Up Costs: The Short and Long of It......Page 359
A Look Ahead......Page 360
Doing What Comes Naturally......Page 365
Defining Perfect Competition......Page 366
Free Entry and Exit......Page 367
ECONOMICS IN ACTION: The Pain of Competition......Page 368
Production and Profits......Page 369
Using Marginal Analysis to Choose the Profit-Maximizing Quantity of Output......Page 370
Pitfalls: What if Marginal Revenue and Marginal Cost Aren’t Exactly Equal?......Page 371
When Is Production Profitable?......Page 372
The Short-Run Production Decision......Page 376
Changing Fixed Cost......Page 378
Summing Up: The Perfectly Competitive Firm’s Profitability and Production Conditions......Page 379
ECONOMICS IN ACTION: A Crushing Reversal......Page 386
The Industry Supply Curve......Page 380
The Short-Run Industry Supply Curve......Page 381
The Long-Run Industry Supply Curve......Page 382
The Cost of Production and Efficiency in Long-Run Equilibrium......Page 385
A Look Ahead......Page 387
Everybody Must Get Stones......Page 391
Types of Market Structure......Page 392
Monopoly: Our First Departure from Perfect Competition......Page 393
What Monopolists Do......Page 394
Why Do Monopolies Exist?......Page 395
GLOBAL COMPARISON: The Price We Pay......Page 397
ECONOMICS IN ACTION: Low Supply and Soaring Demand: A Diamond Producer’s Best Friend......Page 398
The Monopolist’s Demand Curve and Marginal Revenue......Page 399
The Monopolist’s Profit-Maximizing Output and Price......Page 402
Monopoly versus Perfect Competition......Page 403
For Inquiring Minds: Monopoly Behavior and the Price Elasticity of Demand......Page 404
ECONOMICS IN ACTION: California Power Play......Page 405
Monopoly and Public Policy......Page 406
Welfare Effects of Monopoly......Page 407
Dealing with Natural Monopoly......Page 408
ECONOMICS IN ACTION: Cable Dilemmas......Page 411
The Logic of Price Discrimination......Page 412
Perfect Price Discrimination......Page 414
ECONOMICS IN ACTION: Sales, Factory Outlets, and Ghost Cities......Page 417
A Look Ahead......Page 418
Caught in the Act......Page 423
The Prevalence of Oligopoly......Page 424
ECONOMICS IN ACTION: Is It an Oligopoly or Not?......Page 425
A Duopoly Example......Page 426
Collusion and Competition......Page 427
Competing in Prices versus Competing in Quantities......Page 429
ECONOMICS IN ACTION: The Great Vitamin Conspiracy......Page 431
The Prisoners’ Dilemma......Page 432
Overcoming the Prisoners’ Dilemma: Repeated Interaction and Tacit Collusion......Page 434
For Inquiring Minds: Prisoners of the Arms Race......Page 436
The Kinked Demand Curve......Page 437
ECONOMICS IN ACTION: The Rise and Fall and Rise of OPEC......Page 438
The Legal Framework......Page 440
Tacit Collusion and Price Wars......Page 441
Product Differentiation and Price Leadership......Page 443
ECONOMICS IN ACTION: The Price Wars of Christmas......Page 444
How Important Is Oligopoly?......Page 445
A Look Ahead......Page 446
Fast-Food Differentiation......Page 451
Differentiated Products......Page 452
Differentiation by Style or Type......Page 453
For Inquiring Minds: Can’t Buy Love......Page 454
ECONOMICS IN ACTION: Any Color, So Long as It’s Black......Page 455
Monopolistic Competition in the Short Run......Page 456
Monopolistic Competition in the Long Run......Page 457
For Inquiring Minds: Hits and Flops......Page 459
ECONOMICS IN ACTION: The Last Stand of the 6-Percenters?......Page 460
Price, Marginal Cost, and Average Total Cost......Page 461
Is Monopolistic Competition Inefficient?......Page 462
The Role of Advertising......Page 463
Brand Names......Page 464
ECONOMICS IN ACTION: Absolut Irrationality......Page 465
A Look Ahead......Page 466
Who’ll Stop the Rain?......Page 469
The Economics of Pollution......Page 470
Pitfalls: So How Do You Measure the Marginal Social Cost of Pollution?......Page 471
Pollution: An External Cost......Page 472
The Inefficiency of Excess Pollution......Page 473
Private Solutions to Externalities......Page 474
Private versus Social Costs......Page 485
Environmental Standards......Page 476
GLOBAL COMPARISON: Economic Growth and Greenhouse Gases in Five Countries......Page 477
Emissions Taxes......Page 478
Tradable Emissions Permits......Page 480
ECONOMICS IN ACTION: Cap and Trade......Page 481
Production, Consumption, and Externalities......Page 502
Private versus Social Benefits......Page 482
ECONOMICS IN ACTION: The Impeccable Economic Logic of Early Childhood Intervention Programs......Page 486
Types of Network Externality......Page 487
ECONOMICS IN ACTION: The Microsoft Case......Page 489
A Look Ahead......Page 490
The Great Stink......Page 495
Characteristics of Goods......Page 496
Why Markets Can Supply Only Private Goods Efficiently......Page 497
Pitfalls: Marginal Cost of What Exactly?......Page 498
Providing Public Goods......Page 499
How Much of a Public Good Should Be Provided?......Page 500
GLOBAL COMPARISON: Voting as a Public Good: The Global Perspective......Page 503
ECONOMICS IN ACTION: Old Man River......Page 504
Common Resources......Page 505
The Problem of Overuse......Page 506
The Efficient Use and Maintenance of a Common Resource......Page 507
ECONOMICS IN ACTION: A Tale of Two Fisheries......Page 508
Artificially Scarce Goods......Page 509
ECONOMICS IN ACTION: Blacked-Out Games......Page 510
A Look Ahead......Page 511
Insuring Children’s Health......Page 515
The Logic of the Welfare State......Page 516
The Problem of Poverty......Page 517
For Inquiring Minds: Defining Poverty......Page 518
GLOBAL COMPARISON: Poor People In Rich Countries......Page 519
Economic Inequality......Page 520
ECONOMICS IN ACTION: Long-Term Trends in Income Inequality in the United States......Page 523
Means-Tested Programs......Page 526
The Effects of the Welfare State on Poverty and Inequality......Page 527
ECONOMICS IN ACTION: Britain’s War on Poverty......Page 528
The Economics of Health Care......Page 529
The Need for Health Insurance......Page 530
For Inquiring Minds: A California Death Spiral......Page 531
The Problem of the Uninsured......Page 532
Health Care in Other Countries......Page 534
The Health Care Crisis and Proposals for Reform......Page 535
ECONOMICS IN ACTION: The Trouble with Medical Progress......Page 537
Problems with the Welfare State......Page 538
The Politics of the Welfare State......Page 539
ECONOMICS IN ACTION: French Family Values......Page 540
A Look Ahead......Page 541
The Value of a Degree......Page 545
Pitfalls: What Is a Factor, Anyway?......Page 546
For Inquiring Minds: The Factor Distribution of Income and Social Change in the Industrial Revolution......Page 547
ECONOMICS IN ACTION: The Factor Distribution of Income in the United States......Page 548
Value of the Marginal Product......Page 549
Value of the Marginal Product and Factor Demand......Page 551
Shifts of the Factor Demand Curve......Page 552
The Marginal Productivity Theory of Income Distribution......Page 554
The Markets for Land and Capital......Page 555
Pitfalls: Getting Marginal Productivity Right......Page 557
Is the Marginal Productivity Theory of Income Distribution Really True?......Page 558
Wage Disparities in Practice......Page 559
Marginal Productivity and Wage Inequality......Page 560
Market Power......Page 561
Discrimination......Page 562
ECONOMICS IN ACTION: The Economics of Apartheid......Page 563
Work versus Leisure......Page 564
Wages and Labor Supply......Page 565
Shifts of the Labor Supply Curve......Page 567
ECONOMICS IN ACTION: The Decline of the Summer Job......Page 568
A Look Ahead......Page 569
The Time Allocation Budget Line......Page 573
The Effect of a Higher Wage Rate......Page 574
Indifference Curve Analysis......Page 576
The Year of the Hurricane......Page 579
Expectations and Uncertainty......Page 580
The Logic of Risk Aversion......Page 581
Paying to Avoid Risk......Page 586
Buying, Selling, and Reducing Risk......Page 587
Trading Risk......Page 588
Making Risk Disappear: The Power of Diversification......Page 590
The Limits of Diversification......Page 593
ECONOMICS IN ACTION: When Lloyd’s Almost Llost It......Page 594
Adverse Selection: The Economics of Lemons......Page 595
Moral Hazard......Page 597
ECONOMICS IN ACTION: Franchise Owners Try Harder......Page 598
A Look Ahead......Page 599
Solutions to “Check Your Understanding” Questions......Page 605
Glossary......Page 633
B......Page 643
C......Page 644
E......Page 645
G......Page 646
I......Page 647
M......Page 648
O......Page 649
P......Page 650
R......Page 651
S......Page 652
U......Page 653
Z......Page 654
Key Graphs and Equations......Page 655
