Microeconomics, 13th Edition PDF by Roger A. Arnold


Microeconomics, Thirteenth Edition

By Roger A. Arnold

Microeconomics, 13th Edition


An Introduction to Economics

Part 1 Economics: The Science of Scarcity

CHAPTER 1: What Economics is About

Your Life, 2019–2029 1

A Definition of Economics 2

Goods and Bads 2 Resources 2 Scarcity and a Definition of Economics 2

Key Concepts in Economics 4

Opportunity Cost 4 Opportunity Cost and Behavior 6 Benefits and Costs 6

Decisions Made at the Margin 7 Efficiency 9

Does It Matter to You . . . If You Are Efficient or Not? 11

Economics Is About Incentives 12 Unintended Effects 13 Exchange 14

Ceteris Paribus and Theory 16

Ceteris Paribus Thinking 16 What Is a Theory? 17

Hear What and How the Economist Thinks . . . About Theories 19

Economic Categories 20

Positive Economics and Normative Economics 20 Microeconomics and

Macroeconomics 20

Chapter Summary 22

Key Terms and Concepts 23

Questions and Problems 23

Working with Numbers and Graphs 24

Appendix A: Working WITH DIAGRAMS 25

Slope of a Line 26

Slope of a Line Is Constant 27

Slope of a Curve 27

The 45-Degree Line 27

Pie Charts 29

Bar Graphs 29

Line Graphs 30

Appendix Summary 32

Key Terms and Concepts 32

Questions and Problems 32


Five Myths About Economics and Being an Economics Major 35

What Awaits You as an Economics Major? 37

What Do Economists Do? 38

Places to Find More Information 40

Concluding Remarks 40


The Production Possibilities Frontier 41

The Straight-Line PPF: Constant Opportunity Costs 41 The Bowed-Outward

(Concave-Downward) PPF: Increasing Opportunity Costs 42

Does It Matter to You . . . If the Economy Is at One Point on the PPF Instead of Another? 44

Law of Increasing Opportunity Costs 45 Economic Concepts in a Production Possibilities Frontier Framework 46

Specialization and Trade Can Move Us Beyond Our Ppf 51

A Simple Two-Person PPF Model 51 On or Beyond the PPF? 52

Hear What and How the Economist Thinks . . . About Manufacturing Jobs 53

Chapter Summary 56

Key Terms and Concepts 57

Questions and Problems 57

Working with Numbers and Graphs 57


What Is Demand? 59

The Law of Demand 60 Four Ways to Represent the Law of Demand 60 Why Does

Quantity Demanded Go Down as Price Goes Up? 61 Individual Demand Curve and

Market Demand Curve 62 A Change in Quantity Demanded Versus a Change in

Demand 63 What Factors Cause the Demand Curve to Shift? 66 Movement Factors

and Shift Factors 68

Supply 69

The Law of Supply 69 Why Most Supply Curves Are Upward Sloping 70 Changes

in Supply Mean Shifts in Supply Curves 72 What Factors Cause the Supply Curve to

Shift? 72 A Change in Supply Versus a Change in Quantity Supplied 74

The Market: Putting Supply and Demand Together 75

Supply and Demand at Work at an Auction 75 The Language of Supply and Demand: A

Few Important Terms 76 Moving to Equilibrium: What Happens to Price When There Is

a Surplus or a Shortage? 76 Speed of Moving to Equilibrium 76

Hear What and How the Economist Thinks . . . About Higher Prices and Buying More 78

Moving to Equilibrium: Maximum and Minimum Prices 79 The Connection Between

Equilibrium and Predictions 80 Equilibrium in Terms of Consumers’ and Producers’ Surplus 81

Does It Matter to You . . . If You Pay Equilibrium Prices or Not? 83

What Can Change Equilibrium Price and Quantity? 83 It Is Important to Know Why

the Price Changed: Back to Substitutes and Complements 86 Epilogue: Who Feeds Cleveland? 87

Chapter Summary 91

Key Terms and Concepts 91

Questions and Problems 92

Working with Numbers and Graphs 93


Price 95

Price as a Rationing Device 95 Price as a Transmitter of Information 96

Price Controls 97

Price Ceiling 97

Hear What and How the Economist Thinks . . . About Price Ceilings and the Value of Money 102

Price Floor: Definition and Effects 103

Does It Matter to You . . . If the Demand Curve for Unskilled Labor Is Steep or Not? 105

Two Prices: Absolute and Relative 109

Absolute (Money) Price and Relative Price 109 Taxes on Specific Goods and Relative Price Changes 110

Does It Matter to You . . . If Something You Buy Is Taxed or Subsidized? 112

Chapter Summary 114

Key Terms and Concepts 114

Questions and Problems 114

Working with Numbers and Graphs 115


Application 1: U-Haul Rates and Demand 116

Application 2: Subsidizing the Consumption

of Anything Can Raise its Price 117

Application 3: 10 a.m. Classes in College 119

Application 4: Why Do Colleges Use GPAs, ACTs, and SATs for Purposes of Admission? 121

Application 5: Why is Medical Care So Expensive? 122

Application 6: Do You Pay for Good Weather? 124

Application 7: The Price of an Aisle Seat 126

Application 8: College Superathletes 127

Application 9: Easier-to-Obtain Loans and Higher Housing Prices 129

Application 10: Speculators, Price Variability, and Patterns 130

Application 11: Supply and Demand on a Freeway 131

Application 12: Are Renters Better Off? 132

Chapter Summary 135

Questions and Problems 136

Working with Numbers and Graphs 137


Part 2 Microeconomic Fundamentals


Elasticity: Part 1 138

Price Elasticity of Demand 138 Elasticity Is Not Slope 140 From Perfectly Elastic to

Perfectly Inelastic Demand 140 Price Elasticity of Demand and Total Revenue (Total

Expenditure) 143 Elastic Demand and Total Revenue 144

Elasticity: Part 2 149

Price Elasticity of Demand Along a Straight-Line Demand Curve 149 Determinants of

Price Elasticity of Demand 150

Hear What and How the Economist Thinks . . . About the Prevalence of Elasticity 153

Other Elasticity Concepts 154

Cross Elasticity of Demand 154 Income Elasticity of Demand 155 Price Elasticity

of Supply 156 Price Elasticity of Supply and Time 157

The Relationship Between Taxes and Elasticity 160

Who Pays the Tax? 160 Elasticity and the Tax 161

Does It Matter to You . . . If There Are Few or Many Substitutes for the Goods You Buy? 162

Degree of Elasticity and Tax Revenue 163

Chapter Summary 165

Key Terms and Concepts 166

Questions and Problems 166

Working with Numbers and Graphs 167



Utility Theory 168

Utility: Total and Marginal 168 Law of Diminishing Marginal Utility 169 The Solution

to the Diamond–Water Paradox 171

Consumer Equilibrium and Demand 173

Equating Marginal Utilities per Dollar 173 Maximizing Utility and the Law of

Demand 175 Should the Government Provide the Necessities of Life for Free? 175

Hear What and How the Economist Thinks . . . About Towns, Pollution Standards, and

Making the Invisible, Visible 177

Behavioral Economics 178

Are People Willing to Reduce Others’ Incomes? 178 Is One Dollar Always One

Dollar? 179 Coffee Mugs and the Endowment Effect 180 Does the Endowment Effect

Hold Only for New Traders? 182

Does It Matter to You . . . If You Are Subject to the Endowment Effect? 182

The Ultimatum Game—and Facebook, YouTube, and Wikipedia 183 Framing 186

Neuroeconomics 187

Chapter Summary 189

Key Terms and Concepts 190

Questions and Problems 190

Working with Numbers and Graphs 191



The Budget Constraint 192

Slope of the Budget Constraint 192

What Will Change the Budget Constraint? 192

Indifference Curves 193

Constructing an Indifference Curve 194

Characteristics of Indifference Curves 194

The Indifference Map and the Budget Constraint Come Together 197

From Indifference Curves to a Demand Curve 198

Appendix Summary 199

Key Terms and Concepts 199

Questions and Problems 199


Why Firms Exist 200

The Market and the Firm: Invisible Hand Versus Visible Hand 200 The Alchian-and-

Demsetz Answer 201 Shirking on a Team 201 Ronald Coase on Why Firms Exist 202

Markets: Outside and Inside the Firm 203

Two Sides to Every Business Firm 203

More on Total Cost 204 Accounting Profit Versus Economic Profit 204

Does It Matter to You . . . If You Think in Terms of Only Accounting Profit? 205

Zero Economic Profit Is Not as Bad as It Sounds 206

Hear What and How the Economist Thinks . . . About Maximizing Revenue

and Profit 207

Production 208

Common Misconception About the Short Run and Long Run 208 Production in the

Short Run 208 Whose Marginal Productivity Are We Talking About? 210 Marginal

Physical Product and Marginal Cost 210 Average Productivity 213

Costs of Production: Total, Average, Marginal 214

The AVC and ATC Curves in Relation to the MC Curve 217 Tying Short-Run

Production to Costs 220 One More Cost Concept: Sunk Cost 221

Production and Costs in the Long Run 225

Long-Run Average Total Cost Curve 226 Economies of Scale, Diseconomies of Scale,

and Constant Returns to Scale 227 Why Economies of Scale? 228 Why Diseconomies

of Scale? 228 Minimum Efficient Scale and Number of Firms in an Industry 228

Shifts In Cost Curves 229

Taxes 229 Input Prices 229 Technology 229

Chapter Summary 230

Key Terms and Concepts 231

Questions and Problems 232

Working with Numbers and Graphs 233

Part 3 Product Markets and Policies


The Theory of Perfect Competition 234

A Perfectly Competitive Firm Is a Price Taker 235 The Demand Curve for a Perfectly

Competitive Firm Is Horizontal 235 Common Misconceptions about Demand

Curves 236 The Marginal Revenue Curve of a Perfectly Competitive Firm Is the Same

as Its Demand Curve 237 Theory and Real-World Markets 238

Perfect Competition in the Short Run 239

What Level of Output Does the Profit-Maximizing Firm Produce? 239 The Perfectly

Competitive Firm and Resource Allocative Efficiency 239 To Produce or Not to Produce:

That Is the Question 240 Common Misconceptions over the Shutdown Decision 243

The Perfectly Competitive Firm’s Short-Run Supply Curve 244 From Firm Supply Curve

to Market (Industry) Supply Curve 244 Why Is the Market Supply Curve Upward

Sloping? 247

Perfect Competition in the Long Run 247

The Conditions of Long-Run Competitive Equilibrium 248 The Perfectly Competitive

Firm and Productive Efficiency 249 Industry Adjustment to an Increase in Demand 250

Profit from Two Perspectives 253

Does It Matter to You . . . If There Is Easy Entry into a Market? 254

Industry Adjustment to a Decrease in Demand 255 Differences in Costs, Differences in

Profits: Now You See It, Now You Don’t 255

Hear What and How the Economist Thinks . . . About Buyers and Sellers 256

Profit and Discrimination 257

Topics for Analysis in the Theory of Perfect Competition 258

Do Higher Costs Mean Higher Prices? 258 Will the Perfectly Competitive Firm

Advertise? 258 Supplier-Set Price Versus Market-Determined Price: Collusion or

Competition? 259

Chapter Summary 260

Key Terms and Concepts 261

Questions and Problems 261

Working with Numbers and Graphs 262


The Theory of Monopoly 264

Barriers to Entry: A Key to Understanding Monopoly 265 What Is the Difference

Between a Government Monopoly and a Market Monopoly? 265

Monopoly Pricing and Output Decisions 266

The Monopolist’s Demand and Marginal Revenue 267 The Monopolist’s Demand Curve

and Marginal Revenue

Curve Are Not the Same 268 Price and Output for a Profit-

Maximizing Monopolist 268 Comparing the Demand Curve in Perfect Competition

with the Demand Curve in Monopoly 270 If a Firm Maximizes Revenue, Does It

Automatically Maximize Profit Too? 270

Perfect Competition and Monopoly 271

Price, Marginal Revenue, and Marginal Cost 271 Monopoly, Perfect Competition,

and Consumers’ Surplus 271 Monopoly or Nothing? 273

The Case Against Monopoly 274

The Deadweight Loss of Monopoly 274

Does It Matter to You . . . If There Is a Deadweight Loss of Monopoly Triangle? 275

Rent Seeking 275 X-Inefficiency 276

Price Discrimination 277

Types of Price Discrimination 278 Why a Monopolist Wants to Price Discriminate 278

Conditions of Price Discrimination 278

Hear What and How the Economist Thinks . . . About Price Discrimination 279

Moving to P 5 MC Through Price Discrimination 280 Coupons and Price

Discrimination 282

Chapter Summary 284

Key Terms and Concepts 285

Questions and Problems 285

Working with Numbers and Graphs 286



The Theory of Monopolistic Competition 287

The Monopolistic Competitor’s Demand Curve 288 The Relationship between Price

and Marginal Revenue for a Monopolistic Competitor 288 Output, Price, and Marginal

Cost for the Monopolistic Competitor 288 Will There Be Profits in the Long Run? 288

Excess Capacity: What Is It, and Is It “Good” or “Bad”? 289 The Monopolistic Competitor

and Two Types of Efficiency 291

Oligopoly: Assumptions and Real-World Behavior 292

The Concentration Ratio 292

Price and Output Under the Cartel Theory 293

The Cartel Theory 293

Game Theory, Oligopoly, and Contestable Markets 296

Prisoner’s Dilemma 297 Oligopoly Firms’ Cartels and the Prisoner’s Dilemma 299

Are Markets Contestable? 300 Necessary and Sufficient Conditions and Efficiency 301

A Review of Market Structures 301

Applications of Game Theory 302

Grades and Partying 302

Hear What and How the Economist Thinks . . . About Grade Inflation 304

The Arms Race 305 Speed Limit Laws 305

Chapter Summary 307

Key Terms and Concepts 308

Questions and Problems 308

Working with Numbers and Graphs 308




Antitrust 309

Antitrust Acts 310 Unsettled Points in Antitrust Policy 312 Antitrust and Mergers 314

Common Misconceptions about Antitrust Policy 315 Network Monopolies 315

Regulation 318

The Case of Natural Monopoly 318 Regulating the Natural Monopoly 320 Regulating

Industries That are Not Natural Monopolies 322 Theories of Regulation 322

Hear What and How the Economist Thinks . . . About Regulation 323

The Costs and Benefits of Regulation 324

Does It Matter to You . . . If People Are Aware of Both the Costs and the Benefits of

Regulation? 324

Chapter Summary 326

Key Terms and Concepts 327

Questions and Problems 327

Working with Numbers and Graphs 328

Part 4 Factor Markets and Related Issues


Factor Markets 329

The Demand for a Factor 329 Marginal Revenue Product: Two Ways to Calculate It 330

The MRP Curve Is the Firm’s Factor Demand Curve 330 Value Marginal Product 331

An Important Question: Is MRP 5 VMP ? 332 Marginal Factor Cost: The Firm’s Factor

Supply Curve 333 How Many Units of a Factor Should a Firm Buy? 334 When There

Is More Than One Factor, How Much of Each Factor Should the Firm Buy? 334

The Labor Market 336

Shifts in a Firm’s MRP, or Factor Demand, Curve 336 Market Demand for Labor 338

The Elasticity of Demand for Labor 339

Hear What and How the Economist Thinks . . . About the Debate Over the Minimum Wage 339

Does It Matter to You . . . If the Elasticity of Demand for the Good or Service You Produce

Is High or Low? 341

Market Supply of Labor 341 An Individual’s Supply of Labor 342 Shifts in the Labor

Supply Curve 343 Putting Supply and Demand Together 344 Why Do Wage Rates

Differ? 345 Why Demand and Supply Differ among Labor Markets 346 Why Did

You Choose Your Major? 346 Marginal Productivity Theory 347

Labor Markets and Information 349

Screening Potential Employees 349 Promoting from Within 350 Discrimination or an Information Problem? 350

Chapter Summary 351

Key Terms and Concepts 352

Questions and Problems 352

Working with Numbers and Graphs 353


Objectives of Labor Unions 354

Employment for All Members 354 Maximizing the Total Wage Bill 355 Maximizing

Income for a Limited Number of Union Members 355 Wage–Employment Trade-Off 355

Practices of Labor Unions 356

Affecting the Elasticity of Demand for Union Labor 356

Hear What and How the Economist Thinks . . . About Unions and Wages 357

Affecting the Demand for Union Labor 358 Affecting the Supply of Union Labor 358

Affecting Wages Directly: Collective Bargaining 359 Strikes 361

Effects of Labor Unions 361

The Case of Monopsony 361 Unions’ Effects on Wages 363

Does It Matter to You . . . If Things Are Different in the Short-Run Than in

the Long Run? 365

Unions’ Effects on Prices 365 Unions’ Effects on Productivity and Efficiency: Two Views 365

Chapter Summary 368

Key Terms and Concepts 369

Questions and Problems 369

Working with Numbers and Graphs 370


Some Facts About Income Distribution 371

Who Are the Rich and How Rich Are They? 371 The Effect of Age on the Income

Distribution 372 A Simple Equation 374

Does It Matter to You . . . What Your Educational Attainment Level Is? 376

Measuring Income Equality 376

The Lorenz Curve 376 The Gini Coefficient 378 A Limitation of the Gini Coefficient 379

Common Misconceptions about Income Inequality 379

Why Income Inequality Exists 380

Factors Contributing to Income Inequality 381 Income Differences: Some are Voluntary, Some are Not 382

Poverty 383

What Is Poverty? 383 Limitations of the Official Poverty Income Statistics 383

Who Are the Poor? 384 What Is the Justification for Government Redistributing

Income? 384

Chapter Summary 386

Key Terms and Concepts 387

Questions and Problems 387

Working with Numbers and Graphs 387


Interest 388

Loanable Funds: Demand and Supply 388 The Price for Loanable Funds and the

Return on Capital Goods Tend to Equality 390 Why Do Interest Rates Differ? 391

Nominal and Real Interest Rates 391 Present Value: What Is Something Tomorrow

Worth Today? 392

Rent 395

David Ricardo, the Price of Grain, and Land Rent 395 The Supply Curve of Land Can be

Upward Sloping 397 Economic Rent and Other Factors of Production 398 Economic

Rent and Baseball Players: Perspective Matters 398 Competing for Artificial and Real Rents 399

Does It Matter to You . . . If People Compete for Artificial Rents as Opposed to Real Rents? 399

Profit 400

Theories of Profit 400 Profit and Loss as Signals 401

Hear What and How the Economist Thinks . . . About Profit 402

The Entrepreneur 403

A Market 403 How Can the Entrepreneur Increase Trade? 403 Turning Potential Trades

into Actual Trades 404 A Necessary Condition: Turn Potential Trades into Actual Trades

in a Way Acceptable to Consumers 404 Can Increasing Trades in One Area Reduce Trades

in Another? 404 Uncertainty and the Entrepreneur 404

Chapter Summary 406

Key Terms and Concepts 406

Questions and Problems 407

Working with Numbers and Graphs 407

Part 5 Market Failure, Public Choice, and Special-Interest Group Politics


Externalities 408

Costs and Benefits of Activities 408 Marginal Costs and Benefits of Activities 409

Social Optimality, or Efficiency, Conditions 410 Three Categories of Activities 410

Externalities in Consumption and in Production 410 Diagram of a Negative

Externality 410 Diagram of a Positive Externality 413

Internalizing Externalities 414

Persuasion 414 Taxes and Subsidies 415 Assigning Property Rights 415

Hear What and How the Economist Thinks . . . About Coming to Class Late 416

Voluntary Agreements 416 Combining Property Rights Assignments and Voluntary

Agreements 417 Beyond Internalizing: Setting Regulations 418

Environmental Policy 419

Method 1: Government Regulation, or Command and Control 420 Method 2: Emission

Taxes 420 Method 3: Tradable Pollution Permits (Cap and Trade) 421 Similarities and

Differences Between Emission Taxes and Tradable Pollution Permits 422

Public Goods: Excludable and Nonexcludable 423

Goods 423 The Free Rider 424

Does It Matter to You . . . If There Is a Free-Rider Problem? 425

Nonexcludable Versus Nonrivalrous 425

Asymmetric Information 427

Asymmetric Information in a Product Market 427 Asymmetric Information in a Factor

Market 428 Is There Market Failure? 428 Adverse Selection 429 Moral Hazard 430

Chapter Summary 433

Key Terms and Concepts 434

Questions and Problems 435

Working with Numbers and Graphs 436



Public Choice Theory 437

The Political Market 438

Moving Toward the Middle: The Median Voter Model 438 What Does the Theory

Predict? 439

Voters and Rational Ignorance 442

The Costs and Benefits of Voting 442

Does It Matter to You . . . If You Do Not Vote? 443

Rational Ignorance 443

Hear What and How the Economist Thinks . . . About Rational Ignorance 445

More About Voting 446

Example 1: Voting for a Nonexcludable Public Good 446 Example 2: Voting and Efficiency 447

Special-Interest Groups 448

Information and Lobbying 448 Congressional Districts as Special-Interest Groups 449

Public-Interest Talk, Special-Interest Legislation 449 Rent Seeking 450 Bringing About

Transfers 451 Information, Rational Ignorance, and Seeking Transfers 451

Constitutional Economics 453

Chapter Summary 455

Key Terms and Concepts 456

Questions and Problems 456

Working with Numbers and Graphs 457

Part 6 Economic Theory-Building and Everyday Life



A Different Kind of Chapter 458

The Process 459

Observation/Thought 1: The Birthrates in Various Countries are Different 460

The Question 460 The Theory 460 The Predictions 460 A Detour: The Issue of Falsifiability (Refutability) 461

Hear What and How the Economist Thinks . . . About Theories 461

Observation/Thought 2: The Ethical Code of People Who Live in a Small Town is

Different from that of People Who Live in a Large City 462

The Question 463 The Theory 463 The Predictions 463

Observation/Thought 3: The Closer the Dollar Tuition the Student Pays is to the Equilibrium

Tuition, the More on Time and Responsive University Instructors Will Be for Office Hours 465

The Question 465 The Theory 465 The Predictions 467

Observation/Thought 4: Criminals are Not Rational 467

The Question 467 The Theory 467 The Predictions 468 A Detour: Does Evidence

Prove a Theory Correct? 468 Another Detour: After You Have One Theory That Explains

and Predicts, Search for Another 469 A Final Detour: Why Prediction Is So Important, or

Why Good-Sounding Stories are Not Enough 470

Observation/Thought 5: More Students Wear Baseball Caps in Class on Exam Days

Than on Other Days 471

The Question 471 The Theory 471 The Predictions 472

Observation/Thought 6: Houses in “Good” School Districts are Often More Expensive

than Comparable Houses in “Bad” School Districts 474

The Question 474 The Theory 474 The Predictions 474

Observation/Thought 7: Are People Better Off With or Without Health Care Vouchers? 475

The Question 475 The Theory 475 The Predictions 476

Observation/Thought 8: People Who Give to Others Often Complain That They End Up

Giving Too Much 476

The Question 476 The Theory 477 The Predictions 479

Does It Matter to You . . . If and How You Are in Someone Else’s Utility Function? 480

Chapter Summary 481

Questions and Problems 483

Working with Numbers and Graphs 483

The Global Economy

Part 7 International Economics and Globalization


International Trade Theory 484

How Countries Know What to Trade 485

Does It Matter to You . . . If There Is Always Someone Who Can Do Something Better Than You? 487

A Common Misconception about How Much We Can Consume 488 How Countries

Know When They Have a Comparative Advantage 488

Hear What and How the Economist Thinks . . . About Common Sense 490

Trade Restrictions 490

The Distributional Effects of International Trade 491 Consumers’ and Producers’

Surpluses 491 The Benefits and Costs of Trade Restrictions 492 Why Nations

Sometimes Restrict Trade 496

Chapter Summary 500

Key Terms and Concepts 501

Questions and Problems 501

Working with Numbers and Graphs 502


The Foreign Exchange Market 503

The Demand for Goods 504 The Demand for, and Supply of, Currencies 504

Flexible Exchange Rates 505

The Equilibrium Exchange Rate 505

Does It Matter to You . . . If the Dollar Depreciates? 506

Changes in the Equilibrium Exchange Rate 506

Factors That Affect the Equilibrium Exchange Rate 507

Fixed Exchange Rates 510

Fixed Exchange Rates and Overvalued or Undervalued Currency 511 What Is So

Bad about an Overvalued Dollar? 513 Government Involvement in a Fixed Exchange

Rate System 514 Options Under a Fixed Exchange Rate System 514

Fixed Exchange Rates Versus Flexible Exchange Rates 516

Promoting International Trade 516 Optimal Currency Areas 516

Chapter Summary 519

Key Terms and Concepts 520

Questions and Problems 520

Working with Numbers and Graphs 521

Web Chapters

CHAPTER 22: The Economic Case for and Against

Government: Five Topics Considered 522

Economics and Government 522

The Economic Case for Government 523

Government Can Remove Individuals from a Prisoner’s Dilemma Setting 523

Externalities 527 Nonexcludable Public Goods 528 The Case for Smaller or Larger

Government 530

The Economic Case Against Government 531

Unintended Effects of Government Actions 531 Government as Transfer Mechanism

532 Economic Growth Versus Transfers 534 Following the Leader in Pushing for

Transfers 535 Divisive Society: A Nonexcludable Public Bad 537

Chapter Summary 538

Key Terms and Concepts 539

Questions and Problems 539

Working with Numbers and Graphs 540


Financial Markets 541

Stocks 542

Where are Stocks Bought and Sold? 542 The Dow Jones Industrial Average (DJIA) 543

How the Stock Market Works 544 Why Do People Buy Stock? 545 How to Buy

and Sell Stock 545 Buying Stocks or Buying the Market 546 How to Read the Stock

Market Page 547

Bonds 549

The Components of a Bond 549 Bond Ratings 550 Bond Prices and Yields

(or Interest Rates) 550 Common Misconceptions about the Coupon Rate and Yield (Interest

Rate) 551 Types of Bonds 552 How to Read the Bond Market Page 552 Risk and Return 554

Futures and Options 554

Futures 554 Options 555

Chapter Summary 558

Key Terms and Concepts 558

Questions and Problems 558

Working with Numbers and Graphs 559

Self-Test Appendix 522

Glossary 540

Index 547

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