Principles of Microeconomics, Eighth Edition
By N. Gregory Mankiw
Contents:
Preface: To the Student xiii
Acknowledgments xix
PART I Introduction 1
CHAPTER 1
Ten Principles of Economics 3
1-1 How People Make Decisions 4
1-1a Principle 1: People Face Trade-offs 4
1-1b Principle 2: The Cost of Something
Is What You Give Up to Get It 5
1-1c Principle 3: Rational People Think at the Margin 6
1-1d Principle 4: People Respond to Incentives 7
1-2 How People Interact 8
1-2a Principle 5: Trade Can Make Everyone Better Off 8
1-2b Principle 6: Markets Are Usually a Good Way to
Organize Economic Activity 9
FYI: Adam Smith and the Invisible Hand 10
CASE STUDY: Adam Smith Would Have Loved Uber 11
1-2c Principle 7: Governments Can Sometimes
Improve Market Outcomes 11
1-3 How the Economy as a Whole Works 13
1-3a Principle 8: A Country’s Standard of Living Depends
on Its Ability to Produce Goods and Services 13
1-3b Principle 9: Prices Rise When the Government
Prints Too Much Money 13
1-3c Principle 10: Society Faces a Short-Run Trade-off
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
2-2 The Economist as Policy Adviser 27
2-2a Positive versus Normative Analysis 27
2-2b Economists in Washington 28
2-2c Why Economists’ Advice Is Not Always Followed 29
2-3 Why Economists Disagree 30
2-3a Differences in Scientific Judgments 30
2-3b Differences in Values 30
2-3c Perception versus Reality 31
ASK THE EXPERTS: Ticket Resale 32
2-4 Let’s Get Going 32
IN THE NEWS: Why You Should Study Economics 33
Summary 34
Key Concepts 34
Questions for Review 35
Problems and Applications 35
Appendix Graphing: A Brief Review 37
CHAPTER 3
Interdependence and the Gains
from Trade 47
3-1 A Parable for the Modern Economy 48
3-1a Production Possibilities 49
3-1b Specialization and Trade 50
3-2 Comparative Advantage: The Driving Force
of Specialization 52
3-2a Absolute Advantage 52
3-2b Opportunity Cost and Comparative Advantage 52
3-2c Comparative Advantage and Trade 53
3-2d The Price of the Trade 54
FYI: The Legacy of Adam Smith and David Ricardo 55
3-3 Applications of Comparative Advantage 55
3-3a Should Serena Williams Mow Her Own Lawn? 55
IN THE NEWS: Economics within a Marriage 56
3-3b Should the United States Trade with Other Countries? 56
ASK THE EXPERTS: Trade between China and
the United States 58
3-4 Conclusion 58
Summary 59
Key Concepts 59
Questions for Review 60
Problems and Applications 60
PART II How Markets
Work 63
CHAPTER 4
The Market Forces of Supply and
Demand 65
4-1 Markets and Competition 66
4-1a What Is a Market? 66
4-1b What Is Competition? 66
4-2 Demand 67
4-2a The Demand Curve: The Relationship between
Price and Quantity Demanded 67
4-2b Market Demand versus Individual Demand 68
4-2c Shifts in the Demand Curve 69
CASE STUDY: Two Ways to Reduce the Quantity of Smoking
Demanded 71
4-3 Supply 73
4-3a The Supply Curve: The Relationship between Price
and Quantity Supplied 73
4-3b Market Supply versus Individual Supply 74
4-3c Shifts in the Supply Curve 75
4-4 Supply and Demand Together 76
4-4a Equilibrium 76
4-4b Three Steps to Analyzing Changes in Equilibrium 78
4-5 Conclusion: How Prices Allocate Resources 83
ASK THE EXPERTS: Price Gouging 83
IN THE NEWS: Price Increases after Disasters 84
Summary 86
Key Concepts 86
Questions for Review 87
Problems and Applications 87
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
5-3a Can Good News for Farming Be Bad News for
Farmers? 102
5-3b Why Did OPEC Fail to Keep the Price of Oil High? 104
5-3c Does Drug Interdiction Increase or Decrease
Drug-Related Crime? 105
5-4 Conclusion 107
Summary 108
Key Concepts 108
Questions for Review 109
Problems and Applications 109
CHAPTER 6
Supply, Demand, and Government
Policies 111
6-1 Controls on Prices 112
6-1a How Price Ceilings Affect Market Outcomes 112
CASE STUDY: Lines at the Gas Pump 114
CASE STUDY: Rent Control in the Short Run and the Long
Run 115
6-1b How Price Floors Affect Market Outcomes 116
ASK THE EXPERTS: Rent Control 116
CASE STUDY: The Minimum Wage 118
ASK THE EXPERTS: The Minimum Wage 119
6-1c Evaluating Price Controls 120
6-2 Taxes 120
6-2a How Taxes on Sellers Affect Market Outcomes 121
6-2b How Taxes on Buyers Affect Market Outcomes 122
CASE STUDY: Can Congress Distribute the Burden
of a Payroll Tax? 124
6-2c Elasticity and Tax Incidence 124
CASE STUDY: Who Pays the Luxury Tax? 126
6-3 Conclusion 127
Summary 128
Key Concepts 128
Questions for Review 128
Problems and Applications 129
PART III Markets and
Welfare 131
CHAPTER 7
Consumers, Producers, and the Efficiency
of Markets 133
7-1 Consumer Surplus 134
7-1a Willingness to Pay 134
7-1b Using the Demand Curve to Measure Consumer
Surplus 135
7-1c How a Lower Price Raises Consumer Surplus 136
7-1d What Does Consumer Surplus Measure? 137
7-2 Producer Surplus 139
7-2a Cost and the Willingness to Sell 139
7-2b Using the Supply Curve to Measure Producer Surplus 140
7-2c How a Higher Price Raises Producer Surplus 141
7-3 Market Efficiency 142
7-3a The Benevolent Social Planner 143
7-3b Evaluating the Market Equilibrium 144
IN THE NEWS: The Invisible Hand Can Park Your Car 146
CASE STUDY: Should There Be a Market for Organs? 147
ASK THE EXPERTS: Supplying Kidneys 148
7-4 Conclusion: Market Efficiency and Market Failure 148
Summary 150
Key Concepts 150
Questions for Review 150
Problems and Applications 150
CHAPTER 8
Application: The Costs of Taxation 153
8-1 The Deadweight Loss of Taxation 154
8-1a How a Tax Affects Market Participants 155
8-1b Deadweight Losses and the Gains from Trade 157
8-2 The Determinants of the Deadweight Loss 158
CASE STUDY: The Deadweight Loss Debate 160
8-3 Deadweight Loss and Tax Revenue as Taxes Vary 161
CASE STUDY: The Laffer Curve and Supply-Side
Economics 162
ASK THE EXPERTS: The Laffer Curve 163
8-4 Conclusion 164
Summary 165
Key Concept 165
Questions for Review 165
Problems and Applications 165
CHAPTER 9
Application: International Trade 167
9-1 The Determinants of Trade 168
9-1a The Equilibrium without Trade 168
9-1b The World Price and Comparative Advantage 169
9-2 The Winners and Losers from Trade 170
9-2a The Gains and Losses of an Exporting Country 170
9-2b The Gains and Losses of an Importing Country 171
9-2c Effects of a Tariff 173
FYI: Import Quotas: Another Way to Restrict Trade 175
9-2d The Lessons for Trade Policy 175
9-2e Other Benefits of International Trade 176
IN THE NEWS: Trade as a Tool for Economic Development 177
9-3 The Arguments for Restricting Trade 178
9-3a The Jobs Argument 178
IN THE NEWS: Should the Winners from Free Trade
Compensate the Losers? 179
9-3b The National-Security Argument 180
9-3c The Infant-Industry Argument 180
9-3d The Unfair-Competition Argument 181
9-3e The Protection-as-a-Bargaining-Chip Argument 181
CASE STUDY: Trade Agreements and the World Trade
Organization 181
ASK THE EXPERTS: Trade Deals 182
9-4 Conclusion 182
Summary 184
Key Concepts 184
Questions for Review 184
Problems and Applications 185
PART IV The Economics of the
Public Sector 187
CHAPTER 10
Externalities 189
10-1 Externalities and Market Inefficiency 191
10-1a Welfare Economics: A Recap 191
10-1b Negative Externalities 192
10-1c Positive Externalities 193
CASE STUDY: Technology Spillovers, Industrial Policy,
and Patent Protection 194
10-2 Public Policies toward Externalities 195
10-2a Command-and-Control Policies: Regulation 195
10-2b Market-Based Policy 1: Corrective Taxes and
Subsidies 196
ASK THE EXPERTS: Vaccines 196
CASE STUDY: Why Is Gasoline Taxed So Heavily? 197
IN THE NEWS: What Should We Do about Climate
Change? 199
10-2c Market-Based Policy 2: Tradable Pollution
Permits 200
ASK THE EXPERTS: Carbon Taxes 200
10-2d Objections to the Economic Analysis of Pollution 202
10-3 Private Solutions to Externalities 202
10-3a The Types of Private Solutions 202
10-3b The Coase Theorem 203
10-3c Why Private Solutions Do Not Always Work 204
IN THE NEWS: The Coase Theorem in Action 205
10-4 Conclusion 206
Summary 207
Key Concepts 207
Questions for Review 207
Problems and Applications 208
CHAPTER 11
Public Goods and Common
Resources 211
11-1 The Different Kinds of Goods 212
11-2 Public Goods 214
11-2a The Free-Rider Problem 214
11-2b Some Important Public Goods 214
CASE STUDY: Are Lighthouses Public Goods? 216
11-2c The Difficult Job of Cost–Benefit Analysis 216
CASE STUDY: How Much Is a Life Worth? 217
11-3 Common Resources 218
11-3a The Tragedy of the Commons 218
11-3b Some Important Common Resources 219
ASK THE EXPERTS: Congesting Pricing 219
IN THE NEWS: The Case for Toll Roads 220
CASE STUDY: Why the Cow Is Not Extinct 222
11-4 Conclusion: The Importance of Property Rights 223
Summary 224
Key Concepts 224
Questions for Review 224
Problems and Applications 224
CHAPTER 12
The Design of the Tax System 227
12-1 An Overview of U.S. Taxation 228
12-1a Taxes Collected by the Federal Government 228
12-1b Taxes Collected by State and Local Governments 231
12-2 Taxes and Efficiency 232
12-2a Deadweight Losses 232
CASE STUDY: Should Income or Consumption
Be Taxed? 233
12-2b Administrative Burden 234
12-2c Marginal Tax Rates versus Average Tax Rates 235
12-2d Lump-Sum Taxes 235
12-3 Taxes and Equity 236
12-3a The Benefits Principle 236
12-3b The Ability-to-Pay Principle 237
CASE STUDY: How the Tax Burden Is Distributed 238
12-3c Tax Incidence and Tax Equity 239
IN THE NEWS: Tax Expenditures 240
CASE STUDY: Who Pays the Corporate Income Tax? 240
12-4 Conclusion: The Trade-off between Equity and
Efficiency 242
Summary 243
Key Concepts 243
Questions for Review 244
Problems and Applications 224
PART V Firm Behavior and
the Organization of
Industry 245
CHAPTER 13
The Costs of Production 247
13-1 What Are Costs? 248
13-1a Total Revenue, Total Cost, and Profit 248
13-1b Costs as Opportunity Costs 249
13-1c The Cost of Capital as an Opportunity Cost 249
13-1d Economic Profit versus Accounting Profit 250
13-2 Production and Costs 251
13-2a The Production Function 251
13-2b From the Production Function to the Total-Cost
Curve 253
13-3 The Various Measures of Cost 254
13-3a Fixed and Variable Costs 255
13-3b Average and Marginal Cost 255
13-3c Cost Curves and Their Shapes 256
13-3d Typical Cost Curves 258
13-4 Costs in the Short Run and in the Long Run 259
13-4a The Relationship between Short-Run and Long-Run
Average Total Cost 260
13-4b Economies and Diseconomies of Scale 261
FYI: Lessons from a Pin Factory 261
13-5 Conclusion 262
Summary 263
Key Concepts 264
Questions for Review 264
Problems and Applications 264
CHAPTER 14
Firms in Competitive Markets 267
14-1 What Is a Competitive Market? 268
14-1a The Meaning of Competition 268
14-1b The Revenue of a Competitive Firm 269
14-2 Profit Maximization and the Competitive Firm’s
Supply Curve 270
14-2a A Simple Example of Profit Maximization 270
14-2b The Marginal-Cost Curve and the Firm’s Supply
Decision 271
14-2c The Firm’s Short-Run Decision to Shut Down 273
14-2d Spilt Milk and Other Sunk Costs 275
CASE STUDY: Near-Empty Restaurants and Off-Season
Miniature Golf 275
14-2e The Firm’s Long-Run Decision to Exit or Enter a
Market 276
14-2f Measuring Profit in Our Graph for the Competitive
Firm 277
14-3 The Supply Curve in a Competitive Market 279
14-3a The Short Run: Market Supply with a Fixed Number
of Firms 279
14-3b The Long Run: Market Supply with Entry
and Exit 279
14-3c Why Do Competitive Firms Stay in Business
If They Make Zero Profit? 280
14-3d A Shift in Demand in the Short Run and
Long Run 281
14-3e Why the Long-Run Supply Curve Might Slope
Upward 282
14-4 Conclusion: Behind the Supply Curve 284
Summary 285
Key Concepts 285
Questions for Review 285
Problems and Applications 286
CHAPTER 15
Monopoly 289
15-1 Why Monopolies Arise 290
15-1a Monopoly Resources 291
15-1b Government-Created Monopolies 291
15-1c Natural Monopolies 292
15-2 How Monopolies Make Production and Pricing
Decisions 293
15-2a Monopoly versus Competition 293
15-2b A Monopoly’s Revenue 294
15-2c Profit Maximization 296
15-2d A Monopoly’s Profit 298
FYI: Why a Monopoly Does Not Have a Supply Curve 298
CASE STUDY: Monopoly Drugs versus Generic Drugs 299
15-3 The Welfare Cost of Monopolies 300
15-3a The Deadweight Loss 301
15-3b The Monopoly’s Profit: A Social Cost? 303
15-4 Price Discrimination 303
15-4a A Parable about Pricing 304
15-4b The Moral of the Story 305
15-4c The Analytics of Price Discrimination 305
15-4d Examples of Price Discrimination 306
IN THE NEWS: Price Discrimination in Higher
Education 308
15-5 Public Policy toward Monopolies 308
15-5a Increasing Competition with Antitrust Laws 308
15-5b Regulation 309
ASK THE EXPERTS: Airline Mergers 309
15-5c Public Ownership 310
15-5d Doing Nothing 311
15-6 Conclusion: The Prevalence of Monopolies 311
Summary 313
Key Concepts 313
Questions for Review 314
Problems and Applications 314
CHAPTER 16
Monopolistic Competition 319
16-1 Between Monopoly and Perfect Competition 320
16-2 Competition with Differentiated Products 322
16-2a The Monopolistically Competitive Firm in the
Short Run 322
16-2b The Long-Run Equilibrium 323
16-2c Monopolistic versus Perfect Competition 324
16-2d Monopolistic Competition and the Welfare of
Society 327
16-3 Advertising 328
16-3a The Debate over Advertising 328
CASE STUDY: Advertising and the Price of Eyeglasses 329
16-3b Advertising as a Signal of Quality 330
16-3c Brand Names 331
16-4 Conclusion 332
Summary 333
Key Concepts 334
Questions for Review 334
Problems and Applications 334
CHAPTER 17
Oligopoly 337
17-1 Markets with Only a Few Sellers 338
17-1a A Duopoly Example 338
17-1b Competition, Monopolies, and Cartels 339
17-1c The Equilibrium for an Oligopoly 340
17-1d How the Size of an Oligopoly Affects the Market
Outcome 341
ASK THE EXPERTS: Nash Equilibrium 341
17-2 The Economics of Cooperation 342
17-2a The Prisoners’ Dilemma 343
17-2b Oligopolies as a Prisoners’ Dilemma 344
CASE STUDY: OPEC and the World Oil Market 345
17-2c Other Examples of the Prisoners’ Dilemma 346
17-2d The Prisoners’ Dilemma and the Welfare of Society 347
17-2e Why People Sometimes Cooperate 348
CASE STUDY: The Prisoners’ Dilemma Tournament 348
17-3 Public Policy toward Oligopolies 349
17-3a Restraint of Trade and the Antitrust Laws 349
CASE STUDY: An Illegal Phone Call 350
17-3b Controversies over Antitrust Policy 350
CASE STUDY: The Microsoft Case 352
IN THE NEWS: Europe versus Google 354
17-4 Conclusion 354
Summary 355
Key Concepts 356
Questions for Review 356
Problems and Applications 356
PART VI The Economics
of Labor Markets 359
CHAPTER 18
The Markets for the Factors
of Production 361
18-1 The Demand for Labor 362
18-1a The Competitive Profit-Maximizing Firm 363
18-1b The Production Function and the Marginal Product of
Labor 363
18-1c The Value of the Marginal Product and the Demand for
Labor 365
18-1d What Causes the Labor-Demand Curve to Shift? 366
FYI: Input Demand and Output Supply: Two Sides
of the Same Coin 367
18-2 The Supply of Labor 368
18-2a The Trade-off between Work and Leisure 368
18-2b What Causes the Labor-Supply Curve to Shift? 368
ASK THE EXPERTS: Immigration 369
18-3 Equilibrium in the Labor Market 369
18-3a Shifts in Labor Supply 370
18-3b Shifts in Labor Demand 371
IN THE NEWS: The Economics of Immigration 372
CASE STUDY: Productivity and Wages 373
FYI: Monopsony 374
18-4 The Other Factors of Production: Land and Capital 375
18-4a Equilibrium in the Markets for Land and Capital 375
FYI: What Is Capital Income? 376
18-4b Linkages among the Factors of Production 377
CASE STUDY: The Economics of the Black Death 377
18-5 Conclusion 378
Summary 379
Key Concepts 379
Questions for Review 379
Problems and Applications 380
CHAPTER 19
Earnings and Discrimination 383
19-1 Some Determinants of Equilibrium Wages 384
19-1a Compensating Differentials 384
19-1b Human Capital 385
CASE STUDY: The Increasing Value of Skills 385
ASK THE EXPERTS: Inequality and Skills 386
IN THE NEWS: Schooling as a Public Investment 387
19-1c Ability, Effort, and Chance 388
CASE STUDY: The Benefits of Beauty 388
19-1d An Alternative View of Education: Signaling 389
19-1e The Superstar Phenomenon 390
19-1f Above-Equilibrium Wages: Minimum-Wage Laws,
Unions, and Efficiency Wages 390
19-2 The Economics of Discrimination 391
19-2a Measuring Labor-Market Discrimination 391
CASE STUDY: Is Emily More Employable than
Lakisha? 393
19-2b Discrimination by Employers 393
CASE STUDY: Segregated Streetcars and the Profit
Motive 394
19-2c Discrimination by Customers and
Governments 395
CASE STUDY: Discrimination in Sports 395
19-3 Conclusion 396
Summary 397
Key Concepts 398
Questions for Review 398
Problems and Applications 398
CHAPTER 20
Income Inequality and Poverty 401
20-1 The Measurement of Inequality 402
20-1a U.S. Income Inequality 402
20-1b Inequality around the World 403
IN THE NEWS: A Worldwide View of the Income
Distribution 405
20-1c The Poverty Rate 406
20-1d Problems in Measuring Inequality 407
CASE STUDY: Alternative Measures of Inequality 408
20-1e Economic Mobility 409
20-2 The Political Philosophy of Redistributing Income 409
20-2a Utilitarianism 410
20-2b Liberalism 411
20-2c Libertarianism 412
20-3 Policies to Reduce Poverty 413
20-3a Minimum-Wage Laws 413
20-3b Welfare 414
20-3c Negative Income Tax 414
20-3d In-Kind Transfers 415
20-3e Antipoverty Programs and Work Incentives 415
IN THE NEWS: International Differences in Income
Redistribution 416
20-4 Conclusion 418
Summary 419
Key Concepts 420
Questions for Review 420
Problems and Applications 420
PART VII Topics for Further
Study 423
CHAPTER 21
The Theory of Consumer Choice 425
21-1 The Budget Constraint: What the Consumer
Can Afford 426
21-2 Preferences: What the Consumer Wants 428
21-2a Representing Preferences with Indifference
Curves 428
21-2b Four Properties of Indifference Curves 429
21-2c Two Extreme Examples of Indifference Curves 430
21-3 Optimization: What the Consumer Chooses 432
21-3a The Consumer’s Optimal Choices 432
FYI: Utility: An Alternative Way to Describe Preferences and
Optimization 433
21-3b How Changes in Income Affect the Consumer’s
Choices 434
21-3c How Changes in Prices Affect the Consumer’s
Choices 435
21-3d Income and Substitution Effects 436
21-3e Deriving the Demand Curve 438
21-4 Three Applications 439
21-4a Do All Demand Curves Slope Downward? 439
CASE STUDY: The Search for Giffen Goods 440
21-4b How Do Wages Affect Labor Supply? 440
CASE STUDY: Income Effects on Labor Supply: Historical
Trends, Lottery Winners, and the Carnegie Conjecture 443
21-4c How Do Interest Rates Affect Household Saving? 444
21-5 Conclusion: Do People Really Think This Way? 446
Summary 447
Key Concepts 448
Questions for Review 448
Problems and Applications 448
CHAPTER 22
Frontiers of Microeconomics 451
22-1 Asymmetric Information 452
22-1a Hidden Actions: Principals, Agents, and Moral
Hazard 452
FYI: Corporate Management 453
22-1b Hidden Characteristics: Adverse Selection and
the Lemons Problem 454
22-1c Signaling to Convey Private Information 455
CASE STUDY: Gifts as Signals 455
22-1d Screening to Uncover Private Information 456
22-1e Asymmetric Information and Public Policy 456
22-2 Political Economy 457
22-2a The Condorcet Voting Paradox 457
22-2b Arrow’s Impossibility Theorem 458
22-2c The Median Voter Is King 459
22-2d Politicians Are People Too 461
22-3 Behavioral Economics 461
22-3a People Aren’t Always Rational 462
22-3b People Care about Fairness 463
IN THE NEWS: Using Deviations from Rationality 464
22-3c People Are Inconsistent over Time 466
22-4 Conclusion 467
Summary 468
Key Concepts 468
Questions for Review 468
Problems and Applications 468
Glossary 471
Index 477
Acknowledgments xix
PART I Introduction 1
CHAPTER 1
Ten Principles of Economics 3
1-1 How People Make Decisions 4
1-1a Principle 1: People Face Trade-offs 4
1-1b Principle 2: The Cost of Something
Is What You Give Up to Get It 5
1-1c Principle 3: Rational People Think at the Margin 6
1-1d Principle 4: People Respond to Incentives 7
1-2 How People Interact 8
1-2a Principle 5: Trade Can Make Everyone Better Off 8
1-2b Principle 6: Markets Are Usually a Good Way to
Organize Economic Activity 9
FYI: Adam Smith and the Invisible Hand 10
CASE STUDY: Adam Smith Would Have Loved Uber 11
1-2c Principle 7: Governments Can Sometimes
Improve Market Outcomes 11
1-3 How the Economy as a Whole Works 13
1-3a Principle 8: A Country’s Standard of Living Depends
on Its Ability to Produce Goods and Services 13
1-3b Principle 9: Prices Rise When the Government
Prints Too Much Money 13
1-3c Principle 10: Society Faces a Short-Run Trade-off
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
2-2 The Economist as Policy Adviser 27
2-2a Positive versus Normative Analysis 27
2-2b Economists in Washington 28
2-2c Why Economists’ Advice Is Not Always Followed 29
2-3 Why Economists Disagree 30
2-3a Differences in Scientific Judgments 30
2-3b Differences in Values 30
2-3c Perception versus Reality 31
ASK THE EXPERTS: Ticket Resale 32
2-4 Let’s Get Going 32
IN THE NEWS: Why You Should Study Economics 33
Summary 34
Key Concepts 34
Questions for Review 35
Problems and Applications 35
Appendix Graphing: A Brief Review 37
CHAPTER 3
Interdependence and the Gains
from Trade 47
3-1 A Parable for the Modern Economy 48
3-1a Production Possibilities 49
3-1b Specialization and Trade 50
3-2 Comparative Advantage: The Driving Force
of Specialization 52
3-2a Absolute Advantage 52
3-2b Opportunity Cost and Comparative Advantage 52
3-2c Comparative Advantage and Trade 53
3-2d The Price of the Trade 54
FYI: The Legacy of Adam Smith and David Ricardo 55
3-3 Applications of Comparative Advantage 55
3-3a Should Serena Williams Mow Her Own Lawn? 55
IN THE NEWS: Economics within a Marriage 56
3-3b Should the United States Trade with Other Countries? 56
ASK THE EXPERTS: Trade between China and
the United States 58
3-4 Conclusion 58
Summary 59
Key Concepts 59
Questions for Review 60
Problems and Applications 60
PART II How Markets
Work 63
CHAPTER 4
The Market Forces of Supply and
Demand 65
4-1 Markets and Competition 66
4-1a What Is a Market? 66
4-1b What Is Competition? 66
4-2 Demand 67
4-2a The Demand Curve: The Relationship between
Price and Quantity Demanded 67
4-2b Market Demand versus Individual Demand 68
4-2c Shifts in the Demand Curve 69
CASE STUDY: Two Ways to Reduce the Quantity of Smoking
Demanded 71
4-3 Supply 73
4-3a The Supply Curve: The Relationship between Price
and Quantity Supplied 73
4-3b Market Supply versus Individual Supply 74
4-3c Shifts in the Supply Curve 75
4-4 Supply and Demand Together 76
4-4a Equilibrium 76
4-4b Three Steps to Analyzing Changes in Equilibrium 78
4-5 Conclusion: How Prices Allocate Resources 83
ASK THE EXPERTS: Price Gouging 83
IN THE NEWS: Price Increases after Disasters 84
Summary 86
Key Concepts 86
Questions for Review 87
Problems and Applications 87
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
5-3a Can Good News for Farming Be Bad News for
Farmers? 102
5-3b Why Did OPEC Fail to Keep the Price of Oil High? 104
5-3c Does Drug Interdiction Increase or Decrease
Drug-Related Crime? 105
5-4 Conclusion 107
Summary 108
Key Concepts 108
Questions for Review 109
Problems and Applications 109
CHAPTER 6
Supply, Demand, and Government
Policies 111
6-1 Controls on Prices 112
6-1a How Price Ceilings Affect Market Outcomes 112
CASE STUDY: Lines at the Gas Pump 114
CASE STUDY: Rent Control in the Short Run and the Long
Run 115
6-1b How Price Floors Affect Market Outcomes 116
ASK THE EXPERTS: Rent Control 116
CASE STUDY: The Minimum Wage 118
ASK THE EXPERTS: The Minimum Wage 119
6-1c Evaluating Price Controls 120
6-2 Taxes 120
6-2a How Taxes on Sellers Affect Market Outcomes 121
6-2b How Taxes on Buyers Affect Market Outcomes 122
CASE STUDY: Can Congress Distribute the Burden
of a Payroll Tax? 124
6-2c Elasticity and Tax Incidence 124
CASE STUDY: Who Pays the Luxury Tax? 126
6-3 Conclusion 127
Summary 128
Key Concepts 128
Questions for Review 128
Problems and Applications 129
PART III Markets and
Welfare 131
CHAPTER 7
Consumers, Producers, and the Efficiency
of Markets 133
7-1 Consumer Surplus 134
7-1a Willingness to Pay 134
7-1b Using the Demand Curve to Measure Consumer
Surplus 135
7-1c How a Lower Price Raises Consumer Surplus 136
7-1d What Does Consumer Surplus Measure? 137
7-2 Producer Surplus 139
7-2a Cost and the Willingness to Sell 139
7-2b Using the Supply Curve to Measure Producer Surplus 140
7-2c How a Higher Price Raises Producer Surplus 141
7-3 Market Efficiency 142
7-3a The Benevolent Social Planner 143
7-3b Evaluating the Market Equilibrium 144
IN THE NEWS: The Invisible Hand Can Park Your Car 146
CASE STUDY: Should There Be a Market for Organs? 147
ASK THE EXPERTS: Supplying Kidneys 148
7-4 Conclusion: Market Efficiency and Market Failure 148
Summary 150
Key Concepts 150
Questions for Review 150
Problems and Applications 150
CHAPTER 8
Application: The Costs of Taxation 153
8-1 The Deadweight Loss of Taxation 154
8-1a How a Tax Affects Market Participants 155
8-1b Deadweight Losses and the Gains from Trade 157
8-2 The Determinants of the Deadweight Loss 158
CASE STUDY: The Deadweight Loss Debate 160
8-3 Deadweight Loss and Tax Revenue as Taxes Vary 161
CASE STUDY: The Laffer Curve and Supply-Side
Economics 162
ASK THE EXPERTS: The Laffer Curve 163
8-4 Conclusion 164
Summary 165
Key Concept 165
Questions for Review 165
Problems and Applications 165
CHAPTER 9
Application: International Trade 167
9-1 The Determinants of Trade 168
9-1a The Equilibrium without Trade 168
9-1b The World Price and Comparative Advantage 169
9-2 The Winners and Losers from Trade 170
9-2a The Gains and Losses of an Exporting Country 170
9-2b The Gains and Losses of an Importing Country 171
9-2c Effects of a Tariff 173
FYI: Import Quotas: Another Way to Restrict Trade 175
9-2d The Lessons for Trade Policy 175
9-2e Other Benefits of International Trade 176
IN THE NEWS: Trade as a Tool for Economic Development 177
9-3 The Arguments for Restricting Trade 178
9-3a The Jobs Argument 178
IN THE NEWS: Should the Winners from Free Trade
Compensate the Losers? 179
9-3b The National-Security Argument 180
9-3c The Infant-Industry Argument 180
9-3d The Unfair-Competition Argument 181
9-3e The Protection-as-a-Bargaining-Chip Argument 181
CASE STUDY: Trade Agreements and the World Trade
Organization 181
ASK THE EXPERTS: Trade Deals 182
9-4 Conclusion 182
Summary 184
Key Concepts 184
Questions for Review 184
Problems and Applications 185
PART IV The Economics of the
Public Sector 187
CHAPTER 10
Externalities 189
10-1 Externalities and Market Inefficiency 191
10-1a Welfare Economics: A Recap 191
10-1b Negative Externalities 192
10-1c Positive Externalities 193
CASE STUDY: Technology Spillovers, Industrial Policy,
and Patent Protection 194
10-2 Public Policies toward Externalities 195
10-2a Command-and-Control Policies: Regulation 195
10-2b Market-Based Policy 1: Corrective Taxes and
Subsidies 196
ASK THE EXPERTS: Vaccines 196
CASE STUDY: Why Is Gasoline Taxed So Heavily? 197
IN THE NEWS: What Should We Do about Climate
Change? 199
10-2c Market-Based Policy 2: Tradable Pollution
Permits 200
ASK THE EXPERTS: Carbon Taxes 200
10-2d Objections to the Economic Analysis of Pollution 202
10-3 Private Solutions to Externalities 202
10-3a The Types of Private Solutions 202
10-3b The Coase Theorem 203
10-3c Why Private Solutions Do Not Always Work 204
IN THE NEWS: The Coase Theorem in Action 205
10-4 Conclusion 206
Summary 207
Key Concepts 207
Questions for Review 207
Problems and Applications 208
CHAPTER 11
Public Goods and Common
Resources 211
11-1 The Different Kinds of Goods 212
11-2 Public Goods 214
11-2a The Free-Rider Problem 214
11-2b Some Important Public Goods 214
CASE STUDY: Are Lighthouses Public Goods? 216
11-2c The Difficult Job of Cost–Benefit Analysis 216
CASE STUDY: How Much Is a Life Worth? 217
11-3 Common Resources 218
11-3a The Tragedy of the Commons 218
11-3b Some Important Common Resources 219
ASK THE EXPERTS: Congesting Pricing 219
IN THE NEWS: The Case for Toll Roads 220
CASE STUDY: Why the Cow Is Not Extinct 222
11-4 Conclusion: The Importance of Property Rights 223
Summary 224
Key Concepts 224
Questions for Review 224
Problems and Applications 224
CHAPTER 12
The Design of the Tax System 227
12-1 An Overview of U.S. Taxation 228
12-1a Taxes Collected by the Federal Government 228
12-1b Taxes Collected by State and Local Governments 231
12-2 Taxes and Efficiency 232
12-2a Deadweight Losses 232
CASE STUDY: Should Income or Consumption
Be Taxed? 233
12-2b Administrative Burden 234
12-2c Marginal Tax Rates versus Average Tax Rates 235
12-2d Lump-Sum Taxes 235
12-3 Taxes and Equity 236
12-3a The Benefits Principle 236
12-3b The Ability-to-Pay Principle 237
CASE STUDY: How the Tax Burden Is Distributed 238
12-3c Tax Incidence and Tax Equity 239
IN THE NEWS: Tax Expenditures 240
CASE STUDY: Who Pays the Corporate Income Tax? 240
12-4 Conclusion: The Trade-off between Equity and
Efficiency 242
Summary 243
Key Concepts 243
Questions for Review 244
Problems and Applications 224
PART V Firm Behavior and
the Organization of
Industry 245
CHAPTER 13
The Costs of Production 247
13-1 What Are Costs? 248
13-1a Total Revenue, Total Cost, and Profit 248
13-1b Costs as Opportunity Costs 249
13-1c The Cost of Capital as an Opportunity Cost 249
13-1d Economic Profit versus Accounting Profit 250
13-2 Production and Costs 251
13-2a The Production Function 251
13-2b From the Production Function to the Total-Cost
Curve 253
13-3 The Various Measures of Cost 254
13-3a Fixed and Variable Costs 255
13-3b Average and Marginal Cost 255
13-3c Cost Curves and Their Shapes 256
13-3d Typical Cost Curves 258
13-4 Costs in the Short Run and in the Long Run 259
13-4a The Relationship between Short-Run and Long-Run
Average Total Cost 260
13-4b Economies and Diseconomies of Scale 261
FYI: Lessons from a Pin Factory 261
13-5 Conclusion 262
Summary 263
Key Concepts 264
Questions for Review 264
Problems and Applications 264
CHAPTER 14
Firms in Competitive Markets 267
14-1 What Is a Competitive Market? 268
14-1a The Meaning of Competition 268
14-1b The Revenue of a Competitive Firm 269
14-2 Profit Maximization and the Competitive Firm’s
Supply Curve 270
14-2a A Simple Example of Profit Maximization 270
14-2b The Marginal-Cost Curve and the Firm’s Supply
Decision 271
14-2c The Firm’s Short-Run Decision to Shut Down 273
14-2d Spilt Milk and Other Sunk Costs 275
CASE STUDY: Near-Empty Restaurants and Off-Season
Miniature Golf 275
14-2e The Firm’s Long-Run Decision to Exit or Enter a
Market 276
14-2f Measuring Profit in Our Graph for the Competitive
Firm 277
14-3 The Supply Curve in a Competitive Market 279
14-3a The Short Run: Market Supply with a Fixed Number
of Firms 279
14-3b The Long Run: Market Supply with Entry
and Exit 279
14-3c Why Do Competitive Firms Stay in Business
If They Make Zero Profit? 280
14-3d A Shift in Demand in the Short Run and
Long Run 281
14-3e Why the Long-Run Supply Curve Might Slope
Upward 282
14-4 Conclusion: Behind the Supply Curve 284
Summary 285
Key Concepts 285
Questions for Review 285
Problems and Applications 286
CHAPTER 15
Monopoly 289
15-1 Why Monopolies Arise 290
15-1a Monopoly Resources 291
15-1b Government-Created Monopolies 291
15-1c Natural Monopolies 292
15-2 How Monopolies Make Production and Pricing
Decisions 293
15-2a Monopoly versus Competition 293
15-2b A Monopoly’s Revenue 294
15-2c Profit Maximization 296
15-2d A Monopoly’s Profit 298
FYI: Why a Monopoly Does Not Have a Supply Curve 298
CASE STUDY: Monopoly Drugs versus Generic Drugs 299
15-3 The Welfare Cost of Monopolies 300
15-3a The Deadweight Loss 301
15-3b The Monopoly’s Profit: A Social Cost? 303
15-4 Price Discrimination 303
15-4a A Parable about Pricing 304
15-4b The Moral of the Story 305
15-4c The Analytics of Price Discrimination 305
15-4d Examples of Price Discrimination 306
IN THE NEWS: Price Discrimination in Higher
Education 308
15-5 Public Policy toward Monopolies 308
15-5a Increasing Competition with Antitrust Laws 308
15-5b Regulation 309
ASK THE EXPERTS: Airline Mergers 309
15-5c Public Ownership 310
15-5d Doing Nothing 311
15-6 Conclusion: The Prevalence of Monopolies 311
Summary 313
Key Concepts 313
Questions for Review 314
Problems and Applications 314
CHAPTER 16
Monopolistic Competition 319
16-1 Between Monopoly and Perfect Competition 320
16-2 Competition with Differentiated Products 322
16-2a The Monopolistically Competitive Firm in the
Short Run 322
16-2b The Long-Run Equilibrium 323
16-2c Monopolistic versus Perfect Competition 324
16-2d Monopolistic Competition and the Welfare of
Society 327
16-3 Advertising 328
16-3a The Debate over Advertising 328
CASE STUDY: Advertising and the Price of Eyeglasses 329
16-3b Advertising as a Signal of Quality 330
16-3c Brand Names 331
16-4 Conclusion 332
Summary 333
Key Concepts 334
Questions for Review 334
Problems and Applications 334
CHAPTER 17
Oligopoly 337
17-1 Markets with Only a Few Sellers 338
17-1a A Duopoly Example 338
17-1b Competition, Monopolies, and Cartels 339
17-1c The Equilibrium for an Oligopoly 340
17-1d How the Size of an Oligopoly Affects the Market
Outcome 341
ASK THE EXPERTS: Nash Equilibrium 341
17-2 The Economics of Cooperation 342
17-2a The Prisoners’ Dilemma 343
17-2b Oligopolies as a Prisoners’ Dilemma 344
CASE STUDY: OPEC and the World Oil Market 345
17-2c Other Examples of the Prisoners’ Dilemma 346
17-2d The Prisoners’ Dilemma and the Welfare of Society 347
17-2e Why People Sometimes Cooperate 348
CASE STUDY: The Prisoners’ Dilemma Tournament 348
17-3 Public Policy toward Oligopolies 349
17-3a Restraint of Trade and the Antitrust Laws 349
CASE STUDY: An Illegal Phone Call 350
17-3b Controversies over Antitrust Policy 350
CASE STUDY: The Microsoft Case 352
IN THE NEWS: Europe versus Google 354
17-4 Conclusion 354
Summary 355
Key Concepts 356
Questions for Review 356
Problems and Applications 356
PART VI The Economics
of Labor Markets 359
CHAPTER 18
The Markets for the Factors
of Production 361
18-1 The Demand for Labor 362
18-1a The Competitive Profit-Maximizing Firm 363
18-1b The Production Function and the Marginal Product of
Labor 363
18-1c The Value of the Marginal Product and the Demand for
Labor 365
18-1d What Causes the Labor-Demand Curve to Shift? 366
FYI: Input Demand and Output Supply: Two Sides
of the Same Coin 367
18-2 The Supply of Labor 368
18-2a The Trade-off between Work and Leisure 368
18-2b What Causes the Labor-Supply Curve to Shift? 368
ASK THE EXPERTS: Immigration 369
18-3 Equilibrium in the Labor Market 369
18-3a Shifts in Labor Supply 370
18-3b Shifts in Labor Demand 371
IN THE NEWS: The Economics of Immigration 372
CASE STUDY: Productivity and Wages 373
FYI: Monopsony 374
18-4 The Other Factors of Production: Land and Capital 375
18-4a Equilibrium in the Markets for Land and Capital 375
FYI: What Is Capital Income? 376
18-4b Linkages among the Factors of Production 377
CASE STUDY: The Economics of the Black Death 377
18-5 Conclusion 378
Summary 379
Key Concepts 379
Questions for Review 379
Problems and Applications 380
CHAPTER 19
Earnings and Discrimination 383
19-1 Some Determinants of Equilibrium Wages 384
19-1a Compensating Differentials 384
19-1b Human Capital 385
CASE STUDY: The Increasing Value of Skills 385
ASK THE EXPERTS: Inequality and Skills 386
IN THE NEWS: Schooling as a Public Investment 387
19-1c Ability, Effort, and Chance 388
CASE STUDY: The Benefits of Beauty 388
19-1d An Alternative View of Education: Signaling 389
19-1e The Superstar Phenomenon 390
19-1f Above-Equilibrium Wages: Minimum-Wage Laws,
Unions, and Efficiency Wages 390
19-2 The Economics of Discrimination 391
19-2a Measuring Labor-Market Discrimination 391
CASE STUDY: Is Emily More Employable than
Lakisha? 393
19-2b Discrimination by Employers 393
CASE STUDY: Segregated Streetcars and the Profit
Motive 394
19-2c Discrimination by Customers and
Governments 395
CASE STUDY: Discrimination in Sports 395
19-3 Conclusion 396
Summary 397
Key Concepts 398
Questions for Review 398
Problems and Applications 398
CHAPTER 20
Income Inequality and Poverty 401
20-1 The Measurement of Inequality 402
20-1a U.S. Income Inequality 402
20-1b Inequality around the World 403
IN THE NEWS: A Worldwide View of the Income
Distribution 405
20-1c The Poverty Rate 406
20-1d Problems in Measuring Inequality 407
CASE STUDY: Alternative Measures of Inequality 408
20-1e Economic Mobility 409
20-2 The Political Philosophy of Redistributing Income 409
20-2a Utilitarianism 410
20-2b Liberalism 411
20-2c Libertarianism 412
20-3 Policies to Reduce Poverty 413
20-3a Minimum-Wage Laws 413
20-3b Welfare 414
20-3c Negative Income Tax 414
20-3d In-Kind Transfers 415
20-3e Antipoverty Programs and Work Incentives 415
IN THE NEWS: International Differences in Income
Redistribution 416
20-4 Conclusion 418
Summary 419
Key Concepts 420
Questions for Review 420
Problems and Applications 420
PART VII Topics for Further
Study 423
CHAPTER 21
The Theory of Consumer Choice 425
21-1 The Budget Constraint: What the Consumer
Can Afford 426
21-2 Preferences: What the Consumer Wants 428
21-2a Representing Preferences with Indifference
Curves 428
21-2b Four Properties of Indifference Curves 429
21-2c Two Extreme Examples of Indifference Curves 430
21-3 Optimization: What the Consumer Chooses 432
21-3a The Consumer’s Optimal Choices 432
FYI: Utility: An Alternative Way to Describe Preferences and
Optimization 433
21-3b How Changes in Income Affect the Consumer’s
Choices 434
21-3c How Changes in Prices Affect the Consumer’s
Choices 435
21-3d Income and Substitution Effects 436
21-3e Deriving the Demand Curve 438
21-4 Three Applications 439
21-4a Do All Demand Curves Slope Downward? 439
CASE STUDY: The Search for Giffen Goods 440
21-4b How Do Wages Affect Labor Supply? 440
CASE STUDY: Income Effects on Labor Supply: Historical
Trends, Lottery Winners, and the Carnegie Conjecture 443
21-4c How Do Interest Rates Affect Household Saving? 444
21-5 Conclusion: Do People Really Think This Way? 446
Summary 447
Key Concepts 448
Questions for Review 448
Problems and Applications 448
CHAPTER 22
Frontiers of Microeconomics 451
22-1 Asymmetric Information 452
22-1a Hidden Actions: Principals, Agents, and Moral
Hazard 452
FYI: Corporate Management 453
22-1b Hidden Characteristics: Adverse Selection and
the Lemons Problem 454
22-1c Signaling to Convey Private Information 455
CASE STUDY: Gifts as Signals 455
22-1d Screening to Uncover Private Information 456
22-1e Asymmetric Information and Public Policy 456
22-2 Political Economy 457
22-2a The Condorcet Voting Paradox 457
22-2b Arrow’s Impossibility Theorem 458
22-2c The Median Voter Is King 459
22-2d Politicians Are People Too 461
22-3 Behavioral Economics 461
22-3a People Aren’t Always Rational 462
22-3b People Care about Fairness 463
IN THE NEWS: Using Deviations from Rationality 464
22-3c People Are Inconsistent over Time 466
22-4 Conclusion 467
Summary 468
Key Concepts 468
Questions for Review 468
Problems and Applications 468
Glossary 471
Index 477