Principles of Microeconomics 6e · 2019-01-24 · Firm Behavior and the organization oF industry 13 The Costs of Production 14 Firms in Competitive Markets 15 Monopoly 16 Monopolistic

Firm Behavior and the organization oF industry

13 The Costs of Production

14 Firms in Competitive Markets

15 Monopoly

16 Monopolistic Competition

17 Oligopoly

The theory of the firm sheds light on the decisions that lie behind supply in competitive markets.

Firms with market power can cause market outcomes to be inefficient.

the economics oF LaBor markets

18 The Markets for the Factors of Production

19 Earnings and Discrimination

20 Income Inequality and Poverty

These chapters examine the special features of labor markets, in which most people earn most of their income.

topics For Further study

21 The Theory of Consumer Choice

22 Frontiers of Microeconomics

Additional topics in microeconomics include household decision making, asymmetric information, political economy, and behavioral economics.

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Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).

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N. Gregory MankiwHARVARD UNIVERSITY

Sixth Edition

Principles ofPrinciples ofMicroeconomics


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To Catherine, Nicholas, and Peter,my other contributions to the next generation



authorabout the

N. Gregory Mankiw is professor of economics at Harvard University. As a student, he studied eco-nomics at Princeton University and MIT. As a teach-er, he has taught macroeconomics, microeconomics, statistics, and principles of economics. He even spent one summer long ago as a sailing instructor on Long Beach Island. Professor Mankiw is a prolific writer and a regu-lar participant in academic and policy debates. His work has been published in scholarly journals, such as the American Economic Review, Journal of Political Economy, and Quarterly Journal of Economics, and in more popular forums, such as The New York Times and The Wall Street Journal. He is also author of

the best-selling intermediate-level textbook Macroeconomics (Worth Publishers). In addition to his teaching, research, and writing, Professor Mankiw has been a research associate of the National Bureau of Economic Research, an adviser to the Congressional Budget Office and the Federal Reserve Banks of Boston and New York, and a member of the ETS test development committee for the Advanced Placement exam in economics. From 2003 to 2005, he served as chairman of the President’s Council of Economic Advisers. Professor Mankiw lives in Wellesley, Massachusetts, with his wife, Deborah, three children, Catherine, Nicholas, and Peter, and their border terrier, Tobin.

vi


contentscontentsbrief

Part I Introduction 1 1 Ten Principles of Economics 3 2 Thinking Like an Economist 21 3 Interdependence and the Gains from Trade 49

Part II How Markets Work 63 4 The Market Forces of Supply and Demand 65 5 Elasticity and Its Application 89 6 Supply, Demand, and Government Policies 111

Part III Markets and Welfare 133 7 Consumers, Producers, and the Efficiency of Markets 135 8 Application: The Costs of Taxation 155 9 Application: International Trade 171

Part IV The Economics of the Public Sector 193 10 Externalities 195 11 Public Goods and Common Resources 217 12 The Design of the Tax System 233

Part V Firm Behavior and the Organization of Industry 257 13 The Costs of Production 259 14 Firms in Competitive Markets 279 15 Monopoly 299 16 Monopolistic Competition 329 17 Oligopoly 349

Part VI The Economics of Labor Markets 373 18 The Markets for the Factors of Production 375 19 Earnings and Discrimination 397 20 Income Inequality and Poverty 415

Part VII Topics for Further Study 437 21 The Theory of Consumer Choice 439 22 Frontiers of Microeconomics 467

vii




Economics is a study of mankind in the ordinary business of life.” So wrote Alfred Marshall, the great 19th-century economist, in his textbook, Principles of Economics. Although we have learned much about the economy since Marshall’s time, this definition of economics is as true today as it

was in 1890, when the first edition of his text was published. Why should you, as a student at the beginning of the 21st century, embark on the study of economics? There are three reasons. The first reason to study economics is that it will help you understand the world in which you live. There are many questions about the economy that might spark your curiosity. Why are apartments so hard to find in New York City? Why do airlines charge less for a round-trip ticket if the traveler stays over a Saturday night? Why is Johnny Depp paid so much to star in movies? Why are living stan-dards so meager in many African countries? Why do some countries have high rates of inflation while others have stable prices? Why are jobs easy to find in some years and hard to find in others? These are just a few of the questions that a course in economics will help you answer. The second reason to study economics is that it will make you a more astute participant in the economy. As you go about your life, you make many economic decisions. While you are a student, you decide how many years to stay in school. Once you take a job, you decide how much of your income to spend, how much to save, and how to invest your savings. Someday you may find yourself running a small business or a large corporation, and you will decide what prices to charge for your products. The insights developed in the coming chapters will give you a new perspective on how best to make these decisions. Studying economics will not by itself make you rich, but it will give you some tools that may help in that endeavor. The third reason to study economics is that it will give you a better understand-ing of both the potential and the limits of economic policy. Economic questions are always on the minds of policymakers in mayors’ offices, governors’ mansions, and the White House. What are the burdens associated with alternative forms of taxation? What are the effects of free trade with other countries? What is the best way to protect the environment? How does a government budget deficit affect the economy? As a voter, you help choose the policies that guide the allocation of society’s resources. An understanding of economics will help you carry out that responsibility. And who knows: Perhaps someday you will end up as one of those policymakers yourself. Thus, the principles of economics can be applied in many of life’s situations. Whether the future finds you reading the newspaper, running a business, or sit-ting in the Oval Office, you will be glad that you studied economics.

N. Gregory MankiwDecember 2010

“

to the studentto the studentpreface

ix


The Art of Instruction, The Power of Engagement, The Spark of Discovery

ExperienceExperience

Mankiw

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Maximize your efforts — and results — when you Experience Mankiw’s engaging learning tools. With Economics CourseMate, you’ll quickly reinforce chapter concepts and sharpen your skills with interactive, hands-on applications online. If a printed Study Guide better suits your needs and study habits, the Mankiw 6e Study Guide is unsurpassed in its careful attention to accuracy, concise language, and practice that enhances your study time.

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acknowledgments

xii

acknowledgmentsacknowledgments

In writing this book, I benefited from the input of many talented people. Indeed, the list of people who have contributed to this project is so long, and their contributions so valuable, that it seems an injustice that only a single name appears on the cover.

Let me begin with my colleagues in the economics profession. The six editions of this text and its supplemental materials have benefited enormously from their input. In reviews and surveys, they have offered suggestions, identified challeng-es, and shared ideas from their own classroom experience. I am indebted to them for the perspectives they have brought to the text. Unfortunately, the list has be-come too long to thank those who contributed to previous editions, even though students reading the current edition are still benefiting from their insights. Most important in this process have been Ron Cronovich (Carthage College) and David Hakes (University of Northern Iowa). Ron and David, both dedicated teachers, have served as reliable sounding boards for ideas and hardworking part-ners with me in putting together the superb package of supplements. For this new edition, the following diary reviewers recorded their day-to-day experience over the course of a semester, offering detailed suggestions about how to improve the text.

Mark Abajian, San Diego Mesa CollegeJennifer Bailly, Long Beach City CollegeJ. Ulyses Balderas, Sam Houston State

UniversityAntonio Bos, Tusculum CollegeGreg Brock, Georgia Southern

UniversityDonna Bueckman, University of

Tennessee Knoxville

Rita Callahan, Keiser UniversityTina Collins, San Joaquin Valley CollegeBob Holland, Purdue UniversityTom Holmes, University of MinnesotaSimran Kahai, John Carroll UniversityMiles Kimball, University of MichiganJason C. Rudbeck, University of GeorgiaKent Zirlott, University of Alabama

Tuscaloosa

The following reviewers of the fifth edition provided suggestions for refining the content, organization, and approach in the sixth.

Mark Abajian, San Diego Mesa College Hamid Bastin, Shippensburg University Laura Jean Bhadra, Northern Virginia

Community CollegeBenjamin Blair, Mississippi State

UniversityLane Boyte, Troy University Greg Brock, Georgia Southern UniversityAndrew Cassey, Washington State

University Joni Charles, Texas State University -

San Marcos

Daren Conrad, Bowie State University Diane de Freitas, Fresno City College Veronika Dolar, Cleveland State

University Justin Dubas, Texas Lutheran

University Robert L Holland, Purdue University Andres Jauregui, Columbus State

University Miles Kimball, University of Michigan Andrew Kohen, James Madison

University


xiiiACKNOWLEDGMENTS

Daniel Lee, Shippensburg University David Lindauer, Wellesley CollegeJoshua Long, Ivy Tech Community College James Makokha, Collin College Jim McAndrew, Luzerne County

Community College William Mertens, University of ColoradoCindy Munson, Western Technical

College David Mushinski, Colorado State

University Fola Odebunmi, Cypress College

Jeff Rubin, Rutgers University, New Brunswick

Lynda Rush, California State Polytechnic University Pomona

Naveen Sarna, Northern Virginia Community College

Jesse Schwartz, Kennesaw State University

Mark Showalter, Brigham Young University

Michael Tasto, Southern New Hampshire University

I received detailed feedback on specific elements in the text, including all end-of-chapter problems and applications, from the following instructors.

Mark Abajian, San Diego Mesa CollegeAfolabi Adebayo, University of New

HampshireMehdi Afiat, College of Southern

NevadaDouglas Agbetsiafa, Indiana University

South BendRichard Agnello, University of

DelawareHenry Akian, Gibbs CollegeConstantine Alexandrakis, Hofstra

UniversityMichelle Amaral, University of the

PacificShahina Amin, University of Northern

IowaLarry Angel, South Seattle Community

CollegeKathleen Arano, Fort Hays State

UniversityJ. J. Arias, Georgia College & State

UniversityNestor Azcona, Babson CollegeSteve Balassi, St. Mary’s College/Napa

Valley CollegeJuventino Ulyses Balderas, Sam

Houston State UniversityTannista Banerjee, Purdue UniversityJason Barr, Rutgers University, NewarkAlan Barreca, Tulane UniversityHamid Bastin, Shippensburg UniversityTammy Batson, Northern Illinois

University / Rock Valley CollegeCarl Bauer, Oakton Community CollegeKlaus Becker, Texas Tech UniversityRobert Beekman, University of Tampa

Christian Beer, Cape Fear Community College

Gary Bennett, State University of New York Fredonia

Bettina Berch, Borough of Manhattan Community College

Thomas M. Beveridge, Durham Technical Community College

Abhijeet Bhattacharya, Illinois Valley Community College

Prasad Bidarkota, Florida International University

Jekab Bikis, Dallas Baptist UniversityMichael Bognanno, Temple UniversityCecil Bohanon, Ball State University Natalia Boliari, Manhattan CollegeMelanie Boyte, Troy UniversityCharles Braymen, Kansas StateWilliam Brennan, Minnesota State

University at MankatoGreg Brock, Georgia Southern

UniversityKen Brown, University of Northern

IowaLaura Bucila, Texas Christian

UniversityStan Buck, Huntington UniversityDonna Bueckman, University of

Tennessee KnoxvilleJoe Bunting, St. Andrews Presbyterian

CollegeRita Callahan, Keiser UniversityMichael G. Carew, Baruch CollegeJohn Carter, Modesto Junior CollegeKalyan Chakraborty, Emporia State

University



xiv

Henry Check, Penn State UniversityXudong Chen, Baldwin-Wallace CollegeClifton M. Chow, Mass Bay

Community CollegeTina Collins, San Joaquin Valley CollegeValerie Collins, Sheridan CollegeSarah Cosgrove, University of

Massachusetts DartmouthDana Costea, Indiana University South

BendMaria DaCosta, University of Wisconsin

Eau ClaireMian Dai, Drexel UniversityJoel Dalafave, Bucks County

Community CollegeMaylene Damoense, Monash

University South AfricaLorie Darche, Southwest Florida CollegeDiane de Freitas, Fresno City CollegeEjigou Demissie, University of

Maryland Eastern ShoreRichard DePolt, Guilford Technical

Community CollegeAaron Dighton, University of

MinnesotaVeronika Dolar, Cleveland State

UniversityFisher Donna, Georgia Southern

UniversityHarold Elder, University of AlabamaJamie Emerson, Salisbury UniversityElena Ermolenko, Oakton Community

CollegePat Euzent, University of Central

FloridaYan Feng, Hunter College, Queens

College, CUNYDonna K. Fisher, Georgia Southern

UniversityPaul Fisher, Henry Ford Community

CollegeFred Foldvary, Santa Clara UniversityNikki Follis, Chadron State CollegeKent Ford, State University of New York /

Onondaga Community CollegeRyan Ford, Pasadena City CollegeTimothy Ford, California State

University SacramentoJohanna Francis, Fordham UniversityRobert Francis, Shoreline Community

CollegeMark Frascatore, Clarkson University

David Furst, University of South FloridaMonica Galizzi, University of

Massachusetts LowellJean-Philippe Gervais, North Carolina

State UniversityDipak Ghosh, Emporia State UniversityBill Goffe, State University of New York

OswegoRyan Gorka, University of Nebraska

LincolnMarshall Gramm, Rhodes CollegeElias C. Grivoyannis, Yeshiva

UniversityEleanor Gubins, Rosemont CollegeDarrin Gulla, University of KentuckyKaren Gulliver, Argosy UniversityRanganai Gwati, University of

Washington SeattleMike Haupert, University of Wisconsin

La CrosseL Jay Helms, University of California

DavisDr. David Hennessy, University of

DubuqueCurry Hilton, Guilford Technical

Community CollegeGeorge Hoffer, Virginia Commonwealth

UniversityMark Holmes, University of WaikatoCarl Hooker, Community College of

VermontDaniel Horton, Cleveland State UniversityScott Houser, Colorado School of the

MinesFanchang Huang, Washington

University in St LouisGregory Hunter, California State

Polytechnic University PomonaChristopher Hyer, University of New

MexicoLeke Ijiyode, St. Mary’s University of

MinnesotaChris Inama, Golden Gate UniversitySarbaum Jeff, University of North

Carolina GreensboroChad Jennings, Tennessee Temple

UniversityPhilipp Jonas, Kalamazoo Valley

Community CollegeRobert Jones, Rensselaer Polytechnic

InstitutePrathibha Joshi, Gordon College

ACKNOWLEDGMENTS



xv

James Jozefowicz, Indiana University of Pennsylvania

Mahbubul Kabir, Lyon CollegeSimran Kahai, John Carroll UniversityDavid Kalist, Shippensburg UniversityCamilla Kazimi, St. Mary’s CollegeChris Kelton, Naval Postgraduate SchoolBrian Kench, University of TampaHyeongwoo Kim, Auburn UniversityMiles Kimball, University of MichiganAlfreda L. King, Lawson State

Community CollegeElizabeth Knowles, –Univeristy of

Wisconsin La CrosseFred Kolb, University of Wisconsin Eau

ClaireRisa Kumazawa, Duquesne UniversitySumner La Croix, University of HawaiiChristopher Laincz, Drexel UniversityGhislaine Lang, San Jose State

UniversityCarolyn Langston, South Arkansas

Community CollegeRichard Le, Cosumnes River CollegeDaniel Lee, Shippensburg UniversityTom Lehman, Indiana Wesleyan

UniversityMegan Leonard, Hendrix CollegeLarry Lichtenstein, Canisius CollegeTad Lincoln, Middlesex Community

CollegeDavid Linthicum, Cecil College North

East Sam Liu, West Valley CollegeMelody Lo, University of Texas at San

AntonioVolodymyr Logovskyy, Georgia

Institute of TechnologyMin Lu, Robert Morris UniversityGennady Lyakir, Champlain CollegeBruce Madariaga, Montgomery

Community CollegeBrinda Mahalingam, University of

California RiversideRubana Mahjabeen, Truman State

UniversityBahman Maneshni, Paradise Valley

Community CollegeDenton Marks, University of Wisconsin-

WhitewaterTimothy Mathews, Kennesaw State

University

Frances Mc Donald, Northern Virginia Community College

Edward McGrath, Holyoke Community College

Shirley Ann Merchant, George Washington University

William Mertens, University of Colorado

Mitch Mitchell, Bladen Community College Mitch Mitchell, North Carolina Wesleyan Mike Mogavero, University of Notre

DameProf Ramesh Mohan, Bryant UniversityDaniel Monchuk, University of

Southern MississippiVasudeva Murthy, Creighton UniversityDavid Mushinsk, Colorado State

UniversityPaula Nas, University of Michigan FlintRuss Neal, Collin County Community

CollegeMegumi Nishimura, University of

ColoradoPeter Olson, Indiana UniversityEsen Onur, California State University

SacramentoStephen Onyeiwu, Allegheny CollegeMargaret Oppenheimer, DePaul

University Glenda Orosco, Oklahoma State

University Institute of TechnologyDavid Ortmeyer, Bentley UniversityThomas Owen, College of the RedwoodsJan Palmer, Ohio UniversityAmar Parai, State University of New

York at FredoniaNitin Paranjpe, Wayne State and

Oakland UniversityCarl Parker, Fort Hays State UniversityMichael Petrack, Oakland Community

CollegeGyan Pradhan, Eastern Kentucky

UniversityMichael Pries, University of Notre DameJoe Quinn, Boston CollegeMahesh Ramachandran, Clark

UniversityRatha Ramoo, Diablo Valley CollegeSurekha Rao, Indiana University

NorthwestRyan Ratcliff, University of San DiegoScott Redenius, Brandeis University

ACKNOWLEDGMENTS



xvi

Susan Reilly, Florida State College at Jacksonville

Imke Reimers, University of MinnesotaChristopher Richardson, Merrillville

High SchoolArt Riegal, State University of New

York SullivanRichard Risinit, Middlesex Community

College Michael Rogers, Albany State

UniversityPaul Roscelli, Canada CollegeLarry Ross, University of Alaska

AnchorageJeff Rubin, Rutgers UniversityAllen Sanderson, University of ChicagoJeff Sarbaum, University of North

Carolina GreensboroDennis Shannon, Southwestern Illinois

CollegeXuguang Sheng, State University of

New York at FredoniaMark Showalter, Brigham Young

UniversityJohnny Shull, Central Carolina

Community CollegeSuann Shumaker, Las Positas

Community CollegeJonathan Silberman, Oakland UniversitySteven Skinner, Western Connecticut

State UniversityCatherine Skura, Sandhills Community

CollegeGary Smith, D’Youville CollegeWarren Smith, Keiser UniversityWilliam Snyder, Peru State CollegeKen Somppi, Southern Union State

Community CollegeDale Steinreich, Drury UniversityLiliana Stern, Auburn UniversityDerek Stimel, Menlo CollegeCarolyn Fabian Stumph, Indiana

University Purdue University Fort WayneBryce Sutton, University of Alabama at

BirminghamJustin Tapp, Southwest Baptist University

Dosse Toulaboe, Fort Hays State University

Richard Trainer, State University of New York at Nassau

Ngoc Bich Tran, San Jacinto CollegeSandra Trejos, Clarion University of

PennsylvaniaJulie Trivitt, Arkansas Tech UniversityArja Turunen-Red, University of New

OrleansDiane Tyndall, Craven Community

CollegeKay Unger, University of Montana Lee J. Van Scyoc, University of

Wisconsin OshkoshLisa Verissimo-Bates, Foothill CollegePriti Verma, Texas A&M University,

KingsvillePatrick Walsh, St. Michael’s CollegeJing Wang, Northeastern UniversityDonald Waters, Brayant and Stratton

College, Virginia Beach, Virgina Campus

Patrick Welle, Bemidji State UniversityElizabeth Wheaton, Southern Methodist

UniversityLuther White, Central Carolina

Community CollegeOxana Wieland, University of

Minnesota CrookstonJohn Winters, Auburn University at

MontgomerySuzanne Wisniewski, University of

St. ThomasPatricia Wiswell, Columbia-Greene

Community CollegeMark Witte, College of CharlestonLouis A. Woods, University of North

FloridaGuy Yamashiro, California State

University Long BeachBenhua Yang, Stetson UniversityLeslie Young, Kilian Community

CollegeKaren Zempel, Bryant and Stratton

College

ACKNOWLEDGMENTS



xvii

The team of editors who worked on this book improved it tremendously. Jane Tufts, developmental editor, provided truly spectacular editing—as she always does. Mike Worls, economics executive editor, did a splendid job of overseeing the many people involved in such a large project. Jennifer Thomas (supervising devel-opmental editor) and Katie Yanos (supervising developmental editor) were crucial in assembling an extensive and thoughtful group of reviewers to give me feed-back on the previous edition, while putting together an excellent team to revise the supplements. Colleen Farmer, senior content project manager, and Malvine Litten, project manager, had the patience and dedication necessary to turn my manu-script into this book. Michelle Kunkler, senior art director, gave this book its clean, friendly look. Larry Moore, the illustrator, helped make the book more visually appealing and the economics in it less abstract. Sheryl Nelson, copyeditor, refined my prose, and Cindy Kerr, indexer, prepared a careful and thorough index. John Carey, senior marketing manager, worked long hours getting the word out to po-tential users of this book. The rest of the Cengage team was also consistently pro-fessional, enthusiastic, and dedicated: Allyn Bissmeyer, Darrell Frye, Sarah Greber, Betty Jung, Deepak Kumar, Kim Kusnerak, Sharon Morgan, Suellen Ruttkay, and Joe Sabatino. I am grateful also to Stacy Carlson and Daniel Norris, two star Harvard under-graduates, who helped me refine the manuscript and check the page proofs for this edition. Josh Bookin, a former Advanced Placement economics teacher and recently an extraordinary section leader for Harvard’s Ec 10, gave invaluable advice on some of the new material in this edition. As always, I must thank my “in-house” editor Deborah Mankiw. As the first reader of most things I write, she continued to offer just the right mix of criticism and encouragement. Finally, I would like to mention my three children Catherine, Nicholas, and Peter. Their contribution to this book was putting up with a father spending too many hours in his study. The four of us have much in common—not least of which is our love of ice cream (which becomes apparent in Chapter 4). Maybe sometime soon one of them will pick up my passion for economics as well.

N. Gregory MankiwDecember 2010

ACKNOWLEDGMENTS



Preface: To the Student ix

Acknowledgments xii

PartI Introduction 1

Chapter 1

ten Principles of Economics 3How People Make Decisions 4

Principle 1: People Face Trade-offs 4Principle 2: The Cost of Something Is What You Give

Up to Get It 5Principle 3: Rational People Think at the Margin 6Principle 4: People Respond to Incentives 7Case Study: The Incentive Effects of Gasoline Prices 8In The News: Incentive Pay 9

How People Interact 10Principle 5: Trade Can Make Everyone Better Off 10Principle 6: Markets Are Usually a Good Way to Organize

Economic Activity 10Principle 7: Governments Can Sometimes Improve Market

Outcomes 11

FYI: Adam Smith and the Invisible Hand 12

How the Economy as a Whole Works 13Principle 8: A Country’s Standard of Living Depends on Its

Ability to Produce Goods and Services 13In The News: Why You Should Study Economics 14Principle 9: Prices Rise When the Government Prints Too

Much Money 15Principle 10: Society Faces a Short-Run Trade-off between

Inflation and Unemployment 16FYI: How to Read This Book 17

Conclusion 17

Chapter 2

thinking Like an Economist 21The Economist as Scientist 22

The Scientific Method: Observation, Theory, and More Observation 22

The Role of Assumptions 23Economic Models 24Our First Model: The Circular-Flow Diagram 24Our Second Model: The Production Possibilities

Frontier 26Microeconomics and Macroeconomics 29

The Economist as Policy Adviser 29FYI: Who Studies Economics? 30Positive versus Normative Analysis 30Economists in Washington 31In The News: The Economics of President

Obama 32Why Economists’ Advice Is Not Always Followed 32

Why Economists Disagree 34Differences in Scientific Judgments 34Differences in Values 34Perception versus Reality 35

Let’s Get Going 35In The News: Environmental Economics 37

APPENDIX Graphing: A Brief Review 40Graphs of a Single Variable 40Graphs of Two Variables: The Coordinate System 41Curves in the Coordinate System 42Slope 44Cause and Effect 46

xviii

table ofcontents


xix

Chapter 3

Interdependence and the Gains from trade 49A Parable for the Modern Economy 50

Production Possibilities 50Specialization and Trade 52

Comparative Advantage: The Driving Force of Specialization 54Absolute Advantage 54Opportunity Cost and Comparative Advantage 54Comparative Advantage and Trade 55The Price of the Trade 56FYI: The Legacy of Adam Smith and David Ricardo 57

Applications of Comparative Advantage 57Should Tom Brady Mow His Own Lawn? 57Should the United States Trade with Other Countries? 58In The News: The Changing Face of International Trade 59

Conclusion 59

Market Demand versus Individual Demand 68Shifts in the Demand Curve 69Case Study: Two Ways to Reduce the Quantity of

Smoking Demanded 71

Supply 73The Supply Curve: The Relationship between Price and

Quantity Supplied 73Market Supply versus Individual Supply 73Shifts in the Supply Curve 74

Supply and Demand Together 77Equilibrium 77Three Steps to Analyzing Changes in Equilibrium 79In The News: Price Increases after Disasters 82

Conclusion: How Prices Allocate Resources 84

Chapter 5

Elasticity and Its application 89The Elasticity of Demand 90

The Price Elasticity of Demand and Its Determinants 90Computing the Price Elasticity of Demand 91The Midpoint Method: A Better Way to Calculate

Percentage Changes and Elasticities 91The Variety of Demand Curves 92FYI: A Few Elasticities from the Real World 94Total Revenue and the Price Elasticity of Demand 94Elasticity and Total Revenue along a Linear Demand Curve 96Other Demand Elasticities 97

The Elasticity of Supply 98The Price Elasticity of Supply and Its Determinants 98Computing the Price Elasticity of Supply 98The Variety of Supply Curves 99

Three Applications of Supply, Demand, and Elasticity 101Can Good News for Farming Be Bad News for Farmers? 101Why Did OPEC Fail to Keep the Price of Oil High? 103Does Drug Interdiction Increase or Decrease Drug-Related

Crime? 105

Conclusion 106

Chapter 6

Supply, Demand, and Government Policies 111Controls on Prices 112

How Price Ceilings Affect Market Outcomes 112Case Study: Lines at the Gas Pump 114Case Study: Rent Control in the Short Run and

the Long Run 115How Price Floors Affect Market Outcomes 116Case Study: The Minimum Wage 117Evaluating Price Controls 119In The News: Should Unpaid Internships Be Allowed? 120

Taxes 121How Taxes on Sellers Affect Market Outcomes 121

PartII How Markets Work 63

Chapter 4

the Market Forces of Supply and Demand 65Markets and Competition 66

What Is a Market? 66What Is Competition? 66

Demand 67The Demand Curve: The Relationship between Price and

Quantity Demanded 67

CONTENTS


xx CONTENTS

How Taxes on Buyers Affect Market Outcomes 123Case Study: Can Congress Distribute the Burden of a Payroll

Tax? 124Elasticity and Tax Incidence 125Case Study: Who Pays the Luxury Tax? 127

Conclusion 128

The Deadweight Loss of Taxation 156How a Tax Affects Market Participants 157Deadweight Losses and the Gains from Trade 159

The Determinants of the Deadweight Loss 160Case Study: The Deadweight Loss Debate 162

Deadweight Loss and Tax Revenue as Taxes Vary 163Case Study: The Laffer Curve and Supply-Side Economics 165In The News: New Research on Taxation 166

Conclusion 166

Chapter 9

application: International trade 171The Determinants of Trade 172

The Equilibrium without Trade 172The World Price and Comparative Advantage 173

The Winners and Losers from Trade 174The Gains and Losses of an Exporting Country 174The Gains and Losses of an Importing Country 175The Effects of a Tariff 177FYI: Import Quotas: Another Way to Restrict Trade 179The Lessons for Trade Policy 179Other Benefits of International Trade 180In The News: Trade Skirmishes 181

The Arguments for Restricting Trade 182The Jobs Argument 182In The News: Should the Winners from Free Trade

Compensate the Losers? 183The National-Security Argument 184In The News: Second Thoughts about Free Trade 184The Infant-Industry Argument 185The Unfair-Competition Argument 186The Protection-as-a-Bargaining-Chip Argument 186Case Study: Trade Agreements and the World Trade

Organization 186

Conclusion 187

PartIII Markets and Welfare 133

Chapter 7

Consumers, Producers, and the Efficiency of Markets 135Consumer Surplus 136

Willingness to Pay 136Using the Demand Curve to Measure Consumer Surplus 137How a Lower Price Raises Consumer Surplus 138What Does Consumer Surplus Measure? 140

Producer Surplus 141Cost and the Willingness to Sell 141Using the Supply Curve to Measure Producer Surplus 142How a Higher Price Raises Producer Surplus 144

Market Efficiency 145The Benevolent Social Planner 145Evaluating the Market Equilibrium 146In The News: Ticket Scalping 148Case Study: Should There Be a Market in Organs? 149

Conclusion: Market Efficiency and Market Failure 150

Chapter 8

application: the Costs of taxation 155


xxiCONTENTS

Chapter 12

the Design of the tax System 233A Financial Overview of the U.S. Government 234

The Federal Government 235Case Study: The Fiscal Challenge

Ahead 238State and Local Government 240

Taxes and Efficiency 242Deadweight Losses 242Case Study: Should Income or Consumption

Be Taxed? 243In The News: The Temporarily Disappearing

Estate Tax 244Administrative Burden 244Marginal Tax Rates versus Average

Tax Rates 245Lump-Sum Taxes 245

Taxes and Equity 246The Benefits Principle 246The Ability-to-Pay Principle 247Case Study: How the Tax Burden Is

Distributed 248Tax Incidence and Tax Equity 249Case Study: Who Pays the Corporate

Income Tax? 250In The News: The Value-Added Tax 250

Conclusion: The Trade-off between Equity and Efficiency 252

PartIV the Economics of the Public Sector 193

Chapter 10

Externalities 195Externalities and Market Inefficiency 197

Welfare Economics: A Recap 197Negative Externalities 198Positive Externalities 199In The News: The Externalities of Country

Living 200Case Study: Technology Spillovers, Industrial Policy, and

Patent Protection 201

Public Policies toward Externalities 202Command-and-Control Policies: Regulation 203Market-Based Policy 1: Corrective Taxes and

Subsidies 203Case Study: Why Is Gasoline Taxed So Heavily? 204Market-Based Policy 2: Tradable Pollution

Permits 205Objections to the Economic Analysis of Pollution 207In The News: Cap and Trade 208

Private Solutions to Externalities 209The Types of Private Solutions 210The Coase Theorem 210Why Private Solutions Do Not Always Work 211

Conclusion 212

Chapter 11

Public Goods and Common resources 217The Different Kinds of Goods 218

Public Goods 220The Free-Rider Problem 220Some Important Public Goods 220Case Study: Are Lighthouses Public

Goods? 222The Difficult Job of Cost–Benefit Analysis 223Case Study: How Much Is a Life Worth? 223

Common Resources 224The Tragedy of the Commons 224Some Important Common Resources 225In The News: The Case for Toll Roads 226Case Study: Why the Cow Is Not Extinct 228

Conclusion: The Importance of Property Rights 229

PartV Firm Behavior and the Organization of Industry 257


xxii CONTENTS

Chapter 15

Monopoly 299Why Monopolies Arise 300

Monopoly Resources 301Government-Created Monopolies 301Natural Monopolies 302

How Monopolies Make Production and Pricing Decisions 303Monopoly versus Competition 303A Monopoly’s Revenue 304Profit Maximization 306A Monopoly’s Profit 308FYI: Why a Monopoly Does Not Have a Supply Curve 308Case Study: Monopoly Drugs versus Generic Drugs 309

The Welfare Cost of Monopolies 310The Deadweight Loss 311The Monopoly’s Profit: A Social Cost? 313

Price Discrimination 314A Parable about Pricing 314The Moral of the Story 315The Analytics of Price Discrimination 315Examples of Price Discrimination 317

Public Policy toward Monopolies 318In The News: TKTS and Other Schemes 318Increasing Competition with Antitrust Laws 319In The News: President Obama’s Antitrust

Policy 320Regulation 321Public Ownership 323Doing Nothing 323

Conclusion: The Prevalence of Monopolies 323

Chapter 16

Monopolistic Competition 329Between Monopoly and Perfect Competition 330

Competition with Differentiated Products 332The Monopolistically Competitive Firm in the Short Run 332The Long-Run Equilibrium 332Monopolistic versus Perfect Competition 335Monopolistic Competition and the Welfare of

Society 336In The News: Insufficient Variety as a Market

Failure 338

Advertising 338The Debate over Advertising 340Case Study: Advertising and the Price of Eyeglasses 340Advertising as a Signal of Quality 341FYI: Galbraith versus Hayek 342Brand Names 343

Conclusion 344

Chapter 13

the Costs of Production 259What Are Costs? 260

Total Revenue, Total Cost, and Profit 260Costs as Opportunity Costs 260The Cost of Capital as an Opportunity Cost 261Economic Profit versus Accounting Profit 262

Production and Costs 263The Production Function 263From the Production Function to the Total-Cost Curve 265

The Various Measures of Cost 265Fixed and Variable Costs 266Average and Marginal Cost 267Cost Curves and Their Shapes 268Typical Cost Curves 270

Costs in the Short Run and in the Long Run 271The Relationship between Short-Run and Long-Run Average

Total Cost 271Economies and Diseconomies of Scale 272FYI: Lessons from a Pin Factory 273

Conclusion 274

Chapter 14

Firms in Competitive Markets 279What Is a Competitive Market? 280

The Meaning of Competition 280The Revenue of a Competitive Firm 280

Profit Maximization and the Competitive Firm’s Supply Curve 282A Simple Example of Profit Maximization 282The Marginal-Cost Curve and the Firm’s Supply

Decision 283The Firm’s Short-Run Decision to Shut Down 285Spilt Milk and Other Sunk Costs 286Case Study: Near-Empty Restaurants and Off-Season

Miniature Golf 287The Firm’s Long-Run Decision to Exit or Enter a

Market 288Measuring Profit in Our Graph for the Competitive

Firm 288

The Supply Curve in a Competitive Market 289The Short Run: Market Supply with a Fixed

Number of Firms 290The Long Run: Market Supply with Entry and Exit 290Why Do Competitive Firms Stay in Business If They Make

Zero Profit? 292A Shift in Demand in the Short Run and Long Run 293Why the Long-Run Supply Curve Might Slope

Upward 293

Conclusion: Behind the Supply Curve 295



xxiiiCONTENTS

Chapter 17

Oligopoly 349Markets with Only a Few Sellers 350

A Duopoly Example 350Competition, Monopolies, and Cartels 351In The News: Public Price Fixing 352The Equilibrium for an Oligopoly 353How the Size of an Oligopoly Affects the Market Outcome 354

The Economics of Cooperation 355The Prisoners’ Dilemma 355Oligopolies as a Prisoners’ Dilemma 357Case Study: OPEC and the World Oil Market 358Other Examples of the Prisoners’ Dilemma 358The Prisoners’ Dilemma and the Welfare of Society 360Why People Sometimes Cooperate 360Case Study: The Prisoners’ Dilemma Tournament 361

Public Policy toward Oligopolies 362Restraint of Trade and the Antitrust Laws 362Case Study: An Illegal Phone Call 363Controversies over Antitrust Policy 363Case Study: The Microsoft Case 365

Conclusion 366In The News: The Next Big Antitrust Target? 367

The Demand for Labor 376The Competitive Profit-Maximizing Firm 377The Production Function and the Marginal Product of

Labor 377The Value of the Marginal Product and the Demand

for Labor 379What Causes the Labor-Demand Curve to Shift? 380FYI: Input Demand and Output Supply: Two Sides of the

Same Coin 381FYI: The Luddite Revolt 382

The Supply of Labor 383The Trade-off between Work and Leisure 383What Causes the Labor-Supply Curve to Shift? 383

Equilibrium in the Labor Market 384Shifts in Labor Supply 385In The News: The Economics of Immigration 386Shifts in Labor Demand 386Case Study: Productivity and Wages 387FYI: Monopsony 389

The Other Factors of Production: Land and Capital 389Equilibrium in the Markets for Land and Capital 390FYI: What Is Capital Income? 391Linkages among the Factors of Production 391Case Study: The Economics of the Black Death 392

Conclusion 393

Chapter 19

Earnings and Discrimination 397Some Determinants of Equilibrium Wages 398

Compensating Differentials 398Human Capital 398Case Study: The Increasing Value of Skills 399Ability, Effort, and Chance 400Case Study: The Benefits of Beauty 401An Alternative View of Education: Signaling 402The Superstar Phenomenon 402In The News: The Human Capital of Terrorists 403Above-Equilibrium Wages: Minimum-Wage Laws, Unions,

and Efficiency Wages 404

The Economics of Discrimination 405Measuring Labor-Market Discrimination 405Case Study: Is Emily More Employable than

Lakisha? 407Discrimination by Employers 407Case Study: Segregated Streetcars and the Profit

Motive 408Discrimination by Customers and Governments 408Case Study: Discrimination in Sports 409In The News: Gender Differences 410

Conclusion 411

PartVI the Economics of Labor Markets 373

Chapter 18

the Markets for the Factors of Production 375


xxiv CONTENTS

Chapter 20

Income Inequality and Poverty 415The Measurement of Inequality 416

U.S. Income Inequality 416Inequality around the World 417The Poverty Rate 419Problems in Measuring Inequality 420Case Study: Alternative Measures of Inequality 421In The News: What’s Wrong with the Poverty Rate? 422Economic Mobility 423

The Political Philosophy of Redistributing Income 424Utilitarianism 424Liberalism 425Libertarianism 427

Policies to Reduce Poverty 427Minimum-Wage Laws 428Welfare 428Negative Income Tax 429In-Kind Transfers 430In The News: The Root Cause of a Financial Crisis 430Antipoverty Programs and Work Incentives 431

Conclusion 432

Preferences: What the Consumer Wants 441Representing Preferences with Indifference Curves 442Four Properties of Indifference Curves 443Two Extreme Examples of Indifference Curves 444

Optimization: What the Consumer Chooses 446The Consumer’s Optimal Choices 446FYI: Utility: An Alternative Way to Describe Preferences and

Optimization 447How Changes in Income Affect the Consumer’s

Choices 448How Changes in Prices Affect the Consumer’s

Choices 449Income and Substitution Effects 450Deriving the Demand Curve 452

Three Applications 453Do All Demand Curves Slope Downward? 453Case Study: The Search for Giffen Goods 454How Do Wages Affect Labor Supply? 454Case Study: Income Effects on Labor Supply: Historical

Trends, Lottery Winners, and the Carnegie Conjecture 457

In The News: Backward-sloping Labor Supply in Kiribati 458

How Do Interest Rates Affect Household Saving? 459

Conclusion: Do People Really Think This Way? 461

Chapter 22

Frontiers of Microeconomics 467Asymmetric Information 468

Hidden Actions: Principals, Agents, and Moral Hazard 468FYI: Corporate Management 469Hidden Characteristics: Adverse Selection and the

Lemons Problem 470Signaling to Convey Private Information 471Case Study: Gifts as Signals 471Screening to Uncover Private Information 472Asymmetric Information and Public Policy 473

Political Economy 473The Condorcet Voting Paradox 474Arrow’s Impossibility Theorem 475In The News: Arrow’s Problem in Practice 476The Median Voter Is King 478Politicians Are People Too 479

Behavioral Economics 480People Aren’t Always Rational 480People Care about Fairness 481In The News: Sin Taxes 482People Are Inconsistent over Time 484

Conclusion 485

Glossary 489Index 493

PartVII topics for Further Study 437

Chapter 21

the theory of Consumer Choice 439The Budget Constraint: What the Consumer

Can Afford 440


glossary

489

aability-to-pay principle the idea that taxes should be levied on a person according to how well that person can shoulder the burden

absolute advantage the ability to pro-duce a good using fewer inputs than another producer

accounting profit total revenue minus total explicit cost

adverse selection the tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party

agent a person who is performing an act for another person, called the principal

Arrow’s impossibility theorem a mathematical result showing that, under certain assumed conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences

average fixed cost fixed cost divided by the quantity of output

average revenue total revenue divided by the quantity sold

average tax rate total taxes paid divided by total income

average total cost total cost divided by the quantity of output

average variable cost variable cost divided by the quantity of output

bbehavioral economics the subfield of economics that integrates the insights of psychology

benefits principle the idea that people should pay taxes based on the benefits they receive from government services

budget constraint the limit on the con-sumption bundles that a consumer can afford

business cycle fluctuations in econom-ic activity, such as employment and production

ccapital the equipment and structures used to produce goods and services

cartel a group of firms acting in unison

circular-flow diagram a visual model of the economy that shows how dollars flow through markets among house-holds and firms

club goods goods that are excludable but not rival in consumption

Coase theorem the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

collusion an agreement among firms in a market about quantities to produce or prices to charge

commodity money money that takes the form of a commodity with intrinsic value

common resources goods that are rival in consumption but not excludable

comparative advantage the ability to produce a good at a lower opportunity cost than another producer

compensating differential a difference in wages that arises to offset the non-monetary character istics of different jobs

competitive market a market with many buyers and sellers trading identi-cal products so that each buyer and seller is a price taker

complements two goods for which an increase in the price of one leads to a decrease in the demand for the other

Condorcet paradox the failure of majority rule to produce transitive preferences for society

constant returns to scale the property whereby long-run average total cost stays the same as the quantity of output changes

consumer surplus the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

corrective tax a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

cost the value of everything a seller must give up to produce a good

cost–benefit analysis a study that compares the costs and benefits to society of providing a public good

cross-price elasticity of demand a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

ddeadweight loss the fall in total surplus that results from a market distortion, such as a tax


490 GLOSSARY

demand curve a graph of the relation-ship between the price of a good and the quantity demanded

demand schedule a table that shows the relationship between the price of a good and the quantity demanded

diminishing marginal product the property whereby the marginal product of an input declines as the quantity of the input increases

discrimination the offering of different opportunities to similar indi-viduals who differ only by race, ethnic group, sex, age, or other personal characteristics

diseconomies of scale the prop-erty whereby long-run average total cost rises as the quantity of output increases

dominant strategy a strategy that is best for a player in a game regardless of the strategies chosen by the other players

eeconomic profit total revenue minus total cost, including both explicit and implicit costs

economics the study of how society manages its scarce resources

economies of scale the property whereby long-run average total cost falls as the quantity of output increases

efficiency the property of society getting the most it can from its scarce resources

efficient scale the quantity of output that minimizes average total cost

elasticity a measure of the responsive-ness of quantity demanded or quantity supplied to one of its determinants

equality the property of distributing economic prosperity uniformly among the members of society

equilibrium a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

equilibrium price the price that bal-ances quantity supplied and quantity demanded

equilibrium quantity the quantity supplied and the quantity demanded at the equilibrium price

excludability the property of a good whereby a person can be prevented from using it

explicit costs input costs that require an outlay of money by the firm

externality the uncompensated impact of one person’s actions on the well-being of a bystander

ffactors of production the inputs used to produce goods and services

fixed costs costs that do not vary with the quantity of output produced

free rider a person who receives the benefit of a good but avoids paying for it

ggame theory the study of how people behave in strategic situations

Giffen good a good for which an increase in the price raises the quantity demanded

hhorizontal equity the idea that taxpay-ers with similar abilities to pay taxes should pay the same amount

iimplicit costs input costs that do not require an outlay of money by the firm

incentive something that induces a person to act

income effect the change in consump-tion that results when a price change moves the consumer to a higher or lower indifference curve

income elasticity of demand a measure of how much the quantity demanded of a good responds to a change in consumers’ income, comput-ed as the percentage change in quantity demanded divided by the percentage change in income

indifference curve a curve that shows consumption bundles that give the con-sumer the same level of satisfaction

inferior good a good for which, other things equal, an increase in income leads to a decrease in demand

inflation an increase in the overall level of prices in the economy

in-kind transfers transfers to the poor given in the form of goods and services rather than cash

internalizing the externality altering incentives so that people take account of the external effects of their actions

llaw of demand the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises

law of supply the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises

law of supply and demand the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

liberalism the political philosophy according to which the government should choose policies deemed just, as evaluated by an impartial observer behind a “veil of ignorance”

libertarianism the political philosophy according to which the government should punish crimes and enforce voluntary agreements but not redistrib-ute income



491GLOSSARY

life cycle the regular pattern of income variation over a person’s life

lump-sum tax a tax that is the same amount for every person

mmacroeconomics the study of econ-omy-wide phenomena, including inflation, unemployment, and economic growth

marginal changes small incremental adjustments to a plan of action

marginal cost the increase in total cost that arises from an extra unit of production

marginal product the increase in out-put that arises from an additional unit of input

marginal product of labor the increase in the amount of output from an addi-tional unit of labor

marginal rate of substitution the rate at which a consumer is willing to trade one good for another

marginal revenue the change in total revenue from an additional unit sold

marginal tax rate the extra taxes paid on an additional dollar of income

market a group of buyers and sellers of a particular good or service

market economy an economy that allocates resources through the decen-tralized decisions of many firms and households as they interact in markets for goods and services

market failure a situation in which a market left on its own fails to allocate resources efficiently

market power the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

maximin criterion the claim that the government should aim to maximize the well-being of the worst-off person in society

median voter theorem a mathematical result showing that if voters are choos-ing a point along a line and each voter wants the point closest to his most preferred point, then majority rule will pick the most preferred point of the median voter

microeconomics the study of how households and firms make decisions and how they interact in markets

monopolistic competition a market structure in which many firms sell products that are similar but not identical

monopoly a firm that is the sole seller of a product without close substitutes

moral hazard the tendency of a per-son who is imperfectly monitored to engage in dishonest or otherwise unde-sirable behavior

nNash equilibrium a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

natural monopoly a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

negative income tax a tax system that collects revenue from high-income households and gives subsidies to low-income households

normal good a good for which, other things equal, an increase in income leads to an increase in demand

normative statements claims that attempt to prescribe how the world should be

ooligopoly a market structure in which only a few sellers offer similar or identical products

opportunity cost whatever must be given up to obtain some item

pperfect complements two goods with right-angle indifference curves

perfect substitutes two goods with straight-line indifference curves

permanent income a person’s normal income

political economy the study of gov-ernment using the analytic methods of economics

positive statements claims that attempt to describe the world as it is

poverty line an absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty

poverty rate the percentage of the population whose family income falls below an absolute level called the poverty line

price ceiling a legal maximum on the price at which a good can be sold

price discrimination the business practice of selling the same good at dif-ferent prices to different customers

price elasticity of demand a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demand-ed divided by the percentage change in price

price elasticity of supply a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

price floor a legal minimum on the price at which a good can be sold

principal a person for whom another person, called the agent, is performing some act



492 GLOSSARY

prisoners’ dilemma a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

private goods goods that are both excludable and rival in consumption

producer surplus the amount a seller is paid for a good minus the seller’s cost of providing it

production function the relationship between the quantity of inputs used to make a good and the quantity of out-put of that good

production possibilities frontier a graph that shows the combina-tions of output that the economy can possibly produce given the available factors of production and the available production technology

profit total revenue minus total cost

progressive tax a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers

property rights the ability of an indi-vidual to own and exercise control over scarce resources

proportional tax a tax for which high-income and low-income taxpayers pay the same fraction of income

public goods goods that are neither excludable nor rival in consumption

qquantity demanded the amount of a good that buyers are willing and able to purchase

quantity supplied the amount of a good that sellers are willing and able to sell

rrational people people who systemati-cally and purposefully do the best they can to achieve their objectives

regressive tax a tax for which high-income taxpayers pay a smaller fraction

of their income than do low-income taxpayers

rivalry in consumption the property of a good whereby one person’s use diminishes other people’s use

sscarcity the limited nature of society’s resources

screening an action taken by an unin-formed party to induce an informed party to reveal information

shortage a situation in which quantity demanded is greater than quantity supplied

signaling an action taken by an informed party to reveal private infor-mation to an uninformed party

social insurance government policy aimed at protecting people against the risk of adverse events

substitutes two goods for which an increase in the price of one leads to an increase in the demand for the other

substitution effect the change in con-sumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution

sunk cost a cost that has already been committed and cannot be recovered

supply curve a graph of the relation-ship between the price of a good and the quantity supplied

supply schedule a table that shows the relationship between the price of a good and the quantity supplied

surplus a situation in which quan-tity supplied is greater than quantity demanded

ttariff a tax on goods produced abroad and sold domestically

tax incidence the manner in which the burden of a tax is shared among par-ticipants in a market

total cost the market value of the inputs a firm uses in production

total revenue (for firm) the amount a firm receives for the sale of its output

total revenue (in a market) the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

Tragedy of the Commons a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

transaction costs the costs that parties incur in the process of agreeing to and following through on a bargain

uutilitarianism the political philosophy according to which the government should choose policies to maximize the total utility of everyone in society

utility a measure of happiness or satisfaction

vvalue of the marginal product the marginal product of an input times the price of the output

variable costs costs that vary with the quantity of output produced

vertical equity the idea that taxpay-ers with a greater ability to pay taxes should pay larger amounts

wwelfare government programs that supplement the incomes of the needy

welfare economics the study of how the allocation of resources affects eco-nomic well-being

willingness to pay the maximum amount that a buyer will pay for a good

world price the price of a good that prevails in the world market for that good



index

493

aA Beautiful Mind (Nash), 353Ability-to-pay principle, 247, 247–248Absolute advantage, 54Absolute value, 91Accountants, economists vs., 262Accounting profit, 262Adverse selection, 470, 470–471Advertising, 338–344

as signal of quality, 341–343defense of, 340brand names, 343–344critique of, 340debate over, 340Galbraith vs. Hayek, 342price of eyeglasses and, 340–341signaling theory of, 402

Affluent Society, The (Galbraith), 342Agent, 468, 468–470Airlines, price discrimination, 317Alkire, Caroline, 37Alm, Richard, 421American Airlines, 363American Indians, 338–339Anarchy, State, and Utopia (Nozick), 427Andrews, Edmund L., 181Antipoverty programs, 427–432

benefits principle argument for, 247fighting poverty is public good, 222in-kind transfers, 430–431minimum-wage laws, 428negative income tax, 429–430welfare, 428–429work incentives and, 431–432

Antitrust compliance policies, 352Antitrust laws

Clayton Antitrust Act, 319–320, 362controversies over policy, 363–365Google as target of, 367increasing competition with, 319–321Microsoft case, 365–366oligopolies and, 363–365predatory pricing, 364–365resale price maintenance, 363–364restraint of trade, 362Sherman Antitrust Act, 319–320, 362tying, 365

Antitrust policy, Obama’s, 320–321Arbitrage, 315Arrow, Kenneth, 475Arrow’s impossibility theorem, 475, 476–477Assumptions, 23–24

Note: Page numbers in boldface refer to pages where key terms are defined

Asymmetric information, 467, 468–473adverse selection, 470–471agents, 468–470gifts as signals, 471–472hidden actions, 468–470hidden characteristics, 470–471lemons problem, 470–471moral hazards, 468–470principals, 468–470public policy and, 473screening to uncover private info, 472–473signaling to convey private info, 471

AT&T, 320, 322Automobile industry, safety laws, 7–8Average cost, 267–268

and marginal-cost curves, 269pricing, deadweight losses and, 322

Average fixed cost, 268, 274Average fixed cost (AFC) curve, 268, 270Average revenue, 281, 283

for competitive firm, 281monopoly, 304, 305

Average tax rate, 245Average total cost, 267, 274

related to marginal cost, 270in short-run vs. long-run, 271–272U-shaped, 269–270

Average total cost (ATC) curve, 268, 270, 283Average variable cost, 268, 274Average variable cost (AVC) curve, 268, 270

bBackward-sloping labor supply curve, 457Balinski, Michel, 476Bar graph, 40–41Barboza, David, 59Beauty premium, 401–402Behavioral economics, 458, 480, 480–485

fairness and, 481–484inconsistency and, 484–485rationality and, 480–481

Benefits of beauty, 401–402Benefits principle, 246, 246–247Benevolent social planner, 145–146Benham, Lee, 341Benmelech, Efraim, 403Bentham, Jeremy, 424Berrebi, Claude, 403Bertrand, Marianne, 407Bialik, Carl, 476–477Biddle, Jeff, 401–402

Black Death, economics of, 392Blacks

economics of discrimination, 405–410poverty and, 420

Blackstone, Brian, 166Blank, Rebecca M., 422–423Borda count, 475Botswana, elephants as private good, 229Brand names, economics of, 343–344Brand-name product, 309Braniff Airways, 363Brazil

income inequality in, 418tax burden in, 235

Broken window fallacy, 15Budget constraint, 440, 440–441Budget deficit, 238

Federal government and, 238–240fiscal challenge of, 238–240rising cost of healthcare, 238–240

Budget surplus, 238Bush, George W.

antitrust policy under, 320–321reduced highest tax rate, 252voting system and, 476

Business cycle, 16Business-stealing externality, 337Buyers

marginal, 137number of, and shifts in demand, 71taxes on, affect market outcomes,

123–124variables that influence, 71willingness to pay, 136

cCanada

income inequality in, 418NAFTA and, 187tax burden in, 235trade and distribution of income, 184

Cap and trade, 208–209Capital, 390

cost of, 261–262equilibrium in markets for, 390–391factor of production, 389–392human, 398–399, 403, 406–407

Capital income, 391Capone, Al, 233Carbon tax, 208–209Carnegie, Andrew, 457-458


494 Index494

Cartel, 351. See also Organization of Petroleum Exporting Countries (OPEC)

markets with only few sellers, 351–352public price fixing, 352

Catan, Thomas, 320–321Cause and effect, 46–48Centrally planned economies, 10Chamberlin, Edward, 343Charities, private solution to

externalities, 210Chicago School of Economists, 320Chile, unilateral approach to free trade, 186China

game-playing factories, 59income inequality in, 418tariffs on Chinese tires, 181trade and distribution of income, 185

Choice. See Consumer choice; OptimizationCircular-flow diagram, 24, 24–26Clayton Antitrust Act, 319–320, 362Clean Air Act, 37, 207Clean air and water as common resource, 226Clinton, Bill

tax rates raised by, 252welfare reform bill signed by, 432

Club goods, 219, 302Coase, Ronald, 210Coase theorem, 210, 210–211Collusion, 351Combs, Sean (Diddy), 8–9Command-and-control policies, 202, 203Common resources, 217–218, 218, 218–229

animals as, 228–229as natural monopoly, 302clean air and water, 226congested roads, 227–228elephants, 229example of prisoners’ dilemma, 359–360importance of property rights, 229oceans least regulated, 228Tragedy of the Commons, 224–225wildlife as, 228

Communism, collapse in Soviet Union, 10Comparative advantage, 54–59, 55

absolute advantage, 54applications of, 57–58opportunity cost and, 54–55trade and, 55–56world price and, 173

Compensating differentials, 398wage differences and, 406

Competition, 66–67gender differences and, 410–411imperfect, 330international trade increases, 182markets and, 66–67, 351–352monopoly vs., 303–304, 324perfect, 330perfectly competitive markets, 66with differentiated products, 332–337

Competitive firmdemand for labor, 376–382

long-run decision to exit or enter a market, 288

long-run supply curve, 289marginal-cost curve, 283–285market supply with entry and exit,

290–292market supply with fixed number of, 290measuring profit in graph, 288–289profit maximization and, 282–289revenue of, 280–282shift in demand in short and long run, 293short-run decision to shut down, 285–286short-run supply curve, 287sunk costs and, 286–287supply curve, marginal cost as, 285supply decision, 283–285vs. monopoly, 303–304zero profit and, 292–293

Competitive market, 66, 280, 280–282characteristics of, 280demand shift in short and long run, 293firms in, 279–280long-run supply curve slope upward,

293–295market supply with entry and exit, 290–292market supply with fixed number of

firms, 290meaning of, 280revenue of competitive firm, 280–282supply curve in, 289–295zero profit and, 292–293

Complements, 70cross-price elasticity of demand, 98perfect, 445

Concentration ratio, 330Condorcet paradox, 474Condorcet, Marquis de, 474Congestion

common resource and, 227–228gas tax and, 204pricing, 226–227traffic and toll roads, 226–228

Congressional Budget Office, 31, 209Constant returns to scale, 273Consumer choice

budget constraint, 440–441consumer optimal choices, 446–447deriving demand curve, 452–453Giffen good, 453income changes and, 448–449income effect, 448–449, 450–452indifference curve, 442inferior good, 448interest rates and household saving,

459–461marginal rate of substitution (MRS), 442, 447normal good, 448optimization, 446–453perfect complements, 445perfect substitutes, 445preferences, 441–445price changes and, 449–450substitution effect, 450–452

theory of, 439–440, 453–461wages affect labor supply, 454–457

Consumer surplus, 136–141, 137evaluating market equilibrium, 146–149lower price raises, 138–139market efficiency and, 145–150measure, 140–141price affects, 140using demand curve to measure, 137–139willingness to pay, 136–137

Consumptiongap, 422tax, 243, 482–483rivalry in, 218–219trade expands set of opportunities, 53

Consumption-saving decision, 459Coordinate system, 41–44Coordination problems, 273Copyright, 299Copyright laws, 301–302Corporate income tax, 241, 250–251Corporate management, 469Corporation, 236

principal-agent problem, 469Corrective taxes, 203

equivalence of pollution permits and, 207market-based policy, 203–205pollution permits and, 207

Correlation, positive and negative, 42Cost-benefit analysis, 223, 223–224Cost curves. See Total-cost curve

and their shapes, 268–270typical, 270–271

Cost(s), 141, 260–262average fixed, 268, 274average total, 267, 271–272, 274, 290average variable, 268, 274, 367–368budget deficit and healthcare, 239different costs produce upward-sloping

supply curve, 295economic profit vs. accounting profit, 262economies of scale and, 180–182explicit, 261, 274fixed, 266, 266–267, 274implicit, 261, 274in short run and long run, 271–273marginal. See Marginal costof capital, 261–262of possible sellers, 141of taxation, 155–156opportunity. See Opportunity costproduction, 259–260, 263–265social, 198, 313sunk, 285, 286, 286–287total, 260, 263, 274transaction, 212types of, 274variable, 266, 266–267, 274various measures of, 265–271welfare, 310–313willingness to sell and, 141–142

Council of Economic Advisers, 31Cox, Michael, 421



495Index

Crandall, Robert, 363Cross-price elasticity of demand, 97, 97–98Curves, 42–44

movements along, 43–44shifts of, 43–44slope of, 44–46

dDairy industry, competitive market, 280Davies, Kert, 37Deadweight loss, 159

changes in welfare, 159debate, 162–163determinants of, 160–163elasticity and, 160–163gains from trade and, 159–160monopoly and, 311–313of taxation, 156–160tariffs and, 178tax effects on market participants,

157–159tax revenue and, 163–166taxes cause, 234, 242–243triangle, 312–313

DeBeers, 301Deficit, budget. See Budget deficitDemand, 67–73

applications of, 101–106change in, 79, 81decrease in, 69elastic, 90, 92elasticity of. See Demand elasticityequilibrium of supply and, 77–79excess, 78expectations and, 71for labor, 376–382income changes, 70increase, 69, 80, 294individual, 68–69inelastic, 90, 92law of, 67, 79, 453market, 68–69market forces of supply and, 65number of buyers and, 71perfectly elastic, 92perfectly inelastic, 92price elasticity of, 93prices of related goods and, 70reducing smoking, 71–73relationship between price and quantity

demanded, 67–68supply and, 77–84, 111–112, 377tastes and, 70

Demand curve(s), 42–44, 67–68, 68demand schedule and, 138deriving, 452–453difference between competitive firm and

monopoly, 303–304elasticity of linear, 96for monopoly, 306measuring consumer surplus with, 139

price elasticity of demand and, 92–94shifts in, 69–73shifts in vs. movements along, 72slope of, 453using to measure consumer surplus, 137–138variety of, 92–94

Demand elasticity, 90–98Demand schedule, 67

demand curve and, 68, 138for water, 350–351

Department of Justice, antitrust laws, 319Derived demand, 376Dictators, 175Diminishing marginal product, 265, 378Diminishing marginal utility, 447

assumption of, 425Discount coupons, 317Discounting, 318–319Discrimination, 405

by customers and governments, 408–409by employers, 407–408earnings and, 397–398economics of, 405–410in labor market, 407in sports, 409–410price, 314–318profit motive and, 408

Diseconomies of scale, 272, 272–273Distribution

neoclassical theory of, 393of income in U.S., 416

Dominant strategy, 356Downs, Anthony, 226Duopoly, 350

eEarned Income Tax Credit (EITC), 121,

429–430, 432Economic growth, production possibilities

frontier and, 27–29Economic life cycle, 421Economic mobility, 423–424Economic models, 24–29Economic profit, 262Economic Report of the President, 31Economic welfare

price discrimination and, 315total surplus and, 145–146

Economics, 4. See Welfare economicsbehavioral, 480, 480–489environmental, 37of Black Death, 392of brand names, 343–344of cooperation, 355–362of discrimination, 405–410of immigration, 386–387of President Obama, 32–33reasons for studying, 14–15supply-side, and Laffer curve, 165–166ten principles of, 3–4

Economies of scale, 272, 272–273as causes of monopoly, 302lower costs through, 180–182specialization and, 273

Economistsas policy adviser, 29–34as scientist, 22–29disagreement among, 34–35green, 37in Washington, 31–32propositions which most agree about, 36thinking like, 21–22vs. accountants, 262

Economycentrally planned, 10market, 10–11parable for modern, 50–54political, 473, 473–479U.S. deep economic downturn, 16underground, 163

Ecuador, OPEC as cartel, 358Education

alternative view of, 402and success are linked, 403as positive externality, 199cost of college, 5–6signaling theory of, 402social optimum and, 200state and local spending for, 241terrorists and, 403type of human capital, 399wages and, 399

Efficiency, 5, 145, 242–246government intervention and, 12–13lump-sum taxes, 245–246marginal tax rates vs. average tax rates, 245market. See Market efficiencymonopoly and, 311–313of equilibrium quantity, 147production possibilities frontier and, 27total surplus and, 145–146trade-off between equity and, 251

Efficiency wages, 404, 404–405Efficient scale, 270, 291, 336Effort, wages and, 400–401Einstein, Albert, 22Elasticity, 90

along a linear demand curve, 96–97applications of, 89–106deadweight loss and, 160–163income elasticity of demand, 97linear demand curve, 96of demand. See Demand elasticityof supply, 98–101real world, 94tax incidence and, 125–127

Employers, discrimination by, 407–408Employment, moral hazard, 468–470Entry/exit into market

firm’s long-run decision to, 288free, 331long run market supply with, 290–292monopoly, 300–303

Environmental Defense, 37



496 Index496

Environmental economics, 37Environmental Protection Agency (EPA), 37,

203–204, 205–207Environmental regulations, 203Equality, 5, 146

government intervention and, 13Equilibrium, 77, 77–79

analyzing changes in, 79–84consumer and producer surplus in

market, 146decrease in supply affects, 81for an oligopoly, 353–354in labor market, 384–389in markets for land and capital, 390–391increase in demand affects, 80long-run, 332–335markets not in, 78Nash, 353of supply and demand,77zero-profit, 292–293

Equilibrium without international trade, 172–173

Equilibrium price, 77Equilibrium quantity, 77, 147Equity

horizontal, 247, 249tax, 249–251taxes and, 246–251trade-off between efficiency and, 252vertical, 247, 247–248

Estate tax, 244European Central Bank, 166Excess capacity, 335–336Excess demand, 78Excess supply, 77–78Excise taxes, 237Excludability, 218, 218–219Explicit costs, 261, 274Exports, 58. See also International trade

gains/losses of exporting country, 174–175Externality, 12, 12–13, 196, 151, 195–213

carbon tax, 208–209Coase theorem, 210–211command-and-control policies, 202, 203corrective taxes and subsidies, 203–205education as, 199gas tax and, 204–205internalizing, 199market inefficiency and, 197–202negative, 196, 198–199of country living, 200–201positive, 196, 199–202private solutions to, 209–212public policies toward, 202–209technology spillovers, 201–202tradable pollution permits, 205–207transaction costs, 212

fFactors of production, 24–26, 376

competitive profit-maximizing firm, 377

demand for labor, 376–382equilibrium in labor market, 384–389land and capital, 389–392linkages among, 391–392marginal product of labor, 377–378markets for, 24–26, 375–393shifting labor-demand curve, 380–382supply of labor, 383–384value of marginal product and demand

for labor, 379–380Fair Labor Standards Act of 1938, 117Fairness, behavioral economics and, 481–484Farming, applications of supply, demand,

and elasticity, 101–103Federal government

budget deficit, 238–240financial overview of, 234–241receipts of, 235–237spending, 237–240

Federal income tax rates (2010), 236Federal Reserve, 32Federal tax burden, 248FICA (Federal Insurance Contributions Act),

124Financial aid, price discrimination, 317Financial crisis, 430-431Firms. See Competitive firm

as a natural monopoly, 302–303in circular-flow diagram, 24–26marginal, 295market supply with fixed number of, 290profit-maximizing, 377

Fixed costs, 266, 266–267, 274Food Stamp program, 221–222, 237, 430, 432Ford Motor Company, 271–272Ford, Gerald, 15France, tax burden in, 235Franklin, Ben, 233Free rider, 220Free trade, 171–188

gGains from trade

comparative advantage, 54–59deadweight losses and, 159–160of exporting country, 174–175of importing country, 175–177production possibilities, 50–52specialization, 52–54

Galbraith, John Kenneth, 342Game theory, 349, 349–350

cooperation and, 360–361dominant strategy, 356prisoners’ dilemma, 355–357tit-for-tat strategy, 361

Game-playing factories, 59Gasoline prices, incentive effects of, 8–9Gasoline tax

as corrective tax, 204–205

benefits principle and, 246–247road congestion and, 204

Gates, Bill, 365–366GDP (gross domestic product)

government revenue as percentage of, 234government tax revenue as percentage

of, 235Gender differences, 410–411General Agreement on Tariffs and Trade

(GATT), 187Germany

income inequality in, 418inflation in, 15tax burden in, 235tax rate and labor taxes, 166

Giffen good, 453, 454Giffen, Robert, 453Gifts as signals, 471–472Glaeser, Edward L., 200–201Good(s), 70

club, 219, 302complements, 70different kinds of, 218–219excludability of, 218–219Giffen, 453, 454inferior, 70, 97, 448, 449international trade, 180marginal utility of, 447markets for, 24–26normal, 70, 97, 448private, 218, 218–219public, 217–218, 218, 218–219, 220–224related, 70rivalry in consumption, 218–219substitutes, 70types of, 219

Goolsbee, Austan, 9, 403Goulder, Lawrence, 37Government. See also Federal government

benefits of, 11–13discrimination by, 408–409regulation, 300revenue as percentage of GDP, 234tax revenue as percentage of GDP, 235

Government policiesprice control and, 112–121supply, demand, and, 111–112taxes and, 121–127

Graphs, 40–48cause and effect, 46–48curves in, 42–44measuring profit in, 288–289of single variable, 40–41of two variables, 41–42slope of, 44–46

Great Britain, unilateral approach to free trade, 186

Green economists, 37Greenhouse, Steven, 120Greenpeace, 37Greenspan, Alan, 243“Guns and butter” tradeoff, 5



497Index

hHamermesh, Daniel, 401–402Harris, Richard, 458Hayek, Friedrich, 342Health, federal spending and, 237–238Healthcare, 239Hispanics, poverty and, 420Holmes, Oliver Wendell, Jr., 155Homo economics, 480Hong Kong, distribution of income, 185Horizontal equity, 247, 249Horwitz, Jeff, 367Housing, rent control, 115–116Human capital of terrorists, 403Human capital, 398–399, 399

education as, 399role of, 406–407

Human life, value of, 223–224Human organs, market for, 149–150Human-capital theory, 402

iImmigration

causes labor-supply curve to shift, 384economics of, 386–387illegal, 387size of immigrant population in U.S.,

386–387Imperfect competition, 330Implicit costs, 261, 274Import quota, 35

compared to tariff, 179Imports, 58. See also International trade

gains and losses of importing country, 175–177Incentives, 7, 7–9

brand name quality, 343–344incentive pay, 9work, 431–432

Incomecapital, 391consumer choice effects, 448–449economic life cycle, 421increase in, 448in-kind transfers as, 420–421permanent, 421political philosophy of redistributing,

424–427shifts in demand and, 70transitory vs. permanent, 421U.S. distribution of, 416

Income effect, 450, 450–452on labor supply, 457–458

Income elasticity of demand, 97Income inequality

alternative measures of, 421–423around world, 417–418economic mobility, 423–424in U.S., 416–417

measurement of, 416–424poverty and, 415–416, 419–420

Income tax, 243corporate, 241, 250–251negative, 429, 429–430individual, 241

India, income inequality in, 418Indifference curve(s), 442

extreme examples of, 444–445four properties of, 443–444income effect, 450-452perfect complements, 445perfect substitutes, 445representing preferences, 442substitution effect, 450–452

Individual demand, 68–69vs. market demand, 68–69

Individual income tax, 241Individual supply vs. market supply, 73–74Indonesia, OPEC as cartel, 358Industrial organization, 260Industrial policy, 201–202Inefficiency

externalities and, 197–202of monopoly, 312–313

Inelastic demand, 90, 92Inelastic supply, 98Inequality

alternative measures of, 421–423around world, 417–418

Infant-industry argument for trade restrictions, 185–186

Inferior good, 70, 448, 449income elasticity of demand and, 97

Inflation, 15–16In-kind transfers, 420, 420–421

measuring inequality, 420–421policies to reduce poverty, 430–431

Input demand and output supply, 381Input prices and supply, 74–76An Inquiry into the Nature and Causes of the

Wealth of Nations (Smith), 11, 57, 273Instant runoff, 476–477Insurance

adverse selection, 470moral hazard, 470social, 426

Interest rate(s), 459–461Internalizing the externality, 199International trade, 171–188

analysis of oligopoly and, 355benefits of, 180–182changing face of, 59comparative advantage, 173determinants of, 172–173effects of tariffs, 177–179equilibrium without, 172–173gains and losses of exporting country,

174–175gains and losses of importing country, 175–177import quota compared to tariff, 179lessons for policy of, 179–180multilateral approach to free trade, 186–187

of United States, 58outsourcing and, 184–185relative demand for skilled and unskilled

labor and, 399–400restriction of, 179winners and losers from, 174–182world price, 173

Intuit, 319Investment in people, 399Invisible hand, 11–13, 32, 149Iraq, 237, 358Israel, shifts in labor supply and, 385–386

jJacoby, Jeff, 82Japan

income inequality in, 418trade and distribution of income, 184

Jensen, Robert, 454Jobs

argument for trade restrictions, 182–183characteristics of, 398–405

kKahn, Mathew, 200–201Kennedy, John F., 419Kenya, elephant poaching, 229Key resource, 300, 301Keynes, John Maynard, 32–33Krugman, Paul, 184–185Kuwait, OPEC as cartel, 358

lLabor

demand for, 376–382, 379–380international trade and demand for skilled

and unskilled, 309–400jobs argument for trade restrictions, 182–183marginal product of, 377–378, 381supply of, 383–384taxes on, 162–163technology and demand for skilled and

unskilled, 400Labor demand

minimum wage and, 119shifts in, 386–387, 388

Labor demand curveoutput price, 380–381shifting, 380–382supply of other factors, 382technological change and, 381–382

Labor marketadverse selection, 470discrimination, measuring, 405–407



498 Index498

equilibrium in, 384–389minimum wage affects, 118racial discrimination in, 407

Labor supplyincome effects on, 457–458shifts in, 385–386wages and, 454–457

Labor supply curvebackward-sloping, 457, 458changes in alternative opportunities, 383changes in tastes, 383immigration, 384

Labor taxdeadweight loss of, 162–163new research on taxation, 166

Labor-saving technological change, 381–382

Laffer curve, 165–166Laffer, Arthur, 165, 166Laissez faire, 148Land, 389–392Landsburg, Steven E., 183Laraki, Rida, 476Law of demand, 67, 453Law of supply, 73Law of supply and demand, 79Leisure, trade-off between work and, 383Leslie, Philip, 318–319Liberalism, 425, 425–426Libertarianism, 427Libya, OPEC as cartel, 358Life cycle, 421Lighthouses as public goods, 222–223Lindsay, Alistair, 352Linear demand curve, 96–97Local government, 240–241Logic of self-interest, 353Long run

costs in, 271–273decision to exit or enter a market, 288equilibrium, 332–335market supply with entry and exit,

290–292rent control, 115–116shift in demand, 293supply curve slopes upward, 293–295

Losses. See also Deadweight lossof exporting country, 174–175of importing country, 175–177

Ludd, Ned, 382Luddite revolt, 382Lump-sum tax, 245, 245–246Luxuries

income elasticity of demand and, 97price elasticity of demand and, 90

Luxury tax, 127

mMacroeconomics, 29Malawi, elephants as private good, 229

Marginal benefits, 6Marginal buyer, 137Marginal change, 6Marginal cost (MC), 267–268, 268, 274, 381

markup over, monopolistic vs. perfect competition, 336

pricing as regulatory system, 322pricing for natural monopoly, 322relationship average total cost to, 270relationship between price and, 336rising, 268–269

Marginal cost (MC) curve, 268, 270, 283and average-cost curves, 269firm’s supply decision and, 283–285

Marginal firm, 295Marginal product, 264

demand for labor and value of, 379–380diminishing, 265, 378

Marginal product of labor (MPL), 378, 381production function and, 377–378value of, 380

Marginal rate of substitution (MRS), 442, 447Marginal revenue (MR), 282, 283

curve for monopoly, 306for competitive firm, 281monopoly, 304, 305

Marginal seller, 143Marginal tax rate, 162, 236, 245Marginal utility, 425, 447Market(s), 66. See Competitive market

adverse selection and, 470–471competition and, 66–67definition of, 90–91efficiency of, 135–136firm’s long-run decision to exit or enter, 288for goods and services, 24–26for land and capital, equilibrium in, 390–391free entry and exit of, 331perfectly competitive, 66tyranny of, 338–339with only few sellers, 350–355

Market demand, 68–69Market economy, 10, 10–11Market efficiency, 145–150, 150–151Market equilibrium, evaluating, 146–149Market failure, 12, 12–13, 150–151, 323. See

also Externalityinsufficient variety as, 338–339

Market power, 13, 151, 280, 301Market supply

as sum of individual supplies, 75vs. individual supply, 73–74with entry and exit, long run, 290–292with fixed number of firms, short run, 290

Markup over marginal cost, 336Maximin criterion, 426McTeer, Robert D., Jr., 14–15Median annual earnings by race and sex, 405Median voter theorem, 478, 478–479Medicaid, 430, 432Medicare, 124, 236

budget deficit and, 238–240

federal spending and, 237–238rise in government spending for, 238–239tax, 162

Mexicoincome inequality in, 418living standards in, 13NAFTA and, 187

Microeconomics, 29, 467–468Microsoft Corporation, 299–300, 319

antitrust case against, 365–366Sherman Antitrust Act and, 320

Midpoint method, 91–92Mill, John Stuart, 424Miller, Nolan, 454Minimum wage, 117–119Minimum-wage laws, 428

determinant of equilibrium wages, 404–405evaluating price controls, 120–121policies to reduce poverty, 428

Money supply, inflation and, 15Monopolistic competition, 329–330, 330

advertising, 338–344characteristics of, 334–335excess capacity, 335–336in short run, 332long-run equilibrium, 332–335markup over marginal cost, 336vs. perfect competition, 330–332, 335–336, 345welfare of society and, 336–337with differentiated products, 332–337

Monopoly, 67, 299–300, 300, 300–303antitrust laws, 319–321competition vs., 324deadweight loss and, 311–313drugs vs. generic drugs, 309–310economies of scale as, 302government-created, 301–302inefficiency of, 312–313markets with only few sellers, 351–352natural, 219, 302–303perfect competition and, 330–332, 345prevalence of, 323–324price discrimination, 314–318production and pricing decisions, 303–310profit maximization, 306–308profit of, 308–309public ownership, 323,public policy toward, 318–323regulation, 321–322resources, 300, 301revenue of, 304–306social cost, 313supply curve and, 308vs. competition, 303–304welfare cost of, 310–313

Monopsony, 389Moral hazard, 468, 468–470Morris, Eric A., 226Movie industry, example of price

discrimination, 317Mullainathan, Sendhil, 407Muskie, Edmund, 207



499Index

nNader, Ralph, 7, 476NAFTA. See North American Free Trade

AgreementNamibia, elephants as private good, 229Nash equilibrium, 353Nash, John, 353National defense

important public goods, 221spending, 237

National Highway Traffic Safety Administration, 204

National Institutes of Health, 221, 238National Science Foundation, 221National-security argument for trade

restrictions, 184–185Natural disasters, price and, 82–83Natural monopoly, 219, 302, 302–303Necessities

income elasticity of demand and, 97price elasticity of demand and, 90

Negative correlation. 42Negative externality, 196, 198–199, 208Negative income tax, 429, 429–430Neoclassical theory of distribution, 393Newton, Isaac, 22Nigeria

income inequality in, 418living standards in, 13OPEC as cartel, 358

Nike, 338Normal good, 70, 448

income change and, 448income elasticity of demand and, 97

Normative statements, 30–31, 31North American Free Trade Agreement

(NAFTA), 187Nozick, Robert, 427

oObama, Barack, 16, 181, 208–209, 252

antitrust policy, 320–321, 322healthcare reform bill, 239

Observation, 22–23Oceans, common resources, 228Oil industry

OPEC and price of oil, 103–105OPEC and world oil market, 358price ceilings and lines at gas pump,

114–115Oligopoly, 330, 349

analysis of, and international trade, 355cartels and, 351–352competition and, 351–352concentration ratio, 330duopoly example, 350economics of cooperation, 355–362equilibrium for, 353–354game theory and, 357

markets with only few sellers, 350–355monopolies, 351–352OPEC as cartel, 358predatory pricing, 364–365prisoners’ dilemma, 355–357public policy toward, 362–366public price fixing, 352resale price maintenance, 363–364restraint of trade and antitrust laws, 362size affects market outcome, 354–355tying, 365

Omitted variable, 46–47OPEC. See Organization of Petroleum

Exporting CountriesOpportunity cost(s), 6, 54, 54–55, 260–262Optimization, 446–453Optimum

consumer’s, 446social, 198, 200

Ordered pair, 41Organization of Petroleum Exporting

Countries (OPEC)application of supply, demand, and

elasticity, 103–105failure to keep price of oil high, 103–105increase in price of crude oil, 114–115nations in, 358world oil market and, 358

Organs (human), market for, 149–150Origin, of graph, 41Orrenius, Pia, 386–387Output

effect, 305, 354efficient level of, 311levels of, 307price, 380–381supply, input demand and, 381

Outsourcing, 183, 184–185

pPatent, expiration of, 310Patent laws, government-created

monopolies and, 301–302Patent protection, 201–202Patterson, David A., 482Payroll tax, 236

burden of, 124–125Peltzman, Sam, 8Perception vs. reality, 35Perfect competition

monopolistic vs., 335–336monopoly and, 330–332, 345

Perfect complements, 445Perfect price discrimination, 315–316Perfect substitutes, 445Perfectly competitive markets, 66, 280Perfectly elastic demand, 92Perfectly elastic supply, 99Perfectly inelastic demand, 92

Perfectly inelastic supply, 99Permanent income, 421Pharmaceutical vs. generic drugs, 309Pie chart, 40Pigou, Arthur, 203Pigovian taxes, 203Political economy, 468, 473, 473–479

Arrow’s impossibility theorem, 475Condorcet voting paradox, 474median voter theorem, 478–479politician’s behavior, 479

Political philosophy of redistributing income, 424–427

liberalism, 425–426libertarianism, 427utilitarianism, 424–425

Pollutionas negative externality, 226cap and trade, 208–209clean air and water as common resource,

226corrective taxes and, 203–204EPA, 203–204gas tax, 205objections to economic analysis of, 207regulation and, 203social optimum and, 198tradable pollution permits, 205–207

Positive correlation, 42Positive externalities, 196, 199–202Positive statements, 30–31, 31Poverty

correlated with age, race, and family composition, 420

fighting, as public good, 221–222income inequality and, 415–416in-kind transfers and, 420–421measures, 422–423policies to reduce, 427–432

Poverty line, 419Poverty rate, 419, 419–420, 422–423Predatory pricing, 364–365Prescott, Edward C., 251Price(s)

advertising effect on, 340–341allocation of resources and, 84change in, 449–450control on, 112–121equilibrium, 77high raises producer surplus,

144–145input prices and supply, 74–76low raises consumer surplus, 138–139marginal cost and, 336market-clearing, 77natural disasters and, 82–83of related goods and demand,, 70of trade, 56output, 380–381purchase, of land or capital, 390quantity demanded and, 67–68quantity supplied and, 73, 74relative, 447



500 Index500

Price(s) (Continued)rental, of land or capital, 390shortages and, 78surplus and, 77–78when supply and demand shifts, 83willingness to pay, 136–137world, 173

Price ceiling, 112binding constraint, 112lines at gas pump, 114–115market outcomes and, 112–113not binding, 112rent control, 115–116

Price discrimination, 314, 314–318analytics of, 315–317economic welfare and, 315examples of, 317–318moral of story, 315parable about pricing, 314–315rational strategy for a profit-maximizing

monopolist, 315willingness to pay and, 315

Price effect, 305, 354Price elasticity of demand, 90, 90–91

computing, 91determinants of, 90–91elasticity and total revenue along a linear

demand curve, 96–97midpoint method, 91–92total revenue and, 94–96variety of demand curves, 92–94

Price elasticity of supply, 98computing, 98–99determinants of, 98variety of supply curves, 99–101

Price fixing, public, 352Price floor, 112

market outcomes and, 116–117minimum wage as, 117

Price maker, 299Price takers, 66, 174, 280, 299Price-gouging, 83Pricing

average-cost, 322congestion, 226–227dynamics of pricing tickets, 318–319marginal-cost, 322predatory, 364–365resale price maintenance, 363–364tying, 365value, 226–227

Principal, 468, 468–470Principal-agent problem of corporation, 469Principles of Political Economy and Taxation

(Ricardo), 57Prisoners’ dilemma, 355, 355–357

dominant strategy, 356economics of cooperation, 355–357examples of, 358–360oligopoly as, 357tit-for-tat strategy, 361tournament, 361welfare of society and, 360

Private goods, 218, 218–219Procter & Gamble Co., 322Producer surplus, 141, 141–145

cost and willingness to sell, 141–142evaluating market equilibrium, 146higher price raises, 144–145market efficiency and, 145–150using supply curve to measure, 142

Product differentiation, 331Production

cost of, 259–260, 263–265decisions, monopoly and, 303–310factors of, 24–26, 376process, 301resources, limited quantities of, 293–295

Production function, 263, 263–265, 378, 379marginal product of labor and, 377–378to total-cost curve, 265total cost and, 263

Production possibilities frontier, 26, 26–29, 50–52

Productivity, 14, 387–388Products

advertising as signal of quality, 341–343brand-name, 309competition with differentiated, 332–337

Profit, 260accounting, 262as area between price and average total

cost, 290economic, 262measuring in graph for competitive firm,

288–289of monopoly, 308–309

Profit maximization, 282–289, 306–308Progressive tax, 247, 248

Property rights, 11importance of, 229technology and, 202

Property taxes, 240–241Proportional tax, 247, 248Protection-as-a-bargaining-chip argument

for trade restrictions, 186Public choice, 473Public good(s), 217–218, 218, 218–219,

220–224antipoverty programs, 222as natural monopoly, 302basic research, 221cost-benefit analysis, 223–224free-rider problem, 220importance of property rights, 229lighthouses as, 222–223national defense, 221value of human life, 223–224

Public ownership, public policy toward monopolies, 323

Public policies toward externalities, 202–209Public policy, 13. See also Antitrust lawsPublic policy, asymmetric information and,

473Public policy toward monopolies, 318–323

doing nothing, 323

increasing competition with antitrust laws, 319–321

public ownership, 323regulation, 321–322

Public policy toward oligopolies, 362–366controversies over antitrust policy,

363–365restraint of trade and antitrust laws, 362

Public price fixing, 352Putnam, Howard, 363

qQatar, OPEC as cartel, 358Quantity

discounts, example of price discrimination, 318

equilibrium, 77when supply and demand shifts, 83

Quantity demanded, 67change in, 80–81relationship between price and, 67–68

Quantity supplied, 73relationship between price and, 73

Quintiles, 248Quotas, import, 35

compared to tariff, 179

rRace

discrimination in labor market, 407discrimination in sports, 409–410median annual earnings by, 405poverty correlated with, 420segregated streetcars and, 408

Rajan, Raghuram, 430–431Rational people, 6Rationality, behavioral economics and, 480–481Rawls, John, 425–426Reagan, Ronald, 34

tax cuts under, 165, 252Regressive tax, 247, 248Regulation

of externalities, 203public policy toward monopolies,

321–322Reis, Ricardo, 500Relative price

budget constraints and, 440–441consumer’s choice and, 447

Rent control, 35evaluating price controls, 120–121in short run and long run, 115–116price ceiling, 115–116

Rent subsidies, 120–121Rental price of land or capital, 390Resale price maintenance, 363–364Research, basic, as public good, 221



501Index

Resourcescommon, 217–218, 218, 218–219, 224–229, 302limited quantities of production, 293–295monopoly, 300, 301prices and allocation of, 84prisoners’ dilemma, 359–360scarcity of, 4

Revenue. See Total revenueaverage, 281marginal, 282of competitive firm, 280–282of monopoly, 304–306tax, 157

Reverse causality, 47–48Rhodes, Cecil, 301Ricardo, David, 57Rickard, Lisa, 320Rivalry in consumption, 218, 218–219Road congestion, gasoline tax and, 204Road to Serfdom, The (Hayek), 342Roback Jennifer, 408Russia


sSales taxes, 240–241Satisficers, 481Saudi Arabia, OPEC as cartel, 358Saunders, Laura, 244Savings, interest rates affect household,

459–461Scarcity, 4Scatterplot, 41Schumpeter, Joseph, 33Scientific judgments, differences among

economists in, 34Scientific method, 22–23Screening, 472, 472–473Segregation, streetcars and profit motive, 408Self-interest, logic, 353Sellers

number of, and shifts in supply curve, 76taxes on, affect market outcomes,

121–123variables that influence, 76

Services, markets for, 24–26Shaw, George Bernard, 34Sherman Antitrust Act, 319–320, 362Short run

costs in, 271–273decision to shut down, 285–286increase in demand, 294market supply with fixed number of

firms, 290monopolistic competitors in, 333monopolistically competitive firm in,

332rent control, 115–116shift in demand, 293

Shortage, 78lines at gas pump, 114–115price ceilings and, 113

Shutdown, 285competitive firm’s short-run decision to,

285–286near-empty restaurants and, 287off-season miniature golf and, 287

Sierra Club, 210Signaling, 402, 471

to convey private information, 471Signaling theory, 402

of advertising, 402of education, 402

Simon, Herbert, 480Sin taxes, 482–483Singapore, trade and distribution of

income, 185Skills

immigration and, 386–387increasing value of, 399–400

Slope, 44–46Smith, Adam, 11, 12, 32–33, 57, 149, 273, 363Smith, M. Patricia, 120Smoking, reducing, 71–73Social Choice and Individual Values

(Arrow), 475Social cost, 198

monopoly’s profit, 313Social insurance, 426

taxes, 236Social Security, 124, 236, 249

budget deficit and, 238–240federal spending and, 237rise in government spending for, 238–239tax, 162

South Africa, income inequality in, 418South Korea

trade and distribution of income, 185unilateral approach to free trade, 186

Soviet Unionarms race and Cold War, 358–359collapse of communism in, 10

Specializationdriving force of, 54–59economies of scale and, 273trade and, 52–54

Specific technological knowledge, 221Specter, Arlen, 322Sports, discrimination in, 409–410Standard of living, 13–14Standard Oil, Sherman Antitrust Act and,

320State government

receipts of, 240–241spending of, 241

Stein, Charles, 148Stigler, George, 323Still Stuck in Traffic Coping With Peak-Hour

Traffic Congestion (Downs), 226Stockman, David, 165Strike, 404

Subsidiesmarket-based policy, 203–205rent, 120–121wage, 120–121

Substitutes, 70cross-price elasticity of demand, 98perfect, 445price elasticity of demand and, 90

Substitutioneffect, 450, 450–452marginal rate of, 442, 447

Summers, Lawrence H., 32–33Sunk cost, 285, 286, 286–287Superstar phenomenon, 402–404Supplemental Security Income (SSI), 428Supply, 73–76

applications of, 101–106change in, 80–81decrease in, 74, 81elasticity of, 98–101equilibrium of demand and, 77–79excess, 77–78increase in, 74, 102individual, 73–74inelastic, 98input prices and, 74–76law of, 73market vs. individual, 73–74number of sellers and, 76of labor, 383–384perfectly elastic, 99perfectly inelastic, 99price elasticity of, 98–99, 100, 101relationship between price and quantity

supplied, 73technology and, 76

Supply and demand, 77–84, 111–112equilibrium of, 77law of, 79market forces of, 65shift in, 82versatility of, 377

Supply curve(s), 73in competitive market, 289–295monopoly and, 308price elasticity of supply, 99–101shifts in, 74–76shifts in vs. movements along, 79–80supply schedule and, 74, 142using to measure producer surplus, 142–143variety of, 99–101

Supply schedule, 73supply curve and, 74, 142

Supply-side economics and Laffer curve, 165–166

Surplus, 77Surplus. See also Budget surplus; Consumer

surplus; Producer surplus; Total surplusprice floors and, 117

SwedenLaffer curve, 166tax burden in, 235

Synergies, 320–321



502 Index502

tTaiwan, trade and distribution of income, 185Tanzania, elephant poaching, 229Tariffs, 35, 177–181Tax burden

distribution of, 248–249divided, 126of U.S. compared to European companies,

235Tax cuts under Ronald Reagan, 252Tax equity, 249–251Tax incidence, 121, 249–251

elasticity and, 125–127flypaper theory of, 249–251

Tax ratesaverage, 245George W. Bush reduced highest tax rate,

252marginal, 245raised by Bill Clinton, 252

Tax revenue, 157deadweight loss and, 163–166

Tax systems, 247administrative burden of, 244–245design of, 233–234

Taxation, costs of, 155–156Taxes, 121–127, 242–246

ability-to-pay principle, 247–248Barack Obama’s pledged to raise taxes, 252benefits principle and gasoline, 246–247benefits principle, 246–247carbon, 208–209consumption, 243, 482–483corporate income, 241, 250–251corrective, 203cuts under Reagan, 165deadweight loss of taxation, 156–160,

163–166, 234, 242–243equity and, 246–251estate, 244excise, 237gas, 204–205incidence, 121income, 243individual income, 241Laffer curve and supply-side economics,

165–166lump-sum tax, 245, 245–246luxury, 127negative income, 429–430new research on taxation, 166on buyers, market outcomes and, 123–124on labor, 162–163on sellers, market outcomes and, 121–123payroll, 124–125Pigovian, 203progressive, 247, 248property, 240–241proportional, 247, 248regressive, 247regressive, 248

sales, 240–241sin, 482–483social insurance, 236value-added, 243, 250–251

Technological change, 381–382Technological progress, 382Technology

demand for skilled and unskilled labor and, 400

shifts in supply curve and, 76spillovers, 201–202

Teenage labor market, minimum wage and, 118–119

Temporary Assistance for Needy Families (TANF), 221, 237, 428

Textile market, 172–188Theory, 22–23Theory of consumer choice, 439–440

application of, 453–461Theory of Justice (Rawls), 425Ticket scalping, force in free market, 148–149Time horizon, price elasticity of demand, 91Time-series graph, 40, 41Tit-for-tat strategy, 361Toll roads, 226–227Total cost, 260, 274

average, 267, 274production function and, 263

Total revenuealong a linear demand curve, 96–97for competitive firm, 281

Total revenue, 94, 95, 260monopoly, 304, 305price elasticity of demand and, 94–96

Total surplus, 145–146, 148Total-cost curve, 265, 267

from production function to, 265production function and, 264

Tradable permits, 37Tradable pollution permits, market-based

policy, 205–207Trade. See also Free trade; Gains from trade;

International tradeagreements and World Trade

Organization, 186–187benefits of, 10comparative advantage and, 55–56deadweight losses and gains from, 159–160equilibrium without international, 172–173interdependence and gains from, 49–50price of, 56restraint of, 362specialization and, 52–54

Trade barriers, 35Trade restriction

arguments for, 182–187infant-industry argument for, 185–186jobs argument for, 182–183national-security argument, 184–185protection-as-a-bargaining-chip

argument, 186

tariffs, 35unfair-competition argument for, 186

Trade skirmishes, 181Trade-offs, 4–5

between equity and efficiency, 252between inflation and unemployment, 16policy decisions and, 31production possibilities frontier and, 27–28

Traffic, congested roads as public goods or common resources, 227–228

Tragedy of the Commons, 224, 224–225Transaction costs, 212Transfer payments, 237, 249Transitivity, 474, 475Truman, Harry, 31Trustbusters, 320–321Tying, 365

central issues in Microsoft antitrust case, 366Tyranny of market, 338–339Tyranny of the Market, The (Waldfogel), 338

uUganda, elephant poaching, 229Underground economy, 163Unemployment, short-run trade-off between

inflation and, 16Unfair-competition argument for trade

restrictions, 186Union, 404

determinant of equilibrium wages, 404–405Unit elasticity, 92United Arab Emirates, OPEC as cartel, 358United Kingdom


United Statescap and trade, 208–209carbon tax, 208–209distribution of income in, 416income inequality, 416–417, 418inflation in, 15international trade with, 58labor taxes, 166living standards in, 13–14NAFTA and, 187tax burden compared to European

countries, 235trade and distribution of income, 184–185various laws to manage use of fish and

other wildlife, 228Unpaid internships, 120Unsafe at Any Speed (Nader), 7Urbanization, carbon emissions and,

200–201U.S. Chamber Institute for Legal Reform, 320U.S. Justice Department, 362, 365–366U.S. Supreme Court, antitrust laws, 320U-shaped average total cost, 269–270Utilitarianism, 424, 424–425Utility, 424, 447



503Index

vValue of marginal product, 379, 379–380Value pricing, 226–227Value-added (VAT) tax, 243, 250–251Values, differences among economists in,

34–35Variable costs, 266, 266–267, 274

average, 268, 274Variable tolling, 226–227Variables

graphs of single, 40–41graphs of two, 41–42omitted, 46–47that influence buyers, 71that influence sellers, 76

Varian, Hal R., 318–319, 410–411Vascellaro, Jessica E., 37Venezuela, OPEC as cartel, 358Verizon Communications Inc., 322Vertical equity, 247, 247–248Volcker, Paul A., 250Voting systems, 474–478

wWage subsidies, 120–121Wages

ability, effort, and chance, 400–401adverse selection and, 470beauty and, 401–402Black Death and, 392compensating differentials, 398determinants of equilibrium, 398–405education and, 399

efficiency, 404–405free trade and, 184–185human capital, 398–399immigration and, 386–387labor supply and, 454–457minimum, 117–119minimum-wage laws, unions, and

efficiency wages, 404–405productivity and, 387–388signaling, 402superstar phenomenon, 402–404

Waldfogel, Joel, 338–339Walsh, Sheila, 458Water distribution as natural monopoly, 302Wealth of Nations, The (Smith), 12, 363Welfare, 237, 249, 428, 428–429, 432

effects of free trade, 174effects of tariffs, 178in monopolized market, 313policies to reduce poverty, 428–429tax affects, 158

Welfare cost of monopoly, 310–313deadweight loss, 311–313

Welfare economics, 136, 197benevolent social planner, 145–146consumer surplus measures, 140–141cost and willingness to sell, 141–142evaluating market equilibrium, 146–149higher price raises producer surplus, 144–145lower price raises consumer surplus, 138–139market efficiency and market failure, 150–151taxes and, 157–159using demand curve to measure consumer

surplus, 137–138using supply curve to measure producer

surplus, 142–123willingness to pay, 136–137

Welfare of societymonopolistic competition and, 336–337prisoners’ dilemma and, 360

Welfare reform bill signed by Bill Clinton, 432Welfare system, 221–222Willingness to pay, 136, 136–137, 315Willingness to sell, cost and, 141–142Women, gender differences in competition,

410–411Work and leisure, trade-off between, 383Work incentives, antipoverty programs and,

431–432Workfare, 432World price, 173World Trade Organization (WTO), 181, 186

xX-coordinate, 41

yY-coordinate, 41

zZero economic profit, 334Zero profit, competitive firms, 292–293Zero-profit condition, 336Zero-profit equilibrium, 292–293Zimbabwe, elephants as private good, 229



Yoram Bauman and GradY Klein

The Cartoon Introduction to Economics (New York: Hill and Wang, 2010)

Basic economic principles, with humor.

nariman Behravesh

Spin-Free Economics (New York: McGraw-Hill, 2008)

A straightforward guide to major economic policy debates.

William Breit and BarrY t. hirsch

Lives of the Laureates (Cambridge, MA: MIT Press, 2009)

Twenty-three winners of the Nobel Prize in Economics offer autobiographical essays about their life and work.

BrYan caplan

The Myth of the Rational Voter: Why Democracies Choose Bad Policies (Princeton, NJ: Princeton University Press, 2008)

An economist asks why elected leaders often fail to follow the policies that economists recommend.

paul collier

The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It (New York: Oxford University Press, 2007)

A former research director at the World Bank offers his insights into how to help the world’s poor.

avinash dixit and BarrY naleBuff

Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life (New York: Norton, 1991)

This introduction to game theory discusses how all people—from corporate executives to criminals under arrest—should and do make strategic decisions.

SuggeStionS for Summer reading

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