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Abstract
For two-semester courses in Principles of Economics.
The Relevance of Economics Through Real-world Business Examples
One of the challenges of teaching Principles of Economics is fostering interest in concepts that may not seem applicable to students’ lives. Economics makes economics relevant by demonstrating how real businesses use economics to make decisions every day. And with an ever-changing U.S. and world economy, the Sixth Edition has been updated with the latest developments using new real-world business and policy examples. Regardless of their future career path—opening an art studio, trading on Wall Street, or bartending at the local pub—students will benefit from understanding the economic forces behind their work.
MyEconLab® not included. Students, if MyEconLab is a recommended/mandatory component of the course, please ask your instructor for the correct ISBN and course ID. MyEconLab should only be purchased when required by an instructor. Instructors, contact your Pearson representative for more information.
MyEconLab is an online homework, tutorial, and assessment product designed to personalize learning and improve results. With a wide range of interactive, engaging, and assignable activities, students are encouraged to actively learn and retain tough course concepts.
Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Cover | Cover | ||
| Title Page | 3 | ||
| Copyright Page | 4 | ||
| About the Authors | 7 | ||
| Brief Contents | 8 | ||
| Contents | 11 | ||
| Flexibility Chart | 26 | ||
| Preface | 29 | ||
| A Word of Thanks | 57 | ||
| Chapter 1: Economics: Foundations and Models | 60 | ||
| Will Smart Devices Revolutionize Health Care? | 61 | ||
| 1.1. Three Key Economic Ideas | 62 | ||
| 1.2. The Economic Problem That Every Society Must Solve | 66 | ||
| 1.3. Economic Models | 70 | ||
| 1.4. Microeconomics and Macroeconomics | 75 | ||
| 1.5. A Preview of Important Economic Terms | 75 | ||
| Conclusion | 77 | ||
| Chapter Summary and Problems | 80 | ||
| Appendix: Using Graphs and Formulas | 85 | ||
| Graphs of One Variable | 86 | ||
| Graphs of Two Variables | 87 | ||
| Formulas | 92 | ||
| Chapter 2: Trade-offs, Comparative Advantage, and the Market System | 98 | ||
| Managers at Tesla Motors Face Trade-offs | 99 | ||
| 2.1. Production Possibilities Frontiers and Opportunity Costs | 100 | ||
| 2.2. Comparative Advantage and Trade | 106 | ||
| 2.3. The Market System | 112 | ||
| Conclusion | 121 | ||
| Chapter 3: Where Prices Come From: The Interaction of Demand and Supply | 130 | ||
| How Smart Is Your Watch? | 131 | ||
| 3.1. The Demand Side of the Market | 132 | ||
| 3.2. The Supply Side of the Market | 140 | ||
| 3.3. Market Equilibrium: Putting Demand and Supply Together | 144 | ||
| 3.4. The Effect of Demand and Supply Shifts on Equilibrium | 148 | ||
| Conclusion | 155 | ||
| Chapter 4: Economic Efficiency, Government Price Setting, and Taxes | 166 | ||
| The Sharing Economy, Phone Apps, and Rent Control | 167 | ||
| 4.1. Consumer Surplus and Producer Surplus | 168 | ||
| 4.2. The Efficiency of Competitive Markets | 173 | ||
| 4.3. Government Intervention in the Market: Price Floors and Price Ceilings | 175 | ||
| 4.4. The Economic Effect of Taxes | 183 | ||
| Conclusion | 189 | ||
| Appendix: Quantitative Demand and Supply Analysis | 199 | ||
| Demand and Supply Equations | 199 | ||
| Calculating Consumer Surplus and Producer Surplus | 200 | ||
| Chapter 5: Externalities, Environmental Policy, and Public Goods | 204 | ||
| Can Economic Policy Help Protect the Environment? | 205 | ||
| 5.1. Externalities and Economic Efficiency | 206 | ||
| 5.2. Private Solutions to Externalities: The Coase Theorem | 209 | ||
| 5.3. Government Policies to Deal with Externalities | 216 | ||
| 5.4. Four Categories of Goods | 223 | ||
| Conclusion | 231 | ||
| Chapter 6: Elasticity: The Responsiveness of Demand and Supply | 240 | ||
| Do People Respond to Changes in the Price of Gasoline? | 241 | ||
| 6.1. The Price Elasticity of Demand and Its Measurement | 242 | ||
| 6.2. The Determinants of the Price Elasticity of Demand | 249 | ||
| 6.3. The Relationship between Price Elasticity of Demand and Total Revenue | 251 | ||
| 6.4. Other Demand Elasticities | 255 | ||
| 6.5. Using Elasticity to Analyze the Disappearing Family Farm | 258 | ||
| 6.6. The Price Elasticity of Supply and Its Measurement | 260 | ||
| Conclusion | 265 | ||
| Chapter 7: The Economics of Health Care | 274 | ||
| How Much Will You Pay for Health Insurance? | 275 | ||
| 7.1. The Improving Health of People in the United States | 276 | ||
| 7.2. Health Care around the World | 278 | ||
| 7.3. Information Problems and Externalities in the Market for Health Care | 284 | ||
| 7.4. The Debate over Health Care Policy in the United States | 290 | ||
| Conclusion | 301 | ||
| Chapter 8: Firms, the Stock Market, and Corporate Governance | 308 | ||
| Is Twitter the Next Facebook? | 309 | ||
| 8.1. Types of Firms | 310 | ||
| 8.2. How Firms Raise Funds | 314 | ||
| 8.3. Using Financial Statements to Evaluate a Corporation | 321 | ||
| 8.4. Corporate Governance Policy and the Financial Crisis of 2007–2009 | 323 | ||
| Conclusion | 327 | ||
| Appendix: Tools to Analyze Firms’ Financial Information | 333 | ||
| Using Present Value to Make Investment Decisions | 333 | ||
| Going Deeper into Financial Statements | 338 | ||
| Chapter 9: Comparative Advantage and the Gains from International Trade | 342 | ||
| President Obama, Nike, and Free Trade | 343 | ||
| 9.1. The United States in the International Economy | 344 | ||
| 9.2. Comparative Advantage in International Trade | 347 | ||
| 9.3. How Countries Gain from International Trade | 349 | ||
| 9.4. Government Policies That Restrict International Trade | 354 | ||
| 9.5. The Arguments over Trade Policies and Globalization | 363 | ||
| Conclusion | 367 | ||
| Chapter 10: Consumer Choice and Behavioral Economics | 376 | ||
| J.C. Penney Customers Didn’t Buy into “Everyday Low Prices” | 377 | ||
| 10.1. Utility and Consumer Decision Making | 378 | ||
| 10.2. Where Demand Curves Come From | 386 | ||
| 10.3. Social Influences on Decision Making | 389 | ||
| 10.4. Behavioral Economics: Do People Make Their Choices Rationally? | 395 | ||
| Conclusion | 401 | ||
| Appendix: Using Indifference Curves and Budget Lines to Understand Consumer Behavior | 408 | ||
| Consumer Preferences | 408 | ||
| The Budget Constraint | 410 | ||
| Choosing the Optimal Consumption of Pizza and Coke | 411 | ||
| The Slope of the Indifference Curve, the Slope of the Budget Line, and the Rule of Equal Marginal Utility per Dollar Spent | 417 | ||
| Chapter 11: Technology, Production, and Costs | 422 | ||
| Will the Cost of MOOCs Revolutionize Higher Education? | 423 | ||
| 11.1. Technology: An Economic Definition | 424 | ||
| 11.2. The Short Run and the Long Run in Economics | 425 | ||
| 11.3. The Marginal Product of Labor and the Average Product of Labor | 429 | ||
| 11.4. The Relationship between Short-Run Production and Short-Run Cost | 433 | ||
| 11.5. Graphing Cost Curves | 436 | ||
| 11.6. Costs in the Long Run | 438 | ||
| Conclusion | 443 | ||
| Appendix: Using Isoquants and Isocost Lines to Understand Production and Cost | 451 | ||
| Isoquants | 451 | ||
| Isocost Lines | 452 | ||
| Choosing the Cost-Minimizing Combination of Capital and Labor | 454 | ||
| The Expansion Path | 459 | ||
| Chapter 12: Firms in Perfectly Competitive Markets | 464 | ||
| Are Cage-Free Eggs the Road to Riches? | 465 | ||
| 12.1. Perfectly Competitive Markets | 467 | ||
| 12.2. How a Firm Maximizes Profit in a Perfectly Competitive Market | 469 | ||
| 12.3. Illustrating Profit or Loss on the Cost Curve Graph | 472 | ||
| 12.4. Deciding Whether to Produce or to Shut Down in the Short Run | 478 | ||
| 12.5. “If Everyone Can Do It, You Can’t Make Money at It”: The Entry and Exit of Firms in the Long Run | 481 | ||
| 12.6. Perfect Competition and Efficiency | 488 | ||
| Conclusion | 491 | ||
| Chapter 13: Monopolistic Competition: The Competitive Model in a More Realistic Setting | 500 | ||
| Is Chipotle the New McDonald’s? | 501 | ||
| 13.1. Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market | 502 | ||
| 13.2. How a Monopolistically Competitive Firm Maximizes Profit in the Short Run | 504 | ||
| 13.3. What Happens to Profits in the Long Run? | 507 | ||
| 13.4. Comparing Monopolistic Competition and Perfect Competition | 513 | ||
| 13.5. How Marketing Differentiates Products | 515 | ||
| 13.6. What Makes a Firm Successful? | 516 | ||
| Conclusion | 519 | ||
| Chapter 14: Oligopoly: Firms in Less Competitive Markets | 528 | ||
| Apple, Spotify, and the Music Streaming Revolution | 529 | ||
| 14.1. Oligopoly and Barriers to Entry | 530 | ||
| 14.2. Game Theory and Oligopoly | 534 | ||
| 14.3. Sequential Games and Business Strategy | 542 | ||
| 14.4. The Five Competitive Forces Model | 546 | ||
| Conclusion | 549 | ||
| Chapter 15: Monopoly and Antitrust Policy | 556 | ||
| A Monopoly on Lobster Dinners in Maine? | 557 | ||
| 15.1. Is Any Firm Ever Really a Monopoly? | 558 | ||
| 15.2. Where Do Monopolies Come From? | 560 | ||
| 15.3. How Does a Monopoly Choose Price and Output? | 565 | ||
| 15.4. Does Monopoly Reduce Economic Efficiency? | 569 | ||
| 15.5. Government Policy toward Monopoly | 572 | ||
| Conclusion | 581 | ||
| Chapter 16: Pricing Strategy | 588 | ||
| Walt Disney Discovers the Magic of Big Data | 589 | ||
| 16.1. Pricing Strategy, the Law of One Price, and Arbitrage | 590 | ||
| 16.2. Price Discrimination: Charging Different Prices for the Same Product | 592 | ||
| 16.3. Other Pricing Strategies | 601 | ||
| Conclusion | 607 | ||
| Chapter 17: The Markets for Labor and Other Factors of Production | 614 | ||
| Rio Tinto Mines with Robots | 615 | ||
| 17.1. The Demand for Labor | 616 | ||
| 17.2. The Supply of Labor | 620 | ||
| 17.3. Equilibrium in the Labor Market | 622 | ||
| 17.4. Explaining Differences in Wages | 627 | ||
| 17.5. Personnel Economics | 637 | ||
| 17.6. The Markets for Capital and Natural Resources | 640 | ||
| Conclusion | 643 | ||
| Chapter 18: Public Choice, Taxes, and the Distribution of Income | 652 | ||
| Should the Government Use the Tax System to Reduce Inequality? | 653 | ||
| 18.1. Public Choice | 654 | ||
| 18.2. The Tax System | 658 | ||
| 18.3. Tax Incidence Revisited: The Effect of Price Elasticity | 665 | ||
| 18.4. Income Distribution and Poverty | 669 | ||
| Conclusion | 681 | ||
| Chapter 19: GDP: Measuring Total Production and Income | 688 | ||
| Ford Motor Company Rides the Business Cycle | 689 | ||
| 19.1. Gross Domestic Product Measures Total Production | 691 | ||
| 19.2. Does GDP Measure What We Want It to Measure? | 698 | ||
| 19.3. Real GDP versus Nominal GDP | 701 | ||
| 19.4. Other Measures of Total Production and Total Income | 705 | ||
| Conclusion | 707 | ||
| Chapter 20: Unemployment and Inflation | 714 | ||
| Why Is JPMorgan Chase Laying Off Workers? | 715 | ||
| 20.1. Measuring the Unemployment Rate, the Labor Force Participation Rate, and the Employment–Population Ratio | 716 | ||
| 20.2. Types of Unemployment | 725 | ||
| 20.3. Explaining Unemployment | 728 | ||
| 20.4. Measuring Inflation | 730 | ||
| 20.5. Using Price Indexes to Adjust for the Effects of Inflation | 734 | ||
| 20.6. Nominal Interest Rates versus Real Interest Rates | 736 | ||
| 20.7. Does Inflation Impose Costs on the Economy? | 738 | ||
| Conclusion | 741 | ||
| Chapter 21: Economic Growth, the Financial System, and Business Cycles | 752 | ||
| Economic Growth and the Business Cycle at Corning, Inc. | 753 | ||
| 21.1. Long-Run Economic Growth | 754 | ||
| 21.2. Saving, Investment, and the Financial System | 762 | ||
| 21.3. The Business Cycle | 771 | ||
| Conclusion | 781 | ||
| Chapter 22: Long-Run Economic Growth: Sources and Policies | 788 | ||
| Will Economic Reforms in Mexico Boost Growth? | 789 | ||
| 22.1. Economic Growth over Time and around the World | 790 | ||
| 22.2. What Determines How Fast Economies Grow? | 795 | ||
| 22.3. Economic Growth in the United States | 802 | ||
| 22.4. Why Isn’t the Whole World Rich? | 805 | ||
| 22.5. Growth Policies | 814 | ||
| Conclusion | 819 | ||
| Chapter 23: Aggregate Expenditure and Output in the Short Run | 828 | ||
| Fluctuating Demand Helps—and Hurts—Intel and Other Firms | 829 | ||
| 23.1. The Aggregate Expenditure Model | 830 | ||
| 23.2. Determining the Level of Aggregate Expenditure in the Economy | 833 | ||
| 23.3. Graphing Macroeconomic Equilibrium | 847 | ||
| 23.4. The Multiplier Effect | 854 | ||
| 23.5. The Aggregate Demand Curve | 861 | ||
| Conclusion | 863 | ||
| Appendix: The Algebra of Macroeconomic Equilibrium | 870 | ||
| Chapter 24: Aggregate Demand and Aggregate Supply Analysis | 872 | ||
| The Fortunes of Delta Airlines Follow the Business Cycle | 873 | ||
| 24.1. Aggregate Demand | 874 | ||
| 24.2. Aggregate Supply | 882 | ||
| 24.3. Macroeconomic Equilibrium in the Long Run and the Short Run | 888 | ||
| 24.4. A Dynamic Aggregate Demand and Aggregate Supply Model | 895 | ||
| Conclusion | 901 | ||
| Appendix: Macroeconomic Schools of Thought | 909 | ||
| The Monetarist Model | 909 | ||
| The New Classical Model | 910 | ||
| The Real Business Cycle Model | 910 | ||
| The Austrian Model | 910 | ||
| Chapter 25: Money, Banks, and the Federal Reserve System | 914 | ||
| Can Greece Function without Banks? | 915 | ||
| 25.1. What Is Money, and Why Do We Need It? | 916 | ||
| 25.2. How Is Money Measured in the United States Today? | 919 | ||
| 25.3. How Do Banks Create Money? | 923 | ||
| 25.4. The Federal Reserve System | 932 | ||
| 25.5. The Quantity Theory of Money | 939 | ||
| Conclusion | 943 | ||
| Chapter 26: Monetary Policy | 952 | ||
| Why Would a Bank Pay a Negative Interest Rate? | 953 | ||
| 26.1. What Is Monetary Policy? | 954 | ||
| 26.2. The Money Market and the Fed’s Choice of Monetary Policy Targets | 956 | ||
| 26.3. Monetary Policy and Economic Activity | 962 | ||
| 26.4. Monetary Policy in the Dynamic Aggregate Demand and Aggregate Supply Model | 970 | ||
| 26.5. A Closer Look at the Fed’s Setting of Monetary Policy Targets | 975 | ||
| 26.6. Fed Policies during the 2007–2009 Recession | 981 | ||
| Conclusion | 987 | ||
| Chapter 27: Fiscal Policy | 996 | ||
| Does Government Spending Create Jobs? | 997 | ||
| 27.1. What Is Fiscal Policy? | 998 | ||
| 27.2. The Effects of Fiscal Policy on Real GDP and the Price Level | 1003 | ||
| 27.3. Fiscal Policy in the Dynamic Aggregate Demand and Aggregate Supply Model | 1005 | ||
| 27.4. The Government Purchases and Tax Multipliers | 1007 | ||
| 27.5. The Limits to Using Fiscal Policy to Stabilize the Economy | 1011 | ||
| 27.6. Deficits, Surpluses, and Federal Government Debt | 1021 | ||
| 27.7. The Effects of Fiscal Policy in the Long Run | 1026 | ||
| Conclusion | 1029 | ||
| Appendix: A Closer Look at the Multiplier | 1037 | ||
| An Expression for Equilibrium Real GDP | 1037 | ||
| A Formula for the Government Purchases Multiplier | 1038 | ||
| A Formula for the Tax Multiplier | 1039 | ||
| The “Balanced Budget” Multiplier | 1039 | ||
| The Effects of Changes in Tax Rates on the Multiplier | 1040 | ||
| The Multiplier in an Open Economy | 1040 | ||
| Chapter 28: Inflation, Unemployment, and Federal Reserve Policy | 1042 | ||
| Why Does Goodyear Worry about Monetary Policy? | 1043 | ||
| 28.1. The Discovery of the Short-Run Trade-Off Between Unemployment and Inflation | 1044 | ||
| 28.2. The Short-Run and Long-Run Phillips Curves | 1049 | ||
| 28.3. Expectations of the Inflation Rate and Monetary Policy | 1053 | ||
| 28.4. Federal Reserve Policy from the 1970s to the Present | 1056 | ||
| Conclusion | 1067 | ||
| Chapter 29: Macroeconomics in an Open Economy | 1074 | ||
| IBM Sings the Dollar Blues | 1075 | ||
| 29.1. The Balance of Payments: Linking the United States to the International Economy | 1076 | ||
| 29.2. The Foreign Exchange Market and Exchange Rates | 1081 | ||
| 29.3. The International Sector and National Saving and Investment | 1089 | ||
| 29.4. The Effect of a Government Budget Deficit on Investment | 1091 | ||
| 29.5. Monetary Policy and Fiscal Policy in an Open Economy | 1094 | ||
| Conclusion | 1095 | ||
| Chapter 30: The International Financial System | 1102 | ||
| Bayer Uses a Weak Euro to Increase Sales | 1103 | ||
| 30.1. Exchange Rate Systems | 1104 | ||
| 30.2. The Current Exchange Rate System | 1105 | ||
| 30.3. International Capital Markets | 1117 | ||
| Conclusion | 1119 | ||
| Appendix: The Gold Standard and the Bretton Woods System | 1124 | ||
| The Gold Standard | 1124 | ||
| The End of the Gold Standard | 1124 | ||
| The Bretton Woods System | 1125 | ||
| The Collapse of the Bretton Woods System | 1126 | ||
| Glossary | 1131 | ||
| Company Index | 1139 | ||
| Subject Index | 1142 | ||
| Credits | 1163 | ||
| Back Cover | Back Cover |