Microeconomics, Thirteenth Edition
By Roger A. Arnold
Contents:
An Introduction to Economics
Part 1 Economics: The Science of Scarcity
CHAPTER 1: What Economics is About
Your Life, 2019–2029 1
A Definition of Economics 2
Goods and Bads 2 Resources 2 Scarcity and a Definition of Economics 2
Key Concepts in Economics 4
Opportunity Cost 4 Opportunity Cost and Behavior 6 Benefits and Costs 6
Decisions Made at the Margin 7 Efficiency 9
Does It Matter to You . . . If You Are Efficient or Not? 11
Economics Is About Incentives 12 Unintended Effects 13 Exchange 14
Ceteris Paribus and Theory 16
Ceteris Paribus Thinking 16 What Is a Theory? 17
Hear What and How the Economist Thinks . . . About Theories 19
Economic Categories 20
Positive Economics and Normative Economics 20 Microeconomics and
Macroeconomics 20
Chapter Summary 22
Key Terms and Concepts 23
Questions and Problems 23
Working with Numbers and Graphs 24
Appendix A: Working WITH DIAGRAMS 25
Slope of a Line 26
Slope of a Line Is Constant 27
Slope of a Curve 27
The 45-Degree Line 27
Pie Charts 29
Bar Graphs 29
Line Graphs 30
Appendix Summary 32
Key Terms and Concepts 32
Questions and Problems 32
APPENDIX B: SHOULD YOU MAJOR IN ECONOMICS? 34
Five Myths About Economics and Being an Economics Major 35
What Awaits You as an Economics Major? 37
What Do Economists Do? 38
Places to Find More Information 40
Concluding Remarks 40
CHAPTER 2: PRODUCTION POSSIBILITIES FRONTIER FRAMEWORK 41
The Production Possibilities Frontier 41
The Straight-Line PPF: Constant Opportunity Costs 41 The Bowed-Outward
(Concave-Downward) PPF: Increasing Opportunity Costs 42
Does It Matter to You . . . If the Economy Is at One Point on the PPF Instead of Another? 44
Law of Increasing Opportunity Costs 45 Economic Concepts in a Production Possibilities Frontier Framework 46
Specialization and Trade Can Move Us Beyond Our Ppf 51
A Simple Two-Person PPF Model 51 On or Beyond the PPF? 52
Hear What and How the Economist Thinks . . . About Manufacturing Jobs 53
Chapter Summary 56
Key Terms and Concepts 57
Questions and Problems 57
Working with Numbers and Graphs 57
CHAPTER 3: SUPPLY AND DEMAND: THEORY 59
What Is Demand? 59
The Law of Demand 60 Four Ways to Represent the Law of Demand 60 Why Does
Quantity Demanded Go Down as Price Goes Up? 61 Individual Demand Curve and
Market Demand Curve 62 A Change in Quantity Demanded Versus a Change in
Demand 63 What Factors Cause the Demand Curve to Shift? 66 Movement Factors
and Shift Factors 68
Supply 69
The Law of Supply 69 Why Most Supply Curves Are Upward Sloping 70 Changes
in Supply Mean Shifts in Supply Curves 72 What Factors Cause the Supply Curve to
Shift? 72 A Change in Supply Versus a Change in Quantity Supplied 74
The Market: Putting Supply and Demand Together 75
Supply and Demand at Work at an Auction 75 The Language of Supply and Demand: A
Few Important Terms 76 Moving to Equilibrium: What Happens to Price When There Is
a Surplus or a Shortage? 76 Speed of Moving to Equilibrium 76
Hear What and How the Economist Thinks . . . About Higher Prices and Buying More 78
Moving to Equilibrium: Maximum and Minimum Prices 79 The Connection Between
Equilibrium and Predictions 80 Equilibrium in Terms of Consumers’ and Producers’ Surplus 81
Does It Matter to You . . . If You Pay Equilibrium Prices or Not? 83
What Can Change Equilibrium Price and Quantity? 83 It Is Important to Know Why
the Price Changed: Back to Substitutes and Complements 86 Epilogue: Who Feeds Cleveland? 87
Chapter Summary 91
Key Terms and Concepts 91
Questions and Problems 92
Working with Numbers and Graphs 93
CHAPTER 4: PRICES: FREE, CONTROLLED, AND RELATIVE 95
Price 95
Price as a Rationing Device 95 Price as a Transmitter of Information 96
Price Controls 97
Price Ceiling 97
Hear What and How the Economist Thinks . . . About Price Ceilings and the Value of Money 102
Price Floor: Definition and Effects 103
Does It Matter to You . . . If the Demand Curve for Unskilled Labor Is Steep or Not? 105
Two Prices: Absolute and Relative 109
Absolute (Money) Price and Relative Price 109 Taxes on Specific Goods and Relative Price Changes 110
Does It Matter to You . . . If Something You Buy Is Taxed or Subsidized? 112
Chapter Summary 114
Key Terms and Concepts 114
Questions and Problems 114
Working with Numbers and Graphs 115
CHAPTER 5: SUPPLY, DEMAND, AND PRICE: APPLICATIONS 116
Application 1: U-Haul Rates and Demand 116
Application 2: Subsidizing the Consumption
of Anything Can Raise its Price 117
Application 3: 10 a.m. Classes in College 119
Application 4: Why Do Colleges Use GPAs, ACTs, and SATs for Purposes of Admission? 121
Application 5: Why is Medical Care So Expensive? 122
Application 6: Do You Pay for Good Weather? 124
Application 7: The Price of an Aisle Seat 126
Application 8: College Superathletes 127
Application 9: Easier-to-Obtain Loans and Higher Housing Prices 129
Application 10: Speculators, Price Variability, and Patterns 130
Application 11: Supply and Demand on a Freeway 131
Application 12: Are Renters Better Off? 132
Chapter Summary 135
Questions and Problems 136
Working with Numbers and Graphs 137
MICROECONOMICS
Part 2 Microeconomic Fundamentals
CHAPTER 6: ELASTICITY 138
Elasticity: Part 1 138
Price Elasticity of Demand 138 Elasticity Is Not Slope 140 From Perfectly Elastic to
Perfectly Inelastic Demand 140 Price Elasticity of Demand and Total Revenue (Total
Expenditure) 143 Elastic Demand and Total Revenue 144
Elasticity: Part 2 149
Price Elasticity of Demand Along a Straight-Line Demand Curve 149 Determinants of
Price Elasticity of Demand 150
Hear What and How the Economist Thinks . . . About the Prevalence of Elasticity 153
Other Elasticity Concepts 154
Cross Elasticity of Demand 154 Income Elasticity of Demand 155 Price Elasticity
of Supply 156 Price Elasticity of Supply and Time 157
The Relationship Between Taxes and Elasticity 160
Who Pays the Tax? 160 Elasticity and the Tax 161
Does It Matter to You . . . If There Are Few or Many Substitutes for the Goods You Buy? 162
Degree of Elasticity and Tax Revenue 163
Chapter Summary 165
Key Terms and Concepts 166
Questions and Problems 166
Working with Numbers and Graphs 167
CHAPTER 7: CONSUMER CHOICE: MAXIMIZING UTILITY
AND BEHAVIORAL ECONOMICS 168
Utility Theory 168
Utility: Total and Marginal 168 Law of Diminishing Marginal Utility 169 The Solution
to the Diamond–Water Paradox 171
Consumer Equilibrium and Demand 173
Equating Marginal Utilities per Dollar 173 Maximizing Utility and the Law of
Demand 175 Should the Government Provide the Necessities of Life for Free? 175
Hear What and How the Economist Thinks . . . About Towns, Pollution Standards, and
Making the Invisible, Visible 177
Behavioral Economics 178
Are People Willing to Reduce Others’ Incomes? 178 Is One Dollar Always One
Dollar? 179 Coffee Mugs and the Endowment Effect 180 Does the Endowment Effect
Hold Only for New Traders? 182
Does It Matter to You . . . If You Are Subject to the Endowment Effect? 182
The Ultimatum Game—and Facebook, YouTube, and Wikipedia 183 Framing 186
Neuroeconomics 187
Chapter Summary 189
Key Terms and Concepts 190
Questions and Problems 190
Working with Numbers and Graphs 191
APPEnDIx C: BUDGET CONSTRAINT AND INDIFFERENCE
CURVE ANALYSIS 192
The Budget Constraint 192
Slope of the Budget Constraint 192
What Will Change the Budget Constraint? 192
Indifference Curves 193
Constructing an Indifference Curve 194
Characteristics of Indifference Curves 194
The Indifference Map and the Budget Constraint Come Together 197
From Indifference Curves to a Demand Curve 198
Appendix Summary 199
Key Terms and Concepts 199
Questions and Problems 199
CHAPTER 8: PRODUCTION AND COSTS 200
Why Firms Exist 200
The Market and the Firm: Invisible Hand Versus Visible Hand 200 The Alchian-and-
Demsetz Answer 201 Shirking on a Team 201 Ronald Coase on Why Firms Exist 202
Markets: Outside and Inside the Firm 203
Two Sides to Every Business Firm 203
More on Total Cost 204 Accounting Profit Versus Economic Profit 204
Does It Matter to You . . . If You Think in Terms of Only Accounting Profit? 205
Zero Economic Profit Is Not as Bad as It Sounds 206
Hear What and How the Economist Thinks . . . About Maximizing Revenue
and Profit 207
Production 208
Common Misconception About the Short Run and Long Run 208 Production in the
Short Run 208 Whose Marginal Productivity Are We Talking About? 210 Marginal
Physical Product and Marginal Cost 210 Average Productivity 213
Costs of Production: Total, Average, Marginal 214
The AVC and ATC Curves in Relation to the MC Curve 217 Tying Short-Run
Production to Costs 220 One More Cost Concept: Sunk Cost 221
Production and Costs in the Long Run 225
Long-Run Average Total Cost Curve 226 Economies of Scale, Diseconomies of Scale,
and Constant Returns to Scale 227 Why Economies of Scale? 228 Why Diseconomies
of Scale? 228 Minimum Efficient Scale and Number of Firms in an Industry 228
Shifts In Cost Curves 229
Taxes 229 Input Prices 229 Technology 229
Chapter Summary 230
Key Terms and Concepts 231
Questions and Problems 232
Working with Numbers and Graphs 233
Part 3 Product Markets and Policies
CHAPTER 9: PERFECT COMPETITION 234
The Theory of Perfect Competition 234
A Perfectly Competitive Firm Is a Price Taker 235 The Demand Curve for a Perfectly
Competitive Firm Is Horizontal 235 Common Misconceptions about Demand
Curves 236 The Marginal Revenue Curve of a Perfectly Competitive Firm Is the Same
as Its Demand Curve 237 Theory and Real-World Markets 238
Perfect Competition in the Short Run 239
What Level of Output Does the Profit-Maximizing Firm Produce? 239 The Perfectly
Competitive Firm and Resource Allocative Efficiency 239 To Produce or Not to Produce:
That Is the Question 240 Common Misconceptions over the Shutdown Decision 243
The Perfectly Competitive Firm’s Short-Run Supply Curve 244 From Firm Supply Curve
to Market (Industry) Supply Curve 244 Why Is the Market Supply Curve Upward
Sloping? 247
Perfect Competition in the Long Run 247
The Conditions of Long-Run Competitive Equilibrium 248 The Perfectly Competitive
Firm and Productive Efficiency 249 Industry Adjustment to an Increase in Demand 250
Profit from Two Perspectives 253
Does It Matter to You . . . If There Is Easy Entry into a Market? 254
Industry Adjustment to a Decrease in Demand 255 Differences in Costs, Differences in
Profits: Now You See It, Now You Don’t 255
Hear What and How the Economist Thinks . . . About Buyers and Sellers 256
Profit and Discrimination 257
Topics for Analysis in the Theory of Perfect Competition 258
Do Higher Costs Mean Higher Prices? 258 Will the Perfectly Competitive Firm
Advertise? 258 Supplier-Set Price Versus Market-Determined Price: Collusion or
Competition? 259
Chapter Summary 260
Key Terms and Concepts 261
Questions and Problems 261
Working with Numbers and Graphs 262
CHAPTER 10: MONOPOLY 264
The Theory of Monopoly 264
Barriers to Entry: A Key to Understanding Monopoly 265 What Is the Difference
Between a Government Monopoly and a Market Monopoly? 265
Monopoly Pricing and Output Decisions 266
The Monopolist’s Demand and Marginal Revenue 267 The Monopolist’s Demand Curve
and Marginal Revenue
Curve Are Not the Same 268 Price and Output for a Profit-
Maximizing Monopolist 268 Comparing the Demand Curve in Perfect Competition
with the Demand Curve in Monopoly 270 If a Firm Maximizes Revenue, Does It
Automatically Maximize Profit Too? 270
Perfect Competition and Monopoly 271
Price, Marginal Revenue, and Marginal Cost 271 Monopoly, Perfect Competition,
and Consumers’ Surplus 271 Monopoly or Nothing? 273
The Case Against Monopoly 274
The Deadweight Loss of Monopoly 274
Does It Matter to You . . . If There Is a Deadweight Loss of Monopoly Triangle? 275
Rent Seeking 275 X-Inefficiency 276
Price Discrimination 277
Types of Price Discrimination 278 Why a Monopolist Wants to Price Discriminate 278
Conditions of Price Discrimination 278
Hear What and How the Economist Thinks . . . About Price Discrimination 279
Moving to P 5 MC Through Price Discrimination 280 Coupons and Price
Discrimination 282
Chapter Summary 284
Key Terms and Concepts 285
Questions and Problems 285
Working with Numbers and Graphs 286
CHAPTER 11: MONOPOLISTIC COMPETITION, OLIGOPOLY,
AND GAME THEORY 287
The Theory of Monopolistic Competition 287
The Monopolistic Competitor’s Demand Curve 288 The Relationship between Price
and Marginal Revenue for a Monopolistic Competitor 288 Output, Price, and Marginal
Cost for the Monopolistic Competitor 288 Will There Be Profits in the Long Run? 288
Excess Capacity: What Is It, and Is It “Good” or “Bad”? 289 The Monopolistic Competitor
and Two Types of Efficiency 291
Oligopoly: Assumptions and Real-World Behavior 292
The Concentration Ratio 292
Price and Output Under the Cartel Theory 293
The Cartel Theory 293
Game Theory, Oligopoly, and Contestable Markets 296
Prisoner’s Dilemma 297 Oligopoly Firms’ Cartels and the Prisoner’s Dilemma 299
Are Markets Contestable? 300 Necessary and Sufficient Conditions and Efficiency 301
A Review of Market Structures 301
Applications of Game Theory 302
Grades and Partying 302
Hear What and How the Economist Thinks . . . About Grade Inflation 304
The Arms Race 305 Speed Limit Laws 305
Chapter Summary 307
Key Terms and Concepts 308
Questions and Problems 308
Working with Numbers and Graphs 308
CHAPTER 12: GOVERNMENT AND PRODUCT
MARKETS:
ANTITRUST AND REGULATION 309
Antitrust 309
Antitrust Acts 310 Unsettled Points in Antitrust Policy 312 Antitrust and Mergers 314
Common Misconceptions about Antitrust Policy 315 Network Monopolies 315
Regulation 318
The Case of Natural Monopoly 318 Regulating the Natural Monopoly 320 Regulating
Industries That are Not Natural Monopolies 322 Theories of Regulation 322
Hear What and How the Economist Thinks . . . About Regulation 323
The Costs and Benefits of Regulation 324
Does It Matter to You . . . If People Are Aware of Both the Costs and the Benefits of
Regulation? 324
Chapter Summary 326
Key Terms and Concepts 327
Questions and Problems 327
Working with Numbers and Graphs 328
Part 4 Factor Markets and Related Issues
CHAPTER 13: FACTOR MARKETS: WITH EMPHASIS ON THE LABOR MARKET 329
Factor Markets 329
The Demand for a Factor 329 Marginal Revenue Product: Two Ways to Calculate It 330
The MRP Curve Is the Firm’s Factor Demand Curve 330 Value Marginal Product 331
An Important Question: Is MRP 5 VMP ? 332 Marginal Factor Cost: The Firm’s Factor
Supply Curve 333 How Many Units of a Factor Should a Firm Buy? 334 When There
Is More Than One Factor, How Much of Each Factor Should the Firm Buy? 334
The Labor Market 336
Shifts in a Firm’s MRP, or Factor Demand, Curve 336 Market Demand for Labor 338
The Elasticity of Demand for Labor 339
Hear What and How the Economist Thinks . . . About the Debate Over the Minimum Wage 339
Does It Matter to You . . . If the Elasticity of Demand for the Good or Service You Produce
Is High or Low? 341
Market Supply of Labor 341 An Individual’s Supply of Labor 342 Shifts in the Labor
Supply Curve 343 Putting Supply and Demand Together 344 Why Do Wage Rates
Differ? 345 Why Demand and Supply Differ among Labor Markets 346 Why Did
You Choose Your Major? 346 Marginal Productivity Theory 347
Labor Markets and Information 349
Screening Potential Employees 349 Promoting from Within 350 Discrimination or an Information Problem? 350
Chapter Summary 351
Key Terms and Concepts 352
Questions and Problems 352
Working with Numbers and Graphs 353
CHAPTER 14: WAGES, UNIONS, AND LABOR 354
Objectives of Labor Unions 354
Employment for All Members 354 Maximizing the Total Wage Bill 355 Maximizing
Income for a Limited Number of Union Members 355 Wage–Employment Trade-Off 355
Practices of Labor Unions 356
Affecting the Elasticity of Demand for Union Labor 356
Hear What and How the Economist Thinks . . . About Unions and Wages 357
Affecting the Demand for Union Labor 358 Affecting the Supply of Union Labor 358
Affecting Wages Directly: Collective Bargaining 359 Strikes 361
Effects of Labor Unions 361
The Case of Monopsony 361 Unions’ Effects on Wages 363
Does It Matter to You . . . If Things Are Different in the Short-Run Than in
the Long Run? 365
Unions’ Effects on Prices 365 Unions’ Effects on Productivity and Efficiency: Two Views 365
Chapter Summary 368
Key Terms and Concepts 369
Questions and Problems 369
Working with Numbers and Graphs 370
CHAPTER 15: THE DISTRIBUTION OF INCOME AND POVERTY 371
Some Facts About Income Distribution 371
Who Are the Rich and How Rich Are They? 371 The Effect of Age on the Income
Distribution 372 A Simple Equation 374
Does It Matter to You . . . What Your Educational Attainment Level Is? 376
Measuring Income Equality 376
The Lorenz Curve 376 The Gini Coefficient 378 A Limitation of the Gini Coefficient 379
Common Misconceptions about Income Inequality 379
Why Income Inequality Exists 380
Factors Contributing to Income Inequality 381 Income Differences: Some are Voluntary, Some are Not 382
Poverty 383
What Is Poverty? 383 Limitations of the Official Poverty Income Statistics 383
Who Are the Poor? 384 What Is the Justification for Government Redistributing
Income? 384
Chapter Summary 386
Key Terms and Concepts 387
Questions and Problems 387
Working with Numbers and Graphs 387
CHAPTER 16: INTEREST, RENT, AND PROFIT 388
Interest 388
Loanable Funds: Demand and Supply 388 The Price for Loanable Funds and the
Return on Capital Goods Tend to Equality 390 Why Do Interest Rates Differ? 391
Nominal and Real Interest Rates 391 Present Value: What Is Something Tomorrow
Worth Today? 392
Rent 395
David Ricardo, the Price of Grain, and Land Rent 395 The Supply Curve of Land Can be
Upward Sloping 397 Economic Rent and Other Factors of Production 398 Economic
Rent and Baseball Players: Perspective Matters 398 Competing for Artificial and Real Rents 399
Does It Matter to You . . . If People Compete for Artificial Rents as Opposed to Real Rents? 399
Profit 400
Theories of Profit 400 Profit and Loss as Signals 401
Hear What and How the Economist Thinks . . . About Profit 402
The Entrepreneur 403
A Market 403 How Can the Entrepreneur Increase Trade? 403 Turning Potential Trades
into Actual Trades 404 A Necessary Condition: Turn Potential Trades into Actual Trades
in a Way Acceptable to Consumers 404 Can Increasing Trades in One Area Reduce Trades
in Another? 404 Uncertainty and the Entrepreneur 404
Chapter Summary 406
Key Terms and Concepts 406
Questions and Problems 407
Working with Numbers and Graphs 407
Part 5 Market Failure, Public Choice, and Special-Interest Group Politics
CHAPTER 17: MARKET FAILURE: EXTERNALITIES, PUBLIC GOODS, AND ASYMMETRIC INFORMATION 408
Externalities 408
Costs and Benefits of Activities 408 Marginal Costs and Benefits of Activities 409
Social Optimality, or Efficiency, Conditions 410 Three Categories of Activities 410
Externalities in Consumption and in Production 410 Diagram of a Negative
Externality 410 Diagram of a Positive Externality 413
Internalizing Externalities 414
Persuasion 414 Taxes and Subsidies 415 Assigning Property Rights 415
Hear What and How the Economist Thinks . . . About Coming to Class Late 416
Voluntary Agreements 416 Combining Property Rights Assignments and Voluntary
Agreements 417 Beyond Internalizing: Setting Regulations 418
Environmental Policy 419
Method 1: Government Regulation, or Command and Control 420 Method 2: Emission
Taxes 420 Method 3: Tradable Pollution Permits (Cap and Trade) 421 Similarities and
Differences Between Emission Taxes and Tradable Pollution Permits 422
Public Goods: Excludable and Nonexcludable 423
Goods 423 The Free Rider 424
Does It Matter to You . . . If There Is a Free-Rider Problem? 425
Nonexcludable Versus Nonrivalrous 425
Asymmetric Information 427
Asymmetric Information in a Product Market 427 Asymmetric Information in a Factor
Market 428 Is There Market Failure? 428 Adverse Selection 429 Moral Hazard 430
Chapter Summary 433
Key Terms and Concepts 434
Questions and Problems 435
Working with Numbers and Graphs 436
CHAPTER 18: PUBLIC CHOICE AND SPECIAL-INTEREST
GROUP POLITICS 437
Public Choice Theory 437
The Political Market 438
Moving Toward the Middle: The Median Voter Model 438 What Does the Theory
Predict? 439
Voters and Rational Ignorance 442
The Costs and Benefits of Voting 442
Does It Matter to You . . . If You Do Not Vote? 443
Rational Ignorance 443
Hear What and How the Economist Thinks . . . About Rational Ignorance 445
More About Voting 446
Example 1: Voting for a Nonexcludable Public Good 446 Example 2: Voting and Efficiency 447
Special-Interest Groups 448
Information and Lobbying 448 Congressional Districts as Special-Interest Groups 449
Public-Interest Talk, Special-Interest Legislation 449 Rent Seeking 450 Bringing About
Transfers 451 Information, Rational Ignorance, and Seeking Transfers 451
Constitutional Economics 453
Chapter Summary 455
Key Terms and Concepts 456
Questions and Problems 456
Working with Numbers and Graphs 457
Part 6 Economic Theory-Building and Everyday Life
CHAPTER 19: BUILDING THEORIES TO EXPLAIN EVERYDAY LIFE: FROM OBSERVATIONS TO QUESTIONS TO THEORIES
TO PREDICTIONS 458
A Different Kind of Chapter 458
The Process 459
Observation/Thought 1: The Birthrates in Various Countries are Different 460
The Question 460 The Theory 460 The Predictions 460 A Detour: The Issue of Falsifiability (Refutability) 461
Hear What and How the Economist Thinks . . . About Theories 461
Observation/Thought 2: The Ethical Code of People Who Live in a Small Town is
Different from that of People Who Live in a Large City 462
The Question 463 The Theory 463 The Predictions 463
Observation/Thought 3: The Closer the Dollar Tuition the Student Pays is to the Equilibrium
Tuition, the More on Time and Responsive University Instructors Will Be for Office Hours 465
The Question 465 The Theory 465 The Predictions 467
Observation/Thought 4: Criminals are Not Rational 467
The Question 467 The Theory 467 The Predictions 468 A Detour: Does Evidence
Prove a Theory Correct? 468 Another Detour: After You Have One Theory That Explains
and Predicts, Search for Another 469 A Final Detour: Why Prediction Is So Important, or
Why Good-Sounding Stories are Not Enough 470
Observation/Thought 5: More Students Wear Baseball Caps in Class on Exam Days
Than on Other Days 471
The Question 471 The Theory 471 The Predictions 472
Observation/Thought 6: Houses in “Good” School Districts are Often More Expensive
than Comparable Houses in “Bad” School Districts 474
The Question 474 The Theory 474 The Predictions 474
Observation/Thought 7: Are People Better Off With or Without Health Care Vouchers? 475
The Question 475 The Theory 475 The Predictions 476
Observation/Thought 8: People Who Give to Others Often Complain That They End Up
Giving Too Much 476
The Question 476 The Theory 477 The Predictions 479
Does It Matter to You . . . If and How You Are in Someone Else’s Utility Function? 480
Chapter Summary 481
Questions and Problems 483
Working with Numbers and Graphs 483
The Global Economy
Part 7 International Economics and Globalization
CHAPTER 20: INTERNATIONAL TRADE 484
International Trade Theory 484
How Countries Know What to Trade 485
Does It Matter to You . . . If There Is Always Someone Who Can Do Something Better Than You? 487
A Common Misconception about How Much We Can Consume 488 How Countries
Know When They Have a Comparative Advantage 488
Hear What and How the Economist Thinks . . . About Common Sense 490
Trade Restrictions 490
The Distributional Effects of International Trade 491 Consumers’ and Producers’
Surpluses 491 The Benefits and Costs of Trade Restrictions 492 Why Nations
Sometimes Restrict Trade 496
Chapter Summary 500
Key Terms and Concepts 501
Questions and Problems 501
Working with Numbers and Graphs 502
CHAPTER 21: INTERNATIONAL FINANCE 503
The Foreign Exchange Market 503
The Demand for Goods 504 The Demand for, and Supply of, Currencies 504
Flexible Exchange Rates 505
The Equilibrium Exchange Rate 505
Does It Matter to You . . . If the Dollar Depreciates? 506
Changes in the Equilibrium Exchange Rate 506
Factors That Affect the Equilibrium Exchange Rate 507
Fixed Exchange Rates 510
Fixed Exchange Rates and Overvalued or Undervalued Currency 511 What Is So
Bad about an Overvalued Dollar? 513 Government Involvement in a Fixed Exchange
Rate System 514 Options Under a Fixed Exchange Rate System 514
Fixed Exchange Rates Versus Flexible Exchange Rates 516
Promoting International Trade 516 Optimal Currency Areas 516
Chapter Summary 519
Key Terms and Concepts 520
Questions and Problems 520
Working with Numbers and Graphs 521
Web Chapters
CHAPTER 22: The Economic Case for and Against
Government: Five Topics Considered 522
Economics and Government 522
The Economic Case for Government 523
Government Can Remove Individuals from a Prisoner’s Dilemma Setting 523
Externalities 527 Nonexcludable Public Goods 528 The Case for Smaller or Larger
Government 530
The Economic Case Against Government 531
Unintended Effects of Government Actions 531 Government as Transfer Mechanism
532 Economic Growth Versus Transfers 534 Following the Leader in Pushing for
Transfers 535 Divisive Society: A Nonexcludable Public Bad 537
Chapter Summary 538
Key Terms and Concepts 539
Questions and Problems 539
Working with Numbers and Graphs 540
CHAPTER 23: STOCKS, BONDS, FUTURES, AND OPTIONS 541
Stocks 542
Where are Stocks Bought and Sold? 542 The Dow Jones Industrial Average (DJIA) 543
How the Stock Market Works 544 Why Do People Buy Stock? 545 How to Buy
and Sell Stock 545 Buying Stocks or Buying the Market 546 How to Read the Stock
Market Page 547
Bonds 549
The Components of a Bond 549 Bond Ratings 550 Bond Prices and Yields
(or Interest Rates) 550 Common Misconceptions about the Coupon Rate and Yield (Interest
Rate) 551 Types of Bonds 552 How to Read the Bond Market Page 552 Risk and Return 554
Futures and Options 554
Futures 554 Options 555
Chapter Summary 558
Key Terms and Concepts 558
Questions and Problems 558
Working with Numbers and Graphs 559
Self-Test Appendix 522
Glossary 540
Index 547