By Joshua Gans, Stephen King, Martin Byford and N Gregory Mankiw
CONTENTS:
Guide to the text xiii
Guide to the online resources xv
Preface to this edition xvii
Preface to the original edition xx
To the students xxi
About the authors xxii
Acknowledgements xxiv
Part 1 Introduction 2
Chapter 1 Ten principles of economics 4
How people make decisions 5
Principle 1: People face trade-offs 5
Principle 2: The cost of something is what you give up to get it 6
Principle 3: Rational people think at the margin 7
Principle 4: People respond to incentives 9
Case study: Choosing when the stork comes 10
How people interact 11
Principle 5: Trade can make everyone better off 11
In the news: Outsourcing your own job 12
Principle 6: Markets are usually a good way to organise economic activity 13
FYI: Adam Smith and the role of markets 14
Case study: Adam Smith would have loved Uber 15
Principle 7: Governments can sometimes improve market outcomes 15
How the economy as a whole works 17
Principle 8: A country’s standard of living depends on its
ability to produce goods and services 17
Principle 9: Prices rise when the government prints too much money 17
Principle 10: Society faces a short-term trade-off between
inflation and unemployment 18
Conclusion 20
Summary 21
Key concepts 21
Questions for review 21
Multiple choice 21
Problems and applications 22
Chapter 2 Thinking like an economist 24
The economist as scientist 25
The scientific method: Observation, theory and more
observation 25
The role of assumptions 26
Economic models 27
Our first model: The circular-flow diagram 28
Our second model: The production possibilities
frontier 29
Microeconomics and macroeconomics 31
The economist as policy adviser 33
Positive versus normative analysis 33
Economists in government 34
Why economists’ advice is not always
followed 35
Why economists disagree 36
Differences in scientific judgements 36
Differences in values 36
What Australian economists think 37
What Australian economists think 37
Let’s get going 37
Summary 39
Key concepts 39
Questions for review 39
Multiple choice 39
Problems and applications 40
Appendix: Graphing – a brief review 42
Graphs of a single variable 42
Graphs of two variables: The coordinate system 42
Curves in the coordinate system 44
Slope and elasticity 47
Cause and effect 49
Chapter 3 Interdependence and the gains from
trade 52
A parable for the modern economy 53
Production possibilities 54
Specialisation and trade 55
The principle of comparative advantage 57
Absolute advantage 57
Opportunity cost and comparative advantage 57
Comparative advantage and trade 58
FYI: The legacy of Adam Smith and David
Ricardo 59
The price of trade 60
Applications of comparative advantage 60
Should Roger Federer mow his own lawn? 60
Should Australia trade with other countries? 61
In the news: Who has a comparative advantage in
slaying ogres? 62
Conclusion 63
Summary 64
Key concepts 64
Questions for review 64
Multiple choice 64
Problems and applications 65
Part 2 Supply and demand I: How markets
work 68
Chapter 4 The market forces of supply and
demand 70
Markets and competition 71
What is a market? 71
What is competition? 71
Demand 72
The demand curve: The relationship between price and
quantity demanded 72
Market demand versus individual demand 74
FYI: Ceteris paribus 75
Shifts in the demand curve 76
Case study: Are smartphones and tablets substitutes or
complements? 77
Case study: Two ways to reduce the quantity of smoking
demanded 78
Supply 80
The supply curve: The relationship between price and
quantity supplied 80
Market supply versus individual supply 81
Shifts in the supply curve 82
Supply and demand together 85
Equilibrium 85
Three steps for analysing changes in equilibrium 87
Conclusion: How prices allocate resources 90
In the news: Mother Nature shifts the supply curve 92
Summary 93
Key concepts 93
Questions for review 93
Multiple choice 94
Problems and applications 95
Chapter 5 Elasticity and its application 97
The elasticity of demand 98
The price elasticity of demand and its determinants 98
Computing the price elasticity of demand 99
FYI: A few elasticities from the real world 100
The variety of demand curves 100
FYI: The midpoint method: A better way to calculate
percentage changes and elasticities 102
Total revenue and the price elasticity of demand 103
Case study: Pricing admission to an art gallery 105
Elasticity and total revenue along a linear demand
curve 105
Other demand elasticities 107
The elasticity of supply 108
The price elasticity of supply and its determinants 108
Computing the price elasticity of supply 108
The variety of supply curves 109
Three applications of supply, demand and elasticity 109
Can good news for farming be bad news for farmers? 111
Why did OPEC fail to keep the price of oil high? 113
Do drug bans increase or decrease drug-related crime? 114
Conclusion 116
Summary 117
Key concepts 117
Questions for review 117
Multiple choice 118
Problems and applications 118
Chapter 6 Supply, demand and government
policies 121
Controls on prices 122
How price ceilings affect market outcomes 122
Case study: Lines at the petrol station 124
Case study: Rent control in the short run and long
run 125
How price floors affect market outcomes 126
Case study: Minimum wage rates 128
What Australian economists think 130
Evaluating price controls 130
Taxes 131
How taxes on sellers affect market outcomes 132
How taxes on buyers affect market outcomes 133
Case study: Who pays the payroll tax? 135
Elasticity and tax incidence 136
Subsidies 137
How subsidies affect market outcomes 138
Case study: Who gets the benefits from the First Home Owner Grant scheme? 140
What Australian economists think 141
Conclusion 141
Summary 142
Key concepts 142
Questions for review 142
Multiple choice 143
Problems and applications 143
Part 3 Supply and demand II: Markets and welfare 146
Chapter 7 Consumers, producers and the efficiency of markets 148
Consumer surplus 149
Willingness to pay 149
Using the demand curve to measure consumer surplus 150
How a lower price raises consumer surplus 153
What does consumer surplus measure? 153
Case study: How parking meters help you find a parking space 155
Producer surplus 156
Cost and the willingness to sell 156
Using the supply curve to measure producer surplus 157
How a higher price raises producer surplus 158
Market efficiency 160
The benevolent social planner 160
Evaluating the market equilibrium 161
Case study: Should there be a market for organs? 163
Conclusion: Market efficiency and market failure 164
Summary 166
Key concepts 166
Questions for review 166
Multiple choice 166
Problems and applications 167
Chapter 8 Application: The costs of taxation 170
The deadweight loss of taxation 171
How a tax affects market participants 171
Deadweight losses and the gains from trade 175
The determinants of the deadweight loss 176
Case study: The deadweight loss debate 178
Deadweight loss and tax revenue as taxes vary 179
Case study: The Laffer curve and supply-side economics 181
Conclusion 183
Summary 184
Key concept 184
Questions for review 184
Multiple choice 184
Problems and applications 185
Appendix 188
The welfare economics of subsidies 188
The cost of a subsidy 189
The deadweight loss from a subsidy 190
Understanding the deadweight loss from Over production 191
Chapter 9 Application: International trade 192
The determinants of trade 193
The equilibrium without trade 193
The world price and comparative advantage 194
The winners and losers from trade 195
The gains and losses of an exporting country 195
The gains and losses of an importing country 198
The effects of a tariff 200
FYI: Import quotas: Another way to restrict trade 202
The lessons for trade policy 202
Other benefits of international trade 203
In the news: Trade as a tool for economic
development 204
The arguments for restricting trade 205
The jobs argument 206
The national security argument 206
In the news: Should the winners from free trade
compensate the losers? 207
The infant industry argument 208
The unfair competition argument 208
The protection-as-a-bargaining-chip argument 208
Case study: Trade agreements and the World Trade
Organization 209
Conclusion 210
What Australian economists think 211
Summary 212
Key concepts 212
Questions for review 212
Multiple choice 212
Problems and applications 213
Part 4 The economics of the public sector 216
Chapter 10 Externalities 218
Externalities and market inefficiency 220
Welfare economics: A recap 220
Negative externalities 220
Positive externalities 222
Case study: Technology spillovers, industrial policy and
patent protection 223
What Australian economists think 224
Public policies on externalities 225
What Australian economists think 225
Command-and-control policies: Regulation 225
Market-based policy 1: Corrective taxes and
subsidies 226
Case study: Taking out the garbage 227
Market-based policy 2: Tradeable pollution permits 228
Case study: British Columbia adopts a broad-based
carbon tax 229
What Australian economists think 231
Objections to the economic analysis of pollution 231
Private solutions to externalities 232
The types of private solutions 232
The Coase theorem 232
Why private solutions do not always work 233
Conclusion 234
Summary 235
Key concepts 235
Questions for review 235
Multiple choice 235
Problems and applications 236
Chapter 11 Public goods and common
resources 239
The different kinds of goods 240
Public goods 242
The free-rider problem 242
Some important public goods 243
Case study: Are lighthouses public goods? 244
The difficult job of cost–benefit analysis 245
Case study: How much is a life worth? 246
Private provision of public goods 247
Case study: Is music a public good? 248
Common resources 249
The Tragedy of the Commons 249
Some important common resources 250
In the news: The case for toll roads 251
What Australian economists think 253
Case study: Why the cow is not extinct 254
Conclusion: The importance of property rights 255
Summary 256
Key concepts 256
Questions for review 256
Multiple choice 256
Problems and applications 257
Chapter 12 The design of the tax system 260
An overview of Australian taxation 261
Taxes collected by the federal government 261
Taxes collected by state and local governments 264
Taxes and efficiency 265
Deadweight losses 265
Case study: Should income or consumption
be taxed? 266
Administrative burden 267
Marginal tax rates versus average tax rates 267
Lump-sum taxes 268
Taxes and equity 269
The benefits principle 269
The ability-to-pay principle 270
Case study: How the tax burden is distributed 271
Case study: Who should pay for higher education? 272
Tax incidence and tax equity 273
Case study: Who pays company income tax? 273
Conclusion: The trade-off between equity and
efficiency 274
Summary 275
Key concepts 275
Questions for review 275
Multiple choice 275
Problems and applications 276
Part 5 Firm behaviour and the organisation
of industry 278
Chapter 13 The costs of production 280
What are costs? 281
Total revenue, total cost and profit 281
Costs as opportunity costs 282
The cost of capital as an opportunity cost 282
Economic profit versus accounting profit 283
Production and costs 284
FYI: How long is the long run? 284
The production function 285
From the production function to the total-cost curve 287
The various measures of cost 288
Fixed and variable costs 289
Average and marginal cost 290
Cost curves and their shapes 290
Typical cost curves 292
Costs in the short run and in the long run 294
The relationship between short-run and long-run average
total cost 294
Economies and diseconomies of scale 295
Conclusion 296
FYI: Lessons from a pin factory 296
Summary 298
Key concepts 298
Questions for review 298
Multiple choice 299
Problems and applications 299
Chapter 14 Firms in competitive markets 303
What is a competitive market? 304
The meaning of competition 304
The revenue of a competitive firm 305
Profit maximization and the competitive firm’s supply
curve 306
A simple example of profit maximization 306
The marginal-cost curve and the firm’s supply
decision 307
The firm’s short-run decision to shut down 309
FYI: Spilt milk and sunk costs 310
Case study: Near-empty restaurants and off-season
ski lodges 311
The firm’s long-run decision to exit or enter a market 312
Measuring profit in our graph for the competitive firm 313
The supply curve in a competitive market 314
The short run: Market supply with a fixed number of
firms 315
The long run: Market supply with entry and exit 315
Why do competitive firms stay in business if they make
zero profit? 317
A shift in demand in the short run and long run 317
Why the long-run supply curve might slope upwards 319
Conclusion: Behind the supply curve 320
Summary 321
Key concepts 321
Questions for review 321
Multiple choice 321
Problems and applications 322
Chapter 15 Monopoly 326
Why monopolies arise 327
Monopoly resources 328
Case study: The gas industry in south-eastern
Australia 328
Government-created monopolies 329
Natural monopolies 329
How monopolies make production and pricing
decisions 331
Monopoly versus competition 331
A monopoly’s revenue 332
Profit maximisation 334
FYI: Why a monopoly does not have a supply curve 336
A monopoly’s profit 336
Case study: Monopoly pharmaceuticals versus generic
pharmaceuticals 337
The welfare cost of monopoly 338
The deadweight loss 339
The monopoly’s profit: A social cost? 341
Price discrimination 342
A parable about pricing 342
The moral of the story 343
The analytics of price discrimination 344
Examples of price discrimination 345
In the news: Why do Australians pay more for digital
downloads? 347
Conclusion: The prevalence of monopoly 349
Summary 350
Key concepts 350
Questions for review 350
Multiple choice 350
Problems and applications 351
Chapter 16 Monopolistic competition 356
Between monopoly and perfect competition 357
Competition with differentiated products 359
The monopolistically competitive firm in the short run 359
The long-run equilibrium 360
Monopolistic versus perfect competition 362
Monopolistic competition and the welfare of society 364
Advertising 365
The debate about advertising 365
Case study: Advertising and the price of glasses 366
Advertising as a signal of quality 367
Brand names 368
Conclusion 369
Summary 371
Key concepts 371
Questions for review 371
Multiple choice 371
Problems and applications 372
Chapter 17 Oligopoly and business
strategy 375
Markets with only a few sellers 376
A duopoly example 377
Competition, monopolies and cartels 377
The equilibrium for an oligopoly 378
How the size of an oligopoly affects the market
outcome 379
Case study: OPEC and the world oil market 380
The economics of cooperation 381
The prisoners’ dilemma 382
Oligopolies as a prisoners’ dilemma 383
Other examples of the prisoners’ dilemma 384
The prisoners’ dilemma and the welfare of society 385
Why people sometimes cooperate 386
Case study: The prisoners’ dilemma tournament 387
Conclusion 388
Summary 389
Key concepts 389
Questions for review 389
Multiple choice 389
Problems and applications 390
Appendix: Types of oligopolistic competition 394
Anticipating your competitor’s response 394
Cournot quantity competition 394
Bertrand price competition 398
Comparing Cournot and Bertrand competition 399
Chapter 18 Competition policy 400
Public policy towards monopolies 401
Using the law to increase competition 401
What Australian economists think 402
Case study: The ACCC – Australia’s competition
regulator 402
What Australian economists think 404
Regulation 404
Public ownership and privatisation 405
Doing nothing 406
Public policy towards oligopolies 408
Restraint of trade and competition laws 408
In the news: How to form a cartel 408
What Australian economists think 410
Controversies over competition policy 410
In the news: When is the price of milk too low? 411
Case study: The Baxter case 413
Conclusion 415
Summary 416
Key concepts 416
Questions for review 416
Multiple choice 416
Problems and applications 417
Part 6 The economics of labour markets 420
Chapter 19 The markets for the factors of
production 422
The demand for labour 423
The competitive, profit-maximising firm 424
The production function and the marginal product
of labour 425
The value of the marginal product and the demand
for labour 426
What causes the labour demand curve to shift? 427
FYI: Input demand and output supply – two sides
of the coin 428
The supply of labour 429
The trade-off between work and leisure 429
What causes the labour supply curve to shift? 430
In the news: The economy needs you 431
Equilibrium in the labour market 432
Shifts in labour supply 432
Shifts in labour demand 434
Case study: Productivity and wages 435
The other factors of production: Land and capital 436
Equilibrium in the markets for land and capital 436
FYI: What is capital income? 437
Linkages among the factors of production 438
Case study: The economics of the Black Death 438
Conclusion 439
Summary 440
Key concepts 440
Questions for review 440
Multiple choice 440
Problems and applications 441
Appendix: The demand for labour under imperfect
competition and monopoly 444
Chapter 20 Earnings and discrimination 446
Some determinants of equilibrium wages 447
Compensating differentials 447
Human capital 448
Case study: The changing value of skills 449
Ability, effort and chance 449
Case study: The benefits of beauty 450
An alternative view of education: Signalling 451
The superstar phenomenon 452
Above-equilibrium wages: Minimum-wage laws, unions
and efficiency wages 453
The economics of discrimination 454
Measuring labour-market discrimination 454
Case study: Is Jennifer more employable than
Nuying? 455
Discrimination by employers 456
Case study: Segregated streetcars and the profit
motive 457
Discrimination by customers and governments 457
Case study: Discrimination in sports 458
Conclusion 459
Summary 460
Key concepts 460
Questions for review 460
Multiple choice 461
Problems and applications 461
Appendix: Unions and imperfect competition in labour markets 463
Unions as monopolists 463
Bilateral monopoly 465
Are unions good or bad for the economy? 467
Chapter 21 Income inequity and poverty 468
The measurement of inequality 469
Australian income inequality 469
Case study: The women’s movement and income distribution 471
Income inequality around the world 471
The poverty rate 472
Problems in measuring inequality 474
Case study: Alternative measures of inequality 475
The political philosophy of redistributing income 476
Utilitarianism 476
Liberalism 478
Libertarianism 479
What Australian economists think 480
Policies to reduce poverty 480
Minimum-wage laws 480
Social security 481
Negative income tax 481
In the news: Thinking innovatively about income
redistribution 482
In-kind transfers 483
Antipoverty programs and work incentives 484
Conclusion 485
Summary 486
Key concepts 486
Questions for review 486
Multiple choice 486
Problems and applications 487
Part 7 Topics for further study 490
Chapter 22 The theory of consumer choice 492
The budget constraint: What the consumer can afford 493
Preferences: What the consumer wants 495
Representing preferences with indifference curves 495
Four properties of indifference curves 496
Two extreme examples of indifference curves 498
Optimization: What the consumer chooses 500
The consumer’s optimum choices 500
FYI: Utility – an alternative way to describe preferences and optimization 500
How changes in income affect a consumer’s choices 502
How changes in prices affect a consumer’s choices 503
Income and substitution effects 505
Deriving the demand curve 506
Three applications 508
Do all demand curves slope downwards? 508
Case study: The search for Giffen goods 509
How do wages affect labour supply? 509
Case study: Income effects on labour supply – historical
trends, lottery winners and the Carnegie
conjecture 512
What Australian economists think 513
How do interest rates affect household saving? 513
Conclusion: Do people really think this way? 516
Summary 517
Key concepts 517
Questions for review 517
Multiple choice 518
Problems and applications 518
Chapter 23 Frontiers of microeconomics 521
Asymmetric information 522
Hidden actions: Principals, agents and moral hazard 522
FYI: Corporate management 523
Hidden characteristics: Adverse selection and the lemons
problem 524
Signalling to convey private information 525
Case study: Gifts as signals 526
Screening to induce information revelation 526
Asymmetric information and public policy 527
Political economy 528
The Condorcet voting paradox 528
Arrow’s impossibility theorem 529
The median voter is king 530
Politicians are people too 532
Behavioural economics 532
People aren’t always rational 532
In the news: Our inertia may be costing lives 534
People care about fairness 535
People are inconsistent over time 536
What Australian economists think 537
Conclusion 537
Summary 538
Key concepts 538
Questions for review 538
Multiple choice 538
Problems and applications 539
Glossary 542
Suggestions for reading 546
Index 549