Table of Contents Cover Title Copyright About the Author Vision and Story of Economics Principles for a Changing World Rethinking the Connection Between Author, Text, and Technology Thinking About Data Literacy Thinking About What Global Means Acknowledgments Brief Contents Contents 1 Exploring Economics BY THE NUMBERS Economics as a Career What Is Economics About? Why Should One Study Economics? Microeconomics Versus Macroeconomics Economic Theories and Reality Model Building Ceteris Paribus: All Else Held Constant Efficiency Versus Equity ISSUE Do Economists Ever Agree on Anything? Positive Versus Normative Questions Key Principles of Economics Principle 1: Economics Is Concerned With Making Choices With Limited Resources Principle 2: When Making Decisions, One Must Take into Account Tradeoffs and Opportunity Costs Principle 3: Specialization Leads to Gains for All Involved Principle 4: People Respond to Incentives, Both Good and Bad ISSUE Would a City Change Its Name for a Game Show? Principle 5: Rational Behavior Requires Thinking on the Margin Principle 6: Markets Are Generally Efficient; When They Aren’t, Government Can Sometimes Correct the Failure Principle 7: Economic Growth, Low Unemployment, and Low Inflation Are Economic Goals That Do Not Always Coincide ADAM SMITH (1723–1790) Principle 8: Institutions and Human Creativity Help Explain the Wealth of Nations AROUND THE WORLD Nunavut: Land of Abundance and Scarcity Summing It All Up: Economics Is All Around Us Chapter Summary KEY CONCEPTS QUESTIONS AND PROBLEMS ANSWERS TO QUESTIONS IN CHECKPOINTS APPENDIX Working With Graphs and Formulas Graphs and Data Time Series Scatter Plots Pie Charts Bar Charts Simple Graphs Can Pack In a Lot of Information A Few Simple Rules for Reading Graphs Graphs and Models Linear Relationships Computing the Slope of a Linear Line Nonlinear Relationships Computing the Slope of a Nonlinear Curve Ceteris Paribus, Simple Equations, and Shifting Curves Ceteris Paribus: All Else Equal Simple Linear Equations Shifting Curves Correlation Is Not Causation 2 Production, Economic Growth, and Trade BY THE NUMBERS Growth, Productivity, and Trade Are Key to Our Prosperity Basic Economic Questions and Production Basic Economic Questions Economic Systems Resources and Production Land Labor Capital Entrepreneurial Ability Production and Efficiency AROUND THE WORLD Ironbridge: The Beginnings of the Industrial Revolution Production Possibilities and Economic Growth Production Possibilities Opportunity Cost Increasing Opportunity Costs Economic Growth Expanding Resources Technological Change Summarizing the Sources of Economic Growth ISSUE Is the Ocean the Next Frontier? Land Reclamation and Underwater Cities Specialization, Comparative Advantage, and Trade Absolute and Comparative Advantage DAVID RICARDO (1772–1823) The Gains from Trade Practical Constraints on Trade ISSUE Do We Really Specialize in That? Comparative Advantage in the United States and China Chapter Summary KEY CONCEPTS QUESTIONS AND PROBLEMS ANSWERS TO QUESTIONS IN CHECKPOINTS 3 Supply and Demand BY THE NUMBERS The World of Markets Markets ISSUE Do Markets Exist for Everyone, Including Dogs and Cats? The Price System Demand Willingness-to-Pay: The Building Block of Market Demand The Law of Demand: The Relationship Between Quantity Demanded and Price The Demand Curve Determinants of Demand Tastes and Preferences Income Prices of Related Goods The Number of Buyers Expectations About Future Prices, Incomes, and Product Availability Changes in Demand Versus Changes in Quantity Demanded Supply The Law of Supply: The Relationship Between Quantity Supplied and Price The Supply Curve Market Supply Curves Determinants of Supply Production Technology Costs of Resources Prices of Related Commodities Expectations Number of Sellers Taxes and Subsidies Changes in Supply Versus Changes in Quantity Supplied Market Equilibrium Moving to a New Equilibrium: Changes in Supply and Demand Predicting the New Equilibrium When One Curve Shifts ALFRED MARSHALL (1842–1924) ISSUE Two-Buck Chuck: Will People Drink $2-a-Bottle Wine? Predicting the New Equilibrium When Both Curves Shift AROUND THE WORLD Tokyo Disneyland: Is THAT the Line for Space Mountain?! Chapter Summary KEY CONCEPTS QUESTIONS AND PROBLEMS ANSWERS TO QUESTIONS IN CHECKPOINTS 4 Markets and Government BY THE NUMBERS Price Controls and Supports in the Economy Today Consumer and Producer Surplus: A Tool for Measuring Economic Efficiency Using Consumer and Producer Surplus: The Gains from Trade The Consequences of Deviating from Market Equilibrium When Prices Exceed Equilibrium When Prices Fall Below Equilibrium NOBEL PRIZE: PAUL A. SAMUELSON (1915–2009) Market Failure Lack of Competition Information Is Not Shared by All Parties AROUND THE WORLD Singapore: Resolving Traffic Jams and Reducing Pollution Using Price Controls The Existence of External Benefits or Costs The Existence of Public Goods Market Efficiency Versus Equity Price Ceilings and Price Floors Price Ceilings Price Floors ISSUE Are Price Gouging Laws Good for Consumers? Chapter Summary KEY CONCEPTS QUESTIONS AND PROBLEMS ANSWERS TO QUESTIONS IN CHECKPOINTS 5 Introduction to Macroeconomics BY THE NUMBERS A Slow and Steady Macroeconomic Recovery Business Cycles Defining Business Cycles Dating Business Cycles Alternative Measures of the Business Cycle National Activity Index Leading Economic Index Yield Curve ISSUE The End of the Recession . . . It Does Not Feel Like It National Income Accounting The Core of the NIPA NOBEL PRIZE: SIMON KUZNETS (1901–1985) The Circular Flow Diagram Spending and Income: Looking at GDP in Two Ways Gross Domestic Product The Expenditures (Spending) Approach to Calculating GDP Personal Consumption Expenditures Gross Private Domestic Investment Government Purchases Net Exports of Goods and Services Summing Aggregate Expenditures The Income Approach to Calculating GDP Compensation of Employees Proprietors’ Income Corporate Profits Rental Income Net Interest Miscellaneous Adjustments Summing Up Income Measures GDP and Our Standard of Living Different Ways of Comparing GDP Across Countries Population and GDP per Capita Environmental Quality AROUND THE WORLD Costa Rica: Pura Vida and Happiness Without a High Level of GDP Nonmarket Activities and the Informal Economy Chapter Summary KEY CONCEPTS QUESTIONS AND PROBLEMS ANSWERS TO QUESTIONS IN CHECKPOINTS 6 Measuring Inflation and Unemployment BY THE NUMBERS The Twin Evils of Inflation and Unemployment Inflation What Causes Inflation? Measuring Inflation: Consumer Price Index, Producer Price Index, and GDP Deflator The Consumer Price Index The Producer Price Index The GDP Deflator Adjusting for Inflation: Escalating and Deflating Series (Nominal Versus Real Values) Escalator Clauses Deflating Series: Nominal Versus Real Values The Effect of Overstating Inflation The Consequences of Inflation Hyperinflation ISSUE The Consequences of Counterfeit Money on Inflation Unemployment The Historical Record Defining and Measuring Unemployment Employed Unemployed Labor Force Monthly Employment Surveys The Household Survey The Payroll Survey Employment Trends Weekly Jobs Report Relationship Between Employment and the Unemployment Rate Problems with Unemployment Statistics Underemployment and Marginally Attached Workers AROUND THE WORLD The Boom and Bust of Dickinson, North Dakota Unemployment and the Economy Types of Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment Defining Full Employment The Natural Rate of Unemployment Changes in the Unemployment Rate Around the Natural Rate Jobless Recoveries Prolong Unemployment Above the Natural Rate ISSUE Why Do Unemployment Rates Differ So Much Within the United States? Chapter Summary KEY CONCEPTS QUESTIONS AND PROBLEMS ANSWERS TO QUESTIONS IN CHECKPOINTS 7 Economic Growth BY THE NUMBERS Why Should We Care About Economic Growth? Why Is Economic Growth Important? How Is Economic Gr