During my twenty-year career as a student, the course that excited
me most was the two-semester sequence on the principles of economics
I took during my freshman year in college. It is no exaggeration to
say that it changed my life.
I had grown up in a family that often discussed politics over the
dinner table. The pros and cons of various solutions to
societys problems generated fervent debate. But, in school, I
had been drawn to the sciences. Whereas politics seemed vague,
rambling, and subjective, science was analytic, systematic, and
objective. While political debate continued without end, science made
My freshman course on the principles of economics opened my eyes
to a new way of thinking. Economics combines the virtues of politics
and science. It is, truly, a social science. Its subject matter is
society--how people choose to lead their lives and how they interact
with one another. But it approaches its subject with the dispassion
of a science. By bringing the methods of science to the questions of
politics, economics tries to make progress on the challenges that all
I was drawn to write this book in the hope that I could convey
some of the excitement about economics that I felt as a student in my
first economics course. Economics is a subject in which a little
knowledge goes a long way. (The same cannot be said, for instance, of
the study of physics or the Japanese language.) Economists have a
unique way of viewing the world, much of which can be taught in one
or two semesters. My goal in this book is to transmit this way of
thinking to the widest possible audience and to convince readers that
it illuminates much about the world around them.
I firmly believe that everyone should study the fundamental ideas
that economics has to offer. One purpose of general education is to
make people more informed about the world to make them better
citizens. The study of economics, as much as any discipline, serves
this goal. Writing an economics textbook is, therefore, a great honor
and a great responsibility. It is one way that economists can help
promote better government and a more prosperous future. As the great
economist Paul Samuelson put it, "I dont care who writes a
nations laws, or crafts its advanced treaties, if I can write
its economics textbooks."
For Whom Is This Book Written?
It is tempting for a professional economist writing a textbook to
take the economists point of view and to emphasize those topics
that fascinate him and other economists. I have done my best to avoid
that temptation. I have tried to put myself in the position of
someone seeing economics for the first time. My goal is to emphasize
the material that students should and do find interesting
about the study of the economy.
One result is that this book is briefer than many books used to
introduce students to economics. As a student, I was (and
unfortunately still am) a slow reader. I groaned whenever a professor
gave the class a 1000-page tome to read. Of course, my reaction was
not unique. The Greek poet Callimachus put it succinctly: "Big book,
big bore." Callimachus made that observation in 250 B.C., so he was
probably not referring to an economics textbook, but today his
sentiment is echoed around the world every semester when students
first see their economics assignments. My goal in this book is to
avoid that reaction by skipping the bells, whistles, and extraneous
details that distract students from the key lessons.
Another result of this student orientation is that more of this
book is devoted to applications and policy, and less to formal
economic theory, than is the case with many other books written for
the principles course. Throughout this book I have tried to return to
applications and policy questions as often as possible. Most chapters
include "Case Studies" illustrating how the principles of economics
are applied. In addition, "In the News" boxes (most of which are new
to this edition) offer excerpts of newspaper articles showing how
economic ideas shed light on the current issues facing society. After
students finish their first course in economics, they should think
about news stories from a new perspective and with greater insight.
Whats New in the Second Edition?
Much in the world has changed since I wrote the first edition of
this book: The internet has become a central part of American life;
the U.S. federal governments budget has gone from deficit to
surplus; the Justice Department has brought a landmark antitrust suit
against Microsoft; the stock market has experienced an historic boom;
Europe has adopted a common currency; and Michael Jordan has retired
from basketball. Because the teaching of economics has to stay
current with the ever changing world, this new edition includes
dozens of new case studies and boxes.
In addition to updating the book, I have also refined the
books coverage and pedagogy with the input of many users of the
first edition. Several topics appear in this edition that were
missing from first, including cross-elasticity of demand, the debate
over predatory pricing, and the concept of present value. I have also
expanded the treatment of some topics, such as the computation of
elasticity, the various concepts of firms costs, and the model
of aggregate supply and aggregate demand. (Of course, all of these
topics appear only in the complete 34-chapter version of this book.
See below for outlines of each of the five available versions.)
All the changes that I made, and the many others that I
considered, were evaluated in light of the benefits of brevity. Like
most things we study in economics, student time is a scarce resource.
I always keep in mind a dictum from the great novelist Robertson
Davies: "One of the most important things about writing is to boil it
down and not bore the hell out of everybody."
How Is This Book Organized?
To write a brief and student-friendly book, I had to consider new
ways to organize familiar material. What follows is a whirlwind tour
of this text. The tour will, I hope, give instructors some sense of
how the pieces fit together.
Chapter 1, "Ten Principles of Economics," introduces students to
the economists view of the world. It previews some of big ideas
that recur throughout economics, such as opportunity cost, marginal
decisionmaking, the role of incentives, the gains from trade, and the
efficiency of market allocations. Throughout the book, I refer
regularly to the Ten Principles of Economics in Chapter 1 to
remind students that these principles are the foundation for most
economic analysis. A building-blocks icon in the margin calls
attention to these references.
Chapter 2, "Thinking Like an Economist," examines how economists
approach their field of study. It discusses the role of assumptions
in developing a theory and introduces the concept of an economic
model. It also discusses the role of economists in making policy. The
appendix to this chapter offers a brief refresher course on how
graphs are used and how they can be abused.
Chapter 3, "Interdependence and the Gains from Trade," presents
the theory of comparative advantage. This theory explains why
individuals trade with their neighbors, as well as why nations trade
with other nations. Much of economics is about how market forces
coordinate many individual production and consumption decisions. As a
starting point for this analysis, students see in this chapter why
specialization, interdependence, and trade can benefit everyone.
The Fundamental Tools of Supply and Demand
The next three chapters introduce the basic tools of supply and
demand. Chapter 4, "The Market Forces of Supply and Demand," develops
the supply curve, the demand curve, and the notion of market
equilibrium. Chapter 5, "Elasticity and Its Application," introduces
the concept of elasticity and uses it to analyze events in three
different markets. Chapter 6, "Supply, Demand, and Government
Policies," uses these tools to examine price controls, such as
rent-control and minimum-wage laws, and tax incidence.
Chapter 7, "Consumers, Producers, and the Efficiency of Markets,"
extends the analysis of supply and demand using the concepts of
consumer surplus and producer surplus. It begins by developing the
link between consumers willingness to pay and the demand curve
and the link between producers costs of production and the
supply curve. It then shows that the market equilibrium maximizes the
sum of the producer and consumer surplus. Thus, students learn early
about the efficiency of market allocations.
The next two chapters apply the concepts of producer and consumer
surplus to questions of policy. Chapter 8, "Application: The Costs of
Taxation," shows why taxation results in deadweight losses and what
determines the size of those losses. Chapter 9, "Application:
International Trade," considers who wins and who loses from
international trade and presents the debate over protectionist trade
Having examined why market allocations are often desirable, the
book then considers how the government can sometimes improve on
market allocations. Chapter 10, "Externalities," explains how
external effects such as pollution can render market outcomes
inefficient and discusses the possible public and private solutions
to those inefficiencies. Chapter 11, "Public Goods and Common
Resources," considers the problems that arise when goods, such as
national defense, have no market price. Chapter 12, "The Design of
the Tax System," describes how the government raises the revenue
necessary to pay for public goods. It presents some institutional
background about the U.S. tax system and then discusses how the goals
of efficiency and equity come into play when designing a tax system.
The next five chapters examine firm behavior and industrial
organization. Chapter 13, "The Costs of Production," discusses what
to include in a firms costs, and it introduces cost curves.
Chapter 14, "Firms in Competitive Markets," analyzes the behavior of
price-taking firms and derives the market supply curve. Chapter 15,
"Monopoly," discusses the behavior of a firm that is the sole seller
in its market. It discusses the inefficiency of monopoly pricing, the
possible policy responses, and the attempts by monopolies to price
discriminate. Chapter 16, "Oligopoly," covers markets in which there
only a few sellers, using the prisoners dilemma as the model
for examining strategic interaction. Chapter 17, "Monopolistic
Competition," looks at behavior in a market in which many sellers
offer similar but differentiated products. It also discusses the
debate over the effects of advertising.
The next three chapters present issues related to labor markets.
Chapter 18, "The Markets for the Factors of Production," emphasizes
the link between factor prices and marginal productivity. Chapter 19,
"Earnings and Discrimination," discusses the determinants of
equilibrium wages, including compensating differentials, human
capital, and discrimination. Chapter 20, "Income Inequality and
Poverty," examines the degree of inequality in U.S. society, the
alternative views about the governments role in changing the
distribution of income, and the various policies aimed at helping
societys poorest members.
Chapter 21, "The Theory of Consumer Choice," analyzes individual
decisionmaking using budget constraints and indifference curves. It
covers material that is somewhat more advanced than the rest of the
book. Some instructors may want to skip this chapter, depending on
the emphases of their courses and the interests of their students.
Instructors who do cover this material may want to do so earlier, and
I have written this chapter so that it can be covered anytime after
the basics of supply and demand have been introduced.
My overall approach to teaching macroeconomics is to examine the
economy in the long run (when prices are flexible) before examining
the economy in the short run (when prices are sticky). I believe this
organization simplifies learning macroeconomics for several reasons.
First, the classical assumption of price flexibility is more closely
linked to the basic lessons of supply and demand, which students have
already mastered. Second, the classical dichotomy allows the study of
the long run to be broken up in several, more easily digested pieces.
Third, because the business cycle represents a transitory deviation
from the economys long-run growth path, studying the transitory
deviations is more natural after the long-run equilibrium is
understood. Fourth, the macroeconomic theory of the short run is more
controversial among economists than the macroeconomic theory of the
long run. For these reasons, most upper-level courses in
macroeconomics now follow this long-run-before-short-run approach; my
goal is to offer introductory students the same advantage.
Returning to the detailed organization, I start the coverage of
macroeconomics with issues of measurement. Chapter 22, "Measuring a
Nations Income," discusses the meaning of gross domestic
product and related statistics from the national income accounts.
Chapter 23, "Measuring the Cost of Living," discusses the measurement
and use of the consumer price index.
The next three chapters describe the behavior of the real economy
in the long run. Chapter 24, "Production and Growth," examines the
determinants of the large variation in living standards over time and
across countries. Chapter 25, "Saving, Investment, and the Financial
System," discusses the types of financial institutions in our economy
and examines the role of these institutions in allocating resources.
Chapter 26, "Unemployment and Its Natural Rate," considers the
long-run determinants of the unemployment rate, including job search,
minimum-wage laws, the market power of unions, and efficiency wages.
Having described the long-run behavior of the real economy, the
book then turns to the long-run behavior of money and prices. Chapter
27, "The Monetary System," introduces the economists concept of
money and the role of the central bank in controlling the quantity of
money. Chapter 28, "Money Growth and Inflation," develops the
classical theory of inflation and discusses the costs that inflation
imposes on a society.
The next two chapters present the macroeconomics of open
economies, maintaining the long-run assumptions of price flexibility
and full employment. Chapter 29, "Open-Economy Macroeconomics: Basic
Concepts," explains the relationship among saving, investment, and
the trade balance, the distinction between the nominal and real
exchange rate, and the theory of purchasing-power parity. Chapter 30,
"A Macroeconomic Theory of the Open Economy," presents a classical
model of the international flow of goods and capital. The model sheds
light on various issues, including the link between budget deficits
and trade deficits and the macroeconomic effects of trade policies.
Because instructors differ in how much they emphasize this material,
these chapters were written so they could used in different ways.
Some instructors may choose to cover Chapter 29 but not Chapter 30;
others may skip both chapters; and others may choose to defer the
analysis of open-economy macroeconomics until the end of their
After fully developing the long-run theory of the economy in
Chapters 24 through 30, the book turns its attention to explaining
short-run fluctuations around the long-run trend. This organization
simplifies the teaching of the theory of short-run fluctuations
because, at this point in the course, students have a good grounding
in many basic macroeconomic concepts. Chapter 31, "Aggregate Demand
and Aggregate Supply," begins with some facts about the business
cycle and then introduces the model of aggregate demand and aggregate
supply. Chapter 32, "The Influence of Monetary and Fiscal Policy on
Aggregate Demand," explains how policymakers can use the tools at
their disposal to shift the aggregate-demand curve. Chapter 33, "The
Short-Run Tradeoff between Inflation and Unemployment," explains why
policymakers who control aggregate demand face a tradeoff between
inflation and unemployment. It examines why this tradeoff exists in
the short run, why it shifts over time, and why it does not exist in
the long run.
The book concludes with Chapter 34, "Five Debates over
Macroeconomic Policy." This capstone chapter considers five
controversial issues facing policymakers: the proper degree of policy
activism in response to the business cycle, the choice between rules
and discretion in the conduct of monetary policy, the desirability of
reaching zero inflation, the importance of reducing the
governments debt, and the need for tax reform to encourage
saving. For each issue, the chapter presents both sides of the debate
and encourages students to make their own judgements.
The purpose of this book is to help students learn the fundamental
lessons of economics and to show students how those lessons can be
applied to the world in which they live. Toward that end, I have used
various learning tools that recur throughout the book.
Every chapter begins with a list of the chapters primary
objectives to give students a sense of where the chapter is heading.
Each list has been kept brief in order to help students stay focused
on the four or five key lessons presented in that chapter.
Economic theory is useful and interesting only if it can be
applied to understand actual events and policies. This book,
therefore, contains numerous case studies that apply the theory that
has just been developed.
In the News Boxes
One benefit from studying economics is that it gives students a
new perspective and greater understanding about news from around the
world. To highlight this benefit, I have included excerpts from many
newspaper articles. These articles, together with my brief
introductions, show how basic economic theory can be applied. Some of
the articles are opinion columns written by prominent economists.
Most of these boxes are new to this edition.
These boxes provide additional material "for your information."
Some of them give a glimpse into the history of economic thought.
Others clarify technical issues. Still others discuss supplementary
topics that instructors might choose either to discuss or skip in
Definitions of Key Concepts
When key concepts are introduced in the chapter, they are
presented in bold typeface. In addition, their definitions are
placed in the margins. This treatment should aid students in learning
and reviewing the material.
After each major section, students are offered a "quick quiz" to
check their comprehension of what they have just learned. If students
cannot readily answer these quizzes, they should stop and reread
material before continuing.
Each chapter ends with a brief summary that reminds students of
the most important lessons that they have just learned. Later in
their studying it offers them an efficient way to review for exams.
List of Key Concepts
A list of key concepts at the end of each chapter allows students
to test their understanding of the new terms that have been
introduced. Page references are included so students can review the
terms they do not understand.
Questions for Review
At the end of each chapter are questions for review that test the
chapters primary lessons. Students can use these questions to
check their comprehension after finishing a chapter and to prepare
Problems and Applications
Each chapter also contains a variety of problems and applications
that ask students to apply the material they have learned. Some
professors may use these questions for homework assignments. Others
may use them as a starting point for classroom discussions.
Alternative Versions of the Books
The book you are holding in your hand is one of five versions of
this book that are available for introducing students to economics.
Harcourt College Publishers and I offer so many versions because
instructors differ in how much time they have and what topics they
choose to cover. Here is a brief description of each version of the
- Principles of Economics: This complete version of
the book contains all 34 chapters. It is designed for a two-semester
introductory course that covers both microeconomics and
- Principles of Microeconomics: This "split" contains
21 chapters and is designed for one-semester courses in introductory
- Principles of Macroeconomics: This "split" contains
22 chapters and is designed for one-semester courses in introductory
macroeconomics. It contains a full development of the theory of
supply and demand.
- Principles of Macroeconomics--Brief Edition: This
shortened macro split of 17 chapters contains only one chapter on the
basics of supply and demand. It is designed for those instructors who
want to jump to the core topics of macroeconomics more quickly.
- Essentials of Economics: This version of the book
contains 23 chapters. It is designed for one-semester survey courses
that cover the basics of both microeconomics and macroeconomics.
The accompanying table shows precisely
which chapters are included in each book. Instructors who wish more
information about these alternative versions should contact their
local Harcourt representative.
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