Micro Econ 6 Principles of Microeconomics 6Th Edition William A Mceachern Full Chapter

MICRO ECON 6: Principles of
Microeconomics 6th Edition William A.

Mceachern
Visit to download the full and correct content document:
https://ebookmass.com/product/micro-econ-6-principles-of-microeconomics-6th-editio
n-william-a-mceachern/
Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
YOUR
FEED-
BACK
YOUR
BOOKOur research never ends. Continual feedback from you ensures
that we keep up with your changing needs.
www.cengagebrain.com
Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Inside Front Cover (8.5”)

Inside Back Cover (8.5")
YOUR
FEED-
BACK
YOUR
BOOKOur research never ends. Continual feedback from you ensures
that we keep up with your changing needs.
www.cengagebrain.com
micro
ECON Principles of Microeconomics

6
william a. M c Eachern
University of Connecticut
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
This is an electronic version of the print textbook. Due to electronic rights restrictions,
some third party content may be suppressed. Editorial review has deemed that any suppressed
content does not materially affect the overall learning experience. The publisher reserves the right
to remove content from this title at any time if subsequent rights restrictions require it. For
valuable information on pricing, previous editions, changes to current editions, and alternate
formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for
materials in your areas of interest.
Important Notice: Media content referenced within the product description or the product
text may not be available in the eBook version.
Micro ECON6 © 2019, 2017 Cengage Learning, Inc.
Will McEachern Unless otherwise noted, all content is © Cengage.
ALL RIGHTS RESERVED. No part of this work covered by the copyright herein
Senior Vice President, Higher Ed Product, may be reproduced or distributed in any form or by any means, except as
Content, and Market Development: Erin Joyner permitted by U.S. copyright law, without the prior written permission of the
Product Manager: Chris Rader copyright owner.
Content/Media Developer: Sarah Keeling
Product Assistant: Denisse Zavala-Rosales For product information and technology assistance, contact us at
Cengage Customer & Sales Support, 1-800-354-9706 or
Marketing Manager: John Carey
support.cengage.com.
Marketing Coordinator: Audrey Jacobs

For permission to use material from this text or product,
Content Project Manager: Darrell E. Frye submit all requests online at www.cengage.com/permissions.
Sr. Art Director: Bethany Bourgeois
Internal Designer: Lou Ann

Library of Congress Control Number: 2017959260
Thesing/Thesing Design
Cover Designer: Lisa Kuhn, Curio Press, Student Edition ISBN: 978-1-337-40806-6
LLC / Bethany Bourgeois Student Edition with MindTap ISBN: 978-1-337-40805-9
Cover Image: Shutterstock.com/Carlos Castilla,

Maria Kazanova/Shutterstock.com Cengage
20 Channel Center Street
Intellectual Property Analyst: Diane Garrity Boston, MA 02210
Intellectual Property Project Manager: USA
Sarah Shainwald
Cengage is a leading provider of customized learning solutions with
Production Service: SPi Global employees residing in nearly 40 different countries and sales in more
than 125 countries around the world. Find your local representative at
www.cengage.com.
Cengage products are represented in Canada by

Nelson Education, Ltd.
To learn more about Cengage platforms and services, visit

www.cengage.com.
To register or access your online learning solution or purchase materials

for your course, visit www.cengagebrain.com.
Printed in the United States of America

Print Number: 01 Print Year: 2017
M cE ac h e r n
ECONMICRO
6 Brief
Contents
Part 1 Introduction to Economics
1 The Art and Science of Economic Analysis 2
2 Economic Tools and Economic Systems 24
3 Economic Decision Makers 40
4 Demand, Supply, and Markets 56
Part 2 Introduction to the Market System

5 Elasticity of Demand and Supply 74
6 Consumer Choice and Demand 92
7 Production and Cost in the Firm 104
Part 3 Market Structure and Pricing

8 Perfect Competition 120
9 Monopoly 142
10 Monopolistic Competition and Oligopoly 160
Part 4 Resource Markets

11 Resource Markets 180
12 Labor Markets and Labor Unions 196
13 Capital, Interest, Entrepreneurship,
and Corporate Finance 216
14 Transaction Costs, Asymmetric Information,
and Behavioral Economics 234
Part 5 Market Failure and Public Policy

15 Economic Regulation and Antitrust Policy 252
Shutterstock.com/Carlos Castilla, Maria Kazanova/Shutterstock.com
16 Public Goods and Public Choice 268

17 Externalities and the Environment 284
18 Poverty and Redistribution 304
Part 6 International Economics

19 International Trade 324
20 International Finance 344
21 Economic Development 360
Index 380
BRIEF CONTENTS iii

Contents
2-4 Economic Systems 34
Part 1 2-5 Final Word 37
Introduction to economics 3 Economic Decision Makers 40

3-1 The Household 41
3-2 The Firm 43
3-3 The Government 47
© Cartoon Network /Everett Collection

3-4 The Rest of the World 53
3-5 Final Word 54
4 Demand, Supply, and Markets 56

4-1 Demand 57
4-2 What Shifts a Demand Curve? 60
4-3 Supply 62
1 The Art and Science of Economic

Analysis 2
4-4 What Shifts a Supply Curve? 63
4-5 Demand and Supply Create a Market 65
4-6 Changes in Equilibrium Price
1-1 The Economic Problem: Scarce Resources, and Quantity 67
Unlimited Wants 3 4-7 Disequilibrium 70
1-2 The Art of Economic Analysis 7 4-8 Final Word 71
1-3 The Science of Economic Analysis 10
1-4 Some Pitfalls of Faulty Economic
Analysis 13
1-5 If Economists Are So Smart, Why Aren’t
Part 2
They Rich? 14
1-6 Final Word 15
Introduction to the
A1-1 Understanding Graphs 18 Market System
2 Economic Tools and E conomic
Systems 24
Archive Photos/Getty Images
2-1 Choice and Opportunity Cost 25

2-2 Comparative Advantage, Specialization,
and Exchange 27
2-3 The Economy’s Production
Possibilities 30
iv CONTENTS
5 Elasticity of Demand and Supply 74 8 Perfect Competition 120
5-1 Price Elasticity of Demand 75 8-1 An Introduction to Perfect
5-2 Determinants of the Price Elasticity of Demand 80 Competition 121
5-3 Price Elasticity of Supply 83 8-2 Short-Run Profit Maximization 123
5-4 Other Elasticity Measures 86 8-3 Short-Run Loss Minimization 126
5-5 Final Word 88 8-4 Short-Run Supply Curves 129
A5-1 Price Elasticity and Tax Incidence 90 8-5 Perfect Competition in

the Long Run 132
6 Consumer Choice and Demand 92 8-6 Long-Run Industry Supply

Curve 135
6-1 Utility Analysis 93 8-7 Perfect Competition
and Efficiency 137
6-2 Measuring Utility 95
8-8 Final Word 139
6-3 Applications of Utility Analysis 99
9 Monopoly 142
6-4 Final Word 102
7 Production and Cost in the Firm 104 9-1

9-2
Barriers to Entry 143
Revenue for a Monopolist 145
7-1 Cost and Profit 105
7-2 Production in the Short Run 107 9-3 Profit Maximization and Cost Minimization
for a Monopolist 147
7-3 Costs in the Short Run 109
9-4 Perfect Competition and Monopoly
7-4 Costs in the Long Run 113 Compared 152
7-5 Final Word 117 9-5 Problems with Deadweight Loss
Estimates 154
Part 3
9-6 Price Discrimination 155
9-7 Final Word 158
Market Structure 10 Mandonopolistic Competition

and Pricing Oligopoly 160
10-1 Monopolistic Competition 161
10-2 Oligopoly 167
10-3 Three Approaches to
Oligopoly 169
10-4 Comparison of Oligopoly and Perfect
iStockphoto.com/Alle12
Competition 176
10-5 Final Word 177
CONTENTS v
13-6 Corporate Finance 228
Part 4 13-7 Final Word 232
Resource Markets 14 Information,

Transaction Costs, Asymmetric
and Behavioral
Economics 234
14-1 The Firm’s Rationale and Scope of Operation 235
14-2 Market Behavior with Imperfect Information 240
Richard Cavalleri/Shutterstock.com
14-3 Asymmetric Information in Product Markets 242

14-4 Asymmetric Information in Labor Markets 246
14-5 Behavioral Economics 247
14-6 Final Word 249
Part 5
11 Resource Markets 180 Market Failure and
11-1 The Once-Over 181
11-2 Demand and Supply of Resources 182
Public Policy
11-3 Temporary and Permanent Resource
Price Differences 184
11-4 Opportunity Cost and Economic
Zhao jian kang/Shutterstock.com
Rent 185
11-5 A Closer Look at Resource Demand 188
11-6 Final Word 193
12 LUnions
abor Markets and Labor
196
12-1 Labor Supply 197
12-2 Why Wages Differ 202 15 Eand
conomic Regulation
Antitrust Policy 252
12-3 Unions and Collective Bargaining 205
12- 4 Union Wages and Employment 207 15-1 Types of Government Regulation 253
12-5 Final Word 213 15-2 Regulating a Natural Monopoly 254
15-3 Alternative Theories of Economic Regulation 256
13 and
Capital, Interest, E ntrepreneurship,
Corporate Finance 216
15-4 Antitrust Law and Enforcement 258
15-5 Competitive Trends in the U.S. Economy 264
15-6 Final Word 266
13-1 The Role of Time in Production
16 PChoice
and Consumption 217
13-2 The Market for Loanable Funds 221 ublic Goods and Public
13-3 Why Interest Rates Differ 222 268
13-4 Present Value and Discounting 224 16-1 Public Goods 269
13-5 Entrepreneurship 226 16-2 Public Choice in Representative Democracy 272
vi CONTENTS
19
16-3 Exploiting Government versus Avoiding
Government 277 International Trade 324
16-4 Bureaucracy and Representative Democracy 279 19-1 The Gains from Trade 325
16-5 Final Word 281 19-2 Trade Restrictions and Welfare Loss 332
17
19-3 Efforts to Reduce Trade Barriers 336
Externalities and the 19-4 Arguments for Trade Restrictions 338
Environment 284 19-5 Final Word 341
17-1 Externalities and the Common-Pool Problem 285
17-2 Optimal Level of Pollution 287
17-3 Environmental Protection 293
20 International Finance 344
20-1 Balance of Payments 345
17-4 Positive Externalities 298
20-2 Foreign Exchange Rates and Markets 350
17-5 Final Word 299
20-3 Other Factors Influencing Foreign Exchange
Markets 353
18 Poverty and Redistribution 304 20-4 International Monetary System 355
20-5 Final Word 357
18-1 The Distribution of Household Income 305
21
18-2 Redistribution Programs 310
18-3 Who Are the Poor 315 Economic Development 360
18-4 Some Unintended Consequences of Income 21-1 Worlds Apart 361
Assistance 318
21-2 Productivity: Key to Development 366
18-5 Welfare Reforms 319
21-3 International Trade and Development 372
18-6 Final Word 321
21-4 Foreign Aid and Economic Development 374
21-5 Final Word 378
Part 6 Index 380
International Economics
iStockphoto.com/Rafael Ramirez
CONTENTS vii
Part 1
1 The Art and Science

of Economic Analysis
© Cartoon Network /Everett Collection
LEARNING OUTCOMES After finishing this chapter

After studying this chapter, you will be able to…
go to PAGE 16 for STUDY TOOLS
1-1 Explain the economic problem of scarce resources and unlimited wants Topics discussed in Chapter 1 include
1-2 Describe the forces that shape economic choices
• The economic problem
• The scientific method
1-3 Explain the relationship between economic theory and economic reality • Marginal analysis
• Normative versus positive analysis
1-4 Identify some pitfalls of economic analysis
• Rational self-interest
1-5 Describe several reasons to study economics • Some pitfalls of economic thinking
2 PART ONE: Introduction to Economics
▸▸ Why are comic strip and TV characters like those ▸▸ Why is a good theory like a closet organizer?
in Adventure Time, The Simpsons, and Family Guy ▸▸ What’s the big idea with economics?
missing a finger on each hand?
Finally, how can it be said that in economics “what goes
▸▸ Which college majors pay the most? around comes around”? These and other questions are
▸▸ In what way are people who pound on vending answered in this chapter, which introduces the art and
machines r elying on theory? science of economic analysis.
Y
ou have been reading and hearing about or off campus, take a course in accounting or
economic issues for years—unemployment, one in history, get married or stay single, pack
inflation, poverty, recessions, federal defi- a lunch or buy a sandwich. You already know
cits, college tuition, airfares, stock prices, com- much more about economics than you realize.
puter prices, smartphone prices, and gas prices. You bring to the subject a rich personal experi-
When explanations of such issues go into any ence, an experience that will be tapped through-
depth, your eyes may glaze over and you may out the book to reinforce your understanding of
tune out, the same way you do when a weather the basic ideas.
forecaster tries to explain high-pressure fronts
colliding with moisture carried in from the coast.
What many people fail to realize is that
economics is livelier than the dry accounts
offered by the news media. Economics is about
“ Why are comic strip and TV
characters like those in Adventure

making choices, and you make economic choices Time, The Simpsons, and Family Guy
every day—choices about whether to get a part-
time job or focus on your studies, live in a dorm
missing a finger on each hand?
”
1-1 THE ECONOMIC PROBLEM: unlimited wants exists to a greater or lesser extent for
each of the 7.5 billion people on earth. Everybody—
SCARCE RESOURCES, cab driver, farmer, brain surgeon, dictator, shepherd,
student, politician—faces the problem. For example, a
UNLIMITED WANTS cab driver uses time and other scarce resources, such
as the taxi, knowledge of the city, driving skills, and
Would you like a new car, a nicer home, a smarter phone, gasoline, to earn income. That income, in turn, buys
tastier meals, more free time, a more interesting social housing, groceries, clothing, trips to Disney World, and
life, more spending money, more leisure, more sleep? thousands of other goods and services that help satisfy
Who wouldn’t? But even if you can satisfy some of these some of the driver’s unlimited wants. Economics exam-
desires, others keep popping up. The problem is that ines how people use their scarce resources to satisfy
although your wants, or desires, are virtually unlimited, their unlimited wants. Let’s pick apart the definition,
the resources available to satisfy these wants are scarce. b eginning with resources,

A resource is scarce when it is not freely available—that then goods and services, and
is, when its price exceeds zero. Because resources are finally focus on the heart economics The study of
how people use their scarce
scarce, you must choose from among your many wants, of the matter—economic
resources to satisfy their
and whenever you choose, you must forgo satisfying choice, which results from unlimited wants
some other wants. The problem of scarce resources but scarcity.
CHAPTER 1: The Art and Science of Economic Analysis 3

such as bodies of water, trees, oil reserves, minerals,
1-1a Resources and even animals. Natural resources can be divided
Resources are the inputs, or factors of production, used into renewable resources and exhaustible resources. A
to produce the goods and services that people want. Goods renewable resource can be drawn on indefinitely if used
and services are scarce because resources are scarce. conservatively. Thus, timber is a renewable resource if
Resources sort into four broad categories: labor, capital, felled trees are replaced to regrow a steady supply. The
natural resources, and entrepreneurial ability. Labor is air and rivers are renewable resources if they are allowed
human effort, both physical and mental. Labor includes sufficient time to cleanse themselves of any pollutants.
the effort of the cab driver More generally, biological resources like fish, game, live-
resources The inputs, or and the brain surgeon. Labor stock, forests, rivers, groundwater, grasslands, and soil are
factors of production, used to itself comes from a more renewable if managed properly. An exhaustible resource—
produce the goods and services fundamental resource: time. such as oil or coal—does not renew itself and so is avail-
that people want; consist of
labor, capital, natural resources,
Without time we can accom- able in a limited amount. Once burned, each barrel of
and entrepreneurial ability plish nothing. We allocate our oil or ton of coal is gone forever. The world’s oil and coal
time to alternative uses: We deposits are exhaustible.
labor The physical and men-
tal effort used to produce goods can sell our time as labor, or A special kind of human skill called e
ntrepreneurial
and services we can spend our time doing ability is the talent required to dream up a new prod-
other things, like sleeping, eat- uct or find a better way to produce an existing one,
capital The buildings,
equipment, and human skills ing, studying, playing sports, organize production, and assume the risk of profit or
used to produce goods and going online, attending class, loss. This special skill comes from an entrepreneur. An
services watching TV, or just relaxing entrepreneur is a profit-seeking decision maker who
natural resources All with friends. starts with an idea, organizes an enterprise to bring that
gifts of nature used to produce Capital includes all idea to life, and then assumes the risk of operation. An
goods and services; includes human creations used to entrepreneur pays resource owners for the opportunity
renewable and exhaustible
produce goods and services. to employ their resources in the firm. Every firm in the
resources
Economists often distinguish world today, such as Ford, Microsoft, Google, and Face-
entrepreneurial between physical capital book, began as an idea in the mind of an entrepreneur.
ability The imagination
and human capital. Physical Resource owners are paid wages for their labor,
required to develop a new prod-
uct or process, the skill needed capital consists of factories, interest for the use of their capital, and rent for the
to organize production, and the tools, machines, computers, use of their natural resources. Entrepreneurial ability is
willingness to take the risk of buildings, airports, high- rewarded by profit, which equals the revenue from items
profit or loss
ways, and other human cre- sold minus the cost of the resources employed to make
entrepreneur A profit- ations used to produce goods those items. Sometimes the entrepreneur suffers a loss.
seeking decision maker who and services. Physical capi- Resource earnings are usually based on the time these
starts with an idea, organizes an
tal includes the cab driver’s resources are employed. Resource payments therefore
enterprise to bring that idea to
life, and assumes the risk of the taxi, the surgeon’s scalpel, have a time dimension, as in a wage of $10 per hour,
operation and the building where your interest of 6 percent per year, rent of $600 per month, or
wages Payment to resource economics class meets (or, profit of $10,000 per year.
owners for their labor if you are taking this course
online, your computer and
interest Payment to
online connectors). Human
1-1b Goods and Services
resource owners for the use of
their capital capital consists of the knowl- Resources are combined in a variety of ways to produce
edge and skill people acquire goods and services. A farmer, a tractor, 50 acres of land,
rent Payment to resource
owners for the use of their natu- to increase their productiv- seeds, and fertilizer combine to grow the good: corn.
ral resources ity, such as the cab driver’s One hundred musicians, musical instruments, chairs, a
knowledge of city streets, conductor, a musical score, and a music hall combine
profit Reward for entrepre-
neurial ability; sales revenue the surgeon’s knowledge of to produce the service: Beethoven’s Fifth Symphony.
minus resource cost human anatomy, and your Corn is a good because it is something you can see,
knowledge of economics. feel, and touch; it requires scarce resources to produce;
good A tangible product
used to satisfy human wants Natural resources and it satisfies human wants. The book you are now
include all gifts of nature, holding, the chair you are sitting in, the clothes you are
clean seawater have become scarce. Goods and
© laola/Shutterstock.com; © Colia/Shutterstock.com; © Utekhina Anna/Shutterstock.com; © james

weston/Shutterstock.com; © Elena Elisseeva/Shutterstock.com; © zimmytws/Shutterstock.com
services that are truly free are not the subject of
economics. Without scarcity, there would be no
economic problem and no need for prices.
Sometimes we mistakenly think of certain
goods as free because they involve no appar-
ent cost to us. Napkins seem to be free at Star-
bucks. Nobody stops you from taking a fistful.
Supplying napkins, however, costs the company
millions each year and prices reflect that cost.
Some restaurants make special efforts to keep
napkin use down— such as packing them tightly
into the dispenser or making you ask for them.
Moreover, Starbucks recently reduced the
thickness of its napkins.
You may have heard the expression “There
is no such thing as a free lunch.” There is no free
lunch because all goods and services involve a
cost to someone. The lunch may seem free to
you, but it draws scarce resources away from
Scarcity means you must choose among options. the production of other goods and services, and
whoever provides a free lunch often expects
wearing, and your next meal are all goods. The perfor- something in return. A Russian proverb makes
mance of the Fifth Symphony is a service because it is a similar point but with a bit more bite: “The only place
intangible, yet it uses scarce resources to satisfy human you find free cheese is in a mousetrap.” Albert Einstein
wants. Lectures, movies, concerts, phone service, wire- once observed, “Sometimes one pays the most for things
less connections, yoga lessons, dry cleaning, and hair- one gets for nothing.”
cuts are all services.
Because goods and services are produced using Economic Decision
1-1c
scarce resources, they are themselves scarce. A good
or service is scarce if the amount people desire exceeds
Makers and Markets
the amount available at a zero price. Because we cannot There are four types of decision makers in the economy:
have all the goods and services we would like, we must households, firms, governments, and the rest of the
continually choose among them. We must choose among world. Their interaction determines how an economy’s
more pleasant living quarters, better meals, nicer clothes, resources are allocated. Households play the starring
more reliable transportation, faster computers, smarter role. As consumers, households demand the goods and
phones, and so on. Making choices in a world of scarcity services produced. As resource owners, households sup-
means we must pass up some goods and services. But not ply labor, capital, natural resources, and entrepreneurial
everything is scarce. In fact, some things we would prefer ability to firms, governments, and the rest of the world.
to have less of. For example, we would prefer to have Firms, governments, and the rest of the world demand
less garbage, less spam email, fewer telemarketing calls, the resources that households supply and then use these
and less pollution. Things we want none of even at a zero resources to supply the goods and services that house-
price are called bads, the opposite of goods. holds demand. The rest of
A few goods and services seem free because the the world includes foreign
amount available at a zero price exceeds the amount households, foreign firms, service An activity, or intan-
gible product, used to satisfy
people want. For example, air and seawater often seem and foreign governments
human wants
free because we can breathe all the air we want and have that supply resources and
all the seawater we can haul away. Yet, despite the old say- products to U.S. demand- scarcity Occurs when the
amount people desire exceeds
ing “The best things in life are free,” most goods and ser- ers and demand resources
the amount available at a zero
vices are scarce, not free, and even those that appear to be and products from U.S. price
free come with strings attached. For example, clean air and suppliers.

Markets are the means
by which buyers and sellers Exhibit 1.1
carry out exchange at mutu- The Simple Circular-Flow Model for Households and Firms
ally agreeable terms. By Households earn income by supplying resources to resource markets, as shown in
bringing together the two the lower portion of the model. Firms demand these resources to produce goods and
services, which they supply to product markets, as shown in the upper portion of the
sides of exchange, markets model. Households spend their income to demand these goods and services. This
determine price, quantity, spending flows through product markets as revenue to firms.
and quality. Markets are
often physical places, such
as supermarkets, depart-
ment stores, shopping malls,
yard sales, flea markets, and Product
markets
swap meets. But markets Go
o
also include other mecha- ts ds
uc Re
ve
an
nisms by which buyers and nu
o
Pr
d
e e
se
sellers communicate, such
rv
tu
ice
di
as classified ads, radio and en
s
Exp
television ads, telephones,

bulletin boards, online sites,
and face-to-face bargaining.
These market mechanisms
provide information about
the quantity, quality, and Households Firms
price of products offered for
t
ro fi
Lab entre
sale. Goods and services are
,p
or,
nt
bought and sold in product
ca pren
re
pit
t,
co
es
In
markets. Resources are er

al, eur
m nt
,i
es
tu e
na
bought and sold in resource s

ge
rc
ia ral u
l a re Wa so
markets. The most impor- bil so Re
ity urc
tant resource market is the es, Resource
markets
labor, or job, market. Think
about your own experience
looking for a job, and you’ll
already have some idea of
that market.
model focuses on the primary interaction in a market

economy—that between households and firms. Exhibit 1.1
market A set of arrange-
ments by which buyers and
1-1dA Simple shows households on the left and firms on the right;
sellers carry out exchange at Circular-Flow please take a look.
mutually agreeable terms Households supply labor, capital, natural resources,
Model and entrepreneurial ability to firms through resource mar-
product market A
market in which a good or Now that you have learned a kets, shown in the lower portion of the exhibit. In return,
service is bought and sold bit about economic decision households demand goods and services from firms through
resource market A makers and markets, consider product markets, shown on the upper portion of the exhibit.
market in which a resource is how all these interact. Such Viewed from the business end, firms demand labor, capital,
bought and sold a picture is conveyed by the natural resources, and entrepreneurial ability from house-
circular-flow model A circular-flow model, which holds through resource markets, and firms supply goods
diagram that traces the describes the flow of resources, and services to households through product markets.
flow of resources, products, products, income, and revenue The flows of resources and products are supported
income, and revenue among
economic decision makers
among economic decision mak- by the flows of income and expenditure—that is, by the
ers. The simple circular-flow flow of money. So let’s add money. The demand and
supply of resources come together in resource m
arkets to 1-2a Rational Self-Interest
determine what firms pay for resources. These resource
prices—wages, interest, rent, and profit—flow as income A key economic assumption is that individuals, in mak-
to households. The demand and supply of products ing choices, rationally select what they perceive to be in
come together in product markets to determine what their best interests. By rational, economists mean sim-
households pay for goods and services. These expen- ply that people try to make the best choices they can,
ditures on goods and services flow as revenue to firms. given the available time and information. People may not
Resources and products flow in one direction—in this know with certainty which alternative will turn out to be
case, counterclockwise—and the corresponding pay- the best. They simply select the alternatives they expect
ments flow in the other direction—clockwise. What goes will yield the most satisfaction and happiness. In general,
around comes around. Take a little time now to trace the rational self-interest means that each individual tries
logic of the circular flows. to maximize the expected benefit achieved with a given
cost or to minimize the expected cost of achieving a given
benefit. Thus, economists begin with the assumption that
1-2 THE ART OF ECONOMIC ANALYSIS people look out for their self-
interest. For example, a phy- rational self-interest
sician who owns a pharmacy Each individual tries to
An economy results as millions of individuals attempt to prescribes 8 percent more maximize the expected benefit
satisfy their unlimited wants. Because their choices lie at achieved with a given cost or to
drugs on average than a phy-
minimize the expected cost of
the heart of the economic problem—coping with scarce sician who does not own a achieving a given benefit
resources but unlimited wants—these choices deserve a pharmacy.1
closer look. Learning about the forces that shape eco-
nomic choices is the first step toward understanding the 1. Brian Chen, Paul Gertler, and Chuh-Yuh Yang, “Moral Hazard and Econo-
mies of Scope in Physician Ownership of Complementary Medical Services,”
art of economic analysis. NBER Working Paper 19622 (November 2013).
TEN-yard Penalty for Biased Rankings

As one more example of self-interest, the USA Today weekly football poll asks coaches to list the top 25 teams in the country. Economists
who study the rankings found that coaches distort their selections to favor their own teams and their own conferences.
Moreover, to make their own records look better, coaches inflate the rankings of teams they have beaten.
Jeff Schultes/Shutterstock.com
Source: Matthew Kotchen and Matthew Potoski, “Conflicts of Interest Distort Public Evaluations: Evidence from the Top 25 Ballots of NCAA Football
Coaches,” Journal of Economic Behavior & Organization, 107 (November 2014): 51–63.

Rational self-interest should not be viewed as blind and guidance counselors. You likely used school cata-
materialism, pure selfishness, or greed. For most of us, logs, college guides, and websites. You may have even
self-interest often includes the welfare of our family, our visited some campuses to meet the admissions staff
friends, and perhaps the poor of the world. Even so, our and anyone else willing to talk. The decision took time
concern for others is influenced by our personal cost of and money, and it probably involved aggravation and
that concern. We may readily volunteer to drive a friend anxiety.
to the airport on Saturday afternoon but are less likely Because information is costly to acquire, we are
to offer a ride if the flight leaves at 6:00 a.m. When we often willing to pay others to gather and digest it for
donate clothes to an organization such as Goodwill Indus- us. College guidebooks, stock analysts, travel agents,
tries, they are more likely to be old and worn than brand real estate brokers, career counselors, restaurant crit-
new. People tend to give more to charities when their ics, movie reviewers, specialized websites, and Con-
contributions are tax deductible and when contributions sumer Reports magazine attest to our willingness to
garner social approval in the community (as when con- pay for information that improves our choices. As we’ll
tributor names are made public or when big donors get see next, rational decision makers continue to acquire
buildings named after them).2 TV stations are more likely information as long as the additional benefit expected
to donate airtime for public-service announcements dur- from that information exceeds the additional cost of
ing the dead of night than during prime time (which is gathering it.
why 80 percent of such announcements air between 11:00
p.m. and 7:00 a.m.). 1-2cEconomic Analysis
The notion of self-interest does not rule out concern
for others; it simply means that concern for others is Is Marginal Analysis
influenced by the same economic forces that affect other Economic choice usually involves some adjustment to
economic choices. The lower the personal cost of help- the existing situation, or status quo. Amazon.com must
ing others, the more help we offer. We don’t like to think decide whether to add a new line of products. The
that our behavior reflects our self-interest, but it usually school superintendent must decide whether to hire
does. As Jane Austen wrote in Pride and Prejudice, “I another teacher. Your favorite jeans are on sale, and
have been a selfish being all my life, in practice, though you must decide whether to buy another pair. You are
not in principle.” wondering whether to register for an extra course next
1-2bChoice Requires Time

and Information
Rational choice takes time and requires information,
but time and information are themselves scarce and
therefore valuable. If you have any doubts about the
MSPhotographic/Shutterstock.com
time and information needed to make choices, talk to

someone who recently purchased a home, a car, or a
personal computer. Talk to a corporate official trying
to decide whether to introduce a new product, sell
online, build a new factory, or buy another firm. Or
think back to your own experience in choosing a col-
lege. You probably talked to friends, relatives, teachers,
When deciding whether to order dessert, ask
yourself, “is the marginal benefit higher than the
2. Dean Karlan and Margaret McConnell, “Hey Look at Me: The Effect of
Giving Circles on Giving,” Journal of Economic Behavior & Organization marginal cost?”
(forthcoming).
term. You just finished lunch and are deciding whether the choices of various decision makers. Microeconomics
to order dessert. explains how price and quantity are determined in indi-
Economic choice is based on a comparison of the vidual markets—the market for breakfast cereal, sports
expected marginal benefit and the expected marginal equipment, or used cars, for instance.
cost of the action under consideration. Marginal means You have probably given little thought to what influ-
incremental, additional, or extra. Marginal refers to a ences your own economic choices. You have likely given
change in an economic variable, a change in the status even less thought to how your choices link up with those
quo. A rational decision maker changes the status quo if made by millions of others in the U.S. economy to deter-
the expected marginal benefit from the change exceeds mine economy-wide measures such as total production,
the expected marginal cost. For example, Amazon.com employment, and economic growth. Macroeconomics
compares the marginal benefit expected from adding a studies the performance of the economy as a whole.
new line of products (the additional sales revenue) with Whereas microeconomics studies the individual pieces of
the marginal cost (the additional cost of the resources the economic puzzle, as reflected in particular markets,
required). Likewise, you compare the marginal benefit macroeconomics puts all the pieces together to focus on
you expect from eating dessert (the additional pleasure or the big picture. Macroeconomics sees the forest, not the
satisfaction) with its marginal cost (the additional money, trees; the beach, not the grains of sand; and the Rose
time, and calories). Bowl parade float, not the individual flowers that shape
Typically, the change under consideration is small, and color that float.
but a marginal choice can involve a major economic The national economy usually grows over time,
adjustment, as in the decision to quit school and find a but along the way it sometimes stumbles, experiencing
job. For a firm, a marginal choice might mean building a recessions in economic activity, as reflected by a decline
plant in Mexico or even filing for bankruptcy. By focus- in production, employment, and other aggregate mea-
ing on the effect of a marginal adjustment to the status sures. Economic fluctuations are the rise and fall of
quo, the economist is able to cut the analysis of economic economic activity relative to the long-term growth trend
choice down to a manageable size. Rather than confront of the economy. These fluctuations, or business cycles,
a bewildering economic reality head-on, the economist vary in length and intensity, but they usually involve the
begins with a marginal choice to see how this choice entire nation and often other nations too. For exam-
affects a particular market and shapes the economic sys- ple, the U.S. economy now
tem as a whole. Incidentally, to the noneconomist, mar- produces more than four marginal Incremental,
ginal usually means relatively inferior, as in “a movie of times as much as it did in additional, or extra; used
marginal quality.” Forget that meaning for this course and 1960, despite experiencing to describe a change in an
instead think of marginal as meaning incremental, addi- eight recessions since then, economic variable
tional, or extra. including the Great Reces- microeconomics The

sion of 2007–2009. study of the economic behavior
1-2dMicroeconomics in particular markets, such as
that for computers or unskilled
TO REVIEW: The art of eco-
and Macroeconomics nomic analysis focuses on
labor
macroeconomics The
Although you have made thousands of economic how people use their scarce
study of the economic behavior
choices, you probably seldom think about your own resources in an attempt to of entire economies, as
economic behavior. For example, why are you reading satisfy their unlimited wants. measured, for example, by total
this book right now rather than doing something else? Rational self-interest guides production and employment
Microeconomics is the study of your economic behavior individual choice. Choice economic fluctuations
and the economic behavior of others who make choices requires time and informa- The rise and fall of economic
about such matters as how much to study and how much tion and involves a compari- activity relative to the long-term
growth trend of the economy;
to party, how much to borrow and how much to save, son of the expected marginal
also called business cycles
what to buy and what to sell. Microeconomics examines benefit and the expected
individual economic choices and how markets coordinate marginal cost of alternative

actions. Microeconomics looks at the individual pieces
of the economic puzzle; macroeconomics fits the pieces
together to form the big picture.
1-3 THE SCIENCE OF ECONOMIC

ANALYSIS
Economists use scientific analysis to develop theories,
or models, that help explain economic behavior. An
economic theory, or economic model, is a simplifi-
cation of economic reality that is used to make predic-
tions about cause and effect in the real world. A theory,
or model, such as the circular-flow model, captures the
important elements of the problem under study but need
not spell out every detail and interrelation. In fact, add-
ing more details may make a theory more unwieldy and,
therefore, less useful. For example, a wristwatch is a model
that tells time, but a watch festooned with extra features
is harder to read at a glance and is therefore less useful
as a time-telling model. The world is so complex that we
must simplify it to make sense of things. Store mannequins
© iStock.com/Pinopic
simplify the human form (some even lack arms and heads).
Comic strips and cartoons simplify a character’s anatomy—
leaving out fingers (in the case of Adventure Time, The
Simpsons, and Family Guy) or a mouth (in the case of Dil-
bert), for instance. You might think of economic theory as a A good theory can act like a closet organizer for
stripped-down, or streamlined, version of economic reality. your mind, helping you understand a messy and
A good theory helps us understand a messy and confusing world.
confusing world. Lacking a theory of how things work,
our thinking can become cluttered with facts, one piled
on another, as in a messy closet. You could think of a good
theory as a closet organizer for the mind. A good theory understood. Someone who pounds on the Pepsi machine
offers a helpful guide to sorting, saving, and understand- that just ate a quarter has a crude theory about how that
ing information. machine works. One version of that theory might be, “The
quarter drops through a series of whatchamacallits, but
1-3a The Role of Theory sometimes it gets stuck. If I pound on the machine, then I
can free up the quarter and send it on its way.” Evidently,
Most people don’t understand the role of theory. Perhaps this theory is widespread enough that people continue to
you have heard, “Oh, that’s fine in theory, but in practice pound on machines that fail to perform (a real problem
it’s another matter.” The implication is that the theory in for the vending machine industry and one reason newer
question provides little aid in practical matters. People who machines are fronted with glass). Yet, if you were to ask
say this fail to realize that they are merely substituting their these mad pounders to explain their “theory” about how the
own theory for a theory they machine works, they would look at you as if you were crazy.
economic theory, or either do not believe or do not
economic model, A understand. They are really say-
simplification of reality used ing, “I have my own theory that
1-3b The Scientific Method
to make predictions about
works better.” To study economic problems, economists employ a pro-
cause and effect in the real
world All of us employ theories, cess called the scientific method, which consists of four
however poorly defined or steps, as outlined in Exhibit 1.2.
be, “What is the relationship between
Exhibit 1.2 the price of Pepsi and the quantity of
The Scientific Method: Step-by-Step Pepsi purchased?” In this case, the rel-
The steps of the scientific method are designed to develop and test evant variables are price and quantity. A
hypotheses about how the world works. The objective is a theory that variable is a measure that can take on
predicts outcomes more accurately than the best alternative theory.
A hypothesis is rejected if it does not predict as accurately as the best different values at different times. The
alternative. A rejected hypothesis can be modified or reworked in light variables of concern become the ele-
of the test results. ments of the theory, so they must be
selected with care.
1. Identify the question and define relevant variables

Step Two: Specify
Assumptions
The second step is to specify the
2. Specify assumptions
assumptions under which the theory
is to apply. One major category of
assumptions is the other-things-
3. Formulate a hypothesis constant assumption—in Latin, the
ceteris paribus assumption. The idea is
Modify
to identify the variables of interest and
approach
4. Test the hypothesis
then focus exclusively on the relation-
ships among them, assuming that noth-
or ing else important changes—that other
Reject the hypothesis
Use the hypothesis until things remain constant. Again, suppose
a better one shows up
we are interested in how the price
of Pepsi influences the amount pur-
chased. To isolate the relation between
these two variables, we assume that
there are no changes in other relevant variables such
as consumer income, the average daytime tempera-
Step One: Identify the Question ture, or the price of Coke.
and Define Relevant Variables We also make assumptions about how people
The scientific method begins with curiosity: Someone behave; these are called b ehavioral assumptions. The
wants to answer a question. Thus, the first step is to primary behavioral assumption is rational self-interest.
identify the economic question and define the variables Earlier we assumed that each decision maker pursues
relevant to a solution. For example, the question might self-interest rationally and
makes choices accordingly. variable A measure, such a
Rationality implies that each better one shows up as price or
consumer buys the products quantity, that can take on differ-
ent values at different times
expected to maximize his
or her level of satisfaction. other-things-constant
Rationality also implies that assumption The assump-
tion, when focusing on the
Radu Bercan/Shutterstock.com
each firm supplies the prod- relation among key economic

ucts expected to maximize variables, that other variables
the firm’s profit. These kinds remain unchanged; in Latin,
of assumptions are called ceteris paribus
behavioral assumptions behavioral assumptions
because they specify how we An assumption that describes
expect economic decision the expected behavior of
If the price of your favorite soft drink rose, would economic decision makers—
you buy less of it?
makers to behave—what what motivates them
makes them tick, so to speak.

Step Three: Formulate a Hypothesis but they must be subject to verification or refutation by
reference to the facts. Theories are expressed as positive
The third step in the scientific method is to formulate
statements such as “If the price of Pepsi increases, then
a hypothesis, which is a theory about how key vari-
the quantity demanded decreases.”
ables relate to each other. For example, one hypothesis
Most of the disagreement among economists
holds that if the price of Pepsi goes up, other things
involves normative debates—such as the appropriate
constant, then the quantity purchased declines. The
role of government—rather than statements of posi-
hypothesis becomes a prediction of what happens to
tive analysis. To be sure, many theoretical issues remain
the quantity purchased if the price increases. The pur-
unresolved, but economists generally agree on most fun-
pose of this hypothesis, like that of any theory, is to
damental theoretical principles—that is, about positive
help make predictions about cause and effect in the
economic analysis. For example while all economists
real world.
agree on the positive idea that people buy less as prices
Step Four: Test the Hypothesis rise, they may not agree on normative questions such
as, “is the distribution of income in the United States
In the fourth step, by comparing its predictions with
too unequal?”
evidence, we test the validity of a hypothesis. To test a
Normative statements, or value judgments, have a
hypothesis, we must focus on the variables in question,
place in a policy debate such as the proper role of gov-
while carefully controlling for other effects assumed
ernment, provided that statements of opinion are distin-
not to change. The test leads us to either (1) reject the
guished from statements of fact. In such policy debates,
hypothesis, or theory, if it predicts worse than the best
you are entitled to your own opinion, but you are not
alternative theory or (2) use the hypothesis, or theory,
entitled to your own facts.
until a better one comes along. If we reject the hypothe-
sis, we can try to go back and modify our approach in light
of the results. Please spend a moment now reviewing the 1-3d Economists Tell Stories
steps of the scientific method in Exhibit 1.2. Despite economists’ reliance on the scientific method
for developing and evaluating theories, economic analy-
1-3cNormative Versus sis is as much art as science. Formulating a question,
isolating the key variables, specifying the assumptions,
Positive proposing a theory to answer the question, and devis-
Economists usually try to explain how the economy ing a way to test the predictions all involve more than
works. Sometimes they concern themselves not with how simply an understanding of economics and the scientific
the economy does work but how it should work. Com- method. Carrying out these steps requires good intuition
pare these two statements: “The U.S. unemployment and the imagination of a storyteller. Economists explain
rate is 5.6 percent,” and “The U.S. unemployment rate their theories by telling stories about how they think the
should be lower.” The first, called a positive economic economy works. To tell a compelling story, an economist
statement, is an assertion about economic reality that can relies on case studies, anecdotes, parables, the personal
be supported or rejected by reference to the facts. Posi- experience of the listener, and supporting data. Through-
tive economics, like physics or out this book, you’ll hear stories that bring you closer to
hypothesis A theory biology, attempts to understand the ideas under consideration. These stories, such as the
about how key variables one about the Pepsi machine, breathe life into economic
relate
the world around us as it is. The
second, called a n ormative theory and help you personalize abstract ideas.
positive economic economic statement, reflects
statement A statement
that can be proved or an opinion. Moreover, an opin- Predicting Average
1-3e
ion is merely that—it cannot
disproved by reference to
facts be shown to be true or false by
Behavior
normative economic reference to the facts. Positive The goal of economic theory is to predict the impact of
statement A statement statements concern what is; economic events on economic choices and, in turn, the
that reflects an opinion, normative statements concern effect of these choices on particular markets or on the
which cannot be proved or
what, in someone’s opinion, economy as a whole. Does this mean that economists try
disproved by reference to
the facts should be. Positive statements to predict the behavior of particular consumers or pro-
need not necessarily be true, ducers? Not necessarily, because a specific individual
may behave in an unpredictable way. But the unpredict- Can we conclude that physicians cause cancer? No. To
able actions of numerous individuals tend to cancel one assume that event A caused event B simply because the
another out, so the average behavior of groups can be pre- two are associated in time is to commit the association-
dicted more accurately. For example, if the federal gov- is-causation fallacy, a common error. The fact that
ernment cuts personal income taxes, certain households one event precedes another or that the two events occur
might save the entire tax cut. On average, however, house- simultaneously does not necessarily mean that one causes
hold spending would increase. Likewise, if Burger King the other. Remember: Association is not necessarily
cuts the price of Whoppers, the manager can better pre- causation.
dict how much sales will increase than how a specific cus-
tomer coming through the door will respond. The random The Fallacy of Composition
actions of individuals tend to offset one another, so the
Perhaps you have been to a rock concert where every-
average behavior of a large group can be predicted more
one stands to get a better view. At some concerts, most
accurately than the behavior of a particular individual.
people even stand on their chairs. But even stand-
Consequently, economists tend to focus on the average,
ing on chairs does not improve your view if others do
or typical, behavior of people in groups—for example,
the same, unless you are quite tall. Likewise, arriving
as average taxpayers or average Whopper consumers—
early to buy concert tickets does not work if many
rather than on the behavior of a specific individual.
have the same idea. Earning a college degree to get
a better job does not work as well if everyone earns a
1-4 SOME PITFALLS OF FAULTY college degree. These are examples of the fallacy of
composition, which is an erroneous belief that what is
ECONOMIC ANALYSIS true for the individual, or the part, is also true for the
group, or the whole.
Economic analysis, like other forms of scientific inquiry, is
subject to common mistakes in reasoning that can lead to The Mistake of Ignoring
faulty conclusions. Here are three sources of confusion. the Secondary Effects
In many cities, public officials have imposed rent con-
The Fallacy That A
ssociation trols on apartments. The primary effect of this policy,
Is Causation the effect that policy makers focus on, is to keep rents
In the past two decades, the number of physicians spe- from rising. Over time, however, fewer new apart-
cializing in cancer treatment increased sharply. At the ments get built because renting them becomes less
same time, the incidence of some cancers increased. profitable. Moreover, existing rental units deteriorate
because owners have plenty of customers anyway.
Thus, the quantity and quality of housing may decline
as a result of what appears to be a reasonable mea-
sure to keep rents from
rising. The mistake was association-is-causation
to ignore the secondary fallacy The incorrect idea
effects, or the unintended that if two variables are associ-
ated in time, one must necessar-
consequences, of the
ily cause the other
policy. Economic actions
have secondary effects that fallacy of composition
Anna Omelchenko/Fotolia LLC
The incorrect belief that

often turn out to be more what is true for the individual,
important than the primary or part, must necessarily
effects. Secondary effects be true for the group, or
may develop more slowly the whole
and may not be immedi- secondary effects
ately obvious, but good Unintended consequences of
Standing at a concert can help you see better . . . economic actions that may
economic analysis tries to
unless everyone else stands up too! This is an develop slowly over time as
example of the fallacy of composition.
anticipate them and take people react to events
them into account.

1-5 IF ECONOMIST ARE SO SMART,
WHY AREN’T THEY RICH?
Why aren’t economists rich? Well, some are, earning over
$25,000 per appearance on the lecture circuit. Others top
Robert Nickelsberg/Alamy Stock Photo

$2 million a year as consultants and expert witnesses.3
Economists have been appointed to federal cabinet
posts, as secretaries of commerce, defense, labor, state,
and treasury, for example, and to head the U.S. Federal
Reserve System. Economics is the only social science
and the only business discipline for which the prestigious
Nobel Prize is awarded, and pronouncements by econ-
omists are reported in the media daily. A 2015 journal
article argued that “the superiority of economists” gives As more people get college degrees, the advantage
them considerable influence over economic policy.4 And it gives you in the labor market gets smaller. (Don’t
The Economist, a widely respected news weekly from worry, it’s still worth it.)
London, has argued that economic ideas have influenced
policy “to a degree that would make other social scientists
drool.”5
The economics profession thrives because its models appearance, and, yes, luck. Even so, economics is one
usually do a better job of making economic sense out of of the higher paying majors (for those with just a bach-
a confusing world than do alternative approaches. But elor’s degree). A recent study by Georgetown University
not all economists are wealthy, nor is personal wealth the found that economics and business economics were the
goal of the discipline. In a similar vein, not all doctors only two non-STEM (science, technology, engineering,
are healthy (some even smoke), not all carpenters live math) majors among the top 25 earning majors (for work-
in perfectly built homes, not all marriage counselors are ers ages 25–29).6 Exhibit 1.3 shows median annual pay for
happily married, and not all child psychologists have well- a variety of college majors both with 0–5 years experience
adjusted children. Still, those who study economics do and with 10–20 years experience (for workers with only
reap financial rewards. a bachelor’s degree). As can be seen there, those with
Earlier in the chapter, you learned that economic degrees in economics see significant growth in earnings
choice involves comparing the expected marginal ben- as their careers progress.
efit and the expected marginal cost. Surveys show that A number of world leaders majored in economics,
students go to college because they believe a college including four of the last eight U.S. presidents; former
diploma is the ticket to better jobs and higher pay. Put Prime Minister Stephen Harper of Canada; billionaire and
another way, for nearly two-thirds of U.S. high school former president of Chile, Sebastian Pinera (who earned
graduates, the expected marginal benefit of college a Ph.D. in economics from Harvard); Turkey’s first female
apparently exceeds the expected marginal cost. The cost prime minister, Tansu Ciller (who earned a Ph.D. in eco-
of college will be discussed in the next chapter; the focus nomics from the University of Connecticut); Italy’s former
here is on the benefits of college, particularly expected prime minister, Mario Monti (who earned a Ph.D. in eco-
earnings. nomics from Yale); Greece’s former prime minister, Lucas
Among college graduates, all kinds of factors affect Papademos (who earned a Ph.D. in economics from MIT);
earnings, such as general ability, effort, occupation, col- U.S. Supreme Court justices Stephen Breyer and Anthony
lege attended, college major, highest degree earned, Kennedy; and former justice Sandra Day O’Connor.
3. As reported by George Anders, “An Economist’s Courtroom Bonanza,”

Wall Street Journal, 19 March 2007.
6. The Economic Value of College Majors, Anthony P. Carnevale, Ban Cheah,
4. Marion Fourcade, Etienne Ollion, and Yann Algan, "The Superiority of
and Andrew R. Hanson. Georgetown University Center on Education and the
Economists," Journal of Economic Perspectives, 29 (Winter 2015): 89–114.
Workforce. McCourt School of Public Policy. 2015 https://cew.georgetown
5. “The Puzzling Failure of Economics,” The Economist, 23 August 1997, p. 11. .edu/cew-reports/valueofcollegemajors/
Exhibit 1.3
Median Annual Pay by College Major (with Bachelor’s Degree Only)
Computer Engineering
Electrical Engineering
Mechanical Engineering
Computer Science
Civil Engineering Nursing
Economics
Finance
Mathematics
Accounting
Chemistry
Marketing & Management
Political Science
Agriculture
Biology
History
English
Sociology
Psychology 0–5 Years' Experience
Criminal Justice 10–20 Years' Experience
Elementary Education
0 20 40 60 80 100 120
Thousands of Dollars
Sources: Median pay data for 2015 were found at https://www.payscale.com/best-colleges/degrees.asp. For a survey of
e mployment opportunities,go to the U.S. Labor Department’s Occupational Outlook Handbook at https://www.bls.gov/oco/.
Other notable economics majors include former Hewlett- whole story, and economic factors are not always the most
Packard president (and billionaire) Meg Whitman, former important. But economic considerations have important
head of Microsoft (and billionaire) Steve Ballmer, CNN and predictable effects on individual choices, and these
founder (and billionaire) Ted Turner, financial guru (and choices affect the way we live.
billionaire) Warren Buffett, Walmart founder (and bil- Yes, economics is a challenging discipline, but it is
lionaire) Sam Walton, and (non-billionaire) Scott Adams, also an exciting and rewarding one. The good news is
creator of Dilbert, the mouthless wonder. that you already know a lot about economics. To use this
knowledge, however, you must cultivate the art and sci-
ence of economic analysis. You must be able to simplify
1-6 FINAL WORD the world to formulate questions, isolate the relevant
variables, and then tell a persuasive story about how these
variables relate.
This textbook describes how economic factors affect indi- An economic relation can be expressed in words, rep-
vidual choices and how all these choices come together resented as a table of quantities, described by a mathemat-
to shape the economic system. Economics is not the ical equation, or illustrated as a graph. The appendix to this

chapter introduces graphs. You may find a detailed reading The next chapter introduces key tools of economic
of this appendix unnecessary. If you are already familiar analysis. Subsequent chapters use these tools to explore
with relations among variables, slopes, tangents, and the economic problems and to explain economic behavior
like, you can probably just browse. But if you have little that may otherwise seem puzzling. You must walk before
recent experience with graphs, you might benefit from a you can run; however, and in the next chapter, you will
more careful reading with pencil and paper in hand. take your first wobbly steps.
STUDY
TOOLS 1
READY TO STUDY? IN THE BOOK, YOU CAN:
◻ Work the problems at the end of the chapter.
◻ Rip out the chapter review card for a handy summary of the chapter and key terms.
ONLINE AT CENGAGEBRAIN.COM YOU CAN:

◻ Take notes while you read and study the chapter.
◻ Quiz yourself on key concepts.
◻ Prepare for tests with chapter flash cards as well as flash cards that you create.
◻ Watch videos to explore economics further.
CHAPTER 1 PROBLEMS
Your instructor can access the answers to these problems online at https://cengagebrain.com.
1-1 Explain the economic problem of 1-4 Identify some pitfalls

scarce resources and unlimited wants of economic analysis
1. (Definition of Economics) What determines whether or 7. (Pitfalls of Economic Analysis) Review the discussion of
not a resource is scarce? Why is the concept of scarcity pitfalls in economic thinking in this chapter. Then identify
important to the definition of economics? the fallacy, or mistake in thinking, in each of the following
statements:
1-2 Describe the forces that a. Raising taxes always increases government revenues.
shape economic choices b. Whenever there is a recession, imports decrease.
2. (Rational Self-Interest) Discuss the impact of rational self- Therefore, to stop a recession, we should increase
interest on each of the following decisions: imports.
a. Whether to attend college full time or enter the work- c. Raising the tariff on imported steel helps the U.S. steel
force full time industry. Therefore, the entire economy is helped.
b. Whether to buy a new textbook or a used one d. Gold sells for about $1,200 per ounce. Therefore, the
c. Whether to attend a local college or an out-of-town U.S. government could sell all the gold in Fort Knox at
college $1,200 per ounce to reduce the national debt.
3. (Rational Self-Interest) If behavior is governed by rational 8. (Association Versus Causation) Suppose I observe that
self-interest, why do people make charitable contribu- communities with lots of doctors tend to have relatively
tions of time and money? high rates of illness. I conclude that doctors cause illness.
4. (Marginal Analysis) The owner of a small pizzeria is decid- What’s wrong with this reasoning?
ing whether to increase the radius of delivery area by one
mile. What considerations must be taken into account if
1-5 Describe several reasons
such a decision is to increase profitability? to study economics
5. (Time and Information) It is often costly to obtain the 9. (Studying Economics) According to the text, economics
information necessary to make good decisions. yet your majors on average make more money than most other
own interests can be best served by rationally weigh- majors and have more job opportunities. Are these the
ing all options available to you. This requires informed primary motivations one might have for studying econom-
decision making. does this mean that making uninformed ics? What are your motivations for studying economics?
decisions is irrational? How do you determine how much
information is the right amount?
1-3 Explain the relationship between
economic theory and economic reality
6. (Role of Theory) What good is economic theory if it can’t
predict the behavior of a specific individual?

APPENDIX
A1-1 UNDERSTANDING GRAPHS Exhibit A-1

Basics of a Graph
Take out a pencil and a blank piece of paper. Go ahead. Any point on a graph represents a combination of values of
Put a point in the middle of the paper. This is your point two variables. Here, point a represents the combination of
5 units of variable x (measured on the horizontal axis) and
of departure, called the origin. With your pencil at the
15 units of variable y (measured on the vertical axis). Point b
origin, draw a straight line off to the right. This line is represents 10 units of x and 5 units of y.
called the horizontal axis. The value of the variable x
measured along the horizontal axis increases as you move y
to the right of the origin. Now mark off this line from 0
to 20, in increments of 5 units each. Returning to the 20
origin, draw another line, this one straight north. This
line is called the vertical axis. The value of the variable
Vertical axis
15 a
y measured along the vertical axis increases as you move
north of the origin. Mark off this line from 0 to 20, in
increments of 5 units each. 10
Within the space framed by the two axes, you can
plot possible combinations of the variables measured 5 b
along each axis. Each point identifies a value measured
along the horizontal, or x, axis and a value measured along
0
the vertical, or y, axis. For example, place point a in your
Origin 5 10 15 20 x
graph to reflect the combination where x equals 5 units
Horizontal axis
and y equals 15 units. Likewise, place point b in your
graph to reflect 10 units of x and 5 units of y. Now com-
pare your results with points shown in Exhibit A-1.
A graph is a picture showing how variables relate,
and a picture can be worth a thousand words. Take a look the year, the price of a product
origin on a graph
at Exhibit A-2, which shows the U.S. annual unemploy- and the quantity demanded, or depicting two-dimensional
ment rate since 1900. The year is measured along the the price of production and the space, the zero point
horizontal axis and the unemployment rate is measured quantity supplied. Because we
horizontal axis line on
as a percentage along the vertical axis. Exhibit A-2 is a focus on just two variables at a graph that begins at the
time-series graph, which shows the value of a variable, in a time, we usually assume that origin and goes to the right
this case the percent of the labor force unemployed, over other relevant variables remain and left; sometimes called
time. If you had to describe the information presented in constant. the x axis
Exhibit A-2, the explanation could take many words. The One variable often depends vertical axis line on
picture shows not only how one year compares to the next on another. The time it takes a graph that begins at the
origin and goes up and
but also how one decade compares to another and how you to drive home depends on
down; sometimes called
the unemployment rate trends over time. The sharply your average speed. Your weight the y axis
higher unemployment rate during the Great Depression depends on how much you eat.
graph a picture showing
of the 1930s is unmistakable. Graphs convey information The amount of Pepsi you buy how variables relate in two-
in a compact and efficient way. depends on the price. A func- dimensional space; one vari-
This appendix shows how graphs express a variety tional relation exists between able is measured along the
of possible relations among variables. Most graphs of two variables when the value horizontal axis and the other
along the vertical axis
interest in this book reflect the relationship between two of one variable depends on the
economic variables, such as the unemployment rate and value of another variable.
Exhibit A-2
U.S. Unemployment Rate Since 1900
A time-series graph depicts the behavior of some economic variable over time. Shown here are U.S. unemployment rates since 1900.
Unemployment rate (percent)
25
20
15
10
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Year
Source: Historical Statistics of the United States, 1970; and Economic Report of the President, January 2017.
The value of the dependent variable depends on

the value of the independent variable. The task of Exhibit A-3
the economist is to isolate economic relations and deter- Schedule Relating Distance Traveled to Hours
mine the direction of causality, if any. Recall that one of Driven
the pitfalls of economic thinking is the erroneous belief
that association is causation. We cannot conclude that, Hours Driven per Day Distance Traveled per Day (miles)
simply because two events relate in time, one causes the a 1 50
other. There may be no relation between the two events. b 2 100
c 3 150
A1-1a Drawing Graphs d 4 200
e 5 250
Let’s begin with a simple relation. Suppose you are plan-
ning to drive across the country and want to figure out how
far you will travel each day. You plan to average 50 miles
per hour. Possible combinations of driving time and dis-
tance traveled per day appear in Exhibit A-3. One column independent variable. Combinations of hours driven and
lists the hours driven per distance traveled are shown as a, b, c, d, and e. Each com-
dependent variable day, and the next column bination is represented by a point in Exhibit A-4. For exam-
a variable whose value lists the number of miles ple, point a shows that if you drive for 1 hour, you travel
depends on that of the traveled per day, assum- 50 miles. Point b indicates that if you drive for 2 hours,
independent variable
ing an average speed of 50 you travel 100 miles. By connecting the points, or possible
independent miles per hour. The distance combinations, we create a line running upward and to the
variable a variable traveled, the dependent vari- right. This makes sense because, the longer you drive, the
whose value determines that
of the dependent variable able, depends on the num- farther you travel. Assumed constant along this line is your
ber of hours driven, the average speed of 50 miles per hour.

Each of the four panels in Exhibit A-5 indicates a
Exhibit A-4 vertical change, given a 10-unit increase in the horizontal
Graph Relating Distance Traveled to Hours Driven variable. In panel (a), the vertical distance increases by
Points a through e depict different combinations of hours 5 units when the horizontal distance increases by 10 units.
driven per day and the corresponding distances traveled. The slope of the line is therefore 5/10, or 0.5. Notice that
Connecting these points creates a graph.
the slope in this case is a positive number because the
relation between the two variables is positive, or direct.
Distance traveled per day (miles)
This slope indicates that for every 1-unit increase in the

250 horizontal variable, the vertical variable increases by
e
0.5 units. The slope, incidentally, does not imply causal-
200 d ity; the increase in the horizontal variable does not nec-
essarily cause the increase in the vertical variable. The
150 c slope simply measures the relation between an increase
in the horizontal variable and the associated change in
100 b the vertical variable.
In panel (b) of Exhibit A-5, the vertical distance
50 a
declines by 7 units when the horizontal distance increases
by 10 units, so the slope equals –7/10, or –0.7. The slope
in this case is a negative number because the two vari-
0 1 2 3 4 5
Hours driven per day ables have a negative, or inverse, relation. In panel (c),
the vertical variable remains unchanged as the horizontal
variable increases by 10, so the slope equals 0/10, or 0.
Types of relations between variables include the These two variables are not related. Finally, in panel (d),
following: the vertical variable can take on any value, although the
horizontal variable remains unchanged. Again, the two
1. As one variable increases, the other increases—as variables are not related. In this case, any change in the
in Exhibit A-4; this is called a positive, or direct, vertical measure, for example, a 10-unit change, is divided
relation between the variables. by 0, because the horizontal value does not change. Any
2. As one variable increases, the other decreases; this change divided by 0 is mathematically undefined, but as
is called a negative, or inverse, relation. the line tilts toward vertical, its slope gets incredibly large.
3. As one variable increases, the other remains For practical purposes, we will assume that the slope of
unchanged; the two variables are said to be inde- this line is not undefined but infinitely large.
pendent, or unrelated.
A1-1cThe Slope, Units
One of the advantages of graphs is that they easily convey
the relation between variables. We do not need to exam-
of Measurement,
ine the particular combinations of numbers; we need only and Marginal positive relation (direct
relation) occurs when two
focus on the shape of the curve. Analysis variables increase or decrease
together; the two variables
A1-1b The Slope of a Straight The mathematical value of the move in the same direction
slope depends on the units
Line measured on the graph. For negative relation
example, suppose copper tubing inverse (relation) occurs
A more precise way to describe the shape of a curve is when two variables move in
to measure its slope. The slope of a line indicates how costs $1 a foot. Graphs depict- opposite directions; when one
much the vertical variable changes for a given increase ing the relation between total increases, the other decreases
in the horizontal variable. Specifically, the slope between cost and quantity purchased are slope of a line a measure
any two points along any straight line is the vertical shown in Exhibit A-6. In panel of how much the vertical
change between these two points divided by the hori- (a), the total cost increases by $1 variable changes for a given
zontal increase, or for each 1-foot increase in the increase in the horizontal
variable; the vertical change
amount of tubing purchased.
between two points divided
Change in the vertical distance Thus, the slope equals 1/1, or 1.
Slope 5 by the horizontal increase
Increase in the horizontal distance If the cost per foot remains the
Exhibit A-5
Alternative Slopes for Straight Lines
The slope of a line indicates how much the vertically measured variable changes for a given increase in the variable measured
along the horizontal axis. Panel (a) shows a positive relation between two variables; the slope is 0.5, a positive number. Panel
(b) depicts a negative, or inverse, relation. When the x variable increases, the y variable decreases; the slope is 20.7, a nega-
tive number. Panels (c) and (d) represent situations in which two variables are unrelated. In panel (c), the y variable always
takes on the same value; the slope is 0. In panel (d), the x variable always takes on the same value; the slope is mathematically
undefined but we simplify by assuming the slope is infinite.
(a) Positive relation (b) Negative relation

y y
20 5 20 7
Slope = 10 = 0.5 Slope = – = –0.7
10
15
5
10 10
10
–7
3
10
0 10 20 x 0 10 20 x
(c) No relation: zero slope (d) No relation: assumed infinite slope

y y
10
20 20 Slope = 0 = `
0
Slope = 10 = 0 10
10 10
10
0 10 20 x 0 10 x
same but units are measured not in feet but in yards, output, measured along the horizontal axis. For example,
the relation between total cost and quantity purchased is in panel (a) of Exhibit A-6, the marginal cost of another
as depicted in panel (b). Now total cost increases by $3 foot of copper tubing is $1, which also equals the slope
for each 1-yard increase in output, so the slope equals of the line. In panel (b), the marginal cost of another
3/1, or 3. Because different units are used to measure yard of tubing is $3, which again is the slope of that line.
the copper tubing, the two panels reflect different slopes, Because of its applicability to marginal analysis, the slope
even though the cost is $1 per foot in each panel. Keep has special relevance in economics.
in mind that the slope depends in part on the units of
measurement. A1-1d The Slopes of Curved
Economic analysis usually involves marginal analy-
sis, such as the marginal cost of one more unit of output.
Lines
The slope is a convenient device for measuring marginal The slope of a straight line is the same everywhere along
effects because it reflects the change in total cost, mea- the line, but the slope of a curved line differs along the
sured along the vertical axis, for each 1-unit change in curve, as shown in Exhibit A-7. To find the slope of a
Exhibit A-6
Slope Depends on the Unit of Measure
The value of the slope depends on the units of measure. In panel (a), output is measured in feet of copper
tubing; in panel (b), output is measured in yards. Although the cost is $1 per foot in each panel, the slope is
different in the two panels because copper tubing is measured using different units.
(a) Measured in feet (b) Measured in yards

Total Total
cost cost
$6 $6
1
5
3
1
1 3
Slope = = 1 3 Slope = =3
1 1
1
0 5 6 0 1 2
Feet of copper tubing Yards of copper tubing
increases from 0 to 10, the vertical value drops along A

Exhibit A-7 from 40 to 0. Thus, the vertical change divided by the
Slopes at Different Points on a Curved Line horizontal change equals –40/10, or –4, which is the slope
The slope of a curved line varies from point to point. At of the curve at point a. This slope is negative because
a given point, such as a or b, the slope of the curve is the vertical value decreases as the horizontal value
equal to the slope of the straight line that is tangent to
increases. Line B, a line tangent to the curve at point b,
the curve at the point.
has the slope –10/30, or –0.33. As you can see, the curve
y depicted in Exhibit A-7 gets flatter as the horizontal vari-
able increases, so the value of its slope approaches zero.
40 A Other curves, of course, will reflect different slopes
as well as different changes in the slope along the curve.
Downward-sloping curves have negative slopes, and
30
upward-sloping curves, positive slopes. Sometimes
curves, such as those in Exhibit A-8, are more complex,
20 a
having both positive and negative ranges, depending on
the horizontal value. In the hill-shaped curve, for small
10 B
values of x, there is a positive relation between x and y, so
b
the slope is positive. As the value of x increases, however,
0 the slope declines and eventually becomes negative. We
10 20 30 40 x can divide the curve into two segments: (1) the segment
between the origin and point a, where the slope is posi-
tive; and (2) the segment of the curve to the right of
point a, where the slope is negative. The slope of the
curve at point a is 0. The U-shaped curve in Exhibit A-8
curved line at a particular point, draw a straight line that represents the opposite
just touches the curve at that point but does not cut or relation: x and y are nega- tangent a straight line that
cross the curve. Such a line is called a tangent to the tively related until point b is touches a curve at a point but
reached; thereafter, they are does not cut or cross the curve;
curve at that point. The slope of the tangent gives the
used to measure the slope of a
slope of the curve at that point. Look at line A, which is positively related. The slope curve at a point
tangent to the curve at point a. As the horizontal value equals 0 at point b.
Exhibit A-8 Exhibit A-9
Curves with Both Positive and Negative Slopes Shift of Line Relating Distance Traveled
Some curves have both positive and negative slopes. The to Hours Driven
hill-shaped curve (in red) has a positive slope to the left of Line T appeared originally in Exhibit A-5 to show the rela-
point a, a slope of 0 at point a, and a negative slope to the tion between hours driven and distance traveled per day,
right of that point. The U-shaped curve (in blue) starts off assuming an average speed of 50 miles per hour. If the
with a negative slope, has a slope of 0 at point b, and has a speed averages only 40 miles per hour, the entire relation
positive slope to the right of that point. shifts to the right to T9, indicating that any given distance
traveled requires more driving time. For example, 200 miles
y traveled takes 4 hours at 50 miles per hour but 5 hours at
40 miles per hour. This figure shows how a change in
assumptions, in this case, the average speed, can shift the
a entire relationship between two variables.
Distance traveled per day (miles)

250 T’
b
d
200 f
0 x 150
100
A1-1e Line Shifts 50
Let’s go back to the example of your cross-country trip,

where we were trying to determine how many miles you
0 1 2 3 4 5
would travel per day. Recall that we measured hours driven
Hours driven per day
per day on the horizontal axis and miles traveled per day on
the vertical axis, assuming an average speed of 50 miles per
hour. That same relation is shown as line T in Exhibit A-8.
What happens if the average speed is 40 miles per hour?
The entire relation between hours driven and distance trav- 40 miles per hour (as shown by point f on curve T9). Thus,
eled would change, as shown by the shift to the right of line a change in the assumption about average speed changes
T to T9. With a slower average speed, any distance traveled the relationship between the two variables observed. This
per day now requires more driving time. For example, 200 changed relationship is expressed by a shift of the line that
miles traveled requires 4 hours of driving when the average shows how the two variables relate.
speed is 50 miles per hour (as shown by point d on curve That ends our once-over of graphs. Return to this
T), but 200 miles takes 5 hours when your speed averages appendix when you need a review.

2 Economic Tools and
Economic Systems
Gary Bryan/Stone1/Getty Images
LEARNING OUTCOMES After finishing this chapter

After studying this chapter, you will be able to…
go to PAGE 37 for STUDY TOOLS
2-1 Describe the relationship between choice and opportunity cost Topics discussed in Chapter 2 include
• Opportunity cost
2-2 Explain how comparative advantage, specialization, and exchange affect economic outcomes
(output) • Comparative advantage
• Specialization
2-3 Outline how economies function as production systems • Division of labor
• Production possibilities frontier
2-4 Describe different economic systems and the decision-making rules that define them
• Economic systems
• Three economic questions
• Capitalism, command systems, and in between
▸▸ Why are you reading this book right now rather ▸▸ Why is there no point crying over spilled milk?
Q uthan
e sdoing
t i osomething
ns else? ▸▸ Why does common ownership often lead to
▸▸ What is college costing you? common neglect?
▸▸ Why will you eventually major in one subject rather ▸▸ These and other questions are addressed in this
than continue to take courses in various subjects? chapter, which introduces some tools of economic
▸▸ Why is fast food so fast? analysis—some tools of the trade.
C
hapter 1 introduced the idea that scarcity that different economies must answer—questions
forces us to make choices, but the chap- about what goods and services to produce, how to
ter said little about how to make economic produce them, and for whom to produce them.
choices. This chapter develops a framework for
evaluating economic alternatives. First, we con-
“Why is there
sider the cost involved in selecting one alternative
over others. Next, we develop tools to explore the
no point crying over
choices available to individuals and to the econ-
omy as a whole. Finally, we examine the questions
spilled milk?
”
2-1 CHOICE AND OPPORTUNITY COST other possible alternative. You are reading this chapter
right now because you have nothing better to do. In fact,
you are attending college for the same reason: College
Think about a choice you just made: the decision to begin
appears more attractive than your best alternative.
reading this chapter right now rather than use your time to
study for another course, play sports, watch TV, play video
games, go online, get some sleep, hang with friends, or do 2-1b Opportunity Cost
something else. Suppose it’s late and your best alternative Is Subjective
to reading right now is getting some sleep. The cost of
reading is passing up the opportunity of sleep. Because of Like beauty, opportunity cost is in the eye of the beholder.
scarcity, whenever you make a choice, you must pass up It is subjective. Only the individual making the choice can
another opportunity; you must incur an opportunity cost. identify the most attractive alternative. But the chooser
seldom knows the actual value of what was passed up
because that alternative is “the road not taken.” If you
2-1a Opportunity Cost give up an evening of pizza and conversation with friends
What do we mean when we talk about the cost of some- to work on a research paper, you will never know exactly
thing? Isn’t it what we must give up—must forgo—to get what you gave up. You know only what you expected. Evi-
that thing? The opportunity cost of the chosen item or dently, you expected the benefit of working on that paper
activity is the value of the best alternative that is forgone. to exceed the benefit of the best alternative. (Incidentally,
You can think of opportunity cost as the opportunity lost. focusing on the best alternative forgone makes all other
Sometimes opportunity cost can be measured in terms of alternatives irrelevant.)
money, although, as we shall see, money is usually only
part of opportunity cost.
Calculating Opportunity Cost
How many times have you heard people say they Requires Time and Information
did something because they “had nothing better to do”? Economists assume that
They actually mean they had nothing else going on. Yet, people rationally choose the opportunity cost The
value of the best alternative for-
according to the idea of opportunity cost, people always most valued alternative. This
gone when an item or activity
do what they do because they have nothing better to do. does not mean you exhaus- is chosen
The choice selected seems, at the time, preferable to any tively assess the value of all
CHAPTER 2: Economic Tools and Economic Systems 25

possibilities. You assess alternatives as long as the expected
marginal benefit of gathering more information about Goods or (Sunday) Services?
your options exceeds the expected marginal cost (even if Even religious practices are subject to opportunity cost. For
you are not aware of making such conscious calculations). example, about half the U.S. population attends religious services
In other words, you do the best you can for yourself. at least once a month. In some states, so-called blue laws prohibit
retail activity on Sunday. Some states have repealed these laws in
Because learning about alternatives is costly and time recent years, thus raising the opportunity cost of church attendance.
consuming, some choices are based on limited or even wrong Researchers have found that when a state repeals its blue laws, reli-
information. Indeed, some choices may turn out badly (you gious attendance declines, as do church donations. These results do
not seem to be linked to any decline in religiosity before the repeal.
went for a picnic but it rained; the movie that cost $10 stunk;
your new shoes pinched; your new exercise equipment gets
no exercise; the stock you bought tanked). Regret about lost
opportunities is captured in the common expression “coulda,
woulda, shoulda.” At the time you made the selection, how-
ever, you believed you were making the best use of all your
scarce resources, including the time required to gather and
Bob Daemmrich/Alamy Stock Photo

evaluate information about your choices.
Time: The Ultimate Constraint

The Sultan of Brunei is among the richest people on
Earth, worth billions based on huge oil revenues that
flow into his tiny country. He and his royal family (which
has ruled since 1405) live in a palace with 1,788 rooms,
Source: Jonathan Gruber and Daniel Hungerman, “The Church vs. the Mall:
including 257 bathrooms and a throne room the size of a What Happens When Religion Faces Increased Secular Competition?”
football field. The family owns hundreds of cars, includ- Quarterly Journal of Economics, 123 (May 2008): 831–862.
ing dozens of Rolls-Royces; he can drive any of these or

pilot one of his seven planes, including the 747 with gold-
plated furniture. Supported by such wealth, the Sultan
would appear to have overcome the economic problem alternatives—perhaps ahead of reorganizing your closet
of scarcity. Yet, though he can buy just about anything but behind doing your laundry.
he wants, he lacks the time to enjoy all his stuff. If he Opportunity cost is subjective, but in some cases,
pursues one activity, he cannot at the same time do some- money paid for goods and services is a reasonable approx-
thing else. Each activity involves an opportunity cost. imation. For example, the opportunity cost of the new
Consequently, the Sultan must choose from among the smartphone you bought is the benefit from spending that
competing uses of his scarcest resource, time. Although $300 on the best forgone alternative. The money mea-
your alternatives are less exotic, you too face a time con- sure may leave out some important elements, however,
straint, especially as the college term winds down. particularly the value of the time involved. For example,
watching the latest hit movie costs you not only the $10
Opportunity Cost Varies With
admission price but also the time needed to get there,
Circumstance watch the movie, and return home.
Opportunity cost depends on your alternatives. This is
why you are more likely to study on a Tuesday night than
on a Saturday night. The opportunity cost of studying
2-1c Sunk Cost and Choice
is lower on a Tuesday night, because your alternatives Suppose you have just finished grocery shopping and are
are less attractive than on a Saturday night when more is wheeling your cart toward the checkout counters. How do
going on. Suppose you go to a movie on Saturday night. you decide which line to join? Easy. You pick the one with
Your opportunity cost is the the shortest expected wait. Suppose that line has barely
sunk cost A cost that has value of your best alternative moved for 10 minutes, when you notice that a cashier has
already been incurred, can- forgone, which might be attend- opened a new one and invites you to check out. Do you
not be recovered, and thus
ing a college game. For some of switch to the open cashier, or do you think, “Since I’ve
is irrelevant for present and
future economic decisions you, studying on Saturday night already spent 10 minutes in this line, I’m staying put”?
may rank well down the list of The 10 minutes you waited represents a sunk cost,
which is a cost that has already been incurred and can-
not be recovered, regardless of what you do next. You
should ignore sunk costs in making economic choices.
Hence, you should switch lines. Economic decision mak-
YAKOBCHUK VIACHESL AV/Shutterstock.com

ers should consider only those costs that are affected by
the choice. Sunk costs have already been incurred and are
not affected by the choice, so they are irrelevant. Like-
wise, you should walk out on a bad movie, even if you
spent $10 to get in. Your $10 is gone, and sitting through
that stinker only makes you worse off. The irrelevance
of sunk costs is underscored by proverbs such as “Don’t
throw good money after bad,” “Let bygones be bygones,”
“That’s water over the dam,” and “There’s no point crying
over spilled milk.” The milk has already spilled, so what- When deciding how to divide up tasks, compara-
ever you do now cannot change that. Or, as Shakespeare’s tive advantage is more important than absolute
advantage.
Lady Macbeth put it, “Things without all remedy should
be without regard: what’s done is done.” In other words,
forget about it.
Now that you have some idea about opportunity cost, 2-2aThe Law of
let’s see how it helps solve the economic problem. Comparative Advantage
Before long, you each realize that total output would
increase if you did all the typing and your roommate did all
2-2 COMPARATIVE ADVANTAGE, the ironing. In the hour available for these tasks, you type
SPECIALIZATION, AND both papers and your roommate irons 12 shirts. As a result
of specialization, total output increases by nine shirts! You
EXCHANGE strike a deal to exchange your typing for your roommate’s
ironing, so you each end up with a typed paper and six
ironed shirts. Thus, each of you is better off as a result of
Suppose you live in a dormitory (and also either go to col-
specialization and exchange. By specializing in the task that
lege in the 1950s or are a very dedicated hipster). You and
you each do better, you rely on the law of comparative
your roommate have such tight schedules that you each
advantage, which states that the individual with the lower
can spare only about an hour a week for mundane tasks
opportunity cost of producing a particular output should
like ironing shirts and typing papers (granted, in reality
specialize in that output. You face a lower opportunity cost
you may not iron shirts or type papers, but this example
of typing than does your roommate, because in the time it
will help you understand some important principles).
takes to type a paper, you could iron 3 shirts whereas your
Each of you must turn in a typed three-page paper every
roommate could iron 12 shirts. Moreover, if you face a
week, and you each prefer ironed shirts when you have
lower opportunity cost of typing, your roommate must face
the time. Let’s say it takes you a half hour to type a hand-
a lower opportunity cost of ironing (try working that out).
written paper. Your roommate is from the hunt-and-peck
school and takes about an hour. But your roommate is a
talented ironer and can iron a shirt in 5 minutes flat (or 2-2bAbsolute Advantage
should that be, iron it flat in 5 minutes?). You take twice Versus Comparative
as long, or 10 minutes, to iron a shirt.
During the hour set aside each week for typing and
Advantage
ironing, typing takes priority. If you each do your own The gains from specializa-
typing and ironing, you type your paper in a half hour tion and exchange so far are law of comparative
and iron three shirts in the remaining half hour. Your obvious. A more interesting advantage The individual,
roommate spends the entire hour typing the paper, leav- case arises if you are faster firm, region, or country with the
lowest opportunity cost of pro-
ing no time for ironing. Thus, if you each do your own at both tasks. Suppose the
ducing a particular good should
tasks, the combined output is two typed papers and three example changes only in specialize in that good
ironed shirts. one respect: Your roommate

takes 12 minutes to iron a shirt compared with your Comparative advantage is the better guide to who should
10 minutes. You now have an absolute advantage in both do what.
tasks, meaning each task takes you less time than it does The law of comparative advantage applies not only
your roommate. More generally, having an absolute to individuals but also to firms, regions of a country, and
advantage means making something using fewer entire nations. Individuals, firms, regions, or countries
resources than other producers require. with the lowest opportunity cost of producing a particular
Does your absolute advantage in both activities mean good should specialize in producing that good. Because of
specialization is no longer a good idea? Recall that the law such factors as climate, workforce skills, natural resources,
of comparative advantage states that the individual with and capital stock, certain parts of the country and certain
the lower opportunity cost of producing a particular good parts of the world have a comparative advantage in pro-
should specialize in that good. You still take 30 minutes to ducing particular goods. From Washington State apples
type a paper and 10 minutes to iron a shirt, so your oppor- to Florida oranges, from software in India to hardware in
tunity cost of typing the paper remains at three ironed Taiwan—resources are allocated most efficiently across
shirts. Your roommate takes an hour to type a paper and the country and around the world when production and
12 minutes to iron a shirt, so your roommate could iron trade conform to the law of comparative advantage.
five shirts in the time it takes to type a paper. Because
your opportunity cost of typing is lower than your room-
mate’s, you still have a comparative advantage in typing. 2-2cSpecialization
Consequently, your roommate must have a comparative
advantage in ironing (again, try working this out to your
and Exchange
satisfaction). Therefore, you should do all the typing and In the previous example, you and your roommate special-
your roommate, all the ironing. Although you have an ized and then exchanged output. No money was involved.
absolute advantage in both tasks, your comparative In other words, you engaged in barter, where products
advantage calls for specializing in the task for which are traded directly for other products. Barter works best
you have the lower opportunity cost—in this case, typing. in simple economies with little specialization and few
If neither of you specialized, you could type one traded goods. But for economies with greater specializa-
paper and iron three shirts. Your roommate could still tion, money facilitates exchange. Money—coins, bills,
type just the one paper. Your combined checks, and debit cards—is a medium
output would be two papers and three of exchange because it is the one thing
shirts. If you each specialized accord- that everyone accepts in return for
ing to comparative advantage, in an
“The degree of special- goods and services.
hour you could type both papers and ization is limited by the Because of specialization and
your roommate could iron five shirts. comparative advantage, most people
Thus, specialization increases total out-
extent of the market.” consume little of what they produce
put by two ironed shirts. Even though and produce little of what they con-
you are better at both tasks than your sume. Each individual specializes,
roommate, you are comparatively better at typing. Put then exchanges that product for money, which in turn is
another way, your roommate, although worse at both exchanged for other products. Did you make anything you
tasks, is not quite as bad at iron- are wearing? Probably not. Think about the degree of spe-
absolute advantage ing as at typing. cialization that went into your cotton shirt. A farmer in a
The ability to make some- Don’t think that this is just warm climate grew the cotton and sold it to someone who
thing using fewer resources common sense. Common sense spun it into thread, who sold it to someone who wove it into
than other producers use
would lead you to do your own fabric, who sold it to someone who sewed the shirt, who
comparative advan- ironing and typing because you sold it to a wholesaler, who sold it to a retailer, who sold it
tage The ability to make are better at both. Absolute to you. Many specialists in the chain of production created
something at a lower
opportunity cost than other
advantage focuses on who uses that shirt. Exhibit 2.1 traces these steps. Specialization and
producers face the fewest resources, but com- exchange create more interdependence in an economy.
parative advantage focuses on Evidence of specialization is all around us. Shops
barter The direct
exchange of one product what else those resources could at the mall specialize in products ranging from luggage
for another without using produce—that is, on the oppor- to lingerie, and restaurants range from subs to sushi.
money tunity cost of those resources. Without moving a muscle, you can observe the division
one you could make yourself? Why is
Exhibit 2.1 fast food so fast? McDonald’s takes
Specialization in the Production of Cotton Shirts advantage of the gains resulting from
the division of labor. Each worker,
rather than preparing an entire meal,
specializes in separate tasks. This divi-
sion of labor allows the group to pro-
duce much more.
How is this increase in produc-
tivity possible? First, the manager
can assign tasks according to indi-
vidual preferences and abilities—that
is, according to the law of compara-
tive advantage. The worker with the
friendly smile and pleasant personality
can handle the customers up front; the
one with the strong back but few social
graces can handle the heavy lifting out
back. Second, a worker who performs
the same task again and again gets better at
of labor within a single industry by watching the cred- it (experience is a good teacher). The worker filling orders
its roll at the end of a movie. The credits list scores of at the drive-through, for example, learns to deal with spe-
specialists—from gaffer (lighting electrician) to assistant cial problems that arise. As another example, consider the
location scout. The production of movies and TV shows experience gained by someone screening bags at airport
often requires hundreds of specialists. security. Experience helps the screener distinguish the
Some specialties may seem odd. For example, harmful from the harmless. Third, specialization means
professional mourners in Taiwan are hired by grieving no time is lost moving from one task to another. Finally,
families to scream, wail, and otherwise demonstrate the and perhaps most importantly, the specialization of
deep grief befitting a proper funeral. The sharp degree labor allows for the introduction of more sophisticated
of specialization is perhaps most obvious online, where production techniques—techniques that would not make
the pool of potential customers is so vast that individual sense on a smaller scale. For example, McDonald’s large
sites become finely focused. For example, you can find shake machine would be impractical in the home. Spe-
sites specializing in musical bowls, tongue studs, toe cialized machines make each worker more productive.
rings, brass knuckles, mouth harps, ferret toys, and cat To summarize: The specialization of labor (a) takes
bandanas—just to name a few of the hundreds of thou- advantage of individual preferences and natural abilities,
sands of specialty sites. You won’t find such precise spe- (b) allows workers to develop more experience at a par-
cialization at the mall. Adam Smith (1723–1790), who ticular task, (c) reduces the need to shift among different
is considered the father of economics, said the degree tasks, and (d) permits the introduction of labor-saving
of specialization is limited by the extent of the market. machinery. Specialization and the division of labor occur
Online sellers draw on the broadest customer base in the not only among individuals but also among firms, regions,
world to find a market niche. and, indeed, entire countries. The cotton shirt mentioned
earlier might involve growing cotton in one country, turn-
ing it into cloth in another, making the shirt in a third, and
2-2dDivision of Labor and selling it in a fourth.
We should also acknowl-
Gains from Specialization edge the downside of special- division of labor Break-
ing down the production of a
Picture a visit to McDonald’s: “Let’s see, I’ll have a Big ization. Doing the same thing good into separate tasks
Mac, an order of fries, and a chocolate shake.” In minutes all day can become tedious.
your order is ready. It would take you much longer to make Consider, for example, the specialization of labor
Focusing work effort on a par-
a homemade version of this meal. Why is the McDonald’s assembly line worker whose ticular product or a single task
meal faster, cheaper, and—for some people—tastier than sole task is to tighten a

kinds of ways to produce millions of different goods and
services. This section steps back from the immense com-
plexity of the real economy to develop another simple
model, which explores the economy’s production options.
2-3a Efficiency and the

Production Possibilities
Frontier or PPF
© istockphoto.com/EllenMoran
To get an idea of how well the economy works, you

need some perspective; you need a place to stand. Let’s
develop a model to get some idea of how much an econ-
omy can produce with the resources available. What are
the economy’s production capabilities? Here are the
model’s assumptions:
Division of labor puts the “fast” in “fast food.” 1. To simplify matters, output is limited to just two
broad classes of products: consumer goods (which
are purchased by households for consumption) and
capital goods (which are used in the production of
particular bolt. Such a monotonous job could drive other goods). However, any two goods can be used
that worker bonkers or lead to repetitive motion injury. for this exercise. If you like, replace “consumer
Thus, the gains from dividing production into individual goods” with pizza and “capital goods” with robots.
tasks must be weighed against any problems caused by 2. The focus is on production during a given period—
assigning workers to repetitive, tedious, and potentially in this case, a year.
harmful jobs. Fortunately, today many routine tasks, par-
3. The economy’s resources are fixed in both quantity
ticularly on assembly lines, can be turned over to robots.
and quality during that period.
4. Society’s knowledge about how these resources
combine to produce output—that is, the available
2-3 THE ECONOMY’S PRODUCTION technology and know-how—does not change during
POSSIBILITIES the year.
5. Also assumed fixed during the period are the “rules
of the game” that facilitate production and ex-
The focus, up to this point, has been on how individuals
change. These include such things as the legal sys-
choose to use their scarce resources to satisfy their unlim-
tem, property rights, tax laws, patent laws, and the
ited wants or, more specifically,
manners, customs, and conventions of the market.
production possibili- how they specialize based on
ties frontier (PPF) A
comparative advantage. This The point of these simplifying assumptions is to freeze in
curve showing alternative
combinations of goods emphasis on the individual time the economy’s resources, technology and knowhow,
that can be produced when has been appropriate because and rules of the game so we can focus on the economy’s
available resources are used the economy is shaped by the production options. Otherwise, the production possibili-
efficiently; a boundary line
choices of individual decision ties of the economy would be a moving target.
between inefficient and
unattainable combinations makers, whether they are con- Given the resources, technology and know-how, and
sumers, producers, or public rules of the game available in the economy, the production
efficiency The condition officials. Just as resources are possibilities frontier, or PPF, identifies possible combina-
that exists when there is no
way resources can be real- scarce for the individual, they tions of the two types of goods that can be produced when
located to increase the pro- are also scarce for the economy available resources are employed efficiently. Resources are
duction of one good without as a whole (no fallacy of com- employed efficiently when there is no change that could
decreasing the production
position here). An economy has increase the production of one good without decreasing the
of another; getting the most
from available resources millions of different resources production of the other good. E fficiency involves getting
that can be combined in all the most from available resources.
point along the PPF between C and E, such as
Exhibit 2.2 D, yields both more consumer goods and more
The Economy’s Production Possibilities Frontier capital goods than I. Hence, combination I is
If the economy uses its available resources and its technology and inefficient. By using resources more efficiently,
know-how efficiently to produce consumer goods and capital goods, the economy can produce more of at least one
that economy is on its production possibilities frontier, AF. The PPF
is bowed out to reflect the law of increasing opportunity cost; the good without reducing the production of the
economy must sacrifice more and more units of consumer goods to other good. Points outside the PPF, such as U in
produce each additional increment of capital goods. Note that more Exhibit 2.2, identify unattainable combinations,
consumer goods must be given up in moving from E to F than in mov-
ing from A to B, although in each case the gain in capital goods is 10
given the availability of resources, technology
million units. Points inside the PPF, such as I, represent inefficient use and know-how, and rules of the game. Thus, the
of resources. Points outside the PPF, such as U, represent unattainable PPF not only shows efficient combinations of pro-
combinations.
duction but also serves as the boundary between
inefficient combinations inside the frontier and
unattainable combinations outside the frontier.
Consumer goods (millions of units per year)
50
48
A
B 2-3c The Shape
43 C
U
of the PPF
40
Unattainable
Any movement along the PPF involves producing
34 D less of one good to produce more of the other.
30 Movements down along the curve indicate that
Inefficient
the opportunity cost of more capital goods is fewer
I
20 E consumer goods. For example, moving from point
A to point B increases capital production from
10 none to 10 million units but reduces consumer
units from 50 million to 48 million. Increasing cap-
F ital goods by 10 million reduces consumer goods
0
only a little. Capital production initially employs
10 20 30 40 50
resources (such as heavy machinery used to build
Capital goods (millions of units per year) factories) that produce few consumer goods but
are quite productive in making capital.
As shown by the dashed lines in Exhibit 2.2,
each additional 10 million units of capital produced
The economy’s PPF for consumer goods and capital reduce consumer goods by successively larger amounts.
goods is shown by the curve AF in Exhibit 2.2. Point A The resources used to produce more capital are increas-
identifies the amount produced per year if all the economy’s ingly better suited to producing consumer goods. The
resources are used efficiently to produce consumer goods. opportunity cost of making more capital goods increases,
Point F identifies the amount produced per year if all the because not all resources in the economy are perfectly
economy’s resources are used efficiently to produce capital adaptable to the production of both types of goods. The
goods. Points along the curve between A and F identify pos- shape of the production possibilities frontier reflects the
sible combinations of the two goods that can be produced law of increasing opportunity cost. If the economy
when all the economy’s resources are used efficiently. uses resources efficiently, the law of increasing opportu-
nity cost states that each additional increment of one good
2-3bInefficient and requires the economy to sacrifice successively larger and
larger increments of the other good.
Unattainable Production The PPF derives its
Points inside the PPF, such as I in Exhibit 2.2, identify bowed-out shape from the law of increasing
combinations that do not employ resources efficiently. law of increasing opportunity opportunity cost To pro-
duce more of one good, a suc-
Note that C yields more consumer goods and no fewer cost. For example, whereas
cessively larger amount of the
capital goods than I. Moreover, E yields more capital the first 10 million units of other good must be sacrificed
goods and no fewer consumer goods than I. Indeed, any capital have an opportunity
cost of only 2 million consumer units, the final 10 million
units of capital—that is, the increase from E to F—have
an opportunity cost of 20 million consumer units. Notice
that the slope of the PPF shows the opportunity cost of
an increment of capital. As the economy moves down the
curve, the curve becomes steeper, reflecting the higher
opportunity cost of capital goods in terms of forgone
Angela Harburn/Shutterstock.com
consumer goods. The law of increasing opportunity cost
also applies when moving from capital goods to consumer
goods. Incidentally, if resources were perfectly adaptable
to the production of both consumer goods and capital
goods, the PPF would be a straight line, reflecting a con-
stant opportunity cost along the PPF.
Disasters can cause an inward shift or retraction

2-3dWhat Can Shift of the PPF.
the PPF?
Any production possibilities frontier assumes the economy’s
resources, technology and know-how, and rules of the game consumer goods axis, as shown in panel (c). Panel (d)
are fixed during the period under consideration. Over time, shows the effect of an increase in a resource such as con-
however, the PPF may shift if resources, technology, and struction equipment that is suited only to capital goods.
know-how, or the rules of the game change. Economic
growth is an expansion in the economy’s production pos- Increases in the Capital Stock
sibilities as reflected by an outward shift of the PPF. An economy’s PPF depends in part on the stock of human
and physical capital. The more capital an economy pro-
Changes in Resource Availability duces in one period, the more output can be produced in
If people decide to work longer hours, the PPF shifts the next period. Thus, producing more capital goods during
outward, as shown in panel (a) of Exhibit 2.3. An increase this period (e.g., more machines in the case of physical capi-
in the size or health of the labor force, an increase in the tal or more education in the case of human capital) shifts
skills of the labor force, or an increase in the availability the economy’s PPF outward in the next period.
of other resources, such as new oil discoveries, also shifts
the PPF outward. In contrast, a decrease of resources Technological Change and More
shifts the PPF inward, as depicted in panel (b). For Know-How
example, in 1990 Iraq invaded Kuwait, setting oil fields A technological discovery that employs resources more
ablaze and destroying much of Kuwait’s physical capi- efficiently could shift the economy’s PPF outward.
tal. In West Africa, the encroaching sands of the Sahara Some discoveries enhance the production of both con-
destroy thousands of square miles of farmland each year. sumer goods and capital goods, as shown in panel (a) of
And in northwest China, a rising tide of wind-blown sand Exhibit 2.3. For example, the Internet has increased each
has claimed grasslands, lakes, and forests, and swallowed firm’s ability to find available resources. A technological
entire villages, forcing tens of thousands of people to flee. discovery that benefits consumer goods only, such as
The new PPFs in panels (a) and (b) appear to be paral- more disease-resistant crops, is reflected by a rotation
lel to the original ones, indicating that the resources that outward of the PPF along the consumer goods axis, as
changed could produce both capital goods and consumer shown in panel (c). Note that point F remains unchanged
goods. For example, an increase because the breakthrough does not affect the production
in electrical power can enhance of capital goods. Panel (d) shows a technological advance
economic growth An
increase in the economy’s the production of both, as shown in the production of capital goods, such as better software
ability to produce goods and in panel (a). If a resource such as for designing heavy machinery. But even for a given level
services; reflected by an out- farmland benefits just consumer of technology and a given number of workers, output can
ward shift of the economy’s
goods, then increased availability increase over time with more know-how. For example,
production possibilities
frontier or productivity of that resource researchers have documented that steel production dou-
shifts the PPF more along the bled at a mini-mill even though the technology did not
Exhibit 2.3
Shifts of the Economy’s Production Possibilities Frontier
When the resources available to an economy change, the PPF shifts. If more resources become available,
if technology and know-how improve, or if the rules of the game create greater stability, the PPF shifts
outward, as in panel (a), indicating that more output can be produced. A decrease in available resources or
an upheaval in the rules causes the PPF to shift inward, as in panel (b). Panel (c) shows a change affecting
consumer goods. More consumer goods can now be produced at any given level of capital goods. Panel (d)
shows a change affecting capital goods.
(a) Increase in available resources, (b) Decrease in available resources

better technology, more know-how, or or greater uncertainty in the rules
improvement in the rules of the game of the game
A'
A A
Consumer goods
Consumer goods
A''
F F' F '' F
Capital goods Capital goods
(c) Change in resources, technology, know-how, (d) Change in resources, technology,

or rules that benefits consumer goods know-how, or rules that benefits capital goods
A'
A
Consumer goods
Consumer goods
F F F'
Capital goods Capital goods
change nor did the number of workers. Through experi- underpinnings that encourage people to pursue pro-
mentation, workers developed more know-how.1 ductive activity. A more stable political environment
and more reliable property rights increase the incen-
Improvements in the Rules of the Game tive to work and to invest, and thus help the economy
The rules of the game are the formal and informal grow. For example, people have more incentive to work
institutions that support the economy—the laws, cus- if taxes claim less of their paychecks. People have more
toms, manners, conventions, and other institutional incentive to invest if they are confident that their invest-
ment will not be appropriated by government, stolen by
1. Igal Hendel and Yossi Spiegel, “Small Steps for Workers, a Giant Leap for thieves, destroyed by civil unrest, or blown up by ter-
Productivity.” American Economic Journal: Applied Economics, 6 February
2014: 73–90. rorists. Greater certainty and stability in the rules of the
game shift the economy’s PPF outward. On the other efficiently and how the economy selects the most pre-
hand, greater uncertainty about the rules of the game ferred combination depends on the decision-making
reduces the economy’s productive capacity, as reflected rules employed. But regardless of how decisions are
by an inward shift of the PPF. For example, during the made, each economy must answer three fundamental
Great Recession of 2007–2009, trust in U.S. institutions questions.
such as banks, newspapers, Congress, and big corpora-
tions declined and this reduced the economy’s productive
ability.2 2-4aThree Questions Every
Economic System Must
2-3eWhat We Learn from Answer
the PPF What goods and services are to be produced? How are
The PPF demonstrates several ideas introduced so they to be produced? And for whom are they to be pro-
far. The first is efficiency: The PPF describes efficient duced? An economic system is the set of mechanisms
combinations of output, given the economy’s resources, and institutions that resolve the what, how, and for whom
technology and know-how, and rules of the game. The questions. Some criteria used to distinguish among eco-
second idea is scarcity: Given the resources, technol- nomic systems are (1) who owns the resources, (2) what
ogy and know-how, and rules of the game, the economy decision-making process is used to allocate resources
can produce only so much output per period. The PPF and products, and (3) what types of incentives guide eco-
slopes downward, because more of one good means less nomic decision makers.
of the other good, thus demonstrating opportunity cost.
The PPF’s bowed-out shape reflects the law of increasing What Goods and Services
opportunity cost, which arises because some resources Are to Be Produced?
are not perfectly adaptable to the production of each type Most of us take for granted the incredible number of
of good. Moreover, a shift outward in the PPF reflects choices that go into deciding what gets produced—
economic growth. everything from which new kitchen appliances are intro-
Finally, because society must somehow select a duced and which roads get built, to which of the 10,000
specific combination of output—a single point—along movie scripts purchased by U.S. studios each year get to
the PPF, the PPF also underscores the need for choice. be among the 650 or so movies made. Although different
Selecting a particular combination determines not economies resolve these and millions of other questions
only the consumer goods available in this period, but using different decision-making rules and mechanisms,
also the capital stock available in the next period. One all economies must somehow make such choices.
thing the PPF does not tell us is which combination
to choose. The PPF tells us only about the costs, not How Are Goods and Services
the benefits, of the two goods. To make a selection, to Be Produced?
we need to know about both costs and benefits. How The economic system must determine how output gets
society goes about choosing a particular combination produced. Which resources should be used, and how
depends on the nature of the economic system, as you should they be combined to make stuff? How much labor
will see next. should be used and at what skill levels? What kinds of
machines should be used? What new technology should
be incorporated into the latest video games? Should the
2-4 ECONOMIC SYSTEMS office complex be built in the city or closer to the inter-
state highway? Millions of individual decisions determine
which resources are employed and how these resources
Each point along the economy’s production possi-
are combined.
bilities frontier is an efficient combination of outputs.
Whether the economy produces For Whom Are Goods and Services
economic system The
set of mechanisms and to Be Produced?
institutions that resolve the 2. Betsey Stevenson and Justin
Wolfers, “Trust in Public Institutions Who will actually consume the goods and services pro-
what, how, and for whom Over the Business Cycle,” American
questions duced? The economic system must determine how to allo-
Economic Review, 101 (May 2011):
281–287. cate the fruits of production among the population. Should
everyone receive equal shares? Should the weak and the harnesses the pursuit of self-interest to direct resources
sick get more? Should it be “first come, first served,” so that where they earn the greatest reward. According to Smith,
those willing to wait in line get more? Should goods be allo- although each individual pursues his or her self-interest,
cated according to height? Weight? Religion? Age? Gender? the “invisible hand” of market forces promotes the general
Race? Looks? Strength? Political connections? Lottery? welfare. Capitalism is sometimes called laissez-faire; trans-
Majority rule? The value of resources supplied? The ques- lated from the French, this phrase means “to let do,” or to
tion “For whom are goods and services to be produced?” is let people do as they choose without government interven-
often referred to as the distribution question. tion. Thus, under capitalism, voluntary choices based on
Although the three economic questions were dis- rational self-interest are made in unrestricted markets to
cussed separately, they are closely related. The answer to answer the questions what, how, and for whom.
one depends on the answers to the others. For example, As we will see in later chapters, pure capitalism has
an economy that distributes goods and services uniformly its flaws. The most notable market failures are these:
to everyone will, no doubt, answer the what-will-be-
1. No central authority protects property rights,
produced question differently than an economy that
enforces contracts, and otherwise ensures that the
somehow allows more personal choice. As we have seen,
rules of the game are followed.
laws about resource ownership and the role of govern-
ment determine the “rules of the game”—the set of con- 2. People with no resources to sell could starve.
ditions that shape individual incentives and constraints. 3. Some producers may try to monopolize markets by
Along a spectrum ranging from the freest to the most regi- eliminating the competition.
mented types of economic systems, pure capitalism would 4. The production or consumption of some goods
be at one end and the pure command system at the other. involves side effects that can harm or benefit people
not involved in the market transaction.
2-4b Pure Capitalism 5. Firms have no incentive to produce the so-called
public goods, such as national defense, because pri-
Under pure capitalism, there is no government. The rules
vate firms cannot prevent nonpayers from enjoying
of the game include the private ownership of resources and
the benefits of public goods.
the market distribution of products. Owners have property
rights to the use of their resources and are therefore free 6. Market economies experience economic fluctua-
to supply those resources to the highest bidder. Private tions, which are alternating periods of expansions
property rights allow individual owners to use resources and recessions in their level of economic activity,
or to charge others for their use. Any income from sup- especially in employment and production.
plying labor, capital, natural resources, or entrepreneurial Because of these limitations, countries have modified
ability goes to the individual resource owners. Producers pure capitalism to allow some role for government. Even
are free to make and sell whatever they think will be profit- Adam Smith believed government should play a role.
able. Consumers are free to buy whatever goods they can The United States is among the most market-oriented
afford. All this voluntary buying and selling is coordinated economies in the world today.
by unrestricted markets, where buyers and sellers make
their intentions known. Market prices guide resources to
their most productive use and channel goods and services 2-4cPure
to the consumers who value them the most. Command pure capitalism An eco-
nomic system characterized
Under pure capitalism, markets answer the what,
how, and for whom questions. That’s why capitalism is
System by the private ownership of
resources and the use of prices
also referred to as a market system. Markets transmit In a pure command sys- to coordinate economic activity
information about relative scarcity, provide individual tem, resources are directed in unregulated markets
incentives, and distribute income among resource sup- and production is coordi- private property rights
pliers. No individual or small group coordinates these nated not by market forces An owner’s right to use, rent, or
activities. Rather, it is the voluntary choices of many buy- but by the “command,” or sell resources or property
ers and sellers responding only to their individual incen- central plan, of government. pure command system
tives and constraints that direct resources and products In theory at least, instead An economic system character-
ized by the public ownership
to those who value them the most. of private property, there is
of resources and centralized
According to Adam Smith, market forces allocate public, or communal, owner- planning
resources as if by an “invisible hand”—an unseen force that ship of property. That’s why
Another random document with
no related content on Scribd:
There were titters from the younger members of the much
interested audience and even unconcealed laughter from the older
boys, and Elk’s dark countenance took on a deeper and more angry
red as he thrust it close to Laurie’s.
“That’ll be about all for you,” he growled. “You’re one of these
funny guys, aren’t you? Must have your little joke, eh? Well, see how
you like this one!”
Elk raised his right hand, unclenched but formidable. An expectant
hush filled the little store. Polly, with troubled eyes fixed on the
drama, deluged a pineapple ice-cream with soda until it dripped on
the counter below. Laurie continued to smile.
CHAPTER II
KEWPIE STATES HIS CASE
“W hatever’s going on?” asked a pleasant voice from the

doorway that led into the room behind the shop. “Is—is
anything wrong, Polly? Dear me, child, you’re running that all over
the counter!”
More than two dozen pairs of eyes turned to where Mrs. Deane
looked perplexedly about her. She was a sweet-faced little woman
whose white hair was contradicted by a plump, unlined countenance
and rosy cheeks. Elk’s uplifted arm dropped slowly back. For a short
moment the silence continued. Then a veritable Babel of voices
arose. “Hello, Mrs. Deane!” “Say, Mrs. Deane, don’t you remember
me paying you ten cents last Friday? Miss Polly says I still owe—”
“Mrs. Deane, when are you going to have some more of those twirly
things with the cream filling?” “Mrs. Deane, will you wait on me,
please? I want—” “Aw, I was ahead of him—”
The Widow Deane beamed and made her way to the rear of the
counter, greeting the boys by name. She was fond of all boys, but
those of Hillman’s School she looked on as peculiarly her own, and
she knew the names of nearly every one of them and, to a
remarkable extent, their taste in the matter of pastry and beverages.
“I couldn’t imagine what had happened,” she was explaining to Cas
Bennett as she filled his order for two apple turnovers. “All of a
sudden everything became so still in here! What was it?”
Cas grinned. “Oh, just some of Nod Turner’s foolishness,” he
replied evasively. “He and Thurston were—were talking.”
They were still talking, for that matter, although their fickle
audience no longer heeded. The interruption had quite spoiled Elk’s
great scene, and after lowering his arm he had not raised it again.
Even he realized that you couldn’t start anything when Mrs. Deane
was present. But he was still angry and was explaining to Laurie
none too elegantly that vengeance was merely postponed and not
canceled. Ned, maintaining outward neutrality, watched Elk very
closely. Ned had an idea, perhaps a mistaken one, that when it came
to fistic encounters it was his bounden duty to substitute for Laurie,
and he had been on the point of substituting when Mrs. Deane’s
appearance had called a halt.
Laurie’s smile gave place to sudden gravity as he interrupted Elk’s
flow of eloquence. “That will do,” he said. “I’m not afraid of you,
Thurston, but it’s silly to get so upset over a trifle. Of course I
shouldn’t have taken your wheel, but I didn’t hurt it any, and you’ve
bawled me out quite enough, don’t you think? I’ll apologize, if you
like, and—”
“I don’t want your apology,” growled Elk. “You’re too blamed fresh,
Turner, and you talk too much. After this you let everything of mine
alone. If you don’t, I’ll do what I was going to do when the old lady
came in. Understand?”
“Perfectly,” replied Laurie soberly. “Have a soda?”
“Not with you, you little shrimp!” Elk strode away, fuming, to elbow
his way to the fountain.
“What did you have to say that for?” asked Ned. “You had him
pretty nearly calmed down, and then you had to spoil it all by offering
him a drink. When he said you talk too much he was dead right!”
“Oh, well, what’s he want to kick up such a fuss for?” asked Laurie
cheerfully. “Come on. I’ve got to beat it to gym for practice.”
They waved a farewell to Polly over the heads and shoulders of
the throng about the fountain, but that young lady demanded speech
with them and left her duties for a hasty word nearer the door. “I’ve
just got to see you boys about Kewpie,” she announced. “It’s very
important. Can’t you come back a minute before supper, Ned?”
“Kewpie?” asked Laurie. “What’s wrong with him?”
“I don’t know. That’s what I want to talk about. There isn’t time
now.”
“All right, we’ll be back about five thirty,” agreed Ned. “By. See you
later.”
“Wonder what’s up,” said Laurie when, having reached School
Park, they turned their steps briskly over the slushy pavements
toward Hillman’s. “Looked perfectly normal last time I saw him.”
“Kewpie? Sure, all except his size. That’s not normal. By the way,
he was looking for you, Polly said. Matter of life or death.”
“Huh, I know what he wants. He’s got it into that crazy head of his
that he can pitch, and he wants me to give him a try-out. I sort of half
promised I would.”
“Mean he wants to pitch for the nine?” asked Ned incredulously.
“Well, he wants to get on the squad, anyway. Thinks that if I tell Mr.
Mulford he’s sort of good, Pinky will take him on.”
“Would he?”
Laurie shrugged. “I don’t believe. Mulford warned the fellows two
weeks back that if they didn’t report for indoor work he didn’t want
them later. And he generally keeps his word, Pinky does.”
“Why didn’t Kewpie think of it before?” asked Ned.
“Search me, old dear. What’s troubling me is that he’s thought of it
now. He’s been pestering the life out of me for a week.”
“What’s he want you to look him over for? Why doesn’t he ask Cas
Bennett or some one who knows something about pitching?”
“Reckon he knows they wouldn’t bother with him. Thinks because
Pinky’s got it into his old bean that he can make a catcher of me that
I can spot a Mathewson or a Mays with my eyes shut. I appreciate
his faith in me and all that, Ned, and it wounds me sorely that my
own kith and kin—meaning you, old dear—haven’t the same—er—
boundless trust in my ability, but, just between the two of us, I don’t
know a curve from a drop yet, and if I can stop one with my mitt I’m
as pleased as anything and don’t care a continental whether the silly
thing stays in said mitt or doesn’t. Frankly, I’m plumb convinced that
Pinky had a brain-storm when he dragged me in from the outfield
and stuck me behind a wire bird-cage!”
“Oh, I guess he knows his business,” responded Ned. “Anyhow,
you’ve got to do your best. If you don’t I’ll lick the daylight out of you.”
“Don’t you mean into me?” asked Laurie sweetly. “Seems to me
that ought to be the proper phrase. Having, as I understand
physiology, no daylight in me, to start with—”
“Oh, shut up! I mean what I say, though. We agreed when we got
here last fall that I was to go in for football and you for baseball. I
know I didn’t make very good—”
“Shut up yourself! You did so!”
“But that’s the more reason you should. The honor of the Turners
is at stake, partner. Don’t you forget that!”
“Oh, I’ll do my best,” sighed Laurie, “but I certainly do hold it ag’in
Pinky for butting in on my quiet, peaceful life out in the field and
talking me into this catching stuff. Gosh, I had no idea the human
hand could propel a ball through space, as it were, the way those
pitcher guys do! Some time I’ll break a couple of fingers, I suppose,
and then I’ll get let out.”
“Oh, no, you won’t,” said Ned grimly. “All the big league catchers
have two or three broken fingers on each hand. Don’t count on that,
old son!”
They had crossed Walnut Street now and were stamping the
melted snow from their shoes on the drier concrete sidewalk before
the school property. Above the top of a privet hedge the upper
stories of the school buildings were in sight, West Hall, School Hall,
and East Hall facing Summit Street in order. In the windows of West
Hall, a dormitory, gaily hued cushions added color to the monotony
of the brick edifice, and here and there an upthrown casement
allowed a white sash-curtain to wave lazily in the breeze of a mild
March afternoon. As the two boys turned in at the first gate, under
the modest sign announcing “Hillman’s School—Entrance Only,”
Laurie broke the short silence.
“What are you doing this afternoon?” he asked.
“I don’t know. There isn’t much a fellow can do except read.”
“Or study,” supplemented Laurie virtuously. “Better come along
and watch practice a while.”
But Ned shook his head. “Not good enough, old-timer. That
baseball cage is too stuffy. Guess I’ll wander over to the field and
see if there’s anything going on.”
“There won’t be. They say the ice has gone to mush. Listen. If you
see Kewpie, tell him I died suddenly, will you? And how about Polly?
Shall I meet you there?”
“Yes, five thirty we told her. So-long!”
“By, old dear! Here’s where I go and lose a finger!”
Ned climbed to the second floor of East Hall and made his way
along the corridor to No. 16. The door was ajar, and when he had
pushed it open he discovered Kewpie Proudtree stretched at length
on the window-seat. It was no unusual thing to find Kewpie in
possession of No. 16, for he appeared to like it fully as well as his
own quarters across the way, if not better. Kewpie laid down the
magazine he had been examining and laboriously pulled himself to a
sitting posture.
“Hello, Nid,” he greeted. “Where’s Nod?” It was Kewpie who had
tagged those quaint nicknames on the Turner twins, and he never
failed to use them.
“Gym,” answered Ned. “Practice.”
“What! What time is it? And here I’ve been wasting my time
waiting for him!”
“Too bad about your time! Get your cap, and let’s go over to the
field.”
But Kewpie shook his head sadly, relapsing against the cushions.
“I’m not feeling very well, Nid,” he said plaintively.
Ned looked at him with more interest, wondering if it could be
Kewpie’s state of health that was concerning Polly Deane. But it was
difficult to associate that youth’s bulk with illness, and Ned
abandoned the idea. “What’s wrong with you?” he inquired jeeringly.
“It seems to be my stomach,” said Kewpie, laying a sympathetic
hand on that portion of his anatomy.
“Does, eh? Well, what have you been eating?”
“Eating? Nothing much. Well, I did have a cream-puff and a tart at
the Widow’s, but I guess it isn’t that.”
“Oh, no, of course not, you silly prune! And you probably had a nut
sundae with whipped cream and sliced peaches and a lot of other
truck on it. Funny you don’t feel well, isn’t it?”
“I didn’t have any whipped cream,” said Kewpie indignantly. “It—it
makes me bilious.”
“Well, come on over to the field. It’ll do you good.”
“I’ve been there. There’s nothing doing, Nid. The rink looks like
tapioca pudding, and you can go in to your ankles anywhere you
walk. Look at my shoes.”
“Yes, and look at that window-seat, you crazy galoot! Why don’t
you wipe your dirty feet on your own cushions?”
“Oh, that’ll come off.” Kewpie flicked at the muddy stains with a
nonchalant hand. “Say, listen. I’ve been trying to get hold of Nod all
day. How long’s he going to practise?”
“Search me. They keep at it until five or a bit after, I think. What
you got on your so-called mind, Kewpie?”
Kewpie hesitated and finally decided to take Ned into his
confidence. “Well, it’s like this,” he began impressively. “A fellow
needs more exercise than he gets along this time of year, Nid. Of
course, it’s all right for you fellows who play basket-ball or hockey,
but I couldn’t get into those things, and there isn’t much else to keep
you fit. Now—”
“Except pastry at the Widow Deane’s, Kewpie.”
Kewpie ignored the interruption. “Well, anyway, I’ve been thinking
that if I could get into baseball it would be a mighty good thing for
me. Sort of keep me in training, you know. I—I’m likely to put on
weight if I don’t watch out. You understand.”
“What’s your line?” asked Ned innocently. “Short-stop?”
Kewpie grinned. “Pitcher,” he said.
“Really? Why, I didn’t know you were a baseball pitcher. Ever
worked at it much?”
“Sure,” said Kewpie. Then his gaze wavered and he hedged a
trifle. “Of course, I’ve never tried for the team or anything like that,
but last spring we had a scrub team here and I pitched on it—
generally. I’ve got something, too, let me tell you.” Kewpie’s
assurance returned. “All I need is practice, Nid. Why, I can pitch a
drop that’s a wonder!”
“Too bad you didn’t go out for the team this year,” said Ned. “I
understand Mr. Mulford won’t take any fellows on who didn’t report
early.”
Kewpie’s dejection returned and he nodded. “I know,” he
answered. “That’s why I wanted to get Nod to—to sort of speak a
good word for me. You see, if I can show him I’ve got something on
the ball and he tells Pinky, why, I guess Pinky wouldn’t want to lose
me.”
“Why don’t you speak to Pinky yourself?”
“Oh, you know how coaches are. They don’t believe what you tell
’em half the time; think you’re just stringing ’em to get on the squad.”
“And, of course, you wouldn’t do that,” said Ned gravely.
“Oh, shut up,” answered Kewpie, grinning. “You don’t think I can
pitch, I’ll bet.”
“You win,” replied Ned simply.
“All right, then, I’ll show you, by Joshua! You get Nod to catch me,
and you’ll see. Honest, you might help a fellow, Nid, instead of
joshing him. Why, say, look how I got you on the football team last
fall! If I hadn’t told Joe Stevenson about you being a star half-back
—”
“Yes, and you came mighty close to getting your silly dome
knocked clean off you,” interrupted Ned grimly. “A nice bunch of
trouble you got me into!”
“Well, it came out all right, didn’t it?” asked Kewpie irrepressibly.
“Didn’t you win the old game for us with that kick of yours? Sure, you
did! I’ll say so!”
“Never you mind about that, old son. If you expect me to help you
get on the baseball team you needn’t crack up what you did last fall!”
Kewpie looked momentarily pained, but perhaps he was
accustomed to the ingratitude of human nature. Anyway, he arose
with careful deliberation from the window-seat, an inquiring palm laid
against his stomach, and smiled forgivingly down on Ned. “Well, I’ve
got to be going back,” he announced. “Tell Nod I’ll be in about six,
won’t you? And—er—say, you don’t happen to have a half-dollar you
don’t need right away, I suppose.”
“I might,” answered Ned, reaching into a pocket. “Going to bribe
your way into baseball, you fat rascal?”
“No, but I went off without paying for the stuff at the Widow’s, Nid;
clean forgot all about it, and—”
“Kewpie, don’t lie, or you won’t get this!”
Kewpie grinned. “Well, I didn’t exactly forget it, maybe, but it—it
sort of passed out of my mind at the moment. You understand. I
really ought to go back there and pay it, Nid.”
“That’s all right. I can save you the trouble. I’m going down there
myself pretty soon. How much is it?”
“Twenty cents,” faltered Kewpie.
“Fine! Then you won’t need the other thirty, old son.”
There was deep reproach in Kewpie’s face as he went out.
CHAPTER III
THE “A. R. K. P.” IS FORMED
F ew customers patronized the little blue shop on Pine Street

between five and six. Hillman’s discouraged the consumption of
sweets so close to the school supper-hour, and, while there was no
rule against it, the fellows felt themselves more or less on honor to
observe the doctor’s frequently expressed wish. Neighbors ran in at
intervals for a loaf of bread or cake or ten cents’ worth of whipped
cream, but for the most part, as six o’clock approached, the bell
tinkled infrequently. Consequently the conference held this afternoon
in the Widow Deane’s sitting-room, which was also kitchen and
dining-room and parlor, was almost undisturbed. The conference
was participated in by four persons, Polly, Ned, Laurie, and Mae
Ferrand. Mae’s presence had been unforeseen, but as she was
Polly’s particular chum and, as Laurie phrased it, “one of the bunch,”
it occasioned no embarrassment. Mae was about Polly’s age and
perhaps a bit prettier, although, to quote Laurie again, it all depended
on whether you liked light hair or dark. Mae’s hair was pure
sunshine, and her skin was milk-white and rose-pink; and, which
aroused Polly’s envy, she never freckled.
As the four had known each other since autumn there was no
stiffness apparent in either speech or action. Ned lolled back in the
comfortable old patent rocker, with his legs over one arm of it, and
Laurie swung his feet from the table, secure in the knowledge that
Polly’s mother was up-stairs. Laurie had a weakness for positions
allowing him full liberty for his feet. Polly was talking. She and Mae,
arms entwined, occupied the couch between the windows. A shining
kettle on the stove hissed cozily, and a big black cat, Towser by
name, purred in Ned’s lap as he scratched her head.
“There’s something wrong with him,” stated Polly convincedly. “I’ve
noticed it for quite a while, more than two weeks. He looks dreadfully
gloomy and unhappy, and he—he’s absent-minded, too. Just this
afternoon he went off without thinking a thing about paying for a
sundae and some cakes he had.”
Ned grinned but said nothing. Laurie winked gravely.
“And that’s another thing,” continued Polly. “It’s perfectly awful the
way he eats sweet things, Laurie. He comes in every day and, if I’d
let him, he’d make himself sick with cream-puffs and tarts and candy.
It just seems as if he didn’t care what happened to him, as if he was
—was desperate! Why, he told me to-day that maybe he wouldn’t
play football any more!”
“I guess he was just talking,” said Mae.
“I don’t think so.” Polly shook her head. “He acts funny. Haven’t
you noticed it, Laurie?”
“Yes, but he always did act funny. He’s a nut.”
“No, he isn’t; he’s a real nice boy, and you oughtn’t to talk like that.
He’s unhappy, and we ought to help him.”
“All right,” agreed Laurie cheerfully. “What’ll we do?”
“Well, I suppose that first of all we should find out what’s worrying
him,” answered Polly thoughtfully. “You—you have to know the
disease before you apply the remedy.” Polly was plainly rather
pleased with that statement, and so was Mae. Mae squeezed her
friend’s arm in token of appreciation. Laurie allowed that it was a
“wise crack” but wanted to know how Polly proposed to make the
discovery. “Far as I can see,” he added, “Kewpie’s much the same
as usual, if not more so. Although, to tell the honest gospel truth, I
haven’t seen an awful lot of him just recently. I’ve been sort of
keeping out of his way because he’s after me to see him pitch so’s I
can ask Pinky to let him on the baseball squad.”
“It couldn’t be that, do you think?” asked Polly of the room at large.
“I mean, you don’t suppose he’s hurt because you’ve been avoiding
him? He might think that you’d gone back on him, Laurie, and I
guess that Kewpie has a very sensitive nature.”
Ned snorted. “Kewpie’s nature’s about as sensitive as a—a
whale’s!”
“I don’t know anything about whales,” declared Polly with dignity,
“but I do know that very often folks who don’t seem sensitive are
actually the very sensitivest of all. And I am quite sure that if Kewpie
thought Laurie had—had deserted him—”
“Hey, hold hard, Polly! Gee, I haven’t deserted the poor prune. I—
I’ve been busy lately and—and—well, that’s all there is to it. Gosh, I
like Kewpie. He’s all right, isn’t he, Ned?”
“Yes. Look here, Miss Chairwoman and Ladies and Gentlemen of
the Convention, the only thing that’s wrong with Kewpie is that he
doesn’t know what to do with himself. Ever since he stopped playing
football he’s been like a chap who’s lost his job and can’t find
another one. Of course, at first it wasn’t so bad, for Christmas
vacation was coming. But for the last couple of months he’s just sort
of mooned around, getting sore-headed because he couldn’t make
the basket-ball team or the hockey team or anything else. Give the
old chap something to do and he’ll snap out of it. He comes over
here and fills up on pastry and stuff because he hasn’t anything
better to do and has a sweet tooth, anyway. Laurie and I have told
him often enough that he ought to cut it out, but he says he doesn’t
care whether he gets on the eleven next fall or not. That’s just guff,
of course. If they had spring football practice here he’d behave
himself, but they don’t. Only trouble with Kewpie is he’s lost his
ambition.”
After that long speech Ned subsided further into the rocker. Mae
looked across at him admiringly. “I’m sure Ned’s quite right, Polly,”
she declared.
“Well, I’m glad if he is,” said Polly with a sigh of relief. “I was
dreadfully afraid that he had some—some secret sorrow in his life,
like—like a cruel stepmother or—or a father who drank or something.
If it’s only what Ned thinks it is, why, everything’s quite easy,
because getting on the baseball team will be just the thing for him.”
“How’s he going to get there?” asked Laurie suspiciously.
“Why, I thought you said he wanted you to help him!”
“I did, but what he wants and what I aim to do—”
“Kewpie couldn’t play baseball, Polly,” said Ned. “Look at him!”
“But I’ve seen stout boys play baseball plenty of times,” Polly
protested. “Two years ago we had a first baseman on the high
school team who was every bit as fat as Kewpie Proudtree. You
remember George Wallen, Mae.”
“But it isn’t only his fatness, or stoutness, or whatever you like to
call it,” insisted Laurie. “He isn’t built right for baseball. Gee, think of
Kewpie trying to beat out a bunt or sliding to second! Besides, hang
it, I couldn’t get him on the team if he really could pitch! Pinky said
positively—”
“Is he a pitcher?” asked Polly eagerly.
“No, but he wants people to think he is.”
“But that would make it lots easier, Laurie! A pitcher doesn’t have
to run much, and—”
“Why doesn’t he? Don’t you think he has to take his turn at the bat
sometimes?”
“But he never hits the ball,” replied Polly triumphantly, “and so he
doesn’t need to run!”
“She had you there, partner,” laughed Ned.
“Well, just the same,” answered Laurie, grinning, “I’ll be hanged if
I’m going to ask Pinky to let Kewpie on the squad just so he won’t be
lonesome. Pinky wouldn’t listen to me, anyway.”
“You don’t know,” said Polly. “And I think you really ought to try.
Yes, I do! Kewpie’s having a miserable time of it, and he’s ruining
himself for football, and it’s our duty to the school to do everything
we can so he won’t!”
“Say that again,” begged Ned, but Polly paid no heed.
“Besides,” she went on warmly, “we all pretend to be his friends,
and I guess a friend ought to be willing to make some sacrifices for
you, and it wouldn’t be very much for Laurie to get him on the
baseball team and—”
“But I tell you I can’t do it!” wailed Laurie.
“You don’t know. You haven’t tried. Don’t you think he ought to try,
Mae?”
“I certainly do,” said that young lady decisively.
“Don’t you, Ned?” persisted Polly earnestly.
“Not a doubt of it in the world,” answered Ned gravely.
Laurie glared indignantly at him, but Ned was looking at Towser.
After a brief silence Laurie sighed gloomily.
“All right,” he said. “But I can tell you right now that it won’t do any
good. Mr. Mulford said he wouldn’t take on any fellow who didn’t
report for early practice, and he means it. Besides, Kewpie’s no
more of a pitcher than—than I am!”
“I know, Laurie,” said Polly persuasively, “but maybe with practice,
and if you showed him—”
Ned chortled. Laurie, although he wanted to smile, kept a straight
face.
“Of course,” he agreed, “I might do that. Well, I’ll do it, though I’ll
feel like a perfect ass when I speak to Pinky about it.”
“There,” said Polly in triumph. “I knew we could do something if we
all put our heads together! And I do hope it will be all right. Kewpie’s
really a very dear boy, and he certainly did wonderfully at football last
fall and he’s just got to keep on. I do think, though, that we should
keep this quite to ourselves, don’t you, Ned?”
“Don’t just see how we can. If Kewpie gets on the baseball squad
he’s almost sure to know something about it. He’s not such a fool as
he looks sometimes, Polly.”
Polly stared. “I don’t see—” she began. Then the twinkle in Ned’s
eye explained. “Of course I didn’t mean that, silly! I meant that
Kewpie shouldn’t know that we—that we’d been discussing him and
that we had—well, conspired, Ned. Don’t you see? He might resent it
or something.”
“I get you! We’ll make a secret society out of it, eh? Association for
the Restoration—no, that won’t do.”
“Advancement,” suggested Mae.
“Association for the Reclamation of Kewpie Proudtree!”
pronounced Ned. “And the password—”
“Association for the Degradation of Laurence Turner, you mean,”
said Laurie dejectedly. “And there isn’t any password, because he
won’t pass!”
“All right,” agreed Ned. “But the dues are twenty cents. Here you
are, Polly. You’ve got ‘treasurer’ written all over you.”
“But—but what is it?” asked Polly, refusing to accept the two dimes
that Ned proffered.
“Madam, I am settling the debt of none other than our
distinguished and rattle-brained friend Kewpie. At his request. It
seems he—er—he neglected to settle for the entertainment you
provided him this afternoon, and, torn by remorse—”
“Oh, I knew he forgot!” exclaimed Polly gladly.
“He would,” said Laurie pessimistically. “He has a perfectly
remarkable forgetory. I guess he’s the champion long-distance
forgetter—”
“Don’t be horrid,” begged Polly. “With so much on his mind, it’s no
wonder he—”
“On his what?” exclaimed Laurie. “Ned, did you get that? Kewpie
has so much on his mind! Honest, Polly, when Kewpie takes his cap
off he hasn’t—”
The kettle caused a diversion by boiling over just then, and the
conference broke up.
Kewpie awaited Laurie in No. 16, and as the twins entered he
broke into speech. “Say, Nod, when—”
“To-morrow morning. Half-past ten. Back of the gym,” replied
Laurie promptly. Kewpie stared, puzzled.
“What?” he demanded suspiciously.
Laurie performed an exaggerated parody of a pitcher winding up
and delivering a ball. Then, assuming the rôle of catcher, he leaped
high off his feet and pulled down a wild one that would undoubtedly
have smashed the upper pane of the further window had it got by
him.
“Honest?” cried Kewpie. “Me and you?”
“No, you and me.”
“But—how did you know what I was going to ask?”
Laurie viewed him sadly. “Kewpie,” he replied, “it’s a mighty good
thing you decided to be a pitcher. That’s the only position that
doesn’t call for any brain!”
CHAPTER IV
PRACTICE MAKES PERFECT
L aurie folded Kewpie’s sweater and placed it on the ground a few

yards from the gymnasium wall. “There’s your plate,” he
announced. “See if you can put ’em over the middle button, Kewpie.”
Kewpie tightened his belt, thumped a worn baseball into a
blackened glove, and rather ostentatiously dug a hole in the moist
turf with his heel. Laurie grinned. Here on the south side of the
building the sun shone warmly and the ground was fairly dry. Behind
Laurie about four yards away, was a wire fence which, if Kewpie
retained ordinary control of the ball, would make life easier for Ned,
who sat in the embrasure of a basement window. Laurie pulled his
mitten on and waited. Kewpie was at last satisfied with the hole he
had dug and fitted his toe into it. Then he looked speculatively at the
folded sweater and wrapped his fingers about the ball.
“What’s this going to be, Kewpie?” asked Ned. “A drop?”
“Straight ball. Just warming up.” Kewpie let go, and the ball struck
the fence and bounded back. Laurie sighed and went after it.
“I’m not as young as I was, Kewpie,” he said, “and anything more
than ten feet on either side of me is likely to get away. See if you can
put ’em somewhere near the plate.”
Kewpie laughed. “That one got away from me, Nod.”
“Me, too,” said Laurie. “Let her come. Shoot her in!”
Kewpie’s next offering was a good deal better, and Laurie didn’t
have to move to get it. Kewpie sent four or five more balls within
reasonable distance of the sweater. There was no speed in them,
nor were they other than perfectly straight offerings. Still, as Laurie
reflected encouragingly, it was something to be able to do that much.
He was not quite sure he could do it himself the first few times.
“All right, old son,” he called. “Speed ’em up now.”
But speed did not seem to be included in Kewpie’s budget of
tricks. The first attempt sent the ball over Laurie’s head and likewise
over the fence. While Ned, sighing, went after it, Laurie indulged in
gentle sarcasms. Kewpie thumped his glove with a bare fist and
smiled genially. Then the ball came back, and Kewpie began again.
Laurie picked the ball from the trampled turf between his feet and
viewed Kewpie questioningly.
“Didn’t you have some drop on that?” he queried.
“Sure,” answered Kewpie. “Here’s another. You watch it.”
Laurie did watch it. And it did drop. A faint, new-born respect for
Kewpie as a pitcher was reflected in his voice as he said: “That’s not
so poor, old thing. Where’d you learn it?”
But Kewpie was throwing his chest out now, a purely unnecessary
thing for Kewpie to do, and strutting a bit. “Never you mind,” he
answered. “I told you I had something, and you wouldn’t believe me.”
“That’s all right,” remarked Ned, “but you’ve got to know more than
just how to pitch a drop if you’re going to put Nate Beedle out of
business.”
“That’s not half so worse,” commented Laurie after the next ball
had performed a very creditable drop, “but let’s see something else,
old son. How about a curve just for variety?”
“We-ell,” said Kewpie, “I haven’t got curves down so well, but—”
He spent a long moment fingering the ball and finally sent it off with a
decidedly round-arm delivery. Laurie caught it by leaping far to the
left.
“What was that supposed to be?” he asked politely.
“In-shoot,” said Kewpie, but his tone lacked conviction.
“Huh,” returned Laurie, “you ain’t so well in your in-shoot. Better
see a doctor about it. Try an out, old son.”
But Kewpie’s out wasn’t any better, and, at the end of about twenty
minutes, by which time Ned was the only member of the trio not
bathed in perspiration, it had been shown conclusively that Kewpie’s
one and only claim to pitching fame rested on a not very remarkable
drop-ball. Laurie picked up Kewpie’s sweater and returned it to him
gravely. “Better put that on,” he said with vast concern. “It would be
awful if you got cold in that arm of yours.”
Kewpie struggled with the garment, breathing heavily, and when
he had conquered it he turned expectantly to Laurie. “Well, what do
you say?” he asked.
“What do you want me to say?” Laurie stared frowningly at his
mitten.
“Why, you know what I asked you,” said Kewpie. “I—you—”
“But, great jumpin’ Jupiter, Kewpie, I can’t ask Pinky to put you on
the squad just because you can pitch a sort of a drop! You haven’t
an ounce of speed; you can’t curve ’em—”
“Well, but I haven’t had any work!” protested the other. “Gee, I
guess Nate Beedle couldn’t do much better the first time he pitched!”
“But Nate knows how, you simple fish! All the work in the world
won’t make you any better if—”
“Practice makes perfect, don’t it?” interrupted Kewpie indignantly.
“Maybe. Maybe not. If you don’t know anything about pitching you
can practise from now until—”
“But I do know, I tell you. All I need is practice. I’ve got a book that
tells—”
“Book be blowed!” exploded Laurie. “You can’t learn pitching by
taking a correspondence-course, you fat-head!”
“Quit your arguing, you two,” said Ned. “Laurie’s quite right,
Kewpie. He can’t recommend you to Mr. Mulford until you’ve got
more to show than you’ve shown just now. But I don’t see what’s to
prevent you from learning more tricks or what’s to prevent Laurie
from helping you if he can. Seems to me the thing to do is for you
two to get together every day for a while.” Ned was looking
meaningly at his brother. “Maybe Kewpie’s got it in him, Laurie. You
can’t tell yet, eh?”
“Eh? Oh, no, I suppose not. No, you can’t tell. Maybe with practice
—”
“Right-o,” agreed Ned. “That’s it; practice, Kewpie. Now you and
Laurie fix it up between you to get together for half an hour every
morning, savvy? Maybe after a week or so—”
“All right,” agreed Kewpie, beaming. “Gee, in a week I’ll be
speeding them over like—like anything!”
Laurie looked at him pityingly. “You—you poor prune!” he sighed.
Ned surreptitiously kicked him on a shin and quickly drowned
Kewpie’s hurt protest with, “There! That’s fine! Come on, Laurie, it’s
nearly eleven.”
“All right,” answered Laurie, rubbing the shin. “See you later,
Kewpie, and we’ll fix up a time for practice.” Out of ear-shot of the
more leisurely Kewpie, Laurie turned bitterly on his brother. “It’s all
right for you,” he complained, “but that poor fish doesn’t know any
more about pitching than I know about—about my Latin this morning!
It’s all right for you, but—”
“You said that before,” interrupted Ned unfeelingly. “Look here, old-
timer, did we or didn’t we agree to help Kewpie? Are you or aren’t
you a member of the Association for the Reclamation—”
“Sure, I’m a member! And I’m the goat, too, it seems like! I have to
do all the dirty work while you stand around and bark up my shins!
How do you get that way? You can catch a ball if you try. Suppose
you take Kewpie on some of the time and see how you like it!”
“I would in an instant,” responded Ned, “if you’d let me, but you
wouldn’t.”
“I wouldn’t!” echoed Laurie incredulously as he followed the other
up-stairs to No. 16. “Say, you ain’t so well! You just try me!”
But Ned shook his head, smiling gently. “Just now, old son, you’re
not quite yourself. When your better nature asserts itself you’ll—”

Micro Econ 6 Principles of Microeconomics 6Th Edition William A Mceachern Full Chapter

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Micro Econ 6 Principles of Microeconomics 6Th Edition William A Mceachern Full Chapter

Uploaded by

Copyright:

Available Formats

MICRO ECON 6: Principles of

Microeconomics 6th Edition William A.

Inside Front Cover (8.5”)

ECON Principles of Microeconomics

Australia • Brazil • Mexico • Singapore • United Kingdom • United States

Content/Media Developer: Sarah Keeling

Marketing Coordinator: Audrey Jacobs

Sr. Art Director: Bethany Bourgeois

Internal Designer: Lou Ann

Cover Image: Shutterstock.com/Carlos Castilla,

Intellectual Property Project Manager: USA

Cengage products are represented in Canada by

To learn more about Cengage platforms and services, visit

To register or access your online learning solution or purchase materials

Printed in the United States of America

Part 2 Introduction to the Market System

Part 3 Market Structure and Pricing

Part 4 Resource Markets

Part 5 Market Failure and Public Policy

16 Public Goods and Public Choice 268

Part 6 International Economics

BRIEF CONTENTS iii

Introduction to economics 3 Economic Decision Makers 40

© Cartoon Network /Everett Collection

4 Demand, Supply, and Markets 56

1 The Art and Science of Economic

2-1 Choice and Opportunity Cost 25

5-3 Price Elasticity of Supply 83 8-2 Short-Run Profit Maximization 123

5-4 Other Elasticity Measures 86 8-3 Short-Run Loss Minimization 126

5-5 Final Word 88 8-4 Short-Run Supply Curves 129

A5-1 Price Elasticity and Tax Incidence 90 8-5 Perfect Competition in

6 Consumer Choice and Demand 92 8-6 Long-Run Industry Supply

7 Production and Cost in the Firm 104 9-1

Market Structure 10 Mandonopolistic Competition

Resource Markets 14 Information,

14-3 Asymmetric Information in Product Markets 242

Part 6 Index 380

1 The Art and Science

LEARNING OUTCOMES After finishing this chapter

2 PART ONE: Introduction to Economics

CHAPTER 1: The Art and Science of Economic Analysis 3

4 PART ONE: Introduction to Economics

© laola/Shutterstock.com; © Colia/Shutterstock.com; © Utekhina Anna/Shutterstock.com; © james

CHAPTER 1: The Art and Science of Economic Analysis 5

television ads, telephones,

price of products offered for

sale. Goods and services are

markets. Resources are er

bought and sold in resource s

model focuses on the primary interaction in a market

TEN-yard Penalty for Biased Rankings

CHAPTER 1: The Art and Science of Economic Analysis 7

1-2bChoice Requires Time

time and information needed to make choices, talk to

8 PART ONE: Introduction to Economics

tional, or extra. including the Great Reces- microeconomics The

CHAPTER 1: The Art and Science of Economic Analysis 9

1-3 THE SCIENCE OF ECONOMIC

10 PART ONE: Introduction to Economics

1. Identify the question and define relevant variables

each firm supplies the prod- relation among key economic

CHAPTER 1: The Art and Science of Economic Analysis 11

12 PART ONE: Introduction to Economics

Market Structure 10 Mandonopolistic Competition

Resource Markets 14 Information,