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vii
Change in Quantity Demanded versus Change in The Production Approach: Measuring a

Demand 73 Nation’s Macroeconomic Activity Using
Gross Domestic Product 95
Increases in Demand Shift the Demand Curve 74
The Components of GDP 97
Decreases in Demand Shift the Demand Curve 76
Putting It All Together: The GDP Equation 100
A Decrease in Demand Decreases the Equilibrium
Price 77 APPLICATION 2 Intellectual Property in GDP
Accounts 101
APPLICATION 4 Craft Beer and the Price of Hops 77
The Income Approach: Measuring a Nation’s
Market Effects of Changes in Supply 78
Macroeconomic Activity Using National
Change in Quantity Supplied versus Change in Income 101
Supply 78
Measuring National Income 101
Increases in Supply Shift the Supply Curve 78
Measuring National Income through Value
An Increase in Supply Decreases the Equilibrium Added 102
Price 80
An Expanded Circular Flow 103
Decreases in Supply Shift the Supply Curve 80
APPLICATION 3 The Links Between Self-Reported
A Decrease in Supply Increases the Equilibrium Happiness and GDP 104
Price 82
A Closer Examination of Nominal and Real
Simultaneous Changes in Demand and Supply 82
GDP 104
APPLICATION 5 The Harmattan and the Price of Measuring Real versus Nominal GDP 105
Chocolate 84
How to Use the GDP Def lator 106
Predicting and Explaining Market Changes 84
Fluctuations in GDP 107
APPLICATION 6 Why Lower Drug Prices? 85
GDP as a Measure of Welfare 109
* SUMMARY 85 * KEY TERMS 86
* EXERCISES 86 * CRITICAL THINKING 90 Shortcomings of GDP as a Measure of Welfare 109
* ECONOMIC EXPERIMENT 90 * SUMMARY 110 * KEY TERMS 111

* EXERCISES 111 * CRITICAL THINKING 114
PART 2
The Basic Concepts in Macroeconomics 6 Unemployment and Inflation 115
Examining Unemployment 116
5 Measuring a Nation’s Production and How Is Unemployment Defined and Measured? 116
Income 92
Alternative Measures of Unemployment and Why
They Are Important 118
The Flip Sides of Macroeconomic Activity:
Production and Income 93 Who Are the Unemployed? 119
The Circular Flow of Production and Income 94 APPLICATION 1 Declining Labor Force
Participation 120
APPLICATION 1 Using Value Added to Measure
the True Size of Walmart 95 Categories of Unemployment 121
viii
Types of Unemployment: Cyclical, Frictional, and APPLICATION 1 The Black Death and Living
Structural 121 Standards in Old England 142
The Natural Rate of Unemployment 122 Labor Market Equilibrium and Full
Employment 143
APPLICATION 2 Disability Insurance and Labor
Force Participation 123 Using the Full-Employment Model 144
The Costs of Unemployment 123 Taxes and Potential Output 144
APPLICATION 3 Social Norms, Unemployment, and Real Business Cycle Theory 145
Perceived Happiness 124
APPLICATION 2 Do European Soccer Stars Change
Clubs to Reduce Their Taxes? 147
The Consumer Price Index and the Cost of
Living 125
APPLICATION 3 Government Policies and Savings
The CPI versus the Chain Index for GDP 126 Rates 148
APPLICATION 4 The Introduction of Cell Phones Dividing Output among Competing

and the BIAS in the CPI 127 Demands for GDP at Full
Employment 148
Problems in Measuring Changes in Prices 127
International Comparisons 149
Inflation 127
Crowding Out in a Closed Economy 149
Historical U.S. Inf lation Rates 128
Crowding Out in an Open Economy 151
The Perils of Def lation 129
Crowding In 151
The Costs of Inflation 130 * SUMMARY 152 * KEY TERMS 152
Anticipated Inf lation 130
Unanticipated Inf lation 130

8 Why Do Economies Grow? 156
* EXERCISES 132 * CRITICAL THINKING 135 Economic Growth Rates 157
Measuring Economic Growth 158
PART 3
The Economy in the Long Run Comparing the Growth Rates of Various
Countries 159
Are Poor Countries Catching Up? 160

7 The Economy at Full Employment 136
APPLICATION 1 Global Warming, Rich Countries,
Wage and Price Flexibility and Full and Poor Countries 161
Employment 137
APPLICATION 2 Behavioral Incentives in
The Production Function 137 Development 162
Wages and the Demand and Supply for Capital Deepening 162
Labor 140
Saving and Investment 163
Labor Market Equilibrium 141
How Do Population Growth, Government, and
Changes in Demand and Supply 141 Trade Affect Capital Deepening? 164
ix
The Key Role of Technological Progress 166 Flexible and Sticky Prices 185
How Do We Measure Technological How Demand Determines Output in the Short

Progress? 166 Run 186
Using Growth Accounting 167 APPLICATION 1 Measuring Price Stickiness in

Consumer Markets 187
APPLICATION 3 Sources of Growth in China
and India 168 Understanding Aggregate Demand 187
APPLICATION 4 How Important is Infrastructure? 169 What Is the Aggregate Demand Curve? 187
What Causes Technological Progress? 169 The Components of Aggregate Demand 188
Research and Development Funding 169 Why the Aggregate Demand Curve Slopes
Downward 188
Monopolies That Spur Innovation 170
Shifts in the Aggregate Demand Curve 189
The Scale of the Market 170
How the Multiplier Makes the Shift Bigger 190
Induced Innovations 171
APPLICATION 2 Two Approaches to Determining
Education, Human Capital, and the Accumulation the Causes of Recessions 194
of Knowledge 171
New Growth Theory 172 Understanding Aggregate Supply 194

The Long-Run Aggregate Supply Curve 194
APPLICATION 5 The Role of Megacities in
Economic Growth 173 The Short-Run Aggregate Supply Curve 196
APPLICATION 6 Culture, Evolution, and Economic

Supply Shocks 197
Growth 173
APPLICATION 3 Oil Price Increases and the
Changing U.S. Economy 198
A Key Governmental Role: Providing
the Correct Incentives and Property
From the Short Run to the Long Run 199
Rights 174
APPLICATION 7 Lack of Property Rights Hinders * EXERCISES 201 * CRITICAL THINKING 203
Growth in Peru 174

* EXERCISES 176 * CRITICAL THINKING 178 10 Fiscal Policy 204
APPENDIX: A Model of Capital Deepening 179
The Role of Fiscal Policy 205
PART 4 Fiscal Policy and Aggregate Demand 205
Economic Fluctuations and Fiscal Policy The Fiscal Multiplier 206
The Limits to Stabilization Policy 207

9 Aggregate Demand and Aggregate
APPLICATION 1 Increasing Life Expectancy and
Supply 184 Aging Populations Spur Costs of Entitlement
Programs 209
Sticky Prices and Their Macroeconomic
Consequences 185 The Federal Budget 210
x
Federal Spending 210 APPLICATION 2 Multipliers in Good Times and

Bad 233
Federal Revenues 211
The Federal Deficit and Fiscal Policy 213 Government Spending and Taxation 233
Automatic Stabilizers 213 Fiscal Multipliers 233
Are Deficits Bad? 214 Using Fiscal Multipliers 235
APPLICATION 2 Dynamic Scoring 215 Understanding Automatic Stabilizers 237
Fiscal Policy in U.S. History 215 APPLICATION 3 The Broken Window Fallacy and
Keynesian Economics 238
The Depression Era 215
Exports and Imports 240
The Kennedy Administration 216
The Vietnam War Era 216 APPLICATION 4 The Locomotive Effect:

How Foreign Demand Affects a Country’s
The Reagan Administration 217 Output 242
The Clinton and George W. Bush The Income-Expenditure Model and the
Administrations 217 Aggregate Demand Curve 243
The Obama and Trump Administrations 217 * SUMMARY 245 * KEY TERMS 245
APPLICATION 3 How Effective was the 2009
Stimulus? 218 * ECONOMIC EXPERIMENT 249

APPENDIX: Formulas for Equilibrium Income and
the Multiplier 249
11 The Income-Expenditure Model 222

12 Investment and Financial
A Simple Income-Expenditure Model 223
Markets 253
Equilibrium Output 223 An Investment: A Plunge into the

Unknown 254
Adjusting to Equilibrium Output 224
APPLICATION 1 Energy Price Uncertainty Reduces
The Consumption Function 226
Investment Spending 255
Consumer Spending and Income 226
Evaluating the Future 256
Changes in the Consumption Function 227
Understanding Present Value 256
APPLICATION 1 The Wealthy Hand-To-Mouth and
Real and Nominal Interest Rates 258
Consumption Spending 228
APPLICATION 2 Explaining Low Investment

Equilibrium Output and the Consumption
Rates 259
Function 229
Saving and Investment 230 Understanding Investment Decisions 260
Understanding the Multiplier 231 Investment and the Stock Market 261
xi
APPLICATION 3 Underwater Homeowners and APPLICATION 4 Coping with the Financial Chaos
Debt Forgiveness 263 Caused by the Mortgage Crisis 285

How Financial Intermediaries Facilitate
Investment 263
* ECONOMIC EXPERIMENT 288
When Financial Intermediaries Malfunction 266
APPLICATION 4 New Regulations for Financial APPENDIX: Formula for Deposit Creation 290
Stability 267
* SUMMARY 268 * KEY TERMS 268 14 The Federal Reserve and Monetary
* EXERCISES 269 * CRITICAL THINKING 270 Policy 291
The Money Market 292
The Demand for Money 292
PART 5
Money, Banking, and Monetary Policy APPLICATION 1 What to Do with the Fed’s Balance
Sheet? 294
13 Money and the Banking System 272 How the Federal Reserve Can Change the
Money Supply 295
What Is Money? 273
Open Market Operations 295
Three Properties of Money 273
Other Tools of the Fed 296
Measuring Money in the U.S. Economy 275
APPLICATION 2 Commodity Prices and Interest
APPLICATION 1 Cash as a Sign of Trust 276 Rates 297
How Banks Create Money 277 How Interest Rates Are Determined:
A Bank’s Balance Sheet: Where the Money Comes Combining the Demand and Supply
from and Where It Goes 277 of Money 298
How Banks Create Money 278 Interest Rates and Bond Prices 299
How the Money Multiplier Works 279 Interest Rates and How They Change
How the Money Multiplier Works in Reverse 280 Investment and Output (GDP) 301
A Banker’s Bank: The Federal Reserve 281 APPLICATION 3 The Effectiveness of

Committees 301
APPLICATION 2 Bitcoin and Cryptocurrencies 281
Monetary Policy and International Trade 303
Functions of the Federal Reserve 282
The Structure of the Federal Reserve 282 Monetary Policy Challenges for the Fed 305
The Independence of the Federal Reserve 283 Lags in Monetary Policy 305
Inf luencing Market Expectations: From the

What the Federal Reserve Does During a
Federal Funds Rate to Interest Rates on
Financial Crisis 284
Long-Term Bonds 306
APPLICATION 3 Stress Tests for the Financial * SUMMARY 307 * KEY TERMS 307
System 284 * EXERCISES 308 * CRITICAL THINKING 310
xii
PART 6 16 The Dynamics of Inflation and

Inflation, Unemployment, Unemployment 329
and Economic Policy
Money Growth, Inflation, and Interest
Rates 330
15 Modern Macroeconomics: From the
Short Run to the Long Run 311 Inf lation in a Steady State 330
How Changes in the Growth Rate of Money

Linking the Short Run and the Long Affect the Steady State 331
Run 312
The Difference between the Short and Long Understanding the Expectations Phillips
Run 312 Curve: The Relationship between
Unemployment and Inflation 332
Wages and Prices and Their Adjustment over
Time 312 APPLICATION 1 Shifts in the Natural Rate of
Unemployment 332
APPLICATION 1 Secular Stagnation? 313
Are the Public’s Expectations about Inf lation
How Wage and Price Changes Move Rational? 333
the Economy Naturally Back to Full
U.S. Inf lation and Unemployment in the
Employment 314
1980s 334
Returning to Full Employment from a
Shifts in the Natural Rate of Unemployment in
Recession 314
the 1990s 335
Returning to Full Employment from a Boom 315
How the Credibility of a Nation’s Central
Economic Policy and the Speed of Bank Affects Inflation 336
Adjustment 316
APPLICATION 2 Estimating the Natural Real
Liquidity Traps or Zero Lower Bound 317
Interest Rate Around the World 337
Political Business Cycles 318
APPLICATION 3 The Ends of Hyperinflations 339
APPLICATION 2 Elections, Political Parties, and
Voter Expectations 318 Inflation and the Velocity of Money 340
The Economics Behind the Adjustment Hyperinflation 342

Process 319
How Budget Deficits Lead to Hyperinf lation 343
The Long-Run Neutrality of Money 321 * SUMMARY 344 * KEY TERMS 344
Crowding Out in the Long Run 322 * EXERCISES 345 * CRITICAL THINKING 346

APPLICATION 3 Increasing Health-Care
Expenditures and Crowding Out 324
Classical Economics in Historical 17 Macroeconomic Policy Debates 348

Perspective 324
Say’s Law 325 Should We Balance the Federal
Budget? 349
Keynesian and Classical Debates 325
The Budget in Recent Decades 349
* EXERCISES 326 * CRITICAL THINKING 328 Five Debates about Deficits 351
xiii
Should the Fed Target Both Inflation and To Help Domestic Firms Establish Monopolies in
Employment? 355 World Markets 374
APPLICATION 1 Creating the U.S. Federal Fiscal APPLICATION 2 Chinese Imports and Local
System through Debt Policy 355 Economies 375
Two Debates about Targeting 356

A Brief History of International Tariff and
Trade Agreements 375
APPLICATION 2 Do We Need to Change our
Inflation Targets? 358
Recent Policy Debates and Trade
Agreements 376
Should We Tax Consumption Rather than
Income? 359 Are Foreign Producers Dumping Their
Products? 377
Two Debates about Consumption Taxation 360
APPLICATION 3 Should We Care If Another

APPLICATION 3 Is a VAT in Our Future? 362
Country Adopts Our Latest Technology? 377
* EXERCISES 363 * CRITICAL THINKING 364 Do Trade Laws Inhibit Environmental
Protection? 378
PART 7 APPLICATION 4 How American are American

The International Economy Cars? 379
Do Outsourcing and Trade Cause Income

Inequality? 380
18 International Trade and Public
Policy 365 Why Do People Protest Free Trade? 381
Benefits from Specialization and Trade 366 * EXERCISES 382 * CRITICAL THINKING 385
Production Possibilities Curve 366
Comparative Advantage and the Terms of 19 The World of International

Trade 368 Finance 386
The Consumption Possibilities Curve 368
How Exchange Rates Are Determined 387
How Free Trade Affects Employment 369
What are Exchange Rates? 387
Protectionist Policies 370
How Demand and Supply Determine Exchange
Import Bans 370 Rates 388
Quotas and Voluntary Export Restraints 370 Changes in Demand or Supply 389
Responses to Protectionist Policies 372
Real Exchange Rates and Purchasing Power
Parity 391
APPLICATION 1 The Impact of Tariffs on the Poor 373
APPLICATION 1 Big Macs in Norway 393

What Are the Rationales for Protectionist
Policies? 373
The Current Account, the Financial Account,
To Shield Workers from Foreign Competition 374 and the Capital Account 394
To Nurture Infant Industries until They Rules for Calculating the Current, Financial, and
Mature 374 Capital Accounts 394
xiv
APPLICATION 2 Tax Havens and Global APPLICATION 2 Vanity Plates and the Elasticity of
Imbalances 397 Demand 419
Fixed and Flexible Exchange Rates 397 Price Elasticity along a Linear Demand Curve 419
Fixing the Exchange Rate 398 APPLICATION 3 Drones and the Lower Half of a
Linear Demand Curve 421
Fixed versus Flexible Exchange Rates 399
Elasticity and Total Revenue for a Linear Demand
The U.S. Experience with Fixed and Flexible Curve 421
Exchange Rates 400
Exchange Rate Systems Today 401 Other Elasticities of Demand 422

Income Elasticity of Demand 422
Managing Financial Crises 401
Cross-Price Elasticity of Demand 422
APPLICATION 3 Problems within the Euro Bloc 402
The Price Elasticity of Supply 423
APPLICATION 4 The Argentine Financial Crisis 404
APPLICATION 4 I Can Find that Elasticity in Four
Clicks! 423
What Determines the Price Elasticity of
Supply? 424
The Role of Time: Short-Run versus Long-Run

PART 8 Supply Elasticity 425
A Closer Look at Demand and Supply
Extreme Cases: Perfectly Inelastic Supply and
Perfectly Elastic Supply 425
20 Elasticity: A Measure of Predicting Changes in Quantity Supplied 426
Responsiveness 409
APPLICATION 5 The Short-Run and Long-Run
The Price Elasticity of Demand 410 Elasticity of Supply of Coffee 427
Computing Percentage Changes and Elasticities 410 Using Elasticities to Predict Changes in
Price Elasticity and the Demand Curve 411 Prices 427
The Price Effects of a Change in Demand 427
Elasticity and the Availability of Substitutes 413
The Price Effects of a Change in Supply 429
Other Determinants of the Price Elasticity of
Demand 414
APPLICATION 6 A Broken Pipeline and the Price
of Gasoline 430
Using Price Elasticity 415
Predicting Changes in Quantity 415 * EXERCISES 432 * CRITICAL THINKING 436
APPLICATION 1 The Elasticity of Demand for

Public Transit 415
21 Market Efficiency and Government
Price Elasticity and Total Revenue 416 Intervention 437
Using Elasticity to Predict the Revenue Effects of
Price Changes 418 Consumer Surplus and Producer
Surplus 438
Elasticity and Total Revenue for a Linear
Demand Curve 418 The Demand Curve and Consumer Surplus 439
xv
The Supply Curve and Producer Surplus 440 * SUMMARY 456 * KEY TERMS 456
Market Equilibrium and Efficiency 441
Total Surplus Is Lower with a Price below the
Equilibrium Price 441
APPLICATION 1 Consumer Surplus of Internet

22 Consumer Choice: Utility Theory
Service 441 and Insights from Behavioral
Economics 462
Total Surplus Is Lower with a Price above the
Equilibrium Price 443
Traditional Consumer Choice: Utility
Efficiency and the Invisible Hand 443 Theory 463
Government Intervention in Efficient Markets 444 Consumer Constraints: The Budget Line 463
APPLICATION 2 Rent Control and Mismatches 444 Total and Marginal Utility 464
The Marginal Principle and the Equimarginal

Controlling Prices—Maximum and Minimum Rule 466
Prices 445
Conditions for Utility Maximization 467
Setting Maximum Prices 445
Rent Control 445 The Law of Demand and the Individual

Demand Curve 469
APPLICATION 3 Price Controls and the Shrinking
Candy Bar 447 APPLICATION 1 Measuring Diminishing Marginal
Utility 470
Setting Minimum Prices 447
Effect of a Decrease in Price 470
Controlling Quantities—Licensing and Income and Substitution Effects of a Decrease in
Import Restrictions 447 Price 471
Taxi Medallions 448
The Individual Demand Curve 473
Licensing and Market Efficiency 448
APPLICATION 2 A Revenue-Neutral Carbon
Winners and Losers from Licensing 449 Tax 474
Import Restrictions 449

Consumer Decisions: Insights from
Behavioral Economics 474
APPLICATION 4 The Cost of Protecting a Lumber
Job 451 A Brief Look at the Neuroscience of Consumer
Choice 474
Who Really Pays Taxes? 451
Dietary Choice: Donut versus Apple 476
Tax Shifting: Forward and Backward 451
Present Bias: Spending versus Saving 477
Tax Shifting and the Price Elasticity of
Demand 452 Present Bias and Credit Cards 479
Cigarette Taxes and Tobacco Land 453 Present Bias and Smoking 479
The Luxury Boat Tax and Boat Workers 453 APPLICATION 3 Coke Versus Pepsi in the
Prefrontal Cortex 480
Tax Burden and Deadweight Loss 453
* SUMMARY 480 * EXERCISES 481
APPLICATION 5 French Restaurants and VAT 455 * CRITICAL THINKING 484
xvi
APPENDIX: Mental Shortcuts and Consumer Examples of Production Cost 503

Puzzles 484
Scale Economies in Wind Power 503
Mental Accounting and Bundling 485
Anchoring 485 The Average Cost of a Music Video 503
The Decoy Effect 486 Solar versus Nuclear: The Crossover 504
The Appeal of Percentage Changes 487
* SUMMARY 487 * EXERCISES 506 * CRITICAL THINKING 508
PART 9
24 Perfect Competition 509
Market Structures and Pricing
Preview of the Four Market Structures 510
23 Production Technology and Cost 488 APPLICATION 1 Wireless Women in Pakistan 512
Economic Cost and Economic Profit 489 The Firm’s Short-Run Output Decision 512
APPLICATION 1 Opportunity Cost and The Total Approach: Computing Total Revenue
Entrepreneurship 490 and Total Cost 513
The Marginal Approach 514

A Firm with a Fixed Production Facility:
Short-Run Costs 490 Economic Profit and the Break-Even Price 516
Production and Marginal Product 491 APPLICATION 2 The Break-Even Price for
Switchgrass, a Feedstock for Biofuel 516
Short-Run Total Cost 492
Short-Run Average Costs 493 The Firm’s Shut-Down Decision 517
Short-Run Marginal Cost 495 Total Revenue, Variable Cost, and the Shut-Down
Decision 517
The Relationship between Marginal Cost and
Average Cost 496 The Shut-Down Price 518
Fixed Costs and Sunk Costs 519

Production and Cost in the Long Run 497
APPLICATION 3 Shutting Down a Coal Mine 519
APPLICATION 2 The Rising Marginal Cost of Crude
Oil 497
Short-Run Supply Curves 520
Expansion and Replication 498
The Firm’s Short-Run Supply Curve 520
Reducing Output with Indivisible Inputs 499
The Short-Run Market Supply Curve 520
Scaling Down and Labor Specialization 500
Market Equilibrium 521
Economies of Scale 500
APPLICATION 4 Short-Run Supply Curve for
Diseconomies of Scale 500 Cargo 522
Actual Long-Run Average-Cost Curves 501 The Long-Run Supply Curve for an
Short-Run versus Long-Run Average Cost 502 Increasing-Cost Industry 522
Production Cost and Industry Size 523
APPLICATION 3 Indivisible Inputs and the Cost of
Fake Killer Whales 502 Drawing the Long-Run Market Supply Curve 524
xvii
Examples of Increasing-Cost Industries: Sugar and Patents and Monopoly Power 545
Apartments 524
Incentives for Innovation 545
APPLICATION 5 Chinese Coffee Growers Obey the Trade-Offs from Patents 546
Law of Supply 525
APPLICATION 3 Bribing the Makers of Generic
Short-Run and Long-Run Effects of Changes Drugs 546
in Demand 525
Price Discrimination 547
The Short-Run Response to an Increase in
Demand 525 Senior Discounts in Restaurants 548
The Long-Run Response to an Increase in Price Discrimination and the Elasticity of
Demand 526 Demand 549
APPLICATION 6 The Upward Jump and Downward Examples: Movie Admission versus Popcorn, and
Slide of Blueberry Prices 527 Hardback versus Paperback Books 549
Long-Run Supply for a Constant-Cost APPLICATION 4 Refillable Soda Bottles and Price
Industry 528 Discrimination 550

Long-Run Supply Curve for a Constant-Cost
Industry 528
Hurricane Andrew and the Price of Ice 528
APPLICATION 7 Economic Detective and the Case

of Margarine Prices 529
26 Market Entry and Monopolistic
Competition 555
The Effects of Market Entry 556
Entry Squeezes Profits from Three Sides 557
25 Monopoly and Price Discrimination 535 Examples of Entry: Car Stereos, Trucking, and
Tires 558
The Monopolist’s Output Decision 536
APPLICATION 1 Satellite Versus Cable 558
Total Revenue and Marginal Revenue 537
A Formula for Marginal Revenue 538 Monopolistic Competition 559
Using the Marginal Principle 539 When Entry Stops: Long-Run Equilibrium 559
APPLICATION 1 Marginal Revenue from a Baseball

Differentiation by Location 560
Fan 541
APPLICATION 2 Opening a Restaurant 561
The Social Cost of Monopoly 542
Trade-Offs with Entry and Monopolistic
Deadweight Loss from Monopoly 542 Competition 562
Rent Seeking: Using Resources to Get Monopoly Average Cost and Variety 562
Power 544
Monopolistic Competition versus Perfect
Monopoly and Public Policy 544 Competition 562
APPLICATION 2 Rent Seeking for Tribal Casinos 545 APPLICATION 3 Happy Hour Pricing 563
xviii
Advertising for Product Differentiation 564 Entry Deterrence and Contestable

Markets 586
APPLICATION 4 Picture of Man Versus Picture of
Woman 564
When Is the Passive Approach Better? 587
* SUMMARY 566 * KEY TERMS 566 APPLICATION 4 Cable TV Service as an Insecure

* EXERCISES 566 * CRITICAL THINKING 568 Monopolist 587

The Advertisers’ Dilemma 588
APPLICATION 5 Got Milk? 590

27 Oligopoly and Strategic Behavior 570 * SUMMARY 590 * KEY TERMS 591
Cartel Pricing and the Duopolists’
Dilemma 572
Price Fixing and the Game Tree 573
Equilibrium of the Price-Fixing Game 575 28 Controlling Market Power: Antitrust

and Regulation 597
Nash Equilibrium 576
APPLICATION 1 Failure of the Salt Cartel 577 Natural Monopoly 598

Picking an Output Level 598
Overcoming the Duopolists’ Dilemma 577
Will a Second Firm Enter? 599
Low-Price Guarantees 577
Price Controls for a Natural Monopoly 600
Repeated Pricing Games with Retaliation for
Underpricing 578 APPLICATION 1 Public Versus Private
Price Fixing and the Law 580 Waterworks 601
Price Leadership 580 APPLICATION 2 Satellite Radio Versus the

Connected Car 602
APPLICATION 2 Low-Price Guarantee Increases
Tire Prices 581 Antitrust Policy 602
Simultaneous Decision Making and the Breaking Up Monopolies 602

Payoff Matrix 581 Blocking Mergers 603
Simultaneous Price-Fixing Game 581 Merger Remedy for Wonder Bread 604
The Prisoners’ Dilemma 582 Regulating Business Practices 605
APPLICATION 3 Cheating on the Final Exam: The A Brief History of U.S. Antitrust Policy 606
Cheaters’ Dilemma 583
APPLICATION 3 Merger of Pennzoil and Quaker
The Insecure Monopolist and Entry State 607
Deterrence 584
APPLICATION 4 Merger of Office Depot and
Entry Deterrence and Limit Pricing 584 Officemax 607
Examples: Aluminum and Campus * SUMMARY 608 * KEY TERMS 608
Bookstores 586 * EXERCISES 608 * CRITICAL THINKING 610
xix
PART 10 APPLICATION 4 Car Insurance and Risky Driving 624
Externalities and Information Deposit Insurance for Savings and Loans 624
29 Imperfect Information: Adverse
Selection and Moral Hazard 611 * ECONOMIC EXPERIMENT 629
Adverse Selection for Buyers: The Lemons

30 Public Goods and Public Choice 631
Problem 612
Uninformed Buyers and Knowledgeable External Benefits and Public Goods 633
Sellers 612 Public Goods and the Free-Rider Problem 634
Equilibrium with All Low-Quality Goods 613 Behavioral Economics and Free Riding 634
A Thin Market: Equilibrium with Some High- Overcoming the Free-Rider Problem 635
Quality Goods 614
APPLICATION 1 Clearing Space Debris 635
APPLICATION 1 Are Baseball Pitchers Like Used
Cars? 616 APPLICATION 2 Global Weather Observation 636
Evidence of the Lemons Problem 616 Private Goods with External Benefits 636
Responding to the Lemons Problem 617 External Benefits from Education 637
Buyers Invest in Information 617 External Benefits and the Marginal Principle 637
Consumer Satisfaction Scores from Angie‘s List APPLICATION 3 External Benefits from Lojack 638
and eBay 617
APPLICATION 4 The Private and External Benefit
Guarantees and Lemons Laws 618
of Trees 639
APPLICATION 2 Regulation of the California Other Private Goods That Generate External
Kiwifruit Market 618 Benefits 639
Adverse Selection for Sellers: Public Choice and the Median Voter 639
Insurance 619
Voting and the Median-Voter Rule 639
Health Insurance 619
Voting with Feet 641
Equilibrium with All High-Cost Consumers 620
The Median Voter and the Median Location 641
Responding to Adverse Selection in Insurance:
Group Insurance 621 Alternative Models of Government: Self-Interest
and Special Interests 642
The Uninsured 622
Which Theory Is Correct? 643
Other Types of Insurance 622
APPLICATION 5 The Median Voter and Fire
APPLICATION 3 Genetic Testing and Adverse
Protection 643
Selection 622
Insurance and Moral Hazard 623 * EXERCISES 644 * CRITICAL THINKING 646
Insurance Companies and Moral Hazard 623 * ECONOMIC EXPERIMENT 647

xx
31 External Costs and Environmental APPLICATION 5 Young Drivers and

Collisions 665
Policy 648
The Efficient Level of Pollution 649
Using the Marginal Principle 650 * ECONOMIC EXPERIMENT 669
Example: The Efficient Level of Water

Pollution 650 PART 11
The Labor Market and Income
Coase Bargaining 651
Distribution
Taxing Pollution 652
APPLICATION 1 Reducing Methane Emissions 653 32 The Labor Market and the Distribution
of Income 671
A Firm’s Response to a Pollution Tax 653
The Market Effects of a Pollution Tax 653 The Demand for Labor 672
Example: A CO2 Tax 656 Labor Demand by an Individual Firm in the Short
Run 672
APPLICATION 2 Washing Carbon Out of
the Air 656 Market Demand for Labor in the Short Run 674
Labor Demand in the Long Run 674

Traditional Regulation 657
Uniform Abatement with Permits 657 APPLICATION 1 Marginal Revenue Product in
Major League Baseball 676
Command and Control 657
Short-Run versus Long-Run Demand 676
Market Effects of Pollution Regulations 658
Lesson from Dear Abby: Options for Pollution

The Supply of Labor 676
Abatement 658 The Individual Labor-Supply Decision: How
Many Hours? 677
APPLICATION 3 Options for Reducing CO2
Emissions from International Shipping 659 An Example of Income and Substitution
Effects 677
Marketable Pollution Permits 659
The Market Supply Curve for Labor 678
Voluntary Exchange and Marketable Permits 659
APPLICATION 2 Bike Messengers and Revenue
Supply, Demand, and the Price of Marketable Sharing in Zurich 679
Permits 661
Labor Market Equilibrium 679
External Costs from Automobiles 662
Changes in Demand and Supply 679
External Costs from Pollution 662
The Market Effects of the Minimum Wage 680
APPLICATION 4 The Price of CO2 Permits in the
Variation in Wages across Occupations and the
European Union 662
College Premium 681
External Costs from Congestion 663
The Gender Pay Gap and Racial
External Costs from Collisions 664 Discrimination 683
xxi
Labor Unions and Wages 684 APPLICATION 4 Earned Income Tax Credit
and Child Health 691
Immigration and Labor Markets 685
Earned Income Tax Credit 691
The Distribution of Income and Public
Policy 687
APPLICATION 3 The Value of a Statistical Life 687 Glossary 697

The Distribution of Income in 2013 688 Index 707
Changes in the Distribution of Income 689 Photo Credits 735
Poverty and Public Policy 690
P R EFAC E
In preparing this tenth edition, we had three primary goals. • We also incorporated a total of 35 exciting new
First, we wanted to incorporate the ongoing changes in the Applications into this edition, including four in the
United States and world economies as they have continued common chapters (Chapters 1–4), 17 in macroeco-
to recover and adjust from the worldwide recession of the nomics, and 14 in microeconomics. In addition, we
last decade. Second, we strived to update this edition to incorporated a total of 18 new chapter-opening s tories,
reflect the latest exciting developments in economic think- including nine in macroeconomics and nine in micro-
ing and make these accessible to new students of economics. economics. These fresh applications and chapter
Finally, we wanted to stay true to the philosophy of the text- openers show the widespread relevance of economic
book—using basic concepts of economics to explain a wide analysis.
variety of timely and interesting economic applications. • In the chapters common to macroeconomics and
To improve student results, we recommend pairing the microeconomics, the new applications include solar tax
text content with MyLab Economics, which is the teach- credits (Chapter 1), crop insurance and food produc-
ing and learning platform that empowers you to reach every tion (Chapter 3), and the effects of the growing popu-
student. By combining trusted author content with digital larity of craft beer on hop prices (Chapter 4).
tools and a flexible platform, MyLab personalizes the learn-
• In the macroeconomics chapters, other new applica-
ing experience and will help your students learn and retain
tions include explaining high rates of saving in China
key course concepts while developing skills that future
(Chapter 7), the behavior of households that are
employers are seeking in their candidates. From Digital
wealthy but have little cash on hand (Chapter 11),
Interactives to Real-time Data Analysis Exercises,
theories of why investment spending has been low in
MyLab Economics helps you teach your course, your way.
the United States (Chapter 12), the role that Bitcoin
Learn more at www.pearson.com/mylab/economics.
and other cryptocurrencies may play in the monetary
system (Chapter 13), and the role that technological
New to This Edition improvements in other countries will have on trade and
In addition to updating all the figures and data, we made a welfare for the United States (Chapter 18).
number of other key changes in this edition. They include • In the microeconomics chapters, the new applica-
the following: tions include the effect of a VAT tax on French res-
taurants (Chapter 21), the opportunity cost of serving
• At the end of each chapter, we have added Critical as an Airbnb host (Chapter 23), the rationale for shut-
Thinking Exercises that challenge the student to think ting down a coal mine (Chapter 24), the maple syrup
more deeply about the topics and ideas within the cartel (Chapter 27), the implications of genetic testing
chapters. for insurance (Chapter 29), the behavioral econom-
• We discuss in Chapter 6 the links between disability ics of free riding (Chapter 30), carbon permits in the
insurance and labor force participation. European Union (Chapter 31), and how bicycle mes-
• We discuss in Chapter 8 the relationships between cit- sengers respond to incentives (Chapter 32).
ies and economic growth.
• We discuss in Chapter 10 the concept of dynamic scor- Solving Teaching and Learning
ing and explain how it is used to estimate tax revenues Challenges
in the federal budget process.
Many students who take the principles of economics class
• We discuss in Chapter 12 the Dodd-Frank regulations
have difficulty seeing the relevance of the key concepts of
and consider how they will impact the financial sector
economics, including the role of opportunity costs, thinking
and the economy.
on the margin, the benefits of voluntary exchange, the idea
• In Chapter 14, we introduce Jerome Powell, the new of diminishing returns, and the distinction between real and
Chairman of the Federal Reserve and discuss his prior nominal magnitudes. This reduces student preparedness
experience and the challenges he will face in the new and engagement. We explore the five key principles of eco-
economic environment. nomics we think are most important to students and use the
• In Chapter 18, we explore how automobile companies following resources to engage students with the content to
have been purchasing a large fraction of their parts highlight not only how economics is relevant to their lives,
outside the United States to put into “American” cars. but also their future careers.
xxii
xxiii
Make Economics Relevant through nomic and macroeconomic news stories and accompanying
Real-World Application exercises are posted to MyLab Economics. Assignable and
auto-graded, these multi-part exercises ask students to rec-
Real-world application is crucial to helping students find
ognize and apply economic concepts to current events.
the relevance in economics. As such, our applications-driven
text includes over 130 real-world Applications to help stu-
dents master essential economics concepts. Here is an exam- 5.9 Repaying a Car Loan. Suppose you borrow money to 5.10 Inflation and Interest Rates. Len buys MP3 music at
ple of our approach from Chapter 4, “Demand, Supply, and buy a car and must repay $20,000 in interest and prin-
cipal in 5 years. Your current monthly salary is $4,000.
$1 per tune and prefers music now to music later. He is
willing to sacrifice 10 tunes today as long as he gets at
Market Equilibrium.” (Related to Application 5 on page 40.)

Complete the following table.
least 11 tunes in a year. When Len loans $50 to Barb
for a 1-year period, he cuts back his music purchases
66 P AR T 1 by 50 tunes.
Which environment has the lowest real cost of repay-
ing the loan? a. To make Len indifferent about making the
loan, Barb must repay him _________ tunes or
APPLICATION 1 $_________. The implied interest rate is _________
Change in Prices and Months of Work to percent.
THE LAW OF DEMAND FOR YOUNG SMOKERS Wages Monthly Salary Repay $20,000 Loan b. Suppose that over the 1-year period of the loan, all
Stable $4,000 prices (including the price of MP3 tunes) increase by
APPLYING THE CONCEPTS #1: What is the law of demand?
inflation: Prices rise 20 percent, and Len and Barb anticipate the price
by 25% changes. To make Len indifferent about making
that increases in state cigarette taxes between 1990 and 2005 the loan, Barb must repay him _________ tunes or
Deflation: Prices drop
resulted in less participation (fewer smokers) and lower fre-
by 50% $_________. The implied interest rate is _________
quency (fewer cigarettes per smoker).
A change in cigarette taxes in Canada illustrates the sec- percent.
ond effect, the new-smoker effect. in 1994, several provinces
in eastern Canada cut their cigarette taxes in response to the
smuggling of cigarettes from the united States (where taxes are
lower), and the price of cigarettes in the provinces decreased CRITICAL THINKING
by roughly 50 percent. Researchers tracked the choices of
591 youths from the Waterloo Smoking Prevention Program and
concluded that the lower price increased the smoking rate by
1. Consider a college graduate who is thinking about 4. Consider a student studying for a biology exam.
As price decreases and we move downward along the market enrolling in law school. How would you compute the Would you expect study time to be subject to dimin-
demand for cigarettes, the quantity of cigarettes demanded roughly 17 percent. Related to Exercises 1.6 and 1.8.
cost of a 3-year law degree? ishing returns? Suppose productivity is measured as
Stimulate Active Learning with Experiments
increases for two reasons. First, people who smoked cigarettes
2. Suppose you open a new food cart and must decide the anticipated increase in the exam score. Construct
at the original price respond to the lower price by smoking
more. Second, some people start smoking.
SOURCES: (1) Anindya Sen and Tony Wirjanto, “Estimating the Impacts of Ciga-
how long to remain open. Explain how you would use a numerical example in which the first hour is twice as
rette Taxes on Youth Smoking Participation, Initiation, and Persistence: Empirical
in the united States, cigarette taxes vary across states, and economic logic to make the decision. productive as the second hour, which is twice as pro-
studies of cigarette consumption patterns show that higher
taxes mean less cigarette consumption by youths. using data
Evidence from Canada,” Health Economics 19 (2010), pp. 1264–1280. (2) Chris-
topher Carpentera and Philip J. Cook, “Cigarette Taxes and Youth Smoking: New
Evidence from National, State, and Local Youth Risk Behavior Surveys,” Journal
Economics Experiment sections are available throughout
3. At the end of a party, Steph Curry must decide whether
ductive as the third hour, and so on up to five hours
of study.
from the youth Risk Behavior Surveys (ySBS), one study shows of Health Economics 27 (2008), pp. 287–299.
the text, engaging students with
5. the opportunity to perform
to clean up his back yard by tossing discarded napkins
(conveniently rolled into spheres) into a single station- Suppose you graduate from college with $40,000 in
ary trash can. Given his formidable 3-point skills, he student-loan debt. Over the 10 years it takes you to
their own economic analysis.
could complete the task in 3 minutes, compared to repay the debt, do you prefer inflation or stable prices?
Suppose that after you repay your debt, you become a
an hour for a groundskeeper. Should he clear the dis-
The market demand is negatively sloped, reflecting the law of demand. This is lender rather than a borrower. How will your prefer-
carded napkins, or hire a groundskeeper? Explain.
Each Application has at least one related exercise available
sensible, because if each consumer obeys the law of demand, consumers as a group
will, too. When the price increases from $4 to $8, there is a change in quantity
ences with respect to inflation change?
in MyLab Economics. These exercises can beis the

found
demanded as we move along the demand curve from point f to point c. The move-
ment along the demand curve occurs if the price of pizza inthatthe
only variable has
Economic Experiment
Application boxeschanged.
MyLab Economics Study Plan
in the eText with an opportunity for
MyLab Economics Concept Check
PRODUCING FOLD-ITS
additional practiceThe
Learning Objective 4.2 inSupply
the StudyCurve Plan, and in the end-of-
Here is a simple economic experiment that takes about 15 minutes to four students, and so on. How does the number of fold-its change as
chapter section. The Study
supply sidePlan gives
firms sellstudents
their products to personalized
Describe and explain the law of supply.
On the of a market, consumers. Suppose you run. The instructor places a stapler and a stack of paper on a table. Stu- the number of workers increases?
ask the manager of a firm, “How much of your product are you willing to produce and dents produce “fold-its” by folding a page of paper in thirds and stapling
recommendations,sell?” practice opportunities, and learning aids
The answer is likely to be “it depends.” The manager’s decision about how much
to produce depends on many variables, including the following, using pizza as an
both ends of the folded page. One student is assigned to inspect each
fold-it to be sure that it is produced correctly. The experiment starts MyLab Economics
to help them stay on track.
example: with a single student, or worker, who has 1 minute to produce as many
fold-its as possible. After the instructor records the number of fold-its
For additional economic experiments, please visit
• The price of the product (e.g., the price per pizza) www.pearson.com/mylab/economics
• The wage paid to workers produced, the process is repeated with two students, three students,
• The price of materials (e.g., the price of dough and cheese)

• The cost of capital (e.g., the cost of a pizza oven)
• The state of production technology (e.g., the knowledge used in making pizza)
• Producers’ expectations about future prices
• Taxes paid to the government or subsidies (payments from the government to Single Player Experiments are also available in MyLab 45
firms to produce a product)
quantity supplied Together, these variables determine how much of a product firms are willing to pro- Economics to engage students in economic decision-
The amount of a product that firms are
willing and able to sell.
duce and sell, the quantity supplied. We start our discussion of market supply with
the relationship between the price of a good and the quantity of that good supplied, making. Experiments are an easy-to-use, fun, and engaging
way to promote active learning and mastery of important
M02_OSUL1098_10_SE_C02.indd 45 15/09/18 3:24 PM
economic concepts. Single-player experiments allow your

students to play against virtual players from anywhere at
M04_OSUL1098_10_SE_C04.indd 66
any time so long as they have an Internet connection. Pre-
24/08/2018 18:32
and post-questions for each experiment are available for

assignment.
Our macroeconomic world is rich with data. We help

students understand the importance of real and current data
through the incorporation of Real-Time-Data Analysis
Exercises in the Macroeconomics volume. The Real-Time-
Data Analysis Exercises, marked with , allow students
and instructors to use the very latest data from FRED. By
completing the exercises, students become familiar with
a key data source, learn how to locate data, and develop
important employability skills in interpreting data.
Students are often best motivated when they see the
relevance of what they’re learning to the world they live
in. The Current News Exercises available to students in
MyLab Economics help demonstrate the real world rele-
vance of these important concepts. Every week, microeco-
xxiv
Show the Big Picture with Five Key Thinking exercise will be available in MyLab Economics
Principles as an essay question. These open-ended, thought-pro-
voking questions challenge students to think more deeply
In Chapter 2, “The Key Principles of Economics,” we intro-
about and apply the key concepts presented within the
duce the following five key principles and then apply them
chapters.
throughout the book:
Illustrating the Key Principles of Economics
1. The Principle of Opportunity Cost. The opportu-
These big picture concepts are also well-illustrated in
nity cost of something is what you sacrifice to get it.
the figures and tables included in the text. Animated
2. The Marginal Principle. Increase the level of an activ- graphs in MyLab Economics help students understand
ity as long as its marginal benefit exceeds its marginal shifts in curves, movements along curves, and changes in
cost. Choose the level at which the marginal benefit equilibrium values. For every figure in the book, there is
equals the marginal cost. also an exercise directly related to that figure in MyLab
3. The Principle of Voluntary Exchange. A voluntary Economics.
exchange between two people makes both people bet-
ter off.
4. The Principle of Diminishing Returns. If we
increase one input while holding the other inputs fixed,
output will increase, but at a decreasing rate.
5. The Real-Nominal Principle. What matters to people
is the real value of money or income—its p urchasing
power—not the face value of money or income.
This approach of repeating five key principles gives stu-

dents the big picture—the framework of economic reason-
ing. We make the key concepts unforgettable by using them
repeatedly, illustrating them with intriguing examples, and
giving students many opportunities to practice what they’ve
learned, such as the Concept Checks available in MyLab
Developing Employability Skills
Economics. For students to succeed in a rapidly changing job market,
they need thinking and communication skills. In addition,
Practicing the Principles they need to be informed about career options and the path-
Each section of each learning objective concludes with an way from college student to productive employee. This
online Concept Check that contains one or two multiple book—along with the MyLab—promotes skill development
choice, true/false, or fill-in questions. These checks act as and career awareness.
“speed bumps” that encourage students to stop and check We added a new section to Chapter 1 on page 10,
their understanding of fundamental terms and concepts “Employability: Economic Logic on the Job,” where we
before moving on to the next section. The goal of this dig- discuss how economics promotes the sort of critical think-
ital resource is to help students assess their progress on a ing and communication skills that employers value in their
section-by-section basis, so they can be better prepared for workers. Additionally, we discuss the role of economics in a
homework, quizzes, and exams. liberal-arts education in building thinking skills that make
The end-of-chapter exercises then test student under- a worker responsive to changes in the workplace. We also
standing of the concepts presented in each chapter. These point readers to the U.S. Bureau of Labor Statistics as a
exercises are available in MyLab Economics and include good source of information about career paths that start
multiple-choice, graph drawing, and free-response items, with course work in economics.
many of which are generated algorithmically so that each Economics is the science of choice, and the book
time a student works them, a different variation is presented. clearly illustrates the widespread application of econom-
New to this edition are accessible versions of exercises in ics. Throughout the book we use examples from business,
MyLab Economics that ask students to draw a graph. These government, and other organizations to show the practi-
accessible versions present the same question in a different cal deployment of economics to all sorts of decisions. This
form, which will allow every student the same opportunity approach applies economic concepts with real-world situa-
to practice their knowledge of the key principles explored tions, and thus imparts critical thinking skills to workers in
in the text. all sorts of organizations. We deliver these practical applica-
New to this edition are the Critical Thinking exercises tions in the text itself, as well as in chapter openers and 3 to
included in the end-of-chapter section. Every Critical 5 applications per chapter.
Another random document with
no related content on Scribd:
An extremely tough paper made from silk, a recent invention
of T. Oishi, a Japanese manufacturer, would be specially
useful for such a purpose....
It will be noticed that the texture is very compact and free
from pores, as might, indeed, be expected on account of the
fineness of the silk fibres of which it is composed. It must not
be forgotten that cotton fibres are tubes, and gas may pass
through them even when they are embedded in an
impermeable film. Silk fibres, on the other hand, are solid, as
well as stronger than cotton.
Another way in which a tough, flexible cement may be
utilised is to cement a metal foil to a textile fabric. Aluminium
foil, for instance, cemented to cotton by means of flexile
collodion, gives a completely impermeable fabric of much
greater suppleness than the sheet aluminium hitherto used for
balloons.
Fine aluminium flakes dusted upon the freshly varnished
surface adds greatly to the impermeability of the fabric, and
the same may be said of coarsely powdered mica.
It may be noted in this connection that an impermeable varnish

does not only apply to balloon and airship construction, but will also
have its use for impregnating the planes of the heavier-than-air
machines.
6. Great cost of airships.

The cost of airships compared with that of aëroplanes certainly
favours the extended use of the latter in war. It is easy to spend
£50,000 on a very large airship. Supposing the cost of an aëroplane
seating two persons is £1,000, it is a question from an economic
point of view whether the possession of fifty aëroplanes is not far
better military value for the money expended on the solitary airship.
But in the case of the latter it is not only initial expense that has to be
considered, but cost of housing, maintenance, and hydrogen gas.
These items are very considerable. The upkeep of one large airship
very much exceeds that incurred with fifty aëroplanes.
7. The great amount of personnel needed for the manipulation of

large airships.
It is no exaggeration to say that the ground manipulation of large
airships necessitates the attendance of quite an army. In the case of
a Zeppelin the exigencies of wind may call for the assistance of 300
trained sappers on landing. This is the reason why it is so advisable
to have the resting-places of large airships on water. In the case of
rigid airships a slight bump on the earth may do considerable
damage. Colonel Moedebeck has laid especial stress on the
advisability of water landing.
In practice it is never possible, even by working the motor

against the wind, to avoid a certain amount of bumping, since
the aërostatical equilibrium is not easily judged and allowed
for, especially in strong winds. On this account the safer water
landing is always preferable.
An airship can be anchored more easily with the point
against the wind on water. It is quite impossible to anchor on
land when assistance is not forthcoming to hold down the
airship. On water, also, the airship will give a little to side
winds and to alterations in the direction of the wind, without
overturning. On land this danger is not excluded, even with
rigid airships. Of course, a watertight and seaworthy car is a
necessary condition for landing on water.
The landing requires great attention, and rapid, decisive
handling and management on the part of the aëronaut.
In the opinion of the same expert airship travelling on a large

scale would not be possible without the publication of special charts,
which would furnish information concerning natural airship harbours,
and their relation to various winds, and also of the various airship
sheds which may be erected. He states it would be highly dangerous
to undertake airship voyages without the existence of suitable
stations against storms, and where gas supplies, driving material,
and ballast could be renewed.
8. Great liability of being destroyed by aëroplanes in war.

This is no doubt one of the greatest dangers the airship has to
face in war. The aëroplane is the airship’s deadliest enemy. So
terrible to the airship is this hornet of the air that the former has no
chance of making an attack. It must ever remain on the defensive.
The speed and quickly rising power of modern aëroplanes settles
this question. When the aëroplane is advancing the airship cannot
escape. Nor can it now any longer rise to safe altitude, for the
nimbler heavier-than-air machines can easily outdo it.
The only salvation of the attacked airship is its mitrailleuse gun
fixed on the platform at its topmost part, but the chance of hitting the
swiftly advancing aëroplane is fairly remote.
There are more ways than one in which the fatal attack of
aëroplane v. airship can be made. The airman can, indeed, ram the
gas-bags by hurling himself and machine against it. Then destruction
would be swift and sure, with the probable loss of the airman’s own
life. Better tactics would be to fly above, and drop suitable weapons
on the fragile gas-bag; a few sharp and jagged stones would
probably suffice. Sharp darts of steel would be all-effective. So easy,
indeed, would it be for one aëroplane skilfully handled to end the
existence of the largest airship that one cannot refrain from asking
the question whether on this account alone it can survive as the
instrument of war?
9. Insufficient power of quickly rising.

This is a point which wants the attention of the aëronautical
engineer. The old-fashioned spherical balloons were made to rise
and fall by the alternate sacrifice of gas and ballast. Thus the very
life-blood of the balloon became quickly exhausted. It was obvious
that when airships supplanted balloons the former must be supplied
with a less exhausting process of vertical movement.
As has already been mentioned, when treating of the Zeppelin
airship, for the purpose of rising horizontal planes are now fitted to
airships. Some engineers have thought these should be
supplemented by a mechanical device, so that the speed of rising
might be augmented. The late Baron de Bradsky provided his airship
with a horizontal screw placed beneath the car. But one horizontal
screw beneath an airship tends to twist it round—to convert it into an
aërial top. To avoid this effect it would be necessary to have two
horizontal screws rotating in opposite directions. This precaution was
absent in de Bradsky’s construction, and it kept on twisting round,
with the disastrous effect that the steel wires which held the car to
the balloon snapped, with tragic results. But the idea of the
horizontal screw is worth reviving. It has been a cherished plan of M.
Julliot to include the principle in his designs, but on account of extra
weight he has, I believe, hitherto not tried the interesting experiment.
The colour of most of the airships is a disadvantage, though this
is a matter so easy of alteration that it has not been included in the
list of disadvantages.
In military airships, and, it may be added, aëroplanes also, the
colour should be a neutral tint that is as invisible as possible against
the sky. Most of the airships have been made a glaring yellow, so
that the india-rubber in the envelopes may be better preserved from
the action of light. This protection may have to be sacrificed to the
overpowering advantages of invisibility in the case of naval and
military airships.
CHAPTER VI
THE ADVENT OF THE AËROPLANE
The year of 1908 will be memorable in aëronautical science for its

demonstration of the possibility of mechanical flight. Day after day in
France and America was then seen the spectacle of men flying in
the air, with a grace equal to that of the soaring bird. This was done
with a machine not raised by the buoyancy of a gas, but with one
that was heavier than the medium in which it travels, and whose
sustentation and direction was accomplished by dexterity and skill.
The experiments of the brothers Wright were new triumphs of man,
new examples of the old truths that a difficulty is a thing to be
overcome, and that the impossibility of to-day may be the
achievement of to-morrow. This progress in human flight was not the
result of any new discovery; it was the sequence of a long series of
experiments; nor was it one nation only that forged the links that
connected past researches to the successful issues of the present
century.
It is, however, not without honour to the British nation that one of
the fundamental principles of the biplane was proposed and
elucidated by a Briton in 1866. I refer to the important principle of
superposed surfaces advanced in that year by the late F. H.
Wenham. He pointed out that the lifting power of such a surface can
be most economically obtained by placing a number of small
surfaces above each other. Wenham built flying machines on this
principle with appliances for the use of his own muscular power. He
obtained valuable results as to the driving power of his superposed
surfaces, but he did not accomplish flight.
In 1872, H. von Helmholtz emphasised the improbability that
man would ever be able to drive a flying machine by his own
muscular exertion. After his statements there came a period of
stagnation in the attempts to navigate the air by bodies heavier than
air.
It is difficult to say how much aëronautical science owes to two
illustrious names—Sir Hiram Maxim and the late Professor Langley.
The two eminent men took up the subject of flight about the same
time in the last decade of the last century, and applied to it all the
scientific knowledge of the time. The flying machine had come to be
associated in the public mind with foolhardiness and failure. In the
discussion following Sir Hiram Maxim’s paper, “Experiments in
Aëronautics,” read before the Society of Arts on November 28th,
1894, he said, “At the time I took up this subject it was almost
considered a disgrace for anyone to think of it; it was quite out of the
question practically.” But these two scientific men stepped into the
breach, rescued aëronautics from a fallen position, and fired in its
cause the enthusiasm of men of light and leading.
Sir Hiram Maxim built the largest flying machine that had been
constructed. It spread 4,000 square feet of supporting surface, and
weighed 8,000 lb. The screw propellers were no less than 17 feet 11
inches in diameter, the width of the blade at the tip being 5 feet. The
boiler was of 363 h.p. The machine ran on wheels on a railway line,
and was restrained from premature flight by two wooden rails placed
on each side above the wheels. On one occasion, however, the
machine burst through the wooden rails and flew for 300 feet.
In 1896 Langley’s tandem-surfaced model aërodrome had luck
with the aërial currents, and flew for more than three-quarters of a
mile over the Potomac River. This machine had 70 square feet
supporting surface, weighed 72 lb., and had an engine of 1 h.p.,
weighing 7 lb. It is well known how, in later years, Langley
exaggerated his model into a machine which carried a man, and how
twice, when it was put to the test over water, at the very moment of
being launched, it caught in the launching ways and was pulled into
the water. It is interesting to note that the American aviator, Mr.
Curtiss, has lately unearthed the Langley flying machine, and flown
on it. Thus to Langley has come a posthumous aëronautical honour.
Lilienthal, in Germany, in considering equilibrium, experimented
with what are called gliding machines—aëroplanes which are
launched from some hillside against the wind, and depend upon
gravity for their motive power. In this way the art of balancing could
be practised on motorless gliders. With Lilienthal commenced the
age of systematic experimental flight; he made the discovery of the
driving forward of arched surfaces against the wind; he made some
2,000 glides, and sometimes from a height of 30 metres he glided
300 metres. The underlying principle of maintaining equilibrium in the
air has been recognised to be that the centre of pressure should at
all times be on the same vertical line as the centre of gravity due to
the weight of the apparatus. Lilienthal sought to keep his balance by
altering the position of his centre of gravity by movements of his
body. One day he was upset by a side gust and was killed. Pilcher, in
England, took up his work. With his soaring machines he made
some hundred glides, but he also made one too many. One day, in
1899, in attempting to soar from level ground by being towed by
horses, his machine broke, and he fell to the ground. He died shortly
afterwards, a British martyr of the air.
Mr. Octave Chanute’s experiments in 1896–1902 formed
important links in flight development. He first introduced the vital
principle of making the surfaces movable instead of the aviator, and
he made use of superposed surfaces. Though his work was a stage
in the development of the flying machine, it was reserved to two
other geniuses, the brothers Wright, to bring flight to a point of
progress where prejudiced critics would be for ever silenced.
The brothers Wright first carried out laboratory experiments; they
then, in 1900, first began to experiment with gliding machines at Kitty
Hawk, North Carolina. With the comparatively small surfaces (15.3
square metres) they used in that year, they endeavoured to raise the
machine by the wind like a kite; but finding that it often blew too
strongly for such a system to be practical, in 1901 they abandoned
the idea and resorted to gliding flight.
These machines of 1901 had two superposed surfaces, 1.73
metres apart, each being 6.7 metres from tip to tip, 2.13 metres
wide, and arched 1-19th. The total supporting surface was 27 square
metres. They dispensed with the tail which previous experimenters
had considered necessary. Instead, they introduced into their
machine two vital principles, upon which not only the success of their
preliminary gliding experiments depended, but also their later ones
with their motor-driven aëroplanes—(1) the hinged horizontal rudder
in front for controlling the vertical movements of the machine; (2) the
warping or flexing of one wing or the other for steering to right or left.
Later, a vertical rudder was also added for horizontal steering.
The combined movements of these devices maintained equilibrium.
The importance of the system of torsion of the main carrying
surfaces cannot be overestimated. We have only to look to nature for
its raison d’être, and observe a flight of seagulls over the sea: how
varied are the flexings of nature’s aëroplanes in their wondrous
manœuvrings to maintain and recover equilibrium! Since the
appearance of the Wright motor-driven aëroplane, the principle of
moving either the main surface or attachments to the main surface
has been very generally adopted in other types of flying machines. A
feature of these early experiments was the placing of the operator
prone upon the gliding machine, instead of in an upright position, to
secure greater safety in alighting, and to diminish the resistance.
This, however, was only a temporary expedient while the Wrights
were feeling their way. In the motor-driven aëroplanes the navigator
and his companion were comfortably seated. After the experiments
of 1901, the Wrights carried on laboratory researches to determine
the amount and direction of the pressures produced by the wind
upon planes and arched surfaces exposed at various angles of
incidence. They discovered that the tables of the air pressures which
had been in use were incorrect. Upon the results of these
experiments they produced, in 1902, a new and larger machine. This
had 28.44 square metres of sustaining surfaces—about twice the
area that previous experimenters had dared to handle. The machine
was first flown as a kite, so that it might be ascertained whether it
would soar in a wind having an upward trend of a trifle over seven
degrees; and this trend was found on the slope of a hill over which
the current was flowing. Experiment showed that the machine
soared under these circumstances whenever the wind was of
sufficient force to keep the angle of incidence between four and eight
degrees. Hundreds of successful glides were made along the full
length of this slope, the longest being 22½ feet, and the time 26
seconds. A motor and screw propellers were then applied in place of
gravity, in 1903, and four flights made, the first lasting 12 seconds,
and the last 59 seconds, when 260 metres were covered at a height
of two metres.
In 1904, several hundred flights were made, some being circular.
All this work was carried on in a secluded spot and unpublished. In
December, 1905, the world was startled by the news that the
brothers Wright had flown for 24¼ miles in half an hour, at a speed
of 38 miles an hour. More than this at the time the brothers would not
say, and for three years the world thirsted for the fuller knowledge
only revealed in 1908. In the interval some went so far as to distrust
the statements of the brothers Wright; but those who, like myself,
had had the privilege of correspondence with them from their first
experiments felt the fullest confidence that every statement they had
made was fact.
I have somewhat dwelt on the preliminary experiments of the
brothers Wright with their gliding structures as indicating the rapidity
of progress attained when sound scientific method is combined with
practical experiment. Too often in the past there has been a
tendency amongst the workers in science to keep theory and
practice apart. They are, however, interdependent. Each has a
corrective influence on the other.
To the labours of the Wright brothers we certainly owe the advent
of the mobile and truly efficient military air scout. It is their efforts that
have revolutionised warfare. In the present war we see only the
beginnings of what will one day be; but they are none the less truly
prophetic.
It was the enthusiastic Captain Ferber, who later became a
victim to his ardour for aërial achievement, who realised what the
brothers Wright had accomplished for military aëronautics. The latter
having entered into communications with the French Government
respecting the sale of their machines, Captain Ferber was deputed
by the French Government to go to America and report on their
claims. As the brothers Wright at that time so carefully guarded the
secrecy of their details, he was not allowed to see the machine when
he arrived, and had to be content with the mere hearsay of certain
persons at Ohio, who had witnessed their flights. But he had
sufficient faith in the brothers Wright to recommend the French
Government to buy their invention.
The negotiations, however, fell through at the time, but in 1908
Wilbur Wright came to France to carry on experiments at Le Mans,
while his brother, Mr. Orville Wright, went to Fort Myers in America.
In Wilbur Wright’s machine at Le Mans, the two superposed
slightly concave surfaces were about 12.50 metres long and 2
metres wide. They were separated by a distance of 1.80 metres. At a
distance of 3 metres from the main supporting surfaces was the
horizontal rudder for controlling the vertical motions; this was
composed of two oval superposed planes. At 2.50 metres in front of
the main supporting surfaces was the vertical rudder, composed of
two vertical planes.
The 25 h.p. motor was placed on the lower aëro-surface; this
weighed ninety kilogrammes. At the left of the motor were the two
seats, side by side, for the aëronaut and his companion. The two
wooden propellers at the back of the machine were 2.50 metres in
diameter. They revolved at the rate of 450 revolutions per minute.
The area of the sustaining surfaces was fifty square metres. The
weight of the whole machine (with aviator) was about 450
kilogrammes. Levers under the control of the aviator regulated the
various functions of the machine, the flexing of the carrying surfaces,
the movements of the horizontal rudders, the vertical rudder, etc.
Soon after the experiments at Le Mans had commenced there
came the news of the accident to Mr. Orville Wright’s machine in
America, in which the latter’s leg was broken and Lieutenant
Selfridge was killed. This was a critical moment for aëronautical
science. I can myself bear witness to its depressing effect on an
illustrious aëronautical assemblage, for I was myself present at
Wilbur Wright’s aëroplane shed when the telegram came bearing the
sad news. The sacrifice of one life at that moment seemed to
counterbalance the advantages gained by the triumph of the
brothers Wright. Even Wilbur Wright himself seemed to half repent
he had conquered the air! He exclaimed, “It seems all my fault.” It
was, indeed, then little thought what the future toll of the air would
have to be.
Fortunately for aëronautical progress, two days afterwards
Wilbur Wright recovered his nerve, and made the convincing flight of
1 hour 31 minutes 25 4-5th seconds.
From that day onwards there has been an increasing flow of
progress in the mastery of the air.
CHAPTER VII
TYPES OF AËROPLANES
France has indeed been the breeding-place for types of aëroplanes.

From France have the nations of late been largely gathering them—
save Germany. She has preferred to evolve her own distinctive
types. Even before Wilbur Wright appeared with his machine at Le
Mans and the details were known, hearsay of his doings had fired
the French imagination to do what he had done. In ignorance of the
vital principle of movable surfaces that the Wrights had evolved,
there came into existence the unbending, rigid type that was not
destined to survive.
The first of these was the bird of prey of M. Santos Dumont.
Rudely simple was it in its construction. Two box kites formed the
supporting surface. In the centre was the motor, with the screw
behind. To attain flight the machine was run upon wheels along the
ground until a certain speed was reached, when the machine rose
into the air. With this the inventor did not do much more than make
aërial jumps; but rude as it was it contained one feature which has
since been retained in all aëroplanes. In this one respect it was an
advance—and a very necessary one—upon the Wright machine.
That feature was the attachment of wheels to the machine that has
been mentioned above. This was, indeed, an important step in the
evolution of the aërial scout. Had it been necessary to continue using
the external starting catapults that were a feature of the early
experiments of the Wrights, the application of the aëroplane to
warfare would have been somewhat limited.
The well-known Voisin machine was another outcome of this
period, but, imperfect as it was, it brought Mr. Henry Farman into
fame, for on it he was the first man in Europe to fly any distance
worthy of mention.
The Farman Biplane.

Discontented with the Voisin machine, Mr. Henry Farman
constructed one of his own design. Though it appeared at an early
stage of aëroplane development, it still remains one of the most
efficient types of biplanes. It has been used enormously in France,
and armoured Farmans play an important part in the great war that is
proceeding.
Mr. Farman quickly realised that for maintaining lateral stability
the vertical planes fitted between the main planes of the Voisin type
were a very poor substitute for the wing-warping method of the
brothers Wright. He, however, produced the movement of the main
surfaces in an original manner. He hinged small flaps to the rear
extremities of the main planes. These he called “ailerons.” They
produce much the same effect as the wing-warping method of the
brothers Wright. When the biplane tilted sideways, the flaps were
drawn down on the side that was depressed. The pressure of the air
on the flaps forced the aëroplane back on an even keel. In the
normal condition the flaps flew out straight in the wind on a level with
the main planes. Another noticeable feature of Mr. Farman’s
machine was the production of the first light and efficient landing
chassis. This was a combination of wooden skids and bicycle
wheels. Below the biplane, on wooden uprights, he fitted two long
wooden skids. On either side of each skid he placed two little
pneumatic tyred bicycle wheels, connected by a short axle. These
were held in position on the skid by stout rubber bands passing over
the axle.
In a general way the wheels raised the skids from the ground,
but if the ascent was abrupt the wheels were forced against the
rubber bands and the skids came in contact with the ground. With
the abatement of the force of the shock the wheels came again into
play.
Simplification of the chassis is becoming evident in the latest
forms of all military aëroplanes, the reduction of weight in this portion
of the apparatus being important.
To Mr. Farman belongs the credit of having first applied to his
aëroplane the now famous Gnome motor, in which seven or more
cylinders revolve. It can truly be said that the influence of this motor
on facilitating flight generally, and very particularly military aviation,
has been nothing short of prodigious. The aëroplane, like the airship,
had to wait for the light petroleum motor. Its advent made flight
possible, but achievement in flight would have been comparatively
small had it not been for the welcome appearance of a motor
specially adapted to the purpose.
The early forms of aëroplane engines in which the cylinders
were fixed had proved to be quite unreliable owing to the high
speeds at which the engines had to work. Overheating, loss of
power, and stopping were frequent occurrences. The water-cooling
and air-cooling systems introduced were equally inefficient. The very
fact that the cylinders of the Gnome motor revolved effected the
desideratum of automatic cooling, and also gave a smooth, even
thrust to the propeller.
If the aëroplanes in the present war were flying over the enemy’s
lines with old-fashioned engines, they would be dropping down into
hostile hands as quickly as dying flies from the ceiling on the first
winter days.
After the introduction of the Gnome motor, it was quickly realised
that the speeds secured by its use gave the aëroplane a stability that
was absent in the more slowly moving machines. Winds that were
the bugbear of the aëroplanists could then be combated, and the
aëroplane ceased to be the fine-weather machine. Heights could
then be climbed that a little while before were undreamt of. It is said
that there are some disadvantages in the case of revolving cylinders
—that they have been known to produce a gyroscopic effect that has
upset the machine. This, however, is a somewhat doubtful point. It
may be urged that the greater silence of motors with fixed cylinders
is an advantage in war. This may sometimes be so, and it is quite
possible that for offensive aëroplanes a special type of motor may be
in the future evolved.
To return to the other features of the Farman machine. The plan
he adopted in his racing machines of making the upper plane larger
than the lower one was a valuable step in speed-producing
machines.
The records won by Mr. Farman with his machines alone testify
to its efficiency. Often he has held the world’s records of distance,
duration, and height, wrestling, indeed, for these with the Blériot
monoplane.
In 1911 Mr. Farman began to make types of biplanes specially
designed for military use, and in which he studied how he could best
give the observing officer an unobstructed view of the ground
beneath him. He placed both pilot and observer in seats projecting in
front of the main planes. He also made a new departure in placing
his upper plane in advance of the lower one. He claimed that this
facilitates climbing and descent. He has, however, quite lately
evolved a newer type of scouting machine.
In this the lower plane is only one-third the span of the upper
one. The nacelle is not mounted on the lower plane, as in the
ordinary types of his machine, but, instead, strung from the main
spars of the top one. The usual chassis is absent. There is a single
running wheel mounted at each end of the lower plane, which is
brought very close to the ground. The upper and lower planes are
separated by four pairs of struts. The tail is similar to that used on
the ordinary type.
The following are the dimensions of one of the latest 1914 types
of one-seated Farman machines:—
Length 3.75 metres
Span 11.50 metres
Area 26 sq. metres
Weight (total) 290 kgs.
„ (useful) 175 kgs.
Motor 80 h.p. Gnome
Speed 110 km. per hour
The following are the details of one of his high-power

hydroplanes (1914):—
Length 8.80 metres

Span 18.08 metres
Area 50 sq. metres
Weight (total) 605 kgs.
„ (useful) 275 kgs.
Maximum speed 105 km. per hour
[Topical Press.
A BLÉRIOT MONOPLANE IN FLIGHT,
showing one of the two wings attached to the tubular body of machine, chassis,
stabilising plane, and rudder at rear.
The Blériot Monoplane.

At the same time that Mr. Henry Farman was making his first
flights on his biplanes, M. Blériot was experimenting with
monoplanes. His first attempts were disastrous. Time after time he
was dashed to the ground. But he persevered, and produced a
machine which by its performance staggered the aëronautical world.
When he was first experimenting most people thought that it was
in superposed surfaces that success alone lay. They forgot the
researches of Langley. These had showed that support depended on
two factors—speed and surface; that when speed is increased a less
supporting surface will suffice. The success of Blériot took the world
by surprise. If I were asked to name the men who have done most to
further practical aëronautical development, I should unhesitatingly
say: 1, the brothers Wright; 2, Blériot; 3, Pégoud.
The first have been already dealt with. I will speak of the two
latter together.
Of the work of both there has been one underlying characteristic
—simplicity. The former has produced a machine stripped indeed of
encumbering complexities, in which the restriction of accessories to
what is absolutely necessary is carried to a fine art; the latter with
that very machine has performed experiments in the air that the most
sanguine enthusiast of a few years back would have deemed far
beyond the region of the possible. In his graceful air diving, looping
the loop, and flying upside down, he gave the world a great object-
lesson of the materiality of air. He showed the air can give the aviator
as much support as the water can to a fancy swimmer. He showed
that if the aëroplane is an unstable thing, the human brain can
supply the stability; that in human flight, like the bird and its wings,
the machine and individual can be in closest touch. No one has
stripped the air of its terrors as has M. Pégoud. In the yielding air
there is indeed safety! It is the ground the aviator has to fear!
I have spoken of the simplicity of the Blériot monoplane. In the
machine with which M. Blériot flew over the Channel in 1909,
stretched like the wings of a bird on either side of a tubular wooden
frame partly covered with canvas and tapering to the rear, are placed
the two supporting planes, rounded at the ends. At the front end is
placed the motor (in the original type a three-cylindered engine, now
replaced by the Gnome motor), geared direct to a 6 feet 6 inches
wooden propeller, and on a level with the rear end of the planes.
Immediately behind the engine is the petrol tank, and behind that the
aviator’s seat. Near the rear end of the frame and underneath it is
the fixed tail, with two movable elevating tips. How simple is the
working of this monoplane! Moving a lever backwards and forwards
actuates the tips of the fixed tail at the back of the machine, and
causes it to rise or fall. Moving the same lever from side to side
warps the rear surfaces of the supporting planes. The act of pushing
from side to side a bar on which the aviator’s feet rest puts the
rudder into action and steers the machine.
The triumphs of the Blériot monoplane would fill many pages. It
was the first machine to fly over an expanse of water—the Channel.
Later, it carried M. Prior from London to Paris without a stop,
traversing 250 miles in three hours 56 minutes, beating the
performances of the fleetest express trains by three hours. If it no
longer for the moment holds the record of height, which it has so
often done, it carried M. Garros up to a height of 5,000 metres.
When his engine broke down at that prodigious height, by its superb
gliding powers it brought him safely to earth!
It has flown over the Alpine peaks! It carried the first aëroplane
post—1,750 letters and cards—from Hendon to Windsor in
seventeen minutes!
In 1911 Blériot No. XI. flew with ten persons on board.
Its past records have indeed fitted it to be a military machine. It is
doubtlessly destined to play an important rôle in the present war in
the hands of the French aviators. Especially suitable is this type for
the one-seated military machine. Often it may be desirable to employ
a two-seated machine to carry pilot and observer; but there is often,
too, a use for the single-seated type of machine flying at a rate of
some eighty miles an hour. The work of these observers is to make
swift dashes over the enemy’s lines, make a speedy reconnaissance
of the enemy’s position, and return at once to headquarters with
what information has been obtained.
The following are the dimensions, etc., of the 1914 type of
armoured Blériot monoplanes:—
Length 6.15 metres

Span 10.10 metres
Area 19 sq. metres
Motor 80 h.p. Gnome
Speed 100 km. per hour
The Antoinette Monoplane.

There is another monoplane that will figure in the history of
aëronautics—the Antoinette monoplane. This was the first flying
machine to fly in a wind. Up to the time that Mr. Latham went to the
flying meeting at Blackpool, which took place almost immediately
after the famous Rheims meeting, aviators had only dared to fly in
calm weather. On the flying grounds there used to be tiny flags on
posts. When the flags hung down limply that was the time for flying.
When they moved about, even languidly, that was the time to put the
aëroplane to rest in its shed. Aviators then underestimated the
capabilities of their own machines.
When the aviators came to England the island breezes kept the
little flags vigorously moving about. The aviators were consternated.
The public was disappointed. It began to regard flight as a calm-
weather business. Aëroplanes could not face one breath of wind! Of
what practical use would they ever be!
Latham at that time had his Antoinette monoplane at Blackpool.
It consisted of large and strongly built wings, giving a surface of
about 575 square feet, set at a dihedral angle. The motor was some
60 h.p. At the back of the body of the machine were fixed horizontal
and vertical fins. There were hinged horizontal planes at the end of
the tail for elevating or lowering the machine. “Ailerons” were used
on the main surface for controlling lateral stability. One day, at
Blackpool, Latham went up in a very high wind, and remained in the
air for a considerable time. How much of the stability of his machine
was due to his dexterity, or how much to the machine, it is difficult to
say. Probably the fact that the wings were set at a dihedral angle had
much to do with it. He also had a much larger horse power than his
contemporaries, which no doubt contributed to his success. Anyhow,
by the Antoinette monoplane flight was redeemed from the reproach
that it was merely a pastime for ideal weather conditions. From that
time aviators have sought the winds as well as the calms. Now
aircraft can fly in winds of forty-eight or even fifty miles an hour! This
step of Latham gave a great impetus towards the military adoption of
the aëroplane. The military and naval mind tends to despise what is
only of use in the most favourable conditions. It had put aside the

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Applications and Tools, 10th Edition by

Change in Quantity Demanded versus Change in The Production Approach: Measuring a

* ECONOMIC EXPERIMENT 90 * SUMMARY 110 * KEY TERMS 111

APPLICATION 4 The Introduction of Cell Phones Dividing Output among Competing

Unanticipated Inf lation 130

Are Poor Countries Catching Up? 160

How Do We Measure Technological How Demand Determines Output in the Short

Using Growth Accounting 167 APPLICATION 1 Measuring Price Stickiness in

New Growth Theory 172 Understanding Aggregate Supply 194

APPLICATION 6 Culture, Evolution, and Economic

* SUMMARY 175 * KEY TERMS 175

The Limits to Stabilization Policy 207

Federal Spending 210 APPLICATION 2 Multipliers in Good Times and

Automatic Stabilizers 213 Fiscal Multipliers 233

Are Deficits Bad? 214 Using Fiscal Multipliers 235

APPLICATION 2 Dynamic Scoring 215 Understanding Automatic Stabilizers 237

The Vietnam War Era 216 APPLICATION 4 The Locomotive Effect:

* SUMMARY 219 * KEY TERMS 220

11 The Income-Expenditure Model 222

Equilibrium Output 223 An Investment: A Plunge into the

APPLICATION 2 Explaining Low Investment

* SUMMARY 286 * KEY TERMS 286

A Banker’s Bank: The Federal Reserve 281 APPLICATION 3 The Effectiveness of

Inf luencing Market Expectations: From the

PART 6 16 The Dynamics of Inflation and

How Changes in the Growth Rate of Money

The Economics Behind the Adjustment Hyperinflation 342

* ECONOMIC EXPERIMENT 347

Classical Economics in Historical 17 Macroeconomic Policy Debates 348

Two Debates about Targeting 356

APPLICATION 3 Should We Care If Another

PART 7 APPLICATION 4 How American are American

Do Outsourcing and Trade Cause Income

Production Possibilities Curve 366

Comparative Advantage and the Terms of 19 The World of International

APPLICATION 1 Big Macs in Norway 393

Exchange Rate Systems Today 401 Other Elasticities of Demand 422

The Role of Time: Short-Run versus Long-Run

APPLICATION 1 The Elasticity of Demand for

APPLICATION 1 Consumer Surplus of Internet

The Marginal Principle and the Equimarginal

Rent Control 445 The Law of Demand and the Individual

Import Restrictions 449

APPENDIX: Mental Shortcuts and Consumer Examples of Production Cost 503

The Marginal Approach 514

Short-Run Average Costs 493 The Firm’s Shut-Down Decision 517

Fixed Costs and Sunk Costs 519

* SUMMARY 550 * KEY TERMS 551

APPLICATION 7 Economic Detective and the Case

A Formula for Marginal Revenue 538 Monopolistic Competition 559

APPLICATION 1 Marginal Revenue from a Baseball

Advertising for Product Differentiation 564 Entry Deterrence and Contestable

* SUMMARY 566 * KEY TERMS 566 APPLICATION 4 Cable TV Service as an Insecure

* ECONOMIC EXPERIMENT 569

APPLICATION 5 Got Milk? 590

Equilibrium of the Price-Fixing Game 575 28 Controlling Market Power: Antitrust

APPLICATION 1 Failure of the Salt Cartel 577 Natural Monopoly 598

Price Leadership 580 APPLICATION 2 Satellite Radio Versus the

Simultaneous Decision Making and the Breaking Up Monopolies 602

PART 10 APPLICATION 4 Car Insurance and Risky Driving 624

Adverse Selection for Buyers: The Lemons