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MICROECONOMICS Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
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).
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MICROECONOMICS
Thirteenth Edition
Roger A. Arnold
California State University
San Marcos
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
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Roger A. Arnold
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Printed in the United States of America

Print Number: 01 Print Year: 2017
To Sheila, Daniel, and David
BRIEF CONTENTS
Part 4 Factor Markets and Related Issues

Chapter 13 F actor Markets: With Emphasis on the Labor
Market 329
Chapter 14 Wages, Unions, and Labor 354
Chapter 15 The Distribution of Income and Poverty 371
An Introduction to Economics Chapter 16 Interest, Rent, and Profit 388
Part 1 Economics: The Science of Scarcity Part 5 Market Failure, Public Choice,
and Special-Interest Group Politics
Chapter 1 What Economics is About 1
Appendix A Working with Diagrams 25 Chapter 17 Market Failure: Externalities, Public Goods,
and Asymmetric Information 408
Appendix B Should You Major in Economics? 34
Chapter 18 Public Choice and Special-Interest Group Politics 437
Chapter 2 Production Possibilities Frontier Framework 41
Chapter 3 Supply and Demand: Theory 59 Part 6 Economic Theory-Building and Everyday Life
Chapter 4 Prices: Free, Controlled, and Relative 95 Chapter 19 Building Theories to Explain Everyday Life: From
Chapter 5 Supply, Demand, and Price: Applications 116 Observations to Questions to Theories to Predictions 458
Microeconomics The Global Economy

Part 2 Microeconomic Fundamentals Part 7 International Economics and Globalization
Chapter 6 Elasticity 138 Chapter 20 International Trade 484

Chapter 7 C
onsumer Choice: Maximizing Utility and Behavioral Chapter 21 International Finance 503
Economics 168
Appendix C Budget Constraint and Indifference Curve Web Chapters
Analysis 192
Chapter 22 The Economic Case For and Against Government:
Chapter 8 Production and Costs 200
Five Topics Considered 522
Part 3 Product Markets and Policies Chapter 23 Stocks, Bonds, Futures, and Options 541
Chapter 9 Perfect Competition 234

Chapter 10 Monopoly 264 Self-Test Appendix 522
Chapter 11 Monopolistic Competition, Oligopoly, and Game Glossary 540
Theory 287 Index 547
Chapter 12 Government and Product Markets: Antitrust

and Regulation 309
iv
CONTENTS
An Introduction to Economics
Part 1 Economics: The Science of Scarcity
CHAPTER 1: What Economics is About 1

ECONOMICS 24/7
Your Life, 2019–2029 1
Rationing Spots at Yale 5 A Definition of Economics 2
Goods and Bads 2 Resources 2 Scarcity and a Definition of Economics 2
When Is It Too Costly to
Attend College? 8 Key Concepts in Economics 4
Opportunity Cost 4 Opportunity Cost and Behavior 6 Benefits and Costs 6
Can Incentives Make You Decisions Made at the Margin 7 Efficiency 9
Smarter? 12 Does It Matter to You . . . If You Are Efficient or Not? 11
Why Didn’t I Think of That? Economics Is About Incentives 12 Unintended Effects 13 Exchange 14
The Case of Uber and Ceteris Paribus and Theory 16
Airbnb 15 Ceteris Paribus Thinking 16 What Is a Theory? 17
Hear What and How the Economist Thinks . . . About Theories 19
Economic Categories 20
OFFICE Positive Economics and Normative Economics 20 Microeconomics and
HOURS Macroeconomics 20
Chapter Summary 22
“I Don’t Believe That Key Terms and Concepts 23
Every Time a Person Does
Questions and Problems 23
Something, He Compares
the Marginal Benefits and Working with Numbers and Graphs 24
Costs” 21
APPEnDIx A: WoRKInG WITH DIAGRAMS 25
Slope of a Line 26
Slope of a Line Is Constant 27
Slope of a Curve 27
The 45-Degree Line 27
Pie Charts 29
Bar Graphs 29
Line Graphs 30
Appendix Summary 32
Key Terms and Concepts 32
v
vi Contents
APPEnDIx B: SHOULD YOU MAJOR IN ECONOMICS? 34
Five Myths About Economics and Being an Economics Major 35

What Awaits You as an Economics Major? 37
What Do Economists Do? 38
Places to Find More Information 40
Concluding Remarks 40
CHAPTER 2: PRODUCTION POSSIBILITIES FRONTIER FRAMEWORK 41

ECONOMICS 24/7
The Production Possibilities Frontier 41
Deducing Where Sherlock The Straight-Line PPF: Constant Opportunity Costs 41 The Bowed-Outward
Holmes Was on His (Concave-Downward) PPF: Increasing Opportunity Costs 42
Production Possibilities Does It Matter to You . . . If the Economy Is at One Point on the PPF Instead
Frontier? 46 of Another? 44
Studying and Your PPF 50
Law of Increasing Opportunity Costs 45 Economic Concepts in a Production Possibilities
Frontier Framework 46
Specialization and Trade Can Move Us Beyond Our Ppf 51
A Simple Two-Person PPF Model 51 On or Beyond the PPF? 52
OFFICE Hear What and How the Economist Thinks . . . About Manufacturing Jobs 53
HOURS Chapter Summary 56
“What Purpose Does the Key Terms and Concepts 57
PPF Serve?” 55 Questions and Problems 57
Working with Numbers and Graphs 57
CHAPTER 3: SUPPLY AND DEMAND: THEORY 59

ECONOMICS 24/7
What Is Demand? 59
What Do the Following The Law of Demand 60 Four Ways to Represent the Law of Demand 60 Why Does
Have in Common? Losing Quantity Demanded Go Down as Price Goes Up? 61 Individual Demand Curve and
One’s Temper, Arriving to Market Demand Curve 62 A Change in Quantity Demanded Versus a Change in
Class Late, and Buying the Demand 63 What Factors Cause the Demand Curve to Shift? 66 Movement Factors
Textbook for a Class 62 and Shift Factors 68
Are You Buying More Than Supply 69
You Want to Buy? 85 The Law of Supply 69 Why Most Supply Curves Are Upward Sloping 70 Changes
in Supply Mean Shifts in Supply Curves 72 What Factors Cause the Supply Curve to
“Sorry, But This Flight Has Shift? 72 A Change in Supply Versus a Change in Quantity Supplied 74
Been Overbooked” 89 The Market: Putting Supply and Demand Together 75
Supply and Demand at Work at an Auction 75 The Language of Supply and Demand: A
Few Important Terms 76 Moving to Equilibrium: What Happens to Price When There Is
OFFICE a Surplus or a Shortage? 76 Speed of Moving to Equilibrium 76
HOURS Hear What and How the Economist Thinks . . . About Higher Prices and Buying More 78
“I Thought Prices Equaled Moving to Equilibrium: Maximum and Minimum Prices 79 The Connection Between
Costs Plus 10 Percent” 90 Equilibrium and Predictions 80 Equilibrium in Terms of Consumers’ and Producers’
Surplus 81
Does It Matter to You . . . If You Pay Equilibrium Prices or Not? 83
What Can Change Equilibrium Price and Quantity? 83 It Is Important to Know Why
the Price Changed: Back to Substitutes and Complements 86 Epilogue: Who Feeds
Cleveland? 87
Contents vii
Chapter Summary 91
CHAPTER 4: PRICES: FREE, CONTROLLED, AND RELATIVE 95

ECONOMICS 24/7
Price 95
A Price Ceiling in the Price as a Rationing Device 95 Price as a Transmitter of Information 96
Kidney Market 100 Price Controls 97
1973 and 1979 101 Price Ceiling 97
Hear What and How the Economist Thinks . . . About Price Ceilings and the Value of
What Does Price Have to Money 102
Do with Being Late to Price Floor: Definition and Effects 103
Class? 108
Does It Matter to You . . . If the Demand Curve for Unskilled Labor Is Steep or Not? 105
Obesity and a Soda Two Prices: Absolute and Relative 109
Tax 111 Absolute (Money) Price and Relative Price 109 Taxes on Specific Goods and Relative
Price Changes 110
Does It Matter to You . . . If Something You Buy Is Taxed or Subsidized? 112
OFFICE Chapter Summary 114
HOURS Key Terms and Concepts 114
“I Thought Price Ceilings Questions and Problems 114
Were Good for Consumers” Working with Numbers and Graphs 115
113
CHAPTER 5: SUPPLY, DEMAND, AND PRICE: APPLICATIONS 116
Application 1: U-Haul Rates and Demand 116

Application 2: Subsidizing the Consumption of Anything Can Raise its Price 117
Application 3: 10 a.m. Classes in College 119
Application 4: Why Do Colleges Use GPAs, ACTs, and SATs for Purposes
of Admission? 121
Application 5: Why is Medical Care So Expensive? 122
Application 6: Do You Pay for Good Weather? 124
Application 7: The Price of an Aisle Seat 126
Application 8: College Superathletes 127
OFFICE Application 9: Easier-to-Obtain Loans and Higher Housing Prices 129
HOURS Application 10: Speculators, Price Variability, and Patterns 130
Application 11: Supply and Demand on a Freeway 131
“Doesn’t High Demand Application 12: Are Renters Better Off? 132
Mean High Quantity
Demanded?” 134 Chapter Summary 135
viii Contents
MICROECONOMICS
Part 2 Microeconomic Fundamentals
CHAPTER 6: ELASTICITY 138

ECONOMICS 24/7
Elasticity: Part 1 138
Drug Busts and Crime 145 Price Elasticity of Demand 138 Elasticity Is Not Slope 140 From Perfectly Elastic to
Elasticity and the Issue of
Perfectly Inelastic Demand 140 Price Elasticity of Demand and Total Revenue (Total
“How Much” 147
Expenditure) 143 Elastic Demand and Total Revenue 144
Elasticity: Part 2 149
When Is a Half-Packed
Price Elasticity of Demand Along a Straight-Line Demand Curve 149 Determinants of
Auditorium Better Than a
Price Elasticity of Demand 150
Packed One? 148
Hear What and How the Economist Thinks . . . About the Prevalence of Elasticity 153
Price Elasticity of Demand
and Health Care 151 Other Elasticity Concepts 154
Cross Elasticity of Demand 154 Income Elasticity of Demand 155 Price Elasticity
Tuition Hikes at the College of Supply 156 Price Elasticity of Supply and Time 157
or University 152
The Relationship Between Taxes and Elasticity 160
House Prices and the Who Pays the Tax? 160 Elasticity and the Tax 161
Elasticity of Supply 159
Does It Matter to You . . . If There Are Few or Many Substitutes for the Goods You Buy? 162
Degree of Elasticity and Tax Revenue 163
OFFICE Chapter Summary 165
HOURS Key Terms and Concepts 166
“What Is the Relationship
Between Different Price Working with Numbers and Graphs 167
Elasticities of Demand
and
Total Revenue?”164 CHAPTER 7: CONSUMER CHOICE: MAXIMIZING UTILITY
AND BEHAVIORAL ECONOMICS 168
ECONOMICS 24/7
Utility Theory 168
The Gym and Diminishing Utility: Total and Marginal 168 Law of Diminishing Marginal Utility 169 The Solution
Marginal Utility 172 to the Diamond–Water Paradox 171
Consumer Equilibrium and Demand 173
How You Pay for Good
Equating Marginal Utilities per Dollar 173 Maximizing Utility and the Law of
Weather 176
Demand 175 Should the Government Provide the Necessities of Life for Free? 175
$800 for Sure or $1,000
Hear What and How the Economist Thinks . . . About Towns, Pollution Standards, and
with a Probability of 85 Making the Invisible, Visible 177
percent? An Experiment 179
Behavioral Economics 178
$40 and Two People: The Are People Willing to Reduce Others’ Incomes? 178 Is One Dollar Always One
Ultimatum Game 185 Dollar? 179 Coffee Mugs and the Endowment Effect 180 Does the Endowment Effect
Hold Only for New Traders? 182
Does It Matter to You . . . If You Are Subject to the Endowment Effect? 182
OFFICE The Ultimatum Game—and Facebook, YouTube, and Wikipedia 183 Framing 186
HOURS Neuroeconomics 187
Chapter Summary 189
“Is There an Indirect
Way of Proving the Law Key Terms and Concepts 190
of Diminishing Marginal Questions and Problems 190
Utility?” 188 Working with Numbers and Graphs 191
Contents ix
APPEnDIx C: BUDGET CONSTRAINT AND INDIFFERENCE

CURVE ANALYSIS 192
The Budget Constraint 192

Slope of the Budget Constraint 192
What Will Change the Budget Constraint? 192
Indifference Curves 193
Constructing an Indifference Curve 194
Characteristics of Indifference Curves 194
The Indifference Map and the Budget Constraint Come Together 197
From Indifference Curves to a Demand Curve 198
Appendix Summary 199
CHAPTER 8: PRODUCTION AND COSTS 200

ECONOMICS 24/7
Why Firms Exist 200
“He Never Showed Up” 202 The Market and the Firm: Invisible Hand Versus Visible Hand 200 The Alchian-and-
Demsetz Answer 201 Shirking on a Team 201 Ronald Coase on Why Firms Exist 202
High School Students, Staying Markets: Outside and Inside the Firm 203
Out Late, and More 213
Two Sides to Every Business Firm 203
Social Media and Marginal More on Total Cost 204 Accounting Profit Versus Economic Profit 204
Cost 222 Does It Matter to You . . . If You Think in Terms of Only Accounting Profit? 205
Producing a Grade in a Zero Economic Profit Is Not as Bad as It Sounds 206
College Course 223 Hear What and How the Economist Thinks . . . About Maximizing Revenue
and Profit 207
Production 208
Common Misconception About the Short Run and Long Run 208 Production in the
OFFICE Short Run 208 Whose Marginal Productivity Are We Talking About? 210 Marginal
HOURS Physical Product and Marginal Cost 210 Average Productivity 213
Costs of Production: Total, Average, Marginal 214
“What Is the Difference The AVC and ATC Curves in Relation to the MC Curve 217 Tying Short-Run
Between the Law of Production to Costs 220 One More Cost Concept: Sunk Cost 221
Diminishing Marginal Production and Costs in the Long Run 225
Returns and Diseconomies Long-Run Average Total Cost Curve 226 Economies of Scale, Diseconomies of Scale,
of Scale?” 230 and Constant Returns to Scale 227 Why Economies of Scale? 228 Why Diseconomies
of Scale? 228 Minimum Efficient Scale and Number of Firms in an Industry 228
Shifts In Cost Curves 229
Taxes 229 Input Prices 229 Technology 229
Chapter Summary 230
x Contents
Part 3 Product Markets and Policies
CHAPTER 9: PERFECT COMPETITION 234

ECONOMICS 24/7
The Theory of Perfect Competition 234
The Digital Revolution, A Perfectly Competitive Firm Is a Price Taker 235 The Demand Curve for a Perfectly
Price, and Marginal Competitive Firm Is Horizontal 235 Common Misconceptions about Demand
Cost 246 Curves 236 The Marginal Revenue Curve of a Perfectly Competitive Firm Is the Same
as Its Demand Curve 237 Theory and Real-World Markets 238
How Is High-Quality Land
Like a Genius Software Perfect Competition in the Short Run 239
Engineer? 257 What Level of Output Does the Profit-Maximizing Firm Produce? 239 The Perfectly
Competitive Firm and Resource Allocative Efficiency 239 To Produce or Not to Produce:
That Is the Question 240 Common Misconceptions over the Shutdown Decision 243
The Perfectly Competitive Firm’s Short-Run Supply Curve 244 From Firm Supply Curve
OFFICE to Market (Industry) Supply Curve 244 Why Is the Market Supply Curve Upward
HOURS Sloping? 247
Perfect Competition in the Long Run 247
“Do You Have to Know The Conditions of Long-Run Competitive Equilibrium 248 The Perfectly Competitive
the MR 5 MC Condition Firm and Productive Efficiency 249 Industry Adjustment to an Increase in Demand 250
in Order to Be Successful Profit from Two Perspectives 253
in Business?” 259
Does It Matter to You . . . If There Is Easy Entry into a Market? 254
Industry Adjustment to a Decrease in Demand 255 Differences in Costs, Differences in
Profits: Now You See It, Now You Don’t 255
Hear What and How the Economist Thinks . . . About Buyers and Sellers 256
Profit and Discrimination 257
Topics for Analysis in the Theory of Perfect Competition 258
Do Higher Costs Mean Higher Prices? 258 Will the Perfectly Competitive Firm
Advertise? 258 Supplier-Set Price Versus Market-Determined Price: Collusion or
Competition? 259
Chapter Summary 260
ECONOMICS

24/7 CHAPTER 10: MONOPOLY 264
Monopoly and the Boston
Tea Party 266 The Theory of Monopoly 264
Barriers to Entry: A Key to Understanding Monopoly 265 What Is the Difference
Religion and Monopoly 277 Between a Government Monopoly and a Market Monopoly? 265
One for $40 or Two for $70 Monopoly Pricing and Output Decisions 266
279 The Monopolist’s Demand and Marginal Revenue 267 The Monopolist’s Demand Curve
and Marginal Revenue Curve Are Not the Same 268 Price and Output for a Profit-
Do Colleges and Universities Maximizing Monopolist 268 Comparing the Demand Curve in Perfect Competition
Price Discriminate? 281 with the Demand Curve in Monopoly 270 If a Firm Maximizes Revenue, Does It
Buying a Computer and Automatically Maximize Profit Too? 270
Getting a Printer for Perfect Competition and Monopoly 271
$100 Less Than the Retail Price, Marginal Revenue, and Marginal Cost 271 Monopoly, Perfect Competition,
Price 283 and Consumers’ Surplus 271 Monopoly or Nothing? 273
Contents xi
The Case Against Monopoly 274

OFFICE The Deadweight Loss of Monopoly 274
HOURS Does It Matter to You . . . If There Is a Deadweight Loss of Monopoly Triangle? 275
Rent Seeking 275 X-Inefficiency 276
“Does the Single-Price Price Discrimination 277
Monopolist Lower Price Types of Price Discrimination 278 Why a Monopolist Wants to Price Discriminate 278
Only on the Additional Conditions of Price Discrimination 278
Unit?” 284 Hear What and How the Economist Thinks . . . About Price Discrimination 279
Moving to P 5 MC Through Price Discrimination 280 Coupons and Price
Discrimination 282
Chapter Summary 284
CHAPTER 11: MONOPOLISTIC COMPETITION, OLIGOPOLY,

ECONOMICS 24/7 AND GAME THEORY 287
The People Wear Prada 291 The Theory of Monopolistic Competition 287
How Is a New Year’s
The Monopolistic Competitor’s Demand Curve 288 The Relationship between Price
Resolution Like a Cartel
and Marginal Revenue for a Monopolistic Competitor 288 Output, Price, and Marginal
Agreement? 296
Cost for the Monopolistic Competitor 288 Will There Be Profits in the Long Run? 288
Excess Capacity: What Is It, and Is It “Good” or “Bad”? 289 The Monopolistic Competitor
and Two Types of Efficiency 291
OFFICE Oligopoly: Assumptions and Real-World Behavior 292
The Concentration Ratio 292
HOURS Price and Output Under the Cartel Theory 293
The Cartel Theory 293
“Are Firms (as Sellers) Price
Takers or Price Searchers?” Game Theory, Oligopoly, and Contestable Markets 296
306 Prisoner’s Dilemma 297 Oligopoly Firms’ Cartels and the Prisoner’s Dilemma 299
Are Markets Contestable? 300 Necessary and Sufficient Conditions and Efficiency 301
A Review of Market Structures 301
Applications of Game Theory 302
Grades and Partying 302
Hear What and How the Economist Thinks . . . About Grade Inflation 304
The Arms Race 305 Speed Limit Laws 305
Chapter Summary 307
ECONOMICS 24/7 Questions and Problems 308
Thomas Edison and
Hollywood 311
CHAPTER 12: GOVERNMENT AND PRODUCT MARKETS:
Why It May Be Hard to
ANTITRUST AND REGULATION 309
Dislodge People from
Facebook 316
Antitrust 309
High-Priced Ink Cartridges Antitrust Acts 310 Unsettled Points in Antitrust Policy 312 Antitrust and Mergers 314
and Expensive Minibars 317 Common Misconceptions about Antitrust Policy 315 Network Monopolies 315
xii Contents
Regulation 318
OFFICE The Case of Natural Monopoly 318 Regulating the Natural Monopoly 320 Regulating
Industries That are Not Natural Monopolies 322 Theories of Regulation 322
HOURS Hear What and How the Economist Thinks . . . About Regulation 323
The Costs and Benefits of Regulation 324
“What Is the Advantage of
the Herfindahl Index?” 325 Does It Matter to You . . . If People Are Aware of Both the Costs and the Benefits of
Regulation? 324
Chapter Summary 326
Part 4 Factor Markets and Related Issues
CHAPTER 13: FACTOR MARKETS: WITH EMPHASIS

ECONOMICS 24/7
ON THE LABOR MARKET 329
Why Jobs Don’t Always Factor Markets 329

Move to a Low-Wage The Demand for a Factor 329 Marginal Revenue Product: Two Ways to Calculate It 330
Country 337 The MRP Curve Is the Firm’s Factor Demand Curve 330 Value Marginal Product 331
An Important Question: Is MRP 5 VMP ? 332 Marginal Factor Cost: The Firm’s Factor
Adam Smith’s Philosopher
Supply Curve 333 How Many Units of a Factor Should a Firm Buy? 334 When There
and Street Porter 343
Is More Than One Factor, How Much of Each Factor Should the Firm Buy? 334
Who Pays the Social The Labor Market 336
Security Tax? 348 Shifts in a Firm’s MRP, or Factor Demand, Curve 336 Market Demand for Labor 338
The Elasticity of Demand for Labor 339
Hear What and How the Economist Thinks . . . About the Debate Over the Minimum
OFFICE Wage 339
HOURS Does It Matter to You . . . If the Elasticity of Demand for the Good or Service You Produce
Is High or Low? 341
Market Supply of Labor 341 An Individual’s Supply of Labor 342 Shifts in the Labor
“Why Do Economists Think
Supply Curve 343 Putting Supply and Demand Together 344 Why Do Wage Rates
in Twos?” 351
Differ? 345 Why Demand and Supply Differ among Labor Markets 346 Why Did
You Choose Your Major? 346 Marginal Productivity Theory 347
Labor Markets and Information 349
Screening Potential Employees 349 Promoting from Within 350 Discrimination or an
Information Problem? 350
Chapter Summary 351
CHAPTER 14: WAGES, UNIONS, AND LABOR 354
Objectives of Labor Unions 354

Employment for All Members 354 Maximizing the Total Wage Bill 355 Maximizing
Income for a Limited Number of Union Members 355 Wage–Employment Trade-Off 355
Contents xiii
Practices of Labor Unions 356

Affecting the Elasticity of Demand for Union Labor 356
ECONOMICS 24/7
Hear What and How the Economist Thinks . . . About Unions and Wages 357
Technology, the Price of Affecting the Demand for Union Labor 358 Affecting the Supply of Union Labor 358
Competing Factors, and Affecting Wages Directly: Collective Bargaining 359 Strikes 361
Displaced Workers 360 Effects of Labor Unions 361
The Case of Monopsony 361 Unions’ Effects on Wages 363
Are You Ready for Some
Football? 366 Does It Matter to You . . . If Things Are Different in the Short-Run Than in
the Long Run? 365
Unions’ Effects on Prices 365 Unions’ Effects on Productivity and Efficiency: Two Views
365
OFFICE
Chapter Summary 368
HOURS
“Don’t Higher Wages Questions and Problems 369
Reduce Profits?” 368 Working with Numbers and Graphs 370
CHAPTER 15: THE DISTRIBUTION OF INCOME AND POVERTY 371

ECONOMICS 24/7
Some Facts About Income Distribution 371
Statistics Can Mislead If Who Are the Rich and How Rich Are They? 371 The Effect of Age on the Income
You Don’t Know How They Distribution 372 A Simple Equation 374
Are Made 375 Does It Matter to You . . . What Your Educational Attainment Level Is? 376
Measuring Income Equality 376
The Lorenz Curve 376 The Gini Coefficient 378 A Limitation of the Gini
OFFICE Coefficient 379 Common Misconceptions about Income Inequality 379
HOURS Why Income Inequality Exists 380
Factors Contributing to Income Inequality 381 Income Differences: Some are
“Are the Number of Persons Voluntary, Some are Not 382
in Each Fifth the Same?” 385
Poverty 383
What Is Poverty? 383 Limitations of the Official Poverty Income Statistics 383
Who Are the Poor? 384 What Is the Justification for Government Redistributing
Income? 384
Chapter Summary 386
CHAPTER 16: INTEREST, RENT, AND PROFIT 388

ECONOMICS 24/7
Interest 388
Is the Car Worth Buying? 394 Loanable Funds: Demand and Supply 388 The Price for Loanable Funds and the
Return on Capital Goods Tend to Equality 390 Why Do Interest Rates Differ? 391
Investment, Present Value, Nominal and Real Interest Rates 391 Present Value: What Is Something Tomorrow
and Interest Rates 394 Worth Today? 392
Grain Prices and Land Rent 395
Rent 396 David Ricardo, the Price of Grain, and Land Rent 395 The Supply Curve of Land Can be
Upward Sloping 397 Economic Rent and Other Factors of Production 398 Economic
Rent and Baseball Players: Perspective Matters 398 Competing for Artificial and Real
Rents 399
xiv Contents
Does It Matter to You . . . If People Compete for Artificial Rents as Opposed to Real
OFFICE Rents? 399
HOURS Profit 400

Theories of Profit 400 Profit and Loss as Signals 401
“How Is Present Value Used Hear What and How the Economist Thinks . . . About Profit 402
in the Courtroom?” 405 The Entrepreneur 403
A Market 403 How Can the Entrepreneur Increase Trade? 403 Turning Potential Trades
into Actual Trades 404 A Necessary Condition: Turn Potential Trades into Actual Trades
in a Way Acceptable to Consumers 404 Can Increasing Trades in One Area Reduce Trades
in Another? 404 Uncertainty and the Entrepreneur 404
Chapter Summary 406
Part 5 Market Failure, Public Choice, and Special-Interest Group Politics
CHAPTER 17: MARKET FAILURE: EXTERNALITIES, PUBLIC GOODS,

ECONOMICS 24/7 AND ASYMMETRIC INFORMATION 408
An Unintended Effect Externalities 408

of Social Media 412 Costs and Benefits of Activities 408 Marginal Costs and Benefits of Activities 409
Social Optimality, or Efficiency, Conditions 410 Three Categories of Activities 410
Tribes, Transaction Costs,
Externalities in Consumption and in Production 410 Diagram of a Negative
and Social Media 418
Externality 410 Diagram of a Positive Externality 413
“They Paved Paradise and Internalizing Externalities 414
Put Up a Parking Lot” 426 Persuasion 414 Taxes and Subsidies 415 Assigning Property Rights 415
Arriving Late to Class, Hear What and How the Economist Thinks . . . About Coming to Class Late 416
Grading on a Curve, and Voluntary Agreements 416 Combining Property Rights Assignments and Voluntary
Studying Together for the Agreements 417 Beyond Internalizing: Setting Regulations 418
Midterm 431 Environmental Policy 419
Method 1: Government Regulation, or Command and Control 420 Method 2: Emission
Taxes 420 Method 3: Tradable Pollution Permits (Cap and Trade) 421 Similarities and
OFFICE Differences Between Emission Taxes and Tradable Pollution Permits 422
HOURS Public Goods: Excludable and Nonexcludable 423
Goods 423 The Free Rider 424
“Doesn’t It Seem Wrong to
Does It Matter to You . . . If There Is a Free-Rider Problem? 425
Let Some Business Firms Pay
Nonexcludable Versus Nonrivalrous 425
to Pollute?” 432
Asymmetric Information 427
Asymmetric Information in a Product Market 427 Asymmetric Information in a Factor
Market 428 Is There Market Failure? 428 Adverse Selection 429 Moral Hazard 430
Chapter Summary 433
Contents xv
CHAPTER 18: PUBLIC CHOICE AND SPECIAL-INTEREST

ECONOMICS 24/7 GROUP POLITICS 437
A Simple-Majority Voting Rule: Public Choice Theory 437

The Case of the Statue in the The Political Market 438
Public Square 440 Moving Toward the Middle: The Median Voter Model 438 What Does the Theory
Economic Illiteracy Predict? 439
and Democracy 444 Voters and Rational Ignorance 442
The Costs and Benefits of Voting 442
Does It Matter to You . . . If You Do Not Vote? 443
OFFICE Rational Ignorance 443
HOURS Hear What and How the Economist Thinks . . . About Rational Ignorance 445
More About Voting 446
“Doesn’t Public Choice Paint Example 1: Voting for a Nonexcludable Public Good 446 Example 2: Voting
a Bleak Picture of Politics and Efficiency 447
and Government?” 454 Special-Interest Groups 448
Information and Lobbying 448 Congressional Districts as Special-Interest Groups 449
Public-Interest Talk, Special-Interest Legislation 449 Rent Seeking 450 Bringing About
Transfers 451 Information, Rational Ignorance, and Seeking Transfers 451
Constitutional Economics 453
Chapter Summary 455
Part 6 Economic Theory-Building and Everyday Life
CHAPTER 19: BUILDING THEORIES TO EXPLAIN EVERYDAY LIFE: FROM

ECONOMICS 24/7
OBSERVATIONS TO QUESTIONS TO THEORIES TO PREDICTIONS 458
Can Social Media Affect A Different Kind of Chapter 458

Whom a Person Dates? The Process 459
464
Observation/Thought 1: The Birthrates in Various Countries are Different 460
Talking on a Cell Phone The Question 460 The Theory 460 The Predictions 460 A Detour: The Issue
in Public 473 of Falsifiability (Refutability) 461
Hear What and How the Economist Thinks . . . About Theories 461
Observation/Thought 2: The Ethical Code of People Who Live in a Small Town is
OFFICE Different from that of People Who Live in a Large City 462
HOURS The Question 463 The Theory 463 The Predictions 463
Observation/Thought 3: The Closer the Dollar Tuition the Student Pays is to the Equilibrium
“Can Anyone Build Tuition, the More on Time and Responsive University Instructors Will Be for Office Hours 465
a Theory?” 481 The Question 465 The Theory 465 The Predictions 467
Observation/Thought 4: Criminals are Not Rational 467
The Question 467 The Theory 467 The Predictions 468 A Detour: Does Evidence
Prove a Theory Correct? 468 Another Detour: After You Have One Theory That Explains
and Predicts, Search for Another 469 A Final Detour: Why Prediction Is So Important, or
Why Good-Sounding Stories are Not Enough 470
xvi Contents
Observation/Thought 5: More Students Wear Baseball Caps in Class on Exam Days

Than on Other Days 471
The Question 471 The Theory 471 The Predictions 472
Observation/Thought 6: Houses in “Good” School Districts are Often More Expensive
than Comparable Houses in “Bad” School Districts 474
Observation/Thought 7: Are People Better Off With or Without Health Care
Vouchers? 475
Observation/Thought 8: People Who Give to Others Often Complain That They End Up
Giving Too Much 476
Does It Matter to You . . . If and How You Are in Someone Else’s Utility Function? 480
Chapter Summary 481
The Global Economy

Part 7 International Economics and Globalization
CHAPTER 20: INTERNATIONAL TRADE 484

ECONOMICS 24/7
International Trade Theory 484
Dividing the Work 489 How Countries Know What to Trade 485
Offshore Outsourcing, Does It Matter to You . . . If There Is Always Someone Who Can Do Something Better
Than You? 487
or Offshoring 497
A Common Misconception about How Much We Can Consume 488 How Countries
Know When They Have a Comparative Advantage 488
OFFICE Hear What and How the Economist Thinks . . . About Common Sense 490
HOURS Trade Restrictions 490

The Distributional Effects of International Trade 491 Consumers’ and Producers’
“Should We Impose Tariffs if Surpluses 491 The Benefits and Costs of Trade Restrictions 492 Why Nations
They Impose Tariffs?” 499 Sometimes Restrict Trade 496
Chapter Summary 500

ECONOMICS 24/7 CHAPTER 21: INTERNATIONAL FINANCE 503
The U.S. Dollar as the Primary The Foreign Exchange Market 503
Reserve Currency 509 The Demand for Goods 504 The Demand for, and Supply of, Currencies 504
Chinese Imports and the Flexible Exchange Rates 505
U.S. Economy 512 The Equilibrium Exchange Rate 505
Contents xvii
Does It Matter to You . . . If the Dollar Depreciates? 506

OFFICE Changes in the Equilibrium Exchange Rate 506
Factors That Affect the Equilibrium Exchange Rate 507
HOURS
Fixed Exchange Rates 510
“Why Is the Depreciation Fixed Exchange Rates and Overvalued or Undervalued Currency 511 What Is So
of One Currency Tied to Bad about an Overvalued Dollar? 513 Government Involvement in a Fixed Exchange
the Appreciation Rate System 514 Options Under a Fixed Exchange Rate System 514
of Another?” 518 Fixed Exchange Rates Versus Flexible Exchange Rates 516
Promoting International Trade 516 Optimal Currency Areas 516
Chapter Summary 519
Web Chapters
CHAPTER 22: The Economic Case for and Against

ECONOMICS 24/7
Government: Five Topics Considered 522
Culture as a Public Economics and Government 522

Good 529 The Economic Case for Government 523
Government Can Remove Individuals from a Prisoner’s Dilemma Setting 523
Externalities 527 Nonexcludable Public Goods 528 The Case for Smaller or Larger
Government 530
OFFICE The Economic Case Against Government 531
HOURS Unintended Effects of Government Actions 531 Government as Transfer Mechanism
532 Economic Growth Versus Transfers 534 Following the Leader in Pushing for
“I’m No Longer Sure What Transfers 535 Divisive Society: A Nonexcludable Public Bad 537
I Think” 538 Chapter Summary 538
CHAPTER 23: STOCKS, BONDS, FUTURES, AND OPTIONS 541

ECONOMICS 24/7
Financial Markets 541
Are Some Economists Poor Stocks 542
Investors? 546 Where are Stocks Bought and Sold? 542 The Dow Jones Industrial Average (DJIA) 543
$1.3 Quadrillion 551 How the Stock Market Works 544 Why Do People Buy Stock? 545 How to Buy
and Sell Stock 545 Buying Stocks or Buying the Market 546 How to Read the Stock
Market Page 547
xviii Contents
Bonds 549
OFFICE The Components of a Bond 549 Bond Ratings 550 Bond Prices and Yields
(or Interest Rates) 550 Common Misconceptions about the Coupon Rate and Yield (Interest
HOURS Rate) 551 Types of Bonds 552 How to Read the Bond Market Page 552 Risk and
Return 554
“I Have Three Questions.”
557 Futures and Options 554
Futures 554 Options 555
Chapter Summary 558
Self-Test Appendix 522

Glossary 540
Index 547
Roger Arnold’s Microeconomics opens up the world of economic
analysis. Substantive content, detailed diagrams, popular economic features,
and innovative pedagogy are just the beginning. Microeconomics
continues to blaze the trail for constantly updated content and applications
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Does It Matter To You If You are Efficient or Not? or If the Economy is
at One Point on the PPF Instead of Another? or If Something You Buy Is
Taxed or Subsidized? It certainly does.
IN APPRECIATION
Many colleagues have contributed to the success of this text over the last twelve editions. Their feedback continues to influence
and enhance the text and ancillary package and I’m grateful for their efforts. Now into our 13th edition, space dictates that
we can no longer list the names of all reviewers for each past edition; we are including here instructors who contributed to
the development of the 13th edition, but continue to be grateful for the improvements suggested by all of the reviewers and
contributors to this product over the years.
Randy Barcus John Finley Brian Lynch

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xxiii
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I would like to thank Peggy Crane of Southwestern College, who revised the Test Bank and wrote the questions for the Adaptive
Test Prep. I owe a debt of gratitude to all the fine and creative people I worked with at Cengage Learning. These persons include
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My deepest debt of gratitude goes to my wife, Sheila, and to my two sons, David and Daniel. They continue to make all my
days happy ones.
Roger A. Arnold
CHAPTER
What Economics Is About 1

INTRODUCTION
You are about to begin your
study of economics. Before
discussing particular topics in
economics, we think it best to
give you an overview of what
economics is and of some of the
key concepts. The key concepts
can be compared to musical
notes: Just as musical notes are
repeated in any song (you hear
the musical note G over and over
again), so are the key concepts
in economics repeated. Some
of these concepts are scarcity,
opportunity cost, e fficiency,
marginal decision making,
incentives, and exchange.
Denise Lett/Shutterstock.com
1-1 YOUR LIFE, 2019–2029

What will your life be like during the years 2019–2029? What kind of work will you do after
college? How much will you earn in that first job after college? Where will you be living and who
will your friends be? How many friends will you have? Will you buy a house in the next few years?
If so, how much will you pay for the house? And, perhaps most importantly, will you be happy?
The specific answers to these questions and many more have to do with economics. For
example, the salary you will earn has to do with the economic concept of opportunity cost. What
you will do in your first job after college has to do with the state of the economy when you graduate.
The price you pay for a house has to do with the state of the housing market. How many friends
you have has to do with the economic concept of scarcity. Whether you are happy will depend on
such things as the net benefits you receive in various activities, the utility you gain by doing certain
things, and more.
In this chapter, we begin our study of economics. As you read the chapter (and those which
follow), ask yourself how much of what you are reading is relevant to your life today and tomor-
row. Ask: What does what I am reading have to do with my life? Our guess is that after answering
this question a few dozen times, you will be convinced that economics explains much about your
present and future.
1
2 Part 1 Economics: The Science of Scarcity
1-2 A DEFINITION OF ECONOMICS

In this section, we discuss a few key economic concepts; then we incorporate knowledge of these
concepts into a definition of economics.
1-2a Goods and Bads

Economists talk about goods and bads. A good is anything that gives a person utility, or satisfaction.
Good Here is a partial list of some goods: a computer, a car, a watch, a television set, friendship, and love.
Anything from which indi- You will notice from our list that a good can be either tangible or intangible. A computer is a
viduals receive utility or tangible good; friendship is an intangible good. Simply put, for something to be a good (whether
satisfaction. tangible or intangible), it only has to give someone utility or satisfaction.
A bad is something that gives a person disutility or dissatisfaction. If the flu gives you disutility
Utility
The satisfaction one receives
or dissatisfaction, then it is a bad. If the constant nagging of an acquaintance is something that
from a good. gives you disutility or dissatisfaction, then it is a bad.
People want goods, and they do not want bads. In fact, they will pay to get goods (“Here is
Bad $1,000 for the computer”), and they will pay to get rid of bads (“I’d be willing to pay you, doctor,
Anything from which indi-
if you can prescribe something that will shorten the time I have the flu”).
viduals receive disutility or
dissatisfaction.
Can something be a good for one person and a bad for another person? Smoking cigarettes gives
some people utility; it gives others disutility. We conclude that smoking cigarettes can be a good
Disutility for some people and a bad for others. This must be why the wife tells her husband, “If you want
The dissatisfaction one to smoke, you should do it outside.” In other words, “Get those bads away from me.”
receives from a bad.
Land 1-2b Resources

All natural resources, such as
Goods do not just appear before us when we snap our fingers. It takes resources to produce goods.
minerals, forests, water, and
unimproved land.
(Sometimes resources are referred to as inputs or factors of production.)
Generally, economists divide resources into four broad categories: land, labor, capital, and
Labor entrepreneurship.
The work brought about
by the physical and mental • Land includes natural resources, such as minerals, forests, water, and unimproved land.
talents that people contribute For example, oil, wood, and animals fall into this category. (Sometimes economists refer
to the production process. to the category simply as natural resources.)
Capital • Labor consists of the physical and mental talents that people contribute to the production
Produced goods, such as process. For example, a person building a house is using his or her own labor.
factories, machinery, tools, • Capital consists of produced goods that can be used as inputs for further production.
computers, and buildings Factories, machinery, tools, computers, and buildings are examples of capital. One
that can be used as inputs country might have more capital than another; that is, it has more factories, machinery,
for further production. tools, and the like.
Entrepreneurship • Entrepreneurship refers to the talent that some people have for organizing the resources of
The talent that some people land, labor, and capital to produce goods, seek new business opportunities, and develop
have for organizing the new ways of doing things.
resources of land, labor,
and capital to produce
goods, seek new business
1-2c Scarcity and a Definition of Economics
opportunities, and develop We are now ready to define a key concept in economics: scarcity. Scarcity is the condition in which
new ways of doing things. our wants (for goods) are greater than the limited resources (land, labor, capital, and entrepreneur-
Scarcity
ship) available to satisfy those wants. In other words, we want goods, but not enough resources
The condition in which our are available to provide us with all the goods we want.
wants are greater than the Look at it this way: Our wants (for goods) are infinite, but our resources (which we need to
limited resources available to produce the goods) are finite. Scarcity is the result of our infinite wants hitting up against finite
satisfy those wants. resources.
Chapter 1 What Economics Is About 3
Many economists say that if scarcity didn’t exist, neither would economics. In other words, if Economics
our wants weren’t greater than the limited resources available to satisfy them, there would be no The science of scarcity; the
field of study called economics. This is similar to saying that if matter and motion didn’t exist, science of how individuals
neither would physics or that if living things didn’t exist, neither would biology. For this reason, and societies deal with the
fact that wants are greater
we define economics in this text as the science of scarcity. More completely, economics is the science
than the limited resources
of how individuals and societies deal with the fact that wants are greater than the limited resources available to satisfy those
available to satisfy those wants. wants.
THINKING LIKE AN ECONOMIST

Scarcity Affects Everyone Everyone in the world—even a billionaire—has to face
scarcity. Billionaires may be able to satisfy more of their wants for tangible goods (houses,
cars) than most people, but they still may not have the resources to satisfy all their wants.
Their wants might include more time with their children, more friendship, no disease in the
world, peace, and a hundred other things that they don’t have the resources to “produce.”
Thinking in Terms of Scarcity’s Effects Scarcity has effects. Here are three: (1) the need to
make choices, (2) the need for a rationing device, and (3) competition.
Choices People have to make choices because of scarcity. Because our unlimited wants are greater
than our limited resources, some wants must go unsatisfied. We must choose which wants we will
satisfy and which we will not. Jeremy asks, “Do I go to Hawaii or do I pay off my car loan earlier?”
Ellen asks, “Do I buy the new sweater or two new shirts?”
Need for a Rationing Device A rationing device is a means of deciding who gets what of available Rationing Device
resources and goods. Scarcity implies the need for a rationing device. If people have infinite wants A means for deciding who
for goods and if only limited resources are available to produce the goods, then a rationing device gets what of available
is needed to decide who gets the available quantity of goods. Dollar price is a rationing device. For resources and goods.
instance, 100 cars are on the lot, and everyone wants a new car. How do we decide who gets what
quantity of the new cars? The answer is to use the rationing device called dollar price. The people
who pay the dollar price for a new car end up with one.
Scarcity and Competition Do you see competition in the world? Are people competing for jobs?
Are states and cities competing for businesses? Are students competing for grades? The answer
to all these questions is yes. The economist wants to know why this competition exists and what
form it takes. First, the economist concludes, competition exists because of scarcity. If there were
enough resources to satisfy all our seemingly unlimited wants, people would not have to compete
for the available, but limited, resources.
Second, the economist sees that competition takes the form of people trying to get more of
the rationing device. If dollar price is the rationing device, people compete to earn dollars. Look
at your own case. You are a college student working for a degree. One reason (but perhaps not
the only reason) you are attending college is to earn a higher income after graduation. But why
do you want a higher income? You want it because it will allow you to satisfy more of your wants.
Suppose muscular strength (measured by lifting weights), instead of dollar price, were the
rationing device. Then people with more muscular strength would receive more resources and
goods than people with less muscular strength. In that case, people would compete for muscular
strength. (Would they spend more time at the gym lifting weights?) The lesson is simple: Whatever
the rationing device is, people will compete for it.
FINDING ECONOMICS
At the campus bookstore To learn economics well, you must practice what you learn.
One of the ways to practice economics is to find it in everyday life. Consider the following
scene: You are in the campus bookstore buying a book for your computer science course,
and you are handing over $85 to the cashier. Can you find the economics in this simple
scene? Before you read on, think about it for a minute.
Let’s work backward to find the economics. You are currently handing the cashier $85.
We know that dollar price is a rationing device. But let’s now ask ourselves why we would
need a rationing device to get the book. The answer is scarcity. In other words, scarcity is
casting its long shadow there in the bookstore as you buy a book. We have found one of the
key economic concepts—scarcity—in the campus bookstore. (If you also said that a book is a
good, then you have found even more economics in the bookstore. Can you find more than
scarcity and a good?)
SELF-TEST
(Answers to Self-Test questions are in Answers to Self-Test Questions at the back of the book.)
1. True or false? Scarcity is the condition of finite resources. 2. How does competition arise out of scarcity?
Explain your answer. 3. How does choice arise out of scarcity?
1-3 KEY CONCEPTS IN ECONOMICS

A number of key concepts in economics define the field. We discuss a few of these concepts next.
1-3a Opportunity Cost

So far, we have established that people must make choices because scarcity exists. In other words,
because our seemingly unlimited wants push up against limited resources, some wants must go
unsatisfied. We must therefore choose which wants we will satisfy and which we will not. The most
highly valued opportunity or alternative forfeited when we make a choice is known as
Opportunity Cost pportunity cost. Every time you make a choice, you incur an opportunity cost. For example, you
o
The most highly valued have chosen to read this chapter. In making this choice, you denied yourself the benefits of doing
opportunity or alternative something else. You could have watched television, written text messages to a friend, taken a nap,
forfeited when a choice is eaten a few slices of pizza, read a novel, shopped for a new computer, and so on. Whatever you
made.
would have chosen to do is the opportunity cost of your reading this chapter. For instance, if you
would have watched television instead of reading this chapter—if that was your next best
alternative—then the opportunity cost of reading the chapter is watching television.
There Is No Such Thing as a Free Lunch Economists are fond of saying that “there is
no such thing as a free lunch.” This catchy phrase expresses the idea that opportunity costs are
incurred whenever choices are made. Perhaps this is an obvious point, but consider how often
people mistakenly assume that there is a free lunch. For example, some parents think that educa-
tion is free, because they do not pay tuition for their children to attend public elementary school.
That’s a misconception. “Free” implies no sacrifice and no opportunities forfeited, but an elemen-
tary school education requires resources that could be used for other things.
Consider the people who speak about free medical care, free housing, free bridges (“there’s no
charge to cross it”), and free parks. Again, free medical care, free housing, free bridges, and free
parks are misconceptions. The resources that provide medical care, housing, bridges, and parks
could have been used in other ways.
Economics 24/7
Rationing Spots at Yale
Each year, Yale University receives Yale might also decide that it wants
more applications for admission to to admit certain students over others,
the freshmen class than spots are even if the two categories of students
available. In most years, for every have the same academic credentials.
100 applications for admission that For example, suppose Yale wants at
Yale receives, it can accept only least one student from each state in
iStock.com/peterspiro
seven applicants for admission. the country, and only 10 students from
What Yale has to do, then, is ration Wyoming have applied to go to Yale
its available admission spots. whereas 500 students from California
How does it ration its available have applied. Then Yale could very
spots? One way is simply to use well use the rationing device of state
money as a rationing device. In other words, raise the dollar amount diversity to decide in favor of the student from Wyoming instead of
of attending Yale to a high enough level so that the number of the applicant from California.
spots equals the number of students willing and available to pay In the first week of April each year, Yale sends out many more
for admission. To illustrate, think of Yale as auctioning off spots in its rejection letters than acceptance letters. No doubt, some students
freshman class. It calls out a price of $50,000 a year, and at this price who are rejected by Yale feel that some of the students who were
more people wish to be admitted to Yale than there are spots avail- accepted might not be as academically strong as they are. No doubt,
able. Yale keeps on raising the price until the number of students the student with a 4.00 GPA and a perfect SAT score of 2400 feels that
who are willing and able to pay the tuition is equal to the number he might have been slighted by Yale when he learns that a student in
of available spots. Maybe this price is, say, $200,000. his high school with a 3.86 GPA and SAT score of 2180 was chosen over
As we know, Yale does not ration its available spots this way. him. What did the 3.86–2180 student have that he didn’t have? What
In fact, it uses numerous rationing devices in an attempt to whittle rationing device benchmark did the rejected student score lower on?
down the number of applicants to the number of available spots. In life, you will often hear people arguing over what the rationing
For example, it might use the rationing device of high school device for certain things should be. Should high school grades and
grades. Anyone with a GPA in high school of less than, say, 3.50 is standardized test scores be the only two rationing devices for college
not going to be admitted. If, after doing this, Yale still has too admission? What role should money play as a rationing device when
many applicants, it might then make use of the rationing device of a high school graduate applies to college? What role should ethnic
standardized test scores. Anyone with an SAT score of under, say, or racial diversity, or state diversity, or income diversity play in the
2100 is eliminated from the pool of applicants. If there are still too application process? Our point is a simple one: With scarcity comes
many applicants, then perhaps other rationing devices will be used, the need for a rationing device. More people want a spot at Yale
such as academic achievements, community service, degree of than there are spots available. Yale has to use one or more rationing
interest in attending Yale, and so on. devices to decide who will be accepted and who will be rejected.

Zero Price Doesn’t Mean Zero Cost A friend gives you a ticket to an upcoming
concert for zero price (i.e., you pay nothing). Does it follow that zero price means zero cost?
No. There is still an opportunity cost of attending the concert. Whatever you would be doing
if you don’t go to the concert is the opportunity cost of attending. To illustrate, if you don’t
attend the concert, you would hang out with friends. The value you place on hanging out with
friends is the opportunity cost of your attending the concert.
1-3b Opportunity Cost and Behavior

Economists believe that a change in opportunity cost can change a person’s behavior. For exam-
ple, Ryan, who is a sophomore at college, attends classes Monday through Thursday of every
week. Every time he chooses to go to class, he gives up the opportunity to do something else,
such as earn $15 an hour working at a job. The opportunity cost of Ryan’s spending an hour
in class is $15.
Now let’s raise the opportunity cost of attending class. On Tuesday, we offer Ryan $70 to skip
his economics class. He knows that if he attends his economics class, he will forfeit $70. What
will Ryan do? An economist would predict that as the opportunity cost of attending class increases
relative to the benefits of attending, Ryan is less likely to go to class.
This is how economists think about behavior: The higher the opportunity cost of doing something,
the less likely it is that it will be done. This is part of the economic way of thinking.
Look at Exhibit 1, which summarizes some of the things about scarcity, choice, and opportu-
nity cost up to this point.
EXHIBIT 1
Scarcity and Related Concepts
Because of scarcity, a Whatever the rationing device, people will compete

rationing device is needed. for it. Scarcity and competition are linked.
Scarcity
Because of scarcity, people When choices are made, Changes in opportunity cost
must make choices. opportunity costs are incurred. affect behavior.
FINDING ECONOMICS
In Being Late to Class John is often a few minutes late to his biology class. The class starts
at 10 a.m., but John usually walks into the class at 10:03 a.m. The instructor has asked John
to be on time, but John usually excuses his behavior by saying that the traffic getting to college
was bad or that his alarm didn’t go off at the right time or that something else happened to
delay him. One thing the instructor observes, though, is that John is never late when it comes to
test day. He is usually in class a few minutes before the test begins. Where is the economics?
We would expect behavior to change as opportunity cost changes. When a test is being
given in class, the opportunity cost of being late to class is higher than when a test is not being
given and the instructor is simply lecturing. If John is late to class on test day, he then has fewer
minutes to complete the test, and having less time can adversely affect his grade. In short, the
higher the opportunity cost of being late to class, the less likely it is that John will be late.
1-3c Benefits and Costs

If we could eliminate air pollution completely, should we do it? If your answer is yes, then you
are probably focusing on the benefits of eliminating air pollution. For example, one benefit might
be healthier individuals. Certainly, individuals who do not breathe polluted air have fewer lung
disorders than people who do breathe polluted air.
But benefits rarely come without costs. The economist reminds us that, although eliminat-
ing pollution has its benefits, it has costs too. To illustrate, one way to eliminate all car pollution
tomorrow is to pass a law stating that anyone caught driving a car will go to prison for 40 years.
With such a draconian law in place and enforced, very few people would drive cars and all car
pollution would be a thing of the past. Presto! Cleaner air! However, many people would think
that the cost of obtaining that cleaner air is too high. Someone might say, “I want cleaner air, but
not if I have to completely give up driving my car. How will I get to work?”
What distinguishes the economist from the noneconomist is that the economist thinks in terms
of both costs and benefits. Often, the noneconomist thinks in terms of one or the other. Studying
has its benefits, but it has costs too. Coming to class has benefits, but it has costs too. Getting
up early each morning and exercising has its costs, but let’s not forget that there are benefits too.
1-3d Decisions Made at the Margin

It is late at night, and you have already studied three hours for your biology test tomorrow. You look
at the clock and wonder if you should study another hour. How would you summarize your thinking
process? What question or questions do you ask yourself to decide whether to study another hour?
Perhaps without knowing it, you think in terms of the costs and benefits of further study. You
probably realize that studying an additional hour has certain benefits (you may be able to raise your
grade a few points), but it has costs too (you will get less sleep or have less time to watch television
or talk on the phone with a friend). That you think in terms of costs and benefits, however, doesn’t
tell us how you think in terms of costs and benefits. For example, when deciding what to do, do
you look at the total costs and total benefits of the proposed action, or do you look at something
less than the total costs and benefits? According to economists, for most decisions, you think in
Marginal Benefits (MB)
terms of additional, or marginal, costs and benefits, not total costs and benefits. That’s because
Additional benefits; the
most decisions deal with making a small, or additional, change. benefits connected with con-
To illustrate, suppose you just finished eating a hamburger and drinking a soda for lunch. You suming an additional unit of
are still a little hungry and are considering whether to order another hamburger. An economist would a good or undertaking one
say that, in deciding whether to order another hamburger, you compare the additional benefits of more unit of an activity.
the second hamburger with its additional costs. In economics, the word marginal is a synonym for
Marginal Costs (MC )
additional. So, we say that you compare the marginal benefits (MB ) of the (next) hamburger to its Additional costs; the costs
marginal costs (MC ). If the marginal benefits are greater than the marginal costs, you obviously connected with consuming
expect a net benefit to ordering the next hamburger, and therefore you order another. If, however, an additional unit of a good
the marginal benefits are less than the marginal costs, you obviously expect a net cost to ordering or undertaking one more unit
the next hamburger, and therefore you do not order another. Logically, the situation is as follows: of an activity.
Condition Action
MB of next hamburger . MC of next hamburger Buy next hamburger
MB of next hamburger , MC of next hamburger Do not buy next hamburger
What you don’t consider when making this decision are the total benefits and total costs of
hamburgers. That’s because the benefits and costs connected with the first hamburger (the one you
have already eaten) are no longer relevant to the current decision. You are not deciding between eat- Decisions at the Margin
Decision making
ing two hamburgers or eating no hamburgers; your decision is whether to eat a second h amburger
characterized by weighing
after you have already eaten one. the additional (marginal)
According to economists, when individuals make decisions by comparing marginal benefits benefits of a change against
with marginal costs, they are making decisions at the margin. The employee makes a decision at the additional (marginal)
the margin in deciding whether to work two hours overtime; the economics professor makes a costs of a change with
decision at the margin in deciding whether to put an additional question on the final exam. respect to current conditions.
Economics 24/7
When Is It Too Costly to Attend College?
Look around your class. Are there any big-name actors, sports
stars, or comedians between the ages of 18 and 25 in your class?
Probably not. The reason is that, for these people, the opportu-
nity cost of attending college is much higher than it is for most
18-to-25-year-olds. Think of LeBron James, a basketball star,
Chris Rock, a comedian, Johnny Depp, an actor, Will Smith, also
an actor—these people and many more like them chose not to
go to college. Why didn’t they go to college? The fact is that they
didn’t go to college because it was too expensive for them to go
to college. Not “too expensive” in the sense that the “tuition was
too high,” but expensive in terms of what they would have had
to give up if they attended college—expensive in opportunity
cost terms.
To understand this idea, think of what it’s costing you to attend
college. If you pay $3,000 tuition a semester for eight semesters, the
Kent Smith/NBAE/Getty Images
full tuition amounts to $24,000. However, $24,000 is not the full cost
of attending college, because if you were not a student, you could
be earning income working at a job. For example, you could be
working at a full-time job earning $32,000 annually. Certainly, this
$32,000, or at least part of it if you are currently working part time,
is forfeited because you are attending college. It is part of the total
cost of your attending college.
The tuition cost may be the same for everyone who attends Second, we said that economists believe that individuals think
your college, but the opportunity cost is not. Some people have and act in terms of costs and benefits and that they undertake actions
higher opportunity costs of attending college than others. It just only if they expect the benefits to outweigh the costs. Thus, Johnny
so happens that Johnny Depp, LeBron James, Will Smith, and Chris Depp, LeBron James, Will Smith, and Chris Rock saw certain benefits
Rock had extremely high opportunity costs of attending college. to attending college—just as you see certain benefits to attending
Each would have to give up hundreds of thousands of dollars if he college. But those benefits—although they may be the same for
were to attend college on a full-time basis. you and everyone else—are not enough to get everyone to attend
Simply put, our story illustrates two related points we have college. That’s because the benefits are not all that matters. The
made in this chapter. First, earlier we said that the higher the oppor- costs matter, too. In the case of Johnny Depp, LeBron James, Will
tunity cost of doing something, the less likely it will be done. The Smith, and Chris Rock, the costs of attending college were much
opportunity cost of attending college is higher for some people higher than the benefits, so they chose not to attend college.
than others, and that is why not everyone who can pay for college In your case, the benefits are higher than the costs, so you have
chooses to attend college. decided to attend college.
1-3e Efficiency
What is the right amount of time to study for a test? In economics, the right amount of anything
is the optimal or efficient amount—the amount for which the marginal benefits equal the marginal
costs. Stated differently, you have achieved efficiency when the marginal benefits equal the m
arginal Efficiency
costs. Exists when marginal
Suppose you are studying for an economics test, and for the first hour of studying, the marginal benefits equal marginal
benefits (MB) are greater than the marginal costs (MC): costs.
MB studying first hour . MC studying first hour
Given this condition, you will certainly study for the first hour, because it is worth it:
The additional benefits are greater than the additional costs, so there is a net benefit to studying.
Suppose, for the second hour of studying, the marginal benefits are still greater than the
marginal costs:
MB studying second hour . MC studying second hour
Then you will study for the second hour, because the additional benefits are still greater than
the additional costs. In other words, studying the second hour is worthwhile. In fact, you will
continue to study as long as the marginal benefits are greater than the marginal costs. Exhibit 2
illustrates this discussion graphically.
EXHIBIT 2
MB, MC Efficiency
MB 5 marginal benefits and
MB = MC MC 5 marginal costs. In
MC of Studying the exhibit, the MB curve of
studying is downward sloping
A
and the MC curve of studying
MB > MC is upward sloping. As long
MC > MB as MB > MC, the person
will study. The person stops
studying when MB 5 MC.
This point is where efficiency
MB of Studying is achieved.
0 1 2 3 4 5 Time Spent
Studying
Efficient Number (hours)
of Hours to Study
The MB curve of studying is downward sloping because we have assumed that the ben-
efits of studying for the first hour are greater than the benefits of studying for the second
hour and so on. The MC curve of studying is upward sloping because we have assumed that
studying the second hour costs a person more (in terms of goods forfeited) than studying
the first hour, studying the third hour costs more than studying the second, and so on. (If
we assume that the additional costs of studying are constant over time, the MC curve is
horizontal.)
In the exhibit, the marginal benefits of studying equal the marginal costs of studying at
three hours. So, three hours is the efficient length of time to study in this situation. At less
than three hours, the marginal benefits of studying are greater than the marginal costs; thus,
at all these hours, studying has net benefits. At more than three hours, the marginal costs
of studying are greater than the marginal benefits, so studying beyond three hours is not
worthwhile.
Maximizing Net Benefits Take another look at Exhibit 2. Suppose you had stopped
studying after the first hour (or, equivalently, after the 60th minute). Would you have given
up anything? Yes, you would have given up the net benefits of studying longer. To illustrate,
notice that between the first and the second hour, the MB curve lies above the MC curve.
This means that studying the second hour has net benefits. But if you hadn’t studied that
second hour—if you had stopped after the first hour—then you would have given up the
opportunity to collect those net benefits. The same analysis holds for the third hour. We
conclude that, by studying three hours (but not one minute longer), you have maximized
net benefits. In short, efficiency, which is consistent with MB 5 MC, is also consistent with
maximizing net benefits.

No $10 Bills on the Sidewalk An economist says that people try to maximize their
net benefits. You ask for proof. The economist says, “You don’t find any $10 bills on the
sidewalk.” What is the economist getting at by making this statement? Keep in mind that you
don’t find any $10 bills on the sidewalk because, if there were a $10 bill on the sidewalk,
the first person to see it would pick it up; when you came along, it wouldn’t be there. But why
would the first person to find the $10 bill pick it up? The reason is that people don’t pass by
net benefits, and picking up the $10 bill comes with net benefits. The benefits of having an
additional $10 are obvious; the costs of obtaining the additional $10 bill are simply what
you give up during the time you are stooping down to pick it up. In short, the marginal ben-
efits are likely to be greater than the marginal costs (giving us net benefits), and that is why
the $10 bill is picked up. Saying that there are no $10 bills on the sidewalk is the same as
saying that no one leaves net benefits on the sidewalk. In other words, people try to maxi-
mize net benefits.
Does It Matter to You . . .

If You Are Efficient or Not?
The efficient amount of an activity is the amount at which the
marginal benefits (MB) of the activity equal the marginal costs
(MC). With this in mind, look at Exhibit 3. The activity of bowling is
on the horizontal axis, measured in minutes. The marginal benefits
and costs of bowling are on the vertical axis. The efficient amount
Action Plus Sports Images/Alamy Stock Photo

of time spent bowling—the time at which the marginal benefits of
bowling are equal to the marginal costs of bowling—is 60 minutes.
Now let’s ask what is so special about the efficient amount of
owling? Why, in our example, is 60 minutes of bowling preferred to,
b
say, 30 minutes of bowling? To answer the question, consider what
the net benefits of bowling are at 30 minutes and at 60 minutes.
The net benefits of bowling 30 minutes are shown in the diagram
as the shaded red area. To understand why this area represents the
could be better. Notice that there are net benefits gained by b
owling
net benefits of bowling for 30 minutes, consider that from 0 minutes
additional minutes. In fact, there are net benefits gained by bowling
through 30 minutes, the MB curve lies above the MC curve. In other
30 additional minutes (from the 31st through the 60th minute). The
words, from 0 minutes through 30 minutes the marginal benefits of
area of net benefits is shown in the diagram as the shaded blue area.
bowling are greater than the marginal costs, leaving us with net ben-
We have assigned a dollar figure of $6 to these net benefits.
efits. We have assigned a dollar figure of $8 to these net benefits.
Is it better to bowl 30 minutes or 60 minutes? The answer is 60 min-
Now if a person stopped bowling after 30 minutes, he or she would
utes, because having bowled 60 minutes a person receives overall
have received $8 worth of net benefits. That is not bad, but things
net benefits of $8 plus $6 or $14. But bowling only 30 minutes
EXHIBIT 3 leaves a person having gained only $8 worth of net benefits. In
other words, by not bowling after the 30th minute, it is as if a per-
The Efficient Amount of Time to Bowl son is leaving $6 (worth of net benefits) on the table. That’s sort of
like leaving $6 on the street instead of picking it up.
NB = +$8
We started with a question: Does it matter if you are efficient or not?
MB, MC The answer is that it does matter. If you are efficient, you have done
NB = +$6 as well as can be done; you have maximized net benefits.
NC = –$4 Now, if 60 minutes of bowling is better than 30 minutes, then why
isn’t 75 minutes of bowling better than 60 minutes? If you look
MC at the diagram, the answer is obvious. Because bowling for more
than 60 minutes comes with marginal benefits less than marginal
costs. The shaded green area in the exhibit represents the net costs
of bowling from the 60th minute to the 75th minute. We have
MB
assigned a dollar value of $4 to this net cost. What then would your
overall net benefits be if you bowled 75 minutes instead of 60 min-
0 30 60 75 Bowling
(minutes) utes? They would be equal to $8 1 $6 2 $4 or $10. And that, we
notice, is a lower overall net benefit than one receives by bowling
just 60 minutes.
1-3f Economics Is About Incentives

Incentive An incentive is something that encourages or motivates a person to undertake an action.
Something that encourages Often, what motivates a person to undertake an action is the belief that, by taking that action,
or motivates a person to she can make herself better off. For example, if we say that Dawn has an incentive to study for the
undertake an action. upcoming exam, we imply that, by studying, Dawn can make herself better off, probably in terms
of receiving a higher grade on the exam than if she didn’t study.
Incentives are closely related to benefits and costs. Individuals have an incentive to undertake
actions for which the benefits are greater than the costs or, stated differently, for which they expect
to receive net benefits (benefits greater than costs).
Economics 24/7
Can Incentives Make You Smarter?
Most people seem to think themselves smarter when it comes
to some things than other things. For example, a person may say
that she is fairly smart when it comes to learning biology, but not
so smart when it comes to learning mathematics. Another person
might say that he is smart when it comes to fixing cars, but not so
smart when it comes to learning foreign languages.
wavebreakmedia/Shutterstock.com
Now ask yourself if incentives can affect how smart you are
when it comes to any given subject: economics, mathematics,
biology, history, and so on. Consider the experiment described next,
and consider what you think the results of the experiment are likely
to be.
An economics instructor teaches two classes of economics,
A and B. In each class there are 45 students, and in each class the
instructor gives the same eight quizzes. In class A, the instructor
tells each student that, for every quiz on which the student receives or motivated you to study harder (and more), which then had the
a grade of 90 or higher, he or she will receive $100. In class B, the unintended effect of getting you to realize you were smarter than
instructor offers no such incentive. you initially thought.
Now predict whether grades in the two classes will be the Now suppose someone asks how smart you are when it
same or different? If different, in which class, A or B, are students comes to physics or mathematics. If you feel that these subjects
likely to earn higher grades? Finally, ask yourself if you would are beyond you somehow, you might say, “I don’t think I’m
study harder for a quiz given in class A or class B? If your answer to that smart when it comes to physics or mathematics. I don’t
the last question is class A (in which there is a chance of earning really understand a lot that is taught in those subjects.” But
$800 over eight quizzes), then it is very likely that your grades perhaps the correct answer is, “I’m not sure how smart or not
will be higher in class A than in class B. In fact, by studying harder I am when it comes to physics or mathematics. A lot depends
and earning higher grades, you might even end up concluding on the incentives that exist to learn physics and mathematics.
that you are smarter when it comes to economics than you Under certain incentives, I seem to be smarter than under other
thought you were. It’s very likely that the incentive encouraged incentives.”
Economists are interested in what motivates behavior. Why does the person buy more of good
X when its price falls? Why might a person work longer hours when income tax rates decline?
Why might a person buy more of a particular good today if he expects the price of that good to
go up next week? The general answer to many of these questions is that people do what they have
an incentive to do. Economists then hunt for what the incentive is. For example, if a person buys
more of good X when its price goes down, what specifically is the incentive? How, specifically, does
the person make himself better off by buying a good when its price declines. Does he get more
utility or satisfaction? Or how does a person make herself better off if she buys a good today that
she expects will go up in price next week?
1-3g Unintended Effects

Economists think in terms of unintended effects. For instance, Andrés, 16 years old, currently
works after school at a grocery store. He earns $9.50 an hour.
Suppose the state legislature passes a law specifying that the minimum dollar wage a person can
be paid to do a job is $15 an hour. The legislators’ intention in passing the law is to help people
like Andrés earn more income.
Will the $15-an-hour legislation have the intended effect? Perhaps not. The manager of the
grocery store may not find it worthwhile to continue employing Andrés if she has to pay him $15
an hour. In other words, Andrés may have a job at $9.50 an hour but not at $15 an hour. If the
law specifies that no one may earn less than $15 an hour and the manager of the grocery store
decides to fire Andrés rather than pay that amount, then an unintended effect of the legislation
is Andrés losing his job.
As another example, let’s analyze mandatory seat-belt laws to see whether they have any unin-
tended effects. States have laws that require drivers to wear seat belts. The intended effect is
to reduce the number of car-related fatalities by making it more likely that drivers will survive
accidents.
Could these laws have an unintended effect? Some economists think so. They look at accident
fatalities in terms of this equation:
Total number of fatalities 5 Number of accidents 3 Fatalities per accident
For example, if there are 200,000 accidents and 0.10 fatality per accident, the total number
of fatalities is 20,000.
The objective of a mandatory seat-belt program is to reduce the total number of fatalities by
reducing the number of fatalities per accident (the fatality rate). Many studies have found that
wearing seat belts does just that. If you are in an accident, you have a better chance of not being
killed if you are wearing a seat belt.
Let’s assume that, with seat belts, there is 0.08, instead of 0.10, fatality per accident. If there
are still 200,000 accidents, then the total number of fatalities falls from 20,000 to 16,000. Thus,
as the following table shows, the total number of fatalities drops if the number of fatalities per
accident is reduced and the number of accidents is constant:
Number of Fatalities per Total Number

Accidents Accident of Fatalities
200,000 0.10 20,000
200,000 0.08 16,000
However, some economists wonder whether the number of accidents stays constant. Specifi-
cally, they suggest that seat belts may have an unintended effect: The number of accidents may
increase because wearing seat belts may make drivers feel safer. Feeling safer may cause them to
take chances that they wouldn’t ordinarily take, such as driving faster or more aggressively, or con-
centrating less on their driving and more on the music on the radio. For example, if the number
of accidents rises to 250,000, then the total number of fatalities is again 20,000:
Number of Fatalities per Total Number

Accidents Accident of Fatalities
200,000 0.10 20,000
250,000 0.08 20,000
We conclude the following: If a mandatory seat-belt law reduces the number of fatalities per
accident (the intended effect) but increases the number of accidents (an unintended effect), then
the law may not, contrary to popular belief, reduce the total number of fatalities. In fact, some
economics studies show just that.
What does all this mean for you? You may be safer if you know that this unintended effect
exists and you adjust accordingly. To be specific, when you wear your seat belt, your chances
of getting hurt in a car accident are less than if you don’t wear your seat belt. But if this added
sense of protection causes you to drive less carefully than you would otherwise, then you could
unintentionally offset the measure of protection your seat belt provides. To reduce the probability
of hurting yourself and others in a car accident, the best policy is to wear a seat belt and to drive as
carefully as you would if you weren’t wearing a seat belt. Knowing about the unintended effect of
wearing your seat belt could save your life.
1-3h Exchange
Exchange (Trade) Exchange, or trade, is the giving up of one thing for something else. Economics is sometimes
The giving up of one thing called the science of exchange because so much that is discussed in economics has to do with
for something else. exchange.
We start with a basic question: Why do people enter into exchanges? The answer is that they
do so to make themselves better off. When a person voluntarily trades $100 for a jacket, she is
saying, “I prefer to have the jacket instead of the $100.” And, of course, when the seller of the
jacket voluntarily sells the jacket for $100, he is saying, “I prefer to have the $100 instead of the
jacket.” In short, through trade or exchange, each person gives up something he values less for
something he values more.
You can think of trade in terms of utility or satisfaction. Imagine a utility scale that goes
from 1 to 10, with 10 being the highest utility you can achieve. Now, suppose you currently
have $40 in your wallet and you are at 7 on the utility scale. A few minutes later, you are in a
store looking at some new shirts. The price of each is $20, and you end up buying two shirts
for $40.
After you traded your $40 for the shirts, are you still at 7 on the utility scale? The likely
answer is no. If you expected to have the same utility after the trade as you did before, you
probably would not have traded your $40 for the shirts. The only reason you entered into the
trade is that you expected to be better off after the trade than you were before it. In other words,
you thought that trading your $40 for the shirts would move you up the utility scale from 7 to,
say, 8.
Economics 24/7
Why Didn’t I Think of That? The Case of Uber and Airbnb
Consider two companies, both head- exchange or trade is giving up one
quartered in San Francisco. The first is thing for something else. In the case of
Uber and the second is Airbnb. Uber Uber, one person is giving up money
is a company that operates a mobile- for a ride to the airport. The other
app-based transportation network. person is giving up his time and his car
Here are how things work. One person to drive the first person to the airport
svetikd/E+/Getty Images
needs transportation from his home for money. In the case of Airbnb, one
to the airport. Another person, with person is giving up money for a week’s
a car, who is in the vicinity of this first stay in a house. The other person is
person, is willing and able to drive the giving up his occupancy of his house
person to the airport for a fee. Uber for money.
takes a percentage of the dollar transaction between driver and Now what Uber and Airbnb essentially do is bring people
rider. In a way, you could say that Uber is a taxi company, but owns together who want to trade with each other. Uber knows that
no taxis. there are people who want to be transported from one location to
Now consider Airbnb, which is essentially a website. Here are another and other people who want to do the transporting. Uber
how things work at the website. One person wants to rent a room brings these two sets of people together. Airbnb knows that there
in a house, or an entire house, or say a couch in the living room of are people who want to rent a room or a house in, say, Miami Beach
someone’s house for a night, a week, or more. Another person, with for a day or a week and other people who want to rent out their
a room or a house or a couch in the living room, is willing to accom- room or a house in Miami for a day or a week. Airbnb brings these
modate this person. What Airbnb essentially does is put these two two sets of people together.
people in contact with each other and Airbnb charges a fee. In a way, So, how does one come up with the Uber or Airbnb ideas?
you could say that Airbnb is a hotel, but owns no rooms. Basically, both ideas have to do with trying to answer this
Now what many people think when first learning about Uber question: How do I bring together people who want to trade with
and Airbnb is to ask themselves: Why didn’t I think of that? How each other, but who are not currently trading with each other?
ingenious to start your own taxi business but not own any taxis, or That is the question the founders of both Uber and Airbnb asked
to start your own hotel businesses but not own any rooms. and answered, albeit the first with respect to transportation and
Now what must the founders of Uber and Airbnb have been the second with respect to lodging. Are there other instances
thinking that others didn’t? Whether they knew it or not, what they where people who want to trade with each are just waiting to be
were thinking about was exchange or trade. As we stated earlier, brought together?
SELF-TEST
1. Give an example to illustrate how a change in opportunity be consistent with having maximized the net benefits of
cost can affect behavior. studying? Explain your answer.
2. Studying has both costs and benefits. If you continue to 3. You stay up an additional hour to study for a test.
study (e.g., for a test) for as long as the marginal benefits The intended effect is to raise your test grade. What might
of studying are greater than the marginal costs, and you be an unintended effect of staying up another hour to
stop studying when the two are equal, will your action study?
1-4 CETERIS PARIBUS AND THEORY

We cover two important topics in this section: (1) ceteris paribus and (2) theory.
1-4a Ceteris Paribus Thinking

Wilson has eaten regular ice cream for years, and for years his weight has been 190 pounds.
One day, Wilson decides he wants to lose weight. With this objective in mind, he buys a new
fat-free ice cream at the grocery store. The fat-free ice cream has half the calories of regular
ice cream.
Wilson eats the fat-free ice cream for the next few months. He then weighs himself and
finds that he has gained two pounds. Does this mean that fat-free ice cream causes people to
gain weight and regular ice cream does not? The answer is no. Why did Wilson gain weight
when he substituted fat-free ice cream for regular ice cream? Perhaps Wilson ate three times as
much fat-free ice cream as regular ice cream. Or perhaps during the time he was eating fat-free
ice cream, he wasn’t exercising, and during the time he was eating regular ice cream, he was
exercising. In other words, a number of factors—such as eating more ice cream or exercising
less—may have offset the weight loss that Wilson would have experienced had these other
factors not changed.
Now, suppose you want to make the point that Wilson would have lost weight by substituting
fat-free ice cream for regular ice cream had these other factors not changed. What would you say?
A scientist would say, “If Wilson has been eating regular ice cream and his weight has stabilized
at 190 pounds, then substituting fat-free ice cream for regular ice cream will lead to a decline in
weight, ceteris paribus.”
Ceteris Paribus The term ceteris paribus means all other things constant or nothing else changes. In our ice cream
A Latin term meaning all example, if nothing else changes—such as how much ice cream Wilson eats, how much exercise
other things constant or he gets, and so on—then switching to fat-free ice cream will result in weight loss. This expectation
nothing else changes. is based on the theory that a reduction in calorie consumption will result in weight loss and an
increase in calorie consumption will result in weight gain.
Using the ceteris paribus assumption is important because, with it, we can clearly designate
what we believe is the correct relationship between two variables. In the ice cream example, we
can designate the correct relationship between calorie intake and weight gain.
Economists don’t often talk about ice cream, but they will often make use of the ceteris paribus
assumption. An economist might say, “If the price of a good decreases, the quantity of it consumed
increases, ceteris paribus.” For example, if the price of Pepsi-Cola decreases, people will buy more
of it, assuming that nothing else changes.
But some people ask, “Why would economists want to assume that when the price of
Pepsi-Cola falls, nothing else changes? Don’t other things change in the real world? Why make
assumptions that we know are not true?”
Of course, economists do not specify ceteris paribus because they want to say something false
about the world. They specify it because they want to clearly define what they believe to be the
real-world relationship between two variables. Look at it this way: If you drop a ball off the roof
of a house, it will fall to the ground, unless someone catches it. This statement is true, and prob-
ably everyone would willingly accept it as true. But here is another true statement: If you drop a
ball off the roof of a house, it will fall to the ground, ceteris paribus. In fact, the two statements
are identical in meaning. This is because adding the phrase “unless someone catches it” in the first
sentence is the same as saying “ceteris paribus” in the second sentence. If one statement is a cceptable
to us, the other should be too.
1-4b What Is a Theory?

Almost everyone, including you, builds and tests theories or models on a regular basis. (In this text,
the words theory and model are used interchangeably.) Perhaps you thought that only scientists and
others with high-level mathematics at their fingertips built and tested theories. However, theory
building and testing is not the domain of only the highly educated and mathematically proficient.
Almost everyone builds and test theories.
People build theories any time they do not know the answer to a question. Someone asks,
“Why is the crime rate higher in the United States than in Belgium?” Or, “Why did Aaron’s girl-
friend break up with him?” Or, “Why does Professor Avalos give easier final exams than Professor
Shaw, even though they teach the same subject?” If you don’t know the answer to a question, you
are likely to build a theory so that you can provide an answer.
What exactly is a theory? To an economist, a theory is an abstract representation of the world. Theory
In this context, abstract means that you omit certain variables or factors when you try to explain An abstract representation
or understand something. For example, suppose you were to draw a map for a friend, showing of the real world designed
him how to get from his house to yours. Would you draw a map that showed every single thing with the intent to better
understand it.
your friend would see on the trip, or would you simply draw the main roads and one or two
landmarks? If you’d do the latter, you would be abstracting from reality; you would be omitting Abstract
certain things. The process (used in building
You would abstract for two reasons. First, to get your friend from his house to yours, you don’t a theory) of focusing on a
need to include everything on your map. Simply noting main roads may be enough. Second, if limited number of variables
to explain or predict an
you did note everything on your map, your friend might get confused. Giving too much detail
event.
could be as bad as giving too little.
When economists build a theory or model, they do the same thing you do in drawing a map.
They abstract from reality; they leave out certain things. They focus on the major factors or vari-
ables that they believe will explain the phenomenon they are trying to understand.
Suppose a criminologist’s objective is to explain why some people turn to crime. Before actu-
ally building the theory, he considers a number of variables that may explain why some people
become criminals: (1) the ease of getting a gun, (2) child-rearing practices, (3) the neighborhood
a person grew up in, (4) whether a person was abused as a child, (5) family education, (6) the type
of friends a person has, (7) a person’s IQ, (8) climate, and (9) a person’s diet.
The criminologist may think that some of these variables greatly affect the chance that a person
will become a criminal, some affect it only slightly, and others do not affect it at all. For example,
a person’s diet may have only a 0.0001 percent effect on the person becoming a criminal, whereas
whether a person was abused as a child may have a 30 percent effect.
A theory emphasizes only the variables that the theorist believes are the main or critical ones that
explain an activity or event. Thus, if the criminologist in our example thinks that parental child-
rearing practices and family education are likely to explain much more about criminal behavior
than the other variables are, then his (abstract) theory will focus on these two variables and ignore
the others.
All theories are abstractions from reality. But it doesn’t follow that (abstract) theories cannot
explain reality. The objective in theory building is to ignore the variables that are essentially irrel-
evant to the case at hand, making it easier to isolate the important variables that the untrained
observer would probably miss.
In the course of reading this text, you will come across numerous theories. Some of these
theories are explained in words, and others are represented graphically. For example, Chapter 3
presents the theory of supply and demand. First, the parts of the theory are explained. Then the
theory is represented graphically in terms of a supply curve and a demand curve.
What to Ask a Theorist Physicists, chemists, and economists aren’t the only persons who
build and test theories. Historians, sociologists, anthropologists, and many others build and test
theories. In fact, as suggested earlier in this section, almost everyone builds theories (although not
everyone tests theories).
Anytime you listen to someone expound on a theory, you should always ask a key question:
“If your theory is correct, what do you predict we will see in the world?” To illustrate, let’s con-
sider a very simple example. Suppose your history professor comes to class each day clean shaven
and dressed in slacks, shirt, and sports jacket. One day he comes to class unshaven and dressed
in jeans and a somewhat wrinkled T-shirt. The difference in appearance is obvious. You turn to
your friend who sits next to you in class and ask, “What do you think explains the difference in
his appearance and dress?”
Notice that you have asked a question that does not have an obvious answer. Such questions
are ripe for theory building. Your friend proposes an explanation. She says, “I think the profes-
sor forgot to set his alarm clock last night. He got up late this morning and didn’t have time to
shave or to dress the way he usually does. He just threw on the first clothes he found and rushed
to class.”
Your friend has advanced a theory of sorts. She has implicitly assumed that the professor wants
to shave and dress in slacks, shirt, and sports jacket but that some unusual event prevented him
from doing so today.
Somehow, you don’t think your friend’s theory is correct. Instead, you think your history
professor has decided to make a life change of some sort. He has decided to look more casual, to
take life a little easier, to be less formal. You tell your friend what you think explains your profes-
sor’s new behavior.
You, like your friend, have advanced a theory of sorts. Whose theory, if either, is correct? Now
is the time for you to ask your friend, and your friend to ask you, “If your theory is correct, what
do you predict we will see in the world?”
Your friend’s answer should be, “If my theory is correct, then the next time the professor comes
to class, he will be clean shaven and dressed in his old way—slacks, shirt, and sports jacket.” Your
answer should be, “If my theory is correct, then the next time the professor comes to class, he will
be unshaven and dressed as he is today—in jeans, T-shirt, and the like.”
The question—If your theory is correct, what do you predict we will see in the world?—gives
us a way to figure out who might be closer to the truth when people disagree. It minimizes talk
and maximizes the chances of establishing who is correct and who is incorrect.
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PRAGMATISM AND IDEALISM ***
PRAGMATISM AND IDEALISM
AGENTS
America The Macmillan Company
64 & 66 Fifth Avenue, New York
AustralasiaThe Oxford University Press
205 Flinders Lane, Melbourne
Canada The Macmillan Company of Canada, Ltd.
St Martin’s House, 70 Bond Street, Toronto
India Macmillan & Company, Ltd.
Macmillan Building, Bombay
309 Bow Bazaar Street, Calcutta
P R A G M AT I S M
AND
IDEALISM
BY
WILLIAM CALDWELL, M.A., D.Sc.[Edinr.]

SIR WILLIAM MACDONALD PROFESSOR OF MORAL PHILOSOPHY,
McGILL UNIVERSITY, MONTREAL
LONDON
ADAM AND CHARLES BLACK
1913
PREFACE
What is attempted in this book is an examination of the Pragmatist
philosophy in its relations to older and newer tendencies in the
thought and practice of mankind.
While a good deal has been written within the last ten years
upon Pragmatism, the issue that it represents is still an open one—to
judge at least from recent books and reviews, and from recent official
discussions. And there seems to be a favourable opportunity for a
general account of the whole subject and for an estimate of its
significance.
In the opening chapter and elsewhere, both in the text and in the
footnotes, I have put together some things about the development
and the affiliations of Pragmatism, and of pragmatist tendencies, that
may not be altogether new to the professional student. Such a
presentation, or general conspectus, I have found to be a necessity
in the way of a basis both for discussion and for rational
comprehension. Taken along with the original pronouncements of
James and his confrères it affords an indication of the philosophy to
which the pragmatists would fain attain, and of the modification of
rationalistic philosophy they would fain effect.
The chapter upon Pragmatism as Americanism is put forth in the
most tentative spirit possible, and I have thought more than once of
withholding it. Something in this connexion, however, is, in my
opinion, needed to cause us to regard the pragmatist philosophy as
resting upon a very real tendency of the civilized world of to-day—a
tendency that is affecting us all whether we like it or not.
The chapter upon Pragmatism and Anglo-Hegelian Rationalism
is also offered with some degree of reservation and misgiving, for,
like many of my contemporaries, I owe nearly everything in the way
of my introduction to philosophy to the great Neo-Kantian and Neo-
Hegelian movement. In its place, I had some months ago a more
general chapter upon Pragmatism and Rationalism, containing the
results of material that I had been elaborating upon the development
of English Neo-Hegelianism. At the last moment I substituted what is
here offered upon the significant high-water output of Hegelianism
represented in Dr. Bosanquet’s Edinburgh Gifford Lectures.
In regard to the note upon the Pragmatist elements in the
philosophy of Bergson I ought, perhaps, to say that I kept away from
Bergson’s last two books until I had written out what had been
growing up in my own mind about the activism of Pragmatism and its
relations to Idealism. I have found confirmation for much of my own
thought in the teaching of this remarkable and significant thinker, and
I regret the partial representation of it that is here submitted.
Having crossed the ocean for the printing of my book, I have in
some cases lost or misplaced references that I intended to use or to
verify. For this I crave the indulgence of readers and critics.
I am indebted to the following gentlemen for much kind help and
criticism in the revision of my manuscript and proof-sheets for the
press: my brother, the Rev. Victor Caldwell, M.A., of Patna, Ayrshire;
Professor John Laird of Queen’s University, Belfast; Professor
James Seth of the University of Edinburgh; Professor P. T. Lafleur of
M’Gill University. I also owe much in this same connexion to recent
conversations with Professors A. Lalande and D. Parodi of Paris,
upon Pragmatism and contemporary philosophy generally.
London, September 1913.
CONTENTS
CHAP. PAGE
I. Introductory 1
Note on the Meaning of “Pragmatism” 21
II. Pragmatism and the Pragmatist Movement 23
III. Some Fundamental Characteristics 58
IV. Pragmatism and Human Activity 93
Appendix to Chapter IV.—Philosophy and the
Activity-Experience 109
V. Critical 116
VI. Pragmatism as Humanism 141
VII. Pragmatism as Americanism 168
VIII. Pragmatism and Anglo-Hegelian Rationalism 196
IX. Pragmatism and Idealism in the Philosophy
of Bergson 234
Concluding Remarks 262
INDEX 267
PRAGMATISM AND IDEALISM
CHAPTER I
INTRODUCTORY
Pragmatism has by this time received so much attention in the

reflective literature of the day that any writer upon the subject may
now fairly presume upon a general acquaintance with its main
principles and contentions. Indeed, it is probable that most thinking
people may be credited with the ability to have formed some sort of
judgment of their own about a philosophy whose main contention is
that true ideas are working ideas, and that truth itself, like a creed or
a belief, is simply a working valuation of reality. There are still,
however, some things to be said, at least in English, upon the place
and the meaning of Pragmatism in the philosophical reconstruction
that is generally felt to be so necessary to-day.
As far as the external signs of any such vital relation between
Pragmatism and our recent academic philosophy are concerned, the
reader may be aware, to begin with, that there have been many
1
important concessions made to pragmatists by such representative
rationalists as Mr. Bradley and Professor Taylor, not to speak of
2
others, and Pragmatism has certainly had a very powerful effect
upon the professional philosophy of both England and Germany,
judging at least from the extent to which many of the more prominent
representatives of philosophy in these countries have apparently
3
been compelled to accord to it at least an official recognition.
Pragmatism, again, in consequence of the different receptions
that it has met with at the hands of its friends and its foes, has
undergone various phases of exposition and of modification,
although it has not yet, nor is it on the whole likely to have, a
philosophical output comparable to that of Idealism. It has become
more and more conscious of its own affiliations and relations to
older, and to broader doctrines, declaring itself, in the hands of
Professor James and his friends, to be but a new name for older
ways of thinking. And it has succeeded, in a measure, in clearing
itself from liability to the superficial interpretation that it met with a
few years ago, when it was scoffed at for teaching that you may
believe “what you like,” for speaking, for example, as if the
“theoretical” consequences of truth were not to be considered as well
as the “practical.” Although still resting in the main upon an
outspoken declaration of war against Rationalism, it is no longer
blind to the place and the value of thought or the “concept,” in the
matter of the interpretation of our experience.
Pragmatism, as the theory is generally understood, rests in the
main upon the work of three men, Professors James and Dewey of
America, and Dr. Schiller of Oxford. The fact, along doubtless with
other things, that these men have ere now been spoken of as
occupying a right, a left, and a centre in the new movement, is
presumably an indication that it has already received its highest
theoretical expression—presumably in the California pamphlet of
Professor James, or in the famous Popular Science Monthly article
of Peirce, canonized as the patron saint of the movement by James.
Whether this be so or not, it has been in the main the work of
James to set forth the meaning of Pragmatism as a philosophy of
everyday life, as the theory of the attitude of man as man to the
world in which he finds himself. Dr. Schiller, again, it is claimed, has
done much to set forth Pragmatism to the world as an essentially
humanistic philosophy, recognizing and providing for the rights of
faith and of feeling in determining our beliefs and our theories about
things. This philosophy has “much in common with what in other
quarters is called Personalism.” It cannot, however, be differentiated
so sharply as Dr. Schiller apparently would have us believe from the
many manifestations of this philosophy that abound in modern times,
from Fichte, and from Lotze, down to men who are still living—
Eucken and others. The ingenious Professor Dewey, moreover, is
the champion of the scientific, or the empirical, or the “instrumental”
method in philosophy, and has worked hard and successfully at the
reform which he thinks must take place in logical and philosophical
conceptions when interpreted as simply tools or devices for the
economy of our thought.
When, in pragmatist fashion, we seek to judge of Pragmatism by
this last-mentioned matter of its results, by the things it has enabled
its advocates to accomplish, we find that we may, to begin with,
speak in the following terms of the work of Professor James. He has
certainly indicated how the pragmatist method may be applied to the
solution of some of the ordinary difficulties of reflective thought;
about, for example, the nature of matter or the nature of the soul, or
about the old opposition between the “one” and the “many,” about
such concepts as “thing,” “kinds,” “time,” “space,” the “fancied,” the
“real,” and so on. In all such cases an answer, he holds, is obtained
by putting, say, the initial difficulty in the following form: “What
practical difference can it make now that the world should be run by
matter or by spirit?”
A fair illustration of his meaning here would be his own
characteristic attitude, so far as the philosophy of religion is
concerned, to the so-called “theistic” proofs that have been part of
the stock in trade of rational theology. A “necessary being” and a
4
“whole of truth” and the “Absolute” are not, he would hold, what the
average man understands by God; they have hardly any perceptible
effect upon life and conduct—the all-important matter in the thought
of God as he conceives it. Only those notions, he would have it,
which can be interpreted by the thought of the “difference” they make
to our practical conduct are real notions at all—“Providence,” say, or
“God” as the guarantor of the reality and the permanence of the
moral order, and so on. The “soul,” again, he would hold, “is good for
just so much and no more.” And a similar thing, too, would be true
5
about Berkeley’s “matter,” or about the “matter” of the materialists.
This latter, for instance, cannot possibly do all it is claimed to be able
to do in the way of an explanation of the order of the world and the
phenomena of life.
Then again, James has written a great many pages upon the so-
called deeper view of human nature (as inclusive of will and
“emotion” in addition to mere thought) taken by Pragmatism in
comparison with that entertained by Rationalism. We shall have
occasion to return to this point.
He has made it clear, too, that it was an unfair interpretation of
Pragmatism to take it as a plea for believing what you like, as was
said above. Our experience, he puts it, must be consistent, the “parts
with the parts,” and the “parts with the whole.” Beliefs must not clash
with other beliefs, the mind being wedged tightly between the
coercion of the sensible order and that of the ideal order. By
“consequences,” too, he contends we may mean intellectual or
theoretical consequences as well as practical consequences.
He has also, along with his brother-pragmatists, raised the
question of the nature of Truth, attaining to such important results as
the following: (1) there is no such thing as pure truth, or ready-made
6
truth; (2) the “copy-theory” of truth is unintelligible. We shall later be
obliged to examine the more controversial positions that (3) truth is
not an end in itself, but a means towards vital satisfaction; (4) truth is
7
the “expedient” in the way of thinking, as the right is the expedient
in the way of acting, and so on.
Further, Professor James finds that Pragmatism leaves us with
the main body of our common-sense beliefs [Peirce holds practically
the same thing], such as the belief in “freedom”—as a “promise and
a relief,” he adds; and the belief in the religious outlook upon life, in
so far as it “works.” This is the attitude and the tenor of the well-
known books on The Will to Believe and The Varieties of Religious
8
Experience. “Our acts, our turning-places, where we seem to
ourselves to make ourselves and grow, are the parts of the world to
which we are closest, the parts of which our knowledge is the most
intimate and complete. Why should we not take them at their face-
value?” And yet, as against this attitude, Professor James elsewhere
finds himself unable to believe “that our human experience is the
highest form of experience extant in the universe.” It is the
emergence of many such incoherences in his writings that gives to
his pragmatist philosophy of religion a subjective and temperamental
character, and makes it seem to be lacking in any objective basis. “If
radically tough, the hurly-burly of the sensible facts of nature will be
enough for you, and you will need no religion at all. If radically
tender, you will take up with the more monistic form of religion: the
pluralistic form—that is, reliance on possibilities that are not
9
necessities—will not seem to offer you security enough.” He
“inclines,” on the whole, to “Meliorism,” treating satisfaction as
neither necessary nor impossible; the pragmatist lives in “the world
of possibilities.”
These words show clearly how difficult it is to pin down Professor
James to any single intelligible philosophy of belief, if belief be
interpreted as in any sense a “commerce” of the soul with objective
realities, as something more than a merely generous faith in the
gradual perfection or betterment of human society.
“Religious experience,” as he puts it in his Pluralistic Universe,
“peculiarly so called, needs, in my opinion, to be carefully considered
and interpreted by every one who aspires to reason out a more
complete philosophy.” In this same book, it is declared, however, on
the one hand, that “we have outgrown the old theistic orthodoxy, the
God of our popular Christianity being simply one member of a
pluralistic system”; and yet, on the other hand, and with equal
emphasis, that “we finite minds may simultaneously be conscious
10
with one another in a supernatural intelligence.”
The book on The Meaning of Truth seems to return, in the main,
to the American doctrine of the strenuous life as the only
courageous, and therefore true, attitude to beliefs, as the life that
contains, in the plenitude of its energizing, the answer to all
questions. “Pluralism affords us,” it openly confesses, “no moral
holidays, and it is unable to let loose quietistic raptures, and this is a
serious deficiency in the pluralistic philosophy which we have
professed.” Professor James here again attacks Absolutism in the
old familiar manner, as somehow unequal to the complexity of
things, or the pulsating process of the world, casting himself upon
the philosophy of experience, and upon the evident reality of the
“many” and of the endless variety of the relations of things, in
opposition to the abstract simplicity of the “one,” and the limited
range of a merely logical, or mathematical, manner of conceiving of
reality. “The essential service of Humanism, as I conceive the
situation, is to have seen that, though one part of experience may
lean upon another part to make it what it is in any one of several
aspects in which it may be considered, experience as a whole is self-
sustaining and leans on nothing.... “It gets rid of the standing
problems of Monism and of other metaphysical systems and
11
paradoxes.”
Professor James exhibits, however, at the same time a very
imperfect conception of philosophy, holding that it gives us, in
general, “no new range of practical power,” ignoring, as it were, the
difference between philosophy and poetry and religion and mere
personal enthusiasm. And he leaves the whole question of the first
principles of both knowledge and conduct practically unsettled.
12
These things are to him but conceptual tools, and “working” points
of departure for our efforts, and there seems in his books to be no
way of reducing them to any kind of system. And he makes, lastly, a
most unsuccessful attempt at a theory of reality. Reality is to him
sometimes simply a moving equilibrium of experience, the “flux” we
have already referred to; sometimes the fleeting generations of men
who have thought out for us all our philosophies and sciences and
cults and varied experiences, and sometimes the “common-sense
world in which we find things partly joined and partly disjoined.” It is
sometimes, too, other things even than these. In a chapter of the
13
book upon Pragmatism it is stated in italics that “reality is, in
general, what truths have to take account of,” and that it has three
parts: (1) “the flux of our sensations,” and (2) the “relations that
obtain between our sensations, or between their copies in our
minds,” and (3) “the previous truths of which every new inquiry takes
14
account.” Then again, in A Pluralistic Universe, it is declared that
“there may ultimately never be an All-form at all, that the substance
of reality may never get totally collected ... and that a distributive
form of reality, the Each-form, is logically as acceptable and
empirical and probable as the All-form.” This is the theory of the
15
outspoken “radical empiricism” which is the contention of the
volume upon The Meaning of Truth, the main effort of which seems
to be to show again that the world is still in the process of making. It
has the additional drawback of bringing Pragmatism down not only to
the level of radical empiricism, but to that of common-sense realism
or dualism [the belief in the two independent realities of matter and
16
mind], and to that of the “copy-theory” of truth, from which both
Pragmatism and Radical Empiricism are especially supposed to
deliver us. “I will say here again, for the sake of emphasis, that the
existence of the object ... is the only reason, in innumerable cases,
why the idea does work successfully.... Both Dewey and I hold firmly
17
... to objects independent of our own judgments.” Much of all this
is, no doubt, like surrendering philosophy altogether.
In the case of Dr. Schiller, we may notice first his frequent and
successful exhibition of the extent to which human activity enters into
the constitution not only of “truth,” but of “reality,” of what we mean
by reality. This is interwoven in his books with his whole philosophy
of truth as something merely human, as “dependent upon human
purposes,” as a “valuation” expressive of the satisfactory, or the
unsatisfactory, nature of the contents of “primary reality.” It is
interwoven, too, with his doctrine that reality is essentially a ὕλη,
something that is still in the making, something that human beings
can somehow re-make and make perfect. Then this position about
truth and reality is used by him, as by James, as a ground of attack
against Absolutism, with its notion of a “pre-existing ideal” of
knowledge and reality, as already existing in a super-sensible world,
that descends magically into the passively recipient soul of man.
There is no such thing, he claims, as absolute truth, and the
conception of an “absolute reality” is both futile and pernicious.
18
Absolutism, too, has an affinity to Solipsism, the difficulties of
which it can escape only by self-elimination.
19
Then Absolutism is, Schiller continues, “essentially irreligious,”
although it was fostered at first in England for essentially religious
20
purposes. It has developed there now at last, he reminds us, a
21
powerful left wing which, as formerly in Germany, has opened a
quarrel with theology. In Absolutism, the two phases of Deity—God
as moral principle, and God as an intellectual principle—“fall apart,”
and absolutist metaphysic has really no connexion with genuine
religion. Humanism can “renew Hegelianism” by treating the making
of truth as also the making of reality. Freedom is real, and may
22
possibly “pervade the universe.” All truth implies belief, and it is
obviously one of the merits of Pragmatism to bring truth and reason
together. Beliefs and ideas and wishes are really essential and
integral features in real knowing, and if knowing, as above, really
transforms our experience, they must be treated as “real forces,”
23
which cannot be ignored by philosophy.
Against all this would-be positive, or constructive, philosophy we
must, however, record the fact that the pragmatism of Dr. Schiller
breaks down altogether in the matter of the recognition of a
distinction between the “discovering” of reality and the “making” of
reality. And despite the ingenuity of his essay in the first edition of
24
Humanism upon “Activity and Substance,” there is not in his
writings, any more than in those of James, any coherent or adequate
theory of reality. And this is the case whether we think of the “primary
reality” upon which we human beings are said to “react,” in our
knowledge and in our action, or of the supreme reality of God’s
existence, of which such an interesting speculative account is given
in the essay referred to. Nor is there in Dr. Schiller, any more than in
James, any adequate conception, either of philosophy as a whole, or
of the theory of knowledge, or of the relation of Pragmatism as a
“method” (it is modestly claimed to be only such, but the position is
25
not adhered to) to philosophy as such. “For the pragmatic theory of
knowledge initial principles are literally ἀρχαί, mere starting-points
variously, arbitrarily, casually selected, from which we hope to try to
advance to something better. Little we care what their credentials
may be.... And as far as the future is concerned, systems of
philosophy will abound as before, and will be as various as ever, but
they will probably be more brilliant in colouring and more attractive in
their form, for they will certainly have to be put forward and
acknowledged as works of art that bear the impress of a unique and
26
individual soul.”
The main result of pragmatist considerations in the case of
Professor Dewey is perhaps that reconsideration of the problems of
logic and knowledge in the light of the facts of genetic and functional
psychology which has now become fairly general on the part of
English and American students of philosophy. It is through his
influence generally that pragmatists seem always to be talking about
the way in which we “arrive at” our beliefs, about ideas as
“instruments” for the interpretation and arrangement of our
experience, about the “passage” from cognitive expectation to
“fulfilment,” about ideas as “plans of action” and mental habits, about
the growth and the utility of the truth, about the “instrumental”
character of all our thinking, about beliefs as more fundamental than
knowledge, and so on.
Professor Dewey has also written many more or less popular,
but none the less highly valuable, short studies upon the application
of an instrumentalist conception of philosophy to education and to
social questions. One of his last pieces of service in this connection
is a volume in which he associates Pragmatism with the general
revolution effected in the entire range of the mental and moral
sciences by Darwinism, with the present tendency in philosophy to
turn away from ultimate questions to specific problems, and with the
27
reform which, in his opinion, is necessary in our educational ideals
generally.
These three leading exponents of Pragmatism may be regarded
as meeting the objections to philosophy urged respectively by the
“man of affairs,” by the “mystical, religious” man, and by the “man of
28
science.” By this it is meant that the man of affairs will find in
James an exposition of philosophy as the study of different ways of
looking at the world; the mystical, religious man will find in Schiller a
treatment of philosophy as the justification of an essentially spiritual
philosophy of life; and that the scientific man will find in the writings
of Dewey and his associates a treatment of philosophy as nothing
else than an extension into the higher regions of thought of the same

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Part 4 Factor Markets and Related Issues

Microeconomics The Global Economy

Chapter 6 Elasticity 138 Chapter 20 International Trade 484

Chapter 9 Perfect Competition 234

Chapter 12 Government and Product Markets: Antitrust

CHAPTER 1: What Economics is About 1

APPEnDIx B: SHOULD YOU MAJOR IN ECONOMICS? 34

Five Myths About Economics and Being an Economics Major 35

CHAPTER 2: PRODUCTION POSSIBILITIES FRONTIER FRAMEWORK 41

CHAPTER 3: SUPPLY AND DEMAND: THEORY 59

CHAPTER 4: PRICES: FREE, CONTROLLED, AND RELATIVE 95

CHAPTER 5: SUPPLY, DEMAND, AND PRICE: APPLICATIONS 116

Application 1: U-Haul Rates and Demand 116

CHAPTER 6: ELASTICITY 138

 APPEnDIx C: BUDGET CONSTRAINT AND INDIFFERENCE

The Budget Constraint 192

CHAPTER 8: PRODUCTION AND COSTS 200

Part 3 Product Markets and Policies

CHAPTER 9: PERFECT COMPETITION 234

The Case Against Monopoly 274

CHAPTER 11: MONOPOLISTIC COMPETITION, OLIGOPOLY,

Part 4 Factor Markets and Related Issues

CHAPTER 13: FACTOR MARKETS: WITH EMPHASIS

Why Jobs Don’t Always Factor Markets 329

CHAPTER 14: WAGES, UNIONS, AND LABOR 354

Objectives of Labor Unions 354

Practices of Labor Unions 356

CHAPTER 15: THE DISTRIBUTION OF INCOME AND POVERTY 371

CHAPTER 16: INTEREST, RENT, AND PROFIT 388

HOURS Profit 400

Part 5 Market Failure, Public Choice, and Special-Interest Group Politics

CHAPTER 17: MARKET FAILURE: EXTERNALITIES, PUBLIC GOODS,

An Unintended Effect Externalities 408

CHAPTER 18: PUBLIC CHOICE AND SPECIAL-INTEREST

A Simple-Majority Voting Rule: Public Choice Theory 437

Part 6 Economic Theory-Building and Everyday Life

CHAPTER 19: BUILDING THEORIES TO EXPLAIN EVERYDAY LIFE: FROM

Can Social Media Affect A Different Kind of Chapter 458

Observation/Thought 5: More Students Wear Baseball Caps in Class on Exam Days

The Global Economy

CHAPTER 20: INTERNATIONAL TRADE 484

HOURS Trade Restrictions 490

Does It Matter to You . . . If the Dollar Depreciates? 506

CHAPTER 22: The Economic Case for and Against

Culture as a Public Economics and Government 522

CHAPTER 23: STOCKS, BONDS, FUTURES, AND OPTIONS 541

Self-Test Appendix 522

Only available in MindTap®,

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APPEnDIx C: BUDGET CONSTRAINT AND INDIFFERENCE

CHAPTER 8: PRODUCTION AND COSTS 200

CHAPTER 11: MONOPOLISTIC COMPETITION, OLIGOPOLY,

CHAPTER 13: FACTOR MARKETS: WITH EMPHASIS

CHAPTER 14: WAGES, UNIONS, AND LABOR 354

CHAPTER 16: INTEREST, RENT, AND PROFIT 388

CHAPTER 17: MARKET FAILURE: EXTERNALITIES, PUBLIC GOODS,

CHAPTER 18: PUBLIC CHOICE AND SPECIAL-INTEREST

CHAPTER 19: BUILDING THEORIES TO EXPLAIN EVERYDAY LIFE: FROM

CHAPTER 20: INTERNATIONAL TRADE 484

CHAPTER 22: The Economic Case for and Against