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micro
ECON Principles of Microeconomics

6
william a. M c Eachern
University of Connecticut
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Printed in the United States of America

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

APPENDIX
A1-1 UNDERSTANDING GRAPHS Exhibit A-1

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

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

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The rocky nook with hill-tops three
Looked eastward from the farms,
And twice each day the flowing sea
Took Boston in its arms.
The sea returning day by day

Restores the world-wide mart;
So let each dweller on the Bay
Fold Boston in his heart.
Let the blood of her hundred thousands

Throb in each manly vein,
And the wits of all her wisest
Make sunshine in her brain.
And each shall care for other,

And each to each shall bend,
To the poor a noble brother,
To the good an equal friend.
A blessing through the ages thus

Shield all thy roofs and towers!
God with the fathers, so with us,
Thou darling town of ours!
BOSTON.
The old physiologists said, “There is in the air a hidden food of

life;” and they watched the effect of different climates. They believed
the air of mountains and the seashore a potent predisposer to
rebellion. The air was a good republican, and it was remarked that
insulary people are versatile and addicted to change, both in
religious and secular affairs.
The air that we breathe is an exhalation of all the solid material
globe. An aerial fluid streams all day, all night, from every flower and
leaf, from every water and soil, from every rock-ledge; and from
every stratum a different aroma and air according to its quality.
According to quality and according to temperature, it must have
effect on manners.
There is the climate of the Sahara: a climate where the sunbeams
are vertical; where is day after day, sunstroke after sunstroke, with a
frosty shadow between. “There are countries,” said Howell, “where
the heaven is a fiery furnace, or a blowing bellows, or a dropping
sponge, most parts of the year.” Such is the assimilating force of the
Indian climate, that, Sir Erskine Perry says, “the usage and opinion
of the Hindoos so invades men of all castes and colors who deal with
them that all take a Hindoo tint. Parsee, Mongol, Afghan, Israelite,
Christian, have all passed under this influence and exchanged a
good part of their patrimony of ideas for the notions, manner of
seeing, and habitual tone of Indian society.” He compares it to the
geologic phenomenon which the black soil of the Dhakkan offers,—
the property, namely, of assimilating to itself every foreign substance
introduced into its bosom.
How can we not believe in influences of climate and air, when, as
true philosophers, we must believe that chemical atoms also have
their spiritual cause why they are thus and not other; that carbon,
oxygen, alum and iron, each has its origin in spiritual nature?
Even at this day men are to be found superstitious enough to
believe that to certain spots on the surface of the planet special
powers attach, and an exalted influence on the genius of man. And it
appears as if some localities of the earth, through wholesome
springs, or as the habitat of rare plants and minerals, or through
ravishing beauties of Nature, were preferred before others. There is
great testimony of discriminating persons to the effect that Rome is
endowed with the enchanting property of inspiring a longing in men
there to live and there to die.
Who lives one year in Boston ranges through all the climates of
the globe. And if the character of the people has a larger range and
greater versatility, causing them to exhibit equal dexterity in what are
elsewhere reckoned incompatible works, perhaps they may thank
their climate of extremes, which at one season gives them the
splendor of the equator and a touch of Syria, and then runs down to
a cold which approaches the temperature of the celestial spaces.
It is not a country of luxury or of pictures; of snows rather, of east-
winds and changing skies; visited by icebergs, which, floating by, nip
with their cool breath our blossoms. Not a luxurious climate, but
wisdom is not found with those who dwell at their ease. Give me a
climate where people think well and construct well,—I will spend six
months there, and you may have all the rest of my years.
What Vasari says, three hundred years ago, of the republican city
of Florence might be said of Boston; “that the desire for glory and
honor is powerfully generated by the air of that place, in the men of
every profession; whereby all who possess talent are impelled to
struggle that they may not remain in the same grade with those
whom they perceive to be only men like themselves, even though
they may acknowledge such indeed to be masters; but all labor by
every means to be foremost.”
We find no less stimulus in our native air; not less ambition in our
blood, which Puritanism has not sufficiently chastised; and at least
an equal freedom in our laws and customs, with as many and as
tempting rewards to toil; with so many philanthropies, humanities,
charities, soliciting us to be great and good.
New England is a sort of Scotland. ’Tis hard to say why. Climate is
much; then, old accumulation of the means,—books, schools,
colleges, literary society;—as New Bedford is not nearer to the
whales than New London or Portland, yet they have all the
equipments for a whaler ready, and they hug an oil-cask like a
brother.
I do not know that Charles River or Merrimac water is more
clarifying to the brain than the Savannah or Alabama rivers, yet the
men that drink it get up earlier, and some of the morning light lasts
through the day. I notice that they who drink for some little time of the
Potomac water lose their relish for the water of the Charles River, of
the Merrimac and the Connecticut,—even of the Hudson. I think the
Potomac water is a little acrid, and should be corrected by copious
infusions of these provincial streams.
Of great cities you cannot compute the influences. In New York, in
Montreal, New Orleans and the farthest colonies,—in Guiana, in
Guadaloupe,—a middle-aged gentleman is just embarking with all
his property to fulfil the dream of his life and spend his old age in
Paris; so that a fortune falls into the massive wealth of that city every
day in the year. Astronomers come because there they can find
apparatus and companions. Chemist, geologist, artist, musician,
dancer, because there only are grandees and their patronage,
appreciators and patrons. Demand and supply run into every
invisible and unnamed province of whim and passion.
Each great city gathers these values and delights for mankind, and
comes to be the brag of its age and population. The Greeks thought
him unhappy who died without seeing the statue of Jove at Olympia.
With still more reason, they praised Athens, the “Violet City.” It was
said of Rome in its proudest days, looking at the vast radiation of the
privilege of Roman citizenship through the then-known world,—“the
extent of the city and of the world is the same” (spatium et urbis et
orbis idem). London now for a thousand years has been in an
affirmative or energizing mood; has not stopped growing. Linnæus,
like a naturalist, esteeming the globe a big egg, called London the
punctum saliens in the yolk of the world.
This town of Boston has a history. It is not an accident, not a

windmill, or a railroad station, or cross-roads tavern, or an army-
barracks grown up by time and luck to a place of wealth; but a seat
of humanity, of men of principle, obeying a sentiment and marching
loyally whither that should lead them; so that its annals are great
historical lines, inextricably national; part of the history of political
liberty. I do not speak with any fondness, but the language of coldest
history, when I say that Boston commands attention as the town
which was appointed in the destiny of nations to lead the civilization
of North America.
A capital fact distinguishing this colony from all other colonies was
that the persons composing it consented to come on the one
condition that the charter should be transferred from the company in
England to themselves; and so they brought the government with
them.
On the 3d of November, 1620, King James incorporated forty of
his subjects, Sir F. Gorges and others, the council established at
Plymouth in the county of Devon for the planting, ruling, ordering and
governing of New England in America. The territory—conferred on
the patentees in absolute property, with unlimited jurisdiction, the
sole power of legislation, the appointment of all officers and all forms
of government—extended from the 40th to the 48th degree of north
latitude, and in length from the Atlantic to the Pacific.
John Smith writes (1624): “Of all the four parts of the world that I
have yet seen not inhabited, could I but have means to transplant a
colony, I would rather live here than anywhere; and if it did not
maintain itself, were we but once indifferently well fitted, let us
starve. Here are many isles planted with corn, groves, mulberries,
salvage gardens and good harbours. The sea-coast as you pass
shows you all along large corn-fields and great troops of well-
proportioned people.” Massachusetts in particular, he calls “the
paradise of these parts,” notices its high mountain, and its river,
“which doth pierce many days’ journey into the entrails of that
country.” Morton arrived in 1622, in June, beheld the country, and
“the more he looked, the more he liked it.”
In sixty-eight years after the foundation of Boston, Dr. Mather
writes of it, “The town hath indeed three elder Sisters in this colony,
but it hath wonderfully outgrown them all, and her mother, Old
Boston in England, also; yea, within a few years after the first
settlement it grew to be the metropolis of the whole English
America.”
How easy it is, after the city is built, to see where it ought to stand.
In our beautiful bay, with its broad and deep waters covered with
sails from every port; with its islands hospitably shining in the sun;
with its waters bounded and marked by light-houses, buoys and sea-
marks; every foot sounded and charted; with its shores trending
steadily from the two arms which the capes of Massachusetts stretch
out to sea, down to the bottom of the bay where the city domes and
spires sparkle through the haze,—a good boatman can easily find
his way for the first time to the State House, and wonder that
Governor Carver had not better eyes than to stop on the Plymouth
Sands.
But it took ten years to find this out. The colony of 1620 had
landed at Plymouth. It was December, and the ground was covered
with snow. Snow and moonlight make all places alike; and the
weariness of the sea, the shrinking from cold weather and the pangs
of hunger must justify them.
But the next colony planted itself at Salem, and the next at
Weymouth; another at Medford; before these men, instead of
jumping on to the first land that offered, wisely judged that the best
point for a city was at the bottom of a deep and islanded bay, where
a copious river entered it, and where a bold shore was bounded by a
country of rich undulating woodland.
The planters of Massachusetts do not appear to have been hardy

men, rather, comfortable citizens, not at all accustomed to the rough
task of discoverers; and they exaggerated their troubles. Bears and
wolves were many; but early, they believed there were lions;
Monadnoc was burned over to kill them. John Smith was stung near
to death by the most poisonous tail of a fish, called a sting-ray. In the
journey of Rev. Peter Bulkeley and his company through the forest
from Boston to Concord they fainted from the powerful odor of the
sweetfern in the sun;—like what befell, still earlier, Biorn and
Thorfinn, Northmen, in their expedition to the same coast; who ate
so many grapes from the wild vines that they were reeling drunk.
The lions have never appeared since,—nor before. Their crops
suffered from pigeons and mice. Nature has never again indulged in
these exasperations. It seems to have been the last outrage ever
committed by the sting-rays or by the sweetfern, or by the fox-
grapes; they have been of peaceable behavior ever since.
Any geologist or engineer is accustomed to face more serious
dangers than any enumerated, excepting the hostile Indians. But the
awe was real and overpowering in the superstition with which every
new object was magnified. The superstition which hung over the new
ocean had not yet been scattered; the powers of the savage were
not known; the dangers of the wilderness were unexplored; and, in
that time, terrors of witchcraft, terrors of evil spirits, and a certain
degree of terror still clouded the idea of God in the mind of the
purest.
The divine will descends into the barbarous mind in some strange
disguise; its pure truth not to be guessed from the rude vizard under
which it goes masquerading. The common eye cannot tell what the
bird will be, from the egg, nor the pure truth from the grotesque tenet
which sheathes it. But by some secret tie it holds the poor savage to
it, and he goes muttering his rude ritual or mythology, which yet
conceals some grand commandment; as courage, veracity, honesty,
or chastity and generosity.
So these English men, with the Middle Ages still obscuring their
reason, were filled with Christian thought. They had a culture of their
own. They read Milton, Thomas à Kempis, Bunyan and Flavel with
religious awe and delight, not for entertainment. They were precisely
the idealists of England; the most religious in a religious era. An old
lady who remembered these pious people said of them that “they
had to hold on hard to the huckleberry bushes to hinder themselves
from being translated.”
In our own age we are learning to look as on chivalry at the
sweetness of that ancient piety which makes the genius of St.
Bernard, Latimer, Scougal, Jeremy Taylor, Herbert, and Leighton.
Who can read the fiery ejaculations of St. Augustine, a man of as
clear a sight as almost any other; of Thomas à Kempis, of Milton, of
Bunyan even, without feeling how rich and expansive a culture—not
so much a culture as a higher life—they owed to the promptings of
this sentiment; without contrasting their immortal heat with the cold
complexion of our recent wits? Who can read the pious diaries of the
Englishmen in the time of the Commonwealth and later, without a
sigh that we write no diaries to-day? Who shall restore to us the
odoriferous Sabbaths which made the earth and the humble roof a
sanctity?
This spirit, of course, involved that of Stoicism, as, in its turn,
Stoicism did this. Yet how much more attractive and true that this
piety should be the central trait and the stern virtues follow, than that
Stoicism should face the gods and put Jove on his defence. That
piety is a refutation of every skeptical doubt. These men are a bridge
to us between the unparalleled piety of the Hebrew epoch and our
own. These ancient men, like great gardens with great banks of
flowers, send out their perfumed breath across the great tracts of
time. How needful is David, Paul, Leighton, Fénelon, to our devotion.
Of these writers, of this spirit which deified them, I will say with
Confucius, “If in the morning I hear of the right way, and in the
evening die, I can be happy.”
I trace to this deep religious sentiment and to its culture great and
salutary results to the people of New England; first, namely, the
culture of the intellect, which has always been found in the
Calvinistic church. The colony was planted in 1620; in 1638 Harvard
College was founded. The General Court of Massachusetts, in 1647,
“To the end that learning may not be buried in the graves of the
forefathers, ordered, that every township, after the Lord has
increased them to the number of fifty householders, shall appoint
one to teach all children to write and read; and where any town shall
increase to the number of a hundred families, they shall set up a
Grammar School, the Masters thereof being able to instruct youth so
far as they may be fitted for the University.”
Many and rich are the fruits of that simple statute. The universality
of an elementary education in New England is her praise and her
power in the whole world. To the schools succeeds the village
Lyceum,—now very general throughout all the country towns of New
England,—where every week through the winter, lectures are read
and debates sustained which prove a college for the young rustic.
Hence it happens that the young farmers and mechanics, who work
all summer in the field or shop, in the winter often go into a
neighboring town to teach the district school arithmetic and grammar.
As you know too, New England supplies annually a large
detachment of preachers and schoolmasters and private tutors to the
interior of the South and West.
New England lies in the cold and hostile latitude which by shutting
men up in houses and tight and heated rooms a large part of the
year, and then again shutting up the body in flannel and leather,
defrauds the human being in some degree of his relations to external
nature; takes from the muscles their suppleness, from the skin its
exposure to the air; and the New Englander, like every other
northerner, lacks that beauty and grace which the habit of living
much in the air, and the activity of the limbs not in labor but in
graceful exercise, tend to produce in climates nearer to the sun.
Then the necessity, which always presses the northerner, of
providing fuel and many clothes and tight houses and much food
against the long winter, makes him anxiously frugal, and generates
in him that spirit of detail which is not grand and enlarging, but goes
rather to pinch the features and degrade the character.
As an antidote to the spirit of commerce and of economy, the
religious spirit—always enlarging, firing man, prompting the pursuit
of the vast, the beautiful, the unattainable—was especially
necessary to the culture of New England. In the midst of her
laborious and economical and rude and awkward population, where
is little elegance and no facility; with great accuracy in details, little
spirit of society or knowledge of the world, you shall not unfrequently
meet that refinement which no education and no habit of society can
bestow; which makes the elegance of wealth look stupid, and unites
itself by natural affinity to the highest minds of the world; nourishes
itself on Plato and Dante, Michael Angelo and Milton; on whatever is
pure and sublime in art,—and, I may say, gave a hospitality in this
country to the spirit of Coleridge and Wordsworth, and to the music
of Beethoven, before yet their genius had found a hearty welcome in
Great Britain.
I do not look to find in England better manners than the best
manners here. We can show native examples, and I may almost say
(travellers as we are) natives who never crossed the sea, who
possess all the elements of noble behavior.
It is the property of the religious sentiment to be the most refining
of all influences. No external advantages, no good birth or breeding,
no culture of the taste, no habit of command, no association with the
elegant,—even no depth of affection that does not rise to a religious
sentiment, can bestow that delicacy and grandeur of bearing which
belong only to a mind accustomed to celestial conversation. All else
is coarse and external; all else is tailoring and cosmetics beside this;
[2]
for thoughts are expressed in every look or gesture, and these
thoughts are as if angels had talked with the child.
By this instinct we are lifted to higher ground. The religious
sentiment gave the iron purpose and arm. That colonizing was a
great and generous scheme, manly meant and manly done. When
one thinks of the enterprises that are attempted in the heats of youth,
the Zoars, New-Harmonies and Brook-Farms, Oakdales and
Phalansteries, which have been so profoundly ventilated, but end in
a protracted picnic which after a few weeks or months dismisses the
partakers to their old homes, we see with new increased respect the
solid, well-calculated scheme of these emigrants, sitting down hard
and fast where they came, and building their empire by due degrees.
John Smith says, “Thirty, forty, or fifty sail went yearly in America
only to trade and fish, but nothing would be done for a plantation, till
about some hundred of your Brownists of England, Amsterdam and
Leyden went to New Plymouth; whose humorous ignorances caused
them for more than a year to endure a wonderful deal of misery, with
an infinite patience.”
What should hinder that this America, so long kept in reserve from
the intellectual races until they should grow to it, glimpses being
afforded which spoke to the imagination, yet the firm shore hid until
science and art should be ripe to propose it as a fixed aim, and a
man should be found who should sail steadily west sixty-eight days
from the port of Palos to find it,—what should hinder that this New
Atlantis should have its happy ports, its mountains of security, its
gardens fit for human abode where all elements were right for the
health, power and virtue of man?
America is growing like a cloud, towns on towns, States on States;
and wealth (always interesting, since from wealth power cannot be
divorced) is piled in every form invented for comfort or pride.
If John Bull interest you at home, come and see him under new
conditions, come and see the Jonathanization of John.
There are always men ready for adventures,—more in an over-
governed, over-peopled country, where all the professions are
crowded and all character suppressed, than elsewhere. This thirst
for adventure is the vent which Destiny offers; a war, a crusade, a
gold mine, a new country, speak to the imagination and offer swing
and play to the confined powers.
The American idea, Emancipation, appears in our freedom of
intellection, in our reforms, and in our bad politics; it has, of course,
its sinister side, which is most felt by the drilled and scholastic, but if
followed it leads to heavenly places.
European and American are each ridiculous out of his sphere.
There is a Columbia of thought and art and character, which is the
last and endless sequel of Columbus’s adventure.
European critics regret the detachment of the Puritans to this

country without aristocracy; which a little reminds one of the pity of
the Swiss mountaineers when shown a handsome Englishman:
“What a pity he has no goitre!” The future historian will regard the
detachment of the Puritans without aristocracy the supreme fortune
of the colony; as great a gain to mankind as the opening of this
continent.
There is a little formula, couched in pure Saxon, which you may
hear in the corners of streets and in the yard of the dame’s school,
from very little republicans: “I’m as good as you be,” which contains
the essence of the Massachusetts Bill of Rights and of the American
Declaration of Independence. And this was at the bottom of
Plymouth Rock and of Boston Stone; and this could be heard (by an
acute ear) in the Petitions to the King, and the platforms of churches,
and was said and sung in every tone of the psalmody of the
Puritans; in every note of Old Hundred and Hallelujah and Short
Particular Metre.
What is very conspicuous is the saucy independence which shines
in all their eyes. They could say to themselves, Well, at least this
yoke of man, of bishops, of courtiers, of dukes, is off my neck. We
are a little too close to wolf and famine than that anybody should
give himself airs here in the swamp.
London is a long way off, with beadles and pursuivants and horse-
guards. Here in the clam-banks and the beech and chestnut forest, I
shall take leave to breathe and think freely. If you do not like it, if you
molest me, I can cross the brook and plant a new state out of reach
of anything but squirrels and wild pigeons.
Bonaparte sighed for his republicans of 1789. The soul of a
political party is by no means usually the officers and pets of the
party, who wear the honors and fill the high seats and spend the
salaries. No, but the theorists and extremists, the men who are never
contented and never to be contented with the work actually
accomplished, but who from conscience are engaged to what that
party professes,—these men will work and watch and rally and never
tire in carrying their point. The theology and the instinct of freedom
that grew here in the dark in serious men furnished a certain rancor
which consumed all opposition, fed the party and carried it, over
every rampart and obstacle, to victory.
Boston never wanted a good principle of rebellion in it, from the
planting until now; there is always a minority unconvinced, always a
heresiarch, whom the governor and deputies labor with but cannot
silence. Some new light, some new doctrinaire who makes an
unnecessary ado to establish his dogma; some Wheelwright or
defender of Wheelwright; some protester against the cruelty of the
magistrates to the Quakers; some tender minister hospitable to
Whitefield against the counsel of all the ministers; some John Adams
and Josiah Quincy and Governor Andrew to undertake and carry the
defence of patriots in the courts against the uproar of all the
province; some defender of the slave against the politician and the
merchant; some champion of first principles of humanity against the
rich and luxurious; some adversary of the death penalty; some
pleader for peace; some noble protestant, who will not stoop to
infamy when all are gone mad, but will stand for liberty and justice, if
alone, until all come back to him.
I confess I do not find in our people, with all their education, a fair
share of originality of thought;—not any remarkable book of wisdom;
not any broad generalization, any equal power of imagination. No
Novum Organon; no Mécanique Céleste; no Principia; no Paradise
Lost; no Hamlet; no Wealth of Nations; no National Anthem; have we
yet contributed.
Nature is a frugal mother and never gives without measure. When
she has work to do she qualifies men for that and sends them
equipped for that. In Massachusetts she did not want epic poems
and dramas yet, but first, planters of towns, fellers of the forest,
builders of mills and forges, builders of roads, and farmers to till and
harvest corn for the world. Corn, yes, but honest corn; corn with
thanks to the Giver of corn; and the best thanks, namely, obedience
to his law; this was the office imposed on our Founders and people;
liberty, clean and wise. It was to be built on Religion, the
Emancipator; Religion which teaches equality of all men in view of
the spirit which created man.
The seed of prosperity was planted. The people did not gather
where they had not sown. They did not try to unlock the treasure of
the world except by honest keys of labor and skill. They knew, as
God knew, that command of nature comes by obedience to nature;
that reward comes by faithful service; that the most noble motto was
that of the Prince of Wales,—“I serve,”—and that he is greatest who
serves best. There was no secret of labor which they disdained.
They accepted the divine ordination that man is for use; that
intelligent being exists to the utmost use; and that his ruin is to live
for pleasure and for show. And when within our memory some
flippant senator wished to taunt the people of this country by calling
them “the mudsills of society,” he paid them ignorantly a true praise;
for good men are as the green plain of the earth is, as the rocks, and
the beds of rivers are, the foundation and flooring and sills of the
State.
The power of labor which belongs to the English race fell here into
a climate which befriended it, and into a maritime country made for
trade, where was no rival and no envious lawgiver. The sailor and
the merchant made the law to suit themselves, so that there was
never, I suppose, a more rapid expansion in population, wealth and
all the elements of power, and in the citizens, consciousness of
power and sustained assertion of it, than was exhibited here.
Moral values become also money values. When men saw that
these people, besides their industry and thrift, had a heart and soul
and would stand by each other at all hazards, they desired to come
and live here. A house in Boston was worth as much again as a
house just as good in a town of timorous people, because here the
neighbors would defend each other against bad governors and
against troops; quite naturally house-rents rose in Boston.
Besides, youth and health like a stirring town, above a torpid place
where nothing is doing. In Boston they were sure to see something
going forward before the year was out. For here was the moving
principle itself, the primum mobile, a living mind agitating the mass
and always afflicting the conservative class with some odious novelty
or other; a new religious sect, a political point, a point of honor, a
reform in education, a philanthropy.
From Roger Williams and Eliot and Robinson and the Quaker
women who for a testimony walked naked into the streets, and as
the record tells us “were arrested and publicly whipped,—the
baggages that they were;” from Wheelwright the Antinomian and
Ann Hutchinson and Whitefield and Mother Ann the first Shaker,
down to Abner Kneeland and Father Lamson and William Garrison,
there never was wanting some thorn of dissent and innovation and
heresy to prick the sides of conservatism.
With all their love of his person, they took immense pleasure in
turning out the governor and deputy and assistants, and
contravening the counsel of the clergy; as they had come so far for
the sweet satisfaction of resisting the Bishops and the King.
The Massachusetts colony grew and filled its own borders with a
denser population than any other American State (Kossuth called it
the City State), all the while sending out colonies to every part of
New England; then South and West, until it has infused all the Union
with its blood.
We are willing to see our sons emigrate, as to see our hives
swarm. That is what they were made to do, and what the land wants
and invites. The towns or countries in which the man lives and dies
where he was born, and his son and son’s son live and die where he
did, are of no great account.
I know that this history contains many black lines of cruel injustice;
murder, persecution, and execution of women for witchcraft.
I am afraid there are anecdotes of poverty and disease in Broad
Street that match the dismal statistics of New York and London. No
doubt all manner of vices can be found in this, as in every city;
infinite meanness, scarlet crime. Granted. But there is yet in every
city a certain permanent tone; a tendency to be in the right or in the
wrong; audacity or slowness; labor or luxury; giving or parsimony;
which side is it on? And I hold that a community, as a man, is entitled
to be judged by his best.
We are often praised for what is least ours. Boston too is
sometimes pushed into a theatrical attitude of virtue, to which she is
not entitled and which she cannot keep. But the genius of Boston is
seen in her real independence, productive power and northern
acuteness of mind,—which is in nature hostile to oppression. It is a
good city as cities go; Nature is good. The climate is electric, good
for wit and good for character. What public souls have lived here,
what social benefactors, what eloquent preachers, skilful workmen,
stout captains, wise merchants; what fine artists, what gifted
conversers, what mathematicians, what lawyers, what wits; and
where is the middle class so able, virtuous and instructed?
And thus our little city thrives and enlarges, striking deep roots,
and sending out boughs and buds, and propagating itself like a
banyan over the continent. Greater cities there are that sprung from
it, full of its blood and names and traditions. It is very willing to be
outnumbered and outgrown, so long as they carry forward its life of
civil and religious freedom, of education, of social order, and of
loyalty to law. It is very willing to be outrun in numbers, and in wealth;
but it is very jealous of any superiority in these, its natural instinct
and privilege. You cannot conquer it by numbers, or by square miles,
or by counted millions of wealth. For it owes its existence and its
power to principles not of yesterday, and the deeper principle will
always prevail over whatever material accumulations.
As long as she cleaves to her liberty, her education and to her
spiritual faith as the foundation of these, she will teach the teachers
and rule the rulers of America. Her mechanics, her farmers will toil
better; she will repair mischief; she will furnish what is wanted in the
hour of need; her sailors will man the Constitution; her mechanics
repair the broken rail; her troops will be the first in the field to
vindicate the majesty of a free nation, and remain last on the field to
secure it. Her genius will write the laws and her historians record the
fate of nations.
In an age of trade and material prosperity, we have stood a little

stupefied by the elevation of our ancestors. We praised the Puritans
because we did not find in ourselves the spirit to do the like. We
praised with a certain adulation the invariable valor of the old war-
gods and war-councillors of the Revolution. Washington has seemed
an exceptional virtue. This praise was a concession of unworthiness
in those who had so much to say of it. The heroes only shared this
power of a sentiment, which, if it now breathes into us, will make it
easy to us to understand them, and we shall not longer flatter them.
Let us shame the fathers, by superior virtue in the sons.
It is almost a proverb that a great man has not a great son. Bacon,
Newton and Washington were childless. But, in Boston, Nature is
more indulgent, and has given good sons to good sires, or at least
continued merit in the same blood. The elder President Adams has
to divide voices of fame with the younger President Adams. The
elder Otis could hardly excel the popular eloquence of the younger
Otis; and the Quincy of the Revolution seems compensated for the
shortness of his bright career in the son who so long lingers among
the last of those bright clouds,
“That on the steady breeze of honor sail
In long succession calm and beautiful.”
Here stands to-day as of yore our little city of the rocks; here let it
stand forever, on the man-bearing granite of the North! Let her stand
fast by herself! She has grown great. She is filled with strangers, but
she can only prosper by adhering to her faith. Let every child that is
born of her and every child of her adoption see to it to keep the
name of Boston as clean as the sun; and in distant ages her motto
shall be the prayer of millions on all the hills that gird the town, “As
with our Fathers, so God be with us!” Sicut patribus, sit Deus
nobis!
FOOTNOTES:
[2]
“Come dal fuoco il caldo, esser diviso,
Non puo’l bel dall’ eterno.”
Michel Angelo.
[As from fire heat cannot be separated,—neither can beauty
from the eternal.]
MICHAEL ANGELO.
Never did sculptor’s dream unfold

A form which marble doth not hold
In its white block; yet it therein shall find
Only the hand secure and bold
Which still obeys the mind.
Michael Angelo’s Sonnets.
Non ha l’ ottimo artista alcun concetto,
Ch’un marmo solo in sè non circoscriva
Col suo soverchio, e solo a quello arriva
La man che obbedisce all’ intelletto.
M. Angelo, Sonnetto primo.

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MICRO ECON 6: Principles of

Microeconomics William A. Mceachern

MICRO ECON 5: Principles of Microeconomics William A.

Principles of Microeconomics Robert H. Frank

Principles of Microeconomics N. Gregory Mankiw

Principles of Microeconomics 13th Edition Karl E. Case

Principles of Microeconomics, Asia-Pacific Edition N.

Principles of Environmental Science William P.

Microeconomics 13th Edition Roger A. Arnold

Inside Front Cover (8.5”)

ECON Principles of Microeconomics

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Part 2 Introduction to the Market System

Part 3 Market Structure and Pricing

Part 4 Resource Markets

Part 5 Market Failure and Public Policy

16 Public Goods and Public Choice 268

Part 6 International Economics

BRIEF CONTENTS iii

Introduction to economics 3 Economic Decision Makers 40

© Cartoon Network /Everett Collection

4 Demand, Supply, and Markets 56

1 The Art and Science of Economic

2-1 Choice and Opportunity Cost 25

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

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

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

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

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

7 Production and Cost in the Firm 104 9-1

Market Structure 10 Mandonopolistic Competition

Resource Markets 14 Information,

14-3 Asymmetric Information in Product Markets 242

Part 6 Index 380

1 The Art and Science

LEARNING OUTCOMES After finishing this chapter

2 PART ONE: Introduction to Economics

CHAPTER 1: The Art and Science of Economic Analysis 3

4 PART ONE: Introduction to Economics

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

CHAPTER 1: The Art and Science of Economic Analysis 5

television ads, telephones,

price of products offered for

sale. Goods and services are

markets. Resources are er

bought and sold in resource s

model focuses on the primary interaction in a market

TEN-yard Penalty for Biased Rankings

CHAPTER 1: The Art and Science of Economic Analysis 7

1-2bChoice Requires Time

time and information needed to make choices, talk to

8 PART ONE: Introduction to Economics

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

Market Structure 10 Mandonopolistic Competition

Resource Markets 14 Information,