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

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

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

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

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

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

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

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

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

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

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

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

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

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

CURVE ANALYSIS 192
The Budget Constraint 192

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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xxiii
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I would like to thank Peggy Crane of Southwestern College, who revised the Test Bank and wrote the questions for the Adaptive
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Roger A. Arnold
CHAPTER
What Economics Is About 1

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

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

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

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

All natural resources, such as
Goods do not just appear before us when we snap our fingers. It takes resources to produce goods.
minerals, forests, water, and
unimproved land.
(Sometimes resources are referred to as inputs or factors of production.)
Generally, economists divide resources into four broad categories: land, labor, capital, and
Labor entrepreneurship.
The work brought about
by the physical and mental • Land includes natural resources, such as minerals, forests, water, and unimproved land.
talents that people contribute For example, oil, wood, and animals fall into this category. (Sometimes economists refer
to the production process. to the category simply as natural resources.)
Capital • Labor consists of the physical and mental talents that people contribute to the production
Produced goods, such as process. For example, a person building a house is using his or her own labor.
factories, machinery, tools, • Capital consists of produced goods that can be used as inputs for further production.
computers, and buildings Factories, machinery, tools, computers, and buildings are examples of capital. One
that can be used as inputs country might have more capital than another; that is, it has more factories, machinery,
for further production. tools, and the like.
Entrepreneurship • Entrepreneurship refers to the talent that some people have for organizing the resources of
The talent that some people land, labor, and capital to produce goods, seek new business opportunities, and develop
have for organizing the new ways of doing things.
resources of land, labor,
and capital to produce
goods, seek new business
1-2c Scarcity and a Definition of Economics
opportunities, and develop We are now ready to define a key concept in economics: scarcity. Scarcity is the condition in which
new ways of doing things. our wants (for goods) are greater than the limited resources (land, labor, capital, and entrepreneur-
Scarcity
ship) available to satisfy those wants. In other words, we want goods, but not enough resources
The condition in which our are available to provide us with all the goods we want.
wants are greater than the Look at it this way: Our wants (for goods) are infinite, but our resources (which we need to
limited resources available to produce the goods) are finite. Scarcity is the result of our infinite wants hitting up against finite
satisfy those wants. resources.
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SECTION OF THE MISSISSIPPI RIVER.
SHOWING THE DISTANCES FROM

NEW ORLEANS, AND THE ISLANDS
BY THEIR NUMBERS.
SECTION OF THE MISSISSIPPI RIVER.
SHOWING THE DISTANCES FROM

NEW ORLEANS, AND THE ISLANDS
BY THEIR NUMBERS.
The enemy had one bastioned earthwork, mounting fourteen

heavy guns, about half a mile below the town, and another irregular
work at the upper end of the town, mounting seven pieces of heavy
artillery, together with lines of intrenchments between them. Six
gunboats carrying from four to eight heavy guns each, were anchored
along the shore, between the upper and lower redoubts.
The country is perfectly level for miles around the place, and the
river was so high just then, that the gunboats looked directly over the
banks; and the approaches to the town for seven miles were
commanded by direct and cross-fire from at least sixty guns of heavy
calibre.
The column under General Pope left Commerce, Mo., on the 27th
of February, and, after six days of hard marches through and over the
interminable jungles of the great Mingo or Nigger Wool swamp, sat
down before the town. They had scarcely been in camp a day before
the river batteries opened upon them, forcing the right wing back a
few hundred yards further from the river.
Trials and dangers now beset the Federal army, which would have
discouraged less brave men. It would not have been difficult to carry
the intrenchments, but it must have been attended with heavy loss,
and they could not have been held half an hour exposed to the
destructive fire of the gunboats. It therefore became necessary to
bring down a few heavy guns by land to operate against those of the
enemy. They were accordingly sent for; and meantime, forced
reconnoissances were pushed over the whole ground, and into
several parts of the town. Some brisk skirmishes resulted, in which
the enemy invariably retreated precipitately. It was found impossible
to induce them to trust any considerable force of their infantry
outside of their intrenchments. While awaiting the arrival of the
heavy guns, Colonel Plummer, of the Eleventh Missouri, was
dispatched to Point Pleasant, eight miles below, with three regiments
of infantry, three companies of cavalry, and a field battery of 10-
pound Parrott and rifled guns, with orders to make a lodgment on
the river bank; to line the bank with rifle-pits for a thousand men,
and to establish his artillery in sunk batteries of single pieces
between the rifle-pits. This arrangement was made in order to
present the smallest possible marks to the shells of the gunboats, and
to render futile the use of round shot from their heavy guns. Colonel
Plummer, after some cannonading from the gunboats which he
found there, succeeded in making a lodgment, constructing his
batteries and rifle-pits, and occupying them in sufficient force to
maintain them against any open assault.
After repeated and persistent cannonading from the gunboats, the
enemy found it impossible to dislodge him. He maintained his
position, and effectually blockaded the river to transports, during the
whole siege. Meantime, the enemy continued every day to reinforce
New Madrid, until, on the 12th, they had nine thousand infantry,
besides a considerable force of artillery and nine gunboats. The fleet
was commanded by Commodore Hollins, the land forces by Generals
McCown, Stewart and Gantt. On the 11th, the Federal siege guns
were delivered to Colonel Bissell for his engineer regiment, who had
been sent to Cairo. They were at once shipped to Sykestown, reached
New Madrid at sunset on the 12th, and were placed in battery during
the same night, within eight hundred yards of the enemy’s main
work, commanding the river above it. They opened fire at daylight on
the 13th, just thirty-four hours after they were received at Cairo.
A brigade, consisting of the Tenth and Sixteenth Illinois, under
Colonel Morgan, of the Tenth, was detailed to cover the construction
of the battery, and to work in the trenches. It was supported by
Stanley’s division, consisting of the Twenty-seventh and Thirty-ninth
Ohio, under Colonel Groesbeck, and the Forty-third and Sixty-third
Ohio, under Colonel Smith. Captain Mower, First United States
infantry, with companies A and H of his regiment, was placed in
charge of the siege guns.
The enemy’s pickets and grand guards were driven in by Colonel
Morgan, from the ground selected for the battery. The work was
prosecuted in silence, and with the utmost rapidity, until at three
o’clock, A. M., two small redoubts connected by a curtain, and
mounting four heavy guns were completed, together with rifle-pits in
front and on the flanks for two regiments of infantry. The batteries
opened as soon as the day dawned, and were replied to in front and
on the flanks by the whole of the enemy’s heavy artillery on land and
water.
The Union guns were served by Captain Mower with vigor and
skill. In a few hours they disabled several of the gunboats, and
dismounted three of the heavy guns in the enemy’s main work.
Shortly after the Union batteries opened, one of the 24-pound guns
was struck in the muzzle by a round shot from the enemy’s batteries
and disabled.
The cannonading was continued furiously all day by the gunboats
and land batteries of the enemy, but without producing any
impression. Meantime the Union trenches were being extended and
advanced toward the bank of the river. General Paine now made a
demonstration against the rebel intrenchments on the left, supported
by Palmer’s division. The enemy’s pickets and grand guards were
driven in, and the skirmishers forced their way close to the main
ditch.
A furious thunder storm began about eleven o’clock that night, and
continued almost without interruption until morning. Just before
daylight, General Stanley was relieved in his trenches with his
division by General Hamilton. A few minutes after daylight, a flag of
truce approached the batteries, bearing information that the enemy
had evacuated his works. Small parties were at once advanced by
General Hamilton to ascertain the truth of this report; and Captain
Mower, First United States infantry, with companies A and H of that
regiment, were sent forward to plant the United States flag over the
abandoned works.
The enemy had made a hasty and precipitate flight. Their dead
were found unburied, their suppers stood untouched on the tables—
candles were burning in the tents. Private baggage of officers and
knapsacks of the men were left behind. Neither provisions nor
ammunition were carried off—everything gave evidence of a panic.
Artillery, field batteries and siege guns, amounting to thirty-three
pieces; magazines full of fixed ammunition of the best character;
several thousand stands of inferior small arms, with hundreds of
boxes of musket cartridges; tents for an army of ten thousand men;
horses, mules, wagons, intrenching tools, etc., were among the
spoils.
Their flight was so sudden that they abandoned their pickets, and
gave no intimation to the forces at Island No. 10.
The Union loss was fifty-one killed and wounded. The enemy’s loss
could not be ascertained. A number of his dead were left unburied,
and over a hundred new graves were found.
ISLAND No. 10.
When the necessity of an early evacuation of Columbus became

apparent to the rebel leaders, they commenced the fortification of
Island No. 10, in the Mississippi river, forty-five miles below
Columbus and twenty-six from Hickman. It is located 250 miles
below St. Louis and 997 from New Orleans; and when chosen by the
secessionists it was deemed impregnable. The earthworks were
constructed with great skill, and well calculated to resist any assault
which could be made from the river above, while they held
undisputed control of the navigation below, and had at their
command a formidable fleet of gunboats. New Madrid, on the
Missouri shore of the river, a few miles below, was fortified and
garrisoned by rebel troops, and they had easy communication and
abundant facilities for supplies and reinforcements, if needed.
The energy and perseverance of General Pope, which enabled him,
despite the most serious obstacles, to invest and capture the town of
New Madrid, was the first note of warning received by the rebels at
Island No. 10 that their position was no longer tenable.
The topography of the peninsula on the Tennessee shore,
immediately back of the island, where most of the rebel forces were
located, is very peculiar; and if the disadvantages of position which
the course of events gradually unfolded could have been foreseen,
the site would never have been selected. Commencing at a point
about a mile and a half above the island is a range of high land,
which extends back south-eastwardly to Reelfoot Lake, a distance of
four miles. This lake, in the rear of the peninsula, is fifteen miles in
length, and terminates in a swamp, which extends south of
Tiptonville, a town on the river bank, below the peninsula. The
swamp at that time varied in width from one and a half to eight
miles, its narrowest point being four miles above Tiptonville, where
the rebels had prepared a corduroy road and bridge, as a means of
escape from their position, should retreat by land become necessary.
On the 15th of March, the gun and mortar-boats comprising the
fleet of Commodore Foote commenced the investment and
bombardment of Island No. 10, and the rebel batteries and camps at
the adjacent peninsula on the Tennessee shore.
The fleet consisted of eleven gunboats, and twelve mortar-boats,
each of the latter carrying one immense mortar, throwing a shell of
two hundred and twenty pounds weight a distance of from two to
three miles. The Commodore engaged the rebel batteries almost
daily for three weeks, deeming it imprudent to risk the destruction of
his vessels by close action, as any misfortune to them would have
placed all the towns on the Upper Mississippi at the mercy of the
armed steamers of the enemy.
The rebels had eighty guns of heavy calibre in the batteries on the
island and the adjacent peninsula, while the iron-clad ram Manassas,
and a fleet of twenty vessels—gunboats, steamers and transports,
were moored under their guns, prepared to act as opportunity or
emergency might require.
One or more gunboats would advance to attack a shore battery
from the right hand of the river—or engage the water battery on the
island, approaching from the left bank. The mortars kept continually
changing positions, generally hugging the shore on the left bank
where the rebel batteries could not reach them, as they were covered
by a promontory, or neck of land, made by the bend of the river; and
their fire was kept up so unceasingly, that frequently a mortar-shell
was thrown every hour during the night.
At two o’clock on the morning of April 1, a most daring enterprise
on the part of Colonel Roberts, of the Forty-second Illinois regiment,
was crowned with success. Taking advantage of a severe storm while
the elements were raging furiously, and a dreadful hurricane,
accompanied with thunder and lightning, was sweeping the earth
and driving the vessels from their moorings, he started with forty
picked men, in six yawl boats, and with muffled oars rowed towards
the upper water battery on Island No. 10, keeping close to the edge of
the river bank. The boats, favored by the intense darkness,
approached within a few rods of the battery, when a blinding sheet of
lightning flashed across the water, revealing the adventurous party to
the enemy’s sentinels. The dark object looming out from the storm
alarmed the sentinels, who fired wildly and at random, fleeing with
the first discharge. The Union boats made no reply. A few minutes
more brought them to the slope of the earthworks, and the men at
once sprung over the parapet. In less than five minutes the huge
guns on the battery were securely spiked. They were all of large
calibre, consisting of two 64, two 80-pounders and one splendid 9-
inch pivot gun. Their desperate work accomplished, the boats
returned safely to the fleet, having performed a perilous exploit with
wonderful success.
CAPTURE OF ISLAND No. 10 AND THE
REBEL ARMY.
After the surrender of the forts at New Madrid, Colonel Bissell’s

engineer regiment was engaged for four days unspiking guns,
changing batteries, and establishing new works. Then they were sent
over by General Pope to ascertain whether it would be practicable to
establish batteries opposite Island No. 10, and enfilade the rebel
works on the Tennessee shore. They spent three days in the swamps,
living in their canoes with negroes, but found the project
impracticable. Colonel Bissell, however, stated that he could by hard
labor get steamboats and flatboats through the woods and bayous,
and by that means avoid the batteries on the island, and bring the
vessels to New Madrid, whence General Pope’s army could be
transported to a point nearly opposite, and take all the enemy’s
works in the rear.
General Pope at once gave him a carte blanche, and he sent to
Cairo for four steamboats, six flats, and such guns as could be
spared. They sent the steamers W. B. Terry, John Trio, Gilmore, and
Emma, with the barges, a quantity of lumber, etc., and one eight-inch
columbiad and three thirty-two pounders. Tools were not needed, for
the regiment carried everything, from the heaviest ropes and screws
down to fine steel drills for unspiking guns.
The route was about twelve miles long, of which two traversed
were through thick timber, and the remaining ten narrow, crooked
bayous, choked up with brush and small trees. They cut their way
through, the track being fifty feet wide, of which thirty feet was
required for the hulls of the boats. The timber was cut four feet below
the surface of the water. In one short stretch they cut seventy-five
trees, not one less than two feet through. The machines were rigged
from rafts and flats, and each worked by about twenty men. In the
first place three large launches went ahead to cut out and clear away
the underbrush and driftwood; then three rafts followed, on which
were the axemen, followed by the saws, two large barges, and one of
the steamboats. Very large lines were provided to run from the
capstan of the steamboat and haul out by snatchblocks what the men
could not handle. Men were engaged all the time in the fleet which
followed, converting the flatboats into floating batteries.
BOMBARDMENT OF ISLAND NO. 10.
1. Rebel Floating Battery.—2. Rebel Gunboats and Rams.—3.

Federal Gunboats.—4. Point Pleasant.—5. Island No. 10.—6.
Smith’s Landing.—7. Mortar Boats.
From the starting point on the river to the levee the distance is
about five hundred feet; here the water was shallow and the route
full of stumps. It took one whole day to pass this point. Then they cut
in the levee. Here the fall was over two feet, and the rush of water
tremendous. The largest boat was dropped through with five lines
out ahead. Then a corn field, overflowed from a cut in the levee,
where a channel was cut by the swift water, and floated them onward
nearly a quarter of a mile to the woods. Here was great labor—two
straight and long miles to the nearest point in the bayou. It took
eight days to get through this distance. Then came Wilson’s Bayou,
East Bayou, and St. John’s Bayou, which empties into the Mississippi
at New Madrid. It sometimes took twenty men a whole day to get out
a half sunken tree across the bayou; and as none of the rafts or flats
could get by, this always detained the whole fleet. The water, after
they got in the woods, was about six feet deep, with a gentle current
setting across the peninsula. In the East Bayou the current was
tremendous, and the boats had to be checked down with heavy head
lines. Here they found some obstructions, caused by heaps of
driftwood, but a few sturdy blows dislodged some of the logs and
sent the whole mass floating down the current.
While the engineers were engaged in this herculean enterprise, the
gunboat Carondelet ran safely by the rebel batteries on the island,
and reached New Madrid on the night of April 4th. On the
succeeding night another boat, the Pittsburg, ran the gauntlet of the
enemy’s fire unscathed, in time to convoy the transports as they
entered the river.
On the 6th of April the two gunboats attacked and destroyed four
batteries erected by the rebels on the Tennessee shore. On the 7th, by
daylight, the divisions of Generals Paine and Stanley were marched
to Tiptonville, fifteen miles down the river from New Madrid. The
rebels had retreated in that direction the afternoon before, and it was
thought that they were endeavoring to cross over Reelfoot lake. The
troops were pushed forward with all possible speed, and at night
encamped at Tiptonville and Merriwether’s, while a strong force was
posted at the only point where by any possibility the rebels could
cross the lake, some four miles from the town. Squads of rebel
soldiers kept in sight of the Union pickets during the night, and at
times would come boldly up and surrender themselves as prisoners
of war. At daylight General Pope and staff, and Assistant Secretary of
War Scott, went down to the locality, and General Pope assumed the
full command. It was expected that some resistance would be made,
and no one surmised that the enemy, who it was learned had
marched over from Island No. 10, had concluded to give himself up.
But shortly after sunrise General Pope received a message from the
General commanding the Confederates, stating that he had
surrendered the island and fortifications to Commodore Foote the
night before, and that the forces under his command were ready to
follow the “fortunes of war;” and he requested General Pope to
receive and march them into camp. General Pope gave directions for
the Confederate troops to come into camp and go through the
formula. Accordingly about four thousand rebels were marched in
and stacked their arms.
On the same day Island No. 10 was surrendered to Commodore
Foote, with all its war material; and all the gunboats and transports
fell into the hands of the victors.
BATTLE OF WINCHESTER, VA.
March 22, 23, 1862.
On the 21st of March, General Shields, commanding a division of

the Fifth Army Corps of the Potomac, under General Banks, was
stationed at Winchester, with a force of about seven thousand men.
General Jackson, with a rebel force of ten thousand men, and
twenty-eight pieces of artillery, was then at Strasburg, ten miles
distant, closely scrutinizing the movements of the Federal army, and
only awaiting the arrival of General Johnston, his superior, who was
daily expected with a much larger force. With these united, they
expected to strike a telling blow on the army of General Banks, and
thus prevent any combined action on his part with General
McClellan.
Not anticipating an immediate attack from General Jackson,
General Banks had just left Winchester for Harper’s Ferry, and
General Williams’ division had marched the same day towards
Centreville. Of these movements the rebel General was duly notified,
as his numerous spies within the Federal lines lost no opportunity of
supplying the enemy with full details of all the actions of the Federal
commanders.
Though looking for reinforcements from Generals Longstreet and
Smith, Jackson determined to attack Shields’ troops;—but his
attempt to surprise them was frustrated by the vigilance of that
officer. Apprehensive that the enemy designed an early advance,
General Shields had just completed a hasty reconnoissance to
Strasburg, by which he obtained important information of Jackson’s
numbers and intentions. This induced him to withdraw most of his
men to a position two miles north-east of Winchester, while his
pickets extended five miles beyond, on the Strasburg road. The
enemy were led to believe that the town was open to their
occupation, and that the greater portion of the Federal troops had
been withdrawn from the vicinity.
On Saturday afternoon, March 22, about a quarter-past two
o’clock, the Federal advanced pickets on the Strasburg road
discovered the rebel cavalry, under Colonel Ashby, about half a mile
beyond them, reconnoitering the woods on both sides of the
turnpike, and steadily advancing. The pickets consisted of a few men
of the Fourteenth Indiana infantry at that point, and they fell back
half a mile to the hamlet of Kernstown, four miles from Winchester.
Steadily did the troopers advance as the Union men wheeled to aim
and fire. The first volley sent many rebels reeling from their saddles,
and threw the rest into confusion. Before they could be again rallied
for a charge, the gallant little band of infantry was beyond their
power, without having lost a man killed or wounded. General Shields
hearing of the advance of the rebel cavalry, ordered four advanced
companies of infantry to rally to the support of the pickets, and hold
the rebels in check till he could move down the division. These
companies were one from the Maryland First, one from the Twenty-
eighth Pennsylvania, one from the Forty-sixth Pennsylvania, and one
from the Twenty-eighth New York. Their regiments had marched
away under General Williams.
A battery of artillery was also sent forward, and General Shields,
after ordering out the division, rode to the front, accompanied by his
staff. While engaged in directing the fire of the artillery, a shell from
the rebel battery of four guns, which now began to play on them,
burst near him, and a splinter from it struck him in the left arm, just
above the elbow, fracturing the bone and creating a painful wound.
But without heeding it he gave a fresh order to the artillery, and
continued on the field till satisfied that all was right.
The Federal division began to arrive in force on the field towards
dark; the rebels, perceiving this, did not push their advance, but
halted about three miles from Winchester for the night, lighted their
camp fires and bivouacked, while the opposing army lay between
them and the town.
About ten o’clock on Sunday, reinforcements of five regiments of
infantry and two batteries of artillery having arrived from Strasburg,
under General Garnett, were welcomed by vociferous and prolonged
cheers from their lines. The attack was not long delayed. The enemy
advanced his army, which now consisted of sixteen regiments of
infantry, numbering eleven thousand men; five batteries of artillery,
with a total of twenty-eight field pieces, and three battalions of horse,
under Ashby and Stewart. His line of battle extended about a mile on
the right of the village of Kernstown, and a mile and three-quarters
on the left of it. The village lay on the road between the rebel right
and centre. There is a mud road branching from the turnpike a mile
or so from Winchester to the right of the road going towards
Strasburg. This road passed through the left of the enemy’s centre,
and was one of their points of defence. Beyond that is a grove of
trees, and farther on, a ridge of hills with a stone wall about breast-
high running along its summit. This was the rebel line of offence and
defence on the right of the Union line.
The most advanced regiment on the Union side was the Eighth
Ohio, of General Tyler’s brigade. The rebels made a furious
onslaught about half-past ten o’clock, A. M., on Thursday, with the
intention of turning the right flank. The Ohio Eighth met them with a
deadly fire of rifles. Five times did the enemy emerge from the woods
and from behind their stone parapet with vastly superior numbers,
and strive in vain to accomplish their object. The Union left wing,
consisting of the Thirteenth Indiana, Seventh Ohio and a battery of
the Fourth regular artillery, under Captain Jenks, had a feint made
on it, while the real attack of the enemy was being directed against
the Union right wing. The feint on the left was a heavy fire of artillery
posted on both sides of the village and the turnpike, which, however,
did trifling damage. The Union battery replied, silencing those of the
enemy, though the firing was well maintained for a long time on both
sides. The Union centre consisted of the Fourteenth Indiana, the
Eighth and Sixty-seventh Ohio, and the Eighty-fourth Pennsylvania.
Two artillery batteries belonging to the First Ohio artillery, and the
cavalry, consisting of the First Michigan and First Ohio, were drawn
up in the rear. The Union right wing was made up of the Fifth and
Eighth Ohio regiments and a battery of the First Virginia regiment.
The reserves consisted of the Twelfth Indiana, the Thirty-ninth
Illinois and a squadron of the Michigan cavalry. General Shields was
unable to appear on the field in person, and the command
consequently devolved upon Acting Brigadier Kimble, who led the
centre. The right was commanded by Acting Brigadier General Tyler,
while Colonel Sullivan directed the operations on the left.
The battle raged along the whole line with great fury from eleven A.
M. till half-past two P. M., when General Shields, who received
accounts of the progress of the fight on his couch, ordered the right,
where the contest raged the hottest, to charge upon the enemy. That
was an awful charge. The left of the enemy prepared desperately to
repel the gallant troops, but their rush was irresistible. Previous to
this the Union line of battle had been somewhat changed. The
Eighty-fourth Pennsylvania reinforced its right, and also a battery of
artillery. The whole Union force now engaged was about six
thousand men, while that of the enemy was at the lowest estimate
eight thousand. The rebels had also changed their line, and
extending both their wings, presented a concave front. They had
reinforced their left wing, and the charge to be made by the Union
right was all important in its consequences. On it, at three o’clock,
depended the fate of the entire battle. Tyler led the charge, sword in
hand. The rebels fired from the woods with artillery and small arms,
while the Federals advanced against their murderous showers of lead
and iron, returning few shots and reserving their fire.
SPLENDID CHARGE OF THE RIGHT WING, UNDER GENERAL

TYLER.
Up to this time the armies had not been much nearer to each other
than three hundred yards, unless in some few instances. The wood
was soon cleared at the point of the bayonet, the Unionists
discharging their pieces at twenty and even five yards distance from
the rebels, and then dashing at them with the bayonet.
The rebels fought well. They contested the ground foot by foot, and
marked every yard of their retreat with blood. They retired behind
the stone wall, on the ridge, but the Unionists jumped over, and
drove them in the greatest confusion and with fearful slaughter upon
their centre. The panic was contagious. Kimble ordered a charge
along the whole line, and for a short time the fighting was desperate.
The roar of the cannon was no longer heard, unless in occasional
bursts, but the rattle of musketry was more deafening than ever.
The rout of the rebels had fairly commenced; two of their guns and
four caissons were taken, and though many of them turned and fired
again and again at the pursuing host, many more threw away
muskets and bayonets without hesitation. Darkness and the extreme
fatigue of the Union troops, however, saved them for the time, and
the Federals retired about two miles and bivouacked.
At daybreak General Shields ordered the rebel position to be
attacked, and the enemy, after replying by a few shots from his
artillery, continued his retreat. Meantime General Banks, who had
been at Harper’s Ferry, arrived, and taking command of the troops in
person, continued the pursuit with about ten thousand men, and
pressed the rebels beyond Middleburg, cutting off many stragglers.
The object was to capture his whole force, if possible. General
Williams, with his forces, arrived on the field, too late to participate
in the action. They joined in the chase.
The loss of the enemy in killed and wounded was six hundred. The
number of prisoners taken was three hundred.
The Union loss in killed was one hundred, and about four hundred
wounded. Though the enemy had a much larger force, four pieces of
cannon more than the Federals, the selection of fighting ground, and
every other advantage, yet all the trophies of the occasion belong to
the Union army.
The rebels had an Irish battalion of one hundred and fifty men, of
whom forty were killed on the field, and many of the rest wounded.
Their commander, Captain Jones, was captured, having lost both
eyes by a bullet.
The loss on the Union side was heaviest in the Eighty-fourth
Pennsylvania regiment. Of the five companies of three hundred men,
in all, engaged, they lost Colonel Murray, a brave officer; one captain,
one lieutenant, twenty-three privates and non-commissioned officers
killed, and sixty-three wounded. The loss in the Eighth and Fifth
Ohio regiments was about seventy-five and sixty, respectively, killed
and wounded.
Lieutenant-Colonel Thorburn, of the Third Virginia, was among
the wounded. These were the only field officers killed or wounded in
the Union forces.
The battle-field after the struggle was a terrible sight. The night
was dark and cold. After the battle the ambulances were busily
engaged removing the wounded. The enemy carried off most of their
wounded and some of their dead. The wounded were intermingled
with the dead, and their sufferings before they were removed to the
hospitals were heart-rending. The next day was spent in burying the
dead. The ghastly aspect of the field after the wounded were
removed, and before the dead were interred, was appalling.
BATTLE OF PITTSBURG LANDING.
April 6–7, 1862.
When the surrender of Forts Henry and Donelson reached

Washington and Richmond there was depression among the
secessionists and great rejoicing at the North. The news of these
events was followed directly by the capture of Nashville and New
Madrid, and it became certain to the Confederate leaders that Island
No. 10 must soon surrender. Under these untoward events it became
imperative that a new strategic point should be at once established
beyond reach of the gunboats, that had already produced so much
mischief. Beauregard, then in command, selected Corinth as the
most promising point for his operations, and a position which would
render any attempt of the Federals to cut him off from western
Tennessee, or the eastern and southern States, extremely difficult of
success. He called on the Governors of Tennessee, Mississippi and
Alabama for help, and a prompt response was made. First came Polk
from Columbus, then Bragg from Mobile and Pensacola, followed by
General A. S. Johnston from Murfreesborough, who took command.
After selecting their new line of defence, they commenced fortifying
it and diligently concentrated their forces. Generals Hardee,
Breckinridge, Sterling Price and Hindman soon came in, and the
fortifications made rapid progress.
Corinth is a very important strategical point. It is situated in a
branch of the Apalachian range, which diverges from the Alleghany
mountains, and forms the uplands and gold-bearing regions of
Georgia and Alabama. The village is nearly surrounded by an
irregular circle of hills, rising in the north, about four miles distant,
with the State line between Tennessee and Mississippi crossing their
summit. The Mobile and Ohio railway intersects this ridge through a
cut seventy-five feet in depth. Similar cuts, of lesser depth, penetrate
the hills on the east, west and south, where the railways enter.
Beyond these hills, in the direction of Pittsburg and Savannah, the
ground becomes more level, and is generally low and swampy. The
topography of the region renders Corinth susceptible of strong
defences. The village was formerly called Farmington, and is so
mentioned in the gazetteers. It is a post village of Tishomingo
county, Mississippi, distant two hundred and sixty-two miles north-
east from Jackson, the capital of the State. There were not half a
dozen stores in the village, and its population was relatively small.
Tishomingo county forms the north-eastern extremity of Mississippi,
bordering on Tennessee and Alabama. The Tombigbee river rises in
the county; the Tennessee flows along the north-east border, and it is
drained by Tuscumbia creek. A large portion of the county is covered
with forests of oak, hickory, walnut and pine.
The principal military value of this place consists in the fact that
the railroads from Memphis on the west, Columbus, on the north,
and Mobile on the south, cross at this point.
About the middle of March Grant’s victorious army at Nashville
was sent by Halleck to occupy first Savannah, and then Pittsburg
Landing, preparatory to the arrival of Buell’s Kentucky army, when
Halleck intended himself to take the field and move on Corinth.
Pittsburg Landing is situated in Hardin county, Tenn., on the west
side of the Tennessee river. It is in itself of little importance, being
close to Savannah, which is a flourishing post village of Hardin
county, situated on the eastern side of the river. The Landing is about
one hundred and twenty miles from Nashville; nearly one hundred
miles from Columbia, on the Nashville and Decatur railroad; by a
turnpike road, crossing the river at a ferry, about twenty-five miles
from Corinth. The country is very wild, the surface rising on both
sides of the river in a gradual ascent.
Savannah is the capital of Hardin county. Previous to the rebellion
it had been a place of considerable business note. The population in
1853 was only eight hundred, but it had been greatly increased. The
area of the county is about six hundred and fifty miles. The
Tennessee river flows through it, dividing it into nearly equal parts.
The river is navigable for steamboats through the entire county,

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Printed in the United States of America

Part 4 Factor Markets and Related Issues

Microeconomics The Global Economy

Chapter 6 Elasticity 138 Chapter 20 International Trade 484

Chapter 9 Perfect Competition 234

Chapter 12 Government and Product Markets: Antitrust

CHAPTER 1: What Economics is About 1

APPEnDIx B: SHOULD YOU MAJOR IN ECONOMICS? 34

Five Myths About Economics and Being an Economics Major 35

CHAPTER 2: PRODUCTION POSSIBILITIES FRONTIER FRAMEWORK 41

CHAPTER 3: SUPPLY AND DEMAND: THEORY 59

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

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

Application 1: U-Haul Rates and Demand 116

CHAPTER 6: ELASTICITY 138

 APPEnDIx C: BUDGET CONSTRAINT AND INDIFFERENCE

The Budget Constraint 192

CHAPTER 8: PRODUCTION AND COSTS 200

Part 3 Product Markets and Policies

CHAPTER 9: PERFECT COMPETITION 234

The Case Against Monopoly 274

CHAPTER 11: MONOPOLISTIC COMPETITION, OLIGOPOLY,

Part 4 Factor Markets and Related Issues

CHAPTER 13: FACTOR MARKETS: WITH EMPHASIS

Why Jobs Don’t Always Factor Markets 329

CHAPTER 14: WAGES, UNIONS, AND LABOR 354

Objectives of Labor Unions 354

Practices of Labor Unions 356

CHAPTER 15: THE DISTRIBUTION OF INCOME AND POVERTY 371

CHAPTER 16: INTEREST, RENT, AND PROFIT 388

HOURS Profit 400

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

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

An Unintended Effect Externalities 408

CHAPTER 18: PUBLIC CHOICE AND SPECIAL-INTEREST

A Simple-Majority Voting Rule: Public Choice Theory 437

Part 6 Economic Theory-Building and Everyday Life

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

Can Social Media Affect A Different Kind of Chapter 458

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

The Global Economy

CHAPTER 20: INTERNATIONAL TRADE 484

HOURS Trade Restrictions 490

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

CHAPTER 22: The Economic Case for and Against

APPEnDIx C: BUDGET CONSTRAINT AND INDIFFERENCE

CHAPTER 8: PRODUCTION AND COSTS 200

CHAPTER 11: MONOPOLISTIC COMPETITION, OLIGOPOLY,

CHAPTER 13: FACTOR MARKETS: WITH EMPHASIS

CHAPTER 14: WAGES, UNIONS, AND LABOR 354

CHAPTER 16: INTEREST, RENT, AND PROFIT 388

CHAPTER 17: MARKET FAILURE: EXTERNALITIES, PUBLIC GOODS,

CHAPTER 18: PUBLIC CHOICE AND SPECIAL-INTEREST

CHAPTER 19: BUILDING THEORIES TO EXPLAIN EVERYDAY LIFE: FROM

CHAPTER 20: INTERNATIONAL TRADE 484

CHAPTER 22: The Economic Case for and Against