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ESSENTIAL FOUNDATIONS OF ECONOMICS
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ALWAYS LEARNING
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Essential Foundations of
Economics
Robin Bade
Michael Parkin
University of Western Ontario
EIghTh EDITION
Copyright © 2018, 2015, 2013 by Pearson Education, Inc. or its affiliates. All Rights Reserved.
Manufactured in the United States of America. This publication is protected by copyright, and
permission should be obtained from the publisher prior to any prohibited reproduction, storage in
a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying,
recording, or otherwise. For information regarding permissions, request forms, and the appropriate
contacts within the Pearson Education Global Rights and Permissions department, please visit www
.pearsoned.com/permissions/.
Acknowledgments of third-party content appear on the appropriate page within the text and on
pages C-1–C-2, which constitutes an extension of this copyright page.
PEARSON, ALWAYS LEARNING, and MYECONLAB® are exclusive trademarks owned by Pearson
Education, Inc. or its affiliates in the U.S. and/or other countries.
Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in
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1 17
Robin and Michael are a wife-and-husband team. Their most notable joint
research created the Bade-Parkin Index of central bank independence and
spawned a vast amount of research on that topic. They don’t claim credit for
the independence of the new European Central Bank, but its constitution and
the movement toward greater independence of central banks around the world
were aided by their pioneering work. Their joint textbooks include Macroeconom-
ics (Prentice-Hall), Modern Macroeconomics (Pearson Education Canada), and
Economics: Canada in the Global Environment, the Canadian adaptation of Parkin,
Economics (Addison-Wesley). They are dedicated to the challenge of explaining
economics ever more clearly to a growing body of students.
Music, the theater, art, walking on the beach, and five grandchildren
provides their relaxation and fun.
viii
ECONOMICS Brief Contents
PArT 1 INTrODUCTION
1 Getting started 1
2 The U.s. and Global Economies 33
3 The Economic Problem 59
4 Demand and supply 83
Glossary G-1
index i-1
credits c-1
ix
This page intentionally left blank
xi
Contents
PA r T 1 I N T rO DU C T ION
1.2 The Economic Way of Thinking 8 2.1 What, How, and for Whom? 34
A Choice Is a Tradeoff 8 What Do We Produce? 34
Cost: What You Must Give Up 8 How Do We Produce? 36
Benefit: What You Gain 9 For Whom Do We Produce? 39
Rational Choice 9
cHEckPoinT 2.1 40
How Much? Choosing at the Margin 10
Choices Respond to Incentives 11 2.2 The Global Economy 41
cHEckPoinT 1.2 13 The People 41
The Economies 41
1.3 Economics as a Life skill 14 What in the Global Economy 42
Economics as a Decision Tool 14 How in the Global Economy 44
Economics as a Social Science 14 For Whom in the Global Economy 44
Economics as an Aid to Critical Thinking 16
cHEckPoinT 2.2 47
cHEckPoinT 1.3 18
2.3 The circular Flows 48
cHAPTER sUmmARY 19 Households and Firms 48
cHAPTER cHEckPoinT 20 Markets 48
Real Flows and Money Flows 48
Governments 50
Appendix: making and Using Graphs 23 Governments in the Circular Flow 51
Basic Idea 23 Circular Flows in the Global Economy 52
Interpreting Data Graphs 24
cHEckPoinT 2.3 54
Interpreting Graphs Used in Economic Models 26
The Slope of a Relationship 29 cHAPTER sUmmARY 55
Relationships Among More Than Two Variables 30
cHAPTER cHEckPoinT 56
APPEnDix cHEckPoinT 32
■ EYE on the BEnEFiT AnD cosT oF scHooL ■ EYE on the U.s. EconomY
Did You Make the Right Decision? 12 What We Produce 35
xi
xii Contents
PA r T 2 A C LO S E r LOOk AT M A r k E T S
cHAPTER 5 cHAPTER 6
Elasticities of Demand Efficiency and Fairness
and supply 113 of markets 139
cHAPTER cHEckLisT 113 cHAPTER cHEckLisT 139
5.1 The Price Elasticity of Demand 114 6.1 Allocation methods and Efficiency 140
Percentage Change in Price 114 Resource Allocation Methods 140
Percentage Change in Quantity Demanded 115 Using Resources Efficiently 143
Comparing the Percentage Changes in Price cHEckPoinT 6.1 147
and Quantity 115
Elastic and Inelastic Demand 116 6.2 value, Price, and consumer surplus 148
Influences on the Price Elasticity of Demand 116 Demand and Marginal Benefit 148
Computing the Price Elasticity of Demand 118 Consumer Surplus 149
Interpreting the Price Elasticity of Demand cHEckPoinT 6.2 150
Number 119 6.3 cost, Price, and Producer surplus 151
Elasticity Along a Linear Demand Curve 120 Supply and Marginal Cost 151
Total Revenue and the Price Elasticity of Demand 122 Producer Surplus 152
cHEckPoinT 5.1 125 cHEckPoinT 6.3 153
5.2 The Price Elasticity of supply 126 6.4 Are markets Efficient? 154
Elastic and Inelastic Supply 126 Marginal Benefit Equals Marginal Cost 154
Influences on the Price Elasticity of Supply 126 Total Surplus Is Maximized 155
Computing the Price Elasticity of Supply 128 The Invisible Hand 155
cHEckPoinT 5.2 130 Market Failure 157
5.3 cross Elasticity and income Elasticity 131 Sources of Market Failure 158
Cross Elasticity of Demand 131 Alternatives to the Market 159
Income Elasticity of Demand 132 cHEckPoinT 6.4 160
cHEckPoinT 5.3 134 6.5 Are markets Fair? 161
cHAPTER sUmmARY 135 It’s Not Fair If the Rules Aren’t Fair 161
It’s Not Fair If the Result Isn’t Fair 161
cHAPTER cHEckPoinT 136 Compromise 163
cHEckPoinT 6.5 164
■ EYE on the GLoBAL EconomY
Price Elasticities of Demand 121 cHAPTER sUmmARY 165
■ EYE on ELAsTiciTY AT THE coFFEE sHoP cHAPTER cHEckPoinT 166
What Do You Do When Starbucks Raises the Price
of a Latte? 123 ■ EYE on the U.s. EconomY
■ EYE on the U.s. EconomY The Invisible Hand and e-Commerce 156
Two Applications of the Price Elasticity of ■ EYE on PRicE GoUGinG
Demand 124 Should Price Gouging Be Illegal? 162
■ EYE on YoUR LiFE ■ EYE on YoUR LiFE
Your Price Elasticities of Demand 133 Allocation Methods, Efficiency, and Fairness 163
xiv Contents
cHAPTER 7 cHAPTER 8
Government Actions in Global markets in Action 197
markets 169 cHAPTER cHEckLisT 197
cHAPTER cHEckLisT 169
8.1 How Global markets Work 198
7.1 Taxes on Buyers and sellers 170 International Trade Today 198
Tax Incidence 170 What Drives International Trade? 198
Taxes and Efficiency 171 Why the United States Imports T-Shirts 200
Incidence, Inefficiency, and Elasticity 172 Why the United States Exports
Incidence, Inefficiency, and the Elasticity of Airplanes 201
Demand 173 cHEckPoinT 8.1 202
Incidence, Inefficiency, and the Elasticity of
8.2 Winners, Losers, and net Gains From
Supply 174
Trade 203
cHEckPoinT 7.1 175 Gains and Losses from Imports 204
7.2 Price ceilings 176 Gains and Losses from Exports 205
A Rent Ceiling 176 cHEckPoinT 8.2 206
Are Rent Ceilings Efficient? 179
8.3 international Trade Restrictions 207
Are Rent Ceilings Fair? 180
Tariffs 207
If Rent Ceilings Are So Bad, Why Do We Have
Import Quotas 211
Them? 180
Other Import Barriers 213
cHEckPoinT 7.2 181 Export Subsidies 213
7.3 Price Floors 182 cHEckPoinT 8.3 214
The Minimum Wage 183
8.4 The case Against Protection 215
Is the Minimum Wage Efficient? 186
Three Traditional Arguments for
Is the Minimum Wage Fair? 187
Protection 215
If the Minimum Wage Is So Bad, Why Do We
Four Newer Arguments for Protection 217
Have It? 187
Why Is International Trade
cHEckPoinT 7.3 188 Restricted? 218
7.4 Production quotas 189 cHEckPoinT 8.4 220
Production Quota: An Example 189
cHAPTER sUmmARY 221
cHEckPoinT 7.4 192
cHAPTER cHEckPoinT 222
cHAPTER sUmmARY 193
■ EYE on the U.s. EconomY
cHAPTER cHEckPoinT 194
U.S. Exports and Imports 199
■ EYE on the U.s. EconomY ■ Eye on GLoBALiZATion
The Federal Minimum Wage 185 Who Wins and Who Loses from
■ EYE on PRicE REGULATion Globalization? 203
Can Congress Repeal the Law of Market Forces? 187 ■ EYE on the PAsT
■ EYE on the GLoBAL EconomY The History of U.S. Tariffs 207
Production Quotas 189 ■ EYE on YoUR LiFE
■ EYE on YoUR LiFE International Trade 219
Price Ceilings and Price Floors You Encounter 191
Contents xv
PA r T 3 P rI C E S , P rO F I T S , A N D I N D US Try PE r FOr M A NC E
cHAPTER 10 10.4 Long-Run cost 271
Production and cost 251 Plant Size and Cost 271
The Long-Run Average Cost Curve 272
cHAPTER cHEckLisT 251
cHEckPoinT 10.4 274
10.1 Economic cost and Profit 252 cHAPTER sUmmARY 275
The Firm’s Goal 252
Accounting Cost and Profit 252 cHAPTER cHEckPoinT 276
Opportunity Cost 252
■ EYE on YoUR LiFE
Economic Profit 253
Your Average and Marginal Grades 261
cHEckPoinT 10.1 255
■ EYE on RETAiLERs’ cosTs
short Run and Long Run 256 Which Store Has the Lower Costs: Walmart or
7-Eleven? 273
10.2 short-Run Production 257
Total Product 257
Marginal Product 258 cHAPTER 11
Average Product 260
Perfect competition 279
cHEckPoinT 10.2 262
cHAPTER cHEckLisT 279
10.3 short-Run cost 263
Total Cost 263 market Types 280
Marginal Cost 264 Perfect Competition 280
Average Cost 265 Other Market Types 280
Why the Average Total Cost Curve Is U-Shaped 267
11.1 A Firm’s Profit-maximizing choices 281
Cost Curves and Product Curves 268
Price Taker 281
Shifts in the Cost Curves 268
Revenue Concepts 281
cHEckPoinT 10.3 270 Profit-Maximizing Output 282
xvi Contents
Marginal Analysis and the Supply Decision 284 12.4 Price Discrimination 322
Temporary Shutdown Decision 285 Price Discrimination and Consumer Surplus 322
The Firm’s Short-Run Supply Curve 286 Profiting by Price Discriminating 323
cHEckPoinT 11.1 288 Perfect Price Discrimination 324
Price Discrimination and Efficiency 326
11.2 output, Price, and Profit in The short Run 289
cHEckPoinT 12.4 327
Market Supply in the Short Run 289
Short-Run Equilibrium in Normal Times 290 12.5 monopoly Regulation 328
Short-Run Equilibrium in Good Times 291 Efficient Regulation of a Natural Monopoly 328
Short-Run Equilibrium in Bad Times 292 Second-Best Regulation of a Natural
cHEckPoinT 11.2 293 Monopoly 329
cHEckPoinT 12.5 334
11.3 output, Price, and Profit in The Long Run 294
Entry and Exit 295 cHAPTER sUmmARY 335
The Effects of Exit 296
cHAPTER cHEckPoinT 336
Change in Demand 297
Technological Change 297 ■ EYE on the U.s. EconomY
Is Perfect Competition Efficient? 300 Information-Age Monopolies 310
Is Perfect Competition Fair? 301
■ EYE on the U.s. EconomY
cHEckPoinT 11.3 302
Airline Price Discrimination 326
cHAPTER sUmmARY 303 ■ EYE on micRosoFT
cHAPTER cHEckPoinT 304 Are Microsoft’s Prices Too High? 331
■ EYE on YoUR LiFE
■ EYE on REcoRD sToREs Monopoly in Your Everyday Life 332
Where Have All the Record Stores Gone? 298
■ EYE on YoUR LiFE
The Perfect Competition That You Encounter 301
cHAPTER 13
monopolistic competition and
oligopoly 339
cHAPTER 12 cHAPTER cHEckLisT 339
monopoly 307
cHAPTER cHEckLisT 307 13.1 monopolistic competition: output and
Price 340
12.1 monopoly and How it Arises 308 Describing Monopolistic Competition 340
No Close Substitute 308 Identifying Monopolistic Competition 341
Barrier to Entry 308 Output and Price in Monopolistic Competition 343
Monopoly Price-Setting Strategies 310 Monopolistic Competition and Perfect
cHEckPoinT 12.1 311 Competition 345
12.2 single-Price monopoly 312 cHEckPoinT 13.1 346
Price and Marginal Revenue 312 13.2 innovation and Advertising 347
Marginal Revenue and Elasticity 313 Design and Quality Decisions 347
Output and Price Decision 314 Advertising 347
cHEckPoinT 12.2 316 The Demand for Advertising 348
The Supply of Advertising 349
12.3 monopoly and competition
Equilibrium and Efficiency in the Advertising
compared 317
Market 350
Output and Price 317
Is Monopoly Efficient? 318 cHEckPoinT 13.2 351
Is Monopoly Fair? 319 13.3 oligopoly 352
Rent Seeking 319 Collusion 352
cHEckPoinT 12.3 321 Duopoly in Airplanes 353
xxviii PrefaCe
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