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ECONOMICS
The McGraw-Hill Economics Series
SURVEY OF ECONOMICS ECONOMICS OF SOCIAL ISSUES MONEY AND BANKING
Brue, McConnell, and Flynn Guell Cecchetti and Schoenholtz
Essentials of Economics Issues in Economics Today Money, Banking, and Financial Markets
Fourth Edition Ninth Edition Sixth Edition
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Second Edition First Edition McConnell, Brue, and Macpherson
Contemporary Labor Economics
Colander Eleventh Edition
MANAGERIAL ECONOMICS
Economics, Microeconomics, and Macroeconomics
Eleventh Edition Baye and Prince
PUBLIC FINANCE
Managerial Economics and Business Strategy
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Streamlined Editions: Principles of Economics, Princi- Field and Field
ples of Microeconomics, Principles of Macroeconomics Thomas and Maurice Environmental Economics: An Introduction
Third Edition Managerial Economics Seventh Edition
Thirteenth Edition
Karlan and Morduch
INTERNATIONAL ECONOMICS
Economics, Microeconomics, Macroeconomics INTERMEDIATE ECONOMICS
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Nineteenth Edition
Frank
Schiller and Gebhardt Microeconomics and Behavior
The Economy Today, The Micro Economy Today, and Ninth Edition
The Macro Economy Today
Fifteenth Edition ADVANCED ECONOMICS
Slavin Romer
Economics, Microeconomics, and Macroeconomics Advanced Macroeconomics
Twelfth Edition Fifth Edition
ECONOMICS Improve Your World
THIRD EDITION

Dean Karlan
Northwestern University and Innovations for Poverty Action

Jonathan Morduch
New York University
ECONOMICS: IMPROVE YOUR WORLD, THIRD EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2021 by McGraw-Hill
Education. All rights reserved. Printed in the United States of America. Previous editions © 2018 and 2014.
No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database
or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in
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This book is printed on acid-free paper.
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Library of Congress Cataloging-in-Publication Data
Names: Karlan, Dean S., author. | Morduch, Jonathan, author.
Title: Economics : improve your world / Dean Karlan, Northwestern University and
Innovations for Poverty Action, Jonathan Morduch, New York University.
Description: Third Edition. | Dubuque : McGraw-Hill Education, 2019. |
Revised edition of the authors’ Economics, [2018]
Identifiers: LCCN 2019033366 | ISBN 9781260225310 (hardcover)
Subjects: LCSH: Economics.
Classification: LCC HB171.5 .K297 2019 | DDC 330—dc23
LC record available at https://lccn.loc.gov/2019033366

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does
not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not
guarantee the accuracy of the information presented at these sites.

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dedication
We dedicate this book to our families.

—Dean and Jonathan

v
about the authors
Dean Karlan
Dean Karlan is the Frederic
Esser Nemmers Distinguished
Professor of Economics and
Finance at the Kellogg School
of Management at Northwestern
University and President and
Founder of Innovations for
Poverty Action (IPA). Dean
©Dean Karlan
started IPA in 2002 with two
aims: to help learn what works and what does not in the fight
against poverty and other social problems around the world,
and then to implement successful ideas at scale. IPA has worked
in over 50 countries, with 1,000 employees around the world.
Dean’s personal research focuses on using field experiments to
learn more about the effectiveness of financial services for low-
income households, with a focus on using behavioral economics
approaches to improve financial products and services as well
as build sustainable sources of income. His research includes
related areas, such as charitable fund-raising, voting, health, and
education. Dean is also cofounder of stickK.com, a start-up that
helps people use commitment contracts to achieve personal
goals, such as losing weight or completing a problem set on time,
and in 2015 he cofounded ImpactMatters, an organization that
produces ratings of charities based on impact estimates. Dean is
a Sloan Foundation Research Fellow, a Guggenheim Fellow, and
an Executive Committee member of the Board of the MIT Jameel
Poverty Action Lab. In 2007 he was awarded a Presidential
Early Career Award for Scientists and Engineers. He is coeditor
of the Journal of Development Economics. He holds a BA from
University of Virginia, an MPP and MBA from University of
Chicago, and a PhD in Economics from MIT. He has coauthored
The Goldilocks Challenge (2018), Failing in the Field (2016), and
More Than Good Intentions: Improving the Ways the World’s Poor
Borrow, Save, Farm, Learn, and Stay Healthy (2011).
Jonathan
Morduch
Jonathan Morduch is Professor
of Public Policy and Econom-
ics at New York University’s
Wagner ­Graduate School of
Public Service. ­Jonathan
focuses on innovations that
©Jonathan Morduch
expand the frontiers of finance
and how financial markets shape economic growth and inequal-
ity. Jonathan has lived and worked in Asia, but his newest book,
The Financial Diaries: How American ­Families Cope in a World
of Uncertainty (written with Rachel Schneider and published by
Princeton University Press, 2017), follows families in California,
Mississippi, Ohio, Kentucky, and New York as they cope with
economic ups and downs over a year. The new work jumps off
from ideas in Portfolios of the Poor: How the World’s Poor Live on
$2 a Day (Princeton University Press, 2009), which Jonathan
coauthored and which describes how families in Bangladesh,
India, and South Africa devise ways to make it through a year
living on $2 a day or less. Jonathan’s research on financial mar-
kets is collected in The Economics of Microfinance and Banking
the World, both published by MIT Press. At NYU, Jonathan is
executive director of the Financial Access Initiative, a center
that supports research on extending access to finance in low-
income communities. Jonathan’s ideas have also shaped policy
through work with the United Nations, World Bank, and other
international organizations. In 2009, the Free University of
Brussels awarded Jonathan an honorary doctorate to recognize
his work on microfinance. He holds a BA from Brown and a
PhD from Harvard, both in Economics.

Karlan and Morduch first met in 2001 and have been friends and colleagues ever since. Before writing this text, they col-
laborated on research on financial institutions. Together, they’ve written about new directions in financial access for the
middle class and poor, and in Peru they set up a laboratory to study incentives in financial contracts for loans to women to
start small enterprises. In 2006, together with Sendhil Mullainathan, they started the Financial Access Initiative, a center
dedicated to expanding knowledge about financial solutions for the 40 percent of the world’s adults who lack access to
banks. This text reflects their shared passion for using economics as a tool to improve one’s own life and to promote better
business and public policies in the broader world.

vi

Thinking Like an Economist
Part 1 The Power of Economics 1
1 Economics and Life 3
2 Specialization and Exchange 25
Part 2 Supply and Demand 47
3 Markets 49
4 Elasticity 79
5 Efficiency 103
6 Government Intervention 129
Microeconomics: Thinking Like a
Microeconomist
Part 3 Individual Decisions 163
7 Consumer Behavior 165
8 Behavioral Economics: A Closer Look at Decision
Making 189
9 Game Theory and Strategic Thinking 203
10 Information 229
11 Time and Uncertainty 245
Part 4 Firm Decisions 265
12 The Costs of Production 267
13 Perfect Competition 293
14 Monopoly 323
15 Monopolistic Competition and Oligopoly 353
16 The Factors of Production 383
17 International Trade 419
Part 5 Public Economics 449
18 Externalities 451
19 Public Goods and Common Resources 477
20 Taxation and the Public Budget 497
brief contents
21 Poverty, Inequality, and Discrimination 525
22 Political Choices 563
23 Public Policy and Choice Architecture 585
Macroeconomics: Thinking Like a
Macroeconomist
Part 6 The Data of Macroeconomics 603
24 Measuring GDP 605
25 The Cost of Living 637
Part 7 Labor Markets and Economic
Growth 663
26 Unemployment and the Labor Market 665
27 Economic Growth 689
Part 8 The Economy in the Short and Long
Run 713
28 Aggregate Expenditure 715
29 Aggregate Demand and Aggregate Supply 739
30 Fiscal Policy 773
Part 9 The Financial System and
Institutions 797
31 The Basics of Finance 799
32 Money and the Monetary System 835
33 Inflation 867
34 Financial Crisis 899
Part 10 International Policy Issues 923
35 Open-Market Macroeconomics 925
36 Development Economics 963
vii
Improve your world
The field and practice of economics has changed a lot. Most textbooks haven’t. This one is
different.
Economics is now much more empirical, even compared to 15 years ago. The incredible data
and computing power available today have transformed research on economic inequality, mobility,
health care, trade, the environment, media, finance, macro mechanisms, and—well, you name it.
Almost every part of economics is being reshaped by new evidence. Topics often not thought of
as “economics,” such as love, happiness, sports, and social networks, are now regularly analyzed
through economic frameworks.
We’ve found that incorporating new research and evidence makes teaching and learning easier,
not harder, by connecting to what students see in everyday life. The new economics of inequality,
for example, shows students that the field is not single-mindedly concerned with overall growth
of an economy but also with whether and why some are left out of that growth (and what to do
about it). Similarly, new work on international trade shows that economists are deeply engaged by
who’s winning and who’s losing as markets expand. Increasingly, economic research is also leading
to new, practical ideas to improve lives.
In our own work, for example, we show how financial innovations inspired by behavioral
economics can help people save and invest more effectively, and we’ve worked these insights
into the text where appropriate. For example, a box in Chapter 21, based on recent financial-
diary research, illustrates, through a description of one family’s financial struggle, the problem of
income instability.
Another transformation in economics is happening as the field attracts new voices. Younger
economists have taken a broad view of economics. They come from a wider variety of backgrounds,
and they are more likely to be women, compared to scholars a generation ago. This edition brings
their voices more fully into the intro course.
• In Chapter 4, we describe an experiment by Pascaline Dupas and Jessica Cohen that shows
how elasticities shape policies to prevent communicable disease.
• In Chapter 22, we draw on Thomas Fujiwara’s study showing how new voting technologies
expanded voting and led to an increase in the provision of public goods.
• In Chapter 35, we describe Gita Gopinath’s work on why it matters that the dollar is the
leading “international currency.”
The work of these economists has inspired us, and we hope that examples of their work will help
students find new connections—and maybe even some new role models—in economics.
Throughout the text, we have worked hard to inspire students. Students’ impressions of
economics sometimes are right: The field can be dry and technical—and thus often harder to
learn. But it doesn’t have to be that way.
We’ve aimed at a casual tone, imagining that we’re having a conversation with students, with
down-to-earth situations and personal examples that resonate with student readers. For example:
• How understanding price elasticity can help you spend less money on plane tickets.
• Whether the cost of college is worth it. (Spoiler: It probably is.)
Teachers know the value of a good story, one that connects economic principles to ideas and
issues in the world. In our text, we weave real stories into the presentation—at the start of every chapter
and as recurring examples and in boxes throughout the chapters. For example, Chapter 2 uses the cell
phone market to illustrate supply and demand, and Chapter 4 uses the price of a latte to demonstrate
elasticity. We employ economic tools as a way of explaining real people and their decisions.
viii
 Improve Your World ix

We then layer policy implications into the discussion of economic ideas and principles. For exam-
ple, in Chapter 1, the idea of opportunity cost is first framed as a personal example of whether to
spend the evening having dinner with friends. We next broaden the idea to the opportunity cost
of an unpaid internship, and later in the chapter broaden the idea still further with a box that asks
students to compare the cost of an iPad to charitable giving as a way to think about opportunity
costs in a global context.
Our goal in this third edition is to help close the gap between economics in the classroom and
the economic world that students see around them. Our aim is not just to bring students up to date,
but to demonstrate the idea that “Economics can improve your world.”

Who are we? Why did we write this text?

Economics draws on our own experiences as academic economists, teachers, and policy advisors.
We are based at large research universities and often work with and advise nonprofit organizations,
governments, international agencies, donors, and private firms. Much of our research involves fig-
uring out how to improve the way real markets function. Working with partners in the United States
and on six continents, we are involved in testing new economic ideas. Economics draws on the spirit
of that work, as well as similar research, taking students through the process of engaging with real
problems, using analytical tools to devise solutions, and ultimately showing what works and why.
One of the best parts of writing this text, promoting its first edition, and revising for the second
and third editions has been the opportunity to spend time with instructors across the country.
We’ve been inspired by their creativity and passion and have learned from their pedagogical ideas.
One of the questions we often ask fellow instructors is why they originally became interested in
economics. A common response—one we share—is an attraction to the logic and power of eco-
nomics as a social science. We also often hear instructors describe something slightly different:
the way that economics appealed to them as a tool for making sense of life’s complexities, whether
in business, politics, or daily life. We wrote this text to give instructors a way to share with their
students both of those ways that economics matters.
We also are grateful to the many adopters and near-adopters of the first two editions who
provided many helpful suggestions for ways to make the third edition an even better resource for
instructors and students. As you’ll see in the list of chapter-by-chapter changes that starts on page
xviii, we’ve worked hard to fulfill your expectations and meet that goal.
We hope to inspire students to continue their studies in economics, and we promise this text
will give them something useful to take away even if they choose other areas of study.
Finally, we hope that, in ways small and large, the tools they learn in these pages and this
course will help them to think critically about their environment, to live better lives, and to make
an impact on their world. Our underlying motive throughout has been to demonstrate—through
stories, examples, research, and policy discussions—the good that economics can do to “improve
your world.”

Dean Karlan Jonathan Morduch

Northwestern University New York University
inspire student learning
Karlan/Morduch connects with students—from its consistent data-driven and impact-based
approach to a wide variety of examples and case studies, demonstrating how questions can be
used to address real issues. By teaching the right questions to ask, the text provides students with
a method for working through decisions they’ll face as consumers, employees, entrepreneurs, and
voters. Here are the four questions:
• Question 1: What are the wants and constraints of those involved? This question introduces
the concept of scarcity. It asks students to think critically about the preferences and resources
driving decision making in a given situation. It links into discussions of utility functions,
­budget constraints, strategic behavior, and new ideas that expand our thinking about
­rationality and behavioral economics.
• Question 2: What are the trade-offs? This question focuses on opportunity cost. It asks
­students to understand trade-offs in any decision, including factors that might go beyond the
­immediate financial costs and benefits. Consideration of trade-offs takes us to discussions of
­marginal decision making, sunk costs, nonmonetary costs, and discounting.
• Question 3: How will others respond? This question asks students to focus on incentives,
both their incentives and the incentives of others. Students consider how individual choices
­aggregate in both expected and unexpected ways, and what happens when incentives change.
The question links into understanding supply and demand, elasticity, competition, taxation,
game theory, and monetary and fiscal policy.
• Question 4: Are resources being allocated in the best way possible? This question relates to
efficiency. It asks students to start from an assumption that markets work to provide desired
goods and services, and then to think carefully about why something that seems like a good
idea isn’t already being done. We encourage students to revisit their answers to the previous
three questions, to see whether they missed something about the trade-offs, incentives, or
other forces at work, or are looking at a genuine market failure. When we consider alloca-
tions, we also ask who’s winning and who’s losing through economic changes. This fourth
question links topics such as public goods, externalities, information gaps, monopoly, arbi-
trage, and how the economy operates in the
Confirming Pageslong run versus the short run.

Engaging pedagogical features

Economics and Life ■ Chapter 1
Compelling examples and stories open each chapter 17
and are woven throughout the narrative. These
include such examples as eBay, gifts of ugly holiday sweaters, how to curb littering, the cost of
3. A good model describes the real world accurately. If a model does not describe what actually
happens in the real world, something about the model is wrong. We’ve admitted that mod-
prescription medicines, why diamonds are expensive, the music-recording industry, why MLB
els are not perfectly accurate because they are intentionally simpler than the real world.
But if a model predicts things that are not usually or approximately true, it is not useful.
pitchers are paid more than farm workers, why politicians haven’t enacted a carbon tax, how a
How do we tell if a model is realistic? Economists test their models by observing what
jar of peanut butter relates to the size of the U.S. economy, the Great Recession and the housing
happens in the real world and collecting data, which they use to verify or reject the model.
In the Economics in Action box “When education pays off,” take a look at a model that
bubble, cigarette money in World War II, and the iPhone as an import. Through these stories, we
explains the returns that people experience when investing in a college education.
introduce to students issues that consumers, voters, busi-
When education pays off nesspeople, and family members face in their lives.
Economics in Action Additionally, the following features add interesting real-
Economics in Action boxes show how the concept you’re reading about relates to the real world. Often world details:
these boxes present interesting ideas or describe situations in which people used an economic idea to
solve business or policy questions. • Economics in Action boxes, originally titled Real Life,
Why go to college? Well, of course, you learn a lot of important things and can make amazing
friends. Also—not to be too crass about it—a college diploma will generally lead to bigger pay- describe a short case or policy question, findings
checks. On average, completing college roughly doubles lifetime earnings compared to earnings
without a degree. In fact, the earnings advantage from having more education has grown bigger
from history or academic studies, and anecdotes
over time. from the field.
What drives those gains to education? To answer that question, Claudia Goldin and Law-
rence Katz, economists at Harvard University, pieced together a century of data on wages in the
x United States. Two models helped them explain the patterns over time.
The first model predicts that education boosts earnings because it allows workers to take
advantage of technical innovations that increase productivity. The greater the pace of technical
 The underlying factor is called an omitted variable—despite the fact that it is an important part
time
of theis tight, so you havestory,
cause-and-effect to choose
it hasbetween
been lefttheout
offers.
of the analysis. The From Another Angle box
Whaticeare
“Does the opportunity
cream cause polio?”costs
tellsofthe
thestory
choices?
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omitted variablecost
that of the unpaid
convinced internship
some doctors
istothe $1,600 that Inspire
you would Student
havea earned Learning xi
mistakenly campaign against staple ofif summer
you had fun:
instead
ice chosen
cream. the paid job. The opportunity
cost of the paid job is a bit trickier. It’s what you would give up by not taking the internship. Part
of the value of the internship is that you expect the experience to contribute to your career. It
• From Another Angle boxes show a different way of may be hard to put an exact number on the expected value to your career, but you may be able to
predict whether Does ice cream
the expected contribution causeof the polio?
internship is bigger or smaller than $1,600. The
­looking at an economic concept—a ­different way of internship would be Another
appealing Angle
if the expected gain to your career substantially exceeds $1,600.
From
thinking about a situation, a humorous story, or some- Otherwise, the paid job could make more financial sense.
Of
Fromcourse,
Anotherwe’re
Anglesimplifying
boxes show a lot
youhere. You might
a completely needway
different theofmoney
lookingnow,
at anrather thanconcept.
economic at a later
times just an unusual application of a standard idea. date—which would
We find that push
a little bit you toward goes
of weirdness the paid job.
a long wayAlso, you may
in helping us toberemember
looking things.
for gains that are not
purely financial—like having interesting experiences and meeting new people. Either way, thinking
• What Do You Think? boxes offer a longer case study, Polio is a disease that once crippled or killed thousands of children in the United States every
about opportunity costs is a critical part of making good decisions of all kinds.
year. Before the cause of polio was known, doctors noticed that polio infections seemed to be
with implications for public policy and student-related Once you start to think about opportunity costs, you see them everywhere. For an application
more common in children who had been eating lots of ice cream. Observing this correlation led
of opportunity
some peoplecost to a serious
to assume moral
that there wasquestion, read the What
a causal relationship Do You
between Think?
the two. Someboxdoctors
“The oppor-
Confirming Pages
rec-
issues. They present relevant data or historical evidence tunity cost of athat
ommended life.”kids stop eating ice cream, and many fearful parents understandably took their
and ask students to employ both economic analysis and advice.
We now know that ice cream is safe. Polio is caused by a virus that spreads from one person
normative arguments to defend a position. We leave to another. The virus is transmitted through contaminated food and water—for example, dirty
swimmingThe pools or opportunity
water fountains. Itcost of ato life
has nothing do with ice cream.
the student with open-ended questions, which 54profes- Part 2 ■ Supply and Demand
The iceWhat cream Do confusion was caused by an omitted variable: warm weather. In warm weather,
You Think?
sors can assign as homework or use for classroom children
dren are
are more
alsoThink?
likely
more likely
to use swimming
to questions
eat ice cream.
pools and
Polio you
water fountains. And in warm weather, chil-
was totherefore with eating ice cream,
Confirm
FIGURE 3-1 What Do You present that require combinecorrelated
facts and economic analysis with
discussion. Many of these boxes are current ideas: but it
values and
Demand schedule and the demand
certainly
curve
wasn’t caused by it.
moral reasoning. There can be many “correct” answers, depending on your values and
goals.Happily, in 1952 a scientist named Jonas Salk developed a vaccine that made polio a rare
the $15 minimum wage, who should be able to buy (A) Demand schedule disease. One unintended benefit was that doctors, and parents,
The philosopher Peter Singer writes that opportunity(B)costs Demand stopped telling kids to stay away
cancurvebe a matter of life or death.
assault rifles, ­payday lending, preventive health care, from ice cream.
Imagine you are a salesperson, and on your way to a meeting on a hot summerElasticity
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220
If you find this discussion of price elasticity particularly interesting, you might want to con-
­admission, and more. 30
You have a choice. If you
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200stop the car and dive into the lake to save the child, you will be late
180as a pricing analyst. In the near term, though, you can apply your knowledge about
for your meeting, miss out on making a sale, and lose $1,500. The opportunity cost of saving the
price elasticity when you buy 180airline tickets. You can read more about this in the Econ and YOU
• Econ and YOU boxes are new to this edition and have 60 child’s160
Reverse
box “Finding
lifecausation
is $1,500.
a travel bargain.” A third common source of confusion between correlation and causa-
tion isAlternatively,
reverse causation: if you continue
160 A on
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economics in their personal decisions. ­Topics included 120
mightWhat
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observe
to the correlation between rain and raincoats. If we knew nothing about rain, we
Finding
thatyou it do?
oftenaMost
travel
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appears bargain
peopletogether
don’t hesitate. They immediately
with raincoats; we mightsay they would
conclude thatstop the a
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in this new boxed feature include ­personal finance, 150 car, dive into the lake, and save the drowning child. After all, a child’s life is worth more than
raincoat
$1,500.
(A)
100 Econ
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(B).
100In this case, we all know that the causation goes
2. …the the other way, but
quantity
observation alone does not tell us that. demanded increases.
raising a family, unpaid internships, among others. We180 Econ
Lookingand
80 YOUat the boxes
timingshowof tips,
80 twostrategies, and events
correlated other wayscan that economicsprovide
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weave these every day scenarios with economic prin- 210 happensElasticity
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before ■B, Chapter
it hints4 that
60fantasizing about traveling 60
A causes B rather
someplace
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warm for spring
you leave home in the morning frequently happens before it rains in the afternoon. The break? Taking a trip to see family
timing
ciples to help students develop
To ensure ­economic
that elasticity intuition.
will be the same whether you move
240 up or down
or friends? If you’ve looked40
the 40
and some
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much cheaper—even on the same routes. Why?
should use the mid-point method, as in Equation 4-6. 20
Airline prices are, of course, partly determined by the cost of getting you from point A to
In this edition, we’veEQUATION
added4-625 new stories across the four 270
(Q 2 − Q 1)/[(Q 1 point
Price elasticity of supply = ___________________
+ Q 2)B.
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Demand

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• Caution: CommonSoMistake and ofTake
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elasticities. price of
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to differentiate them from the effect of the current price of the good
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spend money on the extra amenities, but then, as the day of the flight approaches, they do.)
• Unit-elastic, if it has an absolute value of exactly 1.
need to understand economic language and reasoning On airlines with a wider variety of ticket options, finding a cheaper ticket may require sig-
We can also describe the extreme cases: Supply is perfectly elastic if the quantity
Consumer
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havecould
preferences
you a high price elasticity. preferences
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are thechoices
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good. customers
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people like
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just need Saturday night likes
that these oftenand
signals
dislikes
Throughout this text, every chapter contains built-in
the same, regardless of the price.
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influence
TAKE NOTE.their purchases.
.. At any given price, some low
head
elasticity (since
consumers
home for
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the
travelers tend
more enjoyment
weekend). Or buying
(i.e.,toben-
tick-
efits) out of a cell phone than do others. That enjoyment may be based simply on how much they
review tools and study devices forbeans
supply of coffee student use:
is relatively inelastic, at least in the short run. • talking
like Remember that the
to friends, orelasticity of demand
whether they ets early
is phones
use their for (some
work, orsayany
seven weeksofisother
number the sweet
personal
Does this result make sense? As it turns out, coffee takes a long calculated by dividing a positive number by spot). Or accepting the restrictions, such as
preferences.
time to grow. Coffee plants don’t produce a full yield for four to six a negative number, or by dividing a nega- limited overhead bin access and restrictions
• Test Yourself questions tied to learning objectives appear
years after they are planted. Because coffee growers can’t increase tive number by a positive number, so the on changing your ticket, that come with “basic
economy” tickets. You might find that these
at the end of eachproduction
major quickly,
section andsense
it makes prompt students
that the supply of coffee would answer is always negative.
trade-offs are worth it, but sometimes they can
be inelastic. (What if prices had fallen from $1.20 to $1, instead of • The elasticity of supply, on the other hand, turn a great deal into a headache, with lots of
to make sure theyrising
understand theUsing
from $1 to $1.20? topics covered
the mid-point before
method, the elasticity is calculated by dividing either a positive extra fees for flight changes and baggage fees.
would be the same.)
moving on. There is one important difference between the elasticities of sup-kar25313_ch03_047-078.indd 54
©kasto/123RF
number by another positive number or a
08/14/19 08:16 PM
negative number by another negative num-
• Conclusions at theplyend of each
and demand: The chapter sum
price elasticity up the
of demand is always negative ber. In either case, the answer is always
and the price elasticity of supply is always positive. The reason is positive.
­overall lessons learned
simple: The and lookdemanded
quantity aheadalways to how the
moves in the topic
opposite direc- Remembering this rule can help you
from the price, but the quantity supplied moves in the same
just presented willtion
be used in other
direction as the price.
chapters. to check your arithmetic.

• Key Terms provide a convenient list of the economic terminology introduced and defined in kar25313_ch04_079-102.indd 97 08/

the chapter. Determinants of price elasticity of supply

Whether supply is elastic or inelastic depends on the supplier’s ability to change the quantity pro- LO 4.4 Explain how
• Summaries give a duced
deeper synopsis
in response of what
to price changes. each
Three factorslearning objective
affect a supplier’s covered.
ability to expand production: the determinants
of price elasticity
the availability of inputs, the flexibility of the production process, and the time needed to adjust to
of supply affect the
changes in price. Recall that this last factor—time—is also a determinant of the elasticity of demand.
degree of elasticity.
Just as consumers take time to change their habits, suppliers need time to ramp up production.
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detailed content changes
We’ve made numerous changes to the third edition of this text, prompted by users, reviewers, and
developing ideas in economics. This section provides a detailed list of changes.

In all chapters
In all chapters, the authors have made the following changes:
• Updated real-world data in text, figures, and tables.
• Added a new category of boxed insert, “Econ and YOU,” that offers examples of ­economics
at play in personal decisions large and small. Topics include personal finance, raising a
­family, and unpaid internships, among others.  
• Added 25 new boxes (see details in the chapter lists below).
• Freshened existing boxes either by updating or by substituting new box topics for old ones,
as detailed below. In addition, we’ve retitled the “Real Life” boxes as “Economics in
Action.”
• Reformatted long discussions into smaller bites of content, to further sharpen the text’s
already-strong readability and student interest.
• Added more female names and examples throughout. Added more non-Western names in
end-of-chapter materials.
• Added photos in some boxes, for greater student interest.
The following list does not repeat these text-wide changes but, rather, details specific changes
made to each chapter.

Chapter 1: Economics and Life

• Changed the fourth economist’s question from “Why isn’t someone already doing it?” to
“Are resources being allocated in the best way possible?” to clarify the idea of efficiency.
Revised the associated text section on efficiency, with discussion of the practical implications
of efficiency.
• Clarified the opportunity cost example—changed from going on a road trip to having dinner
with friends. Added example of unpaid internship.
• Added “Marginal decision making” subheading.
• New Figure 1-1 (showing total revenue generated by bowling alleys correlated with per capita
consumption of sour cream) illustrates the need to differentiate between correlation and
causation.
• Replaced the box about Malthus’s model with a new Economics in Action box, titled
When education pays off, about Goldin & Katz’s model explaining gains from education.

Chapter 2: Specialization and Exchange

• Slightly revised and shortened the From Another Angle box about Babe Ruth as an example
of absolute and comparative advantage.
• Replaced Bill Gates as a text example of specialization with Stacy Brown-Philpot, CEO of
TaskRabbit.
• Replaced the Economics in Action Is self-sufficiency a virtue? box with a new box Winners
and losers; the new box describes the closing of an Ohio factory as a way to show how
xviii
 Detailed Content Changes xix

international trade results in some winners and some losers (suggesting that getting the
­benefits of trade can depend on compensating those who lose out from trade).
• Moved from online-only into the print product the Economics in Action box C ­ omparative
advantage: The good, the bad, and the ugly that discusses whether a country’s loss of
­comparative advantage at producing a particular good is something to worry about.

Appendix A: Math Essentials: Understanding Graphs and

Slopes
• Revised Figures A-1 and A-3 with new data.
• Replaced Figure A-2 with data showing market share for domestic and imported vehicle
types.

Chapter 3: Markets
• Replaced the Real Life The Prius shortage of 2003 box with a new Economics in Action box,
The great Elmo shortage.
• Revised the Economics in Action Give a man a fish box to clarify the findings of economist
Robert Jensen’s research on how cell phones changed the market for fish in Kerala, India.

Chapter 4: Elasticity
• Revised the Economics in Action Does charging for bednets decrease malaria? box to clarify
and better highlight the work of Jessica Cohen and Pascaline Dupas on the price elasticity of
demand for bednets in Kenya.
• Updated the What Do You Think? Should entrance fees at national parks be raised? box to
include the 2017 proposal to increase fees in national parks.
• Removed the Where Can It Take You? Pricing analyst box and replaced it with a new Econ
and YOU Finding a travel bargain box that discusses how understanding price elasticity can
help when you buy airline tickets.

Chapter 5: Efficiency
• In the “Willingness to sell and the supply curve” subsection, revised the example (and related
figures) by changing Seller #1 from a comic book collector to a college student wanting
money to see a favorite band.
• Changed the Real Life Haggling and bluffing box to an Econ and YOU It pays to negotiate box
that discusses salary negotiations as a common version of price negotiation. The new box
­references recent research by Marianne Bertrand; Hannah Riley Bowles, Linda Babcock, and
Lei Lai; Andres Leibbrandt and John List; and Ellen Pao on gender differences in negotiation.

Chapter 6: Government Intervention

• Revised the What Do You Think? Put a cap on payday lending? box (including questions) to
make it more personal (a broken-down car).
• Revised the data in the “Buyers pay more” example in Figure 6-10.
• Removed the Where Can It Take You? Public economics box and replaced it with a new Econ
and YOU Out of sight, out of mind box that looks at research by Raj Chetty, Adam Looney,
and Kory Kroft to test whether grocery-store shoppers “forget” about sales tax when they
look at price tags.
• Replaced the What Do You Think? Farm subsidies box with a new Fight for $15 box that
looks at the debate and economic research about a $15 federal minimum wage.
xx Detailed Content Changes

Chapter 7: Consumer Behavior

• Revised the Real Life The science of happiness box. Repurposed as an Econ and YOU box
titled Spending your way to happiness?, it now looks at the idea of utility to understand what
makes people happy and includes research by Tamas Hajdu and Gabor Hajdu from a survey
tracking the overall life satisfaction and spending habits of 10,000 people in Hungary.
• Fixed text references to points in panels A and B of Figure 7-1, and added a point B to panel
B of Figure 7-1.
• Repurposed the What Do You Think? Choosing a league box to Econ and YOU.
• Shortened the Economics in Action Why we give box.

Appendix E: Using Indifference Curves

• Changed the gender in the example used throughout the appendix from male (Malik) to
female (Laila), to further differentiate the related examples used in the body of Chapter 7
and in this appendix.

Chapter 8: Behavioral Economics

• Added a new Econ and YOU Is a dollar a dollar? box about the method-of-payment effect.

Chapter 9: Game Theory and Strategic Thinking

• In the “Prisoners’ dilemma” subsection, changed the text references from the Bush and Kerry
2004 campaign to more-generic Party A and Party B.
• Revised the colors used in the decision matrixes in the chapter to make them more lively.
• Repurposed the From Another Angle Tit-for-tat and human emotions box to an Econ and
YOU Can game theory explain why you feel guilt? box; the box looks at how emotions may
have promoted cooperation in hunter-gatherer societies.
• Revised the Real Life Dr. Strangelove. . . box to an Economics in Action box titled Totally
MAD that focuses on the story of Soviet Commander Stanislav Petrov who used his
­understanding of game theory, and his intuition, to decide not to launch a missile attack
against the United States in 1983.

Chapter 10: Information

• Replaced the Where Can It Take You? Risk management box with a new Econ and YOU
Is ­college worth it? box that discusses the financial return on a college degree and introduces
Bryan Caplan’s idea of a degree as a signaling device.
• Deleted the Real Life Dress for success box.
• Revised the What Do You Think? From spray paint to auto insurance box, retitled Should
teenagers be able to buy assault rifles? to focus on a more current and controversial issue of
statistical discrimination.
• Moved from online-only into the print product the What Do You Think? box How much
­information is too much? for a health-related look at adverse selection.

Chapter 11: Time and Uncertainty

• Added a new Econ and YOU The rule of 70 box about how to estimate compounding of both
savings and debt over time.
• Repurposed the From Another Angle Hindsight is 20/20 box to an Econ and YOU
Are extended warranties worth it? box that looks at the costs and benefits of such insurance.
 Detailed Content Changes xxi

Appendix F: Math Essentials: Compounding

Shortened the discussion of the rule of 70 in this appendix and elaborated on it in the body of
Chapter 11 instead.

Chapter 12: The Costs of Production

• Revised the chapter-opening feature story to discuss EpiPen pricing (instead of Lipitor).
• Repurposed the From Another Angle The “production” of kids box to an Econ and YOU
The quarter-million dollar kid box, updated with USDA estimates.
• Revised the From Another Angle Beyond the bottom line box for greater clarity about the
goals of social enterprises.
• Revised Figure 12-2 by changing the axes to flatten out the total production curve.
• Revised Figure 12-3 by changing the axes to flatten out the average and marginal product curves.
• Added new subheadings “Graphing total cost” and “Graphing average cost” to present the
discussion of total and average costs in smaller bites.
• Revised Figure 12-4 by changing the axes and showing data points, for better student
understanding.
• Revised Figure 12-5 by changing the axes and showing data points, with call-out labels to
differentiate between the lowest points on the AVC and ATC curves, for better student
understanding.
• Revised Figure 12-6 by changing the axes and showing data points to correct the shape of
the marginal cost curve.
• Revised Figure 12-7 by changing the axes and showing data points to correct the shape of
the marginal cost curve and its intersection with the average total cost curve.
• Revised Figure 12-9 to make the long-run ATC curve more U-shaped and highlight that the
long-run ATC curve represents the lowest point of all short-run ATC curves.
• Updated the Economics in Action Walmart and economies of scale box with a comparison of
economies of scale for Walmart and Amazon.
• Updated and shortened the What Do You Think? The profit motive and “orphan” drugs box,
retitled Should drug companies care about neglected diseases? to focus on the ethical issues
surrounding drug development.

Chapter 13: Perfect Competition

• Revised the Real Life Bazaar competition box and retitled it Economics in Action Why
does the “Motor Mile” exist? to discuss why we often see many businesses of the same type
­clustered near each other.
• Revised Figure 13-1 to show a more traditional marginal cost curve.
• Added a new From Another Angle Who wants competition? box, discussing that the amount
of competition in a market can make or break a contestant’s hopes on the ABC television
show Shark Tank.

Chapter 14: Monopoly

• Made slight revisions to the discussion of natural monopolies, to clarify.
• Revised the From Another Angle Poor monopolists box for greater clarity and retitled it
Phone ladies.
• Updated the text examples of recent big mergers (e.g., Amazon and Whole Foods).
• Added a new From Another Angle The origins of Monopoly box, discussing the original
­economic message and intent of the now-familiar board game.
xxii Detailed Content Changes

Chapter 15: Monopolistic Competition and Oligopoly

• Updated Figure 15-1 with revised data showing market share in the music business.
• Added a new Econ and YOU Fight the (market) power! box about market power and its
­economic effects.
• In the “Oligopolies in competition” subsection, added subheadings for “Two firms
(­duopoly)” and “Three or more firms,” to break down text into smaller discrete bites.

Chapter 16: The Factors of Production

• Replaced the featured player (Clayton Kershaw) in the chapter-opening story with Mike Trout.
• Expanded the discussion of the income and price effects of a wage increase with additional
explanation of the fact that individual labor supply curves are not always linear and so the
effect of a change in wages on hours worked may depend on where an individual is on the
labor supply curve.
• Corrected the text statement in the discussion of Figure 16-7, which said (incorrectly) that
demand shifted to the right, rather than to the left.
• Updated Figure 16-8, to show immigration through 2017.
• Revised the What Do You Think Should the United States be a country of immigrants? box to
expand the discussion and to include mention of H-1B visas.
• Updated Figure 16-11, showing the factor distribution of income.
• In the subsection on “minimum wages and efficiency wages,” expanded the text discussion of
the effects of minimum-wage laws.
• Revised the online-only box on monopsony in baseball with a new Economics in Action
Have noncompete clauses gone too far? box that explores how the idea of monopsony applies
in today’s labor market.
• Updated with a new paragraph on the 2018 Supreme Court ruling that public-sector unions
can’t force all employees to join the union and pay union dues.

Chapter 17: International Trade

• Replaced the chapter-opening feature story with one titled A New Meaning to “Made in the
USA” that focuses on U.S.–China trade.
• Repurposed the old chapter-opening feature story about the garment business in Lesotho to a
new in-chapter Economics in Action Made in Lesotho. But why? box to show that trade agree-
ments can sometimes be more important than natural resources and climate in producing
comparative advantage.
• In both the “Becoming a net importer” and “Becoming a net exporter” sections, expanded
the text a bit to acknowledge that though the outcome of competition in world trade might
be efficient, trade forces uncomfortable economic adjustments and has real political
consequences.
• Clarified the callout labels in Figure 17-6.
• Revised the price data in Figure 17-7.
• Deleted the subsection “Selective exemptions from quotas and tariffs.”
• In the“WTO and trade mediation” section, added a paragraph about the most-favored-nation
provision. Also added a short discussion about 2018 trade negotiations between the United
States and China.
• Revised the From Another Angle Are environmental regulations bad for the environment?
box to address the idea of pollution displacement enabled by international trade and trade
agreements.
• Retitled the subheading “Fair(ly) free trade” to “Pocketbook activism.”
• Deleted the What Do You Think? Lift the embargo on Cuba? box.
 Detailed Content Changes xxiii

Chapter 18: Externalities

• Added clarifying text statements about the terminology marginal social cost curve and the
marginal social benefit curve.
• Replaced the Real Life The fight over cap-and-trade legislation box with a new Economics in
Action Why not tax ourselves? box about the difficulties of imposing taxes on external costs
like contributions to greenhouse-gas emissions.

Chapter 19: Public Goods and Common Resources

• Slightly revised examples in Figure 19-1 showing four categories of goods.
• Added as key terms private goods and artificially scarce goods.
• Added a new Economics in Action Artificially scarce music box about how streaming services
like Spotify and Pandora make music excludable, creating an artificially scarce good that
enables the services to charge a price above marginal cost.
• Replaced the text paragraph about Elinor Ostrom’s research with a new Economics in
Action It’s not necessarily a tragedy box that looks in more depth at Ostrom’s research into
how social norms can sometimes be powerful enough for commonly held property to be
managed extremely well.
• Moved from online-only into the print product the Economics in Action Why the Colorado
River no longer reaches the ocean box that illustrates some mistakes in the management of a
very important common resource, water.
• Deleted the Real Life North American fisheries learn from failure box.

Chapter 20: Taxation and the Public Budget

• Updated the tax data in the chapter’s text, figures, and tables.
• Shortened the From Another Angle Love the sinner, love the sin tax box, now retitled Can
some taxes make people happier? and refocused on the purpose and effects of “sin taxes,”
­particularly in helping people curb consumption of cigarettes or alcohol.
• Added subheadings under the “Personal income tax” subheading for smaller bites of content
and to differentiate between calculating personal income tax and the topic of capital gains
tax.
• In the section on “Other taxes,” added a paragraph about Internet sales tax collection, with
reference to the 2018 Supreme Court ruling.
• Retitled the What Do You Think? Death, taxes, and “death taxes” box as Death and taxes.
• Revised the term nondiscretionary spending to mandatory spending and made it a key term.
• Added a short paragraph about voluntary gifts to the U.S. Treasury.

Chapter 21: Poverty, Inequality, and Discrimination

• Updated poverty data in the chapter’s text, figures, and tables.
• Replaced the Real Life What if your $2 a day doesn’t come every day? box with a related
­Economics in Action box, Up and down in America that focuses on Jonathan Morduch’s
U.S. financial diaries research.
• Slightly broadened LO 21-2 to address factors that contribute to poverty.
• Revised and shortened the Economics in Action Getting out of the neighborhood box.
• Revised the discussion of the Gini coefficient to use 100 (rather than 1) to indicate perfectly
unequal income distribution, to reflect data found in typical Gini-coefficient resources.
• The revised Figure 21-5 now shows Gini coefficients for 30 countries.
• Added a new From Another Angle Just give money box about universal basic income (UBI).
The new box replaces the online-only From Another Angle Paying people to help themselves box.
xxiv Detailed Content Changes

• In the discussion of statistical discrimination, added a text statistic about changes in the
number of male doctors between 1960 and 2010.
• Updated the Economics in Action Are Emily and Greg more employable than Lakisha and
Jamal? box with follow-up research.

Chapter 22: Political Choices

• Updated the chapter-opening story to include the October 2018 report on global warming
conducted by the Intergovernmental Panel on Climate Change and to mention the 2018
Nobel Memorial Prize in Economics awarded to Yale’s William Nordhaus, which recognized
the contribution that economists can have in addressing the complexities of climate change.
• Slightly expanded the discussion of the median-voter theorem.
• Added a new Economics in Action The rise of Donald Trump box that addresses recent
­real-world evidence that contradicts the median-voter theorem.
• Slightly expanded the discussion of alternative voting systems.
• Added a new Economics in Action Ranked-choice takes the Golden ticket to Washington box
about the application of a ranked-choice voting system in the election of Congressman Jared
Golden (Maine).
• Deleted the Real Life Monitoring corruption in Indonesia box.

Chapter 23: Public Policy and Choice Architecture

• In the chapter-opening story, added mention of Richard Thaler’s Nobel Prize in economics.
• Revised the Real Life Committing to fertilizer box to liken the decision Kenyan farmers make
about whether to purchase fertilizer to decisions people make about saving for retirement
and retitled it as Economics in Action It’s all about timing.
• Moved from online-only into the print product the Real Life Is payday lending predatory
box and recategorized the box as Econ and YOU.

Chapter 24: Measuring GDP

• Changed the numbers in the text example used to explain the value-added approach to clarify
the value added at each step of production.
• Expanded the text discussion of NBER’s definition of recession.
• Moved the discussion of well-being before data challenges (home production, the
­underground economy, and environmental degradation), and revised LO 24.7 to reflect that
transposition.
• Retitled the From Another Angle Valuing homemakers box as Not everything that counts can
be counted and expanded the discussion to highlight cases of production that are not counted
in GDP.
• Shortened the From Another Angle The politics of Green GDP box (by removing focus on
French efforts) and retitled it as Green GDP.

Chapter 25: The Cost of Living

• Under the “Cost of Living” heading, added a discussion reviewing the concept of real value
of goods and services and differentiating real value from nominal price changes.
• Added a new paragraph (at the end of “Changes over time: Substitution and innovation” sub-
section) using the price of an iMac computer as an example of hedonic quality adjustment.
• Revised the What Do You Think? COLAs for better or worse box to Economics in Action
Poverty and the minimum wage. The revised box focuses on the federal poverty line and
 Detailed Content Changes xxv

the real value of the minimum wage over time, using as its “hook” a story about Senator
Elizabeth Warren’s ­family in 1961.
• Moved from online-only into the print product Real Life Counting the poor, give or take
400 million box, now retitled Economics in Action What can you buy for $1.90?

Chapter 26: Unemployment and the Labor Market

• Revised LO 26.6 to focus on unemployment insurance.
• Revised the From Another Angle Immigration’s effects on the labor market box with a
­paragraph that expands economists’ debate whether immigrant workers directly compete
with native workers.
• Added a new Economics in Action Employment guaranteed box about economic arguments
for and against a federally guaranteed $15-an-hour job, including research by economists
Stephanie Kelton, Darrick Hamilton, and William Darity.
• Deleted the Real Life Unemployment and developing countries box.
• Repurposed the What Do You Think? Youth employees on trial box as Econ and YOU
Are internships experience or exploitation?, focused on the economics and ethics of
internships.

Chapter 27: Economic Growth

• Moved the Real Life Green revolutions in Asia and Africa box from the “Growth and ­Public
Policy” section to the earlier subsection “Accounting for growth.” Retitled Economics in
Action Feeding the world, the box discusses why the Green Revolution has not been as
­successful in Africa as in Asia, including research by economists Esther Duflo and Micheal
Kramer.
• Revised the discussion of investment funds from within a country to include corporation
profits as a source of domestic savings.
• Added the new subhead “Public policy” under which “Education and health,” new
“­Infrastructure and industrial policy” discussion, and “Technological development” appear.
The revised LO 27.7 covers this revised content.
• Moved from online-only into the print product the Economics in Action Planning for growth
box about the idea that governments can effectively plan growth by “picking winners.”
• Retitled the What Do You Think? Should poor countries be as earth-friendly as rich ones?
box to Is it okay to pollute one’s way to progress?

Chapter 28: Aggregate Expenditure

• Revised all relevant chapter figures to show PAE touching the y-axis.
• Revised and transposed LOs 28.5 and 28.6.
• Revised the CO feature story to make it more general (and removed quotations from the Bill
O’Reilly book).
• In the “Components of Aggregate Expenditure” section, removed the “Autonomous expendi-
ture and simplifying assumptions” subsection and the related LO (old LO 28.5).
• Moved the discussion of autonomous expenditure (and the related LO 28.5, now LO 28.6)
into the “Aggregate Expenditure Equilibrium and the Keynesian Cross” section.
• Heavily revised the “Aggregate Expenditure Equilibrium and the Keynesian Cross” section,
focused on planned aggregate expenditure. To improve student understanding, the section
now starts by looking at PAE in a closed, private economy and then moves to an open
economy.
• Added new Figures 28.2 (the investment schedule) and 28.3 (consumption and GDP).
xxvi Detailed Content Changes

• Expanded the text discussion of the significance of Keynes’s insights about how economies
can get stuck and introduced the term Keynesian cross (as an italicized term).
• Added new Table 28.5 with data showing values of GDP and its components against
­aggregate expenditure for a hypothetical country, enabling students to practice aggregate
expenditure calculations.
• Added new Figure 28.6 (disequilibrium in the Keynesian cross), which captures the results of
new Table 28.5 graphically.
• Near the end of the chapter, added an explicit discussion of government intervention to put
the Keynesian model to powerful use.

Chapter 29: Aggregate Demand and Aggregate Supply

• In all relevant figures in the chapter, changed the label on the x-axis to read “Output, or
GDP, Y,” for clarity.
• Revised the “Tying It All Together” heading to “Building a Model of the Economy.”
• Added a new subheading “Why does the aggregate demand curve slope downward?” and
expanded that section to elaborate on the real-balances effect, the interest-rate effect, and the
exchange-rate effect.
• Transposed Figures 29-1 and 29-2.
• Expanded the paragraph discussing debate among economists about the strength of the
­negative relationships among the components of aggregate expenditure and the price level.
The discussion now includes mention of autonomous spending (introduced in Chapter 28).
• Revised the discussion of confidence in the economy to better highlight the factors that
affect consumption and investment decisions.
• Revised the “Multiplier and shifts in aggregate demand” subheading to “Stimulus spending
or tax cut?”
• Added as new key terms long-run aggregate supply (LRAS) curve and short-run aggregate
­supply (SRAS) curve.
• In the subsection on “Long-run aggregate supply,” added a new subheading “The business cycle.”
• In the subsection on “Effects of a shift in aggregate demand,” add the subheadings “Increases
in aggregate demand” and “Decreases in aggregate demand” for smaller bites of content.

Chapter 30: Fiscal Policy

• In the “Fiscal Policy” section, added new text that further describes what fiscal policy is and
introduces the idea of automatic stabilizers.
• Revised the “Expansionary or contractionary” subhead to “Fiscal Policy and aggregate
demand,” and under that heading added new subheads “Effects on aggregate demand” and
“Expansionary or contractionary policy.”
• In the “Real-world challenges” subsection, added crowding out as a key term.
• Replaced the Real Life A timeline of the 2009 stimulus plan box with a new Economics in
Action A check in the mail, or more in your paycheck? box that looks at the effectiveness of
two different ways of delivering tax-cut stimulus through research by Claudia Sahm, Matthew
Shapiro, and Joel Slemrod.
• Updated the discussion of the budget deficit with a projection about an increase in the deficit
as a result of the 2017 tax cut.
• Moved from online-only into the print product the Economics in Action And the projection is. . .
box, retitled From surplus to deficit. The revised box succinctly chronicles how wars, tax cuts,
and a recession caused the U.S. to go from a budget surplus in 2001 to its current deficit.
• Deleted the paragraph that discussed TIPs.
• Deleted Figure 30-7 (foreign holders of U.S. debt) and moved that information into a short
text discussion.
 Detailed Content Changes xxvii

Chapter 31: The Basics of Finance

• Added subheads “Adverse selection” and “Moral hazard” to break the text discussion
of information asymmetries in financial markets into smaller bites and highlight those
terms.
• In the section “Major players in the financial system,” added the subheadings “Commercial
banks,” “Investment banks,” “Mutual funds,” “Pension funds,” and “Life insurance policies”
for smaller chunking and greater clarity.
• Repurposed the Real Life The incredible index fund box into the new Econ and YOU ­category
and moved it closer to the mutual funds discussion.
• Repurposed the What Do You Think? Are speculators a good influence on markets? box
to the From Another Angle category and removed the discussion questions at the end of
the box.
• Deleted the text reference to inflation-linked bonds.
• Revised the definition of standard deviation.
• In the section “Predicting returns: The efficient market hypothesis,” added the subheadings
“Fundamental analysis,” “Technical analysis,” and “Efficient-market hypothesis” for smaller
content bites and greater clarity.
• In the efficient-market hypothesis discussion, added data about the percentage of managed
funds that have beat the market average over time.
• Moved from online-only into the print product the Economics in Action Behavioral finance
and the efficient market hypothesis box and retitled it Behavioral finance. The revised box
addresses questions that behavioral finance asks about the validity of the efficient-market
hypothesis.
• In the “National Accounts Approach to Finance” section, added new Equation 31-5 to show
the formula for national savings (and renumbered subsequent formulas).

Chapter 32: Money and the Monetary System

• In the “What Is Money?” section, added a new What Do You Think? No card, no service? box
that addresses the arguments for and against a cashless—though not moneyless—economy,
particularly focusing on how going cashless may affect the poorest members of society.
• Added a discussion of the resource cost of commodity-backed money.
• Slightly expanded the discussion of the money multiplier, for greater clarity.
• Updated and shortened the From Another Angle Is bitcoin the currency of the future? box.
• Added zero lower bound as a key term.
• In the discussion of the liquidity-preference model, expanded the discussion of interest rates
as a determinant of money demand. The revised text example replaces the discussion of
government bonds with interest rates on CDs.

Chapter 33: Inflation

• In the “Measuring inflation” discussion, added the formula for how to compute the inflation
rate, first introduced in Chapter 25, to remind students.
• Slightly revised the wording of the definition of core inflation.
• Revised the discussion of the quantity theory of money, to work through the intuition more
carefully, and added new Equation 33-3 as part of that revised discussion.
• Replaced four maps in Figure 33-4 with one graph.
• Retitled the Economics in Action Inflating away the debt box as Just print money!
• Slightly shortened and simplified the text discussion of the Phillips curve.
• Added a brief mention, with an italicized term, of stagflation in the 1970s, moved from
Chapter 34 in the previous edition.
xxviii Detailed Content Changes

Chapter 34: Financial Crisis

• Shortened the From Another Angle Do investors rationally inflate bubbles? box and retitled it
Timing is everything.
• Added a new paragraph about the effects of declining house prices during the housing
bubble.
• Revised Figure 34-4 to show total debt service as a percent of income for U.S. consumers;
demonstrates the effect of low interest rates on debt service.
• Retitled the Economics in Action Japan’s lost decade box as The walking dead.

Chapter 35: Open-Market Macroeconomics

• Added a new discussion (text plus new Figure 35-4) showing U.S. exports and imports of
services.
• Under the “Foreign investment” heading, added new subheads “Foreign direct investment,”
“Foreign portfolio investment,” and “Net capital flow” for smaller chunks and better student
understanding.
• Added an equation that shows total expenditure in an economy and reworked the intuition
surrounding the balance of payments calculation, for greater clarity.
• Deleted the Real Life Iceland and the banking crisis box.
• In the “Exchange Rates” section, added a new Economics in Action box The almighty
­dollar that features research by Gita Gopinath that discusses the predominance of the
U.S. dollar, describes costs for other countries, and explores possible alternative currencies.
• Under the subheading “Another example: A rising interest rate,” expanded the explanation of
the effects of tighter U.S. monetary policy.
• Under the subheading “Is the Chinese currency undervalued?” revised the text discussion
about China’s floating renminbi and the effect on trade balances.
• Moved from online only into the print product the From Another Angle box Cooling down
hot money about the possible application of a small tax to all foreign-capital transactions
(e.g., the Tobin tax or the Spahn tax).

Chapter 36: Development Economics

• In the chapter-opening introduction, added a short paragraph about the authors’ interest in
development economics.
• Revised the What Do You Think? Utility versus capabilities box to focus less on utility and
more on capability (work of Amartya Sen).
• Revised the From Another Angle Trillion-dollar bills on the sidewalk? box, retitled as
Is ­immigration the answer?
• Updated (and shortened) the What Do You Think? Should the U.S. give more in foreign aid?
box.
• Updated the discussion of the U.N. Millennium Development Goals—now known as
­Sustainable Development Goals.
• Replaced the From Another Angle In Zambia, did the Steelers win Super Bowl XLV? box with
a new Econ and YOU Buy a shoe, give a shoe box about TOMS (shoes) goods-in-kind giving
program.
• Added a new From Another Angle Cash, no strings attached box about GiveDirectly, an
­organization built around the idea that the best way to give aid is to give cash.

Guide to Data Sources

• Made updates to sources and revised accompanying questions, for currency.
 acknowledgments
Many people helped us create this text. It’s said that “it takes a village,” but it often felt like we had
the benefit of an entire town.
We thank Meredith Startz, Ted Barnett, and Andrew Wright for the foundational work they
contributed to the first edition, which still shines through in this edition. Thanks, too, to ­Victor
Matheson (College of the Holy Cross), Diana Beck (New York University), Amanda Freeman
(Kansas State University), and John Kane (SUNY--Oswego) for their contributions to and
thoughts about early drafts of chapters.
An energetic group of collaborators helped us shape second-edition content in ways that are
relevant and engaging for a student audience: David “Dukes” Love (Williams College) steered
us through the writing of the macro chapters, helping us revamp our treatment of the aggre-
gate expenditure model and how it leads into the aggregate demand and aggregate supply model.
Erin Moody (University of Maryland) applied her extensive classroom experience as an essential
contributor throughout the micro chapters, ensuring that we addressed the many suggestions we
received from users and reviewers of our text. Camille Soltau Nelson (Oregon State University)
analyzed Chapter 18, “Externalities,” and made immeasurable improvements. Our IPA team of
researchers, Radhika Lokur and Noor Sethi, brought a recent-student perspective to the text and
helped us update many of our examples and figures with the most current data.
Many other talented individuals have contributed to previous editions. We thank Bob Schwab,
Kevin Stanley, Ross vanWassenhove, and James Peyton for closely reviewing a draft of our revised
Chapter 18 and helping guide us toward a final version. We thank John Neri and Murat Doral for
providing detailed feedback on all the macro chapters of the text. We appreciate Jodi Begg’s help
in providing a base to work from for Chapter 28, “Aggregate Expenditure.” We thank Chiuping
Chen, Ashley Hodgson, Michael Machiorlatti, and Germain Pichop for reviewing said chapter in
its draft stages to ensure we were on the right track.
We thank Peggy Dalton (Frostburg State University) and Erin Moody (University of Maryland)
for their many and varied contributions to end-of-chapter and test bank content, both in the text and
in Connect. We are very appreciative of the extensive work done by Katrina Babb (Indiana State
University) and Susan Bell (Seminole State College) in accuracy-checking this content. In addition,
we thank Greg Gilpin (Montana State University) for authoring the PowerPoint Presentation and
Russell Kellogg (University of Colorado Denver) for authoring the LearnSmart content.
Ted Barnett played an essential role in this edition, helping us introduce new material and new
ways of describing economic ideas. We are grateful for his creativity and knowledge of pedagogy and
economics. He also made improvements to the test bank content. We thank Dick Startz for sharing
his insights about new approaches in macroeconomics and for his feedback. Fatima Khan led the
efforts to update the data and figures throughout the text.
We also want to share our appreciation to the following people at McGraw-Hill for the hard work
they put into creating the product you see before you: Anke Weekes, Portfolio Director, helped us
communicate the overarching vision and promoted our revision. Bobby Pearson, Marketing Man-
ager, guided us in visiting schools and working with the sales team. Ann Torbert, Content Developer,
has been an exemplary editor, improving the exposition on each page and keeping attention on
both the big picture and key details. We feel lucky to have had her partnership on all three editions.
­Christina Kouvelis, Senior Product Developer, managed innumerable and indispensable details—
reviews, manuscript, and the many aspects of the digital products and overall package. Kathryn
Wright, Senior Core Content Project Manager, helped turn our manuscript into the finished, pol-
ished product you see before you. Keri Johnson, Senior Assessment Content Project Manager, skill-
fully guided the digital plan. Thanks, too, to Douglas Ruby, Senior Director of Digital Content, for
his careful shepherding of the digital materials that accompany the text.
xxix
xxx Acknowledgments

Thank You!
Creating the third edition of a book is a daunting task. We wanted to do everything we could to
improve upon the previous editions, and we couldn’t have done this without professors who told
us honestly what they thought we could do better. To everyone who helped shape this edition, we
thank you for sharing your insights and recommendations.

Symposia Eric Nielsen Nara Mijid

Saint Louis Community College Central Connecticut State University
Luca Bossi
University of Pennsylvania Rich Numrich Shahruz Mohtadi
College of Southern Nevada Suffolk University
Regina Cassady
Valencia College Michael Polcen Victor Moussoki
Northern Virginia Community College Lone Star College
June Charles
North Lake College Martin Sabo Kevin Nguyen
Community College of Denver Lone Star College
Monica Cherry
St. John Fisher College and State University Latisha Settlage Jan Palmer
of New York at Buffalo University of Arkansas–Fort Smith Ohio University
George Chikhladze Mark Showalter Julia Paxton
University of Missouri–Columbia Brigham Young University Ohio University
Patrick Crowley Warren Smith Tracy Regan
Texas A&M University–Corpus Christi Palm Beach State College Boston College
Attila Cseh Kay Strong Christina Robinson
Valdosta State University Baldwin Wallace University Central Connecticut State University
Susan Doty Ryan Umbeck Rosemary Rossiter
University of Texas at Tyler Ivy Tech Community College Ohio University
Irene Foster Ross vanWassenhove Sara Saderion
George Washington University University of Houston Houston Community College
Don Holley Terry Von Ende
Texas Tech University
Boise State University Reviews
Ricot Jean Jennifer Wissink
Steve Abid
Valencia College Cornell University
Grand Rapids Community College
Sarah Jenyk Eric Abrams
Youngstown State University Focus Groups McKendree University
Stephanie Jozefowicz Siddiq Abdullah Richard Ugunzi Agesa
Indiana University of Pennsylvania University of Massachusetts–Boston Marshall University
Nkongolo Kalala Seemi Ahmad Seemi Ahmad
Bluegrass Community and Technical College Dutchess Community College Dutchess Community College
Carrie Kerekes Nurul Aman Jason A. Aimone
Florida Gulf Coast University University of Massachusetts–Boston Baylor University
Brandon Koford Aimee Chin Donald L. Alexander
Weber State University University of Houston Western Michigan University
Soloman Kone Can Erbil Ricky Ascher
City University of New York Boston College Broward College and Palm Beach State College
W. J. Lane Varun Gupta Shannon Aucoin
University of New Orleans Wharton County Junior College University of Louisiana at Lafayette
Jose Lopez-Calleja Moon Han Gyanendra Baral
Miami Dade College North Shore Community College Oklahoma City Community College
Erika Martinez Hilaire Jean-Gilles Klaus Becker
University of South Florida–Tampa Bunker Hill Community College Texas Tech University
Geri Mason Jennifer Lehman Pedro Bento
Seattle Pacific University Wharton County Junior College West Virginia University
ABM Nasir Mikko Manner, Jennifer Bossard
North Carolina Central University Dutchess Community College Doane College
 Acknowledgments xxxi

Kristen Broady Allison Kaminaga Per Norander

Fort Valley State University Bryant University University of North Carolina–Charlotte
Gregory Brock Mina Kamouie Ronald Oertel
Georgia Southern University Ohio University Western Washington University
Giuliana Andreopoulos Campanelli Russell Kellogg Constantin Ogloblin
William Paterson University University of Colorado Denver Georgia Southern University
Paul Chambers Melissa Knox Alex Olbrecht
University of Central Missouri University of Washington Ramapo College of New Jersey
Sewin Chan Benjamin Kwitek Beau Olen
New York University Pueblo Community College Oregon State University
Joni Charles Greg Lindeblom Tomi Ovaska
Texas State University Broward College Youngstown State University
Jan Palmer
Chiuping Chen Michael Machiorlatti
Ohio University
American River College Oklahoma City Community College
Julia Paxton
Tom Creahan Rita Madarassy
Ohio University
Morehead State University Santa Clara University
James Peyton
Nicholas Dadzie Edouard Mafoua
Highline College
Bowling Green State University State University of New York at Canton
Germain Pichop
Can Dogan C. Lucy Malakar Oklahoma City Community College
North American University Lorain County Community College
Brennan Platt
Brandon Dupont Geri Mason Brigham Young University
Western Washington University Seattle Pacific University
Elizabeth Porter
Matthew J. Easton Katherine McClain University of North Carolina–Asheville
Pueblo Community College University of Georgia Mathew Price
Jennifer Elias Bruce McClung Oklahoma City Community College
Radford University Texas State University Christina Robinson
Linda K. English Robin McCutcheon Central Connecticut State University
Baylor University Marshall University Matthew Roelofs
Irene R. Foster Tia M. McDonald Western Washington University
George Washington University Ohio University Randall R. Rojas
Alka Gandhi William McLean University of California–Los Angeles
Northern Virginia Community College Oklahoma State University John Rykowski
Soma Ghosh Jennifer Meredith Kalamazoo Valley Community College
Albright College Seattle Pacific University Robert M. Schwab
Gregory Gilpin John Min University of Maryland
Montana State University Northern Virginia Community College Gasper Sekelj
Lisa Workman Gloege Sam Mirmirani Clarkson University
Grand Rapids Community College Bryant University James K. Self
Cynthia Harter Ida A. Mirzaie Indiana University
Eastern Kentucky University Ohio State University Michael Scott
Darcy Hartman Franklin G. Mixon Jr. Pueblo Community College
Ohio State University Columbus State University Mark Showalter
Ashley Hodgson Erin Moody Brigham Young University
St. Olaf College University of Maryland Kevin Stanley
Don Holley Barbara Moore Highline College
Boise State University University of Central Florida Steve Trost
Yuri Hupka Christopher Mushrush Virginia Polytechnic Institute and State
Oklahoma State University Illinois State University University
Harvey James Charles Myrick Ross S. vanWassenhove
University of Missouri Oklahoma City Community College University of Houston
Sarah Jenyk Camille Nelson Allison Witman
Youngstown State University Oregon State University University of North Carolina-Wilimington
xxxii Acknowledgments

In addition, we continue to be grateful to the first-edition contributors, who over the course
of several years of development attended focus groups or symposia or provided content reviews.
Thanks to the following, whose insights, recommendations, and feedback helped immeasurably as
the project took shape.

Mark Abajian Ken Brown Harry Ellis

San Diego Mesa College University of Northern Iowa University of North Texas
Tom Adamson Laura Bucila Maxwell Eseonu
Midland University Texas Christian University Virginia State University
Richard Agesa Andrew Cassey Brent Evans
Marshall University Washington State University Mississippi State University
Rashid Al-Hmoud Kalyan Chakraborty Russell Evans
Texas Tech University Emporia State University Oklahoma State University
Frank Albritton Catherine Chambers Fidelis Ezeala-Harrison
Seminole State College-Sanford University of Central Missouri Jackson State University
Terence Alexander Chris Fant
Britton Chapman
Iowa State University Spartanburg Community College
State College of Florida–Manatee
Clifford Althoff Michael Fenick
Sanjukta Chaudhuri
Joliet Junior College Broward College
University of Wisconsin–Eau Claire
Diane Anstine Abdollah Ferdowsi
Chiuping Chen
North Central College Ferris State University
American River College
Michael Applegate Tawni Ferrarini
Ron Cheung
Oklahoma State University–Stillwater Campus Northern Michigan University
Oberlin College
Ali Ataiifar Herbert Flaig
Young Back Choi
Delaware County Community College Milwaukee Area Technical College
Saint John’s University
Roberto Ayala Irene Foster
Dmitriy Chulkov George Washington University
California State Polytechnic Indiana University–Kokomo
University–Pomona Joseph Franklin
Cindy Clement Newberry College
Jim Barbour University of Maryland–College Park
Elon University Shelby Frost
Howard Cochran Georgia State University
Gary Benson Belmont University
Southwest Community College Fran Lara Garib
Jim Cox San Jacinto College
Laura Jean Bhadra Georgia Perimeter College
Northern Virginia Community Deborah Gaspard
College–Manassas Matt Critcher Southeast Community College
University of Arkansas Community Karen Gebhardt
Prasun Bhattacharjee
College–Batesville Colorado State University
East Tennessee State University–Johnson
City Chifeng Dai Juan Alejandro Gelves
Southern Illinois University–Carbondale Midwestern State University
Radha Bhattacharya
California State University–Fullerton Thomas Davidson Kirk Gifford
Principia College Brigham Young University–Idaho
Michael Bonnal
University of Tennessee–Chattanooga Rafael Donoso Otis Gilley
Camelia Bouzerdan Lone State College–North Harris Louisiana Technical University
Middlesex Community College Floyd Duncan Gregory Gilpin
Dale Bremmer Virginia Military Institute Montana State University–Bozeman
Rose-Hulman Institute of Technology David Eaton Bill (Wayne) Goffe
Anne Bresnock Murray State University State University of New York–Oswego
University of California–Los Angeles Eric Eide Michael Gootzeit
Bruce Brown Brigham Young University–Provo University of Memphis
California State Polytechnic Marwan El Nasser George Greenlee
University–Pomona State University of New York–Fredonia St. Petersburg College
 Acknowledgments xxxiii

Galina Hale Richard Le Thaddaeus Mounkurai

Federal Reserve Bank of San Francisco Cosumnes River College Daytona State College–Daytona Beach
Oskar Harmon Jim Lee Chris Mushrush
University of Connecticut–Stamford Texas A&M University–Corpus Christi Illinois State University
David Hedrick Willis Lewis Muhammad Mustafa
Central Washington University–Ellensburg Winthrop University South Carolina State University
Dennis Heiner Qing Li Tony Mutsune
College of Southern Idaho College of the Mainland Iowa Wesleyan College
Andrew Helms Tin-Chun Lin Max Grunbaum Nagiel
Washington College Indiana University Northwest–Gary Daytona State College–Daytona Beach
David Hickman Delwin Long John Nordstrom
Frederick Community College San Jacinto College College of Western Idaho
Ashley Hodgson Katie Lotz Emlyn Norman
Saint Olaf College Lake Land College Texas Southern University
Vanessa Holmes Karla Lynch Christian Nsiah
Pennsylvania State University–Scranton North Central Texas College Black Hills State University
Scott Houser Arindam Mandal Jan Ojdana
Colorado School of Mines Siena College University of Cincinnati
Gregrey Hunter Daniel Marburger Ronald O’Neal
California Polytechnic University–Pomona Arkansas State University–Jonesboro Camden County College
Kyle Hurst Geri Mason Serkan Ozbeklik
University of Colorado–Denver Seattle Pacific University Claremont McKenna College
Jonathan Ikoba Victor Matheson Debashis Pal
Scott Community College College of the Holy Cross University of Cincinnati–Cincinnati
Onur Ince Bryan McCannon
Robert Pennington
Appalachian State University Saint Bonaventure University
University of Central Florida–Orlando
Dennis Jansen Michael McIlhon
Andrew Perumal
Texas A&M University Century Community and Technical College
University of Massachusetts–Boston
Shuyi Jiang Hannah McKinney
Steven Peterson
Emmanuel College Kalamazoo College
University of Idaho
Barbara Heroy John Al Mickens
Brennan Platt
University of Dayton State University of New York–Old
Brigham Young University
James Johnson Westbury
University of Arkansas Community Nara Mijid Sanela Porca
College–Batesville Central Connecticut State University University of South Carolina–Aiken
Mahbubul Kabir Martin Milkman Gregory Pratt
Lyon College Murray State University Mesa Community College
Ahmad Kader Douglas Miller William Prosser
University of Nevada–Las Vegas University of Missouri–Columbia Cayuga Community College
John Kane Gregory Miller Gregory Randolph
State University of New York–Oswego Wallace Community College–Selma Southern New Hampshire University
Tsvetanka Karagyozova Edward Millner Mitchell Redlo
Lawrence University Virginia Commonwealth University Monroe Community College
Joel Kazy Mitch Mitchell Timothy Reynolds
State Fair Community College Bladen Community College Alvin Community College
Daniel Kuester Daniel Morvey Michael Rolleigh
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Gary Langer Rebecca Moryl Amanda Ross
Roosevelt University Emmanuel College West Virginia University–Morgantown
Daniel Lawson Tina Mosleh Jason Rudbeck
Oakland Community College Ohlone College University of Georgia
xxxiv Acknowledgments

Michael Ryan Brad Stamm Jeffery Vicek

Gainesville State College Cornerstone University Parkland College
Robert Rycroft Karl Strauss Jennifer Vincent
University of Mary Washington Saint Bonaventure University Champlain College
Michael Salemi Chuck Stull Terry von Ende
University of North Carolina–Chapel Hill Kalamazoo College Texas Tech University
Gregory Saltzman Abdulhamid Sukar Craig Walker
Albion College Cameron University Oklahoma Baptist University
Ravi Samitamana Albert Sumell Jennifer Ward-Batts
Daytona State College Youngstown State University Wayne State University
Saied Sarkarat Philip Isak Szmedra Tarteashia Williams
West Virginia University–Parkersburg Georgia Southwestern State University Valencia College–West Campus
Naveen Sarna Melissa Wiseman
Christine Tarasevich
Northern Virginia Community Houston Baptist University
Del Mar College
College–Alexandria Jim Wollscheid
Noreen Templin
Jesse Schwartz University of Arkansas–Fort Smith
Butler Community College
Kennesaw State University Jeff Woods
Darryl Thorne
Abdelkhalik Shabayek University of Indianapolis
Valencia College East
Lane College Ranita Wyatt
Mark Showalter Kiril Tochkov Pasco-Hernando Community College–West
Brigham Young University Texas Christian University Campus
Cheri Sides Demetri Tsanacas Suthathip Yaisawarng
Lane College Ferrum College Union College
Megan Silbert George Tvelia Jim Yates
Salem College Suffolk County Community College Darton College
Sovathana Sokhom Nora Underwood Daehyun Yoo
Loyola Marymount University University of Central Florida Elon University
Souren Soumbatiants Jose Vazquez Ceren Ertan Yoruk
Franklin University University of Illinois–Champaign Sage College of Albany
Marilyn Spencer Marieta Velikova Chuck Zalonka
Texas A&M University–Corpus Christi Belmont University Oklahoma State University–Oklahoma City

Finally, thanks to the following instructors, and their students, who class-tested chapters of the
first edition before publication. Their engagement with the content and their feedback from the
“test drive” made this a better product.

Richard Agesa John Kane Kolleen Rask

Marshall University State University of New York–Oswego College of the Holy Cross
Anne Bresnock Jim Lee Jesse Schwartz
University of California–Los Angeles Texas A&M University–Corpus Christi Kennesaw State University
Chiuping Chen Martin Milkman Jennifer Vincent
American River College Murray State University Champlain College
 detailed contents
Part 1 Part 2
The Power of Economics 1 Supply and Demand 47
Chapter 1 Chapter 3
Economics and Life 3 Markets 49
Making an Impact with Small Loans 3 Mobiles Go Global 49
The Basic Insights of Economics 4 Markets 50
Scarcity 5 What is a market? 50
Opportunity cost and marginal decision making 6 What is a competitive market? 50
Incentives 9 Demand 52
Efficiency 10 The demand curve 53
An Economist’s Problem-Solving Toolbox 12 Determinants of demand 53
Correlation and causation 13 Shifts in the demand curve 57
Models 15 Supply 59
Positive and normative analysis 17 The supply curve 60
Conclusion 19 Determinants of supply 60
Shifts in the supply curve 62
Chapter 2
Market Equilibrium 63
Specialization and Exchange 25
Reaching equilibrium 64
The Origins of a T-Shirt 25 Changes in equilibrium 65
Production Possibilities 27 Conclusion 72
Drawing the production possibilities frontier 27
APPENDIX B Math Essentials:
Choosing among production possibilities 30
Working with Linear Equations 78A
Shifting the production possibilities frontier 31
Interpreting the Equation of a Line 78A
Absolute and Comparative Advantage 33
Turning a graph into an equation 78B
Absolute advantage 33
Turning an equation into a graph 78B
Comparative advantage 33
Equations with x and y reversed 78D
Why Trade? 35
Shifts and Pivots 78E
Specialization 35
Solving for Equilibrium 78H
Gains from trade 37
Comparative advantage over time 40 Chapter 4
Conclusion 42 Elasticity 79
APPENDIX A Math Essentials: Understanding Coffee Becomes Chic 79
Graphs and Slope 46A What Is Elasticity? 80
Creating a Graph 46A Price Elasticity of Demand 81
Graphs of one variable 46A Calculating price elasticity of demand 81
Graphs of two variables 46C Determinants of price elasticity of demand 84
Slope 46F Using price elasticity of demand 85
Calculating slope 46G Price Elasticity of Supply 92
The direction of a slope 46H Calculating price elasticity of supply 92
The steepness of a slope 46I Determinants of price elasticity of supply 93
xxxv
xxxvi Detailed Contents

Other Elasticities 94
Cross-price elasticity of demand 94
Part 3
Income elasticity of demand 95 Individual Decisions 163
Conclusion 98 Chapter 7
Consumer Behavior 165
APPENDIX C Math Essentials: Calculating
Percentage Change, Slope, and Elasticity 102A The Season for Giving 165
Percentage Change 102A The Basic Idea of Utility 166
Slope and Elasticity 102B Utility and decision making 167
X over Y, or Y over X? 102D Revealed preference 168
Elasticity changes along lines with constant slope 102D Utility functions 169
Chapter 5 Marginal Utility 170
Efficiency 103 Maximizing utility within constraints 172
Responding to Changes in Income and Prices 175
A Broken Laser Pointer Starts an Internet Revolution 103
Changes in income 175
Willingness to Pay and Sell 104 Changes in prices 177
Willingness to pay and the demand curve 105 Utility and Society 180
Willingness to sell and the supply curve 107 Utility and status 180
Measuring Surplus 109 Utility and altruism 182
Consumer surplus 110 Utility and reciprocity 183
Producer surplus 112 Conclusion 184
Total surplus 113
Using Surplus to Compare Alternatives 115 APPENDIX E Using Indifference Curves 188A
Market equilibrium and efficiency 115 Representing Preferences Graphically 188A
Changing the distribution of total surplus 117 Consumption bundles and indifference curves 188A
Deadweight loss 118 Properties of indifference curves 188C
Missing markets 119 Perfect substitutes and perfect complements 188D
Conclusion 121 Understanding Consumer Choice 188E
Equalizing the marginal utility of the last purchase 188E
APPENDIX D Math Essentials: The Area under a
Finding the highest indifference curve 188G
Linear Curve 128A
How Consumers Respond to Change 188H
The Area under a Linear Curve 128A
Responding to a change in income 188I
Chapter 6 Responding to a change in prices 188I
Government Intervention 129 Deriving the demand curve using indifference curves 188K
Feeding the World, One Price Control at a Time 129 Conclusion 188L

Why Intervene? 130 Chapter 8

Three reasons to intervene 130 Behavioral Economics:
Four real-world interventions 131 A Closer Look at Decision Making 189
Price Controls 132
Price ceilings 132 When Is $20 Not Quite $20? 189
Price floors 136 Dealing with Temptation and Procrastination 191
Taxes and Subsidies 139 Time inconsistency, competing selves, and commitment 191
Taxes 140 Thinking Irrationally about Costs 194
Subsidies 146 The sunk-cost fallacy 194
Evaluating Government Interventions 150 Undervaluing opportunity costs 195
How big is the effect of a tax or subsidy? 151 Forgetting about Fungibility 196
Short-run versus long-run impact 153 Creating mental categories for money 196
Conclusion 156 Conclusion 199
 Detailed Contents xxxvii

Chapter 9 Expected value 252

Game Theory and Strategic Thinking 203 Propensity for risk 253
Insurance and Managing Risk 254
Litterbugs Beware 203
The market for insurance 254
Games and Strategic Behavior 204 Pooling and diversifying risk 254
Rules, strategies, and payoffs 205 Problems with insurance 258
One-Time Games and the Prisoners’ Dilemma 205 Conclusion 260
Prisoners’ dilemma 205
APPENDIX F Math Essentials:
Finding the dominant strategy 207
Compounding 264A
Reaching equilibrium 208
Compounding and Future Value 264A
Avoiding competition through commitment 209
The rule of 70 264C
Promoting competition in the public interest 210
Repeated Play in the Prisoners’ Dilemma 212
The tit-for-tat strategy 212 Part 4
Sequential Games 214 Firm Decisions 265
Think forward, work backward 215 Chapter 12
Deterring market entry: A sequential game 215 The Costs of Production 267
First-mover advantage in sequential games 218
What Are You Paying for in That Prescription? 267
Repeated sequential games 218
The Building Blocks of Business: Revenues,
Commitment in sequential games 219
Costs, and Profits 268
Conclusion 221
Profit is revenue minus costs 269
Chapter 10 Fixed and variable costs 269
Information 229 Explicit and implicit costs 271
Economic and accounting profit 272
A Solution for Student Loans? 229
Production Functions 274
Information: Knowledge Is Power 230 Marginal product 274
Information asymmetry 231 Cost Curves 277
Adverse selection and the lemons problem 231 Total, average, and marginal costs 277
Principal–agent problems and moral hazard 233 Production in the Short Run and the Long Run 283
Moral hazard and adverse selection—avoiding confusion 234 Costs in the long run 283
Solving Information Problems 235 Economies and diseconomies of scale 283
Screening 235 Conclusion 287
Signaling 236 Chapter 13
Reputation 237
Perfect Competition 293
Statistical discrimination 237
Trainside Variety 293
Regulation and education 239
Conclusion 241 A Competitive Market 294
Characteristics of a competitive market 294
Chapter 11 Revenues in a perfectly competitive market 298
Time and Uncertainty 245 Profits and Production Decisions 300
Deciding how much to produce 300
Is College Worth It? 245
Deciding when to operate 303
Value over Time 246 Behind the Supply Curve 307
Timing matters 246 Short-run supply 307
Interest rates 247 Long-run supply 308
Compounding 248 Why the long-run market supply curve shouldn’t slope upward,
Present value 249 but does 313
Risk and Uncertainty 251 Responding to shifts in demand 315
What is risk? 251 Conclusion 316
xxxviii Detailed Contents

Chapter 14 Land and Capital 401

Monopoly 323 Capitalists: Who are they? 401
Markets for land and capital 401
Diamonds Weren’t Always Forever 323
The factor distribution of income 403
Why Do Monopolies Exist? 324 Real-World Labor Markets 405
Barriers to entry 325 Minimum wages and efficiency wages 405
How Monopolies Work 327 Company towns, unions, and labor laws 407
Monopolists and the demand curve 327 Changing demographics 409
Monopoly revenue 329 Conclusion 411
Problems with Monopoly and Public Policy Solutions 333
Chapter 17
The welfare costs of monopoly 334
Public policy responses 336
International Trade 419
Market Power and Price Discrimination 341 A New Meaning to “Made in the USA” 419
What is price discrimination? 341 Why Trade? A Review 420
Conclusion 346 Comparative advantage 420
Chapter 15 Gains from trade 421
Monopolistic Competition and The roots of comparative advantage 422
Oligopoly 353 Incomplete specialization 424
From Autarky to Free Trade 425
Which One of These Is Just Like the Others? 353 Becoming a net-importer 426
What Sort of Market? 354 Becoming a net-exporter 428
Oligopoly and monopolistic competition 355 Big economy, small economy 430
Monopolistic Competition 356 Restrictions on Trade 433
Monopolistic competition in the short run 357 Why restrict trade? 433
Monopolistic competition in the long run 358 Tariffs 433
The welfare costs of monopolistic competition 361 Quotas 435
Product differentiation, advertising, and branding 362 Trade Agreements 437
Oligopoly 367 International labor and capital 437
Oligopolies in competition 368 The WTO and trade mediation 438
Compete or collude? Using game theory to analyze Labor and environmental standards 439
oligopolies 371 Embargoes: Trade as foreign policy 441
Oligopoly and public policy 374 Conclusion 442
Conclusion 376
Chapter 16
The Factors of Production 383
Part 5
Public Economics 449
The Fields of California 383
Chapter 18
The Factors of Production: Land, Labor, and Capital 384 Externalities 451
Derived demand 385
The Costs of Car Culture 451
Marginal productivity 385
Picking the right combination of inputs 385 What Are Externalities? 452
Labor Markets and Wages 386 External costs and benefits 453
Demand for labor 387 Negative externalities and the problem of “too much” 455
Supply of labor 389 Positive externalities and the problem of “too little” 457
Reaching equilibrium 393 Private Solutions to Externalities 459
Shifts in labor supply and labor demand 394 Public Solutions to Externalities 463
What’s missing? Human capital 399 Taxes and subsidies 464
 Detailed Contents xxxix

Other policy options: Quotas and tradable allowances 467 Policies to Reduce Poverty and Inequality 543
Targeting externalities with public policy 469 Public policy goals 543
Conclusion 469 The welfare state 545
Trade-offs between equity and efficiency 548
Chapter 19
Discrimination 549
Public Goods and Common Resources 477 Measuring discrimination in the labor market 550
A New Tragedy of the Commons 477 Do free markets reduce discrimination? 552
Characteristics of Goods 478 Long-term effects of discrimination 552
Excludable goods 479 Conclusion 554
Rival-in-consumption goods 479 Chapter 22
Four categories of goods 480 Political Choices 563
Public Goods 481
Global Warming Hot Potato 563
The free-rider problem 481
Solutions to the free-rider problem 484 The Economics of Elections 564
Common Resources 486 Stick to the middle: Median-voter theorem 565
The tragedy of the commons 486 The elusive perfect voting system 567
Solutions to the tragedy of the commons 487 Political participation and the myth of the “rational voter” 572
Conclusion 492 The Economics of Policy-Making 574
Diffuse costs, concentrated benefits 574
Chapter 20 Corruption and rent-seeking 576
Taxation and the Public Budget 497 The system matters: How political structure
affects outcomes 577
Happy to Pay Taxes? 497
Conclusion 579
Why Tax? 498
Principles of Taxation 500 Chapter 23
Efficiency: How much (extra) will the tax cost? 500 Public Policy and Choice Architecture 585
Revenue: How much money will the tax raise? 503 Saving more for Tomorrow 585
Incidence: Who ultimately pays the tax? 505
Choice Architecture and Nudges 587
A Taxonomy of Taxes 508
Why nudge? 587
Personal income tax 508
Mistakes people make 590
Capital gains tax 511
Tools of Choice Architecture 592
Payroll tax 511
Commitment devices 592
Corporate income tax 512
Information campaigns and disclosure rules 593
Other taxes 512
Default rules 595
The Public Budget 514
Framing choices 597
Balancing the budget 516
Conclusion 598
Conclusion 519

Chapter 21 Part 6
Poverty, Inequality, and Discrimination 525
The Data of Macroeconomics 603
Striking It Richer 525
Chapter 24
Poverty 526
Measuring GDP 605
Measuring poverty 527
Why are people poor? 533 It’s More than Counting Peanuts 605
Inequality 536 Valuing an Economy 606
Measuring inequality 536 Unpacking the definition of GDP 607
Income inequality versus income mobility 542 Production equals expenditure equals income 609
xl Detailed Contents

Approaches to Measuring GDP 610 Cyclical unemployment 676

The expenditure approach 610 Public Policies and Other Influences on
The income approach 613 Unemployment 678
The “value-added” approach 615 Factors that may stop wage rates from falling 679
Using GDP to Compare Economies 616 Unemployment insurance 683
Real versus nominal GDP 616 Other factors 683
The GDP deflator 618 Conclusion 684
Using GDP to assess economic health 619 Chapter 27
Limitations of GDP Measures 623 Economic Growth 689
GDP vs. well-being 624
Data challenges 625 Why Economic Growth Matters 689
Conclusion 629 Economic Growth through the Ages 690
History of world growth 690
Chapter 25
Compounding and the rule of 70 692
The Cost of Living 637
Determinants of Productivity 694
Thank You for Not Smoking 637 Productivity drives growth 694
The Cost of Living 638 Components of productivity 695
Measuring Price Changes over Time 639 Rates versus levels 697
The market basket 640 Accounting for growth 698
Consumer Price Index (CPI) 641 Convergence 700
The challenges in measuring price changes 642 Growth and Public Policy 701
Using Price Indexes 645 Investment and savings 702
The inflation rate 645 Public policy 703
Deflating nominal variables 647 The juggling act 706
Adjusting for inflation: Indexing 649 Conclusion 708
Accounting for Price Differences across Places 652
Purchasing power parity 652 Part 8
Purchasing power indexes 653
The Economy in the Short and
PPP-adjustment 654
Conclusion 656
Long Run 713
Chapter 28
Aggregate Expenditure 715
Part 7 The Big Crash 715
Labor Markets and Economic The Components of Aggregate Expenditure 716
Growth 663 Consumption (C) 717
Chapter 26 Investment (I) 719
Unemployment and Government spending (G) 720
the Labor Market 665 Net exports (NX) 721
A summary of the determinants of aggregate
What Does It Mean to Be Unemployed? 665
expenditure 723
Defining and Measuring Unemployment 666 Aggregate Expenditure Equilibrium and the Keynesian
Measuring unemployment 667 Equilibrium 723
Beyond the unemployment rate 671 Actual versus planned aggregate expenditure 723
Where do the data come from? 672 Keynesian equilibrium 726
Equilibrium in the Labor Market 672 Output gaps 729
Categories of Unemployment 675 The multiplier effect 730
Natural rate of unemployment 675 Conclusion 733
 Detailed Contents xli

APPENDIX G Math Essentials: Algebra and

Aggregate Expenditure 738A
Part 9
Using Algebra to Find Equilibrium Aggregate Expenditure 738A The Financial System and
Using algebra to derive the expenditure multiplier 738B Institutions 797
Chapter 29 Chapter 31
Aggregate Demand and Aggregate Supply 739 The Basics of Finance 799
Henry Lehman and His Brothers 799
“Pop!” Goes the Bubble 739

Building a Model of the Economy 740 The Role of Financial Markets 800
What is a financial market? 801
Aggregate Demand 741
Information asymmetries and financial markets 801
The aggregate demand curve 741
Functions of banks and financial markets 802
Shifting the aggregate demand curve 743
Stimulus spending or tax cut? 746 The Market for Loanable Funds: A Simplified Financial
Market 804
Aggregate Supply 749
Savings, investment, and the price of loanable funds 804
The difference between short-run and long-run aggregate
supply 749 Changes in the supply and demand for loanable
funds 806
Shifts in the short-run aggregate supply curve 753
A price for every borrower: A more realistic look at interest
Shifts in the long-run aggregate supply curve 753
rates 810
Economic Fluctuations 756 The Modern Financial System 811
Effects of a shift in aggregate demand 756
Functions of the financial system 812
Effects of a shift in aggregate supply 759
Major financial assets 813
Comparing demand and supply shocks 761
Major players in the financial system 815
The Role of Public Policy 764 Valuing Assets 819
Government spending to counter
The trade-off between risk and return 819
negative demand shocks 765
Predicting returns: The efficient-market hypothesis 821
Government spending to counter
negative supply shocks 766 Bubbles 823

Conclusion 767 A National Accounts Approach to Finance 824

The savings-investment identity 824
Chapter 30 Private savings, public savings, and capital flows 825
Fiscal Policy 773 Conclusion 827
From Housing Bubble to Great Recession 773
Chapter 32
Fiscal Policy 774 Money and the Monetary System 835
Fiscal policy and aggregate demand 774
Cigarette Money 835
Policy response to short-run economic fluctuations 775
Real-world challenges 778 What Is Money? 836
Policy tools—discretionary and automatic 781 Functions of money 836
Limits of fiscal policy: The money must come from What makes for good money? 837
somewhere 782 Commodity-backed money versus fiat money 840
The Government Budget 784 Banks and the Money-Creation Process 841
Revenue and spending 784 “Creating” money 841
The U.S. budget deficit 784 Measuring money 846
The Public Debt 786 Managing the Money Supply:
Size of the debt 787 The Federal Reserve 848
How does the government go into debt? 788 The role of the central bank 848
Is government debt good or bad? 789 How does the Federal Reserve work? 850
Conclusion 790 Tools of monetary policy 851
xlii Detailed Contents

The Economic Effects of Monetary Policy 854 International Flows of Goods and Capital 926
Interest rates and monetary policy: Imports and exports 926
The liquidity-preference model 854 Foreign investment 929
Interest rates and the economy 856 Balance of payments 931
Conclusion 860 International Capital Flows 933
Chapter 33 Determinants of international capital flows 933
Inflation 867 Effects of foreign investment 934
Can a country save too much? 936
A Land of Opportunity . . . and Inflation 867 Exchange Rates 938
Changing Price Levels 868 The foreign-exchange market 938
Measuring inflation 868 A model of the exchange-rate market 942
The neutrality of money 870 Exchange-rate regimes 945
The classical theory of inflation 870 Macroeconomic policy and exchange rates 949
The quantity theory of money 872 The real exchange rate 951
Other causes of changing price levels 874 Global Financial Crises 952
Why Do We Care about Changing Price Levels? 876 The role of the IMF 952
Inflation 876 Debt crises 953
Deflation 879 Exchange-rate crises 953
Controlling inflation, or not: Disinflation and hyperinflation 881 Conclusion 956
Why a little inflation is good 883
Chapter 36
Inflation and Monetary Policy 884
Development Economics 963
The competing goals of the dual mandate 884
Inflation and unemployment 886 Poverty amid Plenty 963
Conclusion 892 Development and Capabilities 964
Chapter 34 The capabilities approach 964
Financial Crisis 899 Economic growth and economic development 966
The Basics of Development Economics 966
A Financial Storm 899 Human capital 967
The Origins of Financial Crises 900 Institutions and good governance 969
Irrational expectations 900 Investment 970
Leverage 902 Trade 971
Two famous historical financial crises 903 Migration 972
The Great Recession: A Financial-Crisis Case Study 905 What Can Aid Do? 974
Subprime lending 905 Perspectives on foreign aid 975
The creation of the housing bubble 906 Impact investing 981
Effects of the housing bubble collapse 909 How do we know what works? 981
The immediate response to the crisis 912 Conclusion 985
Stimulus at the zero lower bound 916
Guide to Data Sources GU-1
Conclusion 917 Glossary GL-1
Indexes IN-1
Part 10
International Policy Issues 923
Chapter 35
Open-Market Macroeconomics 925
From Factory to Figures 925
 feature boxes
ECONOMICS IN ACTION Can money buy you happiness? 625
When education pays off 17 The costs of living in New York City vs. Iowa City 639
Specialization sauce 37 Poverty and the minimum wage 650
Winners and losers 39 What can you buy for $1.90? 655
Comparative advantage: The good, the bad, and the ugly 41 Employment guaranteed 680
Can instant noodle sales predict a recession? 56 What a difference 50 years makes: The story of Korea and
The great Elmo shortage 66 Ghana 693
Give a man a fish 71 Feeding the world 699
Does charging for bednets decrease malaria? 87 Planning for growth 704
The unintended consequences of biofuel subsidies 150 The wealthy hand-to-mouth 718
Why we give 183 The great multiplier debate 732
Give more tomorrow 192 The Kobe earthquake and aggregate supply 764
Take out a contract on yourself 193 A check in the mail, or more in your paycheck? 780
What do price-matching guarantees guarantee? 213 Spending your stimulus check 783
Totally MAD 220 From surplus to deficit 785
The weather can’t cheat 234 Behavioral finance 823
Walmart and economies of scale 285 Banking with a cell phone 839
Why does the “Motor Mile” exist? 297 Bank runs and the banking holiday 845
How Ford changed the world 313 Where’s George? 875
Rockers vs. Ticketmaster 337 Just print money! 880
What really sells loans? 364 A real plan—with fake currency 882
Have noncompete clauses gone too far? 407 Too big to fail? 914
Made in Lesotho. But why? 423 The walking dead 916
Why not tax ourselves? 468 The almighty dollar 939
Artificially scarce music 480 Dollarization: When not in the U.S. . . . 946
It’s not necessarily a tragedy 487
Why the Colorado River no longer reaches the ocean 491 FROM ANOTHER ANGLE
The insecure future of Social Security 518 Does ice cream cause polio? 14
Up and down in America 532 Babe Ruth, star pitcher 34
Getting out of the neighborhood 534 How much would you pay to keep the Internet from
Are Emily and Greg more employable than Lakisha and disappearing? 110
Jamal? 551 Beyond the bottom line 273
The rise of Donald Trump 566 Who wants competition? 309
Ranked-choice takes the Golden ticket to Washington 571 Phone ladies 336
Face value—May the best-looking politician win 573 The origins of Monopoly 340
Enfranchising the poor helps the poor 578 Rickshaw rides: Price discrimination and asymmetric
It’s all about timing 588 information 346
Who doesn’t want to be an organ donor? 595 Coke, Pepsi, and the not-so-secret formula 366

xliii
xliv Feature Boxes

Are environmental regulations bad for the environment? 440 Is payday lending predatory? 594
Does no-fault divorce law increase the divorce rate? 463 Are internships experience or exploitation? 683
Why does Wikipedia work? 483 The incredible index fund 817
Can some taxes make people happier? 499 Buy a shoe, give a shoe 979
“Just give money” 546
Turn down the AC for a smiley face 597 WHAT DO YOU THINK?
Not everything that counts can be counted 626 The opportunity cost of a life 7
Green GDP 628 The cost of college cash 18
The wealthiest American? 649 Should entrance fees at national parks be raised? 91
Immigration’s effects on the labor market 678 Kidneys for sale 120
Save . . . no, spend! 747 Put a cap on payday lending? 135
Are speculators a good influence on markets? 818 Fight for $15 154
Savings glut? 826 Credit-card categories: More realistic or more confusing? 197
Is bitcoin the currency of the future? 849 Surviving with strategic thinking 217
Timing is everything 901 Should teenagers be able to buy assault rifles? 238
Cooling down hot money 955 How much information is too much? 240
Is immigration the answer? 973 Who should bear the risk that a college degree doesn’t
Cash, no strings attached 984 pay off? 255
Should health insurance include preventive care? 259
ECON AND YOU Should drug companies care about neglected diseases? 286
Finding a travel bargain 97 Should the United States be a country of immigrants? 397
It pays to negotiate 108 Work, wages, and social value 404
Out of sight, out of mind 152 Population policy and the wealth of nations 410
Spending your way to happiness? 168 Reclining transactions 461
Choosing a league 181 Should conservationists be principled or pragmatic? 489
Why we give 183 Death and taxes 513
Is a dollar a dollar? 198 The super-wealthy 540
Can game theory explain why you feel guilt? 214 Affirmative action in college admissions 553
Is college worth it? 236 Is it okay to pollute one’s way to progress? 706
The rule of 70 249 No card, no service? 838
Are extended warranties worth it? 257 Are sweatshops good or bad? 930
The quarter-million dollar kid 271 Utility versus capabilities 965
Fight the (market) power! 362 Should the United States give more in foreign aid? 976
Another random document with
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 “Brother Frank, I must tell you, and when I do, you will not believe
me—It was not our father whom we both saw this morning.”
“It was no other whom I saw. What do you mean? Do you suppose
that I do not know my own father?”
“I tell you it was not, and could not be. I had an express from him
yesterday. He is two hundred miles from this, and cannot be in
Scotland sooner than three weeks hence.”
“You astonish me, Thomas. This is beyond human
comprehension.”
“It is true—that I avouch, and the certainty of it has sickened me at
heart. You must be aware that he came not home last night, and that
his horse and retinue have not arrived.”
“He was not at home, it is true, nor have his horse and retinue
arrived in Scotland. Still there is no denying that our father is here,
and that it was he who spoke to and admonished me.”
“I tell you it is impossible. A spirit has spoken to us in our father’s
likeness, for he is not, and cannot be, in Scotland at this time. My
faculties are altogether confounded by the event, not being able to
calculate on the qualities or condition of our monitor. An evil spirit it
certainly could not be, for all its admonitions pointed to good. I
sorely dread, Francis, that our father is no more: that there has been
another engagement, that he has lost his life, and that his soul has
been lingering around his family before taking its final leave of this
sphere. I believe that our father is dead; and for my part I am so sick
at heart, that my nerves are all unstrung. Pray, do you take horse and
post off for Salop, from whence his commission to me yesterday was
dated, and see what hath happened to our revered father.”
“I cannot, for my life, give credit to this, brother, or that it was any
other being but my father himself who rebuked me. Pray allow me to
tarry another day at least before I set out. Perhaps our father may
appear in the neighbourhood, and may be concealing himself for
some secret purpose. Did you tell him of our quarrel?”
“No. He never asked me concerning it, but charged me sharply
with my intent on the first word, and adjured me, by my regard for
his blessing, and my hope of heaven, to desist from my purpose.”
“Then he knew it all intuitively; for when I first went in view of the
spot appointed for our meeting, I perceived him walking sharply to
and fro, wrapped in his military cloak. He never so much as deigned
to look at me, till I came close to his side, and thinking it was
yourself, I fell to upbraiding him, and desired him to draw. He then
threw off his cloak, drew his sword, and, telling me he came in your
place, dared me to the encounter. But he knew all the grounds of our
quarrel minutely, and laid the blame on me. I own I am a little
puzzled to reconcile circumstances, but am convinced my father is
near at hand. I heard his words, and saw his eyes flashing anger and
indignation. Unfortunately, I did not touch him, which would have
put an end to all doubts; for he did not present the hand of
reconciliation to me, as I expected he would have done, on my
yielding implicitly to all his injunctions.”
The two brothers then parted, with protestations of mutual
forbearance in all time coming, and with an understanding, as that
was the morning of Saturday, that if their father, or some word of
him, did not reach home before the next evening, the Tutor of
Cassway was to take horse for the county of Salop early on Monday
morning.
Thomas, being thus once more left to himself, could do nothing
but toss and tumble in his bed, and reflect on the extraordinary
occurrence of that morning; and, after many troubled cogitations, it
at length occurred to his recollection what Mrs Jane Jerdan had said
to him:—“Do it, then. Do it with a vengeance!—But remember this,
that wherever ye set the place of combat, be it in hill or dale, deep
linn or moss hag, I shall have a thirdsman there to encourage you on.
I shall give you a meeting you little wot of.”
If he was confounded before, he was ten times more so at the
remembrance of these words of most ominous import.
At the time he totally disregarded them, taking them for mere
rhodomontade; but now the idea was to him terrible, that his father’s
spirit, like the prophet’s of old, should have been conjured up by
witchcraft; and then again he bethought himself that no witch would
have employed her power to prevent evil. In the end he knew not
what to think, and so, taking the hammer from its rest, he gave three
raps on the pipe drum (for there were no bells in the towers of those
days), and up came John Burgess, Thomas Beattie’s henchman,
huntsman, and groom of the chambers, one who had been attached
to the family for fifty years, and he says, in his slow west-border
tongue, “How’s thou now, callan’?—Is thou ony better-lins? There
has been tway stags seen in the Bloodhope-Linns this morning
already.”
“Ay, and there has been something else seen, John, that lies nearer
to my heart to-day.” John looked at his master with an inquisitive
eye and quivering lip, but said nothing. The latter went on: “I am
very unwell to-day, John, and cannot tell what is the matter with me.
I think I am bewitched.”
“It’s very like thou is, callan’. I pits nae doubt on’t at a’.”
“Is there anybody in this moor district whom you ever heard
blamed for the horrible crime of witchcraft?”
“Ay, that there is; mair than ane or tway. There’s our neighbour,
Lucky Jerdan, for instance, and her niece Nell,—the warst o’ the pair,
I doubt.” John said this with a sly stupid leer, for he had admitted the
old lady to an audience with his master the day before, and had eyed
him afterwards bending his course towards Drumfielding.
“John, I am not disposed to jest at this time; for I am disturbed in
mind, and very ill. Tell me, in reality, did you ever hear Mrs Jane
Jerdan accused of being a witch?”
“Why, look thee, master, I dare nae say she’s a witch; for Lucky has
mony good points in her character. But it’s weel kenned she has mair
power nor her ain, for she can stop a’ the plews in Eskdale wi’ a wave
o’ her hand, and can raise the dead out o’ their graves, just as a
matter of coorse.”
“That, John, is an extraordinary power indeed. But did you never
hear of her sending any living men to their graves? For as that is
rather the danger that hangs over me, I wish you would take a ride
over and desire Mrs Jane to come and see me. Tell her I am ill, and
request her to come and see me.”
“I shall do that, callan’. But are thou sure it is the auld witch I’m to
bring? For it strikes me the young ane maybe has done the deed; and
if sae, she is the fittest to effect the cure. But I shall bring the auld
ane.—Dinna flee intil a rage, for I shall bring the auld ane; though,
gude forgie me! it is unco like bringing the houdie.”
Away went John Burgess to Drumfielding; but Mrs Jane would not
move for all his entreaties. She sent back word to his master, to “rise
out o’ his bed, for he wad be waur if ony thing ailed him; and if he
had aught to say to auld Jane Jerdan, she would be ready to hear it at
hame, though he behoved to remember that it wasna ilka subject
under the sun that she could thole to be questioned anent.”
With this answer John was forced to return, and there being no
accounts of old Beattie having been seen in Scotland, the young men
remained all the Sabbath-day in the utmost consternation at the
apparition of their father they had seen, and the appalling rebuke
they had received from it. The most incredulous mind could scarce
doubt that they had had communion with a supernatural being; and
not being able to draw any other conclusion themselves, they became
persuaded that their father was dead; and accordingly, both prepared
for setting out early on Monday morning toward the county of Salop,
from whence they had last heard of him.
But just as they were ready to set out, when their spurs were
buckled on and their horses bridled, Andrew Johnston, their father’s
confidential servant, arrived from the place to which they were
bound. He had ridden night and day, never once stinting the light
gallop, as he said, and had changed his horse seven times. He
appeared as if his ideas were in a state of derangement and
confusion; and when he saw his young masters standing together,
and ready-mounted for a journey, he stared at them as if he scarcely
believed his own senses. They of course asked immediately about the
cause of his express; but his answers were equivocal, and he
appeared not to be able to assign any motive. They asked him
concerning their father, and if anything extraordinary had happened
to him. He would not say either that there had, or that there had not;
but inquired, in his turn, if nothing extraordinary had happened with
them at home. They looked to one another, and returned him no
answer; but at length the youngest said, “Why, Andrew, you profess
to have ridden express for the distance of two hundred miles; now
you surely must have some guess for what purpose you have done
this? Say, then, at once, what your message is: Is our father alive?”
“Ye—es; I think he is.”
“You think he is? Are you uncertain, then?”
“I am certain he is not dead,—at least, was not when I left him. But
—hum—certainly there has a change taken place. Hark ye, masters—
can a man be said to be in life when he is out of himself?”
 “Why, man, keep us not in this thrilling suspense. Is our father
well?”
“No—not quite well. I am sorry to say, honest gentlemen, that he is
not. But the truth is, my masters, now that I see you well and hearty,
and about to take a journey in company, I begin to suspect that I
have been posted all this way on a fool’s errand; and not another
syllable will I speak on the subject, till I have some refreshment, and
if you still insist on hearing a ridiculous story, you will hear it then.”
When the matter of the refreshment had been got over to Andrew’s
full satisfaction, he began as follows:—
“Why, faith, you see, my masters, it is not easy to say my errand to
you, for in fact I have none. Therefore, all that I can do is to tell you a
story—a most ridiculous one it is, as ever sent a poor fellow out on
the gallop for the matter of two hundred miles or so. On the morning
before last, right early, little Isaac, the page, comes to me, and he
says,—‘Johnston, thou must go and visit master. He’s bad.’”
“Bad!” says I, “Whatever way is he bad?”
“‘Why,’ says he, ‘he’s so far ill as he’s not well, and desires to see
you without one moment’s delay. He’s in fine taking, and that you’ll
find; but what for do I stand here? Lord, I never got such a fright.
Why, Johnston, does thou know that master hath lost himself?’
“‘How lost himself, rabbit?’ says I; ‘speak plain out, else I’ll have
thee lug-hauled, thou dwarf!’ for my blood rose at the imp, for
fooling at any mishap of my master’s. But my choler only made him
worse, for there is not a greater diel’s-buckie in all the Five Dales.
“‘Why, man, it is true that I said,’ quoth he, laughing; ‘the old gurly
squire hath lost himself; and it will be grand sport to see thee going
calling him at all the stane-crosses in the kingdom, in this here way.
—Ho, yes! and a two times ho, yes! and a three times ho, yes! Did
anybody no see the better half of my master, Laird of the twa
Cassway’s, Bloodhope, and Pentland, which was amissing overnight,
and is supposed to have gone a-woolgathering? If anybody hath seen
that better part of my master, whilk contains as much wit as a man
could drive on a hurlbarrow, let them restore it to me, Andrew
Johnston, piper, trumpeter, whacker, and wheedler, to the same
great and noble squire; and high shall be his reward. Ho, yes!’
 “‘The deuce restore thee to thy right mind!’ said I, knocking him
down, and leaving him sprawling in the kennel, and then hasted to
my master, whom I found feverish, restless, and raving, and yet with
an earnestness in his demeanour that stunned and terrified me. He
seized my hand in both his, which were burning like fire, and gave
me such a look of despair as I shall never forget. ‘Johnston, I am ill,’
said he, ‘grievously ill, and know not what is to become of me. Every
nerve in my body is in a burning heat, and my soul is as it were torn
to fritters with amazement. Johnston, as sure as you are in the body,
something most deplorable hath happened to them.’
“‘Yes, as sure as I am in the body, there has, master,’ says I. ‘But I’ll
have you bled and doctored in style, and you shall soon be as sound
as a roach,’ says I, ‘for a gentleman must not lose heart altogether for
a little fire-raising in his outworks, if it does not reach the citadel,’
says I to him. But he cut me short by shaking his head and flinging
my hand from him.
“‘A truce with your talking,’ says he. ‘That which hath befallen me
is as much above your comprehension as the sun is above the earth,
and never will be comprehended by mortal man; but I must inform
you of it, as I have no other means of gaining the intelligence I yearn
for, and which I am incapable of gaining personally. Johnston, there
never was a mortal man suffered what I have suffered since
midnight. I believe I have had doings with hell; for I have been
disembodied, and embodied again, and the intensity of my tortures
has been unparalleled.—I was at home this morning at daybreak.’
“‘At home at Cassway!’ says I. ‘I am sorry to hear you say so,
master, because you know, or should know, that the thing is
impossible, you being in the ancient town of Shrewsbury on the
king’s business.’
“‘I was at home in very deed, Andrew,’ returned he; ‘but whether in
the body or out of the body, I cannot tell—the Lord only knoweth.
But there I was in this guise, and with this heart and all its feelings
within me, where I saw scenes, heard words, and spoke others, which
I will here relate to you. I had finished my despatches last night by
midnight, and was sitting musing on the hard fate and improvidence
of my sovereign master, when, ere ever I was aware, a neighbour of
ours, Mrs Jane Jerdan, of Drumfielding, a mysterious character, with
whom I have had some strange doings in my time, came suddenly
into the chamber, and stood before me. I accosted her with doubt
and terror, asking what had brought her so far from home.’
“‘You are not so far from home as you imagine,’ said she; ‘and it is
fortunate for some that it is so. Your two sons have quarrelled about
the possession of niece Ellen, and though the eldest is blameless of
the quarrel, yet has he been forced into it, and they are engaged to
fight at daybreak at the Crook of Glendearg. There they will assuredly
fall by each other’s hands, if you interpose not; for there is no other
authority now on earth that can prevent this woful calamity.’
“‘Alas! how can I interfere,’ said I, ‘at a distance? It is already
within a few hours of the meeting, and before I get from among the
windings of the Severn, their swords will be bathed in each other’s
blood! I must trust to the interference of Heaven.’
“‘Is your name and influence, then, to perish for ever?’ said she. ‘Is
it so soon to follow your master’s, the great Maxwell of the Dales,
into utter oblivion? Why not rather rouse into requisition the
energies of the spirits that watch over human destinies? At least step
aside with me, that I may disclose the scene to your eyes. You know I
can do it; and you may then act according to your natural impulse.’
“Such was the import of the words she spoke to me, if not the very
words themselves. I understood them not at the time; nor do I yet.
But when she had done speaking, she took me by the hand, and
hurried me towards the door of the apartment, which she opened,
and the first step we took over the threshold, we stepped into a void
space and fell downward. I was going to call out, but felt my descent
so rapid, that my voice was stifled, and I could not so much as draw
my breath. I expected every moment to fall against something, and
be dashed to pieces; and I shut my eyes, clenched my teeth, and held
by the dame’s hand with a frenzied grasp, in expectation of the
catastrophe. But down we went—down and down, with a celerity
which tongue cannot describe, without light, breath, or any sort of
impediment. I now felt assured that we had both at once stepped
from off the earth, and were hurled into the immeasurable void. The
airs of darkness sung in my ears with a booming din as I rolled down
the steeps of everlasting night, an outcast from nature and all its
harmonies, and a journeyer into the depths of hell.
“I still held my companion’s hand, and felt the pressure of hers;
and so long did this our alarming descent continue, that I at length
caught myself breathing once more, but as quick as if I had been in
the height of a fever. I then tried every effort to speak, but they were
all unavailing; for I could not emit one sound, although my lips and
tongue fashioned the words. Think, then, of my astonishment, when
my companion sung out the following stanza with the greatest glee:—
‘Here we roll,
Body and soul,
Down to the deeps of the Paynim’s goal—
With speed and with spell,
With yo and with yell,
This is the way to the palace of hell—
Sing yo! ho!
Level and low,
Down to the Valley of Vision we go!’

“‘Ha, ha, ha! Tam Beattie,’ added she, ‘where is a’ your courage
now? Cannot ye lift up your voice and sing a stave wi’ your auld
crony? And cannot ye lift up your een, and see what region you are in
now?’
“I did force open my eyelids, and beheld light, and apparently
worlds, or huge lurid substances, gliding by me with speed beyond
that of the lightning of heaven. I certainly perceived light, though of a
dim, uncertain nature; but so precipitate was my descent, I could not
distinguish from whence it proceeded, or of what it consisted,
whether of the vapours of chaotic wastes, or the streamers of hell. So
I again shut my eyes closer than ever, and waited the event in terror
unutterable.
“We at length came upon something which interrupted our farther
progress. I had no feeling as we fell against it, but merely as if we
came in contact with some soft substance that impeded our descent;
and immediately afterwards I perceived that our motion had ceased.
“‘What a terrible tumble we hae gotten, Laird!’ said my
companion. ‘But ye are now in the place where you should be; and
deil speed the coward!’
“So saying, she quitted my hand, and I felt as if she were wrested
from me by a third object; but still I durst not open my eyes, being
convinced that I was lying in the depths of hell, or some hideous
place not to be dreamt of; so I lay still in despair, not even daring to
address a prayer to my Maker. At length I lifted my eyes slowly and
fearfully; but they had no power of distinguishing objects. All that I
perceived was a vision of something in nature, with which I had in
life been too well acquainted. It was a glimpse of green glens, long
withdrawing ridges, and one high hill, with a cairn on its summit. I
rubbed my eyes to divest them of the enchantment, but when I
opened them again, the illusion was still brighter and more
magnificent. Then springing to my feet, I perceived that I was lying
in a little fairy ring, not one hundred yards from the door of my own
hall!
“I was, as you may well conceive, dazzled with admiration; still I
felt that something was not right with me, and that I was struggling
with an enchantment; but recollecting the hideous story told me by
the beldame, of the deadly discord between my two sons, I hasted to
watch their motions, for the morning was yet but dawning. In a few
seconds after recovering my senses, I perceived my eldest son
Thomas leave his tower armed, and pass on towards the place of
appointment. I waylaid him, and remarked to him that he was very
early astir, and I feared on no good intent. He made no answer, but
stood like one in a stupor, and gazed at me. ‘I know your purpose,
son Thomas,’ said I; ‘so it is in vain for you to equivocate. You have
challenged your brother, and are going to meet him in deadly
combat; but as you value your father’s blessing, and would deprecate
his curse—as you value your hope of heaven, and would escape the
punishment of hell—abandon the hideous and cursed intent, and be
reconciled to your only brother.’
“On this, my dutiful son Thomas kneeled to me, and presented his
sword, disclaiming at the same time all intentions of taking away his
brother’s life, and all animosity for the vengeance sought against
himself, and thanked me in a flood of tears for my interference. I
then commanded him back to his couch, and taking his cloak and
sword, hasted away to the Crook of Glendearg, to wait the arrival of
his brother.”
Here Andrew Johnston’s narrative detailed the selfsame
circumstances recorded in a former part of this tale, as having passed
between the father and his younger son, so that it is needless to
recapitulate them; but beginning where that broke off, he added, in
the words of the old laird: “As soon as my son Francis had left me, in
order to be reconciled to his brother, I returned to the fairy knowe
and ring, where I first found myself seated at daybreak. I know not
why I went there, for though I considered with myself, I could
discover no motive that I had for doing so, but was led thither by a
sort of impulse which I could not resist, and from the same feeling
spread my son’s mantle on the spot, laid his sword beside it, and
stretched me down to sleep. I remember nothing farther with any
degree of accuracy, for I instantly fell into a chaos of suffering,
confusion, and racking dismay, from which I was only of late
released by awaking from a trance on the very seat, and in the same
guise in which I was the evening before. I am certain I was at home
in body or in spirit—saw my sons—spake these words to them, and
heard theirs in return. How I returned I know even less, if that is
possible, than how I went; for it seemed to me that the mysterious
force that presses us to this sphere, and supports us on it, was in my
case withdrawn or subverted, and that I merely fell from one part of
the earth’s surface and alighted on another. Now I am so ill that I
cannot move from this couch; therefore, Andrew, do you mount and
ride straight home. Spare no horseflesh, by night or by day, to bring
me word of my family, for I dread that some evil hath befallen them.
If you find them in life, give them many charges from me of brotherly
love and affection; if not—what can I say, but, in the words of the
patriarch, if I am bereaved of my children, I am bereaved.”
The two brothers, in utter amazement, went together to the green
ring on the top of the knoll above the castle of Cassway, and there
found the mantle lying spread, and the sword beside it. They then,
without letting Johnston into the awful secret, mounted straight, and
rode off with him to their father. They found him still in bed, and
very ill; and though rejoiced at seeing them, they soon lost hope of
his recovery, his spirits being broken and deranged in a wonderful
manner. Their conversations together were of the most solemn
nature, the visitation deigned to them having been above their
capacity. On the third or fourth day, their father was removed by
death from this terrestrial scene, and the minds of the young men
were so much impressed by the whole of the circumstances, that it
made a great alteration in their after life. Thomas, as solemnly
charged by his father, married Ellen Scott, and Francis was well
known afterwards as the celebrated Dr Beattie of Amherst. Ellen was
mother to twelve sons; and on the night that her seventh son was
born, her aunt Jerdan was lost, and never more heard of, either
living or dead.[9]
9. This will be viewed as a most romantic and unnatural story, as without
doubt it is; but I have the strongest reasons for believing that it is founded on a
literal fact, of which all the three were sensibly and positively convinced. It was
published in England in Dr Beattie’s lifetime, and by his acquiescence, and owing
to the respectable source from whence it came, it was never disputed in that day
that it had its origin in truth. It was again republished, with some miserable
alterations, in a London collection of 1770, by J. Smith, at No. 15, Paternoster Row,
and though I have seen none of these accounts, but relate the story wholly from
tradition, yet the assurance obtained from a friend of their existence, is a curious
corroborative circumstance, and proves that if the story was not true, the parties at
least believed it to be so.—Note by the Author.
 THE ELDER’S FUNERAL.

By Professor Wilson.

How beautiful to the eye and to the heart rise up, in a pastoral
region, the green silent hills from the dissolving snow-wreaths that
yet linger at their feet! A few warm sunny days, and a few breezy and
melting nights, have seemed to create the sweet season of spring out
of the winter’s bleakest desolation. We can scarcely believe that such
brightness of verdure could have been shrouded in the snow,
blending itself, as it now does, so vividly with the deep blue of
heaven. With the revival of nature our own souls feel restored.
Happiness becomes milder, meeker, and richer in pensive thought;
while sorrow catches a faint tinge of joy, and reposes itself on the
quietness of earth’s opening breast. Then is youth rejoicing—
manhood sedate—and old age resigned. The child shakes his golden
curls in his glee; he of riper life hails the coming year with temperate
exultation; and the eye that has been touched with dimness, in the
general spirit of delight, forgets or fears not the shadows of the grave.
On such a vernal day as this did we, who had visited the Elder on
his death-bed,[10] walk together to his house in the Hazel Glen, to
accompany his body to the place of burial. On the night he died, it
seemed to be the dead of winter. On the day he was buried, it seemed
to be the birth of spring. The old pastor and I were alone for awhile
as we pursued our path up the glen, by the banks of the little burn. It
had cleared itself off from the melted snow, and ran so pellucid a
race that every stone and pebble was visible in its yellow channel.
The willows, the alders, and the birches, the fairest and the earliest of
our native hill-trees, seemed almost tinged with a verdant light, as if
they were budding; and beneath them, here and there peeped out, as
in the pleasure of new existence, the primrose lonely, or in little
families and flocks. The bee had not yet ventured to leave his cell, yet
the flowers reminded one of his murmur. A few insects were dancing
in the air, and here and there some little moorland bird, touched at
the heart with the warm and sunny change, was piping his love-sweet
song among the braes. It was just such a day as a grave meditative
man, like him we were about to inter, would have chosen to walk
over his farm in religious contentment with his lot. That was the
thought that entered the pastor’s heart, as we paused to enjoy one
brighter gleam of the sun in a little meadow-field of peculiar beauty.
10. See ante, page 280.
“This is the last day of the week, and on that day often did the
Elder walk through this little happy kingdom of his own, with some
of his grandchildren beside and around him, and often his Bible in
his hand. It is, you feel, a solitary place,—all the vale is one seclusion
—and often have its quiet bounds been a place of undisturbed
meditation and prayer.”
We now came in sight of the cottage, and beyond it the
termination of the glen. There the high hills came sloping gently
down; and a little waterfall, in the distance, gave animation to a
scene of perfect repose. We were now joined by various small parties
coming to the funeral through openings among the hills; all sedate,
but none sad, and every greeting was that of kindness and peace. The
Elder had died full of years; and there was no need why any out of his
household should weep. A long life of piety had been beautifully
closed; and, therefore, we were all going to commit the body to the
earth, assured, as far as human beings may be so assured, that the
soul was in heaven. As the party increased on our approach to the
house, there was even cheerfulness among us. We spoke of the early
and bright promise of spring—of the sorrows and joys of other
families—of marriages and births—of the new schoolmaster—of to-
morrow’s Sabbath. There was no topic of which, on any common
occasion, it might have been fitting to speak, that did not now
perhaps occupy, for a few moments, some one or other of the group,
till we found ourselves ascending the greensward before the cottage,
and stood below the bare branches of the sycamores. Then we were
all silent, and, after a short pause, reverently entered into the house
of death.
 At the door the son received us with a calm, humble, and
untroubled face; and in his manner towards the old minister, there
was something that could not be misunderstood, expressing
penitence, gratitude, and resignation. We all sat down in the large
kitchen; and the son decently received each person at the door, and
showed him to his place. There were some old gray heads, more
becoming gray, and many bright in manhood and youth. But the
same solemn hush was over them all, and they sat all bound together
in one uniting and assimilating spirit of devotion and faith. Wine and
bread were to be sent round; but the son looked to the old minister,
who rose, lifted up his withered hand, and began a blessing and a
prayer.
There was so much composure and stillness in the old man’s
attitude, and something so affecting in his voice, tremulous and
broken, not in grief but age, that no sooner had he begun to pray,
than every heart and every breath at once were hushed. All stood
motionless, nor could one eye abstain from that placid and
patriarchal countenance, with its closed eyes, and long silvery hair.
There was nothing sad in his words, but they were all humble and
solemn, and at times even joyful in the kindling spirit of piety and
faith. He spoke of the dead man’s goodness as imperfect in the eyes
of his Great Judge, but such as, we were taught, might lead, through
intercession, to the kingdom of heaven. Might the blessing of God, he
prayed, which had so long rested on the head now coffined, not
forsake that of him who was now to be the father of this house. There
was more—more joy, we were told, in heaven, over one sinner that
repenteth, than over ninety and nine just persons which need no
repentance. Fervently, too, and tenderly, did the old man pray for
her, in her silent chamber, who had lost so kind a parent, and for all
the little children round her knees. Nor did he end his prayer without
some allusion to his own gray hairs, and to the approaching day on
which many then present would attend his burial.
Just as he ceased to speak, one solitary stifled sob was heard, and
all eyes turned kindly round to a little boy who was standing by the
side of the Elder’s son. Restored once more to his own father’s love,
his heart had been insensibly filled with peace since the old man’s
death. The returning tenderness of the living came in place of that of
the dead, and the child yearned towards his father now with a
stronger affection, relieved at last from all his fear. He had been
suffered to sit an hour each day beside the bed on which his
grandfather lay shrouded, and he had got reconciled to the cold but
silent and happy looks of death. His mother and his Bible told him to
obey God without repining in all things; and the child did so with
perfect simplicity. One sob had found its way at the close of that
pathetic prayer; but the tears that bathed his glistening cheeks were
far different from those that, on the day and night of his
grandfather’s decease, had burst from the agony of a breaking heart.
The old minister laid his hand silently upon his golden head; there
was a momentary murmur of kindness and pity over the room; the
child was pacified, and again all was repose and peace.
A sober voice said all was ready, and the son and the minister led
the way reverently out into the open air. The bier stood before the
door, and was lifted slowly up with its sable pall. Silently each
mourner took his place. The sun was shining pleasantly, and a gentle
breeze, passing through the sycamore, shook down the glittering
raindrops upon the funeral velvet. The small procession, with an
instinctive spirit, began to move along; and as I cast up my eyes to
take a farewell look of that beautiful dwelling, now finally left by him
who so long had blessed it, I saw at the half-open lattice of the little
bedroom window above, the pale weeping face of that stainless
matron, who was taking her last passionate farewell of the mortal
remains of her father, now slowly receding from her to the quiet field
of graves.
We proceeded along the edges of the hills, and along the meadow-
fields, crossed the old wooden bridge over the burn, now widening in
its course to the plain, and in an hour of pensive silence, or pleasant
talk, we found ourselves entering, in a closer body, the little gateway
of the churchyard. To the tolling of the bell we moved across the
green mounds, and arranged ourselves, according to the plan and
order which our feelings suggested, around the bier and its natural
supporters. There was no delay. In a few minutes the Elder was laid
among the mould of his forefathers, in their long-ago chosen spot of
rest. One by one the people dropped away, and none were left by the
new made grave but the son and his little boy, the pastor and myself.
As yet nothing was said, and in that pause I looked around me, over
the sweet burial-ground.
 Each tombstone and grave over which I had often walked in
boyhood arose in my memory, as I looked steadfastly upon their
long-forgotten inscriptions; and many had then been erected. The
whole character of the place was still simple and unostentatious, but
from the abodes of the dead I could see that there had been an
improvement in the condition of the living. There was a taste visible
in their decorations, not without much of native feeling, and
occasionally something even of native grace. If there was any other
inscription than the name and age of the poor inhabitants below, it
was, in general, some short text of Scripture; for it is most pleasant
and soothing to the pious mind, when bereaved of friends, to
commemorate them on earth by some touching expression taken
from that Book which reveals to them a life in heaven.
There is a sort of gradation, a scale of forgetfulness, in a country
churchyard, where the processes of nature are suffered to go on over
the green place of burial, that is extremely affecting in the
contemplation. The soul goes from the grave just covered up, to that
which seems scarcely joined together, on and on to those folded and
bound by the undisturbed verdure of many, many unremembered
years. It then glides at last into nooks and corners where the ground
seems perfectly calm and waveless, utter oblivion having smoothed
the earth over the long mouldered bones. Tombstones, on which the
inscriptions are hidden in green obliteration, or that are mouldering,
or falling to a side, are close to others which last week were brushed
by the chisel;—constant renovation and constant decay—vain
attempts to adhere to memory—and oblivion, now baffled and now
triumphant, smiling among all the memorials of human affection, as
they keep continually crumbling away into the world of
undistinguishable dust and ashes.
The churchyard, to the inhabitants of a rural parish, is the place to
which, as they grow older, all their thoughts and feelings turn. The
young take a look of it every Sabbath-day, not always perhaps a
careless look, but carry away from it, unconsciously, many salutary
impressions. What is more pleasant than the meeting of a rural
congregation in the churchyard before the minister appears? What is
there to shudder at in lying down, sooner or later, in such a peaceful
and sacred place, to be spoken of frequently on Sabbath among the
groups of which we used to be one, and our low burial-spot to be
visited, at such times, as long as there remains on earth any one to
whom our face was dear? To those who mix in the strife and dangers
of the world, the place is felt to be uncertain wherein they may finally
lie at rest. The soldier—the sailor—the traveller—can only see some
dim grave dug for him when he dies, in some place obscure,
nameless, and unfixed to the imagination. All he feels is, that his
burial will be—on earth—or in the sea. But the peaceful dwellers who
cultivate their paternal acres, or tilling at least the same small spot of
soil, shift only from a cottage on the hillside to one on the plain, still
within the bounds of one quiet parish; they look to lay their bones at
last in the burial-place of the kirk in which they were baptised, and
with them it almost literally is but a step from the cradle to the grave.
Such were the thoughts that calmly followed each other in my
reverie, as I stood beside the Elder’s grave, and the trodden grass was
again lifting up its blades from the pressure of many feet, now all, but
a few, departed. What a simple burial had it been! Dust was
consigned to dust—no more. Bare, naked, simple, and austere is in
Scotland the service of the grave. It is left to the soul itself to
consecrate, by its passion, the mould over which tears, but no words,
are poured. Surely there is a beauty in this; for the heart is left unto
its own sorrow—according as it is a friend—a brother—a parent—or a
child, that is covered up from our eyes. Yet call not other rites,
however different from this, less beautiful or pathetic. For willingly
does the soul connect its grief with any consecrated ritual of the
dead. Sound or silence—music—hymns—psalms—sable garments, or
raiment white as snow—all become holy symbols of the soul’s
affection; nor is it for any man to say which is the most natural,
which is the best, of the thousand shows and expressions, and
testimonies of sorrow, resignation, and love, by which mortal beings
would seek to express their souls when one of their brethren has
returned to his parent dust.
My mind was recalled from all these sad, yet not unpleasant
fancies, by a deep groan, and I beheld the Elder’s son fling himself
down upon the grave and kiss it passionately, imploring pardon from
God. “I distressed my father’s heart in his old age—I repented—and
received thy forgiveness even on thy death-bed! But how may I be
assured that God will forgive me for having so sinned against my old,
grayheaded father, when his limbs were weak and his eyesight dim!”
The old minister stood at the head of the grave without speaking a
word, with his solemn and pitiful eyes fixed upon the prostrate and
contrite man. His sin had been great, and tears that till now had, on
this day at least, been compressed within his heart by the presence of
so many of his friends, now poured down upon the sod as if they
would have found their way to the very body of his father. Neither of
us offered to lift him up, for we felt awed by the rueful passion of his
love, his remorse, and his penitence; and nature, we felt, ought to
have her way. “Fear not, my son,” at length said the old man, in a
gentle voice—“fear not, my son, but that you are already forgiven.
Dost thou not feel pardon within thy contrite spirit?” He rose up
from his knees with a faint smile, while the minister, with his white
head yet uncovered, held his hands over him as in benediction; and
that beautiful and loving child, who had been standing in a fit of
weeping terror at his father’s agony, now came up to him and kissed
his cheek—holding in his little hand a few faded primroses which he
had unconsciously gathered together as they lay on the turf of his
grandfather’s grave.
 MACDONALD, THE CATTLE-RIEVER.

Archibald Macdonald was perhaps the most perfect master of his

hazardous profession of any who ever practised it. Archibald was by
birth a gentleman, and proprietor of a small estate in Argyleshire,
which he however lost early in life. He soon distinguished himself as
a cattle-lifter on an extensive scale; and weak as the arm of the law
might then have been, he found it advisable to remove further from
its influence, and he shifted his residence from his native district of
Appin to the remote peninsula of Ardnamurchan, which was
admirably adapted to his purpose, from its geographical position. He
obtained a lease of an extensive farm, and he fitted up a large
cowhouse, though his whole visible live-stock consisted of one filly.
His neighbours could not help making remarks on this subject, but
he begged of them to have no anxiety on that head, assuring them
that his byre would be full ere Christmas; and he was as good as his
word. He had trained the filly to suit his purpose, and it was a
practice of his to tie other horses to her tail; she then directed her
course homeward by unfrequented routes, and always found her way
in safety.
His expeditions were generally carried on by sea, and he annoyed
the most distant of the Hebrides, both to the south and north. He
often changed the colour of his boats and sails, and adopted
whatever appeared best suited to his immediate purpose. In
consequence of this artifice, his depredations were frequently
ascribed to others, and sometimes to men of the first distinction in
that country, so dexterously did he imitate their birlings and their
insignia. He held his land from Campbell of Lochnell, into whose
favour he had insinuated himself by his knowledge and address.
When Lochnell resided at the castle of Mingary, Archibald was
often ordered to lie on a mattress in his bedroom, to entertain him at
night with the recitation of the poems of Ossian, and with tales.
Archibald contrived means to convert this circumstance to his
advantage. He ordered his men to be in readiness, and that night he
selected one of his longest poems. As he calculated, Lochnell fell
asleep before he had finished the recital; the robber slunk out and
soon joined his associates. He steered for the island of Mull, where
some of his men had been previously sent to execute his orders; he
carried off a whole fold of cattle, which he landed safely, and
returned to his mattress before Lochnell awoke. When he lay down
he purposely snored so loudly that the sleeping chief was disturbed,
and complained of the tremendous noise the fellow made, observing
that, fond as he was of poetry, he must deprive himself of it in future
on such conditions. To this Archibald had no objections; his
principal object was then accomplished, and taking up the tale where
he had stopped when his patron fell asleep, he finished it, and slept
soundly to an advanced hour.
The cattle were immediately missed, and suspicion fell on
Archibald; but he triumphantly referred to Lochnell for a proof of his
innocence, and this he obtained. That gentleman solemnly declared
that the robber had never been out of his room during that night, and
the charge was of course dropped.
A wealthy man who resided in the neighbourhood was noted for
his penurious habits, and he had incurred particular odium by
refusing a supply of meal to a poor widow in distress. This man had
sent a considerable quantity of grain to the mill, which, as usual, he
attended himself, and was conveying the meal home at night on
horseback. The horses were tied in a string, the halter of one fixed to
the tail of another; and the owner led the foremost by a long tether.
His road lay through a wood, and Archibald there watched his
approach. The night was dark, and the man walked slowly, humming
a song; the ground was soft, and the horses having no shoes (as is
still usual in that country), their tread made no noise. Archibald
ordered one of his men to loosen the tether from the head of the
front horse, and to hold it, himself occupying the place of the horse,
and walking on at the same pace. He thus got possession of the
whole. The miser soon arrived at his own door, and called for
assistance to deposit his winter store in safety, but, to his
astonishment, found he had but the halter!