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17th Edition James D. Gwartney

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The Eight Guideposts to Economic Thinking
These eight guideposts provide the foundation for the economic way of thinking (they are
discussed in Chapter 1). To do well in this course you will need to understand and be able
to apply these ideas to a wide range of issues.
1. The use of scarce resources is costly; trade-offs must always be made.

2. Individuals choose purposefully — they try to get the most from their limited resources.
3. Incentives matter — choice is influenced in a predictable way by changes in incentives.
4. Individuals make decisions at the margin.
5. Although information can help us make better choices, its acquisition is costly.
6. Beware of the secondary effects: Economic actions often generate indirect
as well as direct effects.
7. The value of a good or service is subjective.
8. The test of a theory is its ability to predict.
Special Topics
These Special Topics covered in the “Applying the Basics” section use the basic concepts
to analyze important current-day topics.
1. Government Spending and Taxation

2. The Economics of Social Security
3. The Stock Market: Its Function, Performance, and Potential as an Investment
Opportunity
4. Keynes and Hayek: Contrasting Views on Sound Economics and the Role
of Government
5. The 2020 COVID-19 Recession: Cause, Response, and Implications for the Future
6. The Great Recession of 2008-2009: Causes and Response
7. Lessons from the Great Depression
8. The Economics of Health Care
9. Earnings Differences between Men and Women
10. Do Labor Unions Increase the Wages of Workers?
11. The Question of Resource Exhaustion
12. Difficult Environmental Cases and the Role of Government
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Keys to Economic Prosperity
These keys to the economic prosperity of a nation are highlighted throughout the text.
1. Human Ingenuity. Economic goods are the result of human ingenuity and action;
thus, the size of the economic pie is variable, not fixed. [Chapter 2]
2. Private Ownership. Private ownership provides people with a strong incentive to take
care of things and develop resources in ways that are highly valued by others. [Chapter 2]
3. Gains from Trade. Trade makes it possible for individuals to generate more output
through specialization and division of labor, large-scale production processes,
and the dissemination of improved products and production methods. [Chapter 2]
4. Invisible Hand Principle. Market prices coordinate the actions of self-interested
individuals and direct them toward activities that promote the general welfare. [Chapter 3]
5. Profits and Losses. Profits direct producers toward activities that increase the value
of resources; losses impose a penalty on those who reduce the value of resources.
[Chapter 3]
6. Competition. Competition motivates businesses to produce efficiently, cater to the
views of consumers, and search for innovative improvements. [Chapter 22]
7. Entrepreneurship. The entrepreneurial discovery and development of improved products
and production processes is a central element of economic progress. [Chapter 23]
8. Productivity and Earnings. In a market economy, productivity and earnings are closely
linked. In order to earn a large income, one must provide large benefits to others.
[Chapter 26]
9. Innovation and the Capital Market. If the potential gains from innovative ideas and
human ingenuity are going to be fully realized, it must be relatively easy for individuals
to try their innovative and potentially ingenious ideas, but difficult to continue if the
idea is a bad one. [Chapter 27]
10. Price Stability. Maintenance of price stability is the essence of sound monetary policy;
price stability provides the foundation for both economic stability and the efficient
operation of markets. [Chapter 14]
11. International Trade. When people are permitted to engage freely in international
trade, they are able to achieve higher income levels and living standards than would
otherwise be possible. [Chapter 18]
12. Role of Government. Governments promote economic progress when they protect
individuals and their property, enforce contracts impartially, provide access to money
of stable value, avoid high taxes and excessive regulation, and foster competitive
markets and free international trade. [Chapter 16]
ECONOMICS
PRIVATE AND PUBLIC CHOICE
17E
JAMES D. GWARTNEY
Florida State University
RICHARD L. STROUP
Professor Emeritus of Economics at Montana State University
RUSSELL S. SOBEL
The Citadel
DAVID A. MACPHERSON
Trinity University, San Antonio TX
With Assistance of Jane Shaw Stroup
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
Economics: Private and Public Choice, 17e © 2022, 2018 Cengage Learning, Inc.
James D. Gwartney WCN: 02-300
Richard L. Stroup
Unless otherwise noted, all content is © Cengage.
Russell S. Sobel
David A. Mcpherson ALL RIGHTS RESERVED. No part of this work covered by the copyright herein
may be reproduced or distributed in any form or by any means, except as
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Printed in the United States of America

Print Number: 01 Print Year: 2020
BRIEF CONTENTS
INDEX
Preface xix
Acknowledgments xxv
About the Authors xxvii
Part 1: The Economic Way of Thinking 1
Chapter 1 The Economic Approach 2
Chapter 2 Some Tools of the Economist 17
Part 2: Markets and Government 41
Chapter 3 Demand, Supply, and the Market Process 42
Chapter 4 Demand and Supply: Applications and Extensions 70
Chapter 5 Difficult Cases for the Market, and the Role of Government 93
Chapter 6 The Economics of Political Action 110
Part 3: Core Macroeconomics 131
Chapter 7 Taking the Nation’s Economic Pulse 132
Chapter 8 Economic Fluctuations, Unemployment, and Inflation 156
Chapter 9 An Introduction to Basic Macroeconomic Markets 175
Chapter 10 Dynamic Change, Economic Fluctuations, and the AD–AS Model 197
Chapter 11 Fiscal Policy: The Keynesian View and the Historical Development of
Macroeconomics 217
Chapter 12 Fiscal Policy, Incentives, and Secondary Effects 231
Chapter 13 Money and the Banking System 248
Chapter 14 Modern Macroeconomics and Monetary Policy 270
Chapter 15 Macroeconomic Policy, Economic Stability, and the Federal Debt 291
Chapter 16 Creating an Environment for Growth and Prosperity 311
Chapter 17 The Economics of Development 335
Part 4: International Economics 355
Chapter 18 Gaining from International Trade 356
Chapter 19 International Finance and the Foreign Exchange Market 378
Part 5: Core Microeconomics 397
Chapter 20 Consumer Choice and Elasticity 398
Chapter 21 Costs and the Supply of Goods 416
Chapter 22 Price Takers and the Competitive Process 438
Chapter 23 Price-Searcher Markets with Low Entry Barriers 457
Chapter 24 Price-Searcher Markets with High Entry Barriers 473
Chapter 25 The Supply of and Demand for Productive Resources 496
Chapter 26 Earnings, Productivity, and the Job Market 515
Chapter 27 Investment, the Capital Market, and the Wealth of Nations 532
Chapter 28 Income Inequality and Poverty 551
Part 6: Applying the Basics: Special Topics in Economics 571
Special Topic 1: Government Spending and Taxation 572
Special Topic 2: The Economics of Social Security 587
Special Topic 3: The Stock Market: Its Function, Performance, and Potential as an
Investment Opportunity 597
Special Topic 4: Keynes and Hayek: Contrasting Views on Sound Economics and the
Role of Government 608
Special Topic 5: The 2020 COVID-19 Recession: Cause, Response, and Implications for
the Future 615
Special Topic 6: The Great Recession of 2008–2009: Causes and Response 623
Special Topic 7: Lessons from the Great Depression 637
Special Topic 8: The Economics of Health Care 651
iii
iv BRIEF CONTENTS
Special Topic 9: Earnings Differences between Men and Women 663

Special Topic 10: Do Labor Unions Increase the Wages of Workers? 670
Special Topic 11: The Question of Resource Exhaustion 681
Special Topic 12: Difficult Environmental Cases and the Role of Government 691
Appendix A General Business and Economics Indicators for the United States 701
Appendix B Answers to Selected Critical Analysis Questions 708
Glossary 725
Index 737
CONTENTS
INDEX
Preface xix
Acknowledgments xxv
About the Authors xxvii
Part 1 The Economic Way of Thinking 1

1-1 What Is Economics About? 3
1-1a Scarcity and Poverty Are Not the Same 5
1-1b Scarcity Necessitates Rationing 6
1-1c The Method of Rationing Influences the Nature of Competition 6
1-2 The Economic Way of Thinking 6
1-2a Eight Guideposts to Economic Thinking 7
1-3 Positive and Normative Economics 12
1-4 Pitfalls to Avoid in Economic Thinking 13
1-4a Violation of the Ceteris Paribus Condition Can Lead One to Draw the Wrong Conclusion 13
1-4b Good Intentions Do Not Guarantee Desirable Outcomes 13
1-4c Association Is Not Causation 14
1-4d The Fallacy of Composition: What’s True for One Might Not Be True for All 15
Key Points 15
Critical Analysis Questions 16
Chapter 2 Some Tools of the Economist 17

2-1 What Shall We Give Up? 18
2-1a Opportunity Cost 18
2-1b Opportunity Cost and the Real World 18
2-2 Trade Creates Value 19
2-2a Transaction Costs—A Barrier to Trade 20
2-2b The Middleman as a Cost Reducer 21
2-3 The Importance of Property Rights 22
2-3a Private Ownership and Markets 24
2-4 Production Possibilities Curve 26
2-4a Shifting the Production Possibilities Curve Outward 28
2-4b Production Possibilities and Economic Growth 31
2-5 Trade, Output, and Living Standards 32
2-5a Gains from Specialization and Division of Labor 32
2-5b Gains from Mass Production Methods 33
2-5c Gains from Innovation 34
2-6 Human Ingenuity, Entrepreneurship, and the Creation of Wealth 34
2-7 Economic Organization 35
2-7a Market Organization 35
2-7b Political Organization 37
Key Points 37
Addendum 39
Comparative Advantage, Specialization, and Gains from Trade 39
vi CONTENTS
Part 2 Markets and Government 41

Chapter 3 Demand, Supply, and the Market Process 42
3-1 Consumer Choice and the Law of Demand 43
3-1a The Market Demand Schedule 44
3-1b Consumer Surplus 45
3-1c Responsiveness of Quantity Demanded to Price Changes: Elastic and Inelastic
Demand Curves 46
3-2 Changes in Demand versus Changes in Quantity Demanded 47
3-3 Producer Choice and the Law of Supply 50
3-3a The Role of Profits and Losses 52
3-3b Market Supply Schedule 52
3-3c Producer Surplus 53
3-3d Responsiveness of Quantity Supplied to Price Changes: Elastic and Inelastic
Supply Curves 54
3-4 Changes in Supply versus Changes in Quantity Supplied 55
3-5 How Market Prices Are Determined: Demand and Supply Interact 57
3-5a Market Equilibrium 57
3-5b Efficiency and Market Equilibrium 59
3-6 How Markets Respond to Changes in Demand and Supply 60
3-7 Entrepreneurship, Profit, and the Dynamics of Market Competition 63
3-8 Invisible Hand Principle 65
3-8a Prices and Market Order 65
3-8b Competition and Property Rights 67
Key Points 67
Chapter 4 Demand and Supply: Applications and Extensions 70

4-1 The Link between Resource and Product Markets 71
4-2 The Economics of Price Controls 72
4-2a The Impact of Price Ceilings 72
4-2b Rent Control: A Closer Look at a Price Ceiling 75
4-2c The Impact of Price Floors 76
4-2d Minimum Wage: A Closer Look at a Price Floor 77
4-3 Black Markets and the Importance of the Legal Structure 80
4-4 The Impact of a Tax 80
4-4a The Deadweight Loss Caused by Taxes 82
4-4b Actual versus Statutory Incidence 82
4-4c Elasticity and the Incidence of a Tax 84
4-4d Elasticity and the Deadweight Loss 85
4-5 Tax Rates, Tax Revenues, and the Laffer Curve 85
4-6 The Impact of a Subsidy 88
4-6a Elasticity and the Benefit of Government Subsidy Programs 88
4-6b Real-World Subsidy Programs 89
Key Points 91
Chapter 5 Difficult Cases for the Market, and the Role of Government 93
5-1 A Closer Look at Economic Efficiency 94
5-1a If It’s Worth Doing, It’s Worth Doing Imperfectly 95
5-2 Thinking About the Economic Role of Government 96
5-2a Protective Function of Government 96
5-2b Productive Function of Government 96
5-3 Potential Shortcomings of the Market 97
5-3a Lack of Competition 97
5-3b Externalities—A Failure to Account for All Costs and Benefits 98
5-3c External Costs 99
5-3d What Should Be Done About External Costs? 100
5-3e External Benefits 101
CONTENTS vii
5-3f Expanding the Scope of a Project and Capturing External Benefits 102
5-3g Public Goods and Why they Pose a Problem for the Market 104
5-3h Potential Information Problems 105
5-3i Information as a Profit Opportunity 106
5-4 Market and Government Failure 108
Key Points 109
Chapter 6 The Economics of Political Action 110

6-1 The Size and Growth of the U.S. Government 111
6-2 Similarities and Differences between Political and Market Allocation 113
6-3 Political Decision-Making: An Overview 114
6-3a Incentives Confronted by the Voter 115
6-3b Incentives Confronted by the Politician 116
6-3c Incentives Confronted by the Government Bureaucrat 117
6-4 When the Political Process Works Well 118
6-5 When the Political Process Works Poorly 120
6-5a Special-Interest Effect 120
6-5b Shortsightedness Effect 123
6-5c Rent-seeking 124
6-5d Inefficiency of Government Operations 125
6-6 Political Favoritism, Crony Capitalism, and Government Failure 125
6-7 The Economic Way of Thinking about Markets and Government 128
Key Points 129
Part 3 Core Macroeconomics 131

Chapter 7 Taking the Nation’s Economic Pulse 132
7-1 GDP—A Measure of Output 133
7-1a What Counts toward GDP? 133
7-1b Dollars Are the Common Denominator for GDP 135
7-2 GDP as a Measure of Both Output and Income 135
7-2a Deriving GDP by the Expenditure Approach 136
7-2b Deriving GDP by the Resource Cost–Income Approach 138
7-2c The Relative Size of GDP Components 139
7-2d The COVID-19 Pandemic and GDP 140
7-3 Adjusting for Price Changes and Deriving Real GDP 140
7-3a Key Price Indexes: The Consumer Price Index and the GDP Deflator 141
7-3b Using the GDP Deflator to Derive Real GDP 142
7-4 Problems with GDP as a Measuring Rod 145
7-4a Nonmarket Production 145
7-4b Underground Economy 146
7-4c Leisure and Human Costs 146
7-4d Quality Variation and the Introduction of New Goods 146
7-4e Harmful Side Effects and Economic “Bads” 147
7-4f GDP Understates Well-Being in the Information Age 147
7-5 Differences in GDP over Time 149
7-6 The Great Contribution of GDP 150
Key Points 153
Addendum 155
The Construction of a Price Index 155
Chapter 8 Economic Fluctuations, Unemployment, and Inflation 156

8-1 Swings in the Economic Pendulum 157
8-1a A Hypothetical Business Cycle 157
8-2 Economic Fluctuations and the Labor Market 159
viii CONTENTS
8-2a The Labor Force Participation and Unemployment Rates 160

8-2b Employment Fluctuations and Trends: The Historical Record 161
8-2c Dynamic Change and Reasons for Unemployment 163
8-3 Three Types of Unemployment 164
8-3a Frictional Unemployment 165
8-3b Structural Unemployment 166
8-3c Cyclical Unemployment 167
8-4 Full Employment and the Natural Rate of Unemployment 168
8-5 Actual and Potential GDP 169
8-6 The Effects of Inflation 170
8-6a Unanticipated and Anticipated Inflation 171
8-6b Why Does Inflation Adversely Affect the Economy? 171
8-6c What Causes Inflation? 172
Key Points 172
Chapter 9 An Introduction to Basic Macroeconomic Markets 175

9-1 Understanding Macroeconomics: Our Game Plan 176
9-2 Four Key Markets: Resources, Goods and Services, Loanable Funds, and
Foreign Exchange 176
9-3 Aggregate Demand for Goods and Services 178
9-3a Why Does the Aggregate Demand Curve Slope Downward? 179
9-3b The Downward-Sloping Aggregate Demand Curve: A Summary 180
9-4 Aggregate Supply of Goods and Services 181
9-4a Aggregate Supply in the Short Run 181
9-4b Aggregate Supply in the Long Run 182
9-5 Equilibrium in the Goods and Services Market 184
9-5a Equilibrium in the Short Run 184
9-5b Equilibrium in the Long Run 184
9-5c Long-Run Equilibrium, Potential Output, and Full Employment 185
9-5d What Happens When the Economy’s Output Differs from Its Long-Run Potential? 186
9-6 Resource Market 187
9-7 Loanable Funds Market 188
9-7a Does Inflation Help Borrowers? 190
9-7b Loanable Funds Market, Interest Rates, and Bond Prices 191
9-7c Global Loanable Funds Market 191
9-8 Foreign Exchange Market 192
9-9 Long-Run Equilibrium 195
Key Points 195
Chapter 10 Dynamic Change, Economic Fluctuations, and the AD–AS Model 197
10-1 Anticipated and Unanticipated Changes 198
10-2 Factors that Shift Aggregate Demand 198
10-3 Shifts in Aggregate Supply 201
10-3a Changes in Long-Run Aggregate Supply 202
10-3b Changes in Short-Run Aggregate Supply 203
10-4 Steady Economic Growth and Anticipated Changes in Long-Run Aggregate Supply 204
10-5 Unanticipated Changes and Market Adjustments 205
10-5a Unanticipated Increases in Aggregate Demand 205
10-5b Unanticipated Reductions in Aggregate Demand 207
10-5c Unanticipated Increases in Short-Run Aggregate Supply 208
10-5d Unanticipated Reductions in Short-Run Aggregate Supply 209
10-6 The Price Level, Inflation, and the AD–AS Model 210
10-7 Unanticipated Changes, Recessions, and Booms 210
10-7a Expansions and Recessions: The Historical Record 212
10-7b Using the AD–AS Model to Think About the Business Cycle and the Great
Recession of 2008–2009 212
Key Points 214
CONTENTS ix
Chapter 11 Fiscal Policy: The Keynesian View and the Historical

Development of Macroeconomics 217
11-1 The Great Depression, Economic Instability, and the Development of
Keynesian Economics 218
11-1a The Great Depression and Keynesian Economics 218
11-1b Output, Employment, and Keynesian Equilibrium 218
11-1c The Multiplier and Economic Instability 219
11-1d Adding Realism to the Multiplier 221
11-1e Keynes and Economic Instability: A Summary 221
11-2 The Federal Budget and Fiscal Policy 222
11-3 Fiscal Policy and the Good News of Keynesian Economics 222
11-3a Using the Budget to Promote Stability 223
11-3b Fiscal Policy Changes and Problems of Timing 225
11-3c Automatic Stabilizers 226
11-4 Saving, Spending, Debt, and the Impact of Fiscal Policy 227
Key Points 229
Chapter 12 Fiscal Policy, Incentives, and Secondary Effects 231

12-1 Fiscal Policy, Borrowing, and the Crowding-Out Effect 232
12-1a Do Global Financial Markets Minimize the Crowding-Out Effect? 233
12-2 Fiscal Policy, Future Taxes, and the New Classical Model 234
12-2a Is Job Creation a Good Reason to Support a Government Spending Program? 236
12-3 Political Incentives and the Effective Use of Discretionary Fiscal Policy 237
12-4 Is Discretionary Fiscal Policy an Effective Stabilization Tool? 237
12-5 The Supply-Side Effects of Fiscal Policy 238
12-5a Why Do High Tax Rates Decrease Output? 239
12-5b How Important Are the Supply-Side Effects? 239
12-6 Fiscal Policy and Recovery from Recessions 242
12-6a Will Fiscal Stimulus Speed Recovery? 242
12-6b Tax Cuts versus Spending Increases 242
12-7 U.S. Fiscal Policy: 1990–2019 243
Key Points 246
Chapter 13 Money and the Banking System 248

13-1 What Is Money? 249
13-1a Money as a Medium of Exchange 249
13-1b Money as a Store of Value 249
13-1c Money as a Unit of Account 249
13-2 How the Supply of Money Affects Its Value 250
13-3 How Is the Money Supply Measured? 250
13-3a The M1 Money Supply 250
13-3b The Broader M2 Money Supply 251
13-3c Credit Cards versus Money 252
13-4 The Business of Banking 252
13-4a Fractional Reserve Banking 253
13-4b Bank Runs, Bank Failures, and Deposit Insurance 254
13-5 How Banks Create Money by Extending Loans 254
13-5a The Actual Deposit Expansion Multiplier 256
13-6 The Federal Reserve System 256
13-6a Structure of the Fed 256
13-6b How the Fed Controls the Money Supply 259
13-6c Recent Fed Policy, the Monetary Base, and the Money Supply 261
13-6d The Fed and the Treasury 265
13-7 Ambiguities in the Meaning and Measurement of the Money Supply 266
Key Points 267
x CONTENTS
Chapter 14 Modern Macroeconomics and Monetary Policy 270

14-1 Impact of Monetary Policy: A Brief Historical Background 271
14-2 The Demand and Supply of Money 271
14-2a The Equilibrium between Money Demand and Money Supply 273
14-3 How Does Monetary Policy Affect the Economy? 274
14-3a The Effects of an Unanticipated Expansionary Monetary Policy 276
14-3b The Effects of an Unanticipated Restrictive Monetary Policy 277
14-3c Shifts in Monetary Policy and Economic Stability 278
14-4 Monetary Policy in the Long Run 279
14-4a The Quantity Theory of Money 279
14-4b Long-Run Impact of Monetary Policy: The Modern View 280
14-4c Money and Inflation 282
14-5 Money, Economic Stability, and Proper Monetary Policy 282
14-5a Time Lags, Monetary Shifts, and Economic Stability 282
14-5b Monetary Policy and Price Stability 283
14-6 Recent Low Interest Rates and Monetary Policy 284
14-7 Interest Rates, Velocity of Money, and Monetary Policy 287
Key Points 289
Chapter 15 Macroeconomic Policy, Economic Stability, and the Federal Debt 291
15-1 Economic Fluctuations: The Past 100 Years 292
15-2 Can Discretionary Policy Promote Economic Stability? 292
15-2a The Time Lag Problem 293
15-3 Forecasting Tools and Macro Policy 293
15-3a Index of Leading Indicators 294
15-3b Computer Forecasting Models 295
15-3c Market Signals as Forecasting Tools 296
15-3d Is Accurate Forecasting Feasible? 296
15-4 How Are Expectations Formed? 296
15-5 Macro Policy Implications of Adaptive and Rational Expectations 298
15-6 The Phillips Curve: The View of the 1960s versus Today 299
15-6a Expectations and the Modern View of the Phillips Curve 301
15-7 The Growing Federal Debt and Economic Stability 303
15-7a Deficits, Surpluses, and the National Debt 303
15-7b Who Owns the National Debt? 305
15-7c How Does Debt Financing Influence Future Generations? 306
15-7d Why Is Deficit Spending So Difficult to Control? 306
15-7e Have Federal Debt Obligations Grown to a Dangerous Level? 307
15-8 Perspective on Recent Macroeconomic Policy and Economic Instability 308
Key Points 309
Chapter 16 Creating an Environment for Growth and Prosperity 311

16-1 Why Is Economic Growth Important? 312
16-1a The Impact of Sustained Economic Growth 312
16-2 Sources of Economic Growth and High Incomes 313
16-2a Gains from Trade 313
16-2b Entrepreneurship, Technology, and the Discovery of Better Ways of Doing Things 315
16-2c Investment in Physical and Human Capital 316
16-3 What Institutions and Policies Will Promote Growth? 317
16-3a Legal System: Secure Property Rights, Rule of Law, and Even-Handed
Enforcement of Contracts 318
16-3b Competitive Markets 319
16-3c Stable Money and Prices 319
16-3d Avoidance of Regulations that Restrict Trade and Entry into Markets 319
16-3e Avoidance of High Tax Rates 320
16-3f Trade Openness 321
16-4 Economic Freedom as a Measure of Sound Institutions 322
16-5 Institutions, Policies, and Economic Performance 323
CONTENTS xi
16-5a Economic Freedom and Per Capita Income 324

16-5b Economic Freedom and Growth of Per Capita Income 325
16-5c Economic Freedom and the Poverty Rate 326
16-5d Economic Freedom and Life Expectancy 326
16-5e Economic Freedom and Environmental Quality 327
16-6 Economic Freedom and Per Capita Income: How Strong is the Linkage? 327
Key Points 330
Addendum 332
The 2018 Economic Freedom of the World Country Rankings and Ratings 332
Chapter 17 The Economics of Development 335

17-1 The Economic Record of the Last 1000 Years 336
17-2 Theories of Development 337
17-2a Malthusian Theory of Development 337
17-2b Colonialism, European Settlements, and Institutions 338
17-2c Neoclassical Production Function Theory of Development 338
17-2d Geography and Development 339
17-3 The Transportation-Communication Revolution 341
17-4 The Transportation-Communication Revolution and Economic Development 343
17-5 The Transportation-Communication Revolution and the Historic Economic
Progress of the Past 50 Years 347
17-5a Growth of High-Income and Developing Countries During the Past
Half-Century 348
17-5b Countries With the Best and Worst Growth Records 349
17-5c Dramatic Reduction in the Worldwide Poverty Rate 350
17-6 The Transportation-Communication Revolution versus the Industrial Revolution 351
17-7 The Future of Economic Development 352
Key Points 353
Part 4 International Economics 355

Chapter 18 Gaining from International Trade 356
18-1 The Trade Sector of the United States 357
18-2 Gains from Specialization and Trade 358
18-2a How Trade Expands Consumption Possibilities 360
18-2b Some Real-World Considerations 362
18-3 Supply, Demand, and International Trade 363
18-4 The Economics of Trade Restrictions 365
18-4a The Economics of Tariffs 365
18-4b The Economics of Quotas 367
18-4c Exchange Rate Controls as a Trade Restriction 368
18-5 Why Do Nations Adopt Trade Restrictions? 368
18-5a The National-Defense Argument 369
18-5b The Infant-Industry Argument 369
18-5c The Antidumping Argument 369
18-5d Special Interests and the Politics of Trade Restrictions 370
18-6 Do More Open Economies Perform Better? 371
18-7 Trade Barriers and Popular Trade Fallacies 372
18-7a Trade Fallacy 1: Trade Restrictions that Limit Imports Save Jobs and Expand
Employment 372
18-7b Trade Fallacy 2: Free Trade with Low-Wage Countries Like Mexico and China will
Reduce the Wages of Americans 374
18-8 Institutions and the Changing Nature of Global Trade 374
Key Points 376
xii CONTENTS
Chapter 19 International Finance and the Foreign Exchange Market 378

19-1 Foreign Exchange Market 379
19-2 Determinants of the Exchange Rate 381
19-3 Why Do Exchange Rates Change? 382
19-3a Changes in Income 383
19-3b Differences in Rates of Inflation 383
19-3c Changes in Interest Rates 384
19-3d Changes in the Business and Investment Climate 385
19-4 International Finance and Alternative Exchange Rate Regimes 386
19-4a Fixed Rate, Unified Currency System 386
19-4b Pegged Exchange Rate Regime 387
19-5 Balance of Payments 388
19-5a Current-Account Transactions 389
19-5b Balance on Current Account 390
19-5c Capital-Account Transactions 391
19-5d Official Reserve Account 391
19-5e The Balance of Payments Must Balance 392
19-6 Exchange Rates, Current Account Balance, and Capital Inflow 392
Key Points 395
Part 5 Core Microeconomics 397

Chapter 20 Consumer Choice and Elasticity 398
20-1 Fundamentals of Consumer Choice 399
20-2 Marginal Utility, Consumer Choice, and the Demand Curve of an Individual 401
20-2a Consumer Equilibrium with Many Goods 402
20-2b Price Changes and Consumer Choice 404
20-2c Time Costs and Consumer Choice 404
20-2d Market Demand Reflects the Demand of Individual Consumers 405
20-3 Elasticity of Demand 405
20-3a Graphic Representation of Price Elasticity of Demand 407
20-3b How Large Are the Demand Elasticities of Various Products? 408
20-3c Why Do the Price Elasticities of Demand Vary? 409
20-3d Time and Demand Elasticity 411
20-4 How Demand Elasticity and Price Changes Affect Total Expenditures
(or Revenues) on a Product 411
20-5 Income Elasticity 413
20-6 Price Elasticity of Supply 414
Key Points 414
Chapter 21 Costs and the Supply of Goods 416

21-1 The Organization of the Business Firm 417
21-1a Incentives, Cooperation, and the Nature of the Firm 417
21-1b Three Types of Business Firms 418
21-2 How Well Does the Corporate Structure Work? 419
21-3 The Economic Role of Costs 420
21-3a Calculating Economic Costs and Profits 420
21-3b How Do Economic and Accounting Profit Differ? 420
21-4 Short-Run and Long-Run Time Periods 421
21-5 Categories of Costs 422
21-6 Output and Costs in the Short Run 423
21-6a Diminishing Returns and Production in the Short Run 424
21-6b Diminishing Returns and the Shape of the Cost Curves 426
21-7 Output and Costs in the Long Run 428
21-7a Economies and Diseconomies of Scale 429
CONTENTS xiii
21-7b Alternative Shapes of the LRATC 431

21-8 What Factors Cause Cost Curves to Shift? 431
21-8a Prices of Resources 432
21-8b Taxes 433
21-8c Regulations 433
21-8d Technology 433
21-9 The Economic Way of Thinking About Costs 433
21-9a What Are Sunk Costs? 435
21-9b How Will Cost Influence Supply? 435
Key Points 436
Chapter 22 Price Takers and the Competitive Process 438

22-1 Price Takers and Price Searchers 439
22-2 What Are the Characteristics of Price-Taker Markets? 439
22-3 How Does the Price Taker Maximize Profit? 440
22-3a Profit Maximizing—A Numeric Example 441
22-3b Losses and When to Go Out of Business 442
22-4 The Firm’s Short-Run Supply Curve 444
22-5 The Short-Run Market Supply Curve 445
22-6 Price and Output in Price-Taker Markets 445
22-6a Long-Run Equilibrium 446
22-6b How Will the Market Respond to an Increase in Demand? 447
22-6c How Will the Market Respond to a Decrease in Demand? 448
22-6d The Long-Run Market Supply Curve 448
22-6e Supply Elasticity and the Role of Time 450
22-7 The Role of Profits and Losses 451
22-8 Competition Promotes Prosperity 452
Key Points 454
Chapter 23 Price-Searcher Markets with Low Entry Barriers 457

23-1 Competitive Price-Searcher Markets 458
23-1a Price and Output in Competitive Price-Searcher Markets 458
23-2 Contestable Markets and the Competitive Process 461
23-3 Evaluating Competitive Price-Searcher Markets 462
23-4 A Special Case: Price Discrimination 464
23-5 Entrepreneurship and Economic Progress 466
23-5a Technology, Entrepreneurship, and Dynamic Competition 468
23-5b Dynamic Competition, Innovation, and Business Failures 469
Key Points 470
Chapter 24 Price-Searcher Markets with High Entry Barriers 473

24-1 Why Are Entry Barriers Sometimes High? 474
24-1a Economies of Scale 474
24-1b Government Licensing and Other Legal Barriers to Entry 474
24-1c Patents 474
24-1d Control Over an Essential Resource 475
24-2 Characteristics of a Monopoly 475
24-2a Price and Output under Monopoly 476
24-3 The Characteristics of an Oligopoly 478
24-3a Interdependence among Oligopolistic Firms 478
24-3b Substantial Economies of Scale 479
24-3c Significant Barriers to Entry 479
24-3d Identical or Differentiated Products 479
24-4 Price and Output under Oligopoly 480
24-4a The Incentive to Collude . . . and to Cheat 481
24-4b Obstacles to Collusion 482
24-4c Uncertainty and Oligopoly 484
xiv CONTENTS
24-5 Market Power and Profit—The Early Bird Catches the Worm 485
24-6 Defects of Markets with High Entry Barriers 486
24-7 Policy Alternatives When Entry Barriers Are High 487
24-7a Antitrust Policy and Controlling the Structure of an Industry 487
24-7b Reduce Artificial Barriers to Trade 488
24-7c Regulate the Price 488
24-7d Problems with Regulation 489
24-7e Supply Market with Government Production 490
24-7f Pulling It Together 491
24-8 Dynamic Competition in the Digital Age 491
Key Points 493
Chapter 25 The Supply of and Demand for Productive Resources 496

25-1 Resource Markets and Human and Nonhuman Resources 497
25-2 The Demand for Resources 498
25-2a Substitution in Production 499
25-2b Substitution in Consumption 499
25-2c How Time Changes the Demand for Resources 500
25-2d Shifts in the Demand for a Resource 500
25-3 Marginal Productivity and the Firm’s Hiring Decision 502
25-3a Using a Variable Resource with a Fixed Resource 502
25-3b MRP and the Firm’s Demand Curve for a Resource 504
25-3c Multiple Resources and How Much to Use of Each 505
25-3d Maximizing Profits When Multiple Resources Are Used 505
25-3e Cost Minimization When Multiple Resources Are Used 505
25-4 The Supply of Resources 507
25-4a Short-Run versus Long-Run Resource Supply 507
25-4b Short-Run Supply 509
25-4c Long-Run Supply 509
25-5 Supply, Demand, and Resource Prices 510
25-5a The Coordinating Function of Resource Prices 511
Key Points 512
Chapter 26 Earnings, Productivity, and the Job Market 515

26-1 Why Do Earnings Differ? 516
26-1a Earnings Differentials Due to Nonidentical Workers 516
26-1b Earnings Differentials Due to Nonidentical Jobs 521
26-1c Earnings Differentials Due to the Immobility of Labor 521
26-1d Sources of Wage Differentials: A Summary 523
26-2 The Economics of Employment Discrimination 524
26-2a How Much Impact Does Employment Discrimination Have on Earnings? 525
26-3 The Link between Productivity and Earnings 526
26-3a Robots, Productivity, and the Future of Employment 527
26-3b Productivity and Compensation: Measurement Problems 528
Key Points 530
Chapter 27 Investment, the Capital Market, and the Wealth of Nations 532
27-1 Why People Invest 533
27-2 Interest Rates 534
27-2a How Interest Rates Are Determined 534
27-2b The Money Rate versus the Real Rate of Interest 535
27-2c Interest Rates and Risk 536
27-3 The Present Value of Future Income and Costs 536
27-4 Present Value, Profitability, and Investment 538
27-4a Expected Future Earnings, the Interest Rate, and Asset Values 539
27-4b Asset Prices, Business Investment, and Efficiency 541
27-5 Investing in Human Capital 541
CONTENTS xv
27-6 Uncertainty, Entrepreneurship, and Profit 542

27-6a Returns to Physical and Human Capital 545
27-7 Why Is the Capital Market So Important? 546
Key Points 549
Chapter 28 Income Inequality and Poverty 551

28-1 How Much Income Inequality Exists in the United States? 552
28-1a The Factors Affecting Income Distribution 553
28-1b Why Has Income Inequality Increased? 555
28-2 Household Expenditures and Economic Inequality 557
28-3 Income Mobility and Inequality in Economic Status 558
28-4 Poverty in the United States 560
28-4a Transfer Payments and the Poverty Rate 561
28-4b Why Haven’t Anti-Poverty Programs Been More Effective? 562
28-4c Estimating the Costs of Redistribution 564
28-4d Why Transfers Often Fail to Improve the Well-Being of their Recipients 565
28-5 Income Inequality: Some Concluding Thoughts 566
Key Points 567
Part 6 Applying the Basics: Special Topics in Economics 571

Special Topic 1: Government Spending and Taxation 572
Special Topic 2: The Economics of Social Security 587
Special Topic 3: The Stock Market: Its Function, Performance, and Potential as an
Investment Opportunity 597
Special Topic 4: Keynes and Hayek: Contrasting Views on Sound Economics and the
Role of Government 608
Special Topic 5: The 2020 COVID-19 Recession: Cause, Response, and Implications for
the Future 615
Special Topic 6: The Great Recession of 2008–2009: Causes and Response 623
Special Topic 7: Lessons from the Great Depression 637
Special Topic 8: The Economics of Health Care 651
Special Topic 9: Earnings Differences between Men and Women 663
Special Topic 10: Do Labor Unions Increase the Wages of Workers? 670
Special Topic 11: The Question of Resource Exhaustion 681
Special Topic 12: Difficult Environmental Cases and the Role of Government 691
Appendix A General Business and Economics Indicators for the United States 701
Appendix B Answers to Selected Critical Analysis Questions 708
Glossary 725
Index 737
RELATIONSHIP BETWEEN MAIN EDITION AND THE MACRO/MICRO EDITIONS
In addition to the full length text, Microeconomic and Macroeconomic splits of this text are also available.
The chapters and special topics covered by the micro and macro split versions are indicated in this table.
Chapters
Economics Microeconomics Macroeconomics
1 1 1 The Economic Approach
2 2 2 Some Tools of the Economist
3 3 3 Demand, Supply, and the Market Process
4 4 4 Demand and Supply: Applications and Extensions
5 5 5 Difficult Cases for the Market, and the Role of
Government
6 6 6 The Economics of Political Action
7 7 Taking the Nation’s Economic Pulse
8 8 Economic Fluctuations, Unemployment, and Inflation
9 9 An Introduction to Basic Macroeconomic Markets
10 10 Dynamic Change, Economic Fluctuations, and the
AD–AS Model
11 11 Fiscal Policy: The Keynesian View and the Historical
Development of Macroeconomics
12 12 Fiscal Policy, Incentives, and Secondary Effects
13 13 Money and the Banking System
14 14 Modern Macroeconomics and Monetary Policy
15 15 Macroeconomic Policy, Economic Stability, and the
Federal Debt
16 16 Creating an Environment for Growth and Prosperity
17 17 The Economics of Development
18 16 18 Gaining from International Trade
19 19 International Finance and the Foreign Exchange Market
20 7 Consumer Choice and Elasticity
21 8 Costs and the Supply of Goods
22 9 Price Takers and the Competitive Process
23 10 Price-Searcher Markets with Low Entry Barriers
24 11 Price-Searcher Markets with High Entry Barriers
25 12 The Supply of and Demand for Productive Resources
26 13 Earnings, Productivity, and the Job Market
27 14 Investment, the Capital Market, and the Wealth of Nations
28 15 Income Inequality and Poverty
SPECIAL TOPICS
Economics Microeconomics Macroeconomics Topic Title

1 1 1 Government Spending and Taxation
2 2 2 The Economics of Social Security
3 3 3 The Stock Market: Its Function, Performance, and
Potential as an Investment Opportunity
4 4 4 Keynes and Hayek: Contrasting Views on Sound
Economics and the Role of Government
5 5 5 The 2020 COVID-19 Recession: Cause, Response, and
Implications for the Future
6 6 6 The Great Recession of 2008–2009: Causes and
Response
7 7 7 Lessons from the Great Depression
8 8 The Economics of Health Care
9 9 Earnings Differences between Men and Women
10 10 Do Labor Unions Increase the Wages of Workers?
11 11 The Question of Resource Exhaustion
12 12 Difficult Environmental Cases and the Role of
Government
PREFACE
These are interesting times. Our lives have been shaken by a once-in-a-century worldwide
pandemic, unemployment rates not seen since the Great Depression, racial unrest, and
political uncertainty. Moreover, technology is altering how we communicate, learn, and
interact with each other. Students are struggling to understand recent changes and their
impact on their lives. Beginning with the first edition 45 years ago, our goal has been to
use the tools of economics to explain how the real world works and to do so in a clear and
understandable manner. This goal was at the forefront of our minds as we worked on this
edition.
We have always used the tools of economics to analyze the operation of both the
market and political processes. Both are central to the understanding of today’s rapidly
changing world. More than any other principles text, we highlight the roles of entrepre-
neurship, dynamic competition, and public choice analysis. Entrepreneurship is the key to
understanding how markets work and the vast improvement in our living standards. Public
choice is the key to understanding the structure of incentives confronted by voters, politi-
cians, and bureaucrats and how this impacts political outcomes. This text examines both
markets and political decision-making and indicates conditions under which each works
well and alternative conditions that cause each to work poorly.
The micro chapters provide extensive coverage of entrepreneurship, innovation, and
dynamic competition in the operation of markets. The macro chapters analyze the major
alternative theories of both fiscal and monetary policy and provide up-to-date coverage of
recent changes in Federal Reserve policy, government debt, and other factors impacting
the macroeconomy. The “Beyond the Basics” Special Topics section includes features on
micro topics such as the stock market, health care, and environmental economics as well as
macro topics like the Great Depression, the Great Recession of 2008-2009, and the 2020
COVID-19 Recession.
ORGANIZATION AND INSTRUCTOR

FLEXIBILITY
The organization of Economics: Private and Public Choice is designed to provide instruc-
tors with maximum flexibility. Those using the full-length text for a two-semester course
can cover either microeconomics or macroeconomics first. As in recent editions, the text
is divided into core chapters and a concluding special topics section. The 28 core chapters
cover all of the material taught in most principles courses, and they are presented in the
usual manner. Examples and data from the real world are used to reinforce the analysis.
In addition, the “Beyond the Basics” Special Topics section includes 12 relatively short
special topic applications covering both micro and macro topics. Features in this section
address questions such as these: “How will the 2020 COVID-19 Recession impact our
future?,” “What caused the Great Depression?,” “Is discrimination responsible for the earn-
ings differences between men and women?,” and “Are we running out of resources?” These
features will grab the interest of students and are short enough to cover during a single
class period. If you have not integrated the special topic materials into your course, please
consider doing so. They will enrich your course and help students better understand the
political economy debates that dominate the daily news of our world.
Instructors integrating public choice throughout their course will probably want to
cover Chapters 5 and 6 before moving to the core micro or macro material. Others teach-
ing a microeconomics course may want to jump from Chapter 4 directly to the core micro
chapters. Correspondingly, some macroeconomics instructors will want to move directly
xix
xx PREFACE
from Chapter 3 or 4 to the core macro material. The chapters have been written so that any
of these options will work.
NEW MATERIAL IN THIS EDITION

New material designed to enliven economics and illustrate its relevance has been integrated
into just about every chapter. The following are several of these additions:
The coverage of entrepreneurship and its importance as a source of new goods, services,
and production methods that enrich our lives has been expanded in several chapters, including
2, 3, 16, 17, 22, 23, and 24. In addition, a new series, “Entrepreneurs Who Have Changed Our
Lives,” is integrated into more than a dozen chapters. This series highlights both the contri-
butions and interesting personal attributes of key entrepreneurs. While students will recognize
several of the entrepreneurs in the series, others are relatively unknown. Jeff Bezos, Kendra
Scott, Steve Jobs, Malcom McLean, Fred Smith, Oprah Winfrey, Sergey Brin, and Larry Page
are among the entrepreneurs featured in the series. This feature will enhance the knowledge of
students about how their lives are impacted by entrepreneurs.
Chapter 2 includes a new feature on “Are Scandinavian Countries Socialist?”
The empirical evidence on this question is examined.
In Chapter 4, the analysis of the minimum wage, including the effect of recent
increases in city and state minimums, has been updated and expanded.
Chapter 13 has been modified to reflect the recent changes in the operating procedures
of the Federal Reserve, including the elimination of reserve requirements and substitution
of interest payments to banks as the primary mechanism used to control bank reserves.
The recent dramatic changes in the relationships between (a) bank reserves and checkable
deposits, and (b) the monetary base and the money supply are also examined.
Chapter 14 examines the low interest rates of recent years and factors underlying those
rates; it also analyzes their impact on both the economy and the conduct of monetary policy.
Chapter 15 examines the expanding federal debt, explains why it is so difficult to con-
trol, and analyzes the potential consequences of high levels of debt.
Chapters 16 and 17 on economic growth and development were revised extensively.
These chapters highlight the fundamental causes of economic growth and provide analysis
of the importance of economic institutions, climate and geography, history, demography,
technology, investment, and changes in transportation and communication costs on the
pattern of growth and development during the past 1000 years. Factors underlying the
remarkable economic progress of developing countries during the past half-century are
examined in detail. More than any other principles text, this edition reflects the modern
view of economic growth and development.
Chapter 23 (Chapter 10 in the micro split) contains new material that examines how
technological advances that have reduced search and transaction costs, including the growth
of the ‘sharing economy,’ have altered the nature of markets and enabled entrepreneurs to
break down traditional barriers to entry and expand competition.
Chapter 24 (Chapter 11 in the micro split) contains new material on dynamic competition
in the digital age, including the impact of network effects and platform businesses. These two
concepts help students understand the changing nature of markets and the growing presence of
larger online firms. The impact of the sharing economy and the platform business model based
on crowdsourced resources on the competitiveness of markets and choices available to consum-
ers are examined. Improvements in technology, communications, and transportation have low-
ered transaction and monitoring costs, weakening the forces leading to diseconomies of scale.
Marketing, advertising, and information costs have also changed in ways that make it easier to
reach a larger customer base more rapidly and cost-effectively.
The new Special Topic 5 on the 2020 COVID-19 Recession examines the factors
underlying the huge increase in unemployment and the severe economic downturn. The
causes of the economic crisis, the policy response, and examination of how this recession differs
from earlier ones are all discussed. This feature provides the foundation for future analysis
of an economic event that is sure to attract student interest in the years immediately ahead.
PREFACE xxi
ADDITIONAL TEXT FEATURES

Economics: Private and Public Choice retains several features that make the presentation
of economics both more interesting and understandable.
• Keys to Economic Prosperity. Students often fail to appreciate the organizational and
institutional factors that are the foundation for economic progress. To help remedy this
situation, we have incorporated a “Keys to Economic Prosperity” feature that highlights
the importance of factors like gains from trade, secure property rights, competition, and
free trade as sources of economic prosperity. In all, 12 key factors that underlie modern
economic prosperity are highlighted at appropriate places throughout the text; they also
are listed inside the front cover.
• Applications in Economics. “Applications in Economics” boxes apply economic theory
to real-world issues and controversies. These features illustrate the importance and pow-
er of the principles covered in the text.
• Outstanding Economists. Boxes throughout the text highlight the lives of major
economists and focus on how their work has contributed to the development of
economics.
• Entrepreneurs Who Have Changed Our Lives. This new series highlights both the
economic contribution and personal attributes of key entrepreneurs. It will help
students better understand the role of entrepreneurs and how their actions have
contributed to the development of various goods and services that are often taken
for granted.
• Key Point Summaries. At the end of each chapter, the Key Points section provides
students with a concise statement of the material covered in the chapter (the chapter
learning objectives).
• Critical Analysis Questions. Each chapter concludes with a set of analysis and discus-
sion questions designed to test students’ ability to analyze economic issues and to apply
economic theory to real-world events. Appendix B at the end of the text contains sug-
gested answers for approximately a third of these questions.
SUPPLEMENTARY MATERIALS
The text is accompanied by a robust set of online learning tools designed to support your
classroom work. MindTap includes real-time, interactive tutorials; online experiments;
Graph Builder; A+ Test Prep; Graphing at a Glance; ConceptClips; Audio Cases with
assessments; Concept & Application Videos; automatically graded quizzes; and automati-
cally graded problem sets. Likewise, the book’s dynamic PowerPoint presentation has been
further enhanced to facilitate your teaching.
FOR THE STUDENT

MindTap MindTap is a fully online, highly personalized learning experience built via
Cengage Learning content that combines student learning tools—readings, multimedia,
activities, and assessments—into a singular Learning Path that guides students through
their course.
FOR THE INSTRUCTOR

We are sure that many of the features incorporated with this textbook will help you become
a better teacher and make your classes more interesting to students. Personally, we have
incorporated the Keys to Economic Prosperity series, economics video clips, homework
assignments, and online quiz questions into our own classes with great success. The full set
of supplements that can accompany the book include the following:
xxii PREFACE
MindTap MindTap is a fully online, highly personalized learning experience built via
Cengage Learning content that combines student learning tools—readings, multimedia,
activities, and assessments—into a singular Learning Path that guides students through
their course. Instructors personalize the experience by customizing authoritative Cengage
Learning content and learning tools, including the ability to add their own content in the
Learning Path via apps that integrate into the MindTap framework seamlessly with Learn-
ing Management Systems.
Interactive eBook In addition to interactive teaching and learning tools, Economic

MindTap includes an interactive eBook. Students can take notes, highlight, search, and
interact with embedded media specific to their book. Use it as a supplement to the printed
text or as a substitute—with MindTap, the choice is up to your students.
Test Banks The test banks for the 17th edition were prepared by the author team
with the assistance of Shannon Aucoin and other members of Cengage’s excel-
lent team of subject matter experts. The authors have worked hard to update and im-
prove the test banks for this edition. Joe Calhoun of Florida State University, was the
primary author of the test bank for the last edition and the current version is reflective
of this excellent work. The test bank contains approximately 6,000 questions—multiple
choice and short answer. Within each chapter, the questions are tied to the major heads
and specific topics within the chapter. Instructors who want to motivate their students
to study will find online practice quizzes on MindTap that can easily be incorporated
into their quizzes and exams. The cloud-based test banks for this edition have been en-
hanced significantly. Cognero contains all of the questions in the test bank so that you
can create and customize tests in minutes. You can easily edit and import your own
questions and graphics and edit and maneuver existing questions.
PowerPoint We believe our PowerPoint presentation, prepared by Joseph Connors of

Florida Southern University, is the best you will find in the principles market. The pre-
sentation includes chapter-by-chapter lecture notes and hyperlinked slides of the exhibits
included in the text. To facilitate classroom discussion and interaction, questions are
strategically interspersed throughout the PowerPoint slides to help students develop the
economic way of thinking. Instructions explaining how professors can easily add, delete,
and modify slides in order to tailor the presentation to their liking are included. If instruc-
tors want to make the PowerPoint presentation available to students, they can place it on
their website (or the site for their course).
Instructor’s Manual Information on how to use and modify the PowerPoint material
is contained in the front of the Instructor’s Manual. The manual is divided by chapters, and
each chapter begins with a detailed chapter outline in lecture-note form. It is designed to
help instructors organize their notes to match the 17th edition of the book. Then there are
focus questions which cover all the concepts in the chapter. Then the context of each chap-
ter is given followed by important points and teaching suggestions. Each chapter also pro-
vides in-class economic games and experiments. Contributed in part by Professor Charles
Stull of Kalamazoo College, the games are popular with many instructors. We hope you
will try them.
The book companion Web site contains the key supplements designed to aid instruc-
tors, including the content from the Instructor’s Manual, test banks, and PowerPoint lecture
and exhibit slides
A NOTE TO INSTRUCTORS
As we try to improve the book from one edition to the next, we rely heavily on our
experiences as teachers. But our experience using the book is minuscule compared to that
of the hundreds of instructors who use it nationwide. If you encounter problems or have
PREFACE xxiii
suggestions for improving the book, we urge you to let us know by writing to us in care of
Cengage Learning, 5191 Natorp Blvd., Mason, OH 45040.
A NOTE TO STUDENTS
This textbook contains several features we think will help you maximize (a good economic
term) the returns of your study efforts. Here are some of the things that will help you and a
few tips for making the most of them.
• Each chapter begins with an opening page that indicates the central issues of the chapter.
Before you read the chapter, briefly think about the questions the chapter will examine
and how they relate to the material of prior chapters.
• The textbook is organized in the form of an outline. The headings within the text (in
red) are the major points of the outline. Minor headings are subpoints under the major
headings. In addition, important subpoints within sections are often set off and num-
bered. Bold italicized type is used to highlight material that is particularly important.
Sometimes “thumbnail sketches” are included to recap material and help you keep the
important points mentally organized.
• A “Key Points” summary appears at the end of each chapter. Use the summary as a
checklist to determine whether you understand the major points of the chapter.
• A review of the exhibits and illustrative pictures will also provide you with a summary
of the key points of each chapter. The accompanying captions briefly describe the eco-
nomic phenomena illustrated by the exhibits.
• The key terms introduced in each chapter are defined in the margins. As you study the
chapter, review the marginal definition of each key term as it is introduced. Later, you
also may find it useful to review the marginal definitions. If you have forgotten the
meaning of a term introduced earlier, consult the glossary at the end of the book.
• The critical analysis questions at the end of each chapter are intended to test your un-
derstanding of the economic way of thinking. Answering these questions and solving
the problems will greatly enhance your knowledge of the material. Answers to approxi-
mately a third of these questions are provided in Appendix B.
If you need more practice, ask your professor about MindTap.
ACKNOWLEDGMENTS
A project of this magnitude is a team effort. Through the years, numerous people have
assisted us in various ways. Jane Shaw Stroup deserves special recognition for her con-
tribution to this edition. She researched and prepared the initial draft of the material on
the “Entrepreneurs Who Have Changed Our Lives” series and assisted the author team
with research and proofing. As a result, we listed her name on the title page. Reagan
Sobel provided valuable assistance in updating examples, data, and content in many chapters.
Signè Thomas, Joe Connors, Robert Lawson, Joe Calhoun, Hugo Moises Montesinos Yufa
and Amy Gwartney assisted us with preparation of exhibits and proofing of the manuscript.
The text still bears an imprint of the contributions of Woody Studenmund of Occidental
College and Gary Galles of Pepperdine University, who assisted us in numerous ways with
past editions.
We are also very much indebted to the excellent team of professionals at Cengage
Learning, including Chris Rader, Product Manager; Sarah Keeling, Learning Designer;
Colleen Farmer, Senior Content Project Manager; Ashley Maynard, Intellectual Property
Analyst; John Carey, Marketing Manager; and Shannon Aucoin, Ethan Crist, Eugenia
Belova, Brian Rodriguez, and Kasie Jean, the inhouse subject matter experts.
We have often revised material in light of suggestions made by reviewers, users,
friends, and even a few competitors. In this regard, we would like to express our apprecia-
tion to the following people for their reviews and helpful suggestions for recent editions:
Pete Calcagno, College of Charleston; Joseph Calhoun, Florida State University; Cathy
Carey, Bowling Green University; Lee Coppock, University of Virginia; Hugo Faría,
University of Miami; Tawni Ferrarini, Northern Michigan University; Burton Folsom,
Hillsdale College; Seth Gershenson, Michigan State University; Monica Greer, Bellarm-
ine University; Michael Hammock, Florida State University; Robert Higgs, Independent
Institute; John Hilston, Eastern Florida State College; Randall Holcombe, Florida State
University; Aaron Lowen, Grand Valley State University; Lynn MacDonald, St. Cloud
State University; Thomas McCaleb, Florida State University; Barbara Moore, University
of Central Florida; Mark Perry, University of Michigan–Flint; Ivan Pongracic, Hillsdale
College; Gerry Simons, Grand Valley State University; and Carol Sweeney, Florida Gulf
Coast University.
Through the years, many other instructors have provided us with insightful comments
and constructive suggestions. We would like to express our appreciation to the following:
Steve Abid, Grand Rapids Community College; Douglas Agbetsiafa, Indiana University,
South Bend; James C. W. Ahiakpor, California State University, Hayward; Ali T. Akar-
ca, University of Illinois at Chicago; Ryan C. Amacher, University of Texas at Arlington;
Stephen A. Baker, Capital University; Bharati Basu, Central Michigan University; Don
Bellante, University of South Florida; Jennis Biser, Austin Peay State University; Don-
ald Boudreaux, George Mason University; George Bowling, St. Charles Community Col-
lege; Robert Brittingham, Christian Brothers University; Byron Brown, Michigan State
University; James Bryan, Manhattanville College; Kathy Clark, Florida Southwestern
State College; Mike Cohick, Collin County Community College; David S. Collins, Vir-
ginia Highlands Community College; Steven R. Cunningham, University of Connecticut;
Jeff Edwards, Lone Star College–CyFair; Ann Eike, University of Kentucky; Christina
Esquivel, McLennan Community College; Robert C. Eyler, Sonoma State University;
James R. Fain, Oklahoma State University; Andrew W. Foshee, McNeese State University;
Mark Funk, University of Arkansas at Little Rock; Gary Galles, Pepperdine University;
xxv
xxvi ACKNOWLEDGMENTS
Marsha Goldfarb, University of Maryland Baltimore County; Richard Gosselin, Houston

Community College; Darrin Gulla, University of Kentucky; Barry Haworth, University of
Louisville; Ronald Helgens, Golden Gate University; Robert E. Herman, Nassau Com-
munity College/SUNY; William D. Hermann, Golden Gate University, San Francisco; Rey
Hernandez, Metropolitan State College of Denver; Brad Hobbs, Clemson University; Jim
Hubert, Seattle Central Community College; Katherine Huger, Charleston Southern Uni-
versity; Woodrow W. Hughes, Jr., Converse College; Jeffrey Rogers Hummel, San Jose
State University; Tom Jeitschko, Michigan State University; Rob H. Kamery, Christian
Brothers University; Derek Kellenberg, University of Montana; Robert Kling, Colorado
State University; Frederic R. Kolb, University of Wisconsin–Eau Claire; Barbara Kousk-
oulas, Lawrence Technological University; Cory Krupp, Duke University; Jean Kujawa,
Lourdes University; Randy W. LaHote, Washtenaw Community College; John Larrivee,
Mount St. Mary’s University; Robert Lawson, Southern Methodist University; Don R.
Leet, California State University, Fresno; Joe LeVesque, Northwood University; Andrew T.
Light, Liberty University; Edward J. López, Western Carolina University; Dale Matcheck,
Northwood University; G. Dirk Mateer, University of Texas; John McArthur, Wofford Col-
lege; David M. Mitchell, Missouri State University; Hadley Mitchell, Taylor University;
Glen A. Moots, Northwood University; Debasri Mukherjee, Western Michigan University;
Todd Myers, Grossmont College; Jennifer Pate, Loyola Marymount University; Lloyd Orr,
Indiana University, Bloomington; Judd W. Patton, Bellevue University; James Payne, Uni-
versity of New Orleans; Dennis Pearson, Austin Peay State University; Claudiney Pereira,
Arizona State University; Jack Phelan, University of New Haven; Jennifer Platania, Elon
University; Robert C. Rencher, Jr., Liberty University; Dan Rickman, Oklahoma State
University; Karin L. Russell, Keiser University; Allen Sanderson, University of Chicago;
Thomas W. Secrest, USC Coastal Carolina; Tim Shaugnessey, Louisiana State Univer-
sity–Shreveport; Gerald Simons, Grand Valley State University; Charles D. Skipton, Uni-
versity of New Haven; Marcia Snyder, College of Charleston; John Solow, University of
Iowa; Ken Somppi, Southern Union State Community College; John Sophocleus, Auburn;
Joe Stevano, Coker College; Edward Stringham, Trinity College; David Switzer, St.
Cloud State University; Alex Tokarev, Northwood University; Richard D.C. Trainer,
Warsaw School of Economics; Bich Tran, San Jacinto College; Scott Ward, Trevecca
Nazarene University; Christopher Westley, Florida Gulf Coast University; David Wharton,
Washington College; Mark Wheeler, Western Michigan University; Edward Wolpert,
University of Central Florida; and Janice Yee, Worcester State University.
ABOUT THE AUTHORS
James D. Gwartney is Professor of Economics at Florida State University, where he

holds the Gus A. Stavros Eminent Scholar Chair of Economic Education. He is a co-author
of Common SenseEconomics: What Everyone Should Know About Wealth And Prosperity
(St. Martin’s Press, 2016), a primer on economics and personal finance. He is also the co-
author of the annual report Economic Freedom of the World, which provides information
on the consistency of institutions and policies with economic freedom for more than 160
countries. His publications have appeared in scholarly journals, including the American
Economic Review, Journal of Political Economy, Journal of Economic Education, Southern
Economic Journal, and Journal of Institutional and Theoretical Economics. During 1999–
2000, he served as Chief Economist of the Joint Economic Committee of the U. S. Congress.
He is a past president of the Southern Economic Association and the Association of Private
Enterprise Education. His Ph.D. in economics is from the University of Washington.
Richard L. Stroup is Professor Emeritus of economics at Montana State University

and Professor Emeritus of economics at North Carolina State University. His Ph.D. is from
the University of Washington. From 1982–1984, he served as Director of the Office of
Policy Analysis at the U.S. Department of the Interior. Stroup has published and spoken
on global warming, land use regulation, archaeology, and needed environmental policy
improvements. His research helped to develop the approach known as free market envi-
ronmentalism. His book Eco-nomics: What Everyone Should Know About Economics and
the Environment (Washington: Cato Institute, 2003), was sponsored by the Property and
Environment Research Center, of which he is a cofounder.
Russell S. Sobel is Professor of Economics and Entrepreneurship in the Baker School

of Business at The Citadel in his hometown of Charleston, South Carolina. He is co-editor
of the Southern Economic Journal and editorial board member for the Journal of Entre-
preneurship & Public Policy and Public Choice. He has received numerous awards for
both his teaching and research including the Kenneth G. Elzinga Distinguished Teaching
Award from the Southern Economic Association, the Georgescu-Roegen Prize for Best
Article of the Year in the Southern Economic Journal, the Association of Private Enterprise
Education Distinguished Scholar Award, and the Sir Antony Fisher International Memo-
rial Award. He is the author or coauthor of over 250 books and articles including Growth
and Variability in State Tax Revenue: An Anatomy of State Fiscal Crises, The Rule of Law,
Unleashing Capitalism, and The Essential Joseph Schumpeter. His scholarly publications
have appeared in journals such as the Journal of Political Economy, Journal of Law and
Economics, Public Choice, Journal of Business Venturing, Small Business Economics, and
Economic Inquiry. His current research focuses on the intersection of entrepreneurship
and economic policy. His Ph.D. in economics is from Florida State University.
David A. Macpherson is the E.M. Stevens Professor of Economics and Economics

Department Chair at Trinity University. Previously, he was Director of the Pepper Institute
on Aging and Public Policy and the Rod and Hope Brim Eminent Scholar of Economics
at Florida State University, where he received two university-wide awards for teaching
excellence. His teaching areas include principles of microeconomics, money and banking,
econometrics, and labor economics. Dr. Macpherson is an applied economist whose re-
search focuses on real estate, pensions, discrimination, industry deregulation, labor unions,
and the minimum wage. He has published more than 60 articles in leading economics
and real estate journals, including Review of Economics and Statistics, Journal of Labor
xxvii
xxviii ABOUT THE AUTHORS
Economics, Journal of Human Resources, Industrial and Labor Relations Review, and
Journal of Real Estate Economics and Finance. His research has been funded by a variety
of entities including the National Science Foundation, Florida Legislature, and the National
Association of Realtors. He is co-author of the undergraduate labor economics text, Con-
temporary Labor Economics, 12e. He is included in Who’s Who in Economics, 4e, which
includes the 1,200 most frequently cited economists. Dr. Macpherson received his under-
graduate degree and Ph.D. from Pennsylvania State University.
PAR T 1
The Economic Way of Thinking
Life is a series of choices

Economics is about how people choose. The choices constantly altering the attractiveness of various op-
we make influence our lives and those of others. Your tions and the opportunities available to us. The eco-
future will be influenced by the choices you make with nomic way of thinking is all about how incentives alter
regard to education, job opportunities, savings, and the choices people make. It can help you make bet-
investment. Furthermore, changes in technology, deter choices and enhance your understanding of our
mographics, communications, and transportation are dynamic world.
CHAPTER 1
The Economic Approach

Economist, n.–A scoundrel whose faulty vision sees things as they really are, not as they ought
to be. —Daniel K. Benjamin, after Ambrose Bierce
Welcome to the world of economics. In recent You may have heard some of the follow-
years, economics has often been front-page ing statements: The soaring federal debt is
news, and it affects all of our lives. Soaring un- mortgaging the future of our children, and
employment as the result of the stay-at-home it will bankrupt the country if we do not get
orders accompanying the 2020 COVID-19 pan- it under control. Foreign immigrants are steal-
demic, the rise of online work and school, the growth ing our jobs and paralyzing our economy. A move
of the sharing economy, concern about robots elimi- toward socialism would improve outcomes in the
nating jobs, tariffs on international trade, the rising United States. A higher minimum wage will help
cost of a college education, income inequality, and the poor. Making college tuition free for all will pro-
climate change—all of these have been in the news mote economic growth and lead to higher earn-
and have exerted a major impact on the lives of al- ings. Are these statements true? This course will
most everyone around the world. Economics will en- provide you with knowledge that will enhance your
hance your understanding of all of these topics and understanding of issues like these and numerous oth-
many more. You will soon see that economics is about ers. It may even alter the way you think about them.
much more than just financial markets and economic The origins of economics date back to Adam
policy. In fact, a field trip to the fruits and vegetables Smith, a Scottish moral philosopher, who expressed
section at your local grocery store could well be filled the first economic ideas in his breakthrough book, An
with more economics lessons than a trip to the New Inquiry into the Nature and Causes of the Wealth of
York Stock Exchange. Nations, published in 1776. As the title of his book
In a nutshell, economics is the study of human suggests, Smith sought to explain why people in some
behavior, with a particular focus on human decision- nations were wealthier than those in others. This very
making. It will introduce you to a new and powerful question is still a central issue in economics. It is so
way of thinking that will both help you make better important that throughout this book we will use a spe-
decisions and enhance your understanding of how cial “Keys to Economic Prosperity” symbol in the
the world works. margin to highlight sections that focus on this topic.
A listing of the major keys to prosperity is presented • What is the economic way of thinking? What is
inside the front cover of the book. These keys and ac- the basic postulate of economics, and why is it so
companying discussions will help you understand what important?
factors enable economies, and their citizens, to grow
• What is the difference between positive and norma-
wealthier and prosper.
tive economics?
As you read this chapter, look for answers to
the following questions:
• What is scarcity? Why does scarcity necessitate ra-
tioning and cause competition?
Outstanding Economist: The Importance of

Adam Smith, the Father of Economic Science
Economics is a relatively young science. The foundation of economics was laid in 1776, when
©Bettmann/CORBIS
Adam Smith (1723–1790) published An Inquiry into the Nature and Causes of the Wealth of
Nations.
Smith was a lecturer at the University of Glasgow, in his native Scotland. Before economics,
morals and ethics were actually his concern. His first book was The Theory of Moral Sentiments.
For Smith, self-interest and sympathy for others were complementary. However, he did not believe that charity alone
would provide the essentials for a good life.
Smith stressed that free exchange and competitive markets would harness self-interest as a creative force. He be-
lieved that individuals pursuing their own interests would be directed by the “invisible hand” of market prices toward
the production of those goods that were most advantageous to society. He argued that the wealth of a nation does
not lie in gold and silver, but rather in the goods and services produced and consumed by people. According to Smith,
competitive markets would lead to coordination, order, and efficiency without the direction of a central authority.
These were revolutionary ideas at the time, but they had consequences. Smith’s ideas greatly influenced not only
Europeans but also those who developed the political economy structure of the United States. Further, Smith’s notion
of the “invisible hand” of the market continues to enhance our understanding of why some nations prosper while
others stagnate.1
1
For an excellent biographical sketch of Adam Smith, see David Henderson, ed., The Fortune Encyclopedia of Economics (New York: Warner Books, 1993),
836–38. The entire text of this useful encyclopedia is now available online, free of charge, at https://oll.libertyfund.org/titles/1064.
1-1 WHAT IS ECONOMICS ABOUT?

Economics is about scarcity and the choices we have to make because our desire for goods
and services is far greater than their availability from nature. Would you like some new
clothes, a nicer car, and a larger apartment? How about better grades and more time to
watch television, go skiing, and travel? Do you dream of driving your brand-new Porsche
into the driveway of your oceanfront house? As individuals, we have a desire for goods that
is virtually unlimited. We may want all of these things. Unfortunately, both as individuals
and as a society we face a constraint called scarcity that prevents us from being able to Scarcity
completely fulfill our desires. Fundamental concept of
Scarcity is present whenever there is less of a good or resource freely available than economics that indicates that
there is less of a good freely
people would like. There are some things that are not scarce—seawater comes to mind; available than people would
nature has provided as much of it as people want. But almost everything else you can think like.
of—even your time—is scarce. In economics, the word scarce has a very specific meaning
that differs slightly from the way it is commonly used. Even if large amounts of a good
have been produced, it is still scarce as long as there is not as much of it freely available
as we would all like. For example, even though goods like apples and automobiles are
4 PART 1 THE ECONOMIC WAY OF THINKING
relatively abundant in the United States, they are still scarce because we would like to have
more of them than nature has freely provided. In economics, we generally wish to deter-
mine only if a good is scarce or not, and refrain from using the term to refer to the relative
availability or abundance of a good or resource.
Because of scarcity, we have to make choices. Should I spend the next hour studying or
watching TV? Should I spend my last $20 on a new cell phone case or on a shirt? Should this
Choice factory be used to produce clothing or furniture? Choice, the act of selecting among alter-
The act of selecting among
natives, is the logical consequence of scarcity. When we make choices, we constantly face
alternatives.
trade-offs between meeting one desire or another. To meet one need, we must let another
go unmet. The basic ideas of scarcity and choice, along with the trade-offs we face, provide
the foundation for economic analysis.
Resource Resources are the ingredients, or inputs, that people use to produce goods and ser-
An input used to produce vices. Our ability to produce goods and services is limited precisely because of the limited
economic goods. Land, labor, nature of our resources.
skills, natural resources,
and human-made tools and Exhibit 1 lists a number of scarce goods and the limited resources that might be used
equipment provide examples. to produce them. There are three general categories of resources. First, there are human
Throughout history, people resources—the productive knowledge, skill, and strength of human beings. Second, there
have struggled to transform are physical resources—things like tools, machines, and buildings that enhance our ability
available, but limited, to produce goods. Economists often use the term capital when referring to these human-
resources into things they
would like to have—economic made resources. Third, there are natural resources—things like land, mineral deposits,
goods. oceans, and rivers. The ingenuity of humans is often required to make these natural re-
sources useful in production. For example, until recently, the yew tree was considered a
Capital “trash tree,” having no economic value. Then, scientists discovered that the tree produces
Human-made resources (such
as tools, equipment, and taxol, a substance that could be used to fight cancer. Human knowledge and ingenuity
structures) used to produce made yew trees a valuable resource. As you can see, natural resources are important, but
other goods and services. knowing how to use them productively is just as important. This knowledge is something
They enhance our ability to that is discovered as a result of the competitive market process.
produce in the future.
As economist Thomas Sowell points out, cavemen had the same natural resources at
their disposal that we do today. The huge difference between their standard of living and
ours reflects the difference in the knowledge they could bring to bear on those resources
versus what we can.1 Over time, human ingenuity, discovery, improved knowledge, and
better technology have enabled us to produce more goods and services from the available
resources. Nonetheless, our desire for goods and services is still far greater than our ability
to produce them. Thus, scarcity is a fact of life today, and in the foreseeable future. As a
result, we confront trade-offs and have to make choices. This is what economics is about.
EXHIBIT 1
Scarce Goods Limited Resources
A General Listing of
Food (bread, milk, meat, eggs, Land (various degrees of fertility)
Scarce Goods and
vegetables, coffee, etc.) Natural resources (rivers, trees, minerals,
Limited Resources Clothing (shirts, pants, blouses, shoes, oceans, etc.)
History is a record of our socks, coats, sweaters, etc.) Machines and other human-made physical
struggle to transform Household goods (tables, chairs, rugs, resources
available, but limited, beds, dressers, televisions, etc.) Nonhuman animal resources
resources into goods that Education Technology (physical and scientific
we would like to have. National defense “recipes” of history)
Leisure time Human resources (the knowledge, skill,
Entertainment and talent of individual human beings)
Clean air
Pleasant environment (trees, lakes, rivers,
open spaces, etc.)
Pleasant working conditions
1
Thomas Sowell, Knowledge and Decisions (New York: Basic Books, 1980), 47.
1-1a SCARCITY AND POVERTY ARE NOT THE SAME

Think for a moment about what life was like in 1750. People all over the world struggled 50, 60,
and 70 hours a week to obtain the basic necessities of life—food, clothing, and shelter. Manual
labor was the major source of income. Animals provided the means of transportation. Tools
and machines were primitive by today’s standards. As the English philosopher Thomas Hobbes
stated in the seventeenth century, life was “solitary, poor, nasty, brutish, and short.” 2
Throughout much of South America, Africa, and Asia, economic conditions today
continue to make life difficult. In North America, Western Europe, Oceania, and some
parts of Asia, however, economic progress has substantially reduced physical hardship and
human drudgery. In these regions, the typical family is more likely to worry about financ-
ing its summer vacation than about obtaining food and shelter. As anyone who has watched
the TV reality show Survivor knows, we take for granted many of the items that modern
technological advances have allowed us to produce at unbelievably low prices. Contestants
on Survivor struggle with even basic things like starting a fire, finding shelter, and catching
fish. They are thrilled when they win ordinary items like shampoo, rice, and toilet paper.
During one episode, a contestant eagerly paid over $125 for a small chocolate bar and
spoonful of peanut butter at an auction—and she considered it a great bargain!
It is important to note that scarcity and poverty are not the same thing. Scarcity is an objective Objective
concept that describes a factual situation in which the limited nature of our resources keeps us A fact based on observable
phenomena that is not
from being able to completely fulfill our desires for goods and services. In contrast, poverty is
influenced by differences in
a subjective concept that refers to a personal opinion of whether someone meets an arbitrarily personal opinion.
defined level of income. This distinction is made even clearer when you realize that different
people have vastly different ideas of what it means to be poor. The average family in the United Subjective
An opinion based on personal
States that meets the federal government’s definition of being “in poverty” would be considered preferences and value
wealthy in most any country in Africa. A family in the United States in the 1950s would have judgments.
been considered fairly wealthy if it had air conditioning, an automatic dishwasher or clothes
dryer, or a television. Today, the majority of U.S. families officially classified as poor have many
items that would have been viewed as symbols of great wealth just 70 years ago.
People always want more and better goods for themselves and others about whom
they care. Scarcity is the constraint that prevents us from having as much of all goods as
we would like, but it is not the same as poverty. Even if every individual were rich, scarcity
would still be present.
The degree to which modern

Monty Brinton/CBS Photo Archive/Getty Images
technology and knowledge

allow us to fulfill our desires
and ease the grip of scarcity
is often taken for granted—as
the castaways on the CBS
reality series Survivor quickly
find out when they have to
struggle to meet even basic
needs, such as food, shelter,
and cleaning their bodies and
clothes.
2
Thomas Hobbes, Leviathan (1651), Part I, Chapter 13.
1-1b SCARCITY NECESSITATES RATIONING

Rationing Scarcity makes rationing a necessity. When a good or resource is scarce, some criterion
Allocating a limited supply of must be used to determine who will receive it and who will go without. The choice of
a good or resource among which method is used will, however, have an influence on human behavior. When rationing
people who would like to
have more of it. When price is done through the government sector, a person’s political status and ability to manipulate
performs the rationing the political process are the key factors. Powerful interest groups and those in good favor
function, the good or resource with influential politicians will be the ones who obtain goods and resources. When this
is allocated to those willing method of rationing is used, people will devote time and resources to lobbying and favor
to give up the most “other seeking with those who have political power, rather than to productive activities.
things” in order to get it.
When the criterion is first-come, first-served, goods are allocated to those who are
fastest at getting in line or willing to spend the longest time waiting in line or searching
at many different sellers or locations. Many colleges use this method to ration tickets to
sporting events, and the result is students waiting in long lines. Sometimes, as at Duke Uni-
versity during basketball season, they even camp out for multiple nights to get good tickets!
Imagine how the behavior of students would change if tickets were instead given out to the
students with the highest grade point average.
In a market economy, price is generally used to ration goods and resources only to
those who are willing and able to pay the prevailing market price. Because only those
goods that are scarce require rationing, in a market economy one easy way to determine
whether a good or resource is scarce is to ask if it sells for a price. If you have to pay for
something, it is scarce.
1-1c THE METHOD OF RATIONING INFLUENCES

THE NATURE OF COMPETITION
Competition is a natural outgrowth of scarcity and the desire of human beings to improve
their conditions. Competition exists in every economy and every society. But the criteria
used to ration scarce goods and resources will influence the competitive techniques em-
ployed. When the rationing criterion is price, individuals will engage in income-generating
activities that enhance their ability to pay the price needed to buy the goods and services
they want. Thus, one benefit of using price as a rationing mechanism is that it encourages
individuals to engage in the production of goods and services to generate income. In con-
trast, rationing on the basis of first-come, first-served encourages individuals to waste a
substantial amount of time waiting in line or searching, while rationing through the politi-
cal process encourages individuals to waste time and other resources in competing with
others to influence the political process.
Within a market setting, the competition that results from scarcity is an important
ingredient in economic progress. Competition among business firms for customers results
in newer, better, and less expensive goods and services. Competition between employers
for workers results in higher wages, benefits, and better working conditions. Further, com-
petition encourages discovery and innovation, two important sources of growth and higher
living standards.
It [economics] is a method
rather than a doctrine, an ap- 1-2 THE ECONOMIC WAY OF THINKING
paratus of the mind, a tech- One does not have to spend much time around economists to recognize that there is an
nique of thinking which helps “economic way of thinking.” Admittedly, economists, like others, differ widely in their
its possessor to draw correct ideological views. A news commentator once remarked that “any half-dozen economists
conclusions. will normally come up with about six different policy prescriptions.” Yet, in spite of their
—John Maynard Keynes3 philosophical differences, the approaches of economists reflect common ground.
3
John Maynard Keynes (1883–1946) was an English economist whose writings during the 1920s and 1930s
exerted an enormous impact on both economic theory and policy. Keynes established the terminology and the
economic framework that are still widely used when economists study problems of unemployment and inflation.
That common ground is economic theory, developed from basic principles of Economic theory
human behavior. Economic researchers are constantly involved in testing and seeking to A set of definitions, postulates,
and principles assembled
verify their theories. When the evidence from the testing is consistent with a theory, even-
in a manner that makes
tually that theory will become widely accepted among economists. Economic theory, like clear the “cause-and-effect”
a road map or a guidebook, establishes reference points indicating what to look for and relationships.
how economic issues are interrelated. To a large degree, the basic economic principles are
merely common sense. When applied consistently, however, these commonsense concepts
can provide powerful and sometimes surprising insights.
1-2a EIGHT GUIDEPOSTS TO ECONOMIC THINKING

The economic way of thinking requires incorporating certain guidelines—some would say
the building blocks of basic economic theory—into your own thought process. Once you
incorporate these guidelines, economics can be a relatively easy subject to master. Students
who have difficulty with economics have almost always failed to assimilate one or more
of these principles. The following are eight principles that characterize the economic way
of thinking. We will discuss each of these principles in more depth throughout the book so
that you will be sure to understand how and when to apply them.
1. The use of scarce resources is costly, so decision-makers must make

trade-offs. Economists sometimes refer to this as the “there is no such thing as a free
lunch” principle. Because resources are scarce, the use of resources to produce one good
diverts those resources from the production of other goods. A parcel of undeveloped land
could be used for a new hospital or a parking lot, or it could simply be left undeveloped.
No option is free of cost—there is always a trade-off. A decision to pursue any one of
these options means that the decision-maker must sacrifice the others. The highest valued
alternative that is sacrificed is the opportunity cost of the option chosen. For example, Opportunity cost
if you use one hour of your scarce time to study economics, you will have one hour less The highest valued alternative
time to watch television, spend on social media, sleep, work at a job, or study other sub- that must be sacrificed as a
result of choosing an option.
jects. Whichever one of these options you would have chosen had you not spent the hour
studying economics is your highest valued option forgone. If you would have slept, then
the opportunity cost of this hour spent studying economics is a forgone hour of sleep. In
economics, the opportunity cost of an action is the highest valued option given up when a
choice is made.
It is important to recognize that the use of scarce resources to produce a good is always
costly, regardless of who pays for the good or service produced. In many countries, vari-
ous kinds of schooling are provided free of charge to students. However, provision of the
schooling is not free to the community as a whole. The scarce resources used to produce
the schooling—to construct the building, hire teachers, buy equipment, and so on—could
have been used instead to produce more recreation, entertainment, housing, medical care,
or other goods. The opportunity cost of the schooling is the highest valued option that must
now be given up because the required resources were used to produce the schooling.
By now, the central point should be obvious. As we make choices, we always face
trade-offs. Using resources to do one thing leaves fewer resources to do another.
Reprinted with special permission of
When a scarce resource is

King Features Syndicate
used to meet one need, other

competing needs must be
sacrificed. The forgone shoe
store is an example of the
opportunity cost of building
the new drugstore.
Consider one final example. Mandatory air bags in automobiles save an estimated 400
lives each year. Economic thinking, however, forces us to ask ourselves if the $50 billion
spent on air bags could have been used in a better way—perhaps say, for cancer research
that could have saved more than 400 lives per year. Most people don’t like to think of air
bags and cancer research as an “either/or” proposition. It’s more convenient to ignore these
trade-offs. But if we want to get the most out of our resources, we have to consider all of
our alternatives. In this case, the appropriate analysis is not simply the lives saved with
air bags versus dollars spent on them, but also the number of lives that could have been
saved (or other things that could have been accomplished) if the $50 billion had been used
differently. A candid consideration of hard trade-offs like this is essential to using our
resources wisely.
2. Individuals choose purposefully—they try to get the most from

their limited resources. People try not to squander their valuable resources delib-
erately. Instead, they try to choose the options that best advance their personal desires
Economizing behavior and goals at the least possible cost. This is called economizing behavior. Economizing
Choosing the option that behavior is the result of purposeful, or rational, decision-making. When choosing among
offers the greatest benefit at things of equal benefit, an economizer will select the cheapest option. For example, if a
the least possible cost.
pizza, a lobster dinner, and a sirloin steak are expected to yield identical benefits for Mary
(including the enjoyment of eating them), economizing behavior implies that Mary will
select the cheapest of the three alternatives, probably the pizza. Similarly, when choosing
among alternatives of equal cost, economizing decision-makers will select the option that
yields the greatest benefit. If the prices of several dinner specials are equal, for example,
economizers will choose the one they like the best. Because of economizing behavior, the
desires or preferences of individuals are revealed by the choices they make.
Purposeful choosing implies that decision-makers have some basis for their evaluation
Utility of alternatives. Economists refer to this evaluation as utility—the benefit or satisfaction
The subjective benefit or that an individual expects from the choice of a specific alternative. Utility is highly subjec-
satisfaction a person expects tive, often differing widely from person to person. The steak dinner that delights one person
from a choice or course of
action. may be repulsive to another (a vegetarian, for example).
The idea that people behave rationally to get the greatest benefit at the least possible
cost is a powerful tool. It can help us understand their choices. However, we need to realize
that a rational choice is not the same thing as a “right” choice. If we want to understand
people’s choices, we need to understand their own subjective evaluations of their options
as they see them. As we have said, different people have different preferences. If Joan pre-
fers $10 worth of chocolate to $10 worth of vegetables, buying the chocolate would be the
rational choice for her, even though some outside observer might say that Joan is making
a “bad” decision. Similarly, some motorcycle riders choose to ride without a helmet be-
cause they believe the enjoyment they get from riding without one is greater than the cost
(the risk of injury). When people weigh the benefits they receive from an activity against
its cost, they are making a rational choice—even though it might not be the choice you or
I would make in the same situation.
3. Incentives matter—changes in incentives influence human choices

in a predictable way. Both monetary and nonmonetary incentives mat-
©Magicinfoto/Shutterstock.com
ter. If the personal cost of an option increases, people will be less likely to choose it.
Correspondingly, when an option becomes more attractive, people will be more likely to
choose it. This vitally important guidepost, sometimes called the basic postulate of eco-
nomics, is a powerful tool because it applies to almost everything that we do.
Think about the implications of this proposition. When late for an appointment, a per-
son will be less likely to take time to stop and visit with a friend. Fewer people will go pic-
nicking on a cold and rainy day. Higher prices will reduce the number of units consumers
Because consumers respond
to incentives, store owners will want to purchase. Attendance in college classes will be below normal the day before
know they can sell off excess spring break. During the 2020 COVID-19 pandemic, persons over the age of 70 were far
inventory by reducing prices. less likely than the young to go out to grocery stores and practiced greater social distancing,
because they were at significantly higher risk of contracting and dying from the virus than
those under age 30. In each case, the explanation is the same: As the option becomes more
costly, less is chosen.
Similarly, when the payoff derived from a choice increases, people will be more likely
to choose it. A person will be more likely to bend over and pick up a quarter than a penny.
Students will attend and pay more attention in class when the material is covered exten-
sively on exams. Customers will buy more from stores that offer low prices, high-quality
service, and a convenient location. Senior voters will be more likely to support candidates
who favor higher Social Security benefits. All of these outcomes are highly predictable, and
they merely reflect the “incentives matter” postulate of economics.
Noneconomists sometimes argue that people respond to incentives only because they
are selfish and greedy. This view is false. People are motivated by a variety of goals, some
humanitarian and some selfish, and incentives matter equally in both. Even an unselfish
individual would be more likely to attempt to rescue a drowning child from a three-foot
swimming pool than the rapid currents approaching Niagara Falls. Similarly, people are
more likely to give a needy person their hand-me-downs rather than their favorite new
clothes.
Just how far can we push the idea that incentives matter? If asked what would happen
to the number of funerals performed in your town if the price of funerals rose, how would
you respond? The “incentives matter” postulate predicts that the higher cost would reduce
the number of funerals. While the same number of people will still die each year, the num-
ber of funerals performed will still fall as more people choose to be cremated or buried in
cemeteries in other towns. Substitutes are everywhere—even for funerals. Individuals also
respond to incentives when committing crimes—precisely the reason why people put signs
in their yard saying “This house protected by XYZ Security.”
4. Individuals make decisions at the margin. When making a choice between

two alternatives, individuals generally focus on the difference in the costs and benefits
between alternatives. Economists describe this process as marginal decision-making, or Marginal
“thinking at the margin.” The last time you went to eat fast food, you probably faced a deci- Term used to describe the
sion that highlights this type of thinking. Will you get the $3.50 cheeseburger and the $1.50 effects of a change in the
current situation. For example,
medium drink, or instead get the $6.00 value meal that has the cheeseburger and drink and a producer’s marginal cost
also comes with a medium order of fries? Naturally, individual decision-making focuses is the cost of producing an
on the difference between the alternatives. The value meal costs $1.00 more (its marginal additional unit of a product,
cost) but will give you one extra food item—the fries (its marginal benefit). Your marginal given the producer’s current
decision is whether it is worth the extra $1.00 to have the fries. If you pay attention, you’ll facility and production rate.
notice yourself frequently thinking at the margin. Next time you find yourself asking a
salesclerk, “How much more is this one?” when you are choosing between two items, you
are doing a marginal analysis.
Marginal choices always involve the effects of net additions to or subtractions from
current conditions. In fact, the word additional is often used as a substitute for marginal.
For example, a business decision-maker might ask, “What is the additional (or marginal)
cost of producing one more unit?” Marginal decisions may involve large or small changes.
The “one more unit” could be a new factory or a new stapler. It is marginal because it in-
volves additional costs and additional benefits. Given the current situation, what marginal
benefits (additional sales revenues, for example) can be expected from the new factory,
and what will be the marginal cost of constructing it? What is the marginal benefit versus
marginal cost of purchasing a new stapler? The answers to these questions will determine
whether building the new factory or buying the new stapler is a good decision.
It is important to distinguish between average and marginal. A manufacturer’s average
cost of producing automobiles (which would be the total cost of production divided by the
total number of cars the manufacturer produces) may be $25,000, but the marginal cost of
producing an additional automobile (or an additional 1,000 automobiles) might be much
lower, say, $10,000 per car. Costs associated with research, testing, design, molds, heavy
equipment, and similar factors of production must be incurred whether the manufacturer is
going to produce 1,000 units, 10,000 units, or 100,000 units. Such costs will clearly con-
tribute to the average cost of an automobile, but they will change very little as additional
units are produced. Thus, the marginal cost of additional units may be substantially less
than the average cost. Should production be expanded or reduced? That choice should be
based on marginal costs, which indicate the change in total cost due to the decision.
People commonly ignore the implications of marginal thinking in their comments, but
seldom in their actions. Thus, the concept is far better at explaining how people act than
what they say. Students are often overheard telling other students that they shouldn’t skip
class because they have paid to enroll in it. Of course, the tuition is not a factor relevant at
the margin—it will be the same whether or not the student attends class on that particular
day. The only real marginal considerations are what the student will miss that day (a quiz,
information for the exam, etc.) versus what he or she could do with the extra time by skip-
ping class. This explains why even students who tell others not to skip class because they
paid too much for it will ignore the tuition costs when they themselves decide to skip class.
Decisions are made at the margin. That means that they almost always involve addi-
tions to, or subtractions from, current conditions. If we are going to get the most out of
our resources, activities that generate more benefits than costs should be undertaken, while
those that are more costly than they are worth should not be undertaken. This principle of
sound decision-making applies to individuals, businesses, governments, and for society as
a whole.
5. Although information can help us make better choices, its acquisi-

tion is costly. Information that helps us make better choices is valuable. However, the
time needed to gather it is scarce, making information costly to acquire. As a result, people
economize on their search for information just like they do anything else. For example,
when you purchase a pair of jeans, you might evaluate the quality and prices of jeans at
several different stores. At some point, though, you will decide that additional comparison-
shopping is simply not worth the trouble. You will make a choice based on the limited
information you already have.
The process is similar when individuals search for a restaurant, a new car, or a room-
mate. They will seek to acquire some information, but at some point, they will decide that
the expected benefit derived from gathering still more information is simply not worth the
cost. When differences among the alternatives are important to decision-makers, they will
spend more time and effort gathering information. People are much more likely to read
reviews before purchasing a new automobile than they are before purchasing a new can
opener. Because information is costly for people to acquire, limited knowledge and uncer-
tainty about the outcome generally characterize the decision-making process.
6. Beware of the secondary effects: Economic actions often gen-

erate indirect as well as direct effects. In addition to direct effects
that are quickly visible, people’s decisions often generate indirect, or “secondary,”
effects that may be observable only with time. Failure to consider secondary effects is one
of the most common economic errors because these effects are often quite different from
initial, or direct, effects. Frédéric Bastiat, a nineteenth-century French economist, stated
that the difference between a good and a bad economist is that the bad economist consid-
ers only the immediate, visible effects, whereas the good economist is also aware of the
Secondary effects secondary effects. The true cause of these secondary effects might not be seen, even
The indirect impact of an later, except by those using the logic of good economics.
event or policy that may not Perhaps a few simple examples that involve both immediate (direct) and secondary
be easily and immediately
observable. In the area of (indirect) effects will help illustrate the point. The immediate effect of an aspirin is a bitter
policy, these effects are taste in one’s mouth. The secondary effect, which is not immediately observable, is relief
often both unintended and from a headache. The short-term direct effect of drinking twelve cans of beer might be a
overlooked. warm, jolly feeling. In contrast, the secondary effect is likely to be a sluggish feeling the
next morning, and perhaps a pounding headache.
Sometimes, as in the case of the aspirin, the secondary effect—headache relief—is
actually an intended consequence of the action. In other cases, however, the secondary
effects are unintended. Changes in government policy often alter

incentives, indirectly affecting how much people work, earn, invest,
consume, and conserve for the future. When a change alters incen-
tives, unintended consequences that are quite different from the
intended consequences may occur.
Let’s consider a couple of examples that illustrate the potential
importance of unintended consequences. In an effort to help the en-
vironment, many jurisdictions, including San Francisco County, have
banned plastic grocery bags. However, reusable grocery bags tend to
gather harmful bacteria, such as E. coli, with repeated use. A study
published by the University of Pennsylvania found that emergency
room visits and deaths related to these bacteria have risen by 25 per-
cent in areas banning plastic bags. Once you consider the harmful
eatures Syndicate
secondary effects on human health, these regulations are significantly
less beneficial than they might first appear.
Trade restrictions between nations have important second-
Bil Keane, Inc. King F

ary effects as well. The proponents of tariffs and quotas on foreign
goods almost always ignore the secondary effects of their poli-
cies. Import quotas restricting the sale of foreign-produced sugar
in the U.S. market, for example, have resulted in domestic sugar
prices that have often been two or three times the price in the rest
of the world. The proponents of this policy—primarily sugar pro- Sometimes actions change
ducers—argue that the quotas “save jobs” and increase employment. No doubt, the em- the incentives people face
ployment of sugar growers in the United States is higher than it otherwise would be. and they respond accordingly,
creating secondary effects
But what about the secondary effects? The higher sugar prices mean it’s more expensive that were not intended.
for U.S. firms to produce candy and other products that use a lot of sugar. As a result,
many candy producers, including the makers of Life Savers, Jaw Breakers, Red Hots, and
most candy canes, have moved to countries like Canada and Mexico, where sugar can
be purchased at its true market price. Thus, employment among sugar-using firms in the
United States is reduced. Further, because foreigners sell less sugar in the United States,
they have less purchasing power with which to buy products we export to them. This, too,
reduces U.S. employment.
Once the secondary effects of trade restrictions like tariffs on imported goods are taken
into consideration, we have no reason to expect that U.S. employment will increase as a
result. There may be more jobs in favored industries, but there will be less employment in
others. Trade restrictions reshuffle employment rather than increase it. But those who un-
wittingly fail to consider the secondary effects will miss this point. Clearly, consideration
of the secondary effects is an important ingredient of the economic way of thinking.
7. The value of a good or service is subjective. Preferences differ, sometimes

dramatically, between individuals. How much is a ticket to see a performance of the Bolshoi
Ballet worth? Some people would be willing to pay a very high price, while others might
prefer to stay home, even if tickets were free! Circumstances can change from day to day,
even for a given individual. Alice, a ballet fan who usually would value the ticket at more
than its price of $100, is invited to a party and suddenly becomes uninterested in attending
the ballet. Now what is the ticket worth? If she knows a friend who would give her $40
for the ticket, it is worth at least that much. If she advertises the ticket on StubHub and gets
$60 for it, a higher value is created. But if someone who doesn’t know of the ticket would
have been willing to pay even more, then a potential trade creating even more value is
missed. If that particular performance is sold out, perhaps someone in town would be will-
ing to pay $120. One thing is certain: The value of the ticket depends on several things,
including who uses it and under what circumstances.
Economics recognizes that people can and do value goods differently. Mike may pre-
fer to have a grass field rather than a parking lot next to his workplace and be willing to
bear the cost of walking farther from his car each day. Kim, on the other hand, may prefer
the parking lot and the shorter walk. As a science, economics does not place any inherent
moral judgment or value on one person’s preferences over another’s—in economics, all
individuals’ preferences are counted equally. Because the subjective preferences of indi-
viduals differ, it is difficult for one person to know how much another will value an item.
Think about how hard it is to know what would make a good gift for even a close
friend or family member. Thus, arranging trades, or otherwise moving items to higher
valued users and uses, is not a simple task. The entrepreneurial individual, who knows how
to locate the right buyers and arranges for goods to flow to their highest valued use, can
sometimes create huge increases in value from existing resources. In fact, moving goods
toward those who value them most and combining resources into goods that individuals
value more highly are primary sources of economic progress.
8. The test of a theory is its ability to predict. Economic thinking is

Scientific thinking scientific thinking. The proof of the pudding is in the eating. How useful an economic
Developing a theory from theory is depends on how well it predicts the future consequences of economic action.
basic principles and testing Economists develop economic theories using scientific thinking based on basic principles.
it against events in the real
world. Good theories are The idea is to predict how incentives will affect decision makers and compare the predic-
consistent with and help tions against real-world events. If the events in the real world are consistent with a theory,
explain real-world events. we say that the theory has predictive value and is therefore valid.
Theories that are inconsistent If it is impossible to test the theoretical relationships of a discipline, the discipline does
with the real world are invalid not qualify as a science. Because economics deals with human beings who can think and
and must be rejected.
respond in a variety of ways, can economic theories really be tested? The answer to this
question is yes, if, on average, human beings respond in predictable and consistent ways to
changes in economic conditions. The economist believes that this is the case, even though
not all individuals will respond in the specified manner. Economists usually do not try to
predict the behavior of a specific individual; instead, they focus on the general behavior of
a large number of individuals.
In the 1950s, economists began to do laboratory experiments to test economic theories.
Individuals were brought into laboratories to see how they would act in buying and selling
situations, under differing rules. For example, cash rewards were given to individuals who,
when an auction was conducted, were able to sell at high prices and buy at low prices, thus
approximating real-world market incentives. These experiments have verified many of the
important propositions of economic theory.
Laboratory experiments, however, cannot duplicate all real economic interactions. How
can we test economic theory when controlled experiments are not feasible? This is a problem,
but economics is no different from astronomy in this respect. Astronomers can use theories
tested in physics laboratories, but they must also deal with the world as it is. They cannot change
the course of the stars or planets to see what impact the change would have on the gravitational
pull of Earth. Similarly, economists cannot arbitrarily change the prices of cars or unskilled-
labor services in real markets just to observe the effects on quantities purchased or levels of
employment. However, economic conditions (for example, prices, production costs, technology,
and transportation costs), like the location of the planets, do change from time to time. As actual
conditions change, an economic theory can be tested by comparing its predictions with real-
world outcomes. Just as the universe is the main laboratory of the astronomer, the real-world
economy is the primary laboratory of the economist.
1-3 POSITIVE AND NORMATIVE ECONOMICS

As a social science, economics is concerned with predicting or determining the impact of
changes in economic variables on the actions of human beings. Scientific economics, com-
Positive economics monly referred to as positive economics, attempts to determine “what is.” Positive eco-
The scientific study of nomic statements involve potentially verifiable or refutable propositions. For example, “If
“what is” among economic the price of gasoline rises, people will buy less gasoline.” We can statistically investigate
relationships.
(and estimate) the relationship between gasoline prices and gallons sold. We can analyze
the facts to determine the correctness of a positive economic statement. Remember, a posi-
tive economic statement need not be correct; it simply must be testable.
In contrast, normative economics is about “what ought to be,” given the prefer- Normative economics
ences and philosophical views of the advocate. Value judgments often result in disagree- Judgments about “what
ought to be” in economic
ment about normative economic matters. Two people may differ on a policy matter because
matters. Normative economic
one is from one political party and the other is from another, or because one wants cheaper views cannot be proved false
food while the other favors organic farming (which is more expensive), and so on. They because they are based on
may even agree about the expected outcome of altering an economic variable (that is, the value judgments.
positive economics of an issue), but disagree as to whether that outcome is desirable.
Unlike positive economic statements, normative economic statements can neither be
confirmed nor proven false by scientific testing. “Business firms should not be concerned
with profits.” “We should have fewer parking lots and more green space on campus.” “The
price of gasoline is too high.” These normative statements cannot be scientifically tested
because their validity rests on value judgments.
Normative economic views can sometimes influence our attitude toward positive
economic analysis, however. When we agree with the objectives of a policy, it’s easy to
overlook the warnings of positive economics. Although positive economics does not tell
us which policy is best, it can provide evidence about the likely effects of a policy. Some-
times proponents unknowingly support policies that are actually in conflict with their own
goals and objectives. Positive economics, based on sound economic logic, can help over-
come this potential problem.
Economics can expand our knowledge of how the real world operates, in both the pri-
vate and the public (government) sectors. However, it is not always easy to isolate the im-
pact of economic changes. Let’s now consider some pitfalls to avoid in economic thinking.
1-4 PITFALLS TO AVOID IN ECONOMIC

THINKING
1-4a VIOLATION OF THE CETERIS PARIBUS CONDITION
CAN LEAD ONE TO DRAW THE WRONG CONCLUSION
Economists often qualify their statements with the words ceteris paribus. Ceteris pa- Ceteris paribus
ribus is a Latin term meaning “other things constant.” An example of a ceteris paribus A Latin term meaning “other
statement would be the following: “Ceteris paribus, an increase in the price of housing will things constant” that is used
when the effect of one change
cause buyers to reduce their purchases of housing.” However, we live in a dynamic world, is being described, recognizing
so things seldom remain constant. For example, as the price of housing rises, the income of that if other things changed,
consumers might also increase for unrelated reasons. Each of these factors—higher hous- they also could affect the
ing prices and increasing consumer income—will have an impact on housing purchases. In result. Economists often
fact, we would generally expect them to have opposite effects: Higher prices are likely to describe the effects of one
change, knowing that in the
reduce housing purchases, whereas higher consumer incomes are likely to increase them. real world, other things might
We point out this pitfall because sometimes statistical data (or casual observations) appear change and also exert an
inconsistent with economic theories. In most of these cases, the apparent contradictions effect.
reflect the effects of changes in other factors (violations of the ceteris paribus conditions).
The observed effects are the result of the combination of the changes.
The task of sorting out the effects of two or more variables that change at the same
time is difficult. However, with a strong grip on economic theory, some ingenuity, and
enough data, it can usually be done. This is, in fact, precisely the day-to-day work of many
professional economists.
1-4b GOOD INTENTIONS DO NOT GUARANTEE

DESIRABLE OUTCOMES
There is a tendency to believe that if the proponents of a policy have good intentions, their
proposals must be sound. This is not necessarily the case. Proponents may be unaware
of some of the adverse secondary effects of their proposals, particularly when they are
indirect and observable only over time. Even if their policies would be largely ineffective,
politicians may still find it advantageous to call attention to the severity of a problem and
propose a program to deal with it. In other cases, proponents of a policy may actually be
seeking a goal other than the one they espouse. They may tie their arguments to objectives
that are widely supported by the general populace. Thus, the fact that an advocate says a
program will help the economy, expand employment, help the poor, increase wages, im-
prove health care, or achieve some other highly desirable objective does not necessarily
make it so.
Let’s begin with a couple of straightforward examples. Federal legislation has been
introduced that would require all children, including those under age two, to be fastened
in a child safety seat when traveling by air. Proponents argue the legislation will increase
the survival rate of children in the case of an airline crash and thereby save lives. Certainly,
saving lives is a highly desirable objective, but will this really be the case? Some lives will
probably be saved. But what about the secondary effects? The legislation would mean that
a parent traveling with a small child would have to purchase an additional ticket, which will
make it more expensive to fly. As a result, many families will choose to travel by auto rather
than by air. Because the likelihood of a serious accident per mile traveled in an automobile
is several times higher than for air travel, more automobile travel will result in more inju-
ries and fatalities. In fact, studies indicate that the increase in injuries and fatalities from
additional auto travel will exceed the number of lives saved by airline safety seats.4 Thus,
even though the intentions of the proponents may well be lofty, there is reason to believe
that the net impact of their proposal will be more fatalities and injuries than would be the
case in the absence of the legislation.
The stated objective of the Endangered Species Act is to protect various species that
are on the verge of extinction. Certainly, this is an admirable objective, but there is none-
theless reason to question the effectiveness of the act itself. The Endangered Species Act
allows the government to regulate the use of individual private property if an endangered
species is found present on or near an individual’s land. To avoid losing control of their
property, many landowners have taken steps to make their land less attractive as a natural
habitat for these endangered species. For example, the endangered red-cockaded wood-
pecker nests primarily in old trees within southern pine ecosystems. Landowners have re-
sponded by cutting down trees the woodpeckers like to nest in to avoid having one nest on
their land, which would result in the owner losing control of this part of their property. The
end result is that the habitat for these birds has actually been disappearing more rapidly.
As you can see, good intentions are not enough. An unsound proposal will lead to
undesirable outcomes, even if it is supported by proponents with good intentions. Sound
economic reasoning can help us better anticipate the secondary effects of policy changes
and avoid the pitfall of thinking that good intentions are enough.
1-4c ASSOCIATION IS NOT CAUSATION

In economics, identifying cause-and-effect relationships is very important. But statistical
association alone cannot establish this causation. Perhaps an extreme example will illus-
trate the point. Suppose that each November, a witch doctor performs a voodoo dance
designed to summon the gods of winter, and that soon after the dance is performed, the
weather in fact begins to turn cold. The witch doctor’s dance is associated with the arrival
of winter, meaning that the two events appear to have happened in conjunction with one
another. But is this really evidence that the witch doctor’s dance actually caused the arrival
of winter? Most of us would answer no, even though the two events seemed to happen in
conjunction with one another.
Those who argue that a causal relationship exists simply because of the presence of
statistical association are committing a logical fallacy known as the post hoc propter ergo
hoc fallacy. Sound economics warns against this potential source of error.
4
For a detailed analysis of this subject, see Thomas B. Newman, Brian D. Johnston, and David C. Grossman,
“Effects and Costs of Requiring Child-Restraint Systems for Young Children Traveling on Commercial
Airplanes,” Archives of Pediatrics and Adolescent Medicine 157 (October 2003): 969–74.
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adjournment, it is thereby removed from before the House, and does
not stand ipso facto before them at their next meeting, but must
come forward in the usual way. So, when it is interrupted by the
order of the day. Such other privileged questions also as dispose of
the main question, (e. g., the previous question, postponement, or
commitment,) remove it from before the House. But it is only
suspended by a motion to amend, to withdraw, to read papers, or by
a question of order or privilege, and stands again before the House
when these are decided. None but the class of privileged questions
can be brought forward while there is another question before the
House, the rule being that when a motion has been made and
seconded, no other can be received except it be a privileged one.
SEC. XXXVIII.—EQUIVALENT QUESTIONS.
If, on a question for rejection, a bill be retained, it passes, of

course, to its next reading. Hakew., 141; Scob., 42. And a question for
a second reading determined negatively, is a rejection without
further question. 4 Grey, 149. And see Elsynge’s Memor., 42, in what
cases questions are to be taken for rejection.
Where questions are perfectly equivalent, so that the negative of
the one amounts to the affirmative of the other, and leaves no other
alternative, the decision of the one concludes necessarily the other. 4
Grey, 157. Thus the negative of striking out amounts to the
affirmative of agreeing; and therefore to put a question on agreeing
after that on striking out, would be to put the same question in effect
twice over. Not so in questions of amendments between the two
Houses. A motion to recede being negatived, does not amount to a
positive vote to insist, because there is another alternative, to wit, to
adhere. A bill originating in one House is passed by the other with an
amendment. A motion in the originating House to agree to the
amendment is negatived. Does there result from this vote of
disagreement, or must the question on disagreement be expressly
voted? The question respecting amendments from another House
are—1st, to agree; 2d, disagree; 3d, recede; 4th, insist; 5th, adhere,
Either of these concludes the other necessarily, for the positive of
either is exactly the equivalent of the negative of the other, and no
1st. To
other alternative remains. On either motion amendments to the
agree.
amendment may be proposed; e. g., if it be moved to disagree, those
2d. To
who are for the amendment have a right to propose amendments,
disagree.
and to make it as perfect as they can, before the question of
disagreeing is put.
You may then either insist or adhere.
3d. To You may then either recede or adhere.
recede. You may then either recede or insist.
4th. To Consequently the negative of these is not equivalent to a positive
insist. vote, the other way. It does not raise so necessary an implication as
5th. To may authorize the Secretary by inference to enter another vote; for
adhere. two alternatives still remain, either of which may be adopted by the
House.
SEC. XXXIX.—THE QUESTION.
The question is to be put first on the affirmative, and then on the

negative side.
After the Speaker has put the affirmative part of the question, any
member who has not spoken before to the question may rise and
speak before the negative be put; because it is no full question till the
negative part be put. Scob., 23; 2 Hats., 73.
But in small matters, and which are of course, such as receiving
petitions, reports, withdrawing motions, reading papers, &c., the
Speaker most commonly supposes the consent of the House where
no objection is expressed, and does not give them the trouble of
putting the question formally. Scob., 22; 2 Hats., 87; 5 Grey, 129; 9
Grey, 301.
SEC. XL.—BILLS, THIRD READING.
To prevent bills from being passed by surprise, the House, by a

standing order, directs that they shall not be put on their passage
before a fixed hour, naming one at which the House is commonly
full. Hakew., 153.
[The usage of the Senate is, not to put bills on their passage till
noon.]
A bill reported and passed to the third reading, cannot on that day
be read the third time and passed; because this would be to pass on
two readings in the same day.
At the third reading the Clerk reads the bill and delivers it to the
Speaker, who states the title, that it is the third time of reading the
bill, and that the question will be whether it shall pass. Formerly the
Speaker, or those who prepared a bill, prepared also a breviate or
summary statement of its contents, which the Speaker read when he
declared the state of the bill, at the several readings. Sometimes,
however, he read the bill itself, especially on its passage. Hakew.,
136, 137, 153; Coke, 22, 115. Latterly, instead of this, he, at the third
reading, states the whole contents of the bill verbatim, only, instead
of reading the formal parts, “Be it enacted,” &c., he states that
“preamble recites so and so—the 1st section enacts that, &c.; the 2d
section enacts,” &c.
[But in the Senate of the United States, both of these formalities
are dispensed with; the breviate presenting but an imperfect view of
the bill, and being capable of being made to present a false one; and
the full statement being a useless waste of time, immediately after a
full reading by the Clerk, and especially as every member has a
printed copy in his hand.]
A bill on the third reading is not to be committed for the matter or
body thereof, but to receive some particular clause or proviso, it hath
been sometimes suffered, but as a thing very unusual. Hakew., 156.
Thus, 27 El., 1584, a bill was committed on the third reading, having
been formerly committed on the second, but is declared not usual.
D’Ewes, 337, col. 2; 414, col. 2.
When an essential provision has been omitted, rather than erase
the bill and render it suspicious, they add a clause on a separate
paper, engrossed and called a rider, which is read and put to the
question three times. Elsynge’s Memo., 59; 6 Grey, 335; 1 Blackst.,
183. For examples of riders, see 3 Hats., 121, 122, 124, 156. Every one
is at liberty to bring in a rider without asking leave. 10 Grey, 52.
It is laid down as a general rule, that amendments proposed at the
second reading shall be twice read, and those proposed at the third
reading thrice read; as also all amendments from the other House.
Town., col. 19, 23, 24, 25, 26, 27, 28.
It is with great and almost invincible reluctance that amendments
are admitted at this reading, which occasion erasures or
interlineations. Sometimes a proviso has been cut off from a bill;
sometimes erased. 9 Grey, 513.
This is the proper stage for filling up blanks; for if filled up before,
and now altered by erasure, it would be peculiarly unsafe.
At this reading the bill is debated afresh, and for the most part is
more spoken to at this time than on any of the former readings.
Hakew., 153.
The debate on the question whether it should be read a third time,
has discovered to its friends and opponents the arguments on which
each side relies, and which of these appear to have influence with the
House; they have had time to meet them with new arguments, and to
put their old ones into new shapes. The former vote has tried the
strength of the first opinion, and furnished grounds to estimate the
issue; and the question now offered for its passage is the last
occasion which is ever to be offered for carrying or rejecting it.
When the debate is ended, the Speaker, holding the bill in his
hand, puts the question for its passage, by saying, “Gentlemen, all
you who are of opinion that this bill shall pass, say aye;” and after the
answer of the ayes, “All those of the contrary opinion, say no.”
Hakew., 154.
After the bill is passed, there can be no further alteration of it in
any point. Hakew., 159.
SEC. XLI.—DIVISION OF THE HOUSE.
The affirmative and negative of the question having been both put
and answered, the Speaker declares whether the yeas or nays have it
by the sound, if he be himself satisfied, and it stands as the judgment
of the House. But if he be not himself satisfied which voice is the
greater, or if before any other member comes into the House, or
before any new motion made, (for it is too late after that,) any
member shall rise and declare himself dissatisfied with the Speaker’s
decision, then the Speaker is to divide the House. Scob., 24; 2 Hats.,
140.
When the House of Commons is divided, the one party goes forth,
and the other remains in the House. This has made it important
which go forth and which remain; because the latter gain all the
indolent, the indifferent, and inattentive. Their general rule,
therefore, is, that those who give their vote for the preservation of the
orders of the House shall stay in; and those who are for introducing
any new matter or alteration, or proceeding contrary to the
established course, are to go out. But this rule is subject to many
exceptions and modifications. 2 Hats., 134; 1 Rush., p. 3, fol. 92;
Scob., 43, 52; Co., 12, 116; D’Ewes, 505, col. 1; Mem. in Hakew., 25,
29; as will appear by the following statement of who go forth:
Petition that it be received
Ayes.
Read
Lie on the table

Noes.
Rejected after refusal to lie on table
Referred to a committee, for further proceeding Ayes.
Bill, that it be brought in

Read first or second time
Engrossed or read third time Ayes.
Proceeding on every other stage
Committed
To Committee of the whole Noes.
To a select committee Ayes.
Report of bill to lie on table Noes.
Be now read Ayes.

Be taken into consideration three months hence 30, P.J. 251.
Amendments to be read a second time Noes.
Clause offered on report of bill to be read second time

For receiving a clause Ayes. 334.
With amendments be engrossed 395.
That a bill be now read a third time Noes. 398.
Receive a rider 260.

Pass Ayes.
259.
Be printed
Committees. That A take the chair Noes. 291.

To agree to the whole or any part of report
That the House do now resolve into committee
Speaker. That he now leave the chair, after order to go into
committee
That he issue warrant for a new writ
Member. That none be absent without leave
Witness. That he be further examined Ayes. 344.
Previous question Noes.
Blanks. That they be filled with the largest sum.

Ayes.
Amendments. That words stand part of
Lords. That their amendment be read a second time Noes.
Messenger be received
Ayes.
Orders of day to be now read, if before 2 o’clock
If after 2 o’clock Noes.
Adjournment. Till the next sitting day, if before 4 o’clock Ayes.
If after 4 o’clock Noes.
Over a sitting day, (unless a previous resolution.) Ayes.
Over the 30th of January Noes.
For sitting on Sunday, or any other day not being a sitting day Ayes.
The one party being gone forth, the Speaker names two tellers
from the affirmative and two from the negative side, who first count
those sitting in the House and report the number to the Speaker.
Then they place themselves within the door, two on each side, and
count those who went forth as they come in, and report the number
to the Speaker. Mem. in Hakew., 26.
A mistake in the report of the tellers may be rectified after the
report made. 2 Hats., 145, note.
[But in both Houses of Congress all these intricacies are avoided.
The ayes first rise, and are counted standing in their places by the
President or Speaker. Then they sit, and the noes rise and are
counted in like manner.]
[In Senate, if they be equally divided, the Vice-President
announces his opinion, which decides.]
[The Constitution, however, has directed that “the yeas and nays of
the members of either House on any question, shall at the desire of
one-fifth of those present, be entered on the journal.” And again: that
in all cases of reconsidering a bill disapproved by the President, and
returned with is objections, “the votes of both Houses shall be
determined by yeas and nays, and the names of persons voting for
and against the bill shall be entered on the journals of each House
respectively.”]
[By the 16th and 17th rules of the Senate, when the yeas and nays
shall be called for by one-fifth of the members present, each member
called upon shall, unless for special reasons he be excused by the
Senate, declare openly, and without debate, his assent or dissent to
the question. In taking the yeas and nays, and upon the call of the
House, the names of the members shall be taken alphabetically.]
[When the yeas and nays shall be taken upon any question in
pursuance of the above rule, no member shall be permitted, under
any circumstances whatever, to vote after the decision is announced
from the Chair.]
[When it is proposed to take the vote by yeas and nays, the
President or Speaker states that “the question is whether, e. g., the
bill shall pass—that it is proposed that the yeas and nays shall be
entered on the journal. Those, therefore, who desire it, will rise.” If
he finds and declares that one-fifth have risen, he then states that
“those who are of opinion that the bill shall pass are to answer in the
affirmative; those of the contrary opinion in the negative.” The Clerk
then calls over the names, alphabetically, note the yea or nay of each,
and gives the list to the President or Speaker, who declares the result.
In the Senate, if there be an equal division, the Secretary calls on the
Vice-President and notes his affirmative or negative, which becomes
the decision of the House.]
In the House of Commons, every member must give his vote the
one way or the other, Scob., 24, as it is not permitted to any one to
withdraw who is in the House when the question is put, nor is any
one to be told in the division who was not in when the question was
put. 2 Hats., 140.
This last position is always true when the vote is by yeas and nays;
where the negative as well as affirmative of the question is stated by
the President at the same time, and the vote of both sides begins and
proceeds pari passu. It is true also when the question is put in the
usual way, if the negative has also been put; but if it has not, the
member entering, or any other member, may speak, and even
propose amendments, by which the debate may be opened again,
and the question be greatly deferred. And as some who have
answered ay may have been changed by the new arguments, the
affirmative must be put over again. If, then, the member entering
may, by speaking a few words, occasion a repetition of a question, it
would be useless to deny it on his simple call for it.
While the House is telling, no member may speak or move out of
his place; for if any mistake be suspected, it must be told again.
Mem. in Hakew., 26; 2 Hats., 143.
If any difficulty arises in point of order during the division, the
speaker is to decide peremptorily, subject to the future censure of the
House if irregular. He sometimes permits old experienced members
to assist him with their advice, which they do sitting in their seats,
covered, to avoid the appearance of debate; but this can only be with
the Speaker’s leave, else the division might last several hours. 2
Hats., 143.
The voice of the majority decides; for the lex majoris partis is the
law of all councils, elections, &c., where not otherwise expressly
provided. Hakew., 93. But if the House be equally divided, semper
presumatur pro negante; that is, the former law is not to be changed
but by a majority. Towns., col. 134.
[But in the Senate of the United States, the Vice-President decides
when the House is divided. Const. U. S., I, 3.]
When from counting the House on a division it appears that there
is not a quorum, the matter continues exactly in the state in which it
was before the division, and must be resumed at that point on any
future day. 2 Hats., 126.
1606, May 1, on a question whether a member having said yea may
afterwards sit and change his opinion, a precedent was remembered
by the Speaker, of Mr. Morris, attorney of the wards, in 39 Eliz., who
in like case changed his opinion. Mem. in Hakew., 27.
SEC. XLII.—TITLES.
After the bill has passed, and not before, the title may be amended,
and is to be fixed by a question; and the bill is then sent to the other
House.
SEC. XLIII.—RECONSIDERATION.
[When a question has been once made and carried in the

affirmative or negative, it shall be in order for any member of the
majority to move for the reconsideration thereof; but no motion for
the reconsideration of any vote shall be in order after a bill,
resolution, message, report, amendment, or motion upon which the
vote was taken shall have gone out of the possession of the Senate
announcing their decision; nor shall any motion for reconsideration
be in order unless made on the same day on which the vote was
taken, or within the two next days of actual session of the Senate
thereafter. Rule 20.]
[1798, Jan. A bill on its second reading being amended, and on the
question whether it shall be read a third time negatived, was restored
by a decision to reconsider that question. Here the votes of negative
and reconsideration, like positive and negative quantities in
equation, destroy one another, and are as if they were expunged from
the journals. Consequently the bill is open for amendment, just so far
as it was the moment preceding the question for the third reading;
that is to say, all parts of the bill are open for amendment except
those on which votes have been already taken in its present stage. So,
also, it may be recommitted.]
[[102]The rule permitting a reconsideration of a question affixing to
it no limitation of time or circumstance, it may be asked whether
there is no limitation? If, after the vote, the paper on which it is
passed has been parted with, there can be no reconsideration; as if a
vote has been for the passage of a bill, and the bill has been sent to
the other House. But where the paper remains, as on a bill rejected;
when, or under what circumstances, does it cease to be susceptible of
reconsideration? This remains to be settled; unless a sense that the
right of reconsideration is a right to waste the time of the House in
repeated agitations of the same question, so that it shall never know
when a question is done with, should induce them to reform this
anomalous proceeding.]
In Parliament a question once carried cannot be questioned again
at the same session, but must stand as the judgment of the House.
Towns., col. 67; Mem. in Hakew., 33. And a bill once rejected,
another of the same substance cannot be brought in again the same
session. Hakew., 158; 6 Grey, 392. But this does not extend to
prevent putting the same question in different stages of a bill;
because every stage of a bill submits the whole and every part of it to
the opinion of the House, as open for amendment, either by insertion
or omission, though the same amendment has been accepted or
rejected in a former stage. So in reports of committees, e. g., report
of an address, the same question is before the House, and open for
free discussion. Towns., col. 26; 2 Hats., 98, 100, 101. So orders of
the House, or instructions to committees, may be discharged. So a
bill, begun in one House, and sent to the other, and there rejected,
may be renewed again in that other, passed and sent back Ib., 92: 3
Hats., 161. Or if, instead of being rejected, they read it once and lay it
aside or amend it, and put it off a month, they may order in another
to the same effect, with the same or a different title. Hakew., 97, 98.
Divers expedients are used to correct the effects of this rule; as, by
passing an explanatory act, if anything has been omitted or ill
expressed, 3 Hats., 278, or an act to enforce, and make more
effectual an act, &c., or to rectify mistakes in an act, &c., or a
committee on one bill may be instructed to receive a clause to rectify
the mistakes of another. Thus, June 24, 1685, a clause was inserted
in a bill for rectifying a mistake committed by a clerk in engrossing a
bill of supply. 2 Hats., 194, 6. Or the session may be closed for one,
two, three or more days, and a new one commenced. But then all
matters depending must be finished, or they fall, and are to begin de
novo. 2 Hats., 94, 98. Or a part of the subject may be taken up by
another bill, or taken up in a different way. 6 Grey, 304, 316.
And in cases of the last magnitude, this rule has not been so
strictly and verbally observed as to stop indispensable proceedings
altogether. 2 Hats., 92, 98. Thus when the address on the
preliminaries of peace in 1782 had been lost by a majority of one, on
account of the importance of the question, and smallness of the
majority, the same question in substance, though with some words
not in the first, and which might change the opinion of some
members, was brought on again and carried, as the motives for it
were thought to outweigh the objection of form. 2 Hats., 99, 100.
A second bill may be passed to continue an act of the same session,
or to enlarge the time limited for its execution. 2 Hats., 95, 98. This
is not in contradiction to the first act.
SEC. XLIV.—BILLS SENT TO THE OTHER HOUSE.
[All bills passed in the Senate shall, before they are sent to the
House of Representatives, be examined by a committee, consisting of
three members, whose duty it shall be to examine all bills,
amendments, resolutions, or motions, before they go out of the
possession of the Senate, and to make report that they are correctly
engrossed; which report shall be entered on the journal. Rule 34.]
A bill from the other House is sometimes ordered to lie on the
table. 2 Hats., 97.
When bills, passed in one House and sent to the other, are
grounded on special facts requiring proof, it is usual, either by
message or at a conference, to ask the grounds and evidence; and
this evidence, whether arising out of papers, or from the examination
of witnesses, is immediately communicated. 3 Hats., 48.
SEC. XLV.—AMENDMENTS BETWEEN THE HOUSES.
When either House, e. g., the House of Commons, send a bill to the
other, the other may pass it with amendments. The regular
progression in this case is, that the Commons disagree to the
amendment; the Lords insist on it; the Commons insist on their
disagreement; the Lords adhere to their amendment; the Commons
adhere to their disagreement. The term of insisting may be repeated
as often as they choose to keep the question open. But the first
adherence by either renders it necessary for the other to recede or
adhere also; when the matter is usually suffered to fall. 10 Grey, 148.
Latterly, however, there are instances of their having gone to a
second adherence. There must be an absolute conclusion of the
subject somewhere, or otherwise transactions between the Houses
would become endless. 3 Hats., 268, 270. The term of insisting, we
are told by Sir John Trevor, was then (1679) newly introduced into
parliamentary usage, by the Lords. 7 Grey, 94. It was certainly a
happy innovation, as it multiplies the opportunities of trying
modifications which may bring the Houses to a concurrence. Either
House, however, is free to pass over the term of insisting, and to
adhere in the first instance; 10 Grey, 146; but it is not respectful to
the other. In the ordinary parliamentary course, there are two free
conferences, at least, before an adherence. 10 Grey, 147.
Either House may recede from its amendment and agree to the
bill; or recede from their disagreement to the amendment, and agree
to the same absolutely, or with an amendment; for here the
disagreement and receding destroy one another, and the subject
stands as before the agreement. Elsynge, 23, 27; 9 Grey, 476.
But the House cannot recede from or insist on its own
amendment, with an amendment; for the same reason that it cannot
send to the other House an amendment to its own act after it has
passed the act. They may modify an amendment from the other
House by ingrafting an amendment on it, because they have never
assented to it; but they cannot amend their own amendment,
because they have, on the question, passed it in that form. 9 Grey,
363; 10 Grey, 240. In the Senate, March 29, 1798. Nor where one
House has adhered to their amendment, and the other agrees with
an amendment, can the first House depart from the form which they
have fixed by an adherence.
In the case of a money bill, the Lords’ proposed amendments,
become, by delay, confessedly necessary. The Commons, however,
refused them, as infringing on their privilege as to money bills; but
they offered themselves to add to the bill a proviso to the same effect,
which had no coherence with the Lords’ amendments; and urged
that it was an expedient warranted by precedent, and not
unparliamentary in a case become impracticable, and irremediable
in any other way. 3 Hats., 256, 266, 270, 271. But the Lords refused,
and the bill was lost. 1 Chand., 288. A like case, 1 Chand., 311. So the
Commons resolved that it is unparliamentary to strike out, at a
conference, anything in a bill which hath been agreed and passed by
both Houses. 6 Grey, 274; 1 Chand., 312.
A motion to amend an amendment from the other House takes
precedence of a motion to agree or disagree.
A bill originating in one House is passed by the other with an
amendment.
The originating House agrees to their amendment with an
amendment. The other may agree to their amendment with an
amendment, that being only in the 2d and not the 3d degree; for, as
to the amending House, the first amendment with which they passed
the bill is a part of its text; it is the only text they have agreed to. The
amendment to that text by the originating House, therefore, is only
in the 1st degree, and the amendment to that again by the amending
House is only in the 2d, to wit, an amendment to an amendment, and
so admissible. Just so, when, on a bill from the originating House,
the other, at its second reading, makes an amendment; on the third
reading this amendment is become the text of the bill, and if an
amendment to it be moved, an amendment to that amendment may
also be moved, as being only in the 2d degree.
SEC. XLVI.—CONFERENCES.
It is on the occasion of amendments between the Houses that

conferences are usually asked; but they may be asked in all cases of
difference of opinion between the two Houses on matters depending
between them. The request of a conference, however, must always be
by the House which is possessed of the papers. 3 Hats., 31; 1 Grey,
425.
Conferences may be either simple or free. At a conference simply,
written reasons are prepared by the House asking it, and they are
read and delivered, without debate, to the managers of the other
House at the conference; but are not then to be answered. 4 Grey,
144. The other House then, if satisfied, vote the reasons satisfactory,
or say nothing; if not satisfied, they resolve them not satisfactory and
ask a conference on the subject of the last conference, where they
read and deliver, in like manner, written answers to those reasons. 3
Grey, 183. They are meant chiefly to record the justification of each
House to the nation at large, and to posterity, and in proof that the
miscarriage of a necessary measure is not imputable to them. 3 Grey,
255. At free conferences, the managers discuss, viva voce and freely,
and interchange propositions for such modifications as may be made
in a parliamentary way, and may bring the sense of the two Houses
together. And each party reports in writing to their respective
Houses the substance of what is said on both sides, and it is entered
on their journals. 9 Grey, 220; 3 Hats., 280. This report cannot be
amended or altered, as that of a committee may be. Journal Senate,
May 24, 1796.
A conference may be asked, before the House asking it has come to
a resolution of disagreement, insisting or adhering. 3 Hats., 269, 341.
In which case the papers are not left with the other conferees, but are
brought back to be the foundation of the vote to be given. And this is
the most reasonable and respectful proceeding; for, as was urged by
the Lords on a particular occasion, “it is held vain, and below the
wisdom of Parliament, to reason or argue against fixed resolutions,
and upon terms of impossibility to persuade.” 3 Hats., 226. So the
Commons say, “an adherence is never delivered at a free conference,
which implies debate.” 10 Grey, 137. And on another occasion the
Lords made it an objection that the Commons had asked a free
conference after they had made resolutions of adhering. It was then
affirmed, however, on the part of the Commons, that nothing was
more parliamentary than to proceed with free conferences after
adhering, 3 Hats., 269, and we do in fact see instances of conference,
or of free conference, asked after the resolution of disagreeing, 3
Hats., 251, 253, 260, 286, 291, 316, 349; of insisting, ib., 280, 296,
299, 319, 322, 355; of adhering, 269, 270, 283, 300; and even of a
second or final adherence. 3 Hats., 270. And in all cases of
conference asked after a vote of disagreement, &c., the conferees of
the House asking it are to leave the papers with the conferees of the
other; and in one case where they refused to receive them, they were
left on the table in the conference chamber. ib., 271, 317, 323, 354; 10
Grey, 146.
After a free conference, the usage is to proceed with free
conferences, and not to return again to a conference. 3 Hats., 270; 9
Grey, 229.
After a conference denied, a free conference may be asked. 1 Grey,
45.
When a conference is asked, the subject of it must be expressed, or
the conference not agreed to. Ord. H Com., 89; Grey, 425; 7 Grey,
31. They are sometimes asked to inquire concerning an offense or
default of a member of the other House. 6 Grey, 181; 1 Chand., 304.
Or the failure of the other House to present to the King a bill passed
by both Houses, 8 Grey, 302. Or on information received, and
relating to the safety of the nation. 10 Grey, 171. Or when the
methods of Parliament are thought by the one House to have been
departed from by the other, a conference is asked to come to a right
understanding thereon. 10 Grey, 148. So when an unparliamentary
message has been sent, instead of answering it, they ask a
conference. 3 Grey, 155. Formerly an address or articles of
impeachment, or a bill with amendments, or a vote of the House, or
concurrence in a vote, or a message from the King, were sometimes
communicated by way of conference. 6 Grey, 128, 300, 387; 7 Grey,
80; 8 Grey, 210, 255; 1 Torbuck’s Deb., 278; 10 Grey, 293; 1
Chandler, 49, 287. But this is not the modern practice. 8 Grey, 255.
A conference has been asked after the first reading of a bill. 1 Grey,
194. This is a singular instance.
SEC. XLVII.—MESSAGES.
Messages between the Houses are to be sent only while both

Houses are sitting. 3 Hats., 15. They are received during a debate
without adjourning the debate. 3 Hats., 22.
[In Senate the messengers are introduced in any state of business,
except, 1. While a question is being put. 2. While the yeas and nays
are being called. 3. While the ballots are being counted. Rule 51. The
first case is short; the second and third are cases where any
interruption might occasion errors difficult to be corrected. So
arranged June 15, 1798.]
In the House of Representatives, as in Parliament, if the House be
in committee when a messenger attends, the Speaker takes the chair
to receive the message, and then quits it to return into committee,
without any question or interruption. 4 Grey, 226.
Messengers are not saluted by the members, but by the Speaker
for the House. 2 Grey, 253, 274.
If messengers commit an error in delivering their message, they
may be admitted or called in to correct their message. 4 Grey, 41.
Accordingly, March 13, 1800, the Senate having made two
amendments to a bill from the House of Representatives, their
Secretary, by mistake, delivered one only; which being inadmissible
by itself, that House disagreed, and notified the Senate of their
disagreement. This produced a discovery of the mistake. The
Secretary was sent to the other House to correct his mistake, the
correction was received, and the two amendments acted on de novo.
As soon as the messenger, who has brought bills from the other
House, has retired, the Speaker holds the bills in his hand, and
acquaints the House “that the other House have by their messenger
sent certain bills,” and then reads their titles, and delivers them to
the Clerk, to be safely kept till they shall be called for to be read.
Hakew., 178.
It is not the usage for one House to inform the other by what
numbers a bill is passed. 10 Grey, 150. Yet they have sometimes
recommended a bill, as of great importance, to the consideration of
the House to which it is sent. 3 Hats., 25. Nor when they have
rejected a bill from the other House, do they give notice of it; but it
passes sub silentio, to prevent unbecoming altercations. 1 Blackst.,
183.
[But in Congress the rejection is notified by message to the House
in which the bill originated.]
A question is never asked by the one House of the other by way of
message, but only at a conference; for this is an interrogatory, not a
message. 3 Grey, 151, 181.
When a bill is sent by one House to the other, and is neglected,
they may send a message to remind them of it. 3 Hats., 25; 5 Grey,
154. But if it be mere inattention, it is better to have it done
informally by communications between the Speakers or members of
the two Houses.
Where the subject of a message is of a nature that it can properly
be communicated to both Houses of Parliament, it is expected that
this communication should be made to both on the same day. But
where a message was accompanied with an original declaration,
signed by the party to which the message referred, its being sent to
one House was not noticed by the other, because the declaration,
being original, could not possibly be sent to both Houses at the same
time. 2 Hats., 260, 261, 262.
The King having sent original letters to the Commons, afterward
desires they may be returned, that he may communicate them to the
Lords. 1 Chandler, 303.
SEC. XLVIII.—ASSENT.
The House which has received a bill and passed it may present it
for the King’s assent, and ought to do it, though they have not by
message notified to the other their passage of it. Yet the notifying by
message is a form which ought to be observed between the two
Houses from motives of respect and good understanding. 2 Hats.,
242. Were the bill to be withheld from being presented to the King, it
would be an infringement of the rules of Parliament. Ib.
[When a bill has passed both Houses of Congress, the House last
acting on it notifies its passage to the other, and delivers the bill to
the Joint Committee of Enrolment, who see that it is truly enrolled in
parchment]. When the bill is enrolled, it is not to be written in
paragraphs, but solidly, and all of a piece, that the blanks between
the paragraphs may not give room for forgery. 9 Grey, 143. [It is then
put into the hands of the Clerk of the House of Representatives to
have it signed by the Speaker. The Clerk then brings it by way of
message to the Senate to be signed by their President. The Secretary
of the Senate returns it to the Committee of Enrolment, who present
it to the President of the United States. If he approve, he signs, and
deposits it among the rolls in the office of the Secretary of State, and
notifies by message the House in which it originated that he has
approved and signed it; of which that House informs the other by
message. If the President disapproves, he is to return it, with his
objections, to that House in which it shall have originated; who are to
enter the objections at large on their journal, and proceed to
reconsider it. If, after such reconsideration, two-thirds of that House
shall agree to pass the bill, it shall be sent, together with the
President’s objections, to the other House, by which it shall likewise
be reconsidered; and if approved by two-thirds of that House, it shall
become a law. If any bill shall not be returned by the President
within ten days (Sundays excepted) after it shall have been presented
to him, the same shall be a law, in like manner after he had signed it,
unless the Congress, by their adjournment, prevent its return; in
which case it shall not be a law. Const., I, 7.]
[Every order, resolution, or vote, to which the concurrence of the
Senate and House of Representatives may be necessary, (except on a
question of adjournment), shall be presented to the President of the
United States, and, before the same shall take effect, shall be
approved by him; or, being disapproved by him, shall be repassed by
two-thirds of the Senate and House of Representatives, according to
the rules and limitations prescribed in the case of a bill. Const., I, 7.]
SEC. XLIX.—JOURNALS.
[Each House shall keep a journal of its proceedings, and from time
to time publish the same, excepting such parts as may, in their
judgment, require secrecy. Const., I, 5.]
[The proceedings of the Senate, when not acting as in a Committee
of the Whole, shall be entered on the journals as concisely as
possible, care being taken to detail a true account of the proceedings.
Every vote of the Senate shall be entered on the journals, and a brief
statement of the contents of each petition, memorial, or paper
presented to the Senate, be also inserted on the journal. Rule 5.]
[The titles of bills, and such parts thereof, only, as shall be affected
by proposed amendments, shall be inserted on the journals. Rule 5.]
If a question is interrupted by a vote to adjourn, or to proceed to
the orders of the day, the original question is never printed in the
journal, it never having been a vote, nor introductory to any vote; but
when suppressed by the previous question, the first question must be
stated, in order to introduce and make intelligible the second. 2
Hats., 83.
So also when a question is postponed, adjourned, or laid on the
table, the original question, though not yet a vote, must be expressed
in the journals; because it makes part of the vote of postponement,
adjourning, or laying it on the table.
Where amendments are made to a question, those amendments
are not printed in the journals, separated from the question; but only
the question as finally agreed to by the House. The rule of entering in
the journals only what the House has agreed to, is founded in great
prudence and good sense; as there may be many questions proposed,
which it may be improper to publish to the world in the form in
which they are made. 2 Hats., 85.
[In both Houses of Congress, all questions whereon the yeas and
nays are desired by one-fifth of the members present, whether
decided affirmatively or negatively, must be entered in the journals.
Const., I, 5.]
The first order for printing the votes of the House of Commons
was October 30, 1685. 1 Chandler, 387.
Some judges have been of opinion that the journals of the House of
Commons are no records, but only remembrances. But this is not
law. Hob., 110, 111; Lex Parl., 114, 115; Jour. H. C., Mar. 17, 1592;
Hale, Parl., 105. For the Lords in their House have power of
judicature, the Commons in their House have power of judicature,
and both Houses together have power of judicature; and the book of
the Clerk of the House of Commons is a record, as is affirmed by act
of Parl., 6 H. 8, c. 16; 4 Inst., 23, 24; and every member of the House
of Commons hath a judicial place. 4 Inst., 15. As records they are
open to every person, and a printed vote of either House is sufficient
ground for the other to notice it. Either may appoint a committee to
inspect the journals of the other, and report what has been done by
the other in any particular case. 2 Hats., 261; 3 Hats., 27–30. Every
member has a right to see the journals and to take and publish votes
from them. Being a record, every one may see and publish them. 6
Grey, 118, 119.
On information of a mis-entry or omission of an entry in the
journal, a committee may be appointed to examine and rectify it, and
report it to the House. 2 Hats., 194, 1195.
SEC. L.—ADJOURNMENT.
The two Houses of Parliament have the sole, separate, and

independent power of adjourning each their respective Houses. The

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Economics: Private & Public Choice

17th Edition James D. Gwartney

Macroeconomics: Private & Public Choice 17th Edition

Economics: Private and Public Choice 16th Edition

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Public & Private Families. 1st Edition Andrew J.

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TNM Atlas 7th Edition James D. Brierley

International Project Finance: The Public-Private

1. The use of scarce resources is costly; trade-offs must always be made.

1. Government Spending and Taxation

With Assistance of Jane Shaw Stroup

Australia • Brazil • Mexico • Singapore • United Kingdom • United States

Printed in the United States of America

Special Topic 9: Earnings Differences between Men and Women 663

Part 1 The Economic Way of Thinking 1

Chapter 2 Some Tools of the Economist 17

Part 2 Markets and Government 41

Chapter 4 Demand and Supply: Applications and Extensions 70

Chapter 6 The Economics of Political Action 110

Part 3 Core Macroeconomics 131

Chapter 8 Economic Fluctuations, Unemployment, and Inflation 156

8-2a The Labor Force Participation and Unemployment Rates 160

Chapter 9 An Introduction to Basic Macroeconomic Markets 175

Chapter 11 Fiscal Policy: The Keynesian View and the Historical

Chapter 12 Fiscal Policy, Incentives, and Secondary Effects 231

Chapter 13 Money and the Banking System 248

Chapter 14 Modern Macroeconomics and Monetary Policy 270

Chapter 16 Creating an Environment for Growth and Prosperity 311

16-5a Economic Freedom and Per Capita Income 324

Chapter 17 The Economics of Development 335

Part 4 International Economics 355

Chapter 19 International Finance and the Foreign Exchange Market 378

Part 5 Core Microeconomics 397

Chapter 21 Costs and the Supply of Goods 416

21-7b Alternative Shapes of the LRATC 431

Chapter 22 Price Takers and the Competitive Process 438

Chapter 23 Price-Searcher Markets with Low Entry Barriers 457

Chapter 24 Price-Searcher Markets with High Entry Barriers 473

Chapter 25 The Supply of and Demand for Productive Resources 496

Chapter 26 Earnings, Productivity, and the Job Market 515

27-6 Uncertainty, Entrepreneurship, and Profit 542

Chapter 28 Income Inequality and Poverty 551

Part 6 Applying the Basics: Special Topics in Economics 571

Economics Microeconomics Macroeconomics Topic Title

ORGANIZATION AND INSTRUCTOR

NEW MATERIAL IN THIS EDITION

ADDITIONAL TEXT FEATURES

FOR THE STUDENT

FOR THE INSTRUCTOR

Interactive eBook In addition to interactive teaching and learning tools, Economic

PowerPoint We believe our PowerPoint presentation, prepared by Joseph Connors of

Marsha Goldfarb, University of Maryland Baltimore County; Richard Gosselin, Houston

James D. Gwartney is Professor of Economics at Florida State University, where he

Richard L. Stroup is Professor Emeritus of economics at Montana State University

Russell S. Sobel is Professor of Economics and Entrepreneurship in the Baker School

David A. Macpherson is the E.M. Stevens Professor of Economics and Economics

The Economic Way of Thinking

Life is a series of choices

The Economic Approach

Outstanding Economist: The Importance of

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1-1a SCARCITY AND POVERTY ARE NOT THE SAME