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BRIEF
CONTENTS
Guide to the text xiii
Guide to the online resources xv
Preface to this edition xvii
Preface to the original edition xx
To the students xxi
About the authors xxii
Acknowledgements xxiv

Part 1 Introduction 2 Part 5 Firm behaviour and the organisation

Chapter 1 Ten principles of economics 4 of industry 278

Chapter 2 Thinking like an economist 24 Chapter 13 The costs of production 280

Chapter 3 Interdependence and the gains from Chapter 14 Firms in competitive markets 303
trade 52 Chapter 15 Monopoly 326

Part 2 Supply and demand I: How markets Chapter 16 Monopolistic competition 356
work 68 Chapter 17 Oligopoly and business strategy 375
Chapter 4 The market forces of supply and Chapter 18 Competition policy 400
demand 70
Part 6 The economics of labour markets 420
Chapter 5 Elasticity and its application 97
Chapter 19 The markets for the factors of
Chapter 6 Supply, demand and government production 422
policies 121
Chapter 20 Earnings and discrimination 446
Part 3 Supply and demand II: Markets and Chapter 21 Income inequity and poverty 468
welfare 146
Chapter 7 Consumers, producers and the efficiency Part 7 Topics for further study 490
of markets 148 Chapter 22 The theory of consumer choice 492
Chapter 8 Application: The costs of taxation 170 Chapter 23 Frontiers of microeconomics 521
Chapter 9 Application: International trade 192 Glossary 542
Suggestions for reading 546
Part 4 The economics of the public sector 216 Index 549
Chapter 10 Externalities 218
Chapter 11 Public goods and common resources 239
Chapter 12 The design of the tax system 260

v
 CONTENTS
Guide to the text xiii
Guide to the online resources xv
Preface to this edition xvii
Preface to the original edition xx
To the students xxi
About the authors xxii
Acknowledgements xxiv

Our first model: The circular-flow diagram 28

Part 1 Introduction 2
Our second model: The production possibilities
Chapter 1 Ten principles of economics 4 frontier 29
How people make decisions 5 Microeconomics and macroeconomics 31
Principle 1: People face trade-offs 5 The economist as policy adviser 33
Principle 2: The cost of something is what you give up to Positive versus normative analysis 33
get it 6 Economists in government 34
Principle 3: Rational people think at the margin 7 Why economists’ advice is not always
Principle 4: People respond to incentives 9 followed 35
Case study: Choosing when the stork comes 10 Why economists disagree 36
How people interact 11 Differences in scientific judgements 36
Principle 5: Trade can make everyone better off 11 Differences in values 36
In the news: Outsourcing your own job 12 What Australian economists think 37
Principle 6: Markets are usually a good way to organise What Australian economists think 37
economic activity 13 Let’s get going 37
FYI: Adam Smith and the role of markets 14 Summary 39
Case study: Adam Smith would have loved
Uber 15 Key concepts 39
Principle 7: Governments can sometimes improve Questions for review 39
market outcomes 15 Multiple choice 39
How the economy as a whole works 17 Problems and applications 40
Principle 8: A country’s standard of living depends on its Appendix: Graphing – a brief review 42
ability to produce goods and services 17
Graphs of a single variable 42
Principle 9: Prices rise when the government prints too
Graphs of two variables: The coordinate system 42
much money 17
Curves in the coordinate system 44
Principle 10: Society faces a short-term trade-off between
inflation and unemployment 18 Slope and elasticity 47
Cause and effect 49
Conclusion 20
Summary 21 Chapter 3 Interdependence and the gains from
Key concepts 21 trade 52
Questions for review 21 A parable for the modern economy 53
Multiple choice 21 Production possibilities 54
Specialisation and trade 55
Problems and applications 22
The principle of comparative advantage 57
Chapter 2 Thinking like an economist 24 Absolute advantage 57
The economist as scientist 25 Opportunity cost and comparative advantage 57
The scientific method: Observation, theory and more Comparative advantage and trade 58
observation 25 FYI: The legacy of Adam Smith and David
The role of assumptions 26 Ricardo 59
Economic models 27 The price of trade 60

vi
Applications of comparative advantage 60 The variety of demand curves 100
Should Roger Federer mow his own lawn? 60 FYI: The midpoint method: A better way to calculate
Should Australia trade with other countries? 61 percentage changes and elasticities 102
In the news: Who has a comparative advantage in Total revenue and the price elasticity of demand 103
slaying ogres? 62 Case study: Pricing admission to an art gallery 105
Conclusion 63 Elasticity and total revenue along a linear demand
curve 105
Summary 64
Other demand elasticities 107
Key concepts 64 The elasticity of supply 108
Questions for review 64 The price elasticity of supply and its determinants 108
Multiple choice 64 Computing the price elasticity of supply 108
Problems and applications 65 The variety of supply curves 109
Three applications of supply, demand and elasticity 109
Part 2 Supply and demand I: How markets Can good news for farming be bad news for farmers? 111
work 68 Why did OPEC fail to keep the price of oil high? 113
Do drug bans increase or decrease drug-related
Chapter 4 The market forces of supply and
crime? 114
demand 70
Conclusion 116
Markets and competition 71
Summary 117
What is a market? 71
Key concepts 117
What is competition? 71
Demand 72 Questions for review 117
The demand curve: The relationship between price and Multiple choice 118
quantity demanded 72 Problems and applications 118
Market demand versus individual demand 74
FYI: Ceteris paribus 75 Chapter 6 Supply, demand and government
Shifts in the demand curve 76 policies 121
Case study: Are smartphones and tablets substitutes or Controls on prices 122
complements? 77 How price ceilings affect market outcomes 122
Case study: Two ways to reduce the quantity of smoking Case study: Lines at the petrol station 124
demanded 78 Case study: Rent control in the short run and long
Supply 80 run 125

CONTENTS
The supply curve: The relationship between price and How price floors affect market outcomes 126
quantity supplied 80 Case study: Minimum wage rates 128
Market supply versus individual supply 81 What Australian economists think 130
Shifts in the supply curve 82 Evaluating price controls 130
Supply and demand together 85 Taxes 131
Equilibrium 85 How taxes on sellers affect market outcomes 132
Three steps for analysing changes in equilibrium 87 How taxes on buyers affect market outcomes 133
Conclusion: How prices allocate resources 90 Case study: Who pays the payroll tax? 135
In the news: Mother Nature shifts the supply curve 92 Elasticity and tax incidence 136
Summary 93 Subsidies 137
Key concepts 93 How subsidies affect market outcomes 138
Case study: Who gets the benefits from the First Home
Questions for review 93 Owner Grant scheme? 140
Multiple choice 94 What Australian economists think 141
Problems and applications 95 Conclusion 141
Summary 142
Chapter 5 Elasticity and its application 97
Key concepts 142
The elasticity of demand 98
Questions for review 142
The price elasticity of demand and its determinants 98
Computing the price elasticity of demand 99 Multiple choice 143
FYI: A few elasticities from the real world 100 Problems and applications 143

vii
 Chapter 9 Application: International trade 192
Part 3 Supply and demand II: Markets and
welfare 146 The determinants of trade 193
The equilibrium without trade 193
Chapter 7 Consumers, producers and the
The world price and comparative advantage 194
efficiency of markets 148
The winners and losers from trade 195
Consumer surplus 149
The gains and losses of an exporting country 195
Willingness to pay 149
The gains and losses of an importing country 198
Using the demand curve to measure consumer
The effects of a tariff 200
surplus 150
FYI: Import quotas: Another way to restrict trade 202
How a lower price raises consumer surplus 153
The lessons for trade policy 202
What does consumer surplus measure? 153
Other benefits of international trade 203
Case study: How parking meters help you find a parking
In the news: Trade as a tool for economic
space 155
development 204
Producer surplus 156
The arguments for restricting trade 205
Cost and the willingness to sell 156
The jobs argument 206
Using the supply curve to measure producer surplus 157
The national security argument 206
How a higher price raises producer surplus 158 In the news: Should the winners from free trade
Market efficiency 160 compensate the losers? 207
The benevolent social planner 160 The infant industry argument 208
Evaluating the market equilibrium 161 The unfair competition argument 208
Case study: Should there be a market for organs? 163 The protection-as-a-bargaining-chip argument 208
Conclusion: Market efficiency and market failure 164 Case study: Trade agreements and the World Trade
Summary 166 Organization 209
Conclusion 210
Key concepts 166
What Australian economists think 211
Questions for review 166
Summary 212
Multiple choice 166
Key concepts 212
Problems and applications 167
Questions for review 212
Chapter 8 Application: The costs of Multiple choice 212
taxation 170 Problems and applications 213
The deadweight loss of taxation 171
CONTENTS

How a tax affects market participants 171 Part 4 The economics of the public sector 216
Deadweight losses and the gains from trade 175
The determinants of the deadweight loss 176
Chapter 10 Externalities 218
Case study: The deadweight loss debate 178 Externalities and market inefficiency 220
Deadweight loss and tax revenue as taxes vary 179 Welfare economics: A recap 220
Case study: The Laffer curve and supply-side Negative externalities 220
economics 181 Positive externalities 222
Conclusion 183 Case study: Technology spillovers, industrial policy and
patent protection 223
Summary 184 What Australian economists think 224
Key concept 184 Public policies on externalities 225
Questions for review 184 What Australian economists think 225
Multiple choice 184 Command-and-control policies: Regulation 225
Problems and applications 185 Market-based policy 1: Corrective taxes and
subsidies 226
Appendix 188
Case study: Taking out the garbage 227
The welfare economics of subsidies 188 Market-based policy 2: Tradeable pollution permits 228
The cost of a subsidy 189 Case study: British Columbia adopts a broad-based
The deadweight loss from a subsidy 190 carbon tax 229
Understanding the deadweight loss from What Australian economists think 231
overproduction 191 Objections to the economic analysis of pollution 231

viii
Private solutions to externalities 232 Tax incidence and tax equity 273
The types of private solutions 232 Case study: Who pays company income tax? 273
The Coase theorem 232 Conclusion: The trade-off between equity and
Why private solutions do not always work 233 efficiency 274
Conclusion 234 Summary 275
Summary 235 Key concepts 275
Key concepts 235 Questions for review 275
Questions for review 235 Multiple choice 275
Multiple choice 235 Problems and applications 276
Problems and applications 236
Part 5 Firm behaviour and the organisation
Chapter 11 Public goods and common of industry 278
resources 239
Chapter 13 The costs of production 280
The different kinds of goods 240
What are costs? 281
Public goods 242
Total revenue, total cost and profit 281
The free-rider problem 242
Costs as opportunity costs 282
Some important public goods 243
The cost of capital as an opportunity cost 282
Case study: Are lighthouses public goods? 244
Economic profit versus accounting profit 283
The difficult job of cost–benefit analysis 245
Case study: How much is a life worth? 246 Production and costs 284
Private provision of public goods 247 FYI: How long is the long run? 284
Case study: Is music a public good? 248 The production function 285
Common resources 249 From the production function to the total-cost curve 287
The Tragedy of the Commons 249 The various measures of cost 288
Some important common resources 250 Fixed and variable costs 289
In the news: The case for toll roads 251 Average and marginal cost 290
What Australian economists think 253 Cost curves and their shapes 290
Case study: Why the cow is not extinct 254 Typical cost curves 292
Conclusion: The importance of property rights 255 Costs in the short run and in the long run 294
Summary 256 The relationship between short-run and long-run average
Key concepts 256 total cost 294

CONTENTS
Economies and diseconomies of scale 295
Questions for review 256
Conclusion 296
Multiple choice 256
FYI: Lessons from a pin factory 296
Problems and applications 257 Summary 298
Chapter 12 The design of the tax system 260 Key concepts 298
An overview of Australian taxation 261 Questions for review 298
Taxes collected by the federal government 261 Multiple choice 299
Taxes collected by state and local governments 264 Problems and applications 299
Taxes and efficiency 265
Deadweight losses 265 Chapter 14 Firms in competitive markets 303
Case study: Should income or consumption What is a competitive market? 304
be taxed? 266 The meaning of competition 304
Administrative burden 267 The revenue of a competitive firm 305
Marginal tax rates versus average tax rates 267 Profit maximisation and the competitive firm’s supply
Lump-sum taxes 268 curve 306
Taxes and equity 269 A simple example of profit maximisation 306
The benefits principle 269 The marginal-cost curve and the firm’s supply
The ability-to-pay principle 270 decision 307
Case study: How the tax burden is distributed 271 The firm’s short-run decision to shut down 309
Case study: Who should pay for higher education? 272 FYI: Spilt milk and sunk costs 310

ix
 Case study: Near-empty restaurants and off-season Chapter 16 Monopolistic competition 356
ski lodges 311 Between monopoly and perfect competition 357
The firm’s long-run decision to exit or enter a market 312
Competition with differentiated products 359
Measuring profit in our graph for the competitive firm 313
The monopolistically competitive firm in the short run 359
The supply curve in a competitive market 314
The long-run equilibrium 360
The short run: Market supply with a fixed number of
Monopolistic versus perfect competition 362
firms 315
Monopolistic competition and the welfare of society 364
The long run: Market supply with entry and exit 315
Advertising 365
Why do competitive firms stay in business if they make
zero profit? 317 The debate about advertising 365
A shift in demand in the short run and long run 317 Case study: Advertising and the price of glasses 366
Why the long-run supply curve might slope upwards 319 Advertising as a signal of quality 367
Brand names 368
Conclusion: Behind the supply curve 320
Conclusion 369
Summary 321
Summary 371
Key concepts 321
Key concepts 371
Questions for review 321
Questions for review 371
Multiple choice 321
Multiple choice 371
Problems and applications 322
Problems and applications 372
Chapter 15 Monopoly 326
Chapter 17 Oligopoly and business
Why monopolies arise 327
strategy 375
Monopoly resources 328
Case study: The gas industry in south-eastern Markets with only a few sellers 376
Australia 328 A duopoly example 377
Government-created monopolies 329 Competition, monopolies and cartels 377
Natural monopolies 329 The equilibrium for an oligopoly 378
How monopolies make production and pricing How the size of an oligopoly affects the market
decisions 331 outcome 379
Case study: OPEC and the world oil market 380
Monopoly versus competition 331
A monopoly’s revenue 332 The economics of cooperation 381
Profit maximisation 334 The prisoners’ dilemma 382
CONTENTS

FYI: Why a monopoly does not have a supply curve 336 Oligopolies as a prisoners’ dilemma 383
A monopoly’s profit 336 Other examples of the prisoners’ dilemma 384
Case study: Monopoly pharmaceuticals versus generic The prisoners’ dilemma and the welfare of society 385
pharmaceuticals 337 Why people sometimes cooperate 386
The welfare cost of monopoly 338 Case study: The prisoners’ dilemma tournament 387
The deadweight loss 339 Conclusion 388
The monopoly’s profit: A social cost? 341 Summary 389
Price discrimination 342 Key concepts 389
A parable about pricing 342 Questions for review 389
The moral of the story 343
Multiple choice 389
The analytics of price discrimination 344
Problems and applications 390
Examples of price discrimination 345
In the news: Why do Australians pay more for digital Appendix: Types of oligopolistic competition 394
downloads? 347 Anticipating your competitor’s response 394
Conclusion: The prevalence of monopoly 349 Cournot quantity competition 394
Summary 350 Bertrand price competition 398
Comparing Cournot and Bertrand competition 399
Key concepts 350
Questions for review 350 Chapter 18 Competition policy 400
Multiple choice 350 Public policy towards monopolies 401
Problems and applications 351 Using the law to increase competition 401

x
 What Australian economists think 402 Problems and applications 441
Case study: The ACCC – Australia’s competition Appendix: The demand for labour under imperfect
regulator 402 competition and monopoly 444
What Australian economists think 404
Regulation 404 Chapter 20 Earnings and discrimination 446
Public ownership and privatisation 405 Some determinants of equilibrium wages 447
Doing nothing 406 Compensating differentials 447
Public policy towards oligopolies 408 Human capital 448
Restraint of trade and competition laws 408 Case study: The changing value of skills 449
In the news: How to form a cartel 408 Ability, effort and chance 449
What Australian economists think 410 Case study: The benefits of beauty 450
Controversies over competition policy 410 An alternative view of education: Signalling 451
In the news: When is the price of milk too low? 411 The superstar phenomenon 452
Case study: The Baxter case 413 Above-equilibrium wages: Minimum-wage laws, unions
Conclusion 415 and efficiency wages 453
Summary 416 The economics of discrimination 454
Key concepts 416 Measuring labour-market discrimination 454
Case study: Is Jennifer more employable than
Questions for review 416
Nuying? 455
Multiple choice 416
Discrimination by employers 456
Problems and applications 417 Case study: Segregated streetcars and the profit
motive 457
Part 6 The economics of labour markets 420 Discrimination by customers and governments 457
Chapter 19 The markets for the factors of Case study: Discrimination in sports 458
production 422 Conclusion 459
The demand for labour 423 Summary 460
The competitive, profit-maximising firm 424 Key concepts 460
The production function and the marginal product Questions for review 460
of labour 425 Multiple choice 461
The value of the marginal product and the demand
Problems and applications 461
for labour 426
What causes the labour demand curve to shift? 427 Appendix: Unions and imperfect competition in labour

CONTENTS
FYI: Input demand and output supply – two sides markets 463
of the coin 428 Unions as monopolists 463
The supply of labour 429 Bilateral monopoly 465
The trade-off between work and leisure 429 Are unions good or bad for the economy? 467
What causes the labour supply curve to shift? 430 Chapter 21 Income inequity and poverty 468
In the news: The economy needs you 431
The measurement of inequality 469
Equilibrium in the labour market 432
Australian income inequality 469
Shifts in labour supply 432
Case study: The women’s movement and income
Shifts in labour demand 434 distribution 471
Case study: Productivity and wages 435
Income inequality around the world 471
The other factors of production: Land and capital 436
The poverty rate 472
Equilibrium in the markets for land and capital 436
Problems in measuring inequality 474
FYI: What is capital income? 437
Case study: Alternative measures of inequality 475
Linkages among the factors of production 438
The political philosophy of redistributing income 476
Case study: The economics of the Black Death 438
Utilitarianism 476
Conclusion 439
Liberalism 478
Summary 440
Libertarianism 479
Key concepts 440 What Australian economists think 480
Questions for review 440 Policies to reduce poverty 480
Multiple choice 440 Minimum-wage laws 480

xi
 Social security 481 Chapter 23 Frontiers of microeconomics 521
Negative income tax 481 Asymmetric information 522
In the news: Thinking innovatively about income
Hidden actions: Principals, agents and moral hazard 522
redistribution 482
FYI: Corporate management 523
In-kind transfers 483
Hidden characteristics: Adverse selection and the lemons
Antipoverty programs and work incentives 484 problem 524
Conclusion 485 Signalling to convey private information 525
Summary 486 Case study: Gifts as signals 526
Key concepts 486 Screening to induce information revelation 526
Asymmetric information and public policy 527
Questions for review 486
Political economy 528
Multiple choice 486
The Condorcet voting paradox 528
Problems and applications 487
Arrow’s impossibility theorem 529
Part 7 Topics for further study 490 The median voter is king 530
Politicians are people too 532
Chapter 22 The theory of consumer choice 492 Behavioural economics 532
The budget constraint: What the consumer can People aren’t always rational 532
afford 493 In the news: Our inertia may be costing lives 534
Preferences: What the consumer wants 495 People care about fairness 535
Representing preferences with indifference curves 495 People are inconsistent over time 536
Four properties of indifference curves 496 What Australian economists think 537
Two extreme examples of indifference curves 498 Conclusion 537
Optimisation: What the consumer chooses 500 Summary 538
The consumer’s optimum choices 500 Key concepts 538
FYI: Utility – an alternative way to describe preferences
Questions for review 538
and optimisation 500
How changes in income affect a consumer’s choices 502 Multiple choice 538
How changes in prices affect a consumer’s choices 503 Problems and applications 539
Income and substitution effects 505
Glossary 542
Deriving the demand curve 506 Suggestions for reading 546
Three applications 508 Index 549
CONTENTS

Do all demand curves slope downwards? 508

Case study: The search for Giffen goods 509
How do wages affect labour supply? 509
Case study: Income effects on labour supply – historical
trends, lottery winners and the Carnegie
conjecture 512
What Australian economists think 513
How do interest rates affect household saving? 513
Conclusion: Do people really think this way? 516
Summary 517
Key concepts 517
Questions for review 517
Multiple choice 518
Problems and applications 518

xii
PREFACE TO
THIS EDITION
Studying economics should invigorate and enthral. It should challenge students’ preconceptions and
provide them with a powerful, coherent framework for analysing the world they live in. Yet, all too often,
economics textbooks are dry and confusing. Rather than highlighting the important foundations of
economic analysis, these books focus on the ‘ifs’ and ‘buts’. The motto underlying this book is that it is
‘the rule, not the exception’ that is important. Our aim is to show the power of economic tools and the
importance of economic ideas.
This book has been designed particularly for students in Australia and New Zealand. However, we
are keenly aware of the diverse mix of students studying in these countries. When choosing examples
and applications, we have kept an international focus. Whether the issue is sauce tariffs in the EU, rent
control in Mumbai, road tolls in Singapore or the gas industry in Australia, examples have been chosen
for their relevance and to highlight that the same economic questions are being asked in many
countries. The specific context in which economics is applied may vary, but the lessons and insights
offered by the economic way of thinking are universal.
To boil economics down to its essentials, we had to consider what is truly important for students to
learn in their first course in economics. As a result, this book differs from others not only in its length
but also in its orientation.
It is tempting for professional economists writing a textbook to take the economist’s point of view
and to emphasise those topics that fascinate them and other economists. We have done our best to
avoid that temptation. We have tried to put ourselves in the position of students seeing economics for
the first time. Our goal is to emphasise the material that students should and do find interesting about
the study of the economy.
One result is that more of this book is devoted to applications and policy, and less is devoted to
formal economic theory, than is the case with many other books written for the principles course. For
example, after students learn about the market forces of supply and demand in Chapters 4 to 6, they
immediately apply these tools in Chapters 7 to 9 to consider three important questions facing our
society: Why is the free market a good way to organise economic activity? How does taxation interfere
with the market mechanism? Who are the winners and losers from international trade? These kinds of
questions resonate with the concerns and interests that students hear about in the news and bring from
their own lives.
Throughout this book, we have tried to return to applications and policy questions as often as
possible. Most chapters include case studies illustrating how the principles of economics are applied. In
addition, ‘In the news’ boxes offer excerpts from newspaper and magazine articles showing how
economic ideas shed light on the current issues facing society. It is our hope that after students finish
their first course in economics, they will think about news stories from a new perspective and with
greater insight.

xvii
 To write a brief and student-friendly book, we had to consider new ways to organise the material.
This book includes all the topics that are central to a first course in economics, but the topics are not
always arranged in the traditional order. What follows is a whirlwind tour of this text. This tour will, we
hope, give instructors some sense of how the pieces fit together.
Chapter 1, ‘Ten principles of economics’, introduces students to the economist’s view of the world. It
previews some of the big ideas that recur throughout economics, such as opportunity cost, marginal
decision making, the role of incentives, the gains from trade and the efficiency of market allocations.
Throughout the book, we refer regularly to the Ten Principles of Economics in Chapter 1 to remind
students that these principles are the foundation for most economic analysis. A key icon in the margin
calls attention to these references.
Chapter 2, ‘Thinking like an economist’, examines how economists approach their field of study. It
discusses the role of assumptions in developing a theory and introduces the concept of an economic
model. It also discusses the role of economists in making policy. The appendix to this chapter offers a
brief refresher course on how graphs are used and how they can be abused.
Chapter 3, ‘Interdependence and the gains from trade’, presents the theory of comparative
advantage. This theory explains why individuals trade with their neighbours, and why nations trade
with other nations. Much of economics is about the coordination of economic activity through market
forces. As a starting point for this analysis, students see in this chapter why economic interdependence
can benefit everyone. This is done using a familiar example of trade in household chores among
flatmates.
The next three chapters introduce the basic tools of supply and demand. Chapter 4, ‘The market
PREFACE TO THIS EDITION

forces of supply and demand’, develops the supply curve, the demand curve and the notion of market
equilibrium. Chapter 5, ‘Elasticity and its application’, introduces the concept of elasticity and uses it in
three applications to quite different markets. Chapter 6, ‘Supply, demand and government policies’,
uses these tools to examine price controls, such as rent control, the award wage system, tax incidence
and subsidies.
Attention then turns to welfare analysis using the tools of supply and demand. Chapter 7,
‘Consumers, producers and the efficiency of markets’, extends the analysis of supply and demand using
the concepts of consumer surplus and producer surplus. It begins by developing the link between
consumers’ willingness to pay and the demand curve and the link between producers’ costs of
production and the supply curve. It then shows that the market equilibrium maximises the sum of the
producer and consumer surplus. In this book, students learn about the efficiency of market allocations
early in their studies.
The next two chapters apply the concepts of producer and consumer surplus to questions of policy.
Chapter 8, ‘Application: The costs of taxation’, examines the deadweight loss of taxation. Chapter 9,
‘Application: International trade’, examines the winners and losers from international trade and the
debate about protectionist trade policies.
Having examined why market allocations are often desirable, the book then considers how the
government can sometimes improve on market allocations. Chapter 10, ‘Externalities’, examines why
external effects such as pollution can render market outcomes inefficient. It also examines the possible
public and private solutions to those inefficiencies. This has become highly relevant as policymakers
attempt to deal with mitigating the causes of climate change. Chapter 11, ‘Public goods and common
resources’, considers the inefficiencies that arise for goods that have no market price, such as national
defence. Chapter 12, ‘The design of the tax system’, examines how the government raises the revenue

xviii
necessary to pay for public goods. It presents some institutional background about the tax system and
then discusses how the goals of efficiency and equity come into play in the design of a tax system.
The next six chapters examine firm behaviour and industrial organisation. Chapter 13, ‘The costs of
production’, discusses what to include in a firm’s costs and introduces cost curves. Chapter 14, ‘Firms
in competitive markets’, analyses the behaviour of price-taking firms and derives the market supply
curve. Chapter 15, ‘Monopoly’, discusses the behaviour of a firm that is the sole seller in its market. It
discusses the inefficiency of monopoly pricing and the value of price discrimination. Chapter 16,
‘Monopolistic competition’, examines behaviour in a market in which many sellers offer similar but
differentiated products. It also discusses the debate about the effects of advertising. Chapter 17,
‘Oligopoly and business strategy’, examines markets when there are only a few sellers and so strategic
interactions are important. It uses the prisoners’ dilemma as the model for examining strategic
interaction. Chapter 18, ‘Competition policy’, describes the policy instruments used by governments to
control monopoly power and preserve competition in markets.
Microeconomic reform is discussed throughout the chapters on firm behaviour and industrial
organisation rather than as a separate topic. For instance, the role of privatisation is included in Chapter
15, and competition and trade practices issues are discussed in Chapter 18. Also, note that Chapter 17
includes an appendix that can be used to teach students about the differences between price and
quantity competition in oligopoly. This appendix makes the latest game-theoretic thinking on these
issues accessible to introductory economics students.
The next three chapters examine issues related to labour markets. Chapter 19, ‘The markets for the

PREFACE TO THIS EDITION

factors of production’, emphasises the link between factor prices and marginal productivity. It includes
an appendix on the firm demand for labour under imperfect competition and monopoly. Chapter 20,
‘Earnings and discrimination’, discusses the determinants of equilibrium wages, including
compensating differentials, human capital, unions, efficiency wages and discrimination. The union
discussion goes beyond simplistic analyses of unions and monopolists, introducing union behaviour as
part of a bargaining equilibrium in bilateral monopoly. The discussion of human capital and efficiency
wages proves a convenient point to introduce students to the concepts of signalling and asymmetric
information. Chapter 21, ‘Income inequity and poverty,’ examines the degree of inequality in Australian
society, the alternative views about the government’s role in changing the distribution of income, and
the various policies aimed at helping society’s poorest members.
Chapter 22, ‘The theory of consumer choice’, analyses individual decision making using budget
constraints and indifference curves. Finally, Chapter 23, ‘Frontiers of microeconomics’, goes beyond
standard microeconomics to examine cutting-edge issues such as the role of information, political
economy and behavioural economics; all of which help explain more of what happens in the real world.
These last two chapters cover material that is somewhat more advanced than the rest of the book.
Some instructors may want to skip the last chapter, depending on the emphases of their courses and
the interests of their students. Instructors who do cover this material may want to move it earlier, and
we have written this chapter so that it can be covered any time after the basics of supply and demand
have been introduced.

Joshua S. Gans
Stephen P. King
Martin C. Byford

xix
 PREFACE TO THE
ORIGINAL EDITION
During my twenty-year career as a student, the course that excited me most was the two-semester
sequence on the principles of economics I took during my freshman year in college. It is no
exaggeration to say that it changed my life.
I had grown up in a family that often discussed politics over the dinner table. The pros and cons of
various solutions to society’s problems generated fervent debate. But, in school, I had been drawn to the
sciences. Whereas politics seemed vague, rambling and subjective, science was analytic, systematic
and objective. While political debate continued without end, science made progress.
My freshman course on the principles of economics opened my eyes to a new way of thinking.
Economics combines the virtues of politics and science. It is, truly, a social science. Its subject matter is
society – how people choose to lead their lives and how they interact with one another. But it
approaches its subject with the dispassion of a science. By bringing the methods of science to the
questions of politics, economics tries to make progress on the fundamental challenges that all societies
face.
I was drawn to write this book in the hope that I could convey some of the excitement about
economics that I felt as a student in my first economics course. Economics is a subject in which a little
knowledge goes a long way. (The same cannot be said, for instance, of the study of physics or the
Japanese language.) Economists have a unique way of viewing the world, much of which can be taught
in one or two semesters. My goal in this book is to transmit this way of thinking to the widest possible
audience and to convince readers that it illuminates much about the world around them.
I am a firm believer that everyone should study the fundamental ideas that economics has to offer.
One of the purposes of general education is to make people more informed about the world in order to
make them better citizens. The study of economics, as much as any discipline, serves this goal. Writing
an economics textbook is, therefore, a great honour and a great responsibility. It is one way that
economists can help promote better government and a more prosperous future. As the great economist
Paul Samuelson put it, ‘I don’t care who writes a nation’s laws, or crafts its advanced treaties, if I can
write its economics textbooks.’

N. Gregory Mankiw
July 2000

xx
TO THE STUDENTS
‘Economics is a study of mankind in the ordinary business of life.’ So wrote Alfred Marshall, the great
nineteenth-century economist, in his textbook Principles of Economics. Although we have learned much
about the economy since Marshall’s time, this definition of economics is as true today as it was in 1890,
when the first edition of his text was published.
Why should you, as a student entering the twenty-first century, embark on the study of economics?
There are three reasons.
The first reason to study economics is that it will help you understand the world in which you live.
There are many questions about the economy that might spark your curiosity. Why are houses more
expensive in Sydney than in Hobart? Why do airlines charge less for a return ticket if the traveller stays
over a Saturday night? Why are some people paid so much to play tennis? Why are living standards so
meagre in many African countries? Why do some countries have high rates of inflation while others
have stable prices? Why are jobs easy to find in some years and hard to find in others? These are just a
few of the questions that a course in economics will help you answer.
The second reason to study economics is that it will make you a more astute participant in the
economy. As you go about your life, you make many economic decisions. While you are a student, you
decide how many years you will continue with your studies. Once you take a job, you decide how much
of your income to spend, how much to save and how to invest your savings. Someday you may find
yourself running a small business or a large corporation, and you will decide what prices to charge for
your products. The insights developed in the coming chapters will give you a new perspective on how
best to make these decisions. Studying economics will not by itself make you rich, but it will give you
some tools that may help in that endeavour.
The third reason to study economics is that it will give you a better understanding of the potential
and limits of economic policy. As a voter, you help choose the policies that guide the allocation of
society’s resources. When deciding which policies to support, you may find yourself asking various
questions about economics. What are the burdens associated with alternative forms of taxation? What
are the effects of free trade with other countries? What is the best way to protect the environment? How
does a government budget deficit affect the economy? These and similar questions are always on the
minds of policymakers, whether they work for a local council or the prime minister’s office.
Thus, the principles of economics can be applied in many of life’s situations. Whether the future
finds you reading the newspaper, running a business or running a country, you will be glad that you
studied economics.

Joshua S. Gans
Stephen P. King
Martin C. Byford
N. Gregory Mankiw

xxi
 ABOUT THE AUTHORS
Joshua Gans holds the Jeffrey S. Skoll Chair in
Technical Innovation and Entrepreneurship and is
a Professor of Strategic Management at the
Rotman School of Management, University of
Toronto. He studied economics at the University of
Queensland and Stanford University. He currently
teaches digital economics and entrepreneurship to
MBA students. Professor Gans’s research ranges
over many fields of economics, including economic
growth, game theory, regulation and the
economics of technological change and
innovation. His work has been published in
academic journals including the American
Economic Review, Journal of Economic
Perspectives, Journal of Political Economy and the
Rand Journal of Economics. Joshua also has
written the popular books Parentonomics
(published by MIT Press) and Information Wants to
be Shared (published by Harvard Business School
Press) and founded the Core Economics blog
(economics.com.au). Currently, he is an associate
editor at Management Science and the Journal of
Industrial Economics. He has also undertaken
consulting activities (through his consulting firm,
CoRE Research), advising governments and
private firms on the impact of microeconomic
reform and competition policy in Australia. In 2007,
he was awarded the Economic Society of
Australia’s Young Economist Award for the
Australian economist under 40 who has made the
most significant contribution to economic
knowledge. In 2008, he was elected as a Fellow of
the Academy of Social Sciences Australia.
Professor Gans lives in Toronto with his
partner, Natalie Lippey, and children, Belanna,
Ariel and Annika.
xxii
Stephen King is a Commissioner with Australia’s
Productivity Commission and an adjunct Professor
of Economics at Monash University. He has
previously been Dean of Business and Economics
at Monash University, a member of the Economic
Regulation Authority of Western Australia, a
member of the National Competition Council and a
Commissioner at the Australian Competition and
Consumer Commission. After starting (and
stopping) studying Forestry and Botany, Stephen
completed an economics degree at the Australian
National University. He completed his PhD at
Harvard University in 1991. Stephen has taught a
variety of courses, including teaching introductory
economics for 11 years at Harvard University,
Monash University and the University of
Melbourne.
Professor King has researched and published in
a wide range of areas, including law and
economics, game theory, corporate finance,
privatisation and tax policy. From 2012 to 2016, he
had a regular column in The Conversation and he
has a YouTube channel where you can view
companion videos for introductory economics.
Stephen regularly provides advice to government,
private firms and the Courts on a range of issues
relating to regulation and competition policy. He is
a Lay Member of the High Court of New Zealand
and a Fellow of the Academy of Social Sciences in
Australia.
Professor King lives in Melbourne with his wife,
Mary. Their two children, Jacqui and Rebecca,
have grown up, graduated, and run away from
home.
Martin Byford is Senior Lecturer of Economics at
RMIT University. Prior to joining RMIT, he was
Assistant Professor of Economics at the University
of Colorado at Boulder. Martin discovered
economics during the final year of a combined Arts
and Civil Engineering degree. Realising that he
had made a terrible error in his choice of vocation,
Martin went back to university to study economics.
He completed a PhD at the University of Melbourne
in 2007. Martin has taught introductory
microeconomics at RMIT campuses in Australia
and Singapore.
Dr Byford’s research is primarily in the fields of
industrial organisation and microeconomic theory.
He has published in academic journals including
the Journal of Economic Theory, the International
Journal of Industrial Organization and the Journal of
Economics and Management Strategy. Martin also
contributes to economic policy debates on a
diverse range of topics, including the design of the
banking system and labour market reform.
Dr Byford lives in Melbourne with his wife,
Siobhan, and their son, Robert.
N. Gregory Mankiw is Professor of Economics at
Harvard University. As a student, he studied
economics at Princeton University and MIT. As a
teacher, he has taught macroeconomics,
microeconomics, statistics and principles of
economics. He even spent one summer long ago as
a sailing instructor on Long Beach Island.
Professor Mankiw is a prolific writer and a
regular participant in academic and policy debates.
His work has been published in scholarly journals,
such as the American Economic Review, Journal of
Political Economy and Quarterly Journal of
Economics, and in more popular forums, such
as The New York Times, Boston Globe and The
Wall Street Journal. He is also the author of the
best-selling intermediate-level textbook
Macroeconomics (Worth Publishers). In addition to
his teaching, research and writing, Professor
Mankiw is a research associate of the National
Bureau of Economic Research, an adviser to the
Federal Reserve Bank of Boston and the
Congressional Budget Office, and a member of the
ABOUT THE AUTHORS
ETS test development committee for the advanced
placement exam in economics.
Professor Mankiw lives in Wellesley,
Massachusetts, with his wife and three children.
xxiii
 ACKNOWLEDGEMENTS
In updating this book, we have benefited from the input of a wide range of talented people. We would like
to thank all those people who helped us with this task. We would also like to thank those economists who
read and commented on portions of both this edition and the previous editions, including:
Robert Wrathall, Bond University; Nahid Khan, University of Melbourne; Vinod Mishra, Monash
University; Mei Leng Rankin, Melbourne Polytechnic; David Walker, La Trobe University; Dr Yolanta
Kwiecien, Monash College (Monash University); Pundarik Mukhopadhaya, Macquarie University; Anne
Gleeson, Flinders University; Shane Zhang, University of Southern Queensland.
We would also like to extend our thanks to the reviewers from the previous six editions:
Vandana Arya, University of South Australia; Mark Bowden, Swinburne University of Technology;
Laurence Lester, Flinders University; Elizabeth Manning, Deakin University; Mark Hornshaw, University of
Notre Dame Australia; David Walker, La Trobe University; Dipanwita Sarkar, Queensland University of
Technology; Safdar Khan, Bond University; Jeff Borland, University of Melbourne; Vivek Chaudhri,
University of Melbourne; Mark Crosby, University of Melbourne; Peter Dawkins, University of Melbourne;
Laurel Dawson, Deakin University; Sarath Delpachitra, University of Southern Queensland; Robert Dixon,
University of Melbourne; Paul Flatau, Murdoch University; Cathy Fletcher, Monash University; John
Forster, Griffith University; Michael Francis, University of Canberra; John Freebairn, University of
Melbourne; Chris Geller, Deakin University; Mary Graham, Deakin University; Bob Gregory, Australian
National University; Ian Harper, University of Melbourne; Ian Harriss, Charles Sturt University; John Hicks,
Charles Sturt University; Sarah Jennings, University of Tasmania; Chris Jones, Australian National
University; Steven Kemp, Curtin University; Geoff Kelly, University of Western Australia; Monica Keneley,
Deakin University; Micheal Kowalik, Australian Defence Force Academy; Radhika Lahiri, Queensland
University of Technology; Boon Lee, Queensland Institute of Technology; Andrew Leigh, Australian
National University; Jakob Madsen, Monash University; Gary Magee, La Trobe University; Ian McDonald,
University of Melbourne; Alan Morris, Victoria University of Technology; Mark Morrison, Charles Sturt
University; Owen Nguyen, Australian Maritime College; David Owens, Swinburne University of
Technology; Greg Parry, Edith Cowan University; John Perkins, University of New South Wales; Clive
Reynoldson, Edith Cowan University; John Rodgers, University of Western Australia; Amal Sanyal, Lincoln
University; John Searle, University of Southern Queensland; Martin Shanahan, University of South
Australia; Sharshi Sharma, Victoria University of Technology; Leanne Smith, Massey University; Lindsay
Smyrk, Victoria University of Technology; Robin Stonecash, Macquarie University; Judy Taylor, Monash
University; Di Thomson, Deakin University; John Tressler, University of Waikato; Thea Vinnicombe, Bond
University; Neil Warren, University of New South Wales; Philip Williams, University of Melbourne; Ed
Wilson, University of Wollongong; John Wood, Edith Cowan University; Steffen Ziss, Sydney University.
Finally, we give special acknowledgement to our team of research assistants – Teresa Fels, Richard
Hayes, Richard Scheelings, Anna Kim and Kimberly Jin – who worked on this project.

xxiv
PART ONE
Introduction

Chapter 1 Ten principles of economics

Chapter 2 Thinking like an economist
Chapter 3 Interdependence and the gains from trade
 1
Ten principles
of economics
Learning objectives
In this chapter you will:
● learn that economics is about the allocation of scarce resources
● examine some of the trade-offs that people face
● learn the meaning of opportunity cost
● see how to use marginal reasoning when making decisions
● discuss how incentives affect people’s behaviour
● consider why trade among people or nations can be good for everyone
● discuss why markets are a good, but not perfect, way to allocate resources
● learn what determines some trends in the overall economy.

4
The word economy comes from the Greek word oikonomos, which means ‘one who manages a
household’. At first, this origin might seem peculiar. But, in fact, households and economies have
much in common.
A household faces many decisions. It must decide which members of the household do which
tasks and what each member receives in return. Who cooks dinner? Who does the laundry? Who
gets the extra dessert at dinner? Who gets to use the car? In short, the household must allocate its
scarce resources (time, dessert, petrol) among its various members, taking into account each
member’s abilities, efforts and desires.
Like a household, a society faces many decisions. A society must decide what jobs will be done
and who will do them. It needs some people to grow food, other people to make clothing and still
others to design computer software. Once society has allocated people (as well as land, buildings
and machines) to various jobs, it must also allocate the output of the goods and services that they
produce. It must decide who will eat caviar and who will eat potatoes. It must decide who will
drive a Tesla, and who will take the bus.
The management of society’s resources is important because resources are scarce. Scarcity scarcity
means that society has limited resources and therefore cannot produce all the goods and services the limited nature of
society’s resources
people wish to have. Just as each member of a household cannot get everything he or she wants,
each individual in society cannot attain the highest standard of living to which he or she might
aspire.
Economics is the study of how society manages its scarce resources. In most societies, economics
the study of how society
resources are allocated not by an all-powerful dictator but through the combined choices of
manages its scarce
millions of households and firms. Economists, therefore, study how people make decisions – how resources
much they work, what they buy, how much they save and how they invest their savings.
Economists also study how people interact with one another. For instance, they examine how the
buyers and sellers of a good interact to determine the price at which the good is sold and the
quantity that is sold. Finally, economists analyse the forces and trends that affect the economy as a
whole, including the growth in average income, the fraction of the population that cannot find
work and the rate at which prices are rising.
The study of economics has many facets, but it is unified by several central ideas. In the rest of
this chapter, we look at Ten Principles of Economics. Don’t worry if you don’t understand them all
at first or if you are not completely convinced. We explore these ideas more fully in later chapters.
The 10 principles are introduced here to give you an overview of what economics is all about.

How people make decisions

There is no mystery about what an ‘economy’ is. Whether we are talking about the economy of
Sydney, of Australia or of the whole world, an economy is just a group of people interacting with
one another as they go about their lives. Because the behaviour of an economy reflects the
behaviour of the individuals who make up the economy, we begin our study of economics with
four principles of individual decision making.

Principle 1: People face trade-offs

You may have heard the saying ‘There’s no such thing as a free lunch’. To get something that we
like, we usually have to give up something else that we also like. Making decisions requires
trading off one goal against another.

Chapter 1 Ten principles of economics

 Consider a student who must decide how to allocate her most valuable resource – her time. She
can spend all her time studying economics; she can spend all of her time studying psychology; or
she can divide her time between the two fields. For every hour she studies one subject, she gives
up an hour she could have used studying the other. And for every hour she spends studying, she
gives up an hour that she could have spent sleeping, bike riding, watching YouTube clips, or
working at her part-time job for some extra spending money.
Consider parents deciding how to spend their family income. They can buy food or clothing, or
have a holiday. Or they can save some of the family income for retirement or the children’s
education. When they choose to spend an extra dollar on one of these goods, they have one less
dollar to spend on some other good.
When people are grouped into societies, they face different kinds of trade-offs. The classic trade-
off is between ‘guns and butter’. The more we spend on defence to protect our shores from foreign
aggressors (guns), the less we can spend on personal goods to raise our standard of living at home
(butter). Also important in modern society is the trade-off between a clean environment and a high
level of income. Laws that require firms to reduce pollution usually raise the cost of producing goods
and services. Because of these higher costs, these firms end up earning smaller profits, paying lower
wages, charging higher prices or some combination of these three. Thus, while pollution regulations
give us the benefit of a cleaner environment and the improved health that comes with it, they have the
cost of reducing the incomes of the regulated firms’ owners, workers and customers.
efficiency Another trade-off society faces is between efficiency and equity. Efficiency means that society
the property of society
is getting the most it can from its scarce resources. Equity means that the benefits of those
getting the most it can
from its scarce resources are distributed fairly among society’s members. In other words, efficiency refers to the
resources size of the economic pie, and equity refers to how the pie is divided. Often, when government
policies are being designed, these two goals conflict.
equity Consider, for instance, policies aimed at achieving a more equitable distribution of economic
the property of
distributing economic wellbeing. Some of these policies, such as the age pension or unemployment benefits, try to help
prosperity fairly among those members of society who are most in need. Others, such as the individual income tax, ask the
the members of society
financially successful to contribute more than others to support the government. Although these
policies have the benefit of achieving greater equity, they have a cost in terms of reduced
efficiency. When the government redistributes income from the rich to the poor, it can reduce the
reward for working hard; as a result, people may work less and produce fewer goods and
services. In other words, as the government tries to cut the economic pie into more equitable
slices, the pie may get smaller.
Recognising that people face trade-offs does not by itself tell us what decisions they will or
should make. A student should not abandon the study of psychology just because doing so would
increase the time available for the study of economics. Society should not stop protecting the
environment just because environmental regulations reduce our material standard of living. The
poor should not be ignored just because helping them distorts work incentives. Nonetheless,
acknowledging life’s trade-offs is important because people are likely to make good decisions only
if they understand the options that they have available. Our study of economics starts by
acknowledging life’s trade-offs.

Principle 2: The cost of something is what you give up to get it

Because people face trade-offs, making decisions requires comparing the costs and benefits of
alternative courses of action. In many cases, however, the cost of some action is not as obvious as
it might first appear.

Part 1 Introduction
 Consider, for example, the decision whether to go to university. The benefits include intellectual
enrichment, and a lifetime of better job opportunities. But what is the cost? To answer this
question, you might be tempted to add up the money you or your parents spend on fees, books,
rent and food. Yet this total does not truly represent what you give up to spend a year at
university.
There are two problems with this calculation. First, it includes some things that are not really
costs of university education. Even if you quit university, you would need a place to sleep and food
to eat. Rent and food are costs of going to university only to the extent that they may be more
expensive because you are going to university. For instance, you might have to move cities to
attend university, and live away from home.
Second, this calculation ignores the largest cost of going to university – your time. When you
spend a year listening to lectures, reading textbooks and writing assignments, you cannot spend
that time working at a job. For most students, the wages given up to attend university are the
largest single cost of their education.
The opportunity cost of an item is the best alternative you give up to get that item. When opportunity cost
making any decision, such as whether to attend university, decision makers should be aware of the best alternative that
must be given up to
the opportunity costs that accompany each possible action. In fact, they usually are. For example, obtain some item
some young athletes can earn millions if they forgo university and play professional sports. Their
opportunity cost of university is very high. It is not surprising that they often decide that the
benefit of a university education is not worth the opportunity cost.

Principle 3: Rational people think at the margin

Economists normally assume that people are rational. Rational people systematically and
purposefully do the best they can do to achieve their objectives, given the opportunities they have.
As you study economics, you will encounter firms that decide how many workers to hire and how
much of their product to manufacture and sell to maximise profits. You will encounter individuals
who decide how much time to spend working, and what goods and services to buy with the
resulting income to achieve the highest possible level of satisfaction.
Rational people know that decisions in life are rarely black and white but usually involve shades
of grey. At dinnertime, the choice you face is not ‘Should I fast or eat like a pig?’. More likely you
will be asking yourself ‘Should I eat that extra spoonful of mashed potatoes?’. When exams roll
around, your decision is not between blowing them off and studying 24 hours a day, but whether
to spend an extra hour reviewing your notes instead of updating your Facebook status.
Economists use the term marginal change to describe a small incremental adjustment to an marginal change
a small incremental
existing plan of action. Keep in mind that margin means ‘edge’, so marginal changes are
adjustment to a plan of
adjustments around the edges of what you are doing. Rational people often make decisions by action
comparing marginal benefits and marginal cost.
For example, suppose you are considering calling a friend on your mobile phone. You decide
that talking with her for 10 minutes would give you a benefit that you value at about $12. Your
mobile phone plan costs you $40 per month plus $1 per minute for whatever calls you make. You
usually talk for 100 minutes a month, so your total monthly bill is $140 ($1 per minute times 100
minutes, plus the $40 fixed fee). Under these circumstances, should you make the call? You might
be tempted to reason as follows: ‘Because I pay $140 for 100 minutes of calling each month, the
average minute on the phone costs me $1.40. So a 10-minute call costs $14. Because that $14 cost
is greater than the $12 benefit, I am going to skip the call.’ That conclusion is wrong, however.
Although the average cost of a 10-minute call is $14, the marginal cost – the amount your bill

Chapter 1 Ten principles of economics

 increases if you make the extra call – is only $10. You will make the right decision only by
comparing the marginal benefit and the marginal cost. Because the marginal benefit of $12 is
greater than the marginal cost of $10, you should make the call. This is a principle that people
innately understand: mobile phone users with unlimited calls (that is, phone calls that are free at
the margin) are often prone to making long and frivolous calls.

Is the marginal benefit

of this call greater than
the marginal cost?

Source: Shutterstock.com/wavebreakmedia.
Thinking at the margin works for business decisions as well. Consider an airline deciding how
much to charge passengers who fly standby. Suppose that flying a 200-seat plane from Brisbane
to Perth costs the airline $100 000. In this case, the average cost of each seat is $100 000/200, which
is $500. One might be tempted to conclude that the airline should never sell a ticket for less than
$500. But the airline can often increase its profits by thinking at the margin. Imagine that a plane
is about to take off with 10 empty seats and a standby passenger waiting at the gate will pay $300
for a seat. Should the airline sell the ticket? Of course it should. If the plane has empty seats, the
cost of adding one more passenger is tiny. Although the average cost of flying a passenger is
$500, the marginal cost is merely the cost of the sandwich and coffee that the extra passenger will
consume. As long as the standby passenger pays more than the marginal cost, selling the ticket is
profitable.
Marginal decision making can help explain some otherwise puzzling economic phenomena.
Here is a classic question: Why is water so cheap, while diamonds are so expensive? Humans
need water to survive, while diamonds are unnecessary. Yet people are willing to pay much more
for a diamond than for a cup of water. The reason is that a person’s willingness to pay for a good
is based on the marginal benefit that an extra unit of the good would yield. The marginal benefit, in
turn, depends on how many units a person already has. Although water is essential, the marginal
benefit of an extra cup is small because water is plentiful. By contrast, no one needs diamonds to
survive, but because diamonds are so rare, people consider the marginal benefit of an extra
diamond to be large.

Part 1 Introduction
 A rational decision maker takes an action if and only if the marginal benefit of the action
exceeds the marginal cost. This principle explains why people use mobile phones as much as they
do, why airlines are willing to sell tickets below average cost and why people are willing to pay
more for diamonds than for water. It can take some time to get used to the logic of marginal
thinking, but the study of economics will give you ample opportunity to practise.

Principle 4: People respond to incentives

An incentive is something (such as the prospect of a punishment or reward) that induces a person
to act. Because rational people make decisions by comparing costs and benefits, they respond to
incentives. You will see that incentives play a central role in the study of economics. One
economist went so far as to suggest that the entire field could be summarised simply: ‘People
respond to incentives. The rest is commentary.’
Incentives are key to analysing how markets work. For example, when the price of an apple
rises, people decide to eat fewer apples. At the same time, apple orchards decide to hire more
workers and harvest more apples. In other words, a higher price in a market provides an
incentive for buyers to consume less and an incentive for sellers to produce more. As we will see,
the influence of prices on the behaviour of consumers and producers is crucial to understanding
how the economy allocates scarce resources.
Public policymakers should never forget about incentives. Many policies change the costs or
benefits that people face and, as a result, alter their behaviour. A tax on petrol, for instance,
encourages people to drive smaller, more fuel-efficient cars. That is one reason people drive
smaller cars in Europe and Australia, where petrol taxes are higher, than in the United States,
where petrol taxes are low. A petrol tax also encourages people to take public transportation
rather than drive, and to live closer to where they work. If the tax were larger, more people would
be driving hybrid cars, and if it were large enough, they would switch to electric cars.
When policymakers fail to consider how their policies affect incentives, they often end up facing
unintended consequences. For example, consider public policy towards seat belts and car safety. In
the 1950s, few cars had seat belts. Today all cars do, and in Australia it is compulsory to wear seat
belts. The reason for the change is public policy. In the late 1960s, the rising death toll from motor
vehicle accidents in Australia generated much public concern over car safety. State governments
responded and in December 1970 the Victorian Government passed legislation requiring car
drivers and passengers to wear seat belts. Other states followed and by 1973 it was compulsory
throughout Australia to wear seat belts.
How does a seat belt law affect car safety? The direct effect is obvious. When wearing seat belts
is compulsory, more people wear seat belts and the probability of surviving a major car accident
rises. In this sense, seat belts save lives. This direct impact of seat belts on safety is what motivated
Australian governments to change the law.
But that is not the end of the story because the law also affects behaviour by changing
incentives. In this case, the relevant behaviour is the speed and care with which drivers operate
their cars. Driving slowly and carefully is costly because it uses the driver’s time and energy.
When deciding how safely to drive, rational people compare the marginal benefit from safer
driving with the marginal cost. They drive more slowly and carefully when the benefit of increased
safety is high. This explains why people drive more slowly and carefully when roads are wet and
slippery than when roads are clear.
Now consider how a seat belt law alters a driver’s cost–benefit calculation. Seat belts make
accidents less costly because they reduce the probability of injury or death. In other words,

Chapter 1 Ten principles of economics

 wearing a seat belt reduces the benefits of slow and careful driving. People respond to wearing
seat belts as they would to an improvement in road conditions – by driving faster and less
carefully. The result of a seat belt law, therefore, is a larger number of accidents. The decline in
safe driving has a clear, adverse impact on pedestrians who are more likely to find themselves in
an accident but, unlike the drivers, are not protected by a seat belt. Thus, a seat belt law tends to
increase the number of pedestrian deaths.
At first, this discussion of incentives and seat belts might seem like idle speculation. Yet, in a
classic 1975 study, economist Sam Peltzman argued that car safety laws in the United States have,
in fact, had many of these effects. According to Peltzman’s evidence, US laws give rise to both
fewer deaths per accident, and also to more accidents. He concluded that the net result was little
change in the number of driver deaths and an increase in the number of pedestrian deaths.
Peltzman’s analysis of car safety is an offbeat and controversial example of the general principle
that people respond to incentives. It implies that more recent changes to car safety laws, such as
requiring airbags and advanced braking systems in new cars, may mean more deaths for
pedestrians and cyclists. When analysing any policy, we must consider not only the direct effects
but also the less obvious, indirect effects that work through incentives. If the policy changes
incentives, it will cause people to alter their behaviour.

QUIZ
Describe an important trade-off you recently faced. Give an example of some action that has both
a monetary and non-monetary opportunity cost. Describe an incentive your parents offered you in
an effort to influence your behaviour.

CASE
STUDY

Choosing when the stork comes
In the decade between 2004 and 2014, the
Australian Government made a payment to
parents for every baby born. These payments
were known as the ‘baby bonus’, and ranged
in value between $3000 and $5437 across the
lifetime of the scheme. The story of the baby
bonus has lessons for how people respond
to incentives and why governments (and
others) need to anticipate these responses.
In May 2004, the then Treasurer, Peter
Costello, announced a $3000 payment
(rising to $5000 in 2008) for every child born
after 1 July 2004. This meant that the
parents of someone whose birthday was
30 June 2004 or earlier would receive
nothing. But hold off a day or so, and they
would get $3000. This created an incentive
for parents to delay births, if they could. And
by agreeing with their doctors to schedule
planned caesareans and inducements a
little later, births could be moved.
The graph in Figure 1.1 shows what
happened.
Notice that there was a dip in births in
the last week of June followed by a sharp
rise on 1 July 2004. Indeed, that day had the
most number of recorded births on a single
day in Australian history. And if you think
this might just be ‘fiddling the books’, 2 July
had the seventh-highest number of births.

10

Part 1 Introduction
 FIGURE 1.1 Births in Australia, June–July 2004

No. of
births
900

800

700

600

500

400
June 3 June 10 June 17 June 24 July 1 July 7 July 14 July 21 July 28
Source: Joshua Gans and Andrew Leigh, ‘Born on the First of July’, Journal of Public Economics, Vol. 93, Nos 1–2,
February 2009, pp. 246–63.

In their paper ‘Born on the First of July’,
Joshua Gans and Andrew Leigh estimated
that 1167 births were shifted from June to
July that year, all as a result of the baby
bonus. Medical organisations raised
concerns about the health consequences of
maternity hospital congestion caused by
this, while economists argued that the
policy should have been ‘phased-in’ so
given day. Nonetheless, politicians have
failed to heed these warnings. On 1 July
2006, the Howard government raised the
baby bonus by $834. Gans and Leigh again
found shifts in birth timing, but of a lower
magnitude (around 700 births).
Source: Joshua Gans and Andrew Leigh, ‘Born on the First
of July’, Journal of Public Economics, Vol. 93, Nos 1–2,
February 2009, pp. 246–63.

there were no big jumps in payments on any

How people interact

The first four principles discussed how individuals make decisions. As we go about our lives, many
of our decisions affect not only ourselves but other people as well. The next three principles present
some key ideas about how people interact with one another.

Principle 5: Trade can make everyone better off

You may have heard on the news how Australian workers compete with overseas workers for jobs,
and Australian businesses compete with overseas firms for sales. In some ways, this competition is
real because Australian workers and firms produce many of the same goods that are produced
overseas. A company mining iron ore in the Pilbara competes for the same customers as iron ore
producers in Brazil, South Africa and Peru. Clothing firms in Victoria compete with those in China
and Vietnam to sell shirts.
Yet it is easy to be misled when thinking about competition among countries. Trade between
Australia and another country is not like a sports contest, where one side wins and the other side
loses. In fact, the opposite is true: trade between two countries can make each country better off.

11

Chapter 1 Ten principles of economics

 To see why, consider how trade affects your family. When a member of your family looks for a job,
he or she competes against members of other families who are looking for jobs. Families also compete
against one another when they go shopping, because each family wants to buy the best goods at the
lowest prices. So, in a sense, each family in the economy is competing with all other families.
Despite this competition, your family would not be better off isolating itself from all other families.
If it did, your family would need to grow its own food, make its own clothes and build its own home.
Clearly, your family gains much from its ability to trade with others. Trade allows each person to
specialise in the activities he or she does best, whether it is farming, sewing or home building. By
trading with others, people can buy a greater variety of goods and services at lower cost.
Like families, countries also benefit from the ability to trade with one another. Trade allows
countries to specialise in what they do best and to enjoy a greater variety of goods and services.
The Chinese, the Japanese, the Germans and the Indonesians are as much our partners in the
world economy as they are our competitors.

IN THE
NEWS Outsourcing your own job

The principle that ‘trade can make everyone better off’ is illustrated by this case of an
American software developer who outsourced his own job to China.

Software developer Bob out-
sources own job and whiles
away shifts on cat videos
by Caroline Davies
When a routine security check by a
US-based company showed someone was
repeatedly logging on to their computer
system from China, it naturally sent alarm
bells ringing. Hackers were suspected and
telecoms experts were called in.
It was only after a thorough
investigation that it was revealed that the
culprit was not a hacker, but ‘Bob’ (not his
real name), an ‘inoffensive and quiet’
family man and the company’s top-
performing programmer, who could be
seen toiling at his desk day after day and
staring diligently at his monitor.
For Bob had come up with the idea of
outsourcing his own job – to China. So, while
a Chinese consulting firm got on with the
job he was paid to do, on less than one-fifth
of his salary, he whiled away his working
day surfing Reddit, eBay and Facebook.
The extraordinary story has been
revealed by Andrew Valentine, senior
investigator at US telecoms firm Verizon
Business, on its website, securityblog.
verizonbusiness.com.
12
Verizon’s risk team was called by the
unnamed critical infrastructure company
last year, ‘asking for our help in
understanding some anomalous activity
that they were witnessing in their VPN
logs’, wrote Valentine.
The company had begun to allow its
software developers to occasionally work
from home and so had set up ‘a fairly
standard VPN [virtual private network]
concentrator’ to facilitate remote access.
When its IT security department
started actively monitoring logs being
generated at the VPN, ‘What they found
startled and surprised them: an open and
active VPN connection from Shenyang,
China! As in this connection was live when
they discovered it,’ wrote Valentine.
What was more, the developer whose
credentials were being used was sitting at
his desk in the office.
‘Plainly stated, the VPN logs showed
him logged in from China, yet the
employee is right there, sitting at his desk,
staring into his monitor.’
Verizon’s investigators discovered
‘almost daily connections from Shenyang,
and occasionally these connections
spanned the entire workday’.
The employee, whom Valentine calls
Bob, was in his mid-40s, a ‘family man,

Part 1 Introduction
 inoffensive and quiet. Someone you
wouldn’t look twice at in an elevator.’
But an examination of his workstation
revealed hundreds of pdf invoices from a
third party contractor/developer in
Shenyang.
‘As it turns out, Bob had simply
outsourced his own job to a Chinese
consulting firm. Bob spent less than one-
fifth of his six-figure salary for a Chinese
firm to do his job for him.’
He had physically FedExed his security
RSA ‘token’, needed to access the VPN, to
China so his surrogates could log in as him.
When the company checked his web-
browsing history, a typical ‘work day’ for Bob
was: 9am, arrive and surf Reddit for a couple
of hours, watch cat videos; 11.30am, take
lunch; 1pm, eBay; 2pm-ish, Facebook
updates, LinkedIn; 4.40pm–end of day,
update email to management; 5pm, go home.
The evidence, said Valentine, even
suggested he had the same scam going
across multiple companies in the area.
‘All told, it looked like he earned several
hundred thousand dollars a year, and only
had to pay the Chinese consulting firm
about fifty grand annually’.
Meanwhile, his performance review
showed that, for several years in a row,
Bob had received excellent remarks for his
codes which were ‘clean, well written and
submitted in a timely fashion’.
‘Quarter after quarter, his performance
review noted him as the best developer in
the building,’ wrote Valentine.
Bob no longer works for the company.
Source: ‘Software developer Bob outsources own
job and whiles away shifts on cat videos’, by
Caroline Davies, The Guardian, 16 January 2013.
Copyright Guardian News & Media Ltd 2017.

Principle 6: Markets are usually a good way to organise

economic activity
The collapse of communism in the Soviet Union and Eastern Europe in the late 1980s and early
1990s was one of the last century’s most transformative events. Communist countries operated on
the premise that government workers were in the best position to guide economic activity. These
workers, called central planners, decided what goods and services were produced, how much was
produced and who produced and consumed these goods and services. The theory behind central
planning was that only the government could organise economic activity in a way that promoted
economic wellbeing for the country as a whole.
Most countries that once had centrally planned economies have abandoned this system and are
market economy
instead developing market economies. In a market economy, the decisions of a central planner are an economy that
replaced by the decisions of millions of firms and households. Firms decide whom to hire and what to allocates resources
make. Households decide which firms to work for and what to buy with their incomes. These firms through the
decentralised decisions
and households interact in the marketplace, where prices and self-interest guide their decisions. of many firms and
At first glance, the success of market economies is puzzling. In a market economy, no one is households as they
interact in markets for
looking out for the economic wellbeing of society as a whole. Decisions are made by millions of self- goods and services
interested households and firms. It might sound like chaos. Yet this is not the case. Market economies
have proven remarkably successful in organising economic activity to promote overall economic
wellbeing. invisible hand
In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, economist Adam the idea that buyers and
sellers freely
Smith explained the success of market economies. He noted that households and firms interacting in interacting in a market
markets act as if they are guided by an ‘invisible hand’ that leads them to desirable market outcomes. economy will create an
outcome that allocates
One of our goals in this book is to understand how this invisible hand works its magic. goods and services to
As you study economics, you will learn that prices are the instrument with which the invisible those people who value
them most highly and
hand directs economic activity. In any market, buyers look at the price when determining how makes the best use of
much to demand, and sellers look at the price when deciding how much to supply. As a result of our scarce resources

13

Chapter 1 Ten principles of economics

 the decisions that buyers and sellers make, prices reflect both the value of a good to society and the
cost to society of making the good. Smith’s great insight was that prices adjust to guide these
individual buyers and sellers to reach outcomes that, in many cases, maximise the wellbeing of
society as a whole.
Smith’s insight has an important corollary: when the government prevents prices from
adjusting naturally to supply and demand, it impedes the invisible hand’s ability to coordinate the
millions of households and firms that make up the economy. This corollary explains why taxes
adversely affect the allocation of resources. Taxes distort prices and thus the decisions of
households and firms. It also explains the great harm caused by policies that directly control
prices, such as rent control. And it explains the failure of communism. In communist countries,
prices were not determined in the marketplace but were dictated by government central planners.
These planners lacked the necessary information about consumers’ tastes and producers’ costs,
which in a market economy is reflected in prices. Central planners failed because they tried to run
the economy with one hand tied behind their backs – the invisible hand of the marketplace.

FYI Adam Smith and the role of markets

Adam Smith is often determine the value of a product. This theory

seen as the founder of
modern economics.
When his great book
An Inquiry into the
Nature and Causes of
the Wealth of Nations
was published in
1776, England and
Europe were going
through a period of
Adam Smith major social, political
and economic uphea-
val. The indus-
trial revolution was changing the economic
landscape just as the American and the French
revolutions were to change the political and
social landscape. Smith’s book reflects a point
of view that was gaining importance at the
time – that individuals are usually best left to
their own devices, without the heavy hand of
government guiding their actions. This political
philosophy provides the intellectual basis for
the market economy, and for free society more
generally.
To Smith, individuals interacting through
the marketplace, guided only by their
self-interest, promote general economic
wellbeing. This view was based on three
principles that contradicted the conventional
wisdom of Smith’s day. First, it involves a
view that the individual is best able to
of value opposed the mercantilist view of the
time that certain goods, such as gold, were
intrinsically valuable and that successful
commercial policy for a nation involved the
hoarding of these intrinsically valuable
goods. Second, Smith argued that individual
specialisation is a key way to create value.
This idea led to the theory of comparative
advantage that we will discuss in Chapter 3.
Third, Smith argued that market-based
interaction can not only replace centrally
coordinated commercial interaction but is
likely to be superior to centrally planned
systems. While a monarch or a parliament
could organise trade and commerce through
laws that set prices and restricted certain
types of market interactions, this is likely to
result in less value creation and national
wealth than the relatively unfettered inter-
action of individuals in the marketplace. We
discuss the interaction between government
policies and economic welfare throughout
this book.
Considerable advances in economics have
been made since 1776. But many of Smith’s
insights remain at the centre of modern
economics. Our analysis in the coming
chapters will allow us to express Smith’s
ideas and conclusions more precisely and to
analyse fully the strengths and weaknesses
of a market-based economy.

14

Part 1 Introduction
 CASE
STUDY

Adam Smith would have
loved Uber
You may never have lived in a centrally
planned economy, but if you have ever tried
to hail a taxi, you have experienced a highly
regulated market. In many cities around the
world, the local government imposes strict
controls in the market for taxis. The rules
usually go well beyond regulation of
insurance and safety. Taxi regulators limit
entry into the market by restricting the
number of taxi licences, and determine the
prices that taxis are allowed to charge.
A 2012 inquiry into the Victorian taxi
industry, chaired by Professor Allan Fels,
found that these restrictions have had a
number of detrimental effects. Taxis can be
difficult to find at certain times of day, and
in particular locations. The quality of
service is poor. And restrictions on the
number of taxi licences hinder competition
and innovation.
Recently, however, the highly regulated
taxi market has been confronted by a
disruptive force: Uber. Launched in 2009,
this company provides an app for
smartphones that directly connects
passengers and drivers. Uber cars often
charge less than taxis, but not always. Uber
raises prices significantly when there is a
surge in demand, such as during a sudden
rainstorm or late on New Year’s Eve, when
numerous tipsy party-goers are looking for
a safe way to get home. By contrast,
regulated taxis are prevented both from
offering discounts to attract customers, and
surge pricing during busy periods.
Not everyone is fond of Uber. Drivers of
traditional taxis complain that this new
competition eats into their source of
income. This is hardly a surprise: suppliers
of goods and services usually dislike new
competitors. But vigorous competition
among producers makes a market work
well for consumers.
That is why economists love Uber. A
2014 survey of several dozen prominent
economists asked whether car services
such as Uber increased consumer
wellbeing. Yes, said every single economist.
The economists were also asked whether
surge pricing increased consumer
wellbeing. Yes, said 85 per cent of them.
Surge pricing makes consumers pay more
at times, but because Uber drivers respond
to incentives, it also increases the quantity
of car services supplied when they are most
needed. Surge pricing also helps allocate
the services to those consumers who value
them most highly and reduces the costs of
searching and waiting for a car.
If Adam Smith were alive today, he
would surely have the Uber app on his
phone!

Principle 7: Governments can sometimes improve market

outcomes
If the invisible hand of the market is so great, why do we need government? One purpose of
studying economics is to refine your view about the proper role and scope of government policy.
One reason we need government is that the invisible hand can work its magic only if property rights
government enforces the rules and maintains the institutions that are key to a market economy. the ability of an
individual to own and
Most important, markets work only if property rights are enforced so individuals can own and
exercise control over
control scarce resources. A farmer won’t grow food if she expects her crop to be stolen; a scarce resources

15

Chapter 1 Ten principles of economics

 restaurant won’t serve meals unless it is assured that customers will pay before they leave; and a
film company won’t produce movies if too many potential customers avoid paying by making
illegal copies. We all rely on government-provided police and courts to enforce our rights over the
things we produce – and the invisible hand depends on our ability to enforce those rights.
Another reason we need government is that, although the invisible hand is powerful, it is not
omnipotent. There are two broad rationales for a government to intervene in the economy and
change the allocation of resources that people would choose on their own: to promote efficiency
and to promote equity. That is, most policies aim either to enlarge the economic pie or to change
how the pie is divided.
Consider first the goal of efficiency. Although the invisible hand usually leads markets to
allocate resources to maximise the size of the economic pie, this is not always the case. Economists
market failure use the term market failure to refer to a situation in which the market on its own fails to allocate
a situation in which a resources efficiently.
market left on its own
fails to allocate One possible cause of market failure is an externality. An externality is the impact of one
resources efficiently person’s actions on the wellbeing of a bystander. Pollution is a classic example. If a chemical
factory does not take into account the impact of its smoke emissions on the health of nearby
externality residents, it is likely to emit too much. In this case, the government can raise economic wellbeing
the uncompensated
impact of one person’s through environmental regulation.
actions on the wellbeing Another possible cause of market failure is market power, which refers to the ability of a single
of a bystander. A
positive externality person (or small group of people) to unduly influence market prices. For example, suppose that
makes the bystander everyone in town needs water but there is only one well. The owner of the well has market power
better off. A negative
externality makes the over the sale of water; he may choose to restrict the availability of water in order to increase the
bystander worse off. price. He is not subject to the rigorous competition with which the invisible hand normally keeps
self-interest in check. In this case, regulating the price that the monopolist charges may improve
market power economic efficiency.
the ability of a single
economic actor (or Now consider the goal of equity. Even when the invisible hand is yielding efficient outcomes, it
small group of actors) to can nonetheless leave big differences in economic wellbeing. A market economy rewards people
have a substantial
influence on market
according to their ability to produce things that other people are willing to pay for. The world’s
prices best soccer player earns more than the world’s best chess player simply because people are
willing to pay more to see soccer than chess. The invisible hand does not ensure that everyone has
sufficient food, decent clothing and adequate health care. Many public policies, such as the tax and
social welfare systems, aim to achieve a more equitable distribution of economic wellbeing.
To say that the government can improve on market outcomes at times does not mean that it
always will. Public policy is made by politicians operating in a political process that is far from
perfect. Sometimes policies are designed simply to reward the politically powerful. Sometimes they
are made by well-intentioned leaders who are not fully informed. As you study economics, you will
become a better judge of when a government policy is justifiable because it promotes efficiency or
equity and when it is not.

QUIZ
Why is a country better off not isolating itself from all other countries? Why do we have markets
and, according to economists, what roles should governments play in them?

16

Part 1 Introduction
How the economy as a whole works
We started by discussing how individuals make decisions and then looked at how people interact
with one another. All these decisions and interactions together make up ‘the economy’. The last
three principles concern the workings of the economy as a whole.

Principle 8: A country’s standard of living depends on its

ability to produce goods and services
The differences in living standards around the world are staggering. In 2014, the average
Australian had an income (in US dollars) of about $45 000. In the same year, the average South
Korean earned $33 000, the average New Zealander earned $36 000 and the average Indian earned
$5000. Not surprisingly, this large variation in average income is reflected in various measures of
the quality of life. Citizens of high-income countries have more smartphones, more cars, better
nutrition, better health care, and longer life expectancy than citizens of low-income countries.
Changes in living standards over time are also large. In Australia, incomes have historically
grown about 2 per cent per year (after adjusting for changes in the cost of living). At this rate,
average real income doubles every 35 years. In some countries, economic growth has been even
more rapid. In South Korea, for instance, average income has doubled in the past 15 years. In
China, average income has been growing at around 8 per cent per year since 2000, a rate of
growth that will see it double in just under 10 years.
What explains these large differences in living standards among countries and over time? The
answer is surprisingly simple. Almost all variation in living standards is attributable to differences
in countries’ productivity – that is, the amount of goods and services produced by each hour of a productivity
worker’s time. In nations where workers can produce a large quantity of goods and services per the quantity of goods
and services produced
hour, most people enjoy a high standard of living; in nations where workers are less productive, from each hour of a
most people must endure a more meagre existence. Similarly, the growth rate of a nation’s worker’s time
productivity determines the growth rate of its average income.
The relationship between productivity and living standards is simple, but its implications are
far-reaching. If productivity is the primary determinant of living standards, other explanations
must be of secondary importance. For example, it might be tempting to credit labour unions or
award wage laws for the rise in living standards of Australian workers over the past century. Yet
the real hero of Australian workers is their rising productivity.
The relationship between productivity and living standards also has profound implications for
public policy. When thinking about how any policy will affect living standards, the key question
is how it will affect our ability to produce goods and services. To boost living standards,
policymakers need to raise productivity by ensuring that workers are well educated, have the tools
needed to produce goods and services and have access to the best available technology.

Principle 9: Prices rise when the government prints too much

money
In January 1921, a daily newspaper in Germany cost 0.30 of a mark. Less than two years later, in
November 1922, the same newspaper cost 70 000 000 marks. All other prices in the economy rose inflation
an increase in the
by similar amounts. This episode is one of history’s most spectacular examples of inflation, an overall level of prices in
increase in the overall level of prices in the economy. the economy

17

Chapter 1 Ten principles of economics

 Although Australia and New Zealand have never experienced inflation even close to that in
Germany in the 1920s, inflation has at times been an economic problem. During the 1970s, for
instance, the overall level of prices more than doubled, and political leaders lived under the
catchcry ‘Fight Inflation First!’. In contrast, in the first decade of the twenty-first century, inflation
has run at about 2.5 per cent per year; at this rate, it would take almost 30 years for prices to
double. Because high inflation imposes various costs on society, keeping inflation at a low level is
a goal of economic policymakers around the world.
Source: © Tribune Media Services, Inc. All Rights Reserved. Reprinted with permission.

What causes inflation? While there is some disagreement among economists about inflation in
the short term, the answer in the long term is clear. In most cases of large or persistent inflation,
the culprit turns out to be the same – growth in the quantity of money. When a government
creates large quantities of the nation’s money, the value of the money falls. In Germany in the
early 1920s, when prices were, on average, tripling every month, the quantity of money was also
tripling every month. Although less dramatic, the economic history of Australia, New Zealand and
the United States points to a similar conclusion – the high inflation of the 1970s was associated
with rapid growth in the quantity of money, and the return of low inflation in the 1990s and 2000s
has been associated with slow growth in the quantity of money.

Principle 10: Society faces a short-term trade-off between

inflation and unemployment
If long-term inflation is so easy to explain, why do policymakers sometimes have trouble ridding
the economy of it? One reason is that reducing inflation is often thought to cause a temporary rise
Phillips curve in unemployment. This trade-off between inflation and unemployment is called the Phillips curve,
the short-term trade-off
after the economist who first examined this relationship.
between inflation and
unemployment The Phillips curve remains a controversial topic among economists, but most economists today
accept the idea that there is a short-term trade-off between inflation and unemployment.

18

Part 1 Introduction
According to a common explanation, this trade-off arises because some prices are slow to adjust.
Suppose, for example, that the government reduces the quantity of money in the economy. In the
long term, the only result of this policy change will be a fall in the overall level of prices. Yet not all
prices will adjust immediately. It may take several years before all firms issue new catalogues, all
unions make wage concessions and all restaurants print new menus. That is, prices are said to be
sticky in the short term.
Because prices are sticky, various types of government policy have short-term effects that differ
from their long-term effects. When the government reduces the quantity of money, for instance, it
reduces the amount that people spend. Lower spending, together with prices that are stuck too
high, reduces the quantity of goods and services that firms sell. Lower sales, in turn, cause firms
to lay off workers. Thus, the reduction in the quantity of money raises unemployment temporarily
until prices have fully adjusted to the change.
The trade-off between inflation and unemployment is only temporary, but it can last for several
years. The Phillips curve is, therefore, crucial for understanding many developments in the
economy. In particular, policymakers can exploit this trade-off using various policy instruments. By
changing the amount that the government spends, the amount it taxes and the amount of money
it prints, policymakers can, in the short term, influence the combination of inflation and
unemployment that the economy experiences. Because these instruments of monetary and fiscal
policy are potentially so powerful, how policymakers should use these instruments to control the
economy, if at all, is a subject of continuing debate.

QUIZ
What factors determine a country’s standard of living? How does printing more money affect a
country’s economy in the long term and in the short term?

TABLE 1.1 Ten principles of economics

How people make decisions
How people interact
How the economy as a whole works
1: People face trade-offs.
2: The cost of something is what you give up to get it.
3: Rational people think at the margin.
4: People respond to incentives.
5: Trade can make everyone better off.
6: Markets are usually a good way to organise economic activity.
7: Governments can sometimes improve market outcomes.
8: A country’s standard of living depends on its ability to produce
goods and services.
9: Prices rise when the government prints too much money.
10: Society faces a short-term trade-off between inflation and
unemployment.

19

Chapter 1 Ten principles of economics

 Conclusion
You now have a taste of what economics is all about. In the coming chapters we will develop many
specific insights about people, markets and economies. Mastering these insights will take some
effort, but it is not an overwhelming task. The field of economics is based on a few basic ideas that
can be applied in many different situations.
Throughout this book we will refer to the Ten Principles of Economics highlighted in this
chapter and summarised in Table 1.1. Keep these building blocks in mind: even the most
sophisticated economic analysis is founded on the 10 principles introduced here.

20

Part 1 Introduction
Summary
• The fundamental lessons about individual decision making are that people face trade-offs among
alternative goals, that the cost of any action is measured in terms of forgone opportunities, that
rational people make decisions by comparing marginal costs and marginal benefits, and that
people change their behaviour in response to the incentives they face.
• The fundamental lessons about interactions among people are that trade can be mutually
beneficial, that markets are usually a good way of coordinating trade among people, and that the
government can potentially improve market outcomes if there is some market failure or if the
market outcome is inequitable.
• The fundamental lessons about the economy as a whole are that productivity is the ultimate
source of living standards, that money growth is the ultimate source of inflation, and that society
faces a short-term trade-off between inflation and unemployment.

Key concepts
economics, p. 5 invisible hand, p. 13 opportunity cost, p. 7
efficiency, p. 6 marginal change, p. 7 Phillips curve, p. 18
equity, p. 6 market economy, p. 13 productivity, p. 17
externality, p. 16 market failure, p. 16 property rights, p. 15
inflation, p. 17 market power, p. 16 scarcity, p. 5

Questions for review

1 Give three examples of important trade-offs that you face in your life.
2 What alternatives would you include when determining your opportunity cost of a dinner at a
fancy restaurant?
3 Water is necessary for life. Is the marginal benefit of a glass of water large or small?
4 Why should policymakers think about incentives?
5 Why isn’t trade among countries like a game with some winners and some losers?
6 What does the ‘invisible hand’ of the marketplace do?
7 What are ‘efficiency’ and ‘equity’, and what do they have to do with government policy?
8 Why is productivity important?
9 What is inflation, and what causes it?
10 How are inflation and unemployment related in the short term?

Multiple choice
1 Economics is best defined as the study of
a how society manages its scarce resources.
b how to run a business most profitably.
c how to predict inflation, unemployment and stock prices.
d how the government can stop the harm from unchecked self-interest.
2 Your opportunity cost of going to a movie is
a the price of the ticket.
b the price of the ticket plus the cost of any drink and popcorn you buy at the theatre.
c the total cash expenditure needed to go to the movie plus the value of your time.
d zero, as long as you enjoy the movie and consider it a worthwhile use of time and money.

21

Chapter 1 Ten principles of economics

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Bainbridge, Major-General E. G. T., C.B.

McDouall, Lt.-Colonel R., C.B., C.M.G., C.B.E., D.S.O.

Legion d’Honneur (Chevalier)

Chapman, Major G. A. E., D.S.O.
Crookenden, Major J., D.S.O.

Lee, Major G., M.C.

Medaille Militaire
Fletcher, No. 976 Sgt. E.

Hawkins, No. 5269 Corpl. P.

Hinkley, No. L/8599 L.-Sergt. S. H.

Orwin, No. 8045 Pte. H.

Spiller, No. 9872 Corpl. C. W.

Croix de Guerre
Asprey, Captain P. R., M.C.

Bainbridge, Major-General Sir E. G. T., K.C.B.

Burge, Captain M. R. K.

Cremer, No. 9337 Corpl. W. J.

Hickman, Lieut. F.

Kenchington, Captain A. G., M.C.

Knight, No. 3588 Pte. E. J.

Lynden-Bell, Major-General Sir A. L., K.C.B., K.C.M.G.

Neale, No. 5018 Pte. P. J.

Osborne, Captain A. E.

Ponsonby, Captain C. E.
Power, Lt.-Colonel R. E., D.S.O.

Rand, No. L/10038 Sgt. F. C.

Soames, Lt.-Colonel L. H.

Whitaker, Major F., M.C.

Wilson, Lieut. A. J.

Ordre du Merite Agricole

Scarlett, Lt.-Colonel the Hon. P. G., M.C.

Medaille d’Honneur avec glaives

 Bushell, No. G/8588 L.-Corpl. C. W.

Chapman, No. L/9636 Corpl. F.

George, No. G/9303 Corpl. H.

Harrigan, No. S/8104 Pte. J.

Millen, No. 240161 C.Q.M.S. A. H.

Rainford, No. G/375 Pte. J.

GREECE
Greek Military Cross
Cook, No. L/7907 C.S.M. F. R.

Edwards, No. 6397 R.Q.M.S. W. S.

Thewles, Lt.-Colonel H. A., D.S.O.

Greek Medal for Military Merit

Barnard, Major W. G. F., D.S.O.

Manning, Lieut. W.

ITALY
Order of the Crown of Italy
Lynden-Bell, Major-General Sir A. L., K.C.M.G., C.B.

Trevor, Lt.-Colonel W. H., D.S.O.

Wilson, Lieut. C. E.
 Silver Medal for Military Valour
Henriques, Captain B. L. Q.

Macdonnell, Lieut. R. G.

Peareth, Major A. J.

Bronze Medal for Military Valour

Andrews, No. 7051 C.S.M. A. W.

JAPAN
Order of the Rising Sun
Lynden-Bell, Major-General Sir A. L., K.C.M.G., C.B.

ROUMANIA
Order of the Crown of Roumania
Jude, Captain P.

Medaille Barbatie si Credinta

Butler, No. 22401 Pte. G. W.
Butler, No. 14975 Pte. R. L.

Piggott, No. G/17893 Pte. E. W.

RUSSIA

Order of St. Alexander Nevsky

Paget, General the Rt. Hon. Sir Arthur, P.C., G.C.B., K.C.V.O.

Order of St. Vladimir

 Lynden-Bell, Major-General A. L., C.B., C.M.G.

Order of St. Stanislas

Vyvyan, Colonel Sir C. B., Bart., C.B., C.M.G.

Cross of the Order of St. George

Heasman, No. 9632 Pte. F.

St. John, No. 1111 C.S.M. F. H., D.C.M.

Medal of St. George

Crame, No. G/3301 L.-Corpl. C. J., D.C.M.

Hannaford, No. 8211 L.-Corpl. R.

Hills, No. 9402 Cpl. H. W.

Munday, No. 203 Pte. A.

Rose, No. 10223 Sgt. H.

Smith, No. 8926 Sgt. V. R., D.C.M.

Waghorn, No. 8796 Pte. G. J.

SERBIA
Order of the White Eagle
Barnard, Captain W. G. F., D.S.O.

Lynden-Bell, Major-General Sir A. L., K.C.B., K.C.M.G.

Paget, General the Hon. Sir Arthur, P.C., G.C.B., K.C.V.O.

 Cross of Karageorge
Lawson, No. 5691 Pte. W.

Twort, No. 2133 Pte. R. T.

Silver Medal for Valour

Bebb, No. G/6676 Pte. J. E.

Hedger, No. 04888 Sgt. C. O.

Gold Medal
Ransley, No. 1217 Pte. H.
 APPENDIX V
MENTION IN DESPATCHES

Officers
(The rank is given as stated in the Gazette; in the case of more than
one mention the highest rank is given)
NAME. RANK.
Adamson, G. R. 2nd Lieut.
Allen, C. V. Captain
Allen, E. H. Captain
Allen, J. F. W. Captain
Anderson, D. K. Major (2)
Archer Houblon, H. L. Captain (2)

Bainbridge, E. G. T. Major-General (4)

Barnard, W. G. F. Lt.-Colonel (2)
Barris, J. A. Captain
Beale, G. S. Captain
Beevor, M. Lt.-Colonel (3)
Beswick, A. H. Lieut.
Blackall, C. W. Lt.-Colonel (2)
Blake, N. G. Lieut.
Blood-Smyth, H. B. Captain
Body, J. Lt.-Colonel (4)
Bowden, E. M. Major
Brackenbury, E. A. Captain
Brodie, H. W. Captain

Carman, L. G. Lieut.
Cattley, C. F. Captain
Chamberlain, A. L. L. 2nd Lieut.
Chapman, G. A. E. Major (2)
Clapperton, T. Captain
Clouting, C. E. 2nd Lieut.
Collison-Morley, H. D. Lt.-Colonel
Corney, A. Lieut. & Qr.-Mr. (2)
Corrall, W. R. Lt.-Colonel (3)
Couchman, C. C. Lieut.
Cree, H. F. Captain
Crookenden, J. Major

Dangerfield, P. 2nd Lieut.

Davidson, C. E. G. Captain
Davies, B. E. Captain (3)
Dawson, W. F. Major
Digby, R. L. Lieut.
Dixon, G. S. Captain
Dolamore, A. W. Captain
Dyson, H. A. Captain

Elmslie, W. F. Lt.-Colonel
Essell, F. K. Lt.-Colonel

Fay, C. R. Captain
Ferguson, D. G. 2nd Lieut.
Filmer, W. G. H. Captain (2)
Finch Hatton, E. H. Br.-General (2)
Findlay, H. Lt.-Colonel (2)
Fine, H. Captain
Fish, A. L. Lieut.
Fisher, C. J. Major
Ford, H. F. P. 2nd Lieut.
Fort, L. Captain
Forwood, H. Major
Foster, F. W. Captain & Qr.-Mr. (3)
Fraser, J. S. Major
Friend, R. S. I. Lt.-Colonel
Froome, H. A. J. 2nd Lieut.
Furley, B. E. Major

Geddes, A. D. Colonel
Goss, E. H. A. Lieut.
Grant, L. B. Major (2)
Green, E. C. Captain
Green, H. W. Lt.-Colonel (2)
Greenway, C. D. K. Captain (2)
Groves-Raines, R. G. D. Captain

Hall, E. F. Captain (2)

Hamilton, G. F. Lieut.
Hammond, G. F. Lieut.
Hardy, H. S. Captain
Harper, N. A. Lieut.
Harrison, W. A. Captain
Hasler, J. Br.-General (2)
Hatfield, C. E. Captain
Hayfield, A. S. 2nd Lieut.
Hayfield, C. D. Captain (2)
Hedley, W. A. C. Captain
Henriques, B. L. Q. Lieut. (2)
Hill, H. C. de la M. Colonel
Hollebone, E. G. Captain
Homan, R. W. Captain
Hulke, L. I. B. Lt.-Colonel
Hunter, H. 2nd Lieut.

Jackson, J. V. R. Captain
James, A. K. H. Captain
James, G. M. Captain
Jelf, C. G. 2nd Lieut.
Jude, P. Major

Keasley, W. E. Lieut.
Keble, T. H. Captain
Keown, R. W. Captain
Kirkpatrick, H. F. Lt.-Colonel (4)

Lamarque, W. C. Captain
Laverton, W. R. C. Captain
Lea-Smith, L. A. Lieut.
Lee, G. Major (3)
Lilley, A. A. 2nd Lieut.
Linwood, N. Captain & Qr.-Mr.
Lomax, J. H. Captain
Lucas, L. W. Lt.-Colonel (4)
Lynden-Bell, A. L. Major-General (10)

McCallum, A. Captain
McDermott, W. K. Lieut.
McDonnell, R. G. 2nd Lieut.
McDouall, R. Br.-General (6)
Macfadyen, W. A. Captain
Marshall, F. A. J. E. Captain
Marsh-Smith, C. W. Captain
Mockett, V. Captain (2)
Morgan, H. de R. Major (2)
Morrell, F. A. Captain

Nicholas, W. L. J. Lieut.
Nicholson, A. C. L. 2nd Lieut.
Northcote, D. H. G. Lieut.

O’Neale, G. Captain
Overy, T. S. Captain

Page, J. C. Captain (2)

Peake, W. Captain
Peareth, A. J. Major (2)
Phillips, F. Captain
Pinhey, R. A. Captain
Pittock, J. A. Lieut. (2)
Porter, C. ’L. Br.-General (8)
Power, R. E. Lt.-Colonel (4)
Prothero, L. E. A. Captain (2)

Rawkins, R. A. Lieut.
Reed, A. H. Lieut.

Sargent, L. C. Major
Scarlett, P. G. Captain the Hon. (2)
Smeltzer, A. S. Lt.-Colonel (4)
Soames, A. Major
Stone, W. T. Captain (2)
Stronge, H. C. T. Lt.-Colonel (2)
Strudd, F. C. R. Lt.-Colonel

Taylor, C. C. O. 2nd Lieut.

Ternan, H. A. B. Major (2)
Thewles, H. A. Lt.-Colonel
Thomas, D. V. Captain
Thomson, A. B. Captain
Thornhill, G. R. Lieut.
Toynbee, J. W. H. Lieut.
Trevor, W. H. Lt.-Colonel (4)
Trollope, A. G. Lt.-Colonel

Vaughan, J. Captain (2)

Vertue, N. G. Captain

Ward, H. E. Captain
Ward, R. O. C. Captain
Weldon, S. W. Captain (3)
Wilkinson, F. D. Lieut.
Williams, W. T. 2nd Lieut. (2)
Whitaker, F. Major
Whitlock, C. S. 2nd Lieut.
Whitmarsh, A. J. Captain
Wilson, C. T. N. W. Captain
Wort, P. C. Lieut.
Worthington, C. A. V. Lt.-Colonel

Warrant and N.C.O.’s and Men

NAME. RANK. REGTL. NO.
Akehurst, W. C.Q.M.S. 270725
Anderson, H. Pte. 9290
Andrews, A. W. R.S.M. L/7051 (2)
Appleton, C. Pte. G/2052
Arundell, S. R. Pte. 242911
Atkinson, J. Pte. 240261
Ayres, A. J. L.-Corpl. 6884

Bacon, E. Corpl. G/13353

Barnes, H. J. Pte. L/10185
Barnes, J. S. L/Sergt. G/8537
Barton, L. R. W. L.-Corpl. 200105
Bebb, J. E. Pte. G/6676
Beverley, H. Pte. L/8497
Bingham, C. F. C.S.M. 265106
Bishop, C. C.Q.M.S. 240525
Blacknell, E. J. Dr. 240039
Blanch, W. E. Pte. G/8455
Borton, E. Sgt. 241861
Boswell, A. L.-Corpl. 10086
Boswell, T. A. L.-Corpl. L/9446
Boyes, G. Pte. 206102
Bradley, E. J. Pte. 241432
Bray, G. V. L.-Corpl. 614
Brett, C. S. R.S.M. L/7906 (2)
Brown, F. F. Pte. 7629
Brown, W. Sgt. 6020
Burberry, D. Sgt. G/428
Buzzard, J. L.-Corpl. 1838
Campbell, F. Pte. 241014
Carpenter, H. F. Sgt. 270618
Chapman, F. L.-Corpl. L/9636
Chatfield, G. E. Sgt. 9710
Clancey, J. Pte. 2183
Clarke, J. W. L.-Corpl. 240422
Cleave, E. L.-Corpl. 3555
Collings, B. Pte. G/22217
Constable, D. W. Sgt. 243277
Cook, F. R. C.S.M. L/7907
Cooling, C. L.-Corpl. 719
Cullen, A. L.-Corpl. 8407

Dewhurst, W. Pte. S/10935

Dixon, E. F. Pte. 484
Driscoll, F. Corpl. 9066
Dunster, R. E. Sgt. 201187
Duff, W. G. Dr. 5995

Ferry, T. H. Pte. 6652

Foley, P. G. Sgt. 270049
Forrest, A. H. Pte. 4412
Fraser, F. G. Corpl. 9226
Freeman, H. Sgt. L/8192
French, F. W. C.Q.M.S. L/8071
Freshwater, T. Pte. L/10501
Friend, E. A. Sgt. 200581

Garlinge, W. J. Pte. 5196

Gibson, V. D. C.S.M. 241021
Gilbert, B. Corpl. 270746
Gilbert, F. T. Sgt. L/8546
Gittings, W. G. Pte. G/876
Goldfinch, A. H. Sgt. 8205
Graves, F. R. Corpl. 10264
Greenless, T. L.-Corpl. 270275
Gundlach, R. T. L.-Corpl. G/639
Gunn, A. E. Pte. 9313
Gurney, A. Pte. 241138

Hackney, P. Sgt. 200615

Hall, F. Corpl. 242905
Hall, W. E. Corpl. G/12913
Harrington, T. F. R.S.M. 8890
Hart, E. G. Pte. G/3435
Harvey, J. W. Pte. 242932
Harvey, O. F. C.Q.M.S. 270024
Heaver, H. W. Sgt. 200329 (2)
Hemens, W. G. C.Q.M.S. 242934
Hickson, H. C. C.S.M. 242779
Hill, H. W. Corpl. 9402
Hills, J. Pte. 8703
Horton, H. G. Pte. 5091
Howard, H. Sgt. 9088
Hull, F. V. C.Q.M.S. 240047

Ings, G. F. R.Q.M.S. 7201

Ivory, S. Corpl. 13292

Jagger, J. J. L.-Sergt. 242907

Jenrick, G. W. Pte. 7655
Jordan, S. Pte. 241875

Karop, A. Sgt. 242980 (2)

Keyes, F. G. Pte. G/12834
King, A. W. Pte. 24290
Kingsford, A. R.Q.M.S. 27004
Kirkbright, W. S. L.-Corpl. 290090

Lambeth, G. Pte. L/9648

Lawrence, H. C.S.M. 241496
Lawson, W. Pte. G/5691
Linstead, W. Pte. 364
Lockyer, H. J. Sgt. 8055

McCann, J. E. Pte. S/145

Maloney, H. J. Pte. L/8152
Marshall, A. E. Pte. 243290
Martin, H. J. C.S.M. 8357
Matthews, T. F. H. Pte. G/882
May, W. A. Pte. 8219
Meggett, W. A. Sgt. 240381
Middleton, J. Pte. 8826
Monger, J. H. R.S.M. G/1460
Moon, L. G. Sgt. 4181
Moore, S. Sgt. 1379
Morgan, J. W. W. Pte. 9191
Mosto, R. W. Pte. 6712

Neville, H. W. L.-Sergt. 269

Newham, H. C.S.M. 241481

Page, F. H. C.S.M. 7763

Page, W. E. C.Q.M.S. 20497
Payne, E. J. Pte. G/3461
Peattie, F. Sgt. 6470
Perry, E. R. C.Q.M.S. 240456
Pilcher, A. C. Corpl. S/160
Poole, E. C.Q.M.S. 6487
Potts, A. J. Sgt. L/8898
Prebble, S. Sgt. G/2549
Purser, L. J. Sgt. 242947

Read, W. R. Corpl. 8974

Real, W. A. Sgt. 10382
Reardon, A. Pte. 270478
Reed, W. N. C.S.M. G/1147
Ronketti, P. A. C.Q.M.S. 20491
Rose, H. Corpl. 20282

St. John, F. R. R.S.M. 240118

Sanger, A. H. T. R.S.M. L/5692
Saunders, A. J. C.S.M. L/6243
Scott, F. F. Sgt. 91
Seath, S. Pte. 148
Setterfield, A. V. Pte. 347
Sharpe, W. J. Sgt. 241199
Sibun, J. Sgt. L/8337
Simmonds, F. T. J. Corpl. G/15862
Simmons, A. C. Sgt. L/9239
Skinner, W. J. J. Pte. 559
Smith, C. Pte. 242956
Spargo, H. T. Pte. 202952
Stocks, J. Corpl. G/1829
Swinyard, G. A. C.S.M. 240072

Thorpe, C. H. C.Q.M.S. 270505

Trick, F. W. Sgt. 243082
Turmaine, F. W. C.Q.M.S. L/6662
Turnbull, G. Sgt. 242782
Vincer, P. A. Sgt. 7967

Wall, W. J. L.-Corpl. 260

Wanstall, F. N. Pte. G/7628
Ward, J. Sgt. 8438
Wicken, P. C. Pte. G/12941
Wickington, H. G. Sgt. 1300
Willis, F. E. Col.-Sergt. 240043
Wren, W. H. Corpl. 6635
 APPENDIX VI
MENTION “B” (FOR RECORD)

Officers
NAME. RANK.
Bayard, R. Br.-General
Burge, M. R. K. Lieut. (2)
Butler, E. M. Lieut.

Cobbe, C. C. Major
Cowell, A. V. Lt.-Colonel

Dauglish, G. V. Colonel
Dimmock, F. M. Captain

Groves-Raines, R. G. D. Major
Gullick, H. T. Major

Hardy, H. S. Major
Hart, N. S. Captain
Hirst, H. D. Lt.-Colonel
Hulke, L. I. B. Lt.-Colonel (2)

Jackson, H. W. Captain

Kingsland, C. P. Major
Knight, L. C. E. Major

Mantle, H. Lieut.
Meakin, G. A. Captain
Messel, L. C. R. Lt.-Colonel
Moilliet, E. L. Lieut.

Palmer, V. T. D. Captain
Parry, E. C. M. Captain
Pearson, R. F. Colonel
Phillips, W. A. Captain
Pike, H. E. Lieut.
Port, J. Captain

Sparrow, H. F. Lt.-Colonel
 Tait, G. M. Captain (2)
Tattersall, J. C. Major
Twisleton-Wykeham-Fiennes, H. E. Major
Tylden, W. Major
Tylden-Pattenson, A. H. Major

Ward, H. E. Captain
Wilkins, D. A. Captain
Williams, M. S. Major
Williams, R. W. Captain

Warrant and N.C.O.’s and Men

NAME. RANK. REGTL. NO.
Allen, W. G. Pte. 6266

Ball, G. E. Sergt.-Major 6127 (2)

Bosanquet, B. R.S.M. L/10853
Brown, C. R.S.M. L/8652
Buckley, J. W. C.S.M. 200055
Butler, G. E. Q.M.S. 6388

Carpenter, C. K. S.M. 6124

Cavanagh, J. T. Pte. G/17555
Cooke, W. H. R.S.M. L/2531
Cooper, A. C. Sgt. 8874
Coopey, T. G. C.Q.M.S. 204472
Corke, W. S.M. 6132 (2)
Cufflin, J. Corpl. L/10750
Cumbley, S. G. — 6122

Dewey, H. J. S.M. 6129 (2)

Early, J. H. C.Q.M.S. 1461

Fisher, A. E. S.M. 6227 (2)

Fox, F. W. C.S.M. 200004

Gilmore, F. Q.M.S. 6125 (2)

Glover, H. Q.M.S. 6241
Gordon, C. J. Q.M.S. 8307

Hanson, H. E. Q.M.S. 6283

Hartridge, W. F. Q.M.S. 8544
Hayes, S. H. S.M. 6130 (2)
Hayhow, A. Q.M.S. 7845

Johnson, H. Pte. 19204

Jones, S. J. Sgt. 53090

Kendall, S. C. Q.M.S. 8117

Kinnear, G. V. Q.M.S. 6119
Knott, R. H. Q.M.S. G/6370
Kottaun, W. F. Corpl. 19318

Latham, G. F. Q.M.S. 36902

Laver, G. H. S.S. G/5953

McKeen, J. J. Sgt. 200062

McVey, J. — 6195
Martin, R. C.S.M. 5003
Masters, F. A. R. Q.M.S. 8543
Milnes, N. Sgt. 241649
Mousley, G. S. Pte. 11103
Musty, W. J. Q.M.S. 6010

Pearce, W. S. Q.M.S. 8858

Potter, T. S.M. 6131 (2)

Revell, D. R.S.M. TR.10/16001

Ritchie, F. J. Q.M.S. 8810
Roberts, T. Q.M.S. 6123 (2)
Robinson, J. Q.M.S. 7924 (2)
Rowe, H. J. — 8116
Rudge, T. Pte. 19206

Scott, W. J. C.Q.M.S. 265108

Scragg, F. C. C.Q.M.S. G/21586
Shoobridge, C. S. L.-Sergt. 203601
Smith, H. Pte. G/17556
Smith, S. Q.M.S. 6120
Stace, C. Q.M.S. 5986
Streten, A. J. Q.M.S. 6253

Thomas, W. S.M. 36901

Waterfall, F. Q.M.S. 8545

Watson, J. W. L.-Sergt. S/708
Weeks, E. O. Sgt. 5458
Wellington, E. E. Q.M.S. 5951