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Economics
TWELFTH EDITION

sla35718_fm_i-1.indd i 06/24/19 08:13 PM


viii Preface to the Instructor
7. It is a text pitched both to advanced students and
­students who are struggling. What you have is a three-
track book—a mainstream text, advanced work boxes
for those who want to be challenged, and extra help
boxes for the students who need more support.
Special Features
Four special features of the book are its integrated cover-
age of the global economy, extra help boxes, advanced work
boxes, and its end-of-chapter Economics in Action features.
The Global Economy
Until the early 1970s our economy was largely insulated
from the rest of the world economy. All of this changed with
the oil price shock of 1973, our subsequent growing appetite
for fuel-efficient Japanese compact cars, as well as for TVs,
DVD players, cell phones, personal computers, and other
consumer electronics made in Asia. As our trade deficits
grew, and as foreigners bought up more and more American
assets, every American became quite aware of how inte-
grated we had become within the global economy.
The twelfth edition has three chapters devoted entirely
to the global economy—Chapter 31 (International Trade),
Chapter 32 (International Finance), and Chapter 8
(The Export–Import Sector). Chapter 8 is part of the
sequence (C, I, G, and Xn) leading up to the chapter on
GDP (Chapter 9). In addition, we have integrated a great
deal of material dealing specifically with the global econ-
omy throughout the text.
Here are some of the things we look at:
• Shipbreaking (Ch. 3, p. 63)
• The “Isms”: Capitalism, Communism, Fascism, and
Socialism (Ch. 3, pp. 69–72)
• The Decline and Fall of the Communist System
(Ch. 3, pp. 72–73)
• The American Consumer: World-Class Shopper
(Ch. 5, p. 125)
• Why Did Incorporation Come So Late to Islamic
Middle Eastern Nations? (Ch. 6, pp. 136–137)
• Foreign Investment in the United States (Ch. 6, p. 144)
• Are We Giving Away the Store? (Ch. 7, p. 164)
• The World’s 10 Largest Economies, (Ch. 9, p. 220)
• Comparative Unemployment Rates (Ch. 10, p. 247)
• Budget Deficit as Percentage of GDP, Selected
Countries (Ch. 12, p. 319)
• Economic Growth during the Last Millennium
(Ch. 16, p. 431)
• The Corporate Hierarchy (Ch. 22, p. 630)
• The Dango (Ch. 24, p. 666)
• European Antitrust (Ch. 25, pp. 692–694)
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Extra Help Boxes
Students taking the principles course have widely varying
backgrounds. Some have no problem doing the math or
understanding basic economic concepts. But many others
are lost from day one.
I have provided dozens of Extra Help boxes for the
students who need them. They are especially useful to
instructors who don’t want to spend hours of class time
going over material that they assume should be understood
after one reading.
Of course these boxes can be skipped by the better-
prepared students.
Here are some of the topics covered in the Extra
Help boxes:
• Finding the Opportunity Cost (Ch. 2, p. 38)
• How Changes in Demand Affect Equilibrium (Ch. 4,
p. 87)
• How Changes in Supply Affect Equilibrium (Ch. 4,
p. 89)
• Price Ceilings, Price Floors, Shortages, and Surpluses
(Ch. 4, p. 93)
• How Did We Get an Average Tax Rate of 15 Percent?
(Ch. 7, p. 167)
• Calculating Percentage Changes (Ch. 9, p. 215)
• Read Only If You’re Not Sure How to Calculate the
Unemployment Rate (Ch. 10, p. 246)
• Finding Percentage Changes in the Price Level
(Ch. 10, p. 253)
• Finding Equilibrium GDP (Ch. 11, p. 289)
• Finding the Multiplier (Ch. 12, p. 307)
• Does Printing More Money Increase Our Money
Supply? (Ch. 14, p. 379)
• Differentiating between Changes in Demand and
Changes in the Quantity Demanded (Ch. 17, p. 467)
• Differentiating between Changes in Supply and
Changes in Quantity Supplied (Ch. 17, p. 473)
• Practice Problems Finding Price Elasticity of Demand
(Ch. 18, p. 497)
• Calculating Marginal Utility and Total Utility (Ch. 19,
p. 530)
• Finding Marginal Cost When the Output Is 0 (Ch. 20,
p. 547)
• What’s the Difference between Shutting Down and
Going Out of Business? (Ch. 20, p. 562)
• Accounting Profit versus Economic Profit (Ch. 21,
p. 579)
• Finding the Firm’s Short-Run and Long-Run Supply
Curves, and Shut-Down and Break-Even Points
(Ch. 21, p. 586)
06/24/19 08:13 PM

• How to Find the Monopolist’s Price and Output
(Ch. 22, p. 616)
• Productivity and Marginal Physical Product (Ch. 26,
p. 711)
• Finding the Imperfect Competitor’s MRP (Ch. 26, p. 715)
• Quick Review of Calculating Percentage Changes
(Ch. 28, p. 759)
• Finding the Percentage of Income Share of the
Quintiles in Figure 30.1 (Ch. 30, p. 805)
• Interpreting the Trade Weighted U.S. Dollar Index in
Figure 32.5 (Ch. 32, p. 878)
Advanced Work Boxes
There are some concepts in the principles course that many
instructors will want to skip. (Of course, if they’re not
included in principles texts, this will make other instruc-
tors quite unhappy.) These boxes are intended for the better
prepared students who are willing to tackle these relatively
difficult concepts.
Here is a sampling of my Advanced Work boxes:
• Post–World War II Recessions (Ch. 1, p. 13)
• The Law of Increasing Costs (Ch. 2, pp. 40–41)
• APCs Greater Than One (Ch. 5, p. 109)
• Nominally Progressive, Proportional, and Regressive
Taxes (Ch. 7, p. 169)
• Should Cigarettes Be Taxed? (Ch. 7, p. 174)
• Why NDP Is Better Than GDP (Ch. 9, p. 211)
• Calculating per Capita Real GDP (Ch. 9, p. 221)
• The Paradox of Thrift (Ch. 12, p. 309)
• Money versus Barter (Ch. 13, p. 340)
• Three Modifications of the Deposit Expansion
Multiplier (Ch. 14, p. 372)
• Rational Expectations versus Adaptive Expectations
(Ch. 15, p. 416)
• The Malthusian Theory of Population (Ch. 16, p. 450)
• Finding Equilibrium Price and Quantity (Ch. 17, p. 478)
• Why We Don’t Use a Simpler Elasticity Formula
(Ch. 18, p. 496)
• Deriving the Shut-Down and Break-Even Points
(Ch. 20, p. 564)
• Calculating a Firm’s Total Loss (Ch. 21, pp. 584–585)
• Maximizing Total Profit and Maximizing Profit per
Unit (Ch. 21, p. 595)
• Perfect Price Discrimination (Ch. 23, p. 651)
• The Concept of Margin in Economic Analysis (Ch. 26,
p. 710)
• Who Created the Land? (Ch. 29, p. 782)
• Usury in Ancient Times (Ch. 29, p. 785)
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Preface to the Instructor ix
Economics in Action
Students often ask, “How does any of this affect me?” Or,
“Why do I have to study economics?” The Economics in
Action features provide answers to those questions. Each is
a practical application of at least one of the concepts cov-
ered in the chapter.
Chapter 1: Making the American Economy Great
Again (p. 21)
Chapter 2: Will You Be Underemployed When You
Graduate? (pp. 44–45); Our Economy’s Growing
Inefficiency (p. 45)
Chapter 3: The Bridge to Nowhere (p. 74); The
Internal Revenue Code (p. 75)
Chapter 4: High Gas Prices—Something Only an
Economist Could Love (p. 97)
Chapter 5: The American Consumer: World-Class
Shopper (p. 125)
Chapter 6: “Benedict Arnold Corporations”? (p. 152)
Chapter 7: Will Social Security Be There for
You? (p. 180); Should Millionaires Pay More
Taxes? (p. 181)
Chapter 8: Is Your School Sweatshirt Sewn in a
Sweatshop? (p. 200)
Chapter 9: GDP or GPI? (p. 228)
Chapter 10: Where Are All the Jobs? (p. 265)
Chapter 11: Keynes and Say in the 21st Century
(p. 292)
Chapter 12: Trillion-Dollar Deficits as Far as the Eye
Can See? (p. 328)
Chapter 13: Overdraft Privileges (p. 355)
Chapter 14: Should Ben Bernanke Have Been
Given a Second Term? (p. 391); The
Financialization of the American Economy
(p. 392); Janet Yellen’s Report Card (p. 393)
Chapter 15: True Believers (p. 422); An Economics
Behaviorist Laboratory Test (p. 422)
Chapter 16: China’s Rapid Economic Growth (p. 451);
The True Cost of Medicare for All (p. 452)
Chapter 17: Why Can’t I Sell My House? (p. 482)
Chapter 18: The Price Elasticity of Demand for Oil
(p. 516)
Chapter 19: All-You-Can-Eat Buffets (p. 535);
Eliminating the Consumer Surplus: A Pricing
Strategy Not Taken (p. 536)
Chapter 20: Wedding Hall or City Hall? (p. 567)
Chapter 21: The Internet Effect: A More Perfect
Knowledge and Lower Prices (p. 600)
Chapter 22: Would You Allow Walmart to Open a
Supercenter in Your Community? (pp. 631–632)
Chapter 23: Selling Status (p. 653)
Chapter 24: Cutthroat Competition in the College
Textbook Market (p. 670)
Chapter 25: Pharmaceutical Fraud (p. 700)
Chapter 26: Washing Machines and Women’s
Liberation (p. 720)
06/24/19 08:13 PM

x Preface to the Instructor
Chapter 27: The Card Check Law (p. 740);
Two Landmark U.S. Supreme Court Decisions
(p. 740)
Chapter 28: The Education Gap (p. 770)
Chapter 29: Subprime, Fringe, and Payday Lending
(p. 794)
Chapter 30: Will You Ever Be Poor? (p. 828);
The 1 Percent the 99 Percent (p. 829)
Chapter 31: Buy American? (p. 860); Globalization
(p. 861); Trump’s Trade Wars (p. 861)
What’s New and Different in
the 12th Edition?
The millennials will probably be the first generation to have
a lower standard of living than their parents’ generation.
So, when they complain that our introductory economics
course is not relevant to their lives, what can the authors of
principles texts do to meet that need?
There are two major substantive changes in the twelfth
edition of my book. First, there are extensive discussions
of current political issues and government policies. And
second, we’ll talk about the declining efficiency in several
major economic sectors. Let’s look at each, in turn.
Had we been teaching economics around the turn of
the twentieth century along with Alfred Marshall and John
Bates Clark, we too would have been professors of politi-
cal economy. But increasingly, since the middle of the last
century, political discussion has been largely removed from
economics texts, just as it has been this past Thanksgiving
from millions of dinner tables.
Earlier editions did include the basic elements of such
major legislation as the 1981 Kemp-Roth tax cut, the 1996
Welfare Reform law, and the 2010 Affordable Care Act
(Obamacare). But now we go well beyond just listing the
provisions of major laws and presidential initiatives, and
fully examining their consequences.
Although our economy is profoundly affected by the
spending, taxation, and regulatory actions of the govern-
ment, principles authors tend to steer clear of political
issues. We know too well how easily even the blandest polit-
ical observations can offend potential adopters of our texts.
Whatever our students think about the outcome of the
2016 presidential election, they have some awareness of the
economic issues raised. Surely the cancellation of hundreds
of billions in student debt, raising the minimum hourly
wage, and dealing with the effects of climate change would
engender lively classroom discussion.
Efficiency is a central tenet of economics. Every prin-
ciples text has multiple graphs showing that a firm’s most
efficient output occurs where its MC curve crosses its ATC
curve. Despite such extensive analysis and discussion of
efficiency on a micro level, our macro chapters provide
little analysis of how efficiently our economy uses its land,
labor, and capital.
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When a business firm in a competitive industry has
much higher costs than its rivals, it will be driven out of the
industry. A firm that produces an inferior good or service will
meet the same fate. Similarly, a nation that does not use its
resources efficiently goes into long-term economic decline.
Let’s very briefly consider three major sectors of our
economy—health care, transportation, and education. How
efficiently can we possibly be using our resources when our
health care costs us nearly twice as much per capita as it costs
most other economically advanced nations? Why must most
American families spend at least 50 percent more on trans-
portation than the citizens of other rich nations? And why is
it that half our 18-year-olds cannot do eighth grade work?
As it turns out, health care, transportation, and edu-
cation are just some of the major sectors that have grown
increasingly inefficient. Others include financial services,
defense, criminal justice, and what I call our vast make-
work sector.
If we could make our economy operate more efficiently,
all of us would enjoy a much higher standard of living. But
somehow, my fellow principles authors and I have managed
to neglect this very fundamental economic problem.
I’ve now integrated discussions of current political
issues and our growing inefficiency throughout the text.
Hopefully, our students will no longer complain that the
principles course is irrelevant to their lives. And who knows:
Perhaps in the long run we will all be political economists.
Chapter-by-Chapter Changes
Here’s a chapter-by-chapter list of new topics covered in the
twelfth edition
• Chapter 1: Added subsection, “The Second Decade:
Obama and Trump.” New Economics in Action:
“Making the American Economy Great Again.”
• Chapter 2: Added Economics in Action 2: “Our
Economy’s Growing Inefficiency.”
• Chapter 3: Added box, “Should Public Colleges Be
Free?” New subsection “The Paris Agreement.”
• Chapter 5: Updated data in Figure 5.1, 5.2, 5.3, 5.9,
and 5.10. Cut Figure 5.11, which was replaced with
Figure 5.12, “Saving as Percentage of GDP, 2017.”
Figure 5.13 became Figure 5.12, “Private Consumption
as Percentage of GDP, Selected Countries, 2017.”
• Chapter 6: Updated data in Tables 6.1, 6.2, 6.3, and 6.7.
Updated data in Figures 6.2 and 6.3. Cut Figure 6.6.
• Chapter 7: Cut boxes, “The Chronology of Federal
Budget Preparation” and “Should Our Gasoline
Taxes be Raised?” Updated data in Figures 7.2, 7.5,
7.6, 7.7, and Table 7.1. Added Advanced Work boxes,
“Calculating the Medicare Tax” and “Figuring Out
Your Federal Personal Income Tax.” Added subsec-
tion, “The Tax Cut and Jobs Act of 2017.”
• Chapter 8: Added new Figure 8.1, “The World’s Five
Largest Exports.” Added subsection, “Trans-Pacific
06/24/19 08:13 PM

Partnership (TPP).” Updated data in Figure 8.2, Table
8.4, and Table 8.5.
• Chapter 9: Added subsection, “Free Digital Services.”
Update data in Figures 9.2, 9.3, 9.4, 9.5, 9.6, and
Table 9.3.
• Chapter 10: Update Advanced Work Box, “Did We
Really Recover from the Great Recession?” Updated
box, “Comparative Unemployment Rates, February
2018.” Updated data in Figures 10.5, 10.6, 10.7, 10.9,
10.10, and Table 10.3. Cut Table 10.2.
• Chapter 12: Added Last Word, “The Student Debt.”
Updated data in Figures 12.6, 12.7, 12.8, 12.9, and
12.10. Cut data in Figure 12.11 and replaced with data
in Figure 12.12. Cut subsection, “Economics in Action
1: A Jobless Recovery?” and replaced with subsection,
“Last Word: The Student Debt.”
• Chapter 13: Updated data in Figures 13.1, 13.2, 13.4,
and 13.5. Cut Table 13.1.
• Chapter 14: Added subsection, “Financial Crime
and Punishment.” New Economics in Action: “The
Financialization of the American Economy” and
“Janet Yellen’s Report Card.” Updated data in Table
14.1, Figures 14.3, and 14.6.
• Chapter 15: New Economics in Action: “An Economic
Behaviorist Laboratory Test.”
• Chapter 16: New Economics in Action: “The True
Cost of Medicare for All.” Cut box, “The Affordable
Health Care Act of 2010.” Updated data in Figures 16.1,
16.2, 16.3, 16.5, 16.6, and Table 16.1.
• Chapter 17: New box, “Snob Goods and Services.”
• Chapter 18: Updated data in Table 18.1.
• Chapter 19: New Economics in Action: “Eliminating
the Consumer Surplus: A Price Strategy Not Taken.”
• Chapter 21: New box, “Perfect Knowledge of Price.”
Updated box, “More Perfect Knowledge.”
• Chapter 22: Updated data in box, “The Corporate
Hierarchy.”
• Chapter 23: New question added to section, “Questions
for Further Thought and Discussion.”
• Chapter 24: Updated data in Table 24.1 and Figure 24.2.
Updated data in box, “Oligopoly in the Automobile
Industry.”
• Chapter 25: Cut box, “The Scorecard for Scandal.”
Updated data in Tables 25.1 and 25.2.
• Chapter 27: New Economics in Action: “Two
Landmark U.S. Supreme Court Decisions.” Updated
data in Figures 27.2, 27.3, 27.4, 27.5, and Table 27.1.
• Chapter 28: New table, “States with Minimum
Hourly Wage Higher Than Federal Minimum Hourly
Wage.” Cut box, “The 10-Minute Gallon.” Updated
sla35718_fm_i-1.indd xi
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Preface to the Instructor xi
data in Figures 28.7, 28.8, 28.9, 28.11, 28.12, Table
28.1, and boxes, “Are You in the Primary Market or
the Secondary Market?” and Women CEOs of the
Fortune 500.”
• Chapter 29: New box, “T-Shirt for Sale at a Street Fair.”
Updated data in Figure 29.5.
• Chapter 30: Updated data in Tables 30.1, 30.2, 30.3,
30.4, Figures 30.2, 30.3, 30.4, 30.5, 30.6, 30.7, 30.8,
and 30.9.
• Chapter 31: New Economics in Action: “Trump’s
Trade Wars.” Updated data in Figures 31.1, 31.5, and
Table 31.1.
• Chapter 32: Updated data in box, “The Hamburger
Standard”; Tables 32.1, 32.2, 32.3; and Figures 32.1,
32.2, 32.3, 32.5, and 32.6.
Updates to the Digital Offer
More robust Connect offer. There have been significant
updates to our assessment content available through
McGraw-Hill Connect®, an online assignment and assess-
ment solution that is discussed in more detail later in this
preface. The Connect offer has been expanded to include
all end-of-chapter Test-Prep questions! The available assess-
ment content now includes all of the multiple-choice
questions and problems, and new to Connect, the fill-in
questions, which have been made autogradable for ease
of use.
Adaptive reading experience. SmartBook contains the
same content as the print book, but actively tailors that
­content to the needs of the individual through ­adaptive
probing. The SmartBook content has been completely
revamped for this edition with updated learning objectives
and associated questions.
Algorithmic questions in test bank. The test bank has
been revised and expanded to include algorithmic ques-
tions, available in core chapters, to provide instructor’s with
­additional testing options.
Refer to the supplement and Connect pages that ­follow
later in the preface for additional information on all the
assets available to you.
One-Semester Courses from
Economics, 12e
Here are some syllabi for one-semester courses with varying
orientations:
Macro oriented:
Chapters 1–9; 12–14; 28–31.
Chapters 1–3; 10; 12–14; 16; 25; 27–32.
Chapters 1–10; 16–17; 25; 30–32.
06/24/19 08:13 PM

xii Preface to the Instructor
Micro oriented:
Chapters 2–4; 10; 16–25.
Chapters 1–4; 16–24; 31–32.
Chapters 2, 4; 17–21; 26–32.
Balanced approach:
Chapters 1–9; 17–21; 31–32.
Chapters 1–4; 16–21; 25–30.
Here’s another possibility—a one-semester course that
focuses on contemporary problems:
Chapters 2–4; 10; 12–14; 16; 25; 28–32.
Acknowledgments
As any textbook author will tell you, there’s no way I could
have written this without an editor. And even though this
was her first rodeo, Della Jerkan handled her duties like an
old pro, moving all the pieces, keeping all of us on the same
page, so to speak.
The content project manager, Maria McGreal and the
copy editor, Sharon O’Donnell not only made scores of cor-
rections, but also made many very helpful suggestions. They
made sure the numbers always added up, that every techni-
cal term was clearly explained, and that the readers would
not be left wondering what they had just read.
I also have faith that the proofreader, Susan Gall,
caught any typos, missing sources, or dubious phraseology
that the rest of us had missed.
Despite 30 years of begging and pleading, I was per-
haps the last living author of a two-color economics prin-
ciples text—until now. My editorial director, Anke Weekes,
did something not one of her eleven predecessors had done:
She made sure that the twelfth edition of Slavin’s Economics
was a four-color text. I also appreciate her advocacy within
a publishing environment of great constraints, in making
sure that my book would successfully negotiate the increas-
ingly difficult production process.
I would also like to thank my former editor, Christina
Kouvelis; Managing Director, Terri Schiesl; Program
Manager, Mark Christianson; Content Project Manager,
Keri Johnson; Designer, Beth Bleck; Content Licensing
Specialist, Sarah Flynn; and Marketing Manager, Bobby
Pearson, for all their contributions.
As every economist knows, no product just sells itself.
I want to thank all the McGraw-Hill learning technology
reps for all their efforts to sell the last eleven editions of
my book. And I would like to especially thank the reps in
Dubuque, Iowa, who have personally accounted for a quar-
ter of our sales.
I’d also like to thank the many reviewers who helped
improve this text.
sla35718_fm_i-1.indd xii
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John Atkins, Pensacola Junior College
Lyndell L. Avery, Penn Valley Community College
James Q. Aylsworth, Lakeland Community College
John Baffoe-Bonnie, Pennsylvania State University
Mohsen Bahmani-Oksooee, University of Wisconsin,
Milwaukee
Kathleen Bailey, Eastern Arizona College
Kevin Baird, Montgomery Community College
Gyanendra Baral, Oklahoma City Community College
Brian Bartel, Mid-State Technical College
Barbara L. Barth, Central Maine Community College
Patrick Becker, Sitting Bull College
David Bennett, Ivy Tech Community College
Gary Benson, Southwest Community College
Derek Berry, Calhoun Community College
John Bethune, Barton College
Anoop Bhargava, Finger Lakes Community College
Robert G. Bise, Orange Coast College
John Bockino, Suffolk County Community College
Jennifer Bossard, Doane University
Van Bullock, New Mexico State University
James Burkard, Nashville State Community College
Gerard A. Cahill, Florida Institute of Technology
Joseph Calhoun, Florida State University
Joy Callan, University of Cincinnati
Tony Caporale, University of Dayton
Perry A. Cash, Chadwick University
Andrew Cassey, University of Minnesota
Franny Chan, Mt. San Antonio Collge
Jannet Chang, Northwestern University
Michael Cohik, Collin Community College
Steve Cole, Bethel College
Ana-María Conley, DeVry Institute of Technology–Decatur
Dave Cook, Western Nevada Community College
James Cover, University of Alabama, Tuscaloosa
Andre Crawford, Virginia Polytechnic Institute and
State University
Debra Cummings, Fort Scott Community College
Rosa Lea Danielson, College of DuPage
Ribhi Daoud, Sinclair Community College
Bill Demory, Central Arizona College
Craig Depken II, University of Texas, Arlington
Thomas O. Depperschmidt, University of Memphis
Sowjanya Dharmasankar, Waubonsee Community College
Sally Dodge, Jefferson College
Amrik Singh Dua, Mt. San Antonio College
Ronald Dunbar, MATC Truax
Jerry Dunn, Southwestern Oklahoma State University
Swarna Dutt, University of West Georgia
Faruk Eray Duzenli, Denison University
06/24/19 08:13 PM

Angela Dzata, Alabama State University
Stacey Edgington, San Diego State University
Maurita T. Fawls, Portland Community College
Deborah M. Figart, Richard Stockton College
Daniel Fischer, University of Arizona
Russell L. Flora, Pikes Peak Community College
Jack Foley, Blinn College
Diana Fortier, Waubonsee Community College
Charles Fraley, Cincinnati State Technical and
Community College
Arthur Friedberg, Mohawk Valley Community College
Harold Friesen, Friends University
Yoshikazu Fukasawa, Midwestern State University
Marilyn Fuller, Paris Junior College
Alejandro Gallegos, Winona State University
Frank Garland, Tricounty Technical College
Eugene Gendel, Woodbury University
Kelly George, Florida Community College of Jacksonville
Kirk Gifford, Brigham Young University, Idaho
Adam Gifford, Lake-Sumter Community College
Scott Gilbert, Southern Illinois University, Carbondale
Michael Goode, Central Piedmont Community College
Jay Goodman, Southern Colorado University
Cindy Goodyear, Webster University
Mehdi Haririan, Bloomsburg University
Charles W. Harrington Jr., Nova Southeastern
University
Virden Harrison, Modesto Junior College; California
State University, Stanislaus, Turlock
Tina Harvell, Blinn College
Gail Hawks, Miami Dade Community College
Sanford B. Helman, Middlesex County College
Carol Hogan, University of Michigan, Dearborn
Jim Holcomb, The University of Texas at El Paso
Lora Holcomb, Florida State University
Jack W. Hou, California State University, Long Beach
Nancy Howe-Ford, Hudson Valley Community College
Calvin Hoy, County College of Morris
Won-jea Huh, University of Pittsburgh
Scott Hunt, Columbus State Community College
Janet Hunter, Northland Pioneer College
Robert Jakubiak, Milwaukee Area Technical College
Danny Jeftich, Ivy Tech
Mark G. Johnson, Lakeland Community College
Roger Johnson, Messiah College
Paul Jorgensen, Linn-Benton Community College
George Jouganatos, California State University, Sacramento
Lillian Kamal, Northwestern University
Brad Kamp, University of South Florida
Tim Kane, University of Texas, Tyler
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Preface to the Instructor xiii
Janis Kea, West Valley College
Elizabeth Sawyer Kelly, University of Wisconsin, Madison
James Kelly, Rio Hondo College
M. Moosa Khan, Prairie View A&M University
Kenneth E. Kimble, Sinclair Community College
Kamau Kinuthia, American River College
Sara Kiser, Judson College
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you. Your comments and suggestions have helped make this
the best edition yet.
—Stephen L. Slavin
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   CONNECT ECONOMICS
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PREFACE TO THE STUDENT
W
hat have you heard about economics? That it’s dull,
it’s hard, it’s full of undecipherable equations and
incomprehensible graphs? If you were to read vir-
tually any of the introductory economics textbooks, that’s
exactly what you would find.
How is this book different from all other books?
Reading this book is like having a conversation with me.
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in this book.
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like those ultramodern paintings that even the artists can’t
explain? You can relax. No graph in this book has more
xx
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than four lines, and by the time you’re through, you’ll be
drawing your own graphs.
In nearly every chapter you’ll find one or two boxes
labeled “Extra Help.” Sometimes you can master a concept
when additional examples are given. Don’t be too proud to
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Unlike virtually every other economics text, this one
includes a built-in workbook. Even if your professor does not
assign the questions at the end of each chapter, I urge you to
answer them because they provide an excellent review.
I can’t guarantee an “A” in this course, but whether you
are taking it to fulfill a college requirement or planning to
be an economics major, you will find that economics is nei-
ther dull nor all that hard.
—Stephen L. Slavin
06/24/19 08:13 PM
 Final PDF to printer

CONTENTS IN BRIEF

1 A Brief Economic History of the 18 The Price Elasticities of Demand and

United States 2
  2 Resource Utilization 28
  3 The Mixed Economy 54
  4 Supply and Demand 82
  5 The Household-Consumption Sector 104
  6 The Business–Investment Sector 132
  7 The Government Sector 160
  8 The Export–Import Sector 188
  9 Gross Domestic Product 208
10 Economic Fluctuations, Unemployment, and
Inflation 236
11 Classical and Keynesian Economics 274
12 Fiscal Policy and the National Debt 300
13 Money and Banking 338
14 The Federal Reserve and Monetary Policy 364
15 A Century of Economic Theory 402
16 Economic Growth and Productivity 430
17 Demand, Supply, and Equilibrium 460
Supply 494
19 Theory of Consumer Behavior 526
20 Cost 544
21 Profit, Loss, and Perfect Competition 576
22 Monopoly 612
23 Monopolistic Competition 640
24 Oligopoly 658
25 Corporate Mergers and Antitrust 686
26 Demand in the Factor Market 708
27 Labor Unions 724
28 Labor Markets and Wage Rates 748
29 Rent, Interest, and Profit 778
30 Income Distribution and Poverty 802
31 International Trade 838
32 International Finance 870
Appendix 895
Glossary 899
Index 911

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EXPANDED CONTENTS

CHAPTER 1 CHAPTER 3
A Brief Economic History of the The Mixed Economy 54
United States 2 The Three Questions of Economics 55
Introduction 3 What Shall We Produce? 55
How Shall These Goods and Services Be
The American Economy in the 19th Century 3 Produced? 55
Agricultural Development 3 For Whom Shall the Goods and Services
The National Railroad Network 5 Be Produced? 55
The Age of the Industrial Capitalist 6 To Sum Up 56

The American Economy in the 20th Century 7 The Invisible Hand, the Price Mechanism, and
The Roaring Twenties 7 Competition 56
The 1930s: The Great Depression 8 The Invisible Hand 56
The 1940s: World War II and Peacetime Prosperity 11 The Price Mechanism 57
The 1950s: The Eisenhower Years 15 Competition 57
The Soaring Sixties: The Years of Kennedy and Johnson 15 Trust 58
The Sagging Seventies: The Stagflation Decade 16 Equity and Efficiency 58
The 1980s: The Age of Reagan 16
The State of American Agriculture 17 The Circular Flow Model 59
The “New Economy” of the Nineties 18
The Economic Role of Government 60
The American Economy in the 21st Century 19 Market Failure 61
The Ominous 00s 19 Externalities 61
The Second Decade: Obama and Trump 20 Curbing Environmental Pollution 62
Lack of Public Goods and Services 64
Economics in Action: Making the American
Economy Great Again 21 Government Failure 65
Last Word 21 Capital 67
The “Isms”: Capitalism, Communism, Fascism, and
CHAPTER 2 Socialism 69
The Decline and Fall of the Communist System 72
Resource Utilization 28 Transformation in China 73
Economics in Action 1: The Bridge to Nowhere 74
Economics Defined 29
Economics in Action 2: The Internal Revenue
The Central Fact of Economics: Scarcity 29
Code 75
Scarcity and the Need to Economize 29
The Economic Problem 29 Last Word: The End of the Isms? 75
The Four Economic Resources 30
Opportunity Cost 32 CHAPTER 4
Full Employment and Full Production 33 Supply and Demand 82
The Production Possibilities Curve 36
Productive Efficiency 39 Demand 83
Economic Growth 39 Supply 84
Economics in Action 1: Will You Be Underemployed Equilibrium 85
Surpluses and Shortages 86
When You Graduate? 44
Economics in Action 2: Our Economy’s Growing Shifts in Demand and Supply 86
Inefficiency 45 Price Ceilings and Price Floors 90

xxii

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Applications of Supply and Demand 94 Stocks and Bonds 136

Interest Rate Determination 94 Capitalization and Control 137
College Parking 96 Market Capitalization 138
The Rationing Function of the Price System 96 The Business Population 139

Economics in Action: High Gas Prices—Something Investment 140

Only an Economist Could Love 97 Investment Defined 140
Why Isn’t Education Spending Classified as
Last Word 97 Investment? 142

How Do Savings Get Invested? 143

CHAPTER 5
Gross Investment versus Net Investment 144
The Household-Consumption Building Capital 145
Sector 104 Raising Capital to Start Your Own Business 145
GDP and Big Numbers 105 The Determinants of the Level of Investment 145
(1) The Sales Outlook 145
Consumption 105 (2) Capacity Utilization Rate 146
Individual Saving 106 (3) The Interest Rate 147
(4) The Expected Rate of Profit 147
Average Propensity to Consume and Average Why Do Firms Invest? 148
Propensity to Save 107
Marginal Propensity to Consume and Marginal Graphing the C + I Line 149
Propensity to Save 109 The Summing Up of Investment 150
Graphing the Consumption and Saving Last Word: America’s Business Environment 151
Functions 111 Economics in Action: “Benedict Arnold
Reading a Graph 111 Corporations”? 152
The Consumption Function 111
The Saving Function 113
CHAPTER 7
Autonomous Consumption and Induced The Government Sector 160
Consumption 115
Introduction: The Growing Economic Role of
What the Consumer Buys 116
Government 161
Determinants of the Level of Consumption 118
Government Spending 161
The Level of Disposable Income 118
Credit Availability 119 Federal Government Spending 161
Stock of Liquid Assets in the Hands of Consumers 119 State and Local Government Spending 163
Stock of Durable Goods in the Hands of Consumers 120 Government Purchases versus Transfer Payments 164
Keeping Up with the Joneses 120 Graphing the C + I + G Line 165
Maintaining a “Basic” Standard of Living 120
Consumer Expectations 120 Taxes 165
The Wealth Effect 121 The Average Tax Rate and the Marginal Tax Rate 166
Types of Taxes 167
The Permanent Income Hypothesis 121 Sources of Federal Revenue 171
Is the Consumer Really King? 121 Recent Tax Legislation 174
Sources of State and Local Revenue 175
Why Do We Spend So Much and Save So Little? 123 The State and Local Fiscal Dilemma 176
Total Saving: Individual Saving + Business Saving + Comparison of Taxes in the United States and
Government Saving 124 Other Countries 177

Economics in Action: The American Consumer—­ The Economic Role of Government 178
World-Class Shopper 125 (1) Provision of Public Goods and Services 178
(2) Redistribution of Income 178
(3) Stabilization 179
CHAPTER 6 (4) Economic Regulation 179
The Business–Investment Sector 132 Economics in Action 1: Will Social Security Be
There for You? 180
Proprietorships, Partnerships, and Corporations 133 Conclusion 180
The Proprietorship 133
The Partnership 133 Economics in Action 2: Should Millionaires Pay
The Corporation 133 More Taxes? 181

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xxiv Expanded Contents

CHAPTER 8 Types of Unemployment 248

Natural Unemployment Rate 250
The Export–Import Sector 188 Inflation 251
Defining Inflation 251
The Basis for International Trade: Specialization and Deflation and Disinflation 253
Exchange 189 The Post–World War II History of Inflation 255
Specialization and Exchange 189 The Construction of the Consumer Price Index 256
Anticipated and Unanticipated Inflation: Who Is Hurt by
U.S. Exports and Imports 191 Inflation and Who Is Helped? 257
Outsourcing and Offshoring 193 What’s a Dollar Worth Today? 259
Theories of the Causes of Inflation 259
A Summing Up: C + I + G + Xn 194 Inflation as a Psychological Process 261
World Trade Agreements and Free Trade Zones 194 Creeping Inflation and Hyperinflation 261
Free Trade Zones 194 The Misery Index 264
World Trade Agreements 197
Economics in Action: Where Are All the Jobs? 265
Economics in Action: Is Your School Sweatshirt
Sewn in a Sweatshop? 200 CHAPTER 11
CHAPTER 9 Classical and Keynesian
Economics 274
Gross Domestic Product 208
Part I: The Classical Economic System 275
What Is Gross Domestic Product? 209 Say’s Law 275
How GDP Is Measured 210 Supply and Demand Revisited 276
Two Things to Avoid When Compiling GDP 212 The Classical Equilibrium: Aggregate Demand
Multiple Counting 212 Equals Aggregate Supply 278
Treatment of Transfer Payments and Financial
The Aggregate Demand Curve 278
Transactions 213
The Long-Run Aggregate Supply Curve 280
Nominal GDP versus Real GDP 214 The Short-Run Aggregate Supply Curve 281
International GDP Comparisons 219 Part II: The Keynesian Critique of the Classical
Per Capita Real GDP 219 System 283
Shortcomings of GDP as a Measure of National Part III: The Keynesian System 286
Economic Well-Being 221 The Keynesian Aggregate Expenditure Model 287
Production That Is Excluded 221 Disequilibrium and Equilibrium 289
Volunteer Work 225
Treatment of Leisure Time 225 (1) Aggregate Demand Exceeds Aggregate Supply 289
Human Costs and Benefits 226 (2) Aggregate Supply Exceeds Aggregate Demand 290
What Goes into GDP? 227 (3) Summary: How Equilibrium Is Attained 290

Economics in Action: GDP or GPI? 228 Keynesian Policy Prescriptions 290

Economics in Action: Keynes and Say in the 21st
CHAPTER 10 Century 292

Economic Fluctuations, Unemployment, CHAPTER 12

and Inflation 236
Fiscal Policy and the National
Economic Fluctuations 237
Is There a Business Cycle? 237
Debt 300
Cycle Turning Points: Peaks and Troughs 237
The Conventional Three-Phase Business Cycle 238
Putting Fiscal Policy into Perspective 301
Are Economic Fluctuations Becoming Less Extreme? 239 Part I: The Recessionary Gap and the Inflationary
Business Cycle Theories 241 Gap 301
Business Cycle Forecasting 242 The Recessionary Gap 301
The Inflationary Gap 302
Unemployment 244
The Problem 244 Part II: The Multiplier and Its Applications 304
How the Unemployment Rate Is Computed 245 The Multiplier 304
How Accurate Is the Unemployment Rate? 246 Applications of the Multiplier 305

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Part III: The Automatic Stabilizers 307
Personal Income and Payroll Taxes 308
Personal Savings 308
Credit Availability 308
Unemployment Compensation 308
The Corporate Profits Tax 310
Other Transfer Payments 310
Part IV: Discretionary Fiscal Policy 311
Making the Automatic Stabilizers More
Effective 311
Public Works 311
Changes in Tax Rates 312
Changes in Government Spending 312
Who Makes Fiscal Policy? 312
Part V: Fiscal Policy Lags 314
Defining the Lags 314
Chronology of the Lags in 2008 314
Part VI: The Economic Stimulus Package of
2009 315
The Economic Stimulus Act of 2009 315
How Effective Was the Stimulus Package? 316
Was the Deficit Too Big? 316
The Chinese Stimulus Plan 317
Stimulus II 317
Part VII: The Deficit Dilemma 317
Deficits, Surpluses, and the Balanced Budget 317
Deficits and Surpluses: The Record 318
Why Are Large Deficits So Bad? 319
Must We Balance the Budget Every Year? 320
Part VIII: The Crowding-Out and Crowding-In
Effects 320
Part IX: The National Debt 322
The Debt Ceiling, the Fiscal Cliff, and Budget
Sequestration 327
Economics in Action: Trillion-Dollar Deficits as Far
as the Eye Can See? 328
Last Word: The Student Debt 328
CHAPTER 13
Money and Banking 338
Money 339
The Three Jobs of Money 339
Medium of Exchange 339
Standard of Value 339
Store of Value 339
Other Useful Properties of Money 340
Money versus Barter 340
Our Money Supply 341
How Do We Pay Our Bills? 342
M1 and M2 342
Our Growing Money Supply 344
The Demand for Money 344
Banking 346
A Short History of Banking 346
Modern Banking 348
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Bank Regulation 352
Branch Banking and Bank Chartering 352
The Federal Deposit Insurance Corporation 353
The Savings and Loan Debacle 354
Economics in Action: Overdraft Privileges 355
CHAPTER 14
The Federal Reserve and Monetary
Policy 364
The Federal Reserve System 365
The Federal Reserve District Banks 365
The Board of Governors 366
Independence of the Board of Governors 367
Legal Reserve Requirements 367
Primary and Secondary Reserves 369
The Creation and Destruction of Money 369
The Creation of Money 369
The Destruction of Money 370
Limits to Deposit Creation 370
Deposit Expansion 370
How Deposit Expansion Works 370
The Deposit Expansion Multiplier 371
Cash, Checks, and Electronic Money 372
The Tools of Monetary Policy 373
How Open-Market Operations Work 373
The Federal Open Market Committee 375
Discount Rate and Federal Funds Rate Changes 377
Paying Interest on Reserve Deposits 378
Changing Reserve Requirements 379
Summary: The Tools of Monetary Policy 380
The Fed’s Effectiveness in Fighting Inflation and
Recession 381
A Summing Up: The Transmission Mechanism 381
The Liquidity Trap 383
Monetary Policy Lags 383
The Depository Institutions Deregulation and
Monetary Control Act of 1980 385
The Banking Act of 1999 385
The Housing Bubble, the Subprime Mortgage Mess,
and the Financial Crisis of 2008 386
Restoring a Normally Functioning Financial
System 388
The $700,000,000,000 TARP Bailout 388
Quantitative Easing 389
Financial Crime and Punishment 390
Financial Regulatory Reform 390
Economics in Action 1: Should Ben Bernanke Have
Been Given a Second Term? 391
Economics in Action 2: The Financialization of the
American Economy 392
Economics in Action 3: Janet Yellen’s Report
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 measurements in, 147

Gram molecule, volume of in

gases, 30, 31

Grating: molecular, 197; spacing,

261

Greek philosophy, 1, 2, 9 f., 232

, value of, 117, 212, 213, 242,

245, 261

Hipp chronoscope, 74

“Hot spark,” 143, 220

Ion, 28, 29; diffusion coefficient of,

36, 262; gaseous and electrolytic,
34; isolation of, 67; mobility
of, 35, 36 f., 39, 262;
positive and negative, 38, 48;
univalent, in electrolysis, 34, 39

Ionic charge, 29, 39, 45, 47, 176;

elementary, 76; mobility, 264

Ionization: by rays, 139 f., 144;

by -rays, 138, 144; by ether
waves, 134, 144; gaseous and
electrolytic, 39; mechanism of
gaseous, 125; oil-drop experiments
in, 127, 141; by X-rays
and radium rays, 125, 134

Kinetic energy: of atom, 194, 273;

of light, 239; of translation of
molecule, 261
Kinetic theory, 8, 31, 49, 157;
of gases, 145, 268

Lenard’s trigger theory, 251

Light-quantas, 244, 256

Mass, electrical theory of, 185,

188; of hydrogen atom, 261;
variation of with speed, 188

Mass of charge on sphere of

radius , 272

Maxwell-Boltzmann law, 81

Maxwell distribution law, 151,

275 f.; theory, 24

Mean free path of a gas molecule,

8, 183, 275

Mean free path of a negative electron,

191

Measurements, exact, 58, 65

Molecular cross-section, 275

Molecule: diameter of, 215; of

gas, 261; kinetic energy of
agitation of, 80, 81, 194

Moseley’s discovery, 196, 203;

atomic numbers, 198, 200, 203;
atomic weights, 202; X-ray
frequencies equal, 246

Moseley’s law, 204 f.; inexactness

 of, 216

, value of, in electrolysis, 31;

in gases, 35, 262

, discrepancies, 168 ff.; in gases,

34, 125, 166 f.; value of, for
electrolysis, 30, 31; value of, for
negative and positive ions, 125

Norman Bridge Laboratory, 4

Nucleus: of atom, 193; charge on,

195; number of electrons in,
207, 277, 281

Peltier effects, 20

Perrin’s value of , 170

Photo-electric effect, 236, 244, 246,

255

Planck’s , 117, 212, 213, 242, 245,

261

Positive and negative electrical

charges, , 12

Quantitative measurements in
gases, 147

Quantum theory of radiation,

Einstein’s, 237 f.; Planck’s, 253

Radiant energy, 242, 245; nature

of, 232

Radiation, black-body, 237; discontinuous,

 244; quantum theory
of, 237, 253; theories of, 232;
Thomson’s ether-string theory,
236, 237

Radium, conductivity in air due

to, 33; as ionizing agent, 53, 57,
79; mechanism of ionization by,
125; structure of atom of, 230

Resistance to motion independent

of charge, 86

Rutherford’s method, 277

Rydberg constant, 210, 282; value

of, 282

Ryerson Laboratory, 4, 37, 93, 94,

95, 150, 178, 209, 239

Stark effect, 219

Stefan-Boltzmann constant , 117,

261

Stokes’s law, 48, 49, 52, 55, 63,

66, 167; correction of, 98 f.,
101, 113, 162; failure of, 90 ff.,
93, 98, 163; limits of validity
of 95 ff.

Sub-electron, 161 f., 166, 175,

181

Thomson-Einstein hypothesis, 253

Valency in gaseous ionization,

127 f.
Velocity of agitation of molecules,
8; of emission of electrons under
monochromatic light, 245

Velocity of drop, 86, 101

Vienna Academy, 153, 175

Viscosity of air, 93

Wave theory, 233, 234

Wien constant , 117, 261

X-rays, 23, 33, 39, 40, 46, 50,

57, 192, 204, 235, absorption of,
199; Duane’s method, 214;
frequencies, 202, 246; ionizing
agent, 79, 126, 134; and
series, 204; and light, 248;
mechanism of ionization by,
125; monochromatic 246; photographs
of spectra, Fig. 21;
spectra, 196, 200; spectrometer,
197; wave-lengths of metals, 197
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