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contents
Why economists disagree 32

Differences in scientific judgements ............................................................................................................................... 32
Differences in values.......................................................................................................................................................... 33
What Australian economists think................................................................................................................................... 33
What Australian economists think ................................................................................................................................ 34
Let’s get going 34
Summary 35
Key concepts 35
Questions for review 35
Multiple choice 35
Problems and applications 36
Appendix: Graphing – a brief review 38
Graphs of a single variable ............................................................................................................................................... 38
Graphs of two variables: The coordinate system........................................................................................................... 38
Curves in the coordinate system ..................................................................................................................................... 41
Slope and elasticity............................................................................................................................................................ 44
Cause and effect ................................................................................................................................................................ 45
Chapter 3 Interdependence and the gains from trade 49

A parable for the modern economy 50
Production possibilities...................................................................................................................................................... 51
Specialisation and trade.................................................................................................................................................... 52
The principle of comparative advantage 54
Absolute advantage ........................................................................................................................................................... 54
Opportunity cost and comparative advantage ............................................................................................................... 54
Comparative advantage and trade................................................................................................................................... 55
Applications of comparative advantage 56
Should Roger Federer mow his own lawn? .................................................................................................................... 56
Should a country trade with other countries? ................................................................................................................ 57
In the news: Who has a comparative advantage in slaying ogres?.......................................................................... 57
FYI: The legacy of Adam Smith and David Ricardo................................................................................................... 58
Conclusion 59
Summary 60
Key concepts 60
Multiple choice 60
Part 2 Supply and demand I: How markets work 65

Chapter 4 The market forces of supply and demand 66
Markets and competition 67
What is a market? .............................................................................................................................................................. 67
What is competition?......................................................................................................................................................... 67
Demand 68
The demand curve: The relationship between price and quantity demanded.......................................................... 68
Market demand versus individual demand .................................................................................................................... 71
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FYI: Ceteris paribus ........................................................................................................................................................ 71

Shifts in the demand curve .............................................................................................................................................. 72
Case study: Are smart phones and tablet computers substitutes
or complements? ............................................................................................................................................................. 73
Case study: Two ways to reduce the quantity of smoking demanded.................................................................... 74
Supply 76
The supply curve: The relationship between price and quantity supplied ................................................................ 76
Market supply versus individual supply.......................................................................................................................... 77
Shifts in the supply curve ................................................................................................................................................. 78
Supply and demand together 81
Equilibrium.......................................................................................................................................................................... 81
Three steps for analysing changes in equilibrium......................................................................................................... 83
Conclusion: How prices allocate resources 87
In the news: Mother Nature shifts the supply curve.................................................................................................. 88
Summary 90
Key concepts 90
Multiple choice 91
Chapter 5 Elasticity and its application 95

The elasticity of demand 96
The price elasticity of demand and its determinants.................................................................................................... 96
Computing the price elasticity of demand ..................................................................................................................... 97
The variety of demand curves.......................................................................................................................................... 98
FYI: The midpoint method: A better way to calculate percentage
changes and elasticities ................................................................................................................................................. 98
Total revenue and the price elasticity of demand ......................................................................................................... 99
Case study: Pricing admission to an art gallery ........................................................................................................ 102
Other demand elasticities ............................................................................................................................................... 103
FYI: Elasticity and total revenue along a linear demand curve............................................................................... 104
The elasticity of supply 105
The price elasticity of supply and its determinants .................................................................................................... 105
Computing the price elasticity of supply ...................................................................................................................... 106
The variety of supply curves .......................................................................................................................................... 106
Three applications of supply, demand and elasticity 108
Can good news for farming be bad news for farmers? ............................................................................................... 109
Why did OPEC fail to keep the price of oil high?........................................................................................................ 110
Do drug bans increase or decrease drug-related crime? ............................................................................................ 112
Conclusion 114
Summary 115
Key concepts 115
Multiple choice 116
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contents
Chapter 6 Supply, demand and government policies 119

Controls on prices 120
How price ceilings affect market outcomes ................................................................................................................. 120
Case study: Lines at the petrol station....................................................................................................................... 122
Case study: Rent control in the short run and long run .......................................................................................... 123
In the news: Rent control in Mumbai, India .............................................................................................................. 125
How price floors affect market outcomes ..................................................................................................................... 126
Case study: Minimum wage rates .............................................................................................................................. 127
What Australian economists think .............................................................................................................................. 129
Evaluating price controls................................................................................................................................................. 130
Taxes 130
How taxes on buyers affect market outcomes ............................................................................................................. 131
How taxes on sellers affect market outcomes .............................................................................................................. 133
Case study: Who pays the payroll tax? ...................................................................................................................... 134
Elasticity and tax incidence ........................................................................................................................................... 135
Subsidies 137
How subsidies affect market outcomes ........................................................................................................................ 137
Case study: Who gets the benefits from the First Home Owner Grant scheme?................................................. 139
Conclusion 140
Summary 141
Key concepts 141
Multiple choice 141
Part 3 Supply and demand II: Markets and welfare 145

Chapter 7 Consumers, producers and the efficiency of markets 146
Consumer surplus 147
Willingness to pay............................................................................................................................................................ 147
Using the demand curve to measure consumer surplus............................................................................................. 148
How a lower price raises consumer surplus................................................................................................................. 150
What does consumer surplus measure?........................................................................................................................ 150
Producer surplus 153
Cost and the willingness to sell ..................................................................................................................................... 153
Using the supply curve to measure producer surplus................................................................................................. 154
How a higher price raises producer surplus................................................................................................................. 156
Market efficiency 157
The benevolent social planner........................................................................................................................................ 157
Evaluating the market equilibrium ................................................................................................................................ 159
Case study: Should there be a market in organs? .................................................................................................... 161
Conclusion: Market efficiency and market failure 162
In the news: Ticket scalping ....................................................................................................................................... 163
Summary 165
Key concepts 165
ix
contents

Multiple choice 165
Chapter 8 Application: The costs of taxation 169

The deadweight loss of taxation 170
How a tax affects market participants .......................................................................................................................... 170
Deadweight losses and the gains from trade ............................................................................................................... 174
The determinants of the deadweight loss 175
Case study: The deadweight loss debate .................................................................................................................. 177
Deadweight loss and tax revenue as taxes vary 178
Case study: The Laffer curve and supply-side economics ...................................................................................... 178
Conclusion 181
Summary 182
Key concept 182
Multiple choice 182
Appendix 186
The welfare economics of subsidies 186
The cost of a subsidy ...................................................................................................................................................... 187
The deadweight loss from a subsidy............................................................................................................................. 188
Understanding the deadweight loss from over production......................................................................................... 189
Chapter 9 Application: International trade 191

The determinants of trade 192
The equilibrium without trade ....................................................................................................................................... 192
The world price and comparative advantage............................................................................................................... 193
The winners and losers from trade 194
FYI: Comparing prices and comparative advantages............................................................................................... 194
The gains and losses of an exporting country ............................................................................................................. 195
The gains and losses of an importing country............................................................................................................. 197
The effects of a tariff ....................................................................................................................................................... 200
The effects of an import quota....................................................................................................................................... 201
The lessons for trade policy ............................................................................................................................................ 204
FYI: Other benefits of international trade................................................................................................................... 205
The arguments for restricting trade 205
The jobs argument ........................................................................................................................................................... 206
The national security argument ..................................................................................................................................... 206
In the news: Should the winners from free trade compensate the losers? ............................................................ 207
The infant industry argument ........................................................................................................................................ 208
The unfair competition argument .................................................................................................................................. 208
The protection-as-a-bargaining-chip argument ........................................................................................................... 209
Case study: Trade agreements and the World Trade Organization........................................................................ 209
In the news: Threats to free trade .............................................................................................................................. 210
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contents
Conclusion 211
Summary 214
Key concepts 214
Multiple choice 214
Part 4 The economics of the public sector 219

Chapter 10 Externalities 220
Externalities and market inefficiency 222
Welfare economics: A recap ........................................................................................................................................... 222
Negative externalities in production ............................................................................................................................. 222
Positive externalities in production ............................................................................................................................... 224
Case study: The debate about technology policy..................................................................................................... 225
Externalities in consumption .......................................................................................................................................... 226
Private solutions to externalities 227
The types of private solutions ........................................................................................................................................ 227
The Coase theorem.......................................................................................................................................................... 228
Why private solutions do not always work ................................................................................................................... 229
Public policies on externalities 230
Command-and-control policies: Regulation .................................................................................................................. 231
Market-based policy 1: Corrective taxes and subsidies.............................................................................................. 231
Case study: Taking out the garbage .......................................................................................................................... 232
Market-based policy 2: Tradeable pollution permits ................................................................................................... 233
Case study: British Columbia adopts a broad-based carbon tax ............................................................................ 235
Objections to the economic analysis of pollution ........................................................................................................ 236
Conclusion 237
In the news: Children as externalities ........................................................................................................................ 237
Summary 239
Key concepts 239
Multiple choice 239
Chapter 11 Public goods and common resources 243

The different kinds of goods 244
Public goods 246
The free-rider problem..................................................................................................................................................... 246
Some important public goods......................................................................................................................................... 247
Case study: Are lighthouses public goods? ............................................................................................................... 248
The difficult job of cost–benefit analysis....................................................................................................................... 249
Case study: How much is a life worth? ..................................................................................................................... 250
xi
contents
Private provision of public goods................................................................................................................................... 251

Case study: Is music a public good? .......................................................................................................................... 252
Common resources 253
The Tragedy of the Commons........................................................................................................................................ 253
Some important common resources .............................................................................................................................. 254
In the news: The case for toll roads ........................................................................................................................... 255
Case study: Why the cow is not extinct .................................................................................................................... 258
Conclusion: The importance of property rights 259
Summary 260
Key concepts 260
Multiple choice 260
Chapter 12 The design of the tax system 264

A financial overview of Australian government 265
The federal government .................................................................................................................................................. 266
State and local governments .......................................................................................................................................... 270
Taxes and efficiency 271
Deadweight losses ........................................................................................................................................................... 271
Case study: The goods and services tax ................................................................................................................... 272
Administrative burden..................................................................................................................................................... 274
Marginal tax rates versus average tax rates................................................................................................................. 274
FYI: Tax avoidance and tax evasion........................................................................................................................... 275
Case study: Marginal tax rates and the poverty trap............................................................................................... 275
Lump-sum taxes............................................................................................................................................................... 276
Taxes and equity 277
The benefits principle...................................................................................................................................................... 277
The ability-to-pay principle............................................................................................................................................. 278
Case study: How the burden of taxes is distributed ................................................................................................ 279
Case study: Who should pay for higher education? ................................................................................................. 280
Tax incidence and tax equity......................................................................................................................................... 281
In the news: The HECS experience............................................................................................................................ 281
Case study: Who pays company income tax?........................................................................................................... 283
Conclusion: The trade-off between equity and efficiency 284
Summary 285
Key concepts 285
Multiple choice 285
Part 5 Firm behaviour and the organisation of industry 289

Chapter 13 The costs of production 290
What are costs? 291
Total revenue, total cost and profit................................................................................................................................ 291
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contents
Costs as opportunity costs.............................................................................................................................................. 292

The cost of capital as an opportunity cost ................................................................................................................... 292
Economic profit versus accounting profit ..................................................................................................................... 293
Production and costs 294
FYI: How long is the long run?.................................................................................................................................... 294
The production function.................................................................................................................................................. 295
From the production function to the total-cost curve ................................................................................................. 297
The various measures of cost 298
Fixed and variable costs ................................................................................................................................................. 299
Average and marginal cost............................................................................................................................................. 300
Cost curves and their shapes ......................................................................................................................................... 301
Typical cost curves .......................................................................................................................................................... 303
Costs in the short run and in the long run 303
The relationship between short-run and long-run average total cost ....................................................................... 304
Economies and diseconomies of scale .......................................................................................................................... 305
Conclusion 306
FYI: Lessons from a pin factory................................................................................................................................... 307
Summary 309
Key concepts 309
Multiple choice 310
Chapter 14 Firms in competitive markets 315

What is a competitive market? 316
The meaning of competition .......................................................................................................................................... 316
The revenue of a competitive firm ................................................................................................................................ 317
Profit maximisation and the competitive firm’s supply curve 318
A simple example of profit maximisation ..................................................................................................................... 318
The marginal-cost curve and the firm’s supply decision............................................................................................ 320
The firm’s short-run decision to shut down ................................................................................................................. 322
Case study: Near-empty restaurants and off-season ski lodges.............................................................................. 323
FYI: Spilt milk and sunk costs ..................................................................................................................................... 324
The firm’s long-run decision to exit or enter a market ............................................................................................... 324
Measuring profit in our graph for the competitive firm .............................................................................................. 325
The supply curve in a competitive market 327
The short run: Market supply with a fixed number of firms ...................................................................................... 327
The long run: Market supply with entry and exit........................................................................................................ 327
A shift in demand in the short run and long run ........................................................................................................ 329
FYI: Why do competitive firms stay in business if they
make zero profit?........................................................................................................................................................... 331
Why the long-run supply curve might slope upwards ................................................................................................ 331
Conclusion: Behind the supply curve 332
Summary 333
Key concepts 333
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contents
Multiple choice 333

Chapter 15 Monopoly 337

Why monopolies arise 339
Monopoly resources ......................................................................................................................................................... 339
Case study: The gas industry in south-eastern Australia ........................................................................................ 339
Government-created monopolies.................................................................................................................................... 340
Natural monopolies .......................................................................................................................................................... 341
How monopolies make production and pricing decisions 342
Monopoly versus competition......................................................................................................................................... 342
A monopoly’s revenue..................................................................................................................................................... 343
Profit maximisation .......................................................................................................................................................... 345
FYI: Why a monopoly does not have a supply curve ............................................................................................... 347
A monopoly’s profit.......................................................................................................................................................... 348
Case study: Bell’s monopoly and the price of telephone calls................................................................................. 348
The welfare cost of monopoly 350
The deadweight loss........................................................................................................................................................ 350
The monopoly’s profit: A social cost?............................................................................................................................ 352
FYI: Measuring the cost of monopoly......................................................................................................................... 353
Price discrimination 353
A parable about pricing .................................................................................................................................................. 354
The moral of the story ..................................................................................................................................................... 355
The analytics of price discrimination ............................................................................................................................ 355
Examples of price discrimination................................................................................................................................... 356
In the news: Why do Australians pay more for digital downloads? ....................................................................... 358
Conclusion: The prevalence of monopoly 360
Summary 362
Key concepts 362
Multiple choice 362
Chapter 16 Monopolistic competition 367

Between monopoly and perfect competition 368
Competition with differentiated products 370
The monopolistically competitive firm in the short run .............................................................................................. 370
The long-run equilibrium ................................................................................................................................................ 371
Monopolistic versus perfect competition ...................................................................................................................... 373
Monopolistic competition and the welfare of society.................................................................................................. 375
Advertising 376
The debate about advertising ........................................................................................................................................ 376
Case study: Advertising and the price of glasses..................................................................................................... 377
Advertising as a signal of quality .................................................................................................................................. 378
Brand names..................................................................................................................................................................... 379
Conclusion 380
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contents
Summary 382
Key concepts 382
Multiple choice 382
Chapter 17 Oligopoly and business strategy 385

Markets with only a few sellers 386
A duopoly example .......................................................................................................................................................... 387
Competition, monopolies and cartels ............................................................................................................................ 388
The equilibrium for an oligopoly .................................................................................................................................... 388
How the size of an oligopoly affects the market outcome.......................................................................................... 389
Case study: OPEC and the world oil market ............................................................................................................. 391
Game theory and the economics of cooperation 391
The prisoners’ dilemma................................................................................................................................................... 392
Oligopolies as a prisoners’ dilemma .............................................................................................................................. 393
Other examples of the prisoners’ dilemma ................................................................................................................... 394
The prisoners’ dilemma and the welfare of society..................................................................................................... 396
Why people sometimes cooperate ................................................................................................................................. 397
Case study: The prisoners’ dilemma tournament...................................................................................................... 398
Conclusion 399
Summary 400
Key concepts 400
Multiple choice 400
Appendix: Types of oligopolistic competition 405
Anticipating your competitor’s response ...................................................................................................................... 405
Cournot quantity competition ........................................................................................................................................ 405
Bertrand price competition ............................................................................................................................................. 409
Comparing Cournot and Bertrand competition ............................................................................................................ 410
Chapter 18 Competition policy 412

Public policy towards monopolies 413
Using the law to increase competition ......................................................................................................................... 414
FYI: What Australian economists think ...................................................................................................................... 415
Regulation ......................................................................................................................................................................... 416
Public ownership and privatisation ............................................................................................................................... 417
Doing nothing................................................................................................................................................................... 418
Case study: The ACCC – Australia’s competition regulator.................................................................................... 418
Public policy towards oligopolies 421
Restraint of trade and competition laws ....................................................................................................................... 421
In the news: How to form a cartel .............................................................................................................................. 421
Controversies over competition policy .......................................................................................................................... 423
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contents
In the news: When is the price of milk too low?....................................................................................................... 424

Case study: The Baxter case ....................................................................................................................................... 426
Conclusion 427
Summary 429
Key concepts 429
Multiple choice 429
Part 6 The economics of labour markets 433

Chapter 19 The markets for the factors of production 434
The demand for labour 436
The competitive profit-maximising firm........................................................................................................................ 436
The production function and the marginal product of labour .................................................................................... 437
The value of the marginal product and the demand for labour ................................................................................. 438
What causes the labour demand curve to shift?.......................................................................................................... 440
FYI: Input demand and output supply – two sides of the coin............................................................................... 440
The supply of labour 441
The trade-off between work and leisure ....................................................................................................................... 442
What causes the labour supply curve to shift? ............................................................................................................ 442
In the news: The economy needs you ....................................................................................................................... 443
Equilibrium in the labour market 444
Shifts in labour supply..................................................................................................................................................... 444
Shifts in labour demand .................................................................................................................................................. 445
Case study: Productivity and wages .......................................................................................................................... 447
The other factors of production: Land and capital 448
Equilibrium in the markets for land and capital .......................................................................................................... 448
FYI: What is capital income? ....................................................................................................................................... 449
Linkages among the factors of production ................................................................................................................... 450
Case study: The economics of the Black Death ....................................................................................................... 450
Conclusion 451
Summary 452
Key concepts 452
Multiple choice 452
Appendix: The demand for labour under imperfect competition and monopoly 456
Chapter 20 Earnings, unions and discrimination 459

Some determinants of equilibrium wages 460
Compensating differentials ............................................................................................................................................. 460
Human capital .................................................................................................................................................................. 461
Case study: The changing value of skills................................................................................................................... 462
Ability, effort and chance................................................................................................................................................ 463
Case study: The benefits of beauty ............................................................................................................................ 463
An alternative view of education: Signalling................................................................................................................ 464
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contents
The superstar phenomenon ............................................................................................................................................ 465

Unions and imperfect competition in labour markets 466
Unions as monopolists..................................................................................................................................................... 467
Bilateral monopoly............................................................................................................................................................ 469
Are unions good or bad for the economy? ................................................................................................................... 471
The theory of efficiency wages 472
Worker health ................................................................................................................................................................... 472
FYI: Why do strikes occur? .......................................................................................................................................... 472
Worker turnover................................................................................................................................................................ 474
Worker effort ..................................................................................................................................................................... 474
Worker quality .................................................................................................................................................................. 474
Case study: Henry Ford and the generous $5-a-day wage ..................................................................................... 475
The economics of discrimination 476
Measuring labour-market discrimination ...................................................................................................................... 476
Discrimination by employers .......................................................................................................................................... 477
Case study: Segregated streetcars and the profit motive ........................................................................................ 478
Discrimination by customers and governments........................................................................................................... 479
Case study: Can asymmetric information explain discrimination? ......................................................................... 480
Conclusion 480
Summary 482
Key concepts 482
Multiple choice 483
Chapter 21 Income inequity and poverty 486

The measurement of inequality 487
Australian income inequality.......................................................................................................................................... 487
Case study: The women’s movement and income distribution .............................................................................. 489
The poverty rate............................................................................................................................................................... 490
Case study: Income inequality around the world ..................................................................................................... 491
Problems in measuring inequality.................................................................................................................................. 492
The political philosophy of redistributing income 494
Utilitarianism..................................................................................................................................................................... 494
Liberalism.......................................................................................................................................................................... 496
Libertarianism................................................................................................................................................................... 497
Policies to reduce poverty 498
Minimum-wage laws ....................................................................................................................................................... 498
Social security .................................................................................................................................................................. 499
Negative income tax........................................................................................................................................................ 499
In the news: Thinking innovatively about income redistribution............................................................................ 500
In-kind transfers ............................................................................................................................................................... 501
Anti-poverty programs and work incentives ................................................................................................................ 502
Conclusion 503
Summary 504
xvii
contents
Key concepts 504

Multiple choice 504
Part 7 Topics for further study 507

Chapter 22 The theory of consumer choice 508
The budget constraint: What the consumer can afford 509
Preferences: What the consumer wants 511
Representing preferences with indifference curves..................................................................................................... 511
Four properties of indifference curves........................................................................................................................... 513
Two extreme examples of indifference curves............................................................................................................. 515
Optimisation: What the consumer chooses 516
The consumer’s optimum choices ................................................................................................................................. 516
FYI: Utility – an alternative way to describe preferences and optimisation .......................................................... 516
How changes in income affect a consumer’s choices ................................................................................................ 518
How changes in prices affect a consumer’s choices .................................................................................................. 519
Income and substitution effects ..................................................................................................................................... 521
Deriving the demand curve ............................................................................................................................................ 523
Three applications 524
Do all demand curves slope downwards? ..................................................................................................................... 524
How do wages affect labour supply?............................................................................................................................. 525
Case study: Income effects on labour supply – historical trends, lottery winners
and the Carnegie conjecture ....................................................................................................................................... 528
How do interest rates affect household saving? .......................................................................................................... 529
Conclusion: Do people really think this way? 532
Summary 533
Key concepts 533
Multiple choice 534
Chapter 23 Frontiers of microeconomics 537

Asymmetric information 538
Hidden actions: Principals, agents and moral hazard ................................................................................................. 538
FYI: Corporate management ........................................................................................................................................ 539
Hidden characteristics: Adverse selection and the lemons problem ........................................................................ 540
Signalling to convey private information ...................................................................................................................... 541
Case study: Gifts as signals......................................................................................................................................... 542
Screening to induce information revelation.................................................................................................................. 543
Asymmetric information and public policy................................................................................................................... 543
Political economy 544
The Condorcet voting paradox....................................................................................................................................... 544
Arrow’s impossibility theorem........................................................................................................................................ 545
The median voter is king................................................................................................................................................ 546
xviii
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Politicians are people too ................................................................................................................................................ 548

Behavioural economics 548
People aren’t always rational .......................................................................................................................................... 548
Case study: Left-digit bias ........................................................................................................................................... 550
People care about fairness .............................................................................................................................................. 551
People are inconsistent over time.................................................................................................................................. 551
Conclusion 553
Summary 554
Key concepts 554
Multiple choice 554
Glossary 558
Suggestions for reading 563
Index 565
xix
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.
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.
xx
preface to this edition
Chapter 1, ‘Ten lessons from 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 Lessons from Economics in
chapter 1 to remind students that these lessons 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 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 necessary to pay for public goods. It presents some institutional
xxi
preface to this edition
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 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, unions 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 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
xxii
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
xxiii
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
xxiv
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if possible, than had been his slavery. But happily, both for the old
master-class, and for the recently emancipated, there came then,
as there will come now, the sober second thought. The old master-
class then found it had made a great mistake. It had driven away
the means of its own support. It had destroyed the hands, and left
the mouths. It had starved the negro, and starved itself. Not even
to gratify its own anger and resentment could it afford to allow its
fields to go uncultivated, and its tables unsupplied with food.
Hence the freedman, less from humanity than cupidity, less from
choice than necessity, was speedily called back to labor and life.
“But now, after fourteen years of service, and fourteen years of
separation from the visible presence of slavery, during which he
has shown both disposition and ability to supply the labor market
of the South, and that he could do so far better as a freedman than
he ever did as a slave; that more cotton and sugar can be raised
by the same hands, under the inspiration of liberty and hope, than
can be raised under the influence of bondage and the whip, he is
again, alas! in the deepest trouble; again without a home, out
under the open sky, with his wife and little ones. He lines the
Sunny banks of the Mississippi, fluttering in rags and
wretchedness, mournfully imploring hard-hearted Steamboat
Captains to take him on board; while the friends of the emigration
movement are diligently soliciting funds all over the North to help
him away from his old home to the new Canaan of Kansas.”
I am sorry to be obliged to omit the statement which here follows,

of the reasons given for the Exodus movement, and my explanation of
them, but from want of space I can present only such portions of the
paper as express most vividly and in fewest words, my position in
regard to the question. I go on to say:
“Bad as is the condition of the negro to-day at the South, there

was a time when it was flagrantly and incomparably worse. A few
years ago he had nothing—he had not even himself. He belonged
to somebody else, who could dispose of his person and his labor
as he pleased. Now he has himself, his labor, and his right to
dispose of one and the other as shall best suit his own happiness.
He has more. He has a standing in the supreme law of the land—
in the Constitution of the United States—not to be changed or
affected by any conjunction of circumstances likely to occur in the
immediate or remote future. The Fourteenth Amendment makes
him a citizen and the Fifteenth makes him a voter. With power
behind him, at work for him, and which cannot be taken from him,
the negro of the South may wisely bide his time. The situation at
the moment is exceptional and transient. The permanent powers
of the government are all on his side. What though for the moment
the hand of violence strikes down the negro’s rights in the South,
those rights will revive, survive, and flourish again. They are not
the only people who have been, in a moment of popular passion,
maltreated and driven from the polls. The Irish and Dutch have
frequently been so treated. Boston, Baltimore, and New York have
been the scenes of lawless violence; but those scenes have now
disappeared.... Without abating one jot of our horror and
indignation at the outrages committed in some parts of the
Southern States against the negro, we cannot but regard the
present agitation of an African exodus from the South as ill-timed
and in some respects hurtful. We stand to-day at the beginning of
a grand and beneficent reaction. There is a growing recognition of
the duty and obligation of the American people to guard, protect,
and defend the personal and political rights of all the people of all
the States; to uphold the principles upon which rebellion was
suppressed, slavery abolished, and the country saved from
dismemberment and ruin.
“We see and feel to-day, as we have not seen and felt before,
that the time for conciliation and trusting to the honor of the late
rebels and slaveholders has passed. The President of the United
States himself, while still liberal, just, and generous toward the
South, has yet sounded a halt in that direction, and has bravely,
firmly, and ably asserted the constitutional authority to maintain the
public peace in every State in the Union, and upon every day in
the year, and has maintained this ground against all the powers of
House and Senate.
“We stand at the gateway of a marked and decided change in
the statesmanship of our rulers. Every day brings fresh and
increasing evidence that we are, and of right ought to be, a nation;
that Confederate notions of the nature and powers of our
government ought to have perished in the rebellion which they
supported; that they are anachronisms and superstitions and no
longer fit to be above ground....
“At a time like this, so full of hope and courage, it is
unfortunate that a cry of despair should be raised in behalf of the
colored people of the South; unfortunate that men are going over
the country begging in the name of the poor colored man of the
South, and telling the people that the government has no power to
enforce the Constitution and laws in that section, and that there is
no hope for the poor negro but to plant him in the new soil of
Kansas or Nebraska.
“These men do the colored people of the South a real
damage. They give their enemies an advantage in the argument
for their manhood and freedom. They assume their inability to take
care of themselves. The country will be told of the hundreds who
go to Kansas, but not of the thousands who stay in Mississippi and
Louisiana.
“It will be told of the destitute who require material aid, but not
of the multitude who are bravely sustaining themselves where they
are.
“In Georgia the negroes are paying taxes upon six millions of
dollars; in Louisiana upon forty or fifty millions; and upon
unascertained sums elsewhere in the Southern States.
“Why should a people who have made such progress in the
course of a few years be humiliated and scandalized by exodus
agents, begging money to remove them from their homes?
especially at a time when every indication favors the position that
the wrongs and hardships which they suffer are soon to be
redressed?
“Besides the objection thus stated, it is manifest that the public
and noisy advocacy of a general stampede of the colored people
from the South to the North is necessarily an abandonment of the
great and paramount principle of protection to person and property
in every State in the Union. It is an evasion of a solemn obligation
and duty. The business of this nation is to protect its citizens
where they are, not to transport them where they will not need
protection. The best that can be said of this exodus in this respect
is, that it is an attempt to climb up some other way; it is an
expedient, a half-way measure, and tends to weaken in the public
mind a sense of absolute right, power, and duty of the
government, inasmuch as it concedes by implication at least, that
on the soil of the South the law of the land cannot command
obedience, the ballot-box cannot be kept pure, peaceable
elections cannot be held, the Constitution cannot be enforced, and
the lives and liberties of loyal and peaceable citizens cannot be
protected. It is a surrender, a premature disheartening surrender,
since it would secure freedom and free institutions by migration
rather than by protection; by flight rather than by right; by going
into a strange land rather than by staying in one’s own. It leaves
the whole question of equal rights on the soil of the South open
and still to be settled, with the moral influence of exodus against
us; since it is a confession of the utter impracticability of equal
rights and equal protection in any State where those rights may be
struck down by violence.
“It does not appear that the friends of freedom should spend
either time or talent in furtherance of this exodus, as a desirable
measure, either for the North or the South. If the people of this
country cannot be protected in every State of the Union, the
government of the United States is shorn of its rightful dignity and
power, the late rebellion has triumphed, the sovereignty of the
nation is an empty name, and the power and authority in individual
States is greater than the power and authority of the United
States....
“The colored people of the South, just beginning to accumulate
a little property, and to lay the foundation of family, should not be in
haste to sell that little and be off to the banks of the Mississippi.
The habit of roaming from place to place in pursuit of better
conditions of existence is never a good one. A man should never
leave his home for a new one till he has earnestly endeavored to
make his immediate surroundings accord with his wishes. The
time and energy expended in wandering from place to place, if
employed in making him a comfortable home where he is, will, in
nine cases out of ten, prove the best investment. No people ever
did much for themselves or for the world without the sense and
inspiration of native land, of a fixed home, of familiar neighborhood
and common associations. The fact of being to the manner born
has an elevating power upon the mind and heart of a man. It is a
more cheerful thing to be able to say I was born here and know all
the people, than to say I am a stranger here and know none of the
people.
“It cannot be doubted that in so far as this exodus tends to
promote restlessness in the colored people of the South, to
unsettle their feeling of home, and to sacrifice positive advantages
where they are, for fancied ones in Kansas or elsewhere, it is an
evil. Some have sold their little homes, their chickens, mules, and
pigs, at a sacrifice, to follow the exodus. Let it be understood that
you are going, and you advertise the fact that your mule has lost
half its value; for your staying with him makes half his value. Let
the colored people of Georgia offer their six millions’ worth of
property for sale, with the purpose to leave Georgia, and they will
not realize half its value. Land is not worth much where there are
no people to occupy it, and a mule is not worth much where there
is no one to drive him.
“It may be safely asserted that whether advocated and
commended to favor on the ground that it will increase the political
power of the Republican party, and thus help to make a solid North
against a solid South, or upon the ground that it will increase the
power and influence of the colored people as a political element,
and enable them the better to protect their rights, and insure their
moral and social elevation, the exodus will prove a
disappointment, a mistake, and a failure; because, as to
strengthening the Republican party, the emigrants will go only to
those States where the Republican party is strong and solid
enough already with their votes; and in respect to the other part of
the argument, it will fail because it takes colored voters from a
section of the country where they are sufficiently numerous to
elect some of their number to places of honor and profit, and
places them in a country where their proportion to other classes
will be so small as not to be recognized as a political element or
entitled to be represented by one of themselves. And further,
because go where they will, they must for a time inevitably carry
with them poverty, ignorance, and other repulsive incidents,
inherited from their former condition as slaves—a circumstance
which is about as likely to make votes for Democrats as for
Republicans, and to raise up bitter prejudice against them as to
raise up friends for them....
“Plainly enough, the exodus is less harmful as a measure than
are the arguments by which it is supported. The one is the result of
a feeling of outrage and despair; but the other comes of cool,
selfish calculation. One is the result of honest despair, and
appeals powerfully to the sympathies of men; the other is an
appeal to our selfishness, which shrinks from doing right because
the way is difficult.
“Not only is the South the best locality for the negro, on the
ground of his political powers and possibilities, but it is best for him
as a field of labor. He is there, as he is nowhere else, an absolute
necessity. He has a monopoly of the labor market. His labor is the
only labor which can successfully offer itself for sale in that market.
This fact, with a little wisdom and firmness, will enable him to sell
his labor there on terms more favorable to himself than he can
elsewhere. As there are no competitors or substitutes he can
demand living prices with the certainty that the demand will be
complied with. Exodus would deprive him of this advantage....
“The negro, as already intimated, is preëminently a Southern
man. He is so both in constitution and habits, in body as well as
mind. He will not only take with him to the North, southern modes
of labor, but southern modes of life. The careless and improvident
habits of the South cannot be set aside in a generation. If they are
adhered to in the North, in the fierce winds and snows of Kansas
and Nebraska, the emigration must be large to keep up their
numbers....
“As an assertion of power by a people hitherto held in bitter
contempt, as an emphatic and stinging protest against high-
handed, greedy, and shameless injustice to the weak and
defenceless, as a means of opening the blind eyes of oppressors
to their folly and peril, the exodus has done valuable service.
Whether it has accomplished all of which it is capable in this
direction, for the present is a question which may well be
considered. With a moderate degree of intelligent leadership
among the laboring class of the South, properly handling the
justice of their cause, and wisely using the exodus example, they
can easily exact better terms for their labor than ever before.
Exodus is medicine, not food; it is for disease, not health; it is not
to be taken from choice, but necessity. In anything like a normal
condition of things, the South is the best place for the negro.
Nowhere else is there for him a promise of a happier future. Let
him stay there if he can, and save both the South and himself to
civilization. While, however, it may be the highest wisdom in the
circumstances for the freedmen to stay where they are, no
encouragement should be given to any measures of coercion to
keep them there. The American people are bound, if they are or
can be bound to anything, to keep the north gate of the South
open to black and white and to all the people. The time to assert a
right, Webster says, is when it is called in question. If it is
attempted, by force or fraud to compel the colored people to stay
there, they should by all means go—go quickly, and die if need be
in the attempt.”...
CHAPTER XVI.
“TIME MAKES ALL THINGS EVEN.”
Return to the “old master”—A last interview—Capt. Auld’s admission “had I

been in your place, I should have done as you did”—Speech at Easton—
The old jail there—Invited to a sail on the revenue cutter Guthrie—Hon.
John L. Thomas—Visit to the old plantation—Home of Col. Lloyd—Kind
reception and attentions—Familiar scenes—Old memories—Burial-ground
—Hospitality—Gracious reception from Mrs. Buchanan—A little girl’s floral
gift—A promise of a “good time coming”—Speech at Harper’s Ferry,
Decoration day, 1881—Storer College—Hon. A. J. Hunter.
THE leading incidents to which it is my purpose to call attention and

make prominent in the present chapter, will, I think, address the
imagination of the reader with peculiar and poetic force, and might
well enough be dramatized for the stage. They certainly afford
another striking illustration of the trite saying, that “truth is stranger
than fiction.”
The first of these events occurred four years ago, when, after a
period of more than forty years, I visited and had an interview with
Captain Thomas Auld, at St. Michaels, Talbot County, Maryland. It
will be remembered by those who have followed the thread of my
story, that St. Michaels was at one time the place of my home, and
the scene of some of my saddest experiences of slave life; and that I
left there, or, rather, was compelled to leave there, because it was
believed that I had written passes for several slaves to enable them
to escape from slavery, and that prominent slaveholders in that
neighborhood had, for this alleged offense, threatened to shoot me
on sight, and to prevent the execution of this threat, my master had
sent me to Baltimore.
My return, therefore, to this place, in peace, among the same
people, was strange enough of itself, but that I should, when there,
be formally invited by Capt. Thomas Auld, then over eighty years old,
to come to the side of his dying bed, evidently with a view to a
friendly talk over our past relations, was a fact still more strange, and
one which, until its occurrence, I could never have thought possible.
To me, Capt. Auld had sustained the relation of master—a relation
which I had held in extremest abhorrence, and which, for forty years,
I had denounced in all bitterness of spirit and fierceness of speech.
He had struck down my personality, had subjected me to his will,
made property of my body and soul, reduced me to a chattel, hired
me out to a noted slave breaker to be worked like a beast and
flogged into submission; he had taken my hard earnings, sent me to
prison, offered me for sale, broken up my Sunday-school, forbidden
me to teach my fellow slaves to read on pain of nine and thirty
lashes on my bare back; he had sold my body to his brother Hugh,
and pocketed the price of my flesh and blood without any apparent
disturbance of his conscience. I, on my part, had traveled through
the length and breadth of this country and of England, holding up this
conduct of his in common with that of other slaveholders to the
reprobation of all men who would listen to my words. I had made his
name and his deeds familiar to the world by my writings in four
different languages, yet here we were after four decades once more
face to face—he on his bed, aged and tremulous, drawing near the
sunset of life, and I, his former slave, United States Marshal of the
District of Columbia, holding his hand and in friendly conversation
with him, in a sort of final settlement of past differences, preparatory
to his stepping into his grave, where all distinctions are at an end,
and where the great and the small, the slave and his master, are
reduced to the same level. Had I been asked in the days of slavery
to visit this man, I should have regarded the invitation as one to put
fetters on my ankles and handcuffs on my wrists. It would have been
an invitation to the auction-block and the slave whip. I had no
business with this man under the old regime but to keep out of his
way. But now that slavery was destroyed, and the slave and the
master stood upon equal ground, I was not only willing to meet him,
but was very glad to do so. The conditions were favorable for
remembrance of all his good deeds, and generous extenuation of all
his evil ones. He was to me no longer a slaveholder either in fact or
in spirit, and I regarded him as I did myself, a victim of the
circumstances of birth, education, law, and custom.
Our courses had been determined for us, not by us. We had both
been flung, by powers that did not ask our consent, upon a mighty
current of life, which we could neither resist nor control. By this
current he was a master, and I a slave; but now our lives were
verging towards a point where differences disappear, where even the
constancy of hate breaks down, where the clouds of pride, passion,
and selfishness vanish before the brightness of infinite light. At such
a time, and in such a place, when a man is about closing his eyes on
this world and ready to step into the eternal unknown, no word of
reproach or bitterness should reach him or fall from his lips; and on
this occasion there was to this rule no transgression on either side.
As this visit to Capt. Auld has been made the subject of mirth by
heartless triflers, and regretted as a weakening of my life-long
testimony against slavery, by serious-minded men, and as the report
of it, published in the papers immediately after it occurred, was in
some respects defective and colored, it may be proper to state
exactly what was said and done at this interview.
It should in the first place be understood that I did not go to St.
Michaels upon Capt. Auld’s invitation, but upon that of my colored
friend, Charles Caldwell; but when once there, Capt. Auld sent Mr.
Green, a man in constant attendance upon him during his sickness,
to tell me he would be very glad to see me, and wished me to
accompany Green to his house, with which request I complied. On
reaching the house I was met by Mr. Wm. H. Bruff, a son-in-law of
Capt. Auld, and Mrs. Louisa Bruff, his daughter, and was conducted
by them immediately to the bed-room of Capt. Auld. We addressed
each other simultaneously, he calling me “Marshal Douglass,” and I,
as I had always called him, “Captain Auld.” Hearing myself called by
him “Marshal Douglass,” I instantly broke up the formal nature of the
meeting by saying, “not Marshal, but Frederick to you as formerly.”
We shook hands cordially, and in the act of doing so, he, having
been long stricken with palsy, shed tears as men thus afflicted will do
when excited by any deep emotion. The sight of him, the changes
which time had wrought in him, his tremulous hands constantly in
motion, and all the circumstances of his condition affected me
deeply, and for a time choked my voice and made me speechless.
We both, however, got the better of our feelings, and conversed
freely about the past.
Though broken by age and palsy, the mind of Capt. Auld was
remarkably clear and strong. After he had become composed I
asked him what he thought of my conduct in running away and going
to the north. He hesitated a moment as if to properly formulate his
reply, and said: “Frederick, I always knew you were too smart to be a
slave, and had I been in your place I should have done as you did.” I
said, “Capt. Auld, I am glad to hear you say this. I did not run away
from you, but from slavery; it was not that I loved Cæsar less, but
Rome more.” I told him that I had made a mistake in my narrative, a
copy of which I had sent him, in attributing to him ungrateful and
cruel treatment of my grandmother; that I had done so on the
supposition that in the division of the property of my old master, Mr.
Aaron Anthony, my grandmother had fallen to him, and that he had
left her in her old age, when she could be no longer of service to
him, to pick up her living in solitude with none to help her, or in other
words had turned her out to die like an old horse. “Ah!” he said, “that
was a mistake, I never owned your grandmother; she in the division
of the slaves was awarded to my brother-in-law, Andrew Anthony;
but,” he added quickly, “I brought her down here and took care of her
as long as she lived.” The fact is, that after writing my narrative
describing the condition of my grandmother, Capt. Auld’s attention
being thus called to it, he rescued her from her destitution. I told him
that this mistake of mine was corrected as soon as I discovered it,
and that I had at no time any wish to do him injustice; that I regarded
both of us as victims of a system. “Oh, I never liked slavery,” he said,
“and I meant to emancipate all of my slaves when they reached the
age of twenty-five years.” I told him I had always been curious to
know how old I was, that it had been a serious trouble to me, not to
know when was my birthday. He said he could not tell me that, but
he thought I was born in February, 1818. This date made me one
year younger than I had supposed myself from what was told me by
Mistress Lucretia, Captain Auld’s former wife, when I left Lloyd’s for
Baltimore in the Spring of 1825; she having then said that I was
eight, going on nine. I know that it was in the year 1825 that I went to
Baltimore, because it was in that year that Mr. James Beacham built
a large frigate at the foot of Alliceana street, for one of the South
American Governments. Judging from this, and from certain events
which transpired at Col. Lloyd’s, such as a boy without any
knowledge of books, under eight years old, would hardly take
cognizance of, I am led to believe that Mrs. Lucretia was nearer right
as to my age than her husband.
Before I left his bedside Captain Auld spoke with a cheerful
confidence of the great change that awaited him, and felt himself
about to depart in peace. Seeing his extreme weakness I did not
protract my visit. The whole interview did not last more than twenty
minutes, and we parted to meet no more. His death was soon after
announced in the papers, and the fact that he had once owned me
as a slave was cited as rendering that event noteworthy.
It may not, perhaps, be quite artistic to speak in this connection
of another incident of something of the same nature as that which I
have just narrated, and yet it quite naturally finds place here; and
that is, my visit to the town of Easton, county seat of Talbot County,
two years later, to deliver an address in the Court House, for the
benefit of some association in that place. This visit was made
interesting to me, by the fact that forty-five years before I had, in
company with Henry and John Harris, been dragged to Easton
behind horses, with my hands tied, put in jail, and offered for sale, for
the offense of intending to run away from slavery.
It may easily be seen that this visit, after this lapse of time,
brought with it feelings and reflections such as only unusual
circumstances can awaken. There stood the old jail, with its white-
washed walls and iron gratings, as when in my youth I heard its
heavy locks and bolts clank behind me.
Strange too, Mr. Joseph Graham, who was then Sheriff of the
County, and who locked me in this gloomy place, was still living,
though verging towards eighty, and was one of the gentlemen who
now gave me a warm and friendly welcome, and was among my
hearers when I delivered my address at the Court House. There too
in the same old place stood Sol. Law’s Tavern, where once the slave
traders were wont to congregate, and where I now took up my abode
and was treated with a hospitality and consideration undreamed of
as possible by me in the olden time.
When one has advanced far in the journey of life, when he has
seen and traveled over much of this great world, and has had many
and strange experiences of shadow and sunshine, when long
distances of time and space have come between him and his point
of departure, it is natural that his thoughts should return to the place
of his beginning, and that he should be seized with a strong desire to
revisit the scenes of his early recollection, and live over in memory
the incidents of his childhood. At least such for several years had
been my thoughts and feeling in respect of Col. Lloyd’s plantation on
Wye River, Talbot County, Maryland; for I had never been there since
I left it, when eight years old, in 1825.
While slavery continued, of course this very natural desire could
not be safely gratified; for my presence among slaves was
dangerous to the public peace, and could no more be tolerated than
could a wolf among sheep, or fire in a magazine. But now that the
results of the war had changed all this, I had for several years
determined to return to my old home upon the first opportunity.
Speaking of this desire of mine last winter, to Hon. John L. Thomas,
the efficient collector at the port of Baltimore, and a leading
Republican of the State of Maryland, he urged me very much to go,
and added that he often took a trip to the eastern shore in his
Revenue Cutter, Guthrie, (otherwise known in time of war as the
Ewing,) and would be much pleased to have me accompany him on
one of these trips. I expressed some doubt as to how such a visit
would be received by the present Col. Edward Lloyd, now proprietor
of the old place, and grandson of Governor Ed. Lloyd whom I
remembered. Mr. Thomas promptly assured me that from his own
knowledge I need have no trouble on that score. Mr. Lloyd was a
liberal minded gentleman, and he had no doubt would take a visit
from me very kindly. I was very glad to accept the offer. The
opportunity for the trip however did not occur till the 12th of June,
and on that day, in company with Messrs. Thomas, Thompson, and
Chamberlain, on board the Cutter, we started for the contemplated
visit. In four hours after leaving Baltimore, we were anchored in the
River off the Lloyd estate, and from the deck of our vessel I saw
once more the stately chimneys of the grand old mansion which I
had last seen from the deck of the Sallie Lloyd when a boy. I left
there as a slave, and returned as a freeman: I left there unknown to
the outside world, and returned well known: I left there on a freight
boat and returned on a Revenue Cutter: I left on a vessel belonging
to Col. Edward Lloyd, and returned on one belonging to the United
States.
As soon as we had come to anchor, Mr. Thomas despatched a
note to Col. Edward Lloyd, announcing my presence on board his
Cutter, and inviting him to meet me, informing him it was my desire, if
agreeable to him, to revisit my old home. In response to this note,
Mr. Howard Lloyd, a son of Col. Lloyd, a young gentleman of very
pleasant address, came on board the Cutter, and was introduced to
the several gentlemen and myself.
He told us that his father was gone to Easton on business,
expressed his regret at his absence, hoped he would return before
we should leave, and in the meantime received us cordially and
invited us ashore, escorted us over the grounds, and gave us as
hearty a welcome as we could have wished. I hope I shall be
pardoned for speaking of this incident with much complacency. It
was one which could happen to but few men, and only once in the
life time of any. The span of human life is too short for the repetition
of events which occur at the distance of fifty years. That I was deeply
moved, and greatly affected by it, can be easily imagined. Here I
was, being welcomed and escorted by the great grandson of Colonel
Edward Lloyd—a gentleman I had known well 56 years before, and
whose form and features were as vividly depicted on my memory as
if I had seen him but yesterday. He was a gentleman of the olden
time, elegant in his apparel, dignified in his deportment, a man of few
words and of weighty presence; and I can easily conceive that no
Governor of the State of Maryland ever commanded a larger
measure of respect than did this great grandfather of the young
gentleman now before me. In company with Mr. Howard was his little
brother Decosa, a bright boy of eight or nine years, disclosing his
aristocratic descent in the lineaments of his face, and in all his
modest and graceful movements. As I looked at him I could not help
the reflections naturally arising from having seen so many
generations of the same family on the same estate. I had seen the
elder Lloyd, and was now walking around with the youngest member
of that name. In respect to the place itself, I was most agreeably
surprised to find that time had dealt so gently with it, and that in all its
appointments it was so little changed from what it was when I left it,
and from what I have elsewhere described it. Very little was missing
except the squads of little black children which were once seen in all
directions, and the great number of slaves on its fields. Col. Lloyd’s
estate comprised twenty-seven thousand acres, and the home-farm
seven thousand. In my boyhood sixty men were employed in
cultivating the home farm alone. Now, by the aid of machinery, the
work is accomplished by ten men. I found the buildings, which gave
it the appearance of a village, nearly all standing, and I was
astonished to find that I had carried their appearance and location so
accurately in my mind during so many years. There was the long
quarter, the quarter on the hill, the dwelling-house of my old master,
Aaron Anthony; the overseer’s house, once occupied by William
Sevier, Austin Gore, James Hopkins, and other overseers. In
connection with my old master’s house was the kitchen where Aunt
Katy presided, and where my head had received many a thump from
her unfriendly hand. I looked into this kitchen with peculiar interest,
and remembered that it was there I last saw my mother. I went round
to the window at which Miss Lucretia used to sit with her sewing, and
at which I used to sing when hungry, a signal which she well
understood, and to which she readily responded with bread. The little
closet in which I slept in a bag had been taken into the room; the dirt
floor, too, had disappeared under plank. But upon the whole, the
house is very much as it was in the olden time. Not far from it was
the stable formerly in charge of old Barney. The store-house at the
end of it, of which my master carried the keys, had been removed.
The large carriage house, too, which in my boy days contained two
or three fine coaches, several phaetons, gigs, and a large sleigh (for
the latter there was seldom any use) was gone. This carriage house
was of much interest to me because Col. Lloyd sometimes allowed
his servants the use of it for festal occasions, and in it there was at
such times music and dancing. With these two exceptions, the
houses of the estate remained. There was the shoemaker’s shop,
where Uncle Abe made and mended shoes; and there the
blacksmith’s shop, where Uncle Tony hammered iron, and the
weekly closing of which first taught me to distinguish Sundays from
other days. The old barn, too, was there—time-worn, to be sure, but
still in good condition—a place of wonderful interest to me in my
childhood, for there I often repaired to listen to the chatter and watch
the flight of swallows among its lofty beams, and under its ample
roof. Time had wrought some changes in the trees and foliage. The
Lombardy poplars, in the branches of which the red-winged black
birds used to congregate and sing, and whose music awakened in
my young heart sensations and aspirations deep and undefinable,
were gone; but the oaks and elms where young Daniel (the uncle of
the present Edward Lloyd) used to divide with me his cakes and
biscuits, were there as umbrageous and beautiful as ever. I
expressed a wish to Mr. Howard to be shown into the family burial
ground, and thither we made our way. It is a remarkable spot—the
resting place for all the deceased Lloyds for two hundred years, for
the family have been in possession of the estate since the settlement
of the Maryland colony.
The tombs there remind one of what may be seen in the grounds
of moss-covered churches in England. The very names of those who
sleep within the oldest of them are crumbled away and become
undecipherable. Everything about it is impressive, and suggestive of
the transient character of human life and glory. No one could stand
under its weeping willows, amidst its creeping ivy and myrtle, and
look through its somber shadows, without a feeling of unusual
solemnity. The first interment I ever witnessed was in this place. It
was the great-great-grandmother, brought from Annapolis in a
mahogany coffin, and quietly, without ceremony, deposited in this
ground.
While here, Mr. Howard gathered for me a bouquet of flowers
and evergreens from the different graves around us, and which I
carefully brought to my home for preservation.
Revisits his Old Home.

Notable among the tombs were those of Admiral Buchanan, who
commanded the Merrimac in the action at Hampton Roads with the
Monitor, March 8, 1862, and that of General Winder of the
Confederate army, both sons-in-law of the elder Lloyd. There was
also pointed out to me the grave of a Massachusetts man, a Mr.
Page, a teacher in the family, whom I had often seen and wondered
what he could be thinking about as he silently paced up and down
the garden walks, always alone, for he associated neither with
Captain Anthony, Mr. McDermot, nor the overseers. He seemed to
be one by himself. I believe he originated somewhere near
Greenfield, Massachusetts, and members of his family will perhaps
learn for the first time, from these lines, the place of his burial; for I
have had intimation that they knew little about him after he once left
home.
We then visited the garden, still kept in fine condition, but not as
in the days of the elder Lloyd, for then it was tended constantly by
Mr. McDermot, a scientific gardener, and four experienced hands,
and formed, perhaps, the most beautiful feature of the place. From
this we were invited to what was called by the slaves the Great
House—the mansion of the Lloyds, and were helped to chairs upon
its stately veranda, where we could have a full view of its garden,
with its broad walks, hedged with box and adorned with fruit trees
and flowers of almost every variety. A more tranquil and tranquilizing
scene I have seldom met in this or any other country.
We were soon invited from this delightful outlook into the large
dining room, with its old-fashioned furniture, its mahogany side-
board, its cut-glass chandeliers, decanters, tumblers, and wine
glasses, and cordially invited to refresh ourselves with wine of most
excellent quality.
To say that our reception was every way gratifying is but a feeble
expression of the feeling of each and all of us.
Leaving the Great House, my presence became known to the
colored people, some of whom were children of those I had known
when a boy. They all seemed delighted to see me, and were pleased
when I called over the names of many of the old servants, and
pointed out the cabin where Dr. Copper, an old slave, used to teach
us with a hickory stick in hand, to say the “Lord’s Prayer.” After
spending a little time with these, we bade good-bye to Mr. Howard
Lloyd, with many thanks for his kind attentions, and steamed away to
St. Michael’s, a place of which I have already spoken.
The next part of this memorable trip took us to the home of Mrs.
Buchanan, the widow of Admiral Buchanan, one of the two only
living daughters of old Governor Lloyd, and here my reception was
as kindly as that received at the Great House, where I had often
seen her when a slender young lady of eighteen. She is now about
seventy-four years, but marvelously well preserved. She invited me
to a seat by her side, introduced me to her grandchildren, conversed
with me as freely and with as little embarrassment as if I had been
an old acquaintance and occupied an equal station with the most
aristocratic of the Caucasian race. I saw in her much of the quiet
dignity as well as the features of her father. I spent an hour or so in
conversation with Mrs. Buchanan, and when I left a beautiful little
granddaughter of hers, with a pleasant smile on her face, handed me
a bouquet of many-colored flowers. I never accepted such a gift with
a sweeter sentiment of gratitude than from the hand of this lovely
child. It told me many things, and among them that a new
dispensation of justice, kindness, and human brotherhood was
dawning not only in the North, but in the South; that the war and the
slavery that caused the war were things of the past, and that the
rising generation are turning their eyes from the sunset of decayed
institutions to the grand possibilities of a glorious future.
The next, and last noteworthy incident in my experience, and
one which further and strikingly illustrates the idea with which this
chapter sets out, is my visit to Harper’s Ferry on 30th of May, of this
year, and my address on John Brown, delivered in that place before
Storer College, an Institution established for the education of the
children of those whom John Brown endeavored to liberate. It is only
a little more than twenty years ago when the subject of my discourse
(as will be seen elsewhere in this volume) made a raid upon
Harper’s Ferry; when its people, and we may say the whole nation,
were filled with astonishment, horror, and indignation at the mention
of his name; when the Government of the United States co-operated
with the State of Virginia in efforts to arrest and bring to capital
punishment all persons in any way connected with John Brown and
his enterprise; when United States Marshals visited Rochester and
elsewhere in search of me, with a view to my apprehension and
execution, for my supposed complicity with Brown; when many
prominent citizens of the North were compelled to leave the country
to avoid arrest, and men were mobbed, even in Boston, for daring to
speak a word in vindication or extenuation of what was considered
Brown’s stupendous crime; and yet here I was, after two decades
upon the very soil he had stained with blood, among the very people
he had startled and outraged, and who a few years ago would have
hanged me to the first tree, in open daylight, allowed to deliver an
address, not merely defending John Brown, but extolling him as a
hero and martyr to the cause of liberty, and doing it with scarcely a
murmur of disapprobation. I confess that as I looked out upon the
scene before me and the towering heights around me, and
remembered the bloody drama there enacted; saw the log house in
the distance where John Brown collected his men, saw the little
engine house where the brave old Puritan fortified himself against a
dozen companies of Virginia Militia, and the place where he was
finally captured by United States troops under Col. Robert E. Lee, I
was a little shocked at my own boldness in attempting to deliver an
address in such presence, and of the character advertised in
advance of my coming. But there was no cause of apprehension.
The people of Harper’s Ferry have made wondrous progress in their
ideas of freedom, of thought, and speech. The abolition of slavery
has not merely emancipated the negro, but liberated the whites;
taken the lock from their tongues, and the fetters from their press.
On the platform from which I spoke, sat Hon. Andrew J. Hunter, the
prosecuting attorney for the State of Virginia, who conducted the
cause of the State against John Brown, that consigned him to the
gallows. This man, now well stricken in years, greeted me cordially,
and in conversation with me after the address, bore testimony to the
manliness and courage of John Brown, and though he still
disapproved of the raid made by him upon Harper’s Ferry, he
commended me for my address, and gave me a pressing invitation
to visit Charlestown, where he lives, and offered to give me some
facts which might prove interesting to me, as to the sayings and
conduct of Captain Brown while in prison and on trial, up to the time

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Why economists disagree 32

Chapter 3 Interdependence and the gains from trade 49

Part 2 Supply and demand I: How markets work 65

FYI: Ceteris paribus ........................................................................................................................................................ 71

Chapter 5 Elasticity and its application 95

Chapter 6 Supply, demand and government policies 119

Part 3 Supply and demand II: Markets and welfare 145

Questions for review 165

Chapter 8 Application: The costs of taxation 169

Chapter 9 Application: International trade 191

Part 4 The economics of the public sector 219

Chapter 11 Public goods and common resources 243

Private provision of public goods................................................................................................................................... 251

Chapter 12 The design of the tax system 264

Part 5 Firm behaviour and the organisation of industry 289

Costs as opportunity costs.............................................................................................................................................. 292

Chapter 14 Firms in competitive markets 315

Multiple choice 333

Chapter 15 Monopoly 337

Chapter 16 Monopolistic competition 367

Chapter 17 Oligopoly and business strategy 385

Chapter 18 Competition policy 412

In the news: When is the price of milk too low?....................................................................................................... 424

Part 6 The economics of labour markets 433

Chapter 20 Earnings, unions and discrimination 459

The superstar phenomenon ............................................................................................................................................ 465

Chapter 21 Income inequity and poverty 486

Key concepts 504

Part 7 Topics for further study 507

Chapter 23 Frontiers of microeconomics 537

Politicians are people too ................................................................................................................................................ 548

I am sorry to be obliged to omit the statement which here follows,

“Bad as is the condition of the negro to-day at the South, there

Return to the “old master”—A last interview—Capt. Auld’s admission “had I

THE leading incidents to which it is my purpose to call attention and

Revisits his Old Home.

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