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111458 Cust: Pearson Au: Heyne Pg No iii Title: The Economic Way of Thinking 13/e Server: PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services This page intentionally left blank The Economic Way of Thinking Paul Heyne U n i v e r sity of Wa sh ing ton Peter J Boettke G e o r g e M a son U niversity David L Prychitko N o r t h e rn M ichig a n U niversity Thirteenth Edition Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo # 111458 Cust: Pearson Au: Heyne Pg No v Title: The Economic Way of Thinking 13/e Server: PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services Editor in Chief: Donna Battista Senior Acquisitions Editor: Noel Seibert Acquisitions Editor: Christina Masturzo Senior Editorial Project Manager: Carolyn Terbush Editorial Assistant: Emily Brodeur Director of Marketing: Maggie Moylan Marketing Manager: Lori DeShazo Marketing Assistant: Kim Lovato Managing Editor: Jeff Holcomb Production Project Manager: Alison Eusden Senior Manufacturing Buyer: Carol Melville Creative Director: Jayne Conte Cover Designer: Suzanne Behnke Cover Art: ©wenani/Fotolia Full-Service Project Management and Composition: S4Carlisle Publishing Services Printer/Binder: Edwards Brothers Malloy State Cover Printer: Lehigh-Phoenix/Hagerstown Text Font: New Aster LT Std Regular, 10/12 Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within text Copyright © 2014, 2010, 2006 by Pearson Education, Inc All rights reserved Manufactured in the United States of America This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290 Many of the designations by manufacturers and sellers to distinguish their products are claimed as trademarks Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps Library of Congress Cataloging-in-Publication Data Heyne, Paul T The economic way of thinking / Paul Heyne, University of Washington, Peter J Boettke, George Mason University, David L Prychitko, Northern Michigan University — Thirteenth edition pages cm Includes index ISBN-13: 978-0-13-299129-2 ISBN-10: 0-13-299129-2 1. Economics. I. Boettke, Peter J. II. Prychitko, David L. III. Title HB171.5.H46 2014 330—dc23 2013006767 10 9 8 7 6 5 4 3 2 ISBN 10: 0-13-299129-2 ISBN 13: 978-0-13-299129-2 # 111458 Cust: Pearson Au: Heyne Pg No vi Title: The Economic Way of Thinking 13/e Server: PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services In memory of Paul Heyne, and our professors Hans Sennholz, Howard Swaine, Don Lavoie, Kenneth Boulding, and James Buchanan # 111458 Cust: Pearson Au: Heyne Pg No vii Title: The Economic Way of Thinking 13/e Server: PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services Paul Heyne 1931–2000 # 111458 Cust: Pearson Au: Heyne Pg No viii Title: The Economic Way of Thinking 13/e Server: PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services A Tribute On a rare occasion, if you are fortunate, you will run across an individual who lives and acts upon the ideals that we profess I was fortunate Paul Heyne came into my life in 1975 Out of the blue, he sent me a letter that began as follows: I’m going to be moving to Seattle at the end of the current academic year, and I’d like to find a college or university in the city at which I could be an economics teacher Those are two separate decisions I’ll be moving to Seattle whether or not I find a position in an economics department there But teaching and especially the teaching of introductory economics is one of the things I think I well and something I would continue doing I had assumed the chairmanship of the department of economics at the University of Washington in 1967 and set out to make it one of the best in the country My definition of best included not only scholarly eminence, which we were in the process of achieving, but the effective, caring teaching of the multitude of undergraduates that populated a large state university The University played lip service to good teaching but the reward system was geared to publication and most, but not all, of my colleagues acted accordingly Shortly after assuming the chairmanship, I decided I should go back to teaching the introductory course to see just what we did I was dismayed to find that it had not changed an iota from my undergraduate days The textbooks were full of the formal jargon of economic theory elucidating the perfectly competitive model, imperfect competition a la Chamberlin and Joan Robinson, and monopoly replete with all the marginal analysis and appropriate graphs Following the tradition, I was in the midst of my fourth lecture on perfect competition, illustrating it with the case of American agriculture, when a student in the back of the auditorium noisily took exception to what I was saying I thought I would teach him a lesson and invited him to address the class, explaining himself He did, describing effectively the myriad of price supports, milk marketing acts, sugar production subsidies, etc that pervaded agriculture and made it far from the competitive model I slunk back to my office and began a search for a more effective teaching program I was some years into an attempt when Paul’s letter arrived I wrote back asking what he would like to as a teacher His reply, in part: I would like to teach at a college whose faculty was enthusiastically committed to providing a liberal education for undergraduates I would like to be a member of a faculty that was continuously asking about the nature and significance of liberal education and looking critically at its own efforts to provide one The members of such a faculty would use their own disciplines as bases for venturing # 111458 Cust: Pearson Au: Heyne Pg No ix Title: The Economic Way of Thinking 13/e Server: PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services 424 Glossary tends to increase if the Fed reduces the discount rate, and it tends to decrease if the Fed raises the discount rate Discouraged Worker: A person who because of poor job prospects has given up searching for work, and thereby drops out of the labor force A discouraged worker is not counted among the unemployed (Also See Unemployed.) Disinflation: A slowing down (lowering) of the inflation rate Division of Labor: Another term for specialization, or the following of one’s comparative advantage Economic Growth: A sustained increase in real GDP over time Economic Profit: Total revenue minus total (explicit plus implicit) cost Takes into account the opportunity costs associated with the profit-seeker’s resources Compare this with Accounting Profit Economics: The study of choice and its consequences Because unintended consequences are so often overlooked by noneconomists, economists often define their discipline as the study of choice and its unintended consequences, for emphasis Economizing Behavior: The way individuals choose because they are faced with scarcity One economizes by selecting those courses of action in which the expected additional benefits exceed the expected additional costs Economizing behavior is actually another term for efficient behavior (Also see Efficiency.) Economy: The set of institutions (rules, practices, customs) through which people coordinate their production and consumption plans Efficiency: For economists, this term refers to a comparison between expected additional benefits and expected additional costs An action or a project is deemed efficient if, in the eyes of the chooser, he feels the additional benefits outweigh the additional costs Elasticity: The sensitivity of choosers to changes in price (Also see Price Elasticity of Demand, Price Elasticity of Supply.) Employment Rate: The number of people employed divided by the number of people in the noninstitutional population Entrepreneur: The person who strives to earn an economic profit, but also faces the possibility of bearing the burden of economic loss Entrepreneurs therefore are also called “residual claimants”: they claim the residual (the profit or loss) after all prior agreements have been honored Entrepreneurship: The act of engaging in arbitrage and innovation in the search for economic profit Externality: The benefit or the cost that is unintentionally enjoyed by, or imposed on, third parties who are not directly involved in a market exchange (Also see Negative Externality, Positive Externality.) Federal Funds Market: The process of lending short-term loans between commercial banks Federal Funds Rate: The interest rate that commercial banks charge one another when they extend short-term bank-to-bank loans Federal Reserve: The central bank of the United States, created in 1913 by an act of Congress Fiat Money: Something official declared by law to serve as money In some situations, however, fiat money does not actually serve as money! Final Good: In the context of national income accounting, a final good is a good that has been acquired by a final demander That is, a good that is purchased without the intention of resale Compare with Intermediate Good Fiscal Policy: The manipulation of the federal government’s budget in order to bring about desired levels of total spending in the overall economy Foreign-Exchange Rate: The price of one country’s currency expressed in another country’s currency # 111458 Cust: Pearson Au: Heyne Pg No 424 Title: The Economic Way of Thinking 13/e Server: PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services Free Good: A good that can be obtained without sacrificing something else of value Compare with Scarce Good Free Rider: An individual who enjoys consuming a good without having to pay his/her share of the costs of producing that good Futures Contracts: Agreements to deliver or to accept, at some specified date in the future, amounts of a commodity at a price determined at the time of the agreement Futures Market: The process through which futures contracts are agreed on and settled Compare this with Spot Market Good: Anything in which more of it is preferred to less (Also see Final Good, Free Good, Inferior Good, Intermediate Good, Normal Good, Scarce Good.) Government: A generally conceded monopoly of coercion over a group of people within a specific geographical location Gross Domestic Product (GDP): The total market value of all final goods and services produced within a country, during a particular period of time (Also see Nominal GDP, Real GDP.) Gross National Product (GNP): The total market value of all final goods and services produced by citizens of a country, during a particular period of time Hedge: An attempt to reduce one’s exposure to risk and uncertainty Human Capital: The knowledge and skills that people accumulate through education, training, or experience that enable them to supply valuable productive services to others Inferior Good: Relates to the way demand changes with a change in income A good is inferior, by definition, if the demand for it increases (decreases) when one’s income decreases (increases) Compare this with Normal Good Inflation: A fall in the purchasing power of money, often experienced as a rise, on average, of the monetary value of goods and services Interest: The price that people pay to obtain resources sooner rather than later Interest is the premium paid to enjoy current command of resources (Also see Time Preference, Nominal Interest Rate, Real Interest Rate.) Intermediate Good: In the context of national income accounting, an intermediate good is a good that is purchased with the intention of further manufacturing and/ or resale Compare with Final Good Labor Force: Anybody 16 years or older in the noninstitutional population who is either employed or unemployed Law of Comparative Advantage: States that individuals within a society can enjoy greater wealth by specializing in the activities that they more efficiently than others, and exchanging the goods and services that they produce for the goods and services produced more efficiently by others Law of Demand: States that the quantity demanded of a good increases as the relative price of the good falls, and decreases as the relative price of the good rises, holding other influences on demand (such as tastes, income, expectations, the prices of substitute goods and complementary goods) constant Law of Supply: States that the quantity supplied of a good increases as the relative price of the good rises, and decreases as the relative price of the good falls, holding other influences on supply (such as prices of factors of production, or expected prices of the output) constant Margin: In economics, margin means “the edge,” the particular moment when an action is undertaken Being “at” or “on” the margin is like standing at a “fork in the road.” Marginal: Means additional Marginal Benefit: The additional benefit that will be expected to occur if an action is undertaken # 111458 Cust: Pearson Au: Heyne Pg No 425 Title: The Economic Way of Thinking 13/e Server: PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services 425 Glossary 426 Glossary Marginal Cost: The additional cost that will be expected to be incurred if an action is undertaken Compare this with Sunk Cost Marginal Revenue: The additional expected revenue that will be created by selling more output Market: The process through which people coordinate their consumption and production plans through the exchange of private property rights Market Clearing: The condition whereby quantity demanded (the plans of consumers) are fully coordinated with quantity supplied (the plans of suppliers) Compare this with Shortage, Surplus Middleman: Someone who specializes in lowering the transaction costs among suppliers and demanders Minimum Wage: A legally mandated price floor in the unskilled labor market Monetary Calculation: The use of money and market-based prices to calculate the expected (and realized) costs and benefits of one’s projects Business accounting is a clear example of the use of monetary calculation Monetary Policy: The attempt by a nation’s central bank to manipulate the overall money supply, often with the goal of influencing overall spending in the economy Money: Anything that serves as a general or common medium of exchange (Also see Fiat Money.) Money Supply: A measure of the total amount of money in the economy The M1 money supply measure includes all currency in circulation, plus money on deposit in checking accounts, plus any issued traveler’s checks The M2 measure includes all of M1, plus money on deposit in savings accounts and money market accounts Monopoly: Literally means “single seller.” National Debt: The total dollar amount of principle plus interest owed by the federal government Negative Externality: The cost imposed on a third party to an exchange Also called a “spillover cost.” Compare with Positive Externality Nominal GDP: A measure of GDP using current dollars, which does not account for any inflationary or deflationary circumstances Compare this with Real GDP Nominal Interest Rate: The rate of interest quoted in a contract Compare this with Real Interest Rate Normal Good: Relates to the way demand changes with a change in income A good is normal, by definition, if the demand for it increases (decreases) when one’s income increases (decreases) Compare this with Inferior Good Not-for-Profit: A firm that has no residual claimant The firm might actually make an accounting profit (TR > TC), but nobody in particular has rights to that profit Open Market Operations: The purchase and sale of U.S government bonds by the Federal Reserve, in an attempt to manipulate the overall money supply The Fed’s purchase of bonds tends to increase the money supply (and lower interest rates), and the Fed’s sale of bonds tends to decrease the money supply (and raise interest rates) Today this is often referred to as “quantitative easing.” Opportunity Cost: The next-best alternative that is sacrificed when a choice or action is undertaken Perfect Competition: The hypothetical state characterized by (1) large numbers of buyers and sellers, (2) perfect information, (3) homogeneous (or identical) products, (4) zero transaction costs, and (5) price-taking behavior among all participants Compare this with Competition Positive Externality: The unintended benefit enjoyed by a third party to an exchange Compare this to Negative Externality # 111458 Cust: Pearson Au: Heyne Pg No 426 Title: The Economic Way of Thinking 13/e Server: PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services Predatory Pricing: The attempt to compete with one’s rivals by cutting prices, with the hope that it might drive them out of business, providing the opportunity to raise prices in the future Present Value: A calculation of the current value of a future income stream Price Ceiling: A legally mandated maximum price set on a good or service Price Control: Another term for either a price ceiling or price floor Price Elasticity of Demand: The percentage change in quantity demanded divided by the percentage change in price A measure of consumer sensitivity to changes in price Price Elasticity of Supply: The percentage change in quantity supplied divided by the percentage change in price A measure of seller sensitivity to changes in price Price Floor: A legally mandated minimum price set on a good or service Price Searcher: A supplier who enjoys some degree of market power, and has the ability to raise or lower his price In this context, he has to “search” for the best price to charge for his goods or service Compare this with Price Taker Price Taker: A supplier who is such a small player in an overall market that he has no ability to raise, nor any incentive to lower, the price he charges He simply “takes” the prevailing market price as a given Private Property Rights: Legal rights assigned to a particular person that allow him to use, depreciate, or exchange his title with somebody else Compare this with Social Property Rights Production: In its broadest sense, production is the creation of value, the creation of wealth Production Possibilities Frontier: Illustrates the maximum amounts of two goods that can be produced with a given set of resources Profit: Total revenue minus total costs Also referred to as “residual” or “net revenue,” or, in not-for-profit circles, as an “inurement.” (Also see Accounting Profit, Economic Profit.) Property Rights: Legal rules that establish who owns what, and how their property can be used (Also see Private Property Rights, Social Property Rights.) Purchasing Power Parity: A situation in which a unit of a nation’s currency can be used to purchase the same quantity of goods in all countries Rarity: A measure of the amount of a particular thing in existence Compare this with Scarcity Real GDP: A measure of GDP that uses a price level established in a base year Real GDP is an adjustment of nominal GDP for any inflationary or deflationary effects, and attempts to provide a clearer picture of the actual performance of the economy Compare this with Nominal GDP Real Interest Rate: The nominal (quoted) interest rate minus the rate of inflation Recession: Traditionally defined as a decrease in real GDP over two consecutive quarters (six months) More recently, economies that experience a slowing down of the rate of economic growth are also said to be in a recession (Also see Depression.) Rent: The income generated by the leasing of property to others Required Reserve Ratio: The percentage of a bank’s total deposits that it must hold in the form of vault cash or cash on deposit at a Federal Reserve Bank Residual Claimant: One who has ownership rights to the profit of a firm (Also see Entrepreneur.) Scarce Good: A good that can be obtained only by sacrificing something else of value Compare with Free Good Scarcity: A condition under which an individual must choose, incur a cost, a trade-off, or a sacrifice, in order to obtain more of what he or she values # 111458 Cust: Pearson Au: Heyne Pg No 427 Title: The Economic Way of Thinking 13/e Server: PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services 427 Glossary 428 Glossary Seignorage: The net revenue from the minting of coins calculated as the difference between the coin’s face value and the value of the metal contained in the coin Shortage: The situation of plan discoordination, whereby the quantity demanded of a good exceeds the quantity supplied Compare this with Surplus Social Property Rights: Legal rights that assign ownership to society as a whole, and therefore to nobody in particular Socialism: An economic system based on comprehensive economic planning and social ownership of the means of production Specialization: The pursuit of one’s comparative advantage Another term for Division of Labor Speculator: In its broadest sense, a speculator is anybody who faces an uncertain future In that way every human being is a speculator A professional speculator, on the other hand, is a specialist who tries to profit on the futures market Spot Market: The exchange of goods and services with immediate payment and acceptance Compare this with Futures Market Sunk Cost: The nonrecoverable cost that was incurred in the past, and reflects no current opportunity for choice Compare this with Marginal Cost Surplus: A situation of plan discoordination whereby the quantity supplied of a good exceeds the quantity demanded Compare this with Shortage Theory: A systematic way of thinking about cause-and-effect relationships in the world around us Time Preference: The term for the tendency for an individual to place a higher value on goods and services when they’re obtained sooner in time, rather than later in time Transaction Cost: The cost of arranging agreements and exchanges between buyers and sellers Unemployed: Somebody 16 years or older in the noninstitutional population who is currently not employed, and is either looking for a job or waiting to begin or return to a job Unemployment Rate: The number of people unemployed divided by the number of people in the civilian labor force Specifically, this is the definition for the official U3 rate Broader rate measures, such as the U6, try to account for discouraged workers and others who are marginally attached to the labor force Wage: Income earned by people who sell their labor to others Wealth: In its broadest definition, wealth is anything that a person values # 111458 Cust: Pearson Au: Heyne Pg No 428 Title: The Economic Way of Thinking 13/e Server: PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services Index Note: The letter f indicates a figure appears on the page, t indicates a table, n indicates information is included in a footnote A Accounting profit, 156–158 Adjudication, 231–234, 261 Adjustment, mutual, 7–8 Africa, 408–409t, 412t Aggregate fluctuations, 313, 323–328 See also Gross Domestic Product (GDP); Inflation; Recession Agriculture costs and supply, 79–86, 80f, 82t, 83t, 84t, 85t futures markets, 167–173 price supports, 132–133 Aid, foreign, 400–402 Aid to Families with Dependent Children, 291 Alcohol, prohibition of, 130–132 American Recovery and Reinvestment Act (2009), 386 The Antitrust Paradox, 220–221 Antitrust policy, 217–223 Arbitrage, 161–162, 306 Argentina, 407–408t Asia, economic growth in, 405–407 Average costs, 85t–86 See also Costs B Balanced budget amendment, 381–383 Bank notes, 336 See also Money Banks See also Federal Reserve credibility and confidence, 339, 341 deposit expansion, 343–345, 344t discount rate, 348 Great Depression, 361–362 legal reserve requirements, 342–343 monetary equilibrium, 350–352 open market operations, 348–350 Barter system, 109–110 Beef cattle, 139–140 Benefits, perceived economic theory and, 12 efficiency and value, 22–24 elected officials, interests of, 266–268 mutual adjustment, 7–8 trade and wealth creation, 21–22 Bias, economic theory and, 11–14 Block, Walter, 403–404f Bonds, 343, 348–350 Bork, Robert, 220–221 Brazil, 408t Bubble concept, 240–241 Buchanan, James, 253, 368n3, 372n5 Bureau of Labor Statistics (BLS), 315–317 Burundi, 412t C Capital defined, 283 economic development and, 397–398 foreign investment, 399–402 human capital, 282–283, 402 Cartels, 208 Catastrophic events See Unintended consequences Census Bureau, poverty and inequality, 290t–291, 292t Central African Republic, 412t # 111458 Cust: Pearson Au: Heyne Pg No 429 Title: The Economic Way of Thinking 13/e Server: Central planning, 106–108 Change, radical, 234 Checkable deposits, 337–338, 342–343, 352–353 See also Money Chile, 408t China, 406–407, 409 Choice bias of economic theory, 11–12 economic way of thinking, 5–6 marginal values, 46–47 mutual adjustment, 7–8 opportunity cost, 73–75 Clayton Act, 217–223 Coercion, use of income redistribution, 263 public interest, 264–265 right to use, 257–258 voluntary exchange, 263–264 Colombia, 408t Commercial society, defined, Commodities, futures markets, 167–173 The Communist Manifesto, 34, 359–360 Community Reinvestment Act (1995), 383–384 Comparative advantage alcohol, prohibition of, 130–132 defined, 26t markets as discovery process, 32–33 middlemen, role of, 31–32 outsourcing, 416 specialization and, 27–28 Competition antitrust policy, 217–223 appropriate cost, defining, 212–214 control and restriction of, 207–210 free-market prices, 104–106 government agencies, 255 PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services 429 430 Index Competition (continued) income distribution, 288–289 market clearing and, 102–103 predators, 214–215 pressures of, 206–207 price controls and, 126–127 as process, 204–206 property rights and, 211 regulating prices, 215–217 selling below cost, 212 vertical restraints, 219–220 Complementary goods, defined, 54–55 Congestion pricing, 242–243 Conglomerate mergers, 218 Congo, 409t, 412t Consequences beef cattle, 139–140 criminal incentives, 130–132 framing questions correctly, 141–145, 144f hospital care costs, 140–141 minimum wage, 133–135 price controls, 124–127 rent control example, 128f–130 slavery and, 135–136 sports vs poetry, 137 supports and surpluses, 132–133 unintended, overview, 6, 120–124 Consumer preference, demand and, 53 Consumer Price Index, 319–320 Contracts, income agreements, 154 Cooperation catastrophe and, 122–124 central planning, flaws of, 106–108 coercion, 257–258 free markets, 108–109 importance of, 1–4 market clearing and, 102–103 monetary equilibrium, 350–352 money and interest, roles of, 109–114, 113f mutual adjustment, 7–8 overview of, 96–99 price discrimination as, 194 profit and loss as signals, 164–165 public interest, 264–265 rules, economic systems, 9–10, 297 Cost-plus-markup theory, 182–183, 195 Costs appropriate cost, defining, 212–214 credit, interest rate decisions, 364–365 economic theory and, 12 efficiency and value, 22–24 elected officials, interests of, 266–268 ethics of, 90 free riders, 258–261 hospital care and, 140–141 marginal and average costs, 85t–86 marginal opportunity costs, 79 markets, basic process, 99–102, 100f money and interest, coordination of, 109–114, 113f mutual adjustment, 7–8 non-monetary costs, 64 people or machines, decisions about, 286–287 pollution control example, 235–243, 236t price and, 137–139, 182–183 producers cost, 77–79 profit calculation, 155–158 selling below cost, 212 sunk costs, 75–76 supply curve, 79–84t, 80f, 80t, 82t, 83f trade and wealth creation, 21–22 transaction costs, 29 volunteer military force example, 86–89, 87t Cote d’Ivoire, 409t Council of Economic Advisers, 370 Credit coordination and, 362–365, 364f fiscal policy, 367–368 # 111458 Cust: Pearson Au: Heyne Pg No 430 Title: The Economic Way of Thinking 13/e Server: Great Recession, causes and response, 383–386 money and interest, coordination of, 112–114, 113f recession as market correction, 365–366 Criminal incentives, 130–132 Currency See also Money checkable deposits, 338 international GDP comparisons, 411–412t D Data, framing questions, 141–145, 144f Debt See also Interest credibility and confidence, 339–341 government debt, 372n5, 377–379f government deficits, 373–376t, 374t, 375t Great Recession, causes and response, 383–386 Deficits, government, 373–376t, 374t, 375t Deflation, 320–323, 321t, 322f Demand See also Competition; Quantity demanded aggregate fluctuations, 323–324 beef cattle, 139–140 central planning, 106–108 changes in, 51–55, 52t coordination, overview of, 98–99 credit and coordination, 362–365, 364f criminal incentives, 130–132 demand curve, 47t–49, 48f, 144f–145 derived demand, services, 287–288 discount pricing, 191 economizing actions, 5–6 education, 262–263 framing questions correctly, 141–145, 144f free-market prices, 104–106 gold, 139 hospital care, 140–141 inflation and, 55–56 PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services Ivy College pricing example, 189–190f law of, 50 marginal revenue, 185–187f market clearing, 102–103 markets, basic process, 99–102, 100f markets, changing conditions, 104 middlemen, role of, 30–32 minimum wage, 133–135 non-monetary costs, 64 price and cost decisions, 138–139, 183–184f price controls, 124–127 price elasticity, 57–60 price gouging, 122–124 property rights and, 108–109 quantity demanded and, 50–51 recessions, 360–362 rent control example, 128f–130 roads, 262–263 role of, 61–63 slavery and, 135–136 sports vs poetry, 137 supports and surpluses, 132–133 time and, 56–57 vertical demand, 60–61 Demanders, 281–282 Democracy in America, 273 Democracy in Deficit: The Political Legacy of Lord Keynes, 368n3 Democratic Republic of Congo, 409t, 412t Deposit expansion, 343–345, 344t Deposits, 338 de Tocqueville, Alexis, 273 Disasters See Unintended consequences Discount rate, 348 Discounts, pricing strategies, 191 Disinflation, 320–323, 321t, 322f Division of labor economic growth and, 33–36, 397–398 overview, specialization, benefits of, 27–28, 96–97 Drugs, illegal trade in, 131–132 E eBay, 31–32 Economic Freedom Index, 403–404f Economic growth Asia, 405–407 Economic Freedom Index, 403–404f foreign investment, 399–402 globalization, criticism of, 412–415, 414t global wealth and poverty, 394–395 human capital, 402 knowledge and ideas, 402–403 outside of Asia, 407–410, 408t, 409t outsourcing, 416 property rights, development of, 404–405 reasons for, 32–36 sources of, 396–398 wealth and, 21 Economic performance See Performance measures Economic profit, 156–158 Economics biases of theory, 11–14 economic way of thinking, 4–7 economists, skills of, 14–15, 420–422 framing questions correctly, 141–145, 144f limitations of, 420–422 mutual adjustment, 7–8 property rights, 10–11 signals, systems, rules of, 9–10 theory and government action, 255–257 The Economics of Control, 368n3 Economists, skills of, 14–15, 420–422 Economizing actions, 5–6 Education, financing of, 262–263 Efficiency innovation, 163 markets, role of, 32–33 pollution control example, 239–240 value and, 22–24 # 111458 Cust: Pearson Au: Heyne Pg No 431 Title: The Economic Way of Thinking 13/e Server: Elasticity of demand, 57–60 Elected officials, interests of, 266–268 Engels, Friedrich, 34, 359–360 Entrepreneurs market process and, 161–164 predictions and, 165–167 profit and, 159–160 speculation, 167–173 Equilibrium price, defined, 103 See also Market-clearing price Eritrea, 412t An Essay on the History of Civil Society (1767), 35 Ethics, cost as justification, 90 Ethiopia, 408–409t, 410, 412t Exchange goods, defined, 19–20 individual and international, 28–29 middlemen, role of, 29–32 money and interest, coordination of, 109–114, 113f specialization and, 6–7, 27–28 trade, misconceptions about, 18–19 Exchange rates, currency, 411–412t Expectations, 232, 233–234, 285–286 Expenditures, GDP and, 308–309t Explicit costs, 156–158 Exploitation, 395–396 Exports, 28–29 Externalities See also Government adjudication, 231–234 coercion, 257–258 free riders, 260–261 government, positive externalities of, 269–270 legislation and, 235 negotiation, 230–231 pollution example, 235–243, 236t radical change, 234 traffic congestion example, 242–243 types of, 227–230 PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services 431 Index 432 Index F Fairness, pollution control example, 239–240 Federal budget, 370–371 Federal Deposit Insurance Corporation (FDIC), 346–347 Federal funds market, 348 Federal Open Market Committee, 351–352 Federal Reserve creation of money, 343–345, 344t credibility and confidence, 339, 341 discount rate, 348 gold, 352–353 Great Recession, causes and response, 383–386 interest rate decisions, 363–365, 364f legal reserve requirements, banks, 342–343 management of, 351–352 monetary equilibrium, 350–352 monetary policy, effectiveness of, 366–367 money, evolution of, 336–338 money supply, 338–339, 340t open market operations, 348–350 role of, 345–347 timing of decisions, 369–370 tools of, 347–348 Federal Trade Commission Act (1914), 217–218 Ferguson, Adam, 35 Fiat money, 337 Final goods, 306, 308–309t Finished goods, 306, 308–309t Fiscal policy confidence and, 367–368 deficit spending, 373–376f, 374f, 375f discretionary policy, 379–381 federal budget, 370–371 government debt, 377–379f Great Recession and, 383–386 time horizons, 371–372 timing of decisions, 369–370 Fisher, Gordon, 291 Foreign aid, 400–402 Foreign exchange rates, 411–412t Foreign investment, 399–402 Free goods, 19–20 Free riders, 259–261 Friedman, Milton, 369n4, 372n5, 378n6 Functional finance theory, 368n3 Futures markets, 167–173 G GDP See Gross Domestic Product (GDP) The General Theory of Employment, Interest and Money, 367–368 Ghana, 409t Globalization Asia, 405–407 criticism of, 412–414t Economic Freedom Index, 403–404f economic growth, sources of, 396–398 foreign investment, 399–402 GDP comparisons, 410–412t growth outside of Asia, 407–410, 408t, 409t history of, 395–396 human capital, 402 knowledge and ideas, 402–403 outsourcing, 416 property rights, development of, 404–405 wealth and poverty, 394–395 GNP (Gross National Product), 307, 394–395 Gold, 352–353 Goods See also Substitutes complementary goods, 54–55 defined, 19–20 demand, role of, 61–63 economic growth and, 34 final and intermediate goods, 306 GDP measures and, 308–309t inferior goods, 53–54 # 111458 Cust: Pearson Au: Heyne Pg No 432 Title: The Economic Way of Thinking 13/e Server: middlemen, role of, 31–32 normal goods, 53–54 unsold and unused goods, GDP and, 311–313 Government adjudication, 231–234 aggregate fluctuations, 323–324 ambivalence of, 211 antitrust policy, 217–223 Asia, economic growth, 405–407 balanced budget amendment, 381–383 benefit programs, 291 coercion, use of, 257–258 competition, 255 debt levels, 377–379f deficits, 373–376t, 374t, 375t discretionary fiscal and monetary policy, 379–381 economic theory and, 255–257 elected officials, interest of, 266–268 externalities and legislation, 235 federal budget, 370–371 Federal Reserve, role of, 345–347 fiscal policy, 367–368 foreign aid, 400–402 foreign investment, 399–400 free riders, 258–261 Globalization, criticism of, 412–415, 414t income redistribution, 263 information and, 265–266 law and order function, 261 legal restrictions on competition, 208–209 licenses, 210–211 limits of, 273 national defense, 262 necessity of, 258 pollution control example, 235–243, 236t positive externalities, 269–270 prisoner’s dilemma, 271–273, 272f private vs public, 254–255 public good, identifying, 270 public interest and, 264–265 PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services redistribution of income, 295–296 regulating prices, 215–217 roads, 262–263 role of, 35–36 schools, 262–263 voluntary exchange, regulation of, 263–264 Graphs, framing questions, 144f–145 Great Depression, 313, 324, 359–362, 366, 367–368 Great Recession, 313, 383–386 Greenspan, Alan, 384 Gross Domestic Product (GDP) aggregate fluctuations, 313, 323–324 Asia, economic growth in, 405–407 Economic Freedom Index, 403–404f economic growth, sources of, 396–398 inflation, 318–323, 321t, 322f international comparisons, 410–412t labor-market decisions, 316–317 limitations of national accounting, 325–328 overview, 305–307 purchases and, 308–309t recessions, 317f–318, 360–362 total income, 307–308 total value added, 309–311t unemployment, 313–318, 317f unsold inventories, unused goods, 311–313 Gross National Product (GNP), 307, 394–395 Guaranteed profit, 210 Guinea-Bissau, 412t H Hayek, F A., 380n7 Hedge, futures markets, 168–173 Hobbes, Thomas, Horizontal merger, 218 Hospital care, costs of, 140–141 Human capital, 282–283, 402 Hume, David, 378 Hungary, 411 Hurricane Katrina, 121–122 Hyperinflation, 378n6 I Illegal activities, 326–327 Imitation, 163 Implicit costs, 156–158 Imports, 28–29 Incentives, free riders, 258–261 Income aggregate fluctuations, 323–324 demand and, 53 GDP as, 307–308 global comparisons, 394–395, 410–412t redistribution of, 263 unsold or unused goods, 311–313 Income distribution actual, legal, and moral rights, 285 competition, 288–289 derived demand for services, 287–288 expectations and investment, 285–286 human capital, 282–283 poverty and inequality, 289–295, 290t, 292t, 294t property rights and, 283–284 redistributing income, 295–296 suppliers and demanders, 281–282 technology and, 286–287 India, 406–407 Individualism, 255 Inequality, income, 289–296, 290t, 292t, 294t Inferior good, defined, 53–54 Inflation demand and, 55–56 GDP and, 318–323, 321t, 322f hyperinflation, 378n6 interest rates, real and nominal, 113–114 time horizons and politics, 371–372 Information democratic governments, 265–266 middlemen, role of, 29–32 as scarce good, 97 # 111458 Cust: Pearson Au: Heyne Pg No 433 Title: The Economic Way of Thinking 13/e Server: In-kind transfers, 291 Innovation, 163, 398 An Inquiry into the Nature and Causes of the Wealth of Nations (1776) competition, 207 division of labor, 6, 34, 35 economic growth, reasons for, 4, 33 income, 280 Institutions, market systems and, 108–109 Interest credit and coordination, 362–365, 364f discount rate, 348 as income, 154 money, coordination of roles, 109–114, 113f open market operations, 348–350 real and nominal rates, 113–114 Intermediate goods, 306, 308–309t International Bank for Reconstruction and Development, 394–395 International trade, 28–29 See also Globalization Inventory, unsold and unused goods, 311–313 Investment credit and coordination, 362–365, 364f foreign investment, 399–402 income and, 285–286 J Japan, 406–407 K Katrina, Hurricane, 121–122 Kenya, 409t Keynes, John Maynard, 367–368 Knight, Frank, 153, 163–164, 420 Knowledge, value of, 97 L Labor derived demand, 287–288 PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services 433 Index 434 Index Labor (continued) exploitation of, globalization, 395–396 GDP, limitations of, 325–328 labor-market decisions, 316–317 markets, basic process, 99–102, 100f minimum wage, 133–135 outsourcing, 416 specialization, 6–7, 34–35, 96–97 technology and, 286–287 unemployment, 313–318, 317f unions and competition, 289 Latin America, 407–410, 408t, 409t Law and order, 261 Law of demand, 50 See also Demand Lawson, Robert, 403–404f Legal factors See also Government; Property rights adjudication, 231–234 ambivalence of, 211 antitrust policy, 217–223 externalities and legislation, 235 law and order function, government, 261 pollution control examples, 235–243, 236t regulating prices, 215–217 restrictions on competition, 208–209 selling below cost, 212 Legal reserve requirements, banks, 342–343, 346–348 Lerner, Abba, 368n3 Leviathan (1651), Licenses, 210–211, 238–239 Loss defined, 155 GDP calculations, 310–311t monetary calculations, 164–165 predictions about, 165–167 speculation, 167–173 uncertainty and, 158–159 M Macroeconomics See also Federal Reserve aggregate fluctuations, 313, 323–324 balanced budget amendment, 381–383 credit and coordination, 362–365, 364f discretionary monetary and fiscal policy, 379–381 federal budget, 370–371 fiscal policy, 367–368 GDP, overview, 305–307 GDP, purchases and, 308–309t government debt, 377–379f government deficits, 373–376t, 374t, 375t Great Depression, 313, 324, 359–362, 366, 367–368 Great Recession, 313, 383–386 inflation, 318–323, 321t, 322f labor-market decisions, 316–317 limitations of national accounting, 325–328 market corrections, 365–366 monetary equilibrium, 350–352 monetary policy, effectiveness of, 366–367 recessions, 317f–318, 360–362 Smoot-Hawley tariffs, 366 time horizons and politics, 371–372 timing, policy decisions, 369–370 total value added, GDP as, 309–311t unemployment, 313–318, 317f unsold inventories, unused goods, 311–313 Maddison, Angus, 395n1, 407 Madison, James, 380n7 Malawi, 412t Malaysia, 409 Marginal opportunity cost vs average costs, 85t–86 marginal revenue and, 186–187f # 111458 Cust: Pearson Au: Heyne Pg No 434 Title: The Economic Way of Thinking 13/e Server: supply and, 79–81, 80f, 80t, 82t supply curve, 81–84t, 82t, 83f Marginal revenue, 185–187f Marginal values overview, 46–47 vs sunk costs, 75–76 Market-clearing price See also Unintended consequences arbitrage, 161–162 defined, 103 minimum wage, 133–135 Markets basic process of, 99–102, 100f central planning, 106–108 changing conditions, 104 competition as a process, 204–206 coordination, overview of, 98–99 as discovery process, 32–33 entrepreneurs and, 161–164 free-market prices, 104–106 GDP, limitations of, 325–328 market clearing, 102–103 market corrections, 365–366 money and interest, coordination of, 109–114, 113f private vs public, 254–255 profit and loss as signals, 164–165 property rights and institutions, 108–109 speculation, 167–173 theory biases, 12–13 Market value, GDP and, 305–307, 309–311t Markup, price theory, 182–183 Marx, Karl, 34, 359–360 Mergers, 218 Mexico, 408t Middlemen, 29–32 Military service example, 86–89, 87t Mill, John Stuart, 421 Minimum wage, 133–135 Mobility, 293–294 Money See also Federal reserve banks, legal reserve requirements, 342–343 PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services checkable deposits, 337–338 creation of, 343–345, 344t credibility and confidence, 339, 341 credit and coordination, 362–365, 364f discount rate, 348 discretionary monetary policy, 379–381 evolution of, 35, 335–336 Federal Reserve, role of, 345–347 Federal Reserve, tools of, 347–348 fiat money, 337 fiscal policy, 367–368 gold, 352–353 government debt, 377–379f hyperinflation, Argentina, 379n6 interest, coordination of roles, 109–114, 113f monetary equilibrium, 350–352 monetary policy, effectiveness of, 366–367 monetary policy, Great Recession, 383–386 open market operations, 348–350 profit and loss as signals, 164–165 recession as market correction, 365–366 supply of, 338–339, 340t Monitoring the World Economy, 1820-1922, 395n1 Moral hazard, 385–386 Mozambique, 410 Mutual adjustment, 7–8 N National Bureau of Economic Research, 320 National defense, 262 National income, 307–308 Needs concept of, 44–45 demand curve, 47t–49, 48f Negotiation, 230–231 Net revenue, 155, 181, 184f Niger, 412t Nigeria, 409t Nominal interest rates, 113–114 Normal good, defined, 53–54 Not-for-profit institutions, 160–161 O Open market operations, 348–350 Opportunity cost defined, 22 demand and, 64 overview of, 73–75 producers’ costs and, 77–79 production trade-offs, 25f–26t profit calculation, 155–156 volunteer military force example, 86–89, 87t Organization for Economic Cooperation and Development, 395n1 Ownership, 10–11, 284 See also Property rights P Pakistan, 406–407 Parentalistic, 264 Performance measures aggregate fluctuations, 325–328 GDP, overview, 305–307 Great Depression, 359–360 limitations of national accounting, 325–328 Persuasion, 257–258 Peru, 408t Politics Asia, economic growth, 405–407 balanced budget amendment, 381–383 discretionary fiscal and monetary policy, 379–381 federal budget, 370–371 fiscal policy, 367–368 foreign investment, 399–400 functional finance theory, 368n3 globalization, criticism of, 412–415, 414t Great Depression, 359–360, 366 Great Recession, 383–386 # 111458 Cust: Pearson Au: Heyne Pg No 435 Title: The Economic Way of Thinking 13/e Server: monetary policy, effectiveness of, 366–367 time horizons, 371–372 timing, policy decisions, 369–370 Pollution, 235–243, 236t Poverty global comparisons, 394–395 international GDP comparisons, 410–412t overview, 289–295, 290t, 292t, 294t redistribution of income, 295–296 Poverty line, 291 Precedent, 233–234 Predators, 214–215 Price See also Competition appropriate cost, defining, 212–214 arbitrage, 161–162 beef cattle, 139–140 cartels, 208 changes in demand, 51–55, 52t congestion pricing, 242–243 cost and, 137–139 credit, interest rate decisions, 364–365 criminal incentives, 130–132 example, Ed Sike price searching, 183–184f example, Ivy College, 189–190f example, lunch and dinner, 193–194 example, rent control, 128f–130 framing questions correctly, 141–145, 144f free-market prices, 104–106, 108–109 GDP, overview, 305–307 gold, 139 hospital care, 140–141 inflation, GDP and, 318–323, 321t, 322f inflation and demand, 55–56 law of demand, 50 marginal revenue and, 185–187f PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services 435 Index 436 Index Price (continued) market-clearing price, 103 markets, basic process, 99–102, 100f market signals, 164–165 minimum wage, 133–135 money and interest, coordination of, 109–114, 113f non-monetary costs, 64 predatory pricing, 214–215 price ceiling, 124 price controls, 90, 124–127 price discrimination strategies, 190–193, 192f price elasticity of demand, 57–60 price elasticity of supply, 89–90 price floor, 132–133, 134 price gouging, 122–124 price stability, 351 regulation of, 215–217 selling below cost, 212 slavery and, 135–136 speculation, 167–173 sports vs poetry, 137 sunk costs, 75–76 supply and, 84 supports and surpluses, 132–133 theory of price setting, 181–183, 195 wages, rent, and interest, 154 Principles of Political Economy and Taxation (1817), 28 Prisoner’s dilemma, 271–273, 272f Private sector, 254–255 Production costs of, 156–158 economic growth and, 34 GDP, limitations of, 325–328 human capital, 282–283 marginal and average costs, 85t–86 opportunity costs, 25f–26t, 77–79 supply curve, 81–82t supply curve shifts, 82–84t, 83f wealth creation and, 21–22 Production possibilities frontiers costs and supply, 79–81, 80f, 80t, 82t overview, 25f–26t Productive services, 282 Profit calculation of, 155–156 competition, control of, 207–210 definition of, 153, 155 economic vs accounting, 156–158 entrepreneurs and, 159–164 GDP, limitations of, 325–327 monetary calculations, 164–165 not-for-profit institutions, 160–161 predictions about, 165–167 speculation, 167–173 uncertainty and, 158–159 wage, rent and interest, 154 Prohibition of alcohol, 130–132 Property rights actual, legal, and moral rights, 285 adjudication, 231–234 competition and, 211 demand, role of, 61–63 economic freedom and, 404–405 externalities and legislation, 241–242 government action, 256–257 importance of, 10–11, 35–36 income and, 283–284 market systems and, 108–109 overview, 10–11 radical change, 234 Public good, identifying, 270 Public interest, 264–265 Public Principles of Public Debt, 368n3 Public sector, 254–255 Purchases, GDP and, 308–309t Q Quantitative easing, 385–386 Quantity demanded See also Demand # 111458 Cust: Pearson Au: Heyne Pg No 436 Title: The Economic Way of Thinking 13/e Server: arbitrage, 161–162 changes in demand, 51–55, 52t defined, 48f demand and, 50–51 markets, basic process, 99–102, 100f markets, changing conditions, 104 price controls, 124–127 price elasticity of demand, 57–60 R Radical change, 234 Reagan, Ronald, 378 Real estate bubbles, 383–385 Real interest rates, 113–114 Recession causes of, 360–362 credit and coordination, 362–365, 364f discretionary fiscal and monetary policy, 379–381 inflation and, 320–323, 321t, 322f as market correction, 365–366 timing of policy decisions, 369–370 unemployment and, 313, 317f–318 Redistribution of income, 295–296 Regulators, 215–217, 263–264 Rent, as income, 154 Rent control, 128f–130 Required reserve ratio, 342–343 Residual claimant, 160–161 See also Entrepreneurs Residual profit, 155, 159 See also Profit Resources knowledge and ideas, 402–403 markets, basic process, 99–102, 100f producers’ costs, 77–79 Revenue marginal revenue, 185–187f net revenue, defined, 181 net revenue, maximizing, 184f profit, defined, 155 Ricardo, David, 28 PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services Rights, 285 Risk futures markets, 167–173 inflation, 319–323, 321t, 322f interest rates, 113 Roads, financing of, 262–263 Roosevelt, Franklin D., 367, 377 Rules, economic systems, 9–11 S Savings credit and coordination, 362–365, 364f money and interest, coordination of, 112–114, 113f Scarcity See also Substitutes central planning markets, 106–108 demand, law of, 50 demand, role of, 61–63 demand curve, 47t–49, 48f free-market prices, 104–106 gold, 352–353 knowledge and information, 97 overview, 5–6 price controls, 124–127 price gouging, 122–124 rent control example, 128f–130 scarce goods, defined, 19–20 speculators and, 171 Schools, financing of, 262–263 Schuler, Kurt, 379n6 Seignorage, 336 Services derived demand, 287–288 human capital, 282–283 middlemen, role of, 31–32 productive services, 282 Sherman Antitrust Act (1890), 217–223 Shortages market clearing, 102–103 markets, basic process, 101–102 price controls, 124–127 Sierra Leone, 412t Signals, Slavery, 135–136 Smith, Adam commercial society, competition, 207 division of labor, 34, 35 economic growth, 4, 33 exploitation of labor, 395–396 government debt, 378 income, 280 specialization, 96–97 speculation, 168 Smoot-Hawley tariff, 366 Social cooperation, 1–4, 9–10 Socialist economies, 10, 106–108 Social property rights, 10–11 Social Security, 291 South Korea, 405–407 Specialization benefits of, 27–28, 96–97 economic growth and, 33–36, 397–398 overview, 6–7 Speculation, 167–173 Spillover costs, 228 See also Externalities Stagflation, 320, 322 Stigler, George, 221 Substitutes changes in demand, 51–55, 52t demand, role of, 61–63 demand curve, 47t–49, 48f long-term behavior, 56–57 marginal values and choices, 46–47 needs, concept of, 44–45 non-monetary costs, 64 price elasticity of demand, 57–60 vertical demand, 60–61 Sunk costs hospital care, 140–141 overview, 75–76 price decisions, 138–139 Superbowl effect, 13–14 Suppliers, 281–282 Supply See also Competition aggregate fluctuations, 323–324 beef cattle, 139–140 central planning, 106–108 coordination, overview of, 98–99 cost and, 79–81, 80f, 80t, 82t credit, interest rate decisions, 363–365, 364f criminal incentives, 130–132 discount pricing, 191 # 111458 Cust: Pearson Au: Heyne Pg No 437 Title: The Economic Way of Thinking 13/e Server: economizing actions, 5–6 example, Ivy College pricing, 189–190f example, rent control, 128f–130 example, volunteer military service, 86–89, 87t framing questions correctly, 141–145, 144f free-market prices, 104–106 gold, 139 hospital care, 140–141 marginal and average costs, 85t–86 marginal revenue, 185–187f market clearing, 102–103 markets, basic process, 99–102, 100f markets, changing conditions, 104 middlemen, role of, 30–32 minimum wage, 133–135 opportunity cost, 73–75 price and cost decisions, 138–139, 183–184f price controls, 124–127 price elasticity of, 89–90 price gouging, 122–124 property rights and, 108–109 recessions, 360–362 roads, 262–263 schools, 262–263 slavery and, 135–136 sports vs poetry, 137 supply curve, 81–82t, 144f–145 supply curve shifts, 82–84t, 83f supports and surpluses, 132–133 Surplus, 102–103, 132–133 T Taiwan, 406–407 Tanzania, 408–409t, 410 Taxes See also Government fiscal policy, 367–368 income redistribution, 263 pollution control example, 237–238 redistribution of income, 295–296 time horizons and politics, 371–372 PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services 437 Index 438 Index Technology, 286–287, 398 Temporary Assistance to Needy Families, 291 Thailand, 409 Theory, government action and, 255–257 Time money and interest, coordination of, 111–114, 113f politics and, 371–372 price elasticity of demand, 58 Tocqueville, Alexis de, 273 Total receipts, elasticity and, 59–60 Total value added, 309–311t Trade goods, defined, 19–20 individual and international, 28–29 middlemen, role of, 29–32 misconceptions about, 18–19 specialization, benefits of, 27–28 transaction costs, 29 wealth creation and, 21–22 Trade-offs, 5–6 See also Substitutes Traffic congestion, externalities, 242–243 Transaction costs, 29–32, 229 U Uncertainty, profit and, 158–159 Unemployment, 313–318, 317f Unfair Practices Act, 212 Unintended consequences beef cattle, 139–140 criminal incentives, 130–132 framing questions correctly, 141–145, 144f hospital care costs, 140–141 minimum wage, 133–135 overview, 6, 120–124 price controls, 124–127 rent control example, 128f–130 slavery and, 135–136 sports vs poetry, 137 supports and surpluses, 132–133 Unions, 289 Unit elastic demand, 58 Unsustainable boom, 363–365, 364f U.S Department of Labor, 315–317 V Value defining, 20–24 GDP, limitations of, 326–327 GDP, overview of, 305–307 gold, 352–353 marginal values, 46–47 money, evolution of, 335–336 non-monetary costs, 64 sunk costs, 75–76 total value added, GDP as, 309–311t trade and wealth creation, 21–22 unsold and unused goods, GDP and, 311–313 Venezuela, 408t Vertical demand, 60–61 Vertical mergers, 218 # 111458 Cust: Pearson Au: Heyne Pg No 438 Title: The Economic Way of Thinking 13/e Server: Vertical restraints, competition, 219–220 Voluntary exchange, 263–264 Volunteer military service, 86–89, 87t Voting, 265–266 W Wages as income, 154 minimum wage, 133–135 unions and competition, 289 Wagner, Richard, 368n3 War on drugs, 131–132 Wealth defined, 20–21 global comparisons, 394–395 international GDP comparisons, 410–412t specialization, benefits of, 27–28 trade and, 21–22 The Wealth of Nations competition, 207 division of labor, 6, 34, 35 economic growth, reasons for, 4, 33 income, 280 Weingast, Barry, 380n7 Welfare, 291 World Bank, 394–395, 400 World Development Indicators, 410–412t Worth, efficiency and value, 22–24 Z Zaire, 409t, 412t PMS / K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services ... Hartwick/Olewiler The Economics of Natural Resource Use Cooter/Ulen Law & Economics Heilbroner/Milberg The Making of the Economic Society Downs An Economic Theory of Democracy Heyne/Boettke/Prychitko The Economic. .. precisely described in the title of the book—as a way of thinking Comprehending that way of thinking was, and continues to be, the revolutionary contribution of economics to the social sciences... all the entrances and exits on the right Why don’t all the drivers stay in the far-right lane? Why some of them go to the trouble of driving all the way over to the far left when they know they’ll