Ebook Macroeconomics for today (6th edition): Part 1

(BQ) Part 1 book Macroeconomics for today has contents: Introducing the economic way of thinking; production possibilities, opportunity cost, and economic growth; market demand and supply; markets in action; gross domestic product; business cycles and unemployment,...and other contents.

My objective in writing this book is to provide you with everything you need for

success in the course and to improve your ability to make better decisions in your

everyday life-including understanding economic issues in the news My writing

style is intended to be engaging, clear, and straightforward with an emphasis on real-world applications As I was writing the text, I viewed myself explaining the

concepts to a student in my office As a result, there is a conversational tone to

the text To avoid boredom, the text uses a fast-paced, action-packed approach that explains all essential concepts without becoming an encyclopedia

As a principles of economics instructor for over 25 years, I know from firsthand experience that many students are apprehensive about taking economics In fact,

I still recall vividly that, as a freshman about to take my first economics course,

I had only the vaguest idea of what this subject was about To my delight, my freshman principles of economics course opened my eyes to a new way of

thinking And my years of teaching this powerful reasoning process inspired me

to try to write a text that conveyed my excitement about economics to students

Please read through the preface, which takes you on a tour of the special

pedagogical features and ancillary materials that have been created to help you maximize your learning experience with this textbook If I can help you in your endeavor, contact me through the “Talk to Author” feature on the Web site at

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Library of Congress Control Number: 2008940840 Macroeconomics Student Edition ISBN 13: 978-0-324-59137-8 Macroeconomics Student Edition ISBN 10: 0-324-59137-3 Macroeconomics Instructor ’s Edition ISBN 13: 978-0-324-78383-4 Macroeconomics Instructor ’s Edition ISBN 10: 0-324-78383-3 South-Western Cengage Learning

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1 2 3 4 5 6 7 12 11 10 09 08

ABOUT THE AUTHOR

Irvin B Tucker

Irvin B Tucker has more than 30 years of experience teaching introductory

eco-nomics at the University of North Carolina Charlotte and the University of South

Carolina He earned his B.S in economics at N.C State University and his M.A

and Ph.D in economics from the University of South Carolina Dr Tucker is former

director of the Center for Economic Education at the University of North Carolina

Charlotte and is a longtime member of the National Council on Economic

Educa-tion He is recognized for his ability to relate basic principles to economic issues and

public policy His work has received national recognition by being awarded the

Meritorious Levy Award for Excellence in Private Enterprise Education, the

Federa-tion of Independent Business Award for Postsecondary Educator of the Year in

En-trepreneurship and Economic Education, and the Freedom Foundations George

Washington Medal for Excellence in Economic Education In addition, his research

has been published in numerous professional journal articles on a wide range of

to-pics, including industrial organization, entrepreneurship, and economics of

educa-tion Dr Tucker is also the author of the highly successful Survey of Economics,

sixth edition, a text for the one-semester principles of economics courses, published

by South-Western Publishing Also, Dr Tucker has coauthored, with professors

Allan Layton and Tim Robins of Queensland University of Technology, a

one-semester edition of Economics for Today for Australia, New Zealand, and

South-east Asia, published by Nelson/Cengage Learning

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PART 1 INTRODUCTION TO ECONOMICS 1

Chapter 1 Introducing the Economic Way of Thinking 2

Appendix to Chapter 1: Applying Graphs to Economics 19

Chapter 2 Production Possibilities, Opportunity Cost,

and Economic Growth 31

Appendix to Chapter 3: Consumer Surplus, ProducerSurplus, and Market Efficiency 85

Appendix to Chapter 4: Applying Supply and DemandAnalysis to Health Care 117

Appendix to Chapter 5: A Four-Sector Circular Flow Model 147

Chapter 6 Business Cycles and Unemployment 149

Chapter 9 The Keynesian Model in Action 221

Chapter 10 Aggregate Demand and Supply 242

Appendix to Chapter 10: The Self-Correcting AggregateDemand and Supply Model 268

Chapter 13 Federal Deficits, Surpluses, and the National Debt 327

Chapter 14 Money and the Federal Reserve System 354

Appendix to Chapter 16: Policy Disputes Using theSelf-Correcting Aggregate Demand and Supply Model 423

Chapter 17 The Phillips Curve and Expectations Theory 428

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BRIEF CONTENTS

Chapter 19 Economies in Transition 491

Chapter 20 Growth and the Less-Developed

Appendix C: Answers to Road Map

ix

About the Author vii

PART 1

Chapter 1

CHECKPOINT Can You Prove There Is No Trillion-Dollar Person? 8

CHECKPOINT Should Nebraska State Join a Big-Time Athletic Conference? 9 YOU ’RE THE ECONOMIST Mops and Brooms, the Boston Snow Index,

the Super Bowl, and Other Economic Indicators 10

YOU ’RE THE ECONOMIST Does Raising the Minimum Wage Help

1

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CONTENTS

Production Possibilities, Opportunity Cost, and Economic Growth 31

YOU ’RE THE ECONOMIST FedEx Wasn’t an Overnight Success 41

CHECKPOINT What Does a War on Terrorism Really Mean? 41

Present Investment and the Future Production Possibilities Curve 42

GLOBAL ECONOMICS How Does Public Capital Affect a Nation ’s Curve? 43

The Distinction between Changes in Quantity Demanded and

CHECKPOINT Can Gasoline Become an Exception to the Law of Demand? 63

CHECKPOINT Can the Law of Supply Be Repealed for the Oil Market? 65

The Distinction between Changes in Quantity Supplied and Changes in Supply 66

YOU ’RE THE ECONOMIST PC Prices: How Low Can They Go? 70

GLOBAL ECONOMICS The Market Approach to Organ Shortages 74

CHECKPOINT Can the Price System Eliminate Scarcity? 77

2

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Chapter 4

CHECKPOINT Why the Higher Price for Ethanol Fuel? 96 Can the Laws of Supply and Demand Be Repealed? 97 CHECKPOINT Is There Price-Fixing at the Ticket Window? 102

APPENDIX TO CHAPTER 4

Applying Supply and Demand Analysis to Health Care 117

PART 3

Chapter 5

3

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YOU ’RE THE ECONOMIST Is GDP a False Beacon Steering Us

CHECKPOINT Where Are We on the Business-Cycle Roller Coaster? 154

CHECKPOINT What Kind of Unemployment Did the Invention of the

YOU ’RE THE ECONOMIST What Kind of Unemployment

YOU ’RE THE ECONOMIST Brother Can You Spare a Dime? 166

Chapter 7

CHECKPOINT The College Education Price Index 176

YOU ’RE THE ECONOMIST How Much More Does It Cost

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In flation in Other Countries 185 GLOBAL ECONOMICS When the In flation Rate Is 116,000

Introducing Classical Theory and The Keynesian Revolution 197

YOU ’RE THE ECONOMIST Does a Stock Market Crash Cause Recession? 212

Chapter 9

Adding Government and Global Trade to the Keynesian Model 222

YOU ’RE THE ECONOMIST The Great Ice Cream War 233 CHECKPOINT Full-Employment Output, Where are You? 234 CHECKPOINT How Much Spending Must Uncle Sam Cut? 235

4

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Chapter 10

Reasons for the Aggregate Demand Curve ’s Shape 244

Nonprice-Level Determinants of Aggregate Demand 245

Changes in the AD-AS Macroeconomic Equilibrium 253

Nonprice-Level Determinants of Aggregate Supply 255

Cost-Push and Demand-Pull In flation Revisited 257

YOU ’RE THE ECONOMIST Was John Maynard Keynes Right? 260

Increase in Both Aggregate Demand and Aggregate Supply Curves 261

CHECKPOINT Would the Greenhouse Effect Cause In flation,

APPENDIX TO CHAPTER 10

The Self-Correcting Aggregate Demand and Supply Model 268

Why the Short-Run Aggregate Supply Curve Is Upward Sloping 268

Why the Long-Run Aggregate Supply Curve Is Vertical 270

Equilibrium in the Self-Correcting AD-AS Model 270

The Impact of an Increase in Aggregate Demand 271

The Impact of a Decrease in Aggregate Demand 273

Increase in the Aggregate Demand and Long-Run Aggregate Supply Curves 276

CHECKPOINT What Is the MPC for Uncle Sam ’s Stimulus Package? 288

CHECKPOINT Walking the Balanced Budget Tightrope 293

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Summary of Conclusion Statements 302

Chapter 12

YOU ’RE THE ECONOMIST Is It Time to Trash the 1040s? 319 CHECKPOINT What Does Public Choice Say about a Budget De ficit? 322

Chapter 13Federal Deficits, Surpluses, and the National Debt 327

YOU ’RE THE ECONOMIST The Great Federal Budget Surplus Debate 336 CHECKPOINT What ’s Behind the National Debt? 337 YOU ’RE THE ECONOMIST How Real Is Uncle Sam’s Debt? 343

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Money Supply De finitions 359

YOU ’RE THE ECONOMIST The Wreck of Lincoln Savings and Loan 368

Chapter 15

Multiplier Expansion of Money by the Banking System 380

CHECKPOINT Who Has More Dollar Creation Power? 385

YOU ’RE THE ECONOMIST How Does the FOMC Really Work? 388

Chapter 16

How Monetary Policy Affects the Interest Rate 401

CHECKPOINT What Does the Money Supply Curve Look Like When the

How Monetary Policy Affects Prices, Output, and Employment 403

YOU ’RE THE ECONOMIST America’s Housing Market Bubble Busts 410

YOU ’RE THE ECONOMIST Monetary Policy during the Great Depression 413

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Checkpoint Answers 420

APPENDIX TO CHAPTER 16

Policy Disputes Using the Self-Correcting Aggregate Demand

The Classical versus Keynesian Views of Expansionary Policy 423 Classical versus Keynesian Views of Contractionary Policy 424

Chapter 17

YOU ’RE THE ECONOMIST The Political Business Cycle 436

CHECKPOINT Does Rational Expectations Theory Work in the Classroom? 439 Applying the AD-AS Model to the Great Expectations Debate 439

YOU ’RE THE ECONOMIST Ford’s Whip Inflation Now (WIN) Button 443 CHECKPOINT Can Wage and Price Controls Cure Stag flation? 445 How Different Macroeconomic Theories Attack In flation 445

CHECKPOINT Do Nations with an Advantage Always Trade? 464

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Birth of the Euro 470

CHECKPOINT Should Everyone Keep a Balance of Payments? 475

GLOBAL ECONOMICS Return to the Yellow Brick Road? 482

Chapter 19

GLOBAL ECONOMICS Choosing an Economic System on Another Planet 498

CHECKPOINT To Plan or Not to Plan —That Is the Question 502

GLOBAL ECONOMICS China ’s Quest for Free Market Reform 506

Chapter 20

Comparing Developed and Less-Developed Countries 513

Economic Growth and Development around the World 517

CHECKPOINT Does Rapid Growth Mean a Country Is Catching Up? 520

GLOBAL ECONOMICS Hong Kong: A Leaping Paci fic Rim Tiger 526

CHECKPOINT Is the Minimum Wage an Antipoverty Solution for Poor Countries? 529

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Appendix B: Answers to Practice Quizzes 551

Appendix C: Answers to Road Map Questions 553

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The Four Versions of This Book

Economics for Today

Economics for Today

Microeconomics for Today

Macroeconomics for Today

Survey of Economics for Today

1 Introducing the Economic Way of

Thinking

2 Production Possibilities, Opportunity

Cost, and Economic Growth

23 Federal De ficits, Surpluses, and the

Text with a Mission

The purpose of Economics for Today, Sixth Edition, is to teach, in an engaging style,the basic operations of the U.S economy to students who will take a two-term eco-nomics course Rather than taking an encyclopedic approach to economic concepts,Economics for Today focuses on the most important tool in economics—supply anddemand analysis—and applies it to clearly explain real-world economic issues.Every effort has been made to make Economics for Today the most“studentfriendly” text on the market This text was written because so many others exposestudents to a confusing array of economic analyses that force students to simplymemorize in order to pass the course Instead, Economics for Today presents astraightforward and unbiased approach that effectively teaches the application ofbasic economic principles After reading this text, the student should be able to say

“now that economics stuff in the news makes sense.”

How It Fits Together

The text presents the core principles of microeconomics, macroeconomics, and ternational economics Thefirst 14 chapters introduce the logic of economic analy-sis and develop the core of microeconomic analysis Here students learn the role ofdemand and supply in determining prices in competitive versus monopolistic mar-kets This part of the book explores such issues as minimum wage laws, rent con-trol, and pollution The next 13 chapters develop the macroeconomics part of thetext Using the modern, yet simple, aggregate demand and aggregate supply model,the text explains measurement of and changes in the price level, national output,and employment in the economy The study of macroeconomics also includes howthe supply of money and the demand for money influence the economy Finally, thetext concludes with three chapters devoted entirely to global issues For example,students will learn how the supply of and demand for currencies determineexchange rates and what the complications of a strong or a weak dollar are

in-Text Flexibility

The full version of Economics for Today is easily adapted to an instructor’s ence for the sequencing of microeconomics and macroeconomics topics The textcan be used in a macroeconomic-microeconomic sequence by teaching thefirst fourchapters and then Parts 5 through 7 Next, microeconomics is covered in Parts 2through 4 Finally, the course can be completed with Part 8, consisting of threechapters devoted to international economics

prefer-An important design of this text is that it accommodates the two camps forteaching principles of macroeconomics: (1) those who cover both the KeynesianCross and AD/AS models and (2) those who skip the Keynesian model and coveronly the AD/AS model For instructors who prefer the former model sequence, Eco-nomics for Today moves smoothly in Chapters 18–19 (8–9) from the Keynesianmodel (based on the Great Depression) to the AD/AS model in Chapter 20 (10) Forinstructors using the latter approach, this text is written so that instructors can skipthe Keynesian model in Chapters 18–19 (8–9) and proceed from Chapter 17 (7) to

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PREFACE

For instructors who wish to teach the self-correcting AD/AS model, emphasis

can be placed on the appendixes to Chapters 20 (10) and 26 (16) Instructors who

choose not to cover this model can simply skip these appendixes In short,

Econom-ics for Today provides more comprehensive and flexible coverage of

macroeco-nomics models than is available in other texts Also, a customized text might meet

your needs If so, contact your South-Western/Cengage sales representative for

information

How Not to Study Economics

To some students, studying economics is a little frightening because many chapters

are full of graphs Students often make the mistake of preparing for tests by trying

to memorize the lines of graphs When their graded tests are returned, the students

using this strategy will probably exclaim, “What happened?” The answer to this

query is that the students should have learned the economic conceptsfirst; then they

would understand the graphs as illustrations of these underlying concepts Stated

simply, superficial cramming for economics quizzes does not work

For students who are anxious about using graphs, the appendix to Chapter 1

provides a brief review of graphical analysis In addition, The Graphing Workshop

and the Study Guide contain step-by-step features on how to interpret graphs

New to the Sixth Edition

The basic layout of the sixth edition remains the same The following are changes:

• New feature titled“Road Map” at the end of each part provides review

ques-tions linked to an interactive causation chain game

• New Global Economics feature, titled“How Does Public Capital Affect a

Nation’s Curve?”

• New Checkpoint feature titled“Why the Higher Price for Ethanol?”

• New You’re the Economist feature titled “Why is That Web Site You’re Using

Free?”

• New You’re the Economist feature titled “Social-Networking Sites: The New

Advertising Game.”

• New box insert feature titled“Social Security: Past, Present, and Future.”

• New Global Economics feature titled“How Should Carbon Emissions be

Reduced: Cap-and-Trade or Carbon Taxes?”

• New Checkpoint feature titled“What is the Real Price of Gasoline?”

• New Checkpoint feature titled“What is the MPC for Uncle Sam’s Stimulus

• Over 600 new questions added to the test bank

• Over 700 new question added to the online quizzes

• A new feature on classroom games added to the Instructor’s Manual

• Revised Lecture PowerPoint Slides

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fer different topics of this text:

• Economics for Today This complete version of the book contains all 30 ters It is designed for two-semester introductory courses that cover both micro-economics and macroecnomics

chap-• Microeconomics for Today This version contains 17 chapters and is designedfor one-semester courses in introductory microeconomics

• Macroeconomics for Today This version contains 20 chapters and designed forone-semester courses in introductory macroeconomics

• Survey of Economics This version of the book contains 23 chapers It is signed for one-semester courses that cover the basics of both microeconomicsand macroeconomics

de-The accompanying table shows precisely which chapters are included in eachbook Instructors who wish more information about these alternative versionshould contact their local Cengage South-Western representative

Motivational Pedagogical Features

Economics for Today strives to motivate and advance the boundaries of pedagogywith the following features:

Part Openers

Each part begins with a statement of the overall mission of the chapters in the part

In addition, there is a nutshell introduction of each chapter in relation to the part’slearning objective

Chapter Previews

Each chapter begins with a preview designed to pique the student’s interest and inforce how the chapterfits into the overall scheme of the book Each preview ap-peals to the student’s “Sherlock Holmes” impulses by posing several economicspuzzles that can be solved by understanding the material presented in the chapter

Key concepts introduced in the chapter are highlighted in bold type and then fined in the text and again in the margins This feature therefore serves as a quickreference

de-Conclusion Statements

Throughout the chapters, highlighted conclusion statements of key concepts appear

at the ends of sections and tie together the material just presented Students will beable to see quickly if they have understood the main points of the section A sum-mary of these conclusion statements is provided at the end of each chapter

Each chapter includes boxed inserts that provide the acid test of “relevance toeveryday life.” This feature gives the student an opportunity to encounter timely,

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ensure that the student wastes no timefiguring out which concepts apply to the

arti-cle, applicable concepts are listed after each title Many of these boxed features

include quotes from newspaper articles over a period of years demonstrating that

economics concepts remain relevant over time

Global Economics

Today’s economic environment is global Economics for Today carefully

inte-grates international topics throughout the text and presents the material using a

highly readable and accessible approach designed for students with no training in

international economics All sections of the text that present global economics are

identified by a special global icon in the text margin and in the International

Eco-nomics boxes In addition, thefinal three chapters of the book are devoted entirely

to international economics

Analyze the Issue

This feature follows each You’re the Economist and Global Economics feature and

asks specific questions that require students to test their knowledge of how the

ma-terial in the boxed insert is relevant to the applicable concept To allow these

ques-tions to be used in classroom discussions or homework assignments, answers are

provided in the Instructor’s Manual rather than the text

Checkpoint

Watch for these! Who said learning economics can’t be fun? This feature is a unique

approach to generating interest and critical thinking These questions spark

stu-dents to check their progress by asking challenging economics puzzles in game-like

style Students enjoy thinking through and answering the questions, and then

check-ing the answers at the end of the chapter Students who answer correctly earn the

satisfaction of knowing they have mastered the concepts

Illustrations

Attractive large graphical presentations with grid lines and real-world numbers are

essential for any successful economics textbook Each exhibit has been carefully

analyzed to ensure that the key concepts being represented stand out clearly Brief

descriptions are included with graphs to provide guidance for students as they study

the graph When actual data are used, the Web site reference is provided so that

stu-dents can easily locate the data source

Causation Chains Game

This will be one of your favorites The highly successful causation chains are

in-cluded under many graphs throughout the text This pedagogical device helps

stu-dents visualize complex economic relationships in terms of simple box diagrams

that illustrate how one change causes another change Each exhibit having a

causa-tion chain in the text is included in the animaed Causacausa-tion Chains game on the text

website (www.cengage.com/economics/tucker) This game makes it fun to learn

Arrange the blocks correctly and hear the cheers

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the Tucker Web site (www.cengage.com/economics/tucker) As a study aid, you canuse the key concepts asflashcards to test your knowledge First state the definitionand then click on the term to check for correctness.

Visual Summaries

Each chapter ends with a brief point-by-point summary of the key concepts Many

of these summarized points include miniaturized versions of the important graphsand causation chains that illustrate many of the key concepts These are intended toserve as visual reminders for students as theyfinish the chapters and are also useful

in reviewing and studying for quizzes and exams

Study Questions and Problems

The end-of-chapter questions and problems offer a variety of levels ranging fromstraightforward recall to deeply thought-provoking applications The answers toodd questions and problems are in the back of the text This feature gives studentsimmediate feedback without requiring the instructor to check their work

End-of-Chapter Practice Quizzes

A great help before quizzes Many instructors test students using multiple-choicequestions For this reason, thefinal section of each chapter provides the type of mul-tiple-choice questions given in the instructor’s Test Bank The answers to all of thesequestions are given in the back of the text In addition, students may visit theTucker Web site (www.cengage.com/economics/tucker) and then click the tutorial

to obtain a visual explanation of each correct answer and a reference to page bers in the text that explain the answer Here students can actually see the graphsshift as arrows point to key changes in prices, output, and other key variables

num-Online Quizzes

In addition to the end-of-chapter practice quizzes, there are multiple-choice questions

on the Tucker Web site (cengage.com/economics/tucker) Each question explains why

an answer is incorrect or correct Between this feature and the end-of-chapter practicequizzes, students are well prepared for tests

Part Road Map

This feature concludes each part with review questions listed by chapter from theprevious part To reinforce the concepts, each set of questions relates to the interac-tive causation chain game Click on the Tucker Web site and make learning fun lis-tening to the cheers when correct and jeers for a wrong answer Answers to thequestions are in the back of the text

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links pertaining to relevant topics in the subject matter These addresses provide

stu-dents with access to specific content and real-world application There’s no need to

type in the links; they’re a mere click away!

A Supplements Package Designed

for Success

To learn more about the supplements for Economics Today, visit the Tucker Web

site, www.cengage.com/economics/tucker For additional information, contact your

Cengage South-Western sales representative

Instructor Resources

This manual, prepared by Douglas Copeland of Johnson County Community

Col-lege, provides valuable course assistance to instructors It includes chapter outlines,

instructional objectives, critical thinking/group discussion questions, hints for

effec-tive teaching, answers to the Analyze the Issue questions, answers to even-numbered

questions and problems, summary quizzes with answers, and classroom games

In-structor’s Manual ISBN: 0324781997

Test Bank

Prepared by the text author to match the text, the Test Bank includes over 7,000

multiple-choice, true-false, and short essay questions The questions are arranged by

the order presented in the chapter and are grouped with concept headings that

make it easy to select questions Most questions have been thoroughly tested in the

classroom by the author and are classified by topic and degree of difficulty Text page

references help locate pages where material related to the questions is explained

Macro Test Bank ISBN: 032478208X

Micro Test Bank ISBN: 0324782098

ExamView

ExamView Computerized Testing Software contains all of the questions in the printed

Test Bank ExamView is an easy-to-use test creation software compatible with both

Microsoft Windows and Apple Macintosh Instructors can add or edit questions,

in-structions, and answers; select questions by previewing them on the screen; or select

them randomly or by number Instructors can also create and administer quizzes

on-line, whether over the Internet, a local area network (LAN), or a wide area network

(WAN) Available on the Instructor’s Resource CD: ISBN: 0324782071

PowerPoint Lecture Slides

This state-of-the-art slide presentation provides instructors with visual support in

the classroom for each chapter Lecture Slides contain vivid highlights of important

concepts Instructors can edit the PowerPoint presentations or create their own

exciting in-class presentations These slides are available on the Instructor’s

Re-source CD as well as for downloading from the Tucker Web site www.cengage

com/economics/tucker

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corporate them into their own PowerPoint presentations from the Tucker Web site.

Get quick access to all instructor ancillaries from your desktop This easy-to-use CDlets you review, edit, and copy exactly what you need in the format you want Thissupplement contains the Instructor’s Manual, Test Bank, ExamView Testing soft-ware, and the PowerPoint presentation slides IRCD ISBN: 0324782071

Student Resources Study Guide

The Study Guide is recommended for each student using the text It is perhaps the bestway to prepare for quizzes Too often, study guides are not written by the author, andthe material does not reallyfit the text Not so here The Study Guide was prepared bythe text author to prepare students before they take tests in class The Study Guidecontains student-friendly features such as the chapter in a nutshell, key concepts re-view, learning objectives,fill-in-the-blank questions, step-by-step interpretation of thegraph boxes, multiple-choice questions, true-false questions, and crossword puzzles.ISBN: 0324782004

The Tucker EconCentral Web site

The EconCentral Web site: (www.cengage.com/economics/tucker6e/econcentral)features a content-rich, robust set of multimedia learning tools These Web featureshave been specifically developed with the student in mind:

• The Graphing Workshop The Graphing Workshop is a one-stop learning source for help in mastering the language of graphs, one of the more difficultaspects of an economics course for many students It enables students to exploreimportant economic concepts through a unique learning system made up oftutorials, interactive drawing tools, and exercises that teach how to interpret,reproduce, and explain graphs

re-• ABC News Video Segments ABC video segments bring the“real world” right

to students’ desktops The ABC News videos illustrate how economics is an portant part of students’ daily lives and help them learn the material by apply-ing it to current events

im-• Ask the Instructor Video Clips Via streaming video, difficult concepts areexplained and illustrated These video clips are extremely helpful review andclarification tools if a student has trouble understanding an in-class lecture or is

a visual learner

• Economic Applications (EconApps) EconNews Online, EconDebate Online,and EconData Online features help to deepen students’ understanding of thetheoretical concepts through hands-on exploration and analysis of the latesteconomic news stories, policy debates, and data

For Students and Instructors The Wall Street Journal

The Wall Street Journal is synonymous with the latest word on business, economics,and public policy Economics for Today makes it easy for students to apply

xxviii

Economics for Today can be packaged with a card entitling students to a 15-week

subscription to both the print and online versions of The Wall Street Journal

Instructors with at least seven students who activate their subscriptions will

auto-matically receive their own free subscription Contact your Cengage South-Western

sales representative for package pricing and ordering information

TextChoice: Economic Issues and Activities

TextChoice is the home of Cengage Learning’s online digital content TextChoice

provides the fastest, easiest way for you to create your own learning materials

South-Western’s Economic Issues and Activities content database includes a wide

variety of high-interest, current event/policy applications as well as classroom

activ-ities that are designed specifically to enhance introductory economics courses

Choose just one reading, or many—even add your own material—to create an

ac-companiment to the textbook that is perfectly customized to your course Contact

your Cengage South-Western sales representative for more information

Tucker Web Site

The Tucker Web site (www.cengage.com/economics/tucker) provides open access

to: PowerPoint chapter review slides, tutorials for the text’s end-of-chapter Practice

Quizzes, online quizzing, direct links to the Internet activities mentioned in the text,

updates to the text, the opportunity to communicate with the author, and other

downloadable teaching and learning resources

Acknowledgments

A deep debt of gratitude is owed to the reviewers for their expert assistance All

comments and suggestions were carefully evaluated and served to improve thefinal

product To each of the reviewers of all six editions, I give my sincerest thanks

Jack E Adams

University of Arkansas-Little Rock

John W Alderson, III

East Arkansas Community

Wright State UniversityOrn B Bodvarsson

St Cloud State UniversityTantatape BrahmasrenePurdue University, North CentralJoyce Bremer

Oakton Community CollegeAnne Bresnock

California State University,Pomona

Stacey BrookUniversity of Sioux FallsStephanie CampbellMineral Area CollegeJuan Castro

ETX Baptist UniversityDell Champlin

Eastern Illinois UniversityDoug Copeland

Johnson County CommunityCollege

John P DahlquistCollege of AlamedaJames P D’AngeloUniversity of Cincinnati

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Utah State University

Arthur A Fleisher, III

Metropolitan State College of

Miami Dade CommunityCollege

Michael G HeslopNorthern Virginia CommunityCollege

Yu-Mong HsiaoCampbell University

R Jack InchOakland Community CollegeHans R Isakson

University of Northern IowaBarbara H John

University of DaytonPetur O JonssonFayetteville State UniversityPaul Jorgensen

Linn-Benton Community CollegeLouise Keely

University of WisconsinRandall G KesselringArkansas State UniversityHarry T KolendrianosDanville Community CollegeWilliam F KordsmeierUniversity of Central ArkansasMargaret Landman

Bridgewater State CollegeDavid Latzko

Pennsylvania State University,York

Ralph F LewisOrange Coast CollegeStephen E LileWestern Kentucky UniversityDandan Liu

Bowling Green State University

MississippiThomas MaloyMuskegon Community CollegeDayle Mandelson

University of Wisconsin-StoutRobert A Margo

Vanderbilt UniversityMelanie MarksLongwood CollegeMichael MarlowCal Polytechnic StateUniversity-SLOFred MayTrident Technical CollegeJames C McBreartyUniversity of ArizonaDiana L McCoyTruckee Meadows CommunityCollege

Donald P McDowellFlorida Community CollegeFazlul Miah

Fayetteville State UniversityDavid S Moewes

Concordia CollegeMargaret MooreFranklin UniversityMarie MoraNew Mexico State UniversityKevin J Murphy

Oakland UniversityJack MurynUniversity of Wisconsin-Washington CountyLee NordgrenIndiana UniversityPeter K OlsonIndiana UniversityPatrick B O’NeillUniversity of North Dakota

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Larry SingellUniversity of OregonAlden W SmithAnne Arundel Community CollegeTricia Snyder

William Patterson UniversityAngela M SparkmanItawamba Community CollegeLarry Spizman

SUNY-OswegoRebecca SummarySoutheast Missouri StateUniversity

Daniel A TalleyDakota State UniversityDaryl Thorne

Valencia Community CollegeLarry Towle

Eastern Nazarene CollegeGreg Trandel

University of Georgia

CollegeTracy M TurnerKansas State UniversityRoy van Til

University of Maine-FarmingtonLee Van Scyok

University of Wisconsin-OshkoshDarlene Voeltz

Rochester Community andTechnical College

Rosemary WalkerWashburn UniversityHarold WarrenEast Tennessee State UniversityRobert G Welch

Midwestern State UniversityHerbert D Werner

University of MissouriMichael D White

St Cloud State UniversityLeo M Weeks

Northwestern UniversityGwen Williams

Alvernia CollegeVirginia S YorkGulf Coast Community CollegePaul Young

Dodge City Community CollegeMichael J Youngblood

Rock Valley College

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at UNC Charlotte Many of the ideas in the Checkpoint sections are the result ofbrainstorming sessions with him Special thanks also go to Douglas Copeland ofJohnson County Community College for preparing the Instructor’s Manual andBob Sandman of the University of Cincinnati, who provided PowerPoint slides andnew ideas for the You’re the Economist and Global Economics.

My appreciation goes to Steve Scoble, Senior Acquisitions Editor for CengageLearning/South-Western My thanks also to Mike Guendelsberger, DevelopmentalEditor; Jaci Featherly, Content Project Manager; Lena Mortis, Editorial Assistant;and Suellen Ruttkay, Marketing Coordinator, who put all the pieces of the puzzletogether and brought their creative talent to this text Kelly Birch was superb in hercopyediting of the manuscript I am also grateful to John Carey for his skillful mar-keting Finally, I give my sincere thanks for a job well done to the entire team atCengage Learning/South-Western

xxxii

Introduction to

Economics

eco-nomic knowledge vital to understanding the other chapters in

the text In these introductory chapters, you will begin to learn a

valuable reasoning approach to solving economics puzzles that

the cornerstone of this type of logical analysis by presenting basic

economic models that explain such important topics as scarcity,

Introducing the

Economic Way of

Thinking

W elcome to an exciting and useful subject

economists call “the economic way of ing ” As you learn this reasoning technique, it will

think-become infectious You will discover that the world is full

of economics problems requiring more powerful tools

than just common sense As you master the methods

explained in this book, you will appreciate economics as

a valuable reasoning approach to solving economics

puzzles Stated differently, the economic way of thinking

is important because it provides a logical framework for

organizing your thoughts and understanding an

eco-nomic issue or event Just to give a sneak preview, in later

chapters you will study the perils of government price

fix-ing for gasoline and health care You will also find out

why colleges and universities charge students different

tuitions for the same education You will investigate

whether you should worry if the federal government fails

to balance its budget You will learn that the island of Yap

uses large stones with holes in the center as money In the final chapter, you will study why some countries grow rich while others remain poor and less developed And the list of fascinating and relevant topics continues throughout each chapter As you read these pages, your efforts will be rewarded by an understanding of just how economic theories and policies affect our daily lives — past, present, and future.

Chapter 1 acquaints you with the foundation of the economic way of thinking The first building blocks joined are the concepts of scarcity and choice The next building blocks are the steps in the model-building process that economists use to study the choices people make Then

we look at some pitfalls of economic reasoning and explain why economists might disagree with one another The chapter concludes with a discussion of why you may wish to be an economics major.

© David Muir/Digital Vision/Getty Images.

2

CHAPTER

1

• Can you prove there is no person worth a

trillion dollars?

• Why would you purchase more Coca-Cola

when the price increases?

• How can we explain the relationship

between the Super Bowl winner and

changes in the stock market?

• What famous people majored in

economics?

The Problem of Scarcity

Our world is afinite place where people, both individually and collectively, face the

problem of scarcity Scarcity is the condition in which human wants are forever

greater than the available supply of time, goods, and resources Because of scarcity,

it is impossible to satisfy every desire Pause for a moment to list some of your

unsa-tisfied wants Perhaps you would like a big home, gourmet meals, designer clothes,

clean air, better health care, shelter for the homeless, more leisure time, and so on

Unfortunately, nature does not offer the Garden of Eden, where every desire is

ful-filled Instead, there are always limits on the economy’s ability to satisfy unlimited

wants Alas, scarcity is pervasive, so“You can’t have it all.”

You may think your scarcity problem would disappear if you were rich, but

wealth does not solve the problem No matter how affluent an individual is, the

wish list continues to grow We are familiar with the“rich and famous” who never

seem to have enough Although they live well, they still desire finer homes, faster

planes, and larger yachts In short, the condition of scarcity means all individuals,

whether rich or poor, are dissatisfied with their material well-being and would like

more What is true for individuals also applies to society Even Uncle Sam can’t

escape the problem of scarcity because the federal government never has enough

money to spend for the poor, education, highways, police, national defense, Social

Security, and all the other programs it wishes to fund

Scarcity is a fact of life throughout the world In much of South America, Africa,

and Asia, the problem of scarcity is often life threatening On the other hand, North

America, Western Europe, and some parts of Asia have achieved substantial

eco-nomic growth and development Although life is much less grueling in the more

advanced countries, the problem of scarcity still exists because individuals and

coun-tries never have as much of all the goods and services as they would like to have

Scarce Resources and Production

Because of the economic problem of scarcity, no society has enough resources to

produce all the goods and services necessary to satisfy all human wants Resources

are the basic categories of inputs used to produce goods and services Resources are

Scarcity

The condition in which human wants are forever greater than the available supply of time, goods, and resources.

Resources

The basic categories of inputs used to produce goods and services Resources are also called factors of production Economists divide resources into three categories: land, labor, and capital.

3

also called factors of production Economists divide resources into three categories:land, labor, and capital (see Exhibit 1).

Land

Landis a shorthand expression for any natural resource provided by nature Landincludes those resources that are gifts of nature available for use in the productionprocess Farming, building factories, and constructing oil refineries would be impos-sible without land Land includes anything natural above or below the ground, such

as forests, gold, diamonds, oil, wildlife, and fish Other examples are rivers, lakes,seas, wind and the sun Two broad categories of natural resources are renewableresources and nonrenewable resources Renewable resources are basic inputs thatnature can automatically replace Examples include lakes, crops, and clean air.Nonrenewable resources are basic inputs that nature cannot automatically replace.There is only so much coal, oil, and natural gas in the world If these fossil fuels dis-appear, we must use substitutes

Labor

Laboris the mental and physical capacity of workers to produce goods and services.The services of farmers, assembly-line workers, lawyers, professional footballplayers, and economists are all labor The labor resource is measured both by thenumber of people available for work and by the skills or quality of workers One rea-son nations differ in their ability to produce is that human characteristics, such as theeducation, experience, health, and motivation of workers, differ among nations.Entrepreneurship is a special type of labor Entrepreneurship is the creativeability of individuals to seek profits by taking risks and combining resources to pro-duce innovative products An entrepreneur is a motivated person who seeks profits

by undertaking such risky activities as starting new businesses, creating new ducts, or inventing new ways of accomplishing tasks Entrepreneurship is a scarcehuman resource because relatively few people are willing or able to innovate andmake decisions involving greater-than-normal chances for failure

pro-EXHIBIT 1 Three Categories of ResourcesResources are the basic categories of inputs organized by entrepreneurship (a special type of labor) to produce goods and services Economists divide resources into the three categories of land, labor, and capital.

Entrepreneurship organizes resources to produce goods and services

Land

A shorthand expression for

any natural resource

The creative ability of

individuals to seek pro fits

by taking risks and

combining resources to

produce innovative

products.

Entrepreneurs are the agents of change who bring material progress to society.

The birth of the Levi Strauss Company is a classic entrepreneurial success story In

1853, at the age of 24, Levi Strauss, who was born in Bavaria, sailed from New

York to join the California Gold Rush His intent was not to dig for gold, but to sell

cloth By the time he arrived in San Francisco, he had sold most of his cloth to other

people on the ship The only cloth he had left was a roll of canvas for tents and

cov-ered wagons On the dock, he met a miner who wanted sturdy pants that would last

while digging for gold, so Levi made a pair from the canvas Later a customer gave

Levi the idea of using little copper rivets to strengthen the seams Presto! Strauss

knew a good thing when he saw it, so he hired workers, built factories, and became

one of the largest pants makers in the world As a reward for taking business risks,

organizing production, and introducing a product, the Levi Strauss Company

earned profits, and Strauss became rich and famous

Capital

Capital is the physical plants, machinery, and equipment used to produce other

goods Capital goods are human-made goods that do not directly satisfy human

wants Before the Industrial Revolution, capital meant a tool, such as a hoe, an axe,

or a bow and arrow In those days, these items served as capital to build a house or

provide food for the dinner table Today, capital also consists of factories, office

buildings, warehouses, robots, trucks, and distribution facilities College buildings,

the printing presses used to produce this textbook, and pencils are also examples of

capital

The term capital as it is used in the study of economics can be confusing

Econ-omists know that capital in everyday conversations means money or the money

value of paper assets, such as stocks, bonds, or a deed to a house This is actually

financial capital In the study of economics, capital does not refer to money assets

Instead, capital in economics means a factor of production, such as a factory or

machinery Stated simply, you must pay special attention to this point: Money is not

capital and is therefore not a resource

Conclusion Financial capital by itself is not productive; instead, it is only a

paper claim on economic capital

Economics: The Study of Scarcity

and Choice

The perpetual problem of scarcity forcing people to make choices is the basis for the

definition of economics.Economicsis the study of how society chooses to allocate

its scarce resources to the production of goods and services in order to satisfy

unlimited wants You may be surprised by this definition People often think

eco-nomics means studying supply and demand, the stock market, money, and banking

In fact, there are many ways one could define economics, but economists accept the

definition given here because it includes the link between scarcity and choices

Society makes two kinds of choices: economywide, or macro choices, and

indi-vidual, or micro, choices The prefixes macro and micro come from the Greek

words meaning “large” and “small,” respectively Reflecting the macro and micro

perspectives, economics consists of two main branches: macroeconomics and

microeconomics

Capital

The physical plants, machinery, and equipment used to produce other goods Capital goods are human – made goods that do not directly satisfy human wants.

Economics

The study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants.