Microeconomics (with InfoTrac)

by Arnold, Roger A.

• ISBN13: 9780324236705
• ISBN10: 0324236700
• Edition: 7th
• Format: Paperback
• Copyright: 2004-12-23
• Publisher: South-Western College Pub

Summary

Offering a unique blend of solid theoretical content and student accessibility, this text: 1) covers all the basics of microeconomics, 2) gives students a clear idea of how economists think about the world, 3) stresses the key concepts in economics, and 4) is extremely rich in intriguing applications that convey the prevalence of economics in everyday life. Many principles instructors are constantly challenged with the goal of getting students excited about realization that economics is everywhere! Arnold has taken this to another level. He is so passionate about touching his students that he felt the need to write a Microeconomics text that is dedicated to opening the science of economics through the pictures and applications of our lives. Arnold is considered the most innovative author in this market to meet the fast pace interests of both instructors and students. His five themes of Theory and Model building, Key Concepts, Primary and Secondary Consequences, Real-World Applications, and the idea that Economics is about gifts, exchanges, and transfers, set the tone for a teaching text that is extremely approachable by instructors and students.

Table of Contents

Preface	xiii
Student Learning Guide	xxii
An Introduction to Economics
Part 1: Economics: The Science of Scarcity
What Economics Is About	1	(32)
Definitions of Economics	2	(1)
Economic Categories	2	(2)
Positive and Normative Economics	3	(1)
Microeconomics and Macroeconomics	3	(1)
Key Concepts in Economics	4	(12)
Thinking in Terms of Scarcity and Its Effects	4	(2)
Thinking in Terms of Opportunity Cost	6	(2)
Thinking in Terms of Costs and Benefits	8	(1)
Thinking in Terms of Decisions Made at the Margin	9	(1)
Thinking in Terms of Efficiency	10	(2)
Thinking in Terms of Unintended Effects	12	(1)
Thinking in Terms of Equilibrium	13	(1)
Thinking in Terms of the Ceteris Paribus Assumption	14	(1)
Thinking in Terms of the Difference Between Association and Causation	15	(1)
Thinking in Terms of the Difference Between the Group and the Individual	15	(1)
Economists Build and Test Theories	16	(5)
What Is a Theory?	16	(1)
Building and Testing a Theory	17	(2)
How Do We Judge Theories?	19	(1)
What to Ask a Theorist	20	(1)
A Reader Asks	21	(1)
Chapter Summary	21	(2)
Key Terms and Concepts	23	(1)
Questions and Problems	23	(1)
Internet Activities	24	(1)
Appendix A: Working With Diagrams	25	(1)
Two-Variable Diagrams	25	(1)
Slope of a Line	26	(1)
Slope of a Line Is Constant	26	(2)
Slope of a Curve	28	(1)
The 45° Line	28	(1)
Pie Charts	29	(1)
Bar Graphs	29	(1)
Line Graphs	30	(2)
Appendix Summary	32	(1)
Questions and Problems	32	(1)
Economic Activities: Producing and Trading	33	(27)
The Production Possibilities Frontier	34	(7)
The Straight-Line PPF: Constant Opportunity Costs	34	(1)
The Bowed-Outward (Concave-Downward) PPF: Increasing Opportunity Costs	35	(1)
Law of Increasing Opportunity Costs	36	(1)
Economic Concepts Within a PPF Framework	37	(4)
Trade or Exchange	41	(4)
The Purpose of Trade	41	(1)
Periods Relevant to Trade	42	(1)
Trade and the Terms of Trade	42	(1)
Costs of Trades	43	(2)
Trades and Third-Party Effects	45	(1)
Production, Trade, and Specialization	45	(4)
Producing and Trading	46	(2)
Profit and a Lower Cost of Living	48	(1)
A Benevolent and All-Knowing Dictator Versus the Invisible Hand	49	(1)
Producing, Trading, and Economic Systems	49	(4)
Economic Systems	49	(2)
But First, a Warning	51	(1)
Economic Systems and the PPF	51	(1)
Three Economic Questions That Deal With Production	51	(1)
Trade	52	(1)
Prices	52	(1)
Property Rights	53	(3)
Economic Systems and Property Rights	53	(1)
Do Property Rights Matter?	54	(1)
Property Rights and Scarce Resources	54	(2)
A Reader Asks	56	(1)
Chapter Summary	56	(1)
Key Terms and Concepts	57	(1)
Questions and Problems	57	(1)
Working With Numbers and Graphs	58	(1)
Internet Activities	59	(1)
Supply and Demand: Theory	60	(33)
A Note About Theory	61	(1)
Demand	61	(11)
The Law of Demand	61	(1)
Four Ways to Represent the Law of Demand	62	(1)
Absolute and Relative Price	63	(1)
Why Quantity Demanded Goes Down as Price Goes Up	63	(1)
Individual Demand Curve and Market Demand Curve	64	(1)
A Change in Quantity Demanded Versus a Change in Demand	65	(3)
What Factors Cause the Demand Curve to Shift?	68	(4)
Supply	72	(4)
The Law of Supply	72	(1)
Why Most Supply Curves Are Upward-Sloping	72	(1)
The Market Supply Curve	72	(1)
Changes in Supply Mean Shifts in Supply Curves	73	(1)
What Factors Cause the Supply Curve to Shift?	74	(1)
A Change in Supply Versus a Change in Quantity Supplied	75	(1)
The Market: Putting Supply and Demand Together	76	(8)
Supply and Demand at Work at an Auction	77	(1)
The Language of Supply and Demand: A Few Important Terms	78	(1)
Moving to Equilibrium: What Happens to Price When There Is a Surplus or a Shortage?	78	(1)
Speed of Moving to Equilibrium	79	(1)
Moving to Equilibrium: Maximum and Minimum Prices	80	(1)
Equilibrium in Terms of Consumers' and Producers' Surplus	80	(2)
What Can Change Equilibrium Price and Quantity?	82	(2)
Price Controls	84	(5)
Price Ceiling: Definition and Effects	84	(3)
Do Buyers Prefer Lower Prices to Higher Prices?	87	(1)
Price Floor: Definition and Effects	88	(1)
A Reader Asks	89	(1)
Chapter Summary	89	(1)
Key Terms and Concepts	90	(1)
Questions and Problems	90	(1)
Working With Numbers and Graphs	91	(1)
Internet Activities	92	(1)
Supply and Demand: Practice	93	(28)
Application 1: Why Do Colleges Use GPAs, ACTs, and SATs for Purposes of Admission?	94	(1)
Application 2: What Will Happen to the Price of Marijuana if the Purchase and Sale of Marijuana Are Legalized?	95	(1)
Application 3: Where Did You Get That Music?	96	(1)
Application 4: The Minimum Wage Law	97	(1)
Application 5: Price Ceiling in the Kidney Market	98	(2)
Application 6: Health Care and the Right to Sue Your HMO	100	(2)
Application 7: If Gold Prices Are the Same Everywhere, Then Why Aren't House Prices?	102	(1)
Application 8: Do You Pay for Good Weather?	103	(1)
Application 9: Paying All Professors the Same Salary	103	(2)
Application 10: Price Floors and Winners and Losers	105	(1)
Application 11: College Superathletes	106	(2)
Application 12: Supply and Demand on a Freeway	108	(1)
Application 13: What Does Price Have to Do With Getting to Class on Time?	109	(2)
Application 14: Aisle Seats on Commercial Airplanes	111	(1)
Application 15: 10 A.M. Classes in College	112	(1)
Application 16: What Is the Price of an A?	113	(1)
A Reader Asks	114	(1)
Chapter Summary	115	(1)
Key Terms and Concepts	116	(1)
Questions and Problems	116	(1)
Working With Numbers and Graphs	117	(1)
Internet Activities	117	(1)
Economics in Perspective: Musical Notes, Economic Notes	118	(3)
Microeconomics
Part 2: Microeconomic Fundamentals
Elasticity	121	(27)
Elasticity: Part 1	122	(9)
Price Elasticity of Demand	122	(1)
Elasticity Is Not Slope	123	(1)
From Perfectly Elastic to Perfectly Inelastic Demand	124	(2)
Price Elasticity of Demand and Total Revenue (Total Expenditure)	126	(3)
Agriculture: An Application of Price Elasticity of Demand	129	(2)
Elasticity: Part 2	131	(4)
Price Elasticity of Demand Along a Straight-Line Demand Curve	131	(2)
Determinants of Price Elasticity of Demand	133	(2)
Other Elasticity Concepts	135	(9)
Cross Elasticity of Demand	135	(1)
Income Elasticity of Demand	136	(2)
Traffic Jams in Bangkok, Sao Paulo, and Cairo	138	(1)
Price Elasticity of Supply	138	(2)
Price Elasticity of Supply and Time	140	(1)
The Relationship Between Taxes and Elasticity	140	(4)
A Reader Asks	144	(1)
Chapter Summary	145	(1)
Key Terms and Concepts	146	(1)
Questions and Problems	146	(1)
Working With Numbers and Graphs	146	(1)
Internet Activities	147	(1)
Consumer Choice: Maximizing Utility and Behavioral Economics	148	(27)
Utility Theory	149	(5)
Utility, Total and Marginal	149	(1)
Law of Diminishing Marginal Utility	149	(3)
The Millionaire and the Pauper: What the Law Says and Doesn't Say	152	(1)
The Solution to the Diamond-Water Paradox	153	(1)
Is Gambling Worth the Effort?	153	(1)
Consumer Equilibrium and Demand	154	(6)
Equating Marginal Utilities per Dollar	154	(1)
Consumer Equilibrium and the Law of Demand	155	(1)
Income and Substitution Effects	156	(2)
Should the Government Provide the Necessities of Life for Free?	158	(2)
Behavioral Economics	160	(4)
Are People Willing to Reduce Others' Incomes?	160	(1)
Is $1 Always $1?	161	(1)
Coffee Mugs and the Endowment Effect	162	(1)
Does the Endowment Effect Hold Only for New Traders?	163	(1)
A Reader Asks	164	(1)
Chapter Summary	164	(1)
Key Terms and Concepts	165	(1)
Questions and Problems	165	(1)
Working With Numbers and Graphs	166	(1)
Internet Activities	166	(1)
Appendix B: Budget Constraint and Indifference Curve Analysis	167	(1)
The Budget Constraint	167	(1)
Slope of the Budget Constraint	167	(1)
What Will Change the Budget Constraint?	168	(1)
Indifference Curves	168	(4)
Constructing an Indifference Curve	169	(1)
Characteristics of Indifference Curves	169	(3)
The Indifference Map and the Budget Constraint Come Together	172	(1)
From Indifference Curves to a Demand Curve	173	(1)
Appendix Summary	174	(1)
Questions and Problems	174	(1)
The Firm	175	(19)
Why Firms Exist	176	(4)
The Market and the Firm: Invisible Hand Versus Visible Hand	176	(1)
The Alchian and Demsetz Answer	176	(1)
Shirking in a Team	176	(1)
Ronald Coase on Why Firms Exist	177	(2)
Markets: Outside and Inside the Firm	179	(1)
The Questions the Firm Must Answer	180	(1)
The Objective of the Firm	180	(2)
Types of Business Firms	182	(3)
Proprietorships	182	(1)
Partnerships	183	(1)
Corporations	184	(1)
Some Financial Aspects of Firms	185	(4)
The Balance Sheet of a Firm	185	(1)
Financing Corporate Activity	186	(3)
Nonprofit Firms	189	(1)
A Reader Asks	190	(1)
Chapter Summary	191	(1)
Key Terms and Concepts	192	(1)
Questions and Problems	192	(1)
Working With Numbers and Graphs	193	(1)
Internet Activities	193	(1)
Production and Costs	194	(26)
The Firm's Objective: Maximizing Profit	195	(2)
Accounting Profit Versus Economic Profit	195	(1)
Zero Economic Profit Is Not so Bad as It Sounds	196	(1)
Production	197	(5)
Production in the Short Run	198	(1)
Marginal Physical Product and Marginal Cost	199	(3)
Average Productivity	202	(1)
Costs of Production: Total, Average, Marginal	202	(10)
The AVC and ATC Curves in Relation to the MC Curve	205	(2)
Tying Short-Run Production to Costs	207	(1)
One More Cost Concept: Sunk Cost	207	(5)
Production and Costs in the Long Run	212	(4)
Long-Run Average Total Cost Curve	212	(2)
Economies of Scale, Diseconomies of Scale, and Constant Returns to Scale	214	(1)
Why Economies of Scale?	215	(1)
Why Diseconomies of Scale?	215	(1)
Minimum Efficient Scale and Number of Firms in an Industry	216	(1)
Shifts in Cost Curves	216	(1)
Taxes	216	(1)
Input Prices	216	(1)
Technology	216	(1)
A Reader Asks	217	(1)
Chapter Summary	217	(1)
Key Terms and Concepts	218	(1)
Questions and Problems	218	(1)
Working With Numbers and Graphs	219	(1)
Internet Activities	219	(1)
Part 3: Product Markets and Policies Perfect Competition	220	(291)
Market Structures	221	(26)
The Theory of Perfect Competition	221	(1)
A Perfectly Competitive Firm Is a Price Taker	221	(4)
The Demand Curve for a Perfectly Competitive Firm Is Horizontal	222	(1)
The Marginal Revenue Curve of a Perfectly Competitive Firm Is the Same as Its Demand Curve	223	(1)
Theory and Real-World Markets	224	(1)
Perfect Competition in the Short Run	225	(6)
What Level of Output Does the Profit-Maximizing Firm Produce?	225	(1)
The Perfectly Competitive Firm and Resource Allocative Efficiency	226	(1)
To Produce or Not to Produce: That Is the Question	227	(2)
The Perfectly Competitive Firm's Short-Run Supply Curve	229	(1)
From Firm to Market (Industry) Supply Curve	229	(1)
Why Is the Market Supply Curve Upward-Sloping?	230	(1)
Perfect Competition in the Long Run	231	(10)
The Conditions of Long-Run Competitive Equilibrium	231	(3)
The Perfectly Competitive Firm and Productive Efficiency	234	(1)
Industry Adjustment to an Increase in Demand	234	(4)
What Happens as Firms Enter an Industry in Search of Profits?	238	(1)
Industry Adjustment to a Decrease in Demand	239	(1)
Differences in Costs, Differences in Profits: Now You See It, Now You Don't	239	(1)
Profit and Discrimination	240	(1)
Topics for Analysis Within the Theory of Perfect Competition	241	(1)
Do Higher Costs Mean Higher Prices?	241	(1)
Will the Perfectly Competitive Firm Advertise?	242	(1)
Supplier-Set Price Versus Market-Determined Price: Collusion or Competition?	242	(1)
A Reader Asks	242	(1)
Chapter Summary	243	(1)
Key Terms and Concepts	244	(1)
Questions and Problems	244	(1)
Working With Numbers and Graphs	245	(1)
Internet Activities	245	(2)
Monopoly	247	(21)
The Theory of Monopoly	248	(2)
Barriers to Entry: A Key to Understanding Monopoly	248	(1)
What Is the Difference Between a Government Monopoly and a Market Monopoly?	249	(1)
Monopoly Pricing and Output Decisions	250	(5)
The Monopolist's Demand and Marginal Revenue	250	(2)
The Monopolist's Demand and Marginal Revenue Curves Are Not the Same: Why Not?	252	(1)
Price and Output for a Profit-Maximizing Monopolist	252	(1)
If a Firm Maximizes Revenue, Does It Automatically Maximize Profit Too?	253	(2)
Perfect Competition and Monopoly	255	(2)
Price, Marginal Revenue, and Marginal Cost	255	(1)
Monopoly, Perfect Competition, and Consumers' Surplus	255	(1)
Monopoly or Nothing?	256	(1)
The Case Against Monopoly	257	(3)
The Deadweight Loss of Monopoly	257	(1)
Rent Seeking	258	(2)
X-Inefficiency	260	(1)
Price Discrimination	260	(5)
Types of Price Discrimination	260	(1)
Why a Monopolist Wants to Price Discriminate	260	(1)
Conditions of Price Discrimination	261	(1)
Moving to P = MC Through Price Discrimination	261	(2)
You Can Have the Comics, Just Give Me the Coupons	263	(2)
A Reader Asks	265	(1)
Chapter Summary	265	(1)
Key Terms and Concepts	266	(1)
Questions and Problems	266	(1)
Working With Numbers and Graphs	266	(1)
Internet Activities	267	(1)
Monopolistic Competition, Oligopoly, and Game Theory	268	(27)
The Theory of Monopolistic Competition	269	(4)
The Monopolistic Competitor's Demand Curve	269	(1)
The Relationship Between Price and Marginal Revenue for a Monopolistic Competitor	269	(1)
Output, Price, and Marginal Cost for the Monopolistic Competitor	269	(1)
Will There Be Profits in the Long Run?	270	(1)
Excess Capacity: What Is It, and Is It ``Good'' or ``Bad''?	271	(1)
The Monopolist Competitor and Two Types of Efficiency	272	(1)
Advertising and Designer Labels	272	(1)
Oligopoly: Assumptions and Real-World Behavior	273	(1)
Price and Output Under Three Oligopoly Theories	274	(6)
The Cartel Theory	274	(2)
The Kinked Demand Curve Theory	276	(2)
The Price Leadership Theory	278	(2)
Game Theory, Oligopoly, and Contestable Markets	280	(6)
Prisoner's Dilemma	280	(2)
Oligopoly Firms Cartels, and Prisoner's Dilemma	282	(1)
Are Markets Contestable?	283	(3)
A Review of Market Structures	286	(1)
Applications of Game Theory	287	(4)
Grades and Partying	287	(1)
The Arms Race	288	(1)
Speed Limit Laws	289	(1)
The Fear of Guilt as an Enforcement Mechanism	290	(1)
A Reader Asks	291	(1)
Chapter Summary	292	(1)
Key Terms and Concepts	292	(1)
Questions and Problems	293	(1)
Working With Numbers and Graphs	293	(1)
Internet Activities	294	(1)
Government and Product Markets: Antitrust and Regulation	295	(27)
Antitrust	296	(11)
Antitrust Acts	296	(1)
Unsettled Points in Antitrust Policy	297	(3)
Antitrust and Mergers	300	(1)
Eight Antitrust Cases and Actions	300	(3)
Network Monopolies	303	(2)
Civil Action No. 98-1232	305	(2)
Regulation	307	(9)
The Case of Natural Monopoly	307	(1)
Regulating the Natural Monopoly	308	(2)
Regulating Industries That Are Not Natural Monopolies	310	(1)
Theories of Regulation	310	(2)
The Costs and Benefits of Regulation	312	(1)
Some Effects of Regulation Are Unintended	313	(1)
Social Regulation	314	(1)
Deregulation	315	(1)
A Reader Asks	316	(1)
Chapter Summary	317	(1)
Key Terms and Concepts	317	(1)
Questions and Problems	317	(1)
Working With Numbers and Graphs	318	(1)
Internet Activities	319	(1)
Economics in Perspective: Intuition and Counterintuition	320	(2)
Part 4: Factor Markets and Related Issues
Factor Markets: With Emphasis on the Labor Market	322	(23)
Factor Markets	323	(6)
The Demand for a Factor	323	(1)
Marginal Revenue Product: Two Ways to Calculate It	323	(1)
The MRP Curve Is the Firm's Factor Demand Curve	324	(1)
Value Marginal Product	325	(1)
An Important Question: Is MRP = VMP?	325	(1)
Marginal Factor Cost---The Firm's Factor Supply Curve	325	(1)
How Many Units of a Factor Should a Firm Buy?	326	(1)
When There Is More Than One Factor, How Much of Each Factor Should the Firm Buy?	327	(2)
The Labor Market	329	(9)
Shifts in a Firm's MRP, or Factor Demand, Curve	329	(1)
Market Demand for Labor	329	(3)
The Elasticity of Demand for Labor	332	(1)
Market Supply of Labor	333	(1)
An Individual's Supply of Labor	334	(1)
Shifts in the Labor Supply Curve	334	(1)
Putting Supply and Demand Together	335	(1)
Why Do Wage Rates Differ?	335	(1)
Why Demand and Supply Differ in Different Labor Markets	336	(2)
Why Did You Choose the Major That You Chose?	338	(1)
Marginal Productivity Theory	338	(2)
Labor Markets and Information	340	(2)
Screening Potential Employees	340	(1)
Promoting From Within	341	(1)
Is It Discrimination or Is It an Information Problem?	341	(1)
A Reader Asks	342	(1)
Chapter Summary	342	(1)
Key Terms and Concepts	343	(1)
Questions and Problems	343	(1)
Working With Numbers and Graphs	343	(1)
Internet Activities	344	(1)
Wages, Unions, and Labor	345	(18)
The Facts and Figures of Labor Unions	346	(1)
Types of Unions	346	(1)
A Few Facts and Figures	346	(1)
Objectives of Labor Unions	347	(1)
Employment for All Members	347	(1)
Maximizing the Total Wage Bill	347	(1)
Maximizing Income for a Limited Number of Union Members	347	(1)
Wage-Employment Tradeoff	348	(1)
Practices of Labor Unions	348	(4)
Affecting Elasticity of Demand for Union Labor	349	(1)
Affecting the Demand for Union Labor	349	(1)
Affecting the Supply of Union Labor	350	(1)
Affecting Wages Directly: Collective Bargaining	351	(1)
Strikes	351	(1)
Effects of Labor Unions	352	(8)
The Case of Monopsony	352	(3)
Unions' Effects on Wages	355	(2)
Unions' Effects on Prices	357	(1)
Unions' Effects on Productivity and Efficiency: Two Views	357	(3)
A Reader Asks	360	(1)
Chapter Summary	360	(1)
Key Terms and Concepts	361	(1)
Questions and Problems	361	(1)
Working With Numbers and Graphs	361	(1)
Internet Activities	362	(1)
The Distribution of Income and Poverty	363	(22)
Some Facts About Income Distribution	364	(5)
Who Are the Rich and How Rich Are They?	364	(1)
Adjusting the Income Distribution	364	(3)
The Effect of Age on the Income Distribution	367	(1)
A Simple Equation	368	(1)
Measuring Income Equality	369	(3)
The Lorenz Curve	369	(1)
The Gini Coefficient	370	(1)
A Limitation of the Gini Coefficient	371	(1)
Why Income Inequality Exists	372	(4)
Factors Contributing to Income Inequality	372	(2)
Income Differences: Some Are Voluntary, Some Are Not	374	(2)
Normative Standards of Income Distribution	376	(3)
The Marginal Productivity Normative Standard	376	(2)
The Absolute Income Equality Normative Standard	378	(1)
The Rawlsian Normative Standard	378	(1)
Size of the Income Pies	379	(1)
Poverty	379	(3)
What Is Poverty?	379	(1)
Limitations of the Official Poverty Income Statistics	380	(1)
Who Are the Poor?	380	(1)
What Is the Justification for Government Redistributing Income?	380	(2)
A Reader Asks	382	(1)
Chapter Summary	383	(1)
Key Terms and Concepts	384	(1)
Questions and Problems	384	(1)
Working With Numbers and Graphs	384	(1)
Internet Activities	384	(1)
Interest, Rent, and Profit	385	(18)
Interest	386	(6)
Loanable Funds: Demand and Supply	386	(2)
The Price for Loanable Funds and the Return on Capital Goods Tend to Equality	388	(1)
Why Do Interest Rates Differ?	388	(1)
Nominal and Real Interest Rates	389	(1)
Present Value: What Is Something Tomorrow Worth Today?	390	(1)
Deciding Whether or Not to Purchase a Capital Good	391	(1)
Rent	392	(5)
David Ricardo, the Price of Grain, and Land Rent	393	(1)
The Supply Curve of Land Can Be Upward-Sloping	394	(1)
Economic Rent and Other Factors of Production	395	(1)
Economic Rent and Baseball Players: The Perspective From Which the Factor Is Viewed Matters	395	(1)
Competing for Artificial and Real Rents	396	(1)
Do People Overestimate Their Worth to Others, or Are They Simply Seeking Economic Rent?	396	(1)
Profit	397	(3)
Theories of Profit	397	(1)
What Is Entrepreneurship?	398	(1)
What Do a Microwave Oven and an Errand Runner Have in Common?	398	(1)
Profit and Loss as Signals	399	(1)
A Reader Asks	400	(1)
Chapter Summary	400	(1)
Key Terms and Concepts	401	(1)
Questions and Problems	401	(1)
Working With Numbers and Graphs	401	(1)
Internet Activities	402	(1)
Part 5: Market Failure and Public Choice
Market Failure: Externalities, Public Goods, and Asymmetric Information	403	(27)
Market Failure	404	(1)
Externalities	404	(6)
Costs and Benefits of Activities	404	(1)
Marginal Costs and Benefits of Activities	405	(1)
Social Optimality or Efficiency Conditions	405	(1)
Three Categories of Activities	405	(1)
Externalities in Consumption and in Production	406	(1)
Diagram of a Negative Externality	406	(2)
Diagram of a Positive Externality	408	(2)
Internalizing Externalities	410	(5)
Persuasion	410	(1)
Taxes and Subsidies	410	(1)
Assigning Property Rights	411	(1)
Voluntary Agreements	412	(1)
Combining Property Rights Assignments and Voluntary Agreements	412	(2)
Beyond Internalizing: Setting Regulations	414	(1)
Dealing With a Negative Externality in the Environment	415	(3)
Is No Pollution Worse Than Some Pollution?	415	(1)
Two Methods to Reduce Air Pollution	416	(2)
Public Goods: Excludable and Nonexcludable	418	(3)
Goods	418	(1)
The Free Rider	419	(1)
Nonexcludable Versus Nonrivalrous	420	(1)
Asymmetric Information	421	(5)
Asymmetric Information in a Product Market	421	(1)
Asymmetric Information in a Factor Market	422	(1)
Is There Market Failure?	422	(1)
Adverse Selection	423	(1)
Moral Hazard	424	(2)
A Reader Asks	426	(1)
Chapter Summary	427	(1)
Key Terms and Concepts	428	(1)
Questions and Problems	428	(1)
Working With Numbers and Graphs	428	(1)
Internet Activities	429	(1)
Public Choice: Economic Theory Applied to Politics	430	(27)
Public Choice Theory	431	(1)
The Political Market	431	(3)
Moving Toward the Middle: The Median Voter Model	431	(1)
What Does the Theory Predict?	432	(2)
Voters and Rational Ignorance	434	(2)
The Costs and Benefits of Voting	434	(1)
Rational Ignorance	435	(1)
More About Voting	436	(3)
Example 1: Voting for a Nonexcludable Public Good	436	(2)
Example 2: Voting and Efficiency	438	(1)
Special Interest Groups	439	(8)
Information and Lobbying Efforts	439	(2)
Congressional Districts as Special Interest Groups	441	(1)
Public Interest Talk, Special Interest Legislation	441	(1)
Special Interest Groups and Rent Seeking	442	(5)
Government Bureaucracy	447	(1)
A View of Government	448	(1)
A Reader Asks	448	(1)
Chapter Summary	449	(1)
Key Terms and Concepts	450	(1)
Questions and Problems	450	(1)
Working With Numbers and Graphs	450	(1)
Internet Activities	451	(1)
Appendix C: The Economics of Transfers	452	(1)
The Marginal Return of Transferring	452	(1)
Ability to Effect Transfers	452	(1)
The Transaction Costs of Transfers and ``Money for Nothing''	453	(1)
Political Extortion and Transfers	453	(1)
Voting and Transfers	454	(3)
The World Economy
Part 6: International Economics: Theory and Policy
International Trade	457	(18)
International Trade Theory	458	(3)
How Do Countries Know What to Trade?	458	(3)
How Do Countries Know When They Have a Comparative Advantage?	461	(1)
Trade Restrictions	461	(10)
The Distributional Effects of International Trade	461	(2)
Consumers' and Producers' Surplus	463	(1)
The Benefits and Costs of Trade Restrictions	464	(3)
If Free Trade Results in Net Gain, Why Do Nations Sometimes Restrict Trade?	467	(3)
What Price Jobs?	470	(1)
The World Trade Organization (WTO)	471	(1)
A Reader Asks	471	(1)
Chapter Summary	472	(1)
Key Terms and Concepts	472	(1)
Questions and Problems	473	(1)
Working With Numbers and Graphs	473	(1)
Internet Activities	474	(1)
International Finance	475	(36)
The Balance of Payments	476	(6)
Current Account	476	(4)
Capital Account	480	(1)
Official Reserve Account	480	(1)
Statistical Discrepancy	480	(1)
What the Balance of Payments Equals	481	(1)
The Foreign Exchange Market	482	(2)
The Demand for Goods	482	(1)
The Demand for and Supply of Currencies	483	(1)
Flexible Exchange Rates	484	(4)
The Equilibrium Exchange Rate	484	(1)
Changes in the Equilibrium Exchange Rate	485	(1)
Factors That Affect the Equilibrium Exchange Rate	486	(2)
Fixed Exchange Rates	488	(7)
Fixed Exchange Rates and Overvalued/Undervalued Currency	488	(2)
What Is So Bad About an Overvalued Dollar?	490	(1)
Government Involvement in a Fixed Exchange Rate System	491	(1)
Options Under a Fixed Exchange Rate System	491	(2)
The Gold Standard	493	(2)
Fixed Exchange Rates Versus Flexible Exchange Rates	495	(3)
Promoting International Trade	495	(1)
Optimal Currency Areas	495	(3)
The Current International Monetary System	498	(2)
A Reader Asks	500	(1)
Chapter Summary	500	(1)
Key Terms and Concepts	501	(1)
Questions and Problems	502	(1)
Working With Numbers and Graphs	502	(1)
Internet Activities	503	(2)
Appendix D: Should You Major in Economics?	505	(1)
Five Myths About Economics and an Economics Major	506	(2)
What Awaits You as an Economics Major?	508	(1)
What Do Economists Do?	509	(1)
Places to Find More Information	510	(1)
Concluding Remarks	510	(1)
Self-Test Appendix	511	(16)
Glossary	527	(8)
Index	535