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PRINCIPLES OF MICROECONOMICS:
A
G U I D E D
T O U R
PART ONE: INTRODUCTION
Chapter 1
Ten Principles of Economics
The study of economics is guided by a few big ideas.
Chapter 2
Thinking Like an Economist
Economists view the world as both scientists and policymakers.
Chapter 3
Interdependence and the
Gains from Trade
The theory of comparative advantage explains how people benefit
from economic interdependence.
PART TWO: SUPPLY AND DEMAND I: HOW MARKETS WORK
Chapter 4
The Market Forces of
Supply and Demand
Chapter 5
Elasticity and Its Application
Chapter 6
Supply, Demand, and
Government Policies
How does the economy coordinate interdependent economic
actors? Through the market forces of supply and demand.
The tools of supply and demand are put to work to examine the
effects of various government policies.
PART THREE: SUPPLY AND DEMAND II: MARKETS AND WELFARE
Chapter 7
Consumers, Producers, and
the Efficiency of Markets
Chapter 8
Application: The Costs of
Taxation
Chapter 9
Application: International Trade
Why is the equilibrium of supply and demand desirable for
society as a whole? The concepts of consumer and producer and
surplus explain the efficiency of markets, the costs of taxation,
and the benefits of international trade.
PART FOUR: THE ECONOMICS OF THE PUBLIC SECTOR
Chapter 10
Externalities
Chapter 11
Public Goods and Common
Resources
Chapter 12
The Design of the Tax System
Market outcomes are not always efficient, and governments can
sometimes remedy market failure.
To fund programs, governments raise revenue through their tax
systems, which are designed with an eye toward balancing
efficiency and equity.
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PART FIVE: FIRM BEHAVIOUR AND THE ORGANIZATION OF INDUSTRY
Chapter 13
The Costs of Production
Chapter 14
Firms in Competitive Markets
Chapter 15
Monopoly
Chapter 16
Monopolistic Competition
Chapter 17
Oligopoly
The theory of the firm sheds light on the decisions that lie behind
supply in competitive markets.
Firms with market power can cause market outcomes to be
inefficient.
PART SIX: THE ECONOMICS OF LABOUR MARKETS
Chapter 18
The Markets for the Factors
of Production
Chapter 19
Earnings and Discrimination
Chapter 20
Income Inequality and Poverty
The special features of labour markets, in which most people earn
most of their income.
PART SEVEN: TOPICS FOR FURTHER STUDY
Chapter 21
The Theory of Consumer Choice
Chapter 22
Frontiers of Microeconomics
Additional topics in microeconomics include household decision
making, asymmetric information, political economy, and
behavioural economics.
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PRINCIPLES
OF
MICROECONOMICS
FIFTH CANADIAN EDITION
N . G R E G O RY M A N K I W
H A RVA R D U N I V E R S I T Y
RONALD D. KNEEBONE
U N I V E R S I T Y O F C A L G A RY
KENNETH J. McKENZIE
U N I V E R S I T Y O F C A L G A RY
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Principles of Microeconomics, Fifth Canadian Edition
by N. Gregory Mankiw, Ronald D. Kneebone, and Kenneth J. McKenzie
Associate Vice President,
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Evelyn Veitch
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COPYRIGHT © 2011, 2008 by
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Adapted from Principles of Microeconomics, Fifth Edition, by
N. Gregory Mankiw, published by
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Learning. Copyright © 2009 by
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For more information contact
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Mankiw, N. Gregory
Principles of microeconomics /
N. Gregory Mankiw, Ronald D.
Kneebone, Kenneth J.
McKenzie. — 5th Canadian ed.
Includes index.
Previous Canadian eds. written by
N. Gregory Mankiw . . . [et al.].
ISBN 978-0-17-650241-6
1. Microeconomics—Textbooks.
2. Microeconomics—Canada—
Textbooks. I. Kneebone, Ronald
D. (Ronald David), 1955–
II. McKenzie, Kenneth J. (Kenneth
James), 1959– III. Title.
HB172.M363 2010
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ISBN-13: 978-0-17-650241-6
ISBN-10: 0-17-650241-6
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Page v
To Catherine, Nicholas, and Peter,
my other contributions to the next generation
To our parents
and
Cindy,
Kathleen, and Janetta
Thanks for your support and patience
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Page vii
B R I E F
C O N T E N T S
PART 1
INTRODUCTION
CHAPTER 1
CHAPTER 2
Ten Principles of Economics 3
Thinking Like an Economist 21
Appendix Graphing: A Brief Review 42
Interdependence and the Gains
from Trade 51
CHAPTER 3
PART 2
CHAPTER 4
CHAPTER 5
CHAPTER 6
1
SUPPLY AND DEMAND I: HOW MARKETS
WORK 67
The Market Forces of Supply
and Demand 69
Elasticity and Its Application 95
Supply, Demand, and Government
Policies 119
PART 3
SUPPLY AND DEMAND II: MARKETS AND
WELFARE 143
CHAPTER 7
Consumers, Producers, and the Efficiency
of Markets 145
Application: The Costs of Taxation 165
Application: International Trade 181
CHAPTER 8
CHAPTER 9
PART 4
THE ECONOMICS OF THE PUBLIC
SECTOR 203
CHAPTER 10
CHAPTER 11
Externalities 205
Public Goods and Common
Resources 229
The Design of the Tax System 245
CHAPTER 12
NEL
PART 5
FIRM BEHAVIOUR AND THE
ORGANIZATION OF INDUSTRY
267
CHAPTER 13
CHAPTER 14
CHAPTER 15
CHAPTER 16
CHAPTER 17
The Costs of Production 269
Firms in Competitive Markets 291
Monopoly 313
Monopolistic Competition 345
Oligopoly 365
PART 6
THE ECONOMICS OF LABOUR
MARKETS 391
CHAPTER 18
CHAPTER 19
CHAPTER 20
The Markets for the Factors
of Production 393
Earnings and Discrimination 415
Income Inequality and Poverty 435
PART 7
TOPICS FOR FURTHER STUDY
CHAPTER 21
CHAPTER 22
The Theory of Consumer Choice 459
Frontiers of Microeconomics 487
457
Glossary 509
Index
513
vii
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T A B L E
O F
Tupungato/Shutterstock.com
Preface xvii
How the Book Is Organized xvii
Walk-Through xx
New in This Fifth Canadian Edition xxiii
Supplements xxiv
About the Authors xxvii
Acknowledgments xxviii
PART 1
INTRODUCTION
Learning Objectives
1
3
3
How People Make Decisions 4
Principle #1: People Face Tradeoffs 4
Principle #2: The Cost of Something
Is What You Give Up to Get It 5
IN THE NEWS: Using Opportunity Cost to Sell 6
Principle #3: Rational People Think at the Margin 8
Principle #4: People Respond to Incentives 9
How People Interact 10
Principle #5: Trade Can Make Everyone Better Off 10
Principle #6: Markets Are Usually a Good Way to
Organize Economic Activity 10
FYI: Adam Smith and the Invisible Hand 12
Principle #7: Governments Can Sometimes Improve
Market Outcomes 12
viii
How the Economy as a Whole Works 13
Principle #8: A Country’s Standard of Living
Depends on Its Ability to Produce Goods
and Services 13
Principle #9: Prices Rise When the Government
Prints Too Much Money 14
Principle #10: Society Faces a Short-Run Tradeoff
between Inflation and Unemployment 15
FYI: How to Read This Book 16
Conclusion 17
Summary 17
Key Concepts 17
Questions for Review 18
Problems and Applications 18
CHAPTER 2
THINKING LIKE AN ECONOMIST
CHAPTER 1
TEN PRINCIPLES OF ECONOMICS
C O N T E N T S
Learning Objectives
21
21
The Economist as Scientist 22
The Scientific Method: Observation, Theory,
and More Observation 22
The Role of Assumptions 23
Economic Models 24
Our First Model: The Circular-Flow Diagram 24
Our Second Model: The Production Possibilities
Frontier 26
Microeconomics and Macroeconomics 28
The Economist as Policy Adviser 30
Positive versus Normative Analysis 30
Economists in Ottawa 31
IN THE NEWS: Super Bowl Economics 33
CASE STUDY: Mr. Mankiw Goes to Washington
Why Economists Disagree 35
Differences in Scientific Judgments 35
Differences in Values 36
Perception versus Reality 36
IN THE NEWS: Environmental Economists
34
37
NEL
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TABLE OF CONTENTS
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Let’s Get Going 38
Summary 39
Key Concepts 39
Questions for Review 39
Problems and Applications 40
Appendix Graphing: A Brief Review 42
Graphs of a Single Variable 42
Graphs of Two Variables: The Coordinate System 42
Curves in the Coordinate System 43
Slope 47
Cause and Effect 48
PART 2
SUPPLY AND DEMAND I:
HOW MARKETS WORK 67
CHAPTER 3
INTERDEPENDENCE AND THE GAINS FROM TRADE
Learning Objectives
ix
51
51
A Parable for the Modern Economy
Production Possibilities 52
Specialization and Trade 54
52
Comparative Advantage: The Driving Force
of Specialization 56
Absolute Advantage 57
Opportunity Cost and Comparative Advantage 57
Comparative Advantage and Trade 58
FYI: The Legacy of Adam Smith and David Ricardo 59
The Price of the Trade 59
IN THE NEWS: How Committed Is Canada to Free
Trade? 60
Applications of Comparative Advantage 61
Should Mike Weir Mow His Own Lawn? 61
Should Canada Trade with Other Countries? 62
Conclusion 63
Summary 63
Key Concepts 63
Questions for Review 63
Problems and Applications 64
CHAPTER 4
THE MARKET FORCES OF SUPPLY AND DEMAND
Learning Objectives
69
69
Markets and Competition 70
What Is a Market? 70
What Is Competition? 70
Demand 71
The Demand Curve: The Relationship between
Price and Quantity Demanded 71
Market Demand versus Individual Demand 72
Shifts in the Demand Curve 73
CASE STUDY: Two Ways to Reduce the Quantity
of Smoking Demanded 76
Supply 77
The Supply Curve: The Relationship between
Price and Quantity Supplied 77
Market Supply versus Individual Supply 79
Shifts in the Supply Curve 79
Supply and Demand Together 81
Equilibrium 81
Three Steps to Analyzing Changes in Equilibrium 83
IN THE NEWS: Supply, Demand, and Technology 88
Conclusion: How Prices Allocate Resources 89
Summary 90
Key Concepts 91
Questions for Review 91
Problems and Applications 91
NEL
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TABLE OF CONTENTS
CHAPTER 5
ELASTICITY AND ITS APPLICATION
Learning Objectives
95
95
The Elasticity of Demand 96
The Price Elasticity of Demand and Its
Determinants 96
Computing the Price Elasticity of Demand 97
The Midpoint Method: A Better Way to Calculate
Percentage Changes and Elasticities 97
The Variety of Demand Curves 98
Total Revenue and the Price Elasticity of Demand 99
Elasticity and Total Revenue along a Linear Demand
Curve 101
Other Demand Elasticities 103
IN THE NEWS: The Elasticity of Caffeine 104
The Elasticity of Supply 105
The Price Elasticity of Supply and Its
Determinants 105
Computing the Price Elasticity of Supply 106
The Variety of Supply Curves 106
Three Applications of Supply, Demand,
and Elasticity 109
Can Good News for Farming Be Bad News for
Farmers? 109
Why Did OPEC Fail to Keep the Price of Oil
High? 111
Does Drug Interdiction Increase or Drecrease
Drug-Related Crime? 113
Conclusion 115
Summary 115
Key Concepts
IN THE NEWS: Does a Drought Need to Cause a Water
Shortage? 126
CASE STUDY: The Minimum Wage 127
Evaluating Price Controls 130
Taxes 131
How Taxes on Buyers Affect Market Outcomes 132
How Taxes on Sellers Affect Market Outcomes 133
CASE STUDY: Can Parliament Distribute the Burden
of a Payroll Tax? 135
Elasticity and Tax Incidence 136
Conclusion 138
Summary 138
Key Concepts
138
Questions for Review 139
Problems and Applications 139
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PART 3
SUPPLY AND DEMAND II:
MARKETS AND WELFARE 143
115
Questions for Review 116
Problems and Applications 116
CHAPTER 7
CONSUMERS, PRODUCERS,
AND THE EFFICIENCY OF MARKETS
Learning Objectives
CHAPTER 6
SUPPLY, DEMAND, AND GOVERNMENT
POLICIES 119
Learning Objectives
119
Controls on Prices 120
How Price Ceilings Affect Market Outcomes 120
CASE STUDY: Lines at the Gas Pump 122
CASE STUDY: Rent Control in the Short Run
and Long Run 123
How Price Floors Affect Market Outcomes 125
145
145
Consumer Surplus 146
Willingness to Pay 146
Using the Demand Curve to Measure Consumer
Surplus 147
How a Lower Price Raises Consumer Surplus 148
What Does Consumer Surplus Measure? 149
Producer Surplus 151
Cost and the Willingness to Sell 151
Using the Supply Curve to Measure Producer Surplus 152
How a Higher Price Raises Producer Surplus 154
NEL
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xi
TABLE OF CONTENTS
Market Efficiency 155
The Benevolent Social Planner 155
Evaluating the Market Equilibrium 156
CASE STUDY: Should Ticket Scalping Be Illegal? 159
IN THE NEWS: Scalping Their Own Tickets 160
Conclusion: Market Efficiency and Market Failure 161
Summary 162
Key Concepts 162
Questions for Review 162
Problems and Applications 162
The Arguments for Restricting Trade 193
The Jobs Argument 193
The National-Security Argument 194
The Infant-Industry Argument 194
The Unfair-Competition Argument 195
The Protection-as-a-Bargaining-Chip Argument 195
CASE STUDY: Trade Agreements and the World Trade
Organization 195
IN THE NEWS: A Rethink of Canada’s Trade Focus 196
Conclusion 198
Summary 199
199
Key Concepts
CHAPTER 8
APPLICATION: THE COSTS OF TAXATION
Learning Objectives
165
Questions for Review 199
Problems and Applications 200
165
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The Deadweight Loss of Taxation 166
How a Tax Affects Market Participants 166
Deadweight Losses and the Gains from Trade 169
The Determinants of the Deadweight Loss 171
CASE STUDY: The Deadweight Loss Debate 171
FYI: Henry George and the Land Tax 174
Deadweight Loss and Tax Revenue as Taxes Vary 174
CASE STUDY: The Laffer Curve and Supply-Side
Economics 176
Conclusion 177
Summary 178
Key Concepts 178
Questions for Review 178
Problems and Applications 178
CHAPTER 10
CHAPTER 9
EXTERNALITIES
APPLICATION: INTERNATIONAL TRADE
Learning Objectives
PART 4
THE ECONOMICS OF
THE PUBLIC SECTOR 203
181
205
Learning Objectives
205
181
The Determinants of Trade 182
The Equilibrium without Trade 182
The World Price and Comparative Advantage 183
The Winners and Losers from Trade 184
The Gains and Losses of an Exporting Country 184
The Gains and Losses of an Importing Country 186
The Effects of a Tariff 187
FYI: Import Quotas: Another Way to Restrict Trade 189
IN THE NEWS: Canada, the United States, and
Softwood Lumber 190
The Lessons for Trade Policy 190
Other Benefits of International Trade 192
Externalities and Market Inefficiency 207
Welfare Economics: A Recap 207
Negative Externalities 208
Positive Externalities 211
CASE STUDY: Technology Spillovers and
Industrial Policy 213
Public Policies toward Externalities 214
Command-and-Control Policies: Regulation 214
Market-Based Policy 1: Corrective Taxes
and Subsidies 215
CASE STUDY: Why Is Gasoline Taxed So Heavily? 216
Market-Based Policy 2: Tradable Pollution Permits 217
Objections to the Economic Analysis of Pollution 219
NEL
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TABLE OF CONTENTS
IN THE NEWS: Economic Policy and Climate Change 220
Private Solutions to Externalities 220
The Types of Private Solutions 220
The Coase Theorem 222
Why Private Solutions Do Not Always Work 223
Conclusion 224
Summary 224
Key Concepts 225
Questions for Review 225
Problems and Applications 225
CHAPTER 11
PUBLIC GOODS AND COMMON RESOURCES
Learning Objectives
229
229
The Different Kinds of Goods 230
Administrative Burden 256
Average Tax Rates versus Marginal Tax Rates
Lump-Sum Taxes 257
256
Taxes and Equity 257
The Benefits Principle 258
The Ability-to-Pay Principle 258
CASE STUDY: How the Tax Burden Is Distributed 259
Tax Incidence and Tax Equity 260
CASE STUDY: Who Pays the Corporate Income Tax? 261
IN THE NEWS: Corporate Taxes and Wages 262
Conclusion: The Tradeoff between Equity and
Efficiency 264
Summary 264
Key Concepts 264
Questions for Review 265
Problems and Applications 265
Common Resources 237
The Tragedy of the Commons 237
IN THE NEWS: Solutions to Road Congestion 238
Some Important Common Resources 239
CASE STUDY: The Collapse of the Atlantic
Cod Fishery 240
Conclusion: The Importance of Property Rights 242
Summary 242
Key Concepts 243
Questions for Review 243
Problems and Applications 243
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Public Goods 232
The Free-Rider Problem 232
Some Important Public Goods 232
CASE STUDY: Are Lighthouses Public Goods? 234
The Difficult Job of Cost–Benefit Analysis 235
CASE STUDY: How Much Is a Life Worth? 235
PART 5
FIRM BEHAVIOUR AND
THE ORGANIZATION OF INDUSTRY
267
CHAPTER 13
THE COSTS OF PRODUCTION
CHAPTER 12
Learning Objectives
THE DESIGN OF THE TAX SYSTEM
Learning Objectives
269
269
245
245
A Financial Overview of Canadian Governments 246
The Federal Government 248
Provincial/Territorial and Local Governments 251
What Are Costs? 270
Total Revenue, Total Cost, and Profit 270
Costs as Opportunity Costs 270
The Cost of Capital as an Opportunity Cost 271
Economic Profit versus Accounting Profit 272
Taxes and Efficiency 253
Deadweight Losses 254
CASE STUDY: Should Income or Consumption
Be Taxed? 255
Production and Costs 273
The Production Function 273
From the Production Function to the
Total-Cost Curve 275
NEL
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TABLE OF CONTENTS
The Various Measures of Cost 276
Fixed and Variable Costs 277
Average and Marginal Costs 278
Cost Curves and Their Shapes 279
Typical Cost Curves 281
xiii
Conclusion: Behind the Supply Curve 309
Summary 309
310
Key Concepts
Questions for Review 310
Problems and Applications 310
Costs in the Short Run and in the Long Run 282
The Relationship between Short-Run and Long-Run
Average Total Cost 282
Economies and Diseconomies of Scale 284
FYI: Lessons from a Pin Factory 284
Summary 285
313
Questions for Review 287
Problems and Applications 287
CHAPTER 14
FIRMS IN COMPETITIVE MARKETS
313
Why Monopolies Arise 314
Monopoly Resources 315
Government-Created Monopolies
Natural Monopolies 316
286
Learning Objectives
MONOPOLY
Learning Objectives
Conclusion 285
Key Concepts
CHAPTER 15
291
291
What Is a Competitive Market? 292
The Meaning of Competition 292
The Revenue of a Competitive Firm 292
Profit Maximization and the Competitive Firm’s Supply
Curve 294
A Simple Example of Profit Maximization 294
The Marginal-Cost Curve and the Firm’s
Supply Decision 295
The Firm’s Short-Run Decision to Shut Down 297
Spilt Milk and Other Sunk Costs 299
CASE STUDY: Near-Empty Restaurants and Off-Season
Miniature Golf 300
The Firm’s Long-Run Decision to Exit or Enter a
Market 300
Measuring Profit in Our Graph for the
Competitive Firm 301
The Supply Curve in a Competitive Market 303
The Short Run: Market Supply with a Fixed
Number of Firms 303
The Long Run: Market Supply with Entry
and Exit 304
Why Do Competitive Firms Stay in Business If They
Make Zero Profit? 306
A Shift in Demand in the Short Run and Long Run 306
Why the Long-Run Supply Curve Might Slope
Upward 308
315
How Monopolies Make Production and
Pricing Decisions 317
Monopoly versus Competition 317
A Monopoly’s Revenue 318
Profit Maximization 321
FYI: Why a Monopoly Does Not Have a
Supply Curve 322
A Monopoly’s Profit 323
CASE STUDY: Monopoly Drugs versus
Generic Drugs 324
The Welfare Cost of Monopoly 325
The Deadweight Loss 325
The Monopoly’s Profit: A Social Cost? 327
Price Discrimination 328
A Parable about Pricing 329
The Moral of the Story 330
The Analytics of Price Discrimination 330
Examples of Price Discrimination 333
Public Policy toward Monopolies 334
Increasing Competition with Competition Law 334
Regulation 335
Public Ownership 336
Doing Nothing 337
Conclusion: The Prevalence of Monopoly 337
IN THE NEWS: Price Discrimination: Opportunities
for Arbitrage 338
Summary 339
Key Concepts 340
Questions for Review 340
Problems and Applications 341
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CHAPTER 16
MONOPOLISTIC COMPETITION
Learning Objectives
345
345
Between Monopoly and Perfect Competition 346
Competition with Differentiated Products 348
The Monopolistically Competitive Firm in the
Short Run 348
The Long-Run Equilibrium 348
Monopolistic versus Perfect Competition 350
Monopolistic Competition and the
Welfare of Society 352
Advertising 353
IN THE NEWS: Insufficient Variety as a
Market Failure 354
The Debate over Advertising 354
CASE STUDY: Advertising and the Price of Eyeglasses 356
Advertising as a Signal of Quality 357
Brand Names 358
FYI: Galbraith versus Hayek 359
Conclusion 360
Summary 361
Key Concepts 361
Questions for Review 361
Problems and Applications 362
PART 6
THE ECONOMICS
OF LABOUR MARKETS 391
CHAPTER 18
CHAPTER 17
OLIGOPOLY
CASE STUDY: Collusion in Quebec Driving Schools 378
IN THE NEWS: Aumann and Schelling 379
Controversies over Competition Policy 380
IN THE NEWS: Do We Need Competition Policy? 383
CASE STUDY: The Microsoft Case 384
Conclusion 386
Summary 386
Key Concepts 386
Questions for Review 386
Problems and Applications 387
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Learning Objectives
365
THE MARKETS FOR THE FACTORS
OF PRODUCTION 393
Learning Objectives
Markets with Only a Few Sellers 366
A Duopoly Example 366
Competition, Monopolies, and Cartels 367
The Equilibrium for an Oligopoly 367
How the Size of an Oligopoly Affects the
Market Outcome 369
The Economics of Cooperation 370
The Prisoners’ Dilemma 370
Oligopolies as a Prisoners’ Dilemma 372
CASE STUDY: OPEC and the World Oil Market 373
Other Examples of the Prisoners’ Dilemma 373
The Prisoners’ Dilemma and the Welfare of Society 375
Why People Sometimes Cooperate 375
CASE STUDY: The Prisoners’ Dilemma Tournament 376
Public Policy toward Oligopolies 377
Restraint of Trade and the Competition Act 377
393
The Demand for Labour 394
The Competitive, Profit-Maximizing Firm 394
The Production Function and the Marginal Product
of Labour 395
The Value of the Marginal Product and the Demand
for Labour 397
FYI: Input Demand and Output Supply: Two Sides
of the Same Coin 399
What Causes the Labour Demand Curve to Shift? 399
The Supply of Labour 400
The Tradeoff between Work and Leisure 400
What Causes the Labour Supply Curve
to Shift? 401
Equilibrium in the Labour Market 402
Shifts in Labour Supply 402
Shifts in Labour Demand 403
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TABLE OF CONTENTS
The Other Factors of Production: Land and Capital 408
Equilibrium in the Markets for Land and Capital 408
Linkages among the Factors of Production 409
FYI: What Is Capital Income? 410
Conclusion 411
Summary 411
Key Concepts 412
Questions for Review 412
Problems and Applications 412
CHAPTER 19
EARNINGS AND DISCRIMINATION
Learning Objectives
415
415
Some Determinants of Equilibrium Wages 415
Compensating Differentials 416
Human Capital 416
CASE STUDY: The Value of Skills 417
Ability, Effort, and Chance 419
CASE STUDY: The Benefits of Beauty 420
An Alternative View of Education: Signalling 421
The Superstar Phenomenon 421
Above-Equilibrium Wages: Minimum-Wage Laws, Unions,
and Efficiency Wages 422
The Economics of Discrimination 423
Measuring Labour-Market Discrimination 423
Discrimination by Employers 424
CASE STUDY: Explaining the Gender Wage Gap 425
IN THE NEWS: More Women on Campus 427
Discrimination by Customers and Governments 429
CASE STUDY: Discrimination in Sports 429
Conclusion 431
Summary 431
Key Concepts 432
Questions for Review 432
Problems and Applications 432
Income Inequality around the World 438
The Poverty Rate 439
Problems in Measuring Inequality 440
Economic Mobility 442
IN THE NEWS: Child Poverty 443
The Political Philosophy of Redistributing Income 444
Utilitarianism 444
Liberalism 445
Libertarianism 446
Policies to Reduce Poverty 447
Minimum-Wage Laws 448
Welfare 448
Negative Income Tax 449
In-Kind Transfers 449
Employment Insurance 450
IN THE NEWS: EI and Work Incentives
Conclusion 452
Summary 453
Key Concepts 453
Questions for Review 453
Problems and Applications 454
451
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IN THE NEWS: Immigration and Growth 404
CASE STUDY: Productivity and Wages 406
FYI: Monopsony 407
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PART 7
TOPICS FOR FURTHER STUDY
457
CHAPTER 21
THE THEORY OF CONSUMER CHOICE
Learning Objectives
459
459
CHAPTER 20
INCOME INEQUALITY AND POVERTY
Learning Objectives
435
The Budget Constraint: What the Consumer Can Afford 460
435
The Measurement of Inequality 436
Canadian Income Inequality 436
CASE STUDY: Income Redistribution in Canada 437
Preferences: What the Consumer Wants 461
Representing Preferences with Indifference Curves 462
Four Properties of Indifference Curves 463
Two Extreme Examples of Indifference Curves 464
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Optimization: What the Consumer Chooses 466
The Consumer’s Optimal Choices 467
FYI: Utility: An Alternative Way to Describe Preferences
and Optimization 468
How Changes in Income Affect the Consumer’s
Choices 468
How Changes in Prices Affect the Consumer’s
Choices 469
Income and Substitution Effects 470
Deriving the Demand Curve 472
Three Applications 474
Do All Demand Curves Slope Downward? 474
CASE STUDY: The Search for Giffen Goods 475
How Do Wages Affect Labour Supply? 476
CASE STUDY: Income Effects on Labour Supply:
Historical Trends, Lottery Winners, and
the Carnegie Conjecture 478
How Do Interest Rates Affect Household Saving? 479
Conclusion: Do People Really Think This Way? 482
Summary 482
Key Concepts 483
Questions for Review 483
Problems and Applications 483
CHAPTER 22
FRONTIERS OF MICROECONOMICS
Learning Objectives
487
487
FYI: Corporate Management 489
Hidden Characteristics: Adverse Selection and
the Lemons Problem 490
Signalling to Convey Private Information 490
CASE STUDY: Gifts as Signals 491
Screening to Induce Information Revelation 492
Asymmetric Information and Public Policy 493
CASE STUDY: Asymmetric Information and the 2007–2009
Financial Crisis 493
Political Economy 495
The Condorcet Voting Paradox 495
Arrow’s Impossibility Theorem 496
The Median Voter Is King 497
Politicians Are People, Too 499
Behavioural Economics 500
People Aren’t Always Rational 500
People Care About Fairness 501
IN THE NEWS: This Is Your Brain on Economics
People Are Inconsistent over Time 504
Conclusion 505
Summary 505
Key Concepts 505
Questions for Review 506
Problems and Applications 506
502
Glossary 509
Index
513
Asymmetric Information 488
Hidden Actions: Principals, Agents, and Moral
Hazard 488
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P R E FA C E
As soon as we got our hands on the first U.S. edition of Principles of Microeconomics, it was clear to us that “this one is different.” If other first-year economics
textbooks are encyclopedias, Gregory Mankiw’s was, and still is, a handbook.
Between us, we have many years of experience teaching first-year economics.
Like many instructors, we found it harder and harder to teach with each new edition of the thick, standard texts. It was simply impossible to cover all of the material. Of course, we could have skipped sections, features, or whole chapters, but
then, apart from the sheer hassle of telling students which bits to read and not to
read, and worries about the consistencies and completeness of the remaining
material, we ran the risk of leaving students with the philosophy that what matters is only what’s on the exam.
We do not believe that the writers of these other books set out with the intention of cramming so much material into them. It is a difficult task to put together
the perfect textbook—one that all instructors would approve of and that all students would enjoy using. Therefore, to please all potential users, most of the
books end up covering a wide range of topics. And so the books grow and grow.
Professor Mankiw made a fresh start in the first U.S. edition. He included all
the important topics and presented them in order of importance. And in the fifth
U.S. edition, he has resisted the temptation to add more and more material. We
have, in adapting the text for Canadian students, taken a minimalist approach: “If
it isn’t broken, don’t fix it!” While the book is easily recognizable as Mankiw’s,
we have made changes that increase its relevance to Canadian students. Some of
these changes reflect important differences between the Canadian and U.S.
economies. For example, the Canadian economy is much smaller and more open
than the U.S. economy, and this fact is explicitly recognized in this edition. Other
changes reflect important institutional differences between the two countries,
including the structure of the tax system and the nature of competition policy.
Finally, the Canadian edition focuses on issues and includes examples that are
more familiar and relevant to a Canadian audience.
We would not have agreed to participate in the Canadian edition if we were
not extremely impressed with the U.S. edition. Professor Mankiw has done an
outstanding job of identifying the key concepts and principles that every firstyear student should learn.
It was truly a pleasure to work with such a well-thought-out and well-written
book. We have enjoyed teaching from the earlier Canadian editions and we look
forward to using the fifth Canadian edition. We hope you do, too.
Finally, we wish to acknowledge the contributions of our friend and colleague
Nick Rowe of Carleton University. We began our work adapting Professor
Mankiw’s book with Nick, and while he decided to leave the project with this
edition, his contributions to the book remain and we acknowledge his help and
advice.
HOW THE BOOK IS ORGANIZED
To write a brief and student-friendly book, Mankiw considered new ways to
organize familiar material. What follows is a whirlwind tour of this text. The tour,
we hope, will give you a sense of how the pieces fit together.
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PREFACE
Introductory Material
Chapter 1, “Ten Principles of Economics,” introduces students to the economist’s
view of the world. It previews some of the big ideas that recur throughout
economics, such as opportunity costs, marginal decision making, the role of
incentives, the gain from trade, and the efficiency of market allocations.
Throughout the text an effort is made to relate the discussion back to the ten principles of economics introduced in Chapter 1. The interconnections of the material
with the ten principles are clearly identified throughout the text.
Chapter 2, “Thinking Like an Economist,” examines how economists approach
their field of study, discussing the role of assumptions in developing a theory and
introducing the concepts of an economic model. It also discusses the role of economists in making policy. The appendix to this chapter offers a brief refresher
course on how graphs are used and how they can be abused.
Chapter 3, “Interdependence and the Gains from Trade,” presents the theory of
comparative advantage. This theory explains why individuals trade with their
neighbours, as well as why nations trade with other nations. Much of economics
is about how market forces coordinate many individual production and consumption decisions. As a starting point for this analysis, students see in this
chapter why specialization, interdependence, and trade can benefit everyone.
The Fundamental Tools of Supply and Demand
The next three chapters introduce the basic tools of supply and demand. Chapter
4, “The Market Forces of Supply and Demand,” develops the supply curve, the
demand curve, and the notion of market equilibrium. Chapter 5, “Elasticity
and Its Application,” introduces the concept of elasticity and uses it to analyze
events in three different markets. Chapter 6, “Supply, Demand, and Government
Policies,” uses these tools to examine price controls, such as rent-control and
minimum-wage laws, and tax incidence.
Chapter 7, “Consumers, Producers, and the Efficiency of Markets,” extends the
analysis of supply and demand using the concepts of consumer surplus and producer surplus. It begins by developing the link between consumers’ willingness to
pay and the demand curve, and the link between producers’ costs of production
and the supply curve. It then shows that the market equilibrium maximizes the
sum of the producer and consumer surplus. Thus, students learn early about the
efficiency of market allocations.
The next two chapters apply the concepts of producer and consumer surplus
to questions of policy. Chapter 8, “Application: The Costs of Taxation,” shows
why taxation results in deadweight losses and what determines the size of those
losses. Chapter 9, “Application: International Trade,” considers who wins and
who loses from international trade and presents the debate over protectionist
trade policies.
More Microeconomics
Having examined why market allocations are often desirable, the book then considers how the government can sometimes improve on them. Chapter 10, “Exter-
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PREFACE
xix
nalities,” explains how external effects such as pollution can render market outcomes inefficient and discusses the possible public and private solutions to those
inefficiencies. Chapter 11, “Public Goods and Common Resources,” considers the
problems that arise when goods, such as national defence, have no market price.
Chapter 12, “The Design of the Tax System,” describes how the government
raises the revenue necessary to pay for public goods. It presents some institutional background about the Canadian tax system and then discusses how the
goals of efficiency and equity come into play when designing a tax system.
The next five chapters examine firm behaviour and industrial organization.
Chapter 13, “The Costs of Production,” discusses what to include in a firm’s
costs and introduces cost curves. Chapter 14, “Firms in Competitive Markets,”
analyzes the behaviour of price-taking firms and derives the market supply
curve. Chapter 15, “Monopoly,” discusses the behaviour of a firm that is the sole
seller in its market, the inefficiency of monopoly pricing, the possible policy
responses, and the attempts by monopolies to price-discriminate. Chapter 16,
“Monopolistic Competition,” looks at behaviour in a market in which many
sellers offer similar but differentiated products. It also discusses the debate over
the effects of advertising. Chapter 17, “Oligopoly,” covers markets in which
there are only a few sellers, using the prisoners’ dilemma as the model for examining strategic interaction.
The next three chapters present issues related to labour markets. Chapter 18,
“The Markets for the Factors of Production,” emphasizes the link between factor
prices and marginal productivity. Chapter 19, “Earnings and Discrimination,”
discusses the determinants of equilibrium wages, including compensating differentials, human capital, and discrimination. Chapter 20, “Income Inequality and
Poverty,” examines the degree of inequality in Canadian society, alternative
views about the government’s role in changing the distribution of income, and
various policies aimed at helping society’s poorest members.
The final two chapters present optional material. Chapter 21, “The Theory of
Consumer Choice,” analyzes individual decision making using budget constraints and indifference curves. Chapter 22, “Frontiers of Microeconomics,”
introduces the topics of asymmetric information, political economy, and behavioural economics. Some instructors may skip all or some of this material. Instructors who do cover these topics may choose to assign these chapters earlier than
they are presented in this text, and they have been written to give that flexibility.
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PREFACE
WALK-THROUGH
The purpose of this text is to help students learn the fundamental lessons of economics and to show how such lessons can be applied to the world in which they
live. Toward that end, various learning tools recur throughout the book.
Chapter Openers
Welldesigned chapter openers act as
previews that summarize the
major concepts to be learned in
each chapter.
Case Studies Economic theory is useful and interesting only if
it can be applied to understanding actual events and policies.
Updated or replaced with more current Canadian examples, this
book therefore contains numerous case studies that apply the
theory that has just been developed.
Figures and Tables
Colourful and eye-catching visuals are
used to make important economic points and to clarify
Canadian and other key economic concepts. These have also
proved to be valuable and memorable teaching aids.
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PREFACE
Updated Canadian “In the News” Features
One benefit that students gain from studying
economics is a new perspective and greater
understanding about news from Canada and
around the world. To highlight this benefit, there
are excerpts from many Canadian news articles,
some of which are opinion columns written by
prominent economists. These articles show how
basic economic theory can be applied.
xxi
“FYI” Features
These features provide
additional material “for your information.” Some
of them offer a glimpse into the history of
economic thought. Others clarify technical issues.
Still others discuss supplementary topics that
instructors might choose either to discuss or skip
in their lectures.
Key Concept Definitions
When key concepts
are introduced in the chapter, they are presented in
bold typeface. In addition, their definitions are
placed in the margin and in the “Glossary” at the
back of the book. This treatment should aid
students in learning and reviewing the material.
QuickQuizzes After each major section,
students are offered a quick quiz to check their
comprehension of what they have just learned. If
students cannot readily answer these quizzes, they
should stop and reread the material before
continuing.
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PREFACE
Chapter Summaries
Each chapter ends with a brief
summary that reminds students of the most important
lessons that they have just learned. Later in their study,
it offers an efficient way to review for exams.
List of Key Concepts
A list of key concepts at the
end of each chapter offers students a way to test their
understanding of the new terms that have been
introduced. Page references are included so that
students can review the terms they do not understand.
Questions for Review At the end of each chapter
are questions for review that cover the chapter’s
primary lessons. Students can use these questions to
check their comprehension and to prepare for exams.
Problems and Applications Each chapter also
contains a variety of problems and applications that ask
students to apply the material they have learned. Some
instructors may use these questions for homework
assignments. Others may use them as a starting point
for classroom discussion.
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NEW IN THIS FIFTH CANADIAN EDITION
Chapter 9 A fresh “In the News” feature, “Look beyond the U.S.,” examines
the closely linked trading partners of Canada and the United States.
Chapter 12 “A Toll on the Common Man,” a new “In the News” feature,
argues that workers end up bearing the burden of corporate taxes.
Chapter 16 “If the Shoe Doesn’t Fit,” a new “In the News” feature, argues that
in the presence of large fixed costs, the market may insufficiently service customers with unusual preferences.
Chapter 17 A new “In the News” feature, “Economic Work on ‘Game Theory’
Wins Nobel Prize,” discusses two prominent game theorists who won the Nobel
Prize.
Current Canadian Information Tables, charts, graphs, and diagrams have
been updated to reflect the most current Canadian information available at the
time of publication.
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PREFACE
SUPPLEMENTS
For the Instructor
The Nelson Education Teaching Advantage (NETA) program delivers researchbased resources that promote student engagement and higher-order thinking and
enable the success of Canadian students and educators.
The primary NETA components are NETA Engagement and NETA
Assessment.
NETA Engagement The foundational principles underlying NETA
Engagement are student-centred learning, deep learning, active learning, and
creating positive classroom environments. The NETA Instructor’s Guide to
Classroom Engagement (NETA IGCE) provides an overview of the research
underlying these principles. The structure of the Classroom Engagement
Activities was created by Dr. Roger Fisher and validated by an interdisciplinary
editorial advisory board of scholars of teaching and learning.
Editorial Advisory Board:
Norman Althouse, Haskayne School of Business, University of Calgary
Brenda Chant-Smith, Department of Psychology, Trent University
Scott Follows, Manning School of Business Administration, Acadia University
Glen Loppnow, Department of Chemistry, University of Alberta
Tanya Noel, Department of Biology, York University
Gary Poole, Director, Centre for Teaching and Academic Growth and School of
Population and Public Health, University of British Columbia
Dan Pratt, Department of Educational Studies, University of British Columbia
The Classroom Engagement Activities for Principles of Microeconomics, Fifth
Canadian Edition, were written by Professor Oliver Franke at Concordia University College of Alberta.
NETA Assessment Recognizing the importance of multiple-choice testing in
today’s classroom and in response to instructors’ concerns, Nelson Education has
created the NETA Assessment program. NETA Assessment is a research-based
program that improves the quality of our test banks by ensuring our test banks
measure not just recall (as is typical with test banks) but higher-level thinking skills
as well.
The NETA Assessment program was created in partnership with David
DiBattista, a 3M National Teaching Fellow, professor of psychology at Brock
University, and researcher in the area of multiple-choice testing.
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PREFACE
xxv
All NETA test banks include Professor DiBattista’s guide for instructors, Multiple
Choice Tests: Getting Beyond Remembering. This guide has been designed to assist you
in using Nelson test banks to achieve the desired outcomes in your course.
Instructor’s Resource CD Managing the classroom resources is now easier
for instructors. The new Instructor’s Resource CD contains all key supplements:
Instructor’s Manual, NETA Classroom Engagement Activities, NETA Test Bank,
ExamView Computerized Test Bank, Microsoft® PowerPoint® slides, and Image
Library. ISBN 978-0-17-644179-1.
Computerized Test Bank The ExamView Computerized Testing Software
contains all the questions in the NETA Test Bank. Technically checked and
copyedited for this new edition, the program is an easy-to-use test-creation
software application that is compatible with Microsoft Windows. Instructors can
add or edit questions, instructions, and answers, and can select questions by
previewing them on the screen, selecting them randomly, or selecting them by
number. Instructors can also create and administer quizzes online, whether over
the Internet, a local area network (LAN), or a wide area network (WAN). The
Principles of Macroeconomics Fifth Canadian Edition Test Bank was updated and
revised by Professor Constantin Colonescu at Grant MacEwan University. The
Principles of Microeconomics Fifth Canadian Edition Test Bank was updated and
revised by Professor Hannah Holmes at McMaster University. The Test Banks
reside on the Instructor’s Resource CD and as a downloadable from the
instructor’s area of the text’s website (http://www.mankiw5e.nelson.com).
Microsoft® PowerPoint® Lecture and Exhibit Slides
Available on the
Instructor’s Resource CD and downloadable from the text’s website
(http://www.mankiw5e.nelson.com) are two versions of the PowerPoint
presentation. Revised by Professor Marc Prud’Homme at the University of
Ottawa to save instructors valuable time as they prepare for class using this
comprehensive lecture presentation, this supplement covers all the essential
topics presented in each chapter of the book. Graphs, tables, lists, and concepts are
developed sequentially, much as one might develop them on a chalkboard.
Additional examples and applications are used to reinforce major lessons. A
separate exhibit presentation provides instructors with all of the tables and graphs
from the main text.
Aplia For instructors, Aplia offers high-quality, auto-graded assignments,
which ensure that students put forth effort on a regular basis throughout the term.
Contact your Nelson sales representative for more information.
Ten Principles Video Set Ken Witty, a talented documentary filmmaker,
has produced a video series to illustrate the ten principles of economics
introduced in Chapter 1 of both the fifth Canadian edition and the fifth U.S.
edition texts. Instructors can show these videos as an interesting and visually
appealing introduction to topics discussed throughout the textbook.
ISBN 978-0-324-17395-6.
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PREFACE
For the Student
Study Guide Written by Professors Peter Fortura at Algonquin College and
Shahram Manouchehri at Grant MacEwan University, this study guide was
prepared to enhance student success. Each chapter of the study guide includes
learning objectives, a description of the chapter’s context and purpose, a chapter
review, key terms and definitions, advanced critical thinking questions, and
helpful hints for understanding difficult concepts. Students can develop their
understanding by doing the practice problems and short-answer questions, and
then assess theory mastery of the key concepts with the self-test, which includes
true/false and multiple-choice questions. Solutions to all problems are included
in the study guide.
Principles of Microeconomics Study Guide:
ISBN 978-0-17-644187-6.
Principles of Macroeconomics Study Guide:
ISBN 978-0-17-647135-4.
Aplia For students, Aplia offers a way to stay on top of coursework with
regularly scheduled homework assignments. Interactive tools and content further
increase engagement and understanding. Students, ask your instructor about
Aplia.
Principles of Microeconomics Website Valuable resources for students can
be found on the Internet at the Principles of Microeconomics textbook support site:
http://www.mankiw5e.nelson.com. Students will find more true/false, multiplechoice, and short-answer questions (updated by Eric Moon at the University of
Toronto); links to economics-related Internet sites; PowerPoint slides for their
review; a graphics workshop for appropriate chapters; and much more.
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A B O U T
T H E
A U T H O R S
Jordi Cabré
N. Gregory Mankiw is Professor of Economics at Harvard
University. As a student, he studied economics at
Princeton University and MIT. As a teacher, he has taught
macroeconomics, microeconomics, statistics, and principles of economics. He even spent one summer long ago as
a sailing instructor on Long Beach Island.
Professor Mankiw is a prolific writer and a regular participant in academic and policy debates. His work has
been published in scholarly journals such as the American
Economic Review, Journal of Political Economy, and Quarterly
Journal of Economics, and in more popular forums such as
The New York Times, The Financial Times, The Wall Street Journal, and Fortune. He is
also author of the best-selling intermediate-level textbook Macroeconomics (Worth
Publishing). In addition to his teaching, research, and writing, Professor Mankiw
has been a research associate of the National Bureau of Economic Research, an
adviser to the Federal Reserve Bank of Boston and the Congressional Budget
Office, and a member of the Educational Testing Service (ETS) test development
committee for the advanced placement exam in economics. From 2003 to 2005, he
served as Chairman of the President’s Council of Economic Advisers.
Ronald D. Kneebone is Professor of Economics at the University of Calgary. He received his Ph.D. from McMaster
University. Professor Kneebone has taught courses in
public finance and in macroeconomics from principles
through to the Ph.D. level, and he is a two-time winner of
the Faculty of Social Sciences Distinguished Teacher Award
at the University of Calgary. His research interests are primarily in the areas of public sector finances and fiscal federalism. He shared with Ken McKenzie the Douglas Purvis
Memorial Prize for the best published work in Canadian
public policy in 1999. Since 2008 he has been Director of
Economic and Social Policy Research in The School of Public Policy at the University of Calgary.
Kenneth J. McKenzie is Professor of Economics at the University of Calgary. He received his Ph.D. from Queen’s
University. Specializing in public economics with an
emphasis on taxation and political economy, Professor
McKenzie has published extensively in these areas. He is
the winner of the 1996 Harry Johnson Prize (with University of Calgary colleague Herb Emery) for the best article in
the Canadian Journal of Economics, the 1999 Douglas Purvis
Memorial Prize (with Ron Kneebone) for a published work
relating to Canadian public policy, and the 2000 Faculty of
Social Sciences Distinguished Researcher Award at the
University of Calgary. Professor McKenzie has taught microeconomics and public
economics from the principles to the graduate level, and has received several
departmental teaching awards.
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A C K N O W L E D G M E N T S
The success of each Canadian edition of Principles of Microeconomics and Principles
of Macroeconomics has been due, in part, to the reviewers who helped us shape this
text, edition after edition. We have benefited enormously from their advice and
suggestions.
Collins Ayoo,
Carleton University
James Wishart,
College of the Rockies
Menouar Boulahfa,
Dawson College
Weili Ding,
Queen’s University
Steven Lehrer,
Queen’s University
Kien Tran,
University of Lethbridge
David Gray,
University of Ottawa
Maurice Tugwell,
Acadia University
Kevin Clinton,
Bank of Canada
Keith Baxter,
Bishop’s University
Nancy Churchman,
Carleton University
Aurelia Best,
Centennial College
Bogdan Buduru,
Concordia University
Stephen Rakocsy,
Humber College
Byron Eastman,
Chris McDonnell,
Malaspina University-College
Martin Dooley,
McMaster University
Peter McCabe,
McMaster University
Ernie Jacobson,
Northern Alberta Institute of Technology
Ugurhan G. Berkok,
Queen’s University
Gregor Smith,
Queen’s University
Ibrahim Hayania,
Seneca College
Ather H. Akbari,
St. Mary’s University
Herb Emery,
University of Calgary
Costas Nicolau,
University of Manitoba
Robin Neill,
University of Prince Edward Island and
Carleton University
Pierre Fortin,
University of Quebec at Montreal
Michael Hare,
University of Toronto
Hannah Holmes,
McMaster University
Laurentian University
Special thanks go to Bill Scarth of McMaster University, who offered invaluable advice regarding the structure and emphasis of the Canadian editions. Dr.
Scarth is an award-winning teacher and author, and to ignore his advice would
have been perilous indeed. His extensive comments were instrumental in helping
us formulate our approach to the Canadian editions.
We would also like to thank our colleagues at the University of Calgary who
provided invaluable informal input and useful examples and applications. We, of
course, bear full responsibility for any misinterpretations and errors.
Canadianizing this book has been a team effort from the very start. We would
like to acknowledge the editorial, production, and marketing teams at Nelson for
their professionalism, advice, and encouragement throughout the process.
Deserving special attention are senior acquisitions editor Craig Dyer and the
team at My Editor for helping to ensure the timely completion of our work.
xxviii
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ACKNOWLEDGMENTS
xxix
Finally, we are grateful to our families for their indulgence and encouragement
throughout the research and writing process. Their patience and understanding
are greatly appreciated.
Ronald D. Kneebone
Kenneth J. McKenzie
October 2010
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G L O S S A RY
ability-to-pay principle the idea that
taxes should be levied on a person
according to how well that person can
shoulder the burden
absolute advantage the comparison
among producers of a good according
to their productivity
accounting profit total revenue minus
total explicit cost
adverse selection the tendency for the
mix of unobserved attributes to become
undesirable from the standpoint of an
uninformed party
agent a person who is performing
an act for another person, called the
principal
Arrow’s impossibility theorem a
mathematical result showing that, under
certain assumed conditions, there is no
scheme for aggregating individual
preferences into a valid set of social
preferences
average fixed cost fixed costs divided
by the quantity of output
average revenue total revenue
divided by the quantity sold
average tax rate total taxes paid
divided by total income
average total cost total cost divided
by the quantity of output
average variable cost variable costs
divided by the quantity of output
benefits principle the idea that
people should pay taxes based on the
benefits they receive from government
services
budget constraint the limit on the
consumption bundles that a consumer
can afford
budget deficit an excess of government spending over government
receipts
budget surplus an excess of government receipts over government
spending
business cycle fluctuations in
economic activity, such as employment
and production
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capital the equipment and structures
used to produce goods and services
cartel a group of firms acting in unison
circular-flow diagram a visual model
of the economy that shows how dollars
flow through markets among
households and firms
Coase theorem the proposition that if
private parties can bargain without cost
over the allocation of resources, they can
solve the problem of externalities on
their own
collusion an agreement among firms
in a market about quantities to produce
or prices to charge
common resources goods that are
rival in consumption but not excludable
comparative advantage the comparison among producers of a good
according to their opportunity cost
compensating differential a difference in wages that arises to offset the
nonmonetary characteristics of different
jobs
competitive market a market in which
there are many buyers and many sellers
so that each has a negligible impact on
the market price
complements two goods for which an
increase in the price of one leads to a
decrease in the demand for the other
Condorcet paradox the failure of
majority rule to produce transitive
preferences for society
constant returns to scale the property
whereby long-run average total cost
stays the same as the quantity of output
changes
consumer surplus a buyer’s willingness to pay minus the amount the buyer
actually pays
corrective taxes taxes enacted to
correct the effects of negative
externalities
cross-price elasticity of demand a
measure of how much the quantity
demanded of one good responds to a
change in the price of another good,
computed as the percentage change in
quantity demanded of the first good
divided by the percentage change in the
price of the second good
deadweight loss the fall in total
surplus that results from a market
distortion, such as a tax
demand curve a graph of the
relationship between the price of a good
and the quantity demanded
demand schedule a table that shows
the relationship between the price of a
good and the quantity demanded
diminishing marginal product the
property whereby the marginal product
of an input declines as the quantity of
the input increases
discrimination the offering of
different opportunities to similar
individuals who differ only by race,
ethnic group, sex, age, or other personal
characteristics
diseconomies of scale the property
whereby long-run average total cost
rises as the quantity of output increases
dominant strategy a strategy that is
best for a player in a game regardless of
the strategies chosen by the other
players
economic profit total revenue minus
total cost, including both explicit and
implicit costs
economics the study of how society
manages its scarce resources
economies of scale the property
whereby long-run average total cost
falls as the quantity of output increases
cost the value of everything a seller
must give up to produce a good
efficiency the property of a resource
allocation of maximizing the total
surplus received by all members of
society
cost–benefit analysis a study that
compares the costs and benefits to
society of providing a public good
efficiency wages above-equilibrium
wages paid by firms in order to increase
worker productivity
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GLOSSARY
efficient scale the quantity of output
that minimizes average total cost
implicit costs input costs that do not
require an outlay of money by the firm
impartial observer behind a “veil of
ignorance”
elasticity a measure of the
responsiveness of quantity demanded
or quantity supplied to one of its
determinants
imports goods and services produced
abroad and sold domestically
equilibrium a situation in which the
price has reached the level where
quantity supplied equals quantity
demanded
income effect the change in consumption that results when a price change
moves the consumer to a higher or
lower indifference curve
libertarianism the political philosophy
according to which the government
should punish crimes and enforce
voluntary agreements but not
redistribute income
equilibrium price the price that
balances quantity supplied and quantity
demanded
income elasticity of demand a
measure of how much the quantity
demanded of a good responds to a
change in consumers’ income,
computed as the percentage change in
quantity demanded divided by the
percentage change in income
equilibrium quantity the quantity
supplied and the quantity demanded at
the equilibrium price
equity the fairness of the distribution of
well-being among the members of society
excludability the property of a good
whereby a person can be prevented
from using it
incentive something that induces a
person to act
indifference curve a curve that shows
consumption bundles that give the
consumer the same level of satisfaction
explicit costs input costs that require
an outlay of money by the firm
inferior good a good for which, other
things equal, an increase in income leads
to a decrease in demand
exports goods and services produced
domestically and sold abroad
inflation an increase in the overall
level of prices in the economy
externality the uncompensated impact
of one person’s actions on the wellbeing of a bystander
in-kind transfers transfers to the poor
given in the form of goods and services
rather than cash
factors of production the inputs used
to produce goods and services
fixed costs costs that do not vary with
the quantity of output produced
free rider a person who receives the
benefit of a good but avoids paying for it
game theory the study of how people
behave in strategic situations
Giffen good a good for which an
increase in the price raises the quantity
demanded
horizontal equity the idea that
taxpayers with similar abilities to pay
taxes should pay the same amount
human capital the accumulation of
investments in people, such as
education and on-the-job training
internalizing the externality alter
incentives so that people take account of
the external effects of their actions
law of demand the claim that, other
things equal, the quantity demanded of
a good falls when the price of the good
rises
law of supply the claim that, other
things equal, the quantity supplied of a
good rises when the price of the good
rises
law of supply and demand the claim
that the price of any good adjusts to
bring the quantity supplied and the
quantity demanded for that good into
balance
liberalism the political philosophy
according to which the government
should choose policies deemed
to be just, as evaluated by an
life cycle the regular pattern of income
variation over a person’s life
lump-sum tax a tax that is the same
amount for every person
macroeconomics the study of
economy-wide phenomena, including
inflation, unemployment, and economic
growth
marginal changes small incremental
adjustments to a plan of action
marginal cost the increase in total cost
that arises from an extra unit of
production
marginal product the increase in
output that arises from an additional
unit of input
marginal product of labour the
increase in the amount of output from
an additional unit of labour
marginal rate of substitution the rate
at which a consumer is willing to trade
one good for another
marginal revenue the change in total
revenue from an additional unit sold
marginal tax rate the extra taxes paid
on an additional dollar of income
market a group of buyers and sellers
of a particular good or service
market economy an economy that
allocates resources through the decentralized decisions of many firms and
households as they interact in markets
for goods and services
market failure a situation in which a
market left on its own fails to allocate
resources efficiently
market power the ability of a single
economic actor (or small group of
actors) to have a substantial influence
on market prices
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GLOSSARY
maximin criterion the claim that the
government should aim to maximize the
well-being of the worst-off person in
society
perfect complements two goods with
right-angle indifference curves
median voter theorem a mathematical
result showing that if voters are
choosing a point along a line and each
voter wants the point closest to his most
preferred point, then majority rule will
pick the most preferred point of the
median voter
permanent income a person’s normal
income
microeconomics the study of how
households and firms make decisions
and how they interact in markets
perfect substitutes two goods with
straight-line indifference curves
positive statements claims that
attempt to describe the world as it is
poverty line an absolute level of
income set by the federal government
for each family size, below which a
family is deemed to be in poverty
monopolistic competition a market
structure in which many firms sell products that are similar but not identical
poverty rate the percentage of the
population whose family income falls
below an absolute level called the
poverty line
monopoly a firm that is the sole seller
of a product without close substitutes
price ceiling a legal maximum on the
price at which a good can be sold
moral hazard the tendency of a person
who is imperfectly monitored to engage
in dishonest or otherwise undesirable
behaviour
price discrimination the business
practice of selling the same good at
different prices to different customers
Nash equilibrium a situation in which
economic actors interacting with one
another each choose their best strategy
given the strategies that all the other
actors have chosen
natural monopoly a monopoly that
arises because a single firm can supply a
good or services to an entire market at a
smaller cost than could two or more firms
negative income tax a tax system that
collects revenue from high-income
households and gives transfers to
low-income households
normal good a good for which, other
things equal, an increase in income
leads to an increase in demand
normative statements claims that
attempt to prescribe how the world
should be
oligopoly a market structure in which
only a few sellers offer similar or
identical products
opportunity cost whatever must be
given up to obtain some item
price elasticity of demand a measure
of how much the quantity demanded of
a good responds to a change in the price
of that good, computed as the
percentage change in quantity
demanded divided by the percentage
change in price
price elasticity of supply a measure of
how much the quantity supplied of a
good responds to a change in the price
of that good, computed as the
percentage change in quantity supplied
divided by the percentage change in price
price floor a legal minimum on the
price at which a good can be sold
principal a person for whom another
person, called the agent, is performing
some act
prisoners’ dilemma a particular
“game” between two captured prisoners
that illustrates why cooperation is
difficult to maintain even when it is
mutually beneficial
511
production function the relationship
between quantity of inputs used to
make a good and the quantity of output
of that good
production possibilities frontier a
graph that shows the combinations of
output that the economy can possibly
produce given the available factors of
production and the available production
technology
productivity the quantity of goods
and services produced from each hour
of a worker’s time
profit
total revenue minus total cost
progressive tax a tax for which highincome taxpayers pay a larger fraction
of their income than do low-income
taxpayers
property rights the ability of an
individual to own and exercise control
over scarce resources
proportional tax a tax for which
high-income and low-income taxpayers
pay the same fraction of income
public goods goods that are neither
excludable nor rival in consumption
quantity demanded the amount of a
good that buyers are willing and able to
purchase
quantity supplied the amount of a good
that sellers are willing and able to sell
rational people people who systematically and purposefully do the best they
can to achieve their objectives
regressive tax a tax for which highincome taxpayers pay a smaller fraction
of their income than do low-income
taxpayers
rival in consumption the property
of a good whereby one person’s use
diminishes other people’s use
private goods goods that are both
excludable and rival in consumption
scarcity the limited nature of society’s
resources
producer surplus the amount a seller
is paid for a good minus the seller’s
cost
screening an action taken by an
uninformed party to induce an
informed party to reveal information
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GLOSSARY
shortage a situation in which quantity
demanded is greater than quantity
supplied
signaling an action taken by an
informed party to reveal private
information to an uninformed party
strike the organized withdrawal of
labour from a firm by a union
substitutes two goods for which an
increase in the price of one leads to an
increase in the demand for the other
substitution effect the change in
consumption that results when a price
change moves the consumer along a
given indifference curve to a point with
a new marginal rate of substitution
tariff a tax on goods produced abroad
and sold domestically
should choose policies to maximize the
total utility of everyone in society
tax incidence the manner in which the
burden of a tax is shared among
participants in a market
utility a measure of happiness or
satisfaction
total cost the market value of the
inputs a firm uses in production
value of the marginal product the
marginal product of an input times the
price of the output
total revenue (for a firm) the amount
a firm receives for the sale of its output
total revenue (in a market) the
amount paid by buyers and received
by sellers of a good, computed as
the price of the good times the
quantity sold
sunk cost a cost that has already been
committed and cannot be recovered
Tragedy of the Commons a parable
that illustrates why common resources
get used more than is desirable from the
standpoint of society as a whole
supply curve a graph of the
relationship between the price of a
good and the quantity supplied
transaction costs the costs that parties
incur in the process of agreeing and
following through on a bargain
supply schedule a table that shows
the relationship between the price of a
good and the quantity supplied
surplus a situation in which quantity
supplied is greater than quantity
demanded
union a worker association that
bargains with employers over wages
and working conditions
variable costs costs that vary with the
quantity of output produced
vertical equity the idea that taxpayers
with a greater ability to pay taxes
should pay larger amounts
welfare government programs that
supplement the incomes of the needy
welfare economics the study of how
the allocation of resources affects
economic well-being
willingness to pay the maximum
amount that a buyer will pay for a good
world price the price of a good that prevails in the world market for that good
utilitarianism the political philosophy
according to which the government
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INDEX
Note: Page numbers in boldface refer to
pages where key terms are defined. Page
numbers followed by “f” or “t” refer to
figures or tables.
A
Ability, economic benefits of, 419–420
Ability-to-pay principle, 258
Absolute advantage, 57
Absolute value, 97
Accountants, vs. economists, 271, 272f
Accounting profit, 272
Ackerman, Nance, 444
Adverse selection, 490
Advertising, 353–360
brand names, 358–360
case study, 356–357
critique of, 354–356
debates over, 354–356, 359
defence of, 356
as prisoners’ dilemma, 373–374
as signal of quality, 357–358
Agent, 488
Air, as common resource, 239
Air Canada, 337
Airline prices, price discrimination in, 333
Alberta, 248, 252
Alberta Environment, 127
American Indians, shoes designed for, 354–355
Anticompetition, 384–385
Arbitrage, 330, 338
Aristotle, 238
Arrow’s impossibility theorem, 497
Ashworth, Laurence, 7
Asset-backed securities, 494
Assumptions, 23–24
Asymmetric information, 488–495
adverse selection, 490
banks, 494
case study, 493–495
financial crisis (2007–2009), 493–495
moral hazard, 488–490
public policy, 493
screening, 492
signalling, 490–492
Atlantic Ocean, 240–241
Atomic Energy of Canada Limited, 336
Aumann, Robert, 379–380
Australia, 197
Average-cost curve, 280f
Average fixed cost, 278
Average revenue, 293, 319
Average tax rate, 256
Average total cost, 278, 281–284
Average variable cost, 278
B
Bangladesh, 13
Bank of Montreal, 335
Banks, 335, 494
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Bar graphs, 42, 43f
Barrett, Garry, 442
Barriers to entry, 314
Barr-Telford, Lynn, 428
Basic needs, 439–440
Bear Stearns, 494–495
Beauty, economic benefits of, 420
Behavioural economics, 500–504
fairness, 501–502
inconsistency in behaviour, 504
rationality, 500–501
Belichick, Bill, 33
Benefits principle, 258
Benham, Lee, 356–357
Bentham, Jeremy, 444
Bester, Don, 126
Biddle, Jeff, 420
Binding constraints, 120, 126
Borda count, 497
Bossaerts, Peter L., 502
Bounded rationality, 500
Brain activity, and decision making, 502–503
Brand names, 358–360
Brazil, 197, 438
British Columbia, 248, 252
British North America (BNA) Act (1867), 246
Brown, Gordon, 220
Budget constraint, 460, 461f
Budget deficit, 251. See also Government
Budget surplus, 251. See also Government
Burton, Peter, 443
Bush, George W., 34
Business cycles, 15
Business-stealing externality, 353
Butte Action Committee (BAC), 126–127
Buyers, variables influencing, 74–75, 76t
C
Cabot, John, 240
Caffeine, elasticity of, 104
Camerer, Colin F., 503
Canada
average income, 13
child poverty, 443–444
competition law, 334–335
economists as policy advisers, 31–32
Employment Insurance (EI), 450–452
federalism, 246
financial crisis (2007–2009), 493–495
financial overview, 246–253
free trade, 60–61
government-owned firms, 336–337
immigration, 404–405
income inequality, 436–438
income redistribution, 437–438, 437t
inflation, 14
lumber quotas, 190–191
national defence spending, 233
revenue, 247f, 248–249
road congestion, 238–239
spending, 250–251, 250t
trade focus, 196–197
wages, 417–419, 418f
See also Government
Canada Health Transfer (CHT), 248, 251
Canada Millennium Scholarship
Foundation, 427
Canada Pension Plan (CPP), 250, 444
Canada Post, 336
Canada Social Transfer (CST), 248, 251
Canada–U.S. Free Trade Agreement,
194, 198
Canadian Broadcasting Corporation, 336
Canadian Imperial Bank of Commerce, 335
Canadian National Railway, 337
Capital, 408
as factor of production, 408–410
as opportunity cost, 271–272
Capital gains, 410
Capital income, 410
Carnegie, Andrew, 479
Cartels, 367, 373
Case studies, 171–173
advertising, 356–357
anticompetition, 384–385
asymmetric information, 493–495
collusion, 378–379
common resources, 240–242
consumer choice, 475–476, 478–479
consumption tax, 255–256
corporate income tax, 261–263
deadweight loss, 171–173
discrimination, 429–431
drugs, monopoly vs. generic, 324–325
fixed and variable costs, 300
gasoline taxes, 216–217
gas prices, 122–123
Giffen good, 475–476
income effects on labour supply, 478–479
income redistribution, 437–438
income tax, 255–256
minimum wage, 127–130
monopolies, 324–325
payroll tax, 135, 136f
prisoners’ dilemma, 373, 376–377
productivity and wages, 406–407
public goods, 234–236
rent control, 123–125
signalling, 491–492
skills and wages, 417–419
smoking demand, 76–77
supply-side economics, 176–177
taxes, 135, 171–173, 176–177, 255–256,
259–261
technology spillovers, 213–214
ticket scalping, 159–160
trade agreements, 195–198
wages, 406–407, 417–420, 425–426
Cause and effect, graphs for illustrating,
48–50
513
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Central planning, 11
Chamberlin, Edward, 358
Chance, economic benefits of, 419–420
Chaundy, David, 88
Child poverty, 443–444
China, 197
Chrétien, Jean, 165
Circular-flow diagram, 24, 24–26, 25f
Clean Air Act, 38
Climate change, 220–221
Close substitutes, 96
Coase, Ronald, 222
Coase theorem, 222, 222–223
Cod fishery, 240–242
Cold War, 379–380
Collusion, 367, 378–379
Colum, Mary, 435
Command-and-control policies, 214
Commissioner of Competition, 334, 378
Common resources, 231, 237–242
case study, 240–242
important, 239–241
as prisoners’ dilemma, 374, 375f
Tragedy of the Commons, 237–238
Communism, 11
Comparative advantage, 56–62, 58
applications of, 61–62
opportunity costs, 57–58
trade and, 58, 183
Comparative statics, 84
Compensating differentials, 416, 424
Competition
imperfect, 346
international trade, 193, 195
monopoly vs., 317–318, 339t
perfect, 70–71, 161, 292, 350–352
unfair, 195
See also Monopolistic competition
Competition Act, 377–378, 383–384
Competition Bureau, 334, 378
Competition law, 334–335
Competition policy, 380–384
Competition Tribunal, 334–335, 378, 382
Competitive markets, 70, 70–71, 291–309,
292
case study, 300
characteristics of, 292–294
decisions in, 297–302
demand curve, 317–318, 318f
demand shifts, 306, 307f, 308
labour demand, 394–400
long-run supply curve, 302f, 308–309
marginal-cost curve, 295–297, 297f
market supply with entry and exit,
304–306, 305f
market supply with fixed number of firms,
303, 304f
profit maximization, 294–296, 296f
revenue, 292–294, 293t
short-run supply curve, 299f
supply curve, 303–309
zero-profit condition, 306
Complements, 75, 465–466
Concentration ratio, 346
Condorcet, Marquis de, 495
Condorcet paradox, 496, 496t
ConocoPhilips, 127
Constant returns to scale, 284
Consumer choice. See Theory of consumer
choice
Consumer surplus, 146–150, 147
market equilibrium, 157f
measuring, 147–148, 149f
price effects on, 148–149, 150f
what it measures, 149–150
Consumption tax, 255–256
Cooperation, economics of, 370–377
Coordinate system, 42–43, 44f
Coordination problems, 285
Copyright laws, 315
Corcoran, Terence, 383
Corporate income tax, 250, 252,
261–263
Corporate management, 489
Corrective taxes, 215, 215–216
Cost, 151
Cost–benefit analysis, 235–236
Cost curves, 279–282
rising marginal cost, 279
shapes, 279–281
typical, 281–282, 282f
U-shaped average total cost, 280
Costs, 5–7, 270–272. See also Production
costs
Costs, measures of, 276–282, 277t
average and marginal, 278–279
cost curves, 279–282
fixed and variable, 277
Cragg, Michael, 442
Crisis. See Financial crisis (2007–2009)
Crosby, Sidney, 421–422
Cross-price elasticity of demand, 105
Crown corporations, 336–337
D
Davies, Kart, 38
Deadweight loss, 166–177, 168, 189
debate over, 171–173
determinants of, 171
monopolies, 325–327
negative externalities, 209, 209f
taxes, 166–177, 254
De Beers, 315
Decision making, 4–10
asymmetric information, 488–495
behavioural economics, 500–504
costs, 5–7
incentives, 9–10
neuroscience, 502–503
political economy, 496–499
rationality, 8, 500
theory of consumer choice, 459–482
tradeoffs, 4–5
Declaration of Independence, 12
Demand, 71–77
case study, 76–77
demand curve, 71–72
elasticity of, 96–105
excess, 82
labour, 394–400, 403, 405–406
market vs. individual, 72–73
shifts in demand curve, 73–76
See also Supply and demand
Demand curve, 44–47, 45f, 71–76, 72,
72f, 77f
competitive firms, 317–318, 318f
consumer choice, 472, 473f, 474–476
consumer surplus, 147–148, 149f
monopolies, 317–318, 318f, 320f
price elasticity, 98–99, 101, 103f
Demand schedule, 71, 72f
Derived demands, 394
Devoretz, Dan, 404
Diminishing marginal product, 275, 396
Diminishing marginal utility, 444, 468
Discount coupons, as price discrimination,
333
Discrimination, 423, 423–431
case study, 429–431
customers, 429
education, 427–428
employers, 424–425
gender wage gap, 425–426
government, 429
measuring, 423–424
sports, 429–431
Diseconomies of scale, 284, 284–285
Dividends, 410
Dobson, Wendy, 196
Dominant strategy, 371
Driving schools, collusion of, 378–379
Drought, 126–127
Drugs, monopoly vs. generic, 324–325
Drug use, and elasticity of supply and
demand, 113–114
Duopoly, 366–367
E
Earnings. See Wages
Economic mobility, 442
Economic profit, 272
Economics, 4
assumptions, 23–24
disagreements in, 35–38
macroeconomics, 28–30
microeconomics, 28–30
models, 24–28
principles generally agreed upon, 36t
principles of, 16t
scientific approach to, 22–30
NEL
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Economic well-being
consumer surplus, 148–150
externalities, 207–214
monopolies, 325–328
taxes, 167–169
welfare economics as study of, 146
Economies of scale, 192, 284, 284–285, 316f
Economists
accountants vs., 271, 272f
agreement among, 36t
characteristics of, 38
disagreements among, 35–38
environmental, 36–37
as policy advisers, 30–35, 119
as scientists, 22–30, 119
Economy
models, 24–28, 52–56
operation of, 13–16
standard of living, 13–14
Education
human capital, 416–417
as signalling, 421
women in, 427–428
Efficiency, 5, 156, 158f, 443–444
externalities, 207–214
government intervention for, 13
market, 156–161, 207–214
monopolies, 325–327, 326f, 327f
production possibilities frontier, 27
tax system, 253–257
Efficiency wages, 422
Efficient scale, 280, 350
Effort, economic benefits of, 419–420
Einstein, Albert, 22
Eisenhower, Dwight, 7
Elasticity, 95–115, 96
applications of, 109–114
cross-price elasticity of demand, 105
of demand, 96–105
income elasticity of demand, 103, 105
price elasticity of demand, 96–103
of supply, 105–108
tax incidence and, 136–137
Employers, discrimination by, 424–425
Employment Insurance (EI), 135, 250, 251,
450–452
Entry, 304–305, 314
Environment, economic approach to, 219–221
Environmental Defense, 38
Environmental economists, 36–37
Environmental Protection Agency, 38
Environmental regulations, 214
Environment Canada, 214
Equalization payments, 248
Equilibrium
capital market, 408, 409f
changes in, 83–87
labour market, 402–407
land market, 408, 409f
market, 156–159
oligopoly, 367–368
supply and demand, 81, 81–83, 82f, 83f
without trade, 182–183
Equilibrium price, 81, 81–82
Equilibrium quantity, 81
Equity, 5, 13, 156, 257–261
Excess capacity, 350–351
Excess demand, 82
Excess supply, 82
Excludability, 230
Exit, 298, 300–301, 304–305
Exit price, 301
Expectations
demand affected by, 75
supply affected by, 80
Explicit costs, 271
Exports, 62, 184–185, 185f
Externalities, 13, 161, 205–225, 206
case study, 213–214
examples, 206
internalizing, 211
market inefficiency, 207–214
negative, 206, 208–211
positive, 206, 211–212
private solutions, 220–224
public goods and common resources, 231
public policy, 214–220
technology spillovers, 213–214
F
Factor markets, 393–411
labour demand, 394–400
labour market equilibrium, 402–407
labour supply, 400–401
land and capital, 408
linkages, 409–410
Factors of production, 24, 394, 409–410. See
also Factor markets
Fairness, 501–502
Fair trade, 380–381
Farmers, and elasticity of supply and
demand, 109–111
Federalism, 246
Finances, of Canadian government, 246–253
Financial aid, as price discrimination, 333
Financial crisis (2007–2009), 493–495
Fish, as common resource, 240–241
Fisher, Franklin, 384
Fixed costs, 277
Flypaper theory of tax incidence, 261
Football, 33
Four Feet Up (documentary film), 444
France, 61
Franklin, Benjamin, 245
Frederick, Shane, 6–7
Free rider, 232
Free trade
Canada, 60–61
comparative advantage, 59
Friedman, Milton, 174, 354
515
G
Galbraith, John Kenneth, 359
Game theory, 365, 379–380. See also Prisoners’
dilemma
Gasoline taxes, 216–217
Gates, Bill, 384
Gender wage gap, 425–426, 425t, 426t
General Agreement on Tariffs and Trade
(GATT), 196
George, Henry, 174
Germany, 14–15, 262–263
Giffen, Robert, 474
Giffen good, 474, 474–476, 475f
Gifts, as signalling, 491–492
Goods
inferior, 74, 103, 105
normal, 74, 103, 105
private, 230
public, 231–236
substitute, 96
types of, 230–231, 230f
unpriced, 229–242
Goods and Services Tax (GST),
165, 249
Goulden, Lawrence, 37
Government
big vs. small, 171
economic discrimination, 429
federal, 246, 248–251
financial overview, 246–253
intervention in market by, 12–13
local, 251–253
money supply, 14–15
monopolies, 314
poverty reduction, 234
provincial/territorial, 251–252
revenue, 248–249, 251–252
spending, 250–251, 250t, 253
See also Canada; Public policy
Government-created monopolies,
315–316
Graphing, 42–50
cause and effect, 48–50
curves, 43–47
single variable, 42
slope, 47–48
two variables, 42–43
types of, 42, 43f
Greenpeace, 38, 221
Greenspan, Alan, 34
Gross domestic product (GDP), 247f
Grubel, Herbert, 404–405
Guaranteed Income Supplement
program, 444
H
Hamermesh, Daniel, 420
Harberger, Arnold, 263
Harper, Stephen, 165
Hassett, Kevin, 263
NEL
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Hayek, Friedrich, 359, 502
Hemingway, Ernest, 435
Hiebert, Dan, 404
History, experimental value of, 23
Holmes, Oliver Wendell, Jr., 166
Horizontal equity, 258, 260
Houser, Daniel, 503
Human capital, 416, 416–417, 424
Human life, economic value of, 235–236
Human Resources and Skills Development
Canada, 440
I
IBM, 383
Immigration, and labour supply, 401,
404–405
Imperfect competition, 346
Imperfect price discrimination, 331–333
Implicit costs, 271
Import quotas, 189
Imports, 62, 186–187, 186f
Incentives, 9, 9–10
Income, personal
demand in relation to, 74–75
transitory vs. permanent, 441–442
Income distribution, 436–437, 436t
Income effect, 468–472, 470, 473f, 478–479
Income elasticity of demand, 103, 105
Income inequality, 436–444
Canada, 436–438
child poverty, 443–444
global, 438, 439t
measurement problems, 440–442
poverty rate, 439–440
Income redistribution, 435, 437–438,
444–447
Income tax, 249, 249t, 252, 255–256, 449
India, 197
Indifference curves, 462, 462f, 462–466, 464f,
465f
Individual demand, 72
Individual supply, 79
Indonesia, 197
Industrial organization, 269
Industrial policy, 213
Inequality. See Income inequality
Infant industries, 194
Inferior goods, 74, 103, 105, 469, 470f
Inflation, 14, 15
Information asymmetry. See Asymmetric
information
In-kind transfers, 441, 449–450
Input prices, 80
Interest rates, 479–482
Internalizing the externality, 211
International trade, 181–199
agreements, 195–198
benefits, 192–193
determinants of, 182–183
exporting countries, 184–185
importing countries, 186–187
import quotas, 189
multilateral approach, 195–197
public policy, 190–192
restrictions on, arguments for, 193–195
tariffs, 187–190
unilateral approach, 195
winners and losers, 184–193
Intuit, 314
Invisible hand, 11, 12, 90, 161, 205, 224, 314,
325, 353, 435, 490, 493
Israel, 403
J
Jackson, Penfield, 385
Jagger, Mick, 9
Japan, 61, 197, 438
Jensen, Robert, 475
Jobs, international trade and, 193
Jones, Bruce, 451
Justason, Jennifer, 444
K
Keynes, John Maynard, 32, 38
Knightley, Keira, 420
Knowledge, as public good, 233
Knutson, Brian, 502
Kuhnen, Camelia, 502
Künast, Renate, 262–263
L
Labour demand, 394–400, 403, 405–406, 405f
Labour market
demand, 394–400
equilibrium, 402–407, 402f
supply, 400–401
Labour supply, 400–403, 403f, 476–479
Labour taxes, 172–173
Laffer, Arthur, 176
Laffer curve, 176–177
Laissez faire, 158
Lamy, Pascal, 60
Land, as factor of production, 408–410
Land tax, 174
Law of demand, 71
Law of supply, 78
Law of supply and demand, 83
Lehman Brothers, 494–495
Leisure, 400–401, 476, 476f, 478
Lemons, 490
Liberalism, 445, 445–446
Libertarianism, 446, 446–447
Life cycle, 441
Lighthouses, as public good, 234–235
Linear demand curve, 101, 103f
Lo, Andrew W., 503
Local government, 251–253
Long-run average total cost, 282–284, 283f
Long-run production function, 273
Loopholes, 256
Low-income cutoff (LICO), 439
Lumber quotas, 190–191
Lump-sum taxes, 257
Luxuries, and elasticity of demand, 96
M
Macdonald, John A., 194
Macroeconomics, 28–30, 29
Mankiw, Gregory, 34–35
Marginal benefits, 8
Marginal buyer, 147
Marginal changes, 8
Marginal-cost curve, 280f, 295–297, 297f
Marginal-cost pricing, 335–336, 336f
Marginal costs, 8, 279, 281, 399
Marginal firm, 308
Marginal product, 273
Marginal product of labour, 396, 399
Marginal rate of substitution, 463
Marginal revenue, 294, 319
Marginal-revenue curve, 320f
Marginal revenue product, 397
Marginal seller, 153
Marginal tax rate, 249, 256
Marginal utility, 468
Market-based policies, 215–219
Market Basket Measure (MBM), 440
Market-clearing price, 82
Market demand, 72–73, 73f
Market economy, 11
Market efficiency, 155–161
assumptions, 161
case study, 159–160
market equilibrium, 156–159
market failure, 161
social planning, 155–156
Market equilibrium, 156–159, 157f, 158f
Market failure, 13, 161, 354–355
Market power, 13, 161, 291. See also
Monopolies
Markets, 70
benefits of, 10–11
competitive, 70–71, 291–309
elasticity of demand dependent on, 97
government intervention in, 12–13
Market structure, types of, 347, 347f
Market supply, 79, 79f
Markup, 351–352
Mathur, Aparna, 263
Maximin criterion, 446
McCabe, Kevin, 503
McLachlan, Sarah, 421–422
Median voter theorem, 497–499, 498, 498f
Mexico, 13, 196, 438
M’Gonigle, Michael, 127
Microeconomics, 28–30, 29
Microsoft, 313–314, 384–385
Midpoint method, 97–98
Mill, John Stuart, 354, 444
Miller, Nolan, 475
NEL
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Miller, Richard, 33
Miniature golf courses, fixed and variable
costs of, 300
Minimum wage, as price floor, 127–130
Minimum-wage laws, 422, 448
Models, 24–28
circular-flow diagram, 24–26
production possibilities frontier, 26–28
use and value of, 24
Money, quantity theory of, 15
Money supply, 14–15
Monopolies, 71, 313–340, 314
case study, 324–325
competition law, 334–335
competition vs., 317–318, 339t
demand curve, 317–318, 318f, 320f
economies of scale, 316f
efficiency/inefficiency, 325–327, 326f,
327f
government-created monopolies,
315–316
marginal-revenue curve, 320f
monopoly resources, 315
natural monopolies, 316–317
origins, 314–317
prevalence, 339
price discrimination, 328–334
production and pricing decisions, 317–325
profit amount, 323, 323f
profit maximization, 321–323, 321f
public ownership, 336–337
public policy, 334–337
regulation of, 335–336
revenue, 318–321, 319t
social effects of, 314, 325–328
supply curve, 322
See also Monopolistic competition
Monopolistic competition, 345–361, 346
advertising, 353–360
characteristics of, 346–347, 360t
differentiated products, 348–353
excess capacity, 350–351
long-run equilibrium, 348–349, 350f
markup, 351–352
oligopoly vs., 347
perfect competition vs., 350–352, 351f
short run, 348, 349f
social effects of, 352–353
Monopoly resources, 315
Monopsony, 407
Moral hazard, 488, 488–490
Movements along a curve, 46
Mulroney, Brian, 165, 198
Murphy Oil Corp., 127
Myles, John, 443
N
Nader, Ralph, 9
Nash, John, 368, 380
Nash equilibrium, 368, 501
National defence, as public good, 233, 251
National Policy, 194
National security, international trade
and, 194
Natural monopolies, 316–317
Natural monopoly, 231
Necessities, and elasticity of demand, 96
Negative correlation, 43
Negative externalities, 206, 208–211
Negative income tax, 449
Neoclassical theory of distribution, 411
Neuroscience, and economic decision
making, 502–503
Newfoundland, 242
Newton, Isaac, 22
Nike, 354–355
Normal goods, 74, 103, 105, 469
Normative statements, 30, 30–31
North American Free Trade Agreement
(NAFTA), 195
Nozick, Robert, 447
O
Obama, Barack, 7
Ocean, as common resource, 240–242
Oil prices, and elasticity of supply and
demand, 111–113
Old Age Security program, 250, 444
Oligopoly, 346, 365, 365–386
case studies, 373, 376–379, 384–385
collusion and cartels, 367
cooperation, 370–377
equilibrium, 367–368
markets with few sellers, 366–370
monopolistic competition vs., 347
public policy, 377–385
size of, 369–370
Omitted variables, 48–49, 49f
Ontario, 248
Opportunity costs, 7, 57
capital, 271–272
comparative advantage, 57–58
explained, 6–7
price of trade, 59–60
production costs, 270–271
production possibilities frontier, 27–28
Ordered pairs, 42
Organization of the Petroleum Exporting
Countries (OPEC), 111–113, 122, 373
Origin, in graphing, 43
Output effect, 369
Output price, 399
P
Patent laws, 213–214, 315
Payroll tax, 135, 136f, 250, 252
Peltzman, Sam, 9–10
Percy, Michael, 104
Perfect competition, 70–71, 161, 292,
350–352, 351f
517
Perfect complements, 465–466, 466,
466f
Perfect elasticity/inelasticity, 99
Perfect price discrimination, 330–331
Perfect substitutes, 465, 466f
Permanent income, 442
Perreault, Jacques, 378–379
Personal income tax, 249, 249t, 252,
255–256, 449
Personal interactions
governments and markets,
12–13
markets, 10–11
trade, 10
Petro-Canada, 126–127, 337
Phipps, Shelley, 443–444
Pie charts, 42, 43f
Pigou, Arthur, 215
Pigovian taxes, 215
Pin factory, specialization in, 284
Plato, 452
Poitras, Yvon, 88
Policy. See Public policy
Political economy, 495–499
Arrow’s impossibility theorem, 497
median voter theorem, 497–499
politicians’ motivations, 499
voting paradox, 495–496
Politicians, motivations of, 499
Pollution, objections to economic analysis
of, 219
Pollution permits, 217–219
Porter, Michael, 383
Positive correlation, 43
Positive externalities, 206, 211–212
Positive statements, 30, 30–31
Poverty
child poverty, 443–444
poverty rate, 439–440, 440t
public policy, 447–452
reduction of, 233–234, 447–452
Poverty line, 439
Poverty rate, 439, 439–440, 440t
Predatory pricing, 378–379, 381
Price ceilings, 120, 121f
gas prices, 122–123
market effects, 120–121
rent control, 123–125
Price controls, 120–131
case studies, 122–125, 127–130
evaluating, 130–131
price ceilings, 120–125
price floors, 125–130
rent control, 123–125
Price discrimination, 328, 328–334
analytics of, 330–333
arbitrage, 338
examples, 333–334
rationale, 329–330
Price effect, 369
NEL
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Price elasticity of demand, 96, 100f
applications of, 109–114
computing, 97–98
determinants of, 96–97
total revenue and, 99, 101, 102f
variety of demand curves, 98–99
Price elasticity of supply, 105, 107f, 108f
applications of, 109–114
computing, 106
determinants of, 105–106
variety of supply curves, 106, 108
Price floors, 120, 125f
market effects, 125–127
minimum wage, 127–130
Price makers, 313
Prices
consumer choice, 469–470
consumer surplus, 148–149, 150f
demand curve, 71–72
input prices, 80
markets directed by, 11
money supply and, 14–15
producer surplus, 154–155, 154f
resource allocation, 89
supply curve, 77–78
trade and, 59–60
Price takers, 70, 292
Principal, 488
Prisoners’ dilemma, 370, 370–377, 371f
advertising as, 373–374
case studies, 373, 376–377
characteristics of, 370–372
common resources as, 374, 375f
examples, 373–374
oligopoly as, 372
social effects of, 375
Private goods, 230
Producer surplus, 151–155, 152
cost, 151–152
market equilibrium, 157f
measuring, 152–154, 153f
price effects on, 154–155, 154f
willingness to sell, 151–152
Production costs, 273–286
measures of, 276–282
opportunity costs, 270–271
production function, 273–275
short-run vs. long-run, 282–285
total-cost curve, 275, 276f
Production function, 273, 274f, 274t, 275, 396
Production possibilities frontier, 26, 26–28,
27f, 29f, 52–54, 53f
Productivity, 14, 406–407
Product-variety externality, 352, 354–355
Profit, 270, 272
Profit maximization, 294–296, 296f, 321–322,
321f
Profit motive, 425
Program spending, 250
Progressive tax, 259
Property rights
market failure, 242
significance of, 12, 12
Proportional tax, 259
Provincial government, 251–252, 251t, 253t
Public choice, field of. See Political economy
Public goods, 231, 232–236
case studies, 234–236
cost–benefit analysis, 235–236
free-rider problem, 232
important, 232–234
Public policy, 119–138
asymmetric information, 493
command-and-control, 214
competition policy, 380–384
consumer surplus, 150
corrective taxes, 215–216
drug interdiction, 113–114
economists as advisers to, 30–35
elasticity of supply and demand, 111
employment, 15
externalities, 214–220
incentives, 9–10
industrial policy, 213
inflation, 14–15
market-based, 215–219
monopolies, 334–337
oligopoly, 377–385
political factors, 13
pollution permits, 217–219
positive vs. normative analysis, 30–31
poverty reduction, 447–452
price controls, 120–131
productivity and living standards, 14
role and scope of, 12–13
shifts in demand, 76–77
taxes, 131–137
trade, 190–192
Purchase price, 408
Q
Quantity demanded, 71
Quantity discounts, as price discrimination,
334
Quantity supplied, 77
Quantity theory of money, 15
Quebec, 252, 378–379
Quotas, 189–191
R
Rational people, 8, 500–501
Rawls, John, 445–446
Reagan, Ronald, 176–177
Redistribution. See Income redistribution
Registered pension plans (RPPs), 255–256
Registered retirement savings plans (RRSPs),
255–256
Regressive tax, 259
Regulation, 214, 335–336
Rental price, 408
Rent control, 123–125
Resale price maintenance, 380–381
Research, as public good, 233
Resource allocation, 89
Restaurants, fixed and variable costs of, 300
Reverse causality, 48–50, 50f
Ricardo, David, 59
Rival in consumption, 230
Road congestion, 238–240
Romer, David, 33
Roosevelt, Theodore, 174
Royal Bank, 335
Ryan, Lee, 503
S
Sales tax, 252, 252t
Saskatchewan, 252
Satisficers, 500
Saving, 479–482, 504
Scarcity, 4
Scatterplots, 43
Schelling, Thomas, 379–380
Schmalensee, Richard, 384
Schumpeter, Joseph, 383–384
Science, economics as, 22–30
assumptions, 23–24
disagreements, 35
micro- and macroeconomics, 28–30
models, 24–28
scientific method, 22–23
Scientific method, 22–23
Scott, Sheridan, 383
Screening, 492
Second-degree price discrimination, 331
Securitization, 494
Self-interest, 12
Sellers, variables influencing, 80–81, 81t
Shaw, George Bernard, 35
Shifts of a curve, 46
Shortages, 82
Short-run average total cost, 282–284, 283f
Short-run production function, 273
Shutdown price, 298
Shutdowns, 297–300
Signalling, 490
advertising, 357–358
case study, 491–492
education, 421
private information, 490–492
Simon, Herbert, 500
Skills, wages in relation to, 417–419
Slope, 47–48, 47f
Slopek-Weber, Diane, 104
Smith, Adam, 59, 90, 205, 378, 493
The Wealth of Nations, 11, 12, 284
Smith, Vernon, 503
Snow, John, 34
Social cost, 208–210
Social insurance, 446
South Africa, 438
NEL
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South Korea, 61
Specialization
production, 284
trade, 54–56
Sports, discrimination in, 429–431
Standard of living, 13–14
Starbucks, 104
Start-up price, 298
Statistics Canada, 439
Steeves, Gord, 404–405
Stern, Nicholas, 220–221
Stigler, George, 337
Stockman, David, 176
Stricker, Laura, 7
Strikes, 422
Substitutes, 75, 96, 462–465
Substitution effect, 470, 470–472, 473f
Sunk costs, 298–300, 299
Superstars, economic power of, 421–422
Supply, 77–81
elasticity of, 105–108
excess, 82
labour, 400–403
market vs. individual, 79
shifts in supply, 79–81
supply curve, 77–78
See also Supply and demand
Supply and demand, 81–88
changes in equilibrium, 83–88
equilibrium, 81–83
law of, 83
See also Demand; Supply
Supply curve, 77–78, 78, 78f, 80f
competitive markets, 299f, 302f, 303–309
monopolies, 322
price elasticity, 106, 108
producer surplus, 152–154, 153f
Supply schedule, 78, 78f
Supply-side economics, 176–177
Surplus, 82. See also Budget surplus;
Consumer surplus; Producer surplus;
Total surplus
Sweden, 177
Synergies, 335
T
Tariffs, 187, 187–190, 188f
Tastes, 75, 88
Tax brackets, 252
Tax burden, 259–260, 260t. See also Tax
incidence
Taxes, 131–137
on buyers, 132–133, 132f
case studies, 135, 171–173, 176–177,
255–256, 259–261
consumption, 255–256
corporate income, 250, 252, 261–263
corrective, 215–216
costs of, 165–178
deadweight loss, 166–177
distortions and elasticities, 172f
economic well-being, 167–169, 169f
gasoline, 216–217
labour, 172–173
land, 174
lump-sum, 257
market effects, 132–135, 166–169, 167f
necessity of, 166
payroll, 135, 136f, 250, 252
personal income, 249, 249t, 252, 255–256, 449
revenue, 168f, 247t, 248–249
sales, 252, 252t
on sellers, 133–135, 134f
variation in, 174–176, 175f
See also Tax system
Tax incidence, 131, 135–137, 137f, 260–261. See
also Tax burden
Tax liability, 249
Tax system
ability-to-pay principle, 258–259
administrative burden, 256
average vs. marginal tax rates, 256–257
benefits principle, 258
efficiency, 253–257, 264
equity, 257–261, 264
federal, 248–251
local, 251–253
provincial/territorial, 251–253
tax burden, 259–260
tax incidence, 260–261
Technology
labour output, 400
supply affected by, 80
supply and demand affected by, 88
Technology spillovers, 213–214
Tele-Direct, 382
Territorial government, 251–253, 251t, 253t
Thatcher, Margaret, 220–221
Theory of consumer choice, 459–482
applications of, 474–482
budget constraint, 460–461
case studies, 475–476, 478–479
demand curve, 472, 473f, 474–476
effect of income changes, 468–472, 469f,
478–479
effect of price changes, 469–470, 471f
optimization, 466–474, 467f
preferences, 462–466, 462f
utility, 468
Third-degree price discrimination, 332–333,
332f
Ticketmaster, 160
Ticket scalping, 159–160
Time, elasticity of demand and, 97
Time-series graphs, 42, 43f
Tim Hortons, 104
Tit-for-tat strategy, 377
Toronto-Dominion Bank, 335
Toronto Stock Exchange (TSX), 74
Total cost, 270
519
Total-cost curve, 275, 276f
Total revenue (for a firm), 270, 319
Total revenue (in a market), 99, 101, 101f, 102f
Total surplus, 155
Tradable permits, 217–221
Trade
benefits of, 10
comparative advantage, 58
price of, 59–60
restraint of, 377–378
specialization, 54–56
See also International trade
Tradeoffs, 4–5, 27–28
Tragedy of the Commons, 237, 237–238
Transaction costs, 223
Transfers, governmental, 248
Transitivity, 496
Transitory income, 441–442
Trouard, Theodore, 503
Truman, Harry, 31
Tying, 382
U
Ultimatum game, 501–502
Unemployment, inflation and, 15
Unfair competition, 195
Unions, 422
United States
financial crisis (2007–2009), 494–495
income inequality, 438
lumber quotas, 190–191
monopolies, 314
national defence spending, 233
trade, 196–198
wages, 417–419, 418f
Unit elasticity, 98
U.S. Council of Economic Advisers, 34
U.S. Federal Reserve, 495
U.S. Justice Department, 384–385
Utilitarianism, 444, 444–445
Utility, 444, 468
V
Value of the marginal product, 397, 397–398,
398f
Values, 36
Variable costs, 277
Vertical equity, 258, 258–259
Voting paradox, 495–496, 496t
Voting systems
Arrow’s impossibility theorem, 497
Condorcet paradox, 496
median voter theorem, 497–499
W
Wages, 415–432
above-equilibrium, 422–423
case studies, 406–407, 417–420, 425–426
corporate taxes in relation to, 262–263
determinants of, 415–423
NEL
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Wages (Continued)
discrimination, 423–431
gender gap, 425–426
labour supply, 476–479, 477f
productivity and, 406–407
skills, 417–419
Wal-Mart, 383
Walton, Sam, 383
Water, as common resource, 239
Waterflooding, 126–127
Water shortage, 126–127
Wealth effect, 74–75
Welfare, 448, 448–449. See also Economic
well-being
Welfare economics, 146, 207
Whales, as common resource, 240
Wildlife, as common resource, 240
Willingness to pay, 146
Winter, Judy, 126–127
Women
education, 427–428
in labour force, 401
wages, 425–426
World price, 183
World Trade Organization (WTO), 196–198
WreathsPlus, 451
Y
Yale School of Management, 6
NEL
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S U G G E S T I O N S
F O R
S U M M E R
R E A D I N G
IF YOU ENJOYED THE ECONOMICS COURSE THAT YOU HAVE JUST FINISHED, YOU MIGHT LIKE
TO READ ABOUT ECONOMIC ISSUES IN THE FOLLOWING BOOKS:
PAUL BLUSTEIN
The Chastening: Inside the Crisis That Rocked the Global
Financial System and Humbled the IMF
New York: Public Affairs, 2001
WILLIAM EASTERLY
The Elusive Quest for Growth: Economists’ Adventures and
Misadventures in the Tropics
Cambridge, MA: MIT Press, 2001
A journalist tells the story of how economic policymakers
around the world muddled through the financial crisis of the
late 1990s.
A World Bank economist examines the many attempts to
help the world’s poorest nations and why they have so often
failed.
WILLIAM BREIT AND BARRY T. HIRSCH
MILTON AND ROSE FRIEDMAN
Lives of the Laureates
Cambridge, MA: MIT Press, 2004
Free to Choose
New York: Harcourt Brace, 1979
Eighteen winners of the Nobel prize in economics offer
autobiographical essays about their life and work.
Two economists argue that society should rely less on the
government and more on the free market.
DIANE COYLE
ROBERT L. HEILBRONER
Sex, Drugs, and Economics
New York: Texere, 2002
Basic economics applied to a wide range of sometimes
unconventional topics.
The Worldly Philosophers
New York: Touchstone, 1953; revised 1999
A classic introduction to the lives, times, and ideas of the
great economic thinkers, including Adam Smith, David
Ricardo, and John Maynard Keynes.
JOHN CROW
Making Money: An Insider’s Perspective on Finance,
Politics, and Canada’s Central Bank
Etobicoke, ON: John Wiley & Sons, 2002
JOHN HELLIWELL
Globalization and Well-Being
Vancouver: UBC Press, 2003
Part memoir, part history, part analysis of major monetary
policy issues, Making Money brings to life the inner workings
and the politics of the Bank of Canada.
This text is essential reading for all those trying to think their
way through the welter of conflicting assertions about what
is left for national policies in today’s world.
AVINASH DIXIT AND BARRY NALEBUFF
DOUGLAS A. IRWIN
Thinking Strategically: A Competitive Edge in Business,
Politics and Everyday Life
New York: Norton, 1991
This introduction to game theory discusses how all people—
from corporate executives to criminals under arrest—should,
and do, make strategic decisions.
Free Trade under Fire
Princeton, NJ: Princeton University Press, 2005
An economist sheds some light on the debate over
globalization.
PAUL KRUGMAN
Peddling Prosperity
New York: Norton, 1994
A survey of the evolution of economic ideas and policy, with
an emphasis on macroeconomics and international trade.
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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STEVEN E. LANDSBURG
The Armchair Economist: Economics and Everyday Life
New York: Free Press, 1993
Why does popcorn cost so much at movie theatres? Steven
Landsburg discusses this and other puzzles of economic life.
STEVEN D. LEVITT AND STEPHEN J. DUBNER
Freakonomics: A Rogue Economist Explores the Hidden Side
of Everything
New York: Morrow, 2005
Economic principles and clever date analysis applied to a
wide range of offbeat topics, including drug dealing, online
dating, and sumo wrestling.
CHRISTOPHER RAGAN AND WILLIAM WATSON
Is the Debt War Over? Dispatches from Canada’s Fiscal
Frontline
Montreal: McGill-Queen’s University Press, 2004
Is the current rather modest pace of debt reduction enough?
Or does more have to be done? To put things more
dramatically, is the debt war over? Questions asked and
answered.
RAGHURAM G. RAJAN AND LUIGI ZINGALES
Saving Capitalism from the Capitalists
Princeton, NJ: Princeton University Press, 2003
Two economists explain how society can use financial
markets to create wealth and spread economic opportunity.
BURTON G. MALKIEL
A Random Walk down Wall Street
New York: Norton, 2004
This introduction to stocks, bonds, and financial economics is
not a “get rich quick” book, but it might help you get rich
slowly.
THOMAS SOWELL
Applied Economics: Thinking beyond Stage One
New York: Basic Books, 2004
A nontechnical application of economics to a wide range of
policy issues, including housing, medical care,
discrimination, and economic development.
JOHN MCMILLAN
Reinventing the Bazaar: A Natural History of Markets
New York: Norton, 2002
A deep and nuanced, yet still very readable, analysis of how
society can make the best use of market mechanisms.
JACK MINTZ
Most Favored Nation: Building a Framework for Smart
Economic Policy
C. D. Howe Institute, Policy Study 36, 2001
This study makes a compelling case for new policies to lower
the cost of doing business in Canada, spur growth, and raise
Canadians’ standard of living.
WILLIAM WATSON
Globalization and the Meaning of Canadian Life
Toronto: University of Toronto Press, 1998
This vigorously argued book offers much new insight and
corrects many current misperceptions about Canadian
affairs. Readers will welcome its lively mix of historical and
contemporary perspectives.
THE ECONOMIST
Weekly newsmagazine. Not being a book, this item doesn’t
really fit on this list, but it is the best place to go if you want
solid economic analysis of current events.
P.J. O’ROURKE
Eat the Rich: A Treatise on Economics
New York: Atlantic Monthly Press, 1998
A humorist asks why some nations prosper while other
don’t. He answers with a world tour that takes the reader
from Albania to the New York Stock Exchange.
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.