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MACROECONOMICS
textbook, Krugman and Wells’ signature storytelling style and uncanny eye for revealing
Wells
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examples help readers understand how economic concepts play out in our world.
1
MACROECONOMICS
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FOURTH EDITION
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vii
BRIEF CONTENTS
viii
CONTENTS
The Demand Curve 69 ECONOMICS ➤ IN ACTION The Rise and Fall of the Unpaid
Intern 116
The Demand Schedule and the Demand Curve 69
Shifts of the Demand Curve 70 Controlling Quantities 118
The Anatomy of Quantity Controls 118
GLOBAL COMPARISON: Pay More, Pump Less 71
The Costs of Quantity Controls 121
Understanding Shifts of the Demand Curve 73
ECONOMICS ➤ IN ACTION C rabbing, Quotas, and
ECONOMICS ➤ IN ACTION Beating the Traffic 78
Saving Lives in Alaska 122
The Supply Curve 79 BUSINESS CAS E: M
edallion Financial: Cruising
The Supply Schedule and the Supply Curve 79 Right Along 124
Shifts of the Supply Curve 80
Understanding Shifts of the Supply Curve 81 u CHAPTER 5 International Trade.................... 131
ECONOMICS ➤ IN ACTION Only Creatures Small 131
THE EVERYWHERE PHONE
and Pampered 85
Comparative Advantage and International Trade 132
Supply, Demand, and Equilibrium 86 Production Possibilities and Comparative
Finding the Equilibrium Price and Quantity 86 Advantage, Revisited 133
Why Do All Sales and Purchases in a Market The Gains from International Trade 135
Take Place at the Same Price? 87 Comparative Advantage versus Absolute
Why Does the Market Price Fall If It Is Above Advantage 136
the Equilibrium Price? 88
GLOBAL COMPARISON: Productivity
and Wages Around
Why Does the Market Price Rise If It Is Below the World 137
the Equilibrium Price? 88
Sources of Comparative Advantage 138
Using Equilibrium to Describe Markets 89
FOR INQUIRING MINDS: Increasing Returns to Scale and
ECONOMICS ➤ IN ACTION The Price of Admission 89
International Trade 140
Changes in Supply and Demand 90 ECONOMICS ➤ IN ACTION H
ow Hong Kong Lost
What Happens When the Demand Curve Shifts 91 Its Shirts 140
What Happens When the Supply Curve Shifts 92 Supply, Demand, and International Trade 141
Simultaneous Shifts of Supply and Demand Curves 93 The Effects of Imports 142
FOR INQUIRING MINDS: Tribulations on the Runway 94 The Effects of Exports 144
ECONOMICS ➤ IN ACTION T
he Cotton Panic and International Trade and Wages 146
Crash of 2011 95
ECONOMICS ➤ IN ACTION Trade, Wages, and Land Prices
Competitive Markets—And Others 96 in the Nineteenth Century 147
BUSINESS CAS E: A
n Uber Way to Get a Ride 97 The Effects of Trade Protection 148
The Effects of a Tariff 148
u CHAPTER 4 Price Controls and The Effects of an Import Quota 150
Quotas: Meddling with ECONOMICS ➤ IN ACTION Trade Protection in the United
Markets.................................................... 103 States 151
103
BIG CITY, NOT-SO-BRIGHT IDEAS The Political Economy of Trade Protection 152
Why Governments Control Prices 104 Arguments for Trade Protection 152
CONTENTS xi
Producer Surplus and the Supply Curve 165 FOR INQUIRING MINDS: O
ur Imputed Lives 197
Cost and Producer Surplus 165 FOR INQUIRING MINDS: G What? 200
ross
ECONOMICS ➤ IN ACTION Europe’s Search for a Fiscal ECONOMICS ➤ IN ACTION The Fed’s Balance Sheet,
Rule 401 Normal and Abnormal 440
Long-Run Implications of Fiscal Policy 402 The Evolution of the American Banking System 441
Deficits, Surpluses, and Debt 403 The Crisis in American Banking in the Early Twentieth
GLOBAL COMPARISON: The American Way of Debt 404 Century 441
Problems Posed by Rising Government Debt 405 Responding to Banking Crises: The Creation of the
Deficits and Debt in Practice 406 Federal Reserve 442
The Savings and Loan Crisis of the 1980s 444
FOR INQUIRING MINDS: W
hat Happened to the Debt from World
War II? 407 Back to the Future: The Financial Crisis of 2008 444
Implicit Liabilities 407 ECONOMICS ➤ IN ACTION Regulation After the 2008
ECONOMICS ➤ IN ACTION Are We Greece? 409 Crisis 447
ere Comes the Sun 411
BUSINESS CAS E: H BUSINESS CAS E: The Perfect Gift: Cash or a Gift Card? 449
“Stories are good for us, whether we hear them, read them, write
them, or simply imagine them. But stories that we read are
particularly good for us. In fact I believe they are essential.”
Frank Smith, Reading: FAQ
The Importance of a Narrative Despite the many changes in this new edition, we’ve
tried to keep the spirit the same. This is a book about
Approach economics as the study of what people do and how they
interact, a study very much informed by real-world
More than a decade ago, when Robin and I began
experience.
writing the first edition of this textbook, we had many
small ideas: particular aspects of economics that we
believed weren’t covered the right way in existing text-
books. But we also had one big idea: the belief that an Macroeconomics in the Fourth
economics textbook could and should be built around
narratives, that it should never lose sight of the fact Edition: What’s New?
that economics is, in the end, a set of stories about The first edition of this textbook was published at a time
what people do. of calm in the U.S. and world economies. In fact, at the
Many of the stories economists tell take the form of time (in 2005), many economists believed that the so-
models—for whatever else they are, economic models called Great Moderation, an era of relative stability that
are stories about how the world works. But we believed began in the mid-1980s, would continue indefinitely. We
that students’ understanding of and appreciation for chose, nonetheless, to put recessions and the policies
models would be greatly enhanced if they were present- governments use to fight them front and center, believ-
ed, as much as possible, in the context of stories about ing that the business cycle is still the core issue in mac-
the real world, stories that both illustrate economic roeconomics. And subsequent events have both validated
concepts and touch on the concerns we all face as indi- that decision and provided plenty of material to incorpo-
viduals living in a world shaped by economic forces. rate in each new edition. And so it is with this edition.
Those stories have been integrated into every edition, Above all, Robin and I hope that this fourth edition
including this one. Once again, you’ll find them in the of Macroeconomics leaves students with the sense that
openers, in special features like Economics in Action, they have learned a lot about the world they’re living in,
For Inquiring Minds, Global Comparison, and in our
but we also believe that hard times in the world economy
business cases. We have been gratified by the recep-
have, perversely, greatly improved our ability to teach
tion this storytelling approach has received and in this
macroeconomics. We can now vividly illustrate that mac-
edition of Macroeconomics we continue to expand the
roeconomics really does make sense of the world and that
book’s appeal by including many new stories on a broad
it really matters. We hope you share our enthusiasm.
range of topics, and by updating and revising others.
Specifically, there are 8 new opening stories, 19 new
Economics in Actions, and 8 new business cases. As A Thorough Revision Reflecting
always, a significant number of the features that aren’t Recent Events
completely new have been revised or updated.
The financial crisis of 2008 is slowly receding in the
We remain extremely fortunate in our reviewers,
rearview mirror, but the aftershocks continue to rever-
who have put in an immense amount of work help-
berate, and most of the big changes since the third
ing us to make this book even better. And we are also
edition reflect those aftershocks. We have, of course,
deeply thankful to the users who have given us feed-
updated virtually every data-based figure and table in
back, telling us what works and, even more important,
the book, but beyond that, we have updated or replaced
what doesn’t.
xvii
xviii PR E FAC E
many of the real-world narratives that provide context “Austerity and the Multiplier”—international compari-
for the analytical content, and which we believe make sons between countries with varying degrees of auster-
this book special. ity make the discussion of fiscal impacts much more
This doesn’t mean that we have torn up the basic concrete and accessible.
analysis of previous editions. On the contrary, one little- Meanwhile, long-run fiscal issues—including con-
appreciated aspect of world economic developments cerns about solvency—have also become a lot less
since the crisis is how well basic macroeconomic mod- abstract. We see this in another new Economics in
els have worked in tracking, for example, the effects of Action: “Are We Greece?”, which nobody would have
fiscal policy and monetary expansion. As a result, we considered writing a few years ago.
make extensive use of recent events to illustrate macro- What about the analysis of crises themselves? We
economic principles and concepts, in a way that wouldn’t already had a crisis chapter in the third edition, but
have been possible in a more stable world. it’s now possible to say much more. Chapter 17, “Crises
This incorporation of recent developments literally and Consequences,” extends the story to cover the many
begins at the start, in the first chapter: Chapter 6, aftershocks of the 2008 crisis, especially the succes-
“Macroeconomics, The Big Picture.” Previously, we began sive waves of turmoil that have swept Europe. It also
by depicting mass unemployment in the 1930s; now we includes a discussion of Dodd-Frank financial reform,
begin with a new chapter-opening story about mass which is now a crucial part of the economic scene and
unemployment in today’s Spain (“The Pain in Spain”). parts of which are starting to show real results.
Depression-type conditions are no longer some- And there’s more. For example, when we discuss
thing that happened long ago; as we show in Chapter 8, open-economy macroeconomics in Chapter 19, we
“Unemployment and Inflation,” they’re happening right can illustrate the difference between fixed and float-
now to young Europeans who are a lot like our stu- ing exchange rates by comparing experiences around
dents. And as we also show, even in America, college the European periphery, where Iceland and Latvia
graduates have faced years of tough times and many have followed dramatically different paths. One new
students’ families and friends will have experienced Economics in Action illustrates how Latvia has taken
the pain of protracted unemployment firsthand, so we on outsize significance in the debate over fiscal policy,
believe that the analysis has gained extra relevance. serving as an example of successful austerity (“Lats of
Later on, we use recent data to demonstrate the Luck”). Another looks at the advantages that Iceland, a
validity of a number of key concepts. For example, country with its own currency, has had over euro-using
macroeconomists talk about sticky wages that may not countries, like Greece, when workers’ wages needed
fall even in the face of unemployment; as we show in to be cut during tough economic times (“The Little
Chapter 12, “Aggregate Demand and Aggregate Supply,” Currency That Could”).
in recent years that stickiness has been dramatically
illustrated by a surge in the number of workers whose
wages don’t change at all from year to year. Similarly,
A Revision that Extends Beyond Post-
we don’t need to appeal to events decades ago to support Crisis Analysis
the concept of a short-run trade-off between unemploy- We don’t want to convey the sense that all the changes in
ment and inflation, as we show in Chapter 16, “Inflation, this edition reflect the aftermath of the financial crisis.
Disinflation, Deflation.” You can see that trade-off We have also added a lot of new material in Chapter 9
clearly by looking across advanced countries and seeing on long-run growth, ranging from the all-too-visible
that where unemployment has risen, inflation has fallen effects of rapid growth on air quality in Beijing (in the
the most. opening story, “Airpocalypse Now”), to the disturbing
Another example of how recent events have allowed collapse of productivity growth in Italy (in a new Global
us to look at macroeconomic concepts in a new way is Comparison, “What’s the Matter with Italy?”), to the
the effect of fiscal policy. This used to be a very dif- costs of climate protection (in another new Economics
ficult topic to teach in a way that seemed real, because in Action). Progress in air travel has helped illustrate one
large discretionary changes in government spending of our favorite themes, the often inconspicuous nature of
hardly ever happened. That’s no longer true. The U.S. progress. Today’s jets look a lot like the jets of the 1960s,
stimulus program of 2009–2010 gave substance to the but they’re vastly more efficient as we discuss in the new
concept of expansionary fiscal policy that we illustrated Chapter 9 business case, “How Boeing Got Better.”
in the third edition. But now, in the fourth edition, we In this new edition, we pay particular attention
have even more real-world experience. As we discuss to how changes in technology are transforming the
in Chapter 13, “Fiscal Policy,” since 2010 many but economic landscape. For example, to illustrate mar-
not all countries have imposed drastic fiscal austerity, ket equilibrium we discuss the rise of Uber (in a new
and—as we discuss in the new Economics in Action, Chapter 3 business case, “An Uber Way to Get a Ride”).
PR E FAC E xix
Similarly, the opening story in Chapter 5 on interna- There are also choice-specific feedback and video expla-
tional trade illustrates how international supply chains nations, providing interactive assistance tailored to each
have produced the latest iPhone. student’s needs. Students can use the Work It Outs, along
We believe environmental concerns are one of the with the other offerings in , to independently
most pressing issues today and are a good means of test their comprehension of concepts, build their math
sparking students’ interest in economics. Chapter 3 on and graphing skills, and prepare for class and exams.
supply and demand has been changed to focus on the
economic effects of fracking. There we trace the supply Scan here for a sample Work It Out
shocks and demand changes that gave rise to investment problem.
in the technology of fracking. Being careful not to take
http://qrs.ly/sg49xiw
sides, we trace how the supply changes from fracking have
significantly altered the equilibrium of the natural gas
market. We take this new approach even further in appli-
cations throughout. In Chapter 9 on growth, we examine
the financial costs and environmental benefits of limiting
carbon emissions: in a new Economics in Action, “The
Advantages of This Book
Cost of Limiting Carbon,” students learn that with the Our basic approach to textbook writing is the same as
right incentives, growth and environmental damage need it was in the first edition:
not go hand in hand. A new business case in the growth • Chapters build intuition through realistic exam-
chapter illustrates how stimulus spending on concentrated ples. In every chapter, we use real-world examples,
thermal solar power plants has lead to job creation and stories, applications, and case studies to teach the
environmental benefits (“Here Comes the Sun”). core concepts and motivate student learning. The
And as always, we pay great attention to integrating best way to introduce concepts and reinforce them
an international perspective, in our Global Comparison is through real-world examples; students simply
feature, but also in the many globally oriented applica- relate more easily to them.
tions and stories. All global examples are highlighted
• Pedagogical features reinforce learning. We’ve
with the following icon: O
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Every chapter is structured around a common set of features that help students
learn while keeping them engaged.
CHAPTER
Supply and Demand
O
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3
W
What You Will Learn A NATURAL GAS BOOM
▲
in This Chapter
•andWhat a competitive market is
how it is described by the
supply and demand model
•movements
The difference between
along a curve and
shifts of a curve
determine a market’s
equilibrium price and equilibrium
quantity
Chapter OverviewsRESIDENT
offer students
P
OBAMA GOT A VIVID
a helpful preview of the key concepts
illustration they
of American free speech
from 2002 to 2006? There were two prin-
cipal factors—one reflecting the demand
“game changer” was how energy experts
described the impact of these technol-
will learn about in theinchapter.
action while touring upstate New York for natural gas, the other the supply of ogies on oil and natural gas produc-
on August 23, 2013. The president was natural gas. tion and prices. To illustrate, the United
greeted by more than 500 chanting and First, the demand side. In 2002, the States produced 8.13 trillion cubic feet of
sign-toting supporters and opponents. U.S. economy was mired in recession; natural gas from shale deposits in 2012,
Why the ruckus? Because upstate New with economic activity low and job losses nearly doubling the total from 2010. That
York is a key battleground over the adop- high, people and businesses cut back total increased again in 2013, to 9.35 tril-
tion of a relatively new method of produc- their energy consumption. For example, lion cubic feet of natural gas, making the
ing energy supplies. Hydraulic fracturing, to save money, homeowners turned down U.S. the world’s largest producer of both
or fracking, is a method of extracting their thermostats in winter and turned oil and natural gas—overtaking both
natural gas (and to a lesser extent, oil) them up in the summer. But by 2006, the Russia and Saudia Arabia.
from deposits trapped between layers of U.S. economy came roaring back, and The benefits of much lower natural gas
shale rock thousands of feet underground natural gas consumption rose. Second, prices have not only led to lower heat-
using—using powerful jets of chemical- the supply side. In 2005, Hurricane ing costs for American consumers, they
laden water to release the gas. While it Katrina devastated the American Gulf have also cascaded through American
has been known for almost a century that Coast, site of most of the country’s natu- industries, particularly power generation
the United States contains vast deposits ral gas production at the time. So by 2006 and transportation. Electricity-generating
of natural gas within these shale forma- the demand for natural gas had surged power plants are switching from coal to
tions, they lay untapped because drilling while the supply of natural gas had been natural gas, and mass-transit vehicles are
for them was considered too difficult. severely curtailed. As a result, in 2006 switching from gasoline to natural gas. (You
Until recently, that is. A few decades natural gas prices peaked at around $14 can even buy an inexpensive kit to convert
ago, new drilling technologies were devel- per thousand cubic feet, up from around your car from gasoline to natural gas.) The
oped that made it possible to reach these $2 in 2002. effect has been so significant that many
deeply embedded deposits. But what final- Fast-forward to 2013: natural gas pric- European manufacturers, paying four times
ly pushed energy companies to invest in es once again fell to $2 per thousand more for gas than their U.S. rivals, have
and adopt these new extraction technolo- cubic feet. But this time it wasn’t a slow been forced to relocate plants to American
gies was the high price of natural gas over economy that was the principal expla- soil to survive. In addition, the revived U.S.
the last decade. What accounted for these nation, it was the use of the new tech- natural gas industry has directly created
high natural gas prices—a quadrupling nologies. “Boom,” “supply shock,” and tens of thousands of new jobs.
xx
PR E FAC E xxi
Economics in Action
cases conclude every major
78 PA R T 2 S U P P LY A N D DEMAND
text section. This much-lauded
feature lets students immediately O
RLD VIE
ECONOMICS in Action
W
▲
apply concepts they’ve read
about to real phenomena. Beating the Traffic
A
ll big cities have traffic problems, and many local authorities try to dis-
courage driving in the crowded city center. If we think of an auto trip to
Global Stamps Global Stamps
the city center as a good that people consume, we can use the identify
economics which
of demand to analyze anti-traffic policies.
boxes, cases, and applications
identify are
which
One common strategy is to reduce the demand for auto trips by lowering the
global in focus. boxes,
prices of substitutes. Many metropolitan areas subsidize bus and rail service, cases, and
hoping to lure commuters out of their cars. An alternative is to raise the applications
price of are
Global Warming Images/Alamy
complements: several major U.S. cities impose high taxes on commercial parking
global in focus.
garages and impose short time limits on parking meters, both to raise revenue
and to discourage people from driving into the city.
A few major cities—including Singapore, London, Oslo, Stockholm, and
Milan—have been willing to adopt a direct and politically controversial approach:
reducing congestion by raising the price of driving. Under “congestion pricing”
C
Cities can reduce traffic congestion (or “congestion charging” in the United Kingdom), a charge is imposed on cars
by raising the price of driving. entering the city center during business hours. Drivers buy passes, which are then
debited electronically as they drive by monitoring stations. Compliance is moni-
tored with automatic cameras that photograph license plates.
In 2012, Moscow adopted a modest charge for parking in certain areas in an
attempt to reduce its traffic jams, considered the worst of all major cities. After
the approximately $1.60 charge was applied, city officials estimated that Moscow
Quick Review
traffic decreased by 4%.
• The supply and demand The current daily cost of driving in London ranges from £9 to £12 (about $14
model is a model of a competitive
to $19). And drivers who don’t pay and are caught pay a fine of £120 (about $192)
market—one in which there are
many buyers and sellers of the
for each transgression.
same good or service. Not surprisingly, studies have shown that after the implementation of conges-
tion pricing, traffic does indeed decrease. In the 1990s, London had some of the
• The demand schedule shows
how the quantity demanded worst traffic in Europe. The introduction of its congestion charge in 2003 imme-
changes as the price changes. A diately reduced traffic in the city center by about 15%, with overall traffic falling
demand curve illustrates this by 21% between 2002 and 2006. And there has been increased use of substitutes,
relationship. such as public transportation, bicycles, motorbikes, and ride-sharing. From 2001
• The law of demand asserts to 2011, bike trips in London increased by 79%, and bus usage was up by 30%.
that a higher price reduces the In the United States, the U.S. Department of Transportation has implemented
quantity demanded. Thus, demand pilot programs to study congestion pricing. For example, in 2012 Los Angeles
curves normally slope downward. County imposed a congestion charge on an 11-mile stretch of highway in central
• An increase in demand leads to Los Angeles. Drivers pay up to $1.40 per mile, the amount depending upon traffic
a rightward shift of the demand congestion, with a money-back guarantee that their average speed will never drop
curve: the quantity demanded rises
for any given price. A decrease in
below 45 miles per hour. While some drivers were understandably annoyed at the Check Your
charge, others were more philosophical. One driver felt that the toll was a fair price
demand leads to a leftward shift:
the quantity demanded falls for
Understanding
to escape what often turned into a crawling 45-minute drive, saying, “It’s worth it if
any given price. A change in price you’re in a hurry to get home. You got to pay the price. If not, get stuck inquestions
traffic.” allow
results in a change in the quantity
demanded and a movement along
students to
the demand curve. Check Your Understanding 3-1 immediately test
• The five main factors that
1.
their understanding
Explain whether each of the following events represents (i) a shift of the demand
can shift the demand curve are
changes in (1) the price of a related curve or (ii) a movement along the demand curve. of a section.
a. A store owner finds that customers are willing to pay more for umbrellas on
good, such as a substitute or Solutions appear
a complement, (2) income, (3) rainy days.
tastes, (4) expectations, and (5) the b. When Circus Cruise Lines offered reduced prices for summer cruises at the back of the
in the
number of consumers. Caribbean, their number of bookings increased sharply. book.
• The market demand curve is the c. People buy more long-stem roses the week of Valentine’s Day, even though the
horizontal sum of the individual prices are higher than at other times during the year.
demand curves of all consumers d. A sharp rise in the price of gasoline leads many commuters to join carpools in
in the market. order to reduce their gasoline purchases.
Solutions appear at back of book.
Quick Reviews offer students a short,
bulleted summary of key concepts in the
section to aid understanding.
xxii PR E FAC E
FIGURE 3-2 An Increase in Demand
Price of
natural gas
(per BTU) Demand Schedules for Natural Gas
TOOLS FOR LEARNING WALK THROUGH Quantity of natural
$4.00 gas demanded
Price of (trillions of BTUs)
94 PA R T 2 S U P P LY A N D D E M A N D natural gas
3.75 Demand curve
O
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in 2006 (per BTU) in 2002 in 2006
7.1 8.5
W
$4.00
W
3.50
FOR INQUIRING MINDS Tribulations on the Runway 3.75 7.5 9.0
3.25 3.50 For Inquiring Minds
8.1 9.7
You probably don’t spend much time wor- by a rightward shift of the supply curve
rying about the trials and tribulations of 3.00 in the market for fashion models, which 3.25 boxes apply economic
8.9 10.7
3.00 10.0 12.0
fashion models. Most of them don’t lead
glamorous lives; in fact, except for a lucky
would by itself tend to lower the price
paid to models. 2.75 concepts to real-world
11.5 13.8
2.75
few, life as a fashion model today can be Demand curve And that wasn’t the only change in 2.50 events in unexpected and
14.2 17.0
very trying and not very lucrative. And it’s 2.50 in 2002 the market. Unfortunately
D1 for DBianca
all because of supply and demand. and others like her, the tastes of many
2 sometimes surprising
Consider the case of Bianca Gomez,
a willowy 18-year-old from Los Angeles, 0 7
of those who hire models have changed
9 as well.
11 Fashion13 magazines
15 17have come
ways, generating a sense
with green eyes, honey-colored hair, and Quantity
to prefer using of natural
celebrities
(trillions
such gasas of the power and breadth
flawless skin, whose experience was Beyoncé on their pages of BTUs)
rather than
detailed in a Wall Street Journal article. anonymous models, believing that their of economics. The feature
Bianca began modeling while still in high
school, earning about $30,000 in mod-
readers connect better with a familiar
A strong economy is one factor that increases the demand for natural gas—a rise in the quantity demanded at any given
face. This amounts to a leftward shift
furthers the book’s goal
price. This is represented by the two demand schedules—one showing the demand in 2002 when the economy was weak,
eling fees during her senior year. Having of the demand curve for models—again
the other showing the demand in 2006, when the economy was strong—and their corresponding demand curves. The of helping students build
In For
general, when supply and demand shift in opposite directions, we can’t $9
most goods and services,
most European countries it is
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bitmany
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ability of inputs, that shifts a disproportionately
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lessthan distance
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6 France Canada
other curve will Still,
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boxes give students an demand. Americans—and supply theyasdo. with you can
demand, see
what we figure,
can bestbought
predict are5 the
and sold. That said, we
per person, can make the following prediction about the outcome
effects of shifts of theEuropeans
supply curve. consume less than half as much fuel
4
international perspective when the supply and
As we mentioned
demand curves
as Americans, in mainly
shift
because
the opening
in opposite
they drive
story,
directions:
smaller drilling
improved cars with technology signifi-
3
better mileage. United States
that will expand their • When demand
cantly increaseddecreases
Prices
and supply
the supply
aren’t the only
increases,
of natural
factor
gasthefromequilibrium
affecting
2006 onward.
fuel
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consump-
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thehow
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affected the quantity
marketis equilibrium.
ambiguous. The original equilibrium 1is at
understanding of economics. • WhenE1, demand
tion, but they’re probably the main cause of the difference
the pointincreases
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and supply of the originalthe
decreases, supply curve, price
equilibrium S1, withrisesan
butequilibrium
between European and American fuel consumption per 0 0.2 0.4 0.6 0.8 1.0 1.2 1.4
theprice
change P1 and
in the equilibrium
equilibriumquantityquantityQis1.ambiguous.
As a result of the improved technology, sup-
person. Consumption of gasoline
ply increases and S shifts rightward to S . At the original price P , a surplus of
1 2 1 (gallons per day per capita)
But suppose that the demand and supply curves shift in the same direction.
This isnatural
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now exists and the
in recent market
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A R TDevelopment
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Precession
U PIndicators
LY A N D
inM 2008,
of
andD U.S.
E
the quantity
AEnergy
demanded,
resultingAdministration,
N D Information in an increase
2013.
a downward
in both demand movement
and supply. alongCan thewedemand curve.any
safely make Thepredictions
new equilibrium
about the is at E2, with
P I T F A L L S changes in price anand
equilibrium
quantity? price
In this and an equilibrium
P2situation, the change quantity
in quantity . In the new equi-
Q2 bought
Louisiana Drillersquantity
and Allegheny Natural Gas. For example at a price of around $2 per
WHICH CURVE IS IT, ANYWAY? and sold can belibriumpredicted, E2,but
thetheprice
changeis lower andisthe
in price equilibrium
ambiguous. The two is higher
possible than
BTU,principle:
LouisianaWhen
Drillers supplies 200,000 BTUs and Allegheny Natural Gas supplies
outcomes whenbefore.
When the price of some good or service Thisand
the supply candemand
be stated as a shift
curves general in the same direction supply
(whichof a good or
100,000 BTUs per year, making the quantity supplied to the market 300,000 BTUs.
changes, in general, we can say that youthis
should check service increases,
for yourself) aretheas equilibrium
follows: price of the good or service falls and the
Clearly, the quantity supplied to the market at any given price is larger when
equilibrium quantity of the good or service rises.
reflects a change in either supply or• demand.
Pitfalls
When both demand and supplyboxes
What happens
increase, clarifyAllegheny
the concepts
equilibrium that
quantity
Natural are
Gasrises
is easily
but
also a producer than it would be if Louisiana Drillers were
pricetoisthe market when supply falls? A fall in supply leads
But it is easy to get confused about which
the change in equilibrium ambiguous. the only supplier. The quantity supplied at a given price would be even larger if we
one. A helpful clue is the direction of change
• When in
misunderstood
to a leftward shift of the by supply
both demand and supply decrease, the equilibrium
students
curve. Atnew
the
added a third
to economics.
original
producer,
quantity
price
fallsthen a shortage
buta fourth, and so on. So an increase in the number of
in the quantity. If the quantity sold changes now exists;
KrugWellsEC4e_Micro_CH03.indd 71 as a result, the equilibrium price rises and the quantity
the change in equilibrium
the same direction as the price—for example, price is ambiguous. producers leads to an increase in supply and a rightward shift of the supply curve. 9/30/14 1:27 PM
demanded falls. This describes what happened For a review toofthe
themarket
factorsfor natural
that shift supply, see Table 3-2.
if both the price and the quantity rise—this
suggests that the demand curve has shifted. gas after Hurricane Katrina damaged natural gas production in the Gulf
If the price and the quantity move in opposite of TABLE
Mexico3-2 in 2006. We can
Factors formulate
That a general principle: When supply of
Shift Supply
directions, the likely cause is a shift of the a good
Whenor service decreases, the equilibrium price of the good
this Butorwhen
service
this rises
supply curve. and the equilibrium
happens ... quantity. .of the good
. supply or service falls. happens . . .
increases . . . supply decreases
Price Price
KrugWellsEC4e_Micro_CH03.indd 94 9/23/14 9:34 AM
I
n a densely populated city like New York City, finding a taxi is a relatively easy
applying key economic task on most days—stand on a corner, put out your arm and, usually, before
principles to real-life long an available cab stops to pick you up. And even before you step into the
car you will know approximately how much it will cost to get to your destination,
business situations because taxi meter rates are set by city regulators and posted for riders.
But at times it is not so easy to find a taxi—on rainy days, during rush hour,
in both American and and at crowded locations where many people are looking for a taxi at the
international companies. same time. At such times, you could wait a very long while before finding
an available cab. As you wait, you will probably notice empty taxis pass-
Each case concludes ing you by—drivers who have quit working for the day and are headed
with critical thinking home or back to the garage. There will be drivers who might stop, but
then won’t pick you up because they find your destination inconvenient.
questions. Moreover, there are times when it is simply impossible to hail a taxi—for
example, during a snowstorm or on New Year’s Eve when the demand for
taxis far exceeds the supply.
In 2009 two young entrepreneurs, Garrett Camp and Travis Kalanick,
founded Uber, a company that they believe offers a better way to get a ride.
happen in the market for pickup trucks? Show PROBLEMS change in the quantity demanded at any given price. 10. The supply and demand model is based on the princi-
3. How
An increase doescauses
in demand Uber’s surge pricing
a rightward shift of thesolve the problem described in the previous
ple that the price in a market moves to its equilibrium
this on your diagram. 1. A survey indicated demand question?
that curve. A decrease
chocolate is the Assess
in demand
most Kalanick’s claim
causes a leftward
popular b. that price,
The market the
for St.price
Louis
or isRams
set cotton
market-clearing to leave asthe
T-shirts
price, few people
price at which
c Suppose that the U.S. Department of flavor of ice creamshift. possible
in America. For eachwithout
of the a ride.
follow- Case 1: The the
Rams win the
quantity Super Bowl.
demanded is equal to the quantity sup-
ing, indicate the possible effects on demand, supply, or is the equilibrium quantity.
4. There are five main factors that shift the demand Case 2: The plied. price ofThis quantity
cotton increases. 97 When
Transportation imposes costly regulations on both as well as equilibrium price and quantity of choco-
curve: the price is above its market-clearing level, there is a
late ice cream. c. The market for bagels
manufacturers that cause them to reduce supply • A change in the prices of related goods or services,
surplus that pushes the price down. When the price is
a. A severe drought in the Midwest causes dairy farmers Case 1: People realize how fattening bagels are.
by one-third at any given price. Calculate and plot below its market-clearing level, there is a shortage that
to reduce the numbersuch asof substitutes
milk-producing or complements
cattle in their Case 2: People havethe
pushes lessprice
timeup. to make themselves a
the new supply schedule and indicate the new • AThese
herds by a third. change in income:
dairy farmers whensupplyincome
cream rises, the demand
cooked breakfast.
equilibrium price and quantity on your diagram. for normal goods increases
that is used to manufacture chocolate ice cream.
b. A new report by inferior goodsMedical
the American decreases
End-of-Chapter Reviews include a
and
Association
the demand for 11. An increase in demand
d. The market for the Krugman and Wells economics
textbook
increases both the equilib-
rium price and the equilibrium quantity; a decrease in
KrugWellsEC4e_Micro_CH03.indd 97 reveals that chocolate
health benefits.
• A change does,
in in brief but complete summary of key concepts,
fact, have significant
tastes demand
Case 1: Yourreduces
professor
has the opposite effect. An increase in supply
makes it required reading for 9/23/14 9:34 AM
the equilibrium price and increases the equi-
• A change in expectations all of his or her students.
c. The discovery•ofAcheaper
change synthetic
in the number vanilla a list of key terms, and a comprehensive,
of flavoring
consumers
librium quantity; a decrease in supply has the opposite
Case 2: Printing costs for textbooks are lowered by
effect.
lowers the price of vanilla ice cream. the use of synthetic paper.
NEW! Work It Out appears d. New technology for mixing and freezing ice cream high-quality set of end-of-chapter Problems.
5. The market demand curve for a good or service is the
horizontal sum of the individual demand curves
12. Shifts of the demand curve and the supply curve can
of assume that each person in the United States con-
5. Let’s
lowers manufacturers’ costs of producing chocolate happen simultaneously. When they shift in opposite
all consumers in the market. sumes an average of 37 gallons of soft drinks (nondiet)
in all end-of-chapter problem sets, 98 icePcream.
ART 2 S U P P LY A N D D E M A N D
6. The supply schedule shows the quantity supplied at
2. In a supply and demand diagram, draw the shift of the
directions,
at an average able
pricebutof the
the change
$2 change
per gallon
in equilibrium
and that the
in equilibrium
price is predict-
U.S. is not.
quantity
population is 294 million. At a price of $1.50 per gallon,
offering students online tutorials SUMMARY
each price and is represented graphically by a supply
demand curve for hamburgers in your hometown due
to the following curve.
events.Supply
In eachcurves usually
case, show slope
the upward.
effect on
When they shift in the same direction, the change in
each individual consumer would demand 50 gallons of
equilibrium quantity is predictable but the change
soft drinks. From this information about the individual
that guide them step by step through 1.equilibrium
The supply andprice and quantity.
movement
7. Ademand along
model the supply
illustrates how curve occurs when demand
ing
ule
in equilibrium price is not. In general, the curve that
supply,schedule,
they mean
sup-forinsoft
calculate
shifts ofthe
shifts the greater
themarket
supplydemand
distance
curve—a
has and
sched-
a greater effect on the
a The
a. price of tacos
competitive a price
market, increases.
change
one withleads
manyto abuyers
change in the quantitychange the drinks
quantityfor the prices
supplied at anyofgiven
$1.50 $2 per
price. An
solving key problems. Available in and
b. Allsellers, plied.
none sellers
hamburger When
of whom economists
canthe
raise influence talk
price ofthe of increasing
market
their french or gallon.
decreas-
changes in equilibrium price and quantity.
increase in supply causes a rightward shift of the sup-
fries.works.
price, 6.ply curve. that
Suppose A decrease in supply
the supply schedule causes a leftward
of Maine shift.
lobsters is as
. 2.c. Income
The fallsschedule
demand in town. shows
KEYmost
Assume
TERMS
that
the hamburgers
quantity are a
demand- follows:
8. There are five main factors that shift the supply curve:
ednormal
at eachgood
pricefor people.
and is represented graphically by • A change in input prices
a Income
d. demandfalls Competitive
in town.
curve. The law market,
Assume p.
that
of demand says that are Substitutes, p. 74 Price of lobster
68 hamburgers Quantity of
Movement lobster
along the supply curve,
Supply and demand model, p. 68
• A change in the prices of relatedp.
Complements, p. 74(per pound)
goods
80 and
supplied services
(pounds)
an inferior
demand good
curves for
slope most people.
downward; that is, a higher
Demand schedule, p. 69 Normal • A change
good, p. 74 in$25
technology Input, p. 800
82
price
e. Hot for
dogastands
good or service
cut leads
the price ofpeople to demand a
hot dogs.
Quantity demanded, p. 69 • A change
Inferior good, p. 74 in 20expectations Individual supply curve, p. 83
smaller quantity, other things equal. 700
3. The market for many goods changes in predictable ways Equilibrium price, p. 86
Demand curve, p. 69 Individual• demand
A change curve, p. number
in the 76 of producers
3.according
A movement to the timethe
along of year,
demand
Law of demand, p. 70
in response
curve to events
occurs when aQuantity supplied, p. 79 15
such 600 quantity, p. 86
Equilibrium
as holidays,
price vacation
changeShift atimes,
leadsoftothe change seasonal changesdemand-
in the quantity in pro- 9. The market supply curve for a good or service
500 is the
Supply schedule, p. 79 10
duction,
ed. Whenand so on. Using
economists
demand curve, p. 72
supply
talk of and demand,
increasing
Movement along the demand curve,
explain
or decreasing
Supply curve, p. 79 5
Market-clearing
Surplus, 400
p. 88
price, p. 86
horizontal sum of the individual supply curves of all xxiii
the change in price in each of the following cases. Note producers in the market.
demand, they 72 shifts of the demand curve—a Shift of the supply curve, p. 80
mean
p. Shortage, p. 88
that supply
change and
in the demand
quantity may shiftatsimultaneously.
demanded any given price. Suppose
10. The supply that Maine lobsters
and demand model iscan be on
based sold
theonly in the
princi-
a.
AnLobster
increaseprices usuallycauses
in demand fall during the summer
a rightward shift ofpeak
the United States.
ple that the price The U.S. demand
in a market moves toschedule for Maine
its equilibrium
demand curve. A decreasedespite
lobster harvest season, the fact
in demand thata people
causes leftward lobsters
price, is as follows:
or market-clearing price, the price at which
like to eat lobster during the summer more than at
shift. the quantity demanded is equal to the quantity sup-
Another random document with
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LIISA katsahtaa Anniin ja hänen kalpeille kasvoilleen ilmestyy
kauhea hätä ja epätoivo — niinkuin hän vasta nyt huomaisi
rikoksensa suuruuden; vääntelee käsiään vaikeroiden.
Äiti, äiti… Enhän minä vihainen ole, äiti. On vain niin kovin
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Mutta kuinka minä teille vihainen olisin… äiti-parka?
Älkää nyt ajatelko enää sitä, äiti — rakas äiti. Minä olen niin
iloinen, niin iloinen, kun te puhutte noin… Te ette ole koskaan ollut
tuollainen, pikku Äiti parka…
LIISA hermostuu niin, ettei voi sanoa mitään, nyppii vain vapisevin
sormin esiliinaansa; vihdoin änkyttää katkonaisesti.
Missä Kaarlo on? Tuleeko hän vielä tänään meille? Puhuiko hän
mitään?
KORPI väsyneesti.
ANNI tolkuttomasti.
(Menee ulos.)
LIISA lohduttaen.
Vai jo se vihdoinkin loppui. Vilho, älä ole niin surullinen. Kyllä kai
tästä jotenkin sentään selviydytään…
LIISA kuohahtaen.
KORPI
Voi Vilho parka… kyllä minä ymmärrän, mitä sinä olet kärsinyt. Ja
minäkään en ole oikein sinua ennen ymmärtänyt.
KORPI
KAARLO levottomasti.
Missä se Halonen lienee, kun ei tullut kokoukseen? Minun täytyy
mennä sinne vielä tänään…
KORPI
KORPI väsyneesti.
KORPI
(Anni menee.)
KORPI
Kaarlo, älä huoli lähteä… Kyllä minä tiedän, mitä sinä aiot —
mutta ei nyt mistään puita saa. Kai huomenna jostakin… Emil olisi
tänään saanut mennä jostakin kauempaa hakemaan.
Ei - entä sitten? Mitä, missä hän on…? Tiedätkö jotain hänestä, tai
minkätähden muutuit?
KAARLO
En minä mitään erityistä, mutta kun hän jutteli jotakin, että pitäisi
ajaa ne rikkurit pois, niin…
KAARLO rauhoittaen.
Älkää suotta vaivatko itseänne. Minä kielsin jyrkästi, ettei hän saa
ryhtyä mihinkään… Eikä hän yksin mitään… hän oli vain kiihoittunut.
KORPI mutisten.
Mutta minä en olisi uskonut, että niitä oli niin paljo; tuollaisia kurjia
rankkoja — pettureita! Kuinka se on mahdollista…?
KORPI huokaisten.
(Menee.)
KORPI
(Juovat.)
Lämmittää se.
NAISEN ÄÄNI
ANNIN ÄÄNI
KORPI hermostuneesti.
VAIMO
Sitä en tiedä, mitä hän on tehnyt… mutta sen tiedän mitä te olette
tehneet Haloselle…
Haloselle?
KAARLO
VAIMO
Ei lyönyt, mutta…
Niin se asia on, että Halonen oli koko tämän päivän ollut
murheellisen näköinen, mutta sen jälkeen kun hämärissä kävi
jossakin, muuttui hän yhä kummallisemmaksi… Ensin oli istunut ja
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Mutta kun viimeksi piti pikku Mattia silitellen sen hiuksia, niin oli äkkiä
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KORPI hurjasti.
VAIMO väristen.
Äsken minä juuri näin hänen riippuvan orressa vyöhihnassaan…
— (Anni peittää itkien kasvonsa ja Kaarlo näyttää mielettömältä
kävellessään edestakaisin lattialla.)
VAIMO
(Äänettömyys.)
KORPI
Kysyttekö te sitä? Lakon tähden hän sen teki! Kun lapset olivat jo
toista vuorokautta kärsineet nälkää… ja te, te olette syypää!
KORPI änkyttäen.
KORPI änkyttäen.
VAIMO
VAIMO epätoivoisesti.
Voi, mitä minä nyt teen…? Se on minun syyni! Miksi syytin häntä
niin ankarasti? Enkä ehtinyt peruuttaa, hyvittää — pyytää anteeksi
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KORPI
(Istuutuu jälleen.)
KAARLO
KAARLO surullisesti.
Älähän nyt Kaarlo… kyllä hän kaiken tuon tehnyt on, mutta
pääsyyllinen on sittenkin nykyinen kapitalistinen järjestelmä, kun
tarkemmin ajattelet… Kun mestarien toimena juuri on puristaa
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(Lähtee.)
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KAARLO
KAARLO
Vai oli Kalle kotona?'Sepä hyvä! Sinä olit kai hänen kanssaan
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Vai ei ole — vai niin! Olin vain kuulevinani sinun äänesi. Mutia
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ANNI alkaa hengittää raskaasti ja toistaa koneellisesti kuin
uneksien.
Älä katso — Älä katso? Mitä on tapahtunut, missä olet ollut kun
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Anni parka on ollut?
(Anni ei vastaa.)