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vii
Elasticity and the Availability of Substitutes 78 Using Elasticities to Predict Changes in

Prices 92
Other Determinants of the Price Elasticity of
Demand 79 The Price Effects of a Change in Demand 92
The Price Effects of a Change in Supply 94

Application 1 A Closer Look at the Elasticity
of Demand for Gasoline 80
Application 6 A Broken Pipeline and the Price
Using Price Elasticity 81 of Gasoline 96
Predicting Changes in Quantity 81 * Summary 96 * Key Terms 97

* Exercises 97
Price Elasticity and Total Revenue 81
Using Elasticity to Predict the Revenue Effects 5 Production Technology

of Price Changes 83 and Cost 102
Application 2 Vanity Plates and the Elasticity Economic Cost and Economic Profit 103
of Demand 84
Application 1 Opportunity Cost
Elasticity and Total Revenue for a Linear and Entrepreneurship 104
Demand Curve 84
A Firm with a Fixed Production Facility:
Price Elasticity along a Linear Demand Curve 84 Short-Run Costs 104
Application 3 Drones and the Lower Half of a Production and Marginal Product 104
Linear Demand Curve 86 Short-Run Total Cost 106
Elasticity and Total Revenue for a Linear Demand Short-Run Average Costs 107
Curve 87
Short-Run Marginal Cost 109
Other Elasticities of Demand 87 The Relationship between Marginal Cost
Income Elasticity of Demand 87 and Average Cost 109
Cross-Price Elasticity of Demand 87 Application 2 The Rising Marginal Cost

of Crude Oil 111
Application 4 I Can Find that Elasticity in Four
Clicks! 88 Production and Cost in the Long Run 111
The Price Elasticity of Supply 89 Expansion and Replication 111
What Determines the Price Elasticity Reducing Output with Indivisible Inputs 113
of Supply? 90 Scaling Down and Labor Specialization 114
The Role of Time: Short-Run versus Long-Run Economies of Scale 114
Supply Elasticity 90
Diseconomies of Scale 114
Extreme Cases: Perfectly Inelastic Supply and
Perfectly Elastic Supply 91 Actual Long-Run Average-Cost Curves 115
Short-Run versus Long-Run Average Cost 116

Application 5 The Short-Run and Long-Run
Elasticity of Supply of Coffee 92
Application 3 Indivisible Inputs and the Cost
Predicting Changes in Quantity Supplied 92 of Fake Killer Whales 116
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viii
Examples of Production Cost 117 Drawing the Long-Run Market Supply

Curve 138
Scale Economies in Wind Power 117
Examples of Increasing-Cost Industries: Sugar and
The Average Cost of a Music Video 117 Apartments 138
Solar versus Nuclear: The Crossover 118
Application 5 Chinese Coffee Growers Obey the
* Summary 119 * Key Terms 119 Law of Supply 139
* Exercises 120
Short-Run and Long-Run Effects of Changes
in Demand 139
6 Perfect Competition 123 The Short-Run Response to an Increase in
Demand 139
Preview of the Four Market Structures 124
The Long-Run Response to an Increase in
Application 1 Wireless Women in Pakistan 126 Demand 140
The Firm’s Short-Run Output Decision 126 Application 6 The Upward Jump and Downward
Slide of Blueberry Prices 141
The Total Approach: Computing Total Revenue
and Total Cost 127 Long-Run Supply for a Constant-Cost
The Marginal Approach 128 Industry 142
Economic Profit and the Break-Even Price 130 Long-Run Supply Curve for a Constant-Cost
Industry 142
Application 2 The Break-Even Price for Hurricane Andrew and the Price of Ice 142
Switchgrass, a Feedstock For Biofuel 130
Application 7 Economic Detective and the Case
The Firm’s Shut-Down Decision 131
of Margarine Prices 143
Total Revenue, Variable Cost, and the Shut-Down
* Summary 144 * Key Terms 144
Decision 131
* Exercises 144
The Shut-Down Price 132
Fixed Costs and Sunk Costs 133

7 Monopoly and Price
Application 3 Straddling the Zinc Cost Discrimination 149
Curve 133
The Monopolist’s Output Decision 150
Short-Run Supply Curves 134
Total Revenue and Marginal Revenue 151
The Firm’s Short-Run Supply Curve 134
A Formula for Marginal Revenue 152
The Short-Run Market Supply Curve 134
Using the Marginal Principle 153
Market Equilibrium 135
Application 1 Marginal Revenue From
Application 4 Short-Run Supply Curve for a Baseball Fan 155
Cargo 136
Patents and Monopoly Power 156
The Long-Run Supply Curve for an
Increasing-Cost Industry 136 Incentives for Innovation 156
Production Cost and Industry Size 137 Trade-Offs from Patents 156

ix
Application 2 Bribing the Makers of Generic Price Fixing and the Game Tree 176
Drugs 157
Equilibrium of the Price-Fixing Game 178
Price Discrimination 157 Nash Equilibrium 179
Senior Discounts in Restaurants 158
Application 4 Failure of the Salt Cartel 180
Price Discrimination and the Elasticity of
Demand 159 Overcoming the Duopolists’ Dilemma 180
Examples: Movie Admission versus Popcorn, Low-Price Guarantees 180
and Hardback versus Paperback Books 160
Repeated Pricing Games with Retaliation for
Application 3 Why does Movie Popcorn Cost so Underpricing 181
Much? 160
Price Fixing and the Law 183
Price Leadership 183
* Exercises 161
* Economic Experiment 164 Application 5 Low-Price Guarantee Increases

Tire Prices 184
The Insecure Monopolist and Entry

8 Market Entry, Monopolistic Deterrence 184
Competition, and Oligopoly 165
Entry Deterrence and Limit Pricing 185
The Effects of Market Entry 166 Examples: Aluminum and Campus

Bookstores 187
Entry Squeezes Profits from Three Sides 167
Entry Deterrence and Contestable Markets 187
Examples of Entry: Car Stereos, Trucking,
and Tires 168 When Is the Passive Approach Better? 187
Application 1 Satellite versus Cable 169 Application 6 Microsoft as an Insecure

Monopolist 188
Monopolistic Competition 169
Natural Monopoly 189
When Entry Stops: Long-Run
Equilibrium 170 Picking an Output Level 189
Differentiation by Location 170 Will a Second Firm Enter? 190
Application 2 Opening a Motel 171 Price Controls for a Natural Monopoly 190
Trade-Offs with Entry and Monopolistic Application 7 Public versus Private

Competition 172 Waterworks 192
Average Cost and Variety 172 Application 8 Satellite Radio as a Natural

Monopolistic Competition versus Perfect Monopoly 193
Competition 172
Antitrust Policy 193
Application 3 Happy Hour Pricing 173 Breaking Up Monopolies 193
Oligopoly and Pricing 174 Blocking Mergers 194
Cartel Pricing and the Duopolists’ Dilemma 175 Merger Remedy for Wonder Bread 195

x
Regulating Business Practices 196 Other Types of Insurance 219
A Brief History of U.S. Antitrust Policy 197

Application 3 Genetic Discrimination 220
Application 9 Merger of Pennzoil and Quaker
Insurance and Moral Hazard 220
State 198
Insurance Companies and Moral Hazard 221
Application 10 Merger of Office Depot and
OfficeMax 198 Application 4 Car Insurance and Risky
Driving 221
* Exercises 199 Deposit Insurance for Savings and Loans 222
* Economic Experiment 206 External Benefits and Public Goods 222

Public Goods and the Free-Rider Problem 223
9 Imperfect Information, External Overcoming the Free-Rider Problem 223

Benefits, and External Costs 208
Application 5 Clearing Space Debris 224
Adverse Selection for Buyers: The Lemons
Application 6 Global Weather Observation 224
Problem 209
Uninformed Buyers and Knowledgeable The Optimal Level of Pollution 225
Sellers 210
Using the Marginal Principle 225
Equilibrium with All Low-Quality Goods 211
Example: The Optimal Level of Water
A Thin Market: Equilibrium with Some Pollution 225
High-Quality Goods 212
Coase Bargaining 226
Evidence of the Lemons Problem 213
Application 7 Reducing Methane Emissions 227
Application 1 Are Baseball Pitchers Like Used
Cars? 214 Taxing Pollution 228
A Firm’s Response to a Pollution Tax 228
Responding to the Lemons Problem 214
The Market Effects of a Pollution Tax 229
Buyers Invest in Information 214
Example: A Carbon Tax 231
Consumer Satisfaction Scores from ValueStar and
eBay 215
Application 8 Washing Carbon Out
Guarantees and Lemons Laws 215 of the Air 231
Application 2 Regulation of the California Kiwifruit Traditional Regulation 232

Market 216
Uniform Abatement with Permits 232
Adverse Selection for Sellers: Insurance 216 Command and Control 232
Health Insurance 216 Market Effects of Pollution Regulations 233
Equilibrium with All High-Cost Consumers 218 Lesson from Dear Abby: Options for Pollution
Abatement 233
Responding to Adverse Selection in Insurance:
Group Insurance 219
Application 9 Options for Reducing CO2
The Uninsured 219 Emissions From International Shipping 234

xi
Marketable Pollution Permits 234 Why Do College Graduates Earn Higher

Wages? 259
Voluntary Exchange and Marketable
Permits 234 Labor Unions and Wages 260
Supply, Demand, and the Price of Marketable Application 3 The Beauty Premium 261
Permits 235
The Distribution of Income 261
Application 10 Weather and the Price of Pollution
Permits 237 Income Distribution in 2007 261
* Summary 237 * Key Terms 238 Recent Changes in the Distribution of

* Exercises 238 Income 262
* Economic Experiment 245 Application 4 Trade-Offs From Immigration 263
Public Policy and the Distribution

of Income 264
10 The Labor Market and the
Distribution of Income 247 Effects of Tax and Transfer Policies on the
Distribution of Income 264
The Demand for Labor 248 Poverty and Public Policy 265
Labor Demand by an Individual Firm in the Short The Earned Income Tax Credit 266
Run 248
Market Demand for Labor in the Short Run 250 Application 5 Expanding the Eitc 267
Labor Demand in the Long Run 251 * Summary 267 * Key Terms 268
* Exercises 268
Short-Run versus Long-Run Demand 252
Application 1 Marginal Revenue Product in Major 11 Measuring a Nation’s Production

League Baseball 252 and Income 272
The Supply of Labor 253
The “Flip” Sides of Macroeconomic Activity:
The Individual Labor-Supply Decision: How Production and Income 273
Many Hours? 253
The Circular Flow of Production and Income 274
An Example of Income and Substitution
Effects 253 Application 1 Using Value Added to Measure the
True Size of Walmart 275
The Market Supply Curve for Labor 254
The Production Approach: Measuring a
Application 2 Cabbies Respond to an Increase Nation’s Macroeconomic Activity Using
in the Wage 255 Gross Domestic Product 275
Labor Market Equilibrium 255 The Components of GDP 277
Changes in Demand and Supply 255 Putting It All Together: The GDP Equation 280
The Market Effects of the Minimum Wage 256 Application 2 Comparing Recoveries From
Recessions 281
Why Do Wages Differ across Occupations? 257
The Gender Pay Gap 258

The Income Approach: Measuring a Nation’s
Macroeconomic Activity Using National
Racial Discrimination 259 Income 281

xii
Measuring National Income 281 The Consumer Price Index and the Cost
of Living 305
Measuring National Income through Value
Added 282 The CPI versus the Chain Index for GDP 306
An Expanded Circular Flow 283
Application 4 The Introduction of Cell Phones
Application 3 The Links Between Self-Reported and the Bias in the Cpi 307
Happiness and GDP 284 Problems in Measuring Changes in Prices 307
A Closer Examination of Nominal and Real Inflation 307

GDP 284
Historical U.S. Inf lation Rates 308
Measuring Real versus Nominal GDP 285
The Perils of Def lation 309
How to Use the GDP Def lator 286
The Costs of Inflation 310
Fluctuations in GDP 287
Anticipated Inf lation 310
GDP as a Measure of Welfare 289
Unanticipated Inf lation 310
Shortcomings of GDP as a Measure
of Welfare 289 * Summary 311 * Key Terms 312
* Exercises 312
* Exercises 291
13 Why Do Economies Grow? 315
12 Unemployment and Inflation 295
Economic Growth Rates 316
Examining Unemployment 296 Measuring Economic Growth 317
How Is Unemployment Defined and Comparing the Growth Rates of Various

Measured? 296 Countries 318
Alternative Measures of Unemployment and Why Are Poor Countries Catching Up? 319
They Are Important 298
Application 1 Global Warming, Rich Countries,
Who Are the Unemployed? 299
and Poor Countries 320
Application 1 Declining Labor Force
Application 2 Behavioral Incentives in
Participation 300
Development 321
Categories of Unemployment 301
Capital Deepening 321
Types of Unemployment: Cyclical, Frictional,
Saving and Investment 322
and Structural 301
The Natural Rate of Unemployment 302 How Do Population Growth, Government,

and Trade Affect Capital Deepening? 323
Application 2 Less Unemployment Insurance,
More Employment? 303 The Key Role of Technological
Progress 324
The Costs of Unemployment 303 How Do We Measure Technological
Progress? 324
Application 3 Social Norms, Unemployment,
and Perceived Happiness 304 Using Growth Accounting 325

xiii
Application 3 Sources of Growth in China and Why the Aggregate Demand Curve Slopes
India 326 Downward 341
Application 4 The End of Growth? 327 Shifts in the Aggregate Demand Curve 342
What Causes Technological Progress? 327 How the Multiplier Makes

the Shift Bigger 343
Research and Development Funding 327
Application 2 Two Approaches to Determining the
Monopolies That Spur Innovation 328
Causes of Recessions 346
The Scale of the Market 328
Understanding Aggregate Supply 347
Induced Innovations 329
The Long-Run Aggregate Supply Curve 347
Education, Human Capital, and the Accumulation
of Knowledge 329 The Short-Run Aggregate Supply Curve 348
New Growth Theory 330 Supply Shocks 350
Application 5 The Role of Political Factors in Application 3 Oil Price Declines and the U.S.
Economic Growth 330 Economy 350
Application 6 Culture, Evolution, and Economic From the Short Run to the Long Run 351
Growth 331
A Key Governmental Role: Providing * Exercises 353
the Correct Incentives and Property
Rights 331
Application 7 Lack of Property Rights Hinders 15 Fiscal Policy 356

Growth in Peru 332
* Summary 333 * Key Terms 333 The Role of Fiscal Policy 357
* Exercises 334 Fiscal Policy and Aggregate
Demand 357
The Fiscal Multiplier 358

14 Aggregate Demand and Aggregate
Supply 337 The Limits to Stabilization Policy 359
Application 1 Increasing Life Expectancy and

Sticky Prices and Their Macroeconomic
Aging Populations Spur Costs of Entitlement
Consequences 338
Programs 361
Flexible and Sticky Prices 338
The Federal Budget 362
How Demand Determines Output in the Short
Run 339 Federal Spending 362
Federal Revenues 363

Application 1 Measuring Price Stickiness in
Consumer Markets 340 The Federal Deficit and Fiscal Policy 365
Understanding Aggregate Demand 340 Automatic Stabilizers 365
What Is the Aggregate Demand Curve? 340 Are Deficits Bad? 366
The Components of Aggregate Demand 341 Application 2 The Confucius Curve? 367

xiv
Fiscal Policy in U.S. History 367 * Summary 388 * Key Terms 389
* Exercises 389
The Depression Era 367
The Kennedy Administration 367 * Economic Experiment 391
The Vietnam War Era 368
The Reagan Administration 369 17 Monetary Policy and Inflation 393

The Clinton and George W. Bush The Money Market 394
Administrations 369
The Demand for Money 394
Application 3 How Effective was the 2009
Stimulus? 370 Application 1 Quantitative Easing and the Fed’s
Balance Sheet 396
* Exercises 372 How the Federal Reserve Can Change
the Money Supply 397
Open Market Operations 397
16 Money and the Banking
System 374 Other Tools of the Fed 398
What Is Money? 375 Application 2 Did Fed Policy Cause the

Commodity Boom? 399
Three Properties of Money 375
Measuring Money in the U.S. Economy 377 How Interest Rates Are Determined:
Combining the Demand and Supply of
Application 1 Cash as a Sign of Trust 378 Money 399
How Banks Create Money 379 Application 3 The Effectiveness of

A Bank’s Balance Sheet: Where the Money Comes Committees 401
from and Where It Goes 379
Interest Rates and How They Change
How Banks Create Money 380 Investment and Output (GDP) 401
How the Money Multiplier Works 380 Monetary Policy and International Trade 404
How the Money Multiplier Works in Reverse 382
Monetary Policy Challenges for the Fed 405
Application 2 The Growth in Excess
Lags in Monetary Policy 405
Reserves 383
Expectations of Inf lation 406
A Banker’s Bank: The Federal Reserve 384
Functions of the Federal Reserve 384 * Exercises 408
The Structure of the Federal Reserve 384
The Independence of the Federal Reserve 386
18 International Trade
What the Federal Reserve Does during a and Finance 411
Financial Crisis 386
Comparative Advantage and Trade 412
Application 3 Stress Tests for the Financial
System 387 Specialization and the Gains from Trade 412
Application 4 Coping with the Financial Chaos Comparative Advantage versus Absolute
Caused by the Mortgage Crisis 387 Advantage 414

xv
Comparative Advantage and International How Demand and Supply Determine Exchange
Trade 414 Rates 421
Outsourcing 415 Changes in Demand or Supply 422
Application 1 Absolute Disadvantage and Fixed and Flexible Exchange Rates 424
Comparative Advantage in Latvia 415
Fixing the Exchange Rate 424
Protectionist Policies 416 Fixed versus Flexible Exchange Rates 425
Import Bans 416 The U.S. Experience with Fixed and Flexible
Quotas and Voluntary Export Restraints 416 Exchange Rates 427
Responses to Protectionist Policies 418 Exchange Rate Systems Today 428
Application 2 The Impact of Tariffs on the Application 3 A Troubled Euro 428

Poor 418 * Summary 429 * Key Terms 429
* Exercises 429
A Brief History of International Tariff and Trade
Agreements 419 Glossary 433
How Exchange Rates are Determined 420 Photo Credits 440
What Are Exchange Rates? 420 Index 441

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Preface
c ONE-SEMESTER BOOK c What’s New To This Edition

This book is a one-semester version of our full-length intro- In addition to updating all the figures and data, we made a
ductory text, Economics: Principles, Applications, and Tools, now number of other key changes in this edition. They include
in its ninth edition. This text has been a success in class- the following:
rooms around the country, but many colleges and universi-
ties teach a one-semester economics course that covers both • At the beginning of each chapter, we carefully refined
microeconomics and macroeconomics. This book preserves our Learning Objectives. These give the students a pre-
the key features of Economics: Principles, Applications, and view of what they will learn in each section of the chap-
Tools, including its organization around the five key prin- ter, facilitating their learning.
ciples of economics to explain the most important concepts
• We revised and updated our discussion of fiscal pol-
of economics, and the extensive use of practical applications
icy in Chapter 15 to reflect our changing views of the
to reinforce the learning process.
effectiveness of fiscal stimulus.
In designing a one-semester book, we knew that we had
to focus on the essential concepts of economics. We start • We revised and updated our treatment of monetary
with the five key principles of economics and move quickly policy in Chapter 17, as the Federal Reserve has con-
into the heart of microeconomics: demand and supply. We tinued to manage the aftermath of quantitative easing
then turn to production and cost, competition and market and other new monetary policies.
structure, market failure from imperfect information and • We introduce Janet Yellen, the new Chair of the
externalities, and the labor market. Macroeconomics begins Federal Reserve, in Chapter 17, and discuss her prior
with chapters that introduce national income, unemploy- experience before she assumed her current role.
ment, and inflation. We then explore the issues of economic • We introduce in Chapter 13 the idea of controlled
growth and economic fluctuations. We cover monetary experiments in economic policy as these experiments
and fiscal policy, in both the short run and long run. The have been very influential in recent policy developments.
book concludes with international trade and finance. We’ve
• We revised and expanded our discussion of the euro in
strived to make all explanations of key ideas and key con-
Chapter 18, reflecting the serious challenges now fac-
cepts as simple as possible. In a one-semester book, the
ing the European Monetary Union, particularly with
student will be introduced to a wide range of ideas. It is
the experience of Greece.
important that these ideas be as straightforward and trans-
parent as possible. • We discuss in Chapter 13 the position of the pessimists
In preparing this seventh edition, we had three pri- who think that technological progress has slowed down.
mary goals. First, we wanted to incorporate the sweeping • We developed a new series of Applications and
changes in the U.S. and world economies we have all wit- chapter-opening stories throughout the book. These
nessed in the last several years, and the difficulties that the fresh applications and chapter openers show the
world economies have experienced in recovering from the widespread relevance of economic analysis. The
severe economic downturn. Second, we strived to update new applications include housing prices in Cuba
this edition to reflect the latest exciting developments in (Chapter 1), the effects of winds from the Sahara
economic thinking and make these accessible to new stu- Desert on the price of chocolate (Chapter 3), the time
dents of economics. Finally, we wanted to stay true to the path of blueberry prices triggered by publicity about
philosophy of the textbook—using basic concepts of eco- the health benefits of eating blueberries (Chapter 6),
nomics to explain a wide-variety of timely and interesting and responding to climate change by washing carbon
economic applications. out of the air (Chapter 9).
xvii

xviii
c Applying The Concepts

This is an Applications-driven textbook. We carefully selected over 85 real-world Applications that help students develop
and master essential economic concepts. Here is an example of our approach from Chapter 3, “Demand, Supply, and Market
Equilibrium.”
64 part 1
Application 1
the laW Of DeManD fOr yOUng SMOkerS

APPLying the COnCePts #1: What is the law of demand?
that increases in state cigarette taxes between 1990 and 2005
Each chapter includes three to five thought-provoking

resulted in less participation (fewer smokers) and lower fre-
quency (fewer cigarettes per smoker).
A change in cigarette taxes in Canada illustrates the sec-
ond effect, the new-smoker effect. In 1994, several provinces
in eastern Canada cut their cigarette taxes in response to the
Applying the Concepts questions that convey impor-
smuggling of cigarettes from the United States (where taxes are
lower), and the price of cigarettes in the provinces decreased tant economic concepts, paired with and illustrated by
by roughly 50 percent. Researchers tracked the choices of 591
youths from the Waterloo Smoking Prevention Program and
concluded that the lower price increased the smoking rate by
an Application that discusses the concept and conveys its
real-world use.
As price decreases and we move downward along the market roughly 17 percent. Related to Exercises 1.6 and 1.8.
demand for cigarettes, the quantity of cigarettes demanded
increases for two reasons. First, people who smoked cigarettes
at the original price respond to the lower price by smoking more. SOURCES: (1) Anindya Sen and Tony Wirjanto, “Estimating the Impacts of Cigarette
Second, some people start smoking. Taxes on Youth Smoking Participation, Initiation, and Persistence: Empirical Evi-
In the United States, cigarette taxes vary across states, dence from Canada,” Health Economics 19 (2010), pp. 1264–1280. (2) Christopher
Carpentera and Philip J. Cook, “Cigarette Taxes and Youth Smoking: New Evi-
and studies of cigarette consumption patterns show that higher
dence from National, State, and Local Youth Risk Behavior Surveys,” Journal of
taxes mean less cigarette consumption by youths. Using data
Health Economics 27 (2008), pp. 287–299.
from the Youth Risk Behavior Surveys (YSBS), one study shows
The market demand is negatively sloped, reflecting the law of demand. This is
sensible, because if each consumer obeys the law of demand, consumers as a group
will too. When the price increases from $4 to $8, there is a change in quantity
demanded as we move along the demand curve from point f to point c. The move-
ment along the demand curve occurs if the price of pizza is the only variable that has
For each Application and Applying the Concepts changed.
question, we provide end-of-chapter

The Supply
Learning Objective 4.2 Curve exercises KeY TermS
that test students’ understanding

Describe and explain the law of supply.
of
On the supply side of a market, the
firms concepts.
sell their products to consumers. Suppose you
ask the manager of a firm, “How much of your product are you willing to produce
expectations of inflation, p. 326
expectations phillips curve, p. 329
monetarists, p. 340
money illusion, p. 326
rational expectations, p. 330
real wages, p. 326
and sell?” The answer is likely to be “it depends.” The manager’s decision about how growth version of the quantity nominal wages, p. 326 seignorage, p. 339
much to produce depends on many variables, including the following, using pizza as equation, p. 337 quantity equation, p. 336 velocity of money, p. 336
an example:
hyperinflation, p. 338
• The price of the product (e.g., the price per pizza)
• The wage paid to workers
• The price of materials (e.g., the price of dough and cheese) exerCISeS all problems are assignable in MyEconLab exercises that update with real-time data are marked with .
• The cost of capital (e.g., the cost of a pizza oven)
• The state of production technology (e.g., the knowledge used in making pizza) Money Growth, Inflation, and Interest Rates Understanding the Expectations Phillips Curve: The
5.6 Using Open-Economy Multipliers. In an open
• Producers’ econ- about
expectations A leftward
6.4 future pricesshift in the aggregate demand curve cor- Describe how an economy at full employment with inflation Relationship between Unemployment and Inflation
omy, the marginal propensity to consume is 0.9, and responds to a(n) _________ in equilibrium income. differs from one without inflation. Explain the relationship between inflation and unemployment
• Taxes paid to the government or subsidies (payments from the government to
the marginal propensity to import is 0.3. How much of 6.5 Using Multipliers to Determine the Shift of the in the short run and long run.
firms to produce a product)
an increase in investment would be necessary to raise Aggregate Demand Curve. 1.1 The expected real rate of interest is the nominal interest
GDP by 200? What wouldTogether,
quantity supplied be your answer
theseifvariables
this was determine
a how much ofthe
a. Suppose a product
MPC is firms
equalare to
willing to pro-
0.8. Government rate plus the expected inflation rate. _________ (True/ 2.1 If inflation increases less than expected, the actual
The amount ofclosed
a product economy?
that firms are duce and sell, the quantity supplied. We start our
spending discussion
increases of market
by $20 billion.supply
How farwith
does the False) unemployment rate will be _________ (above/below)
willing and
5.7ableExport-Led
to sell. the relationship
Growth Strategies. Manybetween
countriesthe price of a good and the
aggregate quantity
demand curveofshift
that to
good
the supplied,
right? the natural rate.
1.2 Countries with lower rates of money growth have
believe that they need to increase exports in order to b. Now suppose that the MPC is 0.8 and the marginal _________ interest rates. 2.2 James Tobin explained business cycles with rational
grow. Some of this belief is based on long-run consid- propensity to import is 0.2. How far to the right expectations. _________ (True/False)
1.3 If the growth rate of money increases from 3 to
erations, as competing in export markets may induce will the $20 billion in government spending shift 5 percent, initially interest rates will _________. 2.3 The increase in the fraction of young people in the
their firms to innovate. But some countries also focus the aggregate demand curve?
on the short-run benefits. What are these benefits? 1.4 A firm that expects higher profits from higher prices labor force that occurred when the baby-boom genera-
6.6 Falling Exports and Aggregate Demand. Suppose but does not recognize its costs are increasing is suf- tion came of working age tended to _________ (raise/
(Related to Application 4 on page 238.)
M04_OSUL8847_09_SE_C04.indd 64
foreign countries grow less rapidly than anticipated and
26/10/15 5:35 pm fering from _________. lower) the natural rate of unemployment.
U.S. exports also fall.
1.5 Nominal and Real Interest Rates. In Japan in the 2.4 In the late 1980s, as unemployment fell below the natu-
The Income-Expenditure Model and the Aggregate a. Using the income-expenditure model, first show 1990s interest rates were near zero on government ral rate, inflation _________.
Demand Curve how the decrease in exports will decrease U.S. GDP. bonds. Some economists said that it was still possible to 2.5 Targeting the Natural Rate of Unemployment?
Explain how the aggregate demand curve is related to the b. Using your results in part (a), explain how the stimulate investment by creating negative real interest
income-expenditure model. Because the natural rate of unemployment is the
aggregate demand curve shifts with the decrease in rates. If nominal rates could not fall below zero, explain economists’ notion of what constitutes “full employ-
exports. how real interest rates could be made negative. (Hint: ment,” it might seem logical for the Fed to use mon-
6.1 An increase in the price level will _________ GDP and 6.7 The Size of the Wealth Effect and the Slope of Think about inflation.) etary policy to move unemployment toward its natural
thereby move the economy _________ the aggregate the Aggregate Demand Curve. Suppose the wealth 1.6 Money Neutrality, Long-Run Inflation, and the rate. However, many economists believe such a policy
demand curve. effect is very small; that is, a large fall in prices will not Natural Rate. Explain carefully the relationship would be unwise because the natural rate may shift
6.2 At any price level, the income-expenditure model increase consumption by very much. Explain carefully between the concept of monetary neutrality and the over time and policymakers may misjudge the cor-
determines the level of equilibrium output and the cor- why this will imply that the aggregate demand curve idea that the natural rate is independent of the longrun rect rate. What would happen if the Fed targeted a
responding point on the _________ curve. will have a steep slope. inflation rate. 5 percent unemployment rate but the true natural rate
6.3 An increase in the price level will not shift the aggre- 1.7 Taxes, Inflation, and Interest Rates. If a business were 6 percent?
gate demand curve. _________ (True/False) borrows funds at 10 percent per year, the business has 2.6 Hysteresis and the Labor Force Participation Rate.
a 40 percent tax rate, and the annual inflation rate is In economics the term “hysteresis” means that the his-
5 percent, what are the real after-tax costs of funds to tory of the economy has a lingering effect on current
the business? Similarly, if an investor receives a nomi- economic performance. During the U.S. recession
nal return of 8 percent on a savings deposit, the tax rate starting in 2007, the labor force participation rate con-
ECOnOMIC ExpErIMEnT is 30 percent, and the inflation rate is 6 percent, what tinued to remain below the levels that prevailed before
is the after-tax rate of return? the recession. Could this be an example of hysteresis?
ESTIMaTInG ThE MarGInal prOpEnSITy 1.8 Examples of Money Illusion. What do the following Can you suggest any other explanations?
Monthly $1,250 $1,500 $1,750 $2,000
TO COnSUME two quotes have in common?
Disposable 2.7 Oil Price Changes, Vacancies, and the Natural
Income a. “My wages are going up 5 percent a year. If only
For this experiment, each class member is asked to fill out the Rate. During the mid-1970s, changes in oil prices
Expenditures inflation weren’t 5 percent a year, I would be rich.” required products to be produced by different types of
following table. Given a certain monthly income, how would
you spend it and how much would you save? The top row of and savings b. “My bank is paying 10 percent a year, but the firms in different locations. This raised the number of
each column gives you the monthly disposable income. How Food 8 percent inflation rate is just eating up all my real vacancies relative to the unemployment rate. Accord-
would you allocate it each month among the various catego- housing investment gains.” ing to the theory of William Dickens, how did this
ries of spending in the table and savings? Complete each Transportation 341
column in the table. The sum of your entries should equal Medical
your disposable income at the top of each column. After you
Entertainment
have filled out the chart, compute the changes in your savings
Other expenses
and total consumption as your income goes up. What is your
marginal propensity to save (MPS)? What is your marginal Savings
propensity to consume (MPC) over your total expenditures? M16_OSUL8847_09_SE_C16.indd 341 26/10/15 6:10 pm
Graph your consumption function.
MyEconLab
For additional economic experiments, please visit
In addition, some chapters contain an Economic
www.myeconlab.com.
Experiment section that gives students the opportu-
nity to do their own economic analysis.
244
M11_OSUL8847_09_SE_C11.indd 244 26/10/15 6:06 pm

xix
c Why Five Key Principles? make the key concepts unforgettable by using them repeat-
edly, illustrating them with intriguing examples, and giv-
In Chapter 2, “The Key Principles of Economics,” we intro-
ing students many opportunities to practice what they’ve
duce the following five key principles and then apply them
learned. Throughout the text, economic concepts are con-
throughout the book:
nected to the five key principles when the following callout
is provided for each principle:
1. The Principle of Opportunity Cost. The opportunity
cost of something is what you sacrifice to get it.
P RINCI P L E O F O P P O RTUNITY C O S T
2. The Marginal Principle. Increase the level of an activ- The opportunity cost of something is what you sacrifice to get it.
ity as long as its marginal benefit exceeds its marginal
cost. Choose the level at which the marginal benefit
equals the marginal cost. c HOW IS THE MARKET EQUILIBRIUM
3. The Principle of Voluntary Exchange. A voluntary CHAPTER ORGANIZED?
exchange between two people makes both people bet-
Students need to have a solid understanding of demand and
ter off.
supply to be successful in the course. Many students have
4. The Principle of Diminishing Returns. If we increase difficulty understanding movement along a curve versus
one input while holding the other inputs fixed, output shifts of a curve. To address this difficulty, we developed an
will increase, but at a decreasing rate. innovative way to organize topics in Chapter 3 , “Demand,
5. The Real-Nominal Principle. What matters to people Supply, and Market Equilibrium.” We examine the law of
is the real value of money or income—its purchasing demand and changes in quantity demanded, the law of sup-
power—not the face value of money or income. ply and changes in quantity supplied, and then the notion
of market equilibrium. After students have a firm grasp of
This approach of repeating five key principles gives students equilibrium concepts, we explore the effects of changes in
the big picture—the framework of economic reasoning. We demand and supply on equilibrium prices and quantities.

xx
c MyEconLab ® For the Instructor

Digital Features Located in MyEconLab Instructors can choose how much or how little time to
spend setting up and using MyEconLab. Here is a snapshot
MyEconLab is a unique online course management, testing,
of what instructors are saying about MyEconLab:
and tutorial resource. It is included with the eText version
of the book or as a supplement to the print book. Students MyEconLab offers [students] a way to practice
and instructors will find the following online resources to every week. They receive immediate feedback and a
accompany the ninth edition: feeling of personal attention. As a result, my teach-
• Concept Checks: Each section of each learning objec- ing has become more targeted and efficient.
tive concludes with an online Concept Check that con- —Kelly Blanchard, Purdue University
tains one or two multiple choice, true/false, or fill-in Students tell me that offering them MyEconLab is
questions. These checks act as “speed bumps” that almost like offering them individual tutors.
encourage students to stop and check their understand- —Jefferson Edwards, Cypress Fairbanks College
ing of fundamental terms and concepts before moving
MyEconLab’s eText is great—particularly in that
on to the next section. The goal of this digital resource
it helps offset the skyrocketing cost of textbooks.
is to help students assess their progress on a section-by-
Naturally, students love that.
section basis, so they can be better prepared for home-
—Doug Gehrke,
work, quizzes, and exams.
Moraine Valley Community College
• Animations: Graphs are the backbone of introductory
economics, but many students struggle to understand and Each chapter contains two preloaded exercise sets
work with them. Many of the numbered figures in the that can be used to build an individualized study plan
text a supporting animated version online. The goal of for each student. These study plan exercises contain
this digital resource is to help students understand shifts tutorial resources, including instant feedback, links to
in curves, movements along curves, and changes in equi- the appropriate learning objective in the eText, pop-up
librium values. Having an animated version of a graph definitions from the text, and step-by-step guided solu-
helps students who have difficulty interpreting the static tions, where appropriate. After the initial setup of the
version in the printed text. Graded practice exercises are course by the instructor, student use of these materials
included with the animations. Our experience is that requires no further instructor setup. The online grade
many students benefit from this type of online learning. book records each student’s performance and time spent
• Graphs Updated with Real-Time Data from on the tests and study plan and generates reports by stu-
FRED: Approximately 16 graphs are continuously dent or chapter.
updated online with the latest available data from Instructors can fully customize MyEconLab to match
FRED (Federal Reserve Economic Data), which is a their course exactly, including reading assignments,
comprehensive, up-to-date data set maintained by the homework assignments, video assignments, current news
Federal Reserve Bank of St. Louis. assignments, and quizzes and tests. Assignable resources
include:
Students can display a pop-up
graph that shows new data • Preloaded exercise assignments sets for each chapter
plotted in the graph. The that include the student tutorial resources mentioned
goal of this digital feature is to help students under- earlier
stand how to work with data and understand how • Preloaded quizzes for each chapter that are unique to
including new data affects graphs. the text and not repeated in the study plan or home-
• Interactive Problems and Exercises Updated with work exercise sets
Real-Time Data from FRED: The end-of-chapter • Study plan problems that are similar to the end-of-
problems in select chapters include real-time data chapter problems and numbered exactly like the book
exercises that use the latest data from FRED. The to make assigning homework easier
book contains several of these specially-selected exer-
• Real-Time-Data Analysis Exercises, marked with ,
cises. The goal of this digital feature is to help students
allow students and instructors to use the very latest data
become familiar with this key data source, learn how to
from FRED. By completing the exercises, students
locate data, and develop skills in interpreting data.
become familiar with a key data source, learn how to
locate data, and develop skills in interpreting data.
c Integrated Supplements • In the eText available in MyEconLab, select figures
The authors and Pearson Education have worked together labeled MyEconLab Real-time data allow students to
to integrate the text and media resources to make teaching display a pop-up graph updated with real-time data
and learning easier. from FRED.

xxi
• Current News Exercises provide a turnkey way to important economic concepts. Pearson’s Experiments
assign gradable news-based exercises in MyEconLab. program is flexible, easy-to-assign, auto-graded, and
Each week, Pearson scours the news, finds a current available in Single and Multiplayer versions.
microeconomics and macroeconomics article, creates • Single-player experiments allow your students to play
exercises around these news articles, and then automat-
against virtual players from anywhere at any time so
ically adds them to MyEconLab. Assigning and grading
long as they have an Internet connection.
current news-based exercises that deal with the latest
micro and macro events and policy issues has never • Multiplayer experiments allow you to assign and man-
been more convenient. age a real-time experiment with your class.
• Experiments in MyEconLab are a fun and engag- • Pre- and post-questions for each experiment are avail-
ing way to promote active learning and mastery of able for assignment in MyEconLab.

xxii
For a complete list of available experiments, visit http:// • Step-by-step guided solutions that force students
www.myeconlab.com. to break down a problem in much the same way an
instructor would do during office hours
• Test Item File questions that allow you to assign quiz-
zes or homework that will look just like your exams • Pop-up key term definitions from the eText to help
students master the vocabulary of economics
• Econ Exercise Builder, which allows you to build cus-
tomized exercises • A graphing tool that is integrated into the various exer-
cises to enable students to build and manipulate graphs
Exercises include multiple-choice, graph drawing, and to better understand how concepts, numbers, and
free-response items, many of which are generated algorith- graphs connect.
mically so that each time a student works them, a different
variation is presented.
MyEconLab grades every problem type except essays, Additional MyEconLab Tools
even problems with graphs. When working homework exer- MyEconLab includes the following additional features:
cises, students receive immediate feedback, with links to
additional learning tools. • Enhanced eText—Students actively read and learn,
and with more engagement than ever before, through
Customization and Communication embedded and auto-graded practice, real-time data-
MyEconLab in MyLab/Mastering provides additional graph updates, animations, author videos, and more.
optional customization and communication tools. Instructors • Print upgrade—For students who wish to complete
who teach distance-learning courses or very large lecture sec- assignments in MyEconLab but read in print, Pearson
tions find the MyLab/Mastering format useful because they offers registered MyEconLab users a loose-leaf version
can upload course documents and assignments, customize the of the print text at a significant discount.
order of chapters, and use communication features such as
• Glossary flashcards—Every key term is available as
Document Sharing, Chat, ClassLive, and Discussion Board.
a flashcard, allowing students to quiz themselves on
For the Student vocabulary from one or more chapters at a time.
MyEconLab puts students in control of their learning • MySearchLab—MySearchLab provides extensive help
on the research process and four exclusive databases
through a collection of testing, practice, and study tools tied
of credible and reliable source material, including the
to the online, interactive version of the textbook and other
New York Times, the Financial Times, and peer-reviewed
media resources. Here is a snapshot of what students are
journals.
saying about MyEconLab:
It was very useful because it had EVERYTHING, MyEconLab content has been created through the
from practice exams to exercises to reading. Very efforts of Chris Annala, State University of New York–
helpful. Geneseo; Charles Baum, Middle Tennessee State University;
—student, Northern Illinois University Peggy Dalton, Frostburg State University; Carol Dole,
Jacksonville University; David Foti, Lone Star College; Sarah
I would recommend taking the quizzes on
Ghosh, University of Scranton; Satyajit Ghosh, Universtity
MyEconLab because it gives you a true account of
of Scranton; Melissa Honig, Pearson Education; Woo
whether or not you understand the material.
Jung, University of Colorado; Courtney Kamauf, Pearson
—student, Montana Tech
Education; Chris Kauffman, University of Tennessee–
It made me look through the book to find answers, Knoxville; Russell Kellogg, University of Colorado–Denver;
so I did more reading. Noel Lotz, Pearson Education; Katherine McCann,
—student, Northern Illinois University University of Delaware; Daniel Mizak, Frostburg State
Students can study on their own or can complete assign- University; Christine Polek, University of Massachusetts–
ments created by their instructor. In MyEconLab’s structured Boston; Mark Scanlan, Stephen F. Austin State University;
environment, students practice what they learn, test their Leonie L. Stone, State University of New York–Geneseo;
understanding, and pursue a personalized study plan generated and Bert G. Wheeler, Cedarville University.
from their performance on sample tests and from quizzes cre-
ated by their instructors. In Homework or Study Plan mode,
students have access to a wealth of tutorial features, including: c Other Resources
for the Instructor
• Instant feedback on exercises that helps students under-
stand and apply the concepts Instructor’s Manual
• Links to the eText to promote reading of the text just Jeff Phillips of Colby-Sawyer College revised the
when the student needs to revisit a concept or an expla- Instructor’s Manual for the seventh edition. The Instructor’s
nation Manual is designed to help the instructor incorporate

xxiii
applicable e lements of the supplement package. The Pearson Education is a proud member of the AACSB and
Instructor’s Manual contains the following resources for is pleased to provide advice to help you apply AACSB
each chapter: Assurance of Learning Standards.
• Chapter Summary: a bulleted list of key topics in the What Are AACSB Assurance of Learning Standards?
chapter One of the criteria for AACSB accreditation is the quality
• Learning Objectives of curricula. Although no specific courses are required, the
AACSB expects a curriculum to include learning experiences
• Approaching the Material; student-friendly examples in the following categories of Assurance of Learning Standards:
to introduce the chapter
• Chapter Outline: summary of definitions and concepts • Written and Oral Communication
• Teaching Tips on how to encourage class participation • Ethical Understanding and Reasoning
• Summary and discussion points for the Applications in • Analytical Thinking Skills
the main text
• Information Technology
• New Applications and discussion questions
• Diverse and Multicultural Work
• Solutions to all end-of-chapter exercises.
• Reflective Thinking
The Instructor’s Manual is available for download from the • Application of Knowledge.
Instructor’s Resource Center (http://www.pearsonhighered
.com/osullivan). The solutions to the end-of-chapter Questions that test skills relevant to these standards are
review questions and problems were prepared by the authors tagged with the appropriate standard. For example, a
and Jeff Phillips. question testing the moral questions associated with exter-
nalities would receive the Ethical Understanding and
Test-Item File Reasoning tag.
Jeff Phillips of Colby-Sawyer College prepared the Test Item How Can Instructors Use the AACSB Tags? Tagged
File. It includes multiple-choice, true/false, short-answer, questions help you measure whether students are grasp-
and graphing questions. There are questions to support each ing the course content that aligns with the AACSB guide-
key feature in the book. The Test Item Files are available for lines noted earlier. This in turn may suggest enrichment
download from the Instructor’s Resource Center (http:// activities or other educational experiences to help students
www.pearsonhighered.com/osullivan). Test questions achieve these skills.
are annotated with the following information:
• Difficulty: 1 for straight recall, 2 for some analysis, 3 TestGen

for complex analysis The computerized TestGen package allows instructors to
• Type: multiple-choice, true/false, short-answer, essay customize, save, and generate classroom tests. The test pro-
gram permits instructors to edit, add, or delete questions
• Topic: the term or concept the question supports from the Test Item Files; analyze test results; and orga-
• Learning outcome nize a database of tests and student results. This software
• AACSB (see description that follows) allows for extensive flexibility and ease of use. It provides
many options for organizing and displaying tests, along with
• Page number in the text. search and sort features. The software and the Test Item
Files can be downloaded from the Instructor’s Resource
The Association to Advance Collegiate Schools of
Center (http://www.pearsonhighered.com/osullivan).
Business (AACSB) The Test Item File author has con-
nected select questions to the general knowledge and skill
guidelines found in the AACSB Assurance of Learning PowerPoint Lecture Presentation
Standards. Two sets of PowerPoint slides, prepared by Brock Williams
of Metropolitan Community College, are available:
What Is the AACSB? AACSB is a not-for-profit corpo-
ration of educational institutions, corporations, and other 1. A comprehensive set of PowerPoint slides can be used
organizations devoted to the promotion and improvement by instructors for class presentations or by students
of higher education in business administration and account- for lecture preview or review. These slides include all
ing. A collegiate institution offering degrees in business the graphs, tables, and equations in the textbook. Two
administration or accounting may volunteer for AACSB versions are available—step-by-step mode, in which
accreditation review. The AACSB makes initial accredita- you can build graphs as you would on a blackboard,
tion decisions and conducts periodic reviews to promote and automated mode, in which you use a single click
continuous quality improvement in management education. per slide. Instructors can download these PowerPoint

xxiv
presentations from the Instructor’s Resource Center c Reviewers OF PREVIOUS E

DITIONS
(http://www.pearsonhighered.com/osullivan).
A long road exists between the initial vision of an innovative
2. A student version of the PowerPoint slides is avail- principles text and the final product. Along our journey
able as .pdf files. This version allows students to print we participated in a structured process to reach our goal.
the slides and bring them to class for note taking. We wish to acknowledge the assistance of the many people
Instructors can download these PowerPoint presenta- who participated in this process.
tions from the Instructor’s Resource Center (http://
www.pearsonhighered.com/osullivan). Alabama
Jim Payne, Calhoun Community College
Learning Catalytics™ James Swofford, University of South Alabama
Learning Catalytics is a “bring your own device” Web-based
student engagement, assessment, and classroom intelligence Alaska
system. This system generates classroom discussion, guides Paul Johnson, University of Alaska, Anchorage
lectures, and promotes peer-to-peer learning with real-time
analytics. Students can use any device to interact in the class- Arizona
room, engage with content, and even draw and share graphs. Basil Al-Hashimi, Mesa Community College, Red Mountain
To learn more, ask your local Pearson representative or Pete Mavrokordatos, Tarrant County College/University of Phoenix
visit https://www.learningcatalytics.com. Evan Tanner, Thunderbird, The American Graduate School
of International Management
Digital Interactives Donald Wells, University of Arizona
Focused on a single core topic and organized in progres-

California
sive levels, each interactive immerses students in an assign-
Antonio Avalos, California State University, Fresno
able and auto-graded activity. Digital Interactives are also
Collette Barr, Santa Barbara Community College
engaging lecture tools for traditional, online, and hybrid
T. J. Bettner, Orange Coast College
courses, many incorporating real-time data, data displays, Peter Boelman-Lopez, Riverside Community College
and analysis tools for rich classroom discussions. Matthew Brown, Santa Clara University
Jim Cobb, Orange Coast College
John Constantine, Sacramento City College
c Other Resources Peggy Crane, San Diego State University
for the Student Albert B. Culver, California State University, Chico
Jose L. Esteban, Palomar College
In addition to MyEconLab, Pearson provides the following Gilbert Fernandez, Santa Rosa Junior College
resources. E. B. Gendel, Woodbury University
Charles W. Haase, San Francisco State University
Dynamic Study Modules John Henry, California State University, Sacramento
George Jensen, California State University, Los Angeles
With a focus on key topics, these modules work by continu-
Janis Kea, West Valley College
ously assessing student performance and activity in real time
Rose Kilburn, Modesto Junior College
and, using data and analytics, provide personalized content Philip King, San Francisco State University
to reinforce concepts that target each student’s particular Anthony Lima, California State University, Hayward
strengths and weaknesses. Bret Mcmurran, Chaffey College
Jon J. Nadenichek, California State University, Northridge
PowerPoint Slides Alex Obiya, San Diego City College
Jack W. Osman, San Francisco State University
For student use as a study aid or note-taking guide,
Jay Patyk, Foothill College
PowerPoint slides, prepared by Brock Williams of
Stephen Perez, California State University, Sacramento
Metropolitan Community College, can be downloaded from Ratha Ramoo, Diablo Valley College
MyEconLab or the Instructor’s Resource Center (http:// Greg Rose, Sacramento City College
www.pearsonhighered.com/osullivan) and made avail- Kurt Schwabe, University of California, Riverside
able to students. The slides include: Terri Sexton, California State University, Sacramento
David Simon, Santa Rosa Junior College
• All graphs, tables, and equations in the text Xiaochuan Song, San Diego Mesa College
Ed Sorensen, San Francisco State University
• Figures in step-by-step mode and automated modes,
Susan Spencer, Santa Rosa Junior College
using a single click per graph curve
Linda Stoh, Sacramento City College
• End-of-chapter key terms with hyperlinks to relevant Rodney Swanson, University of California, Los Angeles
slides Daniel Villegas, California Polytechnic State University

xxv
Colombia Indiana
Michael Jetter, Universidad EIFIT John L. Conant, Indiana State University
Mousumi Duttaray, Indiana State University
Robert B. Harris, Indiana Univ. Purdue Univ. Indianapolis
Colorado James T. Kyle, Indiana State University
Steve Call, Metropolitan State College of Denver Virginia Shingleton, Valparaiso University
Connecticut Iowa
John A. Jascot, Capital Community Technical College Dale Borman, Kirkwood Community College
Stephen Rubb, Sacred Heart University Jonathan O. Ikoba, Scott Community College
Saul Mekies, Kirkwood Community College, Iowa City
Delaware
Lawrence Stelmach, Delaware Valley College Kansas
Carl Parker, Fort Hays State University
Florida James Ragan, Kansas State University
Tracy M. Turner, Kansas State University
Irma de Alonso, Florida International University
Jay Bhattacharya, Okaloosa-Walton Community College
Edward Bierhanzl, Florida A&M University
Kentucky
Eric P. Chiang, Florida Atlantic University David Eaton, Murray State University
Martine Duchatelet, Barry University John Robertson, University of Kentucky
George Greenlee, St. Petersburg College, Clearwater
Martin Markovich, Florida A&M University Louisiana
Thomas McCaleb, Florida State University John Payne Bigelow, Louisiana State University
Barbara Moore, University of Central Florida Sang Lee, Southeastern Louisiana University
Stephen Morrell, Barry University Richard Stahl, Louisiana State University
Carl Schmertmann, Florida State University
Garvin Smith, Daytona Beach Community College
Noel Smith, Palm Beach Community College
Maine
Michael Vierk, Florida International University George Schatz, Maine Maritime Academy
Joseph Ward, Broward Community College, Central
Virginia York, Gulf Coast Community College Maryland
Andrea Zanter, Hillsborough Community College Carey Borkoski, Anne Arundel Community College
Gretchen Mester, Anne Arundel Community College
Georgia Irvin Weintraub, Towson State University
Scott Beaulier, Mercer College
Ashley Harmon, Southeastern Technical College Massachusetts
Steven F. Koch, Georgia Southern University Hans Despain, Nichols College
L. Wayne Plumly, Jr., Valdosta State University Brian Deuriarte, Middlesex Community College
Greg Trandel, University of Georgia Dan Georgianna, University of Massachusetts, Dartmouth
James E. Hartley, Mount Holyoke College
Hawaii Marlene Kim, University of Massachusetts, Boston
Mark Siegler, Williams College
Barbara Ross-Pfeiffer, Kapiolani Community College Gilbert Wolfe, Middlesex Community College
Idaho Michigan
Charles Scott Benson, Jr., Idaho State University Christine Amsler, Michigan State University
Tesa Stegner, Idaho State University Bharati Basu, Central Michigan University
Norman Cure, Macomb Community College
Illinois Susan Linz, Michigan State University
Scanlon Romer, Delta College
Diane Anstine, North Central College
Robert Tansky, St. Clair County Community College
Rosa Lea Danielson, College of DuPage
Wendy Wysocki, Monroe Community College
Sel Dibooglu, Southern Illinois University
Linda Ghent, Eastern Illinois University
Gary Langer, Roosevelt University Minnesota
Nampeang Pingkarawat, Chicago State University Ihsuan Li, Minnesota State University, Mankato
Dennis Shannon, Belleville Area College Mike Mcilhon, Augsburg College
Chuck Sicotte, Rock Valley College Richard Milani, Hibbing Community College

xxvi
Mississippi Fred Tyler, Fordham University

Ezgi Uzel, SUNY-Maritime
Billy L. Carson II, Itawamba Community College
Michael Vardanyan, Binghamton University
Arlena Sullivan, Jones County Junior College
Missouri North Carolina

Duane Eberhardt, Missouri Southern State College Katie Canty, Cape Fear Community College
David Gillette, Truman State University Lee Craig, North Carolina State University
Brad Hoppes, Southwest Missouri State University Hossein Gholami, Fayetteville Technical Community College
Denise Kummer, St. Louis Community College Michael G. Goode, Central Piedmont Community College
Steven M. Schamber, St. Louis Community College, Meramec Charles M. Oldham, Jr., Fayetteville Technical Community College
Elias Shukralla, St. Louis Community College, Meramec Randall Parker, East Carolina University
Keith Ulrich, Valencia Community College Julianne Treme, University of North Carolina, Wilmington
George Wasson, St. Louis Community College, Meramec Diane Tyndall, Craven Community College
Chester Waters, Durham Technical Community College
Nebraska James Wheeler, North Carolina State University
Debbie Gaspard, Southeast Community College
Theodore Larsen, University of Nebraska, Kearney
North Dakota
Timothy R. Mittan, Southeast Community College Scott Bloom, North Dakota State University
Stanley J. Peters, Southeast Community College
Brock Williams, Metropolitan Community College Ohio
Fatma Abdel-Raouf, Cleveland State University
Nevada Jeff Ankrom, Wittenberg University
Stephen Miller, University of Nevada, Las Vegas Erwin Ehrardt, University of Cincinnati
Charles Okeke, College of Southern Nevada Kenneth C. Fah, Ohio Dominican University
Taghi T. Kermani, Youngstown State University
New Jersey Dandan Liu, Kent State University
Len Anyanwu, Union County College
Richard Comerford, Bergen Community College
Oklahoma
John Graham, Rutgers University Jeff Holt, Tulsa Community College
Paul C. Harris, Jr., Camden County College Marty Ludlum, Oklahoma City Community College
Calvin Hoy, County College of Morris Dan Rickman, Oklahoma State University
Taghi Ramin, William Paterson University
Brian de Uriarte, Middlesex County College Oregon
Tom Carroll, Central Oregon Community College
New Hampshire Jim Eden, Portland Community College
Jeff Phillips, Colby-Sawyer College John Farrell, Oregon State University
David Figlio, University of Oregon
New Mexico Randy R. Grant, Linfield College
Carl Enomoto, New Mexico State University Larry Singell, University of Oregon
New York Pennsylvania

Farhad Ameen, State University of New York, Westchester County Kevin A. Baird, Montgomery County Community College
Community College Charles Beem, Bucks County Community College
Karijit K. Arora, Le Moyne College Ed Coulson, Pennsylvania State University
Alex Azarchs, Pace University Tahany Naggar, West Chester University
Kathleen K. Bromley, Monroe Community College Abdulwahab Sraiheen, Kutztown University
Barbara Connelly, Westchester Community College
George Frost, Suffolk County Community College South Carolina
Susan Glanz, St. John’s University Donald Balch, University of South Carolina
Serge S. Grushchin, ASA College of Advanced Technology Calvin Blackwell, College of Charleston
Robert Herman, Nassau Community College Janice Boucher Breuer, University of South Carolina
Christopher Inya, Monroe Community College Bill Clifford, Trident Technical College
Marie Kratochvil, Nassau Community College Frank Garland, Tri-County Technical College
Marianne Lowery, Erie Community College Charlotte Denise Hixson, Midlands Technical College
Jeannette Mitchell, Rochester Institute of Technology Woodrow W. Hughes, Jr., Converse College
Ted Muzio, St. John’s University Miren Ivankovic, Southern Wesleyan University
Gray Orphee, Rockland County Community College Chirinjev Peterson, Greenville Technical College
Craig Rogers, Canisius College Gary Stone, Winthrop University

xxvii
Denise Turnage, Midlands Technical College Washington

Chad Turner, Clemson University
William Hallagan, Washington State University
Charles S. Wassell, Jr., Central Washington University
South Dakota Mark Wylie, Spokane Falls Community College
Joseph Santos, South Dakota State University
Australia
Tennessee Hak Youn Kim, Monash University
Cindy Alexander, Pellissippi State University
Nirmalendu Debnath, Lane College
Quenton Pulliam, Nashville State Technical College c Class Testers
Rose Rubin, University of Memphis A special acknowledgment goes to the instructors who were
Thurston Schrader, Southwest Tennessee Community College willing to class-test drafts of early editions in different stages
of development. They provided us with instant feedback on
Texas parts that worked and parts that needed changes:
Rashid Al-Hmoud, Texas Technical University
Sheryl Ball, Virginia Polytechnic Institute and State University
Mahamudu Bawumia, Baylor University
John Constantine, University of California, Davis
Steven Beckham, Amarillo College
John Farrell, Oregon State University
Omar Belazi, Midland College
James Hartley, Mt. Holyoke College
Jack Bucco, Austin Community College
Kailash Khandke, Furman College
Cindy Cannon, North Harris College
Peter Lindert, University of California, Davis
David L. Coberly, Southwest Texas State University
Louis Makowski, University of California, Davis
Ed Cohn, Del Mar College
Barbara Ross-Pfeiffer, Kapiolani Community College
Dean Drainey, St. Phillips College
Michael I. Duke, Blinn College
Ghazi Duwaji, University of Texas, Arlington c Focus Groups
Harry Ellis, University of North Texas
S. Aun Hassan, Texas Tech University
We want to thank the participants who took part in the
Thomas Jeitschko, Texas A&M University focus groups for the first and second editions; they helped
Delores Linton, Tarrant County Community College, Northwest us see the manuscript from a fresh perspective:
Jessica McCraw, University of Texas, Arlington Carlos Aquilar, El Paso Community College
Randy Methenitis, Richland College Jim Bradley, University of South Carolina
William Neilson, Texas A&M University Thomas Collum, Northeastern Illinois University
Michael Nelson, Texas A&M University David Craig, Westark College
Rhey Nolan, Tyler Junior College Jeff Holt, Tulsa Junior College
Paul Okello, University of Texas, Arlington Thomas Jeitschko, Texas A&M University
Joshua Pickrell, South Plains College Gary Langer, Roosevelt University
John Pisciotta, Baylor University Mark McLeod, Virginia Polytechnic Institute and State University
John Rykowski, Kalamazoo Valley Community College Tom McKinnon, University of Arkansas
Dave Shorrow, Richland College Amy Meyers, Parkland Community College
Steve Schwiff, Texas A&M University, Commerce Hassan Mohammadi, Illinois State University
James R. Vanbeek, Blinn College John Morgan, College of Charleston
Inske Zandvliet, Brookhaven College Norm Paul, San Jacinto Community College
Nampeang Pingkaratwat, Chicago State University
Utah Scanlan Romer, Delta Community College
Reed Gooch, Utah Valley University Barbara Ross-Pfeiffer, Kapiolani Community College
Ali Hekmat, College of Eastern Utah Zahra Saderion, Houston Community College
Glenn Lowell, Utah Valley University Virginia Shingleton, Valparaiso University
Jim Swofford, University of South Alabama
Virginia Janet West, University of Nebraska, Omaha
Linda Wilson, University of Texas, Arlington
James Brumbaugh, Lord Fairfax Community College, Middleton
Michael Youngblood, Rock Valley Community College
Campus
Bruce Brunton, James Madison University
Michael G. Heslop, North Virginia Community College c A World Of Thanks . . .
George Hoffer, Virginia Commonwealth University
Melanie Marks, Longwood College We would also like to acknowledge the team of dedi-
Thomas J. Meeks, Virginia State University cated authors who contributed to the various ancillaries
John Min, Northern Virginia Community College, Alexandria that accompany this book: Jeff Phillips of Colby-Sawyer
Shannon K. Mitchell, Virginia Commonwealth University College, and Brock Williams of Metropolitan Community
Bill Reese, Tidewater Community College, Virginia Beach College.

xxviii
For the seventh edition, Liz Napolitano was the senior Deitmer, Christopher Bath, Ben Paris, Elisa Adams, Jodi
production project manager who worked with Michelle Bolognese, David Alexander, Virginia Guariglia, and
Gardner at SPi-Global to turn our manuscript pages into Lynne Breitfeller.
a beautiful published book. Lindsey Sloan, program man- Last but not least, we must thank our families, who have
ager, guided the project and coordinated the schedules for seen us disappear, sometimes physically and other times
the book and the extensive supplement package that accom- mentally, to spend hours wrapped up in our own world of
panies the book. David Alexander, executive acquisitions principles of economics. A project of this magnitude is very
editor, supported us and our users during the life of this absorbing, and our families have been particularly support-
edition. ive in this endeavor.
From the start, Pearson provided us with first-class Arthur O’Sullivan
support and advice. Over the first six editions, many
people contributed to the project, including Leah Jewell, Steven Sheffrin
Rod Banister, P. J. Boardman, Marie McHale, Gladys
Soto, Lisa Amato, Victoria Anderson, Cynthia Regan, Stephen Perez
Kathleen McLellan, Sharon Koch, David Theisen, Steve

C h apte r
1
Introduction:
What Is Economics?
Economics is the science

of choice, exploring the choices
made by individuals and
organizations.
Over the last few centuries, these choices have led to
substantial gains in the standard of living around the
globe. In the United States, the typical person today
has roughly seven times the income and purchasing
power of a person 100 years ago. Our prosperity is the
result of choices made by all sorts of people, includ-
ing inventors, workers, entrepreneurs, and the people
who saved money and loaned it to others to invest in
machines and other tools of production. One reason we have prospered is greater efficiency: We have discovered
better ways to use our resources—raw materials, time, and energy—to produce the goods and services we value.
As an illustration of changes in the standard of living and our growing prosperity, let’s compare the way people
listened to music in 1891 with how we listen today. You can buy an iPod shuffle® for $49 and fill it with 500 songs
at $0.99 each. If you earn a wage of $15 per hour, it would take you about 36 hours of work to purchase and then
fill an iPod. Back in 1891, the latest technological marvel was Thomas Edison’s cylinder phonograph, which played
music recorded on 4-inch cylinders. Imagine that you lived back then and wanted to get just as much music as
you could fit on an iPod. Given the wages and prices in 1891, it would take you roughly 800 hours of work to earn
enough money to buy the phonograph and all the cylinders. And if you wanted to keep your music with you, you
would need 14 backpacks to carry the cylinders.
Although prosperity and efficiency are widespread, they are not universal. In some parts of the world, many
people live in poverty. For example, in sub-Saharan Africa 388 million people—about half the population—live on
less than $1.25 per day. And in all nations of the world, inefficiencies still exist, with valuable resources being wasted.
For example, each year the typical urban commuter in the United States wastes more than 47 hours and $84 worth
of gasoline stuck in rush-hour traffic.
C h apte r O utli n e A n d L ea r n i n g O b j ecti v es
1.1 What Is Economics?, page 2 1.4 Preview of Coming Attractions:

List the three key economic questions. Macroeconomics, page 10
List three ways to use macroeconomics.
1.2 Economic Analysis and Modern
Problems, page 5 1.5 Preview of Coming Attractions:
Discuss the insights from economics for a Microeconomics, page 11
real-world problem such as congestion. List three ways to use microeconomics.
1.3 The Economic Way of Thinking, page 6 MyEconLab

List the four elements of the economic way MyEconLab helps you master each objective and
of thinking. study more efficiently.
1
M01_OSUL9034_07_SE_C01.indd 1 01/12/15 9:20 am

2 C h a p t e r 1 • Int rod u ct ion: W hat Is Econom i cs?
E
conomics provides a framework to diagnose all sorts of problems faced by society
and then helps create and evaluate various proposals to solve them. Economics
can help us develop strategies to replace poverty with prosperity, and to replace
waste with efficiency. In this chapter, we explain what economics is and how we all can
use economic analysis to think about practical problems and solutions.
Learning Objective 1.1 What Is Economics?

List the three key economic questions.
Economists use the word scarcity to convey the idea that resources—the things we use
scarcity to produce goods and services—are limited, while human wants are unlimited. There-
The resources we use to produce goods fore, we cannot produce everything that everyone wants. As the old saying goes, you
and services are limited. can’t always get what you want. Economics studies the choices we make when there is
economics
scarcity; it is all about trade-offs. Here are some examples of scarcity and the trade-offs
The study of choices when there is
associated with making choices:
scarcity. • You have a limited amount of time. If you take a part-time job, each hour on the
job means one fewer hour for study or play.
• A city has a limited amount of land. If the city uses an acre of land for a park, it
has one fewer acre for housing, retail, or industry.
• You have limited income this year. If you spend $17 on a music CD, that’s $17
fewer you have to spend on other products or to save.
factors of production
The resources used to produce goods and
People produce goods (music CDs, houses, and parks) and services (the advice
services; also known as production inputs or of physicians and lawyers) by using one or more of the following five factors of
resources. production, also called production inputs or simply resources:
natural resources • Natural resources are provided by nature. Some examples are fertile land, min-
Resources provided by nature and used to eral deposits, oil and gas deposits, and water. Some economists refer to all types
produce goods and services. of natural resources as land.
labor • Labor is the physical and mental effort people use to produce goods and services.
Human effort, including both physical • Physical capital is the stock of equipment, machines, structures, and infrastruc-
and mental effort, used to produce goods ture that is used to produce goods and services. Some examples are forklifts,
and services.
machine tools, computers, factories, airports, roads, and fiber-optic cables.
physical capital • Human capital is the knowledge and skills acquired by a worker through educa-
The stock of equipment, machines, tion and experience. Every job requires some human capital: To be a surgeon,
structures, and infrastructure that is used you must learn anatomy and acquire surgical skills. To be an accountant, you
to produce goods and services.
must learn the rules of accounting and acquire computer skills. To be a musician,
human capital you must learn to play an instrument.
The knowledge and skills acquired by a • Entrepreneurship is the effort used to coordinate the factors of production—
worker through education and experience
natural resources, labor, physical capital, and human capital—to produce and
and used to produce goods and services.
sell products. An entrepreneur comes up with an idea for a product, decides
entrepreneurship how to produce it, and raises the funds to bring it to the market. Some examples
The effort used to coordinate the factors of entrepreneurs are Bill Gates of Microsoft, Steve Jobs of Apple Computer,
of production—natural resources, labor, Howard Schultz of Starbucks, and Ray Kroc of McDonald’s.
physical capital, and human capital—to
produce and sell products. Given our limited resources, we make our choices in a variety of ways. Sometimes
we make our decisions as individuals, and other times we participate in collective deci-
sion making, allowing the government and other organizations to choose for us. Many
of our choices happen within markets, institutions or arrangements that enable us to
buy and sell things. For example, most of us participate in the labor market, exchanging
our time for money, and we all participate in consumer markets, exchanging money
for food and clothing. But we make other choices outside markets—from our personal
decisions about everyday life to our political choices about matters that concern society
as a whole. What unites all these decisions is the notion of scarcity: We can’t have it
all; there are trade-offs.
M01_OSUL9034_07_SE_C01.indd 2 01/12/15 9:20 am

Chapter 1 • I ntroduct ion: Wha t I s E c on om i c s ? 3
Economists are always reminding us that there is scarcity—there are trade-offs in

everything we do. Suppose that in a conversation with your economics instructor you
share your enthusiasm about an upcoming launch of the space shuttle. The economist
may tell you that the resources used for the shuttle could have been used instead for
an unmanned mission to Mars.
By introducing the notion of scarcity into your conversation, your instructor is
simply reminding you that there are trade-offs, that one thing (a Mars mission) is
sacrificed for another (a shuttle mission). Talking about alternatives is the first step
in a process that can help us make better choices about how to use our resources. For
example, we could compare the scientific benefits of a shuttle mission to the benefits
of a Mars mission and choose the mission with the greater benefit.
Positive versus Normative Analysis

Economics doesn’t tell us what to choose—shuttle mission or Mars mission—but s imply
helps us to understand the trade-offs. President Harry S. Truman once remarked,
All my economists say, “On the one hand, . . .; On the other hand, . . .?.” Give me a one-
handed economist!
An economist might say, “On the one hand, we could use a shuttle mission to do more
experiments in the gravity-free environment of Earth’s orbit; on the other hand, we
could use a Mars mission to explore the possibility of life on other planets.” In using
both hands, the economist is not being evasive, but simply doing economics, discuss-
ing the alternative uses of our resources. The ultimate decision about how to use our
resources—shuttle mission or Mars exploration—is the responsibility of citizens or
their elected officials.
Most modern economics is based on positive analysis, which predicts the positive analysis
consequences of alternative actions by answering the question “What is?” or “What Answers the question “What is?” or
will be?” A second type of economic reasoning is normative in nature. Normative “What will be?”
analysis answers the question “What ought to be?” normative analysis
In Table 1.1, we compare positive questions to normative questions. Normative Answers the question “What ought to be?”
questions lie at the heart of policy debates. Economists contribute to policy debates by
conducting positive analyses of the consequences of alternative actions. For example, an
economist could predict the effects of an increase in the minimum wage on the number
of people employed nationwide, the income of families with minimum-wage workers,
and consumer prices. Armed with the conclusions of the economist’s positive analysis,
citizens and policymakers could then make a normative decision about whether to
increase the minimum wage. Similarly, an economist could study the projects that could
be funded with $1 billion in foreign aid, predicting the effects of each project on the
income per person in an African country. Armed with this positive analysis, policymak-
ers could then decide which projects to support.
Table 1.1 Comparing Positive and Normative Questions

Positive Questions Normative Questions
• If the government increases the minimum • Should the government increase the minimum
wage, how many workers will lose their jobs? wage?
• If two office-supply firms merge, will the price • Should the government block the merger of
of office supplies increase? two office-supply firms?
• How does a college education affect a • Should the government subsidize a college
person’s productivity and earnings? education?
• How do consumers respond to a cut in • Should the government cut taxes to stimulate
income taxes? the economy?
• If a nation restricts shoe imports, who benefits • Should the government restrict imports?
and who bears the cost?
M01_OSUL9034_07_SE_C01.indd 3 01/12/15 9:20 am

Economists don’t always reach the same conclusions in their positive analyses. The
disagreements often concern the magnitude of a particular effect. For example, most
economists agree that an increase in the minimum wage will cause unemployment, but
disagree about how many people would lose their jobs. Similarly, economists agree that
spending money to improve the education system in Africa will increase productivity and
income, but disagree about the size of the increase in income.
The Three Key Economic Questions: What, How, and Who?

We make economic decisions at every level in society. Individuals decide what products
to buy, what occupations to pursue, and how much money to save. Firms decide what
goods and services to produce and how to produce them. Governments decide what
projects and programs to complete and how to pay for them. The choices of individuals,
firms, and governments answer three questions:
1 What products do we produce? Trade-offs exist: If a hospital uses its resources to
perform more heart transplants, it has fewer resources to care for premature
infants.
2 How do we produce the products? Alternative means of production are available:
Power companies can produce electricity with coal, natural gas, or wind power.
Professors can teach in large lecture halls or small classrooms.
3 Who consumes the products? We must decide how to distribute the products of
society. If some people earn more money than others, should they consume more
goods? How much money should the government take from the rich and give to
the poor?
As we’ll see later in the book, most of these decisions are made in markets, where prices
play a key role in determining what products we produce, how we produce them, and
who gets the products. In Chapter 3, we examine the role of markets in modern econo-
mies and the role of government in market-based economies.
Economic Models
Economists use economic models to explore the choices people make and the conse-
quences of those choices. An economic model is a simplified representation of an eco-
nomic environment, with all but the essential features of the environment eliminated.
economic model An economic model is an abstraction from reality that enables us to focus our atten-
A simplified representation of tion on what really matters. As we’ll see throughout the book, most economic models
an economic environment, often use graphs to represent the economic environment.
employing a graph.
To see the rationale for economic modeling, consider an architectural model. An
architect builds a scale model of a new building and uses the model to show how the
building will fit on a plot of land and blend with nearby buildings. The model shows
the exterior features of the building, but not the interior features. We can ignore the
interior features because they are unimportant for the task at hand—seeing how the
building will fit into the local environment.
Economists build models to explore decision making by individuals, firms, and other
organizations. For example, we can use a model of a profit-maximizing firm to predict
how a firm will respond to increased competition. If a new car stereo store opens up in
your town, will the old firms be passive and simply accept smaller market shares, or will
they aggressively cut their prices to try to drive the new rival out of business? The model
of the firm includes the monetary benefits and costs of doing business, and assumes that
firms want to make as much money as possible. Although there may be other motives
in the business world—to have fun or to help the world—the economic model ignores
these other motives. The model focuses our attention on the profit motive and how it
affects a firm’s response to increased competition.
M01_OSUL9034_07_SE_C01.indd 4 01/12/15 9:20 am

Chapter 1 • I ntroduct ion: Wha t I s E c on om i c s ? 5
Economic Analysis and Modern Problems Learning Objective 1.2

Discuss the insights from economics
Economic analysis provides important insights into real-world problems. To explain for a real-world problem such as
how we can use economic analysis in problem solving, we provide three examples. congestion.
You’ll see these examples again in more detail later in the book.
Economic View of Traffic Congestion

Consider first the problem of traffic congestion. According to the Texas Transporta-
tion Institute, the typical U.S. commuter wastes about 47 hours per year because of
traffic congestion.1 In some cities, the time wasted is much greater: 93 hours in Los
Angeles, 72 hours in San Francisco, and 63 hours in Houston. In addition to time lost,
we also waste 2.3 billion gallons of gasoline and diesel fuel each year.
To an economist, the diagnosis of the congestion problem is straightforward. When
you drive onto a busy highway during rush hour, your car takes up space and decreases
the distance between the vehicles on the highway. A driver’s normal reaction to a shorter
distance between moving cars is to slow down. So when you enter the highway, you
force other commuters to slow down and thus spend more time on the highway. If each
of your 900 fellow commuters spends just two extra seconds on the highway, you will
increase the total travel time by 30 minutes. In deciding whether to use the highway,
you will presumably ignore these costs you impose on others. Similarly, your fellow
commuters ignore the cost they impose on you and others when they enter the highway.
Because no single commuter pays the full cost (30 minutes), too many people use the
highway, and everyone wastes time.
One possible solution to the congestion problem is to force people to pay for
using the road, just as they pay for gasoline and tires. The government could impose
a congestion tax of $8 per trip on rush-hour commuters and use a debit card system
to collect the tax: Every time a car passes a checkpoint, a transponder would charge
the commuter’s card. Traffic volume during rush hours would then decrease as
travelers (a) shift their travel to off-peak times, (b) switch to ride-sharing and mass
transit, and (c) shift their travel to less congested routes. The job for the econo-
mist is to compute the appropriate congestion tax and predict the consequences of
imposing it.
Economic View of Poverty in Africa

Consider next the issue of poverty in Africa. In the final two decades of the twentieth
century, the world economy grew rapidly, and the average per capita income (income
per person) increased by about 35 percent. In contrast, the economies of poverty-
stricken sub-Saharan Africa shrank, and per capita income decreased by about 6 percent.
Africa is the world’s second-largest continent in both area and population and accounts
for more than 12 percent of the world’s human population. Figure 1.1 shows a map of
Africa. The countries of sub-Saharan Africa are highlighted in orange.
Economists have found that as a nation’s economy grows, its poorest households
share in the general prosperity.2 Therefore, one way to reduce poverty in sub-Saharan
Africa is to increase economic growth. Economic growth occurs when a country
expands its production facilities (machinery and factories), improves its public infra-
structure (highways and water systems), widens educational opportunities, and adopts
new technology.
The recent experience of sub-Saharan Africa is somewhat puzzling because in the
last few decades the region has expanded educational opportunities and received large
amounts of foreign aid. Some recent work by economists on the sources of growth
suggests that institutions such as the legal system and the regulatory environment also
play key roles in economic growth.3 In sub-Saharan Africa, a simple legal dispute about
a small debt takes about 30 months to resolve, compared to 5 months in the United
States. In Mozambique, it takes 174 days to complete the procedures required to set
up a business, compared to just 2 days in Canada. In many cases, institutions impede
M01_OSUL9034_07_SE_C01.indd 5 01/12/15 9:20 am

Cape
Verde Mauritania Eritrea
Mali
Niger
Senegal Chad
Gambia Burkina Sudan
Guinea Bissau Guinea Faso
Benin
Nigeria
Ghana
Sierra Leone Central African Ethiopia
Cameroon Republic (CAR)
Liberia a
Togo ali
Cote Uganda om
d’Ivoire Equatorial Democratic Kenya S Seychelles
Gabon
Guinea Republic of
Rwanda
Congo (DRC) Burundi
Sao Tome Tanzania
& Principe Republic
of Congo Malawi
Angola
Zambia
car
Zimbabwe
agas
Namibia
Botswana Mauritius
Mad
Mozambique
Swaziland
South
Africa Lesotho
▲ Figure 1.1 Map of Africa

Africa is the world’s second-largest continent in both area and population, and accounts for more than
12 percent of the world’s human population. The countries of sub-Saharan Africa are highlighted in green.
rather than encourage the sort of investment and risk-taking—called entrepreneurship—

that causes economic growth and reduces poverty. As a consequence, economists and
policymakers are exploring ways to reform the region’s institutions. They are also
challenged with choosing among development projects that will generate the biggest
economic boost per dollar spent—the biggest bang per buck.
Economic View of the Current World Recession

Over the last several decades, the U.S. economy has performed well and has raised our
standard of living. The general consensus was that our policymakers had learned to
manage the economy effectively. Although the economy faltered at times, policymakers
seemed to know how to restore growth and prosperity.
That is why the financial crisis and the recession that began in late 2007 has so
shaken the confidence of people in the United States and around the world. The prob-
lems started innocently enough, with a booming market for homes that was fueled by
easy credit from financial institutions. But we later discovered that many purchasers of
homes and properties could not really afford them, and when many homeowners had
trouble making their mortgage payments, the trouble spread to banks and other financial
institutions. As a result, businesses found it increasingly difficult to borrow money for
everyday use and investment, and economic activity around the world began to contract.
The major countries of the world have implemented aggressive policies to try to
halt this downturn. Policymakers want to avoid the catastrophes that hit the global
economy in the 1930s. Fortunately, they can draw on many years of experience in eco-
nomic policy to guide the economy during this difficult time.
Learning Objective 1.3 The Economic Way of Thinking

List the four elements of the economic
How do economists think about problems and decision making? The economic way of
way of thinking.
thinking is best summarized by British economist John Maynard Keynes (1883–1946):4
The theory of economics does not furnish a body of settled conclusions immediately appli-
cable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique
of thinking which helps its possessor draw correct conclusions.
Let’s look at the four elements of the economic way of thinking.
M01_OSUL9034_07_SE_C01.indd 6 01/12/15 9:20 am

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DANCE ON STILTS AT THE GIRLS’ UNYAGO, NIUCHI
Newala, too, suffers from the distance of its water-supply—at least

the Newala of to-day does; there was once another Newala in a lovely
valley at the foot of the plateau. I visited it and found scarcely a trace
of houses, only a Christian cemetery, with the graves of several
missionaries and their converts, remaining as a monument of its
former glories. But the surroundings are wonderfully beautiful. A
thick grove of splendid mango-trees closes in the weather-worn
crosses and headstones; behind them, combining the useful and the
agreeable, is a whole plantation of lemon-trees covered with ripe
fruit; not the small African kind, but a much larger and also juicier
imported variety, which drops into the hands of the passing traveller,
without calling for any exertion on his part. Old Newala is now under
the jurisdiction of the native pastor, Daudi, at Chingulungulu, who,
as I am on very friendly terms with him, allows me, as a matter of
course, the use of this lemon-grove during my stay at Newala.
FEET MUTILATED BY THE RAVAGES OF THE “JIGGER”
(Sarcopsylla penetrans)
The water-supply of New Newala is in the bottom of the valley,

some 1,600 feet lower down. The way is not only long and fatiguing,
but the water, when we get it, is thoroughly bad. We are suffering not
only from this, but from the fact that the arrangements at Newala are
nothing short of luxurious. We have a separate kitchen—a hut built
against the boma palisade on the right of the baraza, the interior of
which is not visible from our usual position. Our two cooks were not
long in finding this out, and they consequently do—or rather neglect
to do—what they please. In any case they do not seem to be very
particular about the boiling of our drinking-water—at least I can
attribute to no other cause certain attacks of a dysenteric nature,
from which both Knudsen and I have suffered for some time. If a
man like Omari has to be left unwatched for a moment, he is capable
of anything. Besides this complaint, we are inconvenienced by the
state of our nails, which have become as hard as glass, and crack on
the slightest provocation, and I have the additional infliction of
pimples all over me. As if all this were not enough, we have also, for
the last week been waging war against the jigger, who has found his
Eldorado in the hot sand of the Makonde plateau. Our men are seen
all day long—whenever their chronic colds and the dysentery likewise
raging among them permit—occupied in removing this scourge of
Africa from their feet and trying to prevent the disastrous
consequences of its presence. It is quite common to see natives of
this place with one or two toes missing; many have lost all their toes,
or even the whole front part of the foot, so that a well-formed leg
ends in a shapeless stump. These ravages are caused by the female of
Sarcopsylla penetrans, which bores its way under the skin and there
develops an egg-sac the size of a pea. In all books on the subject, it is
stated that one’s attention is called to the presence of this parasite by
an intolerable itching. This agrees very well with my experience, so
far as the softer parts of the sole, the spaces between and under the
toes, and the side of the foot are concerned, but if the creature
penetrates through the harder parts of the heel or ball of the foot, it
may escape even the most careful search till it has reached maturity.
Then there is no time to be lost, if the horrible ulceration, of which
we see cases by the dozen every day, is to be prevented. It is much
easier, by the way, to discover the insect on the white skin of a
European than on that of a native, on which the dark speck scarcely
shows. The four or five jiggers which, in spite of the fact that I
constantly wore high laced boots, chose my feet to settle in, were
taken out for me by the all-accomplished Knudsen, after which I
thought it advisable to wash out the cavities with corrosive
sublimate. The natives have a different sort of disinfectant—they fill
the hole with scraped roots. In a tiny Makua village on the slope of
the plateau south of Newala, we saw an old woman who had filled all
the spaces under her toe-nails with powdered roots by way of
prophylactic treatment. What will be the result, if any, who can say?
The rest of the many trifling ills which trouble our existence are
really more comic than serious. In the absence of anything else to
smoke, Knudsen and I at last opened a box of cigars procured from
the Indian store-keeper at Lindi, and tried them, with the most
distressing results. Whether they contain opium or some other
narcotic, neither of us can say, but after the tenth puff we were both
“off,” three-quarters stupefied and unspeakably wretched. Slowly we
recovered—and what happened next? Half-an-hour later we were
once more smoking these poisonous concoctions—so insatiable is the
craving for tobacco in the tropics.
Even my present attacks of fever scarcely deserve to be taken
seriously. I have had no less than three here at Newala, all of which
have run their course in an incredibly short time. In the early
afternoon, I am busy with my old natives, asking questions and
making notes. The strong midday coffee has stimulated my spirits to
an extraordinary degree, the brain is active and vigorous, and work
progresses rapidly, while a pleasant warmth pervades the whole
body. Suddenly this gives place to a violent chill, forcing me to put on
my overcoat, though it is only half-past three and the afternoon sun
is at its hottest. Now the brain no longer works with such acuteness
and logical precision; more especially does it fail me in trying to
establish the syntax of the difficult Makua language on which I have
ventured, as if I had not enough to do without it. Under the
circumstances it seems advisable to take my temperature, and I do
so, to save trouble, without leaving my seat, and while going on with
my work. On examination, I find it to be 101·48°. My tutors are
abruptly dismissed and my bed set up in the baraza; a few minutes
later I am in it and treating myself internally with hot water and
lemon-juice.
Three hours later, the thermometer marks nearly 104°, and I make
them carry me back into the tent, bed and all, as I am now perspiring
heavily, and exposure to the cold wind just beginning to blow might
mean a fatal chill. I lie still for a little while, and then find, to my
great relief, that the temperature is not rising, but rather falling. This
is about 7.30 p.m. At 8 p.m. I find, to my unbounded astonishment,
that it has fallen below 98·6°, and I feel perfectly well. I read for an
hour or two, and could very well enjoy a smoke, if I had the
wherewithal—Indian cigars being out of the question.
Having no medical training, I am at a loss to account for this state
of things. It is impossible that these transitory attacks of high fever
should be malarial; it seems more probable that they are due to a
kind of sunstroke. On consulting my note-book, I become more and
more inclined to think this is the case, for these attacks regularly
follow extreme fatigue and long exposure to strong sunshine. They at
least have the advantage of being only short interruptions to my
work, as on the following morning I am always quite fresh and fit.
My treasure of a cook is suffering from an enormous hydrocele which
makes it difficult for him to get up, and Moritz is obliged to keep in
the dark on account of his inflamed eyes. Knudsen’s cook, a raw boy
from somewhere in the bush, knows still less of cooking than Omari;
consequently Nils Knudsen himself has been promoted to the vacant
post. Finding that we had come to the end of our supplies, he began
by sending to Chingulungulu for the four sucking-pigs which we had
bought from Matola and temporarily left in his charge; and when
they came up, neatly packed in a large crate, he callously slaughtered
the biggest of them. The first joint we were thoughtless enough to
entrust for roasting to Knudsen’s mshenzi cook, and it was
consequently uneatable; but we made the rest of the animal into a
jelly which we ate with great relish after weeks of underfeeding,
consuming incredible helpings of it at both midday and evening
meals. The only drawback is a certain want of variety in the tinned
vegetables. Dr. Jäger, to whom the Geographical Commission
entrusted the provisioning of the expeditions—mine as well as his
own—because he had more time on his hands than the rest of us,
seems to have laid in a huge stock of Teltow turnips,[46] an article of
food which is all very well for occasional use, but which quickly palls
when set before one every day; and we seem to have no other tins
left. There is no help for it—we must put up with the turnips; but I
am certain that, once I am home again, I shall not touch them for ten
years to come.
Amid all these minor evils, which, after all, go to make up the
genuine flavour of Africa, there is at least one cheering touch:
Knudsen has, with the dexterity of a skilled mechanic, repaired my 9
× 12 cm. camera, at least so far that I can use it with a little care.
How, in the absence of finger-nails, he was able to accomplish such a
ticklish piece of work, having no tool but a clumsy screw-driver for
taking to pieces and putting together again the complicated
mechanism of the instantaneous shutter, is still a mystery to me; but
he did it successfully. The loss of his finger-nails shows him in a light
contrasting curiously enough with the intelligence evinced by the
above operation; though, after all, it is scarcely surprising after his
ten years’ residence in the bush. One day, at Lindi, he had occasion
to wash a dog, which must have been in need of very thorough
cleansing, for the bottle handed to our friend for the purpose had an
extremely strong smell. Having performed his task in the most
conscientious manner, he perceived with some surprise that the dog
did not appear much the better for it, and was further surprised by
finding his own nails ulcerating away in the course of the next few
days. “How was I to know that carbolic acid has to be diluted?” he
mutters indignantly, from time to time, with a troubled gaze at his
mutilated finger-tips.
Since we came to Newala we have been making excursions in all
directions through the surrounding country, in accordance with old
habit, and also because the akida Sefu did not get together the tribal
elders from whom I wanted information so speedily as he had
promised. There is, however, no harm done, as, even if seen only
from the outside, the country and people are interesting enough.
The Makonde plateau is like a large rectangular table rounded off
at the corners. Measured from the Indian Ocean to Newala, it is
about seventy-five miles long, and between the Rovuma and the
Lukuledi it averages fifty miles in breadth, so that its superficial area
is about two-thirds of that of the kingdom of Saxony. The surface,
however, is not level, but uniformly inclined from its south-western
edge to the ocean. From the upper edge, on which Newala lies, the
eye ranges for many miles east and north-east, without encountering
any obstacle, over the Makonde bush. It is a green sea, from which
here and there thick clouds of smoke rise, to show that it, too, is
inhabited by men who carry on their tillage like so many other
primitive peoples, by cutting down and burning the bush, and
manuring with the ashes. Even in the radiant light of a tropical day
such a fire is a grand sight.
Much less effective is the impression produced just now by the
great western plain as seen from the edge of the plateau. As often as
time permits, I stroll along this edge, sometimes in one direction,
sometimes in another, in the hope of finding the air clear enough to
let me enjoy the view; but I have always been disappointed.
Wherever one looks, clouds of smoke rise from the burning bush,
and the air is full of smoke and vapour. It is a pity, for under more
favourable circumstances the panorama of the whole country up to
the distant Majeje hills must be truly magnificent. It is of little use
taking photographs now, and an outline sketch gives a very poor idea
of the scenery. In one of these excursions I went out of my way to
make a personal attempt on the Makonde bush. The present edge of
the plateau is the result of a far-reaching process of destruction
through erosion and denudation. The Makonde strata are
everywhere cut into by ravines, which, though short, are hundreds of
yards in depth. In consequence of the loose stratification of these
beds, not only are the walls of these ravines nearly vertical, but their
upper end is closed by an equally steep escarpment, so that the
western edge of the Makonde plateau is hemmed in by a series of
deep, basin-like valleys. In order to get from one side of such a ravine
to the other, I cut my way through the bush with a dozen of my men.
It was a very open part, with more grass than scrub, but even so the
short stretch of less than two hundred yards was very hard work; at
the end of it the men’s calicoes were in rags and they themselves
bleeding from hundreds of scratches, while even our strong khaki
suits had not escaped scatheless.
NATIVE PATH THROUGH THE MAKONDE BUSH, NEAR

MAHUTA
I see increasing reason to believe that the view formed some time
back as to the origin of the Makonde bush is the correct one. I have
no doubt that it is not a natural product, but the result of human
occupation. Those parts of the high country where man—as a very
slight amount of practice enables the eye to perceive at once—has not
yet penetrated with axe and hoe, are still occupied by a splendid
timber forest quite able to sustain a comparison with our mixed
forests in Germany. But wherever man has once built his hut or tilled
his field, this horrible bush springs up. Every phase of this process
may be seen in the course of a couple of hours’ walk along the main
road. From the bush to right or left, one hears the sound of the axe—
not from one spot only, but from several directions at once. A few
steps further on, we can see what is taking place. The brush has been
cut down and piled up in heaps to the height of a yard or more,
between which the trunks of the large trees stand up like the last
pillars of a magnificent ruined building. These, too, present a
melancholy spectacle: the destructive Makonde have ringed them—
cut a broad strip of bark all round to ensure their dying off—and also
piled up pyramids of brush round them. Father and son, mother and
son-in-law, are chopping away perseveringly in the background—too
busy, almost, to look round at the white stranger, who usually excites
so much interest. If you pass by the same place a week later, the piles
of brushwood have disappeared and a thick layer of ashes has taken
the place of the green forest. The large trees stretch their
smouldering trunks and branches in dumb accusation to heaven—if
they have not already fallen and been more or less reduced to ashes,
perhaps only showing as a white stripe on the dark ground.
This work of destruction is carried out by the Makonde alike on the
virgin forest and on the bush which has sprung up on sites already
cultivated and deserted. In the second case they are saved the trouble
of burning the large trees, these being entirely absent in the
secondary bush.
After burning this piece of forest ground and loosening it with the
hoe, the native sows his corn and plants his vegetables. All over the
country, he goes in for bed-culture, which requires, and, in fact,
receives, the most careful attention. Weeds are nowhere tolerated in
the south of German East Africa. The crops may fail on the plains,
where droughts are frequent, but never on the plateau with its
abundant rains and heavy dews. Its fortunate inhabitants even have
the satisfaction of seeing the proud Wayao and Wamakua working
for them as labourers, driven by hunger to serve where they were
accustomed to rule.
But the light, sandy soil is soon exhausted, and would yield no
harvest the second year if cultivated twice running. This fact has
been familiar to the native for ages; consequently he provides in
time, and, while his crop is growing, prepares the next plot with axe
and firebrand. Next year he plants this with his various crops and
lets the first piece lie fallow. For a short time it remains waste and
desolate; then nature steps in to repair the destruction wrought by
man; a thousand new growths spring out of the exhausted soil, and
even the old stumps put forth fresh shoots. Next year the new growth
is up to one’s knees, and in a few years more it is that terrible,
impenetrable bush, which maintains its position till the black
occupier of the land has made the round of all the available sites and
come back to his starting point.
The Makonde are, body and soul, so to speak, one with this bush.
According to my Yao informants, indeed, their name means nothing
else but “bush people.” Their own tradition says that they have been
settled up here for a very long time, but to my surprise they laid great
stress on an original immigration. Their old homes were in the
south-east, near Mikindani and the mouth of the Rovuma, whence
their peaceful forefathers were driven by the continual raids of the
Sakalavas from Madagascar and the warlike Shirazis[47] of the coast,
to take refuge on the almost inaccessible plateau. I have studied
African ethnology for twenty years, but the fact that changes of
population in this apparently quiet and peaceable corner of the earth
could have been occasioned by outside enterprises taking place on
the high seas, was completely new to me. It is, no doubt, however,
correct.
The charming tribal legend of the Makonde—besides informing us
of other interesting matters—explains why they have to live in the
thickest of the bush and a long way from the edge of the plateau,
instead of making their permanent homes beside the purling brooks
and springs of the low country.
“The place where the tribe originated is Mahuta, on the southern
side of the plateau towards the Rovuma, where of old time there was
nothing but thick bush. Out of this bush came a man who never
washed himself or shaved his head, and who ate and drank but little.
He went out and made a human figure from the wood of a tree
growing in the open country, which he took home to his abode in the
bush and there set it upright. In the night this image came to life and
was a woman. The man and woman went down together to the
Rovuma to wash themselves. Here the woman gave birth to a still-
born child. They left that place and passed over the high land into the
valley of the Mbemkuru, where the woman had another child, which
was also born dead. Then they returned to the high bush country of
Mahuta, where the third child was born, which lived and grew up. In
course of time, the couple had many more children, and called
themselves Wamatanda. These were the ancestral stock of the
Makonde, also called Wamakonde,[48] i.e., aborigines. Their
forefather, the man from the bush, gave his children the command to
bury their dead upright, in memory of the mother of their race who
was cut out of wood and awoke to life when standing upright. He also
warned them against settling in the valleys and near large streams,
for sickness and death dwelt there. They were to make it a rule to
have their huts at least an hour’s walk from the nearest watering-
place; then their children would thrive and escape illness.”
The explanation of the name Makonde given by my informants is
somewhat different from that contained in the above legend, which I
extract from a little book (small, but packed with information), by
Pater Adams, entitled Lindi und sein Hinterland. Otherwise, my
results agree exactly with the statements of the legend. Washing?
Hapana—there is no such thing. Why should they do so? As it is, the
supply of water scarcely suffices for cooking and drinking; other
people do not wash, so why should the Makonde distinguish himself
by such needless eccentricity? As for shaving the head, the short,
woolly crop scarcely needs it,[49] so the second ancestral precept is
likewise easy enough to follow. Beyond this, however, there is
nothing ridiculous in the ancestor’s advice. I have obtained from
various local artists a fairly large number of figures carved in wood,
ranging from fifteen to twenty-three inches in height, and
representing women belonging to the great group of the Mavia,
Makonde, and Matambwe tribes. The carving is remarkably well
done and renders the female type with great accuracy, especially the
keloid ornamentation, to be described later on. As to the object and
meaning of their works the sculptors either could or (more probably)
would tell me nothing, and I was forced to content myself with the
scanty information vouchsafed by one man, who said that the figures
were merely intended to represent the nembo—the artificial
deformations of pelele, ear-discs, and keloids. The legend recorded
by Pater Adams places these figures in a new light. They must surely
be more than mere dolls; and we may even venture to assume that
they are—though the majority of present-day Makonde are probably
unaware of the fact—representations of the tribal ancestress.
The references in the legend to the descent from Mahuta to the
Rovuma, and to a journey across the highlands into the Mbekuru
valley, undoubtedly indicate the previous history of the tribe, the
travels of the ancestral pair typifying the migrations of their
descendants. The descent to the neighbouring Rovuma valley, with
its extraordinary fertility and great abundance of game, is intelligible
at a glance—but the crossing of the Lukuledi depression, the ascent
to the Rondo Plateau and the descent to the Mbemkuru, also lie
within the bounds of probability, for all these districts have exactly
the same character as the extreme south. Now, however, comes a
point of especial interest for our bacteriological age. The primitive
Makonde did not enjoy their lives in the marshy river-valleys.
Disease raged among them, and many died. It was only after they
had returned to their original home near Mahuta, that the health
conditions of these people improved. We are very apt to think of the
African as a stupid person whose ignorance of nature is only equalled
by his fear of it, and who looks on all mishaps as caused by evil
spirits and malignant natural powers. It is much more correct to
assume in this case that the people very early learnt to distinguish
districts infested with malaria from those where it is absent.
This knowledge is crystallized in the
ancestral warning against settling in the
valleys and near the great waters, the
dwelling-places of disease and death. At the
same time, for security against the hostile
Mavia south of the Rovuma, it was enacted
that every settlement must be not less than a
certain distance from the southern edge of the
plateau. Such in fact is their mode of life at the
present day. It is not such a bad one, and
certainly they are both safer and more
comfortable than the Makua, the recent
intruders from the south, who have made USUAL METHOD OF
good their footing on the western edge of the CLOSING HUT-DOOR
plateau, extending over a fairly wide belt of
country. Neither Makua nor Makonde show in their dwellings
anything of the size and comeliness of the Yao houses in the plain,
especially at Masasi, Chingulungulu and Zuza’s. Jumbe Chauro, a
Makonde hamlet not far from Newala, on the road to Mahuta, is the
most important settlement of the tribe I have yet seen, and has fairly
spacious huts. But how slovenly is their construction compared with
the palatial residences of the elephant-hunters living in the plain.
The roofs are still more untidy than in the general run of huts during
the dry season, the walls show here and there the scanty beginnings
or the lamentable remains of the mud plastering, and the interior is a
veritable dog-kennel; dirt, dust and disorder everywhere. A few huts
only show any attempt at division into rooms, and this consists
merely of very roughly-made bamboo partitions. In one point alone
have I noticed any indication of progress—in the method of fastening
the door. Houses all over the south are secured in a simple but
ingenious manner. The door consists of a set of stout pieces of wood
or bamboo, tied with bark-string to two cross-pieces, and moving in
two grooves round one of the door-posts, so as to open inwards. If
the owner wishes to leave home, he takes two logs as thick as a man’s
upper arm and about a yard long. One of these is placed obliquely
against the middle of the door from the inside, so as to form an angle
of from 60° to 75° with the ground. He then places the second piece
horizontally across the first, pressing it downward with all his might.
It is kept in place by two strong posts planted in the ground a few
inches inside the door. This fastening is absolutely safe, but of course
cannot be applied to both doors at once, otherwise how could the
owner leave or enter his house? I have not yet succeeded in finding
out how the back door is fastened.
MAKONDE LOCK AND KEY AT JUMBE CHAURO

This is the general way of closing a house. The Makonde at Jumbe
Chauro, however, have a much more complicated, solid and original
one. Here, too, the door is as already described, except that there is
only one post on the inside, standing by itself about six inches from
one side of the doorway. Opposite this post is a hole in the wall just
large enough to admit a man’s arm. The door is closed inside by a
large wooden bolt passing through a hole in this post and pressing
with its free end against the door. The other end has three holes into
which fit three pegs running in vertical grooves inside the post. The
door is opened with a wooden key about a foot long, somewhat
curved and sloped off at the butt; the other end has three pegs
corresponding to the holes, in the bolt, so that, when it is thrust
through the hole in the wall and inserted into the rectangular
opening in the post, the pegs can be lifted and the bolt drawn out.[50]
MODE OF INSERTING THE KEY
With no small pride first one householder and then a second

showed me on the spot the action of this greatest invention of the
Makonde Highlands. To both with an admiring exclamation of
“Vizuri sana!” (“Very fine!”). I expressed the wish to take back these
marvels with me to Ulaya, to show the Wazungu what clever fellows
the Makonde are. Scarcely five minutes after my return to camp at
Newala, the two men came up sweating under the weight of two
heavy logs which they laid down at my feet, handing over at the same
time the keys of the fallen fortress. Arguing, logically enough, that if
the key was wanted, the lock would be wanted with it, they had taken
their axes and chopped down the posts—as it never occurred to them
to dig them out of the ground and so bring them intact. Thus I have
two badly damaged specimens, and the owners, instead of praise,
come in for a blowing-up.
The Makua huts in the environs of Newala are especially
miserable; their more than slovenly construction reminds one of the
temporary erections of the Makua at Hatia’s, though the people here
have not been concerned in a war. It must therefore be due to
congenital idleness, or else to the absence of a powerful chief. Even
the baraza at Mlipa’s, a short hour’s walk south-east of Newala,
shares in this general neglect. While public buildings in this country
are usually looked after more or less carefully, this is in evident
danger of being blown over by the first strong easterly gale. The only
attractive object in this whole district is the grave of the late chief
Mlipa. I visited it in the morning, while the sun was still trying with
partial success to break through the rolling mists, and the circular
grove of tall euphorbias, which, with a broken pot, is all that marks
the old king’s resting-place, impressed one with a touch of pathos.
Even my very materially-minded carriers seemed to feel something
of the sort, for instead of their usual ribald songs, they chanted
solemnly, as we marched on through the dense green of the Makonde
bush:—
“We shall arrive with the great master; we stand in a row and have
no fear about getting our food and our money from the Serkali (the
Government). We are not afraid; we are going along with the great
master, the lion; we are going down to the coast and back.”
With regard to the characteristic features of the various tribes here
on the western edge of the plateau, I can arrive at no other
conclusion than the one already come to in the plain, viz., that it is
impossible for anyone but a trained anthropologist to assign any
given individual at once to his proper tribe. In fact, I think that even
an anthropological specialist, after the most careful examination,
might find it a difficult task to decide. The whole congeries of peoples
collected in the region bounded on the west by the great Central
African rift, Tanganyika and Nyasa, and on the east by the Indian
Ocean, are closely related to each other—some of their languages are
only distinguished from one another as dialects of the same speech,
and no doubt all the tribes present the same shape of skull and
structure of skeleton. Thus, surely, there can be no very striking
differences in outward appearance.
Even did such exist, I should have no time
to concern myself with them, for day after day,
I have to see or hear, as the case may be—in
any case to grasp and record—an
extraordinary number of ethnographic
phenomena. I am almost disposed to think it
fortunate that some departments of inquiry, at
least, are barred by external circumstances.
Chief among these is the subject of iron-
working. We are apt to think of Africa as a
country where iron ore is everywhere, so to
speak, to be picked up by the roadside, and
where it would be quite surprising if the
inhabitants had not learnt to smelt the
material ready to their hand. In fact, the
knowledge of this art ranges all over the
continent, from the Kabyles in the north to the
Kafirs in the south. Here between the Rovuma
and the Lukuledi the conditions are not so
favourable. According to the statements of the
Makonde, neither ironstone nor any other
form of iron ore is known to them. They have
not therefore advanced to the art of smelting
the metal, but have hitherto bought all their
THE ANCESTRESS OF
THE MAKONDE
iron implements from neighbouring tribes.
Even in the plain the inhabitants are not much
better off. Only one man now living is said to
understand the art of smelting iron. This old fundi lives close to
Huwe, that isolated, steep-sided block of granite which rises out of
the green solitude between Masasi and Chingulungulu, and whose
jagged and splintered top meets the traveller’s eye everywhere. While
still at Masasi I wished to see this man at work, but was told that,
frightened by the rising, he had retired across the Rovuma, though
he would soon return. All subsequent inquiries as to whether the
fundi had come back met with the genuine African answer, “Bado”
(“Not yet”).
BRAZIER
Some consolation was afforded me by a brassfounder, whom I

came across in the bush near Akundonde’s. This man is the favourite
of women, and therefore no doubt of the gods; he welds the glittering
brass rods purchased at the coast into those massive, heavy rings
which, on the wrists and ankles of the local fair ones, continually give
me fresh food for admiration. Like every decent master-craftsman he
had all his tools with him, consisting of a pair of bellows, three
crucibles and a hammer—nothing more, apparently. He was quite
willing to show his skill, and in a twinkling had fixed his bellows on
the ground. They are simply two goat-skins, taken off whole, the four
legs being closed by knots, while the upper opening, intended to
admit the air, is kept stretched by two pieces of wood. At the lower
end of the skin a smaller opening is left into which a wooden tube is
stuck. The fundi has quickly borrowed a heap of wood-embers from
the nearest hut; he then fixes the free ends of the two tubes into an
earthen pipe, and clamps them to the ground by means of a bent
piece of wood. Now he fills one of his small clay crucibles, the dross
on which shows that they have been long in use, with the yellow
material, places it in the midst of the embers, which, at present are
only faintly glimmering, and begins his work. In quick alternation
the smith’s two hands move up and down with the open ends of the
bellows; as he raises his hand he holds the slit wide open, so as to let
the air enter the skin bag unhindered. In pressing it down he closes
the bag, and the air puffs through the bamboo tube and clay pipe into
the fire, which quickly burns up. The smith, however, does not keep
on with this work, but beckons to another man, who relieves him at
the bellows, while he takes some more tools out of a large skin pouch
carried on his back. I look on in wonder as, with a smooth round
stick about the thickness of a finger, he bores a few vertical holes into
the clean sand of the soil. This should not be difficult, yet the man
seems to be taking great pains over it. Then he fastens down to the
ground, with a couple of wooden clamps, a neat little trough made by
splitting a joint of bamboo in half, so that the ends are closed by the
two knots. At last the yellow metal has attained the right consistency,
and the fundi lifts the crucible from the fire by means of two sticks
split at the end to serve as tongs. A short swift turn to the left—a
tilting of the crucible—and the molten brass, hissing and giving forth
clouds of smoke, flows first into the bamboo mould and then into the
holes in the ground.
The technique of this backwoods craftsman may not be very far
advanced, but it cannot be denied that he knows how to obtain an
adequate result by the simplest means. The ladies of highest rank in
this country—that is to say, those who can afford it, wear two kinds
of these massive brass rings, one cylindrical, the other semicircular
in section. The latter are cast in the most ingenious way in the
bamboo mould, the former in the circular hole in the sand. It is quite
a simple matter for the fundi to fit these bars to the limbs of his fair
customers; with a few light strokes of his hammer he bends the
pliable brass round arm or ankle without further inconvenience to
the wearer.
SHAPING THE POT
SMOOTHING WITH MAIZE-COB
CUTTING THE EDGE

FINISHING THE BOTTOM
LAST SMOOTHING BEFORE

BURNING
FIRING THE BRUSH-PILE

LIGHTING THE FARTHER SIDE OF
THE PILE
TURNING THE RED-HOT VESSEL
NYASA WOMAN MAKING POTS AT MASASI

Pottery is an art which must always and everywhere excite the
interest of the student, just because it is so intimately connected with
the development of human culture, and because its relics are one of
the principal factors in the reconstruction of our own condition in
prehistoric times. I shall always remember with pleasure the two or
three afternoons at Masasi when Salim Matola’s mother, a slightly-
built, graceful, pleasant-looking woman, explained to me with
touching patience, by means of concrete illustrations, the ceramic art
of her people. The only implements for this primitive process were a
lump of clay in her left hand, and in the right a calabash containing
the following valuables: the fragment of a maize-cob stripped of all
its grains, a smooth, oval pebble, about the size of a pigeon’s egg, a
few chips of gourd-shell, a bamboo splinter about the length of one’s
hand, a small shell, and a bunch of some herb resembling spinach.
Nothing more. The woman scraped with the
shell a round, shallow hole in the soft, fine
sand of the soil, and, when an active young
girl had filled the calabash with water for her,
she began to knead the clay. As if by magic it
gradually assumed the shape of a rough but
already well-shaped vessel, which only wanted
a little touching up with the instruments
before mentioned. I looked out with the
MAKUA WOMAN closest attention for any indication of the use
MAKING A POT. of the potter’s wheel, in however rudimentary
SHOWS THE a form, but no—hapana (there is none). The
BEGINNINGS OF THE embryo pot stood firmly in its little
POTTER’S WHEEL
depression, and the woman walked round it in
a stooping posture, whether she was removing
small stones or similar foreign bodies with the maize-cob, smoothing
the inner or outer surface with the splinter of bamboo, or later, after
letting it dry for a day, pricking in the ornamentation with a pointed
bit of gourd-shell, or working out the bottom, or cutting the edge
with a sharp bamboo knife, or giving the last touches to the finished
vessel. This occupation of the women is infinitely toilsome, but it is
without doubt an accurate reproduction of the process in use among
our ancestors of the Neolithic and Bronze ages.
There is no doubt that the invention of pottery, an item in human
progress whose importance cannot be over-estimated, is due to
women. Rough, coarse and unfeeling, the men of the horde range
over the countryside. When the united cunning of the hunters has
succeeded in killing the game; not one of them thinks of carrying
home the spoil. A bright fire, kindled by a vigorous wielding of the
drill, is crackling beside them; the animal has been cleaned and cut
up secundum artem, and, after a slight singeing, will soon disappear
under their sharp teeth; no one all this time giving a single thought
to wife or child.
To what shifts, on the other hand, the primitive wife, and still more
the primitive mother, was put! Not even prehistoric stomachs could
endure an unvarying diet of raw food. Something or other suggested
the beneficial effect of hot water on the majority of approved but
indigestible dishes. Perhaps a neighbour had tried holding the hard
roots or tubers over the fire in a calabash filled with water—or maybe
an ostrich-egg-shell, or a hastily improvised vessel of bark. They
became much softer and more palatable than they had previously
been; but, unfortunately, the vessel could not stand the fire and got
charred on the outside. That can be remedied, thought our
ancestress, and plastered a layer of wet clay round a similar vessel.
This is an improvement; the cooking utensil remains uninjured, but
the heat of the fire has shrunk it, so that it is loose in its shell. The
next step is to detach it, so, with a firm grip and a jerk, shell and
kernel are separated, and pottery is invented. Perhaps, however, the
discovery which led to an intelligent use of the burnt-clay shell, was
made in a slightly different way. Ostrich-eggs and calabashes are not
to be found in every part of the world, but everywhere mankind has
arrived at the art of making baskets out of pliant materials, such as
bark, bast, strips of palm-leaf, supple twigs, etc. Our inventor has no
water-tight vessel provided by nature. “Never mind, let us line the
basket with clay.” This answers the purpose, but alas! the basket gets
burnt over the blazing fire, the woman watches the process of
cooking with increasing uneasiness, fearing a leak, but no leak
appears. The food, done to a turn, is eaten with peculiar relish; and
the cooking-vessel is examined, half in curiosity, half in satisfaction
at the result. The plastic clay is now hard as stone, and at the same
time looks exceedingly well, for the neat plaiting of the burnt basket
is traced all over it in a pretty pattern. Thus, simultaneously with
pottery, its ornamentation was invented.
Primitive woman has another claim to respect. It was the man,
roving abroad, who invented the art of producing fire at will, but the
woman, unable to imitate him in this, has been a Vestal from the
earliest times. Nothing gives so much trouble as the keeping alight of
the smouldering brand, and, above all, when all the men are absent
from the camp. Heavy rain-clouds gather, already the first large
drops are falling, the first gusts of the storm rage over the plain. The
little flame, a greater anxiety to the woman than her own children,
flickers unsteadily in the blast. What is to be done? A sudden thought
occurs to her, and in an instant she has constructed a primitive hut
out of strips of bark, to protect the flame against rain and wind.
This, or something very like it, was the way in which the principle
of the house was discovered; and even the most hardened misogynist
cannot fairly refuse a woman the credit of it. The protection of the
hearth-fire from the weather is the germ from which the human
dwelling was evolved. Men had little, if any share, in this forward
step, and that only at a late stage. Even at the present day, the
plastering of the housewall with clay and the manufacture of pottery
are exclusively the women’s business. These are two very significant
survivals. Our European kitchen-garden, too, is originally a woman’s
invention, and the hoe, the primitive instrument of agriculture, is,
characteristically enough, still used in this department. But the
noblest achievement which we owe to the other sex is unquestionably
the art of cookery. Roasting alone—the oldest process—is one for
which men took the hint (a very obvious one) from nature. It must
have been suggested by the scorched carcase of some animal
overtaken by the destructive forest-fires. But boiling—the process of
improving organic substances by the help of water heated to boiling-
point—is a much later discovery. It is so recent that it has not even
yet penetrated to all parts of the world. The Polynesians understand
how to steam food, that is, to cook it, neatly wrapped in leaves, in a
hole in the earth between hot stones, the air being excluded, and
(sometimes) a few drops of water sprinkled on the stones; but they
do not understand boiling.
To come back from this digression, we find that the slender Nyasa
woman has, after once more carefully examining the finished pot,
put it aside in the shade to dry. On the following day she sends me
word by her son, Salim Matola, who is always on hand, that she is
going to do the burning, and, on coming out of my house, I find her
already hard at work. She has spread on the ground a layer of very
dry sticks, about as thick as one’s thumb, has laid the pot (now of a
yellowish-grey colour) on them, and is piling brushwood round it.
My faithful Pesa mbili, the mnyampara, who has been standing by,
most obligingly, with a lighted stick, now hands it to her. Both of
them, blowing steadily, light the pile on the lee side, and, when the
flame begins to catch, on the weather side also. Soon the whole is in a
blaze, but the dry fuel is quickly consumed and the fire dies down, so
that we see the red-hot vessel rising from the ashes. The woman
turns it continually with a long stick, sometimes one way and
sometimes another, so that it may be evenly heated all over. In
twenty minutes she rolls it out of the ash-heap, takes up the bundle
of spinach, which has been lying for two days in a jar of water, and
sprinkles the red-hot clay with it. The places where the drops fall are
marked by black spots on the uniform reddish-brown surface. With a
sigh of relief, and with visible satisfaction, the woman rises to an
erect position; she is standing just in a line between me and the fire,
from which a cloud of smoke is just rising: I press the ball of my
camera, the shutter clicks—the apotheosis is achieved! Like a
priestess, representative of her inventive sex, the graceful woman
stands: at her feet the hearth-fire she has given us beside her the
invention she has devised for us, in the background the home she has
built for us.
At Newala, also, I have had the manufacture of pottery carried on
in my presence. Technically the process is better than that already
described, for here we find the beginnings of the potter’s wheel,
which does not seem to exist in the plains; at least I have seen
nothing of the sort. The artist, a frightfully stupid Makua woman, did
not make a depression in the ground to receive the pot she was about
to shape, but used instead a large potsherd. Otherwise, she went to
work in much the same way as Salim’s mother, except that she saved
herself the trouble of walking round and round her work by squatting
at her ease and letting the pot and potsherd rotate round her; this is
surely the first step towards a machine. But it does not follow that
the pot was improved by the process. It is true that it was beautifully
rounded and presented a very creditable appearance when finished,
but the numerous large and small vessels which I have seen, and, in
part, collected, in the “less advanced” districts, are no less so. We
moderns imagine that instruments of precision are necessary to
produce excellent results. Go to the prehistoric collections of our
museums and look at the pots, urns and bowls of our ancestors in the
dim ages of the past, and you will at once perceive your error.
MAKING LONGITUDINAL CUT IN
BARK
DRAWING THE BARK OFF THE LOG
REMOVING THE OUTER BARK

BEATING THE BARK
WORKING THE BARK-CLOTH AFTER BEATING, TO MAKE IT

SOFT
MANUFACTURE OF BARK-CLOTH AT NEWALA

To-day, nearly the whole population of German East Africa is
clothed in imported calico. This was not always the case; even now in
some parts of the north dressed skins are still the prevailing wear,
and in the north-western districts—east and north of Lake
Tanganyika—lies a zone where bark-cloth has not yet been
superseded. Probably not many generations have passed since such
bark fabrics and kilts of skins were the only clothing even in the
south. Even to-day, large quantities of this bright-red or drab
material are still to be found; but if we wish to see it, we must look in
the granaries and on the drying stages inside the native huts, where
it serves less ambitious uses as wrappings for those seeds and fruits
which require to be packed with special care. The salt produced at
Masasi, too, is packed for transport to a distance in large sheets of
bark-cloth. Wherever I found it in any degree possible, I studied the
process of making this cloth. The native requisitioned for the
purpose arrived, carrying a log between two and three yards long and
as thick as his thigh, and nothing else except a curiously-shaped
mallet and the usual long, sharp and pointed knife which all men and
boys wear in a belt at their backs without a sheath—horribile dictu!
[51]
Silently he squats down before me, and with two rapid cuts has
drawn a couple of circles round the log some two yards apart, and
slits the bark lengthwise between them with the point of his knife.
With evident care, he then scrapes off the outer rind all round the
log, so that in a quarter of an hour the inner red layer of the bark
shows up brightly-coloured between the two untouched ends. With
some trouble and much caution, he now loosens the bark at one end,
and opens the cylinder. He then stands up, takes hold of the free
edge with both hands, and turning it inside out, slowly but steadily
pulls it off in one piece. Now comes the troublesome work of
scraping all superfluous particles of outer bark from the outside of
the long, narrow piece of material, while the inner side is carefully
scrutinised for defective spots. At last it is ready for beating. Having
signalled to a friend, who immediately places a bowl of water beside
him, the artificer damps his sheet of bark all over, seizes his mallet,
lays one end of the stuff on the smoothest spot of the log, and
hammers away slowly but continuously. “Very simple!” I think to
myself. “Why, I could do that, too!”—but I am forced to change my
opinions a little later on; for the beating is quite an art, if the fabric is
not to be beaten to pieces. To prevent the breaking of the fibres, the
stuff is several times folded across, so as to interpose several
thicknesses between the mallet and the block. At last the required
state is reached, and the fundi seizes the sheet, still folded, by both
ends, and wrings it out, or calls an assistant to take one end while he
holds the other. The cloth produced in this way is not nearly so fine
and uniform in texture as the famous Uganda bark-cloth, but it is
quite soft, and, above all, cheap.
Now, too, I examine the mallet. My craftsman has been using the
simpler but better form of this implement, a conical block of some
hard wood, its base—the striking surface—being scored across and
across with more or less deeply-cut grooves, and the handle stuck
into a hole in the middle. The other and earlier form of mallet is
shaped in the same way, but the head is fastened by an ingenious
network of bark strips into the split bamboo serving as a handle. The
observation so often made, that ancient customs persist longest in
connection with religious ceremonies and in the life of children, here
finds confirmation. As we shall soon see, bark-cloth is still worn
during the unyago,[52] having been prepared with special solemn
ceremonies; and many a mother, if she has no other garment handy,
will still put her little one into a kilt of bark-cloth, which, after all,
looks better, besides being more in keeping with its African
surroundings, than the ridiculous bit of print from Ulaya.
MAKUA WOMEN

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Economics: Principles, Applications,

A01_OSUL9034_07_SE_FM.indd 29 1/13/16 10:16 PM

Elasticity and the Availability of Substitutes 78 Using Elasticities to Predict Changes in

The Price Effects of a Change in Supply 94

Predicting Changes in Quantity 81 * Summary 96 * Key Terms 97

Using Elasticity to Predict the Revenue Effects 5 Production Technology

Cross-Price Elasticity of Demand 87 Application 2 The Rising Marginal Cost

The Price Elasticity of Supply 89 Expansion and Replication 111

Short-Run versus Long-Run Average Cost 116

A01_OSUL9034_07_SE_FM.indd 7 07/12/15 11:34 am

Examples of Production Cost 117 Drawing the Long-Run Market Supply

Fixed Costs and Sunk Costs 133

A01_OSUL9034_07_SE_FM.indd 8 07/12/15 11:34 am

* Economic Experiment 164 Application 5 Low-Price Guarantee Increases

The Insecure Monopolist and Entry

The Effects of Market Entry 166 Examples: Aluminum and Campus

Application 1 Satellite versus Cable 169 Application 6 Microsoft as an Insecure

Trade-Offs with Entry and Monopolistic Application 7 Public versus Private

Average Cost and Variety 172 Application 8 Satellite Radio as a Natural

Oligopoly and Pricing 174 Blocking Mergers 194

A01_OSUL9034_07_SE_FM.indd 9 07/12/15 11:34 am

Regulating Business Practices 196 Other Types of Insurance 219

A Brief History of U.S. Antitrust Policy 197

* Economic Experiment 206 External Benefits and Public Goods 222

9 Imperfect Information, External Overcoming the Free-Rider Problem 223

Application 2 Regulation of the California Kiwifruit Traditional Regulation 232

A01_OSUL9034_07_SE_FM.indd 10 07/12/15 11:34 am

Marketable Pollution Permits 234 Why Do College Graduates Earn Higher

* Summary 237 * Key Terms 238 Recent Changes in the Distribution of

* Economic Experiment 245 Application 4 Trade-Offs From Immigration 263

Public Policy and the Distribution

Application 1 Marginal Revenue Product in Major 11 Measuring a Nation’s Production

Labor Market Equilibrium 255 The Components of GDP 277

The Gender Pay Gap 258

A01_OSUL9034_07_SE_FM.indd 11 07/12/15 11:34 am

A Closer Examination of Nominal and Real Inflation 307

How Is Unemployment Defined and Comparing the Growth Rates of Various

The Natural Rate of Unemployment 302 How Do Population Growth, Government,

A01_OSUL9034_07_SE_FM.indd 12 07/12/15 11:34 am

What Causes Technological Progress? 327 How the Multiplier Makes

New Growth Theory 330 Supply Shocks 350

Application 7 Lack of Property Rights Hinders 15 Fiscal Policy 356

The Fiscal Multiplier 358

Application 1 Increasing Life Expectancy and

Federal Revenues 363

Understanding Aggregate Demand 340 Automatic Stabilizers 365

A01_OSUL9034_07_SE_FM.indd 13 07/12/15 11:34 am

The Kennedy Administration 367 * Economic Experiment 391

The Vietnam War Era 368

The Reagan Administration 369 17 Monetary Policy and Inflation 393

What Is Money? 375 Application 2 Did Fed Policy Cause the

How Banks Create Money 379 Application 3 The Effectiveness of

A01_OSUL9034_07_SE_FM.indd 14 07/12/15 11:34 am

Outsourcing 415 Changes in Demand or Supply 422

Responses to Protectionist Policies 418 Exchange Rate Systems Today 428

Application 2 The Impact of Tariffs on the Application 3 A Troubled Euro 428

How Exchange Rates are Determined 420 Photo Credits 440

What Are Exchange Rates? 420 Index 441

A01_OSUL9034_07_SE_FM.indd 15 07/12/15 11:34 am

c ONE-SEMESTER BOOK c What’s New To This Edition

A01_OSUL9034_07_SE_FM.indd 17 07/12/15 11:34 am

c Applying The Concepts