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Contents
Guide to the text x
Guide to the online resources xii
Preface to the fifth edition xiv
Acknowledgements xvii
About the authors xix
Part 1 Introduction to economics

Chapter 1 Thinking like an economist 1
The problem of scarcity 3
Scarce resources and production 3
Economics: the study of scarcity and choice 5
The methodology of economics 7
Hazards of the economic way of thinking 9
Why do economists disagree? 11
Economics at work 16
Appendix to Chapter 1: applying graphs to economics 21

A direct relationship 21
An inverse relationship 22
The slope of a straight line 23
The slope of a curve 25
Introducing a third variable to the graph 25
A helpful study hint using graphs 27
Finally, a note on index numbers 27
Chapter 2 Production possibilities and opportunity cost 31

The three fundamental economic questions 32
Opportunity cost 32
Marginal analysis 34
The production possibilities frontier 35
The law of increasing opportunity costs 37
Shifting the production possibilities frontier 39
Present investment and future production possibilities frontier 42
Gains from trade 45
Chapter 3 Market demand and supply 53

The law of demand 54
The distinction between changes in quantity demanded and changes in demand 55
Non-price determinants of demand 58
The law of supply 62
The distinction between changes in quantity supplied and changes in supply 65
Non-price determinants of supply 66
A market supply and demand analysis 70
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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Contents vii
Chapter 4 Markets in action 81

Changes in market equilibrium 82
Can the laws of supply and demand be repealed? 85
Market failure 91
Part 2 Microeconomic fundamentals

Chapter 5 Elasticity of demand and supply 104
Price elasticity of demand 105
Price elasticity of demand variations along a straight-line demand curve 111
Determinants of price elasticity of demand 113
Other elasticity measures 115
Chapter 6 Production costs 130

Costs and profit 131
Short-run production costs 133
Short-run cost formulas 136
Marginal cost relationships 140
Long-run production costs 142
Different scales of production 145
Part 3 Market structures

Chapter 7 Perfect competition 157
Market structures 158
Perfect competition 159
The perfectly competitive firm as a price taker 161
Short-run profit maximisation for a perfectly competitive firm 162
Short-run loss minimisation for a perfectly competitive firm 166
Short-run supply curves under perfect competition 169
Long-run supply curves under perfect competition 173
Three types of long-run supply curves 175
Chapter 8 Monopoly 187

The monopoly market structure 188
Price and output decisions for a monopolist 192
Price discrimination 197
Comparing monopoly and perfect competition 199
The case against and for monopoly 202
Chapter 9 Monopolistic competition and oligopoly 210

The monopolistic competition market structure 211
The monopolistically competitive firm as a price maker 213
Price and output decisions for a monopolistically competitive firm 215
Comparing monopolistic competition and perfect competition 217
The oligopoly market structure 219
Price and output decisions for an oligopolist 221
An evaluation of oligopoly 228
Review of the four market structures 228
Chapter 10 Policy issues: housing affordability and climate change 234

Housing affordability 235
Climate change and carbon emissions 243
viii Contents
Part 4 Macroeconomic fundamentals

Chapter 11 Measuring the size of the economy 256
Gross domestic product 257
Further on measuring GDP 259
The expenditure approach 262
GDP shortcomings as a measure of economic welfare 268
Other national accounts 273
Relationship between community (national) saving and investment 275
Changing nominal GDP to real GDP 277
Chapter 12 Business cycles and economic growth 286

The business cycle roller-coaster 287
Total spending and the business cycle 296
Economic growth in the longer term 297
Endogenous growth model 302
The goals of macroeconomic policy 304
World economic growth and the 2014 G20 World Leaders Brisbane Summit 306
Chapter 13 Inflation and unemployment 312

Meaning and measurement of inflation 313
Consequences of inflation 318
Demand-pull and cost-push inflation 323
Inflation in other countries 323
Unemployment 326
Unemployment in other countries 328
Criticism of the unemployment rate 331
Types of unemployment 331
The goal of full employment 334
Non-monetary and demographic consequences of unemployment 336
Inflation and unemployment – is there a relationship? 338
Part 5 Macroeconomic theory and policy

Chapter 14 A simple model of the macro economy 344
Introducing the Keynesian revolution 346
Economic determinants of the four key expenditure components of aggregate demand 347
The aggregate demand–output model 351
The aggregate demand–aggregate supply model 354
The aggregate demand curve 354
Reasons for the aggregate demand curve’s shape 355
Non-price-level determinants of aggregate demand 357
The aggregate supply curve 359
Three ranges of the aggregate supply curve 363
Changes in the AD–AS macroeconomic equilibrium 366
Equilibrium shifts arising from aggregate supply shifts 369
Cost-push and demand-pull inflation revisited 372
Chapter 15 The monetary and financial system 381

What makes money ‘money’? 382
Other desirable properties of money 385
What stands behind our money? 387
Contents ix
The demand for money 388

Four money-supply definitions 389
Interest rate determination 391
Interest rates, aggregate demand, the central bank and monetary policy 393
A modern financial system 395
Chapter 16 Macroeconomic policy I: monetary policy 412

The goal of monetary policy 413
The monetary policy transmission mechanism 414
How monetary policy affects prices, output and employment 416
Modern monetary policy implementation: the case of Australia 419
An alternative view of the monetary policy transmission mechanism 422
Monetarism and the monetary policy transmission mechanism 425
A case study in monetary targeting: Australia, 1976–85 426
The appropriate role for monetary policy: the rules versus discretion debate 429
Chapter 17 Macroeconomic policy II: fiscal policy 442

Discretionary fiscal policy 443
The balanced budget multiplier 449
Automatic stabilisers 450
Supply-side fiscal policy 452
The federal budget 455
The macroeconomic significance of the budget 458
Implications of the budget outcome for government debt levels 462
The European sovereign debt – and banking – crisis 466
Part 6 Further aspects of international economics

Chapter 18 International trade and finance 474
Why nations benefit from trade 475
Comparative and absolute advantage 479
Free trade, fair trade and protectionism 482
Fair trade, the ‘Fair Trade Movement’ and strategic trade 485
The political economy of reducing barriers to trade 489
Some common (but specious) arguments for protection 489
Free trade (or preferential trade) agreements 492
The balance of payments 494
How is a country’s exchange rate determined? 502
Glossary 517
Index 527
x
Guide to the text

As you read this text you will find a number of features in
every chapter to enhance your study of economics and help you
understand how the theory is applied in the real world.
Chapter features
YOU’RE
Learning outcomes give you a You’re the economist provides THE
clear sense of what topics each opportunities to consider ECONOMIST
chapter will cover and what hypothetical situations, giving
you should be able to do after you an opportunity to apply what
reading the chapter. you have just learnt. Answers
are provided at the end of the
chapter.
Production possibilities and
opportunity cost
02 64 PART 1 / Introduction to economics
YOU’RE Do enrolments in different university courses reflect the law

THE
ECONOMIST of supply?
At the height of the bubble that preceded the been playing by the ‘rules of the game’. Reduced
GFEC there was strong demand for finance job prospects and salary cuts, along with ethical
professionals. Finance jobs were held in issues, have led to a decline in enrolments in
high regard, they were plentiful and rewards finance courses around the world – including
were high. Consequently, enrolments in courses at Australian universities. A similar
finance courses boomed around the world. phenomenon has been observed in the past
Unfortunately for those in the industry, the with enrolments in geology and earth science
onset of the GFEC brought with it a revised courses – when there is a mineral commodities
view about the benefits of employment boom and high salaries are paid in the industry,
in the finance sector. Not only were many enrolments surge; when the boom is over,
As you learned in the previous chapter, economics is all about exercising
professionals who were working in this sector they drop dramatically. Can the law of supply
choice. In this chapter you will learn more about how individual consumers, shown the door but salaries fell and there was help explain these patterns of enrolments in
firms and governments make consumption, production and expenditure also a sense that the industry itself had not university courses?
choices. This chapter begins by examining the three basic economic
questions faced by society: What, How and For whom? Next, you will learn
that the process of answering these basic questions introduces two other Market supply
key building blocks in the economic way of thinking – opportunity cost To construct a market supply curve, we follow the same procedure used to derive a
and marginal analysis. Once you understand these important concepts, it market demand curve; that is, we horizontally sum all the quantities supplied at various
will be easier to interpret our first formal economic model, the production prices that may prevail in the market.
possibilities frontier. This model illustrates how economists use graphs as a Let’s assume RU-Game Company and RSI Company are the only two firms selling
powerful tool to supplement words and develop an understanding of basic electronic games in a given market. You can see in Exhibit 3.7 that the market supply
economic principles. You will discover that the production possibilities model curve Stotal slopes upward to the right. At a price of $50, RU-Game would supply 25 000
explains many of the most important concepts in economics, including games per year, and RSI would supply 35 000 games per year. Thus, summing the two
scarcity, the law of increasing opportunity costs, efficiency, investment and
GLOBAL
economic growth. For example, the chapter includes a section dealing with EXHIBIT 3.7 The market supply curve for electronic games
334 thePART
vexed4question
/ Macroeconomic fundamentals
of whether the increased capacity for national output
RU-Game supply curve + RSI supply curve = Market supply curve
that is brought about by immigration is a good thing.
Explore the effect of the

In this chapter, you will examine these economics questions: 50 50 50
Price per game
FINANCIAL
40 40 40
(dollars)
S1 S2
• Why do some people choose to take 30 30 30
Stotal
jobs in the mining industrywas

recession rather
over, it seemed to take a long time for enough jobs to be generated to 20 20 20
than go to university?
Global financial and economic

10 10 10
get the unemployment rate back down again. For example, in the 1990s recession
AND
• What are someitoftook
the effects of the
less than two years for the unemployment rate to rise from under 6 per cent 0 15 25 0 25 35 0 40 60
ageing of the Australian workforce? Quantity of games Quantity of games Quantity of games
to over 11 per cent, but then it took eight years to get it back down to anything (thousands per year) (thousands per year) (thousands per year)
• Why are investment
like 6and
pereconomic
cent.
crisis on the macroeconomic ECONOMICS

growth so important? The market supply schedule for electronic games
To smooth out these swings in unemployment, a focus of macroeconomic policy is
• Why have politicians in Australia
to moderate cyclical unemployment. Quantity supplied (thousands per year)
been taking a second look at
The goal of full employment environment. CRISIS

population growth? Price per game RU-Game + RSI = Total supply
$50 25 35 60
• What are some of the costs of
introducing a policy of subsidising 40 20 30 50
Full employment In this section we
household solar panels?
take a closer look at the meaning of full employment. Because
xxx
30 15 25 40
The situation in which an seasonal, frictional and structural unemployment are present in good and bad times, full
economy operates at an 20 10 20 30
unemployment rate equal employment does not mean ‘zero per cent unemployment’. 10 5 15 20
to the sum of the seasonal, Full employment is the situation in which an economy operates at an unemployment
frictional and structural
BK-CLA-LAYTON_5E-150111-Chp02.indd 31 16/06/15 7:27 PM
unemployment rates. rate equal to the sum of the seasonal, frictional and structural unemployment rates. RU-Game and RSI are two individual businesses selling games. If these are the only two firms in the games market, the market supply
curve Stotal can be derived by summing horizontally the individual supply curves S1 and S2.
Full employment therefore is that rate of unemployment that involves zero cyclical 272 PART 4 / Macroeconomic fundamentals
unemployment.
full employment Unfortunately, economists cannot state with certainty what percentage of the CHAPTER 18 / International trade and finance 493
labour force is seasonally, frictionally and structurally unemployed at any point in BK-CLA-LAYTON_5E-150111-Chp03.indd 64 16/06/15 7:35 PM
time. In practice, therefore, the full employment rate of unemployment – sometimes GLOBAL
FINANCIAL The impact of the crisis on the GDP of the world’s major
ANALYSE
referred to as the ‘natural rate of unemployment’ or the ‘non-accelerating inflation rate AND economies
of unemployment’ (NAIRU) – is not only difficult to measure but also quite clearly ECONOMIC The US economy officially reached its business oil price shock). This in turn precipitated
members,
CRISISthereby creating, by the 1990s, a single European member-state economy
Analyse the issue topics present

changes over time. cycle peak in December 2007. The US many other smaller dependent economies
THE ISSUE
somewhat comparable in size to thealso
sharemarket USreached
economy. its peak in October around the world to also go into recession.
In Australia in the 1960s, 2 per cent unemployment was generally considered to
The ABS has a wealth In addition, a new currency, theDuring
of that year. euro,2008,hasglobal
nowfinancial
replaced theFortunately,
individual currencies
for reasons ofbea more
which will
of information relating represent full employment. During the 1970s it seemed to rise to around 4 per cent, problems became increasingly evident and fully explained in Chapters 16, 17 and 18,
to changing patterns 19-country subset of the EU countries (originally there were 11 countries). For example,
in the 1980s and 1990s it was probably around 6 to 7 per cent, and in the 2000s up to the world’s other major share markets began the world managed to avert a repeat of a
a brief case study so that you

of unemployment. German marks, French francs to recede and
fromItalian
previous lire
peaks.–Byalong
Septemberwith the individual
1930s-style currencies
full-scale of
Great Depression.
For example, go to 2014 (the time of writing this text) it had probably dropped back down to somewhere
the other founding member 2008 countries – were
all of the world’s all progressively
major share markets taken
For now,out of circulation
consider Exhibit 11.5 where
www.abs.gov.au and between 4.5 and 5 per cent. were tumbling. movements in the calendar years 2006, 2007,
select <Australian from 1 January 2002. The 19Aneuro-currency countries, accounting for around 320 million
Several reasons are given for why the full-employment rate of unemployment is not explanation of the catalyst for 2008 and 2009 GDP for Germany, Japan,
can apply the ideas explained in

Social Trends>, then people, now all have the same currency and areofall subject to the
theUKsame
the financial crisis and details how it and themonetary
US are providedpolicyin index
<WORK>, then <Work fixed.
– National Summary>. controlled by the European Central Bank (the ECB).
spectacularly unfolded during 2008 are number form (with base = 100 in 2006 for
One reason may be that, during the period between the early 1960s and the early provided in Chapter 15. For now, however, each country). Using these data, the impact
In 1993, the United States entered into an FTA with Canada and Mexico called the
1980s, the participation of women in the labour force increased significantly. This suffice it to note that, with the tumbling of the global financial and economic crisis Read more about
North American Free Trade shareAgreement (NAFTA).
markets, plummeting Under
business and NAFTA, (GFEC)effective
of 2008–09 on 1 January
is absolutely stark! The NAFTA at www.
each chapter.
change in the labour force composition is thought to have increased the full-employment en.wikipedia.org/
1994, tariffs and other impediments to trade among
consumer confidence, and severethe three nations
world were to
GDP growth beforprogressively
rates these countries between
rate of unemployment because women typically experience higher unemployment rates 2006 and 2007 were 3.3, 2.2, 3.4 and 1.8 per wiki/Nafta. Similarly,
phased out over 15 years. Inliquidity
late 2014,problems resulting from ailing
the United States had 14 FTAs covering 20 countries, more information
than men. financial institutions and evaporating cent respectively. Extrapolating these growth
including one with Australia, and quite
confidence a number
in them, of others
the crisis which beganunderrates discussion.
for the following two years would havecan also be obtained
Another frequently cited, but not completely uncontroversial, explanation for the rise on the FTAs which
Analogously, South American
as a financial nations also
one quickly have entered
transformed into into seena the
limited
economiesFTA known Japan,
of Germany, as theAustralia has from
in the full-employment rate of unemployment since the 1960s is that relatively larger an economic one. Many countries around United Kingdom and the United States grow
Mercosur since 1991. Japan entered into its first FTA – withby Singapore – in 2002, and the DFAT website
unemployment benefits, welfare and the interaction of the tax and welfare systems have the world went into recession during 2008 6.7, 4.4, 6.9 and 3.6 per cent respectively (www.dfat.gov.au/
now has 11 registered agreements,
and 2009. including one with ASEANfrom and, 2007astoof2009.
2014, onedue
However, withto the GFEC,
fta/index.html).
operated to make unemployment less painful and employment a relatively less attractive
Australia. China also now has a number
In fact, in only theofsecond
FTAs, mostly
occasion sincewith the other Asianofcountries,
economies these countries but
actually Information on the
option than in the 1950s and 1960s. the Second World War, all four of the world’s shrank by 4.2, 6.6, 5.9 and 3 per cent from 2007 Asia Pacific Economic
also with a few outside ofmajorAsia, including one with New Zealand, and as of November
20th-century powerhouse economies – to 2009. These are very significant contractions Cooperation (APEC)
2014, as mentioned above, thewith
US, theAustralia.
UK, Japan and InGermany
addition to China,
– entered and itAustralia
is no wonderand thatASEAN,
unemployment in forum can be found
at
thewww.dfat.gov.au/
ANALYSE New Zealand also has agreements with Thailand and Singapore. Singapore probably
into a period of simultaneous business cycle these countries – and many others around
recessions (business cycles are discussed in world – increased dramatically (see Chapterapec/
THE ISSUE Are machines and robots taking our jobs? holds the world record with 21 registered
12), and did soFTAs
within a(both bilateral13and regional)
details). covering 32
e
Chapter six-month for more
Economics and ethics (e&e)

Consider that, throughout last century, mechanical and electronic devices can of its trading partners as ofperiod
lateduring
2014. the calendar year 2008 (the In each of the subsequent chapters in
The Asia-Pacific Economiconly previous post-war occasion
Cooperation groupwas(APEC)
the this book
was formed we willinbe1994
revisiting
bythetheGFEC in
the music industry was incrementally reasonably well mimic a broad range of
e&
synchronised international recession of the various ways germane to the content of each
impacted by the increased use of machines instrumental sounds. This has meant the leaders of 18 Asian nations early(Australia is included
1970s that resulted in APEC).
from the first world This organisation is based
chapter.
boxes highlight key ethical

for making music. This has inexorably demand for live musicians to produce any on a non-binding agreement to reduce trade barriers over time among member nations.
Applicable concept: introduced greater uncertainty as far as given quantum of musical output wanted Critics of bilateral and/or regional
EXHIBIT 11.5 FTAs
GDP indexfearnumbers
they may largely result
for Germany, Japan, the in UK
trade anddiversion
the US, 2006–09
types of unemployment employment in the industry is concerned. by society is very considerably less than
rather than net trade creation, and that they will make global, multilateral agreements
Today, in the early part of the 21st century, was the case 30 to 35 years ago. Country
increasingly difficult to achieve in the future.2006 They therefore 2007
fear that, over 2008
time, trading 2009
considerations throughout
blocs may emerge that willGermany 100.0 103.3 104.4 99.0
erect new trade barriers across blocs, thereby creating
‘Fortress North America’, ‘Fortress Europe’, ‘Fortress Asia’ and similar impediments 95.5
Japan 100.0 102.2 101.1
to
UK 100.0 103.4 102.6 97.3
the worldwide reduction of trade barriers.
the text.
US 100.0 101.8 101.5 98.7
BK-CLA-LAYTON_5E-150111-Chp13.indd 334 6/19/15 7:15 PM It is certainly true that as FTAs proliferate, these may increasingly act as a barrier
to trade for those countries Base =not
100 in included and, ceteris paribus, this may have quite
2006 for each country
a deleterious impact on the international trade and economic growth of such non-
Source: OECD, from OECD.StatExtracts, http://stats.oecd.org/Index.aspx?DatasetCode=SNA_TABLE1#
accessed on 15 October 2014.
participants. Some believe the name itself – free trade agreement – is a misnomer, and
that a more accurate name would be preferential trade agreement (PTA), since such
agreements only free up trade between the parties to the agreement but other excluded
countries can be significantly negatively affected.
Economics and ethics

e
e&
Despite the incredible income and wealth available in developed countries at the start of the
21st century, very significant poverty continues to exist in quite a large number of less-developed,
Third World countries, particularly in Africa. This poverty continues to plague generation after
generation in such countries, with the result that the quality of life is extremely poor, child
mortality is shamefully high and life expectancy is low.
Each year, the developed countries of the world dutifully contribute aid to such countries –
usually around 1 per cent or so of their annual GDP. However, the aid never seems to permanently
416 PART 5 / Macroeconomic theory and policy
CHAPTER 13 / Inflation and unemployment 325 xi

First, individuals and businesses develop an inflation psychosis, which causes them
money supply increasing from $20 billion60 to $30 billion.
PART The impacttoofeconomics
1 / Introduction the central bank’s
to buy quickly today in order to avoid paying even more tomorrow. expansionary monetary policy is to create $10 billion surplus liquidity in the financial
GLOBAL
Second, huge unanticipated inflation jeopardises debtor–lender contracts, such
system at the prevailing 6 per cent interest rate.
Explore global influences on Throughout each chapter, internet
as credit cards, home mortgages, life-insurance policies, pensions, bonds and other
forms of savings.
How will people react to this additional and excess liquidity in their possession? Money
PERSPECTIVE
Third, hyperinflation sets a vicious wage–price spiral in motion. A wage–price spiral Wage–price spiral
can certainly occur in quite normal economic circumstances but it is deadly in times A situation that occurs when
becomes like a ‘hot potato’ and people seek to buy interest-bearing bonds.3toThe rushrapidly
to in the first few years after graduation. On this b
economics with the Global links will help direct you to use the their incomes grow
increases in nominal wage
of hyperinflation. It occurs as a result of increases in nominal wage rates being very
rapidly passed on in higher prices, which in turn result in even higher nominal wage
rates are passed on in higher
prices, which in turn result purchase bonds drives their prices higher and their yield – i.e. the
theyinterest rate to
are likely – falls.
commitAs the
to substantial levels of borrowing to finance the purcha
in even higher nominal wage
rates and prices, and so on.
interest rate falls, people are willing to hold larger money balances – or, stated differently,
perspective boxes. These present web for future research.
rates and prices.
Fourth, in order to hedge against the high losses of purchasing power from a home, a motor car or overseas travel. Another example is a change in the wea
hyperinflation, people invest in non-productive things like gold, silver, stamps, jewels, art, there is an increase in the quantity of money demanded until the new
which can equilibrium at E2
directly or indirectly cause expectations to shift the demand curve for s
antiques and other currencies, rather than new factories, machinery and technological
is reached. At the lower interest rate of 4 per cent, the opportunity cost Suppose
of holdinga money
ways in which international products. hailstorm destroys a substantial portion of the stone fruit c
research which expand an economy’s production possibilities frontier.
History reveals numerous hyperinflation examples. One of the most famous
occurred during the 1920s. Faced with huge First World War reparations, the German Read more about some
is also lower and the imbalance between money demand andConsumers money supply disappears.
reason that the reduction in available supply will soon drive up prices
interesting episodes of
phenomena affect the chapter topicContractionary monetary policy –they

government simply printed money to pay its bills. By late 1923, the inflation rate in
rush to buy before it is too late. This change in expectations causes the dem hyperinflation around
forincreasing
Germany had reached 35 000 per cent per month, with prices rising many times daily. the world at www.sjsu.
edu/faculty/watkins/
stone fruit to increase.
The German currency became so worthless that people used it as kindling for stoves. No hyper.htm
interest rates by decreasing the money supply

one was willing to make new loans, credit markets collapsed, wealth was redistributed,
and people’s lifetime savings were wiped out.
When the inflation rate is 116 000%, prices change by the hour GLOBAL
PERSPECTIVE
Prices of related goods
Exhibit 16.1(b) illustrates how the central bank can put upward pressure on the interest
A 1985 Wall Street Journal article describes
hyperinflation in La Paz, Bolivia:
The Russian government is likely to try
to solve the country’s economic impasse rate with contractionary monetary policy. Beginning at point
Visit GlobalPetrolPrices. Possibly
E1, thethe most market
money confusing is non-price factor is the influence of other prices on
by printing money and thus cause
A courier stumbles into Banco Boliviano
Americano with a large sack containing 32
hyperinflation. If this happens, Russia’s
inflation rate will reach 450% to 500%
in equilibrium at an interest rate of 4com peratcent.
www. This time the demand
central forbank
a particular
shrinks the good or service. The term non-price seems to forbid any
globalpetrolprices.
million pesos. At that moment the 32 million
pesos – enough bills to stuff a mail sack –
this year, Gaidar, former Prime Minister,
said. Even if the government rejects such Applicable concept: liquidity available to the financial system, depicted in the exhibit
com/gasoline_prices/.
in demand by the resulting
money from supplya change in the price of any product. This confusion e
hyperinflation
the initial when one fails to distinguish
rate of between changes in quantity demanded and cha
were worth only $500. Life’s like that with measures, consumer prices will rise by 250%
quadruple-digit inflation… to 300% this year.3 decreasing from $30 billion to $20 billion. Look at recentAt prices equilibrium interest
for the United States,
a shortage ofin$10 billion.Remember that ceteris paribus holds all prices of other goods cons
demand.
In 1984, prices zoomed 2700 per cent,
compared with a mere 329 per cent the 4 per cent, this decrease in the liquidity South causes
Korea, Germany
year before! Experts predict the inflation
rate could soar as high as 40 000 per cent. Individuals, financial institutions and and thebusinesses Therefore, movement
UK. Do these wish to hold a higher quantity along
of a demand curve occurs solely in response to chang
highly liquid money than is available, help andexplain why US the wish
pricethe of apublic
product or to
service; that is, its ‘own’ price. When we draw the dem
The 1000-peso bill, the most commonly
used, costs more to print than it purchases. It
citizenstogenerally
seek to satisfy this
drive move
buys one bag of tea. To purchase an average-
size television set with 1000-peso bills,
customers have to haul money weighing
sell their bonds for cash. This selling bigger, pressureheavierlowers
and bondcurve
prices,forcausing
an Optus mobile plan, for example, we assume that the prices of a Te
the implied
more than 68 pounds into the showroom.
To ease the strain, the government came out rate of interest to rise. At point E2, themore powerful cars
upward pressure
than their counterparts
on mobile
the planrate
interest andstops.
otherOnce similar plans remain unchanged. What happens if we rela
with a new 100 000-peso note, worth $1.1
A 1993 Charlotte Observer article reported a
the equilibrium interest rate reaches in6South cent, the $20 ceteris
per Korea, billion paribus
availableassumption
liquidity inand the Telstra price rises? Many Telstra buyers switc
rate of inflation in the billions for Belgrade: supply in the financial system is willingly Germany
held.or the UK? an Optus plan and the demand curve for the Optus plans shifts rightward (an incr
The number on Wednesday was
286 125 293 792. It was not the day’s winning
lottery figures nor the number of miles to
Now let’s go through in some detail and represent graphically in demand).
how these An Optus
changesmobile
in plan and a Telstra mobile plan are one type of re
the Hubble space telescope. It was the latest
calculation of Yugoslavia’s nearly incalculable interest rates flow on into changes inSubstitute aggregate gooddemand. goods, called substitute goods (or in this case, services). A substitute good comp
A good that competes with
inflation rate…To cover the costs of war and
pay off the unemployed, the government has
another good for consumer
with another good for consumer purchases. As a result, there is a direct relation
How monetary policy affects prices, output

resorted to indiscriminately printing money.
That has rendered the national currency, the
dinar, practically worthless.2
purchases. As a result, between a price change for one good and the demand for its ‘competitor’ good. O
there is a direct relationship examples of substitutes include chocolates or flowers, new cars and second-hand
xxx
A 1998 Dow Jones Newswire story
and employment
reported: between a price change for
one good and the demand and movies or the theatre.
for its ‘competitor’ good. Game consoles and games illustrate a second type of related goods, c
The next step in our journey is to understand how
Complementary good changes in monetary policygoods
complementary impact . Aoncomplementary good is jointly consumed with ano
the macro economy. Exhibit 16.2 illustrates A good thatthe causation chain
is jointly good.linking monetary
As a result, policy
there is an inverse relationship between a price change for
and economic performance. As mentioned consumed with anotherthis is referred to as the monetary
earlier,
good. As a result, there is an good and the demand for its complementary good. Although in many insta
policy transmission mechanism, andinverse in what follows
relationship below buying
between we elaborate
a game further on theand buying an electronic game are seen as sepa
console
In summary boxes break

details of this mechanism. a price change for one good decisions, these two purchases are often related. The more game consoles bo
and the demand for its
up the learning by IN SUMMARY

‘complementary’ good.
Changes in the supply of money available to the financial system affect interest
rates affect investment and interest-sensitive consumption spending, aggregate
game rates. In turn, interest
consoles
demand
IN SUMMARY
by consumers, the greater is the demand for games. What happens if the pric
falls sharply from, say, $250 to $50? The market demand c
and, finally, real (an increase in demand) because new owners of g
for games shifts rightward
GDP, employment and prices.
summarising sections consoles add their individual demand curves to those of persons already ow
game consoles and buying games. Similarly, if the price of games were to fall, m
of the text The impact of monetary policy using the people would consider purchasing a console. The fall in the price of games
AD–AS model results in an increase in demand for game consoles involving a shift to the rig
the demand curve for consoles.
So far we have sketched out how monetary policy can affect the level of
Exhibit 3.5interest rates the relationship between changes in the non-
summarises
prevailing in the economy. How do changes in the rate determinants of interest affect aggregate
of demand and the demand curve, accompanied by examples for each
of non-price factor change.
3 Again, we remind the reader that the use of the word ‘bonds’ refers to all those financial assets which are income Of course, what has been said about goods in this se
End-of-chapter features
producing but are less liquid than ‘money’. applies equally to services.
At the end of each chapter you’ll find several tools to help you to review, BK-CLA-LAYTON_5E-150111-Chp16.indd 416 6/19/15 8:20 PM
practise and extend your knowledge of the key learning outcomes.

BK-CLA-LAYTON_5E-150111-Chp03.indd 60
Key concepts End-of-chapter activities

340 PART 4 / Macroeconomic fundamentals CHAPTER 13 / Inflation and unemployment 341
KEY CONCEPTS • Full employment occurs when the unemployment rate is equal to the total of the seasonal,
from the chapter give you the opportunity

Inflation Hyperinflation frictional and structural unemployment rates. The actual rate can change through time and
Deflation Wage–price spiral is considered to be at least partially a function of a community’s labour-market institutional
Disinflation Unemployment rate arrangements. If it increases (decreases) with increases (decreases) in the actual measured
Consumer price index (CPI) Civilian labour force unemployment rate, this is known as hysteresis.
Base year Discouraged worker
to test your knowledge and

Wealth Underemployment STUDY QUESTIONS AND PROBLEMS
Nominal (or money) income Seasonal unemployment
Real income Frictional unemployment 1 Consider this statement: ‘When the average level of prices of goods and services rises, the inflation
Nominal interest rate Structural unemployment rate rises’. Do you agree or disagree? Explain.
Real interest rate Cyclical unemployment 2 Compare and contrast ‘disinflation’ and ‘deflation’.
Demand-pull inflation Full employment 3 Suppose your annual income in 2018 is $125 000. Assuming the base year for the CPI is 2011,
consolidate your learning

Cost-push inflation Hysteresis calculate your real 2018 income measured in 2011 dollars, assuming the CPI is 130 in 2018.
4 Why do some people ‘lose’ from inflation and others win?
5 Explain this statement: ‘If everyone expects inflation to occur, it will!’
SUMMARY 6 Explain why quality changes are a problem for measuring the rate of inflation.
7 Explain the ‘substitution bias effect’ criticism of the CPI.
• Inflation is an increase in the general (average) price level of goods and services in the economy. 8 What is ‘demand-pull’ inflation and how does it differ from ‘cost-push’ inflation?
• The consumer price index (CPI) is the most widely known price-level index. It measures the cost 9 When the economy approaches full employment, why does demand-pull inflation become a
of purchasing a market basket of goods and services by a typical household during a time period problem?
relative to the cost of the same bundle during a base year. The annual rate of inflation is the 10 Suppose the annual nominal rate of interest on a bank fixed-term deposit is 8 per cent. What
percentage change in the CPI from one year to the next. would be the real rate of interest over the term of the deposit if the inflation rate turned out to
• Deflation is a decrease in the general level of prices. be 10 per cent?
Chapter summary
• Disinflation is a reduction in the inflation rate. This does not mean that prices are falling, but 11 Describe the relevant criteria that government statisticians use to determine whether a person is
only that the inflation rate falls (for example, from, say, +5 per cent to +3 per cent). ‘unemployed’.
• The CPI is criticised because (1) it is not representative, (2) it insufficiently adjusts for quality 12 Describe two ways in which the official unemployment rate has been criticised for
changes, and (3) it ignores the relationship between items’ price changes and their relative underestimating unemployment?
importance in the market basket. 13 Which gender do you think might experience higher underemployment and why?
• Nominal income is income measured in actual money amounts. Measuring your purchasing 14 If, over two periods, the unemployment rate had reduced from 6.5 per cent to 5.5 per cent and
highlights the important

power requires converting nominal income into real income, which is nominal income adjusted the measured labour underutilisation rate had reduced from 14 per cent to 12 per cent, has the
Answers to You’re the economist

for inflation (percentage change in real income = percentage change in nominal income – CPI underemployment rate increased or decreased and by what percentage?
inflation rate). 15 Is structural unemployment something macroeconomic policymakers should be concerned
• The real interest rate is the nominal interest rate adjusted for inflation (the real interest rate = about? How does it differ from cyclical unemployment?
nominal interest rate – the inflation rate). 16 Why is frictional unemployment inevitable in an economy characterised by imperfect job
• Demand-pull inflation is caused by pressure on prices originating from the buyers’ side of the information and non-zero job-search time?
concepts covered and

market. On the other hand, cost-push inflation is caused by pressure on prices originating from 17 What is the relationship of frictional, structural, seasonal and cyclical unemployment to the full-
assist you to check your work

the sellers’ side of the market. employment rate of unemployment (alternatively known as the natural rate of unemployment)?
• Hyperinflation can seriously disrupt an economy by causing inflation psychosis, credit market 18 Do you agree that one goal of macroeconomics should be to reduce the measured
collapses, a wage–price spiral and speculation. A wage–price spiral occurs when increases in unemployment rate to zero? Why or why not?
nominal wages cause higher prices and, in turn, higher wages and prices, and so on.
• The unemployment rate is the ratio of the number of unemployed to the number in the labour
ANSWERS TO ‘YOU'RE THE ECONOMIST’
links back to the learning

force multiplied by 100. The nation’s labour force consists of people who are employed plus
those who are out of work but seeking employment. Interpretation of a CPI number
• Discouraged workers are persons who want to work but have given up looking for work. Critics
say that the existence of discouraged workers means the unemployment rate is understated. If you said the average level of consumer prices – as measured by the CPI – in 2008–09 was 92.6 per
• Underemployment is another reason why some argue the measured unemployment rate cent of that of 2011–12, or, that the average level of consumer prices in 2008–09 was 7.4 per cent
understates the degree of labour unemployment in the economy. It is defined as those employed below that of 2011–12, then YOU ARE CORRECT.
outcomes
who would nonetheless like to work more hours if they could, expressed as a percentage of the
The university education price index
labour force.
• Seasonal, frictional, structural and cyclical unemployment are different types of If you said the price of Lilly-Anne’s university education increased 8.26 per cent in 2015, YOU ARE
unemployment. Seasonal unemployment is unemployment due to seasonal changes. Frictional CORRECT.
unemployment results when workers are seeking new jobs that exist, but imperfect information
prevents matching of the applicants with the available jobs. Structural unemployment is
What kind of unemployment did the invention of the wheel cause?
unemployment caused by the changing structural features of an economy. Such structural The invention of the wheel represented a new technology for people in ancient times. Many workers
changes include changing job skill needs in the economy, changes in product demand and who transported goods lost their jobs, even in the primitive era, to the more efficient cart with
technological change. Cyclical unemployment is unemployment resulting from recessions. wheels. If you said the invention of the wheel caused structural unemployment, YOU ARE CORRECT.
BK-CLA-LAYTON_5E-150111-Chp13.indd 340 6/19/15 7:15 PM BK-CLA-LAYTON_5E-150111-Chp13.indd 341 6/19/15 7:15 PM
342 PART 4 / Macroeconomic fundamentals CHAPTER 13 / Inflation and unemployment 343
MULTIPLE-CHOICE QUESTIONS 12 The seasonal unemployed are those 16 Structural unemployment is caused by
people who a the impact of the business cycle on job
Multiple-choice Online study tools

1 Inflation is 7 Disinflation is a always quit their jobs at Christmas time opportunities.
a another way to describe a growing a a decrease in a price. owing to the oppressive heat. b temporary layoffs due to long periods of
economy. b a situation of improperly measured inflation. b lose their jobs at regular times of the bad weather in the construction industry.
b an increase in the general price level. c a decrease in the general price level. year because the work they do occurs at c shifts in the economy that make certain
c always a result of high economic growth. d a decrease in the inflation rate. certain times of the year and not at other job skills obsolete.
d an increase in prices relative to wages. 8 Suppose a typical car tyre cost $50 in 2005 times. d workers finding a job in a different sector
questions
2 As shown in Exhibit 13.12, the calculated rate and had a useful life of 40 000 km. In 2015,
help you extend your

c find it difficult to find work because, of the economy after a short period of
of inflation for Year 3 is closest to let’s suppose the typical car tyre cost $75 for medical reasons, they can’t work in unemployment.
a 10 per cent. and had a useful life of 50 000 km. Which different climates. 17 Which of the following statements is not
b 5 per cent. statement do you think is most correct? d are thrown out of work when people’s true?
c 4.8 per cent. a It’s not possible to estimate ‘tyre inflation’ tastes for a particular food changes. a Full employment exists in an economy
d 1.048 per cent. between the two years due to the 13 ‘Full employment’ is defined as a situation when the unemployment rate equals the
difference in expected useful life.
understanding of the
when sum of seasonal, frictional and cyclical
EXHIBIT 13.12 Consumer price index b The best measure of tyre inflation is to a both structural and cyclical unemployment rates.
ignore the change in expected useful life unemployment are zero. b By definition, full employment is not
Year Consumer price index
and estimate it as 50 per cent. b cyclical unemployment is zero. defined as when unemployment is zero.
1 100
c An approximate ‘quality-adjusted’ rate of c all people who want jobs have them. c The economic problem typically
2 105
tyre inflation would be 25 per cent. d all of the above. associated with a recession is rising
3 110
d Whilst some adjustment might be possible 14 Frictional unemployment applies to unemployment.
key points through

4 115
for the longer expected life, when quality a workers with skills not required for d When GDP is falling, unemployment is
5 120 changes occur, it’s best not to try to calculate existing jobs. typically rising.
an inflation measure in such a situation. b unemployment related to the ups and 18 If, over two periods, the unemployment rate
3 As shown in Exhibit 13.12, the actual 9 If inflation is running at 4 per cent and a downs of the business cycle. had reduced from 6.5 per cent to 5.5 per
measured rate of inflation from Year 2 to borrower agrees to pay 6.5 per cent interest c short periods of unemployment needed cent and the measured underemployment
Year 5 is nearest to per annum, the ‘real’ interest rate the to match jobs and job seekers. rate had increased from 7.5 per cent to
wider research using

a 20 per cent. borrower is paying is approximately d people who lose their jobs due to a poor 8.2 per cent, the change to the labour
b 12 per cent. a –2.5 per cent. relationship with their boss. underutilisation rate would have been
c 14 per cent. b 2.5 per cent. 15 Unemployment due to a recession is a an increase of 0.7 per cent
d 15 per cent. c 1.6 per cent. a frictional unemployment. b an increase of 0.3 per cent
4 If the CPI in 2015 was 200, and 208 in 2016, d 10.5 per cent. b recessionary unemployment. c a decrease of 0.3 per cent
the annual rate of inflation was 10 Last year the Carter family earned $50 000. c structural unemployment. d a decrease of 0.7 per cent.
CourseMate and
a 0.04 per cent. This year their income is $55 000. In an d cyclical unemployment.
b 8 per cent. economy with an inflation rate of 8 per cent,
c 4 per cent. which of the following is correct?
d 1.04 per cent. a The Carters’ nominal income and real COURSEMATE
5 Which of the following would result in the income have both risen.
calculated consumer price index overstating b The Carters’ nominal income and real Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Economics
for Today. CourseMate brings chapter concepts to life with interactive learning, study and exam
SearchMe! economics
changes in the general cost of living? income have both fallen.
a a reduction in the GST. c The Carters’ nominal income has fallen preparation tools:
b consumers moving away from products and their real income has risen. • test your understanding of inflation and unemployment by completing the crossword
becoming relatively more expensive. d The Carters’ nominal income has risen • watch the ‘Types of unemployment’ video to revise your knowledge
c neither a nor b. and their real income has fallen. • apply your knowledge with the online exercises on inflation and unemployment.
d both a and b. 11 A person would be considered employed if
6 Consider an economy with only two they
goods: bread and wine. Let’s say that, a were a full-time student doing at least 30
in 2005, the typical family bought four hours work per week on their studies.
loaves of bread at $1.50 per loaf and two b were over 15 years old and worked for more
bottles of wine for $9 per bottle. In 2015, than 15 hours during the survey week doing
let’s say bread cost $4.50 per loaf and wine charity work for their local church.
cost $16 per bottle (fictitious prices). The c were over 15 years old and did at least
CPI for 2015 (using 2005 as base year) is one hour of paid work in the week they
approximately are surveyed.
a 195. d were over 15 years of age and actively
b 208. seeking work during the survey week,
c 239. defined as having attended at least two
d 110. job interviews.
BK-CLA-LAYTON_5E-150111-Chp13.indd 342 6/19/15 7:15 PM BK-CLA-LAYTON_5E-150111-Chp13.indd 343 6/19/15 7:15 PM
xii
Guide to the online resources

FOR THE INSTRUCTOR
Cengage Learning is pleased to provide you with a selection of
resources that will help you prepare your lectures and assessments.
These teaching tools are accessible via http://login.cengage.com.
INSTRUCTOR’S EXAMVIEW®
MANUAL TEST BANK
The Instructor’s Manual includes: ExamView helps you to create, customise and
• Chapter summary deliver tests in minutes for both print and
• Chapter outline online applications. The Test Wizards guide
• Instructional objectives you step-by-step through the test-creation
• Key concepts process.
• Hints for effective teaching
• Solutions
POWERPOINTTM ARTWORK
PRESENTATIONS FROM THE TEXT
Use the chapter-by-chapter PowerPoint Add the digital files of graphs, pictures and
presentations to enhance your lecture flowcharts into your course management
presentations and handouts to reinforce the system, use them within student handouts
key principles of your subject. or copy them into lecture presentations.
xiii
FOR THE STUDENT

New copies of this text come with an access code that gives you a 12-month
subscription to the Economics for Today CourseMate website and Search me!
economics. Visit http://login.cengagebrain.com and login using the code card.
The CourseMate website for students includes Expand your knowledge with Search me!
a suite of resources designed to support your Economics. Fast and convenient, this resource
learning, revision and further research provides you with 24-hour access to full-text
articles from hundreds of scholarly and popular
Includes: journals and newspapers, including The
• eBook Australian and The New York Times. Search
• Revision quizzes me! allows you to explore topics further and find
• Glossary and Flashcards current references.
• Graphing Workshops
Preface to the fifth edition
Text with a mission
The original reason for writing the first edition of Economics for Today was to present,
in an engaging style, the basic principles of microeconomics and macroeconomics to
students who will take a one-semester course in economics. With the growth of business
studies in areas outside economics, including a range of increasingly popular conversion
masters programs, there has been a huge increase in the number of students studying
introductory economics as a terminal course. While this book is aimed at these students,
it also provides a firm foundation for students who will progress to further studies in
economics.
Rather than taking an encyclopaedic approach to economic concepts, Economics for
Today focuses on some of the most important tools in economics, such as supply and
demand analysis, and applies them to clearly explain real-world economic issues. Every
effort has been made to make Economics for Today the most ‘reader-friendly’ text on the
market.
This book was written to simplify the often confusing array of economic analyses
that forces some students simply to memorise in order to pass. Instead, it presents a
straightforward and balanced approach that effectively explains the application of basic
economic principles. After reading this book, the reader should be able to say ‘That
economics stuff in the news finally makes sense to me’.
What’s new in the fifth edition

Following the success of the first four editions of Economics for Today, and wanting to
keep the book contemporary and fresh, especially by introducing new microeconomic
policy issues and extending the book’s already comprehensive treatment of the global
financial and economic crisis (GFEC), we were encouraged to put out this fifth edition.
This new edition includes discussion of important economic and financial issues being
dealt with in the aftermath of the GFEC as well as consideration of policy developments
in carbon pollution abatement and housing affordability. We have enjoyed undertaking
this task and believe this latest edition represents a substantial development over
previous editions.
While we have completely updated all data and exhibits and included relevant recent
macroeconomic and microeconomic real-world events, we have also sought to further
streamline the book to ensure we remain consistent with our original goal of writing an
easy-to-understand introductory text that can be used as a one-semester introduction to
the fundamentals of the fascinating field of economics.
The result is, we believe, an even more accessible presentation of the core
microeconomic and macroeconomic ideas needed by modern business students. Only
essential material is included and key concepts are explained in clear and simple terms.
We have also sought to rework the end-of-chapter study materials, with much of this
material having been refreshed.
Preface to the fifth edition xv
The text of this edition also reflects several ongoing economic issues which hit the
headlines during the 2009–15 period, especially:
• the economic debates surrounding the best means of reducing carbon emissions
• the various ways in which governments can tackle housing affordability
• the importance of ethical issues
• the ongoing economic developments following the monumental macroeconomic
event that was the GFEC of 2008–09 – for example, the European sovereign
debt and bank crisis, and the extensive use of so-called ‘quantitative easing’ by the
world’s major central banks.
The special boxed sections in each of Chapters 11–18 of this fifth edition again bring
out important aspects of the GFEC and its aftermath which are relevant to the subject
matter of each chapter.
As with the previous editions, in making the many revisions incorporated into this
fifth edition, the authors owe a significant and sincere debt of gratitude to the many
adopters and potential adopters who provided feedback on the fourth edition.
How it fits together

The text presents the core principles of microeconomics and macroeconomics in an
international context. The first 10 chapters introduce the logic of economic analysis and
develop the core of microeconomics. Here readers learn the role of demand and supply
in determining prices in markets characterised by varying degrees of competition. This
part of the book explores issues such as minimum wage laws, market failure, economies
and diseconomies of scale, and competition policy. Two topical policy issues – climate
change and housing affordability – are discussed in depth in Chapter 10.
The next eight chapters develop the macroeconomics part of the text. Using the
modern aggregate demand and aggregate supply model, the text develops a clear and
workable understanding of the determinants of changes in the price level, national
output and employment in the economy. The study of macroeconomics also includes
a discussion of a nation’s monetary and financial system, explaining how changes in
the supply of and demand for liquid financial assets in financial markets influence
the wider economy. It also introduces the reader to important issues relating to the
conduct of modern monetary and fiscal policy and uses the 2008–09 GFEC and its
continued aftermath throughout 2010–15 as a major case study running through all
of the macroeconomic chapters to further highlight each chapter’s material in a very
contemporary way.
Throughout the book, the significance of international influences on national
economies is recognised, and to further underline the great importance of international
considerations in understanding modern macroeconomics, the final chapter is devoted
to international matters. For example, readers will learn how the supply of and demand
for currencies determine exchange rates, the importance of international trade and
how it raises the production and consumption possibilities of nations engaging in trade,
whether and when external current account deficits are something to be concerned about,
why protection of domestic industries from foreign competition may actually increase
unemployment and reduce a country’s standard of living, and what the implications are
of a high or low value for the dollar.
xvi Preface to the fifth edition
Text flexibility
Economics for Today is easily adapted to lecturers’ preferences in the sequencing of
microeconomics and macroeconomics topics. The text can be used in a macroeconomic–
microeconomic sequence by teaching the first four chapters and then Chapters 11–18.
The microeconomics content can then be covered with Chapters 5–10. This approach
allows readers to identify with macro issues – which tend often to be in the news –
before moving to microeconomics.
The book has 18 chapters and will allow students to easily cover approximately one-
and-a-half chapters each week over 12 teaching weeks. Alternatively, some chapters and
some parts of chapters can be omitted at the discretion of the lecturer. For example, each
of the two policy issues discussed in depth in Chapter 10 can be used in a stand-alone
manner, with either or both being included in the curriculum. Some further proposals
along these lines are included in the Instructors Manual.
An alternative placement for Chapter 18, ‘International trade and finance’, is also
possible. As well as incorporating international issues throughout, Economics for Today
explicitly addresses international influences on national economies in Chapter 18.
Some instructors may prefer to cover this chapter earlier – immediately after Part 4, for
example.
Finally, when put together, the special GFEC boxed sections also provide the reader
and instructor with a good overall summary of that extraordinary macroeconomic event
and its continuing aftermath. This is best sequenced with the Chapter 15 boxed section
first followed by 11–18 in whatever order is thought preferable by the instructor.
Special features
Each chapter contains a number of current real-world exercises and topics for discussion:
• Internet margin notes throughout the text provide internet addresses of sites
relevant to the topics being discussed, and encourage readers to visit the sites for
more information.
• You’re the economist sections in each chapter ask readers to answer a simple
question related to the topic being discussed. Answers are provided at the end of
the chapter.
• Global perspective sections in each chapter highlight chapter topics in a global
context.
• Ethical considerations are referenced throughout the text. These sections
highlight the fact that many economic issues – and how they are dealt with by
policymakers – often involve ethical dimensions.
• ‘Analyse the issue’ sections in each chapter provide a brief case study for readers
to analyse.
• The summary at the end of each chapter includes graphs and causation chains to
refresh readers’ memories of the chapter topics.
• Each of the macroeconomic chapters, Chapters 11–18, contains a special
focus section on the GFEC of 2008–09 focusing on elements of the crisis
and its continuing aftermath through to 2015.
Acknowledgements
Many people have assisted us in very many ways to bring this fifth edition to fruition.
They include Dr Ted Boss (recently retired Professor from the University of Alabama
at Birmingham), Professors Stan Hurn and Clevo Wilson from QUT, and Emeritus
Professor Ted Kolsen. We also wish to thank the team at Cengage Learning, whose
support and understanding have made the task so much easier for us. Special thanks
must also go to our wives, Monica Layton and Veronica Horgan, for their help and
ongoing support.
Thanks are also due to the many reviewers who have provided numerous insightful
suggestions for the current and previous editions, which we have attempted to take up
wherever possible:
• Vandana Arya – University of South Australia

• Taha Chaiechi – James Cook University
• Philip Gibbs – University of New South Wales
• Boon L. Lee – Queensland University of Technology
• Cecilie Eastwood – International College of Management Sydney
• Mei leng Rankin – NMIT
• Rebecca Reeve – Macquarie University
• Tommy Tang – Queensland University of Technology
• Riccardo Welters – James Cook University
• Ken Tester – Open Polytechnic of New Zealand
• Anita Medhekar – Central Queensland University
• Chris Bajada – University of Technology, Sydney
• Anis Chowdhury – University of Western Sydney
• Jerry Courvisanos – University of Tasmania
• Paul Flatau – Murdoch University
• Anne Garnett – Murdoch University
• Ross Guest – Griffith University
• Tom Nguyen – Griffith University
• Greg Parry – Edith Cowan University
• Peter Slade – University of the Sunshine Coast
• Kanchan Bandyopadhyay – Unitech Institute of Technology, New Zealand
• Dr Galina Ivanova – Central Queensland University
• Maralyn McDowell – Queensland University of Technology
• Petra Behrens – Queensland University of Technology
• Dr Dinty Mather – Curtin University of Technology, Bentley
• Dr Clive Reynoldson – Edith Cowan University
• Roderick Duncan – Charles Sturt University
• John Lodewijks – University of Western Sydney
• Ben Arachi – Central Queensland University
• Chris Fleming – Griffith University
xviii Acknowledgements
• Rod St Hill – Christian Heritage College

• Steven Barrett – University of Adelaide
• Ishita Chatterjee – University of Western Australia
• Shane Zhang – University of Southern Queensland
• Becksndale Masawi – RMIT
Allan Layton
Tim Robinson
Irvin B. Tucker
About the authors
Professor Allan Layton, BEcon. (Hons), MEcon., PhD, received his doctorate from
the University of Queensland in 1982. Since then he has held academic posts at La Trobe
University, Griffith University, Macquarie University, Columbia University in the USA,
the University of Queensland, and the Queensland University of Technology (where he
was Head of School of Economics and Public Policy (from 1992–95), and then Head of
School of Economics and Finance (from 1995 – 2005)). Since 2006, he has been at the
University of Southern Queensland (USQ) and, in mid-2013, completed a seven-year
period as Dean of the Faculty of Business and Law. He continues at USQ as Professor
of Economics and his research and teaching interests span international business-
cycle analysis, financial and monetary economics, macroeconomic policy and applied
econometrics. He is the author of Modern Australian Macroeconomics and has published
widely in international academic journals. He has also served on a number of corporation
boards and acted as consultant to both private- and public-sector organisations.
Professor Tim Robinson, BEcon. (Hons), PhD (Qld), worked in the private sector
for seven years prior to embarking upon an academic career. Part of his time in the
private sector was spent running his own small business. He is currently Emeritus
Professor of Economics at Queensland University of Technology where he previously
held the position of Professor and Head of School of Economics and Finance. As well
as having taught introductory and intermediate economics at a number of universities
over many years, he has also published in the areas of environmental economics, applied
welfare economics, history of economic thought, the teaching of economics, and the
new economy. Books he has authored or co-authored include Economic Theories
of Exhaustible Resources; Work, Leisure and the Environment; Macroeconomics: A
Contemporary Introduction and Microeconomics: A Contemporary Introduction. He has
also undertaken economic consulting work in the areas of curriculum development,
financial investment, taxation and the environment.
Dr Irvin B. Tucker, BS, SC, PhD, has taught introductory economics at the
University of North Carolina at Charlotte and the University of South Carolina. He
is former Director of the Center for Economic Education at the University of North
Carolina at Charlotte and a long-time member of the National Council on Economic
Education. He has published widely in professional journals and is the author of Survey
of Economics.
Thinking like an economist 01
Economists have a particular way of looking at the world. As you become

familiar with their approach, you will begin to see the world around you through
different eyes. You will discover a whole range of economic issues requiring
more powerful tools than just common sense. As you master the methods
explained in this book, you will appreciate that economics provides a valuable
approach to solving many real-world puzzles and issues. The economic way
of thinking is important because it provides a logical framework that can be
used to help us understand a wide range of economic issues and events.
There is no better way to discover the relevance of economics in the world
today than to look at the deliberations of world leaders at the G20 annual
summit. The G20 is an organisation consisting of the world’s leading
19 economies plus the European Union. Together these economies are
responsible for about 85 per cent of world output. The G20 addresses major
economic challenges faced by the world. Thus, for example, it responded
to the global financial and economic crisis (GFEC)1 by encouraging member
Shutterstock.com/Sldesign
1 In Australia the term global financial crisis (GFC) is most commonly used to describe the worldwide events which
unfolded from 2007 onwards and resulted in the most severe global downturn since the Great Depression of the 1930s.
In this book we use the term global financial and economic crisis (GFEC), which highlights the economic consequences
of these events and which is the term more commonly used in other countries.
2 PART 1 / Introduction to economics
nations to introduce trillions of dollars in fiscal stimulus packages which saved

or created millions of jobs that would otherwise have been destroyed. Some
of the initiatives of the 2014 summit held in Brisbane included:
• Policies to lift world economic growth (a topic discussed in Chapter 12).
• A proposal to create a global infrastructure hub designed to increase
investment worldwide. (As a concept central to understanding how
economies work, investment is discussed frequently throughout this
book.)
• A commitment to bring more than 100 million women into the
workforce. (As you will learn, labour is a key input into productive
processes, and employment is a key indicator of a nation’s economic
performance.)
• Reforms designed to have global companies pay their fair share of
taxes in countries where profits are earned. (Taxation is another topic
discussed throughout this book.)
• Strong and effective action to combat climate change (a topic given
special consideration in Chapter 10).
• Continuation of the existing commitment to reduce corruption in both
the public and private sectors. (As you will see, a range of aspects of
ethical behaviour are discussed throughout this text.)
In addition to the topics mentioned above, in this text you will find out
why the GFEC occurred. You will find that government and private-sector
publications designed to help managers understand business costs and
revenues use precisely the same concepts of cost and revenue as are used
by economists when they analyse the behaviour of firms. You will also
investigate whether you should be concerned if you read that the country has
been running a string of budget deficits. You will learn why trying to protect
domestic industries and jobs in the face of competition from emerging
economies like China and India may actually create more unemployment
rather than save jobs. And there are many more of these important issues
discussed in the pages that follow. You’ll see just how economic theories and
policies affect our daily lives.
In this chapter we look first at the concepts of scarcity and choice. Next
we examine the steps involved in building an economic model to explain
aspects of the economy we observe around us. Then we look at some new
developments in economics and explain why economists may disagree with
one another.
In this chapter, you will examine these economics questions:
• Why are forecasts of future house prices sometimes wide of the mark?
• Why would people buy more Lady Gaga concert tickets when the price
increases?
• Why do economists disagree and what new developments in economics
are helping to minimise these disagreements?
• How can self-interested behaviour possibly be beneficial to the
community as a whole?
CHAPTER 1 / Thinking like an economist 3
The problem of scarcity

From the economist’s perspective, coping with scarcity is the essence of the human
condition. Our world is a finite place where people, both individually and collectively,
face the problem of scarcity. Scarcity is the condition in which human wants are forever Scarcity
greater than the available supply of time, goods, services and resources. Because of The condition in which
human wants are forever
scarcity, it is impossible to satisfy every desire. Pause for a moment to think of some greater than the available
of the unwanted effects of the GFEC. Although Australia may have missed many of its supply of time, goods,
services and resources.
adverse effects, in many parts of the US and Europe jobs are still scarcer, opportunities
to start new businesses are scarcer and there is less food on many tables. Even if the
GFEC had not occurred we would all be facing scarcity. Perhaps you would like a bigger
flat-screen TV, more restaurant meals, cleaner air, better health care, shelter for the
homeless, more leisure time and so on. There are always limits on the economy’s ability
to satisfy unlimited wants. Alas, scarcity, which is manifested in the prices you must pay
for the goods and services you wish to consume, is pervasive: you really can’t ‘have it all’.
You may think your scarcity problem would disappear if you were rich, but wealth
does not improve the situation. No matter how affluent an individual is, the wish list
continues to grow. We are familiar with the ‘rich and famous’ who never seem to have
enough. Although they live well, they still desire finer homes, faster planes and larger
yachts. In short, the condition of scarcity means that all individuals, whether rich or
poor, could be more satisfied with their lot. They would like more material goods and
more leisure time in which to use them. What is true for individuals also applies to
society. State governments search for innovative ways to raise taxes for the funding of
schools. The federal government’s desire to spend on the poor and on higher education,
highways and defence exceeds the tax revenue it receives to pay for these programs.
So not even the Australian government escapes the problem of scarcity. Many people
consider the world’s number one problem to be global warming, which is caused by
nothing more than a scarcity of clean air into which pollutants can be dumped.
Of course, scarcity is a fact of life throughout the world. In many parts of South
America, Africa and Asia the problem of scarcity is often life-threatening. On the
other hand, in North America, Europe, Australasia and much of Asia there has been
substantial economic growth and development. Although life is much less gruelling in
the more advanced countries, the problem of scarcity exists because individuals and
countries never have as much of all the goods and services as they would like to have.
Scarce resources and production

Because of the economic problem of scarcity, no society has enough resources to produce all Resources
the goods and services necessary to satisfy all human wants. Resources are the basic categories The basic categories of
inputs used to produce
of inputs used to produce goods and services; and just like goods and services each resource goods and services.
has a price which reflects its degree of scarcity. Resources are also called factors of production. Resources are also called
factors of production.
Economists divide resources into three categories: land, labour and capital (see Exhibit 1.1). Economists divide resources
into three categories: land,
Land labour and capital.
Land is a shorthand expression for any resource provided by nature. Land includes those Land
resources that are gifts of nature available for use in the production process. Land includes A shorthand expression for
any resource provided by
anything natural above or below the ground, such as forests, minerals, oil, wildlife and nature.
fish. Other examples are rivers, lakes, oceans, the atmosphere, the sun and the moon.
Pursuits such as farming, fishing, manufacturing and retailing all use land to a greater
or lesser extent. Land in its usual sense is an important input to the housing industry.
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THE REBEL CAMP.
Upon a high plateau, the heavy trees had all been cut away over a
large area. They were designed for the construction of an abattis, and
though nothing had been done beyond chopping down the heavy
timber, the large trunks and limbs, lying in all directions, would have
presented almost insurmountable obstacles to the approach of
cavalry or artillery, had the rifle-pits, just beyond, been filled with
men.
Crossing the rifle-pits, the Unionists were in the enemy’s camp,
though still more than half a mile from the fort. Here were the wall
tents of a regiment, all standing in complete order, with the camp-
fires still blazing, the copper pots of soup for dinner boiling over
them, and the half-made biscuits in the pans. Inside the tents
everything was just as the enemy had left it—pistols, shot-guns,
muskets, bowie-knives, clothing, tables partially set for dinner,
letters half-written, with the ink scarcely dry upon the open page,
cards thrown down in the midst of the game, overcoats, blankets,
trunks, carpet sacks, and so on through all the articles of camp life. It
seemed as if the men were out at guard-mounting, and expected to
return in ten minutes.
Along the river bank were long rows of log barracks, enough to
accommodate two or three thousand men, and finished comfortably.
Inside they bore the same indications that the inmates had
decamped without a moment’s warning.
ADVANCE OF NATIONAL GUNBOATS UP
THE TENNESSEE RIVER.
In accordance with the instructions of Commodore Foote, given
before the attack on Fort Henry, immediately after the capture of the
fort, February 6, the gunboats Conestoga, Lexington and Tyler,
under the command of Lieutenant Phelps, advanced up the river
twenty-five miles, to the crossing of the Bowling Green and Memphis
railway, breaking up a portion of the railway bridge, and rendering it
impassable. They next proceeded to destroy the rebel gunboats and
transports, capturing large quantities of munitions of war and
supplies, and advanced up the river for upwards of two hundred
miles to Eastport, in Mississippi, and Florence, at the foot of Muscle
Shoals, in Alabama, annihilating the rebel flotilla in the Tennessee
river. The expedition was welcomed at every point by the
inhabitants. Twenty-five Tennesseans enlisted at Cerro Gordo, where
also three steamers were seized, containing 250,000 feet of valuable
ship timber.
Toward the latter part of February, intelligence reached Fort
Henry that the rebels were fortifying a point on the Tennessee river,
near the Mississippi State line, whereupon Lieutenant-Commanding
William Gwin, with the gunboats Tyler and Lexington, were sent
forward to reconnoitre the position.
Having learned that the rebels had occupied and were fortifying a
place called Pittsburgh, nine miles above, on the right bank of the
river, he determined to attack them.
At twelve M. the Taylor, followed by the Lexington, Lieutenant-
Commanding Shirk, proceeded up the river. When within twelve
hundred yards of Pittsburgh, they were opened upon by the rebel
batteries, consisting of six or eight field pieces, some rifled. Getting
within one thousand yards, the Taylor and Lexington opened a well-
directed fire, and had the satisfaction of silencing the batteries.
They then proceeded abreast of the place, and, under the cover of
grape and canister, landed two armed boats from each vessel,
containing, besides their crews, a portion of company C, Captain
Thaddeus Phillips, and company K, First-Lieutenant John C. Rider,
of the Thirty-second regiment, Illinois Volunteers (sharpshooters).
Second-master Jason Gondy, commanded the boats of the Taylor,
and Second-master Martin Dunn, commanded the boats of the
Lexington. The landing was successfully accomplished. This small
force drove back the rebels, and held them in check until they had
accomplished their difficult object, which was to discover the real
strength and purpose of the enemy, and to destroy a house in close
proximity to the batteries. In addition to their artillery, the enemy
had a force of not less than two regiments of infantry, and a regiment
of cavalry.
SECTION OF THE MISSISSIPPI RIVER.
SHOWING THE DISTANCES FROM

NEW ORLEANS.
THE BURNSIDE EXPEDITION.
SAILING OF THE FLEET FOR HATTERAS

INLET.
January 12–20, 1862.
Immediately after the departure of the expedition to operate
against Port Royal and the adjacent territory, the organization of
another armament, to proceed to the North Carolina coast, was
commenced, and like its predecessor, was mainly fitted out at
Annapolis, Md., and gradually concentrated at Fortress Monroe.
After many delays, it sailed from that place for its destination on the
12th of January, 1862. The expedition consisted of a large naval force
of light-draught boats, taken from the commercial marine, fitted up
and armed, and a numerous retinue of transports and supply vessels,
all under the command of Commodore L. M. Goldsborough. There
were thirty-one gunboats in the expedition, exclusive of transports,
carrying an aggregate of ninety-four guns. Five of these, called
“floating batteries,” were vessels of strong hulls, heavily braced, and
cut down so as to present but a small surface when in action, and
designed to be anchored during an engagement. The entire number
of vessels of all classes was one hundred and twenty-five.
The land force consisted of about fourteen thousand men, under
the command of Brigadier-General Ambrose E. Burnside, who was
also Commander-in-chief of the expedition. It consisted of fifteen
regiments, divided into three brigades, commanded in their order by
Generals John G. Foster, Jesse L. Reno, and John G. Parke.
The vessels encountered adverse weather immediately after
starting from Fortress Monroe, and a number of the transports were
obliged to put back, having experienced one of those severe storms
which have rendered the coast of Cape Hatteras a terror and a
proverb to the mariner. For a time the expedition was in deadly peril.
Communication between the vessels of the fleet was rendered
impossible, and wreck and disaster appeared to be their inevitable
fate. Several gunboats and vessels were driven ashore and lost, and a
number of valuable lives sacrificed to the fury of the elements, in a
vain endeavor to succor some of the disabled vessels.
Along the whole coast of North Carolina there are many desolate
sand-bars or islands, varying from half a mile to two miles in width,
intersected by numerous inlets, which with few exceptions, are not
navigable. A principal one of these, known as Hatteras Inlet, opening
into the waters of Albemarle Sound, was the point where
Commodore Goldsborough’s fleet was now endeavoring to
concentrate.
On Monday morning, January 13, they were off Hatteras Inlet. Day
broke with a leaden sky, against which the angry, white-crested
waves raced their mad career along the reefs of Cape Hatteras, that
threw its headland oceanward but eight miles distant. Fourteen
steamers were laboring to weather the storm point. Bravely they
breasted on, staggering beneath the giant blows of each successive
sea, the decks swept fore and aft, and all on board reeling from side
to side like drunken men. One figure stood immovable, grasping the
bits and scanning the horizon for traces of ships as they rose on the
glittering mass of foam. It was the square, manly form of General
Burnside, whose anxiety for the fate of his army was intense. Many of
the vessels on which the troops were embarked were nothing more
than huge top-hampered river steamers, with projecting guards, that
would break up like cardboard if fairly struck by a sea.
At dark, all hands on the flag-ship were startled by the report of a
gun, and on reaching the hurricane deck they saw a large brig
drifting rapidly on to the bar. As it grew darker, and her outline
became less defined, the excitement became intense. She was
evidently in a most critical position, and every moment might be her
last. Slowly the black hull rose and fell, each time gliding nearer and
nearer to the vortex of white breakers, which, once reached, nothing
could save her. Suddenly a fringe of musketry fire surrounded her
bulwarks, and blue-lights were burnt in her tops. Volley after volley
succeeded each other in rapid succession, yet apparently no one
could help her; no human power dared face the tempest, and,
perhaps, share her doom. General Burnside boarded every steamtug
in the harbor; offered any reward, and also to go himself in aid of the
brig, but all held back. Were three hundred men to be launched into
eternity, and no effort made to save them? At last one brave seaman
volunteered to take his little steamer out—General Burnside jumped
aboard her—but by the earnest entreaties of the officers he delegated
the honorable position to one of his staff, for his heroic conduct had
nerved every brave heart in his command.
BURNSIDE’S FLEET AT HATTERAS INLET.
From the 13th of January until the 4th of February, the fleet at
Hatteras Inlet experienced an almost uninterrupted series of gales,
and the two dykes which reach the east and west boundaries of the
inlet, were fringed with perpetual spray and foam from the breakers.
The lighter vessels, comprising the propeller gunboats, the side-
wheel steamers, and most of the schooner transports, had gone
safely through the “Swash,” and were securely anchored some two
miles from the throat of the inlet, while the larger ships and barks
were still riding outside, with colors continually flying for a pilot.
Many of these vessels were crowded with men suffering for the
want of necessary supplies, especially water, and the largest of the
transports had a draught of from two to four feet more than the
specifications of the guarantee should have allowed. The
consequence was, that they grounded in attempting the passage. An
occasional cessation of a few hours in the storm afforded opportunity
that could be taken advantage of by vessels to try the dangerous
passage, aided by the tugs, that responded but shyly to the signals for
aid. And thus for days the severity of the gale defied all
communication between the vessels outside of the bar, as they
battled with a fiercer foe than that upon the land—fighting a very
hand-to-hand fight with storm and ocean.
Nearly three weeks passed before all the vessels of the expedition
were brought in safety through the swash to anchorage within the
inlet. Though the severity of the storm had threatened the
destruction of the entire armada, and occasioned the deepest gloom
and anxiety in the minds of thousands of loyal friends at home, the
brave and skillful commanders were never despondent, and met the
new dangers of each day with hopeful energy and perseverance.
Eight vessels of various sizes were cast away or foundered in the
storm, though but few lives were lost.
Colonel J. W. Allen and Surgeon T. S. Weller, of the Ninth New
Jersey, were drowned from a small boat while on a noble mission to
relieve a suffering crew.
Many of the large transports were grounded in attempting to pass
inside the inlet. From the necessity of lightening them, vast
quantities of property were lost or thrown overboard. An expedition
beset with such difficulties, all overcome by indomitable
perseverance, has seldom been recorded in the history of any
country.
CAPTURE OF ROANOKE ISLAND.
February 8, 1862.
After a detention of three weeks in sight of Hatteras Inlet,

occasioned by the severity of the storm, and the difficulty of piloting
the heavily-laden vessels through the inlet, the expedition received
sailing orders on the 4th of February, and proceeded on the next day
to the point of attack. The fleet anchored on the night of February 5,
about ten miles below the southern point of Roanoke Island, from
whence they again weighed anchor at eight o’clock on the morning of
the 6th. A storm retarded their progress, and they remained over
night without passing through Roanoke Inlet to Croatan Sound.
At ten o’clock on the morning of the 7th, the gunboats, under the
lead of the Flag-officer’s ship, moved forward, and were soon inside
the narrow passage leading into Croatan Sound, known as Roanoke
Inlet. The mainland juts eastward, forming a point of marshy land at
the southern extremity of Croatan Sound, which is the only navigable
water leading past Roanoke Island. A small island forms the eastern
boundary of the channel, while the western shore is a low marshy
point. Following Commodore Goldsborough’s squadron were the
gunboats of the coast division, all of which passed through without
interruption.
The S. R. Spaulding, with General Burnside on board, next passed
through, but the remainder of the transports were detained about
two hours. The rebel gunboats could now be seen close in shore,
evidently under the guns of batteries on shore. As the fleet passed
into the sound, a signal was fired from one of the rebel gunboats, to
announce its approach. This was about half-past ten o’clock. At half-
past eleven the first gun was fired from the flag-ship, and was replied
to by the rebels. The Flag-officer hoisted the signal: “This day our
country expects that every man will do his duty.” The effect was
electric. The men worked their guns with unflagging energy,
determined that their country should have nothing to complain of in
relation to them. As the Federal vessels came within shorter range,
the fire became more rapid, but the regular fire did not commence
until noon, when the flag-ship displayed the signal for close action.
The number of the rebel gunboats visible in the early part of the
engagement was seven. As the vessels came into closer action, they
moved to the northward, with the design of drawing the Union fleet
after them, and bring them under the guns of their batteries on the
island. At twelve o’clock the engagement became general, between
the retreating gunboats of the rebels and the Union fleet, varied by
an occasional shot from a battery on shore. The firing was
exceedingly brisk for some time, but the distance was evidently too
great for destructive effect. The one hundred-pound Parrott gun on
board the Southfield, to which the Flag-Officer transferred his flag,
boomed forth terrific explosions, followed by the roar and crash of
flying shells. The puff of smoke in the air was almost simultaneous
with the splash of fragments in the water. The rebel gunboats kept up
a steady fire in reply. Their fire was varied at times by the louder
report of a hundred-pound Parrott gun on board one of their vessels.
The Sawyer gun on board the Fanny, which was captured by the
enemy at Hatteras Inlet, was the most annoying in its effects, as the
range was long and very accurate.
The fire from the fort indicated a weak force working the guns. The
rebel gunboats retired steadily a considerable distance up the sound.
A line of piles driven into the bed across the principal channel,
obstructed the progress of the Union vessels in the pursuit of the
retreating rebels, who occupied an inner channel under the guns of
their battery. The Union fleet now turned their attention to the fort,
which kept up a steady and rapid fire.
On the afternoon of the 7th, the transports, with the land forces,
were all brought safely through Roanoke Inlet, and clustered securely
in rear of the bombarding fleet. General Burnside gave immediate
orders for landing the forces, which was done at a small cove, known
as Ashby’s Harbor. In less than an hour four thousand men were
landed, and by eleven at night, the entire force, excepting one
regiment, were on the island, and their bivouac-fires lighted up the
shore and the woods for the distance of a mile.
At nine o’clock on the morning of the 8th, a few shots were
exchanged between the Federal gunboats and the battery, which
ceased after fifteen minutes’ duration, and was not renewed during
the day. The rebel gunboats had retreated, and all interest now
centered in the movements of the land forces.
From definite information received by General Burnside, the
position of all the works on the island was clearly known, and his
movements were based on this knowledge. The plan of attack
consisted of a central attacking column, led by Brigadier-General
Foster; a left flanking column to attack the right of the enemy’s work,
under Brigadier-General Reno, and a right flank column to attack the
left of the enemy’s position, under the command of Brigadier-
General Parke.
The approach to the enemy’s position was through a swampy
wood, with a dense undergrowth, rendering it almost impenetrable.
An ordinary cart-road leading through this wood from the shore to
the fieldwork, a distance of about a mile, was the only mode of
communication. The woods in front of the battery had been cut down
a distance of three hundred yards, forming an open space to be
played on by the rebel guns, about two hundred feet wide. The woods
immediately in rear of the work were also cut down to permit the
manœuvreing of their own forces.
Their battery consisted of an earthwork with three faces covering
the open space before, and the woods at each side of the open space,
but with a general direction of fire to the front. The guns were
mounted in embrasure, and consisted of a twenty-four-pounder
brass Dahlgren howitzer, a long eighteen-pounder brass field-gun,
and a twelve-pounder brass field piece. In front of the work was a
ditch eight feet wide and about three feet deep, filled with water. The
earthwork was about thirty-five yards wide, and was erected across
the road. The ground in front of the work was a deep marsh, on
which the trees which were felled still lay. The difficult nature of this
ground was increased by the pits from which the turf and earth for
the fieldwork had been taken. Branches were strewn over the front of
the work, making it impossible to discover it from the wood in front.
The defending force consisted of about three hundred men, within
the breastwork, and about two thousand as a reserve, partly deployed
as skirmishers on the left of the battery. The rebels relied chiefly for
the defence of their flanks on the almost impenetrable nature of the
wood on each side. Their entire force, with the exception of the force
working the battery, was scattered in front and in the woods on the
left as skirmishers.
The Federal army advanced from the bivouac-ground of the
evening previous, where they had spent the night with nothing but
thin overcoats to protect them from a cold, driving rain. They had left
their knapsacks and blankets on the transports, each man carrying
nothing but his haversack, with three days’ provisions, and his
cartridge-box, with forty rounds of ball-cartridge. The centre, under
the command of General Foster, was composed of the Twenty-fifth
Massachusetts, Colonel Upton; Twenty-third Massachusetts, Colonel
Kurtz; Twenty-seventh Massachusetts, Colonel Lee, and the Tenth
Connecticut, Colonel Russell, and moved forward about eight o’clock.
They were followed by the second column, under General Reno,
consisting of the Twenty-first Massachusetts, Lieutenant-Colonel
Maggi; the Fifty-first New York, (Shepard Rifles,) Colonel Ferrero;
Ninth New Jersey, and the Fifty-first Pennsylvania, Colonel Hartraaf.
The third column, led by General Parke, was formed of the Fourth
Rhode Island, Colonel Rodman; First battalion, Fifth Rhode Island,
Major Wright; and Ninth New York, Colonel Hawkins.
A brilliant, well contested fight of two hours’ duration put the
Federal forces in possession of Roanoke Island, with all the batteries,
mounting thirty guns, and Fort Forrest, on the mainland, mounting
eight guns. It resulted in the unconditional surrender of the rebel
army on the island, numbering 2,500 men, with all their arms and
munitions of war. Captain O. Jennings Wise, son of ex-Governor
Wise of Virginia, lost his life in this engagement. The Governor
himself, being absent from his command on the day of battle,
escaped.
Colonel Russell, of the Tenth Connecticut, and Lieutenant-Colonel
De Monteuil, of the New York Fifty-third, were killed.
The Federal loss was fifty killed and one hundred and fifty
wounded. That of the rebels was about twenty killed, and sixty
wounded.
EVACUATION OF BOWLING GREEN, KY.
February 14–16, 1862.
Before the commencement of hostilities in the State of Kentucky,

the rebel General Buckner, Commander-in-Chief of the State militia,
seized upon the town of Bowling Green, in Warren county, in the
southern section of the State, and occupied it as the grand centre and
depot of future military operations. The position was well chosen. It
was situated on the line of the Louisville and Nashville railway, and
connected also by rail with Memphis and Nashville; while water
communication through the Barren river was open to the Green
river, the Ohio, and Mississippi, and thus to all important points.
As a military post, its means of defence were also of the first
importance. The town lies on the south bank of Barren river, at a
point where the channel makes a bend not unlike a horse-shoe. The
buildings are situated a distance of five hundred yards from the
banks, which rise by jutted rocky sides fifty feet from the water level.
A series of nine swelling hills, or knolls, completely encompass the
town on the land side, and on these Buckner had erected a cordon of
forts; some of stone, and others of earth, twenty feet in thickness—all
of great magnitude. Forty-nine guns were mounted on the various
fortifications, and great engineering skill had been displayed in their
construction.
On learning the defeat of Zollicoffer’s troops at Mill Spring, on the
19th of January, General A. S. Johnson, on the 25th, ordered the
evacuation of Bowling Green, and General Floyd’s brigade
immediately marched from thence to Fort Donelson. Active
measures were then taken to carry out the order further, by shipping
heavy ordnance to Columbus, which place General Grant’s
reconnoissance at that time had induced the Confederates to believe
would be the first point of attack from the Federal army.
After the capture of Fort Henry, on the 6th of February, by which
the enemy’s communication with Columbus was intercepted, the
remaining troops were distributed, some to Fort Donelson, some to
Nashville and other points; and a work of indiscriminate destruction
of the buildings and property in the town commenced. The beautiful
iron railway bridge, and the wooden turnpike bridge over the Barren
river were first destroyed. The railway bridge over the Green river,
some forty miles to the north-east, had long since been burned, and
the forces of General Buell had been deterred from crossing that
stream up to the present time.
On the 11th of February, however, General Mitchell’s division,
encamped on Bacon creek, seven miles north of the Green river, were
ordered to advance on Bowling Green, and on that day marched to
Camp Madison, one mile north of the river; where receiving
confirmatory information of the retreat of the rebel forces, they
hastened forward.
Thursday morning, February 13th, the division—infantry, cavalry,
and artillery, left Camp Madison for Bowling Green, forty-two miles
distant, and made twenty miles the first day. The railroad appeared
to be but little injured, but all the buildings were destroyed. The
roads the first day were in splendid order, but much obstructed by
trees, which were, however, speedily removed by two companies of
mechanics and engineers, who swung their axes with energy, and
were never delayed over fifteen minutes by any impediment. The
ponds along the road were filled with dead horses and cattle, so long
as any cattle were to be found to fill them. The troops rested at noon
at Cave City, which was very nearly destroyed. On the second day
they started again for Bowling Green. The next morning was cold,
with about an inch and a half of snow, but they were up betimes and
on their way, the Nineteenth Illinois ahead as usual, with her blue
flag waving triumphantly. The road was obstructed, and filled with
signs of the rapid retreat of Hindman’s forces.
Hearing repeatedly that the railroad bridge over Barren river was
destroyed, and that the Confederates would not stand this side of the
river, Colonel Turchin ordered the cavalry and one battery ahead.
The ranks opened to the right and left, and Captain Loomis’ battery
dashed by in fine style toward Bowling Green. The men hearing the
cannon roar, hurried on, and reached the banks of the river opposite
Bowling Green, about two o’clock, making the forty-two miles in
about thirty-seven hours. After the firing commenced they seized
every team along the road, and had the knapsacks drawn by horses
the rest of the way, much to the relief of tired shoulders. General
Turchin fired the first shell into the town, and immediately three
regiments were seen scampering to the cars, and putting off in great
confusion.
But though within a mile of Bowling Green, they were powerless to
interfere, for there was Barren river, wide and unfordable, between
them, and both bridges destroyed. The Texan Rangers soon began to
fire all the public buildings. Fifty men under Captain Scott, got ready
to cross in a little skiff by parties, and try to drive out the few who
remained to perform this work, but the General would not allow it.
They then pitched their tents and prepared to wait until a bridge
could be erected. When snugly tucked in their blankets, the assembly
beat to arms, and the brigade was soon in ranks. They expected to
march to town, but were put on the back track some three miles.
They left the main road, and soon came to the river, where they
built fires and rested as well as possible. Here the repairs of an old
wherry were completed, and they crossed the river, protected by
artillery. There was a slight snow falling, and it was uncomfortably
cold. The Nineteenth and Twenty-fourth, Hecker’s Illinois, crossed
first. The men suffered intensely from cold, but declared that they
had rather be shot than frozen, and pushed on. But no enemy
appeared, and the tired soldiers soon surrounded the fires, some of
which had been burning for several days. All the public buildings and
several warehouses, filled with pork, beef, coffee, etc., were
destroyed. A pile of grain thirty feet by twenty, was burning when the
Federal troops arrived. Four engines and several cars were also
burnt. The cars had been carrying away provision for a week, but still
immense quantities were destroyed. Boxes of guns, large numbers of
bowie-knives roughly fashioned of iron, every conceivable kind of
shooting apparatus, and all sorts of hardware for cooking and other
uses were found in immense quantities.
Bowling Green is a town of considerable commercial importance,
and possesses many large stores and warehouses. The majority of the
inhabitants were loyal in their sentiments, though many influential
citizens sympathized with the rebellion; but when the work of
destruction commenced, no discrimination was allowed, and all were
made sufferers. The unexpected arrival of General Mitchell’s army,
and the terror of his artillery, drove the rebels from the town before
their incendiary intentions were fully consummated, and much
private property was saved which would else have been consumed by
the flames.
When General Buckner was exercising military sovereignty in
southern Kentucky, one of his proclamations demanded that every
man in Wright county should deliver to him at his headquarters, one
gun, or twenty dollars in money, under the penalty of fifty dollars’
fine, or ninety days’ imprisonment. In response to this edict, a
motley collection of old squirrel and shot-guns were added to the
Confederate stores, and with other treasures were packed in
buildings at Bowling Green. A hasty evacuation of that stronghold
having become a “military necessity,” these buildings were fired by
the retreating rebels, and among the ruins which met the curious
gaze of General Mitchell’s men when they entered the town, were
scattered piles of the iron parts of these guns, in several places a foot
thick.
CAPTURE OF FORT DONELSON.
February 13–16, 1862.
Bravely as the army of the West had sustained the honor of the
Union, the crowning glory of taking Fort Donelson remained to be
accomplished. To attack a strongly-defended fort, formidable by
nature and rendered almost impregnable by military art, was a work
of extreme danger, nay, of impossibility to less resolute men.
ATTACK ON FORT DONELSON BY THE FEDERAL GUNBOATS.

THE SURRENDER OF FORT DONELSON.
The relative positions of Fort Henry and Donelson, the former on

the Tennessee river and the latter on the Cumberland, should be
clearly understood, in order to comprehend the difficulties of this
undertaking.
Fort Henry had been occupied by Federal troops, and it became
necessary to effect the reduction of Fort Donelson, in order to open
the river to the navigation of the national flotilla, and to reach
Nashville, the capital of Tennessee.
The surrender of Fort Henry took place on the 6th of February.
One of the gunboats, the Essex, being disabled, was obliged to return
to Cairo for repairs, while the Lexington, Conestoga and Tyler,
returned to the Ohio, in order to reach the Cumberland river to make
the ascent to Fort Donelson. Commodore Foote having completed
his preparations, left Cairo on the 11th of February for the scene of
action—the Carondelet having previously been sent forward to
reconnoitre the position.
On the same day General Grant issued his orders for the
movement of the land forces in two divisions, on the following
morning. The distance from Fort Henry to Fort Donelson across the
land lying between the two rivers, is fourteen miles. There are several
roads running from Fort Henry to Dover, near which Fort Donelson
was situated. The divisions were disposed by brigades, one of which
was to be thrown into Dover to cut off the retreat of the enemy, if
attempted by that route.
Fort Donelson takes its name from Andrew Jackson Donelson, a
citizen of Tennessee, and its construction was commenced as early as
May, 1861. It occupied the best position for defence on the
Cumberland river, standing on the summit of a fine slope, rising to
the height of one hundred and fifty feet from the river, on its right
bank, and mounted sixteen guns. There were two water batteries,
one of which was about twenty or thirty feet above the river, and
defended by nine pieces, eight thirty-two-pound guns, and one ten-
inch columbiad. The second was some sixty feet above, and was
mounted with one ten-inch columbiad, and two thirty-two pound
carronades.
Both these batteries were sunken or excavated in the hill-side. In
the lower one, strong traverses were left between the guns, to secure
them against an enfilading fire. The elevation above the water at the
time of the gunboat attack, gave them a fine command of the river,
and made the task of attacking them in front an arduous one. The
range of the guns in arc, was, however, quite limited.
The third occupied the summit of the hill, and mounted four 128-
pound guns. The camp was behind the fort on the hill, but within
range of gunboats on the river.
THE NAVAL ATTACK.
On the night of February 11th, the St. Louis, (the flag-ship,)
Louisville, and Pittsburg, sailed from Cairo. The Carondelet, as
already stated, had been dispatched a day or two in advance, and at
Paducah, on the noon of the 12th, the fleet was joined by the
Conestoga and Tyler. Of these the three first were iron-clad vessels.
From Paducah the fleet was accompanied by sixteen transports,
carrying six thousand infantry, and cavalry and artillery.
The fleet followed the flag-ship of Commodore Foote, as they
turned out of the Ohio, and began the ascent of the Cumberland.
Passing onward from the Ohio, sweeping through Kentucky and
Tennessee up to the western boundaries of Virginia, the fleet carried
the national ensign, which was met with continual cheers and
responses from the people on the banks.
About four o’clock in the afternoon, a messenger steamer, the Alps,
met the fleet, with a dispatch from General Grant, requesting all
haste to be made, as the gunboats were anxiously expected. Putting
on steam, the Alps took the St. Louis and Louisville in tow, leaving
the transports to hasten as rapidly as they could be urged. The
former arrived within two miles of the fort at twelve o’clock, on the
night of Thursday, the 13th.
On the morning of that day, the Carondelet, by order of General
Grant, had bombarded the fort, and single-handed, commenced the
attack on the works. On the previous day she had advanced and fired
eight shots, but without drawing out any reply. The attack of the 13th
was differently met by the fort, as the shells were briskly responded
to, and a vigorous fire was maintained for two hours. The Carondelet
kept her bows hard on the fort, carefully guarding against presenting
her broadside to the enemy. She fired one hundred and twenty-eight
shots in ninety-five minutes. At the end of that time, a ball from one
of the 128-pound guns entered her port-bow, and struck a portion of
her machinery. Six men were slightly wounded by the splinters which
flew from the ship’s timbers. She retired beyond the range of the
guns, to ascertain the amount of damage, and in the afternoon, after
repairing, was again ordered to the charge, and fired a number of
shots, but without sensible effect.

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(eBook PDF) Economics for Today 5th

Asia Pacific Edition by Layton

Part 1 Introduction to economics

Appendix to Chapter 1: applying graphs to economics 21

Chapter 2 Production possibilities and opportunity cost 31

Chapter 3 Market demand and supply 53

Chapter 4 Markets in action 81

Part 2 Microeconomic fundamentals

Chapter 6 Production costs 130

Part 3 Market structures

Chapter 8 Monopoly 187

Chapter 9 Monopolistic competition and oligopoly 210

Chapter 10 Policy issues: housing affordability and climate change 234

Part 4 Macroeconomic fundamentals

Chapter 12 Business cycles and economic growth 286

Chapter 13 Inflation and unemployment 312

Part 5 Macroeconomic theory and policy

Chapter 15 The monetary and financial system 381

The demand for money 388

Chapter 16 Macroeconomic policy I: monetary policy 412

Chapter 17 Macroeconomic policy II: fiscal policy 442

Part 6 Further aspects of international economics

Guide to the text

YOU’RE Do enrolments in different university courses reflect the law

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342 PART 4 / Macroeconomic fundamentals CHAPTER 13 / Inflation and unemployment 343

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