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 ESSENTIALS OF
ECONOMICS

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 ESSENTIALS OF
ECONOMICS NINTH EDITION

JOHN SLOMAN
The Economics Network, University of Bristol;
Visiting Professor, University of the West of England

DEAN GARRATT
Aston Business School

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 Pearson Education Limited
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Previously published 1998, 2001, 2004, 2007, 2010 (print), 2013, 2016, 2019 (print and electronic)
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Names: Sloman, John, 1947- author. | Garratt, Dean, 1970- author.
Title: Essentials of economics / John Sloman, The Economics Network,
University of Bristol, Visiting Professor, University of the West of
England, Dean Garratt, Aston Business School.
Description: Ninth edition. | Harlow, England ; Hoboken, New Jersey :
Pearson, 2023. | Includes bibliographical references and index. |
Summary: “Welcome to this introduction to economics. Whether you are
planning to study economics beyond this level, or whether this will be
your only exposure to this fascinating subject, we hope that you will
find the text enjoyable and that it will give you some insight into the
economy in which you live and the economic forces that shape all our
lives”– Provided by publisher.
Identifiers: LCCN 2022050399 (print) | LCCN 2022050400 (ebook) | ISBN
9781292440101 (paperback) | ISBN 9781292440156 (ebook) | ISBN
9781292440149 (epub)
Subjects: LCSH: Economics.
Classification: LCC HB171 .S59 2023 (print) | LCC HB171 (ebook) | DDC
330–dc23/eng/20221026
LC record available at https://lccn.loc.gov/2022050399
LC ebook record available at https://lccn.loc.gov/2022050400

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 About the authors
John Sloman is Visiting Fellow at the
University of Bristol and Associate
of the Economics Network (www.
economicsnetwork.ac.uk) a UK-wide
organisation, where, until his retire-
ment in 2012, he was Director. The
Economics Network is based at the
University of Bristol and provides a
range of services designed to promote
and share good practice in learning
and teaching economics. The Net-
work is supported by grants from the
Royal Economic Society, the Scottish Economic Society and univer-
sity economic departments and units from across the UK.
John is also visiting professor at the University of the West of
England, Bristol, where, from 1992 to 1999, he was Head of School
of Economics. He taught at UWE until 2007.
John has taught a range of courses, including economic principles
on social science and business studies degrees, development econom-
ics, comparative economic systems, intermediate macroeconomics
and managerial economics. He has also taught economics on various
professional courses.
He is also the co-author with Dean Garratt and Jon Guest of
Economics (Pearson Education, 10th edition 2018), with Dean
Dean Garratt is a senior teaching fel-
low at Aston Business School. He
joined Aston University in September
2018 having previously been a Princi-
pal Lecturer at Nottingham Business
School. Dean teaches economics at a
variety of levels, including modules in
macroeconomics and economics for
non-specialists. He is passionate
about encouraging students to com-
municate economics more intuitively,
to deepen their interest in economics and to apply economics to a
range of issues.
Earlier in his career Dean worked as an economic assistant at
both HM Treasury and at the Council of Mortgage Lenders. While
at these institutions he was researching and briefing on a variety of
issues relating to the household sector and to the housing and mort-
gage markets.
Dean is a Senior Fellow of the Higher Education Academy and
an Associate of the Economics Network which aims to promote
F01 Essentials of Economics 40101.indd 5
Garratt, Jon Guest and Elizabeth Jones of Economics for Business
(Pearson Education, 8th edition 2019) and with Elizabeth Jones of
Essential Economics for Business (5th edition 2017). Translations or
editions of the various books are available for a number of different
countries with the help of co-authors around the world.
John is very interested in promoting new methods of teaching
economics, including group exercises, experiments, role playing,
computer-aided learning and use of audience response systems and
podcasting in teaching. He has organised and spoken at conferences
for both lecturers and students of economics throughout the UK and
in many other countries.
As part of his work with the Economics Network he has con-
tributed to its two sites for students and ­prospective students of
economics: Studying Economics (www.studyingeconomics
.ac.uk) and Why Study Economics? (www.whystudyeconomics
.ac.uk)
From March to June 1997, John was a visiting lecturer at the
University of Western Australia. In July and August 2000, he was
again a visiting lecturer at the University of Western Australia and
also at Murdoch University in Perth.
In 2007, John received a Lifetime Achievement Award as ‘outstand-
ing teacher and ambassador of economics’ presented jointly by the
Higher Education Academy, the Government Economic Service and
the Scottish Economic Society.
high-quality teaching practice. He has been involved in several pro-
jects promoting a problem-based learning (PBL) approach in the
teaching of economics. In 2006, Dean was awarded the Outstanding
Teaching Prize by the Economics Network. The award recognises
exemplary teaching practice that deepens and inspires interest in
economics. In 2013, he won the student-nominated Nottingham
Business School teacher of the year award.
Dean has been an academic assessor for the Government Economic
Service (GES) helping to assessed candidates at Economic Assessment
Centres (EACs). In this role he assessed candidates looking to join the
GES, the UK’s largest employer of professional economists.
Dean has run sessions on HM Treasury’s Graduate Develop-
ment Programme (GDP). These sessions covered principles in policy
making, applying economics principles and ideas to analyse policy
issues and contemporary developments in macroeconomics.
Outside of work, Dean is an avid watcher of many sports.
­Having been born in Leicester, he is a season ticket holder at both
Leicester City Football Club and Leicestershire County Cricket
Club.
15/12/2022 14:54
 Brief contents

About the authors v

Preface xiii
Student and lecturer resources xvii
Acknowledgements xix

Part A INTRODUCTION

1 Economic issues 2

Part B MICROECONOMICS

2 Markets, demand and supply 30

3 Markets in action 48
4 The demand decision 71
5 The supply decision 93
6 Market structures 121
7 Wages and the distribution of income 162
8 Market failures and government policy 193

Part C MACROECONOMICS

9 Aggregate demand and the business cycle 232

10 Aggregate supply and economic growth 273
11 The financial system, money and interest rates 301
12 Output, unemployment and inflation 341
13 Macroeconomic policy 374

Part D INTERNATIONAL ECONOMICS

14 Globalisation and international trade 414

15 Balance of payments and exchange rates 453
Websites appendix W:1
Key ideas and glossary K:1
Index I:1

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 Detailed contents

About the authors v Other determinants of demand 32

Movements along and shifts in the demand curve 33
Preface xiii
2.2 Supply 34
Student and lecturer resources xvii Supply and price 34
Acknowledgements xix The supply curve 34
Other determinants of supply 35
Movements along and shifts in the supply curve 36
Part A INTRODUCTION 2.3 The Determination of Price 36
Equilibrium price and output 36
1 Economic issues 2 Movement to a new equilibrium 43
1.1 Global Economic Issues 3 2.4 The Free-Market Economy 45
COVID-19 and the global health emergency 3 Advantages of a free-market economy 45
Global inflation 4 Problems with a free-market economy 45
The environment and the global climate emergency 4
Chapter 2 Boxes
1.2 The Core of Economics 5
2.1 UK House Prices: Unearthing the foundations of house
The problem of scarcity 5
price patterns 38
Demand and supply 6
2.2 Stock Market Prices: Taking stock of share prices 40
1.3 Dividing Up the Subject 6
2.3 Commodity Prices: Riding the commodities
Microeconomics 7
Big Dipper 42
Macroeconomics 9
1.4 Modelling Economic Relationships 12
The production possibility curve 13 3 Markets in action 48
The circular flow of goods and incomes 15 3.1 Price Elasticity of Demand 49
Models and data 16 The price elasticity of demand 49
1.5 Economic Systems 19 Measuring the price elasticity of demand 50
The command economy 20 Interpreting the figure for elasticity 50
The free-market economy 22 Determinants of price elasticity of demand 51
The price mechanism 22 3.2 Price Elasticity of Demand and Consumer
The mixed market economy 26 Expenditure 52
Chapter 1 Boxes 3.3 Price Elasticity of Supply (PES) 55
1.1 The Opportunity Costs of Studying: What are you The determinants of price elasticity of supply 57
sacrificing? 8 3.4 Other Elasticities 57
1.2 Business Cycles: The inherent volatility of economies 11 Income elasticity of demand 57
1.3 Nominal and Real House Prices: Going through the roof 18 Cross-price elasticity of demand 58
1.4 Command Economies: Rise and fall of planning 3.5 Markets and Adjustment over Time 60
in Russia 22 Short-run and long-run adjustment 60
Price expectations and speculation 60
3.6 Markets Where Prices are Controlled 63
Part B MICROECONOMICS Setting a minimum (high) price 63
Setting a maximum (low) price 64
2 Markets, demand and supply 30 Chapter 3 Boxes
2.1 Demand 31 3.1 The Measurement of Elasticity 52
The relationship between demand and price 31 3.2 Advertising and its Effect on Demand Curves: How to
The demand curve 31 increase sales and price 56

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 viii DETAILED CONTENTS

3.3 Elasticities and Relationships: Where there’s a Long-run cost curves in practice 106
relationship, there’s an elasticity 59 Postscript: decision- making in different
3.4 Short Selling: Gambling on a fall in share prices 63 time periods 106
3.5 A Minimum Unit Price for Alcohol: A way of reducing 5.3 Revenue 108
alcohol consumption 65 Total, average and marginal revenue 108
3.6 UK Payday Loan Cap: Capping the cost of short-term Average and marginal revenue curves when
credit 66 price is not affected by the firm’s output 110
3.7 The Effect of Imposing Taxes on Goods: Who ends up Average and marginal revenue curves when
paying? 68 price varies with output 110
Shifts in revenue curves 112
5.4 Profit Maximisation 112
4 The demand decision 71
Some qualifications 113
4.1 Consumer Choice 72 5.5 Problems with Traditional Theory 115
Utility and the rational consumer 72 Explaining actual producer behaviour 115
The rational consumer’s optimal combination of goods 75 Alternative aims 117
4.2 The Timing of Costs and Benefits 77
Intertemporal choices 77 Chapter 5 Boxes
Maximising utility with intertemporal choices 77 5.1 Diminishing Returns in the Bread Shop: Is the baker
4.3 Uncertainty and Risk 78 using his loaf? 95
Choice under risk and uncertainty 78 5.2 Malthus and the Dismal Science of Economics:
Attitudes towards risk 80 Population growth + diminishing returns = starvation 97
Insurance: a way of removing risks 81 5.3 The Relationship Between Averages and Marginals 99
Choices under asymmetric information 83 5.4 Costs and the Economic Vulnerability of Firms: The
4.4 Behavioural Economics 85 behaviour of costs and firms’ financial well-being 100
What is behavioural economics? 85 5.5 The Optimum Combinations of Inputs: Equi-marginal
Processing limited information 85 principle in production 105
Taking other people into account 87 5.6 Minimum Efficient Scale: The extent of economies
Biased behaviour 88 of scale in practice 108
Implications for economic policy 89

Chapter 4 Boxes 6 Market structures 121

4.1 Satisfaction and Consumer Demand: Identifying the 6.1 The Degree of Competition 122
benefit drivers 73 6.2 Perfect Competition 123
4.2 Optimal Consumption Bundles: Equi-marginal principle Assumptions 123
in consumption 76 The short-run equilibrium of the firm 124
4.3 Intertemporal Decision Making and the The short-run supply curve 125
Rational Consumer: Incorporating impatience into The long-run equilibrium of the firm 125
models of consumer choice 79 6.3 Monopoly 127
4.4 Futures Markets: A way of reducing uncertainty 82 What is a monopoly? 127
4.5 Problems with Insurance Markets: Adverse selection Barriers to entry 127
and moral hazard 84 Equilibrium price and output 131
4.6 Nudging People: How to change behaviour without Monopoly versus perfect competition: which
taking away choice 90 best serves the public interest? 132
Potential competition or potential monopoly?
5 The supply decision 93 The theory of contestable markets 133
6.4 Monopolistic Competition 136
5.1 Production and Costs: Short Run 94
Assumptions 136
Short-run and long-run changes in production 94
Equilibrium of the firm 137
Production in the short run: the law of
Non-price competition 138
diminishing returns 94
Monopolistic competition and the public interest 138
Measuring costs of production 95
6.5 Oligopoly 139
Costs and output 96
The two key features of oligopoly 140
5.2 Production and Costs: Long Run 102
Competition and collusion 140
The scale of production 102
Collusive oligopoly 140
Long-run average cost 104
Non-collusive oligopoly: the breakdown
The relationship between long-run and short-run
of collusion 145
average cost curves 106

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 DETAILED CONTENTS ix

Non-collusive oligopoly: assumptions about 7.4 Minimum Wage Legislation: A way of helping
rivals’ behaviour 145 the poor? 182
Oligopoly and the consumer 147 7.5 Inequality and Economic Growth: Macroeconomic
6.6 Game Theory 149 implications of income inequality 184
Simultaneous single-move games 149 7.6 Uk Tax Credits: An escape from the poverty trap? 188
Repeated simultaneous-move games 151
Sequential-move games 152
6.7 Price Discrimination 155 8 Market failures and government policy 193
Advantages to the firm 157 8.1 Social Efficiency 194
Price discrimination and the public interest 157 8.2 Market Failures: Externalities and Public Goods 196
Externalities 196
Chapter 6 Boxes
Public goods 199
6.1 E-Commerce: Has technology shifted market
8.3 Market Failures: Monopoly Power 201
power? 128
Deadweight loss under monopoly 201
6.2 Breaking the Monopoly on live Premier League Football:
Conclusions 202
The sky is the limit for the English Premier League 134
8.4 Other Market Failures 202
6.3 OPEC: The history of the world’s most famous
Imperfect information 202
cartel 142
Immobility of factors and time lags in response 203
6.4 Buying Power: What’s being served up by the UK grocery
Protecting people’s interests 203
sector? 148
Other objectives 204
6.5 The Prisoners’ Dilemma: Choosing whether to deny or
How far can economists go in advising
confess 153
governments? 205
6.6 Profit-Maximising Prices and Output For a
8.5 Government Intervention: Taxes and Subsidies 206
Third-Degree Price Discriminating Firm: Identifying
The use of taxes and subsidies 206
different prices in different markets 159
Assessing the use of taxes and subsidies 208
8.6 Government Intervention: Laws and Regulation 209
Laws prohibiting or regulating undesirable
7 Wages and the distribution of income 162
structures or behaviour 209
7.1 Wage Determination in a Perfect Market 163 Regulatory bodies 209
Perfect labour markets 163 8.7 Other Forms of Government Intervention 212
The supply of labour 163 Changes in property rights 212
The demand for labour: the marginal productivity Provision of information 213
theory 164 The direct provision of goods and services 213
Wages and profits under perfect competition 167 Nationalisation and privatisation 214
7.2 Wage Determination in Imperfect Markets 168 8.8 More or Less Intervention? 216
Firms with power 168 Drawbacks of government intervention 216
The role of trade unions 169 Advantages of the free market 216
Bilateral monopoly 169 Should there be more or less intervention in the
The efficiency wage hypothesis 171 market? 217
7.3 Inequality 172 8.9 The Environment: A Case Study in Market Failure 217
Types of inequality 172 The environmental problem 217
Measuring the size distribution of income 174 Market failures 218
The functional distribution of income 176 Policy alternatives 218
The distribution of wealth 180 How much can we rely on governments? 226
Causes of inequality 181
Chapter 8 Boxes
7.4 The Redistribution of Income 185
8.1 The Tragedy of the Commons: The depletion of
Taxation 185
common resources 200
Benefits 186
8.2 Should Health-Care Provision be Left to the Market?:
The tax/benefit system and the problem of
A case of multiple market failures 204
disincentives: the ‘poverty trap’ 188
8.3 Green Taxes: Are they the answer to the problem
Chapter 7 Boxes of pollution? 220
7.1 Labour Market Trends: Patterns in employment 164 8.4 Trading our Way out of Climate Change: The EU carbon
7.2 Wages under Bilateral Monopoly: All to play for? 170 trading system 222
7.3 The Gender Pay Gap: Wage inequalities between 8.5 The Problem of Urban Traffic Congestion: Does
men and women 178 Singapore have the answer? 224

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 x DETAILED CONTENTS

10.2 Alternative Perspectives on Aggregate Supply 278

Part C MACROECONOMICS
The short-run aggregate supply curve 278
The long-run aggregate supply curve 281
9 Aggregate demand and the business cycle 232
Areas of general agreement 283
9.1 Introduction to Macroeconomics 233 10.3 Introduction to Long-Term Economic Growth 284
Key macroeconomic issues 233 Long-run growth and the AD/AS model 284
Government macroeconomic policy 239 Comparing the growth performance of different
9.2 Economic Volatility and the Business Cycle 240 countries 285
The hypothetical business cycle 240 The causes of economic growth 286
The business cycle in practice 241 10.4 Economic Growth without Technological Progress 287
Spending, output and the business cycle 241 Capital accumulation and capital deepening 287
9.3 The Circular Flow of Income Model 244 A simple model of growth 291
The inner flow, withdrawals and injections 245 The neoclassical growth model 292
The relationship between withdrawals and 10.5 Economic Growth with Technological Progress 295
injections 247 Technological progress and the neoclassical model 295
Equilibrium in the circular flow 248 Endogenous growth theory 296
9.4 Simple Keynesian Model of National Income
Determination 248 Chapter 10 Boxes
Showing equilibrium with a Keynesian diagram 249 10.1 Short-run Aggregate Supply: The importance of
The withdrawals and injections approach 249 micro foundations 278
The income and expenditure approach 250 10.2 Measuring Labour Productivity: Mind the UK
9.5 The Multiplier 252 productivity gap 288
The withdrawals and injections approach 253 10.3 Getting Intensive with Physical Capital: Capital
The income and expenditure approach 254 intensity and labour productivity 290
The multiplier: a numerical illustration 255 10.4 UK Human Capital: Estimating the capabilities of the
The multiplier and the full-employment level of labour force 298
national income 255
9.6 The Volatility of Private-Sector Spending 258 11 The financial system, money and
Consumption cycles 258 interest rates 301
Instability of investment 261 11.1 The Meaning and Functions of Money 302
The role of the financial sector 263 The functions of money 302
Why do booms and recessions come to an end? What should count as money? 303
What determines the turning points? 264 11.2 The Financial System 303
9.7 Appendix Measuring National Income and Output 266 The banking system 303
The product method 266 Deposit taking and lending 305
The income method 267 Profitability, liquidity and capital adequacy 310
The expenditure method 267 Strengthening international regulation of
From GDP to national income 269 capital adequacy and liquidity 313
Households’ disposable income 269 The central bank 317
Taking account of inflation 270 The role of the money markets 319
11.3 The Supply of Money 321
Chapter 9 Boxes
The creation of credit 322
9.1 Output Gaps and the Business Cycle: An alternative
The creation of credit: the real world 323
measure of excess or deficient demand 242
What causes money supply to rise? 325
9.2 The Consumption Function: The relationship between
The flow of funds equation 326
consumption and income 252
Credit cycles 328
9.3 Confidence and Spending: Does confidence help to
The relationship between money supply and
forecast spending? 264
the rate of interest 328
9.4 Making Sense of Nominal and Real GDP: The interesting
11.4 The Demand for Money 331
case of nominal and real Japanese GDP 270
What determines the size of the demand for
money? 331
10 Aggregate supply and economic growth 273 11.5 Equilibrium 333
10.1 The AD/AS Model 274 Equilibrium in the money market 333
The aggregate demand curve 274 The link between the money and goods markets 334
The aggregate supply curve 275 11.6 Money Supply, Aggregate Demand and
Equilibrium 276 Inflation 336

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 DETAILED CONTENTS xi

The equation of exchange 336 Problems of magnitude 382

Money and aggregate demand 337 The problem of timing 384
Fiscal rules 385
Chapter 11 Boxes
13.3 Monetary Policy 386
11.1 Financial Intermediation: What is it that banks do? 304
The policy setting 387
11.2 The Growth of Banks’ Balance Sheets: The rise of
Control of the money supply over the medium
wholesale funding 308
and long term 388
11.3 The Rise of Securitisation: Spreading the risk or
Short-term monetary measures 389
promoting a crisis? 314
Techniques to control the money supply 390
11.4 Minsky’s Financial Instability Hypothesis: Are credit
Techniques to control interest rates 391
cycles inevitable? 329
Using monetary policy 396
12 Output, unemployment and inflation 341 13.4 Demand-Side Policy 398
Attitudes towards demand management 398
12.1 Unemployment 342
The case for rules and policy frameworks 399
Measuring unemployment 342
The case for discretion 400
Unemployment trends 342
Central banks and a Taylor rule 401
Unemployment and the labour market 344
Conclusions 401
Types of disequilibrium unemployment 346
13.5 Supply-Side Policy 402
Types of equilibrium unemployment (or natural
Market-orientated supply-side policies 402
unemployment) 348
Interventionist supply-side policies 405
Long-term changes in unemployment 349
The link between demand-side and supply-side
12.2 Inflation 352
policies 407
Introduction to the causes of inflation 352
12.3 The Relationship Between Output, Chapter 13 Boxes
Unemployment and Inflation: The Short Run 357 13.1 Primary Surpluses and Sustainable Public Finances: The
The AD/AS model 357 fiscal arithmetic of government debt 380
The Phillips curve 359 13.2 The Fiscal Impulse: Assessing a country’s
12.4 The Relationship Between Inflation and fiscal stance 382
Unemployment: Introducing Expectations 363 13.3 The Evolution of the Stability and Growth Pact
The expectations-augmented Phillips curve 363 in the EU: A supranational fiscal framework 386
Natural rate hypothesis 363 13.4 The Operation of Monetary Policy in the UK:
The accelerationist hypothesis 365 Managing the reserves 392
New classical perspective 365 13.5 Monetary Policy in the Eurozone: The role
Keynesian views 368 of the ECB 394
12.5 Inflation Rate Targeting 369 13.6 Quantitative Easing: Rethinking monetary policy
in hard times 396
Chapter 12 Boxes
13.7 Public Funding of Apprenticeships: Reforms to
12.1 The Costs of Unemployment: Is it just the
apprenticeships in England 408
unemployed who suffer? 344
12.2 The Duration of Unemployment: Taking a dip in the
unemployment pool 347
12.3 Inflation and Living Standards: The return of inflation 353 Part D INTERNATIONAL ECONOMICS
12.4 Cost-push Inflation: Cost-push inflation and
supply shocks 356 14 Globalisation and international trade 414
12.5 Mind the Gap: Do output gaps explain inflation? 360 14.1 Global Interdependence 415
12.6 The Accelerationist Hypothesis: The race to outpace Interdependence through trade 415
inflationary expectations 366 Financial interdependence 417
International business cycles 418
13 Macroeconomic policy 374 Global policy response 418
13.1 Fiscal Policy and the Public Finances 375 14.2 The Advantages of Trade 418
Roles for fiscal policy 375 Trading patterns 418
Public-sector finances 375 Specialisation as the basis for trade 421
Sustainability of public finances 378 The law of comparative advantage 421
The business cycle and the public finances 378 The gains from trade based on comparative
The fiscal stance 378 advantage 422
13.2 The Use of Fiscal Policy 379 Other reasons for gains from trade 423
The effectiveness of fiscal policy 382 The terms of trade 423

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 xii DETAILED CONTENTS

14.3 Arguments for Restricting Trade 424 The capital account 455
Arguments in favour of restricting trade 424 The financial account 456
Problems with protection 427 15.2 Exchange Rates 457
14.4 The World Trading System and the WTO 428 Determination of the rate of exchange in a
14.5 Trading Blocs 431 free market 460
Types of preferential trading arrangement 431 15.3 Exchange Rates and the Balance of Payments 462
The direct effects of a customs union: trade Exchange rates and the balance of payments:
creation and trade diversion 432 no government or central bank intervention 462
Longer-term effects of a customs union 432 Exchange rates and the balance of payments:
Preferential trading in practice 433 with government or central bank intervention 463
14.6 The European Union 435 15.4 Fixed Versus Floating Exchange Rates 464
From customs union to common market 435 Advantages of fixed exchange rates 464
The benefits and costs of the single market 436 Disadvantages of fixed exchange rates 464
Completing the internal market 437 Advantages of a free-floating exchange rate 465
The effect of the new member states 438 Disadvantages of a free-floating exchange rate 466
14.7 The UK and Brexit 439 Exchange rates in practice 467
Alternative trading arrangements 439 15.5 The Origins of the Euro 470
Long-term growth, trade and Brexit 439 The ERM 470
14.8 Trade and Developing Countries 442 The Maastricht Treaty and the road to the single
The relationship between trade and currency 471
development 442 15.6 Economic and Monetary Union (EMU)
Trade strategies 443 in Europe 472
Approach 1: Exporting primaries – exploiting Birth of the euro 472
comparative advantage 443 Advantages of the single currency 472
Approach 2: Import-substituting Opposition to EMU 473
industrialisation (ISI) 446 Future of the euro 475
Approach 3: Exporting manufactures – a 15.7 Debt and Developing Countries 479
possible way forward? 447 The oil shocks of the 1970s 479
Dealing with the debt 481
Chapter 14 Boxes
14.1 Trade Imbalance in the USA and China: An illustration Chapter 15 Boxes
of economic and financial interdependencies 416 15.1 Nominal and Real Exchange Rates: Searching for a
14.2 Trading Places: Partners in trade 420 real advantage 459
14.3 Do we Exploit Foreign Workers by Buying Cheap 15.2 Dealing in Foreign Currencies: A daily juggling act 462
Foreign Imports? 426 15.3 The Importance of International Financial
14.4 The Doha Development Agenda: A new direction Movements: How a current account deficit can
for the WTO? 430 coincide with an appreciating exchange rate 466
14.5 Features of The Single Market 436 15.4 The Euro/Dollar See-Saw: Ups and downs in the
14.6 The Evolving Comparative Advantage of China: currency market 468
Riding the dragon 448 15.5 Optimal Currency Areas: When it pays to pay in the
same currency 474
15 Balance of payments and exchange rates 453 Websites appendix W:1
15.1 The Balance of Payments Account 454 Key ideas and glossary K:1
The current account 454 Index I:1

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 Preface
TO THE STUDENT
Welcome to this introduction to economics. Whether you are plan-
ning to study economics beyond this level, or whether this will be
your only exposure to this fascinating subject, we hope that you will
find the text enjoyable and that it will give you some insight into the
economy in which you live and the economic forces that shape all
our lives.
Although you have probably never studied the subject before,
you will almost certainly know quite a lot of economics already.
After all, you make economic decisions virtually every day of your
life. Every time you go shopping, you are acting as an ‘economist’:
deciding what to buy with your limited amount of money. And in
a period of rising prices, such as in 2022, these decisions become
more important. But it is not just with decisions about buying that
we act as economists. How much to work (something that students
are increasingly forced to do nowadays), how much to study, even
how much time to devote to various activities during the course of
the day, are all, in a way, economic choices.
To satisfy us as consumers, goods and services have to be pro-
duced. We will therefore study the behaviour of firms and what
governs the decisions that they make. How will the decisions of big
businesses differ from those of small firms? How will the degree of
competition affect the extent to which we gain or lose from the
activities of firms?
In analysing economic choices we look at some of the big eco-
nomic issues that face us all as members of society in the twen-
ty-first century. Despite huge advances in technology, and despite
the comfortable lives led by many people in the industrialised
world, we continue to suffer from volatile economic growth, indus-
trial change and unemployment and all the insecurity that these
bring. Unexpected shocks, such as the COVID-19 pandemic, can
have a major effect on livelihoods and jobs. We continue to witness
poverty and inequality, and in many countries the gap between rich
and poor has actually grown wider; our environment is polluted and
the planet is warming; our growing affluence as consumers is
increasingly bought at the expense of longer hours at work and
growing levels of stress.
We live in a highly interdependent world where actions have
implications elsewhere. The Russian invasion of Ukraine directly
caused rises in gas, oil and grain prices and drove up the cost of
living, hitting poor people especially hard as they spend a large pro-
portion of their income on energy and food.
F01 Essentials of Economics 40101.indd 13
So, what can be done about these problems? This text seeks not
only to analyse these problems but also to examine the sorts of pol-
icies that governments might pursue in their attempt to address them.
The text is designed with one overriding aim: to make this excit-
ing and highly relevant subject as clear to understand as possible.
To this end, the text has a number of important features:
■ A direct and straightforward written style; short paragraphs
to aid rapid comprehension. The aim all the time is to provide
maximum clarity.
■ A careful use of colour to guide you through the text and make
the structure easy to follow.
■ Key ideas highlighted and explained where they first appear.
These ideas are key elements in the economist’s ‘toolkit’.
Whenever they recur later in the text, an icon appears in the
margin and you are referred back to the page where they are
defined and explained. All the key ideas are gathered together
at the beginning of the Glossary.
■ Some of the key ideas are particularly important in affecting
the way we see the world: they help us think like economists.
We call these ‘threshold concepts’ and there are 15 of these.
■ Clear chapter-opening pages, which set the scene for the chap-
ter. They also highlight the issues that will be covered in the
chapter and can thus be seen as ‘learning objectives’.
■ Summaries at the end of each section (rather than each chap-
ter). This provides a very useful means of revising and checking
your understanding as you progress.
■ Definitions of all technical terms given at the foot of the page where
the term is first used. The term itself is highlighted in the text.
■ ‘Pause for thought’ questions integrated in the text. These are
designed to help you reflect on what you have just read and
to check on your understanding. Answers to all ‘pause for
thought’ questions are given on the student free-access com-
panion website, which, for the rest of the text, we refer to sim-
ply as the ‘student website’.
■ A comprehensive index. This enables you to look up a concept
or topic as required and to see it used in context.
■ An alphabetical glossary at the end of the text. This gathers
together all the defined terms.
■ Plentiful use of up-to-date examples to illustrate the arguments.
This helps to bring the subject alive and puts it in context.
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 xiv PREFACE
■ Review questions at the end of each chapter for either individ-
ual or class use.
■ Answers to all odd-numbered questions are given on
the student website. These questions will be helpful for
self-testing, while the even-numbered ones can be used for
class testing.
■ Many boxes (typically four to six per chapter) providing case
studies, news items, applications, or elaborations of the text.
The boxes are of two types: Case Studies and Applications; and
Exploring Economics. Each box contains questions allowing
students to assess their own understanding and each box con-
tains an activity designed to develop important skills around
research, data analysis and the communication of economic
ideas and principles. These skills are not only of use to you at
university but also in the world of work. They are frequently
identified by employers as being especially valuable. Hence, by
undertaking the activities in the boxes you help increase your
employability.
TO LECTURERS AND TUTORS
This ninth edition of Essentials of Economics is an abridged version
of Economics, 11th edition (John Sloman, Dean Garratt and Jon
Guest). Some passages have been directly transcribed, while others
have been extensively rewritten in order to provide a consistent cov-
erage of the ‘essentials’ of economics.
The text is designed specifically for one-semester courses in
introductory economics. There are 15 chapters (1 introductory,
7 micro, 5 macro and 2 international), each providing about a
week’s worth of reading. The text is also ideal for year-long courses
that are designed for those not going on to specialise in economics,
or where economics is only a subsidiary component.
Naturally, in a one-semester course, or in courses for
non-specialists, tutors cannot hope to cover all the principles of
economics. Thus some things have had to go. The text does not
cover indifference curves or isoquants. The analysis of costs is
developed with only an informal reference to production func-
tions. Distribution theory is confined to the determination of wage
rates. In macroeconomics, IS/LM and IS/MP analysis have been
left out, as have some of the more advanced debates in monetary
and exchange rate theory. In addition, many passages have been
simplified to reflect the nature of courses on which the text is
likely to be used. The result is a text that is approximately half the
length of Economics, 11th edition.
Suggestions for longer or more advanced
courses
If you want to use this text on more rigorous courses, most
chapters have one or more Web Appendices. These introduce
F01 Essentials of Economics 40101.indd 14
■ A comprehensive set of web references at the end of each of
the four parts of the text. Each reference is numbered to match
those in the Web Appendix at the end of the text. You can eas-
ily access any of these sites from this book’s own website (at
http://www.pearsoned.co.uk/sloman). When you enter the site,
click on Hot Links. You will find all the sites from the Web
Appendix listed. Click on the one you want and the ‘hot link’
will take you straight to it.
■ Appendices for most chapters appear on the student website.
These Web Appendices take the argument further than in the
text and look at some more advanced theories. While none of
these is necessary for studying this text, and many courses will
not refer to them, they provide the necessary additional material
for more advanced courses that still require a short textbook.
Good luck with your studies – and have fun. Perhaps this will
be just the beginning for you of a lifelong interest in economic issues
and the economy.
students to more advanced models, such as indifference analy-
sis, isoquant ana­lysis, general equilibrium in both a closed and
an open economy, IS/LM, IS/MP, the full money multiplier, and
trade creation and diversion. You can use any or all of them to
fit your course.
The text is also ideal for the economics AS/A2 syllabuses of the
various boards.
The text as also highly suitable for courses, such as HND, where
the economic environment component is part of a larger module.
Extensive revision within the existing
structure
To bring economics alive and show how the subject relates to
real-world issues, the ninth edition of Essentials of Economics
contains a great deal of applied material. Consequently, there
have been considerable revisions from the previous editions to
reflect contemporary issues, debates and policy interventions.
Specifically, you will find that:
■ Many of the boxes are new or extensively revised.
■ There are many new examples given in the text.
■ All tables and charts have been updated, as have factual refer-
ences in the text.
■ Economic analysis and debate has been strengthened and
revised at various points in the text in light of economic events
and developments in economic thinking.
■ Building on the revisions in previous editions there is consider-
able coverage of behavioural economics.
15/12/2022 14:54

■ The climate emergency is considered in many places through-
out the text, with consideration of the economic causes and
government policies to tackle global warming.
■ There is also coverage throughout of the impact of the COVID-
19 pandemic and the various measures taken by governments
to limit the economic damage.
■ There is analysis of the impact on inflation of both supply
problems in the aftermath of COVID and the Russian inva-
sion of Ukraine. The reaction of governments and central
banks is also considered.
■ All policy sections have been thoroughly revised to reflect
the changes that have taken place since the last edition. This
includes an analysis in several parts of the text of the impli-
cations of the UK’s exit from the EU and of policies being
pursued in various parts of the world that restrict trade.
■ Most importantly, every part of the text has been carefully con-
sidered, and if necessary redrafted, to ensure both maximum
clarity and contemporary relevance.
SUPPLEMENTS
MyLab Economics for students
MyLab Economics provides a comprehensive set of online tests,
homework and revision exercises. If you have purchased this text
as part of a pack, then you can gain access to MyLab by follow-
ing the instructions to register the access code. If you’ve purchased
this text on its own, then you can purchase access online at www.
myeconlab.com
MyLab Economics provides a variety of tools to enable students
to access their own learning, including exercises, quizzes and tests,
arranged chapter by chapter. There are many new questions in this
edition and each question has been carefully considered to reflect
the learning objectives of the chapter. A personalised Study Plan
identifies areas to concentrate on to improve grades, and specific
tools are provided to each student to direct their studies in a more
efficient way.
Student website
In addition to the materials on MyLab Economics, there is an
open-access companion website for students with a large range of
other resources, including:
■ Animations of key models with audio explanations. These
‘audio animations’ can be watched online or downloaded to a
computer, MP4 player, smart phone, etc.
■ Links to the Sloman Economics News site with news items
added several times each month, with introductions, links to
newspaper and other articles and to relevant data, questions
for use in class or for private study, and references to chapters
in the text. You can search the extensive archive by chapter or
keyword.
F01 Essentials of Economics 40101.indd 15
PREFACE xv
The text also contains 36 ‘key ideas’ and these are highlighted
and explained when they first appear. These fundamental concepts
provide a ‘toolkit’ for students. Students can see them recurring
throughout the text, and an icon appears in the margin to refer back
to the page where the idea first appears. Showing how these ideas
can be used in a variety of contexts helps students to relate the dif-
ferent parts of the subject to each other. Fifteen of these concepts
are given the special status of ‘Threshold Concepts’. Understanding
and being able to use these concepts, such as opportunity cost, help
students to ‘think like an economist’. Each of these concepts is
explained in detail in MyLab Economics and on the student
­companion website.
But, despite considerable updating, the book retains the same
structure as the previous edition. This should make the transition
to the ninth edition straightforward as it removes the need to update
references to chapters, sections and pages in the book.
We hope that your students will find this an exciting and
­interesting text that is relevant to today’s issues.
■ More than 200 case studies with questions for self-study,
ordered chapter by chapter and referred to in the text.
■ A set of Web appendices which explore economic theory fur-
ther than in the text and are suitable for courses with more
advanced sections or where students want to study the subject
in greater depth.
■ An updated list of over 280 hot links to sites relevant to eco-
nomics. These are referred to in the book’s Websites Appendix
and at the end of each of the four Parts of the text.
■ Answers to all Pause for thought questions.
■ Answers to end-of-chapter questions.
■ Threshold Concepts. A detailed description of each of the
15 Threshold Concepts, showing how understanding them and
being able to apply them in a variety of contexts helps you to
think like an economist.
Note that Sloman Economics News and hotlinks can also be
accessed directly from http://pearsonblog.campaignserver.co.uk/.
MyLab Economics for lecturers and tutors
You can register online at www.myeconlab.com to use MyLab Eco-
nomics, which is a complete virtual learning environment for your
course or embedded into Blackboard, Moodle or your university’s
own online learning platform. You can customise its look and feel
and its availability to students. You can use it to provide support to
your students in the following ways:
■ MyLab’s gradebook automatically records each student’s
time spent and performance on the tests and Study Plan.
It also generates reports you can use to monitor your students’
progress.
15/12/2022 14:54
 xvi PREFACE
■ You can use MyLab to build your own test, quizzes and home-
work assignments from the question base provided to set your
own students’ assessment.
■ A select number of questions are generated algorithmically so
they use different values each time they are used.
■ You can create your own exercises by using the econ exercise
builder.
Contact your local Pearson representative for more details and
support.
Additional resources for lecturers
and tutors
There are many additional resources for lecturers and tutors that
can be downloaded from the lecturer section of MyLab or from
the Lecturer Resources section of the book’s website at www.pear-
soned.co.uk/sloman. These have been thoroughly revised for the
ninth edition. These include:
■ PowerPoint® slide shows in full colour for use with a data pro-
jector in lectures and classes. These can also be made available
to students by loading them on to a local network. There are
several types of slideshows:
– All figures from the text and most of the tables. Each figure
is built up in a logical sequence, thereby allowing tutors to
show them in lectures in an animated form. There is also a
non-animated version suitable for printing or for display on
an OHP or visualiser.
– A range of models. There are 26 files, each containing one
of the key models from the text, developed in an animated
sequence of between 20 to 80 screens.
– Customisable lecture slideshows. These are a series of
bullet-point lecture plans. There is one for each chapter of
the text. Each one can be easily edited, with points added,
deleted or moved, so as to suit particular lectures. A con-
sistent use of colour is made to show how the points tie
F01 Essentials of Economics 40101.indd 16
together. It is not intended that all the material is covered
in a single lecture; you can break at any point. It’s just con-
venient to organise them by chapter. They come in various
versions:
– Lecture slideshows with integrated diagrams. These lecture
plans include animated diagrams, charts and tables at the
appropriate points.
– Lecture plans with integrated diagrams and questions.
These are like the above but also include multiple-choice
questions, allowing lectures to become more interactive.
They can be used with or without an audience response
system (ARS). A special ARS version is available for Turn-
ingPoint® and is ready to use with appropriate ‘clickers’ or
with smartphones, tablets or laptops.
– Lecture plans without the diagrams. These allow you to con-
struct your own diagrams on the blackboard, whiteboard or
visualiser or use pre-prepared ones on a visualiser or OHP.
■ Case studies. These, also available in MyLab economics and
on the student website, can be reproduced and used for class-
room exercises or for student assignments. Answers are also
provided (not available on the student site).
■ Workshops. There are 15 of these – one for each chapter. They
are in Word® and can be reproduced for use with large groups (up
to 200 students) in a lecture theatre or large classroom. In A-level
classes, they can be used as worksheets, either for use in class or
for homework. Suggestions for use are given in an accompanying
file. Answers to all workshops are given in separate Word files.
■ Teaching/learning case studies. There are 20 of these. They
examine various approaches to teaching introductory econom-
ics and ways to improve student learning.
■ Answers to all end-of-chapter questions, pause for thought
questions, questions in boxes, questions in Web Cases and
Web Appendices and to the 15 workshops. They have been
completely revised with new hyperlinks where appropriate.
The following two pages show in diagrammatic form all the student
and lecturer resources.
15/12/2022 14:54
F01 Essentials of Economics 40101.indd 17
Student Resources

MyLab Economics
Student website (access using code in
(open access) the book or by
purchasing access)

Homework Other
News Threshold Chapter
quizzes resources
blog site concepts (15) resources
and tests for book

Current news Podcasts Links to Animated Calendar

Study plan
articles with on topical news articles models with for homework Glossary Grapher
(exercises)
questions news items by chapter audio (iPod) and tests

News Archive Hotlinks Web Practice and Links to sections Ebook

Case studies Assigned
searchable by to over appendices assigned on student to view any
(224) homework
chapter or month 280 sites (25) tests website chapter online

Answers to pause Answers to end- Hotlinks to

MyLab
for thought of-chapter Results Results sites listed
Economics help
questions questions (odd) in Appendix 2

15/12/2022 14:54
 Lecturer Resources

F01 Essentials of Economics 40101.indd 18

PowerPoint Economic Word
files experiments files

Teaching/
Figures and Models Lecture Student
learning
tables (animated) slideshows case studies
case studies

Animated Non-animated Animated Non-animated Web

Workshops Case studies
in full colour for OHTs in full colour for OHTs appendices
(15) (224)
for projection or printing for projection or printing (25)

Answers to Answers to
With Without Answers to
case study web appendix
questions questions workshops
questions questions

PointSolutions Plain (for Answers to

version for show of questions
clickers/phones hands, etc.) in book

Pause for
End-of-chapter Box
thought
questions questions
questions

15/12/2022 14:54

ACKNOWLEDGEMENTS
As with previous editions, we owe a debt to various people. A spe-
cial thanks to Peter Smith from the University of Southampton for
authoring the MyLab Economics questions and tests. Thanks to the
team at Pearson Education, and especially to Catherine Yates, who
has been a tremendous help and support at every stage of revising
the text. Thanks to Mel Carter, Jodie Mardell-Lines and Vivek
­Khandelwal for all the work they have put in to producing the text
and its supplements. Thanks too to the many users of the text who
have given us feedback. We always value their comments.
PUBLISHER’S ACKNOWLEDGEMENTS
Text credits
11 European Commission: Based on data in AMECO Database,
European Commission, DG Business, Economy, Euro (May 2022);
18 Office for National Statistics: Consumer Price Inflation time
series dataset and UK House Price Index: reports (Office for
National Statistics); 19 Office for National Statistics: Consumer
Price Inflation time series dataset and UK House Price Index:
reports (Office for National Statistics); 23 International Monetary
Fund: Data drawn from World Economic Outlook Database
(IMF, April 2022) and various forecasts; 38 Office for National
Statistics: Based on data from Consumer Price Inflation time series
dataset and UK House Price Index: reports (Office for National
Statistics); 40 Office for National Statistics: Based on data from
Consumer Price Inflation time series dataset, series CHAW (ONS)
and various (2022); 42 The World Bank Group: Based on data
from World Bank Commodity Price Data (The Pink Sheet), (Com-
modity Markets, World Bank, 2022); 97 Macmillan Publishers:
T.R. Malthus, First Essay on Population (Macmillan,1926),
pp. 13–14.; 109 European Commission: C. F. Pratten, ‘A survey of the
economies of scale’, in Research into the ‘Costs of Non-Europe’,
Volume 2 (Commission of the European Communities, Luxem-
bourg, 1988).; 109 European Commission: European Commission/
Economists Advisory Group Ltd, ‘Economies of scale’, The Single
Market Review, Sub-series V, Volume 4 (Commission of the Euro-
pean Communities, Luxembourg, 1997).; 128 Office for National
Statistics: Based on series J4MC from Time Series Data (National
Statistics).; 142 The World Bank Group: Nominal oil price data
from World Commodity Price Data (The Pink Sheet), Commodity
Markets (World Bank); 142 Organisation for Economic Co-­
operation and Development: Price Index from Data Extracts
(OECD); 164 Office for National Statistics: Based on data in series
MGRZ, YCBH, MGRQ, YCBW and EMP17 (ONS); 173 Office
for National Statistics: Based on data from The effects of taxes and
benefits on UK household income UK, 2020/21, Reference Table 2,
(ONS, 28 March 2022); 175 Office for National Statistics: The
F01 Essentials of Economics 40101.indd 19
PREFACE xix
John: As always, I owe a huge debt to my family, and especially my
wife and soulmate Alison, whose love and support have made this
and previous editions possible. And many thanks once again to
Dean, whose ideas and enthusiasm have been fantastic. It’s been
great to work together.
Dean: A special thank you must go to Patricia. She continues to be
my rock and remains steadfastly supportive. I would like to thank
my parents for all their love and continued support. Finally, thanks
to John for again inviting me to work on Essentials of Economics
and, not least, for his abundant patience.
Effects of Taxes and Benefits on Household Income, UK, 2020/21,
Reference Table 9 (ONS, 28 March 2022); 175 Organisation for
Economic Co-operation and Development: Based on data in
Income Inequality, OECD dataset (accessed 21 April 2021), https://
data.oecd.org/inequality/income-inequality.htm; 176 Office for
National Statistics: Based on data inThe Effects of Taxes and Ben-
efits on Household Income, UK, 2020/21, Reference Table 28
(ONS, 28 March 2022); 177 Office for National Statistics: Based on
data from The effects of taxes and benefits on household income,
UK, 2020/21, Reference Table 13, (ONS, 28 March 2022);
177 Office for National Statistics: Based on data in the Annual
Survey of Hours and Earnings, Table 14.2a, (National Statistics,
October 2021); 178 Office for National Statistics: Based on data in
Gender pay gap in the UK: 2021 (ONS, October 2021); 179 Office
for National Statistics: Earnings and Hours Worked, occupation
by four-digit SOC: ASHE Table 14.6a (ONS, October 2021);
180 Office for National Statistics: Household total wealth in Great
Britain: April 2018 to March 2020 (ONS, January 2022); 181 Office
for National Statistics: Based on data in Household Disposable
Income and Inequality, Table 11 (National Statistics, January
2018); 181 Office for National Statistics: Total Wealth: Wealth in
Great Britain, July 2006 to June 2016, Table 2.5 (National Statis-
tics, February 2018); 184 INTERNATIONAL MONETARY
FUND: ‘Tackling Inequality, October 2017’, Fiscal Monitor, IMF
(October 2017).; 187 European Commission: Based on data in
AMECO Database, European Commission (to 1980), https://ec.eu-
ropa.eu/info/business-economy-euro/indicators-statistics/economic-
databases/macro-economic-database-ameco/ameco-database_
en; 189 The National Archives: ‘Universal credit roll out delayed
again – to 2024’, BBC News (3 February 2020); 220 Office for
National Statistics: Based on data from Environmental taxes in the
United Kingdom (Office for National Statistics).; 221 Organisation
for Economic Co-operation and Development: Based on data in
Environmentally related tax revenue (OECD, 2022); 234 Interna-
tional Monetary Fund: Based on data in AMECO Database
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 xx PREFACE
(European Commission) up to 1980; and World Economic Out-
look (IMF, April 2022); 235 International Monetary Fund: Based
on data in data in AMECO Database (European Commission) up
to 1980; and World Economic Outlook (IMF, April 2022);
236 European Commission: Based on data in data in AMECO
Database (European Commission) up to 1980; and World Eco-
nomic Outlook (IMF, April 2022); 236 European Commission:
Based on data in AMECO Database (European Commission) up to
1980; and World Economic Outlook (IMF, April 2022); 239 Office
for National Statistics: Based on series CGDA and YBHA (ONS);
242 European Commission: Based on data from AMECO database
(European Commission, DGECFIN, May 2022) and various fore-
casts; 243 European Commission: Based on data in AMECO Data-
base, European Commission, DGECFIN; 244 United Nations:
National Accounts Main Aggregates Database (United Nations
Statistics Division), https://unstats.un.org/unsd/snaama/;
259 Office for National Statistics: Based on series KGZ7, KG7T
and IHYR (ONS, 2022); 260 Office for National Statistics: Based
on data from The UK National balance sheet estimates: 2021 and
series YBHA and HABN (National Statistics, 2022); 264 European
Commission: Based on data from The UK National balance sheet
estimates: 2021 and series YBHA and HABN (National Statistics,
2022); 265 European Commission: Based on data in AMECO
Database (European Commission, DGECFIN, May 2022);
268 Office for National Statistics: UK National Accounts, The
Blue Book: 2021 (ONS, October 2021); 269 Office for National
Statistics: UK National Accounts, The Blue Book: 2017, ONS,
www.ons.gov.uk/economy/grossdomesticproductgdp/compen-
dium/unitedkingdomnationalaccountsthebluebook/2020;
269 Office for National Statistics: UK National Accounts, The
Blue Book: 2017, ONS, www.ons.gov.uk/economy/grossdomes-
ticproductgdp/compendium/unitedkingdomnationalaccountsthe-
bluebook/2020; 270 International Monetary Fund: World
Economic Outlook Database (IMF, April 2022); 271 International
Monetary Fund: World Economic Outlook Database (IMF, April
2022); 284 Bank of England: Based on data from Bank of England
available at http://www.bankofengland.co.uk/publications/quar-
terlybulletin/threecenturiesofdata.xls; 284 Office for National
Statistics: Based on data from Quarterly National Accounts series
ABMI and IHYP (National Statistics), www.ons.gov.uk/economy/
grossdomesticproductgdp/; 286 European Commission: Based on
data from AMECO database (European Commission, DGECFIN);
288 Office for National Statistics: Based on data in OECDStat
(OECD, 2022); 289 Office for National Statistics: Based on data in
OECDStat (OECD, 2022), rebased by the authors; 289 Office for
National Statistics: Based on data in OECDStat (OECD, 2022);
290 Office for National Statistics: Based on data from Capital
Stocks, Consumption of Fixed Capital in the UK dataset (National
Statistics), https://www.ons.gov.uk/economy/nationalaccounts/
uksectoraccounts/bulletins/capitalstocksconsumptionoffixedcapi-
tal/2021; 291 European Commission: Based on data from AMECO
database (European Commission); 292 Office for National Statis-
tics: Based on series MLR3 and NPQT (National Statistics);
299 Office for National Statistics: Based on data in Human Capital
Estimates in the UK 2004 to 2020 (Office for National Statistics,
F01 Essentials of Economics 40101.indd 20
April 2022); 306 Bank of England: Based on data in Bankstats
(Bank of England), Table B1.4, Data published 1 July 2022;
308 Bank of England: (i) Data showing liabilities of banks and
building societies based on series LPMALOA and RPMTBJF (up
to the end of 2009) and RPMB3UQ (from 2010) from Statistical
Interactive Database, Bank of England (data published 1 October
2018, not seasonally adjusted).; 308 Office for National Statistics:
(ii) GDP based on series YBHA, Office for National Statistics
(GDP figures are the sum of the latest four quarters).; 314 Bank of
England: Based on data from Statistical Interactive Database, Bank
of England, series LPMVUJD (up to 2010); 314 Office for National
Statistics: Based on data from LPMB8GO (data published 30
August 2018) and series YBHA, National Statistics.; 321 Bank of
England: Based on data from Statistical Interactive Database,
series IUMABEDR and IUMASOIA (Bank of England) (data pub-
lished I July 2022); 324 Bank of England: Based on series
LPQAUYN (M4), LPMAVAE (M0) until 2006, LPMBL22
(reserves) and LPMAVAB (notes and coin) from 2006, Statistical
Interactive Database, Bank of England (data published 1 July 2022,
seasonally adjusted except for reserves).; 325 Bank of England:
Statistical Interactive Database (Bank of England), Series LPM-
VQJW (data published 1 July 2022, seasonally adjusted); 327 Bank
of England: Based on data in Bankstats (Bank of England),
Table A3.2 (Data published 29 March 2022); 328 Bank of England:
Based on Statistical Interactive Database, Bank of England, series
LPQVWNV and LPQVWNQ; 328 Office for National Statistics:
Based on series YBHA, Office for National Statistics; 334 Bank of
England: Based on data from Statistical Interactive Database,
series IUMABEDR, IUMASOIA, IUMZID2, IUMALNZC,
IUMTLMV, Bank of England (1 July 2022); 343 European Com-
mission: Based on data in AMECO Database (European Commis-
sion) to 1980 and World Economic Outlook (IMF, April 2022);
343 European Commission: AMECO database (European
Commis­ sion, Economic and Financial Affairs, May 2022);
345 European Commission: Based on data from Employment and
Unemployment (LFS) (Eurostat, European Commission, 2022);
347 Office for National Statistics: Based on series YBWF, YBWG
and YBWH (Office for National Statistics); 351 European Com-
mission: Based on data in EMP16: Underemployment and overem-
ployment (ONS, May 2022); 352 European Commission: Based on
data in data in AMECO Database (European Commission) (to
1981) and World Economic Outlook (IMF, April 2022); 353 Office
for National Statistics: Based on Time Series Data, series L55O
and K8IA (ONS); 354 Office for National Statistics: Based on Time
Series Data, series D7G7, L55O, L5LQ, and K8IA (ONS); 360
European Commission: Based on data in AMECO Database,
(European Commission, DGECFIN, May 2022) and various fore-
casts; 362 Office for National Statistics: Based on data from the
Office for National Statistics; 362 International Monetary Fund:
Based on data from World Economic Outlook Database (IMF);
376 European Commission: Based on data from AMECO data-
base, Tables 16.3 and 18.1 (European Commission, DG ECFIN);
377 The National Archives: Public Finances Databank, Office for
Budget Responsibility (April 2022); 379 The National Archives: ­Public
Finances Databank, Office for Budget Responsibility (April 2022);
15/12/2022 14:54

380 European Commission: Based on data from Fiscal Monitor,
IMF eLibrary-Data, (IMF, April 2022); 382 The National Archives:
Based on data from Fiscal Monitor, IMF eLibrary-Data, (IMF,
April 2022); 386 European Commission: Based on data in World
Economic Outlook Database, (IMF, April 2022); 403 International
Monetary Fund: Based on data from World Economic Outlook
Database (IMF); 403 European Commission: Based on AMECO
database (European Commission); 406 Organisation for Economic
Co-operation and Development: Gross Domestic Spending on
R&D (OECD, 2022); 415 The World Bank Group: Series NY.GDP.
DEFL.KD.ZG, World Bank, https://data.worldbank.org/indica-
tor/NY.GDP.DEFL.KD.ZG; 416 International Monetary Fund:
Based on data from World Economic Outlook database (IMF,
April 2022); 419 World Trade Organization: Based on data from
UNCTADStat (UNCTAD, 2022); 419 World Trade Organization:
Based on data in WTO Stats (WTO, 2022); 420 World Trade
Organization: Based on data in WTO Stats (WTO, 2022);
420 World Trade Organization: Trade Profiles, Statistics Database
(WTO, 2022); 423 European Commission: Based on data in
AMECO Database, (European Commission, DGECFIN, May
2022); 430 Pascal Lamy: Global policy without democracy’, speech
by Pascal Lamy, given in 2001 when he was the EU Trade Commis-
sioner. He later became head of the WTO in 2005; 440 The
National Archives: Adapted from EU Referendum: HM Treasury
analysis key facts, HM Treasury (18 April 2016) (available at
https://www.gov.uk/government/news/eu-referendum-trea-
sury-analysiskey-facts); 441 Office for National Statistics: Based
on data from ONS Time Series Data, series IKBK, IKBL, ABMI,
www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/
ikbk/ukea; 441 Organisation for Economic Co-operation and
Development: The economic consequences of Brexit: a taxing
decision, OECD (25 April 2016) (available at http://www.oecd.
org/economy/the-economic-consequences-of-brexit-ataxing-deci-
sion.htm).; 444 The World Bank Group: Based on data from
World Bank Commodity Price Data (The Pink Sheet), (Commod-
ity Markets, World Bank); 448 The World Bank Group: Based on
data from Databank, World Bank (2022); 448 World Scientific:
Paul Krugman, ‘Increasing Returns in a Comparative Advantage
World’, in Robert M.Stern, Comparative Advantage, Growth, and
F01 Essentials of Economics 40101.indd 21
PREFACE xxi
the Gains from Trade and Globalization (World Scientific, 2011)
Chapter 7, p. 45.; 449 The Washington Post: Jia Lynn Yang,
­‘China’s manufacturing sector must reinvent itself, if it’s to sur-
vive’, The Washington Post (23 November 2012).; 454 Office for
National Statistics: Based on data from Balance of Payments time
series and series YBHA (Office for National Statistics), www.ons.
gov.uk/economy/nationalaccounts/balanceofpayments/datasets/
balanceofpayments; 455 European Commission: Based on data in
AMECO Database (European Commission) (to 1980) and World
Economic Outlook (IMF, April 2022); 457 Office for National
Statistics: Based on data from Balance of Payments time series and
series YBHA (ONS); 458 Office for National Statistics: Based on
data in Statistical Interactive Database (Bank of England);
459 Bank for International Settlements: Based on data from Effec-
tive exchange rate indices (Bank for International Settlements),
Based on data from Effective exchange rate indices, Bank for Inter-
national Settlements, www.bis.org/statistics/eer.htm; 468 Office
for National Statistics: Based on data from ons, series THAP and
AUSS; 468 European Central Bank: Based on the Data from Fed-
eral Reserve Bank and European Central Bank; 476 European
Commission: Based on data from AMECO database (European
Commission, DGECFIN); 476 European Commission: Based on
data in AMECO Database (European Commission, DGECFIN);
477 European Commission: Based on data in AMECO Database
(European Commission, DGECFIN, May 2022); 478 European
Commission: Based on data in AMECO database (European Com-
mission, DGECFIN); 479 The World Bank Group: Based on data
from Databank (World Bank), https://data.worldbank.org/indica-
tor/NE.TRD.GNFS.ZS; 480 The World Bank Group: Based on
data from Databank (World Bank), series DT.TDS.DECT.GN.ZS;
483 Organisation for Economic Co-operation and Development:
Based on data from Net ODA, OECD Data (OECD, 2022).
Photo credits
FM5 Dr Dean Garratt: Courtesy of Dr Dean Garratt; FM5, 1, 2,
29, 30, 48, 71, 93, 121, 162, 193, 231, 232, 273, 301, 341, 374, 413,
414, 453 John Sloman: Courtesy of John Sloman.
15/12/2022 14:54
F01 Essentials of Economics 40101.indd 22 15/12/2022 14:54
 A

Part
Introduction
1 Economic issues 2

M01 Essentials of Economics 40101.indd 1 13/12/2022 22:00

 1

Chapter
Economic issues
We start by looking at three of the biggest issues of our time – the COVID-19 pandemic, the subsequent rise in
global inflation and global warming. These have had profound effects on societies around the world and, in the
case of global warming, will do for decades to come. They are forcing us and our governments to make choices.
Studying these choices is central to economics. Economists can analyse them and present us with policy alterna-
tives. They can help us come to the best decisions in the light of the information presented by scientists.
Economics contains some core ideas. These ideas are simple but can be applied to a wide range of economic prob-
lems. We start examining these ideas in this chapter. We begin on the journey to help you to ‘think like an
economist’ – a journey that we hope you will find fascinating and will give you a sound foundation for many possible
future careers.
In this chapter, we will attempt to answer the question, ‘What is economics about?’, and give you greater insight
into the subject you are studying. We will see how the subject is divided up and distinguish between the two major
branches of economics: microeconomics and macroeconomics.
We will also look at the ways in which different types of economy operate, from the centrally planned economies of
the former communist countries to the more free-market economies of most of the world today. We will ask just
how ‘markets’ work.

After studying this chapter, you should be able to answer the following questions:

• What is economics about?

• What is the central economic problem faced by all individuals and societies?
• How can people set about making the best of their limited resources?
• What is meant by ‘opportunity cost’? How is it relevant when people make economic choices?
• What is the difference between microeconomics and macroeconomics?
• What are the potential social implications of economic choices?
• How can you represent simply economic relationships in a graph?
• Why is the distinction between nominal and real figures important?
• How do different economic systems tackle the problem of scarcity?

M01 Essentials of Economics 40101.indd 2 13/12/2022 22:00


At this point it’s worth drawing your attention to the Economics News site that accompanies this text. You can
access it directly at http://pearsonblog.campaignserver.co.uk/ or from MyLab Economics’ home page, or simply
Google ‘Sloman Economics news site’. The site shows how items in the news are related to the economic issues you
will be studying in this text. There are links to newspaper articles, to videos, to data sources and to reports. There
are questions for you to consider and a powerful search feature that lets you browse earlier articles by chapter of
the book, month and keywords.
1.1 GLOBAL ECONOMIC ISSUES
Problems to analyse and tackle
Economists study the various choices and decisions
that affect our lives and livelihoods. These may be
big decisions made by governments or the day-to-day
decisions that we each make. To give you a flavour
of economic decisions, we look at three of the most
important issues that have faced societies and individ-
uals in recent years.
COVID-19 and the global health emergency
The COVID-19 pandemic dominated our lives during
2020 and 2021 and beyond. People and governments
struggled to cope with illness and death, and the dam-
age to lives and livelihoods. Everyone was faced with
choices, and these affected behaviour. Most of these
had an economic dimension.
Individual choices
People had to decide whether to follow the rules and
advice about behaviour: e.g. whether to wear a face-
mask, or socially distance or follow lockdown rules.
Economics studies people’s behaviour – and how it
impacts on economic decisions and the economy. We
look at such behaviour in Chapters 2 to 4. For example,
early on in the pandemic, many people stockpiled var-
ious items, such as hand sanitiser, toilet rolls and dried
foods. This caused many shops to run out, which only
further encouraged panic buying. Some shops responded
by raising prices to increase their profit margins.
The lockdowns affects firms’ profits. Some sectors
were particularly hard hit, such as hospitality, leisure
and tourism. Profits would have become losses if the
government had not provided substantial support,
which was still not enough to prevent many firms
going out of business.
And the pandemic hastened the move to online
sales and away from the High Street. Across the UK,
some 17 500 chain-store outlets were permanently
closed in 2020. In contrast, sales of online retailers
such as Boohoo and Asos boomed.
We examine costs, revenues and profits in C ­ hapters 5
and 6. We see how some firms are better protected
against market forces than others, especially if they
have a large market share and resulting market power.
M01 Essentials of Economics 40101.indd 3
1.1 GLOBAL ECONOMIC ISSUES 3
As far as employees were concerned, some were
easily able to work from home with a separate room
to work in and a good Internet connection. They also
saved money on commuting costs. Others with child-
care responsibilities and shared working spaces and/
or devices struggled to work efficiently from home.
Some found their incomes constant or even rising;
­others saw a fall or had to rely on furlough money
from the government.
Then vaccines began to be rolled out. Most people
embraced getting jabbed to protect them and their loved
ones. Others were suspicious for various reasons. But
here was a classic problem in economics: what we do
for ourselves often has spillover effects on others. If we
are not protected, we are more likely to catch the dis-
ease and pass it on to others, even if we only get infected
mildly or are largely asymptomatic. Many actions we
take affect others – either beneficially or adversely.
Government choices
The pandemic did not just affect individuals and
firms; it had major effects on whole economies. With
many firms being forced to shut down, even if only
temporarily, and some sectors, such as public trans-
port, facing a collapse in demand, economies around
the world went into recession – economic growth was
negative and unemployment rose.
Governments in many countries responded by sup-
porting individuals through various furlough schemes.
Support was also given to businesses and to the
self-employed. This prevented unemployment from
rising much further.
Other longer-term measures for recovery included
large-scale spending on physical infrastructure, such as
public transport, roads, green energy and broadband,
and on public services, such as health and education.
We look at issues such as growth and unemploy-
ment in Part C of the book.
But the massive support came at a cost. ­Government
spending on support schemes plus a decline in tax rev-
enues meant that government borrowing soared. Gov-
ernments had to finance the borrowing through
paying interest from taxes (or even more borrowing).
So they were faced with the hard choice about when
13/12/2022 22:00
 4 Chapter 1 Economic issues
to start raising taxes or cutting government spending
to reduce the level of borrowing. The general approach
was to spend now and pay later – an easy choice at the
time, but a difficult one later, especially for govern-
ments facing re-­election. Policy choices such as these
are examined in Chapter 13.
Pause for thought
Give some other examples of choices that governments had to
make during the pandemic. To what extent were they
­economic choices?
Global inflation
It was not just governments that were trying to keep
their economies going during the pandemic. Central
banks, such as the Federal Reserve in the USA, the
European Central Bank for the eurozone and the Bank
of England for the UK, were also playing their part.
The general approach was to create more electronic
money, through a process of ‘quantitative easing’. If
there was more money circulating through the bank-
ing system, people would borrow and spend more,
helping to boost businesses.
But when you turn on the ‘money tap’ like this, you
have to choose how much money to create and when
to turn the tap off. Too little money and the recession
may persist; too much money and prices may be
pushed up by soaring spending. This ‘inflation’, as it
is called, creates other problems for the economy, and
central banks are keen not to let prices rise by more
than 2 per cent per annum. The role of money in the
economy is examined in Chapters 11–13.
Inflation really took off in 2022. The extra money
created during the pandemic helped to fund the bounce
back from recession. Spending rose rapidly. But supply
could not keep up with the demand. Supply chains had
been disrupted during the recession: there was a short-
age of transportation (both land transport and ship-
ping), a shortage of various components (such as
computer chips) and a shortage of various types of
skilled labour. Firms responded by raising prices. This
pushed up the general level of prices: inflation took off.
Inflation was compounded by the Russian invasion
of Ukraine. Supplies of oil and gas were disrupted;
energy prices soared. Ukraine is a major exporter of
wheat, sunflower oil and other crops. The blockade
of Ukrainian exports led to a rapid rise in their price;
food prices also soared. This further pushed up the
overall inflation rate, which approached an annual
rate of 10 per cent in many rich countries and higher
rates than this in many poorer countries.
Central banks responded by raising interest rates –
their normal response to rising inflation. The aim is to
dampen spending by making borrowing more
M01 Essentials of Economics 40101.indd 4
expensive and to encourage saving. But this risked
driving countries into recession.
Inequality
A major issue in economics is inequality and poverty.
Over the years this has increased in most countries as
the rich have got richer, while many on low incomes
have seen their real incomes (i.e. incomes after taking
inflation into account) stagnate or even fall.
The inflation of 2022 compounded the problem. The
poor consume a larger proportion of basic foodstuffs
and energy than do the rich. Many poor people were
driven into a state or food and fuel poverty and were not
able to afford both to eat enough and to heat their homes
adequately. We consider inequality in Chapter 7.
The environment and the global climate
emergency
The world is faced with a climate emergency as the
planet warms and as floods, droughts, fires, hurri-
canes and crop failures increase. Economists can look
at policy options and their implications.
A key policy concerns pricing. If renewable energy
were cheaper and fossil fuels were more expensive, then
people would be more willing to switch to low-carbon
consumption. Indeed, pricing is a central issue in eco-
nomics. We look at pricing in Chapters 2, 3 and 5.
But how can prices be altered? They can be reduced
by government subsidies and raised by taxes. We look
at green taxes and subsidies in Chapter 8 and espe-
cially Section 8.9.
Another method for limiting emissions is for gov-
ernments to cap the amount that firms are allowed to
emit. Permits to emit CO2 are allocated or auctioned
to businesses. These can then be traded in markets.
Low emitters will not have to pay so much, thereby
giving them a cost advantage over high-emitting com-
panies, which will require more permits and hence
have to pay more. Economists have played a key role
in developing emissions trading in markets such as the
EU Emissions Trading Scheme (EU ETS).
International action
We live in an interdependent world. Actions in one
part of the globe affect lives in others. A good example
is cutting down rainforests for mining, ranching or
growing monocrops, such as palm oil.
Actions by the global community can help but very
often there are international games being played, with
countries unwilling to commit to carbon-reducing meas-
ures unless they can be convinced that other countries are
playing their part too. Economists study these types of
‘games’. Indeed there is a major branch of economics
called ‘game theory’, which looks at effective ways of
incentivising people, firms and governments to behave in
co-operative ways. We look at game theory in Section 6.6.
13/12/2022 22:00

Pause for thought
For what reasons may governments want other governments
to stick to tough climate or emissions targets and yet be not
willing to do so themselves?
Trade between nations can make everyone better
off. But this only works if certain conditions hold,
1.2 THE CORE OF ECONOMICS
What is economics all about?
Section 1.1 illustrates that economics involves an
­analysis of decision making by individuals, businesses,
governments and countries. These are decisions
­concerned with the following:
■ The production of goods and services: how much
an economy produces, both in total and of individ-
ual items; how much each firm or person produces;
what techniques of production are used; how many
people are employed.
■ The consumption of goods and services: how much
people spend (and how much they save); how much
people buy of particular items; what individuals choose
to buy; how consumption is affected by prices, adver-
tising, fashion, people’s incomes and other factors.
But we still have not quite got to the bottom of
what economics is about. What is the crucial ingre-
dient that makes a problem an economic one? The
answer is that there is one central problem faced by
all individuals and all countries, no matter how rich.
From this one problem stem all the other economic
problems we shall be looking at throughout this text.
This central economic problem is scarcity. For an
economist, scarcity has a very specific definition. Let
us examine that definition.
The problem of scarcity
Ask people if they would like more money, and the
vast majority would answer ‘yes’. They want more
money so that they can buy more goods and services;
and this applies not only to poor people but also to
most wealthy people too. The point is that human
wants are virtually unlimited.
Yet the means of fulfilling human wants are lim-
ited. At any one time the world can produce only a
limited amount of goods and services. This is because
the world has only a limited amount of resources.
These resources, or factors of production as they are
often called, are of three broad types.
■ Human resources: labour. The labour force is lim-
ited in number and in skills.
M01 Essentials of Economics 40101.indd 5
1.2 The CORE OF ECONOMICS 5
including recognition of the environmental impact of
trade. Economists study these conditions and can
advise governments on trade policy. This and other
international issues are the subject of the final two
chapters of the book.
All these economic issues stem from a core set of prob-
lems. It is to this core that we now turn.
■ Natural resources: land and raw materials. The
world’s land area is limited, as are its raw materials
■ Manufactured resources: capital. Capital consists of
all those inputs that have themselves been produced
in the first place. The world has a limited stock of
capital: a limited supply of factories, machines,
transportation and other equipment. The productiv-
ity of capital is limited by the state of technology.
So here is the reason for scarcity: human wants are
virtually unlimited, whereas the resources available to
satisfy these wants are limited. We can thus define
scarcity as follows:
KEY Scarcity is the excess of human wants over what can
IDEA actually be produced. Because of scarcity, various
1 choices have to be made between alternatives.
Of course, we do not all face the problem of scar-
city to the same degree. A poor person unable to
afford enough to eat or a decent place to live will
hardly see it as a ‘problem’ that a rich person cannot
Definitions
Production The transformation of inputs into outputs by
firms in order to earn profit (or meet some other objective).
Consumption The act of using goods and services to
satisfy wants. This will normally involve purchasing the
goods and services.
Factors of production (or resources) The inputs into the
production of goods and services: labour, land and raw
materials, and capital.
Labour All forms of human input, both physical and
mental, into current production.
Land (and raw materials) Inputs into production that
are provided by nature: e.g. unimproved land and min-
eral deposits in the ground.
Capital All inputs into production that have themselves
been produced: e.g. factories, machines and tools.
Scarcity The excess of human wants over what can actu-
ally be produced to fulfil these wants.
13/12/2022 22:00
 6 Chapter 1 Economic issues
afford a second Ferrari. But economists do not claim
that we all face an equal problem of scarcity. In fact,
this is one of the major issues economists study: how
resources and products are distributed, whether
between different individuals, different regions of a
country or different countries of the world.
Pause for thought
If we would all like more money, why doesn’t the government
simply print a lot more?
But given that people, both rich and poor, want
more than they can have, this makes them behave in
certain ways. Economics studies that behaviour. It
studies people at work, producing the goods that peo-
ple want. It studies people as consumers buying the
goods they themselves want. It studies governments
influencing the level and pattern of production and
consumption. In short, it studies anything to do with
the process of satisfying human wants.
Demand and supply
We said that economics is concerned with consump-
tion and production. Another way of looking at this
is in terms of demand and supply. In fact, demand
Recap
1. The central economic problem is that of scarcity.
2. Given that there is a limited supply of factors of production (labour, land and capital), it is impossible to provide everybody with
everything they want.
3. Potential demands exceed potential supplies.
1.3 DIVIDING UP THE SUBJECT
What’s meant by ‘microeconomics’ and ‘macroeconomics’?
Economics is traditionally divided into two main
branches – microeconomics and macroeconomics,
where ‘micro’ means small and ‘macro’ means big.
Microeconomics is concerned with the individual
parts of the economy. It is concerned with the demand
Definition
Microeconomics The branch of economics that studies individual units: e.g. households, firms and industries. It studies the
interrelationships between these units in determining the pattern of production and distribution of goods and services.
M01 Essentials of Economics 40101.indd 6
and supply and the relationship between them lie at
the very centre of economics. But what do we mean
by the terms, and what is their relationship with the
problem of scarcity?
Demand is related to wants. If goods and services
were free, people would simply demand whatever they
wanted. Such wants are virtually boundless, perhaps
limited only by people’s imagination. Supply, on the
other hand, is limited. It is related to resources. The
amount firms can supply depends on the resources and
technology available.
Given the problem of scarcity, given that human
wants exceed what can actually be produced, poten-
tial demands will exceed potential supplies. Society
therefore has to find some way of dealing with this
problem. Somehow it has to try to match demand and
supply. This applies at the level of the economy over- KI 1
all: total spending in the economy must balance total p5
production. It also applies at the level of individual
goods and services. The demand and supply of cab-
bages must balance, and so must the demand and sup-
ply of cars, houses, tablets and holidays.
But if potential demand exceeds potential supply,
how are actual demand and supply to be made equal?
Either demand has to be curtailed, or supply has to be
increased, or a combination of the two. Economics
studies this process. It studies how demand adjusts to
available supplies, and how supply adjusts to con-
sumer demands.
and supply of particular goods and services and
resources such as cars, butter, clothes, haircuts, plumb-
ers, accountants, blast furnaces, computers and oil.
Macroeconomics is concerned with the economy as
a whole. It is thus concerned with aggregate demand
13/12/2022 22:00

and aggregate supply. By ‘aggregate demand’ we mean
the total amount of spending in the economy, whether
by consumers, by customers outside the country for
our exports, by the government, or by firms when they
buy capital equipment or stock up on raw materials.
By ‘aggregate supply’ we mean the total national out-
put of goods and services.
Microeconomics
Microeconomics and choice
KI 1 Because resources are scarce, choices have to be made.
p5 There are three main categories of choice that must be
made in any society.
■ What goods and services are going to be produced
and in what quantities? How many cars, how much
wheat, how much insurance, how many rock con-
certs, etc. will be produced?
■ How are things going to be produced? What
resources are going to be used and in what quanti-
ties? What techniques of production are going to be
adopted? Will cars be produced by robots or by
assembly-line workers? Will electricity be produced
from coal, oil, gas, nuclear fission, renewable
resources or a mixture of these?
■ For whom are things going to be produced? In
other words, how will the nation’s income be dis-
tributed? After all, the higher your income, the
more you can consume of the nation’s output.
What will be the wages of shop workers, profes-
sional footballers, cleaners and accountants? How
much will chief executives of large companies
receive? How much will pensioners receive? How
much of the nation’s income will go to sharehold-
ers or landowners?
All societies have to make these choices, whether
they be made by individuals, by groups or by the
government. These choices are microeconomic
choices, since they are concerned not with the total
amount of national output, but with the individual
goods and services that make it up: what they are,
how they are made, and who gets the incomes to
buy them.
Choice and opportunity cost
Choice involves sacrifice. The more food you choose
to buy, the less money you will have to spend on other
goods. The more food a nation produces, the less
resources there will be for producing other goods. In
other words, the production or consumption of one
thing involves the sacrifice of alternatives. This sacri-
fice of alternatives in the production (or consumption)
of a good is known as its opportunity cost.
M01 Essentials of Economics 40101.indd 7
1.3 Dividing Up the Subject 7
If the workers on a farm can produce either 1000
tonnes of wheat or 2000 tonnes of barley, then the
opportunity cost of producing 1 tonne of wheat is the
2 tonnes of barley forgone. The opportunity cost of
buying a textbook is the new pair of jeans you also
wanted that you have had to go without. The oppor-
tunity cost of working overtime is the leisure you have
sacrificed.
Opportunity cost as the basis for choice is a key
idea. But it is more than that. It is also the first of our
‘threshold concepts’ (click on the Threshold Concepts
link in MyLab Economics or on the student website
for a detailed explanation of each one). There are 15
of these threshold concepts, which we shall be explor-
ing throughout the text. Each of them keeps recurring
in a variety of different contexts.
Once you have grasped these concepts and seen
their significance, they will affect the way that you
understand and analyse economic problems. They
help you to ‘think like an economist’.
KEY The opportunity cost of something is what you
IDEA TC
give up to get it/do it.
2 1
Rational choices
When trying to understand behaviour economists typ-
ically start by assuming ‘rational decision making’.
Consequently, they often refer to rational choices.
This simply means the weighing-up of the costs and
benefits of any activity, whether it be firms choosing
what and how much to produce, workers choosing
whether to take a particular job or to work extra
hours, or consumers choosing what to buy.
Imagine you are doing your shopping in a super-
market and you want to buy a bottle of wine. Do you
Definitions
Macroeconomics The branch of economics that studies
economic aggregates (grand totals): e.g. the overall level
of prices, output and employment in the economy.
Aggregate demand The total level of spending in the
economy.
Aggregate supply The total amount of output in the
economy.
Opportunity cost The cost of any activity measured in
terms of the best alternative forgone.
Rational choices Choices that involve weighing up the
benefit of any activity against its opportunity cost.
13/12/2022 22:00
 8 Chapter 1 Economic issues
BOX 1.1 THE OPPORTUNIT Y COSTS OF STUDYING
What are you sacrificing?
You may not have realised it, but you probably consider
opportunity costs many times a day. The reason is that we are
constantly making choices: what to buy, what to eat, what to
wear, whether to go out, how much to study and so on. Each
time we make such a choice, we are in effect rejecting some
alternative. This alternative forgone is the opportunity cost
TC 1 of the action we chose.
p7 Sometimes the opportunity costs of our actions are
the direct monetary costs we incur. Sometimes it is more
complicated.
Take the opportunity costs of your choices as a student.
Buying a textbook costing £49.95
This choice involves a direct money payment. What you have
to consider is the alternatives you could have bought with the
£49.95. You then have to weigh up the benefit from the best
alternative against the benefit of the textbook.
?
1. What might prevent you from making the best
decision?
Coming to classes
Even though students pay fees for their degrees in many
countries, there is no extra (marginal) monetary cost in com-
ing to classes once the fees have been paid. You will not get
a refund by missing classes. The fees, once you’ve paid them,
are what we call a ‘sunk cost’.
So are the opportunity costs zero? No: by coming to classes
you are not working in the library; you are not having an extra
hour in bed; you are not undertaking paid work during that
time, and so on. If you are making a rational decision to come
to classes, then you will consider such possible alternatives.
?
2. If there are several other things you could have
done, is the opportunity cost the sum of all
of them?
3. What factors would make the opportunity cost of
attending a class relatively high?
Revising for an economics exam
Again, the opportunity cost is the best alternative to which
you could have put your time. This might be revising for some
spend a lot of money and buy a top-quality wine, or
do you buy a cheaper one instead? To make a
rational (i.e. sensible) decision, you will need to
TC 1 weigh up the costs and benefits of each alternative.
p7 The top-quality wine may give you a lot of enjoy-
ment, but it has a high opportunity cost: because it
is expensive, you will need to sacrifice quite a lot of
consumption of other goods if you decide to buy it.
If you buy the cheap bottle, however, although you
will not enjoy it so much, you will have more money
left over to buy other things: it has a lower opportu-
nity cost.
M01 Essentials of Economics 40101.indd 8
CASE STUDIES &
APPLICATIONS
other exam. You will probably want to divide your time sensi-
bly between your subjects. A sensible decision is not to revise
economics on any given occasion if you will gain a greater
benefit from revising another subject. In such a case the
(marginal) opportunity cost of revising economics exceeds
the (marginal) benefit.
Choosing to study at university or college
What are the opportunity costs of being a student in higher
education? At first it might seem that the costs would include
the following:
■ Tuition fees.
■ Books, stationery, etc.
■ Accommodation, food, entertainment, travel and other
living expenses.
But adding these up does not give the opportunity cost.
The opportunity cost is the sacrifice entailed by going to
university or college rather than doing something else. Let
us assume that the alternative is to take a job that has been
offered. The correct list of opportunity costs of higher educa-
tion would include:
■ Books, stationery, etc.
■ Additional accommodation and travel expenses over what
would have been incurred by taking the job (this figure
could be negative).
■ Wages that would have been earned in the job, less any
income received as a student.
■ Tuition fees paid by the student.
?
4. Why is the cost of food not included?
5. What impact would it have on the calculation of
opportunity costs if you really disliked the nature of
the work in the best alternative job?
6. Is the opportunity cost to the individual of attend-
ing higher education different from the opportu-
nity costs to society as a whole? Do the benefits of
higher education for society differ from those for the
individual?
Estimate your own cost of studying for a degree (or
other qualification). For what reasons might you find it
difficult to make such a calculation?
Thus rational decision making, as far as consumers
are concerned, involves choosing those items that give
you the best value for money: i.e. the greatest benefit
relative to cost.
The same principles apply to firms when deciding
what to produce. For example, should a car manufac-
turer open up another production line? A rational
decision will again involve weighing up the benefits
and costs. The benefits are the revenues that the firm
will earn from selling the extra cars. The costs will
include the extra labour costs, raw material costs,
costs of component parts, etc. It will be profitable to
13/12/2022 22:00

open up the new production line only if the revenues
earned exceed the costs entailed: in other words, if it
increases profit.
Marginal costs and benefits
In economics we argue that rational choices involve
weighing up marginal costs and marginal benefits.
TC 2 These are the costs and benefits of doing a little bit more
p9 or a little bit less of a specific activity. They can be con-
trasted with the total costs and benefits of the activity.
Take a familiar example. What time will you set
the alarm clock to go off tomorrow morning? Let us
say that you have to leave home at 8.30 a.m. Perhaps
you will set the alarm for 7 a.m. That will give you
plenty of time to get up and get ready, but it will mean
a relatively short night’s sleep. Perhaps then you will
decide to set it for 7.30 a.m. or even 8 a.m. That will
give you a longer night’s sleep, but much more of a
rush in the morning to get ready.
So how do you make a rational decision about
when the alarm should go off? What you have to do is
to weigh up the costs and benefits of additional sleep.
Each extra minute in bed gives you more sleep (the
marginal benefit) but gives you more of a rush when
you get up (the marginal cost). The decision is there-
fore based on the costs and benefits of extra sleep, not
on the total costs and benefits of a whole night’s sleep.
This same principle applies to rational decisions
made by consumers, workers and firms. For example,
the car firm we were considering just now will weigh
up the marginal costs and benefits of producing cars:
in other words, it will compare the costs and revenue
of producing additional cars. If additional cars add
more to the firm’s revenue than to its costs, it will be
profitable to produce them.
Rational decision making involves weighing up the
KEY
IDEA marginal benefit and marginal cost of any activity. If
3 the marginal benefit exceeds the marginal cost, it is
rational to do the activity (or to do more of it). If the
TC
marginal cost exceeds the marginal benefit, it is
2 rational not to do it (or to do less of it).
Decision making based on marginal costs and benefits
is the second of our threshold concepts, explored on
the book’s website.
Definitions
Marginal costs The additional costs of doing a little bit
more (or 1 unit more if a unit can be measured) of an
activity.
Marginal benefits The additional benefits of doing a
little bit more (or 1 unit more if a unit can be measured)
of an activity.
M01 Essentials of Economics 40101.indd 9
1.3 Dividing Up the Subject 9
Pause for thought
Imagine that, as a student, you are short of money and that
you are offered employment working in the student union
shop. You can choose the number of hours each week that you
work. How would you make a ‘rational’ decision about the
number of hours to work in any given week?
The social implications of choice
Microeconomics does not just study how choices are
made. It also looks at their consequences. Under cer-
tain conditions the consequences may be an efficient
use of the nation’s resources: the economy is making
the most of its scarce resources.
However, a whole series of possible problems can
arise from the choices that people make, whether they
are made by individuals, by firms or by the govern-
ment. These problems include such things as ineffi-
ciency, waste, inequality and pollution.
Take the cases of inequality and pollution.
■ Inequality. Even though the current levels of pro-
duction and consumption might be efficient, they
might be regarded as unfair. For the distribution of
goods and services among different members of
societies to be regarded as equitable it must be con-
sidered fair or just. The problem, of course, is that
people have different notions of fairness. Equity is
therefore described as a value judgement: notions
of equity will depend on the values of individuals
or society.
■ Pollution. It might be profitable for a firm to tip
toxic waste into a river. But what is profitable for
the firm will not necessarily be ‘profitable’ for soci-
ety. There may be serious environmental conse-
quences of the firm’s actions. The case of pollution
illustrates how the effects of people’s choices often
spill over to other people.
Macroeconomics
Because things are scarce, societies are concerned that KI 1
their resources should be used as fully as possible, and p5
that over time their national output should grow.
The achievement of growth and the full use of
resources is not easy, however, as demonstrated by the
periods of high unemployment and stagnation that
have occurred from time to time throughout the world
(for example, in the 1930s, the early 1980s, the early
1990s, the late 2000s and 2020–1 during the pandemic
lockdowns). Furthermore, attempts by government to
stimulate growth and employment can result in infla-
tion and rising imports.
Even when societies do achieve growth, it can be
short-lived. Economies are inherently unstable and
13/12/2022 22:00
 10 Chapter 1 Economic issues
display what are known as business cycles: fluctu­
ations in the economy’s growth rates. The more that
growth rates fluctuate, the more marked are the fluc-
tuations in the path of output traced out by the econ-
omy over time. The inherent instability of economies
is our next threshold concept.
KEY Economies suffer from inherent instability. As a
IDEA result, economic growth and other macroeconomic
4 indicators tend to fluctuate. This is Threshold Con-
cept 3. It is a threshold concept because it is vital to
TC
recognise the fundamental instability in market econ-
3 omies. Analysing the ups and downs of the ‘business
cycle’ occupies many macroeconomists.
Fluctuations in the overall level of economic activ-
ity are linked to changes in the total demand for firms’
goods and services (aggregate demand) and/or in the
amount that firms plan to supply at any given level of
prices (aggregate supply). These changes affect the
balance between aggregate demand and aggregate
supply.
And it is not just economic growth rates: other
macroeconomic problems too are closely related to
the balance between aggregate demand and aggregate
supply. If aggregate demand is too low relative to
aggregate supply, recession and unemployment may
well result.
■ Recession is where the economy’s output declines
for two successive quarters or longer. In other
words, during this period growth becomes negative.
Hence, not all periods during which the economy
contracts are termed ‘recessions’. It is the duration
and persistence of the contraction that distin-
guishes a recession.
  Recessions are associated with low levels of con-
sumer spending. If people spend less, shops are
likely to find themselves with unsold stocks. Then
they will buy less from the manufacturers, who in
turn will cut down on production.
■ Unemployment is likely to result from cutbacks in
production. If firms are producing less, they will
need to employ fewer people.
If aggregate demand is too high relative to aggre-
gate supply, inflation and balance of trade deficits are
likely to result.
■ Inflation refers to a general rise in the level of prices
throughout the economy. If aggregate demand rises
substantially, firms are likely to respond by raising
their prices. If demand is high, they can probably
still sell as much as before (if not more) even at the
higher prices, and thus make higher profits. If firms
in general put up their prices, inflation results. By
M01 Essentials of Economics 40101.indd 10
comparing price levels over time, we can measure
the rate of inflation. Typically, this is the annual
rate of inflation: the percentage increase in prices
over a 12-month period.
■ Balance of trade deficits are the excess of imports
over exports. If aggregate demand rises, people are
likely to buy more imports. In other words, part of
the extra expenditure will go on Japanese electrical
goods, German cars, Chilean wine, and so on. Also,
if the rate of inflation is high, home-produced
goods will become uncompetitive with foreign
goods. We are likely, therefore, to buy more imports,
and people abroad are likely to buy fewer of our
exports.
An important focus of government macroeconomic
policy, therefore, is on the balance of aggregate
demand and aggregate supply. It can be demand-side
policy, which seeks to influence the level of spending
in the economy. This in turn will affect the level of
production, prices and employment. Or it can be
­supply-side policy. This is designed to influence the
level of production directly: for example, by trying to
create more incentives for firms to innovate.
Macroeconomic policies can also be used to foster
future economic growth. Policies in this context are
designed to increase future levels of production by
raising the economy’s productive capabilities. There-
fore, supply-side policy is generally agreed to be par-
ticularly important, though if demand-side policy
Definitions
Business cycle The periodic fluctuations of a country’s
economic growth rates around the long-term trend.
Recession A period where national output falls for two
or more successive quarters.
Unemployment The number of people who are actively
looking for work but are currently without a job. (Note
that there is much debate as to who should officially be
counted as unemployed.)
Inflation A general rise in the level of prices throughout
the economy
(Annual) Rate of inflation The percentage increase in
the level of prices over a 12-month period.
Balance of trade Exports of goods and services minus
imports of goods and services. If exports exceed imports,
there is a ‘balance of trade surplus’ (a positive figure). If
imports exceed exports, there is a ‘balance of trade defi-
cit’ (a negative figure).
Demand-side policy Government policy designed to
alter the level of aggregate demand, and thereby the level
of output, employment and prices.
Supply-side policy Government policy that attempts to
alter the level of aggregate supply directly.
13/12/2022 22:00
 1.3 Dividing Up the Subject 11

EXPLORING
BOX 1.2 BUSINESS CYCLES ECONOMICS

The inherent volatility of economies

Countries rarely experience stable economic growth.
Instead they experience business cycles: periods of rapid
economic growth followed by periods of low growth or
even negative growth (falling output). The volatility of
growth is readily seen when we plot annual percentage
changes in the volume of output. The chart does this for
four economies. In the case of the UK, the growth of out-
put ranges from +6.5 per cent (1973) to -9.3 per cent in
the pandemic (2020). In Japan, it ranges from +10.3 per
cent (1970) to -5.7 per cent (2009).

Growth rates in selected industrial economies

10

8 UK USA
Eurozone Japan
Annual economic growth rate (%)

−2

−4

−6

−8

−10
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Notes: 2022 and 2023 based on forecasts; eurozone figures are the weighted average of the countries using the euro in any given
year; the euro was introduced in 1999; the eurozone figures before 1999 are the weighted average of the original members
Source: Based on data in AMECO Database, European Commission, DG Business, Economy, Euro (May 2022) and various forecasts
for 2022 and 2023.

Explaining volatility One example could be technological changes that

Some economists see the problem as rooted in fluctuations
in aggregate demand: in other words, in the total demand
for the economy’s goods and services, whether by individ-
uals or firms. Changes in the demands of individuals and
firms may interact with each other, affecting the character
of the business cycle.
For example, a rise in consumer spending could stim-
ulate firms to invest to build up capacity to meet the
extra demand. This, in turn, generates more employment,
boost output and employment. Often such changes come
in waves, which would contribute to the observed volatility
of output. Another could be disruptions to supply chains
caused by a pandemic or a war.
But whatever the cause, it is vital to recognise the
fundamental instability of market economies. This is what
makes the volatility in short-term growth rates a threshold
concept.

?
additional national income and so more consumption. A
similar effect could occur if banks felt able to lend more
in response to the growing economy, which would further
stimulate the economy as these funds are spent.
Other economists see the problem as rooted in fluctua-
tions in aggregate supply: in other words, in the total amount
of goods and services firms plan to supply at a given level
of prices. These economists argue that changes in aggre-
gate supply occur if the price, availability or effectiveness
of the inputs in firms’ production processes are in some
way affected.
1. If people believe that the economy’s output level is
about to fall, how may their actions aggravate the
problem?
2. Why will some people suffer more than others from a
downturn in economic activity?
Using the AMECO database, construct a line chart
of the level of GDP at constant prices for the
­eurozone in € billions. Briefly summarise what the
chart shows and the relationship between it and the
­eurozone series shown in the chart in this box.

M01 Essentials of Economics 40101.indd 11 13/12/2022 22:00

 12 Chapter 1 Economic issues

were to reduce economic volatility, it too could con-
tribute to future growth by encouraging investment in
capital and labour.
How desirable is economic growth? Despite eco-
nomic growth being a major objective of governments,
it cannot guarantee rising levels of well-being. Economic
growth can have an array of social implications.
An important illustration of this is the increasing
emphasis placed on sustainable economic develop-
ment. This recognises the importance of considering
the impact of economic development on the environ-
ment. For economic development to be sustainable, it
should not undermine the well-being of the planet’s
natural resources and ecosystems.
The significance of sustainable economic develop-
ment has been formally recognised by the inter­
national community. In September 2015 the United
Nations adopted the 2030 Agenda for Sustainable
Development.1 This saw a commitment to 17 Sustain-
able Development Goals (SDGs) and 169 targets. The
SDGs aim to end poverty, tackle inequalities and
ensure prosperity for all while protecting the planet.
In other words, the SDGs formally recognise the
importance of sustainable economic growth: growth
that aims to satisfy human needs, but which sustains
the planet’s natural resources for future generations.
Another issue is who benefits from growth. It may
be that faster economic growth results in greater
inequality, with the rich seeing their incomes growing
faster than those of the poor. Similarly, policies to
redistribute incomes from rich to poor may result in
slower economic growth. Governments may thus have TC 1
to choose between faster economic growth and reduc- p7
tions in inequality.

Recap
1. The subject of economics is usually divided into two main branches, macroeconomics and microeconomics.
2. Microeconomics deals with the activities of individual units within the economy: firms, industries, consumers, workers, etc. Because
resources are scarce, people must make choices. Society has to choose by some means or other what goods and services to produce,
how to produce them and for whom to produce them. Microeconomics studies these choices.
3. Rational choices involve weighing up the marginal benefits of each activity against its marginal opportunity costs. If the marginal
benefits exceed the marginal costs, it is rational to choose to do more of that activity.
4. Macroeconomics deals with aggregates’ such as the overall levels of unemployment, output, growth and prices in the economy.

1.4 MODELLING ECONOMIC RELATIONSHIPS

How can diagrams be used to illustrate economic issues?

Economics books and articles frequently contain
diagrams. The reason is that diagrams are very use-
ful for illustrating economic relationships. Ideas and
arguments that might take a long time to explain in
words can often be expressed clearly and simply in a
diagram.
Such diagrams are an example of an economic
model. Models are a simplification of reality in order
to show clearly how things are related. For example,
a model could show how the demand for a product is
related to price. It would show how demand changed
as price changed. We would expect that as the price of
a product rose, so the quantity demanded would fall.
If you glance forward to Figure 2.1 on page 32, you
will see a diagram relating the demand for potatoes to
the price of potatoes.
See Transforming our world: the 2030 Agenda for Sustainable
1 ous simplifying assumptions.
Development (United Nations, 21 October).
To examine such relationships, we have to assume
that other things that might affect the outcome do not
change. For example, if we were modelling how the
demand for Cheddar cheese was affected by changes
in its price, we would have to assume that the price
of other products, including other types of cheese,
Definitions
Sustainable economic growth Economic growth which
satisfies human needs, but which sustains the planet’s
natural resources for future generations.
Economic model The representation, either graphically,
mathematically or in words, of the relationship between
two or more variables. A model is a simplification of
reality designed to explain just part of a complex pro-
cess of economic relationships. It is thus based on vari-

M01 Essentials of Economics 40101.indd 12 13/12/2022 22:00

 1.4 Modelling Economic Relationships  13

were held constant. This is known as the ‘ceteris

­paribus’ assumption. Ceteris paribus is Latin for Figure 1.1 A production possibility curve
‘other things being equal’. If the price of other prod-
8

Units of food (millions)

ucts did change, we would then have to re-specify our
7 w
model. 6
x
Modelling in economics is the fourth of our thresh- 5
old concepts. 4
3
2
1
KEY  odelling in economics involves specifying how one
M 0
IDEA variable (the ‘dependent variable’) depends on one or 0 1 2 3 4 5 6 7 8
5 more other variables (‘independent variables’). It Units of clothing (millions)
involves ‘holding constant’ all other variables that
TC
might influence the outcome (the ceteris paribus
4 assumption). A model can be expressed in words, as a
graph, or mathematically in terms of one or more
equations. In this text we use mainly verbal descrip-
tions and graphs. Maximum possible combinations
Table 1.1 of food and clothing that can be
­produced in a given time period

Units of food (millions) Units of clothing (millions)

Two of the most common types of diagram used
in economics are graphs and flow diagrams. In the 8.0 0.0
next two sections we will look at one example of 7.0 2.2
each. These examples are chosen to illustrate the dis- 6.0 4.0
tinction between microeconomic and macroeconomic 5.0 5.0
issues. 4.0 5.6
3.0 6.0
2.0 6.4
The production possibility curve
1.0 6.7
We start by having a look at a production possibility 0.0 7.0
TC 4 curve. This diagram is a graph. Like many diagrams in
p 13 economics it shows a simplified picture of reality – a
picture stripped of all details that are unnecessary to
illustrate the points being made. A production possi-
bility curve is shown in Figure 1.1. The graph is based no clothing. Alternatively, by producing, say, 7 mil-
on the data shown in Table 1.1. lion units of food it could release enough resources –
Assume that some imaginary nation devotes all its land, labour and capital – to produce 2.2 million units
resources – land, labour and capital – to producing of clothing. At the other extreme, it could produce 7
just two goods, food and clothing. Various possible million units of clothing, with no resources at all being
combinations that could be produced over a given used to produce food.
period of time (e.g. a year) are shown in the table. The information in the table can be transferred to
Thus the country, by devoting all its resources to pro- a graph (Figure 1.1). We measure units of food on one
ducing food, could produce 8 million units of food but axis (in this case the vertical axis) and units of clothing
on the other. The curve shows all the combinations of
the two goods that can be produced with all the
nation’s resources fully and efficiently employed. For
Definitions example, production could take place at point x, with
6 million units of food and 4 million units of clothing
Ceteris paribus Latin for ‘other things being equal’. being produced. Production cannot take place beyond
This assumption has to be made when constructing and the curve. For example, production is not possible at
using models.
point w: the nation does not have enough resources to
Production possibility curve A curve showing all the
possible combinations of two goods that a country
do this.
can produce within a specified time period with all its Note that there are two simplifying assumptions in TC 4
resources fully and efficiently employed. this diagram. First, it is assumed that there are just p 13
two types of good that can be produced. It is necessary

M01 Essentials of Economics 40101.indd 13 13/12/2022 22:00

 14 Chapter 1 Economic issues

to make this assumption since we only have two axes

on our graph. The other assumption is that there is Figure 1.2 Increasing opportunity costs
only one type of food and one type of clothing. This
8

Units of food (millions)

is implied by measuring their output in particular
7
units (e.g. tonnes). x
6
These two assumptions are obviously enormous 1 y
5
1
simplifications when we consider the modern complex 4 2
3 z
economies of the real world. But despite this, the dia- 1
2
gram still allows important principles to be illustrated,
1
and illustrated simply. 0
0 1 2 3 4 5 6 7 8

Microeconomics and the production Units of clothing (millions)

possibility curve
A production possibility curve illustrates the micro-
economic issues of choice and opportunity cost.
If the country chose to produce more clothing, it It is because opportunity costs increase that the
would have to sacrifice the production of some food. production possibility curve is bowed outward rather
KI 1 This sacrifice of food is the opportunity cost of the than being a straight line. Thus in Figure 1.2 as pro-
p5 extra clothing. duction moves from point x to y to z, so the amount
The fact that to produce more of one good involves of food sacrificed rises for each additional unit of
producing less of the other is illustrated by the down- clothing produced. The opportunity cost of the fifth
ward-sloping nature of the curve. For example, the million units of clothing is 1 million units of food. The
country could move from point x to point y in opportunity cost of the sixth million units of clothing
­Figure 1.2. In doing so it would be producing an extra is 2 million units of food.
1 million units of clothing, but 1 million fewer units of
food. Thus the opportunity cost of the 1 million extra Macroeconomics and the production
units of clothing would be the 1 million units of food possibility curve
forgone. There is no guarantee that resources will be fully
It also illustrates the phenomenon of increasing employed, or that they will be used in the most effi-
TC 1 opportunity costs. By this we mean that as a country cient way possible. The nation may thus be producing
p5 produces more of one good it has to sacrifice ever-­ at a point inside the curve: for example, point v in
increasing amounts of the other. The reason for this is Figure 1.3.
that different factors of production have different prop-
erties. People have different skills. Land differs in differ-
ent parts of the country. Raw materials differ one from
another; and so on. Thus, as the nation concentrates
more and more on the production of one good, it has to Figure 1.3 Making a fuller use of resources
start using resources that are less and less suitable –
resources that would have been better suited to produ­
cing other goods. In our example, then, the production
of more and more clothing will involve a growing
x
­marginal cost: ever-increasing amounts of food have to
be sacrificed for each additional unit of clothing
produced. y
Food

v
Definition

Increasing opportunity costs When additional produc-

tion of one good involves ever-increasing sacrifices of
another. O Clothing

M01 Essentials of Economics 40101.indd 14 13/12/2022 22:00

 1.4 Modelling Economic Relationships  15

What we are saying here is that the economy is pro-

ducing less of both goods than it could possibly pro- Pause for thought
duce, either because some resources are not being used
Will economic growth necessarily involve a parallel outward
(for example, workers may be unemployed), or shift in the production possibility curve? Explain.
because it is not using the most efficient methods of
production possible, or a combination of the two. By
using its resources to the full, however, the nation
could move out on to the curve: to point x or y, for The circular flow of goods and incomes
example. It could thus produce more clothing and
The process of satisfying human wants involves pro-
more food.
ducers and consumers. The relationship between them
Here we are not concerned with the combination of
is two-sided and can be represented in a flow diagram
goods produced (a microeconomic issue), but with
(see Figure 1.5).
whether the total amount produced is as much as it
The consumers of goods and services are labelled
could be (a macroeconomic issue).
‘households’. Some members of households, of
As we move closer to an economy’s full-capacity
course, are also workers, and in some cases are the
output and resources become increasingly scarce it is
owners of other factors of production too, such as
likely that inflationary pressures will increase.
land. The producers of goods and services are labelled
Therefore, it is unlikely that an economy could sus-
‘firms’.
tain working at full capacity beyond the short term.
Firms and households are in a twin ‘demand and
But, over time, the production possibilities of a
supply’ relationship with each other.
nation are likely to increase. Investment in new plant
First, in the top half of the diagram, households
and machinery will increase the stock of capital; new
demand goods and services, and firms supply goods
raw materials may be discovered; technological
and services. In the process, exchange takes place. In
advances are likely to take place; through education
a money economy (as opposed to a barter economy),
and training, labour is likely to become more pro-
firms exchange goods and services for money. In
ductive. This growth in full-capacity output is illus-
other words, money flows from households to firms
trated by an outward shift in the production
in the form of consumer expenditure, while goods
TC 4 possibility curve. This will then allow actual output
and services flow the other way – from firms to
p 13 to increase: for example, from point x to point x′ in
households.
Figure 1.4.
This coming together of buyers and sellers is
known as a market – whether it be a street market, a
shop, the Internet, an auction, a mail-order system or
whatever. Thus we talk about the market for apples,
Figure 1.4 Growth in actual and full-capacity output the market for oil, for cars, for houses, for televisions
and so on.
Growth in full-capacity output shown Secondly, firms and households come together in
by outward shift in PP curve. the market for factors of production. This is illus-
Growth in actual output shown trated in the bottom half of the diagram. This time,
by movement from x to x9 the demand and supply roles are reversed. Firms
x9 demand the use of factors of production owned by

5 years’ time
x
Definitions
Food

Now Investment The production of items that are not for

immediate consumption.
PP2
Barter economy An economy where people exchange
PP1 goods and services directly with one another without
any payment of money. Workers would be paid with
bundles of goods.
O
Clothing Market The interaction between buyers and sellers.

M01 Essentials of Economics 40101.indd 15 13/12/2022 22:00

 16 ChAptEr 1 ECONOMIC ISSUES

Figure 1.5 Circular flow of goods and incomes

Goods and services

£
Consumer
expenditure

Wages, rent
dividends, etc.
£

Services of factors of production (labour, etc.)

households – labour, land and capital. Households Models and data

supply them. Thus the services of labour and other
factors flow from households to firms, and in
exchange firms pay households money – namely,
wages, rent, dividends and interest. Just as we
referred to particular goods markets, so we can also
refer to particular factor markets – the market for
bricklayers, for secretaries, for hairdressers, for land,
and so on.
There is thus a circular flow of incomes. House-
holds earn incomes from firms, and firms earn incomes
from households. The money circulates. There is also
a circular flow of goods and services, but in the oppo-
site direction. Households supply factor services to
firms, which then use them to supply goods and ser-
vices to households.
The flow diagram in Figure 1.5, like the production
possibility curve, can help us to distinguish between
micro- and macroeconomics.
Microeconomics is concerned with the composi-
tion of the circular flow: what combinations of
goods make up the goods flow; how the various fac-
tors of production are combined to produce these
goods; for whom the wages, dividends, rent and inter-
est are paid out.
Macroeconomics is concerned with the total size
of the flow and what causes it to expand and
contract.
Economic models, such as the production possibility
curve and the circular flow of income, provide us with
simplified frameworks with which to analyse eco-
nomic issues. Economic data (real or hypothetical) can
be used to contextualise the issues addressed by our
models, to quantity relationships identified by them,
and to analyse further the implied outcomes. As you
go through the text you will regularly come across the
use of economic data in these ways.
Economic data can sometimes seem daunting,
though perhaps less so if you think of them as creating
pictures of economic relationships with real-world
observations. In fact, you will soon recognise that we
commonly present and use data in a relatively limited
number of ways, albeit in many different contexts.
You will find that if you are new to the subject, you
will very quickly become familiar with these tech-
niques. To help you check your understanding of
them, you should visit Web Appendix 1.1 in the
Chapter 1 resources of the book’s website.2
2
This text does not use calculus. If, however, your course does, you
will find some optional Web appendices on the student website
or in MyLab Economics, some of which use differentiation to
explore some of the theories we cover. The rules of differentiation
and their use to find maximum and minimum points are given in
Web Appendix 1.2.

M01 Essentials of Economics 40101.indd 16 13/12/2022 22:00


Nominal and real data
When using data, one particularly important distinc-
tion in economics is that between nominal and real
figures. This distinction applies to all variables mea-
sured in monetary terms, such as pounds (£), dollars
($) or euros (€). It also applies to interest rates and
exchange rates. It is our fifth threshold concept.
Nominal figures are measured in the actual prices
prevailing at the time of measurement. In contrast,
real figures correct for changes in prices and so for
inflation. But, why is this distinction so important?
KEY The distinction between nominal and real figures.
IDEA Nominal figures are those using current prices, inter-
6 est rates, etc. Real figures are figures corrected for
inflation. This distinction is so important in assessing
TC
economic data that it is another of our Threshold
5 Concepts.
Let us consider two applications.
We begin with the concept of gross domestic prod-
uct (GDP). This is the value of output produced within
a country, typically over a 12-month period. There-
fore, it is a measure of a country’s national income
from production. Nominal GDP, sometimes called
‘money GDP’, measures GDP in the prices of the time
(also known as ‘current prices’). So, for example,
nominal GDP in 2021 would be the value of a coun-
try’s output at 2021 prices; and nominal GDP in 1999,
say, would be in 1999 prices. By simply comparing the
figures for the two years, no account is being made for
the effect of inflation. If prices had risen between 1999
and 2021, as indeed they had, growth in output would
appear to have been higher than it actually was.
In 2021 the nominal (or actual) value of GDP in
the UK was £2.3 trillion. It was £1.0 trillion in 1999.
Definitions
Gross domestic product (GDP): The value of output
produced within a country, typically over a 12-month
period.
Nominal GDP: GDP measured in current prices. These
figures take no account of the effect of inflation.
Real GDP: GDP measured in constant prices that ruled
in a chosen base year, such as 2000 or 2015. These figures
do take account of the effect of inflation. When inflation
is positive, real GDP figures will grow more slowly than
nominal GDP figures.
M01 Essentials of Economics 40101.indd 17
1.4 Modelling Economic Relationships  17
If we are to make a sensible comparison of national
income in these two years, we must take inflation into
account. If the 2.3 times increase in national income
were merely the result of a 2.3 times increase in the
general price level for goods and services, then there
would be no real increase in national income.
While nominal GDP figures take no account of the
effect of inflation, real GDP figures do. They measure
GDP in the prices that ruled in some particular year – the
base year. Thus, we could measure each year’s GDP in,
say, 2015 prices (known as ‘GDP at constant 2015
prices’). This would enable us to see how much real GDP
had changed from one period to another by eliminating
increases (or decreases) in money GDP due to increases
(or decreases) in prices. In real terms GDP in 2021 was
only 1.4 times higher than in 1999, not 2.3 times.
Pause for thought
If general price levels are falling, which will rise more quickly:
nominal GDP or real GDP?
Real GDP figures therefore allow inferences to be
drawn about the percentage (or proportionate) change
in the volume of production over time, such as those
from one year to the next. These changes are therefore
used in measuring economic growth and are reflected
in an economy’s business cycle. (see Box 1.2). When
the rate of inflation is positive, real GDP figures grow
more slowly than nominal GDP figures.
The second application of the distinction between
nominal and real is when we are comparing the price
changes of individual goods to the average price change
of all goods. For example, if the prices of bread or houses
have risen more than prices in general (i.e. by more than
the rate of inflation), we say that their real price has
risen. If, however, their price has risen by less than the
rate of inflation, we say that their real price has fallen.
In both these cases, the transformation from nom-
inal to real figures involves dividing or ‘deflating’
nominal figures by some general measure of prices.
Box 1.3 illustrates this process for the case of UK
house prices. The importance of the distinction
between nominal and real GDP is discussed further in
Chapter 9 (see page 270).
Pause for thought
If the nominal price of a product rises, can its real price fall?
13/12/2022 22:00
 18 Chapter 1 Economic issues

BOX 1.3 NOMINAL AND REAL HOUSE PRICES

Going through the roof

The distinction between nominal and real values is
a ­threshold concept. It is fundamental to assessing
­economic data. For example, when looking at patterns in
the prices of individual goods or services it may be that
what we observe is simply reflecting general price
patterns. In this case there is no real or relative price
change. But, if ­individual prices are diverging from
­general price ­patterns, then a real or relative price change
is occurring.
In the UK, house prices are rarely out of the news. This is
not only because nominal (actual) prices are increasing over
the longer term, but, more significantly, because they are
increasing in real terms too. In other words, house prices are
increasing relative to general prices.
We can quantify the nominal increase in house prices quite
straightforwardly. The average UK house price in January
1970 was a little over £3900. By January 2022, as shown in
the table, it had risen to around £274 000, an increase of
nearly 6900 per cent.
Average UK house price and RPI (January)
1970 1980 1990 2000
House price (£) 3 920 19 273 58 250 84 620 167 469 273 762
RPI (Jan
1987 = 100) 17.9 62.2 119.5 166.6
House price at
constant Jan
1987 consumer
prices (£) 21 929 30 995 47 445 50 792 76 856 86 170
Sources: Consumer Price Inflation time series dataset and UK House Price Index (ONS)
1
We use RPI figures as the data go back further than for other measures. For other price indices see Section 12.2 and Figure 12.6.
But, what about the real increase in average UK house
prices? To calculate this, we need to compare the increase in
house prices with general prices. One index of general prices
is the Retail Price Index (RPI).1 This index measures the cost
of a representative basket of consumer goods and services.
Over the same period the RPI increased by 1675 per cent.
While substantial in its own right, it does mean that house
prices have increased more rapidly than consumer prices.
Another way of showing the real increase in house prices
is to eliminate the increase in consumer prices from the
actual (nominal) house price figures. What is left is the
increase in house prices relative to consumer prices. To do
this we estimate house prices as if consumer prices had
remained at levels at a chosen point in time. In the table
we assume that this is January 1987: the RPI equals 100 in
January 1987. We then divide the nominal house price figures
by the RPI figures before multiplying by 100. This creates a
series of average UK house prices at constant January 1987
consumer prices.
The result of this process is illustrated in the final row of
the table which contains our real figures. It shows that in
real terms the average UK house price increased by around
290 per cent between 1970 and 2022: i.e. the average real
2010 2022 house price was 3.9 times more expensive in 2022 than in
1970. The key point, therefore, is that general price inflation
­cannot explain all the long-term growth seen in average
house prices.
217.9 317.7
The chart plots the average nominal and real UK
house price each month from January 1970. The real
series shows not only a long-term relative increase
in house prices but also cycles in the relative price
of houses. Hence, a second important finding is the
­volatility in real house prices. These findings are crucial

Recap
1. The production possibility curve shows the possible combinations of two goods that a country can produce in a given period of time.
Assuming that the country is already producing on the curve, the production of more of one good will involve producing less of the
other. This opportunity cost is illustrated by the slope of the curve.
2. If the economy is producing within the production possibility curve as a result of idle resources or inefficiency, it can produce more
of both goods by taking up this slack. In the longer term it can only produce more of both by shifting the curve outwards through
investment, technological progress, etc.
3. The circular flow of goods and incomes shows the interrelationships between firms and households in a money economy. Firms and
households come together in markets. In goods markets, firms supply goods and households demand goods. In the process, money
flows from households to firms in return for the goods and services that the firms supply. In factor markets, firms demand factors of
production and households supply them. In the process, money flows from firms to households in return for the services of the
­f actors that households supply.
4. When using economic data an important distinction is that between nominal and real figures. This distinction applies to all variables
measured in monetary terms. Nominal figures are measured in the actual prices prevailing at the time of measurement, whereas real
figures correct for changes in the general price level. In the presence of inflation, real figures increase less quickly than nominal
figures.

M01 Essentials of Economics 40101.indd 18 13/12/2022 22:00

 1.5 Economic Systems  19

CASE STUDIES &

APPLICATIONS

Average UK house prices

£300 000
Nominal house price
House price at constant Jan 1987 consumer prices
£250 000

£200 000

£150 000

£100 000

£50 000

£0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Sources: Consumer Price Inflation time series dataset and UK House Price Index: reports (Office for National Statistics)

for informing research into the determination of UK house Begin by extracting data on UK house prices and the
prices. Retail Price Index (or an alternative measure of general
prices) and replicate the chart in the Box. These data

?
1. If house prices were to grow at the same rate as con-
sumer prices over the long term, at what rate would
real house prices have increased?
2. Under what circumstance would nominal house
prices increase while real house prices decrease?
3. What is the difference between ‘cycles in nominal
house prices’ and ‘cycles in real house prices’?
are available from the Office for National Statistics.
Write a short explanation of how you created the real
house price series before summarising what your chart
shows.
Finally, draw a line chart showing the annual percent-
age changes in nominal and real house prices and again
summarise what your chart shows.

1.5 ECONOMIC SYSTEMS

How do countries differ in the way their economies are organised?

All societies are faced with the problem of scarcity.
KI 1 They differ considerably, however, in the way they
p5 tackle the problem. One important difference between
societies is in the degree of government control of the
economy.
At the one extreme lies the completely planned or
command economy, where all the economic decisions
are taken by the government.
At the other extreme lies the completely free-­
market economy. In this type of economy there is no
government intervention at all. All decisions are taken
by individuals and firms. Households decide how
much labour and other factors to supply, and what
goods to consume. Firms decide what goods to
produce and what factors to employ. The pattern of
production and consumption that results depends on
the interactions of all these individual demand and
supply decisions.
Definitions
Centrally planned or command economy An economy
where all economic decisions are taken by the central
authorities.
Free-market economy An economy where all economic
decisions are taken by individual households and firms,
with no government intervention.

M01 Essentials of Economics 40101.indd 19 13/12/2022 22:00

 20 ChAptEr 1 ECONOMIC ISSUES
Figure 1.6 Classifying economic systems
Mid-1980s
N. Korea China
Cuba Poland France
Totally
planned
economy
N. Korea Cuba China
Early 2020s
In practice, all economies are a mixture of the two
and so can be described as mixed economies. However,
mixed economies can be distinguished by the degree of
government intervention. For example, the govern-
ment plays a large role in North Korea, whereas in the
USA, the government plays a much smaller role. The
mixture of government and the market can be shown
by the use of a spectrum diagram such as Figure 1.6. It
shows where particular economies of the real world lie
along the spectrum between the two extremes.
Pause for thought
How do you think the positions of these eight countries will
change over the next decade?
Of course, this analysis presents a very simplified
representation of different economies. Mixed econ-
omies differ in the type of government intervention as
well as the degree. For example, governments can
intervene through planning, public ownership, regu-
lation, taxes and subsidies, partnership schemes with
private industry and so on. Two countries could be in
a similar position along the spectrum but have very
different types of government intervention.
Nevertheless, this type of analysis is a useful start-
ing point for analysing real-world economies. Also, by
looking at the two extremes of a totally planned and
a totally free-market economy, this can give us a
M01 Essentials of Economics 40101.indd 20
Hong
UK USA Kong
Totally
free-market
economy
France USA
Poland UK China
(Hong
Kong)
perspective of the potential advantages and disadvan-
tages of more or less government intervention.
We start by having a brief look at the command econ-
omy. Then we will see how a free-market economy
operates. We conclude by considering some general
reasons for government intervention in market econ-
omies. In subsequent chapters we will examine in
more detail the various ways in which governments
intervene in market economies: and so we will look at
the various forms of mixed market economy.
The command economy
The command economy is usually associated with a
socialist or communist economic system, where land
and capital are collectively owned. The state plans the
allocation of resources at three important levels.
■ It plans the allocation of resources between current
consumption and investment for the future. By sacri-
ficing some present consumption and diverting
Definitions
Mixed economy An economy where economic decisions
are made partly by the government and partly through
the market.
Mixed market economy A market economy where there
is some government intervention.
13/12/2022 22:00

resources into investment, it could increase the econ-
omy’s growth rate. The amount of resources it chooses
to devote to investment will depend on its broad
­macroeconomic strategy: the importance it attaches
to growth as opposed to current consumption.
■ At a microeconomic level it plans the output of each
industry and firm, the techniques that will be used
and the labour and other resources required by each
industry and firm.
  In order to ensure that the required inputs are
available, the state would probably conduct some
TC 4 form of input–output analysis. All industries are
p 13 seen as users of inputs from other industries and as
producers of outputs for consumers or other indus-
tries. For example, the steel industry uses inputs
from the coal and iron-ore industries and produces
outputs for the vehicle and construction industries.
Input–output analysis shows, for each industry, the
sources of all its inputs and the destination of all its
outputs. The state then attempts to match up the
inputs and outputs of each industry so that the
planned demand for each industry’s product is
equal to its planned supply.
■ It plans the distribution of outputs between consum-
ers. This will depend on the government’s aims. It
may distribute goods according to its judgement of
people’s needs; or it may give more to those who
produce more, thereby providing an incentive for
people to work harder.
It may distribute goods and services directly (for
example, by a system of rationing); or it may decide the
distribution of money incomes and allow individuals to
decide how to spend them. If it does the latter, it may
still seek to influence the pattern of expenditure by set-
ting appropriate prices: low prices to encourage con-
sumption, and high prices to discourage consumption.
Assessment of the command economy
With central planning, the government could take an
overall view of the economy. It could direct the nation’s
resources in accordance with specific national goals.
High growth rates could be achieved if the govern-
ment directed large amounts of resources into invest-
ment. Unemployment could be largely avoided if the
government carefully planned the allocation of labour
in accordance with production requirements and
Definition
Input–output analysis This involves dividing the econ-
omy into sectors where each sector is a user of inputs
from and a supplier of outputs to other sectors. The
technique examines how these inputs and outputs can be
matched to the total resources available in the economy.
M01 Essentials of Economics 40101.indd 21
1.5 Economic Systems  21
labour skills. National income could be distributed
more equally or in accordance with needs. The social
repercussions of production and consumption (e.g. the
effects on the environment) could be taken into
account, provided the government was able to predict
these effects and chose to take them into account.
In practice, a command economy could achieve
these goals only at considerable social and economic
cost. The reasons are as follows:
■ The larger and more complex the economy, the
greater the task of collecting and analysing the infor-
mation essential to planning, and the more complex
the plan. Complicated plans are likely to be costly to
administer and involve cumbersome bureaucracy.
■ If there is no system of prices, or if prices are set arbi-
trarily by the state, planning is likely to involve the
inefficient use of resources. It is difficult to assess the
relative efficiency of two alternative techniques that
use different inputs if there is no way in which the
value of those inputs can be ascertained. For exam-
ple, how can a rational decision be made between an
oil-fired and a coal-fired furnace if the prices of oil
and coal do not reflect their relative scarcity?
■ It is difficult to devise appropriate incentives to
encourage workers and managers to be more pro-
ductive without a reduction in quality. For example,
if bonuses are given according to the quantity of
output produced, a factory might produce shoddy
goods, since it can probably produce a larger quan-
tity of goods by cutting quality. To avoid this prob-
lem, a large number of officials may have to be
employed to check quality.
■ Complete state control over resource allocation
would involve a considerable loss of individual lib-
erty. Workers would have no choice where to work;
consumers would have no choice what to buy.
■ The government might enforce its plans even if they
were unpopular.
■ If production is planned, but consumers are free to
spend incomes as they wish, then there will be a
problem if the consumer wishes change. Shortages
will occur if consumers decide to buy more, and
surpluses will occur if they decide to buy less.
Most of these problems were experienced in the
former Soviet Union and the other Eastern bloc coun-
tries, and were part of the reason for the overthrow of
their Communist regimes (see Box 1.4).
Pause for thought
Queues were a common feature of the former Soviet Union.
Why do you think they were so commonplace? Is a system of
queuing a fair way of allocating scarce goods and resources?
13/12/2022 22:00
 22 Chapter 1 Economic issues
BOX 1.4 COMMAND ECONOMIES
Rise and fall of planning in Russia
Collectivisation and central planning
The Bolsheviks under the leadership of Lenin came to power
in Russia with the October Revolution of 1917. Communism
was introduced and the market economy abolished. Indus-
tries were nationalised; workers were told what jobs to do;
food was taken from peasants to feed the towns; workers were
allocated goods from distribution depots.
With the ending of the civil war in 1921, the economy
was in bad shape and Lenin embarked on the New Economic
Policy. This involved a return to the use of markets. Smaller
businesses were returned to private hands and peasants were
able to sell their crops. The economy began to recover; how-
ever, Lenin died in 1924 and Stalin came to power.
The Russian economy underwent a radical transformation
from 1928 onwards. The key features of the Stalinist approach
were collectivisation, industrialisation and central planning.
Peasant farms were abolished and replaced by large-scale col-
lective farms where land was collectively owned and worked,
and by state farms, owned by the state and run by managers.
This caused disruption and famine, with peasants slaughtering
their animals rather than giving them up. However, in the
longer term more food was produced. Both collective and state
farms were given quotas of output that they were ­supposed to
deliver, for which the state would pay a fixed price.
Alongside the agricultural reforms a drive to industrialisa-
tion took place and a vast planning apparatus was developed.
At the top was Gosplan, the central planning agency. This
prepared five-year plans, which specified the general direc-
tion in which the economy was to move, and annual plans,
which gave details of what was to be produced and with what
resources for some 200 or so key products. The system oper-
ated without either the price mechanism or the profit motive,
although incentives existed with bonuses paid to managers
and workers if targets were achieved.
Stalin died in 1953, but the planning system remained
largely unchanged throughout the Soviet Union until the late
The free-market economy
Free decision making by individuals
The free-market economy is usually associated with
a pure capitalist system, where land and capital are
privately owned. All economic decisions are made by
households and firms, which are assumed to act in
their own self-interest. The following assumptions are
usually made:
■ Firms seek to maximise profits.
■ Consumers seek to get the best value for money
from their purchases.
■ Workers seek to maximise their wages relative to
the human cost of working in a particular job.
It is also assumed that individuals are free to make
their own economic choices: consumers are free to decide
what to buy with their incomes; workers are free to
choose where and how much to work; firms are free to
choose what to sell and what production methods to use.
M01 Essentials of Economics 40101.indd 22
1980s. Initially, high growth rates had been achieved, though
at a cost of low efficiency. Poor flows of information led to
inconsistencies in the plans. Targets were often unrealistic,
and as a result there were frequent shortages and sometimes
surpluses. There was little product innovation and goods were
frequently of poor quality. A large ‘underground economy’
flourished in which goods were sold on the illegal market and
in which people did second ‘unofficial’ jobs.
Moves to the market
By the time Gorbachev came to power in 1985 many people
were pressing for economic reform. Gorbachev responded
with his policy of perestroika (economic reconstruction),
which involved managers preparing their own plans and
managers and workers being rewarded for becoming more
efficient. Under the new system, one-person businesses and
larger co-operatives were allowed, while the price mechanism
was re-introduced with the state raising prices if there were
substantial shortages.
These reforms, however, did not halt the economic
decline. Managers resented the extra responsibilities
and people were unclear as to what to expect from the
state. Queues lengthened in the shops and people became
­disillusioned with perestroika.
Communism fell apart in 1989 and both the Soviet Union
and the system of central planning came to an end. Russia
embarked upon a radical programme of market reforms in which
competition and enterprise were intended to replace state
­central planning (see Case Study 1.7 in MyLab Economics.)
Initially, the disruption of the move to the market led to
a sharp decline in the Russian economy. Output fell by an
­average of 5.5 per cent per annum between 1993 and 1998.
However, this was followed by a period of rapid economic
growth, which averaged 7 per cent from 1999 to 2008.
The Russian economy contracted by nearly 8 per cent in
the 2009 recession. Although this was followed by growth
The resulting supply and demand decisions of firms
and households are transmitted to each other through
their effect on prices.
The price mechanism
The price mechanism works as follows. Prices respond
to shortages and surpluses. Shortages cause prices to
rise. Surpluses cause prices to fall.
If consumers decide they want more of a good (or
if producers decide to cut back supply), demand will
Definition
Price mechanism The system in a market economy
whereby price changes that occur in response to changes
in demand and supply have the effect of making demand
equal to supply.
13/12/2022 22:00
Another random document with
no related content on Scribd:
The Project Gutenberg eBook of Ornithological
biography, Vol. 4 (of 5)
This ebook is for the use of anyone anywhere in the United
States and most other parts of the world at no cost and with
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included with this ebook or online at www.gutenberg.org. If you
are not located in the United States, you will have to check the
laws of the country where you are located before using this
eBook.

Title: Ornithological biography, Vol. 4 (of 5)

An account of the habits of the birds of the United
States of America

Author: John James Audubon

Contributor: William MacGillivray

Release date: December 2, 2023 [eBook #72279]

Language: English

Original publication: Edinburgh: Adam & Charles Black, 1835

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*** START OF THE PROJECT GUTENBERG EBOOK

ORNITHOLOGICAL BIOGRAPHY, VOL. 4 (OF 5) ***
 Transcriber’s Note:
Inconsistent hyphenation, capitalization, and spelling in the
original document have been preserved. Obvious typographical
errors have been corrected.
The following inconsistencies were noted and retained:

Lorimier’s Fork, Lorimie’s Fork and Larimie’s Fork may be

the same place.

Grand Mannan and Grand Manan may be the same place.

J. R. Poinsett and Joel Poinsett may be the same person.

Mr Abbot and Mr Abbott may be the same person.

The following are possible errors, but retained:

Arkansa River should possibly be Arkansas.

gambling should possibly be gambolling.

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ORNITHOLOGICAL BIOGRAPHY.
 ORNITHOLOGICAL BIOGRAPHY,

OR AN ACCOUNT OF THE HABITS OF THE

BIRDS OF THE UNITED STATES OF AMERICA,

ACCOMPANIED BY DESCRIPTIONS OF THE OBJECTS REPRESENTED IN

THE WORK ENTITLED

BIRDS OF AMERICA,

TOGETHER WITH AN ACCOUNT OF THE DIGESTIVE ORGANS OF MANY OF

THE SPECIES, ILLUSTRATED BY ENGRAVINGS ON WOOD.

 BY JOHN JAMES AUDUBON, F.R.SS.L.&E.

FELLOW OF THE LINNEAN AND ZOOLOGICAL SOCIETIES OF LONDON; MEMBER OF THE LYCEUM

OF NEW YORK, OF THE NATURAL HISTORY SOCIETY OF PARIS, THE WERNERIAN NATURAL

HISTORY SOCIETY OF EDINBURGH; HONORARY MEMBER OF THE SOCIETY OF NATURAL HISTORY

OF MANCHESTER, AND OF THE SCOTTISH ACADEMY OF PAINTING, SCULPTURE, AND

ARCHITECTURE; MEMBER OF THE AMERICAN PHILOSOPHICAL SOCIETY, OF THE ACADEMY OF

NATURAL SCIENCES AT PHILADELPHIA, OF THE NATURAL HISTORY SOCIETIES OF BOSTON, OF

CHARLESTON IN SOUTH CAROLINA, THE QUEBEC LITERARY AND HISTORICAL SOCIETY, THE

ORNITHOLOGICAL SOCIETY OF LONDON, &C. &C.

VOL. IV.

EDINBURGH:

ADAM & CHARLES BLACK, EDINBURGH:

LONGMAN, ORME, BROWN, GREEN &

LONGMANS, LONDON; R. HAVELL, ENGRAVER,

77. OXFORD STREET, LONDON; ALEXANDER

HILL, EDINBURGH; AND GEORGE SMITH,

LIVERPOOL.
MDCCCXXXVIII.
PRINTED BY NEILL AND CO., OLD FISHMARKET, EDINBURGH.
 INTRODUCTION.
Three years have nearly elapsed since I had the pleasure of
presenting you with the third volume of my “Ornithological
Biography,” and about twelve since the first fasciculus of my
“Illustrations of the Birds of America” was submitted to your
inspection. This work, comprising four hundred and thirty-five plates,
and one thousand and sixty-five figures, was finished on the 20th of
June 1838, without the continuity of its execution having been
broken for a single day, and the numbers having been delivered with
exemplary regularity; for all which I am indebted to my friend and
Engraver, Mr Robert Havell. Once more surrounded by all the
members of my dear family, enjoying the countenance of numerous
friends who have never deserted me, and possessing a competent
share of all that can render life agreeable, I look up with gratitude to
the Supreme Being, and feel that I am happy.
The adventures and vicissitudes which have fallen to my lot, instead
of tending to diminish the fervid enthusiasm of my nature, have
imparted a toughness to my bodily constitution, naturally strong, and
to my mind, naturally buoyant, an elasticity, such as to assure me
that, though somewhat old, and considerably denuded in the frontal
region, I could yet perform on foot a journey of any length, were I
sure that I should thereby add materially to our knowledge of the
ever-interesting creatures which have for so long a time occupied my
thoughts by day, and filled my dreams with pleasant images. Nay,
Reader, had I a new lease of life presented to me, I should chuse for
it the very occupations in which I have been engaged.
And, Reader, the life which I have led has been in some respects a
singular one. Think of a person intent on such pursuits as mine have
been, aroused at early dawn from his rude couch on the alder-
fringed brook of some northern valley, or in the midst of some yet
unexplored forest of the west, or perhaps on the soft and warm
sands of the Florida shores, and listening to the pleasing melodies of
songsters innumerable, saluting the magnificent orb from whose
radiant influence the creatures of many worlds receive life and light.
Refreshed and reinvigorated by healthful rest, he starts upon his
feet, gathers up his store of curiosities, buckles on his knapsack,
shoulders his trusty firelock, says a kind word to his faithful dog, and
recommences his pursuit of zoological knowledge. Now the morning
is spent, and a squirrel or a trout afford him a repast. Should the day
be warm, he reposes for a time under the shade of some tree. The
woodland choristers again burst forth into song, and he starts anew,
to wander wherever his fancy may direct him, or the objects of his
search may lead him in pursuit. When evening approaches and the
birds are seen betaking themselves to their retreats, he looks for
some place of safety, erects his shed of green boughs, kindles his
fire, prepares his meal, and as the Widgeon or Blue-winged Teal, or
perhaps the breast of a Turkey, or a steak of venison, sends its
delicious perfumes abroad, he enters into his parchment-bound
journal the remarkable incidents and facts that have occurred in the
course of the day. Darkness has now drawn her sable curtain over
the scene, his repast is finished, and kneeling on the earth he raises
his soul to Heaven, grateful for the protection that has been granted
to him and the sense of the Divine presence in this solitary place.
Then wishing a cordial good night to all the dear friends at home,
the American Woodsman wraps himself up in his blanket, and
closing his eyes, soon falls into that comfortable sleep which never
fails him on such occasions.
Since I last parted from you, my exertions have been unremitted,
and my rambles extended as far as circumstances allowed, for I
have been ever anxious to render the fourth and concluding volume
of my Illustrations as worthy of your approbation as I could. Whether
I have added to our knowledge of the birds which constantly reside
within the limits of the United States and their Territories, or
periodically visit us from the South, it is yours to say. That I have left
undone much that might have been accomplished by an abler
student of Nature, is doubtless quite true; but that any would have
prosecuted the study of our numerous feathered denizens with more
good will or more sincere desire to obtain facts and rectify errors,
would, I think, be difficult to prove. If my “Birds of America,” and
“Ornithological Biography,” are looked upon by you as having
contributed in some degree to the improvement of our knowledge of
these my favourite objects of observation, and as likely to stimulate
other and perhaps more successful students to perfect it. I shall rest
satisfied with my labours.
Having hitherto given you some account of the occurrences that
have taken place during the time intervening between the
appearance of one volume and that of another, I again resume the
subject, hoping that what I have now to say may prove not less
interesting to a friend like you. When I last left Edinburgh, I
proceeded to London, full of the desire to revisit my native land
before concluding my work. It was my wish to cross the Continent of
America, gaze on the majestic wilds of the Rocky Mountains, wander
along the green valleys of the Oregon, and search the shores of the
Pacific Ocean and a portion of North California; but circumstances
denied me the pleasure anticipated. However, here we are on the
way to the metropolis of England; we have already passed through
Newcastle, York, Leeds, and Manchester, and are just about to alight
in the Main Street of Sheffield. The gentleman who meets me at the
coach door, is John Heppenstall, Esq., well known to me by
correspondence, but not personally until now. Arrived here according
to appointment, we shake hands, and in a few minutes are beneath
his most hospitable roof, and in the midst of his family and friends.
The expectations which we had formed, so far from being
disappointed, were more than gratified, for this sincere and
honourable man is distinguished, not less by liberality of sentiment
than by a generosity commensurate with the goodness of his heart.
In these respects every member of his family is a counterpart of
himself; and, such being our hosts, you may judge how agreeable to
us was our stay in Sheffield. It was while enjoying the hospitality of
this excellent friend, that we became acquainted with Ebenezer
Elliot, Esq. and subsequently with Jonathan Brammell, Esq. from
whom we have since received many acts of kindness. Stopping
afterwards at Derby, we saw our relations there, and on arriving in
London were kindly welcomed by my brother-in-law, Alexander
Gordon, Esq., and soon established ourselves in a house in
Wimpole Street.
I now again enjoyed the society of our numerous friends, and had
the pleasure of seeing my work proceed apace. One day Mr Robert
Havell informed me, that a gentleman, a Fellow of the Royal
Society, residing not far from us, in the same street, had subscribed
for the Birds of America. The gentleman called to see me; my wife
and myself, were introduced to his lady, and the several members of
his amiable family, and our intimacy and friendship have ever since
increased. This excellent friend of mine is a surgeon of the highest
merit. Long before I left England for America, he took charge of my
wife’s precarious health; and when we parted at the coach that took
my son, John Woodhouse, and myself, to Portsmouth, he promised
to watch over her. When I again reached my house in Wimpole
Street, after an absence of a year, he was the first friend to greet me
with a cordial welcome. Were I to mention the many occasions on
which he has aided me by his advice and superior knowledge of the
world, you would be pleased to find so much disinterestedness in
human nature. His professional aid too, valuable as it has proved to
us, and productive of much inconvenience to him, has been
rendered without reward, for I could never succeed in inducing him
to consider us his patients, although for upwards of two years he
never passed a day without seeing my wife. But why should I say
more? This fine specimen of human nature, eminent for every virtue,
this kind and generous friend, is Benjamin Phillips, Esq.
Having been long anxious to introduce into America several species
of European birds, which I thought might thrive with us, I purchased
about an hundred individuals of that delightful songster, the Sky
Lark, fifty Starlings, and several Jays and Wood Pigeons, intending
to set them loose in the Western States. Putting them in ample
cages, accompanied with a store of food for the voyage, I had them
sent on board in the London Docks; but on our reaching Portsmouth
by land, we heard that the weather had been very bad in the
Channel, and that our birds had suffered severely. The news, to my
vexation, proved true; many of the birds had died; and, although our
passage to New York was pleasant as well as speedy, very few were
landed, so that my hopes were entirely disappointed.
On the 1st of August 1836, we went on board the fine American
Packet Ship, the Gladiator, commanded by Thomas Britton, Esq.
and proceeded on our voyage, which proved agreeable. On arriving
at New York, we soon reached the house of my good friend and
brother-in-law Nicholas Berthoud, Esq. Leaving my son there, I
proceeded almost immediately to Boston, where, under the roof of
my generous friend Dr George C. Shattuck, I enjoyed life for a
while. My friend Dr George Parkman was absent, and I missed him
much. Here, through the kindness of Dr Shattuck, I procured two
subscribers, and formed acquaintance with Thomas M. Brewer,
Esq., from whom I have received many valuable services, which you
will find mentioned in the proper places. Pushing on to Salem I
formed some acquaintances there, and procured several
subscribers; then returned to Boston, and as fortune would have it,
heard of the arrival of Thomas Nuttall, Esq., the well-known
zoologist, botanist, and mineralogist, who had performed a journey
over the Rocky Mountains to the Pacific Ocean, accompanied by our
mutual friend John Kirk Townsend, Esq., M. D. Mr Nuttall
generously gave me of his ornithological treasures all that was new,
and inscribed in my journal the observations which he had made
respecting the habits and distribution of all the new and rare species
which were unknown to me. All this information you will find in the
different articles to which it refers, and you will allow that while it
proves his zeal for the furtherance of science, it manifests the
generosity of his noble nature.
Dr Townsend’s collection was at Philadelphia; my anxiety to
examine his specimens was extreme; and I therefore, bidding
farewell to my Boston friends, hurried off to New York, where, in a
week, I added eighteen names to my list of subscribers, in obtaining
which I was materially aided by my brother-in-law. Once more my
son and I reached Philadelphia, where at once we placed ourselves
under the roof of my ever staunch and true friend Richard Harlan,
Esq., M. D., with whom we remained several weeks. Soon after my
arrival, I called on my learned friend Dr Charles Pickering, formed
the desired acquaintance of an enthusiastic young ornithologist,
James Trudeau, Esq., and met my firm friend Edward Harris,
Esq. Having obtained access to the collection sent by Dr Townsend,
I turned over and over the new and rare species; but he was absent
at Fort Vancouver, on the shores of the Columbia River; Thomas
Nuttall had not yet come from Boston, and loud murmurs were
uttered by the soi-disant friends of science, who objected to my
seeing, much less portraying and describing those valuable relics of
birds, many of which had not yet been introduced into our Fauna.
The traveller’s appetite is much increased by the knowledge of the
distance which he has to tramp before he can obtain a meal; and
with me the desire of obtaining the specimens in question increased
in proportion to the difficulties that presented themselves. Having
ascertained the names of the persons best able or most willing to
assist me on this occasion, and aided by Thomas Nuttall, who had
now arrived, Drs Pickering, Harlan, S. G. Morton, Secretary to
the Academy of Natural Sciences, M’Murtrie, Trudeau, and above
all my friend Edward Harris, who offered to pay for them with the
view of presenting them to me, I at length succeeded. It was agreed
that I might purchase duplicates, provided the specific names agreed
upon by Mr Nuttall and myself were published in Dr Townsend’s
name. This latter part of the affair was perfectly congenial to my
feelings, as I have seldom cared much about priority in the naming of
species. I therefore paid for the skins which I received, and have
now published such as proved to be new, according to my promise.
But, let me assure you, Reader, that seldom, if ever in my life, have I
felt more disgusted with the conduct of any opponents of mine, than I
was with the unfriendly boasters of their zeal for the advancement of
ornithological science, who at the time existed in the fair city of
Philadelphia.
From Philadelphia I bent my course toward Baltimore, where I spent
a few days. Before leaving the former city, my good friend Edward
Harris had promised to join us at Charleston, for the purpose of
accompanying us along the western coast of the Floridas, and the
Gulf of Mexico, at least as far as Galveston Island in Texas. On
reaching the city of Washington, I presented myself to the
Honourable Levi Woodbury, Secretary of the Treasury of the
United States, a gentleman of learning, long friendly towards me,
who at once assured me that he would, if possible, grant me one of
our Revenue Cutters, for my intended voyage. The war, which was
at that time raging between the Seminole Indians and the citizens of
Florida tended strongly to frustrate my wishes, as every disposable
vessel of the class under the Secretary of the Treasury was engaged
on the coast of the Peninsula. I called on President Andrew
Jackson, from whom, since 1819, I have received peculiar facilities,
and who assured me of his wish to grant my request. My son and I
dined with him on that day sans façon, both of us in the undress best
suited to practical students of nature. And here I may inform you,
that I have seldom eaten of a better Wild Turkey than the one which
graced his table, and which had been procured not many miles
distant from our centre of political intercourse. I also had the
pleasure of seeing my excellent friend, Colonel J. J. Abert, of the U.
S. Topographical Department, the Honourable J. R. Poinsett, and
the Secretary of the Navy, to whom I then recommended several
American naturalists as worthy of being engaged on any naval
expedition of discovery.
We now proceeded towards Charleston in South Carolina, travelling
the latter part of the way on one of the most extraordinary rail-roads
in the world, and reached in safety the house of my worthy friend the
Reverend John Bachman, D.D. It was indeed a happy meeting!
Here I opened the box containing Dr Townsend’s precious series of
birds, and while waiting the arrival of Mr Harris, drew upwards of
seventy figures of the species which I had procured at Philadelphia,
assisted in the finishing of the plants, branches of trees, and flowers,
which accompany these figures, by my friend’s sister-in-law Miss M.
Martin, to whom I now again offer my most sincere thanks. While
here I received the agreeable intelligence of my having been elected
a Member of the Ornithological Society of London.
Edward Harris joined me, but the Revenue Cutter had not made
its appearance; and time becoming precious, on account of the
approach of spring, we bid adieu to all at Charleston, and pushed for
New Orleans, where, I was informed by Government letters, I should
meet with a vessel. On reaching Augusta in Georgia, I called on Dr
Wray, who promised to forward to me a number of plants for my
noble friend Lord Ravensworth, who has received them in good
order. After several days of severe travelling, we arrived at
Montgomery in Alabama, and meeting there with a steam-boat
bound to Mobile, secured our passage. Next day we arrived there,
and spent two days in examining the neighbourhood; after which we
proceeded to Pensacola, where I felt proud to find a harbour
commodious enough to contain a fleet sufficient to repel the attacks
of any naval force brought against the United States. Here I made
the long-sought-for acquaintance of Mr Innerarity, to whom I had
letters from my friend Alexander Gordon, Esq., and who
introduced us to all who were likely to forward our views. The next
morning he accompanied us on board the United States’ frigate, the
Constellation, and presented us to Commodore Dallas, to whom I
had letters of introduction from our government. This polite and
gallant officer received us all with great kindness, and, after reading
my letters, assured me that as soon as a cutter could be spared, it
should be at my service, and that the information would be
transmitted to me through the medium of the Collector of Customs at
Mobile or New Orleans. After searching the country around
Pensacola, we returned to Mobile, and proceeded to New Orleans in
a steamer, by way of the great lakes.
Having previously received the most pressing invitation from my
friend James Grimshaw, Esq., my son and I went at once to his
house, where we were treated with all the kindness to be expected
from a true English gentleman. I had the pleasure of renewing my
acquaintance with Ex-Governor Roman, and several members of his
most amiable family, among whom was Mr Zaringue. From that
gentleman I received much valuable information respecting some of
our birds, as well as from my long-known acquaintance, the great
sportsman Mr Louis Adam. Here also I for the last time met with
good M. Le Sueur, well known to the world of science as a zoologist
of great merit, and with whom I first became acquainted at
Philadelphia in 1824. He, alas! is now no more.
Having called on Mr Breedlove, Collector of Customs for New
Orleans, and presented to him my letters from the Honourable Levi
Woodbury, he at once assured me that the Revenue Cutter the
Campbell, would be at my disposal in a very few days. But the
service, or other circumstances, did not allow the arrival of that
vessel at New Orleans until late in March, and at a time when,
apprehensive that our intended voyage might be frustrated, we were
all “crest-fallen.” Time, however, passed on, and one morning I was
gladdened by being called upon by the Commander of the Campbell,
and still more upon recognising in him the Lieutenant and Pilot of the
Marion, or Lady of the Green Mantle, so frequently mentioned in the
former volumes of these Ornithological Biographs. I knew that
Napoleon Coste was a true sea-fowl. He assured me of the
excellence of his vessel, and gay and happy were we all when we
removed on board the tight little sea-boat, of scarcely more than
sixty tons burden. Proceeding down the Mississippi, we sailed
through its south-west Pass, where we were joined by a vessel of
eight tons, as a tender for our excursions along the shores. It was
commanded by Captain William Taylor, now, I believe, a