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MICROECONOMICS
Fifteenth Canadian Edition
CAMPBELL R. MCCONNELL
University of Nebraska—Emeritus
STANLEY L. BRUE
Pacific Lutheran University
SEAN M. FLYNN
Scripps College
THOMAS P. BARBIERO
Ryerson University
Microeconomics
Fifteenth Canadian Edition
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Dedication
To my granddaughter, Serafina, and past instructors.
About the Authors
Campbell R. McConnell earned his Ph.D. from the University of Iowa after receiving degrees
from Cornell College and the University of Illinois. He taught at the University of Nebraska–
Lincoln from 1953 until his retirement in 1990. He is also coauthor of Contemporary Labor
Economics, ninth edition; Essentials of Economics, second edition; Macroeconomics: Brief
Edition; and Microeconomics: Brief Edition (all The McGraw-Hill Companies), and has edited
readers for the principles and labour economics courses. He is a recipient of both the University
of Nebraska Distinguished Teaching Award and the James A. Lake Academic Freedom Award
and is past president of the Midwest Economics Association. Professor McConnell was awarded
an honorary Doctor of Laws degree from Cornell College in 1973 and received its Distinguished
Achievement Award in 1994. His primary areas of interest are labour economics and economic
education. He has an extensive collection of jazz recordings and enjoys reading jazz history.
Stanley L. Brue carried out his undergraduate work at Augustana College (South Dakota) and
received its Distinguished Achievement Award in 1991. He received his Ph.D. from the Univer-
sity of Nebraska–Lincoln. He is retired from a long career at Pacific Lutheran University, where
he was honoured as a recipient of the Burlington Northern Faculty Achievement Award. Profes-
sor Brue has also received the national Leavey Award for excellence in economic education. He
has served as national president and chair of the Board of Trustees of Omicron Delta Epsilon
International Economics Honorary. He is coauthor of Economic Scenes, fifth edition (Prentice-
Hall); Contemporary Labor Economics, ninth edition; Essentials of Economics, second edition;
Macroeconomics: Brief Edition; Microeconomics: Brief Edition (all The McGraw-Hill Companies);
and The Evolution of Economic Thought, seventh edition (South-Western). For relaxation, he
enjoys international travel, attending sporting events, and skiing with family and friends.
Sean M. Flynn did his undergraduate work at the University of Southern California before com-
pleting his Ph.D. at U.C. Berkeley, where he served as the Head Graduate Student Instructor for
the Department of Economics after receiving the Outstanding Graduate Student Instructor
Award. He teaches at Scripps College (of the Claremont Colleges) and is the author of Economics
for Dummies (Wiley) and coauthor of Essentials of Economics, second edition; Macroeconomics:
Brief Edition; and Microeconomics: Brief Edition (all The McGraw-Hill Companies). His
research interests include finance, behavioural economics, and health economics. An accom-
plished martial artist, he has represented the United States in international aikido tournaments
and is the author of Understanding Shodokan Aikido (Shodokan Press). Other hobbies include
running, travelling, and enjoying ethnic food.
Thomas P. Barbiero received his Ph.D. from the University of Toronto after completing under-
graduate studies at the same university. He is a professor in the Department of Economics at
Ryerson University in Toronto. His research interests include the economic history of Canada
and modern Italy. He spends his summers in Fontanarosa, a small town in his native region of
Campania in southern Italy. It is situated in the vineyards of the Taurasi wine-growing area.
There he indulges in his favourite pastime: consuming good food and wine.
Brief Contents
Preface xvi
PART 1: An Introduction to Economics and the Economy 1

CHAPTER 1: Limits, Alternatives, and Choices 1
CHAPTER 2: The Market System and the Circular Flow 33
PART 2: Price, Quantity, and Efficiency 57

CHAPTER 3: Demand, Supply, and Market Equilibrium 57
CHAPTER 4: Market Failures: Public Goods and Externalities 95
CHAPTER 5: Government’s Role and Government Failure 126
PART 3: Consumer Behaviour 147

CHAPTER 6: Elasticity 147
CHAPTER 7: Consumer Choice and Utility Maximization 172
CHAPTER 7B: Behavioural Economics (available on Connect) 1
PART 4: Microeconomics of Product Markets and Competition Policy 197

CHAPTER 8: The Firm and the Costs of Production 197
CHAPTER 9: Perfect Competition in the Short Run 227
CHAPTER 10: Perfect Competition in the Long Run 249
CHAPTER 11: Monopoly 265
CHAPTER 12: Monopolistic Competition 292
CHAPTER 13: Oligopoly and Strategic Behaviour 305
CHAPTER 14: Technology, R&D, and Efficiency 333
CHAPTER 15: Competition Policy and Regulation 355
PART 5: Microeconomics of Factor Markets and International Trade 369

CHAPTER 16: The Demand for Factors of Production 369
CHAPTER 17: Wage Determination 389
CHAPTER 18: Rent, Interest, and Profit 416
CHAPTER 18B: Income Inequality, Poverty, and Discrimination
(available on Connect) 1
CHAPTER 19: International Trade 436
CHAPTER 19B: Natural Resource and Energy Economics
(available on Connect) 1
Math Appendices 1
SEE THE MATH (available on Connect) 1
WORKED PROBLEMS (available on Connect) 12
Glossary GL-1
Index IN-1
Contents
Preface xvi Chapter Summary 22

Terms and Concepts 23
PART 1: An Introduction to Economics
and the Economy 1 Discussion Questions 23
Review Questions 24
CHAPTER 1: Limits, Alternatives, and Choices 1
Problems 25
1.1 Ten Key Concepts to Retain for a Lifetime 2
1.2 The Economic Way of Thinking 3 APPENDIX TO CHAPTER 1 26
Scarcity and Choice 4
A1.1 Graphs and Their Meanings 26
Purposeful Behaviour 4
Construction of a Graph 26
Consider This—Free for All? 4
Direct and Inverse Relationships 27
Marginal Analysis: Comparing
Dependent and Independent Variables 27
Benefits and Costs 5
Other Things Equal 27
Consider This—Fast-Food Lines 5
Slope of a Line 28
1.3 Theories, Principles, and Models 6
Vertical Intercept 29
1.4 Microeconomics and Macroeconomics 7 Equation of a Linear Relationship 29
Microeconomics 7 Slope of a Non-linear Curve 29
Macroeconomics 7
Appendix Summary 30
Positive and Normative Economics 8
Appendix Terms and Concepts 31
1.5 The Individual’s Economic Problem 8
Appendix Discussion Questions 31
Limited Income 8
Unlimited Wants 9 Appendix Review Questions 31
The Budget Line 10 Appendix Problems 31
Consider This—Did Zuckerberg, Seacrest,
and Swift Make Bad Choices? 11 CHAPTER 2: The Market System and
the Circular Flow 33
1.6 Society’s Economic Problem 12
2.1 Economic Systems 33
Scarce Resources 12
Laissez-Faire Capitalism 34
Resource Categories 12
The Command System 34
1.7 Production Possibilities Model 13
The Market System 35
Production Possibilities Table 13
2.2 Characteristics of the Market System 35
Production Possibilities Curve 14
Private Property 35
Law of Increasing Opportunity Costs 15
Freedom of Enterprise and Choice 36
Optimal Allocation 16
Self-Interest 37
1.8 Unemployment, Growth, and the Future 17
Competition 37
A Growing Economy 17
Markets and Prices 37
Present Choices and Future Possibilities 19
Technology and Capital Goods 38
Consider This—Women, the Workforce,
Specialization 38
and Production Possibilities 19
Use of Money 39
A Qualification: International Trade 20
Active but Limited Government 40
The Last Word—Pitfalls to Sound Economic
Reasoning 21
vi CONTENTS
2.3 Five Fundamental Questions 40 3.3 Supply 64

What Will Be Produced? 41 Law of Supply 64
Consider This—McHits and McMisses 41 The Supply Curve 65
How Will the Goods and Services Be Produced? 42 Market Supply 65
Who Will Get the Output? 43 Determinants of Supply 66
How Will the System Accommodate Change? 43 Changes in Supply 67
How Will the System Promote Progress? 44 Changes in Quantity Supplied 67
2.4 The Invisible Hand 44 3.4 Market Equilibrium 68
The Demise of the Command System 45 Equilibrium Price and Quantity 68
Consider This—The Two Koreas 46 Rationing Function of Prices 70
2.5 The Circular Flow Model 47 Efficient Allocation 70
Households 47 Consider This—Uber and Dynamic Pricing 71
Businesses 48 3.5 Changes in Supply, Demand, and Equilibrium 71
Product Market 49 Changes in Demand 71
Factor Market 49 Changes in Supply 72
2.6 How the Market System Deals with Risk 49 Complex Cases 72
The Profit System 49 Consider This—Salsa and Coffee Beans 73
Shielding Employees and Suppliers from 3.6 Application: Government-Set Prices 74
Business Risk 50 Price Ceilings 74
Consider This—Insurance 50 Rent Controls 76
Benefits of Restricting Business Risk to Owners 51 Price Floors 76
The Last Word—Shuffling the Deck 52 The Last Word—Student Loans and
Chapter Summary 53 Tuition Costs 78
Terms and Concepts 53 Chapter Summary 79
Discussion Questions 54 Terms and Concepts 80
Review Questions 54 Discussion Questions 80
Problems 56 Review Questions 81

Problems 82
PART 2: Price, Quantity, and Efficiency 57 APPENDIX TO CHAPTER 3 84

CHAPTER 3: Demand, Supply, and Market A3.1 Additional Examples of Supply and Demand 84
Equilibrium 57 Changes in Supply and Demand 84
3.1 Markets 58 A3.2 Upsloping Versus Vertical Supply Curves 87
3.2 Demand 58 Reactions to Demand Shifts 87
Law of Demand 59 Preset Prices 88
The Demand Curve 60 Appendix Summary 90
Market Demand 60 Appendix Discussion Questions 90
Determinants of Demand 60
Appendix Review Questions 90
Changes in Demand 60
Appendix Problems 91
Changes in Quantity Demanded 63
CONTENTS vii
MATH APPENDIX TO CHAPTER 3 93 APPENDIX TO CHAPTER 4 122

A3.1 The Mathematics of Market Equilibrium 93 A4.1 Information Failures 122
The Demand Curve 93 Inadequate Buyer Information About Sellers 122
The Supply Curve 93 Inadequate Seller Information About Buyers 123
The Market Equilibrium 93 Qualification 124
Example 94 Appendix Summary 124
CHAPTER 4: Market Failures: Public Goods Appendix Terms and Concepts 124
and Externalities 95 Appendix Discussion Questions 124
4.1 Market Failures in Competitive Markets 96 Appendix Review Questions 125
Demand-Side Market Failures 96 Appendix Problems 125
Supply-Side Market Failures 96 CHAPTER 5: Government’s Role and
4.2 Efficiently Functioning Markets 96 Government Failure 126
Consumer Surplus 97 5.1 Government’s Economic Role 126
Producer Surplus 98 Government’s Right to Coerce 127
Efficiency Revisited 100 Consider This—Market Failure and the
Efficiency Losses (or Deadweight Losses) 102 Need for Government 127
4.3 Public Goods 103 The Problem of Directing and Managing
Private Good Characteristics 104 Government 128
Public Good Characteristics 104 Consider This—Does Big Government

Equal Bad Government? 129
Consider This—Street Entertainers 105
Optimal Quantity of a Public Good 106 5.2 Government Failure 130
Demand for Public Goods 106 Representative Democracy and the

Principal–Agent Problem 130
Comparing MB and MC 107
Clear Benefits, Hidden Costs 131
Consider This—Responding to Digital
Unfunded Liabilities 132
Free Riding 108
Chronic Budget Deficits 132
Cost–Benefit Analysis 108
Misdirection of Stabilization Policy 132
4.4 Externalities 110
Limited and Bundled Choice 133
Negative Externalities 111
Bureaucracy and Inefficiency 133
Positive Externalities 112
Corruption 135
Government Intervention 112
Imperfect Institutions 136
Consider This—The Fable of the Bees 113
The Last Word—Singapore’s Efficient
4.5 Society’s Optimal Amount of Externality and Effective Health Care System 137
Reduction 115 Chapter Summary 138
MC, MB, and Equilibrium Quantity 115
Shifts in Locations of the Curves 116
Discussion Questions 138
Government’s Role in the Economy 116
Review Questions 139
The Last Word—Carbon Dioxide Emissions,
Cap and Trade, and Carbon Taxes 117 Problems 139
Chapter Summary 118 APPENDIX TO CHAPTER 5: PUBLIC CHOICE

Terms and Concepts 119 THEORY AND VOTING PARADOXES 141
Discussion Questions 120 A5.1 Public Choice Theory 141
Revealing Preferences Through Majority Voting 141
Inefficient Voting Outcomes 141
Problems 121
Interest Groups and Logrolling 142
viii CONTENTS
Paradox of Voting 143 Chapter Summary 169

Median-Voter Model 144 Terms and Concepts 169
Consider This—Voter Failure 144
Appendix Summary 145
Problems 171
Appendix Discussion Questions 145
CHAPTER 7: Consumer Choice and Utility
Appendix Review Questions 146 Maximization 172
Appendix Problems 146 7.1 The Law of Diminishing Marginal Utility 173
Total Utility and Marginal Utility 173
PART 3: Consumer Behaviour 147 Marginal Utility and Demand 175
7.2 The Theory of Consumer Choice 175
CHAPTER 6: Elasticity 147
Consumer Choice and the Budget Constraint 176
6.1 Price Elasticity of Demand 148 Utility-Maximizing Rule 176
The Price Elasticity Coefficient and Formula 148 A Numerical Example 176
Interpretation of Ed 150 Consider This—There’s No Accounting
6.2 The Total-Revenue Test 151 for Taste 178
Elastic Demand 152 7.3 Utility Maximization and the Demand Curve 179
Consider This—A Bit of a Stretch 153 Deriving the Demand Schedule and Curve 179
Inelastic Demand 153
7.4 Income and Substitution Effects 180
Unit Elasticity 153
7.5 Applications and Extensions 181
Price Elasticity Along a Linear Demand Curve 154
iPads 181
Price Elasticity and the Total-Revenue Curve 155
The Diamond–Water Paradox 181
6.3 Determinants of Price Elasticity of Demand 156
Opportunity Cost and the Value of Time 182
Applications of Price Elasticity of Demand 157
Cash and Noncash Gifts 183
6.4 Price Elasticity of Supply 158 The Last Word—Criminal Behaviour 183
Price Elasticity of Supply: The Immediate
Chapter Summary 184
Market Period 159
Price Elasticity of Supply: The Short Run 159 Terms and Concepts 185
Price Elasticity of Supply: The Long Run 160 Discussion Questions 185
Applications of Price Elasticity of Supply 160 Review Questions 186
6.5 Cross Elasticity and Income Elasticity Problems 186
of Demand 161
Cross Elasticity of Demand 161 APPENDIX TO CHAPTER 7 188
Income Elasticity of Demand 162 A7.1 Indifference Curve Analysis 188
6.6 Elasticity and Tax Incidence 163 The Budget Line: What Is Attainable 188
Elasticity and Tax Incidence 164 Indifference Curves: What Is Preferred 189
Efficiency Loss of a Tax 165 The Indifference Map 190
The Last Word—Elasticity and Pricing Power: Equilibrium at Tangency 190
Why Different Consumers Pay Different Equivalency at Equilibrium 192
Prices 168 The Derivation of the Demand Curve 192
CONTENTS ix
Income and Substitution Effects 193 PART 4: Microeconomics of Product

Consider This—Indifference Maps and Markets and Competition Policy 197
Topographical Maps 194
CHAPTER 8: The Firm and the Costs of
Appendix Summary 195
Production 197
8.1 Economic Costs 198
Appendix Discussion Questions 195 Explicit and Implicit Costs 198
Appendix Review Questions 195 Accounting Profit and Normal Profit 199
Appendix Problems 196 Economic Profit 200
Short Run and Long Run 201
CHAPTER 7B: Behavioural Economics 1
8.2 Short-Run Production Relationships 202
7B.1 Systematic Errors and the Origin of
Law of Diminishing Returns 202
Behavioural Economics 2
Consider This—Diminishing Returns from
Comparing Behavioural Economics
Study 203
with Neoclassical Economics 2
Consider This—Wanamaker’s Lament 4
8.3 Short-Run Production Costs 206
Fixed, Variable, and Total Costs 206
7B.2 Our Efficient, Error-Prone Brains 5
Per-Unit, or Average, Costs 208
Heuristics Are Energy Savers 6
Marginal Cost 210
Brain Modularity 7
Consider This—Ignoring Sunk Costs 210
7B.3 Prospect Theory 10 Shifts of Cost Curves 213
Losses and Shrinking Packages 10
8.4 Long-Run Production Costs 214
Consider This—Rising Consumption and the
Firm Size and Costs 214
Hedonic Treadmill 11
The Long-Run Cost Curve 214
Framing Effects and Advertising 11
Economies and Diseconomies of Scale 215
Anchoring and Credit Card Bills 12
Minimum Efficient Scale and Industry
Mental Accounting and Overpriced Warranties 12
Structure 219
The Endowment Effect and Market Transactions 13
Status Quo Bias 13
8.5 Applications and Illustrations 220
The Last Word—3-D Printers 221
7B.4 Myopia and Time Inconsistency 14
Myopia 15
Chapter Summary 222
Consider This—A Bright Idea 15 Terms and Concepts 223

Time Inconsistency 16 Discussion Questions 224
7B.5 Fairness and Self-Interest 17 Review Questions 224
Field Evidence for Fairness 18 Problems 225
Experimental Evidence for Fairness 18
CHAPTER 9: Perfect Competition in the
The Last Word—The Behavioural
Insight Team 21
Short Run 227
Chapter Summary 22
9.1 Four Market Structures 228

9.2 Perfect Competition: Characteristics
and Occurrence 229
9.3 Demand for a Firm in Perfect Competition 230
Review Questions 24
Average, Total, and Marginal Revenue 230
Problems 24
x CONTENTS
9.4 Profit Maximization in the Short Run: Chapter Summary 262

Total-Revenue–Total-Cost Approach 232 Terms and Concepts 263
9.5 Profit Maximization in the Short Run: Discussion Questions 263
Marginal-Revenue–Marginal-Cost Approach 234
Consider This—The “Still There” Motel 239
Problems 264
9.6 Marginal Cost and Short-Run Supply 239
Generalized Depiction 240 CHAPTER 11: Monopoly 265
Diminishing Returns, Production Costs, 11.1 Characteristics of Monopoly 266
and Product Supply 240 Examples of Monopoly 266
Changes in Supply 242 Dual Objectives of the Study of Monopoly 267
Firm and Industry: Equilibrium Price 242
11.2 Barriers to Entry 267
The Last Word—Fixed Costs: Digging
Yourself Out of a Hole 244 11.3 Monopoly Demand 269
Chapter Summary 245 11.4 Output and Price Determination 272

Cost Data 272
MR = MC Rule 273
No Monopoly Supply Curve 273
Review Questions 246 Misconceptions About Monopoly Pricing 273
Problems 247 Possibility of Losses by a Monopolist 275
CHAPTER 10: Perfect Competition in the 11.5 Economic Effects of Monopoly 276
Long Run 249 Price, Output, and Efficiency 276
Monopoly and Deadweight Loss 277
10.1 The Long Run Versus the Short Run in
Perfect Competition 250 Income Transfer 278
Profit Maximization in the Long Run 250 Cost Complications 278

Assessment and Policy Options 280
10.2 The Long-Run Adjustment Process in
Perfect Competition 250 11.6 Price Discrimination 282
Long-Run Equilibrium 250 Conditions 282
Examples of Price Discrimination 282
10.3 Long-Run Supply Curves 252
Graphical Analysis 282
Long-Run Supply for a Constant-Cost Industry 253
Consider This—Price Discrimination at the
Long-Run Supply for an Increasing-Cost Industry 253
Ballpark 283
Long-Run Supply for a Decreasing-Cost Industry 254
11.7 Regulated Monopoly 284
10.4 Perfect Competition and Efficiency 255
Socially Optimal Price: P = MC 284
Productive Efficiency: P = Minimum ATC 257
Fair-Return Price: P = ATC 285
Allocative Efficiency: P = MC 257
Dilemma of Regulation 286
Maximum Consumer and Producer Surplus 258
The Last Word—Personalized Pricing 287
Dynamic Adjustments 258
The “Invisible Hand” Revisited 259
Chapter Summary 288
10.5 Technological Advance and Competition 259
Consider This—Running a Company Is Discussion Questions 289
Hard Business 260 Review Questions 289
Creative Destruction 260
Problems 290
The Last Word—A Patent Failure? 261
CONTENTS xi
CHAPTER 12: Monopolistic Competition 292 13.3 The Incentives and Obstacles to Collusion:
12.1 Monopolistic Competition 292
Two Oligopoly Strategies 313
Relatively Large Number of Sellers 293

Cartels and Other Collusion: Cooperative
Strategies 313
Differentiated Products 293
Price Leadership Model: Another Cooperative
Easy Entry and Exit 294
Strategy 316
Advertising 294
13.4 Oligopoly and Advertising 317
Monopolistically Competitive Industries 294
Positive Effects of Advertising 317
12.2 Price and Output in Monopolistic
Potential Negative Effects of Advertising 318
Competition 296
The Firm’s Demand Curve 296
13.5 Oligopoly and Efficiency 319
The Short Run: Profit or Loss 296 13.6 Game Theory and Strategic Behaviour 320
The Long Run: Only a Normal Profit 296 Credible and Empty Threats 321
12.3 Monopolistic Competition and Efficiency 298

Repeated Games and Reciprocity Strategies 321
First-Mover Advantages and Pre-emption
12.4 Product Variety 300
of Entry 322
Benefits of Product Variety 300
Extensive Form Representation of Sequential
Consider This—The Spice of Life 300 Games 324
Further Complexity 301 A Leader–Follower (Stackelberg Duopoly)
The Last Word—Higher Wages, More Game 325
McRestaurants 301 The Last Word—Internet Oligopolies 327
Chapter Summary 302 Chapter Summary 328
Terms and Concepts 303 Terms and Concepts 329
Discussion Questions 303 Discussion Questions 330
Review Questions 303 Review Questions 331
Problems 304 Problems 332
CHAPTER 13: Oligopoly and Strategic CHAPTER 14: Technology, R&D,
Behaviour 305 and Efficiency 333
13.1 Oligopoly 306 14.1 Invention, Innovation, and Diffusion 334
A Few Large Producers 306 Invention 334
Homogeneous or Differentiated Products 306 Innovation 334
Control over Price, but Mutual Interdependence 306 Diffusion 334
Entry Barriers 306 R&D Expenditures 335
Consider This—Creative Strategic Behaviour 307 Modern View of Technological Advance 336
Mergers 307
14.2 Role of Entrepreneurs and Other Innovators 336
Oligopolistic Industries 307
Forming Start-ups 336
13.2 Oligopoly Pricing Behaviour: A Game Innovating Within Existing Firms 337
Theory Overview 309 Anticipating the Future 337
Basic Concepts 309 Exploiting University and Government
Prisoner’s Dilemma 310 Scientific Research 337
Strategies in a Two-Firm Oligopoly 311
14.3 A Firm’s Optimal Amount of R&D 338
Mutual Interdependence Revisited 311
Interest-Rate Cost of Funds 338
Collusion 311
Expected Rate of Return 339
Incentive to Cheat 311
Optimal R&D Expenditures 340
xii CONTENTS
14.4 Increased Profit via Innovation 341 Chapter Summary 366

Increased Revenue via Product Innovation 341 Terms and Concepts 366
Reduced Cost via Process Innovation 342
14.5 Imitation and R&D Incentives 343
Benefits of Being First 344
Problems 368
Consider This—Trade Secrets 346
14.6 Role of Market Structure 346
Market Structure and Technological Advance 346 PART 5: Microeconomics of Factor
Inverted-U Theory of R&D 348
Markets and international trade 369
Market Structure and Technological Advance: CHAPTER 16: The Demand for Factors of
The Evidence 348
Production 369
14.7 Technological Advance and Efficiency 349
16.1 Significance of Factor Pricing 370
Productive Efficiency 349
16.2 Marginal Productivity Theory of Factor
Allocative Efficiency 349
Demand 370
Creative Destruction 349
16.3 Determinants of Factor Demand 375
The Last Word—Research and Development
Spending in Canada 350 Changes in Product Demand 375
Changes in Productivity 375
Chapter Summary 351
Consider This—Superstars 376
Changes in the Prices of Other Factors 376
16.4 Elasticity of Factor Demand 378
16.5 Optimal Combination of Factors 380
Problems 354 The Least-Cost Rule 380
CHAPTER 15: Competition Policy The Profit-Maximizing Rule 381
and Regulation 355 Numerical Illustration 381
15.1 Industrial Concentration 355 16.6 Marginal Productivity Theory of Income

Competition Policy 356 Distribution 383
Merger Types 356 The Last Word—Labour and Capital:
Competition Law 357 Substitutes or Complements? 384
Merger Guidelines 357 Chapter Summary 385

Consider This—Gas Price Fixing in Quebec 359 Terms and Concepts 385
15.2 Industrial Regulation 359 Discussion Questions 386
Natural Monopoly 360
Problems with Industrial Regulation 360
Problems 387
Legal Cartel Theory 361
Deregulation 361 CHAPTER 17: Wage Determination 389
15.3 Social Regulation 362 17.1 Labour, Wages, and Earnings 390
Distinguishing Features 362 General Level of Wages 390
The Optimal Level of Social Regulation 363 Role of Productivity 390
Two Reminders 364 Real Wages and Productivity 391
The Last Word—Antitrust Online 365 Long-Run Trend of Real Wages 392
CONTENTS xiii
17.2 A Perfectly Competitive Labour Market 393 CHAPTER 18: Rent, Interest, and Profit 416
Market Demand for Labour 393 18.1 Economic Rent 417
Market Supply of Labour 393 Perfectly Inelastic Supply 417
Labour Market Equilibrium 393 Equilibrium Rent and Changes in Demand 418
Consider This—Fringe Benefits Versus Productivity Differences and Rent Differences 418
Take-Home Pay 395
Land Rent: A Surplus Payment 418
17.3 Monopsony Model 396 Land Ownership: Fairness Versus Allocative
Upsloping Labour Supply to a Firm 396 Efficiency 419
MFC Higher Than the Wage Rate 396 18.2 Interest 420
Equilibrium Wage and Employment 397 Money Is Not a Resource 420
Examples of Monopsony Power 398 Interest Rates and Interest Income 420
17.4 Unions and the Labour Market: Three Range of Interest Rates 420
Models 399 Pure Rate of Interest 421
Demand-Enhancement Model 399
18.3 Loanable Funds Theory of Interest 421
Exclusive or Craft Union Model 399
Extending the Model 422
Inclusive or Industrial Union Model 401
18.4 Time Value of Money 424
Wage Increases and Job Loss 402
Consider This—That Is Interest 425
17.5 Bilateral Monopoly Model 402
18.5 Role of Interest Rates 425
Indeterminate Outcome of Bilateral Monopoly 402
Desirability of Bilateral Monopoly 402 18.6 Economic Profit 427
Entrepreneurship and Profit 428
17.6 The Minimum Wage Controversy 403
Insurable and Uninsurable Risks 428
Case Against the Minimum Wage 403
Sources of Uninsurable Risks 428
Case for the Minimum Wage 404
Profit as Compensation for Bearing
Evidence and Conclusions 404
Uninsurable Risks 429
17.7 Wage Differentials 404 Sources of Economic Profit 429
Marginal Revenue Productivity 405 Profit Rations Entrepreneurship 429
Noncompeting Groups 405 Consider This—Profits and Efficiency 430
Consider This—My Entire Life 407 Entrepreneurs, Profits, and Corporate
Compensating Differences 407 Stockholders 430
Market Imperfections 408 The Last Word—Determining the Price
17.8 Pay for Performance 409 of Credit 431
The Principal–Agent Problem 409 Chapter Summary 432
Addenda: The Negative Side Effects of Pay Terms and Concepts 433
for Performance 410
The Last Word—Are Top Executives in
Canada Overpaid? 411 Review Questions 434
Chapter Summary 412 Problems 434
Terms and Concepts 413 CHAPTER 18B: Income Inequality,

Discussion Questions 413 Poverty, and Discrimination 1
Review Questions 413 18B.1 Facts About Income Inequality 2
Problems 414 Distribution by Income Category 2

xiv CONTENTS
Distribution of Personal Income by CHAPTER 19: International Trade 436

Quintiles (Fifths) 2
19.1 The Economic Basis for Trade 437
The Lorenz Curve 3
Comparative Advantage 437
Income Mobility: The Time Dimension 4
Two Isolated Nations 439
Effect of Government Redistribution 4
Self-Sufficiency Output Mix 440
18B.2 Causes of Income Inequality 5 Specialization Based on Comparative Advantage 440
Ability 5 Terms of Trade 441
Education and Training 5 Gains from Trade 442
Discrimination 5 Trade with Increasing Costs 444
Preferences and Risks 6 Consider This—Misunderstanding the
Unequal Distribution of Wealth 6 Gains from Trade 445
Market Power 6 The Case for Free Trade Restated 445
Luck, Connections, and Misfortune 6 19.2 Supply and Demand Analysis of Exports
Trends in Income Inequality 6 and Imports 446
Consider This—Laughing at The Lego Movie 8 Supply and Demand in Canada 446
18B.3 Equality Versus Efficiency 9 Supply and Demand in the United States 448
The Case for Equality: Maximizing Total Utility 9 Equilibrium World Price, Exports, and Imports 448
The Case for Inequality: Incentives and Efficiency 10 19.3 Trade Barriers and Export Subsidies 450
Consider This—Slicing the Pizza 11 Economic Impact of Tariffs 450
The Equality–Efficiency Trade-off 11 Economic Impact of Quotas 452
18B.4 Poverty: Measurement and Incidence 11 Net Costs of Tariffs and Quotas 452
Definition of Poverty 11 The Last Word—Petition of the
Who Are the Poor? 12 Candlemakers, 1845 453
Measurement Issues 12 Chapter Summary 454
The Income Maintenance System 13 Terms and Concepts 454
18B.5 Welfare Policy: Goals and Conflicts 14 Discussion Questions 455
Common Features 14
Conflicts Among Goals 15
Problems 456
18B.6 Economic Analysis of Discrimination 15
Types of Discrimination 15 CHAPTER 19B: Natural Resource
Costs of Discrimination 16 and Energy Economics 1
Statistical Discrimination 17 19B.1 Resource Supplies: Doom or Boom? 1
Occupational Segregation: The Crowding Model 17 Population Growth 2
The Last Word—Poverty in the Voices Resource Consumption per Person 3
of Poor People 19 Consider This—Can Governments Raise
Chapter Summary 19 Birth Rates? 4
Terms and Concepts 20 19B.2 Energy Economics 6

Energy Efficiency Is Increasing 6
Running Out of Energy? 7
Review Questions 21
Consider This—Storage Wars 8
Problems 22
CONTENTS xv
19B.3 Natural Resource Economics 8 Chapter Summary 20

Renewables Versus Non-renewables 9 Terms and Concepts 21
Optimal Resource Management 9
Using Present Values to Evaluate Future
Possibilities 9 Review Questions 22
Non-renewable Resources 10 Problems 22
Incomplete Property Rights Lead to Excessive
Math Appendices 1
Present Use 12
SEE THE MATH (available on Connect) 1
19B.4 Renewable Resources 14
WORKED PROBLEMS (available on Connect) 12
Elephant Preservation 14
Forest Management 14
Glossary GL-1
Optimal Forest Harvesting 15
Optimal Fisheries Management 16 Index IN-1
Consider This—The Tragedy of the Commons 18
The Last Word—Is Economic Growth Bad
for the Environment? 19
Preface
Welcome to the Fifteenth Canadian Edition of Microeconomics. Thousands of Canadian students

have studied economics from the Canadian editions of Macroeconomics and Microeconomics.
An estimated 15 million students worldwide have now used a version of the McConnell
textbooks, making them the world’s best-selling economic principles textbooks.
Fundamental Objectives
We have three main goals for Microeconomics:
∙ Help the beginning student master the principles essential for understanding economic prob-
lems, specific economic issues, and the policy alternatives
∙ Help the student understand and apply the economic perspective, and reason accurately and
objectively about economic matters
∙ Promote a lasting student interest in economics and the economy
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What’s New and Improved?

One of the benefits of writing a successful text is the opportunity to revise—to delete the outdated
and insert the new, to rewrite misleading or ambiguous statements, to introduce more relevant
illustrations, to improve the organizational structure, and to enhance the learning aids.
We trust you will agree that we have used this opportunity wisely and fully. Some of the more
significant changes include the following.
Separate Presentations of Monopolistic

Competition and Oligopoly
In response to instructor feedback, we have split the material on monopolistic competition and
oligopoly that in previous editions had made up a single chapter into two separate chapters. The
separated chapters have been made modular, so skipping either or covering both will be equally
viable options for instructors. This should be particularly helpful to instructors who want to
spend more time on oligopoly.
New Chapter on Technology, R&D,

and Efficiency
CONSIDER THIS
Technological change has picked up considerably since
the information technology revolution began in the early McHits and McMisses
1980s. We have added a new chapter that considers • Hulaburger (1962)—McMiss
• Filet-O-Fish (1963)—McHit
technology and its impact on market structure, pricing, • Strawberry shortcake (1966)—McMiss
and efficiency. • Big Mac (1968)—McHit
• Hot apple pie (1968)—McHit
• Egg McMuffin (1975)—McHit
• Drive-thru (1975)—McHit
New “Consider This” and “Last Word” • Chicken McNuggets (1983)—McHit
Pieces © McGraw-Hill Education/

•
•
Arch Deluxe (1996)—McMiss
McSalad Shaker (2000)—McMiss
John Flournoy, photographer
• McGriddle (2003)—McHit
Our Consider This boxes are used to provide analogies, • Snack Wrap (2006)—McHit
McDonald’s has introduced several new menu items over the
examples, or stories that help drive home central eco- decades. Some have been profitable “hits,” while others • Fish McBites (2012)—McMiss
have been “misses.” In a market system, consumers ulti-
nomic ideas in a student-oriented, real-world manner. mately decide whether a menu item is profitable and there-
Source: Adapted from Passikoff, Robert, “McDonald’s Fish McBites
Flounders,” Forbes, March 12, 2013, forbes.com; Machan, Dyan, “Polishing
fore whether it stays on the McDonald’s menu. the Golden Arches,” Forbes, June 15, 1998, pp. 42–43.
For instance, a Consider This box titled “McHits and
PREFACE xvii
The LAST WORD McMisses” illustrates consumer sovereignty through a listing of suc-
Singapore’s Efficient and Effective Health Care System cessful and unsuccessful products. How businesses exploit price dis-
How does Singapore deliver some of the best health care in the world
while spending less per person than Canada?
crimination is driven home in a Consider This box that explains why
ballparks charge different admission prices for adults and children
but only one set of prices at their concession stands. These brief
vignettes, each accompanied by a photo, illustrate key points in a
lively, colourful, and easy-to-remember way. We have added six new
Consider This boxes in this edition.
© Comstock Images/Picturequest Our Last Word boxes are lengthier applications or case studies
In every health-quality category monitored by the World placed near the end of each chapter. For example, the one for
sents about 92 percent of all non-government health care
Health Organization, the small island nation of Singapore is spending in Singapore, as against just less than 10 percent in
either number one in the world or near the top of the list.
Among other achievements, Singapore has the world’s lowest
Canada. Chapter 1 (Limits, Alternatives, and Choices) examines pitfalls to
Having to pay for most medical spending out of pocket, how-
rate of infant mortality and the world’s fourth-highest life
expectancy.
sound economic reasoning, while the one for Chapter 4 (Market
ever, means that Singapore’s citizens are faced with having to
pay for most of their health care themselves. How can this be
One might expect that achieving these exceptional outcomes
would be extremely expensive. But Singapore is also number Failures: Public Goods and Externalities) examines cap-and-trade
done without bankrupting the average citizen? The answer is
mandatory health savings accounts.
one in another category: It spends less per person on health Singapore’s citizens are required to save about 6 percent
care than any other developed nation. In 2010 Canada spent versus carbon taxes as policy responses to excessive carbon diox-
of their incomes into MediSave accounts. MediSave deposits
about 10 percent of its GDP on health care. Singapore spent just are private property so that people have an incentive to spend
3.8 percent.
How does Singapore deliver world-class health care while
ide emissions. There are six new Last Words in this edition.
the money in their accounts wisely. In addition, the citizens of
Singapore also know that they won’t be left helpless if the
spending less than any other developed nation? The answer is a
unique combination of government mandates to encourage
money in their MediSave accounts runs out. The governmentIf you are unfamiliar with Microeconomics, we encourage you to
subsidizes the health care of those who have exhausted their
competition, high out-of-pocket costs for consumers, and laws
requiring people to save for future health expenditures.
thumb through the chapters to take a quick look at these highly
MediSave accounts as well as the health care of the poor and
others who have not been able to accumulate much money in
Competition is encouraged by forcing hospitals to post
prices for each of their services. Armed with this information,
their MediSave accounts.
visible features.
Given the present universal health care system in Canada,
patients can shop around for the best deal. The government which according to most Canadians functions quite well, it is
also publishes the track record of each hospital on each ser- In previous editions, a substantial portion of our game theory
unlikely that they would opt for a Singapore-style MediSave
vice so that consumers can make informed decisions about system.
quality as well as price. With consumers choosing on the basis
of cost and quality, local hospitals compete to reduce costs andQuestion
coverage appeared in an appendix to a chapter that covered both
improve quality.
Singapore also insists upon high out-of-pocket costs in
What are the three major cost-reducing features of the
monopolistic competition and oligopoly. With the material on
Singapore health care system? Which one do you think has
order to avoid the overconsumption and high prices that
result when insurance policies pick up most of the price for monopolistic competition now located in a separate chapter, we
the largest effect on holding down the price of medical care in
Singapore? How difficult do you think it would be to implement
medical procedures. Indeed, out-of-pocket spending repre- the missing elements in Canada? Explain.
have been able to eliminate the appendix and fully integrate the
game theory material that had appeared there with the treatment of
oligopoly that had appeared in the main body of text. The result is our new Chapter 13, Oligopoly
and Strategic Behaviour.
This integrated presentation facilitates student comprehension of both game theory and oli-
gopoly because strategic interactions are always presented in an accessible, intuitive context.
Students already understand that Google’s actions affect those of rivals such as Facebook, and
vice versa. So integrating oligopoly with game theory illuminates both sets of material.
Tested Content for Peer Instruction

While technology has made learning with Microeconomics more efficient for the individual stu-
dent, we wanted to offer new methods to enhance the effectiveness of the classroom experience
as well. We are consequently proud that we are now going to offer Peer Instruction materials that
are highly effective, comprehensive, and classroom-tested.
Peer Instruction was pioneered by Eric Mazur of Harvard University’s Physics Department. It
is a student-focused, interactive teaching method that has been shown to massively increase the
depth of student understanding across a wide variety of disciplines. It works by having students,
in groups, ponder and discuss questions about challenging scenarios before their instructor steps
in to clear up any lingering misconceptions. Along the way, students first answer each question
individually before voting as a team after a discussion. Those two answers—individual, then
group—provided the evidence for the effectiveness of Peer Instruction.
As explained by Harvard psychologist Stephen Pinker, the group discussions lead to a deeper
and more intuitive understanding of concepts and theories than can usually be achieved with
lecture-based instruction. That is the case because beginners are often better than experts at
explaining challenging ideas to other beginners. The problem with experts—that is, instructors
like you and me—is that the process of becoming an expert rewires the brain so that the expert
can no longer think like a beginner. Our own expertise makes it difficult to see where students
are getting confused and it is consequently very useful to unleash the power of Peer Instruction
to help beginners tackle new material.
xviii PREFACE
The effectiveness of Peer Instruction depends, however, on the quality of the questions and
scenarios that students are asked to ponder. Developing good questions and effective scenarios is
highly time intensive and often a matter of experimentation; you just don’t know how well a
question or scenario will work until you try it. It is not a surprise, then, that today’s busy instruc-
tors often shy away from Peer Instruction because of the high start-up costs and the time required
to develop truly effective questions and scenarios.
Fortunately for you, we did all the work. Author Sean Flynn and Todd Fitch of the University
of San Francisco have field-tested hundreds of questions and scenarios for effectiveness. The
questions and scenarios have been adapted by Thomas Barbiero of Ryerson University and Jason
Dean of Wilfred Laurier. So with this 15th Canadian edition of McConnell, we are ready to offer
a fully supported set of Peer Instruction material tied directly to each of the learning objectives
in Microeconomics. The questions and scenarios, as well as resources to help organize a Peer
Instruction classroom can be found in Connect.
If you have ever been in a situation in which more experienced students helped to teach newer
students, you have seen the power of Peer Instruction. Our new materials bring us back to that
paradigm. So while we are first once again with Peer Instruction in economics, credit belongs to
the pioneering work of dedicated teachers like Eric Mazur and Stephen Pinker for making this
method available across disciplines.
Full Support for Flipped Classroom

Teaching Strategies
We have also designed our new Peer Instruction materials to facilitate flipped-classroom
teaching strategies, wherein students learn basic material at home, before lecture, before being
challenged in class to reach higher levels of understanding. In K–12 math programs, for exam-
ple, students study short videos on new content at home before coming to class to work
problems. That sequence of learning activities assures that an instructor is present at the stage
where students encounter the most difficulties, namely, when they attempt to apply the mate-
rial. By contrast, the traditional (non-flipped) method for teaching elementary math presents
new content in class before sending students home to work problems by themselves. That
sequence leaves students without expert help when they are most vulnerable to misunderstand-
ings and errors.
We have designed our new Peer Instruction materials to facilitate the flipped-classroom
method by leveraging the adaptive learning materials that are already available in our Connect
online learning platform. In particular, students can be assigned new material before lecture via
SmartBook, which is an adaptive-learning technology that tutors students through the basic
concepts and skills presented in each section of the book.
Those pre-class activities will allow students to master the lower levels of Bloom’s Taxonomy
of learning objectives—things like remembering and understanding—before they come to class.
They will then be ready to attack the higher levels of Bloom’s Taxonomy—things like applying,
analyzing, and evaluating. That’s where our new Peer Instruction material comes in. Students
who have each already worked their way through the lower levels of Bloom’s Taxonomy come
together in class under the instruction of an expert—their teacher—to work in unison on the
higher levels of understanding that are the ultimate goal of economics instruction.
Current Discussions and Examples

The Fifteenth Canadian Edition of Microeconomics refers to and discusses many current topics.
Examples are surpluses and shortages of tickets at the Olympics; the myriad impacts of ethanol
subsidies; creative destruction; applications of behavioural economics; applications of game
theory; oil and gasoline prices; cap-and-trade systems and carbon taxes; occupational licens-
ing; consumption versus income inequality; conditional and unconditional cash transfers; and
many others.
PREFACE xix
Chapter-by-Chapter Changes
Each chapter of Microeconomics, Fifteenth Canadian Edition, contains updated data reflecting
the current economy, revised Learning Objectives, and reorganized and expanded end-of-chapter
content. Several chapters also contain one or more additional Quick Review boxes to help
students review and solidify content as they are reading along. In addition to these changes, each
chapter contains the following updates:
Chapter 1: Limits, Alternatives, and Choices features two refreshed Consider This pieces as
well as revised new examples and working improvements to clarify the main concepts.
Chapter 2: The Market System and the Circular Flow contains updated examples and a brief
new introduction to the concept of residual claimant.
Chapter 3: Demand, Supply, and Market Equilibrium includes a new Last Word on how
student lending can raise university and college tuition, data updates, and example updates.
Chapter 4: Market Failures: Public Goods and Externalities features updated examples and
a new Key Word on Pigovian taxes.
Chapter 5: Government’s Role and Government Failure has a new Consider This on govern-
ment agencies violating government laws, several new examples, and wording revisions for
increased clarity.
Chapter 6: Elasticity contains several updated examples.
Chapter 7: Consumer Choice and Utility Maximization incorporates updated examples and
a new Consider This vignette on consumers applying maximizing behaviour to the calorie
data that are now printed on restaurant menus
Chapter 7B: Behavioural Economics contains a new Consider This piece on the myopia-
busting business model employed by Solar City and a new Last Word describing the activities
of the Behavioural Insights Team.
Chapter 8: The Firm and Costs of Production incorporates a few wording updates to facili-
tate rapid comprehension.
Chapter 9: Perfect Competition in the Short Run features several wording changes to
improve student understanding of the end-of-chapter questions and problems.
Chapter 10: Perfect Competition in the Long Run contains several updated examples to keep
the content relevant for today’s students.
Chapter 11: Monopoly has a new Last Word about individualized online price discrimination
and updated examples.
Chapter 12: Monopolistic Competition was previously part of a chapter that covered both
monopolistic competition and oligopoly. We have split that chapter into two parts for the
fifteenth edition so that instructors who wish to skip either set of material may easily do so.
Chapter 13: Oligopoly and Strategic Behaviour was previously part of a chapter that
covered both monopolistic competition and oligopoly. The material on oligopoly consti-
tutes the basis for this stand-alone chapter, which also extends the game theory material
found in the previous edition. Our extended coverage of game theory and strategic behav-
iour includes extensive-form (game-tree) representations of sequential games and the
concept of subgame-perfect Nash equilibrium. As in prior editions, all game theory mate-
rial is kept concrete by presenting it in the context of strategic behaviour among oligopoly
firms.
Chapter 14: Technology, R&D, and Efficiency is a new chapter that considers technology
and its impact on market structure, pricing, and efficiency.
xx PREFACE
Chapter 15: Competition Policy and Regulations has a new Last Word that covers both anti-
trust prosecutions against human managers who intentionally engage in anticompetitive prac-
tices and the newly evolving area of price-fixing by artificial intelligence algorithms that in
effect “collude” to fix prices when they interact.
Chapter 16: The Demand for Factors of Production incorporates light data updates and
an entirely new Last Word on capital–labour substitution. This discussion uses ABM
machines as its main example, just as the Last Word in the previous edition did. But an
update was required because recent research indicates that the main premise of the old
Last Word no longer holds true: ABMs did not in fact replace human tellers in the aggre-
gate, at least not after managers adjusted to the new technology. The new Last Word
updates the story.
Chapter 17: Wage Determination features extensive data updates, improved wording for clar-
ity, and a new Last Word on how unnecessary occupational licensing requirements are reduc-
ing employment opportunities.
Chapter 18: Rent, Interest, and Profit incorporates wording improvements, data updates, and
a new Consider This on the subject of profits.
Chapter 18B: Income Inequality, Poverty, and Discrimination contains a new Consider This
about welfare cliffs and some data updates and several new examples.
Chapter 19: International Trade is largely unchanged from the last edition.
Chapter 19B: Natural Resource and Energy Economics has extensive data updates and a
new Consider This box on how the current limitations of electricity-storage technology stymie
the wider adoption of renewable energy sources such as solar and wind power.
Integrated Text and Website

We continue to integrate the eBook with our extensive supplementary learning offerings.
WORKED PROBLEM 2.1 Least-Cost Production
Worked Problems are hyperlinked within the eBook and provide students with a step-by-step
illustration of how to solve a problem. These pieces consist of side-by-side computational ques-
tions and the computational procedures used to derive the answers. In essence, they extend the
textbook’s explanations involving computations—for example, of real GDP, real GDP per capita,
the unemployment rate, the inflation rate, per-unit production costs, and more. At relevant points
in the text, the Worked Problem hyperlink directs the student to an online appendix for this addi-
tional support.
MATH 4.1 The Optimal Amount of a Public Good
For those students who want to explore the mathematical details of the theoretical concepts
covered in the text, Math indicators direct the students to See the Math exercises in the online
appendix.
To help students understand graphing concepts used in the text, Connect offers a Graphing
Tool Introduction and assignable graphing exercises called Graphing Extras.
Bonus Chapters
Bonus chapters are available online. They are 7B, Behavioural Economics; 18B, Income
Inequality, Poverty, and Discrimination; and 19B, Natural Resource and Energy Economics.
PREFACE xxi
Distinguishing Features
∙ Comprehensive Explanations at an Appropriate Level Microeconomics is comprehensive,
analytical, and challenging, yet fully accessible to a wide range of students. Its thoroughness
and accessibility enable instructors to select topics for special classroom emphasis with
confidence that students can independently read and comprehend other assigned material in
the book. Where needed, an extra sentence of explanation is provided. Brevity at the expense
of clarity is false economy.
∙ Fundamentals of the Market System Many economies throughout the world are making dif-
ficult transitions from planning systems to market systems. Our detailed description of the
institutions and operation of the market system in Chapter 2 (The Market System and the
Circular Flow) is even more relevant than before. We pay particular attention to property
rights, entrepreneurship, freedom of enterprise and choice, competition, and the role of prof-
its, because these concepts are often misunderstood by beginning students.
∙ Extensive Treatment of International Economics We give the principles and institutions
of the global economy extensive treatment. The appendix to Chapter 3 (Demand, Supply,
and Market Equilibrium) has an application on exchange rates. Chapter 19 (International
Trade) examines key facts of international trade, specialization and comparative
advantage.
As noted previously, Chapter 19 (International Trade) is constructed so that instructors
who want to cover international trade early in the course can assign it immediately after
Chapter 3. Comprehending Chapter 19 requires only a good understanding of production
possibilities analysis and of supply and demand analysis. International competition, trade
flows, and financial flows are integrated throughout the micro and macro sections.
Global Perspective boxes add to the international flavour of the book.
∙ Early and Extensive Treatment of Government The public sector is an integral component
of modern capitalism. This book introduces the role of government early. Chapter 4 (Market
Failures: Public Goods and Externalities) systematically discusses public goods and govern-
ment policies toward externalities. Chapter 5 (Government’s Role and Government Failure)
details the factors that cause government failure.
∙ Stress on the Theory of the Firm We have given much attention to microeconomics in gen-
eral and to the theory of the firm in particular, for two reasons. First, the concepts of micro-
economics are difficult for most beginning students; abbreviated expositions usually
compound these difficulties by raising more questions than they answer. Second, we wanted
to couple analysis of the various market structures with a discussion of the impact of each
market arrangement on price, output levels, resource allocation, and the rate of technological
advance.
∙ Emphasis on Technological Change This edition has a new chapter on technological change
and its impact on market structure pricing.
∙ Integrated Text and Website Selected interactive graphs are available on Connect.
Organizational Alternatives
Although instructors generally agree on the content of principles of economics courses, they
sometimes differ on how to arrange the material. Microeconomics includes five parts, and that
provides considerable organizational flexibility. For example, Chapter 19 on international trade
can easily be covered immediately after Chapter 3 on supply and demand for instructors who
want an early discussion of international trade.
xxii PREFACE
Pedagogical Aids
Microeconomics is highly student-oriented. The Fifteenth Canadian Edition is accompanied by a
variety of high-quality supplements that help students master the subject and help instructors
implement customized courses.
LEARNING OBJECTIVES ∙ Learning Objectives The Learning Objectives have been

LO1.1 List the ten key concepts to retain for a lifetime.
LO1.2 Define economics and the features of the economic way of thinking.
expanded in the fifteenth edition. We set out the Learning
LO1.3
LO1.4
Describe the role of economic theory in economics.
Distinguish microeconomics from macroeconomics, and positive economics from normative
Objectives at the start of each chapter so the chapter’s main
economics.
LO1.5 Explain the individual’s economic problem and how trade-offs, opportunity costs, and
concepts can be easily recognized. We have also tied the
mcc54885_ch01_001-032.indd Pageattainable
3 9/24/18combinations
9:10 AM prem /Users/Shared/Telephone/2018-19/Application_files/Neeraj
LO1.6
can be illustrated with budget lines.
List the categories of scarce resources and delineate the economic problem.
Learning Objectives to each of the numbered sections in
LO1.7 Apply the concepts of production possibilities analysis, increasing opportunity costs,
and economic growth.
each chapter and the Questions and Problems at the end of
LO1.8
LOA1.1
Explain how economic growth and international trade increase consumption possibilities.
(Appendix) Understand graphs, curves, and slopes as they relate to economics.
each chapter. In addition, the chapter summaries are orga-
nized by Learning Objective.
∙ Terminology A significant portion of any introductory
course is terminology. Key terms are highlighted in bold
type the first time they appear in the text. A glossary of defi-
nitions can be found at the end of the book. Users of the
Interaction Among Individuals eBook can hover their cursor over each bolded term to see
SPECIALIZATION
AND TRADE
CONCEPT 5 (Specialization and Trade): Specialization and trade will improve
the well-being of all participants.
its definition.
THE EFFECTIVENESS
OF MARKETS
CONCEPT 6 (The Effectiveness of Markets): Markets usually do a good job ∙ Ten Key Concepts Ten Key Concepts have been identified
of coordinating trade among individuals, groups, and nations.
THE ROLE OF CONCEPT 7 (The Role of Governments): Governments can occasionally

to help students organize the main principles. The Ten Key
GOVERNMENTS improve the coordinating function of markets. Concepts are introduced in Chapter 1 and each one is rein-
forced throughout the textbook by an icon.
∙ Graphics with Supporting Data Where possible we have
tried to provide data to support our graphs. In such cases a

data table now appears in the same figure with the graph.
FIGURE 1-1 A Consumer’s Budget Line
The budget line (or budget constraint) shows all the combinations of any two products that can be purchased, given the prices
of the products and the consumer’s money income.
THE BUDGET LINE: WHOLE-UNIT COMBINATIONS 12

OF MOVIES AND PAPERBACK BOOKS ATTAINABLE KEY GRAPH
WITH AN INCOME OF $120
10
Units Units FIGURE 3-6 Equilibrium Price and Quantity
of movies of books Total Income = $120 = 6
Quantity of movies
(price = $20) (price = $10) expenditure 8 Pm = $20 The intersection of the downsloping demand curve D and the upsloping supply curve S indicates the equilibrium price and
quantity, here $3 and 7000 bushels of corn. The shortages of corn at below-equilibrium prices (for example, 7000 bushels
6 0 ($120 = $120 + $0)
at $2) drive up price. These higher prices increase the quantity supplied and reduce the quantity demanded until equilib-
6 Unattainable
5 2 ($120 = $100 + $20) rium is achieved. The surpluses caused by above-equilibrium prices (for example, 6000 bushels at $4) push price down. As
price drops, the quantity demanded rises and the quantity supplied falls until equilibrium is established. At the equilibrium
4 4 ($120 = $80 + $40)
4 price and quantity, there are neither shortages nor surpluses of corn. The arrows in the table indicate the effect on price.
3 6 ($120 = $60 + $60) Income = $120 = 12
P
2 8 ($120 = $40 + $80) Attainable Pb = $10 $6 (3)
2 S (1) Total (4)
1 10 ($120 = $20 + $100) Total quantity (2) quantity Surplus
5 6000-bushel
surplus supplied per Price per demanded (+) or
0 12 ($120 = $0 + $120) week bushel per week shortage (−)
Price (per bushel)
0 2 4 6 8 10 12 14 4
12,000 $5 2,000 +10,000↓
Quantity of paperback books
3 10,000 4 4,000 +6,000↓
7,000 3 7,000 0
2
4,000 2 11,000 −7,000↑
7000-bushel
∙ Key Graphs We have labelled graphs having special 1 shortage
D
1,000 1 16,000 −15,000↑
relevance as Key Graphs. There is a quick quiz of four ques- 0 2 4 6 7 8 10 12 14 16 18

Q
Bushels of corn (thousands per week)

tions related to each Key Graph, with answers provided at
the bottom of the graph.
∙ Reviewing the Chapter Important things should be said

more than once. You will find a Chapter Summary at the
QUICK REVIEW 3.3 conclusion of every chapter as well as two or three Quick
• In competitive markets, prices adjust to the equilibrium • An increase in supply reduces equilibrium price but Reviews within each chapter. The summary at the end of
level at which quantity demanded equals quantity increases equilibrium quantity; a decrease in supply
supplied. increases equilibrium price but reduces equilibrium quantity. each chapter is presented by Learning Objective. These
• The equilibrium price and quantity are those indicated by • Over time, equilibrium price and quantity may change in direc-
the intersection of the supply and demand curves for any tions that seem at odds with the laws of demand and supply review statements will help the student to focus on the
product or resource. because the other-things-equal assumption is violated.
• An increase in demand increases equilibrium price and • Government-controlled prices in the form of ceilings and essential ideas of each chapter and also to study for exams.
quantity; a decrease in demand decreases equilibrium floors stifle the rationing functions of prices, distort
price and quantity. resource allocations, and cause negative side effects.
PREFACE xxiii
Comprehensive Learning and Teaching Package

The Fifteenth Canadian Edition is also accompanied by a variety of high-quality supplements
that help students master the subject and help instructors implement customized courses.
MARKET LEADING TECHNOLOGY

Learn Without Limits
McGraw-Hill Connect® is an award-winning digital teaching and learning platform that gives
students the means to better connect with their coursework, with their instructors, and with the
important concepts that they will need to know for success now and in the future. Using Connect,
instructors can take advantage of McGraw-Hill’s trusted content to seamlessly deliver assign-
ments, quizzes and tests online. McGraw-Hill Connect is the only learning platform that continu-
ously adapts to each student, delivering precisely what they need, when they need it, so class
time is more engaging and effective. It makes teaching and learning personal, easy, and proven.
Connect Key Features

As the first and only adaptive reading experience, SmartBook is changing the way students read
and learn. It creates a personalized reading experience by highlighting the most important con-
cepts a student needs to learn at that moment. As a student engages with SmartBook, the reading
experience continuously adapts by highlighting content according to what each student knows
and doesn’t know. This ensures that he or she is focused on the content needed to close specific
knowledge gaps, while it simultaneously promotes long-term learning.
Connect Insight is a new, one-of-a-kind visual analytics dashboard—now available for both
instructors and students—that provides at-a-glance, immediately actionable information regard-
ing student performance. By presenting assignment, assessment, and topical performance results
together with a time metric that is easily visible for aggregate or individual results, Connect
Insight gives the user the ability to take a just-in-time approach to teaching and learning that was
never before available. Connect Insight presents data that empowers students and helps instruc-
tors improve class performance in a way that is efficient and effective.
Simple Assignment Management

With Connect, creating assignments is easier than ever, so instructors can spend more time teach-
ing and less time managing. Instructors can
∙ Assign SmartBook learning modules
∙ Edit existing questions and create their own questions
∙ Draw from a variety of text-specific questions, resources, and test bank material to assign online
∙ Streamline lesson planning, student progress reporting, and assignment grading to make
classroom management more efficient than ever
Smart Grading
When it comes to studying, time is precious. Connect helps students learn more efficiently by
providing feedback and practice material when they need it, where they need it.
∙ Automatically score assignments, giving students immediate feedback on their work and
comparisons with correct answers.
∙ Access and review each response; manually change grades or leave comments for students to
review.
xxiv PREFACE
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PREFACE xxv
Acknowledgments
The Fifteenth Canadian Edition of Microeconomics has benefited from a number of perceptive
reviewers, who were a rich source of suggestions for this revision. We extend our thanks to every
one of them for their considerable help in improving Microeconomics.
We are greatly indebted to an all-star group of professionals at McGraw-Hill Education—in
particular Kevin O’Hearn, Senior Portfolio Manager; Jeanette McCurdy, Supervising Editor;
Melissa Hudson, Content Developer; Stephanie Giles, Senior Portfolio Associate; and Loula
March, Marketing Manager—for their publishing and marketing expertise. We thank
Rodney Rawlings for his thorough and sensitive editing, Alison Lloyd Baker for her selection of
photos, Liz Harasymczuk for the cover and interior design, and Gianluigi Pelloni of the
University of Bologna (Rimini Campus) and Jose Luis Alvarez Arce of the University of
Navarra in Pamplona, Spain, for their helpful suggestions and insights.
Campbell R. McConnell
Stanley L. Brue
Sean M. Flynn
Thomas P. Barbiero
PART 1 AN INTRODUCTION TO ECONOMICS
AND THE ECONOMY
CHAPTER 1 Limits, Alternatives, and Choices
CHAPTER 2 The Market System and the Circular Flow
CHAPTER 1
Limits, Alternatives, and Choices

An appendix on understanding graphs follows this chapter. If you need a quick review of this mathematical tool,
you might benefit from reading the appendix first.
LEARNING OBJECTIVES
LO1.3 Describe the role of economic theory in economics.
LO1.4 Distinguish microeconomics from macroeconomics, and positive economics from normative
economics.
LO1.5 Explain the individual’s economic problem and how trade-offs, opportunity costs, and
attainable combinations can be illustrated with budget lines.
LO1.6 List the categories of scarce resources and delineate the economic problem.
LO1.7 Apply the concepts of production possibilities analysis, increasing opportunity costs,
and economic growth.
LO1.8 Explain how economic growth and international trade increase consumption possibilities.
LOA1.1 (Appendix) Understand graphs, curves, and slopes as they relate to economics.
2 PART 1 AN INTRODUCTION TO ECONOMICS AND THE ECONOMY
People’s wants are numerous and varied. Biologically, people need only air, water, food, clothing, and shelter. But
in modern society people also desire goods and services that provide a more comfortable standard of living. We
want bottled water, soft drinks, and fruit juices, not just water from the creek. We want salads, burgers, and pizzas,
not just berries and nuts. We want jeans, suits, and coats, not just woven reeds. We want apartments, condomini-
ums, and houses, not just mud huts. And, as the saying goes, “That’s not the half of it.” We also want flat-panel
TVs, Internet service, education, cellphones, health care, and much more.
Fortunately, society possesses productive resources, such as labour and managerial talent, tools and machinery,
and land and mineral deposits. These resources, employed in the economic system (or simply the economy), help
us produce goods and services that satisfy many of our economic wants. But the blunt reality is that our economic
wants far exceed the productive capacity of our scarce (limited) resources. We are forced to make choices. This
unchanging truth underlies the definition of economics, which is the social science concerned with how individu-
als, institutions, and society make optimal (best) choices under conditions of scarcity.
Numerous problems and issues arise from the challenge of making optimal choices under conditions of scar-
city. Although it is tempting to plunge into them, that sort of analysis must wait until we discuss some important
preliminaries.
1.1 Ten Key Concepts to Retain for a Lifetime

Suppose you unexpectedly meet your Introductory Economics professor on the street five or ten years after you
complete this course. What will you be able to tell her you retained from the course? More than likely you will not
be able to remember very much. To help you retain the main ideas that economics has to offer, we have come up
with ten key concepts that we believe are essential to understanding the world around you and will help you in your
chosen career. These concepts will be reinforced throughout the textbook so that you will, we hope, retain them
long after the course is over. When a key concept is about to be discussed, you will be alerted with an icon and the
concept description.
The ten concepts are simply listed here; you will find elaboration of each as we progress through the textbook.
At the end of the course you should review them. They will help you to organize and better understand the materi-
als you have studied. We have divided these key concepts into three categories: (a) concepts that pertain to the
individual, (b) concepts that explain the interaction among individuals, and (c) concepts that deal with the economy
as a whole and the standard of living.
Economics is concerned with

the efficient use of scarce
resources to obtain the maxi-
mum satisfaction of society’s
unlimited wants.
© Ccfuse2003/Dreamstime.com
The Individual
FACING CONCEPT 1 (Facing Trade-offs): Scarcity in relation to wants means you face
TRADE-OFFS trade-offs; therefore, you have to make choices.
OPPORTUNITY CONCEPT 2 (Opportunity Costs): The cost of the choice you make is what you
COSTS give up for it, or the opportunity cost.
LIMITS, ALTERNATIVES, AND CHOICES CHAPTER 1 3
CHOOSING A LITTLE CONCEPT 3 (Choosing a Little More or Less): Choices are usually made at the
MORE OR LESS margin; we choose a little more or a little less of something.
THE INFLUENCE OF CONCEPT 4 (The Influence of Incentives): The choices you make are influ-
INCENTIVES enced by incentives.
Interaction Among Individuals
SPECIALIZATION CONCEPT 5 (Specialization and Trade): Specialization and trade will improve
AND TRADE the well-being of all participants.
THE EFFECTIVENESS CONCEPT 6 (The Effectiveness of Markets): Markets usually do a good job
OF MARKETS of coordinating trade among individuals, groups, and nations.
THE ROLE OF CONCEPT 7 (The Role of Governments): Governments can occasionally

GOVERNMENTS improve the coordinating function of markets.
The Economy as a Whole and the Standard of Living
PRODUCTION AND CONCEPT 8 (Production and the Standard of Living): The standard of living
THE STANDARD OF of the average person in a particular country is dependent on its production of
LIVING goods and services. A rise in the standard of living requires a rise in the output
of goods and services.
MONEY AND CONCEPT 9 (Money and Inflation): If the monetary authorities of a country
INFLATION annually print money in excess of the growth of output of goods and services,
this practice will eventually lead to inflation.
INFLATION– CONCEPT 10 (Inflation–Unemployment Trade-off): In the short run,

UNEMPLOYMENT society faces a short-run trade-off between inflation and its level of
TRADE-OFF unemployment.
As you read the text, be on the lookout for the icon that alerts you that one of these concepts is being discussed. We
now turn to our first topic, the economic way of thinking.
1.2 The Economic Way of Thinking

Close your eyes for a minute and pretend you are in paradise, a place where you can have anything you want
whenever you desire it. On a particular day, you might decide you want a new pair of jeans, a new notebook
computer, a cellphone, tickets to see Justin Bieber, and a new red Ferrari sports car to cruise around in. Your
friends might have a completely different list of wants, but in paradise all of their desires also will be satis-
fied. Indeed, everyone’s desires are satisfied. The following day you can start all over and have any request
fulfilled. And so it will continue, forever. Your body will never get old or sick, you will have all the friends
and love you want, etc., etc.
Of course, paradise may be waiting for us in the afterlife, but in this world our wants greatly outstrip our ability to
satisfy them. Whenever our wants are greater than the resources needed to meet those desires, we have an economic
problem. It is this reality that gives economists their unique perspective. This economic perspective or economic way of
thinking has several crucial and closely interrelated features.
Scarcity and Choice

The economic resources needed to make goods and services are in limited supply. This scarcity restricts
options and requires choices. Because we can’t have it all, we must decide what we will have and what we
must forgo.
At the core of economics is the idea that “there is no free lunch.” You may get treated to lunch, making it free to
you, but there is a cost to someone—ultimately society. Scarce inputs of land, equipment, farm labour, the labour
of cooks and waiters, and managerial talent are required. Because these resources might be used in other produc-
tion activities, they and the other goods and services that might have been produced are sacrificed in making the
lunch available. Economists call these sacrifices opportunity costs. To get more of one thing, you forgo the oppor-
tunity to get something else. That sacrifice is the opportunity cost of the choice. For example, you have $100 that
you can spend on a pair of jeans or shoes. The opportunity cost of buying the shoes is the jeans you could have
purchased, and vice versa.
OPPORTUNITY COSTS
Purposeful Behaviour
Economics assumes that human behaviour reflects rational self-interest. Individuals look for and pursue opportunities
to increase their utility—the pleasure, happiness, or satisfaction obtained from consuming a good or service. They
allocate their time, energy, and money to maximize their satisfaction. Because they weigh costs and benefits, their
decisions are purposeful or rational, not random or chaotic.
Consumers are purposeful in deciding what goods and services to buy. Business firms are purposeful in deciding
what products to produce and how to produce them. Government entities are purposeful in deciding what public
services to provide and how to finance them.
CONSIDER THIS
Free for All?

Free products are seemingly everywhere. Sellers from time entice you to buy a payed
to time offer free apps, free cellphones, and no-fee chequing version that has more fea-
accounts. Dentists give out free toothbrushes. At provincial tures. In other cases, a
visitor centres there are free brochures and maps. product is free only in con-
Does the presence of so many free products contradict junction with a purchase.
the economist’s assertion that there is no free lunch? No! To get the soft drink, you
Scarce resources are used to produce each of these prod- must buy the large pizza.
ucts, and because those resources have alternative uses, To get the free cellphone,
society gives up something else to get the “free” good. you need to sign up for a
Because alternatives must be forsaken, there is no such year (or more) of cellphone © Mar Photographics/Alamy Stock Photo
thing as a free lunch. service.
So why are these goods offered for free? In a word: mar- But while “free” products may come at no cost to the indi-
keting. Firms sometimes offer free products to entice people viduals receiving them, they are never free to society
to try them and perhaps subsequently purchase them. Get- because their manufacture requires the use of resources that
ting to try out the free version of an app may eventually might have been put to alternative uses.
“Purposeful behaviour” does not assume that people and institutions are immune to faulty logic and therefore
are perfect decision makers. They sometimes make mistakes. Nor does it mean that people’s decisions are
unaffected by emotion or the decisions of those around them. Indeed, economists acknowledge that people are
sometimes impulsive or emulate what others do. “Purposeful behaviour” simply means that people make decisions
with some desired outcome in mind.
Rational self-interest is not the same as selfishness. In the economy, increasing one’s own wage, rent, interest,
or profit normally requires identifying and satisfying somebody else’s wants! Also, people make personal sacrifices
for others. They contribute time and money to charities because they derive pleasure from doing so. Parents help
pay for their children’s education for the same reason. These self-interested but unselfish acts help maximize the
giver’s satisfaction as much as any purchase of goods or services. Self-interested behaviour is simply behaviour
designed to increase personal satisfaction, however it may be derived.
Marginal Analysis: Comparing Benefits and Costs

The economic perspective focuses largely on marginal analysis—comparisons of marginal benefits and
marginal costs. To economists, marginal means extra, additional, or a change in. Most choices or deci-
sions involve changes in the status quo (the existing state of affairs). Should you attend school for another
year or not? Should you study an extra hour for an exam? Should you add fries to your fast-food order?
Similarly, should a business expand or reduce its output? Should government increase or decrease health
care funding?
CHOOSING A LITTLE MORE OR LESS
CONSIDER THIS
Fast-Food Lines
The economic perspective is useful in analyzing all sorts Customers at the fast-
of behaviours. Consider an everyday example: the behaviour food establishment do not
of customers at a fast-food restaurant. When customers have perfect information
enter the restaurant, they go to the shortest line, believing when they select lines.
that line will minimize their time cost of obtaining food. They Thus, not all decisions turn
are acting purposefully; time is limited, and people prefer out as expected. For exam-
using it in some way other than standing in line. ple, you might enter a short
If one line is temporarily shorter than other lines, some line only to find that the per- © Syracuse Newspapers/The Image
people will move to that one. They apparently view the time son in front of you is order- Works RF
saving from the shorter line (marginal benefit) as exceeding ing hamburgers and fries
the cost of moving from their present line (marginal cost). for forty people in the Greyhound bus parked out back (and
The line switching tends to equalize line lengths. No further also that the employee taking orders is a trainee!). Neverthe-
movement of customers between lines occurs once all lines less, when you made your decision, you thought it was optimal.
are about equal. Finally, customers must decide what food to order when
Fast-food customers face another cost–benefit decision they arrive at the counter. In making their choices, they again
when a clerk opens a new station at the counter. Should they compare marginal costs and marginal benefits in attempting to
move to the new station or stay put? Those who shift to the obtain the greatest personal satisfaction for their expenditure.
new line decide that the time saving from the move exceeds Economists believe that what is true for the behaviour of
the extra cost of physically moving. In so deciding, customers customers at fast-food restaurants is true for economic
must also consider just how quickly they can get to the new behaviour in general. Faced with an array of choices, con-
station compared with others who may be contemplating the sumers, workers, and businesses rationally compare mar-
same move. (Those who hesitate are lost!) ginal costs and marginal benefits.
Each option will have marginal benefits and marginal costs. In making choices, the decision maker will
compare those two amounts. For example, you and your fiancée are shopping for an engagement ring. Should
you buy a ¼-carat, ½-carat, ¾-carat, or larger diamond? The marginal cost of the larger stone is the added
expense beyond the smaller one. The marginal benefit is the greater lifetime pleasure (utility) from the larger
one. If the marginal benefit of the larger diamond exceeds its marginal cost, you buy the larger one. But if
the marginal cost is more than the marginal benefit, buy the smaller diamond instead, even if you can afford
the larger.
In a world of scarcity, the marginal benefit associated with some specific option always includes the marginal
cost of doing without something else. Spending money on the larger diamond may mean forgoing a honeymoon to
an exotic location. Opportunity costs, the value of the next best thing forgone, are always present whenever a choice
is made.
1.3 Theories, Principles, and Models

LO1.3 Describe the role of economic theory in economics.
Like the physical and life sciences, as well as other social sciences, economics relies on the scientific method. That
procedure consists of several elements:
∙ Observing real-world behaviour and outcomes.
∙ Formulating a possible explanation of cause and effect (hypothesis) based on those observations.
∙ Testing this explanation by comparing the outcomes of specific events to the outcome predicted by the
hypothesis.
∙ Accepting, rejecting, or modifying the hypothesis based on these comparisons.
∙ Continuing to test the hypothesis against the facts. As favourable results accumulate, the hypothesis evolves
into a theory. A very well tested and widely accepted theory is referred to as an economic law or an
economic principle—a statement about economic behaviour or the economy that enables prediction of
the probable effects of certain actions. Combinations of such laws or principles are incorporated into
models, which are simplified representations of how parts of the economy work, such as a market or seg-
ment of the economy.
Economists develop theories of the behaviour of individuals (consumers, workers) and institutions (businesses,
governments) engaged in the production, exchange, and consumption of goods and services. Theories, principles,
and models are purposeful simplifications. The full scope of economic reality itself is too complex and bewildering
to be understood as a whole. In developing theories, principles, and models, economists remove the clutter and
simplify.
Economic principles and models are highly useful in analyzing economic behaviour and understanding
how the economy operates. They are the tools for ascertaining cause and effect (or action and outcome) within
the economic system. Good theories do a good job of explaining and predicting. They are supported by facts
concerning how individuals and institutions actually behave in producing, exchanging, and consuming goods
and services.
Other things you should know about economic principles are as follows:
∙ Generalizations Economic principles are generalizations relating to economic behaviour or to the economy
itself. Economic principles are expressed as the tendencies of typical or average consumers, workers, or
business firms. For example, economists say that consumers buy more of a particular product when its
price falls. Economists recognize that some consumers may increase their purchases by a large amount,
others by a small amount, and a few not at all. This price–quantity principle holds both for the typical con-
sumer and for consumers as a group.
∙ Other-Things-Equal Assumption In constructing their theories, economists use the ceteris paribus or
other-things-equal assumption—the assumption that factors other than those being considered do not change.
They assume that all variables except those under immediate consideration are held constant for a particular
analysis. For example, consider the relationship between the price of Pepsi and the amount of it purchased.
Assume that of all the factors that might influence the amount of Pepsi purchased (for example, the price of
Pepsi, the price of Coca-Cola, and consumer incomes and preferences), only the price of Pepsi varies. This is
helpful because the economist can then focus on the relationship between the price of Pepsi and purchases of
Pepsi in isolation without being confused by changes in other variables.
MATH 1.1 Ceteris Paribus
∙ Graphical Expression Many economic models are expressed graphically. Be sure to read the appendix at the
end of this chapter as a review of graphs.
1.4 Microeconomics and Macroeconomics

LO1.4 Distinguish microeconomics from macroeconomics, and positive economics from
normative economics.
Economists develop economic principles and models at two levels.
Microeconomics
Microeconomics is the part of economics concerned with decision making by individual customers, workers,
households, and business firms. At this level of analysis, we observe the details of their behaviour under a
figurative microscope. We measure the price of a specific product, the number of workers employed by a
single firm, the revenue or income of a particular firm or household, or the expenditures of a specific firm,
government entity, or family. In microeconomics, we examine the grains of sand, the rocks, and the shells, but
not the beach.
Macroeconomics
Macroeconomics examines the performance and behaviour of the economy as a whole. It focuses on eco-
nomic growth, the business cycle, interest rates, inflation, and the behaviour of major economic aggregates
such as the government, household, and business sectors. An aggregate is a collection of specific economic
units treated as one unit. Therefore, we might lump together the millions of consumers in the Canadian econ-
omy and treat them as one huge unit called consumers.
In using aggregates, macroeconomics seeks to obtain an overview, or general outline, of the structure of
the economy and the relationships of its major aggregates. Macroeconomics speaks of such economic meas-
ures as total output, total employment, total income, aggregate expenditures, and the general level of prices in
analyzing various economic problems. Very little attention is given to the specific units that make up the
various aggregates. Figuratively, macroeconomics looks at the beach, not the grains of sand, the rocks, and
the shells.
The last decade has been an exciting time to study macroeconomics. The global financial crisis that
spread to Canada in late 2008 resulted in a deep recession, which has been dubbed the Great Recession.
You will have a much better understanding of what causes recessions, unemployment, inflation, and
changes in the standard of living of the average Canadian once you have finished your course in introductory
macroeconomics.
The micro–macro distinction does not mean that economics is so highly compartmentalized that every topic can
be readily labelled as either macro or micro; many topics and subdivisions of economics are rooted in both. For
example, while the problem of unemployment is usually treated as a macroeconomic topic (because unemployment
relates to aggregate production), economists recognize that the decisions made by individual workers on how long
to search for jobs and the ways in which specific labour markets encourage or impede hiring are also crucial in
determining the unemployment rate.
Positive and Normative Economics

Both microeconomics and macroeconomics contain elements of positive economics and normative economics.
Positive economics focuses on facts and cause-and-effect relationships. It includes description, theory develop-
ment, and theory testing. Positive economics avoids value judgments. It tries to establish scientific statements
about economic behaviour and deals with what the economy is actually like. Such analysis is essential to good
policy analysis.
Economic policy, on the other hand, involves normative economics, which incorporates value judgments about
what the economy should be like or what particular policy actions should be recommended to achieve a desirable
goal. Normative economics looks at the desirability of certain aspects of the economy. It underlies expressions of
support for particular economic policies.
Positive economics concerns what is, whereas normative economics embodies subjective feelings about what
ought to be. For example, a positive statement would be “The unemployment rate in France is higher than that in
Canada.” A normative statement would be “France ought to undertake policies to make its labour market more
flexible to reduce unemployment rates.” When you see words such as “ought” or “should” in a sentence, you are
likely encountering a normative statement.
Most of the disagreement among economists involves normative, value-based policy questions. Of course, there
is often disagreement about which theories or models best represent the economy and its parts. But economists
agree on a full range of economic principles. Most economic controversy thus reflects differing opinions or value
judgments about what society should be like.
QUICK REVIEW 1.1
• Economics examines how individuals, institutions, • Economists use the scientific method to establish economic
and society make choices under conditions of scarcity. theories, which are cause–effect generalizations about the
economic behaviour of individuals and institutions.
• The economic way of thinking stresses (a) resource
scarcity and the necessity of making choices, • Microeconomics focuses on specific decision making
(b) the assumption of purposeful (or rational) within an economy; macroeconomics examines the
behaviour, and (c) comparisons of marginal benefit economy as a whole.
and marginal cost.
• Positive economics deals with factual statements (what is);
• In choosing among alternatives, people incur opportunity normative economics deals with value judgments
costs—the value of the next-best option. (what ought to be).
1.5 The Individual’s Economic Problem

LO1.5 Explain the individual’s economic problem and how trade-offs, opportunity costs, and attainable
combinations can be illustrated with budget lines.
A close examination of the economic problem—the need to make choices because economic wants exceed eco-
nomic means—will enhance your understanding of economic models and the difference between microeconomic
and macroeconomic analysis. Let’s first build a simple microeconomic model of the general economic problem
faced by an individual.
Limited Income
We all have a finite amount of income, even the wealthiest among us. Even members of the Thomson and Weston
families—Canada’s richest—have to decide how to spend their money, and the majority of us have much more
limited means. Our income comes to us in the form of wages, interest, rent, and profit, although we may also
receive money from government programs or from family members. As Global Perspective 1.1 shows, the average
income of Canadians in 2015 was US$47,250. In the poorest nations, it was less than $500.
1.1 GLOBAL PERSPECTIVE

Average Income, Selected Nations
Average income (total income/population), and therefore typical individual budget constraints, vary greatly
among nations.
Per capita income, 2015

(U.S. dollars, based
Country on exchange rates)
Norway $93,530
Switzerland 84,550
United States 55,980
Canada 47,250
France 40,710
Japan 38,840
South Korea 27,450
Brazil 9,990
Mexico 9,710
China 7,710
Pakistan 1,440
Mali 760
Rwanda 700
Congo 410
Source: World Bank. http://hdl.handle.net/123123123123/123. Licence:
Creative Commons Attribution Licence (CC BY 3.0 IGO). The World
Bank authorizes the use of this material subject to the terms and
conditions on its website, http://www.worldbank.org/terms.
Unlimited Wants
For better or worse, most people have virtually unlimited wants. We desire various goods and services that provide
utility. Our wants extend over a wide range of products, from necessities (food, shelter, and clothing) to luxuries
(perfumes, yachts, and sports cars). Some wants, such as basic food, shelter, and clothing, have biological roots.
Other wants—for example, specific kinds of food, shelter, and clothing—arise from the conventions and customs
of society.
Over time, as new and improved products are introduced, economic wants tend to change and multiply,
fuelled by new products. Only recently have people wanted Wi-Fi connections, tablets, or flying drones,
because those products did not exist a few decades ago. Also, the satisfaction of certain wants may trigger
others: the acquisition of a Ford Focus or a Honda Civic has been known to whet the appetite for a Lexus or
a Mercedes.
Services, as well as goods, satisfy our wants. Car repair work, the removal of an inflamed appendix, legal and
accounting advice, and haircuts all satisfy human wants. Actually, we buy many goods, such as automobiles and
washing machines, for the services they render. The differences between goods and services are often smaller than
they appear to be.
For most people, the desires for goods and services cannot be fully satisfied. Bill Gates may have all that he
wants for himself, but it is clear from his massive charitable giving that he keenly wants better health care for the
world’s poor. Our desires for a particular good or service can be satisfied; over a short period of time we can surely
get enough toothpaste or pasta. And one appendectomy is plenty. But our broader desire for more goods and ser-
vices and higher-quality goods and services seems to be another story.
Because we have limited income (usually through our work) but seemingly insatiable wants, it is in our self-interest
to pick and choose goods and services that maximize our satisfaction, given the limitations we face. It should be noted
that while we are stressing limited income, there is rarely enough of all the other things people desire, such as health,
time, physical/mental abilities, and much, much more.
The Budget Line

We can depict the economic problem facing individuals using a budget line (or, more technically, budget
constraint), a schedule or curve that shows various combinations of two products a consumer can purchase with a
specific money income. Although we assume two products, the analysis generalizes to the full range of products
available to consumers.
To understand the idea of a budget line, suppose that you received an Amazon gift card as a birthday present. The
$120 card is soon to expire. You go to Amazon.ca and confine your purchase decisions to two alternatives: movies
and paperback books. Movies are $20 each and paperback books are $10 each. Your purchase options are shown in
the table in Figure 1-1.
At one extreme, you might spend the entire $120 on 6 movies at $20 each and have nothing left to spend on
books. Or, by giving up 2 movies and thereby gaining $40, you can have 4 movies at $20 each and 4 books at
$10 each. And so on to the other extreme, at which you could buy 12 books at $10 each, spending your entire gift
card on books with nothing left to spend on movies.
The graph in Figure 1-1 shows the budget line. Note that, unlike the table, the graph is not restricted to whole
units of movies and books. Every point on the graph represents a possible combination of movies and books, includ-
ing fractional quantities. The slope of the graphed budget line measures the ratio of the price of books (Pb) to the
price of movies (Pm); more precisely, the slope is Pb /Pm = $(−10)/$(+20) = −½. So you must forgo 1 movie
(measured on the vertical axis) to buy 2 books (measured on the horizontal axis). This yields a slope of −½ or −0.5.
The budget line illustrates several ideas.
ATTAINABLE AND UNATTAINABLE COMBINATIONS

All of the combinations of movies and books on or inside the budget line are attainable from the $120 of money
income. You can afford to buy, for example, 3 movies at $20 each and 6 books at $10 each. You obviously can also
FIGURE 1-1 A Consumer’s Budget Line

The budget line (or budget constraint) shows all the combinations of any two products that can be purchased, given the prices
of the products and the consumer’s money income.
THE BUDGET LINE: WHOLE-UNIT COMBINATIONS 12

OF MOVIES AND PAPERBACK BOOKS ATTAINABLE
WITH AN INCOME OF $120
10
Units Units
of movies of books Total Income = $120
=6
Quantity of movies
(price = $20) (price = $10) expenditure 8 Pm = $20

6 0 ($120 = $120 + $0)
6 Unattainable
5 2 ($120 = $100 + $20)
4 4 ($120 = $80 + $40)
4
3 6 ($120 = $60 + $60) Income = $120 = 12
2 8 ($120 = $40 + $80) Attainable Pb = $10
2
1 10 ($120 = $20 + $100)
0 12 ($120 = $0 + $120)
0 2 4 6 8 10 12 14
Quantity of paperback books
afford to buy 2 movies and 5 books, thereby using up only $90 of the $120 available on your gift card. But to
achieve maximum utility you will want to spend the full $120. The budget line shows all combinations that cost
exactly the full $120.
In contrast, all combinations beyond the budget line are unattainable. For example, the $120 limit does not
allow you to purchase 5 movies at $20 each and 5 books at $10 each. That $150 expenditure would clearly exceed
the $120 limit. In Figure 1-1 the attainable combinations are on and within the budget line; the unattainable com-
binations are beyond the budget line.
TRADE-OFFS AND OPPORTUNITY COSTS

The budget line in Figure 1-1 illustrates the idea of trade-offs arising from limited income. To obtain more movies, you
have to give up some books. For example, to obtain the first movie you trade off 2 books. So the opportunity cost of the
first movie is 2 books. To obtain the second movie, the opportunity cost is also 2 books. The straight-line budget
constraint, with its constant slope, indicates constant opportunity cost. That is, the opportunity cost of 1 extra movie
remains the same (= 2 books) as more movies are purchased. And the opportunity cost of 1 extra book does not change
(= ½ movie) as more books are bought.
CHOICE
Limited income forces people to choose what to buy and what to forgo to fulfill wants. You will select the combina-
tion of movies and paperback books that you think is best. That is, you will evaluate your marginal benefits and
marginal costs (here, product price) to make choices that maximize your satisfaction. Other people with the same
$120 gift card would undoubtedly make different choices.
INCOME CHANGES
The location of the budget line varies with money income. An increase in money income shifts the budget line to
the right; a decrease in money income shifts it to the left. To verify this, recalculate the table in Figure 1-1, assum-
ing the card value (income) is (a) $240 and (b) $60, and then plot the new budget lines in the graph. No wonder
people like to have more income: that shifts their budget line outward and enables them to buy more goods and
services. But even with more income, people will still face spending trade-offs, choices, and opportunity costs.
CONSIDER THIS
Did Zuckerberg, Seacrest, and Swift Make Bad Choices?

Opportunity costs come into play in decisions well beyond sim- and TV personality. Finishing
ple buying decisions. Consider the different choices people his post-secondary education
make with respect to post-secondary education. The average might have interrupted the
salaries earned by college/university graduates are nearly twice string of successes that made
as high as those earned by persons with just high school diplo- his career possible. And Swift
mas. For most capable students, “Go to college/university, stay knew that staying on top in
in college/university, and earn a degree” is very sound advice. the world of pop takes
Yet Facebook founder Mark Zuckerberg and media per- unceasing work. So after her
sonality Ryan Seacrest both dropped out of university, while first album became a massive
pop singer Taylor Swift never even bothered to start classes. hit for her at age 16, it made
What were they thinking? Unlike most students, Zuckerberg sense for her to skip post-
faced enormous opportunity costs for staying in post- secondary education in order
secondaty education. He had a vision for his company, and to relentlessly pursue continu- © Helga Esteb/Shutterstock.com
dropping out helped to ensure Facebook’s success. ing success.
Similarly, Seacrest landed a professional DJ job at his local So Zuckerberg, Seacrest, and Swift understood opportunity
radio station when he was in high school before moving to costs and made their choices accordingly. The size of opportu-
Hollywood and eventually becoming America’s top radio nity costs matters greatly in making individual decisions.
QUICK REVIEW 1.2
• Because wants exceed incomes, individuals face an • Straight-line budget constraints imply constant
economizing problem; they must decide what to buy opportunity costs for both goods.
and what to forgo.
• A budget line (budget constraint) shows the various
combinations of two goods that a consumer can purchase
with a specific money income.
WORKED PROBLEM 1.1 Budget Lines
1.6 Society’s Economic Problem

LO1.6 List the categories of scarce resources and delineate the economic problem.
Society must also make choices under conditions of scarcity. It, too, faces the economic problem. Should it devote
more of its limited resources to the criminal justice system (police, courts, and prisons) or to education (teachers,
books, and schools)? If it decides to devote more resources to both, what other goods and services does it forgo?
Health care? Energy development?
Scarce Resources
Society has limited or scarce economic resources, meaning all natural, human, and manufactured resources that go
into the production of goods and services. This includes the entire set of factory and farm buildings and all the
equipment, tools, and machinery used to produce manufactured goods and agricultural products; all transportation
and communication facilities; all types of labour; and land and mineral resources.
Resource Categories
Economists classify economic resources into four general categories.
LAND
Land means much more to the economist than it does to most people. To the economist, land includes all natural
resources (“gifts of nature”) used in the production process. These include forests, mineral and oil deposits, water
resources, wind power, sunlight, and arable land.
LABOUR
The resource labour consists of the physical actions and mental activities that people contribute to the production
of goods and services. The work-related activities of a logger, retail clerk, machinist, teacher, professional hockey
player, and nuclear physicist all fall under the general heading of labour.
CAPITAL
For economists, capital (or capital goods) includes all manufactured aids used in producing consumer goods and
services. Included are all factory, storage, transportation, and distribution facilities, as well as tools and machinery.
Economists refer to the purchase of capital goods as investment to describe spending that pays for the production
and accumulation of capital goods.
Capital goods differ from consumer goods because consumer goods satisfy wants directly, while capital goods
do so indirectly by aiding the production of consumer goods. For example, large commercial baking ovens (capital
goods) help make loaves of bread (consumer goods). Note that the term capital as used by economists does not
refer to money, but to tools, machinery, and other productive equipment. Because money produces nothing, econo-
mists do not include it as an economic resource. Money (or money capital or financial capital) is simply a means of
purchasing capital goods.
ENTREPRENEURIAL ABILITY
Finally, there is the special human resource, distinct from labour, called entrepreneurial ability. It is supplied by
entrepreneurs, who perform several crucial economic functions:
∙ The entrepreneur takes the initiative in combining the resources of land, labour, and capital to produce a good
or a service. Both a spark plug and a catalyst, the entrepreneur is the driving force behind production and the
agent who combines the other resources in what is hoped will be a successful business venture.
∙ The entrepreneur makes the strategic business decisions that set the course of an enterprise.
∙ The entrepreneur innovates. He or she commercializes new products, new production techniques, or even new
forms of business organization.
∙ The entrepreneur bears risk. Innovation is risky, as nearly all new products and ideas can fail. Progress would
cease without entrepreneurs who are willing to take on risk by devoting their time, effort, and ability—as well
as their own money and the money of others—to commercializing new products and ideas that may raise
society’s standard of living.
Because land, labour, capital, and entrepreneurial ability are combined to produce goods and services, they are
called the factors of production, or simply inputs.
1.7 Production Possibilities Model

LO1.7 Apply the concepts of production possibilities analysis, increasing opportunity costs, and
economic growth.
Society uses its scarce resources to produce goods and services. The alternatives and choices it faces can best be
understood through a macroeconomic model of production possibilities. To keep things simple, let’s initially
assume:
∙ Full Employment The economy is employing all its available resources.
∙ Fixed Resources The quantity and quality of the factors of production are fixed.
∙ Fixed Technology The state of technology (the methods used to produce output) is constant.
∙ Two Goods The economy is producing only two goods: pizzas and industrial robots. Pizzas symbolize consumer
goods, products that satisfy our wants directly; industrial robots (for example, the kind used to weld automobile
frames) symbolize capital goods, products that satisfy our wants indirectly by making possible more efficient
production of consumer goods.
Production Possibilities Table

A production possibilities table lists the different combinations of two products that can be potentially pro-
duced with a specific set of resources, assuming full employment. Table 1-1 contains such a simple economy
that is producing pizzas and industrial robots; the data are, of course, hypothetical. At alternative A, this
economy would be devoting all its available resources to the production of industrial robots (capital goods); at
alternative E, all resources would go to pizza production (consumer goods). Those alternatives are unrealistic
extremes; an economy typically produces both capital goods and consumer goods, as in B, C, and D. As
we move from alternative A to E, we increase the production of pizzas at the expense of the production of
industrial robots.
Because consumer goods satisfy our wants directly, any movement toward E looks tempting. In producing
more pizzas, society increases the satisfaction of its current wants. But there is a cost: More pizzas means fewer
industrial robots. This shift of resources to consumer goods catches up with society over time because the stock
of capital expands more slowly, thereby reducing potential future production. By moving toward alternative E,
society chooses “more now” at the expense of “much later.”
By moving toward A, society chooses to forgo current consumption, thereby freeing up resources that can be
used to increase the production of capital goods. By building up its stock of capital this way, society will have
TABLE 1-1 Production Possibilities of Pizzas and Robots with

Full Employment and Productive Efficiency
PRODUCTION ALTERNATIVES
Type of product A B C D E
Pizzas (in hundred thousands) 0 1 2 3 4
Robots (in thousands) 10 9 7 4 0
greater future production and, therefore, greater future consumption. By moving toward A, society is choosing
“more later” at the cost of “less now.”
It is generally true that, at any point in time, a fully employed economy must sacrifice some of one good to obtain
more of another good. Scarce resources prohibit such an economy from having more of both goods. Society must
choose among alternatives. There is no such thing as a free pizza or a free industrial robot. Having more of one thing
means having less of something else. For example, if Canadians want more spending on health care, they may have to
be satisfied with less spending on education.
Production Possibilities Curve

The data presented in a production possibilities table are shown graphically as a production possibilities curve.
Such a curve displays the different combinations of goods and services that society can potentially produce in a
fully employed economy, assuming a fixed availability of supplies of resources and fixed technology. We arbitrarily
represent the economy’s output of capital goods (here, industrial robots) on the vertical axis and the output of con-
sumer goods (here, pizzas) on the horizontal axis, as shown in Figure 1-2 (Key Graph).
KEY GRAPH
FIGURE 1-2 The Production Possibilities Curve
Each point on the production possibilities curve represents some maximum combination of two products that can be
produced if full employment and full production are achieved. When operating on the curve, more robots means fewer
pizzas, and vice versa. Limited resources and a fixed technology make any combination of robots and pizzas lying
outside the curve (such as at W ) unattainable. Points inside the curve are attainable, but they indicate that full
employment and productive efficiency are not being realized.
Q
PRODUCTION ALTERNATIVES
A
10 Type of product A B C D E
B
Industrial robots (thousands)
9 Pizzas (in
Unattainable
8 hundred thousands) 0 1 2 3 4
C
7 Robots
W
6 (in thousands) 10 9 7 4 0
5
D
4
3
2
Attainable
1
E
Q
0 1 2 3 4 5 6 7 8 9
Pizzas (hundred thousands)
QUICK QUIZ
1. Production possibilities curve ABCDE is bowed out 3. The total opportunity cost of 7 units of robots is
from the origin because a. 1 unit of pizzas
a. The marginal benefit of pizzas declines as more b. 2 units of pizzas
pizzas are consumed. c. 3 units of pizzas
b. The curve gets steeper as we move from E to A. d. 4 units of pizzas
c. It reflects the law of increasing opportunity costs.
4. All points on this production possibilities curve neces-
d. Resources are scarce.
sarily represent
2. The marginal opportunity cost of the second unit of a. Society’s optimal choice
pizzas is b. Less than full use of resources
a. 2 units of robots c. Unattainable levels of output
b. 3 units of robots d. Full employment
c. 7 units of robots
d. 9 units of robots
Answers 1. c; 2. a; 3. b; 4. d
Each point on the production possibilities curve represents some maximum output of the two products. The curve
is a constraint because it shows the limit of attainable outputs. Points on the curve are attainable as long as the econ-
omy uses all of its available resources. Points lying inside the curve are also attainable, but they reflect less total
output and therefore are not as desirable as points on the curve. Points inside the curve imply that the economy could
have more of both industrial robots and pizzas if it achieved full employment. Economic fluctuations are inherent in
any economy, and when economic downturns occur, unemployment rises, characterized by points inside the produc-
tion possibilities curve. One of the main goals of macroeconomics is to understand why an economy can settle inside
the production possibilities curve and what policy measures should be undertaken to get the economy back to the
full employment of all its resources, particularly labour. Points lying beyond the production possibilities curve, like
W, would represent a greater output than the output at any point on the curve. Such points are, however, unattainable
with the current availability of resources and technology.
Law of Increasing Opportunity Costs

Figure 1-2 clearly shows that more pizzas means fewer industrial robots. The number of units of industrial robots
that must be given up to obtain another unit of pizzas is, of course, the opportunity cost of that unit of pizzas.
In moving from alternative A to alternative B in Table 1-1, the cost of 1 additional unit of pizzas is 1 less unit of
industrial robots. But when additional units are considered—B to C, C to D, and D to E—an important economic
principle is revealed: For society, the opportunity cost of each additional unit of pizzas is greater than the opportu-
nity cost of the preceding one. When we move from A to B, just 1 unit of industrial robots is sacrificed for 1 more
unit of pizzas; but in going from B to C we sacrifice 2 additional units of industrial robots for 1 more unit of pizzas;
then 3 more of industrial robots for 1 more of pizzas; and finally 4 for 1. Conversely, confirm that as we move from
E to A, the cost of an additional unit of industrial robots (on average) is ¼, ⅓, ½, and 1 unit of pizzas, respectively,
for the four successive moves.
Our example illustrates the law of increasing opportunity costs. As the production of a particular good
increases, the opportunity cost of producing an additional unit rises.
SHAPE OF THE CURVE

The law of increasing opportunity costs is reflected in the shape of the production possibilities curve: The curve
is bowed out from the origin of the graph. Figure 1-2 shows that when the economy moves from A to E, it must
give up successively larger amounts of industrial robots (1, 2, 3, and 4) to acquire equal increments of pizzas
(1, 1, 1, and 1). This is shown in the slope of the production possibilities curve, which becomes steeper as we
move from A to E.
ECONOMIC RATIONALE
The economic explanation for the law of increasing opportunity costs is that economic resources are not completely
adaptable to alternative uses. Many resources are better at producing one type of good than at producing others.
Consider land. Some land is highly suited to growing the ingredients necessary for pizza production. But, as pizza
production expands, society has to start using land that is less bountiful for farming. Other land is rich in mineral
deposits and therefore well suited to producing the materials needed to make industrial robots. That land will be the
first land devoted to the production of industrial robots. But as society steps up the production of robots, it must use
land that is less and less suited to making their components.
If we start at A and move to B in Figure 1-2, we can shift resources whose productivity is relatively high in pizza
production and low in industrial robots. But as we move from B to C, C to D, and so on, resources highly produc-
tive in making pizzas become increasingly scarce. To get more pizzas, resources will be needed whose productivity
in making industrial robots is relatively great. It will take increasingly more of such resources, hence greater sacri-
fices of industrial robots, to achieve each 1-unit increase in pizzas. This lack of perfect flexibility, or interchangea-
bility, on the part of resources is the cause of increasing opportunity costs for society.
WORKED PROBLEM 1.2 Production Possibilities
Optimal Allocation
Of all the attainable combinations of pizzas and industrial robots on the curve in Figure 1-2, which is optimal
(best)? That is, what specific quantities of resources should be allocated to pizzas and what specific quantities to
industrial robots in order to maximize satisfaction?
Recall that economic decisions centre on comparisons of marginal benefit (MB) and marginal cost (MC).
Any economic activity should be expanded as long as marginal benefit exceeds marginal cost and should be
reduced if marginal cost exceeds marginal benefit. The optimal amount of the activity occurs where MB = MC.
Society needs to make a similar assessment about its production decision.
Consider pizzas. We already know from the law of increasing opportunity costs that the marginal cost of additional
units of pizzas will rise as more units are produced. At the same time, we need to recognize that the extra or marginal
benefits that come from producing and consuming pizza decline with each successive unit of pizza. Consequently,
each successive unit of pizza brings with it both increasing marginal costs and decreasing marginal benefits.
The optimal quantity of pizza production is indicated in Figure 1-3 by point e at the intersection of the MB and
MC curves: 200,000 units. Why is this amount the optimal quantity? If only 100,000 units of pizzas were produced,
FIGURE 1-3 Optimal Allocation: MB = MC

Optimal allocation requires the expansion of a good’s output until its marginal benefit (MB) and marginal cost (MC)
are equal. No resources beyond that point should get allocated to the product. Here, allocative efficiency occurs
when 200,000 pizzas are produced.
b c
$15 MC
Marginal benefit and
marginal cost
e
10
MB = MC
d
5
a
MB
0 100,000 200,000 300,000

Quantity of pizzas
(hundred thousands)
the marginal benefit of an extra unit of them (point a) would exceed its marginal cost (point b). In money terms,
MB is $15, while MC is only $5. When society gains something worth $15 at a marginal cost of only $5, it is better
off. In Figure 1-3, net gains can continue to be realized until pizza production has been increased to 200,000.
In contrast, the production of 300,000 units of pizzas is excessive. There the MC of an added unit is $15 (point c)
and its MB is only $5 (point d). This means that 1 unit of pizzas is worth only $5 to society but costs society $15 to
obtain. This is a losing proposition for society!
So resources are being efficiently allocated to any product when the marginal benefit and marginal cost of its
output are equal (MB = MC). Suppose that by applying the above analysis to industrial robots, we find their opti-
mal (MB = MC) quantity is 7000. This would mean alternative C (200,000 units of pizzas and 7000 units of indus-
trial robots) on the production possibilities curve in Figure 1-2 would be optimal for this economy.
QUICK REVIEW 1.3

• Economists categorize economic resources as land, the curve; (c) opportunity cost, illustrated by the down-
labour, capital, and entrepreneurial ability. ward slope of the curve; and (d) the law of increasing
• The production possibilities curve illustrates (a) scarcity opportunity costs, reflected in the bowed-outward
of resources, implied by the area of unattainable combi- shape of the curve.
nations of output lying outside the production possibili- • A comparison of marginal benefits and marginal costs is
ties curve; (b) choice among outputs, reflected in the needed to determine the best or optimal output mix on a
variety of attainable combinations of goods lying along production possibilities curve.
1.8 Unemployment, Growth, and the Future

LO1.8 Explain how economic growth and international trade increase consumption possibilities.
In the depths of the Great Depression of the 1930s, almost 20 percent of workers were unemployed and one-quarter
of Canadian production capacity was idle. Subsequent downturns have been much less severe. During the relatively
deep 2008–2009 recession, for instance, production fell by a comparably smaller 2.8 percent and the unemploy-
ment rate peaked at 8.7 percent. Almost all nations have experienced widespread unemployment and unused
production capacity from business downturns at one time or another. Since 2010, for example, many nations—
including Argentina, Italy, Russia, Japan, and France—have had economic downturns and unemployment.
How do these realities relate to the production possibilities model? Our analysis and conclusions change if we
relax the assumption that all available resources are fully employed. The five alternatives in Table 1-1 represent
maximum outputs; they illustrate the combinations of pizzas and industrial robots that can be produced when the
economy is operating at full employment. With unemployment, this economy would produce less than each alter-
native shown in the table.
Graphically, we represent situations of unemployment by points inside the original production possibilities
curve (reproduced here in Figure 1-4). Point U is one such point. Here the economy is falling short of the various
maximum combinations of pizzas and industrial robots represented by the points on the production possibilities
curve. The arrows in Figure 1-4 indicate three possible paths back to full employment. A move toward full employ-
ment would yield a greater output of one or both products.
A Growing Economy
When we drop the assumptions that the quantity and quality of resources and technology are fixed, the production pos-
sibilities curve shifts position and the potential maximum output of the economy changes.
INCREASES IN FACTOR SUPPLIES

Although factor supplies are fixed at any specific moment, they change over time via more education and training.
Historically, the economy’s stock of capital has increased at a significant, though unsteady, rate. And although
FIGURE 1-4 Unemployment, Productive Inefficiency, and the Production Possibilities Curve
Any point inside the production possibilities curve, such as U, represents unemployment or a failure to achieve
productive efficiency. The arrows indicate that, by realizing full employment and productive efficiency, the economy
could operate on the curve. This means it could produce more of one or both products than it is producing at point U.
10
9
8
Robots (thousands)
7
6
5
4
U
3
2
1
Q
0 1 2 3 4 5 6 7 8 9
Pizzas (hundred thousands)
some of our energy and mineral resources are being depleted, new sources are also being discovered. The develop-
ment of irrigation systems, for example, adds to the supply of arable land.
The net result of these increased supplies of the factors of production is the ability to produce more of both con-
sumer goods and capital goods. Thus, twenty years from now the production possibilities may supersede those
shown in Table 1-1. The new production possibilities might look like those in the table in Figure 1-5. The greater
abundance of resources will result in a greater potential output of one or both products at each alternative. The
economy will have achieved economic growth in the form of expanded potential output. Thus, when an increase in
the quantity or quality of resources occurs, the production possibilities curve shifts outward and to the right, as
illustrated by the move from the inner curve to curve A′B′C′D′E′ in Figure 1-5. This sort of shift represents growth
of economic capacity that, when used, means economic growth: a larger total output.
ADVANCES IN TECHNOLOGY
An advancing technology brings both new and better goods and improved ways of producing them. For now, let’s
think of technological advance as being only improvements in the methods of production—for example, the intro-
duction of computerized systems to manage inventories and schedule production. These advances alter our previ-
ous discussion of the economic problem by allowing society to produce more goods with available resources. As
with increases in resource supplies, technological advances make possible the production of more industrial robots
and more pizzas.
A real-world example of improved technology is the recent surge of new innovations relating to computers,
communications, and biotechnology. Technological advances have dropped the prices of computers and greatly
increased their speed. Improved software has greatly increased the everyday usefulness of computers. Cellphones
and the Internet have increased communications capacity, enhancing production and improving the efficiency of
markets. Advances in biotechnology have resulted in important agricultural and medical discoveries. These and
other new and improved technologies have contributed to both global and Canadian economic growth (outward
shifts of the nation’s production possibilities curve).
Conclusion: Economic growth is the result of (1) increases in supplies of factors of production, (2) improve-
ments in factor quality, and (3) technological advances. The consequence of growth is that a full-employment
economy can enjoy a greater output of both consumption goods and capital goods. While static, no-growth
economies must sacrifice some of one good to obtain more of another, dynamic, growing economies can have
larger quantities of both goods.
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Microeconomics Fifteenth Canadian Edition Campbell R Mcconnell Full Chapter

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Microeconomics Fifteenth Canadian Edition Campbell R Mcconnell Full Chapter

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Microeconomics: Fifteenth Canadian

Edition Campbell R. Mcconnell

About the Authors

PART 1: An Introduction to Economics and the Economy 1

CHAPTER 2: The Market System and the Circular Flow 33

PART 2: Price, Quantity, and Efficiency 57

PART 3: Consumer Behaviour 147

PART 4: Microeconomics of Product Markets and Competition Policy 197

PART 5: Microeconomics of Factor Markets and International Trade 369

Preface xvi Chapter Summary 22

2.3 Five Fundamental Questions 40 3.3 Supply 64

Terms and Concepts 53 Chapter Summary 79

Discussion Questions 54 Terms and Concepts 80

Review Questions 54 Discussion Questions 80

Problems 56 Review Questions 81

PART 2: Price, Quantity, and Efficiency 57 APPENDIX TO CHAPTER 3 84

MATH APPENDIX TO CHAPTER 3 93 APPENDIX TO CHAPTER 4 122

Public Good Characteristics 104 Consider This—Does Big Government

Demand for Public Goods 106 Representative Democracy and the

Chapter Summary 118 APPENDIX TO CHAPTER 5: PUBLIC CHOICE

Paradox of Voting 143 Chapter Summary 169

Income and Substitution Effects 193 PART 4: Microeconomics of Product

Consider This—A Bright Idea 15 Terms and Concepts 223

Terms and Concepts 22

9.4 Profit Maximization in the Short Run: Chapter Summary 262

Chapter Summary 245 11.4 Output and Price Determination 272

Profit Maximization in the Long Run 250 Cost Complications 278

Relatively Large Number of Sellers 293

12.3 Monopolistic Competition and Efficiency 298

14.4 Increased Profit via Innovation 341 Chapter Summary 366

15.1 Industrial Concentration 355 16.6 Marginal Productivity Theory of Income

Merger Guidelines 357 Chapter Summary 385

Chapter Summary 412 Problems 434

Terms and Concepts 413 CHAPTER 18B: Income Inequality,

Review Questions 413 18B.1 Facts About Income Inequality 2

Problems 414 Distribution by Income Category 2

Distribution of Personal Income by CHAPTER 19: International Trade 436

Terms and Concepts 20 19B.2 Energy Economics 6

19B.3 Natural Resource Economics 8 Chapter Summary 20

Welcome to the Fifteenth Canadian Edition of Microeconomics. Thousands of Canadian students

What’s New and Improved?

Separate Presentations of Monopolistic

New Chapter on Technology, R&D,

Pieces © McGraw-Hill Education/

Tested Content for Peer Instruction

Full Support for Flipped Classroom

Current Discussions and Examples

Integrated Text and Website

WORKED PROBLEM 2.1 Least-Cost Production

MATH 4.1 The Optimal Amount of a Public Good

LEARNING OBJECTIVES ∙ Learning Objectives The Learning Objectives have been

THE ROLE OF CONCEPT 7 (The Role of Governments): Governments can occasionally

tried to provide data to support our graphs. In such cases a

THE BUDGET LINE: WHOLE-UNIT COMBINATIONS 12

relevance as Key Graphs. There is a quick quiz of four ques- 0 2 4 6 7 8 10 12 14 16 18

Bushels of corn (thousands per week)

the bottom of the graph.

∙ Reviewing the Chapter Important things should be said

Comprehensive Learning and Teaching Package

MARKET LEADING TECHNOLOGY

Connect Key Features

Simple Assignment Management

∙ Track individual student performance—by question, by assignment, or in relation to the class