Economics, 14th Global Edition Michael

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ECONOMICS
FOURTEENTH EDITION
GLOBAL EDITION

◆
MICHAEL PARKIN
University of Western Ontario
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Authorized adaptation from the Global Editions, entitled Microeconomics, 14th Edition, ISBN 978-1-292-43459-9, and Macroeconomics,
14th Edition, ISBN: 978-1-292-43360-8 by Michael Parkin, published by Pearson Education © 2023.

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TO ROBIN
Michael Parkin is Professor Emeritus in the Department of Economics
◆
ABOUT THE AUTHOR

at the University of Western Ontario, Canada. Professor Parkin has held faculty
appointments at Brown University, the University of Manchester, the University
of Essex, and Bond University. He is a past president of the Canadian Economics
Association and has served on the editorial boards of the American Economic Review
and the Journal of Monetary Economics and as managing editor of the Canadian
Journal of Economics. Professor Parkin’s research on macroeconomics, monetary
economics, and international economics has resulted in over 160 publications in
journals and edited volumes, including the American Economic Review, the Journal
of Political Economy, the Review of Economic Studies, the Journal of Monetary
Economics, and the Journal of Money, Credit and Banking. He became most visible
to the public with his work on inflation that discredited the use of wage and price
controls. Michael Parkin also spearheaded the movement toward European
monetary union. Professor Parkin is an experienced and dedicated teacher
of introductory economics.

5
This page intentionally left blank
PART ONE PART SIX
BRIEF CONTENTS
◆
INTRODUCTION 39 FACTOR MARKETS, INEQUALITY,
CHAPTER 1 What Is Economics? 39 AND UNCERTAINTY 461
CHAPTER 2 The Economic Problem 71 CHAPTER 18 Markets for Factors of Production 461
CHAPTER 19 Economic Inequality 487
PART TWO CHAPTER 20 Uncertainty and Information 511
HOW MARKETS WORK 97
CHAPTER 3 Demand and Supply 97 PART SEVEN
CHAPTER 4 Elasticity 125 MONITORING MACROECONOMIC
CHAPTER 5 Efficiency and Equity 147 PERFORMANCE 533
CHAPTER 6 Government Actions in Markets 169 CHAPTER 21 Measuring the Value of Production:
CHAPTER 7 Global Markets in Action 193 GDP 533
CHAPTER 22 Monitoring Jobs and Inflation 557
PART THREE
HOUSEHOLDS’ CHOICES 219 PART EIGHT
CHAPTER 8 Utility and Demand 219
MACROECONOMIC TRENDS 581

CHAPTER 9 Possibilities, Preferences, CHAPTER 23 Economic Growth 581

and Choices 243 CHAPTER 24 Finance, Saving, and Investment 609
CHAPTER 25 Money, the Price Level, and
PART FOUR Inflation 631
FIRMS AND MARKETS 265 CHAPTER 26 The Exchange Rate and the Balance of
CHAPTER 10 Organizing Production 265 Payments 661
CHAPTER 11 Output and Costs 289
PART NINE
CHAPTER 12 Perfect Competition 313
MACROECONOMIC FLUCTUATIONS 691
CHAPTER 13 Monopoly 339
CHAPTER 27 Aggregate Supply and Aggregate
CHAPTER 14 Monopolistic Competition 365
Demand 691
CHAPTER 15 Oligopoly 383
CHAPTER 28 Expenditure Multipliers 715
PART FIVE CHAPTER 29 The Business Cycle, Inflation, and
MARKET FAILURE AND GOVERNMENT 411 Deflation 745
CHAPTER 16 Public Choices, Public Goods, PART TEN
and Healthcare 411 MACROECONOMIC POLICY 771
CHAPTER 17 Externalities 433
CHAPTER 30 Fiscal Policy 771
CHAPTER 31 Monetary Policy 797

7
◆ ALTERNATIVE PATHWAYS THROUGH MICRO CHAPTERS

Micro Flexibility

Chapter 1 Chapter 5 Chapter 6 Chapter 16

What Is Economics? Efficiency and Equity Government Actions Public Choices,

in Markets Public Goods,
and Healthcare

Chapter 2 Chapter 19 Chapter 7 Chapter 17

The Economic Problem Economic Inequality Global Markets Externalities

in Action

Chapter 3 Chapter 4 Chapter 12

Demand and Supply Elasticity Perfect Competition

Chapter 13

Chapter 10 Chapter 11 Monopoly

Organizing Production Output and Costs

Chapter 14
Chapter 8 Chapter 20
Monopolistic
Uncertainty and Competition
Utility and Demand
Information

Chapter 9 Chapter 15

Possibilities, Oligopoly
Preferences, and
Choices

Chapter 18

Markets for Factors

of Production

Start here ... … then jump to … and jump to any of these after
any of these … doing the prerequisites indicated

8
 ALTERNATIVE PATHWAYS THROUGH MACRO CHAPTERS

Macro Flexibility
◆
Chapter 1 Chapter 23

What Is Economics? Economic Growth

Chapter 2 Chapter 24 Chapter 30

The Economic Problem Finance, Saving, Fiscal Policy

and Investment

Chapter 3 Chapter 21
Chapter 27 Chapter 29
Demand and Supply Measuring the Value
of Production: GDP Aggregate Supply and The Business Cycle,
Aggregate Demand Inflation, and Deflation

Chapter 22
Chapter 24
Monitoring Jobs Chapter 31
and Inflation Finance, Saving,
Monetary Policy
and Investment

Chapter 25

Money, the Price Level,

and Inflation

Chapter 26

The Exchange Rate and

the Balance of Payments

Chapter 28

Expenditure Multipliers

Start here ... … then jump to … and jump to any of these after
any of these … doing the prerequisites indicated

9
◆ DETAILED CONTENTS

PART ONE
APPENDIX Graphs in Economics 55
INTRODUCTION 39 Graphing Data 55
Graphing Economic Data 56
CHAPTER 1 ◆ WHAT IS ECONOMICS? 39 Scatter Diagrams 56

Definition of Economics 40 Graphs Used in Economic Models 58

Two Big Economic Questions 41
What, How, and For Whom? 41
Do Choices Made in the Pursuit of Self-Interest
also Promote the Social Interest? 43
The Economic Way of Thinking 47
A Choice Is a Tradeoff 47
Making a Rational Choice 47
Benefit: What You Gain 47
Cost: What You Must Give Up 47
How Much? Choosing at the Margin 48
Choices Respond to Incentives 48
Economics as Social Science and Policy Tool 49
Economist as Social Scientist 49
Economist as Policy Adviser 49
Variables That Move in the Same Direction 58
Variables That Move in Opposite Directions 59
Variables That Have a Maximum or a
Minimum 60
Variables That Are Unrelated 61
The Slope of a Relationship 62
The Slope of a Straight Line 62
The Slope of a Curved Line 63
Graphing Relationships Among More Than Two
Variables 64
Ceteris Paribus 64
When Other Things Change 65
MATHEMATICAL NOTE
Equations of Straight Lines 66

Economists in the Economy 50 ■ AT ISSUE, 46

Jobs for an Economics Major 50 ■ ECONOMICS IN THE NEWS, 44
Will Jobs for Economics Majors Grow? 50
Earnings of Economics Majors 51
Skills Needed for Economics Jobs 51
A Diversity Challenge in the Economics
Profession 51

Worked Problem, Summary (Key Points and Key Terms),

Problems and Applications, and Additional Problems and
Applications appear at the end of each chapter.

10
 DETAILED CONTENTS 11

CHAPTER 2 ◆ THE ECONOMIC PROBLEM 71

PART TWO
Production Possibilities and Opportunity Cost 72 HOW MARKETS WORK 97
Production Possibilities Frontier 72
Production Efficiency 73 CHAPTER 3 ◆ DEMAND AND SUPPLY 97
Tradeoff Along the PPF 73
Opportunity Cost 73 Markets and Prices 98
Using Resources Efficiently 75 Demand 99
The PPF and Marginal Cost 75 The Law of Demand 99
Preferences and Marginal Benefit 76 Demand Curve and Demand Schedule 99
Allocative Efficiency 77 A Change in Demand 100
A Change in the Quantity Demanded Versus a
Gains from Trade 78
Change in Demand 102
Comparative Advantage and Absolute
Advantage 78 Supply 104
Achieving the Gains from Trade 80 The Law of Supply 104
The Liz–Joe Economy and Its PPF 82 Supply Curve and Supply Schedule 104
A Change in Supply 105
Economic Growth 83
A Change in the Quantity Supplied Versus a
The Cost of Economic Growth 83 Change in Supply 106
A Nation’s Economic Growth 84
Changes in What We Produce 84 Market Equilibrium 108
Price as a Regulator 108
Economic Coordination 86
Price Adjustments 109
Firms 86
Markets 86 Predicting Changes in Price and Quantity 110
Property Rights 86 An Increase in Demand 110
Money 86 A Decrease in Demand 110
Circular Flows Through Markets 86 An Increase in Supply 112
Coordinating Decisions 87 A Decrease in Supply 112
Changes in Both Demand and Supply 114
■ ECONOMICS IN ACTION, 84
MATHEMATICAL NOTE
■ ECONOMICS IN THE NEWS, 74, 88 Demand, Supply, and Equilibrium 118
PART ONE WRAP-UP ◆ ■ ECONOMICS IN THE NEWS, 111, 113, 116

Understanding the Scope of Economics

Your Economic Revolution 95
Talking with
Esther Duflo 96
12 DETAILED CONTENTS
CHAPTER 4 ◆ ELASTICITY 125
Price Elasticity of Demand 126
Calculating Price Elasticity of Demand 126
Inelastic and Elastic Demand 127
The Factors That Influence the Elasticity
of Demand 128
Elasticity Along a Linear Demand Curve 129
Total Revenue and Elasticity 130
Your Expenditure and Your Elasticity 132
More Elasticities of Demand 133
Income Elasticity of Demand 133
Cross Elasticity of Demand 134
Elasticity of Supply 136
Calculating the Elasticity of Supply 136
The Factors That Influence the Elasticity of
Supply 137
■ ECONOMICS IN ACTION, 131, 133, 134
■ ECONOMICS IN THE NEWS, 132, 135, 140
CHAPTER 5 ◆ EFFICIENCY AND EQUITY 147
Resource Allocation Methods 148
Market Price 148
Command 148
Majority Rule 148
Contest 148
First-Come, First-Served 148
Lottery 149
Personal Characteristics 149
Force 149
Benefit, Cost, and Surplus 150
Demand, Willingness to Pay, and Value 150
Individual Demand and Market Demand 150
Consumer Surplus 151
Supply and Marginal Cost 151
Supply, Cost, and Minimum Supply-Price 152
Individual Supply and Market Supply 152
Producer Surplus 153
Is the Competitive Market Efficient? 154
Efficiency of Competitive Equilibrium 154
Market Failure 156
Sources of Market Failure 156
Alternatives to the Market 157
Is the Competitive Market Fair? 158
It’s Not Fair if the Result Isn’t Fair 158
It’s Not Fair if the Rules Aren’t Fair 160
Case Study: A Generator Shortage in a Natural
Disaster 160
■ ECONOMICS IN ACTION, 155
■ AT ISSUE, 161
■ ECONOMICS IN THE NEWS, 162

CHAPTER 6 ◆ GOVERNMENT ACTIONS IN
MARKETS 169
A Housing Market with a Rent Ceiling 170
A Housing Shortage 170
Increased Search Activity 170
An Illicit Market 170
Inefficiency of a Rent Ceiling 171
Are Rent Ceilings Fair? 172
A Labor Market with a Minimum Wage 173
Minimum Wage Brings Unemployment 173
Is the Minimum Wage Fair? 173
Inefficiency of a Minimum Wage 174
Taxes 175
Tax Incidence 175
Equivalence of a Tax on Buyers and Sellers 176
Taxes and Efficiency 177
Tax Influence of the Elasticity of Demand 178
Tax Influence of the Elasticity of Supply 179
Taxes and Fairness 180
The Big Tradeoff 180
Production Quotas and Subsidies 181
Production Quotas 181
Subsidies 182
Markets for Illegal Goods 184
A Free Market for a Drug 184
A Market for an Illegal Drug 184
Legalizing and Taxing Drugs 185
■ ECONOMICS IN ACTION, 172, 180, 183
■ AT ISSUE, 174
■ ECONOMICS IN THE NEWS, 186
DETAILED CONTENTS 13
CHAPTER 7 ◆ GLOBAL MARKETS IN
ACTION 193
How Global Markets Work 194
International Trade Today 194
What Drives International Trade? 194
Why the United States Imports T-Shirts 195
Why the United States Exports Airplanes 196
Winners, Losers, and the Net Gain
from Trade 197
Gains and Losses from Imports 197
Gains and Losses from Exports 198
Gains for All 198
International Trade Restrictions 199
Tariffs 199
Import Quotas 202
Other Import Barriers 205
Export Subsidies 205
The Case Against Protection 206
Helps an Infant Industry Grow 206
Counteracts Dumping 206
Saves Domestic Jobs 206
Allows Us to Compete with Cheap Foreign
Labor 206
Penalizes Lax Environmental Standards 207
Prevents Rich Countries from Exploiting
Developing Countries 207
Reduces Offshore Outsourcing that Sends Good
U.S. Jobs to Other Countries 207
Avoiding Trade Wars 208
Why Is International Trade Restricted? 208
Compensating Losers 209
■ ECONOMICS IN ACTION, 194, 200, 205
■ AT ISSUE, 208
■ ECONOMICS IN THE NEWS, 204, 210
PART TWO WRAP-UP ◆
Understanding How Markets Work
The Amazing Market 217
Talking with
Susan Athey 218
14 DETAILED CONTENTS
PART THREE
HOUSEHOLDS’ CHOICES 219
CHAPTER 8 ◆ UTILITY AND DEMAND 219
Consumption Choices 220
Consumption Possibilities 220
Preferences 221
Utility-Maximizing Choice 223
A Spreadsheet Solution 223
Choosing at the Margin 224
The Power of Marginal Analysis 226
Revealing Preferences 226
Predictions of Marginal Utility Theory 227
A Fall in the Price of a Movie 227
A Rise in the Price of Soda 229
A Rise in Income 230
The Paradox of Value 231
Temperature: An Analogy 232
New Ways of Explaining Consumer Choices 234
Behavioral Economics 234
Neuroeconomics 235
Controversy 235
■ ECONOMICS IN ACTION, 232
■ ECONOMICS IN THE NEWS, 236
CHAPTER 9 ◆ POSSIBILITIES, PREFERENCES,
AND CHOICES 243
Consumption Possibilities 244
Budget Line 244
Budget Equation 245
Preferences and Indifference Curves 247
Marginal Rate of Substitution 248
Degree of Substitutability 249
Predicting Consumer Choices 250
Best Affordable Choice 250
A Change in Price 251
A Change in Income 253
Substitution Effect and Income Effect 254
■ ECONOMICS IN ACTION, 252
■ ECONOMICS IN THE NEWS, 256
PART THREE WRAP-UP ◆
Understanding Households’ Choices
Making the Most of Life 263
Talking with
Steven D. Levitt 264

PART FOUR
FIRMS AND MARKETS 265
CHAPTER 10 ◆ ORGANIZING
PRODUCTION 265
The Firm and Its Economic Problem 266
The Firm’s Goal 266
Accounting Profit 266
Economic Accounting 266
A Firm’s Opportunity Cost of Production 266
Economic Accounting: A Summary 267
The Firm’s Decisions 267
The Firm’s Constraints 268
Technological and Economic Efficiency 269
Technological Efficiency 269
Economic Efficiency 269
Information and Organization 271
Command Systems 271
Incentive Systems 271
The Principal–Agent Problem 271
Coping with the Principal–Agent Problem 271
Types of Business Organization 272
Pros and Cons of Different Types of Firms 273
Markets and the Competitive Environment 275
Measures of Concentration 276
Limitations of a Concentration Measure 278
Produce or Outsource? Firms and Markets 280
Firm Coordination 280
Market Coordination 280
Why Firms? 280
■ ECONOMICS IN ACTION, 274, 277, 279, 281
■ ECONOMICS IN THE NEWS, 272, 282
DETAILED CONTENTS 15
CHAPTER 11 ◆ OUTPUT AND COSTS 289
Decision Time Frames 290
The Short Run 290
The Long Run 290
Short-Run Technology Constraint 291
Product Schedules 291
Product Curves 291
Total Product Curve 292
Marginal Product Curve 292
Average Product Curve 294
Short-Run Cost 295
Total Cost 295
Marginal Cost 296
Average Cost 296
Marginal Cost and Average Cost 296
Why the Average Total Cost Curve Is
U-Shaped 296
Cost Curves and Product Curves 298
Shifts in the Cost Curves 300
Long-Run Cost 302
The Production Function 302
Short-Run Cost and Long-Run Cost 302
The Long-Run Average Cost Curve 304
Economies and Diseconomies of Scale 304
■ ECONOMICS IN ACTION, 294, 305
■ ECONOMICS IN THE NEWS, 298, 306
16 DETAILED CONTENTS
CHAPTER 12 ◆ PERFECT COMPETITION 313
What Is Perfect Competition? 314
How Perfect Competition Arises 314
Price Takers 314
Economic Profit and Revenue 314
The Firm’s Decisions 315
The Firm’s Output Decision 316
Marginal Analysis and the Supply Decision 317
Temporary Shutdown Decision 318
The Firm’s Supply Curve 319
Output, Price, and Profit in the Short Run 320
Market Supply in the Short Run 320
Short-Run Equilibrium 321
A Change in Demand 321
Profits and Losses in the Short Run 321
Three Possible Short-Run Outcomes 322
Output, Price, and Profit in the Long Run 323
Entry and Exit 323
A Closer Look at Entry 324
A Closer Look at Exit 324
Long-Run Equilibrium 325
Changes in Demand and Supply as Technology
Advances 326
A Decrease in Demand 326
An Increase in Demand 327
Technological Advances Change Supply 328
Competition and Efficiency 330
Efficient Use of Resources 330
Choices, Equilibrium, and Efficiency 330
■ ECONOMICS IN ACTION, 323, 325
■ ECONOMICS IN THE NEWS, 327, 329, 332
CHAPTER 13 ◆ MONOPOLY 339
Monopoly and How It Arises 340
How Monopoly Arises 340
Monopoly Price-Setting Strategies 341
A Single-Price Monopoly’s Output and Price
Decision 342
Price and Marginal Revenue 342
Marginal Revenue and Elasticity 343
Price and Output Decision 344
Single-Price Monopoly and Competition
Compared 346
Comparing Price and Output 346
Efficiency Comparison 347
Redistribution of Surpluses 348
Rent Seeking 348
Rent-Seeking Equilibrium 348
Price Discrimination 349
Two Ways of Price Discriminating 349
Increasing Profit and Producer Surplus 350
A Price-Discriminating Airline 350
Efficiency and Rent Seeking with Price
Discrimination 353
Monopoly Regulation 355
Efficient Regulation of a Natural Monopoly 355
Second-Best Regulation of a Natural
Monopoly 356
■ ECONOMICS IN ACTION, 341, 353
■ ECONOMICS IN THE NEWS, 354, 358

CHAPTER 14 ◆ MONOPOLISTIC
COMPETITION 365
What Is Monopolistic Competition? 366
Large Number of Firms 366
Product Differentiation 366
Competing on Quality, Price, and Marketing 366
Entry and Exit 367
Examples of Monopolistic Competition 367
Price and Output in Monopolistic
Competition 368
The Firm’s Short-Run Output and Price
Decision 368
Profit Maximizing Might Be Loss
Minimizing 368
Long Run: Zero Economic Profit 369
Monopolistic Competition and Perfect
Competition 370
Is Monopolistic Competition Efficient? 371
Product Development and Marketing 372
Product Development 372
Advertising 372
Using Advertising to Signal Quality 374
Brand Names 375
Efficiency of Advertising and Brand Names 375
■ ECONOMICS IN ACTION, 367, 373
■ ECONOMICS IN THE NEWS, 376
DETAILED CONTENTS 17
CHAPTER 15 ◆ OLIGOPOLY 383
What Is Oligopoly? 384
Barriers to Entry 384
Small Number of Firms 385
Examples of Oligopoly 385
Oligopoly Games 386
What Is a Game? 386
The Prisoners’ Dilemma 386
An Oligopoly Price-Fixing Game 388
A Game of Chicken 393
Repeated Games and Sequential Games 394
A Repeated Duopoly Game 394
A Sequential Entry Game in a Contestable
Market 396
Antitrust Law 398
The Antitrust Laws 398
Price Fixing Always Illegal 399
Three Antitrust Policy Debates 399
Mergers and Acquisitions 401
■ ECONOMICS IN ACTION, 385, 392, 400, 401
■ ECONOMICS IN THE NEWS, 395, 402
PART FOUR WRAP-UP ◆
Understanding Firms and Markets
Managing Change and Limiting Market
Power 409
Talking with
Thomas Hubbard 410
18 DETAILED CONTENTS
PART FIVE
MARKET FAILURE AND
GOVERNMENT 411
CHAPTER 16 ◆ PUBLIC CHOICES,
PUBLIC GOODS, AND
HEALTHCARE 411
Public Choices 412
Why Governments? 412
Public Choice and the Political Marketplace 412
Political Equilibrium 413
What Is a Public Good? 414
A Fourfold Classification 414
The Things Our Governments Buy 414
Providing Public Goods 416
The Free-Rider Problem 416
Marginal Social Benefit of a Public Good 416
Marginal Social Cost of a Public Good 417
Efficient Quantity of a Public Good 417
Inefficient Private Provision 417
Efficient Public Provision 417
Inefficient Public Overprovision 419
The Economics of Healthcare 420
Healthcare Market Failure 420
Alternative Public Choice Solutions 421
Better Solutions? 425
■ ECONOMICS IN ACTION, 412, 415, 418, 421, 423
■ AT ISSUE, 424
■ ECONOMICS IN THE NEWS, 426
CHAPTER 17 ◆ EXTERNALITIES 433
Externalities in Our Lives 434
Negative Production Externalities 434
Positive Production Externalities 434
Negative Consumption Externalities 434
Positive Consumption Externalities 434
Negative Externality: Pollution 436
Private, External, and Social Cost 436
Establish Property Rights 437
Mandate Clean Technology 438
Tax or Cap and Price Pollution 439
Coping with Global Externalities 442
Negative Externality: The Tragedy of the
Commons 443
Unsustainable Use of a Common Resource 443
Inefficient Use of a Common Resource 444
Achieving an Efficient Outcome 446
Positive Externality: Knowledge 448
Private Benefits and Social Benefits 448
Government Actions in the Market with External
Benefits 449
Illustrating an Efficient Outcome 449
Bureaucratic Inefficiency and Government
Failure 450
■ ECONOMICS IN ACTION, 435, 440, 442, 445,
447, 451
■ AT ISSUE, 441
■ ECONOMICS IN THE NEWS, 452
Part Five Wrap-Up ◆
Understanding Market Failure and
Government
We, the People, ... 459
Talking with
Caroline M. Hoxby 460

PART SIX
FACTOR MARKETS, INEQUALITY,
AND UNCERTAINTY 461
CHAPTER 18 ◆ MARKETS FOR FACTORS OF
PRODUCTION 461
The Anatomy of Factor Markets 462
Markets for Labor Services 462
Markets for Capital Services 462
Markets for Land Services and Natural
Resources 462
Entrepreneurship 462
The Demand for a Factor of Production 463
Value of Marginal Product 463
A Firm’s Demand for Labor 463
A Firm’s Demand for Labor Curve 464
Changes in a Firm’s Demand for Labor 465
Labor Markets 466
A Competitive Labor Market 466
Differences and Trends in Wage Rates 468
A Labor Market with a Union 469
Capital and Natural Resource Markets 473
Capital Rental Markets 473
Land Rental Markets 473
Nonrenewable Natural Resource Markets 475
MATHEMATICAL NOTE
Present Value and Discounting 480
■ ECONOMICS IN ACTION, 468, 477
■ AT ISSUE, 471
■ ECONOMICS IN THE NEWS, 474, 478
DETAILED CONTENTS 19
CHAPTER 19 ◆ ECONOMIC INEQUALITY 487
Economic Inequality in the United States 488
The Distribution of Income 488
The Income Lorenz Curve 489
The Distribution of Wealth 490
Wealth or Income? 490
Annual or Lifetime Income and Wealth? 491
Trends in Inequality 491
Poverty 493
Inequality in the World Economy 495
Income Distributions in Selected Countries 495
Global Inequality and Its Trends 496
The Sources of Economic Inequality 497
Human Capital 497
Discrimination 498
Contests Among Superstars 499
Unequal Wealth 500
Income Redistribution 501
Income Taxes 501
Income Maintenance Programs 501
Subsidized Services 501
The Big Tradeoff 502
■ ECONOMICS IN ACTION, 492, 494, 502
■ ECONOMICS IN THE NEWS, 504
20 DETAILED CONTENTS

CHAPTER 20 ◆ UNCERTAINTY AND

INFORMATION 511
Decisions in the Face of Uncertainty 512
Expected Wealth 512
Risk Aversion 512
Utility of Wealth 512
Expected Utility 513
Making a Choice with Uncertainty 514
Buying and Selling Risk 515
Insurance Markets 515
A Graphical Analysis of Insurance 516
Risk That Can’t Be Insured 517
Private Information 518
Asymmetric Information: Examples and
Problems 518
The Market for Used Cars 518
The Market for Loans 521
The Market for Insurance 522
Uncertainty, Information, and the Invisible
Hand 523
Information as a Good 523
Monopoly in Markets That Cope with
Uncertainty 523
■ ECONOMICS IN ACTION, 517, 522
■ ECONOMICS IN THE NEWS, 524
PART SIX WRAP-UP ◆
Understanding Factor Markets, Inequality,
and Uncertainty
For Whom? 531
Talking with
Raj Chetty 532
PART SEVEN
MONITORING MACROECONOMIC
PERFORMANCE 533
CHAPTER 21 ◆ MEASURING THE VALUE OF
PRODUCTION: GDP 533
Gross Domestic Product 534
GDP Defined 534
GDP and the Circular Flow of Expenditure
and Income 534
Why “Domestic” and Why “Gross”? 536
Measuring U.S. GDP 537
The Expenditure Approach 537
The Income Approach 538
Nominal GDP and Real GDP 539
Calculating Real GDP 539
The Uses and Limitations of GDP 540
The Standard of Living Over Time 540
The Standard of Living Across Countries 542
Limitations of GDP 543
APPENDIX Graphs in Macroeconomics 548
The Time-Series Graph 548
Making a Time-Series Graph 548
Reading a Time-Series Graph 548
Ratio Scale Reveals Trend 549
A Time-Series with a Trend 549
Using a Ratio Scale 549
MATHEMATICAL NOTE
Chained-Dollar Real GDP 550
■ ECONOMICS IN ACTION, 545
■ AT ISSUE, 544

■ ECONOMICS IN THE NEWS, 546


CHAPTER 22 ◆ MONITORING JOBS AND
INFLATION 557
Employment and Unemployment 558
Why Unemployment Is a Problem 558
Current Population Survey 559
Three Labor Market Indicators 559
Other Definitions of Unemployment 561
Most Costly Unemployment 562
Alternative Measures of Unemployment 562
Unemployment and Full Employment 563
Frictional Unemployment 563
Structural Unemployment 563
Cyclical Unemployment 563
“Natural” Unemployment 563
Real GDP and Unemployment over
the Cycle 564
The Price Level, Inflation, and Deflation 566
Why Inflation and Deflation Are Problems 566
The Consumer Price Index 567
Reading the CPI Numbers 567
Constructing the CPI 567
Measuring the Inflation Rate 568
Distinguishing High Inflation from a High
Price Level 569
The Biased CPI 569
Consequences and Magnitude of Bias 570
Alternative Price Indexes 570
Core Inflation 571
■ ECONOMICS IN ACTION, 558, 565, 570
■ ECONOMICS IN THE NEWS, 572
PART SEVEN WRAP-UP ◆
Monitoring Macroeconomic Performance
The Big Picture 579
Talking with
Dave Donaldson 580
DETAILED CONTENTS 21
PART EIGHT
MACROECONOMIC TRENDS 581
CHAPTER 23 ◆ ECONOMIC GROWTH 581
The Basics of Economic Growth 582
Calculating Growth Rates 582
Economic Growth Versus Business Cycle
Expansion 582
The Magic of Sustained Growth 583
Applying the Rule of 70 584
Long-Term Growth Trends 585
Long-Term Growth in the U.S. Economy 585
Real GDP Growth in the World Economy 586
How Potential GDP Grows 588
What Determines Potential GDP? 588
What Makes Potential GDP Grow? 590
Why Labor Productivity Grows 593
Preconditions for Labor Productivity
Growth 593
Physical Capital Growth 593
Human Capital Growth 594
Technological Advances 594
Is Economic Growth Sustainable? Theories,
Evidence, and Policies 597
Classical Growth Theory 597
Neoclassical Growth Theory 597
New Growth Theory 598
New Growth Theory Versus Malthusian
Theory 600
Sorting Out the Theories 600
The Empirical Evidence on the Causes of
Economic Growth 600
Policies for Achieving Faster Growth 600
■ ECONOMICS IN ACTION, 587, 594, 595
■ ECONOMICS IN THE NEWS, 596, 602
22 DETAILED CONTENTS
CHAPTER 24 ◆ FINANCE, SAVING, AND
INVESTMENT 609
Financial Markets and Financial
Institutions 610
Finance and Money 610
Capital and Financial Capital 610
Capital and Investment 610
Wealth and Saving 610
Financial Capital Markets 611
Financial Institutions 612
Funds That Finance Investment 614
Financial Decisions and Risks 616
The Time Value of Money 616
Net Present Value 616
The Decision Rule 616
Financial Risk: Insolvency and Illiquidity 616
Market Risk: Interest Rates and Asset Prices 617
Getting Real 617
The Loanable Funds Market 618
The Demand for Loanable Funds 618
The Supply of Loanable Funds 618
Equilibrium in the Loanable Funds Market 619
Changes in Demand and Supply 620
Government in the Loanable Funds
Market 622
A Government Budget Surplus 622
A Government Budget Deficit 622
■ ECONOMICS IN ACTION, 612, 613, 615, 620
■ ECONOMICS IN THE NEWS, 624
CHAPTER 25 ◆ MONEY, THE PRICE LEVEL,
AND INFLATION 631
What Is Money? 632
Medium of Exchange 632
Unit of Account 632
Store of Value 633
Money in the United States Today 633
Depository Institutions 635
Types of Depository Institutions 635
What Depository Institutions Do 635
Economic Benefits Provided by Depository
Institutions 636
How Depository Institutions Are Regulated 636
Financial Technology 638
The Federal Reserve System 639
The Structure of the Fed 639
The Fed’s Balance Sheet 640
The Fed’s Policy Tools 640
How Banks Create Money 642
Creating Deposits by Making Loans 642
The Money Creation Process 643
The Money Multiplier 644
The Money Market 646
The Demand for Money 646
Changes in the Demand for Money 646
The Supply of Money 647
Money Market Equilibrium 648
The Quantity Theory of Money 650
MATHEMATICAL NOTE
The Money Multiplier 654
■ ECONOMICS IN ACTION, 633, 638, 641, 644, 650
■ AT ISSUE, 637
■ ECONOMICS IN THE NEWS, 645, 652
 DETAILED CONTENTS 23

CHAPTER 26 ◆ THE EXCHANGE RATE

AND THE BALANCE
OF PAYMENTS 661
The Foreign Exchange Market 662
Trading Currencies 662
Exchange Rates 662
Questions About the U.S. Dollar Exchange
Rate 662
An Exchange Rate Is a Price 662
The Demand for One Money Is the Supply
of Another Money 663
Demand in the Foreign Exchange Market 663
Demand Curve for U.S. Dollars 664
Supply in the Foreign Exchange Market 665
Supply Curve for U.S. Dollars 665
Market Equilibrium 666
Changes in the Demand for U.S. Dollars 666
Changes in the Supply of U.S. Dollars 667
Changes in the Exchange Rate 668
Arbitrage, Speculation, and Market
Fundamentals 670
Arbitrage 670
Speculation 671
Market Fundamentals 672
Exchange Rate Policy 673
Flexible Exchange Rate 673
Fixed Exchange Rate 673
Crawling Peg 674
Financing International Trade 676
Balance of Payments Accounts 676
Borrowers and Lenders 678
The Global Loanable Funds Market 678
Debtors and Creditors 679
Is U.S. Borrowing for Consumption? 679
Current Account Balance 680
Net Exports 680
Where Is the Exchange Rate? 681
■ ECONOMICS IN ACTION, 663, 669, 671, 674,
677, 681
■ ECONOMICS IN THE NEWS, 682
PART NINE
MACROECONOMIC FLUCTUATIONS 691
CHAPTER 27 ◆ AGGREGATE SUPPLY AND
AGGREGATE DEMAND 691
Aggregate Supply 692
Quantity Supplied and Supply 692
Long-Run Aggregate Supply 692
Short-Run Aggregate Supply 693
Changes in Aggregate Supply 694
Aggregate Demand 696
The Aggregate Demand Curve 696
Changes in Aggregate Demand 697
Explaining Macroeconomic Trends and
Fluctuations 700
Short-Run Macroeconomic Equilibrium 700
Long-Run Macroeconomic Equilibrium 700
Economic Growth and Inflation in the AS-AD
Model 701
The Business Cycle in the AS-AD Model 702
Fluctuations in Aggregate Demand 704
Fluctuations in Aggregate Supply 705
Macroeconomic Schools of Thought 706
The Classical View 706
The Keynesian View 706
The Monetarist View 707
The Way Ahead 707
■ ECONOMICS IN ACTION, 698, 701, 702
■ ECONOMICS IN THE NEWS, 708

PART EIGHT WRAP-UP ◆

Understanding Macroeconomic Trends
Expanding the Frontier 689
Talking with
Xavier Sala-i-Martin 690
24 DETAILED CONTENTS

CHAPTER 28 ◆ EXPENDITURE CHAPTER 29 ◆ THE BUSINESS CYCLE,

MULTIPLIERS 715 INFLATION, AND
DEFLATION 745
Fixed Prices and Expenditure Plans 716
Expenditure Plans 716 The Business Cycle 746
Consumption and Saving Plans 716 Mainstream Business Cycle Theory 746
Marginal Propensities to Consume and Save 718 Real Business Cycle Theory 747
Slopes and Marginal Propensities 718
Inflation Cycles 751
Consumption as a Function of Real GDP 719
Demand-Pull Inflation 751
Import Function 719
Cost-Push Inflation 753
Real GDP with a Fixed Price Level 720 Expected Inflation 755
Aggregate Planned Expenditure 720 Forecasting Inflation 756
Actual Expenditure, Planned Expenditure, and Inflation and the Business Cycle 756
Real GDP 721
Deflation 757
Equilibrium Expenditure 722
What Causes Deflation? 757
Convergence to Equilibrium 723
What Are the Consequences of Deflation? 759
The Multiplier 724 How Can Deflation Be Ended? 759
The Basic Idea of the Multiplier 724
The Phillips Curve 760
The Multiplier Effect 724
The Short-Run Phillips Curve 760
Why Is the Multiplier Greater Than 1? 725
The Long-Run Phillips Curve 760
The Size of the Multiplier 725
The Multiplier and the Slope of the AE ■ ECONOMICS IN ACTION, 748, 758, 761
Curve 726
■ ECONOMICS IN THE NEWS, 762
Imports and Income Taxes 727
The Multiplier Process 727
PART NINE WRAP-UP ◆
Business Cycle Turning Points 728
Understanding Macroeconomic Fluctuations
The Multiplier and the Price Level 729
Boom and Bust 769
Adjusting Quantities and Prices 729
Aggregate Expenditure and Aggregate Talking with
Demand 729 Emi Nakamura 770
Deriving the Aggregate Demand Curve 729
Changes in Aggregate Expenditure and Aggregate
Demand 730
Equilibrium Real GDP and the Price Level 731
MATHEMATICAL NOTE
The Algebra of the Keynesian Model 736

■ ECONOMICS IN ACTION, 719, 728

■ ECONOMICS IN THE NEWS, 734


PART TEN
MACROECONOMIC POLICY 771
CHAPTER 30 ◆ FISCAL POLICY 771
The Federal Budget 772
The Institutions and Laws 772
Highlights of the 2022 Budget 773
The Budget in Historical Perspective 774
Budget Balance and Debt 776
State and Local Budgets 777
Supply-Side Effects of Fiscal Policy 778
Full Employment and Potential GDP 778
The Effects of the Income Tax 778
Taxes on Expenditure and the Tax Wedge 779
Taxes and the Incentive to Save and Invest 780
Tax Revenues and the Laffer Curve 781
The Supply-Side Debate 781
Generational Effects of Fiscal Policy 782
Generational Accounting and Present Value 782
The Social Security Time Bomb 782
Generational Imbalance 783
International Debt 783
Fiscal Stimulus 784
Automatic Fiscal Policy and Cyclical and
Structural Budget Balances 784
Discretionary Fiscal Stimulus 787
■ ECONOMICS IN ACTION, 777, 779, 786, 788
■ ECONOMICS IN THE NEWS, 790
DETAILED CONTENTS 25
CHAPTER 31 ◆ MONETARY POLICY 797
Monetary Policy Objectives and Framework 798
Monetary Policy Objectives 798
Operational “Stable Prices” Goal 799
Operational “Maximum Employment” Goal 799
Responsibility for Monetary Policy 800
The Conduct of Monetary Policy 800
The Monetary Policy Instruments 800
Monetary Policy Decisions 801
Hitting the Federal Funds Rate Target 803
Monetary Policy Transmission 805
Quick Overview 805
Changes in Interest Rates 806
Changes in Money and Loans 806
Changes in Real GDP, Unemployment,
and Inflation 807
The Change in Aggregate Demand, Real GDP,
and the Price Level 807
The Fed Fights Recession 808
The Fed Fights Inflation 810
Loose Links and Long and Variable Lags 811
Policy Strategies and Clarity 812
Financial Crisis: Cure and Prevention 814
The Anatomy of the Financial Crisis 814
The Fed’s Policy Actions in Crisis 814
Congress’s Policy Actions in Crisis 814
Macroprudential Regulation 815
■ ECONOMICS IN ACTION, 812
■ AT ISSUE, 804
■ ECONOMICS IN THE NEWS, 816
PART TEN WRAP-UP ◆
Understanding Macroeconomic Policy
Tradeoffs and Free Lunches 823
Talking with
Stephanie Schmitt-Grohé 824
Glossary G-1
Index I-1
Credits C-1
This page intentionally left blank
ECONOMICS 14th Edition
Making economics real, showing the action and telling the story, learning interactively.

Making Economics Real ECONOMICS IN THE NEWS

The Market for Vanilla Bean
Crop Uncertainty Drives Vanilla Price Back to
TALKING WITH Esther Duflo

ESTHER DUFLO is the Abdul Latif Jameel Professor of

Record Level Poverty Alleviation and Development Economics at the

Economics in the News, Economics in The price of vanilla soared to a record $270 a pound last
year after a cyclone hit the Madagascar.
Source: Financial Times, March 25, 2018
Massachusetts Institute of Technology. Among her many
honors are the 2010 John Bates Clark Medal for the best
economist under 40 and the Financial Times and Gold-
man Sachs Business Book of the Year Award in 2011
THE DATA for her book (with Abhijit Banerjee) Poor Economics: A

Action, and Talking With focus on Quantity of

vanilla bean
(thousands of tons
Price of
vanilla bean
(dollars
Radical Rethinking of the Way to Fight Global Poverty.
Professor Duflo’s research seeks to advance our under-
standing of the economic choices of the extremely poor
by conducting massive real-world experiments.
Year per year) per pound)
Professor Duflo was an undergraduate student of

real-world issues and events.

2015 7.5 30 history and economics at École Normale Supérieure and
2017 4.5 270 completed a master’s degree at DELTA in Paris before
moving to the United States. She earned her PhD in Eco-
THE QUESTIONS ■ In 2017, the decreased production in Madagascar de- nomics at MIT in 1999.
creased the supply of vanilla bean to S17. Michael Parkin talked with her about her work ,
■ What does the data table tell us?
■ The price rose to $270 a pound and the quantity which advances our understanding of the economic
■ Why did the price of vanilla bean rise? Was it because
traded decreased to 4.5 thousand tons choices and condition of the very poor.
the demand for vanilla bean changed or the supply
changed. In which direction did it change? ■ The higher price brought a decrease in the quantity
of vanilla bean demanded, which is shown by the
ECONOMICS IN ACTION THE ANSWERS movement along the demand cur ve.
Capital goods (per person)

Singapore Overtakes the United States ■ The data table tells us that from 2015 to 2017, the Professor Duflo, what’s the story about how you The ver y poor whom you study are people who live on
Singapore
In 1980, the production possibilities per person in the PPF in 2020 quantity of vanilla bean produced decreased and the became an economist and in particular the architect $1 a day or $2 a day. … Is $1 a day a true measure

Price (dollars per pound)

United States were 40 percent higher than those in
Singapore (see the figure). The United States devoted
one fifth of its resources to accumulating capital, and in
1980, was at point A on its PPF. By 2020, U.S. produc-
tion possibilities had doubled and production was at
point B.
In 1980, Singapore devoted 45 percent of its re-
sources to accumulating capital and was at point C on
its PPF. By 1992, Singapore’s real GDP per person had
grown to equal that of the United States, and by 2020
to exceed it by 50 percent at point D on its 2020 PPF.
If Singapore continues to devote more resources
to accumulating capital than the United States does it
will continue to grow more rapidly. But if Singapore
decreases its capital accumulation, then its rate of
economic growth will slow.
Singapore is typical of the fast-growing Asian
economies, which include Taiwan, Thailand, South
Korea, and China. Production possibilities expand in
these countries by between 5 percent and sometimes
almost 10 percent a year.
400
price of vanilla bean increased sharply. S17
Cyclone decreases of experiments designed to understand the economic
U.S. PPF
in 2020 ■ An increase in demand brings an increase in the supply of vanilla bean … choices of the ver y poor? For defining the poverty line, we don’t include the
D
quantity and a rise in the price. S15 When I was a kid, I was exposed to many stories cost of housing. The poor also get free goods, some-
times of bad quality (education, healthcare) and the
■ A decrease in supply brings a decrease in the quantity 300
Singapore engagement as a doctor in a small NGO dealing value of those is also not included. Other than that,
PPF in 1980 and a rise in the price. 270
Because the quantity of vanilla bean decreased and
■
stories about children living all around the world. Moreover, you have to realize this is everything,
the price of vanilla bean increased, there must have ... and the
B 200 I remember asking myself how taking into account the fact that
quantity
been a decrease in the supply of vanilla bean. I could justify my luck of being … imagine living on under a dollar life is much cheaper in many
demanded
C
A U.S. PPF ■ The news clip says a cyclone hit Madagascar, which decreases born where I was. I had a very a day after your rent is paid in
in 1980 decreased production and brought a decrease in the exaggerated idea of what it was Seattle or Denver. Not easy!
... the
0 Consumption goods (per person) supply of vanilla bean. 100
price
sufficient discomfort that I knew (e.g., a haircut) is cheaper.
■ The figure illustrates the market for vanilla bean in rises ...
For example, in India, the purchasing power of
Economic Growth in the United States and Singapore
2015 and 2017. The demand curve D shows the de- accident, I discovered that economics was the way in
30
mand for vanilla bean. D which I could actually be useful: While spending a about 3 times what it is in the United States. So the
If such high economic growth rates are main- In 2015, the supply curve was S15, the price was $30 0 4.5 7.5 poverty line we use for India is 33 cents per day, not
tained, these other Asian countries will close the gap
■ year in Russia teaching French and studying History,
a pound, and the quantity of vanilla bean traded was Quantity (thousands of tons per year)
and overtake the United States, as Singapore has
done. 7.5 thousand tons. The Market for Vanilla Bean in 2015–2017 intervene in the world while keeping enough sanity to All told, you really have to imagine living on
analyze it. I thought this would be ideal for me and I
have never regretted it. I have the best job in the world.

Showing the Action and Telling the Story

Price (dollars per ton)
An increase in incomes has
increased the demand for
chocolate and cocoa beans, ...
Graphs with realistic values; consistent use of color with S

.. and the
blended arrows that show action; boxed notes that tell the quantity of
cocoa beans
2,800 supplied has
story; and captions that make each diagram a self-contained increased

object for study and review. D2021

1,800
... the price
of cocoa

Learning Interactively
has risen ...

D2018

Worked Problem, and new Economics in the News video series 0 4.6 4.8
Quantity (millions of tons per year)

with linked exercises promote active learning. The Market for Cocoa Beans

WORKED PROBLEM

The table sets out the demand and supply schedules 4. Sellers expect a higher price next weekend, so they
for roses on a normal weekend. decrease the quantity supplied this weekend by
Quantity Quantity
Price demanded supplied Quantity Quantity
(dollars per rose) (roses per week) Price demanded supplied
(dollars per rose) (roses per week)
6.00 150 60
7.00 100 100 6.00 150 0
8.00 70 130 7.00 100 40
9.00 50 150 8.00 70 70
9.00 50 90
Questions At $7 a rose, there is a shortage of 60 roses, so
1. If the price of a rose is $6, describe the situation the price rises to $8 a rose, where the quantity
in the rose market. Explain how the price adjusts. demanded equals the quantity supplied. (Point B)
2. If the price of a rose is $9, describe the situation Key Point: When supply decreases, the price rises.
in the rose market. Explain how the price adjusts. 5. Demand increases by 160 roses. Sellers plan to
3. What is the market equilibrium? increase the normal supply by the 60 roses with-
held last weekend. Create the new table:
4. Rose sellers know that Mother’s Day is next
Quantity Quantity
weekend and they expect the price to be higher, demanded supplied
Price
so they withhold 60 roses from the market this (dollars per rose) (roses per week)
weekend. What is the price this weekend?
6.00 310 120
5. On Mother’s Day, demand increases by 160 roses. 7.00 260 160
What is the price of a rose on Mother’s Day? 8.00 230 190
9.00 210 210
Solutions At $7 a rose, there is a shortage of 100 roses,
1. At $6 a rose, the quantity demanded is 150
demanded equals the quantity supplied. The price
demanded exceeds the quantity supplied and there on Mother’s Day is $9 a rose. (Point C)
is a shortage of 90 roses. With people lining up Key Point: When demand increases by more than
supply, the price rises.
Key Point: When a shortage exists, the price rises. Key Figure
2. At $9 a rose, the quantity demanded is 50 and the
Price (dollars per rose)

10 SM
quantity supplied is 150. The quantity supplied
S1 S0
exceeds the quantity demanded and there is a 9 C
surplus of 100 roses. With slow sales of roses and a
surplus, the price falls to below $9 a rose. 8 B DM
Key Point: When a surplus exists, the price falls. A
Normal Mother's
7
Day
3. Market equilibrium occurs at the price at which
6 Before
the quantity demanded equals the quantity sup- Mother's
plied. That price is $7 a rose. The market equilib- Day D0
5
rium is a price of $7 a rose and 100 roses a week
bought and sold, point A on the figure.
Key Point: At market equilibrium, there is no 0 50 70 100 150 210
Quantity (roses per week)
shortage or surplus.
◆ PREFACE

■ ◆■What’s New in This Edition

New in this fourteenth edition revision are: Fine-tuning the content; several notable
changes; and an applications video series.

Fine-Tuning the Content

This revision is driven by the drama of the extraordinary period of economic his-
tory in which we are living and its rich display of events and forces through which
students can be motivated to discover the power of economic models and the eco-
nomic way of thinking. Chief among these events is the Covid pandemic, its impacts
on markets and resource allocation, and the extraordinary fiscal policy and monetary
policy responses it has brought.
But Covid isn’t an isolated shock in an otherwise tranquil world. Persistent slow
economic growth; increasing concentration of wealth; ongoing tensions arising
from the loss of American jobs to offshore outsourcing and the political popularity
of trade protection; a slowing pace of China’s expansion; enhanced concern about
carbon emission and climate change; relentless pressure on the federal budget from
the demands of an aging population and a sometimes dysfunctional Congress with
its associated rising government debt; the dilemma posed by slow, more than decade-
long recovery from a global financial crisis and recession and the related question,
magnified by Covid, of when and how fast to exit an era of extreme monetary
stimulus. All of these events feature at the appropriate points in this new edition.
Every chapter contains many small changes, all designed to enhance clarity,
currency, and relevancy and the text and examples are all updated to reflect the most
recently available data and events.

Notable Content Changes

Chapter 1, What Is Economics?, has a new section on the diversity challenge in eco-
nomics. Women and minorities are under-represented in economics at every level:
in undergraduate programs, graduate school, faculty appointments, and the broader
private and public sector jobs. Under-representation in economics is more persistent
and greater than in other subjects that use similar skills.
Several chapters feature some aspect of the Covid pandemic:
■■ Chapter 2, The Economic Problem, explores the effects of the pandemic on the
production possibilities frontier.
■■ Chapter 3, Demand and Supply, looks at the hand sanitizer market.
■■ Chapter 4, Elasticity, examines the elasticity of supply of face masks.
■■ Chapter 8, Utility and Demand, looks at movie streaming in the pandemic.
■■ Chapter 12, Perfect Competition, looks at the effect of Covid in the competitive
market for fitness equipment and services.
■■ Chapter 19, Economic Inequality, examines the increased inequality arising from
Covid’s labor market effects.
■■ Chapter 21, Measuring the Value of Production: GDP, nowcasting GDP in the
pandemic.
■■ Chapter 22, Monitoring Jobs and Inflation, measuring unemployment.
■■ Chapter 25, Money, the Price Level, and Inflation, massive bond buying by the
Federal Reserve.
■■ Chapter 27, Aggregate Supply and Aggregate Demand, the Covid recession viewed
through the lens of the AS-AD model.
28
 PREFACE 29

■■ Chapter 28, Expenditure Multipliers, inventories in the Covid recession.

■■ Chapter 29, The Business Cycle, Inflation, and Deflation, post-Covid inflation fears.
■■ The effects of fiscal and monetary stimulus in the Covid recession in
Chapters 30 and 31.
Other notable changes include an illustration of the power of the demand
and supply model to predict and explain large recent changes in the prices of choco-
late and vanilla bean, in Chapter 3; Government Actions in Markets, an analysis of
President Joe Biden’s push for a $15 minimum wage, in Chapter 6; Global Markets
in Action, updated discussions of the work of the World Trade Organization and
its new Director General, Ngozi Okonjo-Iweala and the U.S.–China trade war, in
Chapter 7; Possibilities, Preferences, and Choices, an analysis of the effects of a tax
on sugary drinks, in Chapter 9; Organizing Production, an explanation of Tim Cook’s
pay deal with Apple and an analysis of the digital advertising market, in Chapter 10;
Output and Costs, a look at Amazon’s distribution center decisions, in Chapter 11;
Monopolistic Competition, product differentiation in streaming services, in Chapter 14;
Oligopoly, an account of a 5G prisoners’ dilemma, in Chapter 15; and Externalities,
an analysis of carbon pricing to lower emissions, in Chapter 17.
All the chapters are updated to include the latest data on: the national accounts in
Chapter 21; the labor market and price indexes, Chapter 22; economic growth, Chapter 23;
interest rates and loanable funds, Chapter 24; banks and the money market, Chapter 25;
the exchange rate and balance of payments, Chapter 26; the short-run Phillips curve
tradeoff, Chapter 29; fiscal policy, Chapter 30; and monetary policy, Chapter 31. Other
changes include an explanation of the Fed’s new operating procedures with ample
reserves, Chapter 31; a look at China’s slowing growth rate, Chapter 23; the growth of
“fintec” in financial markets, Chapter 24; and currency manipulation, Chapter 26.

Notable New Videos

Videos based on Economics in the News and Economics in Action boxes provide a lively
alternative way of applying economic principles to real-world issues and events.
Each video runs for around two minutes and is accompanied by a short quiz.
Examples of items included in this video series are the rising price of chocolate, the
push for a $15 minimum wage, Target’s store remodeling and the firm’s cost curves,
price discrimination at Disney World, the UN Human Development Index (HDI),
unemployment in the Covid recession, money and interest rates, China’s currency
manipulation, aggregate demand and aggregate supply in action, and the fiscal policy
and monetary policy responses to Covid.

■ ◆■The Vision
To change the way students see the world: this is my goal in teaching economics and
in writing this book. Three facts about students are my guiding principles.
First, students want to learn, but they are overwhelmed by the volume of claims
on their time and energy. So, they must see the relevance to their lives and future
careers of what they are being asked to learn.
Second, students want to get it, and get it quickly. So, they must be presented
with clear and succinct explanations.
Third, students want to make sense of today’s world and be better prepared for
life after school. So, they must be shown how to apply the timeless principles of
economics and its models to illuminate and provide a guide to understanding today’s
events and issues, and the future challenges they are likely to encounter.
30 PREFACE

The organization, structure, and features of this text arise directly from the three
guiding principles, and I will describe them by placing them in four groups:
■■ Making economics real
■■ Showing the action and telling the story
■■ Learning interactively—learning by doing
■■ Developing employability and citizenship skills

Making Economics Real

The student needs to see economics as a lens that sharpens the focus on real-world is-
sues and events, and not as a series of logical exercises with no real purpose. Economics
in the News, At Issue, and Economics in Action are designed to achieve this goal.
Each chapter ends with an Economics in the News application that helps students
to think like economists by connecting the chapter tools and concepts to the world
around them.
In many chapters, an additional briefer Economics in the News presents a short
news clip, supplemented by data where needed, that poses some questions and walks
through the answers.
Eleven At Issue boxes engage the student in debate and controversy. An At Issue
box introduces an issue and then presents two opposing views. It leaves the matter
unsettled so that students and the instructor can continue the argument in class and
reach their own conclusions.
Economics in Action boxes make economics real by providing data and informa-
tion that links models to real-world economic activity. Some of the issues covered
in these boxes include the best affordable choice of recorded music; the low cost
of making and the high cost of selling a pair of shoes; how Apple doesn’t make the
iPhone; opposing trends in air pollution and carbon concentration the HDI versus
GDP; the fast-growing Asian economies; the home price bubble; banks flush with
reserves; and the size of the fiscal stimulus multipliers.
Interviews with leading economists, whose work correlates to what the student is
learning, are the final component of making economics real. These interviews ex-
plore the education and research of prominent economists and their advice for those
who want to continue studying the subject.

Showing the Action and Telling the Story

Through the past thirteen editions, this book has set the standard of clarity in its diagrams;
the fourteenth edition continues to uphold this tradition. My goal is to show “where the
economic action is.” The diagrams in this book continue to generate an enormously positive
response, which confirms my view that graphical analysis is the most powerful tool available
for teaching and learning economics at the principles level.
Recognizing that some students find graphs hard to work with, I have developed the
entire art program with the study and review needs of the student in mind.
The diagrams feature
■■ Axes that measure and display concrete real-world data, and where possible and
relevant, the most recent data
■■ Graphs paired with data tables from which curves are plotted
■■ Original curves consistently shown in blue
■■ Shifted curves, equilibrium points, and other important features highlighted in red
■■ Color-blended arrows to indicate movement
■■ Diagrams labeled with boxed notes that tell the story
■■ Extended captions that make each diagram and its caption a self-contained object
for study and review
 PREFACE 31

Learning Interactively—Learning by Doing

Every chapter section closes with a Review Quiz, which invites the student to rework
the section with questions that cover the key ideas.
As part of the chapter review, the student is presented with a Worked Problem, a
multipart problem that covers the core content of the chapter and consists of ques-
tions, solutions, key points, and a key figure. This feature increases the incentive for
the student to learn-by-doing and review the chapter actively.

Developing Employability and Citizenship Skills

The economic way of thinking is a foundational skill for career and citizenship. Ev-
ery feature of the text helps the student develop this skill, repeatedly using its central
ideas of tradeoff; opportunity cost; the margin; incentives; the gains from voluntary
exchange; the forces of demand, supply, and equilibrium; the pursuit of economic
rent; and the tension between self-interest and the social interest.
The Chapter 1 section, “Economists in the Economy,” identifies a further five general
skills that are crucial for getting a job and developing a successful career.
This text lays the foundation for effective citizenship by explaining the principles
of welfare economics and the competing ideas about fairness, and repeatedly apply-
ing these principles to a comprehensive range of public choice problems.

■ ◆■Organization
I have organized the sequence of topics and chapters in what I think is the most
natural order in which to cover the material. But I recognize that there are alterna-
tive views on the best order. I have kept this fact and the need for flexibility firmly in
mind throughout the text. Many alternative sequences work, and the Flexibility Charts
on pages 8–9 explain the alternative pathways through the chapters. In using the flex-
ibility information, keep in mind that the best sequence is the one in which I present
the topics. And even chapters that the flexibility charts identify as strictly optional are
better covered than omitted.

■ ◆■Teaching Resources
Parkin teaching resources include an Instructor’s Manual, Solutions Manual,
Test Bank, and PowerPoint. Instructors can download these resources at
www.pearsonglobaleditions.com.
The Instructor’s Manual, authored by Mark Rush, University of Florida, contains
chapter-by-chapter overviews; a list of what’s new in the fourteenth edition; and
ready-to-use lecture notes.
The Solution Manual, authored by Mark Rush, University of Florida, contains
solutions to all Review Quizzes; End-of-chapter Problems; and End-of-chapter
Additional Problems and Applications.
The Test Bank contains 6,000 questions, authored by Svitlana Malsymenko, Uni-
versity of Pittsburgh, and James K. Self, Lee College and reviewed by Mark Rush,
University of Florida to ensure clarity and consistency. The four types of questions
are: multiple-choice, short-answer, graphing, and essay. Each question is classified
by the term or concept it supports, its level of difficulty: 1 for straight recall, 2 for
some analysis, 3 for complex analysis, and its AACSB category. The Association to
Advance Collegiate Schools of Business (AACSB) Guidelines propose learning
32 PREFACE

experiences in the following categories of Assurance of Learning Standards: Written

and Oral Communication; Ethical Understanding and Reasoning; Analytical Thin-
king; Interpersonal Relations and Teamwork; Diverse and Multicultural Work
Environments; Reflective Thinking; Application of Knowledge; and Integration
of Real-World Business Experiences.
The Computerized TestGen allows instructors to customize, save, and generate tests;
edit, add, or delete questions from the Test Bank; analyze test results; and organize
a database of tests and student results. TestGen offers many options for organizing
and displaying tests, along with search and sort features. Instructors can download the
software and the Test Bank at www.pearsonglobaleditions.com.
The Instructor’s PowerPoint contains ready-made lectures with text figures and
tables animated, along with speaking notes from the Instructor’s Manual. Large ver-
sions of all figures are available for instructors to use in creating their own lectures.
 PREFACE 33

■ ◆■■Acknowledgments
I thank my current and former colleagues and friends at the University of Western
Ontario who have taught me so much. They are Jim Davies, Jeremy Greenwood, Ig
Horstmann, Peter Howitt, Greg Huffman, David Laidler, Phil Reny, Chris Robinson,
and John Whalley. I also thank Doug McTaggart and Christopher Findlay, co-authors
of an Australian edition, and Melanie Powell and Kent Matthews, co-authors of the
European edition. Suggestions arising from their adaptations of earlier editions have
been helpful to me in preparing this edition.
I thank the several thousand students whom I have been privileged to teach. The
instant response that comes from the look of puzzlement or enlightenment has taught
me how to teach economics.
It is a special joy to thank the many outstanding people at Pearson who contribut-
ed to the concerted publishing effort that brought this edition to completion. Christo-
pher DeJohn, Content Manager Quantitative Business, and Samantha Lewis, Product
Manager, provided direction and overall management of the project. Thomas Hay-
ward, Senior Content Analyst, provided helpful guidance on the priorities for this
revision and enthusiastic support. Elaine Page, Senior Content Producer, Economics,
managed the production process, and drawing on her earlier career as a develop-
ment editor gave good advice on the new way news items are presented. Noel Lotz,
Digital Content Manager, and Melissa Honig, Digital Studio Producer, directed the
production of MyLab content and the eText and ensured that all our media assets
were correctly assembled. Ashley DePace, Product Marketing Manager, provided
inspired marketing strategy and direction, and Kristin Jobe and Gina Linko, Content
Project Managers, kept the project on track on a tight schedule.
I thank all of these wonderful people. It has been inspiring to work with them
and to share in creating what I believe is a truly outstanding educational tool.
I thank Catherine Baum, who provided a careful, consistent, and intelligent
copy edit and accuracy check.
I especially thank Mark Rush, who yet again played a crucial role in creating
another edition of this text and package. Mark has been a constant source of good
advice and good humor.
I thank the many exceptional reviewers who have shared their insights through
the various editions of this book. Their contribution has been invaluable.
I thank the people who work directly with me. Jeannie Shearer provided out-
standing research assistance on many topics, including finding news articles and
creating MyLab exercises. Richard Parkin created the electronic art files and offered
many ideas that improved the figures in this book. Evan Sauve wrote scripts and
worked with Liam Winckel and Richard to make the videos and associated exercises
that are new in this edition.
As with the previous editions, this one owes an enormous debt to Robin Bade. I
dedicate this book to her and again thank her for her work. I could not have written
this book without the tireless and selfless help she has given me. My thanks to her
are unbounded.
Classroom experience will test the value of this book. I would appreciate hear-
ing from instructors and students about how I can continue to improve it in future
editions.

Michael Parkin
London, Ontario, Canada
michael.parkin@uwo.ca
34 PREFACE
■ ◆■■Reviewers
Eric Abrams, Hawaii Pacific University
Christopher Adams, Federal Trade Commission
John T. Addison, University of South Carolina
Tajudeen Adenekan, Bronx Community College
Syed Ahmed, Cameron University
Frank Albritton, Seminole Community College
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Robert Gillette, University of Kentucky
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PREFACE 35
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36 PREFACE
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Neil Sheflin, Rutgers University
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Dorothy R. Siden, Salem State College
Mark Siegler, California State University at Sacramento
Scott Simkins, North Carolina Agricultural and Technical State
University
PREFACE 37
Jacek Siry, University of Georgia
Chuck Skoro, Boise State University
Phil Smith, DeKalb College
William Doyle Smith, University of Texas, El Paso
Sarah Stafford, College of William and Mary
Rebecca Stein, University of Pennsylvania
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Laura Wolff, Southern Illinois University, Edwardsville
Cheonsik Woo, Vice President, Korea Development Institute
Douglas Wooley, Radford University
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38 PREFACE

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■ ◆■■Global Edition Acknowledgments

Contributor
Eliane Haykal teaches Economics at Notre Dame University and the University of
Balamand, Lebanon. Her work and research is focused on international trade with the
objective of examining the comparative advantage of Lebanon.

Reviewers
We are deeply grateful to the following reviewers, who provided invaluable insights
that helped further develop the content.

Merve Burnazoglu, Utrecht University

Natalie Chen, University of Warwick
Simeon Coleman, Loughborough University
Carsten Küchler, Lucerne School of Business
Eddie Cheung Chi Leung, The Open University of Hong Kong
Joyce Chai Hui Ming, Temasek Polytechnic
Malatji Moye, University of South Africa
Mario Pezzino, University of Manchester
Heng Kiat Sing, Swinburne University
Subidey Togan, Bilkent University

1
After studying this chapter,
you will be able to:
WHAT IS ECONOMICS?
◆ Define economics and distinguish between
microeconomics and macroeconomics
◆ Explain the two big questions of economics
◆ Explain the key ideas that define the economic
way of thinking
◆ Explain how economists go about their work as
social scientists and policy advisers
◆ Describe the jobs available to a graduate with a
major in economics
PArT ONE INTRODUCTION
Is economics about money: How people make it and
◆
spend it? Is it about business, government, and jobs?
Is it about why some people and some nations are rich
and others poor?
Economics is about all these things. But its core is
the study of choices and their consequences.
Your life will be shaped by the choices that you make
and the challenges that you face. To face those challen-
ges and seize the opportunities they present, you must
understand the powerful forces at play. The economics
that you’re about to learn will become your most reliable
guide. This chapter gets you started by describing the
questions that economists try to answer and looking at
how economists think as they search for the answers.
39
40 ChAPTEr 1 What Is Economics?
◆ Definition of Economics
A fundamental fact dominates our lives: We want
more than we can get. Our inability to get everything
we want is called scarcity. Scarcity is universal. It con-
fronts all living things. Even parrots face scarcity!
Not only do I want a cracker—we all want a cracker!
© The New Yorker Collection 1985
Frank Modell from cartoonbank.com. All rights reserved.
Think about the things that you want and the
scarcity that you face. You want to go to a good
school, college, or university. You want to live in a
well-equipped, spacious, and comfortable home. You
want the latest smartphone and the fastest Internet
connection for your laptop or tablet. You want some
sports and recreational gear—perhaps some new run-
ning shoes, or a new bike. You want much more time
than is available to go to class, do your homework,
play sports and games, read novels, go to the movies,
listen to music, travel, and hang out with your
friends. And you want to live a long and healthy life.
What you can afford to buy is limited by your
income and by the prices you must pay. And your
time is limited by the fact that your day has 24 hours.
You want some other things that only govern-
ments provide. You want to live in a safe neighbor-
hood in a peaceful and secure world, and enjoy the
benefits of clean air, lakes, rivers, and oceans.
What governments can afford is limited by the
taxes they collect. Taxes lower people’s incomes and
compete with the other things they want to buy.
What everyone can get—what society can get—is
limited by the productive resources available. These
resources are the gifts of nature, human labor and
ingenuity, and all the previously produced tools and
equipment.
Because we can’t get everything we want, we must
make choices. You can’t afford both a laptop and an
iPhone, so you must choose which one to buy. You
can’t spend tonight both studying for your next test
and going to the movies, so again, you must choose
which one to do. Governments can’t spend a tax dol-
lar on both national defense and environmental pro-
tection, so they must choose how to spend that dollar.
Your choices must somehow be made consistent
with the choices of others. If you choose to buy a lap-
top, someone else must choose to sell it. Incentives rec-
oncile choices. An incentive is a reward that encourages
an action, or a penalty that discourages one. Prices act
as incentives. If the price of a laptop is too high, more
will be offered for sale than people want to buy. And if
the price is too low, fewer will be offered for sale than
people want to buy. But there is a price at which
choices to buy and sell are consistent.
Economics is the social science that studies
the choices that individuals, businesses,
governments, and entire societies make as
they cope with scarcity and the incentives
that influence and reconcile those choices.
The subject has two parts:
■ Microeconomics
■ Macroeconomics
Microeconomics is the study of the choices that indi-
viduals and businesses make, the way these choices
interact in markets, and the influence of governments.
Some examples of microeconomic questions are: Why
are people streaming more movies? How would a
tax on on-line shopping affect Amazon?
Macroeconomics is the study of the performance of
the national economy and the global economy. Some
examples of macroeconomic questions are: Why
does the U.S. unemployment rate fluctuate? Can the
Federal Reserve make the unemployment rate fall by
keeping interest rates low?
REVIEW QUIZ
1 List some examples of the scarcity that you face.
2 Find examples of scarcity in today’s headlines.
3 During the Covid pandemic, what incentives did
you face and how did you respond?
4 Find an example of the distinction between
microeconomics and macroeconomics in
today’s headlines.

◆ Two Big Economic
Questions
Two big questions summarize the scope of economics:
■ How do choices end up determining what, how,
and for whom goods and services are produced?
■ Do choices made in the pursuit of self-interest also
promote the social interest?
What, How, and For Whom?
Goods and services are the objects that people value
and produce to satisfy wants. Goods are physi-
cal objects such as smartphones and automobiles.
Services are tasks performed for people such as wire-
less service and auto-repair service.
What? What we produce varies across countries and
changes over time. In the United States today, agri-
culture accounts for 1 percent of total production,
industry (manufactured goods) for 11 percent, and
services (retail and wholesale trade, healthcare,
and education are the biggest ones) for 80 percent.
In contrast, in low-income Ethiopia, agriculture
accounts for 35 percent of total production, industry
for 22 percent, and services for 44 percent.
Figure 1.1 shows these numbers and also the per-
centages for China, which fall between those for the
United States and Ethiopia.
What determines these patterns of production?
How do choices end up determining the quantities of
smartphones, automobiles, wireless service, auto-repair
service, and the millions of other items that are pro-
duced in the United States and around the world?
How? How we produce is described by the technolo-
gies and resources that we use. The resources used to
produce goods and services are called factors of pro-
duction, which are grouped into four categories:
■ Land
■ Labor
■ Capital
■ Entrepreneurship
Land The “gifts of nature” that we use to produce
goods and services are called land. In economics,
land is what in everyday language we call natural
resources. It includes land in the everyday sense
Two Big Economic Questions 41
FIGURE 1.1 What Three Countries Produce
United States
China
Ethiopia
0 20 40 60 80 100
Percentage of production
Agriculture Industry Services
Agriculture and industry are small percentages of production
in rich countries such as the United States and large percent-
ages of production in poor countries such as Ethiopia. Most
of what is produced in the United States is services. The num-
bers for China fall between poor countries and rich countries.
Source of data: The World Bank Group: Data of World Bank 2021.
together with minerals, oil, gas, coal, water, air,
forests, and fish.
Our land surface and water resources are renew-
able and some of our mineral resources can be recy-
cled. But the resources that we use to create energy
are nonrenewable—they can be used only once.
Labor The work time and work effort that people
devote to producing goods and services is called
labor. Labor includes the physical and mental efforts
of all the people who work on farms and construc-
tion sites and in factories, shops, and offices.
The quality of labor depends on human capital,
which is the knowledge and skill that people obtain
from education, on-the-job training, and work expe-
rience. You are building your own human capital
right now as you work on your economics course,
and your human capital will continue to grow as you
gain work experience.
Human capital expands over time. Today, 91 per-
cent of the adult population of the United States have
completed high school and 38 percent have a college
or university degree. Figure 1.2 shows these measures
of human capital in the United States and its growth
since 1900.
42 ChAPTEr 1 What Is Economics?

incomes have fewer options and can afford a smaller

FIGURE 1.2 A Measure of human range of goods and services.
Capital People earn their incomes by selling the services of
the factors of production they own:
100
Less than 5 years
elementary school ■ Land earns rent.
■ Labor earns wages.
75 ■ Capital earns interest.
Some high school ■ Entrepreneurship earns profit.
Completed
high school
Which factor of production earns the most
50 income? The answer is labor. In 2020, wages were 55
1 to 3 percent of total income and the incomes from land,
years of
college capital, and entrepreneurship totaled 45 percent.
Labor’s share has fallen slightly over the past 20 years.
25
Knowing how income is shared among the fac-
tors of production doesn’t tell us how it is shared
4 years or more
of college
among individuals. And the distribution of income
0
among individuals is extremely unequal. You know
1900 1920 1940 1960 1980 2000 2020 of some people who earn very large incomes.
Year In 2019, Stephen Curry earned $74.4 million and
LeBron James earned $88.2 million. LeBron joined
In 2020, 38 percent of the population aged 25 and older had the Los Angeles Lakers in 2018 under a four-year
4 years or more of college, up from 2 percent in 1900. A further $153 million contract.
53 percent had completed high school, up from 12 percent in You know of even more people who earn very
1900. small incomes. Servers at McDonald’s average around
Source of data: U.S. Census Bureau, 2021. $11.50 an hour; checkout clerks, cleaners, and textile
and leather workers all earn less than $15 an hour.
You probably know about other persistent
Capital The tools, instruments, machines, buildings, differences in the incomes people earn. Men, on
and other constructions that businesses use to pro- average, earn more than women; whites earn more
duce goods and services are called capital. than minorities; college graduates earn more than
In everyday language, we talk about money, high-school graduates.
stocks, and bonds as being “capital.” These items are We can get a good sense of who consumes the
financial capital. Financial capital plays an important goods and services produced by looking at the per-
role in enabling businesses to borrow the funds that centages of total income earned by different groups
they use to buy physical capital. But financial capital of people. The 20 percent of people with the lowest
is not used to produce goods and services and it is incomes earn about 5 percent of total income, while
not a factor of production. the richest 20 percent earn close to 50 percent of
total income. So on average, people in the richest
Entrepreneurship The human resource that organizes
20 percent earn more than 10 times the incomes of
labor, land, and capital is called entrepreneurship.
those in the poorest 20 percent. There is even huge
Entrepreneurs are the drivers of economic progress.
inequality within the richest 20 percent and the top
They develop new ideas about what and how to pro-
1 percent earns almost 15 percent of total income.
duce, make business decisions, and bear the risks that
Why is the distribution of income so unequal?
arise from these decisions.
What determines how the factors of production Economics provides some answers to all these
are used to produce each good and service? questions about what, how, and for whom goods and
services are produced and much of the rest of this
For Whom? Who consumes the goods and services book will help you to understand those answers.
that are produced depends on the incomes that peo- We’re now going to look at the second big ques-
ple earn. People with large incomes can buy a wide tion of economics: Do choices made in the pursuit of
range of goods and services. People with small self-interest also promote the social interest?

Do Choices Made in the Pursuit of Self-
Interest also Promote the Social Interest?
Every day, you and 328 million other Americans,
along with 7.9 billion people in the rest of the world,
make economic choices that result in what, how, and
for whom goods and services are produced. These
choices are made by people who are pursuing their
self-interest.
Self-Interest You make a choice in your self-interest
if you think that choice is the best one available for
you. All the choices that people make about how to
use their time and other resources are made in the
pursuit of self-interest. When you allocate your
time or your budget, you do what makes the most
sense to you. You might think about how your
choices affect other people and take into account
how you feel about that, but it is how you feel that
influences your choice. You order a home-delivery
pizza because you’re hungry, not because the deliv-
ery person needs a job. And when the pizza delivery
person shows up at your door, he’s not doing you a
favor. He’s pursuing his self-interest and hoping for a
tip and another call next week.
The big question is: Is it possible that all the
choices that each one of us makes in the pursuit of
self-interest could end up achieving an outcome that
is best for everyone?
Social Interest An outcome is in the social interest if it
is best for society as a whole. It is easy to see how you
decide what is in your self-interest. But how do we
decide if something is in the social interest? To help
you answer this question, imagine a scene like that in
Economics in the News on p. 44.
Ted, an entrepreneur, creates a new business. He
hires a thousand workers and pays them $20 an hour,
$1 an hour more than they earned in their old jobs.
Ted’s business is extremely profitable and his own
earnings increase by $1 million per week.
You can see that Ted’s decision to create the busi-
ness is in his self-interest—he gains $1 million a
week. You can also see that for Ted’s employees, their
decisions to work for Ted are in their self-interest—
they gain $1 an hour (say $40 a week). And the deci-
sions of Ted’s customers must be in their self-interest,
otherwise they wouldn’t buy from him. But is this
outcome in the social interest?
The economist’s answer is “Yes.” It is in the social
interest because it makes everyone better off. There
are no losers.
Two Big Economic Questions 43
Efficiency and the Social Interest Economists use the
everyday word “efficient” to describe a situation that
can’t be improved upon. Resource use is efficient if it
is not possible to make someone better off without
making someone else worse off. If it is possible to
make someone better off without making anyone
worse off, society can be made better off and the situ-
ation is not efficient.
In the Ted story everyone is better off, so it
improves efficiency and the outcome is in the social
interest. But notice that it would also have been effi-
cient if the workers and customers had gained noth-
ing and Ted had gained even more than $1 million a
week. But would that efficient outcome be in the so-
cial interest?
Many people have trouble seeing the outcome in
which Ted is the only winner as being in the social
interest. They say that the social interest requires Ted
to share some of his gain either with his workers in
higher wages or with his customers in lower prices, or
with both groups.
Fair Shares and the Social Interest The idea that the
social interest requires “fair shares” is a deeply held
one. Think about what you regard as a fair share. To
help you, imagine the following game.
I put $100 on the table and tell someone you
don’t know and who doesn’t know you to propose a
share of the money between the two of you. If you
accept the proposed share, you each get the agreed
upon shares. If you don’t accept the proposed share,
you both get nothing.
It would be efficient—you would both be better
off—if the proposer offered to take $99 and leave
you with $1 and you accepted that offer.
But would you accept the $1? If you are like most
people, the idea that the other person gets 99 times as
much as you is just too much to stomach. “No way,”
you say and the $100 disappears. That outcome is
inefficient. You have both given up something.
When the game I’ve just described is played in a
classroom experiment, about half of the players reject
offers of below $30.
So fair shares matter. But what is fair? There isn’t
a crisp definition of fairness to match that of effi-
ciency. Reasonable people have a variety of views
about it. Almost everyone agrees that too much in-
equality is unfair. But how much is too much? And
inequality of what: income, wealth, or the opportunity
to work, earn an income, and accumulate wealth?
You will examine efficiency again in Chapter 2
and efficiency and fairness in Chapter 5.
44 ChAPTEr 1 What Is Economics?

Questions about the social interest are hard ones multinational firms that produce in low-cost regions
to answer and they generate discussion, debate, and and sell in high-price regions. But is globalization in
disagreement. Four issues in today’s world put some the self-interest of the low-wage worker in Malaysia
flesh on these questions. The issues are: who sews your new running shoes and the displaced
shoemaker in Atlanta? Is it in the social interest?
■ Globalization
■ Information-age monopolies
■ Climate change
■ The Covid pandemic
Globalization The term globalization means the
expansion of international trade, borrowing and lend-
ing, and investment.
When Nike produces sports shoes, people in
Malaysia get work; and when China Airlines buys
new airplanes, Americans who work at Boeing in
Seattle build them. While globalization brings
expanded production and job opportunities for some
workers, it destroys many American jobs. Workers
across the manufacturing industries must learn new
skills, take service jobs, which often pay less, or retire
earlier than previously planned.
Globalization is in the self-interest of those con-
sumers who buy low-cost goods and services produced
in other countries; and it is in the self-interest of the

ECONOMICS IN ThE NEWS

The Invisible Hand
From Brewer to Bio-Tech Entrepreneur
Kiran Mazumdar-Shaw trained to become a master
brewer and learned about enzymes, the stuff from
which bio-pharmaceuticals are made. Discovering it
was impossible for a woman in India to become a
master brewer, the 25-year-old Kiran decided to create
a bio-pharmaceutical business.
Kiran’s firm, Biocon, employed uneducated work-
ers who loved their jobs and the living conditions made
possible by their high wages. But when a labor union
entered the scene and unionized the workers, a furious
Kiran fired the workers, automated their jobs, and hired
a smaller number of educated workers. Biocon continued
to grow and today, Kiran’s wealth exceeds $1 billion.
Kiran has become wealthy by developing and pro-
ducing bio-pharmaceuticals that improve people’s
lives. But Kiran is sharing her wealth in creative ways. She
has opened a cancer treatment center to help thousands
of patients who are too poor to pay and created a health
insurance scheme.
Source: Ariel Levy, “Drug Test,”
The New Yorker, January 2, 2012
THE QUESTIONS
■ Whose decisions in the story were taken in self-
interest?
■ Whose decisions turned out to be in the social interest?
■ Did any of the decisions harm the social interest?
THE ANSWERS
■ All the decisions—Kiran’s, the workers’, the
union’s, and the firm’s customers’—are taken in
the pursuit of self-interest.
■ Kiran’s decisions serve the social interest: She creates
jobs that benefit her workers and products
that benefit her customers. And her charitable
work brings yet further social benefits.
■ The labor union’s decision might have harmed
the social interest because it destroyed the jobs of
uneducated workers.
Kiran Mazumdar-Shaw,
founder and CEO of Biocon
Another random document with
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 EDUCATION OF GAY-NECK
here are two sweet sights in the bird world. One
when the mother breaks open her egg in order to
bring to light her child, and the other when she
broods and feeds him. Gay-Neck was brooded
most affectionately by both his parents. This
brooding did for him what cuddling does for human
children. It gives the helpless ones warmth and
happiness. It is as necessary to them as food. This
is the time when a pigeon hole should not be stuffed with too much
cotton or flannel; which should be put there more and more sparingly
so that the temperature of the nest does not get too hot. Ignorant
pigeon fanciers do not realize that as the baby grows larger he puts
forth more and more heat from his own body. And I think it is wise
not to clean the nest frequently during this time. Everything that the
parents allow to remain in the nest contributes to making their baby
comfortable and happy.
I remember distinctly how, from the second day of his birth, little
Gay-Neck automatically opened his beak and expanded his
carnation-colored body like a bellows every time one of his parents
flew back to their nest. The father or the mother put their beaks into
his wide open maw and poured into it the milk made in their own
organs from millet seeds that they had eaten. I noticed this; the food
that was poured into his mouth was very soft. No pigeon ever gives
any seeds to its baby even when it is nearly a month old without first
keeping them in its throat for some time, which softens the food
before it enters the delicate stomach of the baby.
Our Gay-Neck was a tremendous eater. He kept one of his parents
busy getting food while the other brooded or stayed with him. I think
the father bird brooded and worked for him no less hard than the
mother. No wonder his body grew very fat. His carnation color
changed into a yellowish white—the first sign of feathers coming on.
Then that gave way to prickly white feathers, round and somewhat
stiff like a porcupine needle. The yellow things that hung about his
mouth and eyes fell away. Slowly the beak emerged, firm, sharp and
long. What a powerful jaw! When he was about three weeks old an
ant was crawling past him into the pigeon hole at whose entrance he
was sitting. Without any instruction from anybody he struck it with his
beak. Where there had been a whole ant, now lay its two halves. He
brought his nose down to the dead ant and examined what he had
done. There was no doubt that he had taken that black ant for a
seed and killed an innocent passer-by who was friendly to his race.
Let us hope he was ashamed of it. Anyway, he never killed another
ant the rest of his life.
By the time he was five weeks old he could hop out of his birth-nest
and take a drink from the pan of water left near the pigeon holes.
Even now he had to be fed by his parents, though every day he tried
to get food on his own account. He would sit on my wrist and dig up
a seed at a time from the palm of my hand. He juggled it two or three
times in his throat like a juggler throwing up balls in the air, and
swallowed it. Every time Gay-Neck did that, he turned his head and
looked into my eyes as much as to say: "Am I not doing it well? You
must tell my parents how clever I am when they come down from
sunning themselves on the roof." All the same, he was the slowest of
my pigeons in developing his powers.
Just at this time I made a discovery. I never knew before how
pigeons could fly in a dust storm without going blind. But as I
watched the ever growing Gay-Neck I noticed one day that a film
was drawn over his eyes. I thought he was losing his sight. In my
consternation I put forth my hand to draw him nearer to my face in
order to examine him closely. No sooner had I made the gesture
than he opened his golden eyes and receded into the rear of the
hole. But just the same I caught and took him up on the roof, and in
the burning sunlight of May I scrutinized his eye-lids. Yes, there it
was: he had, attached to his eyelid, another thin lid delicate as tissue
paper, and every time I put his face toward the sun he drew that film
over the two orbits of gold. And so I learned that it was a protective
film for the eye which enabled the bird to fly in a dust storm or
straight toward the sun.
In another fortnight Gay-Neck was taught how to fly. It was not at all
easy, bird though he was by birth. A human child may love the water,
yet he has to make mistakes and swallow water while learning the
art of swimming. Similarly with my pigeon. He had a mild distrust of
opening his wings, and for hours he sat on our roof, where the winds
of the sky blew without quickening him to flight. In order to make the
situation clear, let me describe our roof to you. It was railed with a
solid concrete wall as high as a boy of fourteen. That prevented even
a sleep-walker from slipping off the height of four storeys on the
summer nights, when most of us slept on the roof.
Gay-Neck I put on that concrete wall every day. There he sat for
hours at a time facing the wind, but that was all. One day I put some
peanuts on the roof and called him to hop down and get them. He
looked at me with an inquiring eye for a few moments. Turning from
me he looked down again at the peanuts. He repeated this process
several times. When at last he was convinced that I was not going to
bring these delicious morsels up for him to eat, he began to walk up
and down the railing craning his neck occasionally towards the
peanuts about three feet below. At last after fifteen minutes of heart-
breaking hesitancy he hopped down. Just as his feet struck the floor
his wings, hitherto unopened, suddenly spread themselves out full
sail as he balanced himself over the nuts. What a triumph!
About this time I noticed the change of colours on his feathers.
Instead of a nondescript gray-blue, a glossy aquamarine glowed all
over him. And suddenly one morning in the sunlight his throat
glistened like iridescent beads.
Now came the supreme question of flight. I waited for his parents to
teach him the first lessons, though I helped the only way I could.
Every day for a few minutes I made him perch on my wrist, then I
would swing my arm up and down many times, and in order to
balance himself on such a difficult perch he had to shut and open his
wings frequently. That was good for him, but there ended my part of
the teaching. You may ask me the reason of my hurrying matters so.
He was already behind in his flying lessons, and in June, the rains
begin to fall in India; and with the approach of the rainy season any
long flight becomes impossible. I wished to train him in learning his
directions as soon as I could.
However, one day long before the end of May, his father undertook
the task. This particular day a brisk north wind, that had been
sweeping about and cooling the atmosphere of the city, had just died
down. The sky was clear as a limpid sapphire. The spaces were so
clear that you could see the house-tops of our town, then the fields
and arbours of the country in the farthest distance. About three
o'clock in the afternoon Gay-Neck was sunning himself on the
concrete wall of the roof. His father, who had been flying about in the
air, came down and perched next to him. He looked at his son with a
queer glance, as much as to say: "Here, lazy-bones, you are nearly
three months old, yet you do not dare to fly. Are you a pigeon or an
earthworm?" But Gay-Neck, the soul of dignity, made no answer.
That exasperated his father who began to coo and boom at him in
pigeon-language. In order to get away from that volubility Gay-Neck
moved, but his father followed cooing, booming and banging his
wings. Gay-Neck went on removing himself farther and farther, and
the old fellow, instead of relenting, redoubled his talk and pursued. At
last the father pushed him so close to the edge that Gay-neck had
only one alternative, that is, to slip off the roof. Suddenly his father
thrust upon his young body all the weight of his old frame. Gay-Neck
slipped. Hardly had he fallen half a foot when he opened his wings
and flew. Oh, what an exhilarating moment for all concerned! His
mother, who was downstairs dipping herself in the water and
performing her afternoon toilet, came up through the staircase and
flew to keep her son company. They circled above the roof for at
least ten minutes before they came down to perch. When they
reached the roof the mother folded her wings as a matter of course
and sat still. Not so the son: he was in a panic, like a boy walking
into cold and deep water. His whole body shook, and his feet trod the
roof gingerly as he alighted, skating over it furiously and flapping his
wings in order to balance himself. At last he stopped, as his chest
struck the side of the wall, and he folded his wings as swiftly as we
shut a fan. Gay-Neck was panting with excitement, while his mother
rubbed him and placed her chest against him as if he were a mere
baby who badly needed brooding. Seeing that his task had been
done successfully, Gay-Neck's father went down to take his bath.
CHAPTER III
 TRAINING IN DIRECTION
ow that, like a newly trained diver, he had
overcome his fear of plunging into the air, Gay-
Neck ventured on longer and higher flights. In a
week's time he was able to fly steadily for half an
hour, and when he came home to the roof, he
swooped down as gracefully as his parents. There
was no more of that panicky beating of wings in
order to balance himself as his feet touched the roof.
His parents, who had accompanied Gay-Neck in his preliminary
flights, now began to leave him behind, and to fly much higher above
him. For a while I thought that they were trying to make him fly still
higher; for the son always made an effort to reach the level of his
parents. Perhaps his elders were setting the little fellow a superb
example. But at last one day early in June, that explanation of mine
was shaken by the following fateful incident. Gay-Neck was flying
high: he looked half his usual size. Above him flew his parents
almost as small as a man's fist. They were circling above him with
the regularity of a merry-go-round. It looked monotonous and
meaningless. I removed my gaze from them; after all it is not
comfortable to look upward steadily for long. As I lowered my eyes
toward the horizon they were held by a black spot moving swiftly and
growing larger every second. I wondered what sort of a bird he was
coming at such a speed in a straight line, for in India birds are
named in the Sanskrit, Turyak, or "curve-tracers."
But this one was coming straight, like an arrow. In another two
minutes my doubts were dispelled. It was a hawk making for little
Gay-Neck. I looked up and beheld a miraculous sight. His father was
tumbling steadily down in order to reach his level, while his mother,
bent on the same purpose, was making swift downward curves. Ere
the terrible hawk had come within ten yards of the innocent little
fellow, both his flanks were covered. Now the three flew downwards
at a right angle from the path of their enemy. Undeterred by such a
move, the hawk charged. At once the three pigeons made a dip
which frustrated him, but the force with which he had made the
attack was so great that it carried him a long distance beyond them.
The pigeons kept on circling in the air with an ever-increasing
downward trend. In another minute they were half way to our roof.
Now the hawk changed his mind. He went higher and higher into the
sky: in fact he flew so high that the pigeons could not hear the wind
whistling in the feathers of his wings; and as he was above them
they could not see their foe. Feeling that they were safe, they
relaxed. It was evident that they were not flying as fast as before.
Just then I saw that above them, way up, the hawk was folding his
wings: he was about to drop and in an instant he fell upon them like
a stone. In desperation I put my fingers in my mouth and made a
shrill whistle, a cry of warning. The pigeons dived like a falling sword,
yet the hawk followed. Inch by inch, moment by moment he was
gaining on them. Faster and faster he fell: now there was scarcely
twenty feet between him and his prey. There was no doubt that he
was aiming at Gay-Neck. I could see his sinister claws. "Won't those
stupid pigeons do anything to save themselves?" I thought in an
agony. He was so near him now—if they would only keep their heads
and—Just then they made a vast upward circle. The hawk followed.
Then they flew on an even but large elliptical path. If a bird flies in a
circle he either tends to swing to the centre of that circle or away
from it. Now the hawk missed their intention and tended toward the
centre, making a small circle inside their big one. No sooner was his
back turned to them than the three pigeons made another dive,
almost to our roof, but the sinister one was not to be deterred. He
followed like a tongue of black lightning. His prey made a curving
dive on to the roof, where they were safe at last under my wide-
spread arms! That instant I heard the shriek of the wind in the air;
about a foot above my head flew by the hawk, his eyes blazing with
yellow fire and his claws quivering like the tongue of a viper. As he
passed I could hear the wind still whistling in his feathers.
After that narrow escape of my pet birds, I began to train Gay-Neck
to a sense of direction. One day I took all three birds in a cage
towards the east of our town. Exactly at nine in the morning I set
them free. They came home safely. The next day I took them an
equal distance to the west. Inside of a week they knew the way to
our house from within a radius of at least fifteen miles in any
direction.
Since nothing ends smoothly in this world, the training of Gay-Neck
finally met with a check. I had taken him and his parents down the
Ganges in a boat. When we started it was about six in the morning.
The sky was littered with stray clouds, and a moderate wind was
blowing from the south. Our boat was piled high with rice white as
snow on whose top were heaped mangoes red and golden in colour,
like a white peak afire with the sunset.
I should have foreseen that such auspicious weather might turn
suddenly into a terrible storm, for after all, boy though I was, I knew
something about the freaks of the monsoon in June.
Hardly had we gone twenty miles before the first rain-clouds of the
season raced across the sky. The velocity of the wind was so great
that it ripped off one of the sails of our boat. Seeing that there was
no time to be lost, I opened the cage and released the three pigeons.
As they struck the wind they vaulted right over and flew very low,
almost falling into the water. They flew thus close to the surface of
the river for a quarter of an hour, making very little headway against
the hard wind. But they persisted and another ten minutes saw them
safely tacking and flying landward. Just about the time they had
reached the string of villages on our left, the sky grew pitch black, a
torrential cloudburst blotted everything out, and we saw nothing but
inky sheets of water through which the lightning zig-zagged and
danced the dance of death. I gave up all hope of finding my pigeons
again. We were almost ship-wrecked ourselves, but fortunately our
boat was beached on the shore of a village. Next morning when I
came home by train I found two wet pigeons instead of three. Gay-
Neck's father had perished in the storm. No doubt it was all my fault,
and for the few days that followed our house was given up to
mourning. The two pigeons and I used to go up on the roof
whenever the rain left off a bit in order to scan the sky for a glimpse
of the father. Alas, he never returned.
CHAPTER IV
 GAY-NECK IN THE HIMALAYAS
ince the rain and the heat in the plains proved
excessive, my family decided to take us to the
Himalayas. If you take a map of India you will find
that in its northeast corner is a town called
Darjeeling, standing almost face to face with Mount
Everest, the highest peak in the world. After
travelling, not too fast, by caravan, several days
from Darjeeling, my family, myself and my two
pigeons reached the little village of Dentam. There we were ten
thousand feet above sea level. At such a height an American
mountain or the Alps would have at least some snow, but in India,
which is in the tropics, and on the Himalayas, hardly thirty degrees
north of the equator, the snow line does not commence under ten
thousand feet, and the jungle of the foot hills abounding with animals
is so cold after September that all its denizens migrate southward.
Let me give you just a slight picture of our setting. Our house of
stone and mud overlooked small valleys where tea was grown.
Beyond, between serried ridges that stuck out in harsh but majestic
curves, were valleys full of rice-fields, maize, and fruit orchards.
Further on rose the dark evergreen-clad precipices over which
reared thousands of feet of pure white ranges, the Kanchinjinga, the
peak Makalu, and the Everest ranges. In the first flush of dawn they
looked white; but as the light grew in brightness and the sun rose
higher, peak after peak defined itself, not far off in the horizon, but
piercing the very middle of the sky whence poured a flood of crimson
light like the very blood of benediction.
One usually sees the Himalayas best in the early morning for they
are covered with clouds during the rest of the day. Hindus, who are
religious people, get up in good time to behold the sublime hills and
to pray to God. Can there be a better setting to prayers than those
mountains most of whose peaks yet remain unexplored and
untrodden by man? Their inviolate sanctity is something precious,
which remains a perpetual symbol of divinity. Heights like that of the
Everest are symbols of the highest reality—God. They are symbolic
of God's mystery, too, for with the exception of the early morning
they are as I have said, shrouded with clouds all day. Foreigners
who come to India imagine they would like to see them all the time,
but let no one complain, for he who has beheld Everest in its
morning grandeur and awe-inspiring glory will say "It is too sublime
to be gazed at all day long. None could bear it continually before his
eyes."
In July those early morning views of the Everest are not vouchsafed
us every day, for it is the month of rain. All the ranges lie in the grip
of the most devastating blizzards. Once in a while above the battle of
storms and driven snow the peaks appear—a compact mass of hard
ice and white fire. They glow intensely in the sunlight, while at their
feet the snow clouds whirl and fall like fanatical dervishes dancing
frenziedly before their terrible God.
During the summer my friend Radja and our teacher in jungle lore,
old Ghond, came to visit our home. Radja was about sixteen years
old, already a Brahmin priest, and Ghond we always called old, for
none knew his age. Both Radja and I were handed over to that most
competent of hunters for the purpose of studying under his guidance
the secrets of jungle and animal life. Since I have described them in
my other books, I need not repeat myself here.
As soon as we had settled down in Dentam, I began to train my
pigeons in the art of direction. Whenever we had a clear day we
climbed all the forenoon toward the higher peaks amid ilexes and
balsam forests, and released our birds from some monastery roof, or
from the house of a nobleman. And toward evening when we
returned home, we invariably found Gay-Neck and his mother there
before us.
We had hardly half a dozen clear days during the whole month of
July, but under the guidance of the almost omniscient Ghond, and
with my friend Radja, we travelled very far in a short time. We visited
and stayed with all classes of the mountain folk, who looked much
like Chinese. Their manners were elegant and their hospitality
generous. Of course we took the pigeons with us, sometimes in a
cage but most of the time under our tunics. Though we were
frequently soaked with rain, Gay-Neck and his mother were
religiously guarded from the weather.
Towards the end of July we made a journey beyond every Lamasery
(monastery) and baron's castle of Sikkim that we three human
beings and the two pigeons had seen and known. We passed
Singalele, where there was a nice little Lamasery, on toward Phalut
and the Unknown. At last we reached the homeland of the eagles.
Around us were bare granite cliffs surrounded by fir trees and
stunted pines, before us to the north lay the Kanchinjinga and the
Everest ranges. Here on the edge of an abyss we released our two
birds. In that exhilarating air they flew like children running from
school at the end of the day. Gay-Neck's mother flew far upwards in
order to show her son the sublime heights.
After the two birds had flown away, we three men talked of what they
might be seeing as they sped above the altitudes. Before them, no
doubt, rose the twin peaks of the Kanchinjinga group slightly lower
than Mount Everest but just as impeccable and austere as that
immaculate peak untrodden still by the feet of men. That fact roused
profound emotions in us. We saw the mountain in the distance just
for a few minutes like a mirror before the Face of God and I said to
myself, "O thou summit of sanctity, thou inviolate and eternal, may
no man tarnish thee, nor may any mortal stain thy purity even by his
slightest touch. May thou remain forever unvanquished, oh Thou
backbone of the Universe, and measurement of Immortality."
But I have brought you so high not to tell you about mountains, but of
an adventure that befell us there. Now that Gay-Neck and his mother
had flown, we gave up watching them and went in quest of an
eagle's nest which was on a neighbouring cliff. The Himalayan eagle
is brown with a soft golden glow, and though very beautiful to look at
—it is in perfect proportion of beauty with strength—yet it is a fierce
beast of prey.
But at first on this particular afternoon we encountered nothing
savage. On the contrary, we found two fluffy white eaglets in an
eyrie. They looked as engaging as new-born babes. The southern
wind was blowing right in their eyes but they did not mind it. It is in
the nature of the Himalayan eagle to build his nest facing the
direction of the wind. Why? No one knows. Apparently the bird likes
to face that which he floats up on.
The younglings were nearly three weeks old, for they were already
shedding their birthday cotton-like appearance and had begun to
grow real plumage. Their talons were sharp enough for their age,
and their beaks hard and keen.
An eagle's eyrie is open and large. Its entrance ledge—that is to say,
landing place—is about six or seven feet wide and quite clean. But
within, where it is dark and narrow, there is a perfect litter of twigs,
branches, and a little of the hair and feathers of victims, every other
part of their prey being devoured by the eaglets. The parents devour
most of the bones, hair and feathers with the meat.
Though the surrounding country was clad in stunted pine trees, yet it
was full of bird noises. Also strange insects buzzed in the fir trees.
Jewelled flies fluttered on blue wings over mauve orchids, and
enormous rhododendrons glowed in sizes sometimes as large as the
moon. Now and then a wild cat called, apparently talking in his noon-
day sleep.
Suddenly Ghond told us to run a dozen yards and hide in a bush.
Hardly had we done so when the noises about us began to subside.
In another sixty seconds the insects stopped their buzzing, the birds
ceased to call, and even the trees seemed to grow still with
expectation. In the air slowly rose the thin whistle of something. In a
few moments it fell into a lower key. Hard upon it came a weird noise
almost sounding like a shriek and a giant bird flew down to the
eagle's eyrie. The wind was still whistling in its wings. By its size
Ghond thought it was the mother of the two babies. She remained
still in the air till the eaglets withdrew into the inner recesses of their
home. From her talons hung something well skinned, like a large
rabbit. She landed, dropping her prey on the ledge. One could see
that her wings from tip to tip measured half a dozen feet. She folded
them as a man folds a paper, then seeing that her children were
coming toward her, she drew in her talons lest they pierce their un-
armoured tender flesh. Now she hobbled like a cripple. The two little
fellows ran and disappeared under her half open wings, but they did
not want to be brooded, for they were hungry. So she led them
outward to the dead rabbit, tore away some of its flesh, excluded any
bone that clung to it, and gave it to them to swallow. Again from
below and all about the insects and birds resumed their noises. We
rose from our hiding and started homeward after Radja and I had
extracted a promise from Ghond that he would bring us back later to
see the full-fledged eaglets.
And so in a little over a month we returned. We brought with us Gay-
Neck and his mother, for I wished the little fellow to fly the second
time so that he would know with absolute certainty every village,
Lamasery, lake and river as well as the beasts, and the other birds—
cranes, parrots, Himalayan herons, wild geese, divers, sparrow
hawks and swifts. On this trip we went about a hundred yards
beyond the eagle's nest. The finger of autumn had already touched
the rhododendrons. Their flaming petals were falling out, their long
stems, many feet high, rustled in the winds. Leaves of many trees
had begun to turn, and the air was full of melancholy. At about
eleven, we uncaged our pigeons, who flew away into the sapphire
sky that hung like a sail from the white peaks.
They had flown for about half an hour when a hawk appeared above
them. It drew nearer the two pigeons, and then drove at them. But
the prey proved too wary; they escaped scatheless. Just as Gay-
Neck and his mother were coming down swiftly to where the trees
were, the hawk's mate appeared and attacked. She flew at them as
her husband had done without gaining her objective. Seeing that
their prey was escaping, the male hawk cried shrilly to his mate; at
that she stopped in the air just marking time. The pigeons, feeling
safe, quickened their wing motion and flew southward while the two
hawks followed, converging upon them from the east and the west.
Wing-beat upon wing-beat, they gained on the pigeons. Their wings
shaped like a butcher's hatchet tipped off at the end, cut through the
air like a storm ... one, two, three—they fell like spears! Gay-Neck's
mother stopped, and just floated in the air. That upset the calculation
of the hawks. What to do now? Which one to fall upon? Such
questioning takes time, and Gay-Neck seized the chance to change
his course. Swiftly he rose higher and higher. In a few moments his
example was followed by his mother, but she had lost time, and the
hawks rose almost vaulting up to her. Then apparently a sudden
panic seized her; she was afraid that the hawks were after her son
and in order to protect him—which was utterly unnecessary—she
flew toward the two pursuers. In another minute both of those birds
of prey had pounced upon her. The air was filled with a shower of
feathers! The sight frightened Gay-Neck, who fell upon the nearest
cliff for protection and safety. It was his mother's error that deprived
her of her own life and probably imperiled that of her son.
We three human beings began a search for the cliff where Gay-Neck
had fallen. It was no easy task, for the Himalayas are very
treacherous. Pythons if not tigers were to be feared. Yet my friend
Radja insisted, and Ghond the hunter agreed with him, saying that it
would augment our knowledge.
We descended from the cliff that we were on and entered a narrow
gorge where the raw bones lying on the ground convinced us that
some beast of prey had dined on its victim the previous night. But we
were not frightened, for our leader was Ghond, the most well-
equipped hunter of Bengal. Very soon we began a laborious climb
through clefts and crevices full of purple orchids on green moss. The
odour of fir and balsam filled our nostrils. Sometimes we saw a
rhododendron still in bloom. The air was cold and the climb
unending. After two in the afternoon, having lunched on a handful of
chola (dried beans softened in water), we reached the cliff where
Gay-Neck was hiding. To our surprise we discovered that it was the
eagle's nest with two eaglets—the babies of our previous visit—now
full-fledged. They were sitting on the front ledge of their eyrie, while
to our utter amazement we saw Gay-Neck at the farthest corner of a
neighbouring ledge, cowering and weak. At our approach the eaglets
came forward to attack us with their beaks. Radja, whose hand was
nearest, received an awful stroke which ripped open the skin of his
thumb whence blood flowed freely. The eagles were between us and
Gay-Neck and there was nothing to be done but to climb over a
higher cliff to reach him. Hardly had we gone six yards away from
the nest when Ghond signed to us to hide as we had done the first
time we had come. We did so with celerity, under a pine, and soon
with a soft roar in the air, one of the parent eagles drew near. In a
few seconds there fell a high pitched sound as the eagle sailed into
its nest. A shiver of exquisite pleasure ran up and down my spine as
her tail feather grazed our tree and I heard that whistling mute itself.
Let me re-emphasize the fact that people who have an idea that the
eagle builds its nest on an isolated inaccessible cliff are mistaken. A
powerful bird or beast does not have to be so careful in choosing its
home. It can afford to be negligent. The nest of such a gigantic bird
must have as its first requirement space so that it can open and shut
its wings in the outer court of its home, and a place so spacious
cannot be too inaccessible. Next, the eagle has no knack at building
nests. It chooses a ledge that juts out of a cliff-cavern where nature
has already performed two-thirds of the task. The last third is done
by the birds themselves and it merely consists in getting branches,
leaves, and blades of grass together as a rough bed where the eggs
may be laid and hatched.
All those details we gathered as we crawled out of our hiding place
and examined—for the second time—the eyrie from a distance.
There was no doubt that they were our old friends—the two babies—
grown big, and their mother. She, even now though they were grown
up, drew in her talons as a matter of habit lest they hurt her children.
But it was momentary; after she had made sure that they were
racing to meet her, she opened them and stood firmly on the outer
ledge. The eaglets, though they should not be called so now that
they were full-fledged, rushed forward and took shelter under her
wide-spread wings. But the little beasts did not stay there long, they
did not want to be loved, they were very hungry, they wanted
something to eat and alas, she had brought nothing. At that they
turned from her and sat facing the wind, waiting.
At Ghond's signal we all three rose and began to climb. In the course
of another hour we had crawled in lizard-like silence over the roof of
the eagle's nest. Just as I passed over it, an abominable odour of
bones and drying flesh greeted my nostrils. That proved that the
eagle—king of birds though he is—is not as clean and tidy as a
pigeon. I, for one, prefer a pigeon's nest to an eagle's eyrie.
Soon we reached Gay-Neck and tried to put him in his cage. He was
glad to see us, but fought shy of the cage. Since it was getting late I
gave him some lentils to eat. Just about the middle of his meal,
seeing him deeply absorbed in eating, I made an effort to grab him
with my hand. That frightened the poor bird and he flew away. The
noise of his flight brought the mother eagle out of the inner recess of
her nest. She looked out, her beak quivering and her wings almost
opening for flight. At once all the jungle noises below were stilled and
she sailed away. We felt that all was over for Gay-Neck. Suddenly a
shadow fell upon him. I thought it was the eagle pouncing; however it
only rested on him a moment and then receded, but he had had the
fright of his life and he flew away, driven by sheer terror, in a zig-zag
course, far beyond our sight.
I was convinced that we had lost Gay-Neck. But Ghond insisted that
we would find the bird in a day or two, so we decided to wait and
spend our time there.
Night came on apace and we sought shelter under some pines. The
next morning we were told by Ghond that the day had come for the
young eagles to fly. He concluded: "Eagles never give their children
lessons in flight. They know when their eaglets are ready for it. Then
the parents leave for ever."
All that day the parent eagle did not re-visit her nest. When night
came again her children gave up all hope of her return, and withdrew
into the inner part of their home. It proved a memorable night for us.
We were so far up that we were quite sure of no attack by a four-
footed beast of prey. Tigers and leopards go downwards, not that
they fear the heights, but because like all animals they follow their
food. Antelopes, deer, bison and wild boars graze where valleys and
jungle-growth are plentiful and since they go where grass, sapling,
luscious twigs, in short, their dinner, grows on river banks, those who
live by eating them search for them there. That is why, with the
exception of birds and a few animals such as wild cats, pythons, and
snow leopards, the heights are free of beasts of prey. Even the yak,
who takes the place of the cow, does not climb so high very
frequently or in large numbers. One or two mountain goats one sees
occasionally, but nothing larger, and so our night was free of any
dramatic experience. But this was amply compensated for by the
piercing cold that possessed and shook our bodies in the early
dawn. Sleep was out of the question, so I sat up, and wrapping all
the blankets of my bedding around me, watched and listened. The
stillness was intense—like a drum whose skin had been so stretched
that even breathing on it would make it groan. I felt hemmed in by
the piercing soundlessness from every direction. Now and then like
an explosion came the crackling of some dry autumn leaves as a
soft-footed wild cat leaped on them from the branch of a tree not far
away. That sound very soon sank like a stone in the ever rising tide
of stillness. Slowly one by one the stars set. The rising tide of
mystery that was reigning everywhere deepened, when like the
shaking of lances something shivered in the eagle's eyrie. There was
no doubt now that the day was breaking. Again rose the same sound
from the same place. The eagles were preening their wings as a
man stretches himself before fully waking from sleep. Now I could
hear a rustle near by that I thought must be the two eagles coming
forward on the front ledge of their nest. Soon came other noises.
Storks flew by overhead, strange birds like cranes shouldered the
sky. And nearby the bellow of a yak tore the stillness asunder as if
he had put his horn through the skin of a drum. Far down, birds
called one another. At last fell a white light on the Kanchinjinga
range. Then Mokalu appeared with an immense halo of opal back of
his head. The lower ranges, as high as Mont Blanc, put on their
vesture of milk-white glory: shapes and colours of stone and tree
leaped into sight. Orchids trembled with morning dew. Now the sun,
like a lion, leaped on the shoulder of the sky, and the snow-
bastioned horizons bled with scarlet fire.
Ghond and Radja, who had been awake already, stood up; then the
latter, a well-trained priest, chanted the Sanskrit Vedic prayer to
Savitar—the Sun: