This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially a ffect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit w ww.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. 5522660099__0000__ffmm__ppii--ppxxxxvvii..iinndddd iiii 22//11//1100 1111::3377::4433 PPMM Essentials of Economics Sixth Edition N. Gregory Mankiw HARVARD UNIVERSITY Essentials of Economics, 6E © 2012, 2009 South-Western, Cengage Learning N. Gregory Mankiw ALL RIGHTS RESERVED. 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Gregory Mankiw is professor of economics at Harvard University. As a student, he studied economics at Princeton University and MIT. As a teacher, he has taught macroeconomics, micro- economics, statistics, and principles of economics. He even spent one summer long ago as a sailing instructor on Long Beach Island. Professor Mankiw is a prolific writer and a regu- lar participant in academic and policy debates. His work has been published in scholarly journals, such as the American Economic Review, Journal of Political Economy, and Quarterly Journal of Economics, and in more popular forums, such as The New York Times and The Wall Street Journal. He is also author of the best-selling intermediate-level textbook Macroeconomics (Worth Publishers). In addition to his teaching, research, and writing, Professor Mankiw has been a research associate of the National Bureau of Economic Research, an adviser to the Congressional Budget Office and the Federal Reserve Banks of Boston and New York, and a member of the ETS test development committee for the Advanced Placement exam in economics. From 2003 to 2005, he served as chairman of the President’s Council of Economic Advisers. Professor Mankiw lives in Wellesley, Massachusetts, with his wife, Deborah, three children, Catherine, Nicholas, and Peter, and their border terrier, Tobin. iv brief contents I VI Part Introduction 1 Part The Data of Macro economics 305 1 Ten Principles of Economics 3 15 Measuring a Nation’s Income 307 2 Thinking Like an Economist 21 16 Measuring the Cost of Living 329 3 Interdependence and the Gains from Trade 49 VII Part The Real Economy in the Long Run 345 II Part How Markets Work 63 17 Production and Growth 347 4 The Market Forces of Supply and Demand 65 18 Saving, Investment, and the Financial System 371 5 Elasticity and Its Application 89 19 The Basic Tools of Finance 393 6 Supply, Demand, and Government Policies 111 20 Unemployment 409 III VIII Part Markets and Welfare 133 Part Money and Prices in the Long Run 433 7 Consumers, Producers, and the Efficiency of Markets 135 21 The Monetary System 435 8 Application: The Costs of Taxation 155 22 Money Growth and Inflation 459 9 Application: International Trade 171 IX Part Short-Run Economic Fluctuations 485 IV Part The Economics of the Public Sector 193 23 Aggregate Demand and Aggregate Supply 487 10 Externalities 195 24 The Influence of Monetary and Fiscal Policy on Aggregate 11 Public Goods and Common Resources 217 Demand 525 V Part Firm Behavior and the Organization of Industry 233 12 The Costs of Production 235 13 Firms in Competitive Markets 255 14 Monopoly 275 v This page intentionally left blank preface to the student “Economics is a study of mankind in the ordinary business of life.” So wrote Alfred Marshall, the great 19th-century economist, in his textbook, Principles of Economics. Although we have learned much about the economy since Marshall’s time, this definition of economics is as true today as it was in 1890, when the first edition of his text was published. Why should you, as a student at the beginning of the 21st century, embark on the study of economics? There are three reasons. The first reason to study economics is that it will help you understand the world in which you live. There are many questions about the economy that might spark your curiosity. Why are apartments so hard to find in New York City? Why do airlines charge less for a round-trip ticket if the traveler stays over a Saturday night? Why is Johnny Depp paid so much to star in movies? Why are living stan- dards so meager in many African countries? Why do some countries have high rates of inflation while others have stable prices? Why are jobs easy to find in some years and hard to find in others? These are just a few of the questions that a course in economics will help you answer. The second reason to study economics is that it will make you a more astute participant in the economy. As you go about your life, you make many economic decisions. While you are a student, you decide how many years to stay in school. Once you take a job, you decide how much of your income to spend, how much to save, and how to invest your savings. Someday you may find yourself running a small business or a large corporation, and you will decide what prices to charge for your products. The insights developed in the coming chapters will give you a new perspective on how best to make these decisions. Studying economics will not by itself make you rich, but it will give you some tools that may help in that endeavor. The third reason to study economics is that it will give you a better understand- ing of both the potential and the limits of economic policy. Economic questions are always on the minds of policymakers in mayors’ offices, governors’ mansions, and the White House. What are the burdens associated with alternative forms of taxation? What are the effects of free trade with other countries? What is the best way to protect the environment? How does a government budget deficit affect the economy? As a voter, you help choose the policies that guide the allocation of society’s resources. An understanding of economics will help you carry out that responsibility. And who knows: Perhaps someday you will end up as one of those policymakers yourself. Thus, the principles of economics can be applied in many of life’s situations. Whether the future finds you reading the newspaper, running a business, or sit- ting in the Oval Office, you will be glad that you studied economics. N. Gregory Mankiw December 2010 vviiii YTISREVINU DRAVRAH wiknaM yrogerG .N Experience Mankiw noitidE htxiS scimonocE The Art of Instruction, The Power of Engagement, The Spark of Discovery fo selpicnirP The Power of Engagement Self-Study Resources InteractIve QuIzzIng, vIdeos and More! Economics CourseMate: Engaging, Trackable, Affordable Economics CourseMate brings course concepts to life with interactive learning and study tools that support the printed textbook. Economics CourseMate goes beyond the book to deliver what you need! InteractIve LearnIng tooLs: Economics CourseMate includes interactive learning tools including: • Quizzes • Flashcards • Videos • Graphing Tutorials • News, Debates, and Data InteractIve eBook: In addition to interactive learning tools, Economics CourseMate includes an interactive eBook. You can take notes, highlight, search and interact with embedded media specific to your book. Use it as a supplement to the printed text, or as a substitute—the choice is up to you with CourseMate. To purchase access to CourseMate and these interactive tools, visit www.cengagebrain.com. i DNAMED DNA YLPPUS FO SECROF TEKRAM EHT 4 RETPAHC