In Microeconomics

• “Incentives matter” is a new core principle: If we asked a thousand economists to provide their own versions of the most important economic principles, we'd get a thousand different lists. Yet to dwell on their differences would be to miss their essential similarities. It is less important to have exactly the best short list of principles than it is to use some well-thought-out list of this sort. New to our short list is the “incentives matter” principle, which we added to emphasize that cost-benefit comparisons are relevant not only for identifying the decisions that rational people should make, but also for predicting the actual decisions they do make across numerous diverse domains.
• International trade chapter moved forward: Because the topic is so important, the chapter on international trade (Chapter 16 in our Second Edition) has been moved forward to appear at the end of the Part 2 (Competition and the Invisible Hand). This chapter (now Chapter 9) has been extensively rewritten to incorporate explicit analysis of how producer and consumer surplus are affected by trade and by policies such as tariffs and quotas. A new section addresses the question of which jobs are most vulnerable to outsourcing.
• More emphasis on monopolistic competition and oligopoly: In our Second Edition, the chapter on imperfect competition (Chapter 9 in that edition) briefly defined the three forms of imperfect competition and then focused exclusively on pure monopoly. In this edition, we have added more detailed descriptive accounts of monopolistic competition and oligopoly to this chapter (now Chapter 10). We have also added numerous additional examples involving these industry structures in the succeeding chapter on strategic choice (now Chapter 11).
• Added material on indifference curves: In our second edition, we offered an appendix on the indifference curve approach to the consumer choice problem on the text web site. But because a number of reviewers felt strongly that this material should me more accessible for those who want to use it, we've added it an extensively revised appendix to Chapter 5. This topic can be skipped at no compromise to the material in the succeeding chapters.
• Algebra appendixes added: To the basic review of the algebra and geometry of straight lines presented in the mathematical appendix to Chapter 1, we have added a basic primer on how to solve simple systems of two equations with two unknowns. In this edition, the treatment of supply and demand in the main text is carried out exclusively in verbal and graphical terms. But we have added an appendix to Chapter 3 that presents an algebraic treatment of supply and demand. We have also added a brief appendix to Chapter 10 showing how monopoly profit maximization can be treated in an algebraic framework.
• Additional Economic Naturalist drawings: For reasons best explained by educational psychologists, illustrations can be an enormously effective pedagogical tool, in part because of their ability to trigger rich networks of cognitive association. To exploit this tool more effectively, we commissioned line drawings by the renowned New Yorker cartoonist Mick Stevens and other artists to accompany many of the economic naturalist examples. For this edition, all of the economic naturalist examples are accompanied by such drawings.

In Macroeconomics

• Expanded Discussion of Macroeconomic Policy
  • The revised monetary policy reaction function we introduce in Chapter 27 is a more realistic description of how the Fed actually conducts monetary policy and clarifies the Taylor rule.
  • In Chapter 28 we use this policy reaction function to help students distinguish between a move along the aggregate demand curve and a shift in the aggregate demand curve resulting from a change in monetary policy.
  • In a new Chapter 29, we provide a more complete analysis of the interaction between fiscal and monetary policy, illustrating the crucial role of the central bank in any long-run inflation. We also discuss how enhanced credibility can help to anchor inflationary expectations and explain the contributions of central bank independence, inflation targeting, and central bank reputation. In the last section of Chapter 29 we expand our discussion of the real-world difficulties in conducting macroeconomic policy.
• More Patient Presentation of Models: In Chapter 26 we explain the effects of tax cuts on planned aggregate expenditure more carefully. In an optional box we also solve a simple Keynesian model, leaving the full model in the appendix, as in the second edition. In the diagrams in Chapter 28 we include the transitional short-run aggregate supply lines to illustrate how the short-run aggregate supply line shifts when actual output deviates from potential output.
• Expanded Discussion of Supply-Side Economics: Most economists agree that changes in marginal tax rates can affect both aggregate demand and aggregate supply, but they disagree on the size of the effects. In Chapter 28 we describe this controversy in greater detail and present both the theoretical and empirical evidence of the effects of changes in marginal tax rates on aggregate supply.
• Greater Attention to Asset Prices: In Chapter 21 we provide a clearer explanation of the inverse relationship between bond prices and interest rates. We also discuss the effects of changes in asset prices (especially stocks and houses) on aggregate demand.
• Simpler Presentation of Exchange Rates: We use supply and demand curves to illustrate the determination of nominal exchange rates before we introduce the real exchange rate and purchasing-power-parity.
• Additional Material on China: At its current rate of growth the Chinese economy may become the largest economy in the world within the next generation. In this edition we expand our discussion of China in the world economy. We discuss the determinants of its success and its management of its exchange rate.
• New Material on the Acceleration of Productivity Growth: The productivity slowdown of 1973-1995 has been followed by surprisingly strong productivity growth. We present and discuss the reasons for this acceleration.
• Updated Discussion of Saving and Investment: In addition to emphasizing the importance of public and private saving and the relationship between the budget deficit, national saving, and capital flows, we discuss the recently divergent trends in business and household saving.