An emphasis on seven core principles: As noted, a few core principles do most of the work in economics. By focusing almost exclusively on these principles, the text assures that students leave the course with a deep mastery of them. In contrast, traditional encyclopedic texts so overwhelm students with detail that they often leave the course with little useful working knowledge at all.
The Scarcity Principle: Having more of one good thing usually means having less of another.
The Cost-Benefit Principle: Take no action unless its marginal benefit is at least as great as its marginal cost.
The Incentive Principle: 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.
The Principle of Comparative Advantage: Everyone does best when each concentrates on the activity for which he or she is relatively most productive.
The Principle of Increasing Opportunity Cost: Use the resources with the lowest opportunity cost before turning to those with higher opportunity costs.
The Efficiency Principle: Efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice.
The Equilibrium Principle: A market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action.
Economic naturalism: Our ultimate goal is to produce economic naturalists—people who see each human action as the result of an implicit or explicit cost-benefit calculation. The economic naturalist sees mundane details of ordinary existence in a new light and becomes actively engaged in the attempt to understand them. Some representative examples:
- Why are whales and elephants, but not chickens, threatened with extinction?
- Why do we often see convenience stores located on adjacent street corners?
- Why do supermarket checkout lines all tend to be roughly the same length?
- Why has investment in computers increased so much in recent decades?
- Why does news of inflation hurt the stock market?
- Why did Japan build roads that nobody wants to use?
Active learning stressed: The only way to learn to hit an overhead smash in tennis is through repeated practice. The same is true for learning economics. Accordingly, we consistently introduce new ideas in the context of simple examples and then follow them with applications showing how they work in familiar settings. At frequent intervals, we pose exercises that both test and reinforce the understanding of these ideas. The end-of-chapter questions and problems are carefully crafted to help students internalize and extend core concepts. Experience with our first three editions confirms that this approach really does prepare students to apply basic economic principles to solve economic puzzles drawn from the real world.
Modern Microeconomics: Economic surplus, introduced in Chapter 1 and employed repeatedly thereafter, is more fully developed here than in any other text. This concept underlies the argument for economic efficiency as an important social goal. Rather than speak of trade-offs between efficiency and other goals, we stress that maximizing economic surplus facilitates the achievement of all goals. Common decision pitfalls identified by 2002 Nobel Laureate Daniel Kahneman and others—such as the tendency to ignore implicit costs, the tendency not to ignore sunk costs, and the tendency to confuse average and marginal costs and benefits—are introduced early in Chapter 1 and invoked repeatedly in subsequent chapters.
There is perhaps no more exciting toolkit for the economic naturalist than a few principles of elementary game theory. In Chapter 10, we show how these principles enable students to answer a variety of strategic questions that arise in the marketplace and everyday life. We believe that the insights of the Nobel Laureate Ronald Coase are indispensable for understanding a host of familiar laws, customs, and social norms. In Chapter 11 we show how such devices function to minimize misallocations that result from externalities. A few simple principles from the economics of information form another exciting addition to the economic naturalist’s toolkit. In Chapter 12 we show how the insights that earned the 2001 Nobel Prize in economics for George Akerlof, Joseph Stiglitz, and Michael Spence can be employed to answer a variety of questions from everyday experience.
Modern Macroeconomics: Recent developments have renewed interest in cyclical fluctuations without challenging the importance of such long-run issues as growth, productivity, the evolution of real wages, and capital formation. Our treatment of these issues is organized as follows:
A three-chapter treatment of long-run issues, followed by a modern treatment of short-term fluctuations and stabilization policy, emphasizing the important distinction between short- and long-run behavior of the economy.
Consistent with both media reporting and recent research on monetary policy rules, we treat the interest rate rather than the money supply as the primary instrument of Fed policy.
The analysis of aggregate demand and aggregate supply relates output to inflation, rather than to the price level, sidestepping the necessity of a separate derivation of the link between the output gap and inflation.
This book places a heavy emphasis on globalization, starting with an analysis of its effects on real wage inequality and progressing to such issues as the benefits of trade, the causes and effects of protectionism, the role of capital flows in domestic capital formation, and the links between exchange rates and monetary policy.