Economics IProf. Dr. Peter Schmidt WS 2018/19 (fall / “winter“ term) Economics & Statistics :...
17
P. Schmidt, Hochschule Bremen page 1 Prof. Dr. Peter Schmidt WS 2018/19 (fall / “winter“ term) Economics & Statistics : (0421) 5905-4691 Fax: (0421) 5905-4862 [email protected] www.schmidt-bremen.de Economics I Introduction to Economics, and Microeconomics EFA 3 rd semester References Material • Assessment • Presentation in the Economics classes • 10 Economic Principles (G. Mankiw) • Opportunity (from: The Audacity of Hope by B. Obama)
Transcript of Economics IProf. Dr. Peter Schmidt WS 2018/19 (fall / “winter“ term) Economics & Statistics :...
P. Schmidt, Hochschule Bremen page 1
Prof. Dr. Peter Schmidt WS 2018/19 (fall / “winter“ term)
Economics & Statistics
: (0421) 5905-4691 Fax: (0421) 5905-4862
[email protected] www.schmidt-bremen.de
Economics I Introduction to Economics, and Microeconomics
EFA 3rd semester
References
Material • Assessment • Presentation in the Economics classes • 10 Economic Principles (G. Mankiw) • Opportunity (from: The Audacity of Hope by B. Obama)
Micro-Economics (BIM)
P. Schmidt, Hochschule Bremen page 2
Some References
Sloman, J Garrat, D and Wride, A: “Economics”
Mankiw, G: “Principles of Economics”
Further Literature:
Baye, M: “Managerial Economics and Business Strategy”
Begg, D, Fischer, S, Dornbush, R.: “Economics”
Cleaver, T.: Understanding the World Economy,
Samuelson, P and Nordhaus, W: “Economics”
Sloman, J; Wride, A, and Garratt, D: “Economics”
Hill, C.W.L.: “Global Business Today”
Current issues:
Franco-German Ministerial Council, “Monitoring economic performance, quality of life and sustainability”
Friedman, T.L.: “The World is Flat”,
Meadows, D, Randers, J, Meadows, D: “Limits to Growth - The 30-Year Update”
Sachs, J: “Common Wealth - Economics for a Crowded Planet”
Stiglitz, J: „Globalization and its discontents”
Stiglitz, J.E. and Charlton, A.: Fair Trade For All Current articles / case studies:
→ http://pearsonblog.campaignserver.co.uk/
Pres
enta
tion
Mar
king
Sch
eme
Econ
omic
s@
EFA/
BIM
2018
Pete
r Sch
mid
t
P. S
chm
idt,
Hoc
hsch
ule
Brem
en -
Sour
ce: M
arki
ng S
chem
e Ec
onom
ic A
war
enes
s D
. Otte
r, Le
edsM
etpa
ge 1
Pr
esen
tatio
ns in
the
Econ
omic
s cla
sses
o
f Pet
er S
chm
idt
I.
Gene
ral I
nfor
mat
ion
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. 1
II.
Mar
king
grid
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.. 2
III.
Deta
iled
info
rmat
ion
abou
t mar
king
crite
ria ..
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... 3
I.
Gene
ral I
nfor
mat
ion
For e
ach
chap
ter a
team
pre
sent
s a ca
se st
udy
linke
d to
the
topi
c of o
ne ch
apte
r of t
he S
lo-
man
text
book
. Thi
s sho
uld
be a
n ow
n ca
se st
udy
abou
t a co
ntem
pora
ry to
pic (
you
mig
ht
chec
k fo
r ide
as in
the
case
s del
iver
ed in
the
book
at t
he e
nd o
f eac
h ch
apte
r, bu
t sho
uld
find
your
ow
n ca
se. Y
ou a
re e
ncou
rage
d to
sear
ch fo
r art
icles
in a
cade
mic
(!) jo
urna
ls ab
out y
ou
topi
c.
Your
task
is to
focu
s on
a (s
mal
l) pa
rt o
f the
chap
ter,
som
ethi
ng y
ou fi
nd in
tere
stin
g / i
m-
port
ant t
o sh
are
with
the
class
. (Yo
ur ta
sk is
NO
T to
sum
mar
ize th
e w
hole
chap
ter!
) M
axim
um p
rese
ntat
ion
time
is 20
min
utes
(de
finite
stop
afte
r 25
min
) En
roll
for a
pre
sent
atio
n as
soon
as p
ossib
le -
usin
g th
e AU
LIS
foru
m
Chec
k th
e re
sult
of a
clas
s disc
ussio
n "W
hat m
akes
a g
ood
pres
enta
tion"
Ea
ch te
am h
as to
del
iver
3-5
revi
ew q
uest
ions
at t
he e
nd o
f the
pre
sent
atio
n Th
e go
al is
that
you
del
iver
and
mod
erat
e a
disc
ussio
n ab
out c
onte
mpo
rary
issu
es o
f eco
-no
mic
polic
y in
clas
s In
Mac
roec
onom
ics /
Polic
y w
ill b
e a
stro
nger
em
phas
is on
the
disc
ussio
n of
diff
eren
t (th
eo-
retic
al /
polit
ical)
stan
dpoi
nts.
This
hold
s for
the
cont
ent o
f you
r pre
sent
atio
n as
wel
l as t
he
disc
ussio
n in
clas
s // a
fter/
durin
g yo
ur p
rese
ntat
ions
. Yo
u ha
ve to
pro
vide
a h
ando
ut:
It sh
ould
be
stru
ctur
ed in
the
sam
e w
ay a
s the
pre
sent
atio
n: C
onte
nt, L
ayou
t, …
shou
ld h
elp
the
audi
ence
follo
w y
our a
rgum
enta
tion
and
gath
er th
e m
ost i
mpo
rtan
t mes
sage
(s)
Acad
emic
sour
ces:
o
You
are
requ
ired
to u
se a
t lea
st fi
ve a
dditi
onal
aca
dem
ic so
urce
s o
You
have
to re
fer t
o at
leas
t tw
o ac
adem
ic (!)
jou
rnal
s (or
pap
ers)
o
Spen
d so
me
time
in th
e lib
rary
to fi
nd o
ther
sour
ces,
the
Univ
ersit
y Lib
rary
pro
vide
s he
lpfu
l too
ls (d
ata
base
s int
rodu
ced
in cl
ass,
esp.
Eco
nLit)
o
Book
s abo
ut g
ener
al E
cono
mics
as w
ell a
s spe
cific
book
s abo
ut y
our t
opic
/ fie
ld ca
n bo
th b
e he
lpfu
l o
You
mig
ht w
ant t
o st
art w
ith cl
assic
text
book
s lik
e:
- Man
kiw
"Prin
ciple
s of E
cono
mics
" and
"Bus
ines
s Eco
nom
ics"
- Cas
e Fa
ir O
ster
“Prin
ciple
s of E
cono
mics
- "
Econ
omics
for B
usin
ess"
Re
call
that
the
mat
eria
l for
the
pres
enta
tion
(han
dout
and
ppt
) has
to b
e de
liver
ed o
n th
e da
y be
fore
the
pres
enta
tion
by 4
p.m
! If
a te
am fa
ils to
del
iver
the
mat
eria
l in
time
this
will
lead
to a
redu
ctio
n of
the
mar
k.
Pres
enta
tion
Mar
king
Sch
eme
Econ
omic
s@
EFA/
BIM
2018
Pete
r Sch
mid
t
P. S
chm
idt,
Hoc
hsch
ule
Brem
en -
Sour
ce: M
arki
ng S
chem
e Ec
onom
ic A
war
enes
s D
. Otte
r, Le
edsM
etpa
ge 2
II.M
arki
ng g
rid
Chap
ter:
____
____
____
____
____
___
Nam
e/s:
____
____
____
____
____
____
____
____
_
1. C
onte
nt
(60%
)
Eval
uatio
n --
to +
+ 1.
1 Re
sear
ch q
uest
ion:
Def
ined
ap
prop
riate
ly &
ans
wer
ed
1.2
Lite
ratu
re se
lect
ion
/ ind
epen
-de
nt re
sear
ch 5
ac.
srcs
, 2 jn
l !
1.3
Cont
ents
(apt
sele
ctio
n, …
)
1.4
Appl
icatio
n(s)
of t
heor
ies
1.5
Rang
e of
per
spec
tives
1.6
Conc
lusio
n
(ans
wer
ing
the
ques
tion)
Sub-
tota
l: __
____
____
___%
2.
Han
dout
and
form
al a
spec
ts
(20%
)
Eval
uatio
n --
to +
+ 2.
1 Ha
ndou
t: St
ruct
ure
and
Layo
ut;
help
ful?
2.2
mat
eria
l del
iver
ed o
n tim
e
2.3
Tim
e m
anag
emen
t
2.4
Refe
renc
es &
quo
tatio
ns
Sub-
tota
l: __
____
____
___%
3.
Com
mun
icat
ion
and
Team
wor
k (2
0%)
Ev
alua
tion
-- to
++
3.1
Effe
ctiv
e St
ruct
ure
3.2
Livel
y in
tere
stin
g / I
nitia
tive
and
crea
tivity
3.3
Med
ia: p
pt,
A.V/
I.T, a
nd o
ther
……
3.4
Inte
grat
ion
of o
wn
mat
eria
l (p
pt, h
ando
ut, o
ther
)
3.5
Spea
king
styl
e sk
ills
--
3.6
Inte
grat
ed te
am-w
ork
3.7
Disc
ussio
n: m
otiv
atio
n an
d m
oder
atio
n
Su
b-to
tal:
____
____
____
_%
To
tal:
____
____
____
____
%
Pres
enta
tion
Mar
king
Sch
eme
Econ
omic
s@
EFA/
BIM
2018
Pete
r Sch
mid
t
P. S
chm
idt,
Hoc
hsch
ule
Brem
en -
Sour
ce: M
arki
ng S
chem
e Ec
onom
ic A
war
enes
s D
. Otte
r, Le
edsM
etpa
ge 3
III.
Deta
iled
info
rmat
ion
abou
t mar
king
crite
ria
1 Co
nten
t: (6
0 %
of p
rese
ntat
ion
mar
k)
Di
d th
e gr
oup
pres
ent a
n ap
t RES
EARC
H Q
UEST
ION
Ha
s the
gro
up a
nsw
ered
the
ques
tion/
s?
Did
they
cove
r all
the
requ
ired
read
ing?
Ha
ve th
ey in
depe
nden
tly fo
und
rele
vant
mat
eria
l usin
g th
eir o
wn
rese
arch
skill
s?
Did
the
grou
p fo
cus o
n an
apt
sele
ctio
n of
topi
cs /
CONT
ENT
Have
they
giv
en a
pplie
d re
leva
nt co
ncep
ts/t
heor
ies/
idea
s and
kno
wle
dge
to th
e qu
estio
n?
Have
they
giv
en d
ue w
eigh
t to
the
rang
e of
per
spec
tives
? Ha
ve th
ey co
me
to a
wel
l-arg
ued
conc
lusio
n?
In th
is se
ctio
n w
e ar
e lo
okin
g fo
r you
r hav
ing
appl
ied
the
rele
vant
cont
ent t
o th
e qu
estio
n. W
e ar
e
test
ing
your
und
erst
andi
ng a
nd y
our a
bilit
y to
cons
truc
t an
argu
men
t. Th
is is
a vi
tal s
kill
beca
use
it m
eans
that
you
hav
e to
sele
ct fr
om a
ll th
e in
form
atio
n av
aila
ble
wha
t you
cons
ider
to b
e th
e m
ost
rele
vant
fact
s/ar
gum
ents
and
pre
sent
thes
e in
a co
ncise
way
. Im
port
antly
we
are
look
ing
for y
ou to
sh
ow th
e ra
nge
of v
iew
s exp
ress
ed in
att
empt
ing
to lo
ok a
t the
que
stio
n bu
t for
you
to a
ttem
pt to
sh
ow w
here
you
feel
such
vie
ws a
re st
rong
or w
eak
and
for y
ou to
com
e to
a v
iew
you
rsel
ves.
We
al
so e
xpec
t you
to in
volv
e yo
urse
lves
in in
depe
nden
t res
earc
h.
2 Ha
ndou
t and
form
al a
spec
ts (
20 %
of p
rese
ntat
ion
mar
k)
Ha
ndou
t: St
ruct
ure
and
Layo
ut; h
elpf
ul?
m
ater
ial d
eliv
ered
on
time
Tim
e m
anag
emen
t dur
ing
pres
enta
tion
Refe
renc
es a
nd q
uota
tions
3
Com
mun
icat
ion
and
Team
wor
k (2
0 %
of p
rese
ntat
ion
mar
k)
Is
the
pres
enta
tion
livel
y an
d in
tere
stin
g?
Is it
stru
ctur
ed e
ffect
ivel
y w
ith a
clea
r int
rodu
ctio
n, a
sust
aine
d ar
gum
ent w
hich
cove
rs a
ll vi
ews b
ut se
eks t
o ju
dge
betw
een
them
and
a cl
ear c
onclu
sion
supp
orte
d by
evi
denc
e?
Have
the
grou
p sh
own
initi
ativ
e an
d cr
eativ
ity in
the
desig
n of
the
pres
enta
tion?
Is
ther
e ef
fect
ive
and
appr
opria
te u
se o
f aud
io-v
isual
aid
and
/or I
.T.?
Es
pecia
lly u
se a
nd la
yout
/ ef
fect
iven
ess o
f ppt
-slid
es.
Does
the
hand
out c
ompl
emen
t the
pre
sent
atio
n in
a w
ay th
at e
nabl
es th
e au
dien
ce to
follo
w
the
pres
enta
tion
and
then
take
aw
ay a
n ef
fect
ive
sum
mar
y of
it?
How
wel
l do
the
pres
ente
rs p
rese
nt th
emse
lves
? Is
ther
e go
od v
oice
pro
ject
ion,
eye
cont
act,
conf
iden
t del
iver
y an
d in
tera
ctio
n be
twee
n th
e pr
esen
ters
? W
hat u
se is
mad
e of
cue
card
s/
bulle
t poi
nts a
s opp
osed
to re
adin
g fro
m a
scrip
t?
How
wel
l pre
pare
d ar
e th
e gr
oup
to a
nsw
er o
r pos
e qu
estio
ns th
at a
re re
leva
nt to
the
sub-
ject
? Is
the
pres
enta
tion
clear
ly a
n in
tegr
ated
gro
up e
ffort
as o
ppos
ed to
indi
vidu
al co
ntrib
utio
ns
“cob
bled
” tog
ethe
r?
Pres
enta
tion
Mar
king
Sch
eme
Econ
omic
s@
EFA/
BIM
2018
Pete
r Sch
mid
t
P. S
chm
idt,
Hoc
hsch
ule
Brem
en -
Sour
ce: M
arki
ng S
chem
e Ec
onom
ic A
war
enes
s D
. Otte
r, Le
edsM
etpa
ge 4
How
wel
l hav
e th
ey co
-ord
inat
ed th
eir a
ctiv
ity a
nd p
lann
ed th
eir p
rese
ntat
ion?
Is
ther
e ev
iden
ce th
at th
e gr
oup
have
disc
usse
d th
eir w
ork
prio
r to
the
pres
enta
tion
and
are
awar
e of
the
cont
ribut
ion
of e
ach
mem
ber?
In
this
sect
ion
we
are
look
ing
for a
pre
sent
atio
n w
hich
hol
ds th
e at
tent
ion
of th
e au
dien
ce. Y
ou h
ave
to b
e en
thus
iast
ic an
d sh
ow th
e in
tere
stin
g iss
ues i
nvol
ved.
You
nee
d to
cons
ider
how
you
stru
ctur
e yo
ur p
rese
ntat
ion
and
how
as a
gro
up y
ou a
re g
oing
to p
rese
nt y
ours
elve
s. Av
oid
simpl
y ca
rvin
g up
th
e pr
esen
tatio
n in
to in
divi
dual
chun
ks o
f tim
e. T
ry a
nd “s
witc
h” b
etw
een
pres
ente
rs, u
se O
HPs o
r Po
wer
Poin
t pre
sent
atio
n fa
ciliti
es, a
dd o
ther
med
ia (b
oard
, pos
ters
, aud
io, v
ideo
, …).
Yo
ur h
ando
ut sh
ould
be
arou
nd tw
o sid
es a
nd sh
ould
be
cons
truc
ted
so th
at it
hel
ps o
utlin
e yo
ur
stru
ctur
e an
d sh
ows t
he k
ey p
oint
s/iss
ues t
hat y
ou w
ish to
show
. It s
houl
d al
so co
ntai
n th
e na
mes
of
the
pres
ente
rs a
nd th
e na
me
of th
e co
urse
they
are
follo
win
g. Y
ou sh
ould
hav
e su
fficie
nt co
pies
for a
ll m
embe
rs o
f the
aud
ienc
e. It
shou
ld a
lso co
ntai
n a
full
listin
g of
all
the
read
ing/
rese
arch
sour
ces y
ou
have
use
d us
ing
the
Harv
ard
met
hod
of re
fere
ncin
g.
This
is a
team
pre
sent
atio
n an
d yo
u ha
ve to
wor
k as
a te
am. I
t is e
asy
for t
utor
s to
show
the
exte
nt to
w
hich
you
hav
e op
erat
ed in
the
way
spec
ified
by
the
asse
ssm
ent c
riter
ia g
iven
abo
ve fo
r gro
up sk
ills.
If yo
u ha
ve w
orke
d as
a g
roup
ther
e w
ill b
e a
cons
isten
t use
of t
he p
rese
ntat
ion
aids
, the
re w
ill b
e sm
ooth
inte
rcha
nges
bet
wee
n pr
esen
ters
. In
the
ques
tions
afte
rwar
ds a
ll m
embe
rs w
ill b
e ab
le to
fie
ld q
uest
ion
shou
ld th
ey b
e ca
lled
upon
. If
a gr
oup
cont
ains
a m
embe
r who
is n
ot th
eir p
ullin
g th
eir w
eigh
t it i
s up
to th
e re
st o
f the
gro
up to
so
rt th
is ou
t. Th
ey ca
n ap
proa
ch th
eir l
ectu
rer f
or a
dvice
and
the
lect
urer
may
wish
to ta
lk w
ith th
e pa
rticu
lar i
ndiv
idua
l but
it is
not
up
to th
e tu
tor t
o so
rt o
ut th
e in
tern
al d
ynam
ic of
the
grou
p. If
gr
oups
cont
ain
such
“fre
e rid
ers”
they
will
nee
d to
sort
out
thei
r str
ateg
y fo
r dea
ling
with
this.
. Al
l mem
bers
of t
he g
roup
pre
sent
will
be
awar
ded
the
sam
e m
ark
for t
he p
rese
ntat
ion.
Stu
dent
s who
do
not
att
end
beca
use
of m
itiga
tion
will
hav
e to
allo
w th
e ex
amin
atio
n bo
ards
for t
heir
rout
es to
de-
cide
on th
e fa
irest
way
of m
akin
g up
for t
he n
on-a
tten
danc
e.
Note
s for
Pre
sent
ers
Plea
se fu
lly b
rief y
ours
elf w
ith th
e as
sess
men
t crit
eria
for y
our g
roup
pre
sent
atio
n. T
his i
s how
you
w
ill b
e m
arke
d an
d so
you
nee
d to
pre
pare
you
rsel
f acc
ordi
ngly
.
Prof. Dr. Peter Schmidt schmidt-bremen.de → Economics 1 EFA
C:\Hochschu\VWL\VWL1\EFA_201819\AssessmentWS1819.docx 20.06.18; 15:25 – Seite 1
ECONOMICS I -- Introduction to Economics and Microeconomics EFA 3rd semester – Winter term 2018/19
Assessment:
The assessment is a LEARNING PORTFOLIO. In this type of assessment the students reflect and document their own responsibility for their learning process & learning outcome.
Theoretical definition from the module handbook: "A Learning Portfolio consists of several parts which include individual as well as team results. Part of the final performance are the reflective statements in which the teams and every student critically reviews and evaluates the individual and teams' learning process as well as the roles of the different partial as-sessments”.
The grade depends on the points you collect during the semester:
Maximum points (100%) 1) group presentation
3) Midterm test 2) Final test
+ additional Bonus (optional - see below)
100 50 20 30
up to 20
Mandatory parts of the Learning Portfolio in this class are:
Type Who due max points Remarks
Case study Teams (of 3 - 4 students)
cont. 50 = team-presentation Please check the additional information provided on the class webpage.
Midterm Test
Individual mid Novem-ber
20 Midterm test (30 min)* Topics: – to be discussed –
Test Individual End of January 30 Final test (30 min exam)*
Topics: – to be discussed –
Sum: 100 = 100%
OPTIONAL parts (=you can gather more points but you don’t have to – you still can achieve 100 % as described above)
Expectations Individual 14. October 2018
2 ~ ¼ pages. Individual expectations for this module → What do I want to learn / which topics?
Continuous reflection of the learning progress
Team BLOG (Forum)
due dates in AULIS
8 (2 each)
Reflection of the module, its parts and topics as well as the individual learning process + of the learning processes within the team and the class as a whole (esp. evaluation the simulation game) Each team can deliver up to 4 contributions (one every four weeks). The last contribution has to be an ex post reflection → please check due dates in AULIS
Individual Assessment
Individual (max 2 students)
2 b dis-
cussed 10
Students may opt to propose an individual contribution. It has to be approved by the lecturer. The IA have to be presented (no PowerPoint) in a module exercise, max. time 10 minutes; max two presentations per week; first come first serve. Please do not ask me, what (kind of) IA you “are supposed to do”. It’s voluntary and it’s individual. You have to select a possible topic and format (examples of formats see above).
(other individual 2 b discussed Learning tools in AULIS)
* If you miss a test due to illness - confirmed by a doctor in written form - you can apply for an oral retake for the test, which is likely to take place on the last day(s) of the semester.
Ten
Pri
ncip
les
of
Eco
no
mic
s
Th
e w
ord
eco
nom
yco
mes
fro
m t
he
Gre
ek w
ord
oik
onom
os,
wh
ich
mea
ns
“on
ew
ho
man
ages
a h
ou
seh
old
.” A
t fi
rst,
th
is o
rig
in m
igh
t se
em p
ecu
liar
. B
ut
in f
act,
ho
use
ho
lds
and
eco
no
mie
s h
ave
mu
ch i
n c
om
mo
n.
Ah
ou
seh
old
fac
es m
any
dec
isio
ns.
It
mu
st d
ecid
e w
hic
h m
emb
ers
of
the
ho
use
ho
ld d
o w
hic
h t
ask
s an
d w
hat
eac
h m
emb
er g
ets
in r
etu
rn:
Wh
o c
oo
ks
din
ner
? W
ho
do
es t
he
lau
nd
ry?
Wh
o g
ets
the
extr
a d
esse
rt a
t d
inn
er?
Wh
o g
ets
to c
ho
ose
wh
at T
V s
ho
w t
o w
atch
? In
sh
ort
, th
e h
ou
seh
old
mu
st a
llo
cate
its
scar
ce r
eso
urc
es a
mo
ng
its
var
iou
s m
emb
ers,
tak
ing
in
to a
cco
un
t ea
ch m
emb
er’s
abil
itie
s, e
ffo
rts,
an
d d
esir
es.
Lik
e a
ho
use
ho
ld,
a so
ciet
y f
aces
man
y d
ecis
ion
s. A
soci
ety
mu
st d
ecid
e w
hat
job
s w
ill
be
do
ne
and
wh
o w
ill
do
th
em.
It n
eed
s so
me
peo
ple
to
gro
w f
oo
d,
oth
er p
eop
le t
o m
ake
clo
thin
g,
and
sti
ll o
ther
s to
des
ign
co
mp
ute
r so
ftw
are.
On
ce s
oci
ety
has
all
oca
ted
peo
ple
(as
wel
l as
lan
d,
bu
ild
ing
s, a
nd
mac
hin
es)
tov
ario
us
job
s, i
t m
ust
als
o a
llo
cate
th
e o
utp
ut
of
go
od
s an
d s
erv
ices
th
at t
hey
pro
-d
uce
. It
mu
st d
ecid
e w
ho
wil
l ea
t ca
via
r an
d w
ho
wil
l ea
t p
ota
toes
. It
mu
std
ecid
e w
ho
wil
l d
riv
e a
Fer
rari
an
d w
ho
wil
l ta
ke
the
bu
s.T
he
man
agem
ent
of
soci
ety
’s r
eso
urc
es i
s im
po
rtan
t b
ecau
se r
eso
urc
es a
resc
arce
. S
carc
ity
mea
ns
that
so
ciet
y h
as l
imit
ed r
eso
urc
es a
nd
th
eref
ore
can
no
tp
rod
uce
all
th
e g
oo
ds
and
ser
vic
es p
eop
le w
ish
to
hav
e. J
ust
as
a h
ou
seh
old
can
-n
ot
giv
e ev
ery
mem
ber
ev
ery
thin
g h
e o
r sh
e w
ants
, a
soci
ety
can
no
t g
ive
ever
yin
div
idu
al t
he
hig
hes
t st
and
ard
of
liv
ing
to
wh
ich
he
or
she
mig
ht
asp
ire.
3
scarc
ity
the
lim
ite
d n
atu
re o
fso
cie
ty’s
re
sou
rce
s
1
Eco
no
mic
sis
th
e st
ud
y o
f h
ow
so
ciet
y m
anag
es i
ts s
carc
e re
sou
rces
. In
mo
stso
ciet
ies,
res
ou
rces
are
all
oca
ted
no
t b
y a
n a
ll-p
ow
erfu
l d
icta
tor
bu
t th
rou
gh
th
eco
mb
ined
ac
tio
ns
of
mil
lio
ns
of
ho
use
ho
lds
and
fi
rms.
E
con
om
ists
th
eref
ore
stu
dy
ho
w p
eop
le m
ake
dec
isio
ns:
ho
w m
uch
th
ey w
ork
, w
hat
th
ey b
uy,
ho
wm
uch
th
ey s
ave,
an
d h
ow
th
ey i
nv
est
thei
r sa
vin
gs.
Eco
no
mis
ts a
lso
stu
dy
ho
wp
eop
le i
nte
ract
wit
h o
ne
ano
ther
. F
or
inst
ance
, th
ey e
xam
ine
ho
w t
he
mu
ltit
ud
eo
f b
uy
ers
and
sel
lers
of
a g
oo
d t
og
eth
er d
eter
min
e th
e p
rice
at
wh
ich
th
e g
oo
d i
sso
ld a
nd
th
e q
uan
tity
th
at i
s so
ld.
Fin
ally
, ec
on
om
ists
an
aly
ze f
orc
es a
nd
tre
nd
sth
at a
ffec
t th
e ec
on
om
y a
s a
wh
ole
, in
clu
din
g t
he
gro
wth
in
av
erag
e in
com
e, t
he
frac
tio
n o
f th
e p
op
ula
tio
n t
hat
can
no
t fi
nd
wo
rk,
and
th
e ra
te a
t w
hic
h p
rice
s ar
eri
sin
g.
Alt
ho
ug
h t
he
stu
dy
of
eco
no
mic
s h
as m
any
fac
ets,
th
e fi
eld
is
un
ifie
d b
y s
ev-
eral
cen
tral
id
eas.
In
th
is c
hap
ter,
we
loo
k a
t Te
n P
rin
cipl
es o
f E
con
omic
s.D
on
’tw
orr
y i
f y
ou
do
n’t
un
der
stan
d t
hem
all
at
firs
t o
r if
yo
u d
on
’t f
ind
th
em c
om
-p
lete
ly c
on
vin
cin
g.
In l
ater
ch
apte
rs,
we
wil
l ex
plo
re t
hes
e id
eas
mo
re f
ull
y. T
he
ten
pri
nci
ple
s ar
e in
tro
du
ced
her
e to
giv
e y
ou
an
ov
erv
iew
of
wh
at e
con
om
ics
isal
l ab
ou
t. Y
ou
can
th
ink
of
this
ch
apte
r as
a “
pre
vie
w o
f co
min
g a
ttra
ctio
ns.
”
4PA
RT 1
INT
RO
DU
CT
ION
eco
no
mic
sth
e s
tud
y o
f h
ow
so
cie
tym
anag
es
its
scar
cere
sou
rce
s
HO
W P
EO
PLE
MA
KE
DE
CIS
ION
S
Th
ere
is n
o m
yst
ery
to
wh
at a
n e
con
om
y i
s. W
het
her
we
are
talk
ing
ab
ou
t th
eec
on
om
y o
f L
os
An
gel
es,
of
the
Un
ited
Sta
tes,
or
of
the
wh
ole
wo
rld
, an
eco
n-
om
y i
s ju
st a
gro
up
of
peo
ple
in
tera
ctin
g w
ith
on
e an
oth
er a
s th
ey g
o a
bo
ut
thei
rli
ves
. B
ecau
se t
he
beh
avio
r o
f an
eco
no
my
ref
lect
s th
e b
ehav
ior
of
the
ind
ivid
u-
als
wh
o m
ake
up
th
e ec
on
om
y, w
e st
art
ou
r st
ud
y o
f ec
on
om
ics
wit
h f
ou
r p
rin
ci-
ple
s o
f in
div
idu
al d
ecis
ion
mak
ing
.
Pri
nci
ple
1:
Peo
ple
Face
Tra
de-o
ffs
Th
e fi
rst
less
on
ab
ou
t m
akin
g d
ecis
ion
s is
su
mm
ariz
ed i
n t
he
adag
e “T
her
e is
no
such
th
ing
as
a fr
ee l
un
ch.”
To
get
on
e th
ing
th
at w
e li
ke,
we
usu
ally
hav
e to
giv
e u
p a
no
ther
th
ing
th
at w
e li
ke.
Mak
ing
dec
isio
ns
req
uir
es t
rad
ing
off
on
eg
oal
ag
ain
st a
no
ther
.C
on
sid
er
a st
ud
ent
wh
o
mu
st
dec
ide
ho
w
to
allo
cate
h
er
mo
st
val
uab
lere
sou
rce—
her
tim
e. S
he
can
sp
end
all
of
her
tim
e st
ud
yin
g e
con
om
ics;
sh
e ca
nsp
end
all
of
her
tim
e st
ud
yin
g p
sych
olo
gy
; o
r sh
e ca
n d
ivid
e h
er t
ime
bet
wee
nth
e tw
o f
ield
s. F
or
ever
y h
ou
r sh
e st
ud
ies
on
e su
bje
ct,
she
giv
es u
p a
n h
ou
r sh
eco
uld
hav
e u
sed
stu
dy
ing
th
e o
ther
. A
nd
fo
r ev
ery
ho
ur
she
spen
ds
stu
dy
ing
,sh
e g
ives
up
an
ho
ur
that
sh
e co
uld
hav
e sp
ent
nap
pin
g,
bik
e ri
din
g,
wat
chin
gT
V,
or
wo
rkin
g a
t h
er p
art-
tim
e jo
b f
or
som
e ex
tra
spen
din
g m
on
ey.
Or
con
sid
er p
aren
ts d
ecid
ing
ho
w t
o s
pen
d t
hei
r fa
mil
y i
nco
me.
Th
ey c
an b
uy
foo
d,
clo
thin
g,
or
a fa
mil
y v
acat
ion
. O
r th
ey c
an s
ave
som
e o
f th
e fa
mil
y i
nco
me
for
reti
rem
ent
or
the
chil
dre
n’s
co
lleg
e ed
uca
tio
n.
Wh
en t
hey
ch
oo
se t
o s
pen
d a
nex
tra
do
llar
on
on
e o
f th
ese
go
od
s, t
hey
hav
e o
ne
less
do
llar
to
sp
end
on
so
me
oth
er g
oo
d.
Wh
en p
eop
le a
re g
rou
ped
in
to s
oci
etie
s, t
hey
fac
e d
iffe
ren
t k
ind
s o
f tr
ade-
off
s. T
he
clas
sic
trad
e-o
ff i
s b
etw
een
“g
un
s an
d b
utt
er.”
Th
e m
ore
we
spen
d o
nn
atio
nal
def
ense
(g
un
s) t
o p
rote
ct o
ur
sho
res
fro
m f
ore
ign
ag
gre
sso
rs,
the
less
we
can
sp
end
on
co
nsu
mer
go
od
s (b
utt
er)
to r
aise
ou
r st
and
ard
of
liv
ing
at
ho
me.
Als
o i
mp
ort
ant
in m
od
ern
so
ciet
y i
s th
e tr
ade-
off
bet
wee
n a
cle
an e
nv
i-
1
PSchmidt
Schreibmaschinentext
Source: Mankiw, Greg.: "Principles of Economics", Cengage
PSchmidt
Schreibmaschinentext
PSchmidt
Schreibmaschinentext
ron
men
t an
d a
hig
h l
evel
of
inco
me.
Law
s th
at r
equ
ire
firm
s to
red
uce
po
llu
tio
nra
ise
the
cost
of
pro
du
cin
g g
oo
ds
and
ser
vic
es.
Bec
ause
of
the
hig
her
co
sts,
th
ese
firm
s en
d
up
ea
rnin
g
smal
ler
pro
fits
, p
ayin
g
low
er
wag
es,
char
gin
g
hig
her
pri
ces,
or
som
e co
mb
inat
ion
of
thes
e th
ree.
Th
us,
wh
ile
po
llu
tio
n r
egu
lati
on
sg
ive
us
the
ben
efit
of
a cl
ean
er e
nv
iro
nm
ent
and
th
e im
pro
ved
hea
lth
th
at c
om
esw
ith
it,
th
ey h
ave
the
cost
of
red
uci
ng
th
e in
com
es o
f th
e fi
rms’
ow
ner
s, w
ork
-er
s, a
nd
cu
sto
mer
s.A
no
ther
tra
de-
off
so
ciet
y f
aces
is
bet
wee
n e
ffic
ien
cy a
nd
eq
uit
y. E
ffic
ien
cym
ean
s th
at s
oci
ety
is
get
tin
g t
he
max
imu
m b
enef
its
fro
m i
ts s
carc
e re
sou
rces
.E
qu
ity
mea
ns
that
th
ose
ben
efit
s ar
e d
istr
ibu
ted
fai
rly
am
on
g s
oci
ety
’s m
em-
ber
s. I
n o
ther
wo
rds,
eff
icie
ncy
ref
ers
to t
he
size
of
the
eco
no
mic
pie
, an
d e
qu
ity
refe
rs t
o h
ow
th
e p
ie i
s d
ivid
ed.
Oft
en,
wh
en g
ov
ern
men
t p
oli
cies
are
des
ign
ed,
thes
e tw
o g
oal
s co
nfl
ict.
Co
nsi
der
, fo
r in
stan
ce,
po
lici
es a
imed
at
ach
iev
ing
a m
ore
eq
ual
dis
trib
uti
on
of
eco
no
mic
wel
l-b
ein
g.
So
me
of
thes
e p
oli
cies
, su
ch a
s th
e w
elfa
re s
yst
em o
ru
nem
plo
ym
ent
insu
ran
ce,
try
to
hel
p t
he
mem
ber
s o
f so
ciet
y w
ho
are
mo
st i
nn
eed
. O
ther
s, s
uch
as
the
ind
ivid
ual
in
com
e ta
x,
ask
th
e fi
nan
cial
ly s
ucc
essf
ul
toco
ntr
ibu
te m
ore
th
an o
ther
s to
su
pp
ort
th
e g
ov
ern
men
t. A
lth
ou
gh
th
ese
po
lici
esh
ave
the
ben
efit
of
ach
iev
ing
gre
ater
eq
uit
y, t
hey
hav
e a
cost
in
ter
ms
of
red
uce
def
fici
ency
. W
hen
th
e g
ov
ern
men
t re
dis
trib
ute
s in
com
e fr
om
th
e ri
ch t
o t
he
po
or,
it r
edu
ces
the
rew
ard
fo
r w
ork
ing
har
d;
as a
res
ult
, p
eop
le w
ork
les
s an
d p
ro-
du
ce f
ewer
go
od
s an
d s
erv
ices
. In
oth
er w
ord
s, w
hen
th
e g
ov
ern
men
t tr
ies
tocu
t th
e ec
on
om
ic p
ie i
nto
mo
re e
qu
al s
lice
s, t
he
pie
get
s sm
alle
r.R
eco
gn
izin
g t
hat
peo
ple
fac
e tr
ade-
off
s d
oes
no
t b
y i
tsel
f te
ll u
s w
hat
dec
i-si
on
s th
ey w
ill
or
sho
uld
mak
e. A
stu
den
t sh
ou
ld n
ot
aban
do
n t
he
stu
dy
of
psy
-ch
olo
gy
ju
st b
ecau
se d
oin
g s
o w
ou
ld i
ncr
ease
th
e ti
me
avai
lab
le f
or
the
stu
dy
of
eco
no
mic
s.
So
ciet
y
sho
uld
n
ot
sto
p
pro
tect
ing
th
e en
vir
on
men
t ju
st
bec
ause
env
iro
nm
enta
l re
gu
lati
on
s re
du
ce
ou
r m
ater
ial
stan
dar
d
of
liv
ing
. T
he
po
or
sho
uld
n
ot
be
ign
ore
d
just
b
ecau
se
hel
pin
g
them
d
isto
rts
wo
rk
ince
nti
ves
.N
on
eth
eles
s,
ack
no
wle
dg
ing
li
fe’s
tr
ade-
off
s is
im
po
rtan
t b
ecau
se
peo
ple
ar
eli
kel
y t
o m
ake
go
od
dec
isio
ns
on
ly i
f th
ey u
nd
erst
and
th
e o
pti
on
s th
at t
hey
hav
eav
aila
ble
.
Pri
nci
ple
2:
The C
ost
of
So
meth
ing
Is
What
Yo
u G
ive U
p t
o G
et
It
Bec
ause
peo
ple
fac
e tr
ade-
off
s, m
akin
g d
ecis
ion
s re
qu
ires
co
mp
arin
g t
he
cost
san
d b
enef
its
of
alte
rnat
ive
cou
rses
of
acti
on
. In
man
y c
ases
, h
ow
ever
, th
e co
st o
fso
me
acti
on
is
no
t as
ob
vio
us
as i
t m
igh
t fi
rst
app
ear.
Co
nsi
der
, fo
r ex
amp
le,
the
dec
isio
n t
o g
o t
o c
oll
ege.
Th
e b
enef
it i
s in
tell
ectu
alen
rich
men
t an
d a
lif
etim
e o
f b
ette
r jo
b o
pp
ort
un
itie
s. B
ut
wh
at i
s th
e co
st?
To
answ
er t
his
qu
esti
on
, y
ou
mig
ht
be
tem
pte
d t
o a
dd
up
th
e m
on
ey y
ou
sp
end
on
tuit
ion
, b
oo
ks,
ro
om
, an
d b
oar
d.
Yet
th
is t
ota
l d
oes
no
t tr
uly
rep
rese
nt
wh
at y
ou
giv
e u
p t
o s
pen
d a
yea
r in
co
lleg
e.T
he
firs
t p
rob
lem
wit
h t
his
an
swer
is
that
it
incl
ud
es s
om
e th
ing
s th
at a
re n
ot
real
ly c
ost
s o
f g
oin
g t
o c
oll
ege.
Ev
en i
f y
ou
qu
it s
cho
ol,
yo
u n
eed
a p
lace
to
sle
epan
d f
oo
d t
o e
at.
Ro
om
an
d b
oar
d a
re c
ost
s o
f g
oin
g t
o c
oll
ege
on
ly t
o t
he
exte
nt
that
th
ey a
re m
ore
ex
pen
siv
e at
co
lleg
e th
an e
lsew
her
e. I
nd
eed
, th
e co
st o
f ro
om
and
bo
ard
at
yo
ur
sch
oo
l m
igh
t b
e le
ss t
han
th
e re
nt
and
fo
od
ex
pen
ses
that
yo
uw
ou
ld p
ay l
ivin
g o
n y
ou
r o
wn
. In
th
is c
ase,
th
e sa
vin
gs
on
ro
om
an
d b
oar
d a
re a
ben
efit
of
go
ing
to
co
lleg
e.
CH
AP
TE
R 1
TE
N P
RIN
CIP
LES
OF
EC
ON
OM
ICS
5
eff
icie
ncy
the
pro
pe
rty
of
soci
ety
ge
ttin
g t
he
mo
st i
t ca
nfr
om
its
sca
rce
re
sou
rce
s
eq
uit
yth
e p
rop
ert
y o
f d
istr
ibu
t-in
g e
con
om
ic p
rosp
eri
tyfa
irly
am
on
g t
he
me
m-
be
rs o
f so
cie
ty
Th
e se
con
d p
rob
lem
wit
h t
his
cal
cula
tio
n o
f co
sts
is t
hat
it
ign
ore
s th
e la
rges
tco
st o
f g
oin
g t
o c
oll
ege—
yo
ur
tim
e. W
hen
yo
u s
pen
d a
yea
r li
sten
ing
to
lec
ture
s,re
adin
g t
extb
oo
ks,
an
d w
riti
ng
pap
ers,
yo
u c
ann
ot
spen
d t
hat
tim
e w
ork
ing
at
ajo
b.
Fo
r m
ost
stu
den
ts,
the
wag
es g
iven
up
to
att
end
sch
oo
l ar
e th
e la
rges
t si
ng
leco
st o
f th
eir
edu
cati
on
.T
he
op
po
rtu
nit
y c
ost
of
an i
tem
is
wh
at y
ou
giv
e u
p t
o g
et t
hat
ite
m.
Wh
enm
akin
g a
ny
dec
isio
n,
such
as
wh
eth
er t
o a
tten
d c
oll
ege,
dec
isio
n m
aker
s sh
ou
ldb
e aw
are
of
the
op
po
rtu
nit
y c
ost
s th
at a
cco
mp
any
eac
h p
oss
ible
act
ion
. In
fac
t,th
ey u
sual
ly a
re.
Co
lleg
e at
hle
tes
wh
o c
an e
arn
mil
lio
ns
if t
hey
dro
p o
ut
of
sch
oo
l an
d p
lay
pro
fess
ion
al s
po
rts
are
wel
l aw
are
that
th
eir
op
po
rtu
nit
y c
ost
of
coll
ege
is v
ery
hig
h.
It i
s n
ot
surp
risi
ng
th
at t
hey
oft
en d
ecid
e th
at t
he
ben
efit
is
no
t w
ort
h t
he
cost
.
Pri
nci
ple
3:
Rati
onal P
eo
ple
Thin
k a
t th
e M
arg
in
Eco
no
mis
ts n
orm
ally
ass
um
e th
at p
eop
le a
rera
tio
nal
.R
ati
on
al
peo
ple
syst
emat
-ic
ally
an
d p
urp
ose
full
y d
o t
he
bes
t th
ey c
an t
o a
chie
ve
thei
r o
bje
ctiv
es,
giv
en t
he
op
po
rtu
nit
ies
they
hav
e. A
s y
ou
stu
dy
eco
no
mic
s, y
ou
wil
l en
cou
nte
r fi
rms
that
dec
ide
ho
w m
any
wo
rker
s to
hir
e an
d h
ow
mu
ch o
f th
eir
pro
du
ct t
o m
anu
fac-
ture
an
d s
ell
to m
axim
ize
pro
fits
. Y
ou
wil
l en
cou
nte
r co
nsu
mer
s w
ho
bu
y a
bu
n-
dle
of
go
od
s an
d s
erv
ices
to
ach
iev
e th
e h
igh
est
po
ssib
le l
evel
of
sati
sfac
tio
n,
sub
ject
to
th
eir
inco
mes
an
d t
he
pri
ces
of
tho
se g
oo
ds
and
ser
vic
es.
Rat
ion
al p
eop
le k
no
w t
hat
dec
isio
ns
in l
ife
are
rare
ly b
lack
an
d w
hit
e b
ut
usu
ally
in
vo
lve
shad
es
of
gra
y. A
t d
inn
erti
me,
th
e d
ecis
ion
y
ou
fa
ce
is
no
tb
etw
een
fas
tin
g o
r ea
tin
g l
ike
a p
ig b
ut
wh
eth
er t
o t
ake
that
ex
tra
spo
on
ful
of
mas
hed
po
tato
es.
Wh
en e
xam
s ro
ll a
rou
nd
, y
ou
r d
ecis
ion
is
no
t b
etw
een
blo
w-
ing
th
em o
ff o
r st
ud
yin
g 2
4 h
ou
rs a
day
bu
t w
het
her
to
sp
end
an
ex
tra
ho
ur
rev
iew
ing
yo
ur
no
tes
inst
ead
of
wat
chin
g T
V.
Eco
no
mis
ts u
se t
he
term
marg
inal
chan
ges
to d
escr
ibe
smal
l in
crem
enta
l ad
just
men
ts t
o a
n e
xis
tin
g p
lan
of
acti
on
.K
eep
in
min
d t
hat
mar
gin
mea
ns
“ed
ge,
” so
mar
gin
al c
han
ges
are
ad
just
men
tsar
ou
nd
th
e ed
ges
of
wh
at y
ou
are
do
ing
. R
atio
nal
peo
ple
oft
en m
ake
dec
isio
ns
by
co
mp
arin
g m
argi
nal
ben
efit
san
dm
argi
nal
cos
ts.
Fo
r ex
amp
le,
con
sid
er a
n a
irli
ne
dec
idin
g h
ow
mu
ch t
o c
har
ge
pas
sen
ger
s w
ho
fly
sta
nd
by.
Su
pp
ose
th
at f
lyin
g a
200
-sea
t p
lan
e ac
ross
th
e U
nit
ed S
tate
s co
sts
the
airl
ine
$100
,000
. In
th
is c
ase,
th
e av
erag
e co
st o
f ea
ch s
eat
is $
100,
000/
200,
wh
ich
is $
500.
On
e m
igh
t b
e te
mp
ted
to
co
ncl
ud
e th
at t
he
airl
ine
sho
uld
nev
er s
ell
ati
cket
fo
r le
ss t
han
$50
0. I
n f
act,
ho
wev
er,
the
airl
ine
can
rai
se i
ts p
rofi
ts b
y t
hin
k-
ing
at
the
mar
gin
. Im
agin
e th
at a
pla
ne
is a
bo
ut
to t
ake
off
wit
h t
en e
mp
ty s
eats
,an
d a
sta
nd
by
pas
sen
ger
wai
tin
g a
t th
e g
ate
wil
l p
ay $
300
for
a se
at.
Sh
ou
ld t
he
airl
ine
sell
th
e ti
cket
? O
f co
urs
e it
sh
ou
ld.
If t
he
pla
ne
has
em
pty
sea
ts,
the
cost
of
add
ing
on
e m
ore
pas
sen
ger
is
min
usc
ule
. A
lth
ou
gh
th
e av
erag
eco
st o
f fl
yin
g a
pas
sen
ger
is
$500
, th
e m
argi
nal
cost
is
mer
ely
th
e co
st o
f th
e b
ag o
f p
ean
uts
an
dca
n o
f so
da
that
th
e ex
tra
pas
sen
ger
wil
l co
nsu
me.
As
lon
g a
s th
e st
and
by
pas
sen
-g
er p
ays
mo
re t
han
th
e m
arg
inal
co
st,
sell
ing
th
e ti
cket
is
pro
fita
ble
.M
arg
inal
dec
isio
n m
akin
g c
an h
elp
ex
pla
in
som
e o
ther
wis
e p
uzz
lin
g e
co-
no
mic
ph
eno
men
a. H
ere
is a
cla
ssic
qu
esti
on
: W
hy
is
wat
er s
o c
hea
p,
wh
ile
dia
-m
on
ds
are
so e
xp
ensi
ve?
Hu
man
s n
eed
wat
er t
o s
urv
ive,
wh
ile
dia
mo
nd
s ar
eu
nn
eces
sary
; b
ut
for
som
e re
aso
n,
peo
ple
are
wil
lin
g t
o p
ay m
uch
mo
re f
or
ad
iam
on
d t
han
fo
r a
cup
of
wat
er.
Th
e re
aso
n i
s th
at a
per
son
’s w
illi
ng
nes
s to
pay
for
any
go
od
is
bas
ed o
n t
he
mar
gin
al b
enef
it t
hat
an
ex
tra
un
it o
f th
e g
oo
dw
ou
ld y
ield
. T
he
mar
gin
al b
enef
it,
in t
urn
, d
epen
ds
on
ho
w m
any
un
its
a p
er-
son
alr
ead
y h
as. A
lth
ou
gh
wat
er i
s es
sen
tial
, th
e m
arg
inal
ben
efit
of
an e
xtr
a cu
p
6PA
RT 1
INT
RO
DU
CT
ION
op
po
rtunit
y c
ost
wh
ate
ver
mu
st b
e g
ive
nu
p t
o o
bta
in s
om
e i
tem
rati
onal p
eo
ple
pe
op
le w
ho
sys
tem
ati-
cally
an
d p
urp
ose
fully
do
th
e b
est
th
ey
can
to
ach
ieve
th
eir
ob
ject
ive
s
marg
inal ch
ang
es
smal
l in
cre
me
nta
lad
just
me
nts
to
a p
lan
o
f ac
tio
n
2
is s
mal
l b
ecau
se w
ater
is
ple
nti
ful.
By
co
ntr
ast,
no
on
e n
eed
s d
iam
on
ds
to s
ur-
viv
e, b
ut
bec
ause
dia
mo
nd
s ar
e so
rar
e, p
eop
le c
on
sid
er t
he
mar
gin
al b
enef
it o
fan
ex
tra
dia
mo
nd
to
be
larg
e.A
rati
on
al d
ecis
ion
mak
er t
akes
an
act
ion
if
and
on
ly i
f th
e m
arg
inal
ben
efit
of
the
acti
on
ex
ceed
s th
e m
arg
inal
co
st.
Th
is p
rin
cip
le c
an e
xp
lain
wh
y a
irli
nes
are
wil
lin
g t
o s
ell
a ti
cket
bel
ow
av
erag
e co
st a
nd
wh
y p
eop
le a
re w
illi
ng
to
pay
mo
re f
or
dia
mo
nd
s th
an f
or
wat
er.
It c
an t
ake
som
e ti
me
to g
et u
sed
to
th
e lo
gic
of
mar
gin
al t
hin
kin
g,
bu
t th
e st
ud
y o
f ec
on
om
ics
wil
l g
ive
yo
u a
mp
le o
pp
ort
u-
nit
y t
o p
ract
ice.
Pri
nci
ple
4:
Peo
ple
Resp
ond
to
Ince
nti
ves
An
ince
nti
ve
is s
om
eth
ing
(su
ch a
s th
e p
rosp
ect
of
a p
un
ish
men
t o
r a
rew
ard
)th
at i
nd
uce
s a
per
son
to
act
. B
ecau
se r
atio
nal
peo
ple
mak
e d
ecis
ion
s b
y c
om
par
-in
g c
ost
s an
d b
enef
its,
th
ey r
esp
on
d t
o i
nce
nti
ves
. Y
ou
wil
l se
e th
at i
nce
nti
ves
pla
y a
cen
tral
ro
le i
n t
he
stu
dy
of
eco
no
mic
s. O
ne
eco
no
mis
t w
ent
so f
ar a
s to
sug
ges
t th
at t
he
enti
re f
ield
co
uld
be
sim
ply
su
mm
ariz
ed:
“Peo
ple
res
po
nd
to
ince
nti
ves
. T
he
rest
is
com
men
tary
.”In
cen
tiv
es a
re c
ruci
al t
o a
nal
yzi
ng
ho
w m
ark
ets
wo
rk.
Fo
r ex
amp
le,
wh
en t
he
pri
ce
of
an
app
le
rise
s,
peo
ple
d
ecid
e to
ea
t m
ore
p
ears
an
d
few
er
app
les
bec
ause
th
e co
st o
f b
uy
ing
an
ap
ple
is
hig
her
. A
t th
e sa
me
tim
e, a
pp
le o
rch
ard
sd
ecid
e to
hir
e m
ore
wo
rker
s an
d h
arv
est
mo
re a
pp
les
bec
ause
th
e b
enef
it o
f se
ll-
ing
an
ap
ple
is
also
hig
her
. A
s w
e w
ill
see,
th
e ef
fect
of
a g
oo
d’s
pri
ce o
n t
he
beh
avio
r o
f b
uy
ers
and
sel
lers
in
a m
ark
et—
in t
his
cas
e, t
he
mar
ket
fo
r ap
ple
s—is
cru
cial
fo
r u
nd
erst
and
ing
ho
w t
he
eco
no
my
all
oca
tes
scar
ce r
eso
urc
es.
Pu
bli
c p
oli
cym
aker
s sh
ou
ld n
ever
fo
rget
ab
ou
t in
cen
tiv
es b
ecau
se m
any
po
li-
cies
ch
ang
e th
e co
sts
or
ben
efit
s th
at
peo
ple
fa
ce
and
, th
eref
ore
, al
ter
thei
rb
ehav
ior.
Ata
x o
n g
aso
lin
e, f
or
inst
ance
, en
cou
rag
es p
eop
le t
o d
riv
e sm
alle
r,m
ore
fu
el-e
ffic
ien
t ca
rs.
Th
at i
s o
ne
reas
on
peo
ple
dri
ve
smal
ler
cars
in
Eu
rop
e,w
her
e g
aso
lin
e ta
xes
are
hig
h,
than
in
th
e U
nit
ed S
tate
s, w
her
e g
aso
lin
e ta
xes
are
low
. A
gas
oli
ne
tax
als
o e
nco
ura
ges
peo
ple
to
tak
e p
ub
lic
tran
spo
rtat
ion
rath
er t
han
dri
ve
and
to
liv
e cl
ose
r to
wh
ere
they
wo
rk.
If t
he
tax
wer
e la
rger
,m
ore
peo
ple
wo
uld
be
dri
vin
g h
yb
rid
car
s, a
nd
if
it w
ere
larg
e en
ou
gh
, th
eyw
ou
ld s
wit
ch t
o e
lect
ric
cars
.W
hen
po
licy
mak
ers
fail
to
co
nsi
der
ho
w t
hei
r p
oli
cies
aff
ect
ince
nti
ves
, th
eyo
ften
en
d u
p w
ith
res
ult
s th
ey d
id n
ot
inte
nd
. F
or
exam
ple
, co
nsi
der
pu
bli
c p
ol-
icy
reg
ard
ing
au
to s
afet
y. T
od
ay,
all
cars
hav
e se
at b
elts
, b
ut
this
was
no
t tr
ue
50y
ears
ag
o.
In t
he
1960
s, R
alp
h N
ader
’s b
oo
k U
nsa
fe a
t A
ny
Spe
edg
ener
ated
mu
chp
ub
lic
con
cern
ov
er a
uto
saf
ety.
Co
ng
ress
res
po
nd
ed w
ith
law
s re
qu
irin
g s
eat
bel
ts a
s st
and
ard
eq
uip
men
t o
n n
ew c
ars.
Ho
w d
oes
a s
eat
bel
t la
w a
ffec
t au
to s
afet
y?
Th
e d
irec
t ef
fect
is
ob
vio
us:
Wh
ena
per
son
wea
rs a
sea
t b
elt,
th
e p
rob
abil
ity
of
surv
ivin
g a
maj
or
auto
acc
iden
tri
ses.
Bu
t th
at’s
no
t th
e en
d o
f th
e st
ory
bec
ause
th
e la
w a
lso
aff
ects
beh
avio
r b
yal
teri
ng
in
cen
tiv
es.
Th
e re
lev
ant
beh
avio
r h
ere
is t
he
spee
d a
nd
car
e w
ith
wh
ich
dri
ver
s o
per
ate
thei
r ca
rs.
Dri
vin
g s
low
ly a
nd
car
efu
lly
is
cost
ly b
ecau
se i
t u
ses
the
dri
ver
’s t
ime
and
en
erg
y. W
hen
dec
idin
g h
ow
saf
ely
to
dri
ve,
rat
ion
al p
eop
leco
mp
are
the
mar
gin
al b
enef
it f
rom
saf
er d
riv
ing
to
th
e m
arg
inal
co
st.
Th
ey d
riv
em
ore
slo
wly
an
d c
aref
ull
y w
hen
th
e b
enef
it o
f in
crea
sed
saf
ety
is
hig
h.
It i
s n
osu
rpri
se,
for
inst
ance
, th
at p
eop
le d
riv
e m
ore
slo
wly
an
d c
aref
ull
y w
hen
ro
ads
are
icy
th
an w
hen
ro
ads
are
clea
r.C
on
sid
er h
ow
a s
eat
bel
t la
w a
lter
s a
dri
ver
’s c
ost
–ben
efit
cal
cula
tio
n.
Sea
tb
elts
mak
e ac
cid
ents
les
s co
stly
bec
ause
th
ey r
edu
ce t
he
lik
elih
oo
d o
f in
jury
or
CH
AP
TE
R 1
TE
N P
RIN
CIP
LES
OF
EC
ON
OM
ICS
7
ince
nti
ve
som
eth
ing
th
at i
nd
uce
sa
pe
rso
n t
o a
ct
BA
SK
ET
BA
LLSTA
RLE
BR
ON
JAM
ES
UN
DE
RSTA
ND
SO
PP
OR
TU
NIT
YC
OST
AN
DIN
CE
NT
IVE
S.
HE
DE
CID
ED
TO
SK
IPC
OLL
EG
EA
ND
GO
ST
RA
IGH
TT
O
TH
EP
RO
S,
WH
ER
EH
EH
AS
EA
RN
ED
MIL
LIO
NS
OF
DO
LLA
RS
AS
ON
EO
F
TH
EN
BA
’ST
OP
PLA
YE
RS.
©AP/ASSOCIATED PRESS
“FO
R$
5A
WE
EK
YO
UC
AN
WA
TC
HB
ASE
BA
LLW
ITH
OU
T
BE
ING
NA
GG
ED
TO
CU
TT
HE
GR
ASS!”
dea
th.
In o
ther
wo
rds,
sea
t b
elts
red
uce
th
e b
enef
its
of
slo
w a
nd
car
efu
l d
riv
ing
.P
eop
le r
esp
on
d t
o s
eat
bel
ts a
s th
ey w
ou
ld t
o a
n i
mp
rov
emen
t in
ro
ad c
on
di-
tio
ns—
by
dri
vin
g f
aste
r an
d l
ess
care
full
y. T
he
end
res
ult
of
a se
at b
elt
law
,th
eref
ore
, is
a l
arg
er n
um
ber
of
acci
den
ts.
Th
e d
ecli
ne
in s
afe
dri
vin
g h
as a
cle
ar,
adv
erse
im
pac
t o
n p
edes
tria
ns,
wh
o a
re m
ore
lik
ely
to
fin
d t
hem
selv
es i
n a
nac
cid
ent
bu
t (u
nli
ke
the
dri
ver
s) d
on
’t h
ave
the
ben
efit
of
add
ed p
rote
ctio
n.
At
firs
t, t
his
dis
cuss
ion
of
ince
nti
ves
an
d s
eat
bel
ts m
igh
t se
em l
ike
idle
sp
ec-
ula
tio
n.
Yet
in
a c
lass
ic 1
975
stu
dy,
eco
no
mis
t S
am P
eltz
man
sh
ow
ed t
hat
au
to-
safe
ty l
aws
hav
e h
ad m
any
of
thes
e ef
fect
s. A
cco
rdin
g t
o P
eltz
man
’s e
vid
ence
,th
ese
law
s p
rod
uce
bo
th f
ewer
dea
ths
per
acc
iden
t an
d m
ore
acc
iden
ts.
He
con
-cl
ud
ed t
hat
th
e n
et r
esu
lt i
s li
ttle
ch
ang
e in
th
e n
um
ber
of
dri
ver
dea
ths
and
an
incr
ease
in
th
e n
um
ber
of
ped
estr
ian
dea
ths.
Pel
tzm
an’s
an
aly
sis
of
auto
saf
ety
is
an o
ffb
eat
exam
ple
of
the
gen
eral
pri
nci
-p
le t
hat
peo
ple
res
po
nd
to
in
cen
tiv
es.
Wh
en a
nal
yzi
ng
an
y p
oli
cy,
we
mu
st c
on
-si
der
no
t o
nly
th
e d
irec
t ef
fect
s b
ut
also
th
e in
dir
ect
and
so
met
imes
les
s o
bv
iou
sef
fect
s th
at w
ork
th
rou
gh
in
cen
tiv
es.
If t
he
po
licy
ch
ang
es i
nce
nti
ves
, it
wil
lca
use
peo
ple
to
alt
er t
hei
r b
ehav
ior.
Lis
t an
d b
rie
fly
exp
lain
th
e fo
ur
pri
nci
ple
s o
f in
div
idu
al
de
cisi
on
makin
g.
8PA
RT 1
INT
RO
DU
CT
ION
HO
W P
EO
PLE
IN
TE
RA
CT
Th
e fi
rst
fou
r p
rin
cip
les
dis
cuss
ed h
ow
in
div
idu
als
mak
e d
ecis
ion
s. A
s w
e g
oab
ou
t o
ur
liv
es,
man
y o
f o
ur
dec
isio
ns
affe
ct n
ot
on
ly o
urs
elv
es b
ut
oth
er p
eop
leas
wel
l. T
he
nex
t th
ree
pri
nci
ple
s co
nce
rn h
ow
peo
ple
in
tera
ct w
ith
on
e an
oth
er.
Pri
nci
ple
5:
Trad
e C
an M
ake E
very
one B
ett
er
Off
Yo
u h
ave
pro
bab
ly h
eard
on
th
e n
ews
that
th
e Ja
pan
ese
are
ou
r co
mp
etit
ors
in
the
wo
rld
eco
no
my.
In
so
me
way
s, t
his
is
tru
e b
ecau
se A
mer
ican
an
d J
apan
ese
firm
s p
rod
uce
man
y o
f th
e sa
me
go
od
s. F
ord
an
d T
oy
ota
co
mp
ete
for
the
sam
ecu
sto
mer
s in
th
e m
ark
et f
or
auto
mo
bil
es.
Ap
ple
an
d S
on
y c
om
pet
e fo
r th
e sa
me
cust
om
ers
in t
he
mar
ket
fo
r d
igit
al m
usi
c p
lay
ers.
Yet
it
is e
asy
to
be
mis
led
wh
en t
hin
kin
g a
bo
ut
com
pet
itio
n a
mo
ng
co
un
trie
s.T
rad
e b
etw
een
th
e U
nit
ed S
tate
s an
d J
apan
is
no
t li
ke
a sp
ort
s co
nte
st i
n w
hic
ho
ne
sid
e w
ins
and
th
e o
ther
si
de
lose
s.
In
fact
, th
e o
pp
osi
te
is
tru
e:
Tra
de
bet
wee
n t
wo
co
un
trie
s ca
n m
ake
each
co
un
try
bet
ter
off
.T
o s
ee w
hy,
co
nsi
der
ho
w t
rad
e af
fect
s y
ou
r fa
mil
y. W
hen
a m
emb
er o
f y
ou
rfa
mil
y l
oo
ks
for
a jo
b,
he
or
she
com
pet
es a
gai
nst
mem
ber
s o
f o
ther
fam
ilie
s w
ho
are
loo
kin
g f
or
job
s. F
amil
ies
also
co
mp
ete
agai
nst
on
e an
oth
er w
hen
th
ey g
osh
op
pin
g b
ecau
se e
ach
fam
ily
wan
ts t
o b
uy
th
e b
est
go
od
s at
th
e lo
wes
t p
rice
s.S
o i
n a
sen
se,
each
fam
ily
in
th
e ec
on
om
y i
s co
mp
etin
g w
ith
all
oth
er f
amil
ies.
Des
pit
e th
is c
om
pet
itio
n,
yo
ur
fam
ily
wo
uld
no
t b
e b
ette
r o
ff i
sola
tin
g i
tsel
ffr
om
all
oth
er f
amil
ies.
If
it d
id,
yo
ur
fam
ily
wo
uld
nee
d t
o g
row
its
ow
n f
oo
d,
mak
e it
s o
wn
clo
thes
, an
d b
uil
d i
ts o
wn
ho
me.
Cle
arly
, y
ou
r fa
mil
y g
ain
s m
uch
fro
m i
ts a
bil
ity
to
tra
de
wit
h o
ther
s. T
rad
e al
low
s ea
ch p
erso
n t
o s
pec
iali
ze i
n t
he
CARTOON:FROM THE WALL STREET JOURNAL—
PERMISSION, CARTOON FEATURES SYNDICATE
3
acti
vit
ies
he
or
she
do
es b
est,
wh
eth
er i
t is
far
min
g,
sew
ing
, o
r h
om
e b
uil
din
g.
By
tra
din
g w
ith
oth
ers,
peo
ple
can
bu
y a
gre
ater
var
iety
of
go
od
s an
d s
erv
ices
at
low
er c
ost
.C
ou
ntr
ies
as
wel
l as
fa
mil
ies
ben
efit
fr
om
th
e ab
ilit
y
to
trad
e w
ith
o
ne
ano
ther
. T
rad
e al
low
s co
un
trie
s to
sp
ecia
lize
in
wh
at t
hey
do
bes
t an
d t
o e
njo
y a
gre
ater
var
iety
of
go
od
s an
d s
erv
ices
. T
he
Jap
anes
e, a
s w
ell
as t
he
Fre
nch
an
dth
e E
gy
pti
ans
and
th
e B
razi
lian
s, a
re a
s m
uch
ou
r p
artn
ers
in t
he
wo
rld
eco
n-
om
y a
s th
ey a
re o
ur
com
pet
ito
rs.
Pri
nci
ple
6:
Mark
ets
Are
Usu
ally a
Go
od
Way
to O
rganiz
e E
cono
mic
Act
ivit
y
Th
e co
llap
se o
f co
mm
un
ism
in
th
e S
ov
iet
Un
ion
an
d E
aste
rn E
uro
pe
in t
he
1980
sm
ay b
e th
e m
ost
im
po
rtan
t ch
ang
e in
th
e w
orl
d d
uri
ng
th
e p
ast
hal
f ce
ntu
ry.
Co
mm
un
ist
cou
ntr
ies
wo
rked
on
th
e p
rem
ise
that
go
ver
nm
ent
off
icia
ls w
ere
inth
e b
est
po
siti
on
to
det
erm
ine
the
allo
cati
on
of
scar
ce r
eso
urc
es i
n t
he
eco
no
my.
Th
ese
cen
tral
pla
nn
ers
dec
ided
wh
at g
oo
ds
and
ser
vic
es w
ere
pro
du
ced
, h
ow
mu
ch w
as p
rod
uce
d,
and
wh
o p
rod
uce
d a
nd
co
nsu
med
th
ese
go
od
s an
d s
er-
vic
es.
Th
e th
eory
beh
ind
cen
tral
pla
nn
ing
was
th
at o
nly
th
e g
ov
ern
men
t co
uld
org
aniz
e ec
on
om
ic a
ctiv
ity
in
a w
ay t
hat
pro
mo
ted
eco
no
mic
wel
l-b
ein
g f
or
the
cou
ntr
y a
s a
wh
ole
.T
od
ay,
mo
st c
ou
ntr
ies
that
on
ce h
ad c
entr
ally
pla
nn
ed e
con
om
ies
hav
e ab
an-
do
ned
th
is s
yst
em a
nd
are
try
ing
to
dev
elo
p m
ark
et e
con
om
ies.
In
a m
ark
et
eco
no
my,
the
dec
isio
ns
of
a ce
ntr
al p
lan
ner
are
rep
lace
d b
y t
he
dec
isio
ns
of
mil
-li
on
s o
f fi
rms
and
ho
use
ho
lds.
Fir
ms
dec
ide
wh
om
to
hir
e an
d w
hat
to
mak
e.H
ou
seh
old
s d
ecid
e w
hic
h f
irm
s to
wo
rk f
or
and
wh
at t
o b
uy
wit
h t
hei
r in
com
es.
Th
ese
firm
s an
d h
ou
seh
old
s in
tera
ct i
n t
he
mar
ket
pla
ce,
wh
ere
pri
ces
and
sel
f-in
tere
st g
uid
e th
eir
dec
isio
ns.
At
firs
t g
lan
ce,
the
succ
ess
of
mar
ket
eco
no
mie
s is
pu
zzli
ng
. A
fter
all
, in
am
ark
et e
con
om
y, n
o o
ne
is l
oo
kin
g o
ut
for
the
eco
no
mic
wel
l-b
ein
g o
f so
ciet
y a
sa
wh
ole
. F
ree
mar
ket
s co
nta
in m
any
bu
yer
s an
d s
elle
rs o
f n
um
ero
us
go
od
s an
dse
rvic
es,
and
all
of
them
are
in
tere
sted
pri
mar
ily
in
th
eir
ow
n w
ell-
bei
ng
. Y
etd
esp
ite
dec
entr
aliz
ed d
ecis
ion
mak
ing
an
d s
elf-
inte
rest
ed d
ecis
ion
mak
ers,
mar
-k
et e
con
om
ies
hav
e p
rov
en r
emar
kab
ly s
ucc
essf
ul
in o
rgan
izin
g e
con
om
ic a
ctiv
-it
y i
n a
way
th
at p
rom
ote
s o
ver
all
eco
no
mic
wel
l-b
ein
g.
In h
is 1
776
bo
ok
An
In
quir
y in
to t
he N
atu
re a
nd
Cau
ses
of t
he W
ealt
h of
Nat
ion
s,ec
on
om
ist
Ad
am S
mit
h m
ade
the
mo
st f
amo
us
ob
serv
atio
n i
n a
ll o
f ec
on
om
ics:
Ho
use
ho
lds
and
fir
ms
inte
ract
ing
in
mar
ket
s ac
t as
if
they
are
gu
ided
by
an
“in
vis
ible
han
d”
that
lea
ds
them
to
des
irab
le m
ark
et o
utc
om
es.
On
e o
f o
ur
go
als
in t
his
bo
ok
is
to u
nd
erst
and
ho
w t
his
in
vis
ible
han
d w
ork
s it
s m
agic
.A
s y
ou
stu
dy
eco
no
mic
s, y
ou
wil
l le
arn
th
at p
rice
s ar
e th
e in
stru
men
t w
ith
wh
ich
th
e in
vis
ible
han
d d
irec
ts e
con
om
ic a
ctiv
ity.
In
an
y m
ark
et,
bu
yer
s lo
ok
at
the
pri
ce w
hen
det
erm
inin
g h
ow
mu
ch t
o d
eman
d,
and
sel
lers
lo
ok
at
the
pri
cew
hen
dec
idin
g h
ow
mu
ch t
o s
up
ply
. A
s a
resu
lt o
f th
e d
ecis
ion
s th
at b
uy
ers
and
sell
ers
mak
e, m
ark
et p
rice
s re
flec
t b
oth
th
e v
alu
e o
f a
go
od
to
so
ciet
y a
nd
th
eco
st t
o s
oci
ety
of
mak
ing
th
e g
oo
d.
Sm
ith
’s g
reat
in
sig
ht
was
th
at p
rice
s ad
just
to
gu
ide
thes
e in
div
idu
al b
uy
ers
and
sel
lers
to
rea
ch o
utc
om
es t
hat
, in
man
y c
ases
,m
axim
ize
the
wel
fare
of
soci
ety
as
a w
ho
le.
Th
ere
is a
n i
mp
ort
ant
coro
llar
y t
o t
he
skil
l o
f th
e in
vis
ible
han
d i
n g
uid
ing
eco
-n
om
ic a
ctiv
ity
: W
hen
th
e g
ov
ern
men
t p
rev
ents
pri
ces
fro
m a
dju
stin
g n
atu
rall
y t
osu
pp
ly a
nd
dem
and
, it
im
ped
es t
he
inv
isib
le h
and
’s a
bil
ity
to
co
ord
inat
e th
e m
il-
lio
ns
of
ho
use
ho
lds
and
fir
ms
that
mak
e u
p t
he
eco
no
my.
Th
is c
oro
llar
y e
xp
lain
s
CH
AP
TE
R 1
TE
N P
RIN
CIP
LES
OF
EC
ON
OM
ICS
9
mark
et
eco
no
my
an e
con
om
y th
at a
llo-
cate
s re
sou
rce
s th
rou
gh
the
de
cen
tral
ize
d d
eci
-si
on
s o
f m
any
firm
s an
dh
ou
seh
old
s as
th
ey
inte
r-ac
t in
mar
kets
fo
r g
oo
ds
and
se
rvic
es
wh
y t
axes
ad
ver
sely
aff
ect
the
allo
cati
on
of
reso
urc
es:
Tax
es d
isto
rt p
rice
s an
dth
us
the
dec
isio
ns
of
ho
use
ho
lds
and
fir
ms.
It
also
ex
pla
ins
the
even
gre
ater
har
mca
use
d
by
p
oli
cies
th
at
dir
ectl
y
con
tro
l p
rice
s,
such
as
re
nt
con
tro
l.
An
d
itex
pla
ins
the
fail
ure
o
f co
mm
un
ism
. In
co
mm
un
ist
cou
ntr
ies,
p
rice
s w
ere
no
td
eter
min
ed i
n t
he
mar
ket
pla
ce b
ut
wer
e d
icta
ted
by
cen
tral
pla
nn
ers.
Th
ese
pla
n-
ner
s la
cked
th
e in
form
atio
n t
hat
get
s re
flec
ted
in
pri
ces
that
are
fre
e to
res
po
nd
to
mar
ket
fo
rces
. C
entr
al p
lan
ner
s fa
iled
bec
ause
th
ey t
ried
to
ru
n t
he
eco
no
my
wit
ho
ne
han
d t
ied
beh
ind
th
eir
bac
ks—
the
inv
isib
le h
and
of
the
mar
ket
pla
ce.
Pri
nci
ple
7:
Go
vern
ments
Can S
om
eti
mes
Imp
rove M
ark
et
Outc
om
es
If t
he
inv
isib
le h
and
of
the
mar
ket
is
so g
reat
, w
hy
do
we
nee
d g
ov
ern
men
t?O
ne
pu
rpo
se o
f st
ud
yin
g e
con
om
ics
is t
o r
efin
e y
ou
r v
iew
ab
ou
t th
e p
rop
er r
ole
and
sco
pe
of
go
ver
nm
ent
po
licy
.O
ne
reas
on
we
nee
d g
ov
ern
men
t is
th
at t
he
inv
isib
le h
and
can
wo
rk i
ts m
agic
on
ly i
f th
e g
ov
ern
men
t en
forc
es t
he
rule
s an
d m
ain
tain
s th
e in
stit
uti
on
s th
at a
re
10
PA
RT 1
INT
RO
DU
CT
ION
FY
I
Ad
am
Sm
ith
an
d t
he
In
vis
ible
Han
d
It m
ay b
e on
ly a
coin
cide
nce
that
Ad
am
Smit
h’s
grea
t bo
ok T
he
We
alt
h o
f N
ati
on
sw
as p
ublis
hed
in 1
776,
the
exac
t ye
ar A
mer
ican
rev
olut
iona
ries
sig
ned
the
Dec
lara
tion
of
Inde
pend
ence
.B
ut t
he t
wo
docu
men
ts s
hare
a p
oint
of v
iew
tha
t w
as p
reva
lent
at
the
tim
e:In
divi
dual
s
are
usua
lly b
est
left
to
thei
r ow
n de
vice
s,w
itho
ut
the
heav
y ha
nd o
f go
vern
men
t gu
idin
g th
eir
acti
ons.
This
po
litic
al
philo
soph
y pr
ovid
es
the
inte
llect
ual
basi
s fo
r th
e m
arke
t ec
onom
y an
d fo
r fr
ee s
ocie
ty
mor
e ge
nera
lly.
Why
do
dece
ntra
lized
mar
ket
econ
omie
s w
ork
so
wel
l? I
s it
bec
ause
peo
ple
can
be c
ount
ed o
n to
tre
at
one
anot
her
wit
h lo
ve a
nd k
indn
ess?
Not
at
all.
Her
e
is A
dam
Sm
ith’
s de
scri
ptio
n of
how
peo
ple
inte
ract
in
a m
arke
t ec
onom
y:
Ma
n h
as
alm
ost
co
nst
an
t o
cc
asi
on
fo
r th
e h
elp
of
his
bre
thre
n,
an
d i
t is
va
in f
or
him
to
exp
ec
t it
fro
m
the
ir b
en
evo
len
ce
on
ly.
He
will
be
mo
re l
ike
ly t
o p
reva
il if
he
ca
n i
nte
rest
th
eir
se
lf-l
ove
in
his
fa
vor,
an
d s
ho
w t
he
m
tha
t it
is
for
the
ir o
wn
ad
van
tag
e t
o d
o f
or
him
wh
at
he
req
uir
es
of
the
m..
.. I
t is
no
t fr
om
th
e b
en
evo
len
ce
of
the
bu
tch
er,
th
e b
rew
er,
or
the
ba
ker
tha
t w
e e
xpe
ct
ou
r d
in-
ne
r, b
ut
fro
m t
he
ir r
eg
ard
to
th
eir
ow
n i
nte
rest
....
Eve
ry i
nd
ivid
ua
l ..
. n
eit
he
r in
ten
ds
to p
rom
ote
th
e p
ub
-
lic i
nte
rest
, n
or
kno
ws
ho
w m
uc
h h
e i
s p
rom
oti
ng
it.
...
He
inte
nd
s o
nly
his
ow
n g
ain
, a
nd
he
is
in t
his
,
as
in m
an
y o
the
r c
ase
s, l
ed
by
an
in
visi
ble
ha
nd
to
pro
mo
te a
n e
nd
wh
ich
wa
s n
o p
art
of
his
in
ten
tio
n.
No
r is
it
alw
ays
th
e w
ors
e
for
the
so
cie
ty t
ha
t it
wa
s n
o p
art
of
it.
By
pu
rsu
ing
his
ow
n in
tere
st h
e f
req
ue
ntl
y p
ro-
mo
tes
tha
t o
f th
e s
oc
iety
mo
re e
ffe
ctu
ally
tha
n w
he
n h
e r
ea
lly i
nte
nd
s to
pro
mo
te i
t.
Smit
h is
say
ing
that
par
tici
pant
s in
the
eco
n-
omy
are
mot
ivat
ed b
y se
lf-i
nter
est
and
that
the
“in
visi
ble
hand
”of
th
e m
arke
tpla
ce
guid
es t
his
self
-int
eres
t in
to p
rom
otin
g ge
n-
eral
eco
nom
ic w
ell-
bein
g.
Man
y of
Sm
ith’
s in
sigh
ts r
emai
n at
the
cen
ter
of m
oder
n
econ
omic
s.O
ur a
naly
sis
in t
he c
omin
g ch
apte
rs w
ill a
llow
us
to
expr
ess
Smit
h’s
conc
lusi
ons
mor
e pr
ecis
ely
and
to a
naly
ze f
ully
the
stre
ngth
s an
d w
eakn
esse
s of
the
mar
ket’
s in
visi
ble
hand
.
Ada
m S
mit
h
PHOTO:©BETTMANN/CORBIS
4
key
to
a m
ark
et e
con
om
y. M
ost
im
po
rtan
t, m
ark
ets
wo
rk o
nly
if
pro
pert
y r
igh
tsar
e en
forc
ed.
Afa
rmer
wo
n’t
gro
w f
oo
d i
f h
e ex
pec
ts h
is c
rop
to
be
sto
len
; a
rest
aura
nt
wo
n’t
ser
ve
mea
ls u
nle
ss i
t is
ass
ure
d t
hat
cu
sto
mer
s w
ill
pay
bef
ore
they
lea
ve;
an
d a
mu
sic
com
pa
ny
wo
n’t
pro
du
ce C
Ds
if t
oo
ma
ny
po
ten
tia
lcu
sto
mer
s a
vo
id p
ay
ing
by
ma
kin
g i
lleg
al
cop
ies.
We
all
rel
y o
n g
ov
ern
men
t-p
rov
ided
po
lice
an
d c
ou
rts
to e
nfo
rce
ou
r ri
gh
ts o
ver
th
e th
ing
s w
e p
rod
uce
—an
d t
he
inv
isib
le h
and
co
un
ts o
n o
ur
abil
ity
to
en
forc
e o
ur
rig
hts
.Y
et t
her
e is
an
oth
er,
mo
re p
rofo
un
d r
easo
n w
e n
eed
go
ver
nm
ent:
Th
e in
vis
i-b
le h
and
is
po
wer
ful,
bu
t it
is
no
t o
mn
ipo
ten
t. A
lth
ou
gh
mar
ket
s ar
e o
ften
ag
oo
d w
ay t
o o
rgan
ize
eco
no
mic
act
ivit
y, t
his
ru
le h
as s
om
e im
po
rtan
t ex
cep
-ti
on
s. T
her
e ar
e tw
o b
road
rea
son
s fo
r a
go
ver
nm
ent
to i
nte
rven
e in
th
e ec
on
-o
my
an
d c
han
ge
the
allo
cati
on
of
reso
urc
es t
hat
peo
ple
wo
uld
ch
oo
se o
n t
hei
ro
wn
: to
pro
mo
te e
ffic
ien
cy a
nd
to
pro
mo
te e
qu
ity.
Th
at i
s, m
ost
po
lici
es a
imei
ther
to
en
larg
e th
e ec
on
om
ic p
ie o
r to
ch
ang
e h
ow
th
e p
ie i
s d
ivid
ed.
Co
nsi
der
fir
st t
he
go
al o
f ef
fici
ency
. A
lth
ou
gh
th
e in
vis
ible
han
d u
sual
ly l
ead
sm
ark
ets
to a
llo
cate
res
ou
rces
eff
icie
ntl
y, t
his
is
no
t al
way
s th
e ca
se.
Eco
no
mis
tsu
se t
he
term
mark
et
fail
ure
to r
efer
to
a s
itu
atio
n i
n w
hic
h t
he
mar
ket
on
its
ow
n f
ails
to
pro
du
ce a
n e
ffic
ien
t al
loca
tio
n o
f re
sou
rces
. O
ne
po
ssib
le c
ause
of
mar
ket
fai
lure
is
an e
xte
rnali
ty,
wh
ich
is
the
imp
act
of
on
e p
erso
n’s
act
ion
s o
nth
e w
ell-
bei
ng
of
a b
yst
and
er.
Th
e cl
assi
c ex
amp
le o
f an
ex
tern
alit
y i
s p
oll
uti
on
.A
no
ther
po
ssib
le c
ause
of
mar
ket
fai
lure
is
mark
et
po
wer,
wh
ich
ref
ers
to t
he
abil
ity
of
a si
ng
le p
erso
n (
or
smal
l g
rou
p)
to u
nd
uly
in
flu
ence
mar
ket
pri
ces.
Fo
rex
amp
le,
if e
ver
yo
ne
in t
ow
n n
eed
s w
ater
bu
t th
ere
is o
nly
on
e w
ell,
th
e o
wn
ero
f th
e w
ell
is n
ot
sub
ject
to
th
e ri
go
rou
s co
mp
etit
ion
wit
h w
hic
h t
he
inv
isib
leh
and
no
rmal
ly k
eep
s se
lf-i
nte
rest
in
ch
eck
. In
th
e p
rese
nce
of
exte
rnal
itie
s o
rm
ark
et p
ow
er,
wel
l-d
esig
ned
pu
bli
c p
oli
cy c
an e
nh
ance
eco
no
mic
eff
icie
ncy
.T
he
inv
isib
le h
and
may
als
o f
ail
to e
nsu
re t
hat
eco
no
mic
pro
sper
ity
is
dis
trib
-u
ted
eq
uit
ably
. A
mar
ket
eco
no
my
rew
ard
s p
eop
le a
cco
rdin
g t
o t
hei
r ab
ilit
y t
op
rod
uce
th
ing
s th
at o
ther
peo
ple
are
wil
lin
g t
o p
ay f
or.
Th
e w
orl
d’s
bes
t b
ask
et-
bal
l p
lay
er e
arn
s m
ore
th
an t
he
wo
rld
’s b
est
ches
s p
lay
er s
imp
ly b
ecau
se p
eop
lear
e w
illi
ng
to
pay
mo
re t
o w
atch
bas
ket
bal
l th
an c
hes
s. T
he
inv
isib
le h
and
do
esn
ot
ensu
re
that
ev
ery
on
e h
as
suff
icie
nt
foo
d,
dec
ent
clo
thin
g,
and
ad
equ
ate
hea
lth
care
. M
any
pu
bli
c p
oli
cies
, su
ch a
s th
e in
com
e ta
x a
nd
th
e w
elfa
re s
yst
em,
aim
to
ach
iev
e a
mo
re e
qu
itab
le d
istr
ibu
tio
n o
f ec
on
om
ic w
ell-
bei
ng
.T
o s
ay t
hat
th
e g
ov
ern
men
t ca
nim
pro
ve
on
mar
ket
ou
tco
mes
at
tim
es d
oes
no
t m
ean
th
at i
t al
way
s w
ill.
Pu
bli
c p
oli
cy i
s m
ade
no
t b
y a
ng
els
bu
t b
y a
po
liti
-ca
l p
roce
ss t
hat
is
far
fro
m p
erfe
ct.
So
met
imes
po
lici
es a
re d
esig
ned
sim
ply
to
rew
ard
th
e p
oli
tica
lly
po
wer
ful.
So
met
imes
th
ey a
re m
ade
by
wel
l-in
ten
tio
ned
lead
ers
wh
o a
re n
ot
full
y i
nfo
rmed
. A
s y
ou
stu
dy
eco
no
mic
s, y
ou
wil
l b
eco
me
ab
ette
r ju
dg
e o
f w
hen
a g
ov
ern
men
t p
oli
cy i
s ju
stif
iab
le b
ecau
se i
t p
rom
ote
s ef
fi-
cien
cy o
r eq
uit
y a
nd
wh
en i
t is
no
t.
List
an
d b
rie
fly
exp
lain
th
e t
hre
e p
rin
cip
les
con
cern
ing
pe
op
le’s
eco
-
no
mic
in
tera
ctio
ns.
CH
AP
TE
R 1
TE
N P
RIN
CIP
LES
OF
EC
ON
OM
ICS
11
HO
W T
HE
EC
ON
OM
Y A
S A
WH
OLE
WO
RK
S
We
star
ted
by
dis
cuss
ing
ho
w i
nd
ivid
ual
s m
ake
dec
isio
ns
and
th
en l
oo
ked
at
ho
w
peo
ple
in
tera
ct
wit
h
on
e an
oth
er.
All
th
ese
dec
isio
ns
and
in
tera
ctio
ns
mark
et
failure
a si
tuat
ion
in
wh
ich
am
arke
t le
ft o
n i
ts o
wn
fails
to
allo
cate
reso
urc
es
eff
icie
ntl
y
exte
rnality
the
im
pac
t o
f o
ne
pe
r-so
n’s
act
ion
s o
n t
he
we
ll-b
ein
g o
f a
bys
tan
de
r
mark
et
po
wer
the
ab
ility
of
a si
ng
lee
con
om
ic a
cto
r (o
r sm
all
gro
up
of
acto
rs)
to h
ave
a su
bst
anti
al i
nflu
en
ceo
n m
arke
t p
rice
s
pro
pert
y r
ights
the
ab
ility
of
an i
nd
ivid
-u
al t
o o
wn
an
d e
xerc
ise
con
tro
l o
ver
scar
cere
sou
rce
s
tog
eth
er m
ake
up
“th
e ec
on
om
y.”
Th
e la
st t
hre
e p
rin
cip
les
con
cern
th
e w
ork
ing
so
f th
e ec
on
om
y a
s a
wh
ole
.
Pri
nci
ple
8:
A C
ountr
y’s
Sta
nd
ard
of
Liv
ing
Dep
end
s o
n Its
Ab
ilit
y t
o P
rod
uce
Go
od
s and
Serv
ices
Th
e d
iffe
ren
ces
in l
ivin
g s
tan
dar
ds
aro
un
d t
he
wo
rld
are
sta
gg
erin
g.
In 2
003,
th
eav
erag
e A
mer
ican
had
an
in
com
e o
f ab
ou
t $3
7,50
0. I
n t
he
sam
e y
ear,
th
e av
erag
eM
exic
an e
arn
ed $
8,95
0, a
nd
th
e av
erag
e N
iger
ian
ear
ned
$90
0. N
ot
surp
risi
ng
ly,
this
lar
ge
var
iati
on
in
av
erag
e in
com
e is
ref
lect
ed i
n v
ario
us
mea
sure
s o
f th
eq
ual
ity
of
life
. C
itiz
ens
of
hig
h-i
nco
me
cou
ntr
ies
hav
e m
ore
TV
set
s, m
ore
car
s,b
ette
r n
utr
itio
n,
bet
ter
hea
lth
care
, an
d a
lo
ng
er l
ife
exp
ecta
ncy
th
an c
itiz
ens
of
low
-in
com
e co
un
trie
s.C
han
ges
in
liv
ing
sta
nd
ard
s o
ver
tim
e ar
e al
so l
arg
e. I
n t
he
Un
ited
Sta
tes,
inco
mes
hav
e h
isto
rica
lly
gro
wn
ab
ou
t 2
per
cen
t p
er y
ear
(aft
er a
dju
stin
g f
or
chan
ges
in
th
e co
st o
f li
vin
g).
At
this
rat
e, a
ver
age
inco
me
do
ub
les
ever
y 3
5y
ears
. O
ver
th
e p
ast
cen
tury
, av
erag
e in
com
e h
as r
isen
ab
ou
t ei
gh
tfo
ld.
Wh
at e
xp
lain
s th
ese
larg
e d
iffe
ren
ces
in l
ivin
g s
tan
dar
ds
amo
ng
co
un
trie
s an
do
ver
tim
e? T
he
answ
er i
s su
rpri
sin
gly
sim
ple
. Alm
ost
all
var
iati
on
in
liv
ing
sta
n-
dar
ds
is
attr
ibu
tab
le
to
dif
fere
nce
s in
co
un
trie
s’
pro
du
ctiv
ity
—th
at
is,
the
amo
un
t o
f g
oo
ds
and
ser
vic
es p
rod
uce
d f
rom
eac
h h
ou
r o
f a
wo
rker
’s t
ime.
In
nat
ion
s w
her
e w
ork
ers
can
pro
du
ce a
lar
ge
qu
anti
ty o
f g
oo
ds
and
ser
vic
es p
eru
nit
of
tim
e, m
ost
peo
ple
en
joy
a h
igh
sta
nd
ard
of
liv
ing
; in
nat
ion
s w
her
ew
ork
ers
are
less
pro
du
ctiv
e, m
ost
peo
ple
en
du
re a
mo
re m
eag
er e
xis
ten
ce.
Sim
i-la
rly,
th
e g
row
th r
ate
of
a n
atio
n’s
pro
du
ctiv
ity
det
erm
ines
th
e g
row
th r
ate
of
its
aver
age
inco
me.
Th
e fu
nd
amen
tal
rela
tio
nsh
ip b
etw
een
pro
du
ctiv
ity
an
d l
ivin
g s
tan
dar
ds
issi
mp
le,
bu
t it
s im
pli
cati
on
s ar
e fa
r-re
ach
ing
. If
pro
du
ctiv
ity
is
the
pri
mar
y d
eter
-m
inan
t o
f li
vin
g s
tan
dar
ds,
oth
er e
xp
lan
atio
ns
mu
st b
e o
f se
con
dar
y i
mp
ort
ance
.F
or
exam
ple
, it
mig
ht
be
tem
pti
ng
to
cre
dit
lab
or
un
ion
s o
r m
inim
um
-wag
e la
ws
for
the
rise
in
liv
ing
sta
nd
ard
s o
f A
mer
ican
wo
rker
s o
ver
th
e p
ast
cen
tury
. Y
etth
e re
al h
ero
of
Am
eric
an w
ork
ers
is t
hei
r ri
sin
g p
rod
uct
ivit
y. A
s an
oth
er e
xam
-p
le,
som
e co
mm
enta
tors
hav
e cl
aim
ed t
hat
in
crea
sed
co
mp
etit
ion
fro
m J
apan
and
oth
er c
ou
ntr
ies
exp
lain
ed t
he
slo
w g
row
th i
n U
.S.
inco
mes
du
rin
g t
he
1970
san
d 1
980s
. Y
et t
he
real
vil
lain
was
no
t co
mp
etit
ion
fro
m a
bro
ad b
ut
flag
gin
g p
ro-
du
ctiv
ity
gro
wth
in
th
e U
nit
ed S
tate
s.T
he
rela
tio
nsh
ip b
etw
een
pro
du
ctiv
ity
an
d l
ivin
g s
tan
dar
ds
also
has
pro
fou
nd
imp
lica
tio
ns
for
pu
bli
c p
oli
cy.
Wh
en t
hin
kin
g a
bo
ut
ho
w a
ny
po
licy
wil
l af
fect
liv
ing
sta
nd
ard
s, t
he
key
qu
esti
on
is
ho
w i
t w
ill
affe
ct o
ur
abil
ity
to
pro
du
ceg
oo
ds
and
ser
vic
es.
To
bo
ost
liv
ing
sta
nd
ard
s, p
oli
cym
aker
s n
eed
to
rai
se p
ro-
du
ctiv
ity
by
en
suri
ng
th
at w
ork
ers
are
wel
l ed
uca
ted
, h
ave
the
too
ls n
eed
ed t
op
rod
uce
go
od
s an
d s
erv
ices
, an
d h
ave
acce
ss t
o t
he
bes
t av
aila
ble
tec
hn
olo
gy.
Pri
nci
ple
9:
Pri
ces
Ris
e W
hen t
he G
overn
ment
Pri
nts
To
o M
uch
Mo
ney
In G
erm
any
in
Jan
uar
y 1
921,
a d
aily
new
spap
er c
ost
0.3
0 m
ark
s. L
ess
than
2y
ears
lat
er,
in N
ov
emb
er 1
922,
th
e sa
me
new
spap
er c
ost
70,
000,
000
mar
ks.
All
oth
er p
rice
s in
th
e ec
on
om
y r
ose
by
sim
ilar
am
ou
nts
. T
his
ep
iso
de
is o
ne
of
his
-to
ry’s
mo
st s
pec
tacu
lar
exam
ple
s o
f in
flati
on
,an
in
crea
se i
n t
he
ov
eral
l le
vel
of
pri
ces
in t
he
eco
no
my.
12
PA
RT 1
INT
RO
DU
CT
ION
pro
duct
ivit
yth
e q
uan
tity
of
go
od
san
d s
erv
ice
s p
rod
uce
dfr
om
eac
h h
ou
r o
f a
wo
rke
r’s t
ime
infl
ati
on
an i
ncr
eas
e i
n t
he
ove
rall
leve
l o
f p
rice
s in
th
ee
con
om
y
5
Alt
ho
ug
h t
he
Un
ited
Sta
tes
has
nev
er e
xp
erie
nce
d i
nfl
atio
n e
ven
clo
se t
o t
hat
in G
erm
any
in
th
e 19
20s,
in
flat
ion
has
at
tim
es b
een
an
eco
no
mic
pro
ble
m.
Du
r-in
g t
he
1970
s, f
or
inst
ance
, th
e o
ver
all
lev
el o
f p
rice
s m
ore
th
an d
ou
ble
d,
and
Pre
sid
ent
Ger
ald
Fo
rd c
alle
d i
nfl
atio
n “
pu
bli
c en
emy
nu
mb
er o
ne.
” B
y c
on
tras
t,in
flat
ion
in
th
e 19
90s
was
ab
ou
t 3
per
cen
t p
er y
ear;
at
this
rat
e, i
t w
ou
ld t
ake
mo
re t
han
20
yea
rs f
or
pri
ces
to d
ou
ble
. B
ecau
se h
igh
in
flat
ion
im
po
ses
var
iou
sco
sts
on
so
ciet
y, k
eep
ing
in
flat
ion
at
a lo
w l
evel
is
a g
oal
of
eco
no
mic
po
licy
mak
-er
s ar
ou
nd
th
e w
orl
d.
Wh
at c
ause
s in
flat
ion
? In
alm
ost
all
cas
es o
f la
rge
or
per
sist
ent
infl
atio
n,
the
culp
rit
is g
row
th i
n t
he
qu
anti
ty o
f m
on
ey.
Wh
en a
go
ver
nm
ent
crea
tes
larg
eq
uan
titi
es o
f th
e n
atio
n’s
mo
ney
, th
e v
alu
e o
f th
e m
on
ey f
alls
. In
Ger
man
y i
n t
he
earl
y 1
920s
, w
hen
pri
ces
wer
e o
n a
ver
age
trip
lin
g e
ver
y m
on
th,
the
qu
anti
ty o
fm
on
ey w
as a
lso
tri
pli
ng
ev
ery
mo
nth
. Alt
ho
ug
h l
ess
dra
mat
ic,
the
eco
no
mic
his
-to
ry o
f th
e U
nit
ed S
tate
s p
oin
ts t
o a
sim
ilar
co
ncl
usi
on
: T
he
hig
h i
nfl
atio
n o
f th
e19
70s
was
ass
oci
ated
wit
h r
apid
gro
wth
in
th
e q
uan
tity
of
mo
ney
, an
d t
he
low
infl
atio
n o
f th
e 19
90s
was
ass
oci
ated
wit
h s
low
gro
wth
in
th
e q
uan
tity
of
mo
ney
.
Pri
nci
ple
10
: So
ciety
Face
s a S
ho
rt-R
un T
rad
e-o
ff
betw
een Infl
ati
on a
nd
Unem
plo
ym
ent
Alt
ho
ug
h
a h
igh
er
lev
el
of
pri
ces
is,
in
the
lon
g
run
, th
e p
rim
ary
ef
fect
o
fin
crea
sin
g t
he
qu
anti
ty o
f m
on
ey,
the
sho
rt-r
un
sto
ry i
s m
ore
co
mp
lex
an
d m
ore
con
tro
ver
sial
. M
ost
eco
no
mis
ts d
escr
ibe
the
sho
rt-r
un
eff
ects
of
mo
net
ary
in
jec-
tio
ns
as f
oll
ow
s:
•In
crea
sin
g t
he
amo
un
t o
f m
on
ey i
n t
he
eco
no
my
sti
mu
late
s th
e o
ver
all
lev
elo
f sp
end
ing
an
d t
hu
s th
e d
eman
d f
or
go
od
s an
d s
erv
ices
.•
Hig
her
dem
an
d m
ay
ov
er t
ime
cau
se f
irm
s to
ra
ise
thei
r p
rice
s, b
ut
in t
he
mea
nti
me,
it
als
o e
nco
ura
ges
th
em t
o i
ncr
ease
th
e q
ua
nti
ty o
f g
oo
ds
an
dse
rvic
es t
hey
pro
du
ce a
nd
to
hir
e m
ore
wo
rker
s to
pro
du
ce t
ho
se g
oo
ds
an
dse
rvic
es.
•M
ore
hir
ing
mea
ns
low
er u
nem
plo
ym
ent.
Th
is l
ine
of
reas
on
ing
lea
ds
to o
ne
fin
al e
con
om
yw
ide
trad
e-o
ff:
a sh
ort
-ru
ntr
ade-
off
bet
wee
n i
nfl
atio
n a
nd
un
emp
loy
men
t.A
lth
ou
gh
so
me
eco
no
mis
ts s
till
qu
esti
on
th
ese
idea
s, m
ost
acc
ept
that
so
ciet
yfa
ces
a sh
ort
-ru
n t
rad
e-o
ff b
etw
een
in
flat
ion
an
d u
nem
plo
ym
ent.
Th
is s
imp
lym
ean
s th
at,
ov
er a
per
iod
of
a y
ear
or
two
, m
any
eco
no
mic
po
lici
es p
ush
in
fla-
tio
n a
nd
un
emp
loy
men
t in
op
po
site
dir
ecti
on
s. P
oli
cym
aker
s fa
ce t
his
tra
de-
off
reg
ard
less
of
wh
eth
er i
nfl
atio
n a
nd
un
emp
loy
men
t b
oth
sta
rt o
ut
at h
igh
lev
els
(as
they
wer
e in
th
e ea
rly
198
0s),
at
low
lev
els
(as
they
wer
e in
th
e la
te 1
990s
), o
rso
mep
lace
in
bet
wee
n.
Th
is s
ho
rt-r
un
tra
de-
off
pla
ys
a k
ey r
ole
in
th
e an
aly
sis
of
the
bu
sin
ess
cy
cle—
the
irre
gu
lar
and
lar
gel
y u
np
red
icta
ble
flu
ctu
atio
ns
in e
co-
no
mic
act
ivit
y, a
s m
easu
red
by
th
e p
rod
uct
ion
of
go
od
s an
d s
erv
ices
or
the
nu
m-
ber
of
peo
ple
em
plo
yed
.P
oli
cym
aker
s ca
n e
xp
loit
th
e sh
ort
-ru
n t
rad
e-o
ff b
etw
een
in
flat
ion
an
d u
nem
-p
loy
men
t u
sin
g v
ario
us
po
licy
in
stru
men
ts.
By
ch
ang
ing
th
e am
ou
nt
that
th
eg
ov
ern
men
t sp
end
s, t
he
amo
un
t it
tax
es,
and
th
e am
ou
nt
of
mo
ney
it
pri
nts
, p
ol-
icy
mak
ers
can
in
flu
ence
th
e co
mb
inat
ion
of
infl
atio
n a
nd
un
emp
loy
men
t th
atth
e ec
on
om
y
exp
erie
nce
s.
Bec
ause
th
ese
inst
rum
ents
o
f ec
on
om
ic
po
licy
ar
ep
ote
nti
ally
so
po
wer
ful,
ho
w p
oli
cym
aker
s sh
ou
ld u
se t
hes
e in
stru
men
ts t
o c
on
-tr
ol
the
eco
no
my,
if
at a
ll,
is a
su
bje
ct o
f co
nti
nu
ing
deb
ate.
CH
AP
TE
R 1
TE
N P
RIN
CIP
LES
OF
EC
ON
OM
ICS
13
“WE
LLIT
MA
YH
AV
EB
EE
N
68
CE
NT
SW
HE
NY
OU
GO
T
INLI
NE,
BU
TIT
’S7
4C
EN
TS
NO
W!”
CARTOON:COPYRIGHTED 1978.CHICAGO TRIBUNE
COMPANY.ALL RIGHTS RESERVED.USED WITH PERMISSION.
busi
ness
cycl
eflu
ctu
atio
ns
in e
con
om
icac
tivi
ty,
such
as
em
plo
y-m
en
t an
d p
rod
uct
ion
List
an
d b
rie
fly
exp
lain
th
e t
hre
e p
rin
cip
les
that
de
scri
be
ho
w t
he
eco
no
my
as a
wh
ole
wo
rks.
14
PA
RT 1
INT
RO
DU
CT
ION
FY
I
Ho
w t
o R
ead
Th
is B
oo
k
Econ
omic
s is
fun
,
but
it c
an a
lso
be
hard
to
lear
n.M
y
aim
in
wri
ting
thi
s te
xt i
s to
mak
e it
as
fun
and
easy
as
poss
ible
.
But
you
,th
e st
uden
t,al
so h
ave
a ro
le t
o pl
ay.
Expe
rien
ce s
how
s
that
if
you
are
acti
vely
inv
olve
d as
you
stu
dy t
his
book
,yo
u w
ill
enjo
y a
bett
er o
utco
me
both
on
your
exa
ms
and
in t
he y
ears
that
fol
low
.H
ere
are
a fe
w t
ips
abou
t ho
w b
est
to r
ead
this
book
.
1.S
um
ma
rize
, d
on
’t h
igh
ligh
t.R
unni
ng a
yel
low
mar
ker
over
the
text
is
to
o pa
ssiv
e an
ac
tivi
ty
to
keep
yo
ur
min
d
enga
ged.
Inst
ead,
whe
n yo
u co
me
to t
he e
nd o
f a
sect
ion,
take
a m
inut
e an
d su
mm
ariz
e w
hat
you
just
lea
rned
in
your
own
wor
ds,
wri
ting
yo
ur
sum
mar
y in
th
e w
ide
mar
gins
we’
ve p
rovi
ded.
Whe
n yo
u’ve
fin
ishe
d th
e ch
apte
r,co
mpa
re
your
sum
mar
ies
wit
h th
e on
e at
the
end
of
the
chap
ter.
Did
you
pick
up
the
mai
n po
ints
?
2.Te
st
you
rse
lf.
Thro
ugho
ut
the
book
,Q
uick
Q
uizz
es
offe
r
inst
ant
feed
back
to
find
out
if
you’
ve l
earn
ed w
hat
you
are
supp
osed
to
.Ta
ke
the
oppo
rtun
ity
to
wri
te
dow
n yo
ur
answ
er a
nd t
hen
chec
k it
aga
inst
the
ans
wer
s pr
ovid
ed i
n
the
back
of
the
book
.Th
e qu
izze
s ar
e m
eant
to
test
you
r
basi
c co
mpr
ehen
sion
.If
you
r an
swer
is
inco
rrec
t,yo
u pr
oba-
bly
need
to
revi
ew t
he s
ecti
on.
3.P
rac
tic
e,
pra
cti
ce
, p
rac
tic
e.
At
the
end
of e
ach
chap
ter,
Qu e
stio
ns f
or R
evie
w t
est
your
und
erst
andi
ng,
and
Prob
lem
s
and
App
licat
ions
ask
you
to
appl
y an
d ex
tend
the
mat
eria
l.
Perh
aps
your
ins
truc
tor
will
ass
ign
som
e of
the
se e
xerc
ises
as
hom
ewor
k.If
so,
do t
hem
.If
not
,do
the
m a
nyw
ay.T
he m
ore
you
use
your
new
kno
wle
dge,
the
mor
e so
lid i
t be
com
es.
4.G
o o
nlin
e.T
he p
ublis
her
of t
his
book
mai
ntai
ns a
n ex
tens
ive
web
site
to
help
you
in
your
stu
dy o
f ec
onom
ics.
It i
nclu
des
addi
tion
al e
xam
ples
,ap
plic
atio
ns,
and
prob
lem
s,as
wel
l as
quiz
zes
so y
ou c
an t
est
your
self.
Che
ck i
t ou
t.Th
e w
ebsi
te i
s
htt
p:/
/man
kiw
.sw
learn
ing
.co
m.
5.S
tud
y in
gro
up
s.A
fter
you
’ve
read
the
boo
k an
d w
orke
d
prob
lem
s on
you
r ow
n,ge
t to
geth
er w
ith
clas
smat
es t
o di
s-
cuss
the
mat
eria
l.Yo
u w
ill l
earn
fro
m e
ach
othe
r—an
exa
m-
ple
of t
he g
ains
fro
m t
rade
.
6.D
on
’t f
org
et
the
re
al
wo
rld
.In
the
mid
st o
f al
l th
e nu
mbe
rs,
grap
hs,
and
stra
nge
new
wor
ds,
it i
s ea
sy t
o lo
se s
ight
of
wha
t ec
onom
ics
is a
ll ab
out.
The
Cas
e St
udie
s an
d In
the
New
s bo
xes
spri
nkle
d th
roug
hout
th
is
book
sh
ould
he
lp
rem
ind
you.
Don
’t s
kip
them
.Th
ey s
how
how
the
the
ory
is
tied
to
even
ts h
appe
ning
in
all
of o
ur l
ives
.If
you
r st
udy
is
succ
essf
ul,
you
won
’t b
e ab
le t
o re
ad a
new
spap
er a
gain
wit
hout
thi
nkin
g ab
out
supp
ly,
dem
and,
and
the
won
derf
ul
wor
ld o
f ec
onom
ics.
CO
NC
LU
SIO
N
Yo
u n
ow
hav
e a
tast
e o
f w
hat
eco
no
mic
s is
all
ab
ou
t. I
n t
he
com
ing
ch
apte
rs,
we
wil
l d
evel
op
man
y s
pec
ific
in
sig
hts
ab
ou
t p
eop
le,
mar
ket
s, a
nd
eco
no
mie
s. M
as-
teri
ng
th
ese
insi
gh
ts w
ill
tak
e so
me
effo
rt,
bu
t it
is
no
t an
ov
erw
hel
min
g t
ask
.T
he
fiel
d o
f ec
on
om
ics
is b
ased
on
a f
ew b
asic
id
eas
that
can
be
app
lied
in
man
yd
iffe
ren
t si
tuat
ion
s.T
hro
ug
ho
ut
this
bo
ok
, w
e w
ill
refe
r b
ack
to
th
e Te
n P
rin
cipl
es o
f E
con
omic
sh
igh
lig
hte
d i
n t
his
ch
apte
r an
d s
um
mar
ized
in
Tab
le 1
. W
hen
ever
we
do
so
, an
ico
n w
ill
be
dis
pla
yed
in
th
e m
arg
in,
as i
t is
no
w.
Bu
t ev
en w
hen
th
at i
con
is
abse
nt,
yo
u s
ho
uld
kee
p t
hes
e b
uil
din
g b
lock
s in
min
d.
Ev
en t
he
mo
st s
op
his
ti-
cate
d e
con
om
ic a
nal
ysi
s is
bu
ilt
usi
ng
th
e te
n p
rin
cip
les
intr
od
uce
d h
ere.
6
CH
AP
TE
R 1
TE
N P
RIN
CIP
LES
OF
EC
ON
OM
ICS
15
11T
AB
LE
Ten P
rinci
ple
s o
f E
cono
mic
s
Ho
w P
eo
ple
Make D
eci
sio
ns
1:
Pe
op
le F
ace
Tra
de
-off
s
2:
Th
e C
ost
of
So
me
thin
g Is
Wh
at Y
ou
Giv
e U
p t
o G
et
It
3:
Rat
ion
al P
eo
ple
Th
ink
at t
he
Mar
gin
4:
Pe
op
le R
esp
on
d t
o In
cen
tive
s
Ho
w P
eo
ple
Inte
ract
5:
Trad
e C
an M
ake
Eve
ryo
ne
Be
tte
r O
ff
6:
Mar
kets
Ar e
Usu
ally
a G
oo
d W
ay t
o O
rgan
ize
Eco
no
mic
Act
ivit
y
7:
Go
vern
me
nts
Can
So
me
tim
es
Imp
rove
Mar
ket
Ou
tco
me
s
Ho
w t
he E
cono
my a
s a W
ho
le W
ork
s
8:
A C
ou
ntr
y’s
Sta
nd
ard
of
Livi
ng
De
pe
nd
s o
n Its
Ab
ility
to
Pro
du
ce G
oo
ds
and
Se
rvic
es
9:
Pri
ces
Ris
e W
he
n t
he
Go
vern
me
nt
Pri
nts
To
o M
uch
Mo
ne
y
10
:S
oci
ety
Fac
es
a S
ho
rt-R
un
Tra
de
-off
be
twe
en
In
flati
on
an
d U
ne
mp
loym
en
t
KE
Y C
ON
CE
PT
S
•T
he
fun
dam
enta
l le
sso
ns
abo
ut
ind
ivid
ual
dec
i-si
on
m
akin
g
are
that
p
eop
le
face
tr
ade-
off
sam
on
g
alte
rnat
ive
go
als,
th
at
the
cost
o
f an
yac
tio
n i
s m
easu
red
in
ter
ms
of
forg
on
e o
pp
ort
un
i-ti
es,
that
rat
ion
al p
eop
le m
ake
dec
isio
ns
by
co
m-
par
ing
mar
gin
al c
ost
s an
d m
arg
inal
ben
efit
s, a
nd
that
peo
ple
ch
ang
e th
eir
beh
avio
r in
res
po
nse
to
the
ince
nti
ves
th
ey f
ace.
•T
he
fun
dam
enta
l le
sso
ns
abo
ut
inte
ract
ion
s am
on
gp
eop
le a
re t
hat
tra
de
can
be
mu
tual
ly b
enef
icia
l,th
at m
ark
ets
are
usu
ally
a g
oo
d w
ay o
f co
ord
i-
nat
ing
tra
de
amo
ng
peo
ple
, an
d t
hat
th
e g
ov
ern
-m
ent
can
po
ten
tial
ly i
mp
rov
e m
ark
et o
utc
om
es i
fth
ere
is s
om
e m
ark
et f
ailu
re o
r if
th
e m
ark
et o
ut-
com
e is
in
equ
itab
le.
•T
he
fun
dam
enta
l le
sso
ns
abo
ut
the
eco
no
my
as
aw
ho
le a
re t
hat
pro
du
ctiv
ity
is
the
ult
imat
e so
urc
eo
f li
vin
g
stan
dar
ds,
th
at
mo
ney
g
row
th
is
the
ult
imat
e so
urc
e o
f in
flat
ion
, an
d
that
so
ciet
yfa
ces
a sh
ort
-ru
n t
rad
e-o
ff b
etw
een
in
flat
ion
an
du
nem
plo
ym
ent.
SU
MM
AR
Y
scar
city
, p. 3
eco
no
mic
s, p
. 4ef
fici
ency
, p. 5
equ
ity,
p. 5
op
po
rtu
nit
y c
ost
, p. 6
rati
on
al p
eop
le, p
. 6
mar
ket
po
wer
, p. 1
1p
rod
uct
ivit
y, p
. 12
infl
atio
n, p
. 12
bu
sin
ess
cycl
e, p
. 13
mar
gin
al c
han
ges
, p. 6
ince
nti
ve,
p. 7
mar
ket
eco
no
my,
p. 9
pro
per
ty r
igh
ts, p
. 11
mar
ket
fai
lure
, p. 1
1ex
tern
alit
y, p
. 11
16
PA
RT 1
INT
RO
DU
CT
ION
1.D
escr
ibe
som
e o
f th
e tr
ade-
off
s fa
ced
by
eac
h o
fth
e fo
llo
win
g:
a.a
fam
ily
dec
idin
g w
het
her
to
bu
y a
new
car
b.
a m
emb
er o
f C
on
gre
ss d
ecid
ing
ho
w m
uch
to
spen
d o
n n
atio
nal
par
ks
c.a
com
pan
y
pre
sid
ent
dec
idin
g
wh
eth
er
too
pen
a n
ew f
acto
ryd
.a
pro
fess
or
dec
idin
g
ho
w
mu
ch
to
pre
par
efo
r cl
ass
2.Y
ou
are
try
ing
to
dec
ide
wh
eth
er t
o t
ake
a v
aca-
tio
n.
Mo
st o
f th
e co
sts
of
the
vac
atio
n (
airf
are,
ho
tel,
an
d f
org
on
e w
ages
) ar
e m
easu
red
in
do
l-la
rs,
bu
t th
e b
enef
its
of
the
vac
atio
n a
re p
sych
o-
log
ical
. H
ow
can
yo
u c
om
par
e th
e b
enef
its
toth
e co
sts?
3.Y
ou
wer
e p
lan
nin
g t
o s
pen
d S
atu
rday
wo
rkin
gat
yo
ur
par
t-ti
me
job
, b
ut
a fr
ien
d a
sks
yo
u t
o g
osk
iin
g.
Wh
at
is
the
tru
e co
st
of
go
ing
sk
iin
g?
No
w s
up
po
se y
ou
had
bee
n p
lan
nin
g t
o s
pen
dth
e d
ay s
tud
yin
g a
t th
e li
bra
ry.
Wh
at i
s th
e co
sto
f g
oin
g s
kii
ng
in
th
is c
ase?
Ex
pla
in.
4.Y
ou
win
$10
0 in
a b
ask
etb
all
po
ol.
Yo
u h
ave
ach
oic
e b
etw
een
sp
end
ing
th
e m
on
ey
no
w
or
pu
ttin
g i
t aw
ay f
or
a y
ear
in a
ban
k a
cco
un
t th
atp
ays
5 p
erce
nt
inte
rest
. W
hat
is
the
op
po
rtu
nit
yco
st o
f sp
end
ing
th
e $1
00 n
ow
?
5.T
he
com
pan
y t
hat
yo
u m
anag
e h
as i
nv
este
d $
5m
illi
on
in
d
evel
op
ing
a
new
p
rod
uct
, b
ut
the
dev
elo
pm
ent
is n
ot
qu
ite
fin
ish
ed.
At
a re
cen
tm
eeti
ng
, y
ou
r sa
lesp
eop
le r
epo
rt t
hat
th
e in
tro
-d
uct
ion
of
com
pet
ing
pro
du
cts
has
red
uce
d t
he
exp
ecte
d s
ales
of
yo
ur
new
pro
du
ct t
o $
3 m
il-
lio
n.
If i
t w
ou
ld c
ost
$1
mil
lio
n t
o f
inis
h d
evel
-o
pm
ent
and
mak
e th
e p
rod
uct
, sh
ou
ld y
ou
go
ahea
d
and
d
o
so?
Wh
at
is
the
mo
st
that
y
ou
sho
uld
pay
to
co
mp
lete
dev
elo
pm
ent?
6.T
hre
e m
anag
ers
of
the
Mag
ic P
oti
on
Co
mp
any
are
dis
cuss
ing
a p
oss
ible
in
crea
se i
n p
rod
uct
ion
.E
ach
su
gg
ests
a w
ay t
o m
ake
this
dec
isio
n.
HA
RR
Y:
We
sho
uld
ex
amin
e w
het
her
o
ur
com
pan
y’s
pro
du
ctiv
ity
—g
allo
ns
of
po
tio
n p
er w
ork
er—
wo
uld
ris
e o
rfa
ll.
RO
N:
We
sho
uld
ex
am
ine
wh
eth
er
ou
ra
ver
ag
e co
st—
cost
p
er
wo
rker
—w
ou
ld r
ise
or
fall
.
HE
RM
ION
E:
We
sho
uld
ex
amin
e w
het
her
th
eex
tra
rev
enu
e fr
om
sel
lin
g t
he
add
i-ti
on
al
po
tio
n
wo
uld
b
e g
reat
er
or
smal
ler
than
th
e ex
tra
cost
s.
Wh
o d
o y
ou
th
ink
is
rig
ht?
Wh
y?
7.T
he
So
cial
Sec
uri
ty s
yst
em p
rov
ides
in
com
e fo
rp
eop
le o
ver
ag
e 65
. If
a r
ecip
ien
t o
f S
oci
al S
ecu
-ri
ty d
ecid
es t
o w
ork
an
d e
arn
so
me
inco
me,
th
eam
ou
nt
he
or
she
rece
ives
in
So
cial
Sec
uri
ty b
en-
efit
s is
ty
pic
ally
red
uce
d.
a.H
ow
do
es t
he
pro
vis
ion
of
So
cia
l S
ecu
rity
aff
ect
peo
ple
’s
ince
nti
ve
to
sav
e w
hil
ew
ork
ing
?b
.H
ow
d
oes
th
e re
du
ctio
n
in
ben
efit
s as
soci
-at
ed
wit
h
hig
her
ea
rnin
gs
affe
ct
peo
ple
’sin
cen
tiv
e to
wo
rk p
ast
age
65?
PR
OB
LE
MS A
ND
AP
PLIC
AT
ION
S
1.G
ive
thre
e ex
amp
les
of
imp
ort
ant
trad
e-o
ffs
that
yo
u f
ace
in y
ou
r li
fe.
2.W
hat
is
the
op
po
rtu
nit
y c
ost
of
seei
ng
a m
ov
ie?
3.W
ater
is
nec
essa
ry f
or
life
. Is
th
e m
arg
inal
ben
e-fi
t o
f a
gla
ss o
f w
ater
lar
ge
or
smal
l?
4.W
hy
sh
ou
ld
po
licy
mak
ers
thin
k
abo
ut
ince
n-
tiv
es?
5.W
hy
is
n’t
tr
ade
amo
ng
co
un
trie
s li
ke
a g
ame
wit
h s
om
e w
inn
ers
and
so
me
lose
rs?
6.W
hat
do
es t
he
“in
vis
ible
han
d”
of
the
mar
ket
-p
lace
do
?
7.E
xp
lain
th
e tw
o m
ain
cau
ses
of
mar
ket
fai
lure
and
giv
e an
ex
amp
le o
f ea
ch.
8.W
hy
is
pro
du
ctiv
ity
im
po
rtan
t?
9.W
hat
is
infl
atio
n a
nd
wh
at c
ause
s it
?
10.
Ho
w a
re i
nfl
atio
n a
nd
un
emp
loy
men
t re
late
d i
nth
e sh
ort
ru
n?
QU
EST
ION
S F
OR
RE
VIE
W
7
Peter
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Peter
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Peter
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0
Peter
Schreibmaschinentext
Peter
Schreibmaschinentext
CH
AP
TE
R 1
TE
N P
RIN
CIP
LES
OF
EC
ON
OM
ICS
17
8.A
rece
nt
bil
l re
form
ing
th
e g
ov
ern
men
t’s
anti
-p
ov
erty
pro
gra
ms
lim
ited
man
y w
elfa
re r
ecip
i-en
ts t
o o
nly
2 y
ears
of
ben
efit
s.a.
Ho
w
do
es
this
ch
ang
e af
fect
th
e in
cen
tiv
esfo
r w
ork
ing
?b
.H
ow
mig
ht
this
ch
ang
e re
pre
sen
t a
trad
e-o
ffb
etw
een
eq
uit
y a
nd
eff
icie
ncy
?
9.Y
ou
r ro
om
mat
e is
a b
ette
r co
ok
th
an y
ou
are
,b
ut
yo
u c
an c
lean
mo
re q
uic
kly
th
an y
ou
r ro
om
-m
ate
can
. If
yo
ur
roo
mm
ate
did
all
of
the
coo
k-
ing
an
d y
ou
did
all
of
the
clea
nin
g,
wo
uld
yo
ur
cho
res
tak
e y
ou
mo
re o
r le
ss t
ime
than
if
yo
ud
ivid
ed e
ach
tas
k e
ven
ly?
Giv
e a
sim
ilar
ex
am-
ple
of
ho
w s
pec
iali
zati
on
an
d t
rad
e ca
n m
ake
two
co
un
trie
s b
oth
bet
ter
off
.
10.
Su
pp
ose
th
e U
nit
ed S
tate
s ad
op
ted
cen
tral
pla
n-
nin
g f
or
its
eco
no
my,
an
d y
ou
bec
ame
the
chie
fp
lan
ner
. A
mo
ng
th
e m
illi
on
s o
f d
ecis
ion
s th
aty
ou
nee
d t
o m
ake
for
nex
t y
ear
are
ho
w m
any
com
pac
t d
iscs
to
pro
du
ce,
wh
at a
rtis
ts t
o r
eco
rd,
and
wh
o s
ho
uld
rec
eiv
e th
e d
iscs
.a.
To
m
ake
thes
e d
ecis
ion
s in
tell
igen
tly,
w
hat
info
rmat
ion
wo
uld
yo
u n
eed
ab
ou
t th
e co
m-
pac
t d
isc
ind
ust
ry?
Wh
at i
nfo
rmat
ion
wo
uld
yo
u
nee
d
abo
ut
each
o
f th
e p
eop
le
in
the
Un
ited
Sta
tes?
b.
Ho
w w
ou
ld y
ou
r d
ecis
ion
s ab
ou
t C
Ds
affe
ctso
me
of
yo
ur
oth
er d
ecis
ion
s, s
uch
as
ho
wm
any
CD
pla
yer
s to
mak
e o
r m
p3 p
laye
rs t
op
rod
uce
? H
ow
m
igh
t so
me
of
yo
ur
oth
erd
ecis
ion
s ab
ou
t th
e ec
on
om
y
chan
ge
yo
ur
vie
ws
abo
ut
CD
s?
11.
Nat
ion
s w
ith
co
rru
pt
po
lice
an
d c
ou
rt s
yst
ems
typ
ical
ly
hav
e lo
wer
st
and
ard
s o
f li
vin
g
than
nat
ion
s w
ith
les
s co
rru
pti
on
. W
hy
mig
ht
that
be
the
case
?
12.
Ex
pla
in w
het
her
eac
h o
f th
e fo
llo
win
g g
ov
ern
-m
ent
acti
vit
ies
is m
oti
vat
ed b
y a
co
nce
rn a
bo
ut
equ
ity
or
a co
nce
rn a
bo
ut
effi
cien
cy.
In t
he
case
of
effi
cien
cy,
dis
cuss
th
e ty
pe
of
mar
ket
fai
lure
inv
olv
ed.
a.re
gu
lati
ng
cab
le T
V p
rice
s
b.
pro
vid
ing
so
me
po
or
peo
ple
wit
h v
ou
cher
sth
at c
an b
e u
sed
to
bu
y f
oo
dc.
pro
hib
itin
g s
mo
kin
g i
n p
ub
lic
pla
ces
d.
bre
akin
g u
p S
tan
dar
d O
il (
wh
ich
on
ce o
wn
ed90
p
erce
nt
of
all
oil
re
fin
erie
s)
into
se
ver
alsm
alle
r co
mp
anie
se.
imp
osi
ng
hig
her
per
son
al i
nco
me
tax
rat
es o
np
eop
le w
ith
hig
her
in
com
esf.
inst
itu
tin
g l
aws
agai
nst
dri
vin
g w
hil
e in
tox
i-ca
ted
13.
Dis
cuss
eac
h o
f th
e fo
llo
win
g s
tate
men
ts f
rom
the
stan
dp
oin
ts o
f eq
uit
y a
nd
eff
icie
ncy
.a.
“Ev
ery
on
e in
so
ciet
y
sho
uld
b
e g
uar
ante
edth
e b
est
hea
lth
care
po
ssib
le.”
b.
“Wh
en w
ork
ers
are
laid
off
, th
ey s
ho
uld
be
able
to
co
llec
t u
nem
plo
ym
ent
ben
efit
s u
nti
lth
ey f
ind
a n
ew j
ob
.”
14.
In w
hat
way
s is
yo
ur
stan
dar
d o
f li
vin
g d
iffe
ren
tfr
om
th
at o
f y
ou
r p
aren
ts o
r g
ran
dp
aren
ts w
hen
they
wer
e y
ou
r ag
e? W
hy
hav
e th
ese
chan
ges
occ
urr
ed?
15.
Su
pp
ose
Am
eric
ans
dec
ide
to s
ave
mo
re o
f th
eir
inco
mes
. If
ban
ks
len
d t
his
ex
tra
sav
ing
to
bu
si-
nes
ses,
wh
ich
use
th
e fu
nd
s to
bu
ild
new
fac
to-
ries
, h
ow
mig
ht
this
lea
d t
o f
aste
r g
row
th i
n p
ro-
du
ctiv
ity
? W
ho
do
yo
u s
up
po
se b
enef
its
fro
mth
e h
igh
er p
rod
uct
ivit
y?
Is s
oci
ety
get
tin
g a
fre
elu
nch
?
16.
Imag
ine
that
y
ou
ar
e a
po
licy
mak
er
try
ing
to
dec
ide
wh
eth
er t
o r
edu
ce t
he
rate
of
infl
atio
n.
To
mak
e an
in
tell
igen
t d
ecis
ion
, w
hat
wo
uld
yo
un
eed
to
k
no
w
abo
ut
infl
atio
n,
un
emp
loy
men
t,an
d t
he
trad
e-o
ff b
etw
een
th
em?
17.
Lo
ok
at
a
new
spap
er
or
at
the
web
site
h
ttp
: //
ww
w.e
con
om
ist.
com
to
fin
d
thre
e st
ori
es
abo
ut
the
eco
no
my
th
at h
ave
bee
n i
n t
he
new
s la
tely
.F
or
each
sto
ry,
iden
tify
on
e (o
r m
ore
) o
f th
e Te
nP
rin
cipl
es o
f E
con
omic
sd
iscu
ssed
in
th
is c
hap
ter
that
is
rele
van
t an
d e
xp
lain
ho
w i
t is
rel
evan
t.A
lso
, fo
r ea
ch
sto
ry,
loo
k
thro
ug
h
this
b
oo
k’s
Co
nte
nts
an
d t
ry t
o f
ind
a c
hap
ter
that
mig
ht
shed
lig
ht
on
th
e n
ews
even
t.
Fo
r fu
rth
er
info
rmati
on
on
to
pic
s in
th
is c
hap
ter, a
dd
itio
nal p
rob
lem
s,ap
plic
ati
on
s, e
xam
ple
s, o
nlin
e q
uiz
zes,
an
d m
ore
, p
lease
vis
it o
ur
we
bsi
te a
th
ttp
://m
an
kiw
.sw
learn
ing
.co
m.
8
pschmidt
Schreibmaschinentext
OBAMA, Barack: "The Audacity of Hope", Vintage Books, NY 2008 (C 2006)
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