Preface

We remember what it was like when we first took introductory economics—Taylor in the 1960s, Weerapana in the 1990s. People called 1960s-vintage economics the “new economics,” because many new ideas, including those put forth by John Maynard Keynes, were being applied to public policy for the first time. By the 1990s there was a “new” new economics, stressing incentives, expectations, long-run fundamentals, institutions, and the importance of stable, predictable economic policies. In the 1980s and 1990s, the United States experienced far fewer recessions than in the 1960s and 1970s and the recessions were relatively short and mild. 

But instability returned with the crisis and recession of 2007–2009—one of the longest and deepest in American history. The recession, and the long drawn-out recovery from the recession, caused a great deal of harm to millions of people. In the first decade of the twenty-first century, the global financial crisis, the great recessions in the United States and Europe, and explosive growth in emerging markets required a re-examination of whether the traditional frameworks needed to be augmented to explain this new reality, presenting new challenges and opportunities for instructors of introductory economics.

Economists engaged in a vigorous debate about what caused the crisis and how best to prevent future crises. After the recession ended, they grappled with whether the slow growth in the United States was in fact “the new normal.” The concerns were not restricted to the United States, China’s economy showed signs of slowing from the torrid pace it has sustained for much of the past two decades. The move towards closer economic integration in Europe suffered a devastating blow in 2016 from the Brexit vote, adding to the strains that had been placed on the Eurozone by the Greek debt crisis which neared the end of its 7th year with little relief in sight for the people of Greece, experiencing a downturn that resembled the Great Depression in terms of the depth and length of economic impact.

In this edition, we give these and other recent developments a prominent, clearly explained place within the basic tradition of economics. We emphasize the central idea of economics: that people make purposeful choices with scarce resources and interact with other people when they make these choices. We explain this idea using examples of choices that students actually face. We give real-world examples of how markets work, and we explain why markets are efficient when the incentives are right and inefficient when the incentives are wrong. We stress long-run fundamentals, but we also discuss current public policy issues relating to the crisis where the short run matters. The big policy questions about the role of government being debated by economists and others today receive special attention. We know from our teaching experience that examples of how economic ideas are used in practice make economics more interesting to students, thereby making learning economics easier.

Recognizing that teachers use a wide variety of sequences and syllabi, Principles of Economics allows for alternative plans of coverage. Furthermore, the text is also available in two self-contained volumes, Principles of Microeconomics and Principles of Macroeconomics. The following is a description of the Principles of Economics volume.

The basic workings of markets and the reasons they improve people’s lives are the subjects of the first seven chapters. Chapter 1 outlines the unifying themes of economics: scarcity, choice, and economic interaction. The role of prices, the inherent international aspect of economics, the importance of property rights and incentives, and the difference between central planning and markets are some of the key ideas in this chapter. Chapter 2 introduces the field of economics through a case study showing how economists observe and explain economic puzzles. Chapters 3 and 4 cover the basic supply and demand model and elasticity. Here, the goal is to show how to use the supply and demand model to make sense of the world—and to learn how to ‘‘think like an economist.’’ A trio of chapters—5, 6, and 7—explains why competitive markets are efficient, perhaps the most important idea in economics. The parallel exposition of utility maximization (Chapter 5) and profit maximization (Chapter 6) culminates in a detailed description of why competitive markets are efficient (Chapter 7). The inclusion of interesting results from experimental economics plays a dual role: to illustrate how well models work, and to make the discussion of these important topics less abstract.

A modern market economy is not static; rather, it grows and changes over time as firms add new and better machines and as people add to their skills and training. Chapters 8 and 9 describe how firms and markets grow and change over time. Chapters 10 and 11 demonstrate how economists model the behavior of firms that are not perfectly competitive, such as monopolies. The models of dynamic behavior and imperfect competition developed here are used to explain the rise and fall of real-world firms and industries. Chapter 12 reviews the policy implications. Chapter 13 considers labor markets. Chapters 14 and 15 are devoted to the role of government in the economy. Tax policy, welfare reform, environmental policy, and the role of government in producing public goods are analyzed. Different countries have taken widely different approaches to the economy. The policy of some countries has been to intervene directly in virtually every economic decision; other countries have followed more hands-off policies. The problem of government failure is analyzed using models of government behavior. Chapter 16 discusses capital markets.

The study of macroeconomics begins with Chapter 17. This chapter gives an overview of the facts, emphasizing that macroeconomics is concerned with the growth and fluctuations in the economy as a whole. The overall structure of the book is to begin by introducing students to key macroeconomic variables, how they are measured and what their limitations are, then discuss economic growth, followed by economic fluctuations before moving on to discussing financial markets and economic interconnections between countries.

Chapter 18 shows how GDP and other variables are measured. Chapter 19 starts with the first macro model to determine the long run shares of GDP, illustrating how saving and investment are interrelated in the economy. Chapter 20 gives an analysis of how the level of unemployment in the economy as a whole is determined, concluding the discussion of key macroeconomic variables.

Labor, capital, and technology are then presented in Chapter 21 as the fundamental determinants of the economy’s growth path. One clear advantage of this approach is that it allows students to focus first on issues about which there is general agreement among economists. Moreover, this ordering helps students better understand short-term economic fluctuations. Similarly, the long-run treatment of money, presented in Chapter 22, sets the stage for the discussion of economic fluctuations.

Chapters 23–25 focus on how the economy fluctuates even as it grows over time. Declines in production and increases in unemployment (characteristics of recessions) have not vanished from the landscape as long-term growth issues have come to the fore. These chapters delve into the causes of these fluctuations and propose an analysis of why they end. Chapters 26 and 27 take a deep dive into the world of macroeconomic policy, first fiscal policy and then monetary policy. These chapters discuss how policy can be used to minimize the impact of economic fluctuations but also point out some of the debates that economists engage in as they assess whether policy has been successful at achieving the overall goal of smoothing out fluctuations.

The last decade and a half have taught us that financial markets and global economic linkages are key elements of the world that today’s students of economics will grow up to live in. Chapter 28 discusses economic growth, development and convergence around the world while Chapters 29 and 30 aim to equip students with a better understanding of how and why goods and money are traded among countries. When issues about which there are many differing opinions arise, the text tries to explain these opinions as clearly and as objectively as possible; it also stresses the areas of agreement. 

We hope you enjoy learning economics from this textbook. We are always receptive to feedback and eager to hear from users of the text (instructors and students) about their experience and welcome feedback about how to present material in a way that is more instructive to the reader.

Examples within the text. Illustrations of real-world situations help explain economic ideas and models. We have attempted to include a wide variety of brief examples and case studies throughout the text. 

Examples to give real-life perspectives. Stimulating vignettes appear at the beginning of each chapter. Examples of opening vignettes include explanation of economic events such as the price of Super Bowl tickets and discussions on how the United Nations evaluated the Millennium Development Goals it established at the dawn of the new millennium. Complete captions and small conversation boxes in graphs are also included. The captions and shaded conversation boxes make many of the figures completely self-contained. In some graphs, sequential numbering of these conversation boxes stresses the dynamic nature of the curves. 

Use of photos to illustrate abstract ideas. Special care has gone into the search for and selection of photos to illustrate difficult economic ideas, such as inelastic supply curves or opportunity costs. Many text photos or photo spreads have short titles and captions to explain their relevance to the text discussion.

Key term definitions. Definitions of key terms appear in the margins next to where the key term is presented in the text and are listed in the index, complete with page references.

Brief reviews appear at the end of each major section. These reviews summarize the key points in abbreviated form as the chapter evolves; they are useful for preliminary skim reading as well as for review.

Questions for review appear at the end of every chapter. These are tests of recall and require only short answers; they can be used for oral review or as a quick self-check.

Problems. An essential tool in learning economics, the problems have been carefully selected, revised, and tested for this edition. An ample supply of these problems appears at the end of every chapter and appendix. Some of the problems ask the reader to work out examples that are slightly different from the ones given in the text; others require a more critical thinking approach.