Fluent Essays

The discussion questions each week will be based on your readings from the online textbook and from Economic Freedom and Human Flourishing. Select one of the questions below to address. Respond to at least two of your peers, one of which would be a question you did not address. Support your response with at least one source from the course materials. Do additional research if you wish. Include all references and citations in APA format. Economics is said to be the study of how people make decisions in the face of scarcity in order to maximize their happiness. How would Aristotle respond to this definition? What assumptions about the economy must be true for the invisible hand to work? To what extent are those assumptions valid in the real world? *** PLEASE USE ATTACHED RESOURCES*** P E R S P E C T I V E S F R O M P O L I T I C A L P H I LO S O P H Y ECONOMIC FREEDOM A N D HUMAN FLOURISHING A M E R I C A N E N T E R P R I S E I N S T I T U T E Steven Bilakovics • Richard Boyd • Ryan Patrick Hanley Peter B. Josephson • Yuval Levin • Harvey C. Mansfield Deirdre Nansen McCloskey • John T. Scott • Susan Meld Shell Edited by Michael R. Strain and Stan A. Veuger P E R S P E C T I V E S F R O M P O L I T I C A L P H I LO S O P H Y ECONOMIC FREEDOM A N D HUMAN FLOURISHING A M E R I C A N E N T E R P R I S E I N S T I T U T E Steven Bilakovics • Richard Boyd Ryan Patrick Hanley • Peter B. Josephson Yuval Levin • Harvey C. Mansfield Deirdre Nansen McCloskey • John T. Scott Susan Meld Shell Edited by Michael R. Strain and Stan A. Veuger © 2016 by the American Enterprise Institute. All rights reserved. No part of this publication may be used or reproduced in any man- ner whatsoever without permission in writing from the American Enterprise Institute except in the case of brief quotations embodied in news articles, critical articles, or reviews. The views expressed in the publications of the American Enterprise Institute are those of the authors and do not necessarily reflect the views of the staff, advisory panels, officers, or trustees of AEI. The American Enterprise Insti- tute is a nonpartisan, nonprofit, 501(c)(3) educational organization and does not take institutional positions on any issues. American Enterprise Institute 1150 17th St. NW Washington, DC 20036 www.aei.org ISBN-13: 978-0-8447-5001-9 (hardback) ISBN-10: 0-8447-5001-8 (hardback) ISBN-13: 978-0-8447-5002-6 (paperback) ISBN-10: 0-8447-5002-6 (paperback) ISBN-13: 978-0-8447-5003-3 (ebook) ISBN-10: 0-8447-5003-4 (ebook) iii Contents Preface v Michael R. Strain and Stan A. Veuger Aristotle on Economics and the Flourishing Life 1 Harvey C. Mansfield Hobbes, Locke, and the Problems of Political Economy 9 Peter B. Josephson Rousseau on Economic Liberty and Human Flourishing 30 John T. Scott Adam Smith and Human Flourishing 46 Ryan Patrick Hanley Economic Liberty and Human Flourishing: Kant on Society, Citizenship, and Redistributive Justice 58 Susan Meld Shell Edmund Burke’s Economics of Flourishing 84 Yuval Levin Capitalism as a Road to Serfdom? Tocqueville on Economic Liberty and Human Flourishing 96 Steven Bilakovics John Stuart Mill on Economic Liberty and Human Flourishing 108 Richard Boyd iv ECONOMIC FREEDOM AND HUMAN FLOURISHING Economic Liberty as Anti-Flourishing: Marx and Especially His Followers 129 Deirdre Nansen McCloskey About the Authors 150 v Preface It is easy to forget the broader context in which public policy is placed. So much attention is paid to the means by which policy is conceived and implemented—politics—that it is easy to focus on the game and to lose sight of the reason the game exists in the first place. Conversely, in the world of public policy research, your view can easily become dominated by minutia: Is a particular elasticity equal to –0.1 or –0.2? Should a tax credit be capped at $500 per year or $750? It is helpful and refreshing to broaden the lens from time to time. This collection seeks to do that. Our subject is whether economic liberty is necessary for indi- viduals to lead truly flourishing lives. This question underlies—or, at least, it should underlie—many of our most important policy debates. But it is harder to answer than it may seem. What do we mean by liberty? What is the flourishing life? And once settled on definitions, how are the two related? To answer these questions, we rely on some of history’s great- est thinkers, interpreted by some of today’s leading scholars of their thought. Their essays are valuable—it turns out that Aristotle and Burke and Mill, and philosophers in their class, have much to offer today’s public debate. And we still have much to learn from Marx’s mistakes as well. Politics is important. A deeper understanding of technical ques- tions of economics and social science are important. Both are critical, even. But so too is an understanding of why these endeavors matter— or even exist. M.R.S. & S.A.V. Washington, DC June 2016 1 Aristotle on Economics and the Flourishing Life HARVEY C. MANSFIELD Harvard University and the Hoover Institution To introduce this large topic, it is fitting to consider Aristotle, for centuries “the master of those who know” (as Dante called him). By contrast to our thinking, Aristotle wrote comprehensively on both economics and the flourishing life. Modern economics makes its way without study of the “flourishing life,” which is one translation of what Aristotle meant by happiness. For him, as for common sense, happiness is the goal of ethics and politics, and ulti- mately of economics. At present, however, economics contents itself with the “pursuit of happiness” (to borrow from the Declaration of Independence), a catchall category that specifies at great length how to pursue but hardly at all what to pursue. If we follow Aristotle’s method of beginning from what is familiar, we must begin from modern economics, which is more familiar to us than Aristotle. Every college student has taken, or should have taken, Economics 101, and those who have been deprived of this advantage have to learn what is taught in that course, perhaps more cheaply, perhaps not, in the School of Hard Knocks. Whether the study of economics is worth its cost is an example of a typical eco- nomic calculation, for economics is about calculation. A calculation is a deliberation that focuses on a number, a “metric,” of more, of a greater quantity. It avoids the question of how much more is needed before one can decide that one can stop acquiring and turn to enjoy- ment. Originally—and this is in Aristotle as well as in the founders of modern economics—economics supposed that it could define needs 2 ECONOMIC FREEDOM AND HUMAN FLOURISHING or necessities as opposed to surplus or superfluities. But necessities have a way of expanding from survival to comfort and from comfort to perfect assurance, so that it seems safer, and scientifically more exact, to consider them infinite and thus decline to define them. Economics becomes the science of getting more without ever saying how much more. It is because of its exactness that science requires this vagueness. Economics must either be exact or fall silent; it disdains and rejects the possibility of an inexact statement that is merely probable and better than nothing. It may attempt to evade the difficulty by defining “probability” exactly. The result would be either a vague definition of exact or an exact definition of vague— which leaves the common sense “probable” in charge. So the science of more, of “growth,” drops the utilitarian posture that requires a definition of utility—possibly contestable—and turns to “prefer- ences” that are admittedly quite subjective. Thus does the objectivity of economics require that it surrender totally to human subjectivity. And as the measuring of preferences becomes increasingly sophisti- cated, which means increasingly mathematical, economics becomes increasingly vague as to its end and continually further from defining the “flourishing life.” At the same time the boundary of economics becomes increas- ingly uncertain. It used to be that economists, when pressured with a question hard to answer, would frequently resort to a boundary state- ment and say: “That’s a noneconomic question.” That distinguished an economist from a political scientist, who could never say “that’s a nonpolitical question” because politics admits no sanctuary from pol- itics. But now economists have invaded political science, for example with game theory, reducing political questions to economic ones, and with the same increasing exactness that promotes increasing vague- ness. It is true that many political scientists today, as distinguished from Aristotle, welcome these invaders as saviors of their science. The discussion so far has a skeptical tone you will not find in Economics 101. But perhaps economics does have, despite its sci- entific pretensions, an end in view—and thus a contribution to the question of what is happiness. My father, a professor, used to rent his house in the summer to other professors who needed to live in ARISTOTLE 3 the city he wanted to leave. This was an economic transaction. But he soon learned from hard experience that it was far preferable to rent to an economist than to a sociologist. His lesson was that econ- omists believe in bourgeois virtue and sociologists do not. This is not a matter of calculation but of difference of habit, even of way of life, that he observed. Or it was calculation over the long term, never actually tested, that unkept promises and slovenly behavior would eventually be punished in this world: this is calculation not much different from virtue. A problem of how to live can be seen within economic calcula- tion. Which is better, to spend or to save? In the recent economic crisis, the American government passed a “stimulus” bill, meaning a stimulus on the consumer to spend. But it could also be said that in difficult times it is better to save—as many people did, not respond- ing to the stimulus. Economic calculation might say that it is bet- ter sometimes to save, sometimes to spend, that to be rational one should have no predisposition for one or the other. But to spend or to save is a life choice; each way has habits of its own that are hard to change quickly in accordance with calculation, as when buying or selling a stock. A calculator is always ready to adjust and finds habit, which is fixed and not calculated, to be irrational (as in a way it is). Here, within economic rationality, we see two opposing ways of life, two opposite souls, the easy spender and the tightwad, both economic, but not determined solely by economic advantage. Turning to Aristotle, we see him considering ways of life with a view to which is best rather than calculation of what brings in more. More what, he wants to know, and how much more? For him the “pursuit” of happiness implies an end to the pursuit, since endless pursuit is futile and irrational. All human beings pursue happiness; everything else is instrumental to happiness and pursued because it brings happiness. Even virtue, though an end in itself and often involving sacrifice, is also pursued as the means to happiness. Vir- tue won’t, or at least shouldn’t, make you miserable, Aristotle says, somewhat optimistically. To be happy is to be at rest, as we say, “sit- ting pretty.” Those who scramble without end don’t know how to stop, don’t know how to enjoy. “Enjoy!” we say today in moments 4 ECONOMIC FREEDOM AND HUMAN FLOURISHING of respite; Aristotle would say that enjoyment (not relaxation) is the whole purpose of scrambling to get ahead. Relaxation is to gain respite from scrambling so that one can resume it refreshed, but enjoyment is satisfaction in an end attained. The art or science of achieving happiness is political, and Aristotle calls politics the “master science,” the one that orders and rules over all other sciences, arts, and practices in a society. Even a free society is ruled in such a way that its parts are free and contribute to the whole of a free society. The “free market” studied and recommended by economics has to be the result of a political decision to establish and maintain it. In general, only politics can restrain politics. The free market needs to be sustained by “bourgeois virtue” taught in the schools and the family in consequence of a fundamentally political decision to lead a certain way of life and to live by its rules. The indispensable lessons of Economics 101 also need to be taught by the permission and favor of politics. What we call “civil society” sim- ilarly needs the good opinion and sponsorship of our rulers. Under the notion of “rule” Aristotle puts the main principles or principle of every way of life, so that politics promotes a definition of happiness, not just the means to undefined happiness. “Pluralism” in a society establishes a pluralistic society, a certain type of society distinctive in its ways from other, more prescriptive societies that it rejects and excludes. Aristotle’s “master science” provides a comprehensive role for politics, but it should not be confused with a program for Big Government. Reading from Aristotle’s Ethics as well as his Politics, we see he maintains that virtue is the core of happiness. He means this in both a normative and a descriptive sense. Descriptively, every society has a virtue or cluster of virtues that it promotes as characterizing its way of life and defining its notion of happiness, often in his day the virtue of courage or martial spirit. But as every society claims that its prized virtue is best, Aristotle feels bound to judge normatively whether this claim is correct. For him there is no unbridgeable distinction between fact and value. Now it is obvious that virtue cannot assure happiness. This is true not so much because we often witness the sad fact of virtue ARISTOTLE 5 unrewarded—for virtue is its own reward (not always sufficient!)— but because we observe virtue thwarted for lack of means. Virtue stands in need of “equipment,” Aristotle says nicely. It needs good fortune or the gods’ blessing (implied in the Greek word for hap- piness, eudaimonia, well-blessed), and it needs wealth. One cannot be generous without wealth to give away. Here enters the need for economics as akin to a science of wealth-getting but distinct from it because economics needs to be limited. Aristotle does not hold to the purity of virtue understood as bringing no personal advantage (called “altruism”), but he does agree that wealth-getting is mor- ally dangerous. It is essentially instrumental to virtue but can often become an end in itself regardless of virtue, Aristotle here in accord with Karl Marx. Money monetizes everything, as with the touch of King Midas, and thereby seems to dissolve all value except itself. Virtue as the core of happiness is a habit, not a calculation. If you have to calculate the advantage from virtue, you are no longer being virtuous for the sake of virtue, which is no longer virtuous. You are merely behaving virtuously while others are watching, which is not enough. Virtue is in the intent as well as in the action. Yet again Aristotle admits that calculation can enter into virtue, for example, a generous person calculating how much to give or a courageous person reasoning in a situation of combat so as to avoid being rash. Virtue is divided into virtues, of which Aristotle names 11. An indi- vidual can practice one virtue without the others, and although it is desirable to have all the virtues, and Aristotle adds, to know you have them, this is rare. Like individuals, societies (or, since “society” is a modern con- struct, political regimes, politeiai) tend to specialize in certain virtues. Indeed, regimes are necessarily biased in a certain direction, whereas a rare individual might have all the virtues. Regimes have laws that enshrine their characteristic virtues and make it difficult to adjust to new situations as they might do if they were more calculating. Most men and hence all peoples, because they have a character or type, resist change until they are compelled to change, and then they adopt and hold to the new regime. One revolution leads in time to another, not to an end of revolution—even though all revolution 6 ECONOMIC FREEDOM AND HUMAN FLOURISHING aims at being the final revolution. In the long view politics must rec- ognize the limits to what can be achieved by politics, which means by human beings. The indefinite or infinite growth that modern eco- nomics dimly imagines as its goal is not viable, even if “growth” into nothing definite were intelligible as mere expansion. The same goes for the modern notion of progress or perfectibility, which today has dissolved into “change,” as if it were possible for change to occur except with respect to something that does not change. For if “Amer- ica has changed totally,” how could you still call it “America”? Within Aristotelian virtue there is a distinction characteristic of the Socratic tradition and very important for both economics and flourishing life. This is between the just and the noble. The just is what can be expected from citizens, one’s duty or obligation; it con- tains an element of compulsion although it is voluntary like all the virtues. Examples are paying one’s taxes or bills; payment is virtuous but expected and therefore not admired. Noble actions, however, go “beyond the call of duty,” as we still say; they contain an element of risk and might earn a medal. Modern morality dating from Thomas Hobbes wants to avoid this distinction and to make all morality more certain by considering all of it (typically) under the concept of justice as virtue to be expected. This move permits all morality to be more predictable and calculable, less subject to chance. Happiness in a flourishing life may be more attractive, more admirable, as in the classical gentleman, but homo economicus—the morality of man subject to the laws of economics—is more regular and dependable. The morality of the modern economic man can be calculated together with his economic behavior. In this calculation another distinction within Aristotelian virtue between intellectual and moral virtue can be overcome and the two combined. In the modern view, moral virtue comes under the rule of theory instead of being distinct from it. Moral theory takes the place of ordinary, unscientific praise and blame, and modern philosophers no longer make a point of rising above morality but stoop down to take charge of it. Happiness is regularized by being reduced to something less than the flourish- ing life of a gentleman or lady, let alone a philosopher—to a more attainable life such as bourgeois virtue. Bourgeois virtue has not ARISTOTLE 7 been an unqualified success, however. It turns out that the morality that is more easily attained is also less satisfying, less interesting. A new concern for the boredom of bourgeois society arises, and ennui becomes the problem. Sociology with its critique of bourgeois hap- piness is born. Modern man would rather be “inner-directed” toward self-expression than calculate his self-interest in conformity with society’s norms. A version or perversion of ancient nobility comes to life again in the guise of the radical and the hippy, who in their sepa- rate lives concur to disdain the pettiness of bourgeois virtue. Of the two parts of Aristotle’s virtue, the noble is more a problem for economics. The noble makes us resist economic advantage and the insistence of “incentives” (another modern concept). We often refuse what is presented to us as necessity when necessity no longer seems truly necessary. Economics expands necessity from minimum survival to the necessity of seeking a return on one’s money. The rich man cannot afford not to exploit the opportunities he sees. The poor and their advocates will question this sort of “necessity.” Also, what makes virtue noble is doing it for its own sake rather than for your private advantage. Yet Aristotle, still eschewing moral purity, says that virtue is for your advantage as well. Virtue makes you a better person, and perhaps a still better person if you realize that your vir- tue makes you better. For virtue is enhanced when aware of itself as the best kind of enjoyment. Similarly, the virtuous person does not seek pleasure, but he gets pleasure as a by-product of his virtue, taking a moderate pleasure in doing good and avoiding too much self-congratulation or superiority. What is a better person? It is one with a better soul. Aristotle’s moral, political, and economic thought is based on the soul. In the best case the soul is well-ordered and harmonious, but in every case the soul is a human being’s individual self-government. The soul enables the individual to act and to reflect for himself, as opposed to the various determinants by which we are known and controlled by the various modern sciences, all of them denying or overlooking the soul. Hovering over us today, these sciences want to run our lives for us through the laws peculiar to each of them: laws of psy- chology, biology, chemistry, neurology, and—not least—economics. 8 ECONOMIC FREEDOM AND HUMAN FLOURISHING Much of today’s political science, soulless but not selfless, tries to imitate these more pretentious and more successful sciences. The soul, which Aristotle studied so well, stands in the way of these types of enslavement. It represents freedom in its various aspects: the free- dom to resist necessity and nature (a freedom given to us by nature), the freedom to initiate action, the freedom to stop and reflect, the freedom to take satisfaction in oneself, and the freedom to blame oneself and feel shame. Human beings with souls fall in love and feel anger—two types of action that a calculating person never does and that the calculating sciences never know of. We need a return to reason, to Aristotelian reason. The reason of economics is not empirical as it claims. It is based on the dubious presumption that human beings suffer in a condition of scarcity or necessity that will oblige them with their “preferences” (really, their necessities) to choose in ways that economists can predict and then control. This sort of reason begins in a dubious presumption that denies human freedom, and it dissolves, we have seen, in vagueness that fails to specify a reasonable goal of human life. Aristotle’s reason, by contrast, admits human necessities, for he was one of the found- ers of economics. But, because it is more empirical than economics by itself on the basis of human experience, it also seeks, through the soul, to come to terms with human nobility and freedom. Aristotle’s reason does its best to define the flourishing life, at its peak as well as in average, and measure the ordinary and the common by what is best and rare. 9 Hobbes, Locke, and the Problems of Political Economy PETER B. JOSEPHSON Saint Anselm College In our own time and place we hotly contest the relation of public and private goods or interests. Education, health and birth con- trol, energy and the environment, transportation, social welfare— almost any domestic issue is the subject of such debate. Those debates typically contest whether the issue at hand is properly a matter of public policy at all, and if it is, whether the best approach to addressing the concern is through public or private action. The contest over what is properly a public concern and what is properly private, and therefore over the extent of government authority and the defense of personal responsibility and liberty, has a long history in America. It is a legacy from our founding and from the intellec- tual origins of the founding. Those original intellects often thought better about these enduring problems than we typically do today. Thus we can better understand our own debate by considering its intellectual roots in the revolutionary political theories of 17th cen- tury England, and the understanding in that time and place of the proper relation of public and private goods. We will not find an easy resolution of our problem in those theo- ries. The problem of the relation of public and private goods, like the problem of the relation of the community to the individual, is one of the fundamental problems of political justice. It is the problem that philosophers and statesmen have grappled with for more than two millennia. But modern thinkers such as Thomas Hobbes and John Locke place the problem in stark relief, as an issue of political 10 ECONOMIC FREEDOM AND HUMAN FLOURISHING economy, and the contrasts (and similarities) between them help us see more precisely the difficulty we face.1 Together, Hobbes and Locke can lead partisans of both sides to a better appreciation of the partiality of their positions and a better understanding of the claims on the other side. For all their differences, Hobbes and Locke recog- nize that there is no simple identity of public and private interests or rights. Hobbes and Locke are often paired. Both are 17th-century English philosophers (though separated by a generation). Both are state-of- nature theorists who articulate teachings of natural equality and natural liberty, and both describe civil society and government as artifacts of human invention. The two are also very often contrasted (and their differences regarding the origin of private property are among the most signif- icant).2 Yet what we often take to be their differences—the bumper sticker description of their differences—actually obscures their teachings and makes each less interesting than he really is. For exam- ple, both Hobbes and Locke give an account of a state of nature—a pre-political condition, perhaps meant anthropologically (an his- torical epoch in a long ago age), or perhaps a hypothetical condi- tion (what human life would be like without government). Hobbes famously explains that in the state of nature there is no “mine and thine,” and “no place for industry, because the fruit thereof is uncer- tain, and consequently, no culture of the earth . . . no commodious building . . . no knowledge of the face of the earth.”3 In Hobbes’ account, the condition of perfect liberty and equality—our natu- ral, ungoverned condition—is a state of war: a war of all against all that produces a condition that is “solitary, poor, nasty, brutish, and short.”4 On the other hand, Locke describes a state of nature that includes natural rights to property and therefore an account of natural justice. Locke carefully distinguishes the state of nature from the state of war and describes the state of nature initially as a state of “perfect freedom” and “equality,” governed by a “law of nature” that teaches anyone “who will but consult it” that “no one ought to harm another.”5 In describing the “plain difference” between the state of nature and a state of war, Locke writes that they are “as far distant, HOBBES, LOCKE 11 as a State of Peace, Good Will, Mutual Assistance, and Preservation, and a State of Enmity, Malice, Violence, and Mutual Destruction are from one another.”6 So Hobbes and Locke seem quite different in their accounts of our natural condition, and this leads them to address very different problems. Hobbes is concerned about our natural inclination toward chaos and war, and must explain how peace is produced. For Hobbes, the maintenance of public order is an absolute necessity and requires a nearly absolute sovereign. Locke, beginning more peaceably, must explain that his state of nature is subject to certain “inconveniences” that degenerate into war. But this means that Locke can conceive of a condition without politics that is, at least, livable. The maintenance of public order is, in Locke’s language, a “convenience,” and in his Second Treatise Locke uses the word “sovereignty” only twice.7 Hobbes and Locke therefore differ in their accounts of the politics that emerge out of this natural condition. To address the problem of the state of war—the state of natural confusion or chaos—Hobbes counsels that every state must claim, and be granted, absolute sov- ereign power, and indeed that we are simply fooling ourselves if we believe politics works in any other way. Anything less than acknowl- edging the absolute authority of the sovereign—say, if we were to declare allegiance to the sovereign in some cases but to God in others—can only breed dissent and ultimately civil war.8 On the other hand, Locke famously argues that government must be founded on the consent of the governed, and that political power should be organized constitutionally into something like a system of separation of powers and checks and balances. Where Hobbes emphasizes the authority of the sovereign, Locke emphasizes the pre-eminence of a legislative power. Locke’s two references to “sov- ereignty” in the Second Treatise are first as an example of a thing God has not granted to any person, and second to explain that only God is sovereign.9 And yet Hobbes’ political account … Economics in One Lesson Title Page Table of Contents Preface The Lesson The Lesson Applied The Broken Window The Blessings of Destruction Public Works Mean Taxes Taxes Discourage Production Credit Diverts Production The Curse of Machinery Spread-the-Work Schemes Disbanding Troops and Bureaucrats The Fetish of Full Employment Who's "Protected" by Tariffs? The Drive for Exports "Parity" Prices Saving the X Industry How the Price System Works "Stabilizing" Commodities Government Price-Fixing Minimum Wage Laws Do Unions Really Raise Wages? "Enough to Buy Back the Product The Function of Profits The Mirage of Inflation The Assault on Saving The Lesson Restated A Note on Books iNTRO TO ECONOMICS RESOURCES MODULE 1 https://www.youtube.com/watch?v=EBifN69gcKY&t=6s https://youtu.be/JaKMimJPxyA https://youtu.be/O6XL__2CDPU https://youtu.be/_7VHfuWV-Qg (BOOK IS ATTACHED FOR CHAPTER 1 AND 2) · BBUS 2203 Principles of Microeconomics 2e.8 Chapter 1, "Welcome to Economics” · BBUS 2203 Principles of Microeconomics 2e.8 Chapter 2, "Choice in a World of Scarcity” PAGES 1-8 · Economic Freedom and Human Flourishing, Preface and pp. 1-8 · Economics in One Lesson, Preface and Chapter 1 PRINCIPLES OF MICROECONOMICS Chapter 1 Welcome to Economics! PowerPoint Image Slideshow FIGURE 1.1 Economics is greatly impacted by how well information travels through society. Today, social media giants Twitter, Facebook, and Instagram are major forces on the information super highway. (Credit: modification of work by Manuel Iglesias/Flickr Creative Commons) FIGURE 1.2 Homeless people are a stark reminder that scarcity of resources is real. (Credit: “daveynin”/Flickr Creative Commons) FIGURE 1.3 Adam Smith introduced the idea of dividing labor into discrete tasks. (Credit: Wikimedia Commons) FIGURE 1.4 Workers on an assembly line are an example of the divisions of labor. (Credit: Nina Hale/Flickr Creative Commons) FIGURE 1.5 One of the most influential economists in modern times was John Maynard Keynes. (Credit: Wikimedia Commons) FIGURE 1.6 The circular flow diagram shows how households and firms interact in the goods and services market, and in the labor market. The direction of the arrows shows that in the goods and services market, households receive goods and services and pay firms for them. In the labor market, households provide labor and receive payment from firms through wages, salaries, and benefits. FIGURE 1.7 Ancient Egypt was an example of a command economy. (Credit: Jay Bergesen/Flickr Creative Commons) FIGURE 1.8 Nothing says “market” more than The New York Stock Exchange. (Credit: Erik Drost/Flickr Creative Commons) FIGURE 1.9 Cargo ships are one mode of transportation for shipping goods in the global economy. (Credit: Raul Valdez/Flickr Creative Commons) This PowerPoint file is copyright 2011-2015, Rice University. All Rights Reserved. PRINCIPLES OF MICROECONOMICS Chapter 2 Choice in a World of Scarcity PowerPoint Image Slideshow FIGURE 2.1 In general, the higher the degree, the higher the salary. So why aren’t more people pursuing higher degrees? The short answer: choices and tradeoffs. (Credit: modification of work by “Jim, the Photographer”/Flickr Creative Commons) FIGURE 2.2 Each point on the budget constraint represents a combination of burgers and bus tickets whose total cost adds up to Alphonso’s budget of $10. The slope of the budget constraint is determined by the relative price of burgers and bus tickets. All along the budget set, giving up one burger means gaining four bus tickets. FIGURE 2.3 This production possibilities frontier shows a tradeoff between devoting social resources to healthcare and devoting them to education. At A all resources go to healthcare and at B, most go to healthcare. At D most resources go to education, and at F, all go to education. FIGURE 2.4 Productive efficiency means it is impossible to produce more of one good without decreasing the quantity that is produced of another good. Thus, all choices along a given PPF like B, C, and D display productive efficiency, but R does not. Allocative efficiency means that the particular mix of goods being produced—that is, the specific choice along the production possibilities frontier—represents the allocation that society most desires. FIGURE 2.5 The U.S. PPF is flatter than the Brazil PPF implying that the opportunity cost of wheat in term of sugar cane is lower in the U.S. than in Brazil. Conversely, the opportunity cost of sugar cane is lower in Brazil. The U.S. has comparative advantage in wheat and brazil has comparative advantage in sugar cane. FIGURE 2.6 Both the individual opportunity set (or budget constraint) and the social production possibilities frontier show the constraints under which individual consumers and society as a whole operate. Both diagrams show the tradeoff in choosing more of one good at the cost of less of the other. This PowerPoint file is copyright 2011-2015, Rice University. All Rights Reserved. PRINCIPLES OF MICROECONOMICS Appendix A PowerPoint Image Slideshow FIGURE A1 This line graph has x on the horizontal axis and y on the vertical axis. The y-intercept— that is, the point where the line intersects the y-axis—is 9. The slope of the line is 3; that is, there is a rise of 3 on the vertical axis for every increase of 1 on the horizontal axis. The slope is the same all along a straight line. FIGURE A2 The equations for Qd and Qs are displayed graphically by the sloped lines. FIGURE A3 The line graph shows the relationship between height and weight for boys and girls from birth to 3 years. Point A, for example, shows that a boy of 28 inches in height (measured on the horizontal axis) is typically 19 pounds in weight (measured on the vertical axis). These data apply only to children in the first three years of life. FIGURE A4 This line graph shows the relationship between altitude, measured in meters above sea level, and air density, measured in kilograms of air per cubic meter. As altitude rises, air density declines. The point at the top of Mount Everest has an altitude of approximately 8,828 meters above sea level (the horizontal axis) and air density of 0.023 kilograms per cubic meter (the vertical axis). FIGURE A5 This graph provides a quick visual summary of unemployment data. With a graph like this, it is easy to spot the times of high unemployment and of low unemployment. FIGURE A6 The three pie graphs illustrate the division of total population into three age groups for the three different years. FIGURE A7 The graph shows the 12 countries of the world with the largest populations. The height of the bars in the bar graph shows the size of the population for each country. FIGURE A8 Population data can be represented in different ways. (a) Shows three bars for each year, representing the total number of persons in each age bracket for each year. (b) Shows just one bar for each year, but the different age groups are now shaded inside the bar. (c) Sets the vertical axis as a measure of percentages rather than the number of persons. All three bar graphs are the same height and each bar is divided according to the percentage of population in each age group. FIGURE A9 FIGURE A10 FIGURE A11 PRINCIPLES OF MICROECONOMICS Appendix B PowerPoint Image Slideshow FIGURE B1 Lilly would receive equal utility from all points on a given indifference curve. Any points on the highest indifference curve Uh, like F, provide greater utility than any points like A, B, C, and D on the middle indifference curve Um. Similarly, any points on the middle indifference curve Um provide greater utility than any points on the lowest indifference curve Ul. FIGURE B2 Lilly’s preferences are shown by the indifference curves. Lilly’s budget constraint, given the prices of books and doughnuts and her income, is shown by the straight line. Lilly’s optimal choice will be point B, where the budget line is tangent to the indifference curve Um. Lilly would have more utility at a point like F on the higher indifference curve Uh, but the budget line does not touch the higher indifference curve Uh at any point, so she cannot afford this choice. A choice like G is affordable to Lilly, but it lies on indifference curve Ul and thus provides less utility than choice B, which is on indifference curve Um. FIGURE B3 Manuel and Natasha originally face the same budget constraints; that is, same prices and same income. However, the indifference curves that illustrate their preferences are not the same. (a) Manuel’s original choice at W involves more yogurt and more movies, and he reacts to the higher income by mainly increasing consumption of movies at X. (b) Conversely, Natasha’s original choice (Y) involves relatively more movies, but she reacts to the higher income by choosing relatively more yogurts. Even when budget constraints are the same, personal preferences lead to different original choices and to different reactions in response to a change in income. FIGURE B4 The original choice is A, the point of tangency between the original budget constraint and indifference curve. The new choice is B, the point of tangency between the new budget constraint and the lower indifference curve. Point C is the tangency between the dashed line, where the slope shows the new higher price of haircuts, and the original indifference curve. The substitution effect is the shift from A to C, which means getting fewer haircuts and more pizza. The income effect is the shift from C to B; that is, the reduction in buying power that causes a shift from the higher indifference curve to the lower indifference curve, with relative prices remaining unchanged. The income effect results in less consumed of both goods. Both substitution and income effects cause fewer haircuts to be consumed. For pizza, in this case, the substitution effect and income effect cancel out, leading to the same amount of pizza consumed. FIGURE B5 Petunia starts at choice A, the tangency between her original budget constraint and the lower indifference curve Ul. The wage increase shifts her budget constraint to the right, so that she can now choose B on indifference curve Uh. The substitution effect is the movement from A to C. In this case, the substitution effect would lead Petunia to choose less leisure, which is relatively more expensive, and more income, which is relatively cheaper to earn. The income effect is the movement from C to B. The income effect in this example leads to greater consumption of both goods. Overall, in this example, income rises because of both substitution and income effects. However, leisure declines because of the substitution effect but increases because of the income effect—leading, in Petunia’s case, to an overall increase in the quantity of leisure consumed. FIGURE B6 The original choice is A, at the tangency between the original budget constraint and the original indifference curve Uh. The dashed line is drawn parallel to the new budget set, so that its slope reflects the lower rate of return, but is tangent to the original indifference curve. The movement from A to C is the substitution effect: in this case, future consumption has become relatively more expensive, and present consumption has become relatively cheaper. The income effect is the shift from C to B; that is, the reduction in utility or “buying power” that causes a move to a lower indifference curve Ul, but with the relative price the same. It means less present and less future consumption. In the move from A to B, the substitution effect on present consumption is greater than the income effect, so the overall result is more present consumption. Notice that the lower indifference curve could have been drawn tangent to the lower budget constraint point D or point F, depending on personal preferences. FIGURE B7 FIGURE B8 FIGURE B9 FIGURE B10 FIGURE B11 This PowerPoint file is copyright 2011-2015, Rice University. All Rights Reserved. Principles of Microeconomics 2e SENIOR CONTRIBUTING AUTHORS STEVEN A. GREENLAW, UNIVERSITY OF MARY WASHINGTON DAVID SHAPIRO, PENNSYLVANIA STATE UNIVERSITY TIMOTHY TAYLOR, MACALESTER COLLEGE OpenStax Rice University 6100 Main Street MS-375 Houston, Texas 77005 To learn more about OpenStax, visit https://openstax.org. Individual print copies and bulk orders can be purchased through our website. ©2018 Rice University. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0). 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Table of Contents Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Chapter 1: Welcome to Economics! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.1 What Is Economics, and Why Is It Important? . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.2 Microeconomics and Macroeconomics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.3 How Economists Use Theories and Models to Understand Economic Issues . . . . . . . . . . 15 1.4 How To Organize Economies: An Overview of Economic Systems . . . . . . . . . . . . . . . 18 Chapter 2: Choice in a World of Scarcity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 2.1 How Individuals Make Choices Based on Their Budget Constraint . . . . . . . . . . . . . . . 28 2.2 The Production Possibilities Frontier and Social Choices . . . . . . . . . . . . . . . . . . . . 33 2.3 Confronting Objections to the Economic Approach . . . . . . . . . . . . . . . . . . . . . . . 38 Chapter 3: Demand and Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 3.1 Demand, Supply, and Equilibrium in Markets for Goods and Services . . . . . . . . . . . . . 46 3.2 Shifts in Demand and Supply for Goods and Services . . . . . . . . . . . . . . . . . . . . . 51 3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process . . . . . . . . . . . . . . 61 3.4 Price Ceilings and Price Floors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 3.5 Demand, Supply, and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Chapter 4: Labor and Financial Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 4.1 Demand and Supply at Work in Labor Markets . . . . . . . . . . . . . . . . . . . . . . . . . 84 4.2 Demand and Supply in Financial Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 4.3 The Market System as an Efficient Mechanism for Information . . . . . . . . . . . . . . . . . 98 Chapter 5: Elasticity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 5.1 Price Elasticity of Demand and Price Elasticity of Supply . . . . . . . . . . . . . . . . . . . 108 5.2 Polar Cases of Elasticity and Constant Elasticity . . . . . . . . . . . . . . . . . . . . . . . 113 5.3 Elasticity and Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 5.4 Elasticity in Areas Other Than Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 Chapter 6: Consumer Choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 6.1 Consumption Choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 6.2 How Changes in Income and Prices Affect Consumption Choices . . . . . . . . . . . . . . 141 6.3 Behavioral Economics: An Alternative Framework for Consumer Choice . . . . . . . . . . . 147 Chapter 7: Production, Costs, and Industry Structure . . . . . . . . . . . . . . . . . . . . . . . . 155 7.1 Explicit and Implicit Costs, and Accounting and Economic Profit . . . . . . . . . . . . . . . 157 7.2 Production in the Short Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 7.3 Costs in the Short Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 7.4 Production in the Long Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 7.5 Costs in the Long Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 Chapter 8: Perfect Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 8.1 Perfect Competition and Why It Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 8.2 How Perfectly Competitive Firms Make Output Decisions . . . . . . . . . . . . . . . . . . . 189 8.3 Entry and Exit Decisions in the Long Run . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 8.4 Efficiency in Perfectly Competitive Markets . . . . . . . . . . . . . . . . . . . . . . . . . . 206 Chapter 9: Monopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 9.1 How Monopolies Form: Barriers to Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 9.2 How a Profit-Maximizing Monopoly Chooses Output and Price . . . . . . . . . . . . . . . . 220 Chapter 10: Monopolistic Competition and Oligopoly . . . . . . . . . . . . . . . . . . . . . . . . 235 10.1 Monopolistic Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 10.2 Oligopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 Chapter 11: Monopoly and Antitrust Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 11.1 Corporate Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 11.2 Regulating Anticompetitive Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 11.3 Regulating Natural Monopolies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 11.4 The Great Deregulation Experiment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 Chapter 12: Environmental Protection and Negative Externalities . . . . . . . . . . . . . . . . . 275 12.1 The Economics of Pollution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 12.2 Command-and-Control Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 12.3 Market-Oriented Environmental Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 12.4 The Benefits and Costs of U.S. Environmental Laws . . . . . . . . . . . . . . . . . . . . . 285 12.5 International Environmental Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 12.6 The Tradeoff between Economic Output and Environmental Protection . . . . . . . . . . . 289 Chapter 13: Positive Externalities and Public Goods . . . . . . . . . . . . . . . . . . . . . . . . 301 13.1 Why the Private Sector Underinvests in Innovation . . . . . . . . . . . . . . . . . . . . . 303 13.2 How Governments Can Encourage Innovation . . . . . . . . . . . . . . . . . . . . . . . . 306 13.3 Public Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309 Chapter 14: Labor Markets and Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319 14.1 The Theory of Labor Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 14.2 Wages and Employment in an Imperfectly Competitive Labor Market . . . . . . . . . . . . 326 14.3 Market Power on the Supply Side of Labor Markets: Unions . . . . . . . . . . . . . . . . . 330 14.4 Bilateral Monopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337 14.5 Employment Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338 14.6 Immigration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343 Chapter 15: Poverty and Economic Inequality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 15.1 Drawing the Poverty Line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354 15.2 The Poverty Trap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357 15.3 The Safety Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 15.4 Income Inequality: Measurement and Causes . . . . . . . . . . . . . . . . . . . . . . . . 364 15.5 Government Policies to Reduce Income Inequality . . . . . . . . . . . . . . . . . . . . . . 370 Chapter 16: Information, Risk, and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381 16.1 The Problem of Imperfect Information and Asymmetric Information . . . . . . . . . . . . . 382 16.2 Insurance and Imperfect Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388 Chapter 17: Financial Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 17.1 How Businesses Raise Financial Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 403 17.2 How Households Supply Financial Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 406 17.3 How to Accumulate Personal Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418 Chapter 18: Public Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429 18.1 Voter Participation and Costs of Elections . . . . . . . . . . . . . . . . . . . . . . . . . . 430 18.2 Special Interest Politics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432 18.3 Flaws in the Democratic System of Government . . . . . . . . . . . . . . . . . . . . . . . 435 Chapter 19: International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443 19.1 Absolute and Comparative Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444 19.2 What Happens When a Country Has an Absolute Advantage in All Goods . . . . . . . . . 450 19.3 Intra-industry Trade between Similar Economies . . . . . . . . . . . . . . . . . . . . . . . 454 19.4 The Benefits of Reducing Barriers to International Trade . . . . . . . . . . . . . . . . . . 458 Chapter 20: Globalization and Protectionism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465 20.1 Protectionism: An Indirect Subsidy from Consumers to Producers . . . . . . . . . . . . . . 466 20.2 International Trade and Its Effects on Jobs, Wages, and Working Conditions . . . . . . . . 473 20.3 Arguments in Support of Restricting Imports . . . . . . . . . . . . . . . . . . . . . . . . . 476 20.4 How Governments Enact Trade Policy: Globally, Regionally, and Nationally . . . . . . . . 481 20.5 The Tradeoffs of Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 485 A | The Use of Mathematics in Principles of Economics . . . . . . . . . . . . . . . . . . . . . . . 493 B | Indifference Curves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 509 C | Present Discounted Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 569 This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 PREFACE Welcome to Principles of Microeconomics 2e (2nd Edition), an OpenStax resource. This textbook was written to increase student access to high-quality learning materials, maintaining highest standards of academic rigor at little to no cost. About OpenStax OpenStax is a nonprofit based at Rice University, and it’s our mission to improve student access to education. Our first openly licensed college textbook was published in 2012, and our library has since scaled to over 25 books for college and AP® courses used by hundreds of thousands of students. OpenStax Tutor, our low-cost personalized learning tool, is being used in college courses throughout the country. Through our partnerships with philanthropic foundations and our alliance with other educational resource organizations, OpenStax is breaking down the most common barriers to learning and empowering students and instructors to succeed. 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The text includes many current examples, which are handled in a politically equitable way. The outcome is a balanced approach to the theory and application of economics concepts. The second edition has been thoroughly revised to increase clarity, update data and current event impacts, and incorporate the feedback from many reviewers and adopters. Coverage and scope To develop the first edition of Principles of Microeconomics, we acquired the rights to Timothy Taylor’s Principles of Economics and solicited ideas from economics instructors at all levels of higher education, from community colleges to PhD-granting universities. For the second edition, we received even more expansive and actionable feedback from hundreds of adopters who had used the book for several academic terms. These knowledgeable instructors informed the pedagogical courses, learning objective development and fulfillment, and the chapter arrangements. Faculty who taught from the material provided critical and detailed commentary. Preface 1 The result is a book that covers the breadth of economics topics and also provides the necessary depth to ensure the course is manageable for instructors and students alike. We strove to balance theory and application, as well as the amount of calculation and mathematical examples. The book is organized into five main parts: What is Economics? The first two chapters introduce students to the study of economics with a focus on making choices in a world of scarce resources. Supply and Demand, Chapters 3 and 4, introduces and explains the first analytical model in economics–supply, demand, and equilibrium–before showing applications in the markets for labor and finance. The Fundamentals of Microeconomic Theory, Chapters 5 through 10, begins the microeconomics portion of the text, presenting the theories of consumer behavior, production and costs, and the different models of market structure, including some simple game theory. Microeconomic Policy Issues, Chapters 11 through 18, covers the range of topics in applied micro, framed around the concepts of public goods and positive and negative externalities. Students explore competition and antitrust policies, environmental problems, poverty, income inequality, and other labor market issues. The text also covers information, risk and financial markets, and public economy. International Economics, Chapters 19 and 20, introduces the international dimensions of economics, including international trade and protectionism. Alternate sequencing Principles of Microeconomics 2e was conceived and written to fit a particular topical sequence, but it can be used flexibly to accommodate other course structures. One such potential structure, which fits reasonably well with the textbook content, is provided. Please consider, however, that the chapters were not written to be completely independent, and that the proposed alternate sequence should be carefully considered for student preparation and textual consistency. Chapter 1 Welcome to Economics! Chapter 2 Choice in a World of Scarcity Chapter 3 Demand and Supply Chapter 4 Labor and Financial Markets Chapter 5 Elasticity Chapter 6 Consumer Choices Chapter 19 International Trade Chapter 7 Cost and Industry Structure Chapter 12 Environmental Protection and Negative Externalities Chapter 13 Positive Externalities and Public Goods Chapter 8 Perfect Competition Chapter 9 Monopoly Chapter 10 Monopolistic Competition and Oligopoly Chapter 11 Monopoly and Antitrust Policy Chapter 14 Labor Markets and Income Chapter 15 Poverty and Economic Inequality Chapter 16 Information, Risk, and Insurance Chapter 17 Financial Markets Chapter 18 Public Economy Chapter 20 Globalization and Protectionism Appendix A The Use of Mathematics in Principles of Economics Appendix B Indifference Curves Appendix C Present Discounted Value Changes to the second edition OpenStax only undertakes revisions when significant modifications to a text are necessary. In the case of Principles of Microeconomics, we received a wealth of constructive feedback. Many of the book’s users felt that consequential 2 Preface This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 movement in economic data, coupled with the impacts of national and global events, warranted a full revision. We also took advantage of the opportunity to improve the writing and sequencing of the text, as well as many of the calculation examples. The major changes are summarized below. Augmented explanations in chapters one through four provide a more comprehensive and informative foundation for the book. A clearer explanation, using a numerical example, has been given for finding the utility maximizing combination of goods and services a consumer should choose. The labor markets chapter and the poverty and economic inequality chapter have been resequenced. Substantial revisions to the AD/AS model in chapters 24-26 present the core concepts of macroeconomics in a clearer, more dynamic manner. Case studies and examples have been revised and, in some cases, replaced to provide more relevant and useful information for students. Economic data, tables, and graphs, as well as discussion and analysis around that data, have been thoroughly updated. Wherever possible, data from the Federal Reserve Economic Database (FRED) was included and referenced. In most of these uses, links to the direct source of the FRED data are provided, and students are encouraged to explore the information and the overall FRED resources more thoroughly. Additional updates and revisions appear throughout the book. They reflect changes to economic realities and policies regarding international trade, taxation, insurance, and other topics. For issues that may change in the months or years following the textbook's publication, the authors often provided a more open-ended explanation, but we will update the text annually to address further changes. The revision of Principles of Microeconomics was undertaken by Steven Greenlaw (University of Mary Washington) and David Shapiro (Pennsylvania State University), with significant input by lead reviewer Daniel MacDonald (California State University, San Bernardino). Pedagogical foundation Throughout Principles of Microeconomics 2e, you will find features that engage the students in economic inquiry and support their learning. Our features include: Bring It Home. This feature presents a brief case study, specific to each chapter, which connects the chapter’s main topic to the real world. It is broken up into two parts: the first at the beginning of the chapter (in the Intro module) and the second at chapter’s end, when students have learned what’s necessary to understand the case and “bring home” the chapter’s core concepts. Work It Out. This feature asks students to work through a generally analytical or computational problem, and guides them step-by-step to find out …