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mind guided our efforts; her eagle eyes caught our errors; and her stimulating and pleas-
ant company kept us going. Perhaps most important, we loved and valued her most pro-
foundly. Unfortunately, she has been taken from us much too young. Our children and
grandchildren will understand and surely support our decision, for once, not to dedicate
this edition of the book to them, but rather to our precious lost friend, Sue Anne.


May we offer a suggestion for success in your economics course? Unlike some of the other
subjects you may be studying, economics is cumulative: Each week™s lesson builds on
what you have learned before. You will save yourself a lot of frustration”and a lot of
work”by keeping up on a week-to-week basis.
To assist you in doing so, we provide a chapter summary, a list of important terms and
concepts, a selection of questions to help you review the contents of each chapter, as well
as the answers to odd-numbered Test Yourself questions. Making use of these learning
aids will help you to master the material in your economics course. For additional assis-
tance, we have prepared student supplements to help in the reinforcement of the concepts
in this book and provide opportunities for practice and feedback.
The following list indicates the ancillary materials and learning tools that have been de-
signed specifically to be helpful to you. If you believe any of these resources could benefit
you in your course of study, you may want to discuss them with your instructor. Further
information on these resources is available at http:/ /academic.cengage.com/economics/
We hope our book is helpful to you in your study of economics and welcome your com-
ments or suggestions for improving student experience with economics. Please write to
us in care of Baumol and Blinder, Editor for Economics, South-Western/Cengage Learn-
ing 5191 Natorp Boulevard, Mason, Ohio, 45040, or through the book™s web site at

Multiple resources for learning and reinforcing principles concepts are now available in
one place! EconCentral is your one-stop shop for the learning tools and activities to help
you succeed.
Access online resources like ABC News Videos, Ask the Instructor Videos, Flash Cards,
Interactive Quizzing, the Graphing Workshop, News Articles, Economic debates, Links
to Economic Data, and more. Visit academic.cengage.com/economics/baumol/11e/
econcentral to see the study options available with this text.

Study Guide
The study guide assists you in understanding the text™s main concepts. It includes learn-
ing objectives, lists of important concepts and terms for each chapter, quizzes, multiple-
choice tests, lists of supplementary readings, and study questions for each chapter”all of
which help you test your understanding and comprehension of the key concepts.

Finally, we are pleased to acknowledge our mounting indebtedness to the many who have
generously helped us in our efforts through the nearly 30-year history of this book. We
often have needed help in dealing with some of the many subjects that an introductory
textbook must cover. Our friends and colleagues Charles Berry, Princeton University;
Rebecca Blank, University of Michigan; William Branson, Princeton University; Gregory
Chow, Princeton University; Avinash Dixit, Princeton University; Susan Feiner, University of
Southern Maine, Claudia Goldin, Harvard University; Ronald Grieson, University of Califor-
nia, Santa Cruz; Daniel Hamermesh, University of Texas; Yuzo Honda, Osaka University;
Peter Kenen, Princeton University; Melvin Krauss, Stanford University; Herbert Levine, Uni-
versity of Pennsylvania; Burton Malkiel, Princeton University; Edwin Mills, Northwestern
University; Janusz Ordover, New York University; David H. Reiley Jr., University of Arizona;
Preface xxi

Uwe Reinhardt, Princeton University; Harvey Rosen, Princeton University; Laura Tyson,
University of California, Berkeley; and Martin Weitzman, Harvard University have all given
generously of their knowledge in particular areas over the course of 10 editions. We have
learned much from them and have shamelessly relied on their help.
Economists and students at colleges and universities other than ours offered numerous
useful suggestions for improvements, many of which we have incorporated into this
eleventh edition. We wish to thank Larry Allen, Lamar University, Gerald Bialka, Univer-
sity of North Florida, Kyongwook Choi, Ohio University, Basil G. Coley, North Carolina A & T
State University, Carol A. Conrad, Cerro Coso Community College, Brendan Cushing-
Daniels, Gettysburg College, Edward J. Deak, Fairfield University, Kruti Dholakia, The Uni-
versity of Texas at Dallas, Aimee Dimmerman, George Washington University, Mark Gius,
Quinnipiac University, Ahmed Ispahani, University of La Verne, Jin Kim, Georgetown Univer-
sity, Christine B. Lloyd, Western Illinois University, Laura Maghoney, Solano Community
College, Kosmas Marinakis, North Carolina State University, Carl B. Montano, Lamar Univer-
sity, Steve Pecsok, Middlebury College, J. M. Pogodzinski, San Jose State University, Adina
Schwartz, Lakeland College, David Tufte, Southern Utah University, and Thierry Warin,
Middlebury College for their insightful reviews.
Obviously, the book you hold in your hands was not produced by us alone. An essen-
tial role was played by Susan Walsh, who stepped into the space vacated by Sue Anne and
handled the tasks superbly, with insight and reliability, and did so in a most pleasant man-
ner. We also appreciate the contribution of the staff at South-Western Cengage Learning,
including Alex von Rosenberg, Editor-in-Chief; Michael Worls, Executive Editor; John
Carey, Senior Marketing Manager; Katie Yanos, Developmental Editor; Heather Mann,
Senior Content Project Manager; Deepak Kumar, Media Editor; Michelle Kunkler, Senior
Art Director; Deanna Ettinger, Photo Manager; and Sandee Milewski, Senior Manufactur-
ing Coordinator. It was a pleasure to deal with them, and we appreciate their understand-
ing of our approaches, our goals, and our idiosyncrasies. We also thank our intelligent and
delightful assistants at Princeton University and New York University, Kathleen Hurley
and Janeece Roderick Lewis, who struggled successfully with the myriad tasks involved
in completing the manuscript.
And, finally, we must not omit our continuing debt to our wives, Hilda Baumol and
Madeline Blinder. They have now suffered through 11 editions and the inescapable neg-
lect and distraction the preparation of each new edition imposes. Their tolerance and un-
derstanding has been no minor contribution to the project.

William J. Baumol
Alan S. Blinder
To Sue Anne Batey Blackman: wise, beloved, and irreplaceable.
Licensed to:


Getting Acquainted
with Economics

W elcome to economics! Some of your fellow students may have warned you that
“econ is boring.” Don™t believe them”or at least, don™t believe them too much. It
is true that studying economics is hardly pure fun. But a first course in economics can be
an eye-opening experience. There is a vast and important world out there”the economic
world”and this book is designed to help you understand it.
Have you ever wondered whether jobs will be plentiful or scarce when you graduate?
Or why a college education becomes more and more expensive? Should the government
be suspicious of big firms? Why can™t pollution be eliminated? How did the U.S. economy
manage to grow so rapidly in the 1990s while Japan™s economy stagnated? If any of these
questions have piqued your curiosity, read on. You may find economics to be more inter-
esting than you had thought!
It is only in later chapters that we will begin to give you the tools you need to begin car-
rying out your own economic analyses. However, the four chapters of Part 1 that we list
next will introduce you to both the subject matter of economics and some of the methods
that economists use to study their subject.


1 | What Is Economics? 3 | The Fundamental Economic
Problem: Scarcity and Choice
2 | The Economy:
Myth and Reality 4 | Supply and Demand:
An Initial Look

Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:

Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:

What Is Economics?
Why does public discussion of economic policy so often show the abysmal ignorance
of the participants? Why do I so often want to cry at what public figures, the press,
and television commentators say about economic affairs?

E conomics is a broad-ranging discipline, both in the questions it asks and the meth-
ods it uses to seek answers. Many of the world™s most pressing problems are eco-
nomic in nature. The first part of this chapter is intended to give you some idea of the
sorts of issues that economic analysis helps to clarify and the kinds of solutions that
economic principles suggest. The second part briefly introduces the tools that econo-
mists use”tools you are likely to find useful in your career, personal life, and role as an
informed citizen, long after this course is over.

Idea 7: Productivity Growth Is (Almost) Everything
in the Long Run
Idea 1: How Much Does It Really Cost? Graphs Used in Economic Analysis
Idea 2: Attempts to Repeal the Laws of Supply and Two-Variable Diagrams
Demand”The Market Strikes Back The Definition and Measurement of Slope
Idea 3: The Surprising Principle of Comparative Rays Through the Origin and 45° Lines
Economics as a Discipline
Advantage Squeezing Three Dimensions into Two:
The Need for Abstraction
Idea 4: Trade Is a Win-Win Situation Contour Maps
The Role of Economic Theory
Idea 5: Government Policies Can Limit Economic
What Is an Economic Model?
Fluctuations”But Don™t Always Succeed
Reasons for Disagreements: Imperfect Information
Idea 6: The Short-Run Trade-Off between
and Value Judgments
Inflation and Unemployment

Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:
Part 1
4 Getting Acquainted with Economics

Elephants may never forget, but people do. We realize that most students inevitably forget
much of what they learn in a course”perhaps with a sense of relief”soon after the final
exam. Nevertheless, we hope that you will remember some of the most significant eco-
nomic ideas and, even more important, the ways of thinking about economic issues that,
later, will help you evaluate the economic issues that arise in our economy.
To help you identify some of the most crucial concepts, we have selected seven from
the many in this book. Some offer key insights into the workings of the economy. Several
bear on important policy issues that appear in newspapers. Others point out common
misunderstandings that occur among even the most thoughtful lay observers. Most of
them indicate that it takes more than just good common sense to analyze economic issues
effectively. As the opening quote of this chapter suggests, many learned judges, politi-
cians, and university administrators who failed to understand basic economic principles
could have made wiser decisions than they did.
Try this one on for size. Imagine that Mexican workers, who earn much lower wages than
American workers, can both grow tomatoes and manufacture t-shirts more cheaply than
their American counterparts can. (And imagine that these are the only two goods in ques-
tion.) If the United States opens its border to trade with Mexico, will American workers face
mass unemployment? Will our country be made worse off by trade with Mexico? It may ap-
pear that the common sense answer to both of these questions is “yes.” And many people
think so. But a surprising economic principle introduced on the next page (in Idea 3), and
then explained more fully in Chapters 3 and 17, says that in fact the answers are probably
“no.” We will see why shortly.
Each of the seven Ideas for Beyond the Final Exam, many of which are counterintuitive,
will be sketched briefly here. More important, each will be discussed in depth when it
occurs in the course of the book, where it will be called to your attention by a special icon
in the margin. So don™t expect to master these ideas fully now. But do notice how some of
the ideas arise again and again as we deal with different topics. By the end of the course
you will have a better grasp of when common sense works and when it fails. And you will
be able to recognize common fallacies that are all too often offered as pearls of wisdom by
public figures, the press, and television commentators.

Idea 1: How Much Does It Really Cost?
Because no one has infinite riches, people are constantly forced to make choices. If you
purchase a new computer, you may have to give up that trip you had planned. If a busi-
ness decides to retool its factories, it may have to postpone its plans for new executive
offices. If a government expands its defense program, it may be forced to reduce its
outlays on school buildings.
Economists say that the true costs of such decisions are not the number of dollars spent
on the computer, the new equipment, or the military, but rather the value of what must be
given up in order to acquire the item”the vacation trip, the new executive offices, and the
new schools. These are called opportunity costs because they represent the opportunities
The opportunity cost of
some decision is the value the individual, firm, or government must forgo to make the desired expenditure. Econo-
of the next best alternative mists maintain that rational decision making must be based on opportunity costs, not just
that must be given up
dollar costs (see Chapter 3 and elsewhere).
because of that decision
The cost of a college education provides a vivid example. How much do you think it


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