Principles of Economics
Principles of Economics

Principles of Economics

Lead Author(s): Stephen Buckles

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Principles of Economics will allow you to learn a new set of tools to use in personal, professional, business, and political decision making.

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Key features in this textbook

Our Principles of Economics Textbooks extend beyond the page with interactive graphing tools, real-world news clips and articles that relate to current events and examples that are relevant to millennial audiences.
Our Principles of Micro and Principles of Macro textbooks can be adopted together or separately, giving you the flexibility to customize your course.
Question bank is available with every chapter for easy quiz and test creation.

Comparison of Principles of Economics Textbooks

Consider adding Top Hat’s Principles of Economics textbook to your upcoming course. We’ve put together a textbook comparison to make it easy for you in your upcoming evaluation.

Top Hat

Stephen Buckles, Principles of Economics, Only One Edition needed

Cengage

N. Gregory Mankiw, Principles of Economics, 8th Edition

Pearson

Case, Fair, Oster, Principles of Economics, 12th Edition

McGraw-Hill

McConnell, Brue, Flynn, Principles of Microeconomics, 7th Edition

Pricing

Average price of textbook across most common format

Up to 40-60% more affordable

Lifetime access on any device

$130

Hardcover print text only

$175

Hardcover print text only

$140

Hardcover print text only

Always up-to-date content, constantly revised by community of professors

Content meets standard for Introduction to Anatomy & Physiology course, and is updated with the latest content

In-Book Interactivity

Includes embedded multi-media files and integrated software to enhance visual presentation of concepts directly in textbook

Only available with supplementary resources at additional cost

Only available with supplementary resources at additional cost

Only available with supplementary resources at additional cost

Customizable

Ability to revise, adjust and adapt content to meet needs of course and instructor

All-in-one Platform

Access to additional questions, test banks, and slides available within one platform

Pricing

Average price of textbook across most common format

Top Hat

Stephen Buckles, Principles of Economics, Only One Edition needed

Up to 40-60% more affordable

Lifetime access on any device

Cengage

N. Gregory Mankiw, Principles of Economics, 8th Edition

$130

Hardcover print text only

Pearson

Case, Fair, Oster, Principles of Economics, 12th Edition

$175

Hardcover print text only

McGraw-Hill

McConnell, Brue, Flynn, Principles of Microeconomics, 7th Edition

$140

Hardcover print text only

Always up-to-date content, constantly revised by community of professors

Constantly revised and updated by a community of professors with the latest content

Top Hat

Stephen Buckles, Principles of Economics, Only One Edition needed

Cengage

N. Gregory Mankiw, Principles of Economics, 8th Edition

Pearson

Case, Fair, Oster, Principles of Economics, 12th Edition

McGraw-Hill

McConnell, Brue, Flynn, Principles of Microeconomics, 7th Edition

In-book Interactivity

Includes embedded multi-media files and integrated software to enhance visual presentation of concepts directly in textbook

Top Hat

Stephen Buckles, Principles of Economics, Only One Edition needed

Cengage

N. Gregory Mankiw, Principles of Economics, 8th Edition

Pearson

Case, Fair, Oster, Principles of Economics, 12th Edition

McGraw-Hill

McConnell, Brue, Flynn, Principles of Microeconomics, 7th Edition

Customizable

Ability to revise, adjust and adapt content to meet needs of course and instructor

Top Hat

Stephen Buckles, Principles of Economics, Only One Edition needed

Cengage

N. Gregory Mankiw, Principles of Economics, 8th Edition

Pearson

Case, Fair, Oster, Principles of Economics, 12th Edition

McGraw-Hill

McConnell, Brue, Flynn, Principles of Microeconomics, 7th Edition

All-in-one Platform

Access to additional questions, test banks, and slides available within one platform

Top Hat

Stephen Buckles, Principles of Economics, Only One Edition needed

Cengage

N. Gregory Mankiw, Principles of Economics, 8th Edition

Pearson

Case, Fair, Oster, Principles of Economics, 12th Edition

McGraw-Hill

McConnell, Brue, Flynn, Principles of Microeconomics, 7th Edition

About this textbook

Lead Authors

Stephen Buckles, Ph.DVanderbilt University

Stephen Buckles is a Senior Lecturer at Vanderbilt University, where he also received his Ph.D. in Economics. Buckles has been the recipient of numerous awards, including Madison Sarratt Prize for Excellence in Undergraduate Teaching (Vanderbilt, 2008), Kenneth G. Elzinga Distinguished Teaching Award (Southern Economic Association, 2006), and the Dean’s Award for Excellence in Teaching (Vanderbilt, 2007). His course pack, which this text is based on, has been used by thousands of students and engages the concepts of active learning.

PJ Glandon, PhDKenyon College

PJ Glandon joined Kenyon College as an Associate Professor of Economics after completing his Ph.D. at Vanderbilt University.

Contributing Authors

Benjamin ComptonUniversity of Tennessee

Caleb StroupDavidson College

Chris CotterOberlin College

Cynthia BenelliUniversity of California

Daniel ZuchengoDenver University

Dave BrownPennsylvania State University

John SwintonGeorgia College

Michael MathesProvidence College

Li FengTexas State University

Mariane WanamakerUniversity of Tennessee

Rita MadarassySanta Clara University

Ralph SonenshineAmerican University

Zara LiaqatUniversity of Waterloo

Susan CarterUnited States Military Academy

Julie HeathUniversity of Cincinatti

Explore this textbook

Read the fully unlocked textbook below, and if you’re interested in learning more, get in touch to see how you can use this textbook in your course today.

Chapter 18: Economics After the Course

Figure 18.1: Like painting, economic thinking is a skill that requires lots of practice in order to perfect. [1]

We have discussed and studied a great deal this semester – some characteristics of our economy, an understanding of how different resources are brought together to produce what we value the most, and a number of key economic models. But most important of all, we have practiced, again and again, a method of thinking. Microeconomics discusses the process of decision-making by individuals in our society. We know that individuals may be consumers, business firms, laborers, and government. Each group of decision-makers faces different determinants, incentives, or influences on their decisions. The better we can identify these determinants and understand how they influence decision-making, the better we are able to understand how our economy works.

Our course has identified the important variables that influence an individual’s decisions and the processes that individuals use when making a decision. While not every decision is made in the exact same manner, an understanding of a handful of key concepts will build a foundation for understanding economic outcomes.

Each of the following is one of the key ideas that successful microeconomics students should carry in their intellectual toolbox for use in a variety of personal, professional, and civic roles. Use these key ideas as a means of reviewing what we have done this semester. You should be able to explain the step-by-step reasoning behind each one and give examples of relevant applications.

Following the key ideas are two sets of exercises. Completion of the exercises is a good way to start to review for the final exam.

18.1 Scarcity

​Economists recognize that nothing of value is in limitless supply. Scarcity implies that an individual or group of individuals cannot have everything they want at any point in time. If we cannot obtain something effortlessly, it is by definition scarce, and this means that choices must be made about how scarce resources get allocated. Scarcity makes the fundamental choices of what to produce, how to produce, and for whom to produce necessary. These choices, in turn, create trade-offs. Economic systems help us make the choices, but they do not solve the problem of scarcity. When we make choices, by definition, we forgo something.

Question 18.01

Question 18.01

In many parts of the world, people breathe as much clean air as they wish, every day. Clean air is, therefore, free and not scarce. Is this a true statement?

Hover here to see the hint for Question 18.01.
Click here to see the answer to Question 18.01.

18.2 ​Opportunity Cost

​Opportunity cost is the real cost of doing anything. It is the value of what you give up by making a particular choice. This value includes both explicit costs (out-of-pocket costs) and implicit costs (costs incurred but not paid to anyone).

Question 18.02

Question 18.02

What is the opportunity cost of going to college? What are the explicit costs and the implicit costs?

​Hover here to see the hint for Question 18.02.
Click here to see the answer to Question 18.02.

​There is no more important economic concept than opportunity cost. Take this one with you regardless of what else you may remember. It will help you make better decisions.

​18.3 The Importance of Thinking on the Margin

​Individuals, families, businesses, workers, nonprofit organizations, and governments should compare marginal costs and marginal benefits as a basic step in rational decision-making.

Figure 18.2: Will all of the race teams pictured have enough fuel to finish the race? Probably fewer than you think. [2]

Question 18.03

Question 18.03

In NASCAR racing, many races are decided by who has the good fortune of not running out of gas before they cross the finish line. At the Pocono Raceway in 2015, several leaders ran out of gas, resulting in Matt Kenseth winning the race. Evidently, the decision to refuel or not is an important one. The more a driver pushes his car, accelerating and decelerating, the more fuel is used. Use marginal analysis to describe how racing teams decide whether to refuel at the end of the race.

​​Hover here to see the hint for Question 18.03.
Click here to see the answer to Question 18.03.

18.4 ​Efficiency Is About Doing the Best We Can With Limited Resources

​We will be as well-off as we can possibly be, given our resources, technology, and wants, if our economic system leads us to make choices that result in technical efficiency, allocative efficiency, and full employment. Technical efficiency in production implies the production of the maximum amount of output possible given a set of productive inputs. An alternative way of looking at technical efficiency is producing a given amount of output with the smallest amount of inputs.

Technical efficiency tells us that the economy is producing on the production possibilities frontier. If we are on the frontier, then the economy is experiencing full employment; it is employing all available resources. The economy is producing the most amount of output possible given all of its available resources and inputs.

Allocative efficiency is about the point on the production possibilities frontier that maximizes economic well-being. An allocatively efficient economy produces goods that generate the greatest amount of welfare or value to society. Another way of thinking of this is that the cost to society of producing the last unit of a good, its marginal cost, is just equal to the marginal value of that good to society. 

Question 18.04

Earlier in this course, we discussed a few different market types. For each of the following markets types, specify whether the firms produce at a point of allocative efficiency.

Premise
Response
1

Perfectly competitive market

A

Yes

2

Monopoly

B

No

3

Monopolistically competitive market

C

No

18.5 Incentives Matter

​Consumers, workers, businesses, and governments respond to incentives. If we want to understand how and why these different groups make certain decisions, the first step is to look carefully at the incentives they face.

For instance, Adam Smith in “The Wealth of Nations” helps us understand why people living in market economies can always rely on being able to purchase the things they want: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest." In other words, individuals rationally attempt to maximize their personal welfare and in the process lead the economy to an efficient outcome.

Question 18.05

Question 18.05

Incentives can take any form and may lead to a variety of outcomes. In Jakarta Indonesia, the city government wished to alleviate traffic jams along many of the main city streets. Rather than charging a toll, city leaders passed a resolution that imposed a fine for driving with only one person in the car. The hope was that the same number of people could find a car ride to their destination but in fewer cars. In reality, the regulation reduced single driver cars on the streets but did nothing to reduce traffic congestion. How did the city of Jakarta get this outcome?

​​​Hover here to see the hint for Question 18.05.
Click here to see the answer to Question 18.05.

Figure 18.3: To impact rush hour traffic in cities such as Jakarta, Indonesia, the government must understand and recognize incentives. [3]​

​A similar problem of congestion has occurred in the city-state of Singapore. The government of Singapore chose a different solution to the congestion problem, restricting travel on certain streets and specific days of the week to the last digit of a car’s license plate. Depending on a car’s license plate number, one was able to drive on certain streets on designated days of the week.

Singapore is a city with a relatively high level of per capita income and a relatively small population. The incentives created by the license plate number restriction again had unintended consequences. The incentives resulted in households purchasing a second car with a second license plate number so that they could drive a car every day of the week. 

​What can we take away from these examples?

Changes in policies are fundamentally about changing incentives. It can be difficult to anticipate how thousands of decision-makers will respond to changes in incentives. The goal of policy makers should be to create policies that improve economic well-being. Microeconomics gives us the tools to think carefully about how people will respond to changes in policy.

18.6 Voluntary Trade Benefits Both Parties Involved 

​There are mutual gains from voluntary exchange. Why do we know this? Participation in a market transaction is voluntary. An individual will not voluntarily participate in a transaction if he or she does not expect to gain from it. Since both parties must agree for a trade to take place, only trades that are expected to benefit both parties occur. This is true whether the transaction is between a business and an individual in the same town, different towns in the same state, or between individuals in different parts of the world.

18.7 Markets and Competition Push an Economy Toward Efficiency

​Markets align the incentives of buyers and sellers so that they generate as much surplus as possible. In other words, markets tend to get producers to deliver goods and services at the lowest possible cost (technical efficiency) and only when the marginal cost of production is less than the marginal benefit they confer. Furthermore, consumers who value the goods most are the ones that get the goods. Using scarce resources to produce the most valuable goods and services and selling them to the consumers who value them the most is allocative efficiency.

In circumstances where the market is perfectly competitive, consumers and producers have full knowledge of costs and benefits, and those costs and benefits are fully borne by producers and consumers, the market outcome is likely to be both technically and allocatively efficient.   

18.8 Externalities Reduce the Efficiency of Market Outcomes

​Externalities are benefits or costs born by individuals other than the buyer or seller. External costs and benefits cause misallocation of resources in many circumstances. Governments may be able to correct these market failures but often face perverse incentives in doing so. The results can be less efficient than the market outcome.  

18.9 There Is a Tradeoff Between Efficiency and Equity

​It is not easy to identify a single, all-encompassing definition of fairness. But if we try to adopt a goal of fairness and use it to adjust market outcomes, we often have to sacrifice real output and overall satisfaction.

Subsidies, taxes, tariffs and quotas, and wage and price controls are sometimes used to enhance fairness with serious negative consequences for efficiency. Given evaluation using the principles of rational decision-making, such policies can turn out to be rational or irrational.





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Answer Key

Answer to Question 18.01

No. The air we breathe is directly the result of choices made by the citizens, businesses, and governments. For example, in the burning of coal to produce electricity, we have imposed costly regulations that require electric utilities to mitigate air pollution and improve air quality. We could have even cleaner air, but it would require less energy consumption, fewer miles driven, and more costly techniques for producing electricity. Or you can think of clean air as an individual choice. Suppose you are currently living in Los Angeles, a city with relatively high air pollution. You could breathe much cleaner air by moving to Fairbanks, Alaska. But is the frigid climate and other differences between these two cities worth enduring to breathe cleaner air?

Click here to return to Question 18.01.







Answer to Question 18.02

The explicit costs of attending college are tuition, books, room, and board. The opportunity cost of attending college is the value of the next best alternative to attending college. 

​For the sake of argument, let’s try to come up with some reasonable numbers for these costs. Perhaps the explicit cost of attending college for four years is roughly $80,000. This varies a lot depending on where you go and whether you receive scholarships.  

If we assume a student’s best alternative to college is a job paying $15,000 per year, the opportunity cost of attending college would be the foregone wages from the job they had to quit: $60,000 over four years.

The total cost of attending college would include the explicit cost of $80,000 plus the $60,000 of lost income for a total of $140,000. The higher your wage is, the higher is the opportunity cost of college.

Click here to return to Question 18.02.







Answer to Question 18.03

Each team compares the marginal benefit associated with taking the time to refuel one last time to the marginal cost associated with refueling. A major component of the marginal cost of refueling is the time lost on racing. The benefit to refueling is that the driver can drive more aggressively for a longer period of time without the risk of running out of fuel.

Click here to return to Question 18.03.











Answer to Question 18.05

Local government actions were incentives for the creation of a new market, young riders for hire. Young students chose to miss school to form a queue at various points of the city to sell their services as a rider to allow drivers to have access to certain streets without a fine. A student would accept a ride on one side of town, ride across the city and wait for a ride back to where they started allowing drivers to bypass the new regulation. The new driving law created an incentive to have more people in cars and not necessarily fewer cars on the road. The resolution generated unexpected and unintended outcomes without achieving the intended outcome of reducing traffic congestion. As city officials in Jakarta found out, policymakers must think very carefully about the incentives that new policies create.

Click here to return to Question 18.05.










Image Credits

[1] Image courtesy of Pedro Ribeiro Simões under CC BY 2.0.

[2] Image courtesy of skeeze in the Public Domain.

[3] Image courtesy of Lingaraj GJ under CC BY 2.0.

In any society, clean air represents a choice as to how goods and services are produced.
What would you be doing if you did not attend college or more appropriately, what did you give up to attend college?
For a race car driver and team, the goal is to finish a race in as little time as possible, Each pit stop costs the driver time but also provides fuel to compete more aggressively. Any unused fuel yield little marginal benefit.
We are talking about incentives. What incentives were generated by the regulation that resulted in the same number of cars on the roads and each car complying with the regulation? Note that while the same number of cars were on the road, the number of people traveling in the cars actually increased.