The Economic Way of Thinking

Intended primarily for one semester survey courses in general economics, this text also provides practical content to current and aspiring industry professionals.

Learn how to think like an economist.

The Economic Way of Thinking goes beyond explaining the basic principles of micro- and macroeconomic analysis by showing readers a method of reasoning that teaches them how to apply these principles as tools. The authors expose readers to a method of reasoning that makes them think like an economist through example and application and also shows them how not to think, by exposing errors in popular economic reasoning.

The latest edition has been thoroughly updated with current material.

Chapter 1 The Economic Way of Thinking

Recognizing Order

The Importance of Social Cooperation

How Does It Happen?

An Apparatus of the Mind–The Skill of the Economist

Cooperation Through Mutual Adjustment

Signals

Rules of the Game

Property Rights as Rules of the Game

The Biases of Economic Theory: A Weakness or a Strength?

Biases or Conclusions?

The Skills of the Economist

Questions for Discussion

¿

Chapter 2 Efficiency, Exchange and Comparative Advantage

Goods and Bads

The Myth of Material Wealth

Trade Creates Wealth

Is It Worth It? Efficiency and Values

Recognizing Trade-Offs: Comparing Opportunity Costs of Production

The Gains from Specialization and Exchange

Why Specialize?

From Individual Trade to International Trade, and Back Again

Transaction Costs

Incentives to Reduce Transaction Costs: Middlemen

Middlemen Create Information

Markets as Discovery Processes

The Big Picture:¿ First Thoughts on Economic Growth

Searching for an Explanation

The Evolution of Rules That Encourage Specialization and Exchange

Questions for Discussion

¿

Chapter 3 Substitutes Everywhere: The Concept of Demand

On the Notion of “Needs”

Marginal Values

Forks in the Road:¿ Everyday Choices Are Marginal Choices

The Demand Curve

The Law of Demand

Demand and Quantity Demanded

Demand Itself Can Change

Everything Depends on Everything Else

Misperceptions Caused by Inflation

Time Is on Our Side

Price Elasticity of Demand

Thinking About Elasticity

Elasticity and Total Receipts

The Myth of Vertical Demand

What Role Should Demand Play?

Is Money All That Matters? Money Costs, Other Costs, and Economic Calculation

Questions for Discussion

¿

Chapter 4 Cost and Choice: The Concept of Supply

Refresher on Opportunity Costs

Costs Are Tied to Actions, Not Things

What Do I Do Now? The Irrelevance of “Sunk Costs”

Producers’ Costs as Opportunity Costs

Marginal Opportunity Costs

Costs and Supply

The Supply Curve

Supply Itself Can Change

Marginal and Average Costs

The Cost of a Volunteer Military Force

Price Elasticity of Supply¿¿¿¿¿¿¿¿

Cost as Justification

Questions for Discussion

¿

Chapter 5 Supply and Demand: A Process of Coordination

The Market Is a Process of Plan Coordination

The Basic Process

Competition, Cooperation, and Market Clearing

Changing Market Conditions

Learning from Free-Market Prices Central Planning and the Knowledge Problem

Property Rights and Institutions¿¿¿¿¿¿¿¿

Money: The General Medium of Exchange

Money and Interest

Time Preference

Saving Creates Credit Opportunities

The Risk Factor in Interest Rates

Real and Nominal Interest Rates

Questions for Discussion

¿

Chapter 6 Unintended Consequences: More Applications of Supply and Demand

Catastrophe and Confusion

Catastrophe and Coordination

The Urge to Fix Prices

Competition When Prices Are Fixed¿¿¿¿¿¿¿¿

Appropriate and Inappropriate Signals

Looking for an Apartment in the City? Read the Obituary!

Strong Booze, Stronger Drugs: Criminal Incentives

Skim Milk, Whole Milk, and Gangster Milkmen

Supports and Surpluses

Supply, Demand, and the Minimum Wage

Slavery Goes Global, Again

High-Priced Sports, Low-Priced Poetry:¿ Who’s to Blame?

Do Costs Determine Prices?

The Dropouts Release Their First CD

“There’s Gold in Them Thar Hills!” So What?

Even Butchers Don’t Have the Guts

Why Does It Cost So Much to Change Bedpans?

An Appendix:¿¿Framing Economic Questions Correctly

Beware of Wrong Questions or Misleading Specifications of the Problem

Beware of Data That Appear to Speak for Themselves

The Graphic Case of Growing and Permanent Shortages

Once Over Lightly

Questions for Discussion

¿

Chapter 7 Profit and Loss

Wage, Rent, and Interest: Incomes Established in Advance by Contract

Profit: Income That Can Be Positive or Negative

Calculating Profit: What Should Be Included in Costs?

Comparing Economic Profit and Accounting Profit

Uncertainty: A Necessary Condition for Profit

The Entrepreneur

The Entrepreneur as Residual Claimant

Not-for-Profit Institutions

Entrepreneurship and the Market Process

Mere Luck?

Profit and Loss as Coordinating Signals: The Role of Monetary Calculation

Beware of Experts

An Appendix:¿¿Profiteering in Futures Markets

Questions for Discussion

¿

Chapter 8 Price Searching

The Popular Theory of Price Setting

Introducing Ed Sike

The Basic Rule for Maximizing Net Revenue

The Concept of Marginal Revenue

Why Marginal Revenue Is Less Than Price

Setting Marginal Revenue to Equal Marginal Cost

What About Those Empty Seats?

The Price Discriminator’s Dilemma

The College as Price Searcher

Some Strategies for Price Discrimination

Ed Sike Finds a Way

Resentment and Rationale

Lunch and Dinner Prices

Cost-Plus-Markup Reconsidered

Questions for Discussion

¿

Chapter 9 Competition and Government Policy

Competition as a Process

The Pressures of Competition

Controlling Competition

Restrictions on Competition

Competition for the Key Resource: The $1,000,000 Taxi License

Competition and Property Rights

The Ambivalence of Government Policies

Selling Below Cost

What Is the Appropriate Cost?

“Predators” and Competition

Regulating Prices

“Antitrust” Policy

Interpretations and Applications

Vertical Restraints: Competitive or Anticompetitive

The Range of Opinion

Toward Evaluation

Once Over Lightly

Questions for Discussion

¿

Chapter 10 Externalities and Conflicting Rights

Externalities, Negative and Positive

Perfection Is Unattainable

Negotiation

Reducing Externalities Through Adjudication

The Case of the Complaining Homeowner

The Importance of Precedents

The Problem of Radical Change

Reducing Externalities Through Legislation

Minimizing Costs

Another Approach: Taxing Emissions

Licenses to Pollute?

Efficiency and Fairness

The Bubble Concept

Rights and the Social Problem of Pollution

Traffic Congestion as an Externality

Once Over Lightly

Questions for Discussion

¿

Chapter 11 Markets and Government

Private Versus Public?

Competition and Individualism

Economic Theory and Government Action

The Right to Use Coercion

Is Government Necessary?

Excluding Nonpayers

The Free-Rider Problem

Positive Externalities and Free Riders

Law and Order

National Defense

Roads and Schools

Income Redistribution

The Regulation of Voluntary Exchange

Government and the Public Interest

Information and Democratic Governments

The Interests of Elected Officials

Concentrated Benefits, Dispersed Costs

Positive Externalities and Government Policies

How Do People Identify the Public Interest?

The Prisoners’ Dilemma

The Limits of Political Institutions

Once Over Lightly

Questions for Discussion

¿

Chapter 12 the Distribution of Income

Suppliers and Demanders

Capital and Human Resources

Human Capital and Investment

Property Rights and Income

Actual, Legal, and Moral Rights

Expectations and Investment

People or Machines?

The Derived Demand for Productive Services¿¿¿¿¿¿¿¿

Who Competes Against Whom?

Unions and Competition

Poverty and Inequality

Why Inequality Is Increasing

Are the Rich Getting Richer and the Poor Getting Poorer?

Redistributing Income

Changing Rules and Social Cooperation

Once Over Lightly

Chapter 13 Measuring the Overall Performance of Economic Systems

Gross Domestic Product

GDP or GNP?

GDP as Total Income Created in the Domestic Economy

GDP Is Not a Measure of All Purchases in the Economy

GDP as Total Value Added

Is Value Added Always Positive?

Loose Ends: Unsold Inventories and Used Goods

Aggregate Fluctuations

Unemployment and Nonemployment

Employed, Not Employed, and Unemployed

Labor-Market Decisions

Unemployment and Recessions

Inflation

Recession and Inflation Since 1960

What Causes Aggregate Fluctuations?

¿

Chapter 14 Money

The Evolution of Money

The Myth of Fiat Money

The Nature of Money Today

So How Much Money Is Out There?

Credibility and Confidence

Banks Under Regulation: Legal Reserve Requirements

Deposit Expansion and the Creation of Money

The Fed as Monitor and Rule Enforcer

The Tools Used by the Fed

The Discount Rate

Open Market Operations

Monetary Equilibrium

But Who Is Really in Charge?

An Appendix:¿¿What About Gold?

Once Over Lightly

¿

Chapter 15 Economic Performance and Real-World Politics

The Great Depression

What Really Happens in a Recession?

A Cluster of Errors

Credit and Coordination:¿ Savings and Investment in the Free Market

Credit and Discoordination:¿ The Unsustainable Boom

The Recession is the Correction

When Is Monetary Policy Effective?

The Case for Fiscal Policy

The Necessity of Good Timing

The Federal Budget as a Policy Tool

Time Horizons and Politics

Deficits Unlimited

Why Not Government at All Levels?

Who Is at the Controls?

Understanding Recent Experience

Once Over Lightly

¿

Chapter 16 The Wealth of Nations: Globalization and Economic Growth

Who Is Rich, Who Is Poor?

The Historical Record

Sources of Economic Growth

Foreign Investment

Human Capital

Oil Comes from Our Minds

Economic Freedom Index

The Developmental Power of Private Property Rights

The Asian Record

Outside of Asia

The Difficulties of International GDP Comparisons

Globalization and Its Discontents

The Power of Popular Opinion

The Power of Special Interests

The Outsourcing Controversy: Soundbytes vs. Analysis

Once Over Lightly