The Economic Way of Thinking

Contents (vii)......Page 6
Preface (xi)......Page 9
Recognizing Order (1)......Page 16
The Importance of Social Cooperation (2)......Page 17
How Does It Happen? (3)......Page 18
An Apparatus of the Mind (4)......Page 19
Cooperation through Mutual Adjustment (6)......Page 21
The Biases of Economic Theory (7)......Page 22
Rules of the Game (9)......Page 24
Biases or Conclusions? (10)......Page 25
No Theory Means Poor Theory (11)......Page 26
Once Over Lightly (13)......Page 28
Questions for Discussion (14)......Page 29
2. Substitutes Everywhere: The Concept of Demand (17)......Page 32
Costs and Substitutes (18)......Page 33
The Concept of Demand (20)......Page 35
Marginal Values (21)......Page 36
Decisions at the Margin (22)......Page 37
Demand and Quantity Demanded (24)......Page 39
The Difference It Makes (25)......Page 40
Misperceptions Caused by Inflation (27)......Page 42
Freedom and Power (28)......Page 43
Times Is on Our Side (30)......Page 45
Price Elasticity of Demand (31)......Page 46
Thinking about Elasticity (32)......Page 47
Elasticity and Total Receipts (34)......Page 49
The Myth of Vertical Demand (35)......Page 50
Once Over Lightly (36)......Page 51
Questions for Discussion (37)......Page 52
Costs Are Valuations (45)......Page 60
Producers' Costs as Opportunity Costs (46)......Page 61
Case Studies in Opportunity Cost (48)......Page 63
Costs and Actions (50)......Page 65
The Cost of a Volunteer Military Force (51)......Page 66
The Irrelevance of "Sunk Costs" (54)......Page 69
Marginal Opportunity Costs (55)......Page 70
Marginal and Average Costs (57)......Page 72
Cost as Justification (58)......Page 73
Costs and Supply (59)......Page 74
Price Elasticity of Supply (60)......Page 75
Once Over Lightly (61)......Page 76
Questions for Discussion (62)......Page 77
4. Supply and Demand: A Process of Cooperation (71)......Page 86
Transaction Costs (72)......Page 87
Property Rights and Institutions (74)......Page 89
The Coordinating Role of Money Prices (75)......Page 90
The Basic Process (76)......Page 91
Further Practice (79)......Page 94
The Urge to Fix Prices (80)......Page 95
From Scarcity to Competition (81)......Page 96
Competition When Prices Are Fixed (82)......Page 97
The Supplier's Role in Rationing (83)......Page 98
Appropriate and Inappropriate Signals (84)......Page 99
Is There A Better System? (85)......Page 100
Inflation and Rent Controls (86)......Page 101
Suppliers Who Don't Care about the Price (88)......Page 103
Your Very Own Airport (89)......Page 104
Prices, Committees, and Dictators (90)......Page 105
Once Over Lightly (91)......Page 106
Questions for Discussion (92)......Page 107
Do Costs Determine Prices? (99)......Page 114
Food Prices and Farm Costs (101)......Page 116
Quantity Supplied Versus Supply: A Rule of Thumb (104)......Page 119
Costs and Prices Once Again (105)......Page 120
Costs and Ownership (106)......Page 121
Cost and Congestion (108)......Page 123
More, Please, Since It's Free (110)......Page 125
The Rising Cost of Medical Care (112)......Page 127
Costs and Insurance (113)......Page 128
Hospital Costs (114)......Page 129
Elasticity and Price Changes (115)......Page 130
Who Pays the Tax? (116)......Page 131
Once Over Lightly (119)......Page 134
Questions for Discussion (120)......Page 135
Efficiency and Values (131)......Page 146
The Myth of Material Wealth (133)......Page 148
Trade Creates Wealth (134)......Page 149
Property Rights and Efficiency (135)......Page 150
Efficiency and International Trade (137)......Page 152
Transaction Costs and Efficiency (139)......Page 154
Locating Comparative Advantage (140)......Page 155
Individual Versus Social Efficiency? (142)......Page 157
An Appendix: The Arithmetic of Comparative Advantage (143)......Page 158
Once Over Lightly (146)......Page 161
Questions for Discussion (147)......Page 162
Real Estate Agents as Information Pdresult (157)......Page 172
Markets Create Information (159)......Page 174
Consequences of Speculation (161)......Page 176
Prophets and Losses (162)......Page 177
The Complex Question of "Insider Trading" (163)......Page 178
The Liability Question (166)......Page 181
Physicians and Malpractice Suits (167)......Page 182
An Appendix: Commodity Speculators and Futures Markets (169)......Page 184
Once Over Lightly (172)......Page 187
Questions for Discussion (173)......Page 188
Who Qualifies as a Monpolist? (183)......Page 198
Privileges and Restrictions (185)......Page 200
Price Takers and Price Searchers (187)......Page 202
Price Takers' Markets and "Optimal" Resource Allocation (188)......Page 203
Once Over Lightly (190)......Page 205
Questions for Discussion (191)......Page 206
The Popular Theory of Price Setting (199)......Page 214
Introducing Ed Sike (200)......Page 215
The Basic Rule for Maximizing Net Revenue (201)......Page 216
Why Marginal Revenue Is Less Than Price (202)......Page 217
Setting Marginal Revenue to Equal Marginal Cost (204)......Page 219
The Price Discriminator's Dilemma (205)......Page 220
The College as Price Searcher (206)......Page 221
Some Strategies for Price Discrimination (207)......Page 222
Educate Sike Finds A Way (208)......Page 223
Lunch and Dinner Prices (210)......Page 225
Cost Plus Markup Reconsidered (211)......Page 226
Once Over Lightly (212)......Page 227
Questions for Discussion (213)......Page 228
The Pressures of Competition (225)......Page 240
Controlling Competition (227)......Page 242
Selling below Cost (229)......Page 244
What Is the Appropriate Cost? (230)......Page 245
"Predators" and Competition (232)......Page 247
Regulating Prices (233)......Page 248
"Antitrust" Policy (234)......Page 249
Interpretations and Applications (235)......Page 250
Vertical Restraints: Competitive or Anticompetitive (236)......Page 251
Toward Evaluation (238)......Page 253
Once Over Lightly (239)......Page 254
Questions for Discussion (240)......Page 255
What Should Be Included in Costs? (253)......Page 268
Why Is Interest Paid? (254)......Page 269
The Risk Factor in Interest Rates (256)......Page 271
Uncertainty: A Necessary Condition for Profit (258)......Page 273
The Pursuit of Profit (260)......Page 275
The Entrepreneur (261)......Page 276
Where Does the Buck Stop?......Page 277
Nonprofits Institutions (263)......Page 278
The Transition from Socialism (264)......Page 279
Everyone Is Doing It (266)......Page 281
Competition on other Fronts (267)......Page 282
Competition for the Key Resource (269)......Page 284
An Appendix: Discounting and Present Values (270)......Page 285
Present Value of Future Amts (271)......Page 286
Present Value of Annuities (272)......Page 287
Once Over Lightly (276)......Page 291
Questions for Discussion (277)......Page 292
Suppliers and Demanders (289)......Page 304
Human Capital and Investment (291)......Page 306
Property Rights and Income (292)......Page 307
Expectations and Investment (293)......Page 308
The Law of Demand and Productive Services (294)......Page 309
People or Machines? (296)......Page 311
The Derived Demand for Productive Services (297)......Page 312
Who Competes Against Whom? (298)......Page 313
Unions and Competition (299)......Page 314
Poverty and Inequality (300)......Page 315
Why Inequality Is Increasing (303)......Page 318
Redistributing Income (304)......Page 319
Once Over Lightly (306)......Page 321
Questions for Discussion (307)......Page 322
Externalities, Negative and Positive (321)......Page 336
Perfection Is Unattainable (322)......Page 337
Negotiation (323)......Page 338
Reducing Externalities Through Adjudication (324)......Page 339
The Case of the Complaining Homeowner (325)......Page 340
The Importance of Precedents (326)......Page 341
The Problem of Radical Change (327)......Page 342
Reducing Externalities Through Legislation (328)......Page 343
Minimizing Costs (329)......Page 344
Another Approach: Taxing Emissions (330)......Page 345
Licenses to Pollute? (331)......Page 346
Efficiency and Fairness (332)......Page 347
The Bubble Concept (333)......Page 348
Traffic Congestion as an Externality (335)......Page 350
Once Over Lightly (336)......Page 351
Questions for Discussion (337)......Page 352
Private Versus Public? (349)......Page 364
Economic Theory and Government Action (350)......Page 365
The Right to Use Coercion (352)......Page 367
Excluding Nonpayers (353)......Page 368
The Free-Rider Problem (354)......Page 369
Positive Externalities and Free Riders (355)......Page 370
Law and Order (356)......Page 371
Roads and Schools (357)......Page 372
The Regulation of Voluntary Exchange (358)......Page 373
Government and the Public Interest (359)......Page 374
Information and Democratic Governments (360)......Page 375
The Interests of Elected Officials (361)......Page 376
Positive Externalities and Government Policies (363)......Page 378
How Do People Identify the Public Interest? (364)......Page 379
The Prisoners' Dilemma (365)......Page 380
Once Over Lightly (368)......Page 383
Questions for Discussion (369)......Page 384
15. The Overall Performance of Economic Systems (383)......Page 398
Gross Domestic Product (384)......Page 399
Limitations of National Income Accounting (385)......Page 400
Searching for an Explanation (388)......Page 403
Explaining the Explanation (389)......Page 404
Aggregate Fluctuations (391)......Page 406
Inflation (392)......Page 407
Recession and Inflation since 1960 (393)......Page 408
What Causes Aggregate Fluctuations? (396)......Page 411
Once Over Lightly (398)......Page 413
Questions for Discussion (399)......Page 414
Cigarettes as Money (403)......Page 418
The Evolution of Money (404)......Page 419
The Myth of Fiat Money (405)......Page 420
The Nature of Money Today (408)......Page 423
The Creation of Money (409)......Page 424
Banks under Regulation (411)......Page 426
What about Gold? (413)......Page 428
What Can Be Created Can Be Destroyed (415)......Page 430
So How Much Money Is Out There? (416)......Page 431
The Tools Used by the Fed (417)......Page 432
Who Is Really in Charge? (418)......Page 433
Once Over Lightly (419)......Page 434
Questions for Discussion (420)......Page 435
The Great Depression (425)......Page 440
The Incredible Japanese Economy (426)......Page 441
What Happens in a Recession? (428)......Page 443
The Demand for Money (430)......Page 445
Why Do People Hold Money Balances? (431)......Page 446
Actual and Preferred Money Balances (432)......Page 447
How Stable Is the Dd for Money? (433)......Page 448
Monetary Policy in Practice (435)......Page 450
When Is Monetary Policy Effective? (436)......Page 451
The Case for Fiscal Policy (437)......Page 452
The Necessity of Good Timing (438)......Page 453
The Federal Budget as a Policy Tool (439)......Page 454
Unfinished Business (441)......Page 456
Once Over Lightly (442)......Page 457
Questions for Discussion (443)......Page 458
Accounting for International Transactions (449)......Page 464
Why Credits Must Equal Debits (450)......Page 465
Equilibrium and Disequilibrium (451)......Page 466
The Ambiguities of International Disequilibrium (452)......Page 467
Disequilibrium as a Disguised Policy Judgment (454)......Page 469
But Will It Go on Forever? (455)......Page 470
Foreign Exchange Rates and Purchasing Power Parity (456)......Page 471
The Bretton Woods System (457)......Page 472
Fixed or Floating Exchange Rates? (459)......Page 474
Nobody Knows (460)......Page 475
The Trouble We've Seen (461)......Page 476
The Case for a Common Currency (462)......Page 477
Private Interests, National Interests, Public Interests (464)......Page 479
In Defense of Comparative Advantage (465)......Page 480
Once Over Lightly (467)......Page 482
Questions for Discussion (469)......Page 484
Unemployment and Nonemployment (475)......Page 490
Employed, Not Employed, and Unemployed (476)......Page 491
Labor-Market Decisions (477)......Page 492
Unemployment Rates and Employment Rates (478)......Page 493
Costs and Decisions (482)......Page 497
Unemployment and Recessions (483)......Page 498
Why Does Unemployment Persist? (484)......Page 499
The Phillips Curve (487)......Page 502
Reducing Unemployment by Illusion (488)......Page 503
Labor Market Policies (490)......Page 505
Once Over Lightly (491)......Page 506
Questions for Discussion (492)......Page 507
The Historical Record (499)......Page 514
Sources of Economic Growth (501)......Page 516
Foreign Investment (503)......Page 518
Human Capital (506)......Page 521
The Asian Record (507)......Page 522
Outside of Asia (510)......Page 525
Once Over Lightly (512)......Page 527
Questions for Discussion (513)......Page 528
The Political Setting (517)......Page 532
Time Horizons and the Sequence of Effects (518)......Page 533
Deficits Unlimited (519)......Page 534
Why Not Government at All Levels? (521)......Page 536
The Political Economy of Monetary Policy (523)......Page 538
Discretion and Rules (525)......Page 540
Who Is at the Control? (526)......Page 541
Renewal of the Debate (528)......Page 543
What Lies Ahead? (531)......Page 546
Once Over Lightly (532)......Page 547
Questions for Discussion (533)......Page 548
What Economists Know (539)......Page 554
Beyond Mere Economics (541)......Page 556
Glossary (543)......Page 557
Index (545)......Page 558
Photo Credits (551)......Page 564