ECONOMICS
exploring
ROBERT L. SEXTON
P E P P E R D I N E U N I V E R S I T Y
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Exploring Economics, 3e
Robert L. Sexton COPYRIGHT © 2005 by South-Western, part of the Thomson Corporation. South- Western, Thomson, and the Thomson logo are trademarks used herein under license.
Printed in the United States of America 1 2 3 4 5 07 06 05 04 ISBN: 0-324-26084-9 (Package, includes Text, Info-Trac, Xtra!, and Student Workbook) ISBN: 0-324-22392-7 (Text only) Library of Congress Control Number: 2003113903 ALL RIGHTS RESERVED.
No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution or information storage and retrieval systems—without the written permission of the publisher.
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About the Author
Robert L. Sexton is Distinguished Professor of Economics at Pepperdine University. Professor Sexton has also been a Visiting Professor at the University of California at Los Angeles in the Anderson Graduate School of Management and the Department of Economics.
Professor Sexton’s research ranges across many fields of economics: economics education, labor economics, environmental economics, law and economics, and economic history. He has written several books and has published more than 40 research papers, many in top economic journals such as The American Economic Review, Southern Economic Journal, Economics Letters, Journal of Urban Economics, and The Journal of Economic Education. Professor Sexton has also written more than 100 other articles that have appeared in books, magazines, and newspapers.
Professor Sexton received the Pepperdine Professor of the Year Award in 1991 and 1997, and the Howard A. White Memorial Teaching Award in 1994; he was named a Harriet and Charles Luckman Teaching Fellow in 1994.
Professor Sexton resides in Agoura Hills, California, with his wife, Julie, and their three children, Elizabeth, Katherine, and Tommy.
To my brother William Henry Sexton
When I decided to write this book I hoped that I could bring to many students that same feeling of excitement and relevance I felt when I took my first economics class. I also knew that economics did not have to be the dreaded class it was reputed to be. I wanted to write a book that was truly accessible and student-friendly.
I wanted to focus on those few principles and the wealth of applications that demonstrate the enormous breadth of economics to our everyday life. I figured that if students experience a lively, brief, and relevant text, they are more likely to want more economics. I wanted to skip the very elaborate detail that is available in other texts. In my opinion, the tedious detail, at this stage of the game, can be distracting to the central message of the discipline. In short, I do not believe we should teach the Principles course as if everyone were going on to graduate school in economics.
I have heard the stories from colleagues all over the country that students are not reading their texts. Naturally, because of this students are not performing as well on exams as they did 10 or 15 years ago. My challenge was to not only write a more student-friendly textbook but one that worked. After all, it is usually effort, not ability, which leads to poor performance.
Successful students need to be motivated. I am convinced that today’s students want a text that is lively and exciting and relates to their world. Most of our principles students (over 97%) are not going to take an upper division economics course. My task was to show those students that economics does not have to be boring or, worse yet, frightening. I needed to “fun it up” but at the same time be very careful not to dilute the really important content from the text. I needed to focus on those few principles that demonstrate the enormous breadth of economics to our everyday life.
I also knew that it was rational that students would not want to invest their valuable time reading a text if they were not going to see the fruits of their labor. So I had to make the text work. In education, they call this outcome-based learning. How much do students know at the end of the course? Are students performing as well as they did in the past when they were using a different text? We are pleased to say that this result has been achieved in the first two editions. A number of adopters have given us testimonials that they are observing better test results than ever before—even while still using their own favorite test questions.
INSTRUCTOR
to the
The Problem and The Cure Outcome-Based Learning
A BOOK WRITTEN FOR TODAY’S LEARNER
TO THE INSTRUCTOR | A Book Written for Today’s Learner v
Many students are not lacking in ability, they are lacking a strategy. Information needs to be moved from short-term memory to long-term memory and then retrieved.
Learning theory provides several methods for helping students do this.
Exploring Economics uses a section-by-section approach in its presentation of economic ideas. Information is presented in small, self-contained sections rather than in large blocks of text. Learning theorists call this chunking.
That is, more information can be stored in the working memory as a result of learning in smaller blocks of information.
Also, by using shorter bite-sized pieces, students are not only more likely to read the material but also more likely to reread it, leading to better comprehension and test results. Learning theorists call this rehearsal.
Unlike standard textbook construction, this approach is distinctly more compatible with the modern communication style with which most students are familiar and comfortable: short, intense, and exciting bursts of information. Rather than being distracted and discouraged by the seeming enormity of the task before them, students are more likely to work through a short, selfcontained section before getting up from their desks.
In executing the section-by-section approach in Exploring Economics, every effort has been made to take the intimidation out of economics. The idea of sticking to the basics and reinforcing student mastery, concept by concept, has been done with the student in mind. But students aren’t the only ones to benefit from this approach.
The section-by-section presentation allows instructors greater flexibility in planning their courses.
More importantly, instructors benefit from having a student population that has actually read the textbook and prepared for class!
Imagery is also important for learning. Visual stimulus helps the learning process. This text uses pictures and visual aids to reinforce valuable concepts and ideas. Information is often stored in visual form, thus pictures are important in helping students retain important ideas and retrieve them from their long-term memory. Students want a welcoming, magazine-looking text; a brain-friendly environment. The most consistent remark we have received from Exploring Economics
adopters is that their students are reading their book, and reading the text leads to better test performance.
It is also important that students learn to self-manage.
How well am I doing? How does this relate to what I already know? The section-by-section approach provides continual self-testing along every step of the way from the textbook to the study guide to the Xtra!
site.
In the words of Lake Wobegon philosopher Garrison Keillor, “Just because you sleep in a garage doesn’t make you a car.” In other words, picking up the terminology of economics is not enough; students have to learn when and how to use their new tools.
Economic principles aren’t just definitions to memorize; they are valuable tools that can help students analyze a whole host of issues and problems in the world around them. It is this philosophy that serves as the focus for the problem-solving approach in Exploring Economics, which is designed to serve two key purposes: (1) to facilitate student mastery of concepts both theoretically and in application, and (2) to communicate a sense of relevancy to students.
The problem-solving approach is evident throughout
Exploring Economics, in the basic organization of the text and in the supporting pedagogical elements. This approach is also embodied in the well-integrated student ancillary materials that are packaged with the text, collectively known as the Integrated Learning System.
vi Preface
The Section-By-Section Approach Imagery The Problem-Solving Approach: What and Why?
The Problem-Solving Approach: How?
AN APPROACH GROUNDED IN LEARNING THEORY
Self Management
vi TO THE INSTRUCTOR | An Approach Grounded in Learning Theory
We have made a number of changes in the third edition to make the text even more attractive:
I. NEW CHAPTERS AND ORGANIZATIONAL CHANGES
The entire text has been carefully scrutinized in order to ensure student success in this course. Some sections required streamlining and simplification; a few deserved more thorough explanations; while others merely needed to be reorganized to improve clarity and focus.
Below we have highlighted some of the key changes made to improve the text.
_ Chapters 4 and 5 The lengthy Chapter 4 of the second edition has been split into two smaller chapters in order to slow down and expand the coverage of supply and demand—perhaps the most important principle of economics. Chapter 4 now focuses on demand and the determinants of demand and supply and the determinants of supply. Chapter 5 now focuses on market equilibrium, temporary disequilibrium (shortages and surpluses), changes in the market equilibrium, and price controls.
_ New Chapter 7 “Market Efficiency and Welfare,” covers consumer and producer surplus as well as the welfare effects of taxes and subsidies. These concepts are a focus for many instructors, and therefore deserve their own chapter.
_ Chapter 9 (hardcover and micro split) is now exclusively about consumer choice. This allows instructors to either cover it more thoroughly, or to skip it altogether.
_ Chapter 13 (hardcover and micro split) now merges two previous chapters—Monopolistic Competition and Oligopoly. Reviewers indicated that the opportunity cost of having two separate chapters on these market structures is too high. In an effort to keep the book trim and focus on the most important concepts, these chapters have been streamlined into one.
_ New Chapter 20 (hardcover; chapter 12 in macro split) “Investment and Saving” covers financial markets, investment demand and saving supply, and present value. Given the news coverage and student interest, these topics seemed important enough to deserve their own chapter. This chapter is one of the most applicable to students when they’re asking what economics can do for them.
_ Chapter 21 (hardcover; chapter 13 in macro split) merges the chapters on Aggregate Demand and Aggregate Supply and Macroeconomic Equilibrium together.
This is another instance in which the opportunity cost of having two separate chapters on theory is too high. These chapters have been streamlined into one so that instructors can move more quickly through the theory and get to the applications in the next several chapters.
_ Chapter 22 (hardcover; chapter 14 in macro split) “Fiscal Policy” has been expanded by adding a section on government spending and taxation.
Also, there is new material on social security and global taxation comparisons.
_ The appendix on the aggregate expenditure model
(Keynesian Cross) has doubled in size; covering new material on shifts in aggregate expenditure and the multiplier, the paradox of thrift and a brief section on what the aggregate expenditure model is missing to be a complete model of the macroeconomy.
II. REVISED OR EXPANDED DISCUSSIONS
Nearly all chapters include revised or expanded topical discussions. A few of the more significant include:
_ Chapter 3 Added circular flow diagram and discussion
_ Chapter 8 Added new material to Public Choice section: the median voter model, rational ignorance, special interest groups
_ Chapter 15 (hardcover and micro split)—New discussion and data for moving up and down the economic ladder; new graph and data on education and earnings; new discussion of income redistribution—variety of programs designed to poverty and redistribute income —taxes, transfer payments, and government subsidies
_ Chapter 26 (chapter 17 in micro split; chapter 18 in macro split)—Additional tables and discussion on regional comparative advantage in section on Comparative Advantage and Gains from Trade.
Preface vii
NEW TO THE THIRD EDITION
TO THE INSTRUCTOR | New to the Third Edition vii
III. NEW “IN THE NEWS” FEATURES AND OTHER STUDENT INTEREST BOXES
In an effort to make the student learning experience applicable and enjoyable, we have added numerous boxed features that apply economic concepts to the world around us. Many other application boxes have been retained from the previous edition:
_ Chapter 1 New box on the benevolence of self interest
_ Chapter 2 New box on law and enforcement costs
_ Chapter 3 New “In the News”: “Robot Advancing on the Lawns of the World”—if the price is right capital will be substituted for labor
_ Chapter 6 New “In the News”: “Drugs Across the Border”
_ Chapter 7 New “In the News” story on gift giving and deadweight loss
_ Chapter 8 New “In the News”: “Mum’s the Word”— children and negative externalities
_ Chapter 9 (hardcover and micro split): New “In the News” box that highlights the research in Behavioral economics
_ Chapter 11 (hardcover and micro split): Revised “In the News” box on Internet sports betting
_ Chapter 12 (hardcover and micro split): Revised “In the News” story: “The Best Little Monopoly in America”; new “In the News” story: “the Surge in Concert Ticket Prices”; new “In the News” story on peak load pricing—the pricing of ball games
_ Chapter 13 (hardcover and micro split): New “In the News” article on LeBron James and his endorsement from Nike; new “In the News” on the sudden urge to merge and form oligopolies; new “In the News” on game theory and terrorism
_ Chapter 14 (hardcover and micro split): New “In the News”: “Hire Power—Even at Home Time is Money”—looks at household production
_ Chapter 15 (hardcover and micro split): New “In the News”—“Poverty in America”
_ Chapter 16 (hardcover and micro split): New “In the News” on London tolls as a remedy to traffic problems; new “In the News” on Smoking Bans in New York City
_ Chapter 17 (hardcover; chapter 9 in macro split): New “In the News” on the risks of deflation
_ Chapter 19 (hardcover; chapter 11 in macro split): New “In the News”: “The Rule of Law is Permanent”; New “Global Watch”: “Education Reform in Asia and Latin America”
_ Chapter 20 (hardcover; chapter 12 in macro split): New “In the News” box on hot and cold streaks in sports and the stock market
_ Chapter 21 (hardcover; chapter 13 in macro split): Revised “In the News” adds information about 9/11 and the Iraq war
_ Chapter 21 (hardcover; chapter 13 in macro split): New “In the News” on lipstick sales and recessions
_ Chapter 22 (hardcover; chapter 14 in macro split): New “In the News” application on the broken window fallacy—i.e. be careful when a government program is justified not on its merits but by the jobs it creates; new “In the News” on 2003 Bush tax cut
_ Chapter 24 (hardcover; chapter 16 in macro split): New “In the News”; “The U.S. Economy in the Wake of September 11”—traces the steps the Fed took immediately and in the months following the events of September 11; new “In the News” on the science and art of monetary policy—examines the Taylor Rule and inflation targeting
_ Chapter 26 (chapter 17 in micro split; chapter 18 in macro split): New “In the News” on movies in overseas markets; new “In the News”: “Buy American?”
_ Chapter 27 (chapter 18 in micro split; chapter 19 in macro split): New “In the News”: “The Euro Beginning to Flex its Muscles”; new “In the News”: “The Yen—Keeping it Weak”
viii Preface
viii TO THE INSTRUCTOR | New to the Third Edition
TEST BANK
Gary Galles (Pepperdine University) has thoroughly updated the test bank questions. The test bank includes approximately 150 test questions per chapter, consisting of multiple-choice, true/false, and short-answer questions.
EXAM VIEW TESTING SOFTWARE
ExamView—Computerized Testing Software contains all of the questions in the printed test banks. ExamView is an easy-to-use test creation software compatible with Microsoft Windows. Instructors can add or edit questions, instructions, and answers, and select questions by previewing them on the screen, selecting them randomly, or selecting them by number. Instructors can also create and administer quizzes online, whether over the Internet, a local area network (LAN) or a wide area network (WAN).
INSTRUCTOR’S MANUAL
Prepared by Gary Galles (Pepperdine University), the Instructor’s Manual follows the textbook’s concept-byconcept approach in two parts: chapter outlines and teaching tips. The Teaching Tips section provides analogies, illustrations, and examples to help instructors reinforce each section of the text. Answers to all of the end-of-chapter text questions can also be found in the Instructor’s Manual.
MICROSOFT POWERPOINT® PRESENTATION SLIDES
_ Lecture Presentation in PowerPoint: This PowerPoint presentation covers all the essential sections presented in each chapter of the book. Graphs, tables, lists, and concepts are animated sequentially, much as one might develop them on the blackboard. Additional examples and applications are used to reinforce major lessons. The slides are crisp, clear, and colorful. Instructors may adapt or add slides to customize their lectures.
_ Exhibits From the Text in PowerPoint: Every graph and table within the text has been recreated in PowerPoint. These exhibits are available within the lecture presentation, but we’ve also made them available as a separate batch of slides for those instructors who don’t want the lecture slides.
Both Lecture and Exhibit PowerPoint presentations are available for downloading under “Instructor Resources” at the Sexton Web site http://sexton.swlearning.com.
Preface ix
For Instructors
SUPPLEMENTS
TO THE INSTRUCTOR | Supplements ix
TURNER LEARNING/CNN ECONOMICS VIDEO WITH INTEGRATION GUIDE
Professors can bring the real world into the classroom by using the Turner Learning/CNN Economics Video. This video provides current stories of economic interest.
The accompanying integration guide provides a summary and discussion questions for each clip. The video is produced in cooperation with Turner Learning Inc. Ask your Thomson Learning sales representative for more details.
INSTRUCTOR’S RESOURCE CD-ROM
Get quick access to all instructor ancillaries from your desktop. This easy-to-use CD lets you review, edit, and copy exactly what you need in the format you want.
THE EXPLORING ECONOMICS INTEGRATED LEARNING SYSTEM
The Exploring Economics Integrated Learning System provides students with an exceptional value as well as an incredibly rich and comprehensive learning package. Students purchasing a new textbook also receive in the package the printed Student Workbook and access to Sexton Xtra! online enrichment and study tools. The Student Workbook and Sexton Xtra! are carefully tied to the text pedagogically to provide students with an unparalleled level of support and reinforcement:
_ The Student Workbook ...
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